1
REGISTRATION NO. 333-57242
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SUNSHINE MINING AND REFINING COMPANY
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(Exact name of registrant as specified in governing instruments)
Delaware
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(State or other jurisdiction of incorporation or organization)
1400
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(Primary Standard Industrial Classification Code Number)
75-2231378
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(IRS Employer Identification No.)
5956 Sherry Lane, Suite 1621
Dallas, Texas 75225
(214) 265-1377 o (214) 265-0324 (Fax)
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(Address of principal executive offices)
William W. Davis
President, Chief Operating Officer and Chief Financial Officer
Sunshine Mining and Refining Company
5956 Sherry Lane, Suite 1621
Dallas, Texas 75225
(214) 265-1377 o (214) 265-0324 (Fax)
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(Name and address of agent for service)
With a Copy to:
Steven C. Metzger, Esq.
Prager, Metzger & Kroemer PLLC
2626 Cole Avenue, Suite 900
Dallas, Texas 75204
(214) 969-7600 o (214) 523-3838 (Fax)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
[ ]......................
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]......................
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]......................
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
Title of Each Class of Amount to be Proposed maximum offering Proposed maximum Amount of
Securities to be Registered registered price per unit aggregate offering price registration fee
- --------------------------- ------------ ------------------------- ------------------------ -----------------
Sunshine Mining and
Refining Company Common
Stock, par value $0.01 per
share(1) 44,995,000 shares $1.625(2) $73,116,875(2) $18,279.22(3)
</Table>
(1) Shares of Common Stock being registered are shares issued by the
Registrant under Section 1145(a)(1) of the Bankruptcy Code to certain former
holders of indebtedness issued by the Registrant in connection with a confirmed
Plan of Reorganization. The maximum number of shares outstanding at the
Effective Date of such Plan was 50,000,000 which 1,700,000 shares were gifted to
former stockholders and certain other persons.
(2) Pursuant to Rule 457(c), the proposed maximum Offering Price Per
Unit and Proposed Maximum Aggregate Offering Price have been estimated based on
the average of the bid and ask prices on March 16, 2001.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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2
PROSPECTUS
SUNSHINE MINING AND REFINING COMPANY
COMMON STOCK, $0.01 PAR VALUE
44,995,000 SHARES
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The Selling Stockholders named in this Prospectus are offering to sell
up to 44,995,000 shares of our Common Stock. The Selling Stockholders may offer
and sell some, all or none of the Common Stock under this Prospectus. The
Selling Stockholders may determine the prices at which they will sell the Common
Stock; the prices may be at market prices prevailing at the time of the sale or
some other price. In connection with these sales, the Selling Stockholders may
use brokers or dealers which may receive compensation or commissions for the
sales. We will not receive any of the proceeds from the sale of our Common Stock
by the Selling Stockholders.
Our Common Stock is publicly-traded on the NASDAQ OTC Bulletin Board
under the symbol "SSMR." On September 10, 2001, the last reported sale price for
the Common Stock was $0.20.
THE PURCHASE OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE RISK FACTORS UNDER THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 7 IN THIS PROSPECTUS BEFORE PURCHASING ANY OF OUR
COMMON STOCK FROM THE SELLING STOCKHOLDERS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS,
THE REGISTRATION STATEMENT, AND THE OTHER DOCUMENTS WE HAVE INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
ANY ADDITIONAL OR DIFFERENT INFORMATION. THE INFORMATION CONTAINED IN THIS
PROSPECTUS, AND THE OTHER DOCUMENTS THAT WE HAVE REFERRED YOU TO, IS FULL,
COMPLETE AND ACCURATE AS OF THE DATE OF THIS PROSPECTUS. HOWEVER, BECAUSE
CHANGES IN OUR AFFAIRS MAY OCCUR AFTER THIS DATE, WE CANNOT REPRESENT THAT THIS
INFORMATION REMAINS ACCURATE AS OF ANY SUBSEQUENT DATE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. TO THE
EXTENT REQUIRED BY APPLICABLE LAW IN CERTAIN JURISDICTIONS, SHARES OF COMMON
STOCK OFFERED ARE OFFERED ONLY THROUGH A REGISTERED BROKER/DEALER IN SUCH
JURISDICTION.
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THE DATE OF THIS PROSPECTUS IS __________________, 2001.
3
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
Prospectus Summary................................................................................. 1
Risk Factors....................................................................................... 7
Forward-Looking Statements......................................................................... 11
Use of Proceeds.................................................................................... 12
Capitalization..................................................................................... 12
Dividend Policy.................................................................................... 12
Price Range of Common Stock........................................................................ 13
The Plan of Reorganization......................................................................... 14
Selling Stockholders............................................................................... 20
Plan of Distribution............................................................................... 23
Selected Financial Data............................................................................ 25
Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 26
The Company........................................................................................ 33
Legal Proceedings.................................................................................. 40
Ownership of Principal Stockholders and Management................................................. 41
Management......................................................................................... 42
Change in Accountants.............................................................................. 48
Description of Capital Stock....................................................................... 48
Legal Matters...................................................................................... 49
Experts............................................................................................ 49
Where You Can Find More Information................................................................ 49
Glossary and Index................................................................................. 51
Index to Consolidated Financial Statements......................................................... 53
</Table>
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PROSPECTUS SUMMARY
This summary outlines and highlights information contained elsewhere in
this Prospectus. You should read the entire Prospectus carefully, including the
"Risk Factors" section and the financial statements and related notes before you
make an investment decision.
Whenever we refer in this Prospectus to "Sunshine," "the Company,"
"we," "us," or "our," we mean Sunshine Mining and Refining Company, a Delaware
corporation and its predecessors and subsidiaries.
THE COMPANY
Sunshine was originally incorporated in 1918 and is currently
incorporated under the laws of the State of Delaware. The Company maintains its
principal executive offices at 5956 Sherry Lane, Suite 1621, Dallas, Texas
75225. Sunshine has primarily engaged in mining silver and until recently, was
one of the world's leading primary silver producers. Sunshine is a holding
company whose material assets consists of the stock of subsidiaries. Sunshine
Precious Metals, Inc. owns the Sunshine Mine located in the Coeur d'Alene mining
district near Kellogg, Idaho. The Sunshine Mine produced 5.2 million and 3.9
million ounces of silver in 1999 and 2000, respectively; the primary smelter
customer announced on February 2, 2001 that it was closing and would no longer
accept deliveries. As a result, Sunshine notified its employees at the Sunshine
Mine of a mass lay-off February 16, 2001, and has placed the Sunshine Mine on a
care and maintenance status. Upon initially closing the Sunshine Mine, the
Company intended to hold it under a program of care and maintenance. Under such
a program, major hoisting facilities and main underground haulage and
ventilation levels would be regularly maintained, and pumping would maintain the
water level below the 3700 level. Underground mining equipment which would be
expected to deteriorate has been sold. During the second quarter, the Company
determined not to maintain the property due to the costs of holding the mine
under its original care and maintenance plan. New plans were made to secure the
property, including closing off underground access after removal of certain
equipment, including electrical transformers and substations. Pumps have been
shut off, and it is anticipated that over the next two to four years the water
level at the property will rise to about the 3100 level. The longer the mine
remains closed, the higher the cost to reopen. Over time, the underground shafts
and drifts will deteriorate without regular maintenance, and eventually may
become unusable.
The Company has recently sold an option to acquire its silver refinery,
and/or its tailings impoundment, and/or its antimony plant, and may dispose of
other real estate holdings at the Sunshine Mine. The Company will also consider
a sale of the Sunshine Mine Complex in its entirety, but does not anticipate a
separate sale of hoisting, mineral processing or other surface facilities
necessary for the re-initiation of mining activity at the Complex. The terms of
the option to acquire the refinery, tailings impoundment, and/or the antimony
plant provide that, should the optionee acquire the tailings impoundment, upon
any reopening of the Sunshine Mine, its then-operator will have the right to
deposit waste from the Sunshine Mine into the tailings impoundment.
Should silver prices ever rise to a level which might encourage a
reopening of the Sunshine Mine, prior to undertaking the necessary exploration
and development to establish if additional reserves exist in the mine,
substantial repair and infrastructure replacement will be required. The longer
the mine is closed, the more expensive and longer such a process would be. At
this time, there is no estimate of the time and expense required, and it is not
known what price of silver might justify such an effort.
Sunshine's principal asset is the Pirquitas Mine which is owned by
Sunshine Argentina, Inc. Pirquitas contains 129 million ounces of silver
reserves, as well as significant tin and zinc by-products. The Pirquitas Mine is
planned as an open-pit operation to produce 11 million ounces of silver, 3,200
tonnes (metric tons) of tin, and 16,300 tonnes of zinc per year. Present studies
forecast pre-production capital costs of approximately $133 million to develop
the Pirquitas Mine. On-going capital requirements are forecasted to total
approximately $15 million, and initial working capital requirements are forecast
to be approximately $6 million. The estimated net cash cost of production per
ounce of silver (net of tin and zinc by-product credits) is $1.53. See "THE
COMPANY."
The Company's strategy is to attempt to maintain sufficient liquidity
to allow it to hold Pirquitas pending a recovery in the silver market. Various
studies in recent years have documented a significant shortfall of
newly-produced silver relative to silver demand. These shortfalls have been made
up by the liquidation of above-ground silver stocks. There are no good estimates
of the size of the remaining silver stockpiles in the world, nor at what price
they would be made available to the market. Therefore, the Company is not able
to speculate on how much longer available inventory stockpiles can continue to
hold down the price of silver.
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REORGANIZATION UNDER CHAPTER 11
On August 23, 2000, Sunshine and its wholly-owned subsidiaries,
Sunshine Argentina, Inc., Sunshine Precious Metals, Inc. and Sunshine
Exploration, Inc. all filed voluntary petitions for relief under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The Third Amended and Restated Joint Chapter 11 Plan of Reorganization
as modified December 5, 2000 was the subject of an Order of Confirmation which
resulted in the Plan having an Effective Date of February 5, 2001. The
Proceeding was filed due to our inability to pay our debts as they became due
and low silver prices. The Plan of Reorganization was conceived as an
alternative to the more drastic measures available for restructuring
indebtedness of Sunshine such as a liquidation of all of Sunshine's assets.
As a result of the Plan, all of the outstanding shares of "old common
stock" were cancelled, retired and eliminated with no consideration paid
therefor and Sunshine was deemed to have issued the "New Mining Stock," which is
shares of common stock, par value $0.01 per share. At the Effective Date of the
Plan, 50,000,000 shares of Common Stock were deemed to be issued as the New
Mining Stock to those designated as recipients therefor under the Plan which
generally were certain creditors of Sunshine and others who in turn gifted a
portion (approximately 3.4%) of New Mining Stock to the former common
stockholders on a pro-rata basis, but only to accounts holding in excess of 100
shares of "old common stock." By virtue of this redistribution, holders of
Allowed Claims against Sunshine also received a portion of the New Mining Stock
where the various creditor classes received the same proportion of New Mining
Stock to its Allowed Claim as received by each holder in the respective creditor
classes, and the "gifting" creditors (the Stonehill Group and the Elliott Group)
obtained 89.99% of the New Mining Stock on a fully-diluted basis after taking
into account all of the distributions afforded to the various holders. The
result of the Plan was to eliminate all of the Company's funded indebtedness,
and certain other obligations, which had been incurred prior to August 23, 2000.
In addition, as a result of the Plan, Sunshine Precious Metals, Inc.
and the United States on behalf of the United States Environmental Protection
Agency, the United States Department of the Interior and the United States
Department of Agriculture (the "Government"), as well as the Coeur d'Alene
Indian Tribe (the "Tribe") settled all outstanding environmental litigation
against Sunshine and Sunshine Precious Metals. As part of the settlement, a
total of 4,975,000 warrants to acquire an equivalent number of shares were
issued to the Government and the Tribe. In addition, 324,265 warrants were
issued to Asarco to acquire an equivalent number of shares, and management has
been issued options to acquire 2,500,000 shares. The exercise price for all the
above described options and warrants is $0.66 per share. The New consent Decree
also requires Sunshine Precious Metals, Inc. to provide a net smelter return
royalty payable by it for production anywhere in the United States or by any
Sunshine entity on all production from within one mile of the Sunshine Mine. The
royalty adjusts on a sliding scale based upon the average price of silver. No
royalty is payable until the average silver price exceeds $6 per ounce. The
royalty varies from 1% of net smelter returns at a silver price of $6 per ounce
to 7% at a price of $10 per ounce or more.
CALL OPTION AGREEMENT
Under the terms of the Plan and the Confirmation Order, on the
Effective Date of Plan, the capital stock of Sunshine Argentina, Inc. was
cancelled, and Sunshine Argentina, Inc. issued the "New Argentina Stock."
Sunshine caused the incorporation and organization of Sunshine International
Mining, Inc., a Delaware corporation, all of the issued and outstanding stock of
which is owned by Sunshine. Sunshine contributed to the capital of Sunshine
International, Inc. all of the New Argentina Stock such that Sunshine Argentina,
Inc. became a wholly-owned subsidiary of Sunshine International, Inc. which, in
turn, is a wholly-owned subsidiary of Sunshine. Simultaneously, Sunshine and the
two subsidiaries entered into a Call Option Agreement dated February 5, 2001
with the Elliott Group and the Stonehill Group, pursuant to which those entities
were granted
o a Call Option to each holder within the Elliott Group and the
Stonehill Group to purchase, collectively, up to 100% of the
shares of New Argentina Stock, and
o a first priority perfected security interest in the New
Argentina Stock.
The effect of the "call option" is to potentially allow the Elliott Group
holders and Stonehill Group holders (and certain of their successors and
assigns) upon the occurrence of any one or more of nine separate events, to
acquire Sunshine Argentina, Inc., which in turn owns the Pirquitas Mine and
other assets. See "PLAN OF REORGANIZATION - Argentina Transaction; Call Option
Agreement" for a listing of the events. Should such an event occur, Sunshine's
investment in the acquisition and the valuation of the Pirquitas Mine could no
longer be an asset of Sunshine, nor would the assigned
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proven and probable in-ground reserves totaling 129.6 million ounces of silver,
along with 59,000 tons of tin and 273,000 tons of zinc.
OWNERSHIP; SELLING STOCKHOLDERS
The principal stockholders of Sunshine are the Elliott Group (which
owns 50.98% of the issued and outstanding stock) and the Stonehill Group (which
owns 39.01% of the issued and outstanding common stock of Sunshine). The
principal business of each of the entities within the Stonehill Group and the
Elliott Group is investment in securities. The Elliott Group and the Stonehill
Group are the Selling Stockholders. See "SELLING STOCKHOLDERS" and "PLAN OF
DISTRIBUTION."
PLAN OF DISTRIBUTION
As of September 10, 2001, there were 50,000,000 shares of Sunshine
Common Stock outstanding, of which 44,995,000 were held by the Elliott Group and
the Stonehill Group together, all of which are covered by this Prospectus. This
Prospectus relates to the shares of Sunshine Common Stock which are being
registered under the Securities Act of 1933 on behalf of the Selling
Stockholders in order to permit the public sale or other distribution of the
Shares. See "Selling Stockholders" and "Plan of Distribution."
The shares may be sold from time to time by the Selling Stockholders.
Those sales may be made in many ways through underwriters or dealers, through
brokers or other agents, or directly to one or more purchasers, at market prices
prevailing at the time of sale or at prices otherwise negotiated. The Selling
Stockholders and any broker-dealers, agents or underwriters that participate
with the Selling Stockholders in the distribution of the securities to which
this Prospectus relates may be deemed to be "underwriters" within the meaning of
the Securities Act of 1933, and any commissions received by them and any profit
on the resale of such securities purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act of 1933.
Pursuant to the Registration Rights Agreement, Sunshine agreed to
register or qualify or cooperate with the Selling Stockholders in registering or
qualifying the Shares under the state securities or "blue sky" laws. However,
Sunshine is not be required to
o qualify generally to do business in any jurisdiction where it
is not then so qualified, or
o file a general consent to service of process in any such
states or jurisdictions, or
o take any action which would subject it to general service of
process or to taxation in any jurisdiction where it is not
then so subject.
Unless and until such times as offers and sales of the Shares by Selling
Stockholders are registered or qualified under applicable state securities or
"blue sky" laws, or are otherwise entitled to an exemption therefrom, initial
resales by Selling Stockholders will be materially restricted. Selling
Stockholders are advised to consult with their respective legal counsel prior to
offering or selling any of their Shares.
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ORGANIZATION; OWNERSHIP OF ASSETS
The following chart depicts the principal stock ownership groups, the
summary organizational structure of Sunshine and its material subsidiaries after
giving effect to the implementation of the Plan, and the ownership of properties
which comprise the mines and/or concessions held by the various entities. The
only change in the organization structure from the structure that existed prior
to the effectiveness of the Plan is the creation of Sunshine International
Mining, Inc., as a new holding company for Sunshine Argentina, Inc., as required
by the Plan and the Call Option Agreement. Prior to the effectiveness of the
Plan, Sunshine Argentina, Inc., was a direct subsidiary of Sunshine. See "THE
COMPANY," "THE PLAN OF REORGANIZATION," and "OWNERSHIP OF PRINCIPAL STOCKHOLDERS
AND MANAGEMENT."
[FLOW CHART]
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USE OF PROCEEDS
The Selling Stockholders will receive all proceeds from the sale of the
shares of Sunshine Common Stock. Under the requirements of the Registration
Rights Agreement, Sunshine has agreed to pay all expenses related to the
registration of the shares, except as described herein. Such expenses are
stimated at approximately $55,000.
RISK FACTORS
Prospective investors should carefully consider all of the information
set forth in this Prospectus and, in particular, should evaluate the specific
risk factors under "RISK FACTORS."
THE OFFERING
<Table>
o Common Stock Offered by the Selling Stockholders..................... 44,995,000
o Common Stock outstanding as of September 10, 2001(a)................. 50,000,000
o Use of Proceeds...................................................... All of the net proceeds from the sale of the
Common Stock covered by this Prospectus will
go to the Selling Stockholders who offer and
sell shares of the Common Stock. We will not
receive any proceeds from the sale of the
Common Stock offered by the Selling
Stockholders. See "Use of Proceeds."
o NASDAQ OTC Bulletin Board Market Symbol.............................. SSMR
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(a) This amount excludes the following outstanding securities as of September 10, 2001:
o 4,975,000 shares of Common Stock issuable upon the exercise of warrants held by the
Government and the Tribe at an exercise price of $0.66 per share. See "New Consent
Decree."
o 324,265 shares of Common Stock issuable upon exercise of warrants held by Asarco at an
exercise price of $0.66 per share. See "Asarco Settlement."
o 2,500,000 shares of Common Stock issuable upon the exercise of options held by
Management at an exercise price of $0.66 per share.
</Table>
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SUMMARY FINANCIAL DATA
The following table summarizes our financial results and should be read
in conjunction with the "Selected Financial Data," our audited and unaudited
consolidated financial statements, and their accompanying notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," all of which are included elsewhere in this prospectus. At December
31, 2000, the Company was in Chapter 11 bankruptcy reorganization proceedings.
Pursuant to the guidance of AICPA Statement of Position 90-7, the Company
adopted "fresh start" reporting as of January 31, 2001. In general pursuant to
fresh start reporting, the Company's assets and liabilities were revalued to
fair market value. As a result, the Company's financial statements after January
31, 2001 are not comparable with those for periods before the Plan was
effective.
The unaudited Pro Forma Statement of Operations Data is presented to
give effect to the consummation of the Plan as though it had taken place at the
beginning of the periods.
<Table>
<Caption>
PRO FORMA HISTORICAL
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SIX FIVE ONE SIX
MONTHS YEAR MONTHS MONTH MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, JANUARY 31, JUNE 30, YEAR ENDED DECEMBER 31
2001 2000 2001 2001 2000 2000(3) 1999 1998(3)
--------- ------------ --------- ----------- ----------- ---------- ---------- ----------
(ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Operating Revenues (4) $ 2,919 $ 23,094 $ 904 $ 2,015 $ 13,773 $ 23,094 $ 32,332 $ 34,668
Net loss before reorganization
items (3,456) (13,861) (3,401) (55) (6,813) (18,949) (10,843) (64,845)
Net income (loss) before
extraordinary item (3,456) (13,861) (3,401) 7,401 (6,813) (20,890) 10,843 (64,845)
Net income (loss) (3,456) (13,861) (3,401) 36,278 (6,813) (20,890) (10,843) (64,845)
Basic and diluted income (loss)
per common share (0.07) (0.28) (0.07) (1) (1) (1) (1) (1)
Weighted average common shares 50,000 50,000 50,000 48,685 41,078 43,898 34,682 32,109
PRICE AND PRODUCTION STATISTICS:
Average silver price received $ 4.62 $ 4.93 $ 4.62 $ 5.05 $ 4.93 $ 5.23 $ 5.47
Tons 20,722 169,036 20,722 97,639 169,036 217,601 247,866
Silver grade (ounces per ton) 26.17 23.81 26.17 24.07 23.81 24.75 24.17
Silver ounces produced 519,177 3,879,100 519,177 2,792,022 3,879,100 5,210,843 5,806,468
Net cash cost per ounce (2) $ 3.90 $ 4.75 $ 3.90 $ 4.70 $ 4.75 $ 4.36 $ 4.43
BALANCE SHEET DATA:
Cash and cash investments $ 285 $ 1,206 $ 291 $ 628 $ 1,412
Working capital 1,210 (40,640) 2,824 839 9,716
Total assets 29,405 33,492 22,592 37,020 39,897
Long-term debt and capital
lease obligations 5,000 -- 1,530 38,238 42,597
Redeemable common stock 14,365 -- -- -- --
Stockholders' equity (deficit) (536) (21,401) (36,278) (18,720) (17,466)
Book value per common share (0.01) (0.50) (0.75) (0.48) (0.54)
Common shares outstanding 50,000 43,074 48,685 38,672 32,426
</Table>
-6-
10
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(1) Amounts not presented due to lack of comparability because of
reorganization and adoption of fresh start accounting as of January 31,
2001.
(2) Net cash cost per ounce includes all expenditures (other than
exploration costs and capital expenditures) related to the operation of
the Sunshine Mine and Refinery Complex, less any by-product revenues.
Such costs include non-capital development costs, production and
maintenance costs, ad valorem taxes, insurance, and post-employment
benefit costs incurred on site.
(3) During 2000 and 1998, the Company recorded a $7.2 million and $50.4
million impairment, respectively, of charges to write down the value of
the Company's investment in the Sunshine Mine.
(4) The Sunshine Mine, the only source for operating revenues for the
periods presented, was placed on care and maintenance status in
February 2001. With the mine closed, the Company will have no operating
revenues. Historical financial data presented above will not be
indicative of the Company's future financial condition or results of
operations while the mine is closed.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD
CAREFULLY CONSIDER THE RISK FACTORS BELOW PRIOR TO MAKING AN INVESTMENT DECISION
WITH RESPECT TO THE COMMON STOCK. THE FINANCIAL STATEMENTS AND NOTES TO
FINANCIAL STATEMENTS CONTAIN MORE DETAILED DISCUSSIONS OF SOME OF THE MATTERS
DISCUSSED BELOW. THESE RISK FACTORS ARE THE MATERIAL RISK FACTORS FACED BY
SUNSHINE.
WE HAVE EXPERIENCED OPERATING LOSSES FOR THE LAST TEN YEARS AND EXPECT OUR
LOSSES TO CONTINUE
Our earnings were directly related to the price of silver because
almost all of our revenues came from the sale of silver mined from the Sunshine
Mine, Kellogg, Idaho. Having recently closed the Sunshine Mine, we will have
minimal or no revenues for the foreseeable future. Silver prices have been
depressed since 1985. As a result, Sunshine's mining operations have not been
profitable. Sunshine has experienced net losses for the past ten years. Recent
losses for Sunshine and its subsidiaries on a consolidated basis are as follows:
<Table>
o 1995 - $15.5 million o 1998 - $64.8 million
o 1996 - $25.9 million o 1999 - $10.8 million
o 1997 - $19.3 million o 2000 - $20.9 million
</Table>
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Our consolidated net losses for 2000 and 1998 reflect a $7.2 million
and $50.4 million charge, respectively, to write down an investment in the
Sunshine Mine. At June 30, 2001, Sunshine had a $536 thousand stockholders'
deficit, working capital of $1.2 million and cash and cash investments of $285
thousand. At December 31, 2000, Sunshine reported a consolidated net loss of
$20.9 million (which included a writedown of $7.2 million), had a $36.3 million
stockholders' deficit, working capital of $2.8 million, and cash and cash
investments of $291 thousand. At December 31, 1999, Sunshine had an $18.7
million stockholders' deficit, working capital of $839,000 and cash, cash
investments and bullion of $4.7 million.
We expect our operating losses and cash flow deficiencies to continue
until we complete the development of the Pirquitas Mine in Argentina. Given
current low silver prices and our lack of capital or earnings, we do not
currently have the ability to access the financing to develop the Pirquitas
Mine.
FUTURE LOSSES MAY RESULT IN LIQUIDITY DEFICIENCIES AND AN INABILITY TO CONTINUE
OPERATIONS
Our historic net operating losses led to liquidity deficiencies which
caused us to institute a bankruptcy proceeding in August 2000. Consolidated net
operating losses have been primarily the result of depressed silver prices
resulting in margins that are insufficient to cover our other expenses. We
expect to fund cash losses for the remainder of the 2001 fiscal year from the
Amended Credit Facility. Remaining availability committed under that facility at
September 10, 2001 was $1.1 million, with an additional $1.5 million which may
be made available at the option of the lenders. When this facility is exhausted,
currently anticipated by the third quarter of 2001, we have no other sources of
financing at this time.
To raise cash, we are currently negotiating the sale of certain of the
Company's assets. Underground mining equipment which would be expected to
deteriorate during a period of inactivity at the Sunshine Mine has been sold.
The Company has recently sold an option to acquire its silver refinery, and/or
its tailings impoundment, and/or its antimony plant, and may dispose of other
real estate holdings at the Sunshine Mine. The Company will also consider a sale
of the Sunshine Mine Complex in its entirety, but does not anticipate a separate
sale of hoisting, mineral processing or other surface facilities necessary for
the re-initiation of mining activity at the Complex. The terms of the option to
acquire the refinery, tailings impoundment, and/or the antimony plant provide
that, should the optionee acquire the tailings impoundment, upon any reopening
of the Sunshine Mine, its then-operator will have the right to deposit waste
from the Sunshine Mine into the tailings impoundment. The Company is also
negotiating a sale of the Juanicipio concession in Mexico. If all these
transactions are closed and the lenders make the optional amount available under
the Amended Credit Facility, we expect to be able to fund operations until
approximately the third quarter of 2002.
THE ARGENTINA CALL OPTION
The Elliott Group and the Stonehill Group (two large stockholders who
control 89.99% of the Common Stock) hold the Argentina Call Option whereby,
under certain circumstances, they would be able to obtain controlling interest
in Sunshine Argentina, Inc., the owner of the Pirquitas Mine. According to the
Argentina Call Option, if Sunshine's market capitalization falls below $15
million for fifteen consecutive days, or if there is a further event of
bankruptcy, or if a registration statement is not filed or effective within a
certain number of days after the Confirmation Date or such Registration
Statement's effectiveness is not maintained or if shares of Common Stock are not
traded on the OTC Bulletin Board or other acceptable market, the Elliott Group
and the Stonehill Group will be able to purchase Sunshine Argentina, Inc. for
common stock of Sunshine valued at $1 million. Once they have sold in excess of
one-half of their shares in Sunshine, the amount of Sunshine Argentina, Inc.
they will be able to acquire pursuant to the Argentina Call Option will begin to
decline. Once all of their shares in Sunshine have been sold, the Argentina Call
Option will expire.
Sunshine Argentina, Inc. as the owner of the Pirquitas Mine, is the
principal subsidiary of Sunshine at this time. Exercise of the Argentina Call
Option by the Elliott Group and the Stonehill Group would likely have the effect
of eliminating the viability of Sunshine. If the Call Option is exercised, the
Elliott Group and the Stonehill Group will acquire the stock of Sunshine
Argentina, Inc., and Sunshine will no longer control the Pirquitas Mine or its
reserves. The Pirquitas Mine is the principal asset of Sunshine. The existence
of the Argentina Call Option may adversely affect the availability of
third-party financing.
As the Elliott Group and the Stonehill Group together control
approximately 90% of the Common Stock, their sales of Common Stock may lead to a
reduction in the market capitalization such as would trigger the ability to
exercise the Argentina Call Option. Further, as long as the Argentina Call
Option remains outstanding (until 2010), the availability of financing involving
the Pirquitas project and other corporate purposes may be limited. The existence
of the Call Option may also negatively affect the market value of the stock.
In addition, the Company's market capitalization in recent weeks has
been below $15 million, the level that could trigger exercise of the Call
Option. The Elliott Group and the Stonehill Group have waived any non-compliance
with the Call Option until October 15, 2001 as part of a refinancing of the
Credit Facility.
-8-
12
THE PRICE OF SILVER IS VOLATILE AND AFFECTS THE COMMON STOCK PRICE
Sunshine's earnings and the value of its assets have been (and will
likely continue to be) directly related to the price of silver. Numerous factors
beyond Sunshine's control, alone or in combination, may cause the price of
silver to rise or fall. These factors include, among others:
o Levels of silver production
o The demand for silver as a component of manufactured goods
o Inflation expectations
o Speculative activities of market makers, arbitrageurs, traders
and other participants in the commodities markets
Silver prices have averaged approximately $5 per ounce for the past 13
years, and there is no assurance that the price of silver will improve. On
September 10, 2001, the closing price of spot silver as reported on the COMEX
was approximately $4.156 per ounce.
WE ARE DEPENDENT ON THE SUCCESS OF OUR EXPLORATION AT THE SUNSHINE MINE AND THE
DEVELOPMENT OF THE PIRQUITAS MINE
Substantially all of our revenues have been derived from the Sunshine
Mine (now closed), which has not generated sufficient cash at silver prices
which prevailed in the last ten years to cover current cash requirements. In
addition, silver prices which prevailed prior to its closure, the Sunshine Mine
could not access sufficient reserves to justify maintaining production beyond
2001 without new discoveries and had limited funding for exploration. Therefore,
future production at the Sunshine Mine is dependant on the success of future
exploration and development projects at the Sunshine Mine. In addition, at
current silver prices, future earnings are dependent upon the successful
development of the Pirquitas Mine. Exploration success and successful
development of a new mine involve a high degree of risk. Unknown factors such as
the total extension and amount of ore-grade material and the cost of extraction
of minerals measured against fluctuating metal prices increase the degree of
risk.
BECAUSE RESERVE ESTIMATES ARE IMPRECISE, WE DO NOT KNOW THE EXACT QUANTITY OF
MATERIALS WE WILL RECOVER
Our silver reserve estimates discussed in this Prospectus and other
documents (129 million ounces of silver before metallurgical losses as of
December 31, 2000) represent the judgment of our geologic personnel and are not
guaranties that the indicated quantities will be recovered. 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 mineral on one,
two, or three sides, sampling data, and similar examinations.
Our reserve estimates may change as ore bodies are mined and we obtain
additional data. Our reserve estimates at the Pirquitas Mine come from an
independent study. Our estimates of mineralized material at the Sunshine Mine
were prepared internally; however, the methodology used to prepare the Sunshine
Mine reserve estimates has been reviewed and approved by an independent
consultant.
NO ASSURANCE CAN BE MADE THAT FINANCING CAN BE OBTAINED TO DEVELOP THE PIRQUITAS
MINE
It is estimated that approximately $140 million will be required to put
the Pirquitas Mine into production, including working capital requirements. In
order to develop the Pirquitas Mine, we will need to sell a significant amount
of common stock or other securities in order to obtain bank project financing or
enter into a joint venture, sell a royalty interest or take other similar action
to raise the capital required in order to develop the Pirquitas Mine. Such
sources of capital are likely not available to us given current low silver
prices and our lack of capital or earnings. If such sources are not available,
we will not be able to develop the Pirquitas Mine.
WE MAY NOT BE ABLE TO FULLY INSURE AGAINST RISKS ASSOCIATED WITH OPERATING
MINES, ESPECIALLY ENVIRONMENTAL RISKS
Our operations may be affected by risks and hazards generally
associated with the mining industry. These risks and hazards include fires,
cave-ins, rock bursts, flooding, industrial accidents, mechanical or electrical
failures, unusual or unexpected rock formations, and environmental pollution or
other hazards resulting from the disposal of waste products occurring from
production. Such risks could result in damage to, or destruction of, mineral
properties or producing facilities, personal injury, environmental damage,
delays in mining, monetary losses, and possible legal liability. We may not
always be able to pay for this insurance, especially if there is an increase in
the cost of premiums. Insurance for environmental risk is generally either not
available or too costly for companies in our industry.
-9-
13
THERE IS EXTENSIVE GOVERNMENT REGULATION OF OUR INDUSTRY AND SUCH REGULATION
SOMETIMES RESULTS IN LAWSUITS
Extensive federal, state and local laws and regulations control our
mineral mining and exploration activities. These laws and regulations also
govern the possible effects of these activities on the environment. We have been
involved in lawsuits in which we have been accused of violating environmental
laws in the past (now resolved in the bankruptcy proceeding) alleging natural
resource damage and seeking payment of response or "clean-up" costs and may be
subject to similar lawsuits in the future. These lawsuits have resulted in
substantial expenses and diversions of our resources. See "LEGAL PROCEEDINGS."
Any future lawsuits can be expected to result in similar expenses and
unproductive diversion of our resources. In addition, new legislation and
regulations could be adopted at any time that may result in additional operating
expenses, expenditures or restrictions and delays in the mining, production or
development of our properties. To the extent that we devote money and employee
time responding to governmental regulations or lawsuit, these resources will not
be devoted to further development of our income-producing operations.
THE FINANCIAL CONDITION OF OUR ARGENTINA AND MEXICO OPERATIONS IS SUBJECT TO
SOCIAL, POLITICAL AND ECONOMIC RISKS, INCLUDING CHANGES IN FOREIGN INVESTMENT
AND TRADE POLICIES, AND OTHER RISKS ASSOCIATED WITH FOREIGN OPERATIONS
We presently conduct operations in Argentina and Mexico and anticipate
that we will continue to conduct significant international operations in the
future. Because we conduct operations internationally, we are subject to the
effects of local political and economical developments, exchange controls,
currency fluctuations, royalty and tax increases, retroactive tax claims,
expropriation, import and export regulations, and other foreign laws or policies
governing operations of foreign-based companies, United States laws and policies
affecting foreign trade, taxation and investment and civil unrest and union
activity different from the United States. Changes in these items could restrict
our ability to conduct operations, reduce the profitability of our operations,
or reduce the value of our assets in Argentina and Mexico.
Because we do business with foreign governments, our contracts with
those governments are subject to renegotiation and our ability to enforce our
rights against those governments by bringing a lawsuit may be subject to the
doctrine of sovereign immunity, which prohibits or restricts lawsuits against
government agencies. In addition, if we are sued in a foreign country or are
forced to bring suit in a foreign country to enforce our rights against foreign
parties, our ability to control the costs and manage the conduct of any foreign
litigation will be difficult because of our unfamiliarity with foreign court
systems and procedures, language barriers, and the expense and inconvenience of
international travel and communications.
SALES BY THE ELLIOTT GROUP AND THE STONEHILL GROUP MAY LOWER THE PRICE OF THE
COMMON STOCK.
Upon the Effective Date of the Plan, the Elliott Group and the
Stonehill Group collectively acquired approximately 90% of our Common Stock.
Pursuant to various arrangements, we have agreed with the Elliott Group and the
Stonehill Group to register those shares for resale pursuant to a Registration
Rights Agreement. Sales of Common Stock by the Elliott Group and the Stonehill
Group could have the effect of depressing the market price of our stock.
Depending upon the reaction of the market to such sales, the Elliott Group and
the Stonehill Group may be put in a position to exercise the Argentina Call
Option. Such exercise could result in the Elliott Group and the Stonehill Group
obtaining all of the stock of Sunshine Argentina. See "PLAN OF REORGANIZATION -
Argentina Transaction; Call Option Agreement."
We will need to seek additional financing and could seek such financing
in the equity markets to develop the Pirquitas Mine or fund its exploration and
other activities. The sale of newly-issued shares of Common Stock could
significantly dilute the current stockholders' ownership interests. Sale of
shares of Common Stock previously registered or to be registered for resale
could have a material adverse effect on the market price of the Common Stock.
The issuance of shares of Common Stock that have been reserved for future
issuance (7,799,265 Shares at May 4, 2001) could also have a material adverse
effect on the market price of the Common Stock.
FAILURE TO REGISTER STOCK HELD BY THE ELLIOTT GROUP AND THE STONEHILL GROUP
The Registration Rights Agreement among the Company and the Elliott
Group and the Stonehill Group provides for material penalties for failure by the
Company to provide the Elliott Group and the Stonehill Group and other
stockholders with an effective Registration Statement for the resale of their
stock. These penalties include the ability to exercise the Argentina Call Option
or alternatively, to sell all of the Elliott Group and Stonehill Group Common
Stock to the Company at a price equal to 115% of the "Market Value" (as defined
in the Registration Rights Agreement). Exercise of either of these alternatives
would jeopardize the continued viability of the Company and may negatively
impact the value of the Common Stock.
TWO GROUPS OF STOCKHOLDERS ARE ABLE TO APPROVE ALL MATTERS SUBMITTED TO
STOCKHOLDERS
The Elliott Group and the Stonehill Group acquired 90% of our Common
Stock on the Effective Date of the Plan. These holders have the ability to
approve all matters which may be submitted to stockholders for approval,
including the
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14
election of all directors. The stockholders who collectively hold the remaining
10% of the Common Stock are not able to cause the election of any directors or
block any matter requiring stockholder approval.
SUBSTANTIALLY ALL OF OUR ASSETS ARE PLEDGED TO SECURE DEBT
Sunshine's only debt is the "Exit Financing Facility" in the maximum
principal amount of $5 million to affiliates of our two largest stockholders.
The facility is secured by substantially all of the assets of Sunshine and its
subsidiaries, including the Pirquitas Mine. If Sunshine is unable to meet its
requirements under the Exit Financing Facility, Sunshine faces the possible risk
of foreclosure upon some or all of its assets.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN
The opinion of the Company's independent certified public accountants
covering the 2000 year expresses substantial doubt about the Company's ability
to continue as a going concern. The Company closed the Sunshine Mine in February
2001 and will have no revenues from operations for the foreseeable future. The
recoverability of a major portion of assets listed in the financial statements
is dependent upon the continued operations of the Company. The Company may sell
some or all of its assets and will consider a merger or joint venture for the
development of the Pirquitas Mine. If the Company is unable to sell a sufficient
amount of assets for cash or find a partner to develop the Pirquitas Mine, it
will ultimately cease to be a going concern.
FOREIGN COUNTRY OPERATIONS
The Company has not previously developed a mining project in a foreign
country. Although the Company has endeavored to account for variations in costs,
worker productivity, tax structures and other factors specific to the location
in its feasibility study, there is a risk that the Company has not fully
anticipated all potential impact on the project development schedule or economic
projections for the Pirquitas Mine.
BUSINESS ENVIRONMENT
Due to the extended period of low silver prices, Sunshine and its North
American peers have largely seen very significant reductions in their market
capitalizations over the last several years. Gold mining companies have seen a
similar trend in recent years, although not to the extent of the silver mining
companies as the gold price has gone down only in the last three years, but the
silver price has been at a level too low for North American companies (including
Sunshine) to operate profitably for twelve years or more. Low metals prices
generally have combined with the difficulty caused by low gold and silver prices
to make access to capital difficult and expensive for the industry generally.
Our present circumstances require a market capitalization above $15 million or
the "Call Option" becomes exercisable.
FOREIGN EXCHANGE RATES
Sunshine's metal products are typically priced in dollars on world
markets. Mining operations historically were conducted in the United States, and
the costs of those operations are not subject to fluctuation due to foreign
exchange rates. Sunshine has developed a feasibility study for the development
of the Pirquitas Mine in Argentina. In recent years, Argentina has followed a
policy of currency stabilization by maintaining parity of the local currency,
the peso, with the dollar. This policy has succeeded in maintaining the value of
one Argentine peso equal to one dollar. Should the policy change, a fluctuation
in exchange rates could have an adverse impact on the economics of the project
and reduce the availability of potential investors and lenders. Should the
Argentine peso strengthen, the impact would be to increase capital and operating
costs, making the economics less attractive.
FORWARD-LOOKING STATEMENTS
Some of the information in this Prospectus may contain "forward-looking
statements." Forward-looking statements can be identified by the use of
forward-looking terminology such as "may," "will," "believe," "expect,"
"anticipate," "estimate," "continue," "intends," "plans," "predicts," or other
similar words, and include statements as to the intent, belief or current
expectations of Sunshine and our directors, officers and management with respect
to future operations, performance or position of Sunshine or certain of its
assets, or will contain other "forward-looking" information. These
forward-looking statements are predictions and are based on current information
and expectation, and we assume no obligation to update these statements. When
considering the forward-looking statements in this Prospectus, you should keep
in mind the risk factors and other cautionary statements in this Prospectus. The
risk factors noted in this Prospectus, and the other factors noted throughout
this Prospectus including certain known and unknown risks and uncertainties,
could cause our actual results to differ from those contained in any
forward-looking statement. Where a previously-issued projection is involved, we
will make full and prompt disclosure of material facts, both favorable and
unfavorable regarding our financial condition.
-11-
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USE OF PROCEEDS
All of the net proceeds from the sale of the Common Stock covered by
this Prospectus will go to the Selling Stockholders who offer and sale shares of
the Common Stock. We will not receive any proceeds from the sale of the Common
Stock offered by the selling stockholders pursuant to this Prospectus. If any
warrants are exercised by any holder thereof for cash, we will receive proceeds
equal to the exercise price of the warrant so exercised. We will use the net
proceeds received upon the exercise of any warrants for general corporate
purposes, including working capital.
CAPITALIZATION
The following table describes our capitalization as of June 30, 2001.
When you read this table, it is important that you also read "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our financial statements and related notes.
<Table>
<Caption>
June 30,
2001
--------
TOTAL CURRENT LIABILITIES $ 1,400
Long-Term Debt 5,000
Liabilities subject to compromise --
Other long-term debt 6,436
Liability for call option on Sunshine Argentina, Inc. 2,740
Redeemable common stock 14,365
Stockholders Equity
Common Stock, $0.01 par value 50
Authorized shares 75,000,000
Issued shares 50,000,000
Paid in Capital 2,812
Accumulated other comprehensive loss --
Accumulated deficit (3,401)
Less treasury stock, at cost --
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (539)
--------
TOTAL CAPITALIZATION, EXCLUDING CURRENT LIABILITIES $ 28,005
========
</Table>
DIVIDEND POLICY
Sunshine did not pay any cash dividends on its old common stock for more
than the past five years. Pursuant to restrictions imposed by Sunshine's
outstanding debt securities, Sunshine was not able to pay cash dividends on
shares of its common stock. Under the Exit Financing Facility, Sunshine may not
pay dividends on its Common Stock without the consent of the Lenders. Because
Sunshine is a holding company, its ability to pay dividends depends on the
ability of its subsidiaries to pay cash dividends or make other cash
distributions. Sunshine's Board of Directors has sole discretion over the
declaration and payment of future dividends. Any future dividends will depend
upon Sunshine's profitability, its financial condition, cash requirements,
future prospects, general business conditions, the terms of then existing
arrangements with creditors and other factors Sunshine's Board of Directors
believes relevant.
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PRICE RANGE OF COMMON STOCK
The New Common Stock has had a very limited trading history since the
Effective Date of the Plan. Since March 8, 2001, it has traded on the NASDAQ OTC
Bulletin Board under the symbol "SSMR" at high and low sales prices as reported
by NASDAQ of $2.15 and $0.61 through September 10, 2001. There were
approximately 5,000 stockholders of record at September 10, 2001; however, the
number of beneficial owners is believed to exceed this number.
The old common stock of Sunshine was, until February 28, 2001, traded on
the NASDAQ OTC Bulletin Board under the symbol "SSCF" and "SSCFQ." Holders of
100 or more shares of the Company's old common stock received approximately one
share of New Common Stock for every 28.4 shares of old common stock owned. The
following table shows the high and low sales prices of the old common stock over
recent periods (all amounts have been restated for the approximately one for
28.4 exchange rate under the Plan and do not reflect actual prices).
<Table>
<Caption>
HIGH LOW
2001
Third Quarter (Until Sept. 10, 2001) ... 0.380 0.170
Second Quarter ......................... 1.500 0.270
First Quarter .......................... 3.408 1.136
2000
Fourth Quarter ......................... 2.272 1.136
Third Quarter (from July 14, 2000) ..... 7.952 1.420
</Table>
By letter dated July 7, 2000, the New York Stock Exchange, Inc. ("NYSE")
notified Sunshine that trading in the Sunshine old common stock would be
suspended on July 14, 2000, and application would be made by the NYSE to the
Securities and Exchange Commission to de-list both issues. A notice from the
NYSE advised that the decision was reached based upon an amount of total
stockholders' equity and the 30-day average share price being less than $1 per
share for the old common stock. Sunshine did not appeal the determination. The
following table sets forth the range of high and low sales prices for the old
common stock as reported on the NYSE Composite for the periods indicated
(restated for the approximately one for 28.4 exchange rate pursuant to the
Plan). Such quotations represent inter-dealer prices (restated) without retail
market, mark-down or commissions and may not necessarily represent actual
transactions.
<Table>
<Caption>
HIGH LOW
2000
Third Quarter (until July 14, 2000) .... 10.65 7.10
Second Quarter ......................... 21.30 7.10
First Quarter .......................... 49.70 17.75
1999
Fourth Quarter ......................... 71.00 35.50
Third Quarter(a) ....................... 92.30 56.80
Second Quarter ......................... 120.70 85.20
First Quarter .......................... 170.40 99.40
</Table>
- ----------
(a)Effective August 6, 1999, the old Common Stock was issued following
a one-for-eight reverse stock split of the Common Stock effective on that date.
The reverse split had been previously approved by stockholders at the Annual
Meeting in June 1997. The reverse split was undertaken in order to increase the
Sunshine common stock price to over $1 to comply with NYSE continued listing
requirements.
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THE PLAN OF REORGANIZATION
On August 23, 2000 (the "Petition Date"), Sunshine and its wholly-owned
subsidiaries, Sunshine Argentina, Inc. ("Argentina"), Sunshine Precious Metals,
Inc. ("Metals") and Sunshine Exploration, Inc. ("Exploration"), all filed
voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. Separate cases and
their cause numbers are In Re: Sunshine Mining and Refining Company, Case No.
00-3409(MWF); In Re: Sunshine Argentina, Inc., Case No. 00-3410(MWF); In Re:
Sunshine Precious Metals, Inc., Case No. 00-3412(MWF); and In Re: Sunshine
Exploration, Inc., Case No. 00-3411(MWF) (all collectively called the
"Reorganization Cases"). The four separate cases were procedurally (but not
substantively) consolidated for joint administration (the "Proceeding"). During
the pendency of the Proceeding, Sunshine and its debtor subsidiaries, together
with the Stonehill Group and the Elliott Group were co-proponents of a Joint
Chapter 11 Plan of Reorganization, a Second Amended Joint Chapter 11 Plan of
Reorganization, and a Third Amended and Restated Joint Chapter 11 Plan of
Reorganization, which was modified December 5, 2000. The Third Amended and
Restated Joint Chapter 11 Plan of Reorganization as modified December 5, 2000 is
referred to as the "Plan." The Plan was the subject of an Order Confirming the
Third Amended and Restated Joint Chapter 11 Plan of Reorganization of Sunshine
and its debtor subsidiaries (the "Confirmation Order"). The following
information is a summary of the principal provisions of the Plan and the
Confirmation Order and the treatment of the various classes of claims and equity
interest under the Plan. You may obtain a copy of the Plan and the Confirmation
Order by sending us a written request at 5956 Sherry Lane, Suite 1621, Dallas,
Texas 75225, Attn: Secretary. The Plan and the Confirmation Order are also
attached as exhibits to our Current Report on Form 8-K for event occurring on
February 5, 2001. As used in the Plan and the Confirmation Order, the term
"Effective Date" means the first Business Day after all of the conditions to
effectiveness contained in the Plan and the Confirmation Order have been met or
waived. The Plan Effective Date was February 5, 2001.
The conditions precedent to the effectiveness of the Plan and the
Confirmation Order included designation by certain creditors of four (out of
five) directors (which occurred), a New Consent Decree with Sunshine Metals was
to have been entered and approved by the United States District Court for the
District of Idaho in the case styled United States of America v. Asarco
Incorporated, Case Nos. 96-0122-N-EJL and 91-0342-N-EJL, substantially in
accordance with an agreement in principal annexed to the Plan and such New
Consent Decree was to have been approved by final order of the Idaho District
Court (which occurred on January 18, 2001), and the so-called "Asarco
Settlement" was to have been approved by the Bankruptcy Court (which occurred).
BACKGROUND
Sunshine's primary product has been silver. The Sunshine Mine, in
production for over 100 years, has produced over 350 million ounces of silver,
more than any primary silver-producing mine in North America. In 1992, due to
low silver prices and excessive indebtedness, Metals restructured its Silver
Index Bond indebtedness with the support of Sunshine in a Chapter 11 proceeding
in the United States Bankruptcy Court for the District of Idaho. Pursuant to
that restructuring, the Silver Index Bonds of Metals were the only impaired
class, and were exchanged for newly-issued shares of common stock of Sunshine
and New Silver Index Bonds at a reduced amount payable in shares of common stock
of Sunshine. After emergence from the Idaho bankruptcy case, by the end of 1994
all of the New Silver Index Bonds had been converted into shares of old common
stock. Sunshine proceeded to raise new capital which was used to revitalize the
Sunshine Mine; a new ore body was discovered and a new mining method was
introduced to quickly develop that ore body. As a result, production tripled in
just four years, while unit production costs were reduced more than 30%.
However, because of continued low silver prices and despite substantially
improved operations of the Sunshine Mine, Sunshine continued to operate at a
loss and sought to develop meaningful new sources of production outside the
United States.
Sunshine, through its wholly-owned subsidiary, Argentina, acquired the
Pirquitas Mine in November 1995 from the bankrupt estate of the mine's prior
owner for $1.7 million. The property was acquired because of evidence that
documented the potential for a very large silver resource capable of being mined
using low cost open pit methods. During the subsequent four years, Sunshine,
through Sunshine Argentina, Inc. conducted an aggressive exploration program and
engineering studies that resulted in the completion of the feasibility study for
the property. According to the feasibility study, the Pirquitas Mine ore
reserves total 30.4 million tonnes (metric tons) grading 128 grams per tonnes
silver, 0.17% tin, and 0.81% zinc. The capital required to develop the Pirquitas
Mine is believed to approximate $140 million, including working capital
requirements. Pursuant to the feasibility study, the mine would operate at a
through-put rate of 9,600 tonnes per day, producing concentrates containing 100
million ounces of silver, 29,000 tonnes of tin, and 148,000 tonnes of zinc over
a mine life of approximately ten years. The calculated return to the Company on
its investment assuming a silver price of $5 per ounce is approximately 18% (the
calculated return on investment is 22% if a $5.50 price is assumed). The "return
on investment" is defined as the internal rate of return on all anticipated
future cash flows resulting from the production of currently known proven and
probable reserves. The feasibility study predicts that the cash cost of
production of silver from the Pirquitas Mine, net of tin and zinc by-product
credits, will be approximately $1.53 per ounce. Sunshine believes that in
addition to other possible benefits, there exists the potential for reserve
expansion once operation commences.
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Sunshine attempted to raise the capital to refinance its indebtedness
and finance the equity requirement of the Pirquitas Mine, preparing an offering
to commence at the end of May 1999. Sunshine had assurances from investment
bankers that Sunshine would be able to raise the capital required to refinance
the EuroBonds maturing in March 2000, and if it had done so, Sunshine believes
it would not have commenced the Reorganization Cases. However, Sunshine's
auditors resigned immediately prior to the commencement of the offering.
According to Sunshine's investment bankers, the auditors' resignation made the
offering untenable. A subsequent attempt to revive the offering in the third
quarter of 1999 was unsuccessful. Sunshine believes the auditors' resignation
was a breach of their duty to Sunshine and caused substantial damage to
Sunshine. Sunshine has therefore instituted litigation in Texas state court
seeking recovery of damages from the auditors. The suit was filed in June 2000
and is in the discovery phase. Sunshine cannot predict if it will be successful
in its suit or, if successful, what recoveries might be. See "CHANGE IN
ACCOUNTANTS."
During the fourth quarter of 1999, Sunshine attempted a sale of
Argentina, including its ownership of the Pirquitas Mine. However, the Company
did not receive offers that were sufficient to satisfy all its liabilities. As a
result, Sunshine determined that it was not in the best interest of Sunshine or
its creditors to sell the Pirquitas Mine.
Sunshine determined during the first quarter of 2000 it would be unable
to access the capital required to service its debt. Sunshine commenced
negotiations with the Elliott Group and the Stonehill Group to restructure their
debt and to obtain additional financing. The bulk of Sunshine's indebtedness was
then held by the Elliott Group and the Stonehill Group. The Elliott Group held
approximately two-thirds of the EuroBonds with claims thereupon against Sunshine
and Metals. Pursuant to the terms of a prior Put Option Agreement, Argentina and
Exploration were each indebted to the Elliott Group for the full amount of the
Elliott Group's EuroBond holdings. Stonehill Notes were issued by Sunshine in
November 1997 and were guaranteed at that time by Argentina and Exploration.
Prior to the August 23, 2000 filing of the voluntary petitions in the
Proceeding, The Liverpool Limited Partnership, Liverpool Associates, Ltd.,
Elliott International, L.P. and Elliott International Capital Advisors, Inc.
(collectively the "Elliott Group") acquired 67% of the then outstanding 8%
Senior Exchangeable Notes due 2000 (the "EuroBonds") issued by Metals and
guaranteed by Sunshine. The Elliott Group acquired $14 million in principal
amount of Eurobonds in 1996, $1.6 million in principal amount of Eurobonds in
1997 and $2.9 million in 1998. In connection with an additional financing in
1999, the Elliott Group acquired an option to "put" the "EuroBonds" to
Argentina. On February 9, 2000, certain holders of EuroBonds exchanged
$1,000,000 in principal amount for 756,000 shares of "old common stock" of
Sunshine outstanding prior to August 23, 2000. Similarly, Stonehill
Institutional Partners, L.P., Stonehill Offshore Limited (together with their
affiliates, the "Stonehill Group") had been the principal holders of a series of
10% Notes due November 24, 2002 issued by Sunshine to the Stonehill Group in the
original principal amount of $15,000,000 and guaranteed by Argentina. On April
11 and 17, 2000, holders of the "Stonehill Notes" converted $1,000,000 in
principal amount (plus accrued interest) for 1,937,554 shares of "old common
stock" of Sunshine outstanding prior to August 23, 2000. As the EuroBonds were
not retired or refinanced prior to their maturity, pursuant to the terms of the
Stonehill Notes, Sunshine was obligated to issue to the holders of the Stonehill
Notes additional amounts payable in cash or shares of common stock, and in March
2000, Sunshine issued, as partial payment of the quarterly interest due, an
additional 698,179 shares of old common stock to the holders of the Stonehill
Notes.
By virtue of our inability to pay our debts as they became due and low
silver prices, we conceived the Plan as an alternative to the more drastic
measures available to us for re-structuring indebtedness of Sunshine, such as a
liquidation of all of Sunshine's properties. The terms of the Plan were arrived
at after a diligent search for, and an extensive evaluation of, numerous
financing and liquidation proposals by us and consultation with the Stonehill
Group and the Elliott Group as to what type of plan of reorganization might be
feasible after those lengthy negotiations. The proposals considered included the
Elliott Group providing the Company with an equity line of credit to fund its
operations, while restructuring the Eurobonds to defer their maturity until at
least May 1, 2001, and to provide for the payment of interest on the Eurobonds
using Common Stock. This proposal was made unfeasible by the subsequent decline
in the Company's Common Stock price. Subsequently, the Company, the Elliott
Group and the Stonehill Group negotiated a comprehensive restructuring of the
Eurobonds and the 10% Notes into equity positions similar to those achieved in
the Plan. This plan would have required stockholder approval. Due to the expense
and time involved to solicit stockholder approval, and the uncertainty of
actually attaining approval, it was determined that the Plan was the best
alternative to restructure the Company's debt and provide operating financing.
-15-
19
CANCELLATION OF OLD COMMON STOCK
Prior to the Effective Date, Sunshine had issued and outstanding
48,685,000 shares of old common stock, $0.01 par value. The old common stock was
held by approximately 20,000 shareholders of record. Pursuant to the Plan and
the Confirmation Order, on the Effective Date, all of the "old common stock" (as
well as all outstanding options and warrants) of Sunshine was cancelled, retired
and eliminated with no consideration paid therefor, and Sunshine was deemed to
have issued the "New Mining Stock," which is shares of Common Stock, par value
$0.01 per share. Under the Amended and Restated Certificate of Incorporation of
Sunshine filed with the Secretary of State of Delaware on February 16, 2001,
Sunshine's authorized common stock from and after the Effective Date consists of
200,000,000 shares of Common Stock, par value $0.01 per share. Of that class of
stock, 50,000,000 shares of Common Stock, par value $0.01 per share were issued
as the "New Mining Stock" under the terms of the Plan to those designated as
recipients therefor under the Plan which generally are certain creditors of
Sunshine and others who in turn gifted a portion (approximately 3.4%) of such
New Mining Stock to the former common stockholders on a pro-rata basis, but only
to accounts holding in excess of 100 shares of "old common stock." Accounts
holding 100 or more shares of "old common stock" received the number of shares
of "new common stock" equal to 3.52% of the number of shares of old common stock
owned. Fractional interests were rounded to the next-higher number for each
account. Accounts holding fewer than 100 shares of old common stock did not
receive any new shares. The CUSIP number of the New Common Stock is 867833-60-0.
The Plan's treatment mechanism reflects that Sunshine is a holding
company whose property consists of equity in its subsidiaries which had no real
value to distribute to its creditors because each "debtor subsidiary" was also
insolvent. Therefore, other than through the consensual "redistribution" of
value from the creditors who gifted certain items to the former common
stockholders, Sunshine would have had no value to distribute to its creditors.
In order to establish a consensual restructuring and to provide for a
widely-disbursed body of holders of the "New Mining Stock," certain creditors
(who were the holders of the Allowed Claims against Sunshine and its debtor
subsidiaries) agreed to redistribute certain of their recoveries to other
Sunshine creditors. By virtue of this redistribution, holders of Allowed Claims
against Sunshine received a portion of the New Mining Stock. Through this
arrangement, the various creditor classes received the same proportion of new
common stock to its Allowed Claim as received by each holder in the other
creditor classes, and the "gifting" creditors (the Stonehill Group and the
Elliott Group) obtained 89.99% of the new common stock on a fully-diluted basis
taking into account all of the distributions afforded to the various holders.
Based upon the various creditor classes and the estimates of Allowed
Claims, after effectuation of the redistribution of "New Mining Stock" from the
holders of certain claims (the "Allowed Put Default Claims" and the "Argentina
Allowed Stonehill Notes Claims") to the various classes entitled to receive same
under the Plan, the following percentages of New Mining Stock were distributed:
-16-
20
<Table>
<Caption>
APPROXIMATE NO. OF SHARES
PERCENTAGE OF BASED UPON 50,000,000
CLASS NEW MINING STOCK SHARES OUTSTANDING
Mining Allowed General Unsecured Claims -
Class Mining 2 1.05% 525,000
Mining Allowed EuroBond Guaranty Claims -
Class Mining 3 6.27% 3,137,000
Mining Allowed Stonehill Note Claims -
Class Mining 4 3.35% 1,673,000
Mining Allowed 9% Notes Claims -
Class Mining 5 0.36% 179,000
Mining Allowed 5% Notes Claims -
Class Mining 6 0.08% 39,000
Mining Old Common Share Interest -
Class Mining 8 3.43% 1,714,000
Allowed Put Default Claims -
Class Argentina 1 42.28% 21,141,000
Allowed Stonehill Notes Guaranty Claims -
Class Argentina 2 35.66% 17,832,000
Metals Allowed General Unsecured Claims -
Class Metals 2 0.92% 461,000
Metals Allowed EuroBond Claims -
Class Metals 3 6.60% 3,300,000
------ ----------
TOTAL 100.00% 50,000,000
====== ==========
</Table>
NEW CONSENT DECREE
The Plan contemplated a settlement between Sunshine and Metals and the
United States on behalf of the United States Environmental Protection Agency
("EPA"), the United States Department of the Interior ("DOI") and the United
States Department of Agriculture ("Agriculture") [all collectively the
"Government"] and the Couer d'Alene Tribe (the "Tribe") through a consent decree
(the "New Consent Decree") involving Sunshine and Metals in cases numbered
CIV96-0122-N-EJL and CIV91-0342-N-EJL pending in the United States District
Court for the District of Idaho (the "NRD Actions"). Under the terms of that
settlement, the Government and the Tribe received on the Effective Date of the
Plan warrants to purchase 9.95% of Sunshine's New Common Stock (covering a total
of 4,995,000 shares of New Common Stock)
o with a strike price for such Warrants equal to the strike price of any
management options provided under the Plan based on an equity value of
Sunshine of $33,000,000 [an exercise price of $0.66 per share]
o with a cashless exercise feature
o terminating on the tenth anniversary of the Effective Date of the Plan
(February 5, 2011)
o that are exempt from initial registration pursuant to 11 U.S.C.
Section 1145
o that are freely transferable to any other entity at any time
o that are subject to ordinary terms and conditions, including standard
anti-dilution language, of warrants of this nature reasonably
acceptable to the proponents of the Plan, the Government and the
Tribe.
The New Consent Decree was approved by the U.S. District Court for the District
of Idaho on January 18, 2001, and requires Metals to provide for certain royalty
payments to the Government and the Tribe on a quarterly basis. The royalty is
based on a percentage of the "Net Smelter Returns" from all mining by Metals
anywhere in the United States and all mining by any Sunshine entity from the
Sunshine Mine or within one mile of the current boundaries of the Sunshine Mine.
The royalty is to adjust on a sliding scale based upon the average price of
silver. No royalty must be paid until the average silver price exceeds $6 per
ounce. The royalty varies from one percent of Net Smelter Returns at a silver
price of $6.00 per ounce to seven percent at a price of $10.00 or more per
ounce. Silver prices per ounce are presently below $5 per ounce. In connection
with the closure of the smelter to which the Sunshine Mine shipped concentrates,
Sunshine notified employees that a mass lay-off of the majority of the Sunshine
Mine employees would occur on February 16, 2001, and the Sunshine Mine was
placed on a care and maintenance status. In that status, production does not
occur.
-17-
21
Under the New Consent Decree, SPMI is required to convey the surface rights
to timberlands it owns and uses for non-mining purposes, and to perform certain
remediation and testwork at its ConSil Mine site adjacent to the Sunshine Mine.
We do not consider the value of the surface rights to timberlands to be
material. The Company does not believe that the additional remediation and
testwork will result in any additional material liabilities.
ASARCO SETTLEMENT
As a part of the Plan, Sunshine and Asarco Incorporated ("Asarco") entered
into a stipulation, the terms of which were included in the Confirmation Order
relating to Asarco's claim in the Proceeding. Under the stipulation, Asarco was
paid $125,000 in cash on the Effective Date for an allowed administrative claim,
and Asarco received with respect to its allowed general unsecured claim on the
Effective Date, shares of New Mining Stock in the amount provided for by the
Plan for its Class Mining 2 and Class Metals 2 claims (a total of 324,265
shares), and warrants to purchase 324,265 shares of Sunshine's New Common Stock
o with a strike price for such warrants equal to the strike price of the
management options provided under the Plan based on an equity value of
Sunshine of $33,000,000 (exercise price of $0.66)
o with a cashless exercise feature
o that are exempt from initial registration
o that are freely transferable to any other entity at any time
o that are subject to ordinary terms and conditions, including standard
anti-dilution language of warrants of a similar nature reasonably
acceptable to the Plan proponents and Asarco
o that terminate on the fifth anniversary of the Effective Date of the
Plan (February 5, 2006)
CURRENT CAPITALIZATION - DILUTION POTENTIAL
The number of shares of New Common Stock, par value $0.01 per share of
Sunshine outstanding, the number of shares reserved for future issuance under
the Plan and the aggregate totals are:
<Table>
<Caption>
ESTIMATED* NUMBER OF SHARES
New Common Stock, par value $0.01 per share to be outstanding: 50,000,000
Reserved for issuance pursuant to Warrants held by the
Government and the Tribe [exercise price $0.66 per share]** 4,975,000
Reserved for issuance pursuant to warrants held by Asarco
[exercise price $0.66 per share]** 324,265
Reserved for issuance pursuant to options held by Management
[average exercise price $0.66 per share] 2,500,000
----------
TOTAL 57,799,265
==========
</Table>
- ----------
*estimates do not contemplate adjustments for roundings of calculation,
forfeitures or claims objection results, all of which may change any or all
estimated amounts.
**each Warrant contains anti-dilution features which require an adjustment of
the purchase price and/or number of Shares in the event of subdivisions,
combinations or other issuances of common stock of Sunshine or the declaration
of a stock dividend or other rights or distributions. In the event of any such
circumstances, proportional adjustments are to be made to the purchase price
payable per Share and/or the number of Shares purchasable so that the holder of
the Warrant would be entitled to the same relative ownership position as before
the action taken.
-18-
22
REGISTRATION RIGHTS AGREEMENT
Under the Plan of Reorganization, Sunshine entered into a Registration
Rights Agreement with members of the Stonehill Group and the Elliott Group under
which the shares of new common stock issued to them are to be registered under
federal securities laws. Such agreement provides for filing of a Registration
Statement within a specified period of time covering only the securities issued
to the Elliott Group and the Stonehill Group, the effectiveness of such
Registration Statement within a certain period of time and other matters. Since
the Registration Statement was not effective by May 20, 2001, the Company would
have been liable to each of the holders at the end of each subsequent thirty-day
period it is not effective in an amount equal to 1% of the value of the holder"s
stock. If the Registration Statement had not been effective by July 18, 2001,
the Call Option would have become immediately exercisable, and the holders would
have "put" their shares to the Company at a "Mandatory Repurchase Price" equal
to 115% of the Market Value on the date the holder acquires the rights to
require Sunshine to repurchase such shares. Pursuant to the terms of an
agreement entered into contemporaneously with the Amended Credit Agreement, the
holders have waived any of the violations discussed which occur prior to October
15, 2001. Subsequent to October 15, 2001, should the registration statement
still not be effective, the holders rights to enforce the above penalties will
be reinstated.
ARGENTINA TRANSACTION; CALL OPTION AGREEMENT
Under the terms of the Plan and the Confirmation Order on the Effective
Date, the capital stock of Argentina was cancelled and Argentina issued the "New
Argentina Stock." Sunshine caused the incorporation and organization of a new
subsidiary, Sunshine International Mining, Inc., a Delaware corporation
("International"). Sunshine contributed to the capital of International all of
the New Argentina Stock and Argentina became a wholly-owned subsidiary of
International which in turn is a wholly-owned subsidiary of Sunshine.
Simultaneously Sunshine, International and Argentina entered into a Call Option
Agreement dated February 5, 2001, with the Elliott Group and the Stonehill
Group, under the Call Option Agreement, International granted a call option to
each holder within the Elliott Group and the Stonehill Group to purchase,
collectively, up to 100% of the shares of New Argentina Stock, and a first
priority perfected security interest in the New Argentina Stock. The call
option(s) was granted to purchase a maximum number of shares of New Argentina
Stock at a specified purchase price ($1,000 per share for each of 1,000 shares
outstanding). The option is to be reduced proportionately in the event the
Elliott Group holders and/or the Stonehill Group holders sell more than 50% of
their shares of New Common Stock of Sunshine received. For example, if the
Elliott Group holders were to sell 55% of their shares of Sunshine Common Stock
initially received, then the maximum number of New Argentina Stock that the
Elliott Group holders could purchase in the aggregate upon exercise of their
Call Options would be reduced by a percentage equal to (55% - 50%) x 2, or 10%.
The term of each Call Option expires at the time of exercise in full of such
Call Option, or if the market capitalization of Sunshine exceeds $150,000,000
for at least 60 consecutive days (subject to certain conditions) or on the tenth
anniversary of the Effective Date of the Plan. The Call Option becomes
exercisable upon the occurrence of any one or more of nine separate events,
including
o the de-listing of the Sunshine New Common Stock from an "Approved
Market,"
o suspension of the Sunshine New Common Stock from trading on an
Approved Market for at least seven consecutive calendar days,
o reduction in the overall market capitalization of Sunshine to less
than $15,000,000 for at least fifteen consecutive calendar days,
o a bankruptcy proceeding occurring with respect to Sunshine or one of
its subsidiaries,
o Sunshine fails to comply with its covenants or obligations in the Call
Option Agreement (such as incurring any indebtedness or attempting to
create liens without the holders' consent), and
o other events, including any default under the "Exit Financing
Facility."
The Call Option, once exercisable, may be exercised at any time by any of
the holders thereof. The effect of the Call Option(s) is to potentially allow
the Elliott Group holders and the Stonehill Group holders (and certain of their
successors and assigns) to acquire Sunshine Argentina which in turns owns the
Pirquitas Mine and other assets. Should such an event occur, Sunshine's
investment of approximately $20,000,000 in the acquisition and evaluation of
that property would no longer be an asset of Sunshine, nor would the assigned
proven and probable in-ground reserves before metallurgical losses totaling
129.6 million ounces of silver, along with 59,000 tons of tin and 273,000 tons
of zinc. The New Argentina Stock has been pledged under the Call Option
Agreement under a separate Pledge Agreement to the Elliott Group holders and the
Stonehill Group holders and delivered to Wells Fargo Bank Minnesota, N.A. as
administrative and pledge agent.
The market value of the Company's common stock is currently less than $15
million, the value that triggers the ability to exercise the Call Option.
Pursuant to the terms of our agreement entered into contemporaneously with the
Amended Credit
-19-
23
Agreement, the holders have waived any violations prior to October 15, 2001.
Subsequent to that date, if the Company's market capitalization remains below
$15 million, the holders will have the right to exercise the Call Option.
EXIT FINANCING FACILITY
In connection with the Plan and Confirmation Order, Sunshine's only debt
instrument was the "Exit Financing Facility" which bore interest at a fixed rate
of 15% per annum in the maximum principal amount of $5,000,000 (approximately
$2,700,000 of which was outstanding on the Effective Date). The lenders were
Highwood Partners, L.P. and Stonehill Capital Management, LLC, affiliates of the
Elliott Group and the Stonehill Group, respectively. The facility is secured by
substantially all of the assets of Sunshine and its subsidiaries, including the
Pirquitas Mine. The proceeds of all advances under such facility are to be
utilized solely (a) to provide funds necessary to the conduct of the business of
Sunshine and its subsidiaries in the ordinary course in accordance with an
approved budget, (b) to pay fees and disbursements paid to lenders and their
professionals in accordance with the budget, and (c) as otherwise contemplated
or permitted by the budget.
The availability of the Exit Facility has been used and it has been
replaced by the Amended Credit Facility.
DIRECTORS
At the time of institution of the Reorganization Cases, the members of the
Board of Directors of Sunshine were G. Chris Andersen (a Director since May
1983), V. Dale Babbitt (a Director since December 1992), George M. Elvin (a
Director since June 1994), Daniel D. Jackson (a Director since May 1983), Oren
G. Shaffer (a Director since June 1993), John S. Simko (a Director since
December 1992), and Robert B. Smith (a Director since June 1993). On the
Effective Date of the Plan, the operational management of Sunshine became the
responsibility of the "Reorganized Board of Directors," a majority of whom were
selected by certain creditors in accordance with the Plan. All of the former
Directors ceased to be Directors of Sunshine on the Effective Date of the Plan
and were deemed removed (without cause) pursuant to the Confirmation Order. In
accordance with the terms of the Plan, four "Creditor Directors" were selected,
and one "Management Director" was selected to comprise the Board of Directors of
Sunshine from and after the Effective Date. John S. Simko continues as a
Director as the "Management Director," and George M. Elvin was designated as one
of the "Creditor Directors" by the Elliott Group. The other three "Creditor
Directors" selected are Arnold Kastenbaum (Designee of the Stonehill Group),
Keith McCandlish (Designee of the Elliott Group), and Charles Reardon (Designee
of the Stonehill Group).
CONTINUED JURISDICTION OF BANKRUPTCY COURT
Consistent with the provisions of the Bankruptcy Code, on the Effective
Date of the Plan, title to all assets and property of the estates of the
"Debtors" passed to and vested in "Reorganized Debtors" (Sunshine and its
subsidiaries) free and clear of all claims, allowed interest, liens, charges and
other rights of creditors or equity holders arising prior to the Effective Date.
From and after the Effective Date, Sunshine and its subsidiaries may operate
their respective businesses, and may use, acquire and dispose of property, free
of any restrictions of the Bankruptcy Code, the Bankruptcy Rules and the
Bankruptcy Court, except as provided in the Confirmation Order. The rights
afforded under the Plan and treatment of the Claims and Interests under the Plan
have been in exchange for, and in complete satisfaction, discharge and release
of all Claims and termination of all interests of any nature whatsoever arising
on or before the Effective Date, including any accrued interest on Claims from
the Petition Date. The Bankruptcy Court retained exclusive jurisdiction over the
Reorganization Cases for various matters to sort out any claims, and to
determine any controversies or disputes, as well as all matters set forth in the
Confirmation Order.
SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder, the
number of shares of common stock beneficially owned by each Selling Stockholder
immediately prior to the date of this Prospectus and the number of shares
covered by this Prospectus that each Selling Stockholder may offer and sell
pursuant to this Prospectus, which represents all of the shares of common stock
beneficially owned by each Selling Stockholder. However, because the Selling
Stockholders may offer all or a portion of the shares covered by this Prospectus
at any time and from time to time after the date of this Prospectus, we cannot
determine the exact number of shares that each Selling Stockholder may retain
after completion of this offering.
-20-
24
<Table>
<Caption>
Beneficial
Ownership of Number of Shares Approximate
Shares Before Covered by Percentage of
Name of Selling Stockholder Offering Prospectus Class(a)
--------------------------- ------------- ---------------- -------------
Elliott International, LP(b)
Paul E. Singer, General Partner 12,726,377 12,726,377 25.45%
The Liverpool Limited Partnership(b)
Paul E. Singer, President, Liverpool Associates,
Ltd., General Partner 12,724,912 12,724,912 25.40%
Elliott Associates, LP(b)
Paul E. Singer, President of Elliott Capital
Advisors, Inc., Attorney-In-Fact 38,711 38,711 00.08%
Stonehill Institutional Partners, LP(c)
John Motulsky, Chris Wilson and Wayne Teetsel,
General Partners 6,690,275 6,690,275 13.38%
Stonehill Offshore Partners, Limited LP(c)
John Motulsky, Chris Wilson and Wayne Teetsel,
Managing Members of Stonehill Advisors, LLC 6,690,275 6,690,275 13.38%
</Table>
- ----------
(a) Percentages are based upon 50,000,000 shares of Common Stock outstanding at
September 10, 2001.
(b) Paul E. Singer is the General Partner of Elliott Associates, LP, and is the
President of Liverpool Associates, Ltd., the General Partner of The
Liverpool Limited Partnership. Paul E. Singer is also the President of
Elliott International Capital Advisors, Inc., the attorney-in-fact for
Elliott International, LP. In such capacities, Mr. Singer holds the power
to vote and dispose of the total of 25,490,000 shares of Common Stock held
by such entities, and under Rule 13d-3 of the Securities and Exchange Act
of 1934 (the "1934 Act"). Mr. Singer may be deemed to be the beneficial
owner of all such securities.
(c) John Motulsky, Chris Wilson and Wayne Teetsel are the general partners of
Stonehill Institutional Partners, LP, a Delaware limited partnership and
are the managing members of Stonehill Advisors, LLC, the investment advisor
to Stonehill Offshore Partners Limited, a Cayman Islands corporation. As
such, Messrs. Motulsky, Wilson and Teetsel share the power to vote and
dispose of the 19,505,000 shares of Common Stock held by both entities and
under Rule 13d-3 of the 1934 Act, such individuals together may be deemed
to be the beneficial owners of such securities.
During the past three years, none of the individuals listed above has
held any position with Sunshine or its subsidiaries or affiliates except as
representatives of the Elliott Group or Stonehill Group as the holders of debt
or old common stock of Sunshine.
We cannot assure you that the Selling Stockholders will sell any or all
of the common stock offered by this Prospectus. Because the Selling Stockholders
may sell using this Prospectus or may otherwise sell their common stock, no
estimate can be given as to the amount of common stock that will be held by the
selling stockholders upon termination of any sales. Therefore, the entire number
of shares covered by this Prospectus is set forth in the table above. In
addition, the Selling Stockholders identified above may have sold, transferred
or otherwise disposed of all or a portion of their common stock since the date
on which they provided us the information regarding their ownership of common
stock in transactions exempt from the registration requirements of the
Securities Act of 1933. See "PLAN OF DISTRIBUTION."
Only the Selling Stockholders identified above who beneficially own the
common stock identified with each Selling Stockholder's name on the effective
date of the Registration Statement of which this Prospectus forms a part may
sell common stock pursuant to this Prospectus. We may from time to time include
additional Selling Stockholders in supplements to this Prospectus.
Sunshine will not receive any proceeds from the offering to which this
Prospectus relates. The Selling Stockholders may sell the securities offered
hereby through underwriters or dealers, through brokers or other agents, or
directly to one or more purchasers in one or more transactions in the
over-the-counter market, if such a market develops, or in privately-negotiated
transactions, or in a combination of such transactions. Such transactions may be
effected by the Selling Stockholders at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated
-21-
25
prices, or at fixed prices, which may be changed. Such underwriters, dealers,
brokers or other agents may receive compensation in the form of discounts or
commissions from the Selling Stockholders and may receive commissions from the
purchasers of such securities for whom they act as agent.
Any Selling Stockholder and any dealer, broker or other agent selling
securities offered hereby for the Selling Stockholders or purchasing any such
securities from a Selling Stockholder for purposes of resale may be deemed to be
an underwriter under the Securities Act of 1933, and any compensation received
by such Selling Stockholder, dealer, broker or other agent may be deemed
underwriting compensation. Neither Sunshine nor the Selling Stockholders can
presently estimate the amount of such compensation. Sunshine knows of no
existing arrangements between any selling Stockholder and any other Selling
Stockholder, dealer, or broker or other agent.
Pursuant to the Registration Rights Agreement, Sunshine agreed to
register or qualify or cooperate with the Selling Stockholders in connection
with registering or qualifying the Shares under the state securities or "blue
sky" laws and to do any and all other acts or things necessary or advisable to
enable the offer and sale of the Shares. However, Sunshine is not required to
qualify generally to do business in any jurisdiction where it is not then so
qualified, or take any action which would subject it to general service of
process or to taxation in any jurisdiction where it is not then so subject.
Unless and until such times as offers and sales of Shares by Selling
Stockholders are registered or qualified under applicable state securities or
"blue sky" laws, or are otherwise entitled to an exemption therefrom, initial
resales by Selling Stockholders will be materially restricted. Selling
Stockholders are advised to consult with their respective legal counsel prior to
offering or selling any of their Shares.
In accordance with the provisions contained in the Registration Rights
Agreement, Sunshine is obligated under certain circumstances to indemnify the
Selling Stockholders who sell securities pursuant to this Prospectus, their
respective officers, directors and agents, and controlling persons, and each
underwriter in an offering or sale of such securities, against certain
liabilities related to such sale or disposition, including liabilities arising
under the Securities Act or to contribute to payments which such persons or
entities may be required to make in respect thereof. In accordance with the
Registration Rights Agreement, Sunshine may, in certain circumstances, also be
entitled to indemnification or contribution by the Selling Stockholders or
underwriters participating in an offering of the securities to which this
Prospectus relates.
Sunshine has agreed to pay, with certain limited exceptions, all the
expenses incurred in connection with the preparation and filing of this
Prospectus and the related Registration Statement, including the Securities Act
of 1933, registration and filing fees, fees and expenses associated with filings
required to be made with the National Association of Securities Dealers, Inc.,
fees and expenses of compliance with securities or "blue sky" laws, printing
expenses, messenger and delivery expenses, fees and expenses of counsel for
Sunshine and its independent certified public accountants. Sunshine estimates
that the foregoing expenses in connection with the registration of the
securities will be approximately $55,000. In no event shall Sunshine pay for any
underwriting discounts, commissions, or fees attributable to the sale of Shares
or any other out-of-pocket expenses of the Selling Shareholders incurred in
connection with a sale of Shares.
-22-
26
PLAN OF DISTRIBUTION
We will not receive any of the proceeds of the sale of common stock
offered hereby. The common stock may be sold from time to time to purchasers
directly by the selling stockholders. Alternatively, the selling stockholders
may offer the common stock through brokers, dealers or agents who may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchasers of the common stock for whom they may
act as agent. The selling stockholders and any such brokers, dealers or agents
who participate in the distribution of the common stock may be deemed to be
"underwriters." Any profits on the sale of common stock by them and any
discounts, commissions or concessions received by any such brokers, dealers or
agents might be deemed to be underwriting discounts and commissions under the
Securities Act of 1933. To the extent the selling stockholders may be deemed to
be underwriters, the selling stockholders may be subject to statutory
liabilities of the Securities Act, including but not limited to Sections 11, 12
and 17 of the Securities Act, and Rule 10b-5 under the Securities Exchange Act
of 1934.
The common stock offered by this Prospectus may be sold from time to
time by the selling stockholders (or, to the extent permitted, by their
transferees or successors-in-interest). The selling stockholders may offer and
sell the shares in the over-the-counter market or otherwise. Sales may be made
on the NASDAQ bulletin board at prices and on terms dictated by the then current
market price of the shares or in registered transactions. The shares may be sold
by any one or more of the following methods:
o To the purchasers directly;
o A block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and
resell a portion of a block as principal to facilitate the
transaction;
o Purchases by a broker or dealer as principal, and resale by
such broker or dealer, for its own account pursuant to this
Prospectus;
o Through underwriters or dealers who may receive compensation
in the form of underwriting discounts, concessions, or
commissions from the selling stockholders or such
successors-in-interest and/or from purchasers of the common
stock for whom they act as agent;
o The writing of options on the common stock;
o The pledge of the common stock as security for any loan
obligation, including pledges to brokers or dealers who may,
from time to time themselves effect distributions of common
stock or interest therein;
o An exchange distribution in accordance with the rules of such
exchange or transactions in the over-the-counter market;
o Ordinary brokerage transactions and transactions in which the
broker or dealer solicits purchasers;
o In privately negotiated transactions;
o Through put or call option transactions;
o Through short sales;
o Pursuant to Rule 144 (or any other lawful method of
disposition); or
o A combination of any of the above transactions.
Sales may be made at prices and at terms then prevailing or at prices
related to the then current market price or negotiated prices and terms. Brokers
or dealers may arrange for other brokers or dealers to participate to effect
sales. From time to time, the selling stockholders may engage in short sales,
short sales against the box, puts and calls and other transactions in common
stock or other securities issued by us or derivatives of securities issued by
us. They may sell and deliver the common stock in connection with their
transactions or in settlement of securities loans.
Those transactions may or may not involve brokers or dealers. If the
transactions do include brokers, the Selling Stockholders expect to pay
customary brokerage commissions and charges. We will pay all expenses other than
underwriting discounts, selling commissions and fees, and legal and accounting
fees incurred by the Selling Stockholders incident to the offering and sale of
the common stock.
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The Selling Stockholders are not obligated to sell any or all of the
shares of common stock offered by this Prospectus. Each Selling Stockholder
reserves the right to accept or reject in whole or in part any proposed purchase
of the shares of common stock.
The Selling Stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Securities Exchange
Act of 1934 and the rules and regulations thereunder. That may include, without
limitation, Regulation M, which may limit the timing of purchases and sales of
any of the common stock by the Selling Stockholders and any other person.
Regulation M promulgated pursuant to the Securities Exchange Act of 1934
provides that any person engaged in the distribution of the common stock may not
simultaneously engage in market-making activities with respect to the particular
common stock being distributed for certain periods prior to the commencement of
such distribution. All of the foregoing may affect the marketability of the
common stock and the ability of any person or entity to engage in market-making
activities with respect to the common stock.
To the extent required, a supplement to this prospectus or a
post-effective amendment to the registration statement of which this prospectus
is a part will set forth the aggregate principal amount of the shares to be
sold, the names of the Selling Stockholders, the purchase price, the name of any
agent, broker-dealer or underwriters and any applicable commission with respect
to a particular offer. The Selling Stockholders and any agents, broker-dealers
or underwriters that participate with the selling stockholders in the
distribution of the shares of common stock may be deemed to be "underwriters"
within the meaning of the Securities Act. In that event, any discounts,
commissions or conversions received by the agents, broker-dealers or
underwriters and any profit on the resale of the shares of common stock
purchased by them may be deemed to be underwriting discounts or commissions
under the Securities Act.
We have agreed to indemnify the selling stockholders and their
respective directors, officers, and controlling persons against liabilities
relating to the registration statement, including liabilities under the
Securities Act. Each selling stockholder has agreed to indemnify us and our
directors, officers and controlling persons against liabilities relating to the
information given to us by that selling stockholder in writing for inclusion in
the registration statement, including liabilities under the Securities Act.
-24-
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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. At December 31, 2000, the Company was in Chapter 11 bankruptcy
reorganization proceedings. Pursuant to the guidance of AICPA Statement of
Position 90-7, the Company adopted "fresh start" reporting as of January 31,
2001. As a result, the Company's financial statements are not comparable with
those for periods before the Plan was effective. In general, pursuant to fresh
start reporting, the Company's assets and liabilities were revalued to fair
market value.
The unaudited Pro Forma Statement of Operations Data is presented to
give effect to the consummation of the Plan as though it had taken place at the
beginning of the periods.
<Table>
<Caption>
PRO FORMA HISTORICAL
----------------------- ---------------------------------------------
SIX FIVE ONE SIX
MONTHS YEAR MONTHS MONTH MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, JANUARY 31, JUNE 30,
2001 2000 2001 2001 2000
--------- ------------ ----------- ----------- -----------
(ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Operating Revenues (4) $ 2,919 $ 23,094 $ 904 $ 2,015 $ 13,773
Net loss before reorganization
items (3,456) (13,861) (3,401) (55) (6,813)
Net income (loss) before
extraordinary item (3,456) (13,861) (3,401) 7,401 (6,813)
Net income (loss) (3,456) (13,861) (3,401) 36,278 (6,813)
Basic and diluted income (loss)
per common share (0.07) (0.28) (0.07) (1) (1)
Weighted average common shares 50,000 50,000 50,000 48,685 41,078
PRICE AND PRODUCTION STATISTICS:
Average silver price received $ 4.62 $ 4.93 $ 4.62 $ 5.05
Tons 20,722 169,036 20,722 97,639
Silver grade (ounces per ton) 26.17 23.81 26.17 24.07
Silver ounces produced 519,177 3,879,100 519,177 2,792,022
Net cash cost per ounce (2) $ 3.90 $ 4.75 $ 3.90 $ 4.70
BALANCE SHEET DATA:
Cash and cash investments $ 285 $ 1,206
Working capital 1,210 (40,640)
Total assets 29,405 33,492
Long-term debt and capital
lease obligations 5,000 --
Redeemable common stock 14,365 --
Stockholders' equity (deficit) (536) (21,401)
Book value per common share (0.01) (0.50)
Common shares outstanding 50,000 43,074
<Caption>
HISTORICAL
-------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------
2000(3) 1999 1998(3) 1997 1996(4)
----------- ----------- ----------- ----------- -----------
(ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Operating Revenues (4) $ 23,094 $ 32,332 $ 34,668 $ 24,993 $ 15,315
Net loss before reorganization
items (18,949) (10,843) (64,845) 1,859 (1,101)
Net income (loss) before
extraordinary item (20,890) 10,843 (64,845) 26,852 14,214
Net income (loss) (20,890) (10,843) (64,845) (19,308) (25,902)
Basic and diluted income (loss)
per common share (1) (1) (1) (1) (1)
Weighted average common shares 43,898 34,682 32,109 31,892 27,823
PRICE AND PRODUCTION STATISTICS:
Average silver price received $ 4.93 $ 5.23 $ 5.47 $ 5.02 $ 5.11
Tons 169,036 217,601 247,866 183,404 120,910
Silver grade (ounces per ton) 23.81 24.75 24.17 23.95 22.04
Silver ounces produced 3,879,100 5,210,843 5,806,468 4,253,315 2,577,895
Net cash cost per ounce (2) $ 4.75 $ 4.36 $ 4.43 $ 4.50 $ 6.12
BALANCE SHEET DATA:
Cash and cash investments $ 291 $ 628 $ 1,412 $ 15,985 $ 16,317
Working capital 2,824 839 9,716 26,969 25,559
Total assets 22,592 37,020 39,897 101,601 105,486
Long-term debt and capital
lease obligations 1,530 38,238 42,597 42,265 25,780
Redeemable common stock -- -- -- -- --
Stockholders' equity (deficit) (36,278) (18,720) (17,466) 44,496 63,598
Book value per common share (0.75) (0.48) (0.54) 1.39 2.00
Common shares outstanding 48,685 38,672 32,426 31,904 31,873
</Table>
-25-
29
- ----------
(1) Amounts not presented due to lack of comparability because of
reorganization and adoption of fresh start accounting as of January 31,
2001.
(2) Net cash cost per ounce includes all expenditures (other than
exploration costs and capital expenditures) related to the operation of
the Sunshine Mine and Refinery Complex, less any by-product revenues.
Such costs include non-capital development costs, production and
maintenance costs, ad valorem taxes, insurance, and post-employment
benefit costs incurred on site.
(3) During 2000 and 1998, the Company recorded a $7.2 million and $50.4
million impairment, respectively, of charges to write down the value of
the Company's investment in the Sunshine Mine.
(4) During 1996, the Company recorded a gain applicable to common shares of
$40 million due to the retirement of all of the Company's outstanding
Preferred Stock.
(5) The Sunshine Mine, the only source for operating revenues for the
period presented, was placed on care and maintenance status in February
2001. With the mine closed, the Company will not have operating
revenues. Historical financial data presented above will not be
indicative of the Company's future financial conditions or results of
operations while the mine is closed.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain matters discussed below are "forward-looking statements"
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. See "Forward-Looking
Statements." 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
actual results of exploration, silver prices, imprecisions 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. Readers are cautioned not
to place undue reliance on these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
From 1988 through 2000, a period of 13 years, the price of silver, the
Company's principal product, averaged approximately $5.00 per ounce. In
contrast, for the ten-year period prior to 1988, the price of silver averaged
approximately $9.50 per ounce. While the company significantly improved its
production (from 2.6 million ounces of silver in 1996 to more than 5 million
ounces in each of 1998 and 1999) and unit costs (reduced from $6.12 per ounce of
silver in 1996 to $4.36 in 1998) from the Sunshine Mine in recent years, the
continuing low price of silver resulted in ongoing operating losses. In
addition, the Company invested relatively heavily in new projects, particularly
Pirquitas. Management believed that establishing new, low-cost production from
Pirquitas and/or other properties would be key to establishing profitability in
the low price of silver environment in which it found itself. The Company has no
material commitments for capital expenditures at present.
The Company was able to fund its operating losses and investments with
a variety of financings over this extended period, until it was unable to
refinance the Eurobond indebtedness of $26.5 million which matured in March of
2000. The inability to repay this debt as it matured triggered cross-defaults in
the Company's other indebtedness. The Company and its principal creditors
discussed various means of restructuring the Company's indebtedness outside of
bankruptcy, but ultimately determined that the best route to restructure the
indebtedness would be through Chapter 11. As a result, the Company and three of
its principal subsidiaries filed for protection under Chapter 11 on August 23,
2000. The Elliott Group and the Stonehill Group, whose affiliates were the
Company's principal creditors, were co-proponents with the Company of the Plan
of Reorganization which was filed contemporaneously with the bankruptcy filing.
At the effective date of the Plan of Reorganization, the Stonehill Group and the
Elliott Group became the Company's principal owners, owning approximately 90% of
the Company's common stock.
The proposals considered by the Company and its principal creditors
included the Elliott Group providing the Company with an equity line of credit
to fund its operations, while restructuring the Eurobonds to defer their
maturity until at least May 1, 2001, and to provide for the payment of interest
on the Eurobonds using Common Stock. This proposal was not feasible due to the
subsequent significant decline in the Company's Common Stock price.
Subsequently, the Company, the Elliott Group and the Stonehill Group negotiated
a comprehensive restructuring of the Eurobonds and the 10% Notes into equity
positions similar to those achieved in the Plan. This alternative would have
required stockholder approval. Due to
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the expense and time involved in soliciting stockholder approval, and the
uncertainty of actually attaining approval, it was determined that the Plan was
the best alternative to restructure the Company's debt and to provide operating
financing.
Highwood Partners, L.P. and Stonehill Capital Management, LLC,
affiliates of the Elliott Group and the Stonehill Group, provided the
Debtor-in-Possession (DIP) financing which was used by the Company and its
affiliates as its principal source of funding during the bankruptcy proceeding.
Upon the Effectiveness of the Plan, on February 5, 2001, approximately $2.7
million was borrowed under the DIP facility. The Stonehill and Elliott
affiliates also provided the Credit Facility, which repaid advances under the
DIP facility and funded the Company until the third quarter of 2001. The Credit
Facility bore interest at a fixed rate of 15% per annum in the maximum principal
amount of $5,000,000. The facility was secured by substantially all of the
assets of Sunshine and its subsidiaries, including the Pirquitas Mine. The
proceeds of all advances under such facility were to be utilized solely (a) to
provide funds necessary to the conduct of the business of Sunshine and its
subsidiaries in the ordinary course in accordance with an approved budget, (b)
to reimburse fees and disbursements paid by lenders and their professionals in
accordance with the budget, and (c) as otherwise contemplated or permitted by
the budget. As of June 30, 2001, the Company had borrowed the full $5 million
available under the Credit Facility. In July, 2001, an additional $420 thousand
was advanced by the lenders in the form of Demand Notes. The Company and the
lenders have entered into the Second Amended and Restated Credit Agreement (the
"Amended Credit Facility") to supply the Company with sufficient financing to
maintain the Pirquitas property, complete the closing and securing of the
Sunshine Mine pending a substantial recovery in silver prices, and fund
necessary corporate overhead for a period of time.
The Amended Credit Facility will refinance the entire $5.42 million of
advances made to date and commit to advance another $1.08 million for a total
commitment of $6.5 million, subject to a $325 thousand commitment fee. At the
option of the lenders, an additional $1.5 million of advances may be available,
which if exercised would bring the total borrowing to $8 million. Based on
current projections, we estimate that if the full amount of the facility is made
available, it would fund the Company's cash requirements until the third quarter
of 2002.
The principal amount of the advances are to be repaid on the earlier of
December 31, 2002 or the occurrence of an event of default that shall be
continuing as defined in the Amended Credit Facility. Interest will continue to
accrue at 15% per annum.
In consideration for the increase in the commitment, the extension of
the maturity date of the Credit Facility and the forbearance of affiliates of
the lenders from exercising either penalty and repurchase provisions of the
Registration Rights Agreement or the Call Option, the lenders were granted a
"Participation." The Participation provides that the lenders will be entitled to
the first $10 million of proceeds (above the amount of principal and interest
due) from any proceeds received by the Company on the sale of certain assets,
upon the issuance of any debt or equity securities, or the receipt of any
judgment or award. The Company can, within 90 days of the date of the Amended
Credit Facility (September 7, 2001), refinance these loans, if more favorable
terms can be found, without paying the Participation.
The Company's strategy is to hold Pirquitas with the lowest level of
possible expenditures, pending an improvement in silver prices. The Company is
presently negotiating the sale of certain assets, including the silver refinery
at the Sunshine Mine, and its Juanicipio property in Mexico, proceeds of which
will be used to cover the Company's ongoing costs. The Company's principal costs
going forward are expected to be general and administrative costs, including the
costs of maintaining a public company, legal and other expenses associated with
a lawsuit against the Company's former auditor, costs of maintaining security at
Pirquitas, and the costs of compliance with various Argentine fiscal and mining
laws.
The material covenants of the Exit Financing Facility and the Amended
Credit Facility preclude the Company from incurring any additional debt, liens
or similar obligations, issuing any additional securities, making investments in
any other company, incurring any judgment or environmental action in an amount
greater than $50,000 or the sale of any substantial asset.
In January 1999, the Company completed a private placement of 5%
Convertible Notes due January 28, 2001 totaling $6 million. The per-share
conversion price was based on the average of the lowest median trading price for
five of the twenty consecutive trading days before conversion.
The 5% Convertible Notes, the Debtor-in-Possession financing, and its
replacement Exit Financing Facility for $5 million as discussed above, are the
material financings undertaken by the Company in the last three years.
On February 2, 2001, Sunshine received Notice that the smelter to which
the Sunshine Mine shipped concentrates was closing and would no longer accept
deliveries. Management sought alternatives for the production from the Sunshine
Mine but was not successful in securing an economically viable alternate
arrangement. As a result, Sunshine notified employees that a mass lay-off of the
majority of the Sunshine Mine employees would occur on February 16, 2001.
Since the closure of the Sunshine Mine on February 16, the Company has
no sources of revenues. In addition, we
-27-
31
have been incurring significant costs associated with the closure of the mine,
including funding severance benefits and accrued vacation liability and costs
associated with preparing the mine for an extended period of care and
maintenance. Offsetting a portion of these costs has been proceeds from the
liquidation of equipment at the property, including the entire fleet of diesel
equipment. The decision to liquidate the equipment was based on, among other
things, the expectation that during an extended shutdown period, the equipment
would deteriorate significantly.
It is expected that the reopening of the mine would require a
substantial improvement in silver prices. However, due to lack of available
funds, the Company significantly cut back exploration and development since the
end of 1999, including stopping the so-called ConSil ramp project. Therefore,
access to economically recoverable reserves will be limited upon any reopening
of the mine, and, before commercial operations can be restarted, a substantial
exploration and development effort will be required. In addition, substantial
equipment additions will be required to replace the equipment being sold, and to
replace equipment removed since the decision to secure the mine was made.
Registration Rights Agreement. Under the Plan of Reorganization,
Sunshine entered into a Registration Rights Agreement with members of the
Stonehill Group and the Elliott Group under which the shares of new common stock
issued to them are to be registered under federal securities laws. Such
agreement requires the filing and effectiveness of a Registration Statement
within specified periods of time and other matters. In the event that certain of
the commitments under such agreement are not satisfied, each of the holders has
a right to provide Sunshine with written notice thereof (a "Put Notice") which
would require Sunshine to pay penalties to each such holder (in cash or shares
of common stock at the option of the holder), and/or in certain instances, to
repurchase the securities from the holder for a "Mandatory Repurchase Price"
equal to 115% of the Market Price on the date the holder acquires the right to
require Sunshine to repurchase such shares. The Company does not have adequate
liquidity to satisfy such a put obligation.
The Registration Statement while filed has not yet been declared
effective within the time frame required by the Registration Rights Agreement.
The Company has not recorded any expense relative to penalties mandated by the
Registration Rights Agreement, nor made any provision in its financials
reflecting the potential requirement to repurchase the common stock of the
Elliott Group and the Stonehill Group. The Elliott Group and the Stonehill Group
have agreed to a forbearance of enforcing or exercising the penalties and the
repurchase requirement as part of a refinancing of the Credit Facility.
Argentina Transaction; Call Option Agreement. Under the terms of the
Plan and the Confirmation Order on the Effective Date, the capital stock of
Argentina was cancelled and Argentina issued the "New Argentina Stock." Sunshine
caused the incorporation and organization of Sunshine International Mining,
Inc., a Delaware corporation ("International"), all of the issued and
outstanding stock of which is owned by Sunshine. Sunshine contributed to the
capital of International all of the New Argentina Stock such that Argentina
became a wholly-owned subsidiary of International which in turn is a
wholly-owned subsidiary of Sunshine. Simultaneously Sunshine, International and
Argentina entered into a Call Option Agreement dated February 5, 2001, with the
Elliott Group and the Stonehill Group, pursuant to which International granted
(i) a contingent call option to each holder within the Elliott Group and the
Stonehill Group to purchase, collectively, up to 100% of the shares of New
Argentina Stock for $1 million and (ii) a first priority perfected security
interest in the New Argentina Stock. Such call option(s) was granted to purchase
a maximum number of shares of New Argentina Stock at a specified purchase price
which option is to be reduced proportionately in the event the Elliott Group
holders and/or the Stonehill Group holders sell more than 50% of their shares of
New Common Stock of Sunshine received. For example, if the Elliott Group holders
were to sell 55% of their shares of Sunshine Common Stock initially received,
then the maximum number of New Argentina Stock that the Elliott Group holders
could purchase in the aggregate upon exercise of their Call Options would be
reduced by a percentage equal to (55% - 50%) x 2, or 10%. The term of each Call
Option expires at the time of exercise in full of such Call Option, or if the
market capitalization of Sunshine shall exceed $150,000,000 for at least 60
consecutive days or on the tenth anniversary of the Effective Date of the Plan.
The Call Option becomes exercisable upon the occurrence of any one or more of
nine separate events, including (i) the de-listing of the Sunshine New Common
Stock from an "Approved Market," (ii) suspension of the Sunshine New Common
Stock from trading on an Approved Market for at least seven consecutive calendar
days, (iii) reduction in the overall market capitalization of Sunshine to less
than $15,000,000 for at least fifteen consecutive calendar days, (iv) a
bankruptcy proceeding occurring with respect to Sunshine or one of its
subsidiaries, (v) Sunshine fails to comply with its obligations in the Call
Option Agreement, and (vi) other events, including any default under the Credit
Facility. The Call Option, once exercisable, may be exercised at any time by any
of the holders thereof. The effect of the Call Option(s) is to potentially allow
the Elliott Group holders and the Stonehill Group holders (and certain of their
successors and assigns) to acquire Sunshine Argentina which in turn owns the
Pirquitas Mine and other assets. Should such an event occur, Sunshine's
investment in the property, carried on the balance sheet at $24,750,000, would
no longer be an asset of Sunshine, nor would the assigned proven and probable
reserves totaling 129.6 million ounces of silver, along with 59,000 tons of tin
and 273,000 tons of zinc. The New Argentina Stock has been pledged under the
Call Option Agreement under a separate Pledge Agreement to the Elliott Group
holders and the Stonehill Group holders and delivered to Wells Fargo Bank
Minnesota, N.A. as administrative and pledge agent. If the lenders exercise the
repurchase option or fail to extend additional credit, it is likely that the
Call Option would be exercisable.
In addition, the Company's market capitalization in recent weeks has
been only slightly in excess of or below $15
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million, the level that could trigger exercise of the Call Option. The Elliott
Group and the Stonehill Group have agreed to a forbearance of exercising the
Call Option as part of a refinancing of the Credit Facility.
The opinion of the Company's independent certified public accountants
covering the 2000 year expressed substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE
Whenever circumstances or events indicate, the Company evaluates its
mining properties for impairment, based on undiscounted expected future cash
flows only from proven and probable reserves. Such estimates are based on
assumptions as to future silver prices, mining costs and proven and probable
reserves which management believes are reasonable, based on reasonable and
supportable assumptions, considering all available objectively verifiable
evidence. If the sum of such cash flows is less than the carrying amount of the
asset, the Company would record an impairment loss measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
During the third quarter of 1998, drilling in the West Chance vein
indicated that the size of the vein might be smaller than what was previously
expected. Based on that information, along with low by-product prices and a
decline in silver prices, the Company estimated that future cash flows from the
Sunshine 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. The following major
assumptions were used to estimate future cash flows from the mine:
1. Per ounce price for silver- $5.50.
2. Annual production- 4.1 million ounces of silver.
3. Total cash costs per ounce of silver produced- $5.49.
A further similar review during the fourth quarter of 2000, in light of
the shutdown of the mine, determined that the fair value of the equipment and
real property at the mine was approximately $1.4 million and an impairment
charge of $7.2 million was taken.
Discussion of potential future increases in the price of silver and the
presence of additional mineralized material and resources are forward-looking
statements regarding matters over which the Company has no control. Actual
future silver prices and the results of current exploration may differ from
anticipated values.
OPERATING, INVESTING AND FINANCING ACTIVITIES
Six Months Ended June 30, 2001 and 2000
Cash used in operating activities in the first half of 2001 was $4.4
million compared to $2.2 million in the first half of 2000.
In the first half of 2001, sale of property, plant and equipment
provided $1.1 million of cash. Investing activities in the first half of 2000
included $3.8 million proceeds from sale of investment silver bullion and $1.1
million of net additions to property, plant and equipment including $462
thousand for the development of Pirquitas.
Cash provided by financing activities in 2001 primarily consists of
$3.3 million proceeds from borrowings under the DIP and Credit Facility.
Years Ended December 31, 2000, 1999 and 1998
Cash used in operating activities for the year ended 2000 was $4.9
million compared to $5.8 million in 1999. The $900 thousand improvement was
primarily due to changes in working capital items partially offset by a $2.6
million increase in cash operating loss. The cash operating loss increased
primarily due to a $4.1 million decrease in cash operating income at the
Sunshine Mine and $2.0 million in reorganization costs, partially offset by a
$2.4 million decrease in cash interest expense and a $1.3 million decrease in
general and administrative expense.
Cash provided by investing activities during 2000 included proceeds of
$3.9 million from the sale of investment silver bullion and $0.9 million from
the sale of the La Joya Mine in Argentina. Cash used by investing activities was
$1.6 million for additions to property, plant and equipment primarily consisting
of $1.0 million for the development of Pirquitas
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and $354 thousand in capital expenditures at the Sunshine Mine. Cash used by
investing activities in 1999 was $0.8 million, including $4.2 million of
additions to property, plant and equipment ($2.6 million for the development of
Pirquitas, $1.4 million in capital expenditures at the Sunshine Mine and $200
thousand on other properties). These were offset by $1.9 million in proceeds
from the sale of certain investments and $1.5 million from the sale of 300
thousand ounces of investment silver bullion. $5.8 million cash was used by
investing activities during 1998, including $8.3 million for the development of
the Pirquitas Mine in Argentina and $1.8 million at the Sunshine Mine, partially
offset by $4.5 million of cash proceeds from the sale of certain investments,
the sale of 300 thousand ounces of investment silver bullion, and proceeds from
settlement of certain litigation.
Cash provided by financing activities in 2000 consisted of $1.5 million
of borrowings under the DIP Facility less a $150 thousand commitment fee. $5.8
million in cash was provided through the issuance of the 5% Notes in 1999. Cash
provided by financing activities in 1998 includes $785 thousand from the
exercise of stock options and warrants.
RESULTS OF OPERATIONS - QUARTER AND SIX MONTHS ENDED JUNE 30, 2001
On December 5, 2000, the Company's Plan was confirmed by the United
States Bankruptcy Court and the Company emerged from bankruptcy on February 5,
2001. As a result of the reorganization and the recording of the restructuring
transaction and implementation of fresh start reporting, the Company's results
of operations after February 5, 2001, are not comparable to results reported in
prior periods.
THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2000
Consolidated Results of Operations:
<Table>
<Caption>
Six Months Ended Six Months Ended
(In thousands) June 30, 2001 June 30, 2000
- -------------- ---------------- ----------------
Operating revenues $ 2,919 $ 13,773
Costs and expenses:
Cost of revenues (2,498) (12,704)
Depreciation, depletion and amortization (11) (635)
Property closing and holding costs (2,210) --
Exploration -- (827)
Selling, general and administrative expense (1,601) (2,174)
Net curtailment gain on employee benefit plans 44 --
-------- --------
(6,276) (16,340)
-------- --------
Other income (expense)
Interest income 6 46
Interest and debt expense:
Contractual interest and debt expense (761) (3,915)
Reduction attributable to bankruptcy 316 --
-------- --------
(445) (3,915)
Mark to market loss --
(164)
Other, net 340 (213)
-------- --------
(99) (4,246)
-------- --------
Loss before reorganization items (3,456) (6,813)
Reorganization items:
Adjust accounts to fair value 8,239 --
Professional fees (785) --
Interest earned while in Chapter 11 2 --
-------- --------
Net income (loss) before extraordinary item $ 4,000 $ (6,813)
======== ========
</Table>
Consolidated operating revenues decreased approximately $10.9 million
for the first half of 2001 compared to the first half of 2000. The decrease in
operating revenues primarily resulted from the closure of the Sunshine Mine on
February 16, 2001.
Cost of revenues decreased $10.2 million primarily due to the closure
of the Sunshine Mine on February 16, 2001.
Property closing and holding costs in the first half consisted of
approximately $1.7 million of costs incurred to place the Sunshine Mine on care
and maintenance status. The remaining holding costs of approximately $500
thousand were primarily costs to hold the Pirquitas Mine.
-30-
34
General and administrative costs decreased $573 thousand due primarily
to reductions in staff, partially offset by $212 thousand for legal and other
expenses associated with the Company's lawsuit against Ernst & Young LLP.
In the 2001 period, the Company recognized a curtailment gain of $410
thousand for post retirement benefits other than pensions, partially offset by a
curtailment loss of $366 thousand for pensions.
Interest and debt expense decreased $3.5 million primarily due to the
cancellation of debt pursuant to the Plan.
Mark-to-market loss on silver held for investment amounted to $164
thousand in the 2000 period. No silver was held for investment during the 2001
period.
In the 2001 period, other income of $340 thousand was primarily due to
gains from the sale of certain equipment. Other, net for the 2000 quarter
included fees and expenses related to attempted financing transactions and asset
sales.
RESULTS OF OPERATIONS - 2000 COMPARED TO 1999
Consolidated operating revenues decreased approximately $9.2 million
(28.6%) for the year ended 2000 compared to the year ended 1999, while
mark-to-market losses on investment bullion totaled $167 thousand in 2000
compared to a $359 thousand gain in 1999. The decrease in operating revenues
primarily resulted from a decrease in the average price received per ounce of
silver sold and a decrease in ounces sold (4.2 million ounces of silver at an
average of $4.93 per ounce in the 2000 period compared to 5.5 million ounces at
an average of $5.23 per ounce in the 1999 period), a $734 thousand decrease in
by-product revenue and a $213 thousand decrease in recognized premium income on
the sale of covered calls on silver bullion held as an investment. Silver
production totaled 3,879,100 ounces produced from 169,036 tons at 23.81 ounces
per ton in 2000 versus 5,210,843 ounces from 217,601 tons at 24.75 ounces per
ton in 1999. The decrease in production was primarily due to fewer productive
stopes being available as mining proceeds to the outskirts of the West Chance
area. By-product revenue decreased primarily because of decreased production of
lead and copper.
Cost of revenues decreased $5.1 million (18.4%) from $27.7 million in
1999 to $22.6 million in 2000, primarily due to lower smelter, mining, and
metallurgical costs as a result of the lower production and sales, and also, due
to reduction in tons and ounces of silver produced during the 2000 period. Net
operating cash production costs increased $0.39 to $4.75 per ounce of silver.
This increase was primarily due to fixed costs being spread over fewer ounces of
silver produced.
The 2000 period includes a $7.2 million charge as an impairment
writedown of the Sunshine Mine. See "Liquidity and Capital Resources -
Evaluation of Recoverability of Investment in Sunshine Mine."
Exploration expense increased $358 thousand in 2000 compared to 1999
primarily due to expenditures on certain Argentina properties and Juanicipio in
Mexico.
Interest income decreased $113 thousand due to lower average invested
cash balances.
Selling, general and administrative expense declined $1.3 million due
to a variety of cost reductions.
Interest and debt expense decreased $2.9 million primarily due to the
amortization in 1999 of 100% of the discount feature associated with the 5%
Convertible Notes issued in January 1999, the amortization of debt discount and
issuance costs for the Eurobonds for the full year in 1999 as compared to one
quarter in 2000, the cessation of interest accruals as discussed in Note 8 of
the Consolidated Financial Statements and lower outstanding balances on the
Company's debt. These were partially offset by $1.4 million of additional
interest on the 10% Notes.
Other, net of $193 thousand for the 2000 period includes the gain from
the sale of the La Joya Mine in Argentina, partially offset by the write down of
certain receivables from, and investments in, other mining companies. Other, net
of $297 thousand in 1999 was primarily due to $1.0 million from gains on certain
investments sold and $475 thousand from the recognition of actuarial gains on
pension plans not previously recognized, partially offset by fees and expenses
related to attempting certain debt offerings. The gains on investments were for
the sale of mining properties and equipment and the receipt of a payment on
notes receivable that had previously been written off.
Reorganization items - professional fees are primarily the costs of
legal counsel and other professionals in the preparation and solicitation of
approval of the Company's Chapter 11 Plan of Reorganization and the associated
financing documents. These fees include pre-petition fees of counsel for the
Cosponsoring Bondholders.
-31-
35
1999 COMPARED TO 1998
The Company's net loss decreased $54.0 million in 1999 to $10.8 million
compared to $64.8 million in 1998. The improvement is primarily due to the $50.4
million impairment writedown of the Sunshine Mine in 1998.
Consolidated operating revenues decreased approximately $2.3 million
(6.7%) for 1999 compared to 1998, while mark-to-market gains on investment
bullion totaled $359 thousand in 1999 compared to a $2.6 million writedown in
1998. The decrease in operating revenues primarily resulted from a $0.24
decrease in the average price received per ounce of silver sold (5.5 million
ounces of silver at an average of $5.23 per ounce in 1999 compared to 5.5
million ounces at an average of $5.47 per ounce in 1998), and a $742 thousand
decrease in by-product revenue. By-product revenue decreased primarily because
of a 4.5 million-pound reduction in lead sales, partially offset by a 125
thousand-pound increase in copper sold. The reduction in lead sales is due to
the fact that mining is now being conducted in areas of the West Chance that
contain less lead.
Depreciation, depletion and amortization decreased by approximately
$3.6 million as a result of the writedown of the Sunshine Mine in the third
quarter of 1998.
Exploration expense decreased $2.5 million in 1999 compared to 1998
primarily due to a reduction of expenditures for the Sunshine Mine and other
projects in Argentina and the U.S.
Selling, general and administrative costs decreased $216 thousand
(4.3%) due to a variety of cost reductions.
Interest income decreased $370 thousand due to lower average invested
cash balances.
Interest and debt expense increased $1.2 million primarily due to the
amortization of the beneficial conversion feature associated with the 5% Notes
issued in January 1999, and higher amortization of debt discount for the
outstanding EuroBonds.
In 1999, income of $297 thousand in other net was primarily due to $1.5
million from gains on certain investments sold and recognition of actuarial
gains on pension plans not previously recognized, partially offset by fees and
expenses related to attempting certain debt offerings. The gains on investments
were for the sale of mining properties and equipment and the receipt of a
payment on notes receivable that had previously been written off. Other net of
$2.7 million in 1998 represented a $1.1 million net gain for proceeds received
from settlement of certain litigation and a reduction of the valuation reserves
previously recorded against certain investments.
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 13-year period ended in 2000.
Over the prior ten year period the silver price averaged approximately $9.50 per
ounce.
During 1999 and 1998, the Company from time to time sold covered calls
against its silver bullion inventory. Total premiums earned for the sale of
covered calls aggregated $246,500 and $316,250 in 1999 and 1998, respectively.
At December 31, 1999, the Company had covered call options outstanding for
300,000 ounces of silver with strike prices ranging from $5.25 to $5.35 and
expiration dates of January 27, 2000 (100,000 ounces), February 25, 2000
(100,000 ounces) and March 28, 2000 (100,000 ounces). The fair value of the sold
calls at December 31, 1999 approximates the premiums received when they were
sold. No covered call options were sold during 2000. The Company's policy is not
to sell any uncovered calls. (See Note 3 of Notes to Consolidated Financial
Statements for information related to accounting policies for covered calls.)
FOREIGN CURRENCY RISK
At December 31, 2000, no debt of the Company was denominated in a
foreign currency nor was the Company a party to any firm purchase commitments
denominated in a foreign currency.
-32-
36
THE COMPANY
BUSINESS AND PROPERTIES
Sunshine was originally incorporated in 1918 and is currently
incorporated under the laws of the state of Delaware. The Company maintains its
principal executive offices at 5956 Sherry Lane, Suite 1621, Dallas, Texas
75225.
Sunshine has primarily engaged in mining silver. In 1992 and again in
2000, Sunshine instituted a bankruptcy proceeding to restructure its debt. The
latest proceeding resulted in a confirmed Plan effective February 5, 2001, under
which the holders of the Eurobonds and 10% Notes became the primary equity
owners of Sunshine and the old common stock was cancelled. See "THE PLAN OF
REORGANIZATION" for a more detailed discussion of the Proceeding and the Plan.
The Company owns the Sunshine Mine located in the Coeur d'Alene Mining
District near Kellogg, Idaho, and the Pirquitas Mine in the Jujuy Province of
northwest Argentina. The Sunshine Mine produced 5.2 million and 3.9 million
ounces in silver in 1999 and 2000, respectively. The primary smelter customer
announced on February 2, 2001 that it was closing and would no longer accept
deliveries. As a result, Sunshine notified employees at the Sunshine Mine of a
mass lay-off February 16, 2001, and placed the Sunshine Mine on a "care and
maintenance" status. Later the decision was made not to maintain the facility
due to the cost involved. Underground mining equipment has been sold, and other
equipment, such as transformers and substations have been dismantled and removed
from the property for safe disposal. It is currently anticipated that the mine
would only be reopened after a substantial increase in silver prices. The time
necessary to re-start operations will be lengthened by the need to replace the
electrical infrastructure and repair any damage to the main hoists, shafts and
underground haulageways. This work will be needed prior to embarking on a
program of exploration and development to establish and develop new mineral
reserves.
The Sunshine Mine began operations in 1884 and has produced in excess
of 350 million ounces of silver since that time. The mine is located in northern
Idaho (see Map 1) approximately five miles south of Interstate Highway 90 near
the town of Wallace, Idaho. The property consists of 202 patented and 153
unpatented mining claims totaling 5,075 acres, together with 335 acres of fee
land. The introduction of new mining technologies (such as mechanized, trackless
mining) and more aggressive exploration substantially increased production in
recent years, achieving full production in the fourth quarter of 1997 for the
first time since 1990. This has reduced unit costs as fixed costs have been
spread over a larger production figure. Recent production and unit cost history
of the mine is as follows:
SUNSHINE MINE PRODUCTION
<Table>
<Caption>
2000 1999 1998 1997 1996
Ounces production (millions) 3.9 5.2 5.8 4.3 2.6
Net cash cost per ounce $ 4.75 $ 4.36 $ 4.43 $ 4.50 $ 6.12
</Table>
Placing the Sunshine Mine on a care and maintenance basis on February
16, 2001, has required the Company to reclassify its mineral inventory. The
Sunshine Mine currently has no reserves. Material which had previously been
classified as proven or probable reserve is now considered as "mineralized
material." Sunshine's share of mineralized material at the Sunshine Mine as of
December 31, 2000 was estimated to be 1.23 million tons of material with an
average grade of 23.65 ounces of silver per ton. Metallurgical recoveries at the
Sunshine Mine typically approximate 97% of the contained silver. During its
production history, exploration and development activities have maintained
reserves by finding new ore to replace that which was produced each year.
Management believes that if production is restarted, this will continue, 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 product into favorable lithologic
units.
The Company's principal asset is now the Pirquitas Mine, which is in
the development stage. The Pirquitas Mine is located in Jujuy Province of
northwestern Argentina (See Map 2). Access is from the provincial capital which
has regular air service. To reach the project you must cross approximately 130
miles of paved road and 90 miles of improved secondary road. There is also an
airstrip at the site capable of receiving small aircraft (up to ten passengers).
The Company acquired Pirquitas in November 1995. The mine had previously
operated from 1932 to 1990 by Sociedad Minera Pirquitas Picchetti y Compania.
Operations were shut down in 1990 and the mine allowed to flood.
The Company owns mining rights on 5,850 acres and has applied for an
additional 2,600 acres bordering its existing rights. The Company also owns
16,600 acres of surface land. The surface lands and mining rights cover all
known mineral reserves and anticipated surface facilities.
Upon acquisition of Pirquitas, the Company immediately began an active
exploration and metallurgical testwork program. The Company commissioned a
bankable feasibility study of the property in early 1998 (completed in April
1999)
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37
which estimated that the property contained metal in proven and probable
in-ground reserves (before metallurgical losses) totaling 129 million ounces of
silver, 116 million pounds of tin and 546 million pounds of zinc. The Company
expects future development and exploration work at the site will expand these
reserves. The mine is planned as an open-pit operation to produce annually 11
million ounces of silver, 3,200 tonnes (metric tons) of tin, and 16,300 tonnes
of zinc.
[MAP OF PIRQUITAS MINE JUJUY PROVINCE, ARGENTINA]
[LOCATION MAP OF SUNSHINE MINE KELLOGG, IDAHO]
As more than 80% of the Company's operating revenues have been derived
from the sale of silver, the Company's earnings were 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 was 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.
SILVER SUPPLY, DEMAND AND PRICES
According to studies published by the Silver Institute in its World
Silver Survey (prepared by Gold Fields Mineral Services Ltd.) and by CPM Group
(precious metal industry consultants), since 1990, demand for silver has
significantly exceeded silver production. The gap between new supply and demand
has been bridged by the availability of a large surplus of silver inventories
has kept silver prices at depressed levels. According to these same studies,
silver inventories worldwide have been greatly diminished, and physical
availability of silver should continue to tighten as available inventories are
consumed.
ARGENTINA OPERATIONS
The Company commenced operations in Argentina in 1994 and acquired the
Pirquitas Mine in November 1995. Pirquitas is located in the Puna de Atacama of
northwestern Argentina in the province of Jujuy at an elevation of over 14,000
feet. The nearest major city is the provincial capital, San Salvador de Jujuy,
which is about 220 miles southeast of Pirquitas. The Chilean and Bolivian
borders lie about 31 miles west and 3 miles to the north, respectively.
The Pirquitas Mine had previously operated from 1932 to 1990 by
Sociedad Minera Pirquitas Picchetti y Compania. Initial mining was by alluvial
methods for tin. By the late 1930's, silver and tin veins were discovered
upstream and underground mining was begun. During the course of its operating
history, Pirquitas produced over 40 million ounces of silver making it
Argentina's most important silver mine. Operations were shut down in 1990 and
the mine allowed to flood.
Title to the mining concessions and surface lands is owned 100% by
Sunshine Argentina, Inc. The surface lands and mining rights cover all known
mineral reserves and anticipated surface facilities. There are no underlying
agreements or third-party interests in the project other than the call option
mentioned elsewhere in this Prospectus. Under Argentina law, Sunshine Argentina,
Inc. is required to pay a production royalty to Jujuy Province equivalent to 3%
of the "mine-mouth"
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38
value. "Mine-mouth" value is calculated as the net revenues less all costs
related to processing, transportation, commercialization and other non-mining
expenses.
The Company believes that recent political and economic changes in
Argentina, designed to incentivize foreign investment, particularly in the
mining industry, have made the country an extremely attractive target for mining
investment. The country has privatized many state-owned enterprises, and has
implemented reforms to many previously state-controlled activities, including
mineral exploration and development. A program of fiscal stability has brought
down inflation. Guarantees to foreign investors include parity of treatment with
Argentine nationals, a freely-exchangeable currency, tax-stabilization programs
and complete freedom to repatriate profits.
The Company's most advanced project in Argentina is Pirquitas. The
Company has completed an extensive drill program with over 50,000 meters of
diamond core and reverse circulation hold completed. Drill sections were
established at 25-meter intervals along strike, with numerous angle holes being
drilled into the ore body along each section line. Down dip, drill spacing
averaged approximately 25-30 meters in the area of proven and probable reserves.
Proven plus probable reserves at Pirquitas are summarized as follows:
<Table>
<Caption>
Silver Grade Tin Grade Zinc Grade
Tonnes (gpt) (%) (%)
---------- ------------ --------- ----------
Mine(1) 30,350,500 128 0.17 0.81
Jig Tailings(2) 593,000 234 0.37 0.13
Total 30,943,500 130 0.17 0.80
</Table>
- ----------
(1) Mine Reserves are considered "mineable" or "recoverable" and include
allowances for mining extraction and dilution. Average metallurgical
recoveries are estimated at 78% for silver, 56% for tin and 60% for zinc,
but have not been included in the above figures.
(2) Jig tailings reserves are considered "mineable" or "recoverable." As this
material has already been mined (and diluted), no additional allowances for
mining dilution were applied. Average metallurgical recoveries are
estimated at 55% for silver, 41% for tin and 0% for zinc, but have not been
included in the above figures.
The mine reserves estimate was based on a three-dimensional resource
block model that incorporated all drill hole, channel sampling and assaying
information. Digital models of the surface topography and underground workings
were also included in the database. The area modeled was divided into blocks
measuring 5m by 5 m by 6 m high. Geologic domain boundaries were then
constructed around the high grade, medium grade and low grade zones, and each
zone was then modeled separately suing inverse distance algorithms. Estimation
parameters, such as capping limits and search distances were developed by
performing statistical analyses of the data. The tonnes and grade for each
domain contained within a block was combined to arrive at a total tonnes and
grade for that block. Previously mined areas were removed from the block model.
Once the resource block model was completed, a floating cone analysis
was performed on the mineralized blocks in order to arrive at the optimum
economic open pit design and mineable reserve. Mining extraction and dilution,
95% and 5%, respectively, were first applied to each block. Estimated costs for
waste and ore mining, processing, indirects, overhead, on-going capital and
concentrate transport and smelting were incorporated into the floating cone
analysis, as were metallurgical recoveries, metal prices and smelter payment
terms. Allowable pit slopes were also included. Metal prices used for the
floating cone analysis were $5.50 per ounce for silver, $5,600 per tonne for tin
and $1,036 per tonne for zinc. Because there were three commodities that
contributed to a blocks' value, a simple grade cutoff could not be employed.
Instead, the block's net smelter return value was first computed and compared to
the cost assumptions to determine whether or not the block was economic. Only
those blocks that were economic were then allowed to determine the final outline
of the pit. This resulted in most blocks exceeding 30 gpt silver being
considered ore.
The Pirquitas Mine was previously mined by underground methods. Current
plans call for mining by conventional open pit techniques. Overall stripping
ratio will be approximately 2.4 tonnes of waste to each tonne of ore.
Pre-production capital costs for the Pirquitas Mine were estimated at
$132,950,000. This includes a specific contingency allowance of $7,380,000.
Additionally, on-going capital requirements are estimated to total $14,957,000,
and
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39
start-up working capital requirement are projected to be $5,763,000. All capital
cost figures are in fourth quarter 1998 U.S. dollars.
Pirquitas ore will be processed by first crushing and jigging to
produce a pre-concentrate. This will be followed by grinding and flotation to
produce a silver concentrate and a zinc concentrate. Finally, a tin concentrate
will be produced by both flotation and gravity methods. Overall capacity of the
processing plant is 9,600 tonnes per day of mine-run ore. Overall silver
recovery is projected to be approximately 77% into a concentrate grading 22,300
gpt. Tin recovery is projected to be approximately 55% into a 55% concentrate,
with zinc averaging 60% into a 53% concentrate. Annual production is estimated
to average 10,970,000 ounces of silver, 3,245 tonnes of tin and 16,331 tonnes of
zinc in concentrate. Of the total revenue, silver contributes approximately 71%,
tin 22% and zinc 7%. Metal prices used in the Feasibility Study were $5.50 per
ounce for silver, $5,600 per tonne for tin and $1,036 per tonne for zinc. Net
cash costs of silver production (net of tin and zinc credits) are estimated at
$1.53 per ounce.
The Company has applied for and received all primary permits including
water rights and environmental permits, to begin construction of the project. As
part of the permitting process, the Company was required to submit an
environmental impact statement. This was completed by the Company's contractor,
Knight Piesold and involved the collection of an extensive database containing
information on existing flora, fauna, air and water quality among others. As
part of its permit the Company maintains an on-going water monitoring program.
The Company owns or controls a significant land package at the
property. It holds title to 6,500 acres of mining concessions. It also owns
approximately 18,500 acres of surface lands upon which all facilities will be
built. Most of the property remains unexplored. Significant resources above and
beyond those identified in the feasibility study are believed to exist at the
property. Based on its own exploration, as well as a review of previous
development work, the Company believes that substantial additional mineral
resources surround the identified reserve, because the Company feels that the
favorable geologic environment will continue.
Given the property's excellent economics and the prospect for improved
silver prices, the Company believes Pirquitas provides a very attractive
development opportunity in a somewhat better silver market. The Company's
strategy is to attempt to maintain sufficient liquidity to hold the property
until silver prices improve.
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40
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.
Refinery operations were suspended in 1995. Metals recently sold another mining
company an option to acquire the silver refinery, antimony refinery and tailings
impoundment. The Sunshine Mine currently has no reserves.
The Company's wholly owned subsidiary, Metals, owns substantially all
of the mining claims comprising the Sunshine Mine. Electrical power is supplied
by a public utility from two sources. 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 produced over 350 million ounces of silver since
that time. The underground workings consist of multiple levels developed off the
Jewell shaft, the main production shaft. It extends from the surface to a depth
of over 4,000 feet and is complemented by other interior shafts which develop
levels as deep as 5,600 feet. The mine covers over 10 square miles at the
surface, and contains more than 100 miles of underground workings. It has been
allowed to flood below the 4,000 foot level, and following the recent closure it
is expected that flooding will reach the 3100 foot level in the next two to four
years.
The introduction of new mining technologies and more aggressive
exploration at the Sunshine Mine had substantially increased production in
recent years, achieving full production in the fourth quarter of 1997 for the
first time since 1990. This reduced unit costs as fixed costs were spread over a
larger production figure. Recent production and unit cost history of the mine is
as follows:
<Table>
<Caption>
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Ounces production (millions) ...... 3.9 5.2 5.8 4.3 2.6
Net cash per ounce ................ $ 4.75 $ 4.36 $ 4.43 $ 4.50 $ 6.12
</Table>
Sunshine's share of mineralized material at the Sunshine Mine as of
December 31, 2000 were estimated to be 1.1 million tons with an average grade of
23.6 ounces of silver per ton. Metallurgical recoveries at the Sunshine Mine
have typically approximated 97% of the contained silver. The proven and probable
reserves at the Sunshine Mine have historically totaled approximately 4 to 7
years of annual production (but the Sunshine Mine currently has no reserves).
Over its history, exploration and development activities have maintained
reserves by finding new ore to replace that which was produced each year. Due to
cash constraints, planned exploration and development has been significantly
curtailed since the end of 1999, resulting in a reduction in proven and probable
reserves. If the mine is reopened and an adequate exploration and development
(if warranted) funded in the future, management believes significant new
reserves will be identified, as studies have delineated several areas of
favorable geologic conditions that may host significant deposits. These areas
are contiguous to delineated mineralization, and the ore-bearing structures
project into favorable lithologic units. Further exploration is necessary to
establish the existence of and quantify the additional mineralized material.
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 (if warranted) of these and other veins. A shaft on the ConSil
property extends from the surface to a depth of 5,400 feet and connects to the
Sunshine's eastern workings on the 3,100 level, serving as the Sunshine Mine's
secondary escapeway. Access from this shaft to these exploration areas will be
important in their future exploration and development (if warranted).
The ore extracted from the Sunshine Mine was processed by a
1,000-ton-per-day flotation concentrator, which produced two concentrates, a
high-grade silver concentrate which was transferred to the antimony refinery for
antimony removal, and a lead concentrate which was shipped directly to a smelter
for further processing.
After antimony removal, the silver concentrate can be either
transferred to the Company's silver refinery for recovery of silver and copper,
or sold to a commercial smelter. Factors which influenced Sunshine's decision to
refine its products internally or sell them to a smelter include levels of
production, costs of reagents and available smelter contract terms. The refinery
was designed and built to recover up to 8.0 million ounces of silver from
concentrates annually. Sunshine suspended operations at the silver refinery in
1995 pending higher levels of available feed, and began shipping its silver
concentrate to a smelter at that time. Prior to the closure of its main smelter
customer, the Company's sales to the third party smelters have been under
long-term contracts, generally for a period of at least one year, cancelable by
either party after one year upon thirty days notice. The Company employs no
sales force.
During the three years ended December 31, 2000, the Sunshine Mine
accounted for all of the Company's silver production, and approximately 16% of
the Company's silver reserves at December 31, 2000. (See Note 17 of Notes to
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41
Consolidated Financial Statements included elsewhere herein.) Production for the
three years ended December 31, 2000 is summarized in the chart below:
<Table>
<Caption>
2000 1999 1998
---------- ---------- ----------
Tons of Ore ....................... 169,036 217,601 247,866
Metals Recovered:
Ounces of Silver ......... 3,879,100 5,210,843 5,806,468
Pounds of Copper ......... 1,019,305 1,235,368 1,273,318
Pounds of Antimony ....... 786,078 991,079 1,078,460
Pounds of Lead ........... 4,839,538 6,966,645 12,001,080
</Table>
These metals were recovered from ore containing an average of 23.81,
24.75 and 24.17 ounces of silver per ton, in 2000, 1999 and 1998, respectively.
Metallurgical recoveries were approximately 96.38% of the contained silver, 97%
of the contained copper and 92.5% of the contained lead.
The hourly employees at the Sunshine Mine were represented by the
United Steelworkers of America (the "USWA") (which represented the majority of
the employees) and the International Brotherhood of Electrical Workers Union
(the "IBEW") (collectively, the "Unions"). Effective May 1, 1994, the Unions and
SPMI entered into new six-year labor agreements, which were extended until May
1, 2001. The Company has notified the Unions that the contracts have expired.
MEXICAN OPERATIONS
The Company acquired its first Mexican property, Juanicipio, in 1999.
The property is located in the state of Zacatecas, one of the most prolific
silver mining districts in the world. The district has reportedly produced more
than one billion ounces of silver dating to colonial times. The Company believes
that its recently-completed mapping and geophysical work has demonstrated that
structures similar to those containing mineralization at an adjacent mine may
exist at Juanicipio. The next logical step in the evolution of the property
would be a drilling program to begin to define whether mineralization exists in
these structures. The Company will be reviewing options to enable such a program
to go forward.
The Company's land position at the property is quite large,
approximately 28,100 hectares (69,400 acres). The Company is currently
negotiating a sale of the property.
MARKETING
The Company's primary product at the Sunshine Mine was either refined
silver which was sold to industrial customers or precious metals dealers, or
silver-copper and lead-silver concentrates which are sold to smelters. At the
time of the mine shutdown, all of the concentrates were being sold to a smelter.
Given the limited reserves economically accessible at the Sunshine Mine, upon
the closure of its primary smelter customer, reactivation of the refinery was
not economic. While the Company received offers for its concentrates from other
smelters, the terms were less attractive than those it has been receiving from
its primary customer. Prices received for refined silver were based on market
prices at the time of shipment. Prices received for the silver-copper
concentrate were based on average prices for silver, copper and lead during a
quotational period shortly after shipment. The Company had based 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 were sold to smelters, with prices for
contained lead and silver based on a quotational period shortly after shipment.
The Company's refined silver, antimony and copper products were generally
marketed directly to metals dealers or industrial customers, with prices based
on market prices at the time of shipment.
OTHER BUSINESS AND REGULATORY FACTORS
The Company's precious metals operations are intensely competitive and
subject to risks and regulations inherent in and applicable to mining generally
and the precious metals industry specifically. Competition in the precious
metals mining industry, and particularly the silver mining industry, is very
volatile. The market for gold and silver is international and there is no
significant marketing advantage in domestic production versus international
production. No single source of silver is significant to the world market, and
many of the principal sources of silver as a primary metal have been forced to
close as a result of continued low silver prices over the past several years. As
a result, most new mine production of silver at the present time is from gold,
copper, lead and zinc mines which produce silver as a by-product, and whose
economics are not significantly related to the price of silver.
-38-
42
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 in the United States
(principally the Sunshine Mine), 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, the Clean
Water Act, the Resource Conservation and Recovery Act, the Mine Safety and
Health Act, the Dam Safety Act and various other regulations. These laws and
regulations require the Company to conduct its mining business in a safe and
careful manner to minimize the impact of its mining activities on the
environment and its employees. These environmental laws and regulations may
require the acquisition of permits or other authorizations for certain
activities. 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.
In Argentina, the Company is most directly affected by the
"Environmental Protection for Mining Activity Law," the "National Mining Code"
and the "Mining Investment Law" for its Pirquitas project. These govern most
aspects of mining activity including environmental control, health and safety
and reclamation.
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 2001. The environmental
claims which were settled by the New Consent Decree (see LEGAL PROCEEDINGS)
arose out of mining which occurred prior to 1967 when the Company began to
impound its mine tailings in a tailings impoundment facility. None of the
settled claims were for recent operations of the Company. The Company also does
not anticipate any material effect from compliance with environmental, health
and safety laws, regulations and ordinances.
-39-
43
EMPLOYEES
At December 31, 2000, Sunshine and its subsidiaries, including Metals,
employed approximately 310 persons; 275 of whom are located at the Kellogg
facilities. As a result of the closure of the Sunshine Mine, the number of
employees needed at the Kellogg facilities has been reduced to less than 10 at
September 10, 2001, and is expected to be zero by year end.
LEGAL PROCEEDINGS
Pursuant to the Plan and the Confirmation Order, a settlement or
resolution of all environmental litigation affecting Sunshine was completed. See
"The Plan of Reorganization" with respect to the settlement and New Consent
Decree in the NRD Actions (Case Nos. CIV-96-0122-N-EJL and CIV-91-0342-N-EJL
then pending in the United States District Court for the District of Idaho). By
entry of the New Consent Decree, all claims of the Government and the Tribe for
natural resource damages and response costs to injuries allegedly caused by
Sunshine and Metals in the Coeur d'Alene Basin were dismissed by the Government
and the Tribe. The injuries alleged against Sunshine and Metals were natural
resource damage and response costs. Sunshine and Metals did not admit any
liability in the New Consent Decree. In exchange for the dismissal, under the
New Consent Decree (which was approved on January 18, 2001), Sunshine granted
warrants to purchase 9.95% of Sunshine's New Common Stock to the Tribe and the
Government; Metals is to provide for certain royalty payments to the Government
and the Tribe on a quarterly basis based on a percentage of the "Net Smelter
Returns" from all mining by Metals anywhere in the United States and all mining
by any Sunshine entity from the Sunshine Mine or within one mile of the current
boundaries of the Sunshine Mine. In connection with the settlement, the
Government also agreed to release Sunshine and Metals from a 1994 Consent Decree
which obligated them, with certain other mining companies, to remediate certain
property in the Bunker Hill Superfund Site. Under the New Consent Decree, Metals
was required to convey the surface rights to timber lands it owned and used for
non-mining purposes, and to perform certain remediation and testwork at its
ConSil mine adjacent to the Sunshine Mine.
Management of Sunshine believes that all other environmental claims,
both potential and threatened for activities which occurred prior to the August
23, 2000 filing of the Reorganization Cases, were discharged by the
effectiveness of the Plan and the Confirmation Order on February 5, 2001. See
also "CHANGE IN ACCOUNTANTS."
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44
OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
As of May 4, 2001, according to the Common Stock transfer records of
the Company and other information available to the Company, after giving effect
to the issuance of the "New Mining Stock" pursuant to the Plan of
Reorganization, (i) the following persons were known to be the beneficial owners
of more than 5% of the Common Stock and (ii) the executive officers and current
directors of the Company and all officers and directors as a group beneficially
own the following Common Stock.
<Table>
<Caption>
Amount and Nature of Approximate Percent of
Name of Beneficial Owner Beneficial Ownership Class(a)
------------------------ -------------------- ----------------------
Elliott International, LP(b)
Paul E. Singer, President of Elliott Capital Advisors, Inc.,
attorney-in-fact 12,726,377 25.45%
The Liverpool Limited Partnership(b)
Paul E. Singer, President, Liverpool Associates, Ltd.,
General Partner 12,724,912 25.45%
Elliott Associates, LP(b)
Paul E. Singer, General Partner 38,711 0.08%
Stonehill Institutional Partners, LP(c)
John Motulsky, Chris Wilson and Wayne Teetsel, General
Partners 6,690,275 13.38%
Stonehill Offshore Partners, Limited(c)
John Motulsky, Chris Wilson and Wayne Teetsel, Managing
Members of Stonehill Advisors, LLC 12,814,725 25.63%
William W. Davis 750,000(d) 1.50%
George M. Elvin -0- -0-
Arnold Kastenbaum -0- -0-
Keith McCandlish -0- -0-
Charles C. Reardon -0- -0-
John S. Simko 500,000(d) 1.00%
All Directors and Executive Officers as a Group (seven
individuals) 1,250,000(d) 2.50%
</Table>
- ----------
(a) Percentages are based upon 50,000,000 shares of Common Stock
outstanding at September 10, 2001.
(b) Paul E. Singer is the General Partner of Elliott Associates, LP, and is
the President of Liverpool Associates, Ltd., the General Partner of The
Liverpool Limited Partnership. Paul E. Singer is also the President of
Elliott International Capital Advisors, Inc., the attorney-in-fact for
Elliott International, LP. In such capacities, Mr. Singer holds the
power to vote and dispose of the total of 25,490,000 shares of Common
Stock held by such entities, and under Rule 13d-3 of the 1934 Act, Mr.
Singer may be deemed to be the beneficial owner of all such securities.
(c) John Motulsky, Chris Wilson and Wayne Teetsel are the general partners
of Stonehill Institutional Partners, LP, a Delaware limited partnership
and are the managing members of Stonehill Advisors, LLC, the investment
advisor to Stonehill Offshore Partners Limited, a Cayman Islands
corporation. As such, Messrs. Motulsky, Wilson and Teetsel share the
power to vote and dispose of the 19,505,000 shares of Common Stock held
by both entities and under Rule 13d-3 of the 1934 Act, such individuals
together may be deemed to be the beneficial owners of such securities.
(d) Includes the following shares subject to purchase pursuant to stock
options exercisable within 60 days - Messrs. Davis 750,000 shares, and
Simko, 500,000 shares.
-41-
45
MANAGEMENT
The affairs of the Company are managed and controlled by a Board of
Directors presently consisting of five members, each of whom were designated as
directors at the time of confirmation of the Plan to be comprised of four
creditor directors and one director from prior management. Two of the Directors,
Messrs. Simko and Elvin, have served as Directors for several years and were
Directors at the time of filing of the Bankruptcy Proceeding. The current
directors hold office until the next Annual Meeting of Stockholders, or until
appointment by the incumbent Board of Directors to serve until the next Annual
Meeting or until their respective successor has been duly elected.
At Sunshine's 1999 Annual Meeting of Stockholders seven individuals
were each elected as a member of the Board of Directors of Sunshine, each of
which has been a member of the Board of Directors of Sunshine for more than five
calendar years. The directors were G. Chris Andersen (May 1983), V. Dale Babbitt
(December 1992), George M. Elvin (June 1994), Daniel D. Jackson (May 1983), Oren
G. Shaffer (June 1993), John S. Simko (December 1992) and Robert B. Smith (June
1993).
On the Effective Date of the Plan, the operational management of
Sunshine became the responsibility of "Reorganized Board of Directors" selected
in accordance with the Plan. The directors listed above ceased to be Directors
of Sunshine on the Effective Date of the Plan and were deemed removed (without
cause) pursuant to the Confirmation Order. In accordance with the terms of the
Plan, four "Creditor Directors" were selected and one "Management Director" was
selected to comprise the Board of Directors of Sunshine from and after the
Effective Date. John S. Simko continues as a Director as the Management
Director, and George M. Elvin was selected as one of the Creditor Directors by
Elliott International, L.P. The other three "Creditor Directors" selected are
Arnold Kastenbaum (Designee of Stonehill Offshore Partners Limited), Keith
McCandlish (Designee of Elliott International, L.P.), and Charles Reardon
(Designee of Stonehill Institutional Partners, L.P.)
The officers of Sunshine from and after the Effective Date of the Plan
are listed under "Executive Officers" below and consist primarily of John S.
Simko as Chairman of the Board of Sunshine and William W. Davis, President,
Chief Operating Officer and Chief Financial Officer. Other officers who did not
continue in office after the Effective Date were deemed removed therefrom
(without cause) pursuant to the Confirmation Order.
Set forth below is certain information about the directors of the
Company, including their ages, terms of service, all positions and offices held
with the Company, other principal occupations, business experience and
directorships with other companies during the last five years or more.
DIRECTOR NAME, AGE, PRINCIPAL OCCUPATIONS, BUSINESS EXPERIENCE AND DIRECTORSHIPS
<Table>
<Caption>
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION
NAME AGE AND BUSINESS HISTORIES
---- --- ----------------------------------------------
John S. Simko 62 Director (since December 1992), Chief Executive Officer of Sunshine
(December 1996 to January 2001), Chairman of the Board of Sunshine (since
December 1996), President of Sunshine (December 1992 to January 2001);
previously (from 1984 to November 1992) served the Company as Senior Vice
President and General Counsel.
George M. Elvin 56 Director (since June 1994). Since 1998, he has been President and Owner of
Barrington Associates, a financial consulting business. From 1992 through
2000, he was the President and Owner of Windsor IBC, Inc., a brokerage
firm member of the NASD. Mr. Elvin is a designee of Elliott International,
LP.
Charles C. Reardon 44 Director (since January 2001). Since 1998, he has been Of Counsel to
Westerman, Ball, Ederer & Miller, LLP, and the firm of Goldburg & Smith,
each a Long Island, New York law firm. During the five years prior to
1998, Mr. Reardon has also served as a business consultant and/or
independent contractor for Karamar Publications, a privately-held
publication firm, The Oxford Insurance Agency Group, a Long Island, New
York based casualty insurance agency, and Allen & Company, a New York
merchant banking firm. Since 1982, he has been a member of the New York
State Bar Association and is a practicing attorney. Mr. Reardon is a
Designee of the Stonehill Group.
</Table>
-42-
46
<Table>
<Caption>
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION
NAME AGE AND BUSINESS HISTORIES
---- --- ----------------------------------------------
Arnold Kastenbaum 48 Director (since January 2001). Since 1999, he has been President of Chodan
Advisors, Inc., a New York firm specializing in financial restructuring
consulting. From 1997 through 1999, he was Director/Distress
Securities/Special Situations (similar to a Vice President) of UBS
Warburg; prior thereto, from 1994 until 1997, he was Director of
Research/Senior Research Analyst of MJ Whitman, Inc. Mr. Kastenbaum is a
member of the Board of Directors of Willcox & Gibbs, Inc., a publicly-held
corporation which distributed machinery parts to the garment industry. Mr.
Kastenbaum is a Designee of the Stonehill Group.
Keith McCandlish 43 Director (since January 2001). He is a Canadian citizen and since 1997,
the Manager of Mineral Services at Associated Mining Consultants, Ltd. He
has been employed by Associated Mining Consultants, Ltd. since 1988,
initially as a Senior Geologist (1988-1994) and as Exploration Manager
(1994-1997). Mr. McCandlish is a Registered Professional Geologist with
over twenty years of consulting geological and engineering experience in
minerals, oil, sands/heavy oil, precious stones, coal and industrial
minerals. Mr. McCandlish is a Designee of Elliott International, LP.
</Table>
BOARD MEETINGS AND COMMITTEES.
The Board of Directors held four meetings during the calendar year
ending December 31, 2000. For such year, no Director attended fewer than 75% of
the aggregate of the total number of meetings held by the Board and the total
number of meetings held by all committees of the Board on which he served during
the periods that he served.
Prior to the Effective Date, the Board had an Audit Committee
consisting of George M. Elvin and Robert B. Smith, the function of which was to
review the Company's operating and accounting procedures. That Audit Committee
met once during 2000.
Prior to the Effective Date, the Board also had a Compensation and
Transaction Committee (the members of which were Messrs. Babbitt, Jackson and
Shaffer), the function of which was to review the compensation of the chief
executive officer of the Company and all material transactions involving the
Company. The Board also had a Finance Committee (the members of which were
Messrs. Andersen, Elvin, Shaffer and Simko), the function of which was to review
and assist the Company in connection with its financing activities. In
connection with the Effective Date of the Plan and Confirmation Order, and the
cessation as directors of all directors except Messrs. Simko and Elvin, the
Compensation and Transaction Committee and Finance Committee were not
reconstructed. At the meeting of the new Board of Directors held on February 21,
2001, the Board reconstituted an Audit Committee to consist of Messrs.
Kastenbaum (Chairman) and Elvin.
DIRECTOR COMPENSATION
Our Directors who are not employed by the Company receive annual
compensation of $25,000 per year, and $1,250 per day for each Board and
Committee meeting attended, plus reimbursement of expenses for their service on
the Board. Mr. Simko, who is also an Executive Officer of the Company does not
receive any separate compensation for his services as a Director. Directors who
so elect are covered by the Sunshine Mining Health Insurance Plan. During 2000,
former directors (who ceased to be directors upon issuance of the Confirmation
Order) received compensation in cash and/or health benefits: G. Chris Andersen
$28,750; V. Dale Babbitt $35,307; Daniel Jackson $31,634; Oren G. Shaffer
$28,750; and Robert B. Smith, Jr. $35,307. During 2000, Mr. Elvin received
28,750.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("DGCL") a
Delaware corporation has the power, under specified circumstances, to indemnify
its directors, officers, employees and agents in connection with actions, suits
or proceedings brought against them by a third party or in the right of the
corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, or against expenses incurred in any such action,
suit or proceeding. Article VII of the Amended and Restate Certificate of
Incorporation provides the mandatory indemnification of directors and officers
to the fullest extent permitted by law, including Section 145 of the DGCL.
-43-
47
Section 102(b)(7) of the DGCL provides that a certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, (iii) under Section 174 (relating to liability for
unauthorized acquisitions or redemption of, or dividends on, capital stock) of
the DGCL, or (iv) for any transaction from which the director derived in
improper personal benefit. Article VII of the Amended and Restated Certificate
of Incorporation of Sunshine provides for such provision.
Sunshine's Bylaws also contain certain provisions relating to the
indemnification of directors, officers, employees and agents, which supplement
the indemnification rights afforded under Sunshine's Amended and Restated
Certificate of Incorporation.
As a result of these limitations, we and our stockholders may be unable
to obtain monetary damages from a director for breach of the duty of care. We
and our stockholders may still seek injunctive or other equitable relief for a
director's alleged breach of such director's fiduciary duty. If these equitable
remedies are unavailable, however, we and our stockholders may not have an
effective remedy against the challenged conduct.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
Sunshine under the foregoing provisions, we have been informed that in the
opinion of the Securities and Exchange Commission (the "Commission"), such
indemnification is against public policy as expressed in the Securities Act of
1933, and is therefore unenforceable.
EXECUTIVE OFFICERS
The following are the executive officers (the "Named Executive
Officers") of the Company:
<Table>
<Caption>
POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION
NAME AGE AND BUSINESS HISTORIES
---- --- ----------------------------------------------
John S. Simko 62 Director (since December 1992), Chief Executive Officer (December 1996 to
January 2001), Chairman of the Board (since December 1996), President
(December 1992 to January 2001); previously (1984 to November 1992) served
the Company as Senior Vice President and General Counsel.
William W. Davis 48 President and Chief Operating Officer (since February 2001) and Chief
Financial Officer (since September 1992); Executive Vice President
(December 1995 to January 2001), and Senior Vice President and Chief
Financial Officer of the Company (September 1992 to November 1995);
previously (from 1983) served in various capacities as an employee of the
Company.
Harry F. Cougher 58 Senior Vice President and General Manager-Sunshine Mining since January
1994; previously (since 1984) served in various capacities as an employee
of the Company.
</Table>
Although not Named Executive Officers of the Company, the following
persons currently serve as officers of the Company, M. Michael Owens, Vice
President, Chief Accounting Officer and Treasurer; William J. Pincus, Vice
President, Latin American Operations; and Mary Jo Williams, Secretary. Their
positions with the Company are not subject to a vote of the stockholders. Their
ages, terms of service, all positions and offices with the Company, other
principal occupations, business experience and directorships with other
companies during the last five years or more are set forth below.
-44-
48
<Table>
<Caption>
NAME AGE POSITION(S) WITH COMPANY, PRINCIPAL OCCUPATION AND BUSINESS HISTORIES
M. Michael Owens 47 Vice President, Chief Accounting Officer (since 1997) and Treasurer (since
February 2001); Vice President, Administration (1994 to 1997); and from 1983
to 1994 served in various positions as an employee of the Company.
William J. Pincus 48 Vice President, Latin American Operations (since 1998);General Manager (1996
to 1998) of the Company's Peruvian subsidiary; prior thereto, served in
various capacities as an employee of the Company.
Mary Jo Williams 58 Secretary (since 2000); Assistant Secretary (1995 to 2000)
</Table>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes based on its review of Forms 3, 4 and 5, furnished
to the Company for the fiscal year ended December 31, 2000, and written
representations that no other reports were required for such fiscal year that
all Section 16(a) filing requirements applicable to its officers and directors
were complied with.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid by the
Company, or accrued for the account of each of the "Named Executive Officers"
for calendar years 2000, 1999 and 1998. There were no other executive officers
whose salary and bonus for the year ended December 31, 2000, exceeded $100,000.
-45-
49
<Table>
<Caption>
SUMMARY COMPENSATION TABLE
- ------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION PAYOUTS
AWARDS PAYOUTS
------------ -------
(A) (B) (C) (D) (G) (H) (I)
SECURITIES
UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION AT SALARY BONUS OPTIONS/SARS PAYOUTS COMPENSATION
TIME OF PAYMENT YEAR ($) ($) (#) ($) ($)(1)
- ------------------------------ ---- ------- ------ ------------ ------- ------------
John S. Simko, Chairman, 2000 361,844 0 0 0 0
President and Chief Executive 1999 361,843 0 0 0 11,439
Officer 1998 360,031 55,000 0 0 10,798
William W. Davis, Executive Vice 2000 242,548 0 0 0 0
President and Chief Financial 1999 242,548 50,000 0 0 11,439
Officer 1998 242,547 26,400 0 0 10,798
Harry F. Cougher, Senior Vice 2000 145,026 0 0 0 0
President and Chief Operating 1999 145,026 0 0 0 10,369
Officer - Mining 1998 145,025 10,200 0 0 10,476
</Table>
- ----------
(1) Includes income received pursuant to the Company's Employees Savings and
Security Plan (the "Savings Plan") in which all employees of the Company, other
than those covered by collective bargaining agreement, may participate, and the
Sunshine Defined Contribution Plan (the "DC Plan"). Payments to Mr. Simko under
the Savings Plan were $4,800 and $4,800 in 1999 and 1998, respectively; and
under the DC Plan were $6,639 and $5,998 in 1999 and 1998, respectively.
Payments to Mr. Davis under the Savings Plan were $4,800 and $4,800 in 1999 and
1998, respectively; and under the DC Plan were $6,639 and $5,998 in 1999 and
1998, respectively. Payments to Mr. Cougher under the Savings Plan were $4,351
and $4,657 for 1999 and 1998, respectively; and under the DC Plan were $6,018
and $5,819 for 1999 and 1998, respectively. The Savings Plan is an individual
account plan which provides for deferred compensation as described in Section
401(k) of the Internal Revenue Code and is subject to and complies with all the
principal protective provisions of Titles I and II of the Employee Retirement
Income Security Act of 1974 ("ERISA"). The DC Plan replaced the Company's
Defined Benefit Pension Plan as of January 1, 1994, and is subject to and
complies with ERISA.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to the Named Executive Officers in the
year ended December 31, 2000. Pursuant to the Plan and the Confirmation Order,
the old common stock was cancelled at February 5, 2001, and as a result, the
unexercised options outstanding at that time to purchase old common stock were
also deemed cancelled.
At its meeting held on February 21, 2001, the Board of Directors
granted stock options to seven individuals, including Messrs. Davis (750,000
shares) and Simko (500,000 shares) which are immediately exercisable at an
exercise price of $0.66 per share for a term of ten calendar years. The exercise
price under such options may be paid in cash, shares of Common Stock or
"cashless" exercise based upon the fair market value of Common Stock at the time
of exercise less the exercise price. The total number of shares covered by
options granted on February 21, 2001 is 2,300,000 and options covering an
additional 200,000 shares are reserved for future issuance.
-46-
50
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises in fiscal
2000 by the Named Executive Officers and the value of such officers' unexercised
options at December 31, 2000.
<Table>
<Caption>
(A) (B) (C) (D) (E)
- ------------------ ------------ -------- ------------------------------- ----------------------------
SHARES VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED ON REALIZED UNEXERCISED OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS AT
EXERCISE (#) ($) FY-END (#) FY-END ($)
------------ -------- ------------------------------- ----------------------------
NAME EXERCISABLE* UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------- ----------- -------------
John S. Simko, CEO 0 0 108,125 0 0 0
William W. Davis 0 0 75,000 0 0 0
Harry F. Cougher 0 0 37,500 0 0 0
</Table>
- ----------
*Pursuant to the Plan and the Confirmation Order, the old common stock was
cancelled at February 5, 2001. As a result, the unexercised options outstanding
at that time (and those listed in this table) were also cancelled.
PENSION PLANS
On December 31, 1993, the Company froze its Defined Benefit Pension
Plan (the "Pension Plan"), which was replaced as of January 1, 1994, by the
Company's DC Plan. The Pension Plan was maintained for the benefit of employees
except those covered by a collective bargaining agreement. Benefits under the
Pension Plan ceased to accrue after December 31, 1993.
Annual benefits at age 65 for Messrs. Simko, Davis and Cougher under
the Pension Plan are frozen at $36,186, $33,500 and $15,901, respectively. The
years of credited service at December 31, 1993, for Mr. Simko, Mr. Davis and Mr.
Cougher were nine, ten and nine years, respectively. Employees who are age 55
and who have fifteen or more years of employment with the Company are eligible
for early retirement, and will receive approximately 75% of the accrued benefits
they would have received at age 65.
EMPLOYEE CONTRACTS
Effective January 1, 1994, each of Messrs. Simko, Davis and Cougher
entered into written employment agreements (the "Old Employment Agreements")
with the Company for a term of three years. In December 1995, the Employment
Agreements for Messrs. Simko, Davis and Cougher were amended to extend the term
to December 31, 1999, and again in September 1998 to extend the term to December
31, 2002. Pursuant to the Plan and the Confirmation Order, each of such
agreements was rejected by Sunshine and deemed terminated, and no employment
agreements presently exist.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for salaries and expenses payable to officers and the payments
to directors described under "Director Compensation" above, no related party
transactions or transactions with Management exist.
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51
CHANGE IN ACCOUNTANTS
Ernst & Young, LLP (Sunshine's auditors for many years) abruptly
resigned on May 27, 1999, immediately before the commencement of an offering
intended to raise capital to refinance indebtedness and finance the equity
requirement of the Pirquitas Mine.
The reports of Ernst & Young, LLP on Sunshine's financial statements
for 1998 and 1997 did not contain an adverse opinion or disclaimer of opinion
and were not qualified or modified as to audit scope or accounting principles.
The reports of Ernst & Young LLP for 1998 and 1997 were not modified as to
uncertainty regarding the ability of Sunshine to continue as a going concern. In
connection with the audits of the financial statements of Sunshine for each of
the two fiscal years ended December 31, 1998 and 1997, and in the subsequent
interim periods, there were no disagreements with Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures which, if not resolved to the satisfaction of
Ernst & Young, LLP would have caused them to make reference to the matter in
their report. On June 11, 1999, Grant Thornton LLP was engaged by Sunshine's
Board of Directors as the new independent accountant for Sunshine.
On May 23, 2000, Sunshine filed its original petition against Ernst &
Young, LLP in the case styled Sunshine Mining and Refining Company v. Ernst &
Young, LLP, Cause No. CC-00-06081-A, in the County Court at Law No. 1 of Dallas
County, Texas. Sunshine's complaint alleges that it has sustained substantial
direct and consequential damages in addition to more than $1 million in
out-of-pocket costs and expenses associated with the failed offering. Sunshine
alleges these damages arose out of Ernst & Young, LLP's wrongful conduct
connected to its cessation of the auditor-client relationship. Sunshine alleges
that Ernst & Young, LLP's failure to earlier disclose its planned termination
constituted fraud and/or negligent misrepresentation. In addition, it is alleged
that the termination itself was an act of negligence, professional misconduct
and breach of contract. Sunshine also alleges that Ernst & Young, LLP's abrupt
resignation at the commencement of Sunshine's offering had the foreseeable
effect of alarming the investment community about the integrity of Sunshine's
management and of Sunshine's financial information.
DESCRIPTION OF CAPITAL STOCK
Pursuant to the Plan and the Confirmation Order, on the Effective Date,
all of the "old common stock" of Sunshine was canceled, retired and eliminated
with no consideration paid therefor, and Sunshine was required to issue the "new
mining stock," which is shares of Common Stock, par value $0.01 per share. Under
an amendment to the Certificate of Incorporation filed with the Secretary of
State of Delaware, the authorized capital stock consists of 200,000,000 shares
of new Common Stock, par value $0.01 per share, and 20,000,000 shares of
preferred stock, par value $0.01 per share, issuable in series. The Board of
Directors has the authority to fix or establish by resolution of voting power,
dividend rate, liquidation preference and rights and qualifications, limitations
or restrictions of any class or series of preferred stock. As of March 16, 2001,
no shares of Preferred Stock were issued and outstanding, and no shares of
preferred stock have been designated. As of March 16, 2001, there were
approximately 50,000,000 shares of Common Stock outstanding. The CUSIP number of
the new Common Stock is 867833-60-0.
GENERAL
The Common Stock has no conversion, redemption, preemptive or
subscription rights. The holders of Common Stock are entitled to share, pro
rata, in accordance with the number of shares held by them, such dividends as
may be declared from time to time, by the Board of Directors out of funds
legally available therefor. Any such dividends are payable after all dividends,
current and accrued, shall have been paid or declared and set apart for payment
on any then outstanding shares of various series of preferred stock to the
extent that the Board of Directors shall have directed the dividends on any such
preferred stock shall be paid or declared and set apart for payment before
payment or setting apart for payment of dividends on the Common Stock. All
shares of Common Stock presently issued and outstanding are fully-paid and
non-assessable.
RIGHTS ON LIQUIDATION
Upon liquidation, dissolution or winding up, the holders of Common
Stock are entitled to receive out of our assets, after payment of all debts and
liabilities, the amounts or preference, if any, for each outstanding share of
preferred stock, all of our remaining assets, pro rata, in proportion to the
number of the shares of Common Stock held by them.
VOTING RIGHTS
Each share of Common Stock is entitled to one vote for all purposes in
all matters submitted to the stockholders. Cumulative voting in the election of
directors is not authorized by the Certificate of Incorporation. Similarly,
there are no
-48-
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redemption rights, sinking fund provision or rights of conversion with respect
to the Common Stock and the holders of Common Stock do not have any preemptive
rights to acquire additional shares of Common Stock. In accordance with Section
1123(a)(6) of the United States Bankruptcy Code, our Amended and Restated
Certificate of Incorporation prohibits the issuance of any shares of any
non-voting equity securities.
At any meeting of stockholders, the holders of a majority of the
outstanding shares of stock constitute a quorum at that meeting. In the election
of directors, a plurality of the votes cast shall elect all directors. Any other
action may be authorized by a majority of the votes cast at a meeting except in
limited instances where Delaware Law prescribes a different percentage. Any
action which may be taken or is required to be taken by Delaware law at any
annual or special meeting of stockholders may also be taken without a meeting,
without prior notice and without a vote, if a consent in writing setting forth
the action so taken is signed by the holders of shares of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize such action at a meeting. If such a consent of stockholders is
executed, prompt notice of the taking of the action without a meeting by less
than the unanimous consent is to be given to those stockholders who have not
consented in writing.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, 59 Maiden Lane, New York, New York 10007.
DESCRIPTION OF PREFERRED STOCK
The preferred stock may be issued from time to time, in one or more
series, and our Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rights and terms, redemption
rights, liquidation preferences, conversion rights, voting rights and sinking
fund provisions applicable to each series of preferred stock. If we issue a
series of preferred stock in the future that has voting rights or preferences
over the new Common Stock with respect to the payment of dividends, and upon our
liquidation, dissolution or winding up, the rights of the holders of new Common
Stock may be adversely affected. The issuance of shares of preferred stock could
be used in an attempt to prevent an acquisition of us. We have no present
intention to issue any shares of preferred stock.
THE DELAWARE BUSINESS COMBINATION ACT
We are also subject to the provisions of Section 203 of the DGCL.
Section 203 prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in the manner described
by Section 203. A "business combination" includes mergers, asset sales, and
other transactions that financially benefit the interested stockholder. Subject
to exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the Company's voting stock. The stockholders holding a majority of the shares of
the Company's voting stock may amend the Company's Amended and Restated
Certificate of Incorporation or Amended Bylaws to effectively avoid the
provisions of this statute. We do not intend to "elect out" of this statute by
amending our Amended and Restated Certificate of Incorporation or Amended
Bylaws.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed
upon for us by Richards, Layton & Finger, P.A., Wilmington, Delaware.
EXPERTS
Our consolidated financial statements as of December 31, 2000 and 1999,
and for each of the three years in the period ended December 31, 2000, included
in this Prospectus have been audited by Grant Thornton LLP, independent
certified public accountants, as stated in their report herein, and have been so
included in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information
with the Securities and Exchange Commission. You may read and copy any document
we file with the SEC at its public reference facilities at 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as the SEC's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may call the SEC at 1-800-SEC-0330 for
-49-
53
further information on the public reference rooms. Our SEC filings are also
available to you free of charge at the SEC's website at http://www.sec.gov.
We filed a registration statement on Form S-1 to register with the SEC
the shares of our common stock to be offered hereby. This prospectus is a part
of that registration statement. As allowed by SEC rules, this prospectus does
not contain all of the information you can find in the registration statement or
the exhibits to the registration statement.
Our common stock is quoted on the NASDAQ OTC Bulletin Board under the
symbol "SSMR," and the information that we file with the SEC may also be
inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, Washington, D.C. 20006.
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54
GLOSSARY AND INDEX
Following are a Glossary of Certain Mining Terms used in this
Prospectus that may be technical in nature and an Index of Certain Principal
defined 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 exist from that zone or vein.
EXPLORATION - Work involved in searching for ore, usually by drilling or driving
a draft.
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.
PROBABLE RESERVES - Reserves for which quantity and grade and/or quality are
computed from information similar to that used for proven reserves, but the
sites of inspection, sampling, and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although lower than
that for proven reserves, is high enough to assume continuity between points of
observation.
PROVEN RESERVES - Reserves for which (a) quantity is computed from dimensions
revealed in outcrops, trenches, workings or drill holes; grade and/or quality
are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that the size, shape, depth and mineral content of
the reserves are well-established.
RESERVE - That part of a mineral deposit that could be economically and legally
extracted or produced at the time of the reserve determination.
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.
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55
INDEX OF DEFINED TERMS
<Table>
<Caption>
Page
----
Agriculture.......................................17
Allowed Put Default Claims........................16
Approved Market...................................19
Argentina.........................................14
Argentina Allowed Stonehill Notes Claims..........16
Asarco............................................18
Asarco Settlement.................................14
Business Combination..............................49
Call Option........................................2
Change of Control.................................42
Commission........................................39
Company............................................1
Confirmation Order................................14
Creditor Directors................................20
CUSIP Number......................................16
DC Plan...........................................41
DOI...............................................17
DGCL..............................................39
Effective Date....................................14
Elliott Group.....................................14
EPA...............................................17
ERISA.............................................41
EuroBonds.........................................14
Exit Financing Facility...........................19
Exploration.......................................14
Forward-Looking Statements........................25
Interested Stockholder............................49
IBEW..............................................32
International.....................................19
Government.........................................1
Management Director...............................20
Mandatory Repurchase Price........................19
Metals............................................14
Named Executive Officers..........................39
Net Smelter Returns...............................17
New Argentina Stock...............................19
New Common Stock..................................16
New Consent Decree................................17
New Employment Agreements.........................42
New Mining Stock...................................1
1934 Act..........................................21
NRD Actions.......................................17
NYSE..............................................13
Old Common Stock...................................1
Our................................................1
Pension Plan......................................42
Petition Date.....................................14
Plan..............................................14
Proceeding........................................14
Put Notice........................................19
Registration Rights Agreement.....................18
Reorganization Cases..............................14
Reorganized Board of Directors....................20
Reorganized Debtors...............................20
Savings Plan......................................41
SSCF..............................................13
SSMR..............................................13
Sunshine...........................................1
Stonehill Group...................................14
Stonehill Notes...................................14
Tribe..............................................1
Underwriters.......................................2
Unions............................................32
USWA..............................................32
Us.................................................1
We.................................................1
</Table>
-52-
56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
Report of Independent Certified Public Accountants.................................................. F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999........................................ F-2
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.......... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2000,
1999 and 1998....................................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.......... F-5
Notes to Consolidated Financial Statements.......................................................... F-6
Consolidated Balance Sheet as of June 30, 2001...................................................... F-31
Consolidated Statements of Operation for Periods Ended June 30, 2001 and 2000....................... F-32
Consolidated Statements of Cash Flow for Periods Ended June 30, 2001 and 2000....................... F-33
Notes to June 30, 2001 Consolidated Financial Statements............................................ F-34
</Table>
-53-
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Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Sunshine Mining and Refining Company
We have audited the accompanying consolidated balance sheets of Sunshine Mining
and Refining Company as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sunshine Mining
and Refining Company as of December 31, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the consolidated financial
statements, the Company incurred a net loss of $20,890,000 and used $4,932,000
of cash in operating activities in the year ended December 31, 2000. As
discussed in Note 4 to the consolidated financial statements, the Company closed
the Sunshine Mine in February 2001 and will have no revenues from operations for
the foreseeable future. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 4. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, the Company and
three of its subsidiaries filed voluntary petitions for relief under Chapter 11
of the federal bankruptcy laws in the United States Bankruptcy Court of the
District of Delaware on August 23, 2000. The Company emerged from bankruptcy on
February 5, 2001.
GRANT THORNTON LLP
Dallas, Texas
February 22, 2001
F-1
58
Sunshine Mining and Refining Company
Consolidated Balance Sheets
(in thousands, except per share amounts)
<Table>
<Caption>
DECEMBER 31
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash investments $ 291 $ 628
Silver bullion 10 4,117
Accounts receivable 1,626 2,677
Inventories 1,500 2,826
Equipment held for sale 1,006 --
Other current assets 731 787
--------- ---------
Total current assets 5,164 11,035
Property, plant, and equipment, at cost 40,933 60,720
Less accumulated depreciation, depletion, and amortization (26,262) (37,623)
--------- ---------
14,671 23,097
Investments and other assets 2,757 2,888
--------- ---------
Total assets $ 22,592 $ 37,020
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 697 $ 1,634
Accrued expenses 1,643 3,562
Current portion, long term debt -- 5,000
--------- ---------
Total current liabilities 2,340 10,196
Long term debt 1,530 38,238
Accrued pension and other postretirement benefits 5,230 4,445
Other long-term liabilities and deferred credits 779 2,861
Liabilities subject to compromise 48,991 --
Stockholders' equity (deficit):
Common stock, $0.01 par value:
Authorized shares - 75,000
Issued shares - 49,264 in 2000; 39,252 in 1999 493 393
Paid-in capital 729,956 725,840
Accumulated other comprehensive loss (884) --
Accumulated deficit (764,733) (743,843)
--------- ---------
(35,168) (17,610)
Less treasury stock: 579 shares in 2000 and 1999, at cost (1,110) (1,110)
--------- ---------
(36,278) (18,720)
--------- ---------
Total liabilities and stockholders' deficit $ 22,592 $ 37,020
========= =========
</Table>
See accompanying notes.
F-2
59
Sunshine Mining and Refining Company
Consolidated Statements of Operations
(In thousands, except per share amounts)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2000 1999 1998
-------- -------- --------
Operating revenues $ 23,094 $ 32,332 $ 34,668
Costs and expenses:
Cost of revenues (22,570) (27,673) (28,365)
Depreciation, depletion, and amortization (1,198) (1,328) (4,944)
Impairment of mining properties (7,245) -- (50,425)
Exploration (2,373) (2,015) (4,512)
Selling, general, and administrative
expense (3,450) (4,800) (5,016)
-------- -------- --------
(36,836) (35,816) (93,262)
Other income (expense):
Mark to market gain (loss) (167) 359 (2,588)
Interest income 61 198 567
Interest and debt expense:
Contractual interest and debt expense (6,868) (8,213) (6,979)
Reduction attributable to bankruptcy 1,574 -- --
-------- -------- --------
(5,294) (8,213) (6,979)
Other, net 193 297 2,749
-------- -------- --------
(5,207) (7,359) (6,251)
-------- -------- --------
Loss before reorganization items (18,949) (10,843) (64,845)
Reorganization items:
Professional fees (1,965) -- --
Interest earned while in Chapter 11 24 -- --
-------- -------- --------
Net loss $(20,890) $(10,843) $(64,845)
======== ======== ========
Basic and diluted loss per
common share $ (0.48) $ (0.31) $ (2.02)
======== ======== ========
</Table>
See accompanying notes.
F-3
60
Sunshine Mining and Refining Company
Consolidated Statements of Stockholders' Equity (Deficit)
<Table>
<Caption>
COMMON STOCK ACCUMULATED TREASURY STOCK
--------------- PAID-IN OTHER COMPRE- ACCUMULATED -----------------
SHARES AMOUNT CAPITAL HENSIVE LOSS DEFICIT SHARES AMOUNT TOTAL
------- ------ -------- ------------- ----------- -------- ------- --------
(In Thousands)
Balance at December 31, 1997 32,477 $ 325 $713,465 $ -- $(668,155) 573 $(1,139) $ 44,496
Net loss -- -- -- -- (64,845) -- -- (64,845)
Issuance of common stock upon conversion of
Eurobonds 191 2 1,317 -- -- -- -- 1,319
Issuance of common stock for interest on 10% Notes 134 1 749 -- -- -- -- 750
Issuance of common stock upon exercise of stock
options and warrants 194 2 783 -- -- -- -- 785
Other, net -- -- -- -- -- (3) 29 29
------- ------ -------- --------- --------- -------- ------- --------
Balance at December 31, 1998 32,996 $ 330 $716,314 $ -- $(733,000) 570 $(1,110) $(17,466)
Net loss -- -- -- -- (10,843) -- -- (10,843)
Issuance of common stock upon conversion of:
Eurobonds 337 3 1,178 -- -- -- -- 1,181
5% Notes 3,451 35 5,632 -- -- -- -- 5,667
10% Notes 37 -- 129 -- -- -- -- 129
Beneficial conversion feature on 5% Notes -- -- 962 -- -- -- -- 962
Issuance of common stock for interest on:
Eurobonds 1,587 16 (16) -- -- -- -- --
5% Notes 112 1 150 -- -- -- -- 151
10% Notes 730 8 1,486 -- -- -- -- 1,494
Other, net 2 -- 5 -- -- 9 0 5
------- ------ -------- --------- --------- -------- ------- --------
Balance at December 31, 1999 39,252 $ 393 $725,840 $ -- $(743,843) 579 $(1,110) $(18,720)
Comprehensive loss:
Net loss -- -- -- -- (20,890) -- -- (20,890)
Minimum pension liability adjustment -- -- -- (884) -- -- -- (884)
------- ------ -------- --------- --------- -------- ------- --------
Total comprehensive loss -- -- -- (884) (20,890) -- -- 21,774
Issuance of common stock upon exercise of warrants 5,611 56 (52) -- -- -- -- 4
Issuance of common stock:
Conversion of Eurobonds 756 8 1,023 -- -- -- -- 1,031
Conversion of 10% Notes 1,937 19 1,288 -- -- -- -- 1,307
Interest payment on 10% Notes 698 7 617 -- -- -- -- 624
Mandatory prepayment on 10% Notes 1,010 10 1,240 -- -- -- -- 1,250
------- ------ -------- --------- --------- -------- ------- --------
Balance at December 31, 2000 49,264 $ 493 $729,956 $ (884) $(764,733) 579 $(1,110) $(36,278)
======= ====== ======== ========= ========= ======== ======= ========
</Table>
See accompanying notes.
F-4
61
Sunshine Mining and Refining Company
Consolidated Statements of Cash Flows
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2000 1999 1998
-------- -------- --------
(In Thousands)
OPERATING ACTIVITIES
Net loss $(20,890) $(10,843) $(64,845)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion, and amortization 1,198 1,328 4,944
Impairment of mining properties 7,245 -- 50,425
Amortization of debt issuance costs and accretion of debt
discount 730 3,806 2,480
Gains on sales of investments, property and equipment
(345) (1,138) (1,108)
Interest on Eurobonds and 10% Notes paid or payable in
common stock 2,881 1,645 750
Net (increase) decrease in:
Silver bullion 171 (430) 1,097
Accounts receivable 1,051 124 --
Inventories 1,326 1,410 (609)
Other assets 421 547 (1,660)
Net increase (decrease) in:
Accounts payable and accrued expenses 3,795 (585) 855
Accrued pension and other
postretirement benefits (433) (1,053) (174)
Other liabilities and deferred credits (2,082) (623) (720)
-------- -------- --------
Net cash used in operating activities (4,932) (5,812) (8,565)
-------- -------- --------
INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,646) (4,183) (10,318)
Sale of silver bullion 3,936 1,540 1,438
Sale of property, plant and equipment 925 220 77
Receipt of payment on note receivable -- 1,500 700
Distribution from partnership investment -- -- 798
Other -- 151 519
-------- -------- --------
Net cash provided by (used in) investing activities 3,215 (772) (6,785)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long term debt,
net of issuance costs 1,380 5,827 (7)
Proceeds from issuance of common stock upon exercise of
warrants and other transactions -- (27) 785
-------- -------- --------
Net cash provided by financing activities 1,380 5,800 778
-------- -------- --------
Decrease in cash and cash investments (337) (784) (14,573)
Cash and cash investments at beginning of year 628 1,412 15,985
-------- -------- --------
Cash and cash investments at end of year $ 291 $ 628 $ 1,412
======== ======== ========
Supplemental cash flow information:
Interest paid in cash $ 265 $ 2,526 $ 3,367
Noncash financing transactions:
Common stock issued upon conversion of debt $ 2,338 $ 6,977 $ 1,319
Common stock issued for mandatory prepayment of debt
$ 1,250 $ -- $ --
Common stock issued in payment of interest $ 624 $ 1,645 $ 750
Cash flows related to reorganization items:
Operations activities:
Interest received on accumulated cash $ 24 $ -- $ --
Payment of professional fees $ 967 $ -- $ --
Financing activities $ -- $ -- $ --
Investing activities $ -- $ -- $ --
</Table>
See accompanying notes.
F-5
62
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements
1. VOLUNTARY FILING UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
Sunshine's business and profitability have been negatively affected by an
extremely lengthy period of low silver prices. Since 1988, the price of silver
has averaged less than $5.00 per ounce compared to an average price of
approximately $9.50 per ounce over the prior 10 years. Given the depressed price
of silver compared to the Company's cash production costs, the Company's
operations have generated a negative cash flow for several years.
On August 23, 2000 (the "Petition Date") Sunshine Mining and Refining Company
("Sunshine" or the "Company") and three of its subsidiaries (the "Debtor
Subsidiaries" and together with the Company, the "Debtors") filed voluntary
petitions for relief under Chapter 11 of the federal bankruptcy laws in the
United States Bankruptcy Court for the District of Delaware (Case No. 00-3409
(MFW)). Under Chapter 11, certain claims against the Debtors in existence prior
to the filing of the petitions for relief under the federal bankruptcy laws are
stayed while the Debtors continue business operations as Debtors-in-possession.
These claims are reflected in the December 31, 2000 balance sheet as
"liabilities subject to compromise." Claims secured by the Debtors' assets
("secured claims") also are stayed, although the holders of such claims have the
right to move the court for relief from the stay.
The Debtors received approval from the Bankruptcy Court to pay or otherwise
honor certain of its prepetition obligations, including employee wages and
retirement benefits and certain prepetition claims of certain critical suppliers
of goods and services.
The Third Amended and Restated Joint Chapter 11 Plan of Reorganization as
modified December 5, 2000 (the "Plan") was confirmed on December 5, 2000 (the
"Confirmation Order"). Under the terms of the Confirmation Order, certain
conditions precedent existed to the effectiveness of the Plan set forth in the
Plan and the Confirmation Order. The effective date of the Plan was February 5,
2001 (the "Effective Date"). (See Note 2 for discussion of the Plan.)
To fund continuing operations, the Company procured a $5 million
Debtor-in-possession credit facility (the "DIP Facility"). (See Note 9.)
2. PLAN OF REORGANIZATION
The Plan, cosponsored by four of the Company's major bondholders holding more
than 70% of the Company's outstanding indebtedness (the "Cosponsoring
Bondholders"), became effective on February 5, 2001 and provided that:
o The "old common stock" of Sunshine was canceled (as were all existing
issues of warrants and options). Common stockholders with 100 or more
shares of common stock as of the Effective Date received a pro rata
distribution of approximately 3.4% of the "new common stock." Of the
total new shares of stock outstanding (50 million shares) existing
common stock holders received approximately 1.7 million shares.
F-6
63
o All of the Company's pre-bankruptcy funded debt and certain other
liabilities (totaling approximately $49 million) was canceled and
converted to equity.
o Approximately 90% of the new common stock is held by affiliates of
Elliott Associates, L.P. and Stonehill Capital Management LLC (the
"Principal Shareholders"). They have appointed four members to the
Company's five-member Board of Directors. In addition, the Principal
Shareholders have a Call Option which allows them, upon the occurrence
of certain adverse events, to acquire Sunshine Argentina, the owner of
the Pirquitas Mine in Argentina, the Company's principal asset.
o The Confirmation Order required that, prior to the Effective Date, the
Company obtain approval of a new consent decree from the Idaho District
Court releasing the Company from a 1994 Consent Decree which obligated
it to remediate certain property in the Bunker Hill Superfund Site. The
new Consent Decree was entered on January 22, 2001. The Confirmation
Order also required the incorporation of the agreement reached with
certain agencies of the United States and the Coeur d'Alene Indian
Tribe regarding certain covenants not to sue the Company for
potentially significant environmental claims. In consideration for the
releases and agreement not to sue, the Company agreed to issue the
plaintiffs ten-year warrants to acquire up to 4.975 million shares of
the Company's New Common stock at an exercise price of $.66 per share;
to deed to the plaintiffs certain timberland it owns in North Idaho; to
pay a sliding scale royalty commencing at silver prices in excess of
$6.00 per ounce on production from the Sunshine Mine; and to perform
certain test work and remediation at the Con Sil mine site. (See Note
14.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND STATEMENT PRESENTATION
Sunshine Mining and Refining Company (Sunshine or the Company) is a holding
company whose principal subsidiaries are Sunshine Precious Metals, Inc. (SPMI)
and Sunshine Argentina, Inc. and Sunshine Exploration, Inc. (SEI). SPMI mines,
refines and markets concentrates containing silver and certain by-product metals
to commercial customers. SPMI's principal operating property is the Sunshine
Mine, located near Kellogg, Idaho. The Sunshine Mine accounted for all of the
Company's operating revenues during 2000, 1999 and 1998. As a result, the
Company has only one operating segment. SEI and SPMI are also engaged in
exploration in other parts of the United States. Sunshine Argentina, Inc. owns
the Pirquitas Mine, which is currently in the development stage. (See Note 15.)
The consolidated financial statements include the accounts of Sunshine and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain of the Company's
subsidiaries have foreign operations. The functional currency for these
subsidiaries is the US dollar. Therefore, no translation adjustment is required.
The financial statements for the year ended December 31, 2000 reflect accounting
principles and practices set forth in AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under The Bankruptcy Code"
("SOP 90-7"). Pursuant to the guidance of SOP 90-7, the Company will adopt
"fresh start" reporting as of February 5, 2001. Under "fresh start" reporting,
the reorganization value of the entity is allocated to the entity's assets. As a
result of adopting "fresh start" reporting upon emerging from Chapter 11 status,
the Company's financial statements will not be comparable with those prepared
before the Plan was effective, including the historical financial statements
included in this annual report.
F-7
64
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assessments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain previously reported amounts have been reclassified to conform to the
2000 presentation.
CASH AND CASH INVESTMENTS
Cash and cash investments include certificates of deposit and other highly
liquid investments with maturities of three months or less when purchased.
INVENTORIES AND SILVER BULLION
Investment silver bullion is stated at estimated net realizable prices.
Adjustments to the carrying value of investment silver bullion is included in
revenues. Precious metals inventories, materials and supplies are carried at the
lower of cost (principally average cost) or market.
EQUIPMENT HELD FOR SALE
Management reviewed all the equipment and property located at the Sunshine Mine
in Kellogg, Idaho and determined what equipment could be sold after the mine was
placed on care and maintenance in February 2001. After an evaluation of the
equipment that would be held for sale, the Company wrote the equipment down to
$1 million, which is the fair value, less costs to sell. These assets are not
being depreciated. (See Note 6.)
CONCENTRATION OF CREDIT RISK
During 2000, the Company marketed its concentrates to a commercial smelter in
the United States. Ninety percent of the estimated sales proceeds are due by the
15th of the month following shipment of the concentrates. Final payments are
received by the 10th business day of the fourth month following shipment. The
Company did not require collateral. Management periodically performs reviews as
to the creditworthiness of its customer(s). The Company has not sustained any
significant credit losses on sales of its products. In February 2001, the
Company was notified by the smelter that they were temporarily closing their
operations and would no longer accept deliveries.
SILVER FINANCIAL INSTRUMENTS
The Company sold covered call options on silver bullion held for investment
during 1999 and 1998. The strike price of these agreements exceeded current
market prices at the time they were entered into. Option premiums received were
deferred. If the applicable market price exceeded the strike price and option
premium, the differential was accrued and recognized as a reduction of revenues.
Any remaining deferred option premiums were recognized as a component of
revenues at the end of the option period. No covered call options were sold
during 2000 and $34 thousand of option premiums were recognized as income during
2000.
F-8
65
The fair values of the sold call options are not included in the financial
statements as the fair value approximates the premiums received and recorded as
deferred revenue.
REVENUE RECOGNITION
Sales of refined metals and concentrates are recognized as revenue at the time
of shipment to the customer.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation on buildings,
leasehold improvements, and equipment is provided by straight-line or
declining-balance methods at rates based on the estimated lives of the
respective assets. The principal lives range from 12 to 30 years for buildings
and from 3 to 10 years for equipment (See Note 6).
Depletion of precious metal mineral interests is computed using the
unit-of-production method based on estimated ore reserves. Mine exploration
costs are charged to expense as incurred. Costs of major mine improvements,
including interest, are capitalized and amortized in relation to the production
of estimated ore reserves.
Whenever circumstances or events indicate, the Company evaluates its mining
properties for impairment, based on undiscounted expected future cash flows only
from proven and probable reserves. Such estimates are based on assumptions as to
future silver prices, mining costs, recoverable mineral reserves, and estimates
of future reserve potential which management believes are reasonable, based on
historical silver prices and production. If the sum of such cash flows is less
than the carrying amount of the asset, the Company records an impairment loss
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset.
MINERAL EXPLORATION AND MINE DEVELOPMENT
Exploration costs and development costs for projects not yet determined by
management to be commercially feasible are charged to expense as incurred.
Expenditures for new mine development are capitalized when evidence of an
economically recoverable ore body is established. 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.
F-9
66
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.
BUSINESS AND GEOGRAPHICAL SEGMENTS
The Company's current operations involve a single industry segment; the mining,
refining and marketing concentrates containing silver and certain by-product
metals to commercial customers. The Company operates in several geographic
segments.
DEBT ISSUE COSTS
Debt issue costs are generally capitalized and amortized ratably over the life
of the debt. Debt issue costs are amortized using the effective interest method
if it materially differs from ratable amortization.
4. LIQUIDITY MATTERS AND REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States,
which contemplate continuation of the Company as a going concern. However, the
Company has sustained substantial losses from operations in recent years. In
addition, the Company has used, rather than provided, cash in its operations.
These financial results are primarily attributable to depressed silver prices
and lower by-product prices, resulting in margins insufficient to cover the
Company's fixed expenses.
In February 2001, the Company placed the Sunshine Mine on care and maintenance
status after being notified that the smelter to which the Sunshine Mine shipped
its concentrates was temporarily closing their operations and would no longer
accept any deliveries. As a result of the closure of the Sunshine Mine, the
Company will have no revenues from operations for the foreseeable future.
Recoverability of a major portion of the recorded asset amounts shown in the
accompanying consolidated balance sheets is dependent upon continued operations
of the Company. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Management has taken the following steps to revise its operating and financial
requirements, which it believes will enhance the Company's ability to continue
in existence:
o On February 5, 2001, the Company emerged from Chapter 11 Bankruptcy.
Pursuant to the terms of the Plan, all of the claims of the Eurobonds,
the 10% Notes, the 9% Notes and certain other unsecured creditors was
eliminated in exchange for approximately 96.6% of the 50 million shares
of new Common Stock.
F-10
67
o During the bankruptcy reorganization, the Company was released as a
defendant in certain environmental litigation and settled certain
environmental liabilities associated with a 1994 Consent Decree at the
Bunker Hill Superfund Site. (See Note 14.)
o The Company is currently reviewing its strategic options, which may
include a sale of some or all of its assets, a merger or a joint
venture for the development of Pirquitas.
F-11
68
5. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS
Inventories consist of the following at December 31:
<Table>
<Caption>
2000 1999
------ ------
(In Thousands)
Precious metals inventories:
Work in process $ 187 $1,376
Finished goods 28 107
Materials and supplies inventories(1) 1,285 1,343
------ ------
$1,500 $2,826
====== ======
</Table>
(1) Materials and supplies inventories are primarily spare parts, rock bolts,
drills, hoist cables and motors, as well as supplies and explosives consumed in
the mining operations.
The Company held as an investment, $4.1 million of silver bullion (approximately
760 thousand ounces), in excess of normal operating requirements at December 31,
1999, which was sold during 2000.
The Company sold covered call options on silver bullion held for investment.
Total premiums earned from the sale of covered calls aggregated $34,000,
$246,500 and $316,250 in 2000, 1999 and 1998, respectively. At December 31,
2000, no sold covered call options were outstanding. At December 31, 1999, the
Company had covered call options outstanding for 300,000 ounces of silver with
strike prices ranging from $5.25 to $5.35 and expiration dates of January 27,
2000 (100,000 ounces), February 25, 2000 (100,000 ounces) and March 28, 2000
(100,000 ounces). The fair value of the sold calls at December 31, 1999
approximates the $34,000 of premiums received when they were sold. At December
31, 1998, no sold covered call options were outstanding.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31:
<Table>
<Caption>
2000 1999
------- -------
(In Thousands)
Precious metals mineral interests(1) $ 2,207 $ 8,151
Mine improvements 13,398 12,495
Buildings, leasehold improvements, and equipment
24,948 39,295
Land 380 779
------- -------
40,933 60,720
Less accumulated depreciation, depletion, and
amortization 26,262 37,623
------- -------
$14,671 $23,097
======= =======
</Table>
F-12
69
(1) Includes original purchase price of and lease payments for the Company's
mining properties and the fair value of the reserves at the Sunshine Mine as
determined in conjunction with the 1998 and 2000 impairment review.
As a result of the Sunshine Mine being placed on care and maintenance status, an
extensive review of all the equipment and property at the Sunshine Mine was made
by mine management to determine their respective fair values. This review
resulted in an impairment charge of $7.2 million in the fourth quarter of 2000.
The Company intends to sell certain of the assets at the Sunshine Mine and has
classified them as "Assets held for sale" at their estimated selling price, less
costs to sell, of $1 million. At December 31, 2000, approximately $14.5 million
of the $14.7 million net property, plant and equipment reflected above was not
being either depleted or depreciated.
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.
7. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<Table>
<Caption>
2000 1999
------ ------
(In Thousands)
Compensation, vacation, and severance $ 772 $1,119
Interest 28 1,027
Taxes, other than income taxes -- 298
Reorganization fees and expenses 500 --
Environmental remediation -- 700
Insurance premiums 42 270
Other 301 148
------ ------
$1,643 $3,562
====== ======
</Table>
8. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise on the accompanying December 31, 2000 balance
sheet consist of the following (in thousands):
<Table>
Principal balance of 8% Senior Exchangeable Notes (the "Eurobonds") $ 25,975
Interest due on Eurobonds 1,951
Principal balance of 10% Senior Convertible Notes (the 10% Notes) 12,313
Interest due on 10% Notes 2,583
Principal balance of 9% Convertible Subordinated Debentures
(the "Debentures") 1,515
Interest due on Debentures 82
Principal and interest due on 5% Convertible Notes (the "5% Notes") 345
Deferred financing costs of 10% Notes (92)
Liabilities for unsecured nonpriority claims and provisions for
environmental liability 4,319
--------
Liabilities subject to compromise $ 48,991
========
</Table>
F-13
70
As discussed in Note 2, these liabilities were canceled and converted to equity
pursuant to the Plan as of the Effective Date.
The amounts above may be subject to future adjustment depending on Bankruptcy
Court action, further developments with respect to potential contingent and/or
disputed claims or other events.
As a result of the Chapter 11 filing, the Debtors discontinued accruing interest
as of the Petition Date on the liabilities subject to compromise. Contractual
interest on these liabilities totaled approximately $5.8 million for 2000, which
is approximately $1.6 million in excess of amounts expensed in the accompanying
financial statements. The contractual interest on the 10% Notes includes
approximately $1.4 million of additional interest that became due on March 21,
2000 and an 18% default interest rate from that date.
9. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<Table>
<Caption>
2000 1999
------- -------
(In Thousands)
Debtor in Possession Financing $ 1,530 $ --
Eurobonds 25,975 26,518
10% Notes 12,313 14,871
Debentures 1,515 1,515
Other 345 334
------- -------
41,678 43,238
Less: Current portion -- 5,000
Liabilities subject to compromise 40,148 --
------- -------
$ 1,530 $38,238
======= =======
</Table>
Defaults Upon Senior Securities
The Chapter 11 filing constituted a default under the terms of the Eurobonds,
the 10% Notes and the Debentures. Pursuant to the terms of the Plan all of the
claims of the Eurobonds, the 10% Notes, the Debentures, and certain other
unsecured creditors were eliminated in exchange for approximately 96.6% of the
Company's new Common Stock as of the Effective Date.
For a discussion of the Company's financial reorganization plans, see Notes 1, 2
and 4 to the Financial Statements.
F-14
71
Debtor in Possession Financing/Exit Financing Facility
The Company obtained a $5 million post-petition debtor-in-possession financing
facility (the "DIP Facility") with affiliates of the Cosponsoring Bondholders.
Sunshine Argentina, Inc., a wholly-owned subsidiary, is the borrower under the
DIP Facility. The base rate of interest under the DIP Facility is 15% per annum
with a $150 thousand commitment fee which was expensed in the accompanying
financials. Borrowings under the DIP Facility are secured by substantially all
of the Company's assets. After the Plan became effective on February 5, 2001,
the outstanding balance under the DIP facility of approximately $2.7 million was
rolled into an Exit Financing Facility with the same lenders with repayment due
within eighteen months. The Exit Financing Facility has a maximum commitment of
$5 million, an interest rate of 15% and a commitment fee of $150 thousand. As
the DIP Facility was originally due to be repaid on December 15, 2000 at the
latest, deferral and amortization of the commitment fee is not appropriate.
Eurobonds
In March 1996, SPMI issued $30 million aggregate principal amount of the
Eurobonds. The Eurobonds bore interest at 8% per annum and were initially
scheduled to mature March 21, 2000. The Eurobonds were exchangeable into shares
of stock at an exchange price of $8.00 per share, subject to reset and
adjustment in certain events. In 2000, $1.0 million of the Eurobonds were
exchanged in a negotiated exchange for approximately 750 thousand shares of
common stock at a rate of $1.36 per share, which approximated the market value
of the common stock at the time of the exchange. In 1999, $1.5 million of the
Eurobonds were exchanged in a negotiated exchange for 337,500 shares of common
stock at a rate of $4.44 per share, which approximated the market value of the
common stock at the time of the exchange. In 1998, a total of $1.525 million of
the Eurobonds were exchanged and canceled for approximately 191 thousand shares
of common stock at the stated conversion price of $8 per share.
In March 1999, the Company issued 1.6 million shares to holders of the
Eurobonds. Such shares were issuable in settlement of the additional amount
equal to 22.5% of the principal amount to be paid in either cash or stock if the
Company's stock did not trade at a price 33% above the conversion price of the
Eurobonds for a period of 45 consecutive trading days. When the Eurobonds were
issued, the Company recorded a $6.8 million discount for this potential
additional payment. This discount was amortized as interest expense over the
life of the Eurobonds. The number of shares issued was determined by the average
market price per share of common stock for the ten trading days prior to the
payment. Debt issuance costs were amortized over the life of the Eurobonds.
Unamortized debt issuance costs of $92 thousand is included in "Investments and
other assets" at December 31, 1999.
10% Notes
In November 1997, the Company completed a private placement of the 10% Notes
totaling $15 million aggregate principal amount due November 24, 2002. The
interest was payable in either cash or common stock at the Company's option.
Beginning in February 2000 and quarterly thereafter, $1.25 million principal
amount was required to be redeemed by the Company, payable either in cash or
common stock at the Company's option. The 10% Notes were originally convertible
into shares of Common Stock at $7.60 per share, approximately equal to the
market value of a share of Common Stock as of the date they were issued. The
conversion price was subject to revision to a lower price based on the average
closing bid price for a share of Common Stock for the 15 trading days prior to
the event giving rise to such possible revision. Such events
F-15
72
included the issuance of approximately 5% of additional shares of Common Stock
by the Company and a reverse stock split. As of the date of the Chapter 11
filing, the 10% Notes were convertible into Common Stock at the rate of $0.675
per share.
In February 2000, as required, $1.25 million of the 10% Notes were prepaid and
retired by the issuance of approximately 1 million shares of common stock at a
price which approximated the market value of the common stock at the time of the
prepayment.
During 2000, approximately $1.3 million of the 10% Notes were converted and
canceled for approximately 2.0 million shares of common stock at a conversion
price which approximated the market value of the common stock at the time of the
conversion. During 1999, approximately $129 thousand of the 10% Notes were
converted and canceled for approximately 37 thousand shares of common stock at a
conversion price which approximated the market value of the common stock at the
time of the conversion.
In March 2000, the Company issued approximately 700 thousand shares of Common
Stock to the holder of the 10% Notes as partial payment of the quarterly
interest due April 1, 2000 based on a price per share that approximated the
market value of the common stock at the time it was issued. Pursuant to the
terms of the Notes, a $1.4 million additional interest payment was due because
the Eurobonds were not converted into Common Stock nor refinanced with junior
debt prior to March 21, 2000. This was accrued as an expense, but not paid.
Approximately 134 thousand and 730 thousand shares of common stock were issued
for scheduled interest payments in 1998 and 1999, respectively.
In connection with the issuance of the 10% notes, the purchaser was issued 188
thousand warrants to purchase common stock of Sunshine at 110% of the conversion
price of the 10% Notes. The value of the warrants at the date of issuance was
insignificant and no discount was allocated to the debt. As an incentive to
induce the holder to exercise the warrants, the exercise price of these warrants
was reduced to $3.92 in December 1998, at which time all 188 thousand warrants
were exercised.
Debentures
The Debentures were due July 15, 2008 and were convertible at any time prior to
maturity or redemption into shares of Common Stock of the Company at a
conversion price of $13.28 per share, subject to adjustment. At the time the
Debentures were issued, the conversion price exceeded the market value per share
of Common Stock. The Debentures were unsecured and subordinated in right of
payment to senior indebtedness (as defined).
5% Notes
In January 1999, the Company completed a private placement of 5% Notes due
January 28, 2001 totaling $6 million. The beneficial conversion feature resulted
in a debt discount of $962 thousand, which was amortized over the five months
ended June 1999. During 1999, the notes were converted into 3.6 million shares
of common stock, the maximum number of shares that could be issued under the
terms of the 5% Notes.
F-16
73
10. INCOME TAXES
The Company has incurred losses during each of the three years in the period
ended December 31, 2000, and no tax benefit was recorded because of the
uncertainty of realization of the net deferred tax asset.
F-17
74
The computation of the net deferred tax asset at December 31 is as follows:
<Table>
<Caption>
2000 1999
--------- ---------
(In Thousands)
Deferred tax assets:
Property, plant, and equipment $ 11,041 $ 9,031
Accrued pension and other postretirement benefits
1,482 1,556
Net operating loss carryforward 87,500 99,750
--------- ---------
100,023 110,377
Less valuation allowance 100,023 (110,377)
--------- ---------
$ -- $ --
========= =========
</Table>
At December 31, 2000, the Company had net operating loss carryforwards ("NOL's")
for federal income tax purposes of approximately $250 million. The loss
carryforwards expire principally in the years 2001 through 2020. As a result of
the bankruptcy, the Company's NOL's will be reduced by any cancellation of
indebtedness income and all interest paid or accrued in the last three years on
debt that was cancelled pursuant to the Plan. This will still leave the Company
with more than $200 million of NOL's.
The Company has two options regarding its NOL's after the effective date of the
Plan. The first option is to take the bankruptcy exception so that there would
be no limitations on future utilization of NOL's as a result of the ownership
change pursuant to the Plan. However, if there is a 50% change in ownership
within the next 2 years, the NOL's will be extinguished. Alternatively, the
Company may elect to recognize the ownership change pursuant to the Plan which
would limit the future utilization of the NOL's to an annual amount equal to
approximately 5.5% of the Company's market capitalization on February 5, 2001.
The Company is reviewing these alternatives and has not determined which option
will be chosen.
11. STOCKHOLDER'S EQUITY (DEFICIT)
Pursuant to the terms of the Plan, effective as of February 5, 2001, all
outstanding shares of stock, warrants and options were canceled and 50 million
shares of new Common Stock were issued.
In August 2000, the Company issued 8.3 million warrants to purchase common stock
of the Company to the holders of its 8% Senior Exchangeable Notes and its 10%
Senior Convertible Notes for extensions of maturity and for agreements to
exchange debt for equity in the reorganization. The warrants represented the
right to acquire one new share of the Company's common stock at its par value,
and had a cashless exercise feature. Prior to their cancellation, 6.1 million
warrants were exercised primarily pursuant to the cashless exercise feature.
Effective August 6, 1999, the Company effected a one-for-eight reverse stock
split of its Common Stock. All historical share and per share amounts reported
in this filing have been adjusted to reflect the reverse stock split.
The Company had authorized 20.0 million shares of preferred stock, of which no
shares were issued and outstanding at December 31, 2000 or 1999.
F-18
75
The Company had two stock option plans under which options had been granted to
members of management. The stock option plans covered a total of 1.6 million
shares with 907 thousand options available for grant at December 31, 2000. The
option price could not be less than the market price of the common stock on the
date granted. Payment of the exercise price may be made in cash or by delivery
of shares of common stock, having a market value equal to the exercise price. No
stock options were granted in 2000. Pursuant to the Plan, as of February 5,
2001, all outstanding stock options and the two stock option plans were
canceled.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999
and 1998, respectively: risk-free interest rates of 6.42% and 4.47%; dividend
yields of 0%; volatility factors of the expected market price of the Company's
common stock of .617 and .572; and a weighted-average expected life of the
option of three years.
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:
<Table>
<Caption>
2000 1999 1998
-------- -------- ----------
Pro forma net loss applicable to common shares $(20,890) $(10,854) $ (64,929)
Pro forma basic and diluted loss per share $ (0.48) $ (0.31) $ (2.02)
</Table>
F-19
76
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<Table>
<Caption>
2000 1999 1998
-------------------- --------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------- -------- ------- --------- ------- ---------
Outstanding, beginning of
year 621 $11.40 605 $11.68 607 $11.92
Granted -- -- 18 1.50 19 5.04
Exercised -- -- -- -- (6) 7.28
Forfeited (38) 11.92 (2) 12.00 (15) 12.08
------ ------ ------ ------ ---- ------
Outstanding,
end of year 583 $11.00 621 $11.40 605 $11.68
====== ====== ====== ====== ==== ======
Exercisable at end of year
583 $11.00 621 $11.40 605 $11.68
Weighted-average fair value
of options granted during
the year -- $ 0.65 $ 2.08
</Table>
Exercise prices for options outstanding as of December 31, 2000, ranged from
$1.50 to $23.00.
12. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<Table>
<Caption>
2000 1999 1998
-------- -------- --------
(In thousands, except
per share amounts)
Numerator:
Numerator for basic loss per share -loss available to
common shareholders $(20,890) $(10,843) $(64,845)
Denominator:
Denominator for basic and diluted loss per share -
weighted-average shares 43,898 34,682 32,109
Basic and diluted loss per share $ (0.48) $ (0.31) $ (2.02)
</Table>
All stock options and warrants were excluded from the calculation of diluted
loss per share because including them would have been antidilutive.
F-20
77
13. EMPLOYEE BENEFIT PLANS
The pension plan for hourly employees covered by a collective bargaining
agreement (the Negotiated Plan) is a trusteed defined benefit plan. Benefits
under the plan are based on years of service and include provisions that would
apply in the event of a permanent shutdown of the Sunshine Mine for present
employees who were also covered by a predecessor plan terminated in 1986. The
Company's trusteed defined benefit pension plan for employees not covered by a
collective bargaining agreement was amended to freeze all participant's benefits
as of December 31, 1993.
The following table sets forth the funded status of the Company's trusteed
defined benefit plans and the related amounts included in accrued pension and
other postretirement benefits at December 31 (in thousands):
<Table>
<Caption>
COMBINED
--------------------
2000 1999
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,115 $ 6,104
Service cost 246 238
Interest cost 477 417
Actuarial (gains) losses 864 (349)
Benefit payments (650) (295)
------- -------
Benefit obligation at end of year 7,052 6,115
Change in plan assets:
Fair value of plan assets at beginning of year 6,883 5,842
Actual return on plan assets (168) 1,036
Employer contributions 305 300
Benefit payments (650) (295)
------- -------
Fair value of plan assets at end of year 6,370 6,883
------- -------
Funded (underfunded) status (682) 768
Unrecognized prior service cost 334 474
Unrecognized net (gains)/losses 544 (1,189)
Unrecognized transition asset -- (28)
Additional minimum liability (1,218) --
------- -------
Prepaid (accrued) benefit cost $(1,022) $ 25
======= =======
</Table>
Net periodic pension costs relating to the Company's defined benefit plans
consist of the following for the year ended December 31:
<Table>
<Caption>
2000 1999 1998
----- ----- -----
(In thousands)
Service cost $ 246 $ 238 $ 227
Interest cost 477 417 380
Expected return on plan assets (622) (531) (743)
Net amortization and deferrals 33 58 345
----- ----- -----
Net periodic pension cost $ 134 $ 182 $ 209
===== ===== =====
</Table>
F-21
78
In the fourth quarter of 1999, the Company recognized a $475,000 reduction in
its accrued pension costs, which related to actuarial gains not recognized in
prior years.
The benefit obligation and fair value of plan assets by plan at December 31,
2000 (in thousands):
<Table>
<Caption>
NEGOTIATED FROZEN
PLAN PLAN TOTAL
---------- ------ ------
Benefit obligation $6,167 $ 885 $7,052
Fair value of plan assets $5,174 $1,195 $6,370
</Table>
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:
<Table>
<Caption>
2000 1999 1998
------- ------- -------
Discount rate 8.00% 7.00% 7.25%
Rate increase in compensation 0% 0% 0%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</Table>
The Company's funding policy, with respect to trusteed defined benefit plans, is
to make contributions annually equal to, or in excess of, the minimum funding
requirements of the Employee Retirement Income Security Act of 1974. Assets of
the plans consist of pooled fixed income securities, pooled equity securities,
and cash or cash equivalents.
The Company also has a defined contribution plan for employees not covered by a
collective bargaining agreement. The Company's Board of Directors determines
annually if a contribution will be made, and if so, in what amount. The
Company's Board has not determined if a contribution for 2000 will be made.
Contributions made for 1999 and 1998 were $157,000 and $151,000, respectively.
The Company also sponsors a plan under the provision of Section 401(k) of the
Internal Revenue Code (the 401(k) Plan) for all employees not covered by a
collective bargaining agreement. Company contributions may range from 0% to 100%
of employee contributions, up to a maximum 6% of eligible employee compensation,
as defined. Employees may elect to contribute up to 10% of their eligible
compensation on a pretax basis. Benefits under the 401(k) Plan are limited to
the assets of the 401(k) Plan. The Company's Board has not determined if a
matching contribution for 2000 will be made. Company contributions made for 1999
and 1998 were $108,000 and $115,000, respectively.
Postretirement medical and dental benefits are currently provided only to
certain employees who retired before 1987. The Company's policy is to fund the
cost of these plans as claims are incurred.
The following table sets forth the computation of the accrued liability for
postretirement medical, dental, and life insurance benefits at December 31 (in
thousands):
F-22
79
<Table>
<Caption>
COMBINED
---------------------
2000 1999
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,590 $ 3,930
Service cost 7 7
Interest cost 286 257
Participants' contributions -- 11
Actuarial (gains) losses 862 (189)
Benefit payments (456) (426)
------- -------
Benefit obligation at end of year $ 4,289 $ 3,590
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contributions 457 426
Participants' contributions -- 11
Benefit payments (457) (437)
------- -------
Fair value of plan assets at end of year -- --
------- -------
Underfunded status (4,289) (3,590)
Unrecognized prior service cost (1,081) (1,160)
Unrecognized net losses 1,142 280
------- -------
Accrued benefit cost $(4,208) $(4,470)
======= =======
Weighted average assumptions for end of year disclosure:
Discount rate 8.00% 8.00%
Initial trend rate 9.0% 6.75%
Ultimate trend rate 5.00% 5.00%
Number of years from initial to ultimate trend 10 2
</Table>
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, changing the assumed health care cost trend rates
by one percentage point each year would have the following effects on the latest
actuarial calculations (in thousands):
<Table>
<Caption>
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components $ 17 $ (17)
Effect on postretirement benefit obligation $249 $(215)
</Table>
F-23
80
Net periodic postretirement benefit cost for these plans includes the following
components for the year ended December 31 (in thousands):
<Table>
<Caption>
2000 1999 1998
----- ----- -----
Service cost $ 7 $ 7 $ 7
Interest cost 286 257 343
Net amortization (99) (69) (6)
----- ----- -----
Net periodic cost $ 194 $ 195 $ 344
===== ===== =====
</Table>
Interest costs on the projected benefit obligations and the actual returns on
plan assets of the postretirement benefit plans are included in interest expense
and other income, respectively, in the accompanying consolidated statements of
operations.
14. COMMITMENTS AND CONTINGENCIES
In connection with the confirmation and effectiveness of the Plan, a settlement
of all environmental litigation was effected.
The settlement between the Company, SPMI and the United States on behalf of the
United States Environmental Protection Agency, United States Department of
Interior and the United States Department of Agriculture (the Government) and
the Coeur d'Alene Indian Tribe (the Tribe) was memorialized in a new Consent
Decree in civil actions CIV96-0122-N-EJL and CIV91-0342-N-EJL pending in the
United States District Court for the District of Idaho. By entry of the new
Consent Decree all claims of the Government and the Tribe for natural resource
damages and response costs to injuries allegedly caused by the Company and SPMI
in the Coeur d'Alene Basin were dismissed by the Government and the Tribe. The
new Consent Decree was approved by the United States District Court and entered
on January 22, 2001. In exchange for the dismissal, the Company granted warrants
to purchase 9.95% of Sunshine's new common stock (i) at an exercise price of
$.66 per share, (ii) with a cashless exercise feature, (iii) that are exempt
from registration pursuant to 11 USC Section 1145, (iv) that are fully
transferable to any other entity at any time, and (v) are subject to ordinary
terms and conditions including anti-dilution provisions.
The Company and SPMI have also agreed to provide net smelter return royalty
payments to the Government and the Tribe based on net smelter returns from all
mining by SPMI anywhere in the United States and all mining by any Sunshine
entity from the Sunshine Mine or within one mile of the current boundaries of
the mine. The royalty adjusts on a sliding scale based on the average price of
silver. It varies from one percent of net smelter returns at a silver price of
$6.00 to seven percent at a price of $10.00 or more. No royalty must be paid
until the average silver price exceeds $6.00 per ounce. Under the new Consent
Decree, SPMI is required to convey the surface rights to timber lands it owns
and uses for non-mining purposes, and to perform certain remediation and
testwork at its ConSil mine site adjacent to the Sunshine Mine.
In connection with the settlement, the Government also agreed to release the
Company and SPMI from a 1994 Consent Decree which obligated them among others to
remediate certain property in the Bunker Hill Superfund Site.
The Company believes that all other environmental claims, both potential and
threatened, were discharged by the effectiveness of the Plan of Reorganization
on February 5, 2001.
F-24
81
The Company is subject to certain other legal proceedings and claims that arise
in the conduct of its business. Although it is not possible to predict the
outcome of such matters, in the opinion of management, the ultimate outcomes of
these matters will not have a material adverse effect on the Company's
consolidated financial position, consolidated results of operations or cash
flows.
15. FOREIGN OPERATIONS
The Company has mining projects in Argentina and Mexico, including the Pirquitas
Mine which is in the development stage. The Company began to capitalize
development expenditures at the Pirquitas Mine in 1998 after proven and probable
reserves were established at the end of 1997. Exploration expense for the
Company's foreign operations totaled approximately $1.3 million, $0.7 million
and $1.6 million for years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000, amounts capitalized as property, plant, and equipment for
foreign operations totaled $13.9 million, net of depreciation.
Approximately $2.3 million for Value Added Taxes paid in Argentina are included
in other assets. These taxes are recoverable from future exports of products
produced from Argentina.
The recoverability of the assets related to the Pirquitas Mine is dependent upon
the ability of the Company to: (a) raise sufficient funding for development of
the Pirquitas property, or (b) sell all or a portion of the Company's interest
in the property, or (c) merge with or form a joint venture with a company with
greater financial resources to develop the properties.
The Sunshine Mine, which is located in the United States, has been the only
source of operating revenue for the years identified below. Determination of
revenue by geographic area is based upon location of the mine. Information
regarding foreign operations for the years ended December 31, 2000, 1999 and
1998 follows (in thousands):
<Table>
<Caption>
2000 1999 1998
------- ------- -------
Revenues
United States $23,094 $32,332 $34,668
Argentina -- -- --
Mexico -- -- --
------- ------- -------
$23,094 $32,332 $34,668
Long-lived assets
United States $ 599 $ 9,704 $ 9,658
Argentina 13,883 13,286 10,756
Mexico 190 107 --
Total assets
United States $ 5,808 $21,278 $26,761
Argentina 16,592 15,635 13,136
Mexico 192 107 --
</Table>
F-25
82
16. SIGNIFICANT CUSTOMER
In 2000, 1999 and 1998, one customer accounted for sales of concentrate
aggregating approximately $22.5 million, $31.5 million and $30.7 million,
respectively. In February 2001, this customer notified the Company that it was
temporarily closing the smelter to which the Sunshine Mine shipped concentrates
and that the smelter would no longer accept deliveries.
17. PRECIOUS METALS RESERVES (UNAUDITED)
The table below presents data on proven and probable ore reserves, production
and average prices for each of the years in the five-year period ended December
31, 2000 (in thousands, except average prices):
<Table>
<Caption>
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
SUNSHINE MINE
Reserves at December 31:
Ounces of silver -- 29,992 37,383 39,808 36,241
Production:
Tons of ore 169 218 248 183 121
Ounces of silver 3,879 5,211 5,806 4,253 2,578
PIRQUITAS MINE
Reserves at December 31:
Ounces of silver 129,333 129,333 101,000 72,800 --
REVENUE - VIRGINIUS MINE
Reserves at December 31:
Ounces of silver -- 6,208 6,208 6,208 6,208
AVERAGE PRICES:
Ounce of silver $ 4.93 $ 5.23 $ 5.47 $ 5.02 $ 5.11
</Table>
As a result of production ceasing at the Sunshine Mine and it being placed on
care and maintenance status, the mineral deposit no longer meets the economic
requirements to be classified as a reserve.
The ore reserve estimates presented in the table are estimates of proven and
probable reserves by the Company's geologic personnel. No assurance can be given
that the indicated quantity of in situ silver will be realized. Reserve
estimates are expressions of judgment based largely on data from diamond drill
holes and underground openings, such as drifts or raises, which expose the
mineralization on one, two or three sides, sampling and similar examinations.
Reserve estimates may change as ore bodies are mined and additional data is
derived.
18. UNAUDITED CONDENSED BALANCE SHEET AT JANUARY 31, 2001 AND PRO FORMA
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 RELATED TO THE
CONSUMMATION OF THE PLAN OF REORGANIZATION
Pursuant to the guidance of AICPA Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under The Bankruptcy Code" ("SOP 90-7"),
the Company adopted "fresh start"
F-26
83
reporting as of January 31, 2001. Under "fresh start" reporting, the
reorganization value of the entity is allocated to the entity's assets. The
effective date is considered to be the close of business on January 31, 2001 for
financial reporting purposes. The periods presented prior to January 31, 2001
have been designated "Predecessor Company" and the periods subsequent to January
31, 2001 have been designated "Reorganized Company." As a result of the
implementation of fresh start reporting, the financial statements of the Company
after the effective date are not comparable to the Company's financial
statements for prior periods.
The unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 2000 was prepared as though the consummation of the Plan
had taken place on January 1, 2000.
The reorganization and the adoption of fresh start reporting resulted in the
following adjustments to the Company's Condensed Consolidated Balance Sheet as
of January 31, 2001:
<Table>
<Caption>
Predecessor Reorganization and Reorganized
Company Fresh Start Adjustments Company
----------- -------------------------- -----------
January 31, January 31,
(In thousands) 2001 Debit Credit 2001
- -------------- ----------- --------- --------- -----------
ASSETS
Total current assets $ 5,195 $ -- $ 71(a) $ 5,124
Property, plant and equipment, net 14,669 10,794(a) -- 25,463
Other assets 2,780 -- 1,530(a) 1,250
--------- --------- --------- ---------
$ 22,644 $ 10,794 $ 1,601 $ 31,837
========= ========= ========= =========
LIABILITIES AND STOCK-HOLDERS' EQUITY (DEFICIT)
Total current liabilities $ 2,641 $ -- $ 321(a) $ 2,962
Noncurrent liabilities 57,118 48,846(b) 633(a) 8,905
Liability for call option on Sunshine
Argentina, Inc. -- -- 2,740(c) 2,740
--------- --------- --------- ---------
Total Liabilities 59,759 48,846 3,694 14,607
Redeemable common stock -- -- 14,467(d) 14,467
Stockholders' equity (deficit):
Common stock 492 492(e) 50(f) 50
Paid in capital 729,957 729,957(e) 2,713(f) 2,713
Accumulated other comprehensive
loss (884) -- 884(e) --
Accumulated deficit (765,570) -- 765,570(e) --
Less treasury stock at cost (1,110) -- 1,110(e) --
--------- --------- --------- ---------
(37,115) 730,449 769,289 1,725
--------- --------- --------- ---------
$ 22,644 $ 779,295 $ 788,488 $ 31,837
========= ========= ========= =========
</Table>
Explanations of reorganization and fresh start adjustment columns of the balance
sheet are as follows:
F-27
84
(a) To adjust property, plant and equipment, other assets and liabilities
to estimated current fair value. The book value for the Pirquitas Mine
is increased by approximately $11 million and the book value of other
properties is reduced by approximately $200 thousand. Property, plant
and equipment after adjustments consists of the following:
<Table>
Pirquitas Mine $24,750
Land 380
Other mining interests 333
-------
$25,463
</Table>
(b) To reflect the cancellation of debt and other liabilities pursuant to
the Plan.
(c) To record the estimated fair value of the liability for the Call Option
issued pursuant to the Plan. (See Note 2.)
(d) To reflect the new common stock issued to the Principal Shareholders
which, in certain instances, the Company would be required to
repurchase from the Principal Shareholders.
(e) To eliminate the old stockholders' equity (deficit).
(f) To reflect the issuance of new common stock and warrants to other than
Principal Shareholders.
F-28
85
Pro Forma
Condensed Consolidated Statement
of Operations
(unaudited)
<Table>
<Caption>
Year Ended December 31, 2000
------------------------------------------------------------
Predecessor Reorganization and Reorganized
(In thousands) Company Fresh Start Adjustments Company
- -------------- ----------- ------------------------- -----------
Operating revenues (1) $ 23,094 $ -- $ -- $ 23,094
Costs and expenses
Cost of revenues $(22,570) -- -- $(22,570)
Depreciation, depletion and
amortization (1,198) -- -- (1,198)
Impairment of mining properties (7,245) -- -- (7,245)
Exploration (2,373) -- -- (2,373)
Selling, general and administrative
expense (3,450) -- -- (3,450)
-------- -------- -------- --------
(36,836) -- -- (36,836)
Other income (expense)
Mark to market loss (167) -- -- (167)
Interest income 85 -- -- 85
Interest and debt expense (5,294) 230 5,294(a) (230)
Other, net 193 -- -- 193
-------- -------- -------- --------
(5,016) 230 5,294 48
-------- -------- -------- --------
Loss before reorganization items (18,925) 230 5,294 (13,861)
Reorganization costs (2,965) -- 1,965(b) --
-------- -------- -------- --------
Net loss $(20,890) $ 230 $ 7,259 $(13,861)
======== ======== ======== ========
Basic and fully diluted loss per
common share $ (0.48) $ (0.28)
======== ======== ======== ========
Weighted average common shares
outstanding 43,898 50,000(c)
</Table>
(1) The Sunshine Mine, the only source for operating revenues, was placed
on care and maintenance status in February 2001. With the mine closed,
the Company will have no operating revenues.
Explanations of reorganization and fresh start adjustment columns of the
Statement of Operations are as follows:
(a) Elimination of interest expense on debt that was exchanged for common
stock pursuant to the Plan.
(b) Elimination of costs that relate to bankruptcy filing.
(c) Pro forma loss per common share is computed based on the 50,000,000
shares of New Common Stock issued pursuant to the Plan.
F-29
86
19. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED
--------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
2000:
Operating revenues $ 7,177 $ 6,596 $ 5,139 $ 4,181
Cost of revenues 6,369 6,335 5,440 4,425
Loss applicable to common shares (4,072) (2,741) (3,778) (10,178)
Basic and diluted loss per common share $ (0.10) $ (0.06) $ (0.08) $ (0.21)
1999:
Operating revenues $ 9,651 $ 7,957 $ 8,106 $ 6,618
Cost of revenues 8,693 6,564 6,649 5,767
Loss applicable to common shares (2,866) (2,125) (2,022) (3,830)
Basic and diluted loss per common share $ (.09) $ (.06) $ (.06) $ (.10)
</Table>
During the fourth quarter of 2000, an impairment charge of $7.2 million was
taken. (See Note 6.)
F-30
87
SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands) (Unaudited)
<Table>
<Caption>
June 30, 2001
-------------
ASSETS
Current assets:
Cash and cash investments $ 285
Silver bullion 10
Accounts receivable 106
Inventories 1,174
Assets available for sale 208
Other current assets 827
Total current assets 2,610
--------
Property, plant and equipment, at cost 25,663
Less accumulated depreciation,
depletion and amortization (202)
--------
25,461
Investments and other assets 1,334
--------
Total assets $ 29,405
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 159
Accrued expenses 1,241
--------
Total current liabilities 1,400
Long-term debt 5,000
Accrued pension and other postretirement benefits 5,740
Other long-term liabilities and deferred credits 696
Liability for call option on Sunshine Argentina, Inc. 2,740
Liabilities subject to compromise --
Redeemable common stock (44,680 shares) 14,365
Stockholders' equity (deficit):
Common stock--$.01 par value; 75,000 shares authorized; shares issued:
June 30, 2001 - 5,320
December 31, 2000 - 49,264 53
Paid-in capital 2,812
Accumulated deficit (3,401)
--------
(536)
--------
Total liabilities and stockholders' equity (deficit) $ 29,405
========
</Table>
See accompanying notes.
F-31
88
SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts) (Unaudited)
<Table>
<Caption>
Reorganized
Company Predecessor Company
Five Months One Month Ended Six Months Ended
Ended June 30, January 31, June 30,
2001 2001 2000
-------------- --------------- ----------------
Operating revenues $ 904 $ 2,015 $ 13,773
Costs and expenses:
Cost of revenues (784) (1,714) (12,704)
Depreciation, depletion
and amortization (8) (3) (635)
Property closing and holding costs (2,114) (96) --
Exploration -- -- (827)
Selling, general and
administrative expense (1,393) (208) (2,174)
Net curtailment gain on employee benefit plans 44 -- --
-------- -------- --------
(4,255) (2,020) (16,340)
-------- -------- --------
Other income (expense)
Interest income 6 -- 46
Interest and debt expense:
Contractual interest and debt expense (390) (371) (3,915)
Reduction attributable to bankruptcy -- 316 --
-------- -------- --------
(390) (55) (3,915)
Mark to market loss 0 -- (164)
Other, net 334 6 (213)
-------- -------- --------
(50) (49) (4,246)
-------- -------- --------
Loss before reorganization items (3,401) (55) (6,813)
Reorganization items:
Adjust accounts to fair value -- 8,239 --
Professional fees -- (785) --
Interest earned while in Chapter 11 -- 2 --
-------- -------- --------
Net income (loss) before extraordinary item (3,401) 7,401 (6,813)
Extraordinary item:
Gain on debt discharge -- 28,876 --
-------- -------- --------
Net income (loss) $ (3,401) $ 36,278 $ (6,813)
======== ======== ========
Basic and diluted loss
per common share: $ (0.07)
========
Weighted average common shares outstanding 50,000
========
</Table>
See accompanying notes.
F-32
89
SUNSHINE MINING AND REFINING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, except per share amounts) (Unaudited)
<Table>
<Caption>
Reorganized Company Predecessor Company
Five Months Ended One Month Ended Six Months Ended
June 30, January 31, June 31,
2001 2001 2000
------------------- --------------- ----------------
Cash used by operating activities:
Net income (loss) $ (3,401) $ 36,278 $ (6,814)
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation, depletion and amortization 8 3 635
Gain on sale of property and equipment (315) 0 0
Interest on Senior Conv & 10% Notes paid
or payable in stock -- -- 1,706
Common stock issued for interest on
Senior Convertible Notes -- -- 573
Adjust accounts to fair value -- (8,239) --
Gain on debt discharge -- (28,876) --
Net curtailment gain (44) -- --
Net (increase) decrease in:
Silver bullion -- -- 152
Accounts receivable 1,839 (631) (309)
Inventories 146 193 768
Other assets and deferred charges (233) (30) 232
Net increase (decrease) in:
Accounts payable and accrued expenses (1,563) 582 1,084
Accrued pension and other postretirement benefits (32) (46) (77)
Other liabilities and deferred credits (162) 84 (113)
-------- -------- --------
Net cash used by operations (3,756) (682) (2,163)
-------- -------- --------
Cash provided (used) by investing activities:
Additions to property, plant and equipment -- -- (1,099)
Sale of property, plant and equipment 1,113 -- --
Sale of silver bullion -- -- 3,840
-------- -------- --------
Net cash provided by investing activities 1,113 -- 2,741
-------- -------- --------
Cash provided by financing activities:
Proceeds from issuance of long term debt 2,770 550 0
-------- -------- --------
Increase (decrease) in cash and cash investments 127 (132) 578
Cash and cash investments, beginning of period 158 291 628
-------- -------- --------
Cash and cash investments, end of period $ 285 $ 159 $ 1,206
======== ======== ========
Supplemental cash flow information -
Interest paid in cash $ 99 $ 38 $ 92
======== ======== ========
Noncash financing transactions:
Common stock issued upon conversion of debt -- -- 1,031
Common stock issued for
mandatory prepayment of debt -- -- 1,250
Common stock issued for payment of interest -- -- 544
Cash flows related to reorganization items:
Operations activities:
Interest received on accumulated cash -- 2 --
Payment of professional fees 1,066 102 --
Financing activities -- -- --
Investing activities -- -- --
</Table>
See accompanying notes.
F-33
90
SUNSHINE MINING AND REFINING COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2001
1. BASIS OF PRESENTATION FOR JUNE 30, 2001 UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements
of Sunshine Mining and Refining Company ("Sunshine" or the "Company")
as of June 30, 2001 and for the periods ending June 30, 2001, January
31, 2001 and June 30, 2000 have been prepared in accordance with
accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the period ended June 30,
2001 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2001.
The financial statements for the period ended June 30, 2001 reflect
accounting principles and practices set forth in AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under
The Bankruptcy Code" ("SOP 90-7"). Pursuant to the guidance of SOP
90-7, the Company adopted "fresh start" reporting as of January 31,
2001. Under "fresh start" reporting, the reorganization value of the
entity is allocated to the entity's assets. The net effect of all fresh
start reporting adjustments resulted in income of $8.2 million, which
is reflected in the Statement of Operations for the one month ended
January 31, 2001 in accordance with SOP 90-7. The effective date is
considered to be the close of business on January 31, 2001 for
financial reporting purposes. The periods presented prior to January
31, 2001 have been designated "Predecessor Company" and the periods
subsequent to January 31, 2001 have been designated "Successor
Company." As a result of the implementation of fresh start reporting,
the financial statements of the Company after the effective date are
not comparable to the Company's financial statements for prior periods.
Net income (loss) per share data is not presented for periods prior to
January 31, 2001 because of the general lack of comparability as a
result of the reorganization of the Company and implementation of fresh
start reporting by the Company.
The reorganization and the adoption of fresh start reporting resulted
in the following adjustments to the Company's Condensed Consolidated
Balance Sheet as of January 31, 2001:
F-34
91
<Table>
Predecessor Reorganization and Reorganized
Company Fresh Start Adjustments Company
----------- --------------------------- -----------
January 31, January 31,
(In thousands) 2001 Debit Credit 2001
- -------------- ----------- --------- --------- -----------
ASSETS
Total current assets $ 5,195 $ -- $ 71(a) $ 5,124
Property, plant and equipment, net 14,669 10,794(a) -- 25,463
Other assets 2,780 -- 1,530(a) 1,250
--------- --------- --------- ---------
$ 22,644 $ 10,794 $ 1,601 $ 31,837
========= ========= ========= =========
LIABILITIES AND STOCK-HOLDERS' EQUITY (DEFICIT)
Total current liabilities $ 2,641 $ -- $ 321(a) $ 2,962
Noncurrent liabilities 57,118 48,846(b) 633(a) 8,905
Liability for call option on Sunshine
Argentina, Inc. -- -- 2,740(c) 2,740
--------- --------- --------- ---------
Total Liabilities 59,759 48,846 3,694 14,607
Redeemable common stock -- -- 14,467(d) 14,467
Stockholders' equity (deficit):
Common stock 492 492(e) 50(f) 50
Paid in capital 729,957 729,957(e) 2,713(f) 2,713
Accumulated other comprehensive
loss (884) -- 884(e) --
Accumulated deficit (765,570) -- 765,570(e) --
Less treasury stock at cost (1,110) -- 1,110(e) --
--------- --------- --------- ---------
(37,115) 730,449 769,289 1,725
--------- --------- --------- ---------
$ 22,644 $ 779,295 $ 788,488 $ 31,837
========= ========= ========= =========
</Table>
Explanations of reorganization and fresh start adjustment columns of the balance
sheet are as follows:
(a) To adjust property, plant and equipment, other assets and liabilities
to estimated current fair value. The book value for the Pirquitas Mine
is increased by approximately $11 million and the book value of other
properties is reduced by approximately $200 thousand. Property, plant
and equipment after adjustments consists of the following:
<Table>
Pirquitas Mine $24,750
Land 380
Other mining interests 333
-------
$25,463
=======
</Table>
F-35
92
(b) To reflect the cancellation of debt and other liabilities pursuant to
the Plan.
(c) To record the estimated fair value of the liability for the Call Option
issued pursuant to the Plan. (See Note 2.)
(d) To reflect the new common stock issued to the Principal Shareholders
which, in certain instances, the Company would be required to
repurchase from the Principal Shareholders.
(e) To eliminate the old stockholders' equity (deficit).
(f) To reflect the issuance of new common stock and warrants to other than
Principal Shareholders.
2. RECOVERABILITY OF INVESTMENT IN THE PIRQUITAS MINE
Under the terms of the Plan and the Confirmation Order on the Effective
Date, the capital stock of Sunshine Argentina, Inc. ("Argentina") was
cancelled and Argentina issued the "New Argentina Stock." Sunshine
caused the incorporation and organization of Sunshine International
Mining, Inc., a Delaware corporation ("International"), all of the
issued and outstanding stock of which is owned by Sunshine. Sunshine
contributed to the capital of International all of the New Argentina
Stock such that Argentina became a wholly-owned subsidiary of
International which in turn is a wholly-owned subsidiary of Sunshine.
Simultaneously Sunshine, International and Argentina entered into a
Call Option Agreement dated February 5, 2001, with the Elliott Group
and the Stonehill Group, pursuant to which International granted (i) a
contingent call option to each holder within the Elliott Group and the
Stonehill Group to purchase, collectively, up to 100% of the shares of
New Argentina Stock for $1 million and (ii) a first priority perfected
security interest in the New Argentina Stock. Such call option(s) was
granted to purchase a maximum number of shares of New Argentina Stock
at a specified purchase price which option is to be reduced
proportionately in the event the Elliott Group holders and/or the
Stonehill Group holders sell more than 50% of their shares of New
Common Stock of Sunshine received. For example, if the Elliott Group
holders were to sell 55% of their shares of Sunshine Common Stock
initially received, then the maximum number of New Argentina Stock that
the Elliott Group holders could purchase in the aggregate upon exercise
of their Call Options would be reduced by a percentage equal to (55% -
50%) x 2, or 10%. The term of each Call Option expires at the time of
exercise in full of such Call Option, or if the market capitalization
of Sunshine shall exceed $150,000,000 for at least 60 consecutive days
or on the tenth anniversary of the Effective Date of the Plan. The Call
Option becomes exercisable upon the occurrence of any one or more of
nine separate events, including (i) the de-listing of the Sunshine New
Common Stock from an "Approved Market," (ii) suspension of the Sunshine
New Common Stock from trading on an Approved Market for at least seven
consecutive calendar days, (iii) reduction in the overall market
capitalization of Sunshine to less than $15,000,000 for at least
fifteen consecutive calendar days, (iv) a bankruptcy proceeding
occurring with respect to Sunshine or one of its subsidiaries, (v)
Sunshine fails to comply with its obligations in the Call Option
Agreement, and (vi) other events, including any default under the
Credit Facility. The Call Option,
F-36
93
once exercisable, may be exercised at any time by any of the holders
thereof. The effect of the Call Option(s) is to potentially allow the
Elliott Group holders and the Stonehill Group holders (and certain of
their successors and assigns) to acquire Sunshine Argentina which in
turn owns the Pirquitas Mine and other assets. Should such an event
occur, Sunshine's investment in the property, carried on the balance
sheet at $24,750,000, would no longer be an asset of Sunshine, nor
would the assigned proven and probable reserves totaling 129.6 million
ounces of silver, along with 59,000 tons of tin and 273,000 tons of
zinc. The New Argentina Stock has been pledged under the Call Option
Agreement under a separate Pledge Agreement to the Elliott Group
holders and the Stonehill Group holders and delivered to Wells Fargo
Bank Minnesota, N.A. as administrative and pledge agent.
The Company's market capitalization in recent weeks has been only
slightly in excess of or below $15 million, the level that could
trigger exercise of the Call Option. The Elliott Group and the
Stonehill Group have agreed to a forbearance of exercising the Call
Option as part of a refinancing of the Credit Facility. See Note 7.
3. EXTRAORDINARY ITEM
The extraordinary items recorded for the one month ended January 31,
2001 are comprised of the write-off of the unamortized debt issuance
costs and the extraordinary gain on debt discharge recognized as a
result of the consummation of the Plan as follows (in thousands):
<Table>
Write off of unamortized debt issuance costs $ (92)
Discharge of debt, liabilities and associated accrued interest 48,938
Value of securities issued (19,970)
--------
Extraordinary gain $ 28,876
========
</Table>
F-37
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4. INVENTORIES
The components of inventory consist of the following:
<Table>
<Caption>
June 30 December 31
2001 2000
------- -----------
Precious metals inventories:
Work in process $ 0 $ 187
Finished goods 28 28
Materials and supplies inventories 1,146 1,285
------ ------
$1,174 $1,500
====== ======
</Table>
5. DEBTOR-IN-POSSESSION FINANCING/REPLACEMENT CREDIT FACILITY/AMENDED
CREDIT FACILITY
The Company obtained a $5 million post-petition debtor-in-possession
financing facility (the "DIP Facility") with affiliates of the
Cosponsoring Bondholders. Sunshine Argentina, Inc., a wholly-owned
subsidiary, was the borrower under the DIP Facility, and the Company
and its other subsidiaries were guarantors. The base rate of interest
under the DIP Facility was 15% per annum with a $150 thousand
commitment fee that was expensed in 2000. Borrowings under the DIP
Facility were secured by substantially all of the Company's assets.
After the Plan became effective, the outstanding balance under the DIP
facility of approximately $2.7 million was rolled into a replacement
secured Credit Facility with the same lenders with repayment due within
eighteen months. The Credit Facility has a maximum commitment of $5
million, an interest rate of 15% and a commitment fee of $150 thousand.
As of June 30, 2001, the Company had borrowed the full $5 million under
the Credit Facility. In July, 2001, the lenders advanced an additional
$420 thousand under a secured demand note with the same interest rate
and fees as the Credit Facility. The Company and the lenders have
agreed to enter into the Second Amended and Restated Credit Agreement
(the "Amended Credit Facility") to supply the Company with sufficient
financing to maintain the Pirquitas property, complete the closing and
securing of the Sunshine Mine pending a substantial recovery in silver
prices, and fund necessary corporate overhead for a period of time. The
Company expects to enter into the Amended Credit Facility in the near
future.
The Amended Credit Facility will refinance the entire $5.42 million of
advances made to date and commit to advance another $1.08 million for a
total commitment of $6.5 million, subject to a $325 thousand commitment
fee. At the option of the lenders, an additional $1.5 million of
advances may be available, which if exercised would bring the total
borrowing to $8 million. Based on current projections, we estimate that
if the full amount of the facility is made available, it would fund the
Company's cash requirements through at least the second quarter of
2002.
F-38
95
The principal amount of the advances are to be repaid on the earlier of
December 31, 2002 or the occurrence of an event of default that shall
be continuing as defined in the Amended Credit Facility. Interest will
continue to accrue at 15% per annum.
In consideration for the increase in the commitment, the extension of
the maturity date of the Credit Facility and the forbearance of
affiliates of the lenders from exercising either penalty and repurchase
provisions of the Registration Rights Agreement or the Call Option, the
lenders were granted a "Participation." The Participation provides that
the lenders will be entitled to the first $10 million of proceeds
(above the amount of principal and interest due) from any proceeds
received by the Company on the sale of certain assets, upon the
issuance of any debt or equity securities, or the receipt of any
judgment or award. The Company can, within 90 days of the date of the
Amended Credit Facility (September 7, 2001), refinance these loans, if
more favorable terms can be found, without paying the Participation.
6. CLOSURE OF THE SUNSHINE MINE
Since the closure of the Sunshine Mine on February 16, the Company has
no sources of revenues. In addition, the Company has been incurring
significant costs associated with the closure of the mine, including
funding severance benefits and accrued vacation liability and costs
associated with preparing the mine for an extended period of care and
maintenance. Offsetting a portion of these costs has been proceeds from
the liquidation of certain equipment at the property, including the
entire fleet of diesel equipment. The decision to liquidate the
equipment was based on, among other things, the expectation that during
an extended shutdown period, the equipment would deteriorate
significantly.
During the second quarter, the Company determined that the costs of
holding the mine under its original care and maintenance plan would be
more than it could afford. Therefore, new plans were made to secure the
property, including closing off underground access after removal of
certain equipment, including electrical transformers and substations.
Pumps have been shut off and it is anticipated that over the next two
to four years the water level at the property will rise to about the
3100 level. The Company does not anticipate attempting to reopen the
mine until such time as a substantial increase in the price of silver
would justify the required expenditure.
The cost to reopen the mine is not known. The longer the mine remains
closed in this manner, the higher the cost to reopen will be. Over time
underground shafts and drifts will deteriorate without regular
maintenance, and eventually may become unusable.
7. EMPLOYEE BENEFIT PLANS
During the second quarter, the Company recognized the following
curtailment gain and loss:
F-39
96
<Table>
Curtailment gain for postretirement benefits
other than pensions $ 410
Curtailment loss for pensions (366)
-----
Net curtailment gain $ 44
=====
</Table>
Curtailment Gain for post retirement benefits other than pensions The
collective bargaining agreements ("CBA's") entered into between SPMI
and United Steelworkers of America (which represents the majority of
the employees) and the International Brotherhood of Electrical Workers
Union (the "Unions") expired on April 30, 2001. As a result, SPMI was
no longer required to provide retiree life insurance to all former
employees covered by a collective bargaining agreement ("Post 87 Union
Retirees") who retired after November 23, 1987. Also, as a result of
the expiration of the CBA's, SPMI is only required to provide retiree
medical benefits to qualified Post 87 Union Retirees until April 30,
2002. SPMI recognized a curtailment gain of $410 thousand related to
these changes in required postretirement medical and life insurance
benefits.
In July, SPMI appropriately notified all Union Employees who retired
prior to November 23, 1987 that their retiree life insurance and
medical benefits would be canceled as of August 31, 2001. Also in July,
SPMI appropriately notified employees not covered by a collective
bargaining agreement who retired prior to 1994 that their retiree life
insurance would be canceled as of August 31, 2001 and their retiree
medical benefits would be canceled as of September 30, 2001. During the
third quarter, SPMI expects to recognize a curtailment gain as a result
of these cancellations of retiree life insurance and medical. The
amount of such curtailment gain has not been determined at this time.
Curtailment Loss for Pensions
The Sunshine Negotiated Plan provides for an early retirement benefit
equal to 100% of a participant's accrued benefit if the participant has
30 or more years of service. As a result of the closure of the Sunshine
Mine, approximately 28 Union Employees with 30 or more years of service
elected to retire and receive their early retirement benefit unreduced
despite the fact that they were not 65 years of age. This resulted in a
curtailment loss for pension plans of approximately $366 thousand due
to the acceleration of the payment of benefits compared to prior
actuarial assumptions.
The Negotiated Pension Plan also provides that certain employees who
are "laid off due to the permanent shutdown of the total plant covered
by this Plan may retire and receive a "75/80" pension." Eligibility
requirements are ten years of service, and if at least 55 years of age,
his age and years of service total 75 years or more or
F-40
97
if younger than 55, his age and years of service total 80. If eligible
for the 75/80 retirement, a participant would receive his or her
unreduced early retirement benefit plus a $399.30 temporary monthly
supplement payable until age 65 at the latest. SPMI does not believe
that there has been "permanent shutdown of the total plant." If it were
determined that there has been a permanent shutdown of the total
plant," SPMI would incur an estimated additional curtailment loss for
pension plans of between $900 thousand and $1.2 million.
F-41
98
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY SUNSHINE MINING AND REFINING COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE ISSUER SINCE SUCH DATE.
----------
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
Prospectus Summary........................................................1
Risk Factors..............................................................7
Forward-Looking Statements...............................................11
Use of Proceeds..........................................................12
Capitalization...........................................................12
Dividend Policy..........................................................12
Price Range of Capital Stock.............................................13
The Plan of Reorganization...............................................14
Selling Stockholders.....................................................20
Plan of Distribution.....................................................23
Selected Financial Data..................................................25
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................26
The Company..............................................................33
Legal Proceedings........................................................40
Ownership of Principal Stockholders and Management.......................41
Management...............................................................42
Change in Accountants....................................................48
Description of Capital Stock.............................................48
Legal Matters........................................................... 49
Experts................................................................. 49
Where You Can Find More Information......................................49
Glossary and Index...................................................... 51
Index to Consolidated Financial Statements.............................. 54
</Table>
SUNSHINE MINING
AND
REFINING
COMPANY
44,995,000 SHARES
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
----------
PROSPECTUS
----------
________________, 2001
================================================================================
99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<Table>
Securities and Exchange Commission Registration Fee ....................... $18,279.22
Blue Sky Fees and Expenses (including legal fees and filing fees) ......... 3,000.00*
Printing and Photocopying Expenses ........................................ 7,800.00
Accounting Fees and Expenses .............................................. 10,000.00
Legal Fees and Expenses ................................................... 12,500.00
Miscellaneous Expenses .................................................... 2,900.00
----------
TOTAL: ............................................................. $54,479.22
==========
</Table>
- ----------
*Based on limited number of states which may be increased in the future.
All of the above expenses except the Securities and Exchange Commission
registration fee and the NASDAQ listing fee are estimated. All of such expenses
will be borne by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law gives
corporations the right to indemnify directors and officers, as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation [i.e.,
a "derivative action"]), if they acted in good faith and in a manner they
reasonably believe 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 their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification
extends only to expenses (including attorneys' fees) incurred in connection with
the defense or settlement of such action, and the statute requires court
approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, bylaws, disinterested director vote, stockholder vote,
agreement or otherwise.
Article VII of Sunshine Mining and Refining Company's Amended
Certificate of Incorporation and Article V of the Bylaws of Sunshine Mining and
Refining Company provide no director or officer of the Corporation shall be
liable to the Corporation or its stockholders for monetary damages for breaches
of fiduciary duty as a director or officer except to the extent such exemption
from liability may be limited or not permitted under the Delaware General
Corporation Law as the same exists of directors and officers to the maximum
extent permitted by Delaware law.
The Company has entered into separate indemnification agreements with
its directors and officers. The Company has obtained a directors' and officers'
liability insurance policy effective February 5, 2001.
The general effect upon investors of the indemnification provisions
contained in Delaware law, the Company's Restated Certificate of Incorporation
and Bylaws, and the availability of insurance coverage is to pay or reimburse
any director or officer for all losses and expenses for any event or occurrence
related to the fact that such person is or was a director or officer of the
Company or serving in some other capacity with the Company or incurred with any
threatened, pending or completed legal proceeding. To the extent that insurance
coverage does not reimburse for such costs and expenses, the Company may be
obligated to do so.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On February 24, 2000, Sunshine issued to the holders of the 10%
Senior Convertible Notes due November 24, 2002, on a pro rata basis, 1,009,962
shares of common stock as the first required quarterly prepayment of $1.25
million on the 10% Senior Convertible Notes due November 24, 2002 (the
"Stonehill Notes"). The Stonehill Notes were issued in November 1997 pursuant to
Sunshine's reliance on the exemption from registration under the Securities Act
of 1933, as amended (the "Securities Act"), found in Section 4(2), and the
shares issued as the prepayment were issued pursuant to an exemption from
registration under the Securities Act found in Section 3(a)(9) of the Securities
Act or an exemption from registration under the Securities Act found in Section
4(2).
On February 9, 2000, Sunshine issued to certain holders of the
EuroBonds 756,000 shares of common stock in exchange for $1,000,000 of the 8%
Senior Exchangeable Notes, originally due March 21, 2000 (the "EuroBonds").
Part II - Page 1
100
The EuroBonds were issued in March 1996, pursuant to Sunshine's reliance on the
exemption from registration under the Securities Act found in Regulation S
(Sections 901-905 of the Securities Act), and the shares issued in exchange for
the $1,000,000 of EuroBonds were issued pursuant to an exemption from
registration under the Securities Act found in Section 3(a)(9) of the Securities
Act.
On March 29, 2000, Sunshine issued to the holders of the Stonehill
Notes on a pro rata basis 698,179 shares of common stock as payment of interest
due by April 1, 2000 on the Stonehill Notes. The Stonehill Notes were issued in
November 1997 pursuant to the Company's reliance on the exemption from
registration under the Securities Act found in Section 4(2), and the shares
issued as interest were issued pursuant to an exemption from registration under
the Securities Act found in Section 3(a)(9) of the Securities Act or an
exemption from registration under the Securities Act found in Section 4(2).
Prior to the August 23, 2000 filing of a voluntary petition in
bankruptcy by Sunshine, the Liverpool Limited Partnership, Liverpool Associates,
Ltd., Elliott International, L.P. (formerly known as Westgate International,
LP), and Elliott International Capital Advisors, Inc. (collectively the "Elliott
Group") acquired more than a majority of the 8% Senior Exchangeable Notes due
2000 issued by Sunshine Precious Metals, Inc., a Delaware corporation ("Metals")
guaranteed by Sunshine (the "EuroBonds"). In a separate transaction, the Elliott
Group acquired an option to "put" the EuroBonds to Sunshine Argentina, Inc.
Similarly, Stonehill Institutional Partners, LP, Stonehill Offshore Partners
Limited (together with their affiliates the "Stonehill Group") have been the
principal holders of a series of 10% Notes due November 24, 2002, issued by
Sunshine to the Stonehill Group in the original principal amount of $15 million
and guaranteed by Sunshine Argentina, Inc. On April 11 and 17, 2000, the holders
of the "Stonehill Notes" converted $1 million in principal amount (plus accrued
interest) for 1,937,554 shares of "old common stock" of Sunshine outstanding
prior to August 23, 2000. As the EuroBonds were not retired or refinanced prior
to their maturity, pursuant to the terms of the Stonehill Notes, Sunshine was
obligated to issue to the holders of the Stonehill Notes additional amounts
payable in cash or shares of common stock, and in March 2000, Sunshine issued,
as partial payment of the quarterly interest due, an additional 698,179 shares
of old common stock to the holders of the Stonehill Notes. The shares of old
common stock received by the Stonehill Group and the Elliott Group were
subsequently cancelled and retired in connection with the Plan of Reorganization
of Sunshine and its subsidiaries on the Effective Date of February 5, 2001.
Pursuant to the Plan of Reorganization (the "Plan") in the case
styled In Re: Sunshine Mining and Refining Company, Case No. 00-3409(MWF)
pending in the United States Bankruptcy Court for the District of Delaware (and
certain related cases), and the issuance of an Order Confirming the Third
Amended and Restated Joint Chapter 11 Plan of Reorganization of Sunshine and its
debtor subsidiaries (the "Confirmation Order"), all of which bears an Effective
Date of February 5, 2001, on the Effective Date, all of the "old common stock"
(as well as all options and warrants) of Sunshine was cancelled, retired and
eliminated with no consideration paid therefor, and Sunshine was deemed to have
issued "New Mining Stock," which is shares of Common Stock, par value $0.01 per
share. The New Mining Stock was issued pursuant to the Plan and Confirmation
Order in accordance with Section 1145 of the Bankruptcy Code without
registration. A total of 50,000,000 shares of Common Stock, par value $0.01 per
share, was issued as the "New Mining Stock" under the terms of the Plan to those
designated as recipients therefor under the Plan which generally were certain
creditors of Sunshine and others who in turn gifted a portion (approximately
3.4%) of such New Mining Stock to the former common stockholders on a pro rata
basis, but only to accounts holding in excess of 100 shares of "old common
stock." Of the New Mining Stock, the Stonehill Group and the Elliott Group
acquired 89.99%.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT
DESIGNATION EXHIBIT DESCRIPTION
2.1 Third Amended Joint Chapter 11 Plan of Reorganization dated as of
December 4, 2000, bench-filed in the case styled In Re: Sunshine
Mining and Refining Company, Chapter 11, Case No. 00-3409 (MWF),
filed as Exhibit 2.1 to the Registrant's Current Report on Form
8-K for event reported February 5, 2001.
2.2 Order confirming the Third Amended Joint Chapter 11 Plan of
Reorganization of Sunshine Mining and Refining Company and its
Debtor Subsidiaries as entered December 5, 2000, filed as Exhibit
2.2 to the Registrant's Current Report on Form 8-K for event
reported February 5, 2001.
Part II - Page 2
101
EXHIBIT
DESIGNATION EXHIBIT DESCRIPTION
2.3 Partial Consent Decree with Sunshine Mining and Refining Company
and Sunshine Precious Metals, Inc. in the case styled United
States of America v. Asarco Incorporated, et al., a Consolidated
Case Nos. 96-0122-N-EJL and 91-0342-N-EJL in the United States
District Court for the District of Idaho, filed as Exhibit 2.3 to
the Registrant's Current Report on Form 8-K for event reported
February 5, 2001.
2.4 Notice of Effective Date of Third Amended Joint Chapter 11 Plan
of Reorganization, filed as Exhibit 2.4 to the Registrant's
Current Report on Form 8-K for event reported February 5, 2001.
3.1 Amended and Restated Certificate of Incorporation filed with and
approved by the Secretary of State of Delaware on February 23,
2001, filed as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K for event reported February 5, 2001.
3.2 Amended and Restated Bylaws as adopted February 9, 2001, filed as
Exhibit 3.2 to the Registrant's Current Report on Form 8-K for
event reported February 5, 2001.
3.3+ Specimen Common Stock Certificate.
5.1+ Opinion of Richards, Layton & Finger, PA.
10.1 Call Option Agreement dated February 5, 2001, among Sunshine
International Mining, Inc., Sunshine Mining and Refining Company,
Sunshine Argentina, Inc., Elliott International, L.P., The
Liverpool Limited Partnership, Stonehill Institutional Partners,
L.P. and Stonehill Offshore Partners Limited, filed as Exhibit
10.1 to the Registrant's Current Report on Form 8-K for event
reported February 5, 2001.
10.2 Registration Rights Agreement dated February 5, 2001, among
Sunshine Mining and Refining Company, Stonehill Partners, L.P.,
Stonehill Offshore Partners Limited, Elliott International, L.P.
and The Liverpool Limited Partnership, filed as Exhibit 10.2 to
the Registrant's Current Report on Form 8-K for event report
February 5, 2001.
21.1+ Subsidiaries of the Registrant.
23.1+ Consent of Richards, Layton & Finger, PA (included in the opinion
filed as Exhibit 5.1).
23.2* Consent of Grant Thornton LLP.
24.1+ Power of Attorney.
- ----------
+ Previously filed.
* Filed herewith.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
To reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
Registration Statement
Part II - Page 3
102
(notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar of
securities would not exceed that which was registered) and
any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if in the aggregate, the changes in volume and price
represents no more than 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement); and
To include any material information with respect
to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement; Provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof; and
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering. The undersigned
Registrant hereby undertakes that, for the purposes of determining
any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities
offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue. The
undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of Prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of Prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Part II - Page 4
103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in Dallas, Texas, as of the 14th day of September, 2001.
SUNSHINE MINING AND REFINING COMPANY
By: /s/ William W. Davis
-------------------------------------
William W. Davis
President, Chief Operating Officer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities indicated as of the 10th day of May, 2001.
<Table>
<Caption>
SIGNATURE TITLE DATE
/s/ John S. Simko* Chairman of the Board and Director
- ---------------------------------- (Principal Executive Officer) September 14, 2001
John S. Simko
/s/ William W. Davis
- ---------------------------------- President, Chief Operating Officer and Chief
William W. Davis Financial Officer (Principal Financial Officer) September 14, 2001
/s/ George M. Elvin*
- ---------------------------------- Director September 14, 2001
George M. Elvin
/s/ Arnold Kastenbaum*
- ---------------------------------- Director September 14, 2001
Arnold Kastenbaum
/s/ Keith McCandlish*
- ---------------------------------- Director September 14, 2001
Keith McCandlish
/s/ Charles C. Reardon*
- ---------------------------------- Director September 14, 2001
Charles C. Reardon
</Table>
*By: /s/ William W. Davis
----------------------------------
William W. Davis, Attorney-in-Fact
Part II - Page 5
104
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.3 Partial Consent Decree with Sunshine Mining and Refining Company
and Sunshine Precious Metals, Inc. in the case styled United
States of America v. Asarco Incorporated, et al., a Consolidated
Case Nos. 96-0122-N-EJL and 91-0342-N-EJL in the United States
District Court for the District of Idaho, filed as Exhibit 2.3 to
the Registrant's Current Report on Form 8-K for event reported
February 5, 2001.
2.4 Notice of Effective Date of Third Amended Joint Chapter 11 Plan
of Reorganization, filed as Exhibit 2.4 to the Registrant's
Current Report on Form 8-K for event reported February 5, 2001.
3.1 Amended and Restated Certificate of Incorporation filed with and
approved by the Secretary of State of Delaware on February 23,
2001, filed as Exhibit 3.1 to the Registrant's Current Report on
Form 8-K for event reported February 5, 2001.
3.2 Amended and Restated Bylaws as adopted February 9, 2001, filed as
Exhibit 3.2 to the Registrant's Current Report on Form 8-K for
event reported February 5, 2001.
3.3+ Specimen Common Stock Certificate.
5.1+ Opinion of Richards, Layton & Finger, PA.
10.1 Call Option Agreement dated February 5, 2001, among Sunshine
International Mining, Inc., Sunshine Mining and Refining Company,
Sunshine Argentina, Inc., Elliott International, L.P., The
Liverpool Limited Partnership, Stonehill Institutional Partners,
L.P. and Stonehill Offshore Partners Limited, filed as Exhibit
10.1 to the Registrant's Current Report on Form 8-K for event
reported February 5, 2001.
10.2 Registration Rights Agreement dated February 5, 2001, among
Sunshine Mining and Refining Company, Stonehill Partners, L.P.,
Stonehill Offshore Partners Limited, Elliott International, L.P.
and The Liverpool Limited Partnership, filed as Exhibit 10.2 to
the Registrant's Current Report on Form 8-K for event report
February 5, 2001.
21.1+ Subsidiaries of the Registrant.
23.1+ Consent of Richards, Layton & Finger, PA (included in the opinion
filed as Exhibit 5.1).
23.2* Consent of Grant Thornton LLP.
24.1+ Power of Attorney.
</Table>
- ----------
+ Previously filed.
* Filed herewith.