-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KwTUxVSBYWqDJX3Wjn88XBSOb67oQmfmVJ0S3LHtV8WoyVZIEtZ+QRkzYMK3SJs6 dZrT82AywyYp6skg0eJpBw== 0000950134-95-003455.txt : 19951229 0000950134-95-003455.hdr.sgml : 19951229 ACCESSION NUMBER: 0000950134-95-003455 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19951227 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNSHINE MINING & REFINING CO CENTRAL INDEX KEY: 0000833376 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY SMELTING & REFINING OF NONFERROUS METALS [3330] IRS NUMBER: 752231378 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-98876 FILM NUMBER: 95604798 BUSINESS ADDRESS: STREET 1: 877 WEST MAIN STREET STREET 2: SUITE 600 CITY: BOISES STATE: ID ZIP: 83702 BUSINESS PHONE: 2083450660 MAIL ADDRESS: STREET 1: 877 W MAIN STREET SUITE 600 CITY: BOISE STATE: ID ZIP: 83702 FORMER COMPANY: FORMER CONFORMED NAME: SUNSHINE MINING CO /DE DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SUNSHINE HOLDINGS INC DATE OF NAME CHANGE: 19880915 S-4/A 1 AMENDMENT NO. 1 TO S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 1995 REGISTRATION NO. 33-98876 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- SUNSHINE MERGER COMPANY (Exact name of registrant as specified in its charter) SUNSHINE MINING AND REFINING COMPANY (Name of registrant upon effectiveness of the merger described herein) DELAWARE 1044 75-2618333 (STATE OR OTHER JURISDICTION OF MARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER IDENTIFICATION NO.)
877 W. Main Street, Suite 600 Boise, Idaho 83702 (208) 345-0660 (Address, including ZIP Code, and telephone number, including area code, of registrant's principal executive offices) -------------------- John S. Simko, President SUNSHINE MERGER COMPANY 877 W. Main Street, Suite 600 Boise, Idaho 83702 (208) 345-0660 (Address, including ZIP Code, and telephone number, including area code, of agent for service) -------------------- COPY TO: James D. Hovren, Esq. Evans, Keane 1101 W. River St., Suite 200 Boise, Idaho 83701-0959 -------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE TIME OF THE MERGER DESCRIBED IN THIS REGISTRATION STATEMENT. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.[ ] CALCULATION OF REGISTRATION FEE ================================================================================
Proposed Proposed Title of Each Class of Amount to be Maximum Offering Maximum Aggregate Amount of Securities to be Registered Registered Price Per Security Offering Price Registration Fee - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value 206,917,404(1) $ 1.6875 $ 349,173,119 120,404.00 - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value 66,645,531(2) - 68,526,653 (2) 23,629.00 - ------------------------------------------------------------------------------------------------------------------------------------ New Warrants to purchase common stock 14,332,372(2) - - (2) - - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value, to be issued upon exercise of New Warrants 14,332,372 1.85625 (3) 26,604,465 9,173.00 - ------------------------------------------------------------------------------------------------------------------------------------ Warrants to Purchase Common Stock, $2.12 exercise price 10,086,076(4) $ .703125 $ 7,091,772 2,445.00 - ------------------------------------------------------------------------------------------------------------------------------------ 8 7/8% Convertible Subordinated Debentures 1,519,000 - 1,519,000 (5) 523.00 - ------------------------------------------------------------------------------------------------------------------------------------ $ 156,177.58(6) ====================================================================================================================================
(1) To be issued in exchange for existing common stock. Fee calculated pursuant to 457 (f)(1) based upon the average of high and low prices on NYSE for existing common stock on October 24, 1995. (2) Common Stock and Warrants to purchase common stock to be issued in exchange for existing Preferred Stock. Fee calculated pursuant to 457(f)(1), aggregate price based upon the average of high and low prices on NYSE for Preferred Stock on October 24, 1995. (3) Pursuant to 457(g), based upon 110% of the average high and low prices on NYSE for existing common stock on October 24, 1995. (4) To be issued in exchange for existing Warrants ($2.12 exercise price) to purchase Common Stock. Fee calculated pursuant to 457(f)(1) based upon the average of high and low prices on the NNM for existing warrants ($.65625) on October 24, 1995. (5) Fee calculated pursuant to 457(f)(2). (6) Previously paid (Continued) 2 Also includes such indeterminate number of shares of Common Stock of the Company as are issuable pursuant to Rule 416 on conversion or exercise, as well as such additional shares of Common Stock as may become issuable pursuant to antidulition provisions. 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. 3 SUNSHINE MERGER COMPANY CROSS-REFERENCE SHEET This cross-reference sheet is provided pursuant to Item 501(b) of Regulation S-K showing the location in the Proxy Statement Prospectus of information required by Part I of Form S-4. FORM S-4
ITEM NUMBER LOCATION IN PROXY STATEMENT/PROSPECTUS - ----------- -------------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus . . . . . . . . . . . . . . . . . . . . . Facing Page; Cross-Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus . . . Available Information; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . Available Information; Prospectus Summary; Certain Risk Factors; The Merger Proposal; Sunshine Mining and Refining Company; Sunshine Merger Company; Capitalization; Comparative Per Share Data; Selected Financial Data; Security Ownership of Certain Beneficial Owners and Management; Federal Income Tax Consequences; Voting Securities and Record Date. 4. Terms of Transaction . . . . . . . . . . . . . . . . . . . . The Merger Proposal; Prospectus Summary; Sunshine Mining and Refining Company; Sunshine Merger Company; Description of The Warrants; Federal Income Tax Consequences; Annex A 5. Pro Forma Financial Information . . . . . . . . . . . . . . . Capitalization; Comparative Per Share Data 6. Material Contacts with the Company Being Acquired . . . . . . The Merger Proposal; Annex A 7. Additional Information Required for Reoffering by Person and Not Applicable Parties Deemed to be Underwriters Interests of Name Experts and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . 8. Not Applicable Disclosure of Commission Position on Indemnification for 9. Securities Act Liabilities . . . . . . . . . . . . . . . . . Not Applicable B. INFORMATION ABOUT THE REGISTRANT 10. Information with Respect S-3 Registrants . . . . . . . . . . Not Applicable 11. Incorporation of Certain Information by Reference . . . . . . Not Applicable 12. Information with Respect to S-2 or S-3 Registrants . . . . . Not Applicable 13. Incorporation of Certain Information by Reference . . . . . . Not Applicable 14. Information with Respect to Registrants Other than S-3 or S-2 Registrants . . . . . . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Sunshine Merger Company; Sunshine Mining and Refining Company; The Merger Proposal; Selected Financial Data; Capitalization; Comparative Per Share Data; Annex B
4
FORM S-4 ITEM NUMBER LOCATION IN PROXY STATEMENT/PROSPECTUS - ----------- -------------------------------------- C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information with Respect to S-3 Companies . . . . . . . . . . Not Applicable 16. Information with Respect to S-2 or S-3 Companies . . . . . . Not Applicable 17. Information with Respect to Companies Other Than S-3 or S-2 Companies . . . . . . . . . . . . . . . . . . . . Prospectus Summary; Sunshine Merger Company; Sunshine Mining and Refining Company; The Merger Proposal; Selected Financial Data; Capitalization; Comparative Per Share Data 18. Information if Proxies, Consents or Authorizations are to be Solicited . . . . . . . . . . . . . . . . . . . . . . . . . . Notice of Special Meeting of Stockholders; Outside Front Cover Page of Proxy Statement/Prospectus; The Merger Proposal; Sunshine Mining and Refining Company; Security Ownership of Certain Beneficial Owners and Management; Directors of Sunshine; Annex B 19. Information if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offer . . . . . . . . . . . . Not Applicable
5 SUNSHINE MINING AND REFINING COMPANY 877 WEST MAIN STREET, SUITE 600 BOISE, IDAHO 83702 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD [____________________] A special meeting of shareholders of Sunshine Mining and Refining Company ("Sunshine" or the "Company") will be held on [________], 1996, at 10:00 a.m., local time, at _____________________________, Boise, Idaho, for the purpose of voting on the approval and adoption of an Agreement and Plan of Merger dated [________________________] (the "Merger Agreement") between the Company and Sunshine Merger Company, a wholly-owned subsidiary of the Company, and approval of the transactions contemplated thereby as described in the accompanying Proxy Statement/Prospectus, and all other matters properly coming before the meeting. If the merger contemplated by the Merger Agreement (the "Merger") is consummated, then the Company will be merged with and into Sunshine Merger Company, and Sunshine Merger Company will be the surviving entity. The Merger will become effective (the "Effective Date") immediately upon the filing of a Certificate of Merger in accordance with Delaware General Corporation Law and upon satisfaction or waiver of the conditions to the Merger. On the Effective Date, the name of Sunshine Merger Company will be changed to Sunshine Mining and Refining Company. Only holders of the Company's Common Stock, $.01 par value (the "Existing Common Stock") and holders of the Company's $11.94 (Stated Value) Cumulative Redeemable Preferred Stock (the "Preferred Stock") of record as of the close of business on ____________________ ( the "Record Date"), have the right to receive notice of and to vote at the meeting. A list of these stockholders will be available for inspection for ten (10) days preceding the meeting at the office of the Secretary of the Company, 877 West Main Street, Suite 600, Boise, Idaho 83702, and will also be available for inspection at the meeting. A copy of the Merger Agreement is attached as Annex A to the accompanying Proxy Statement/Prospectus. As stated in the Proxy Statement/Prospectus, upon consummation of the Merger, the Board of Directors of Sunshine Merger Company will consist of the current Directors of the Company, with the exception of Messrs. George M. Elvin, Hoffer Kaback and Douglas K. Stewart, who were elected directors by the holders of Preferred Stock at the Company's 1995 Annual Meeting on June 13, 1995. On the Effective Date, the Preferred Stock of the Company will be terminated and all dividend and redemption rights thereunder will cease to exist, as more fully explained in the accompanying Proxy Statement/Prospectus. The Proxy Statement/Prospectus also relates to the shares of Sunshine Merger Company's Common Stock, par value $.01 (the "New Common Stock") and the Sunshine Merger Company Warrants to be issued pursuant to the Merger. See "DESCRIPTION OF MERGER." YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO COMPLETE, DATE, SIGN, AND RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED AS SOON AS POSSIBLE. IF YOU ATTEND THE MEETING IN PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE YOUR SHARES. THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT YOU MARK YOUR PROXY IN FAVOR OF THE MERGER AGREEMENT. IT WILL NOT BE NECESSARY FOR THE HOLDERS OF COMMON STOCK TO SURRENDER OR EXCHANGE THEIR CERTIFICATES FOR NEW CERTIFICATES REPRESENTING COMMON STOCK IN SUNSHINE MERGER COMPANY. HOLDERS OF PREFERRED STOCK SHOULD NOT SEND IN ANY CERTIFICATES FOR PREFERRED STOCK AT THIS TIME. IF THE MERGER IS CONSUMMATED, HOLDERS OF PREFERRED STOCK WILL RECEIVE INSTRUCTIONS REGARDING SURRENDER OF THOSE STOCK CERTIFICATES. By Order of the Board of Directors REBECCA L. SAUNDERS Secretary [_______________], 1996 6 PROXY STATEMENT/PROSPECTUS -------------------- SUNSHINE MINING AND REFINING COMPANY SUNSHINE MERGER COMPANY 877 W. Main Street, Suite 600 Boise, Idaho 83702 -------------------- SPECIAL MEETING OF STOCKHOLDERS -------------------- TO BE HELD [______], 1996 This Proxy Statement/Prospectus is being furnished to holders of the common stock, par value $.01 per share, (the "Existing Common Stock") and holders of $11.94 (Stated Value) Cumulative Redeemable Preferred Stock (the "Preferred Stock") of Sunshine Mining and Refining Company, a Delaware corporation ("Sunshine" or the "Company"), in connection with the solicitation of proxies by and on behalf of the Board of Directors of the Company for use at the special meeting of Shareholders of the Company, to be held on [_________], 1996, at 10:00 a.m., local time, at [_], Boise, Idaho, and any adjournment thereof (the "Special Meeting"). This Proxy Statement/Prospectus and accompanying Notice of Special Meeting of Stockholders and Form of Proxy are first being mailed to stockholders on or about [______], 1996. At the Special Meeting, stockholders will be asked to consider and vote upon approval of the Merger Agreement between the Company and Sunshine Merger Company, a Delaware corporation and a wholly-owned subsidiary of the Company, with Sunshine Merger Company being the surviving corporation (the "Merger"). On the Effective Date of the Merger, the name Sunshine Merger Company will be changed to Sunshine Mining and Refining Company. The purpose of the Merger is to retire all of the Company's outstanding Preferred Stock, which pursuant to the terms of the Merger will be exchanged for Common Stock of Sunshine Merger Company and newly issued Warrants to purchase additional shares of Sunshine Merger Company Common Stock. On consummation of the Merger, each outstanding share of Existing Common Stock will be converted, without any action by the holder thereof, into one share of Common Stock, par value $.01 per share of Sunshine Merger Company ("New Common Stock"). Each outstanding share of Preferred Stock will be converted by the Merger into [_____] shares of New Common Stock and either .9 (9/10) share of New Common Stock or, at the option of the holder, two (2) Warrants, each to purchase one (1) share of New Common Stock at the exercise price described herein. The number of shares of New Common Stock issued for each share of Preferred Stock and the exercise price of the Warrants are subject to adjustment pursuant to a formula based on the trading price of Common Stock. Based on the composite closing price of the Common Stock on the New York Stock Exchange ("NYSE") of $[______] per share on [_________], 1996, it is estimated that the value of the [______] shares of New Common Stock plus an additional .9 share of New Common Stock have an aggregate value of approximately [______]. It is also estimated that the option of receiving two (2) Warrants in lieu of .9 share of New Common Stock has the same value. However, there can be no assurance that the value of the securities received will not decline in value. SEE, CERTAIN RISK FACTORS--VALUE OF PREFERRED STOCK EXCHANGED; PROSPECTUS SUMMARY-TERMS OF THE MERGER; THE MERGER PROPOSAL; DESCRIPTION OF THE WARRANTS. SEE "TERMS OF THE MERGER." This Proxy Statement/Prospectus also constitutes a prospectus of Sunshine Merger Company for up to [] shares of New Common Stock and up to 14,332,372 Warrants to purchase New Common Stock pursuant to the terms of the Merger. Prior to the Merger, the Existing Common Stock and Preferred Stock are listed on the NYSE. Following the Merger, the New Common Stock will be listed on the NYSE under the symbol "SSC" and the Warrants will be listed on the Nasdaq National Market ("NNM"), under the symbol "SILVZ." THE SECURITIES ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SEE "CERTAIN RISK FACTORS" ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT STOCKHOLDERS SHOULD CONSIDER PRIOR TO EXECUTING A PROXY OR CASTING A VOTE.
- ------------------------------------------------------------------------------------------------------------ Price to Public Underwriting Discounts Proceeds to Issue or and Commissions Other Persons (1)(2) - ------------------------------------------------------------------------------------------------------------ Per Unit(1) . . . . . . . . -0- Total(2) . . . . . . . . . -0- - ------------------------------------------------------------------------------------------------------------
(1) Assumes exercise price of Warrants to be [$_________], which may be reduced pursuant to the terms of the Warrants. See "DESCRIPTION OF THE WARRANTS." (2) Assumes all of the Warrants are issued incident to the Merger and exercised prior to expiration. See "THE MERGER PROPOSAL" and "DESCRIPTION OF THE WARRANTS." The date of this Proxy Statement/Prospectus is [_____], 1996. 7 EXECUTED BUT UNMARKED PROXY CARDS WILL BE VOTED FOR THE MERGER PROPOSAL. AVAILABLE INFORMATION The Company is (and following the Merger Sunshine Merger Company will be) subject to the informational requirements of the Exchange Act, and in accordance therewith files (and Sunshine Merger Company will file) reports, proxy statements and other information with the Commission. Reports, proxy statements and other information, filed by the Company (and to be filed by Sunshine Merger Company) may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Regional offices of the Commission at 7 World Trade Center, Suite 1300, New York, New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such information can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Existing Common Stock is listed for quotation on the New York Stock Exchange ("NYSE") and such material also can be inspected and copied at the offices of the NYSE, 20 Broad Street, New York, New York 10005. Sunshine's principal executive offices are located at 877 West Main Street, Suite 600, Boise, Idaho 83702. Sunshine's telephone number at this address is (208) 345-0660. The Company has appointed The Herman Group, Inc., as Information Agent for the Merger. Questions regarding the enclosed Proxy Statement/Prospectus may be directed to The Herman Group, Inc. at (800) 747-2967. This Proxy Statement/Prospectus does not contain all of the information in the Form S-4 and exhibits thereto. Statements in this Proxy Statement/Prospectus as to the contents of any contract, agreement or other document are summaries only and are not necessarily complete. For complete information as to these matters, stockholders should refer to the applicable exhibit to the Form S-4. The Form S-4 and the exhibits thereto filed by Sunshine Merger Company with the Commission may be inspected at the public reference facilities of the Commission listed above. 8 For 38 years, from 1933 to 1971, the Sunshine Mine produced ore from the Chester Vein, the Sunshine Vein and their associated systems, at an average grade of 32 ounces of silver per ton, and average annual silver production was over 6.5 million ounces. We are looking for the analogy to those systems in the previously unexplored western portion of the mine. The Company began the evaluation of the potential of the West Chance area in 1992. A single drill intercept on the 4200 Level (4200 feet below the collar of the Jewell Shaft) indicated the presence of a structure capable of hosting mineralization. The 4200 Level drift was initiated to test for mineralization at this elevation. The drift encountered over 800 feet of mineralization, although at grades that are not economic at today's silver price. Additional core drilling indicated the continuation of the structure above and below the drift. Ore grade mineralization was delineated above the drift, and the drilling encountered the mineralized West Chance Footwall structure. To further the evaluation process, the 3100 Level drift into the West Chance Vein was commenced in 1993, and the 4400 Level was opened into the Chance Footwall Vein. Work is continuing in these areas at the present time. As of September 30, 1995, 3.4 million ounces of reserves had been delineated on these two levels. Core drilling from the 4200 Level and from the 3100 Level continues to provide impressive drill intercepts, as illustrated in these drawings. As a result, the 2700 and 3700 Level drifts were initiated in the latter half of 1995. An additional six drill stations will be completed in the two drifts by the end of 1996 to continue the process of reserve delineation around these levels. Assuming drilling from the 2700 Level provides evidence that the vein continues above the Level, the Company expects to commence a drift into the structure on the 2300 Level in 1996. Preliminary work for this drift is underway at this time. 2700 LEVEL (FACING NORTH) [GRAPHIC OF DIAGRAM] The diagram above illustrates the projected advance of the 2700 Level drift in relation to some of the assays of drill holes recently completed below the Level. The 2700 drift will be in a position to begin to evaluate the area around these drill holes by August 1996. No reserves have yet been assigned to this area, despite the impressive nature of these drill hole intercepts. The introduction of trackless mining methods will allow the Company to develop any new reserves found below the level of the drift advance. 3100 LEVEL (FACING NORTH) [GRAPHIC OF DIAGRAM] This diagram illustrates the location of three reserve blocks which have been delineated on the 3100 Level drift. These blocks aggregate over 2.1 million ounces of silver reserves, and also contain an average of about 6% lead. Mining has commenced from the WC9 Block in September and will commence in the WC10 Block in November. Drilling indicates good potential to extend the reserves outside the indicated blocks. 3700 LEVEL (FACING NORTH) [GRAPHIC OF DIAGRAM] This diagram illustrates the projected advance of the 3700 Level drift in relation to the assays of some of the recently completed drill holes in the area. The drift will be in a position to better delineate the area by about March 1996. No reserves have yet been assigned to this area. However, given the width and grade of core drill intercepts, it is expected that reserves will be added in the future once the 3700 Drift is completed. 4400 LEVEL CHANCE FOOTWALL (MAP VIEW) [GRAPHIC OF DIAGRAM] The Company has delineated over 900 thousand ounces of silver reserves on the 4400 Level of the Chance Footwall, with about 600 thousand ounces of those reserves in the CF4 reserve block, illustrated above. The total length of the structure has yet to be determined, as the stope is continuing to advance to the east on a high-grade vein. - -------------- * indicates the location of certain ore grade drill intercepts, the true width of the mineralized section, and the silver ounces per ton (opt). 9 SUNSHINE MINING WEST CHANCE DEVELOPMENT PROGRESS [GRAPHIC] DESCRIPTION: Cross section of the Sunshine Mine reflecting the Sunshine Vein System, Chester Vein System, Copper Vein, West Chance Vein, West Chance Footwall Vein, Jewel Shaft, Ten Shaft, Twelve Shaft, certain drifts and proposed drift advances. 10 PROSPECTUS SUMMARY This summary is qualified in its entirety by the detailed information and financial statements appearing elsewhere herein. Reference is made to the Glossary of Certain Mining Terms appearing elsewhere herein. THE COMPANY Sunshine Mining and Refining Company ("Sunshine" or the "Company"), through its principal subsidiary, Sunshine Precious Metals, Inc. ("SPMI"), owns and operates the Sunshine Mine located in the Coeur d'Alene Mining District near Kellogg, Idaho. The Sunshine Mine began operations in 1884 and has produced in excess of 340 million ounces of silver since that time. The mine also produces significant amounts of copper, lead and antimony as by-products. The Sunshine Mine and Refinery Complex consists of the Sunshine Mine, a 1,000 ton-per-day concentrator, an antimony refinery, a silver refinery and associated facilities. SPMI estimates that, as of January 1, 1995, the proven and probable ore reserves at the Sunshine Mine were 1,320,600 tons of ore, at a weighted average grade of 21.8 ounces per ton silver, containing 28,836,500 ounces of silver, of which SPMI's share is approximately 97%. Significant portions of the Sunshine Mine remain unexplored and undeveloped, and the Company is presently actively exploring in one area of the mine, the West Chance, which it feels has significant potential to add to the Company's reserves and production. The Company's earnings are directly related to the price of silver, which has been depressed since 1985. As a result, the Company has reported operating losses for the last ten years. Industry data suggests that excessive above- ground inventories of silver generated in the 1980's are being consumed. The Company believes that elimination of these above-ground excess inventories will cause silver prices to increase significantly over the next several years. The Company is actively exploring to develop new sources of production to achieve positive earnings and cash flow at current silver prices. In response to low silver prices, the Sunshine Mine has been operating at about one-half of its capacity since June, 1991. As a result of exploration of previously undeveloped areas of the Sunshine Mine and the successful testing of a trackless mining method in the Sunshine Mine, the Company has recently accelerated its development program at the Sunshine Mine, and is making plans to return the mine to full production by the end of 1996. The Company has also initiated exploration programs at other locations than the Sunshine Mine in an attempt to develop new sources of reserves and cash flow. As a result, the Company is presently active in exploration projects in Argentina, Peru, Colorado, and Arizona. Of particular significance is the Company's recent acquisition of the Pirquitas property in Argentina. Exploration at its Sunshine Mine is currently focused on an area called the West Chance, where the Company has identified at least two new vein systems. Prior to June, 1995, the Company had drifts on four levels in various stages of completion, from which it is conducting an extensive drilling program to better delineate the ore bodies. The total proven and probable reserves developed as of September 30, 1995 in the West Chance area total 3.4 million ounces of silver, with only a small portion of the potential ore body having been explored. In June of 1995, because of encouraging results, the Company decided to accelerate the pace of exploration work in the area by commencing two new exploration drifts and more than doubling the rate of diamond drilling. The present status of West Chance exploration is described in detail in the map inset in the prospectus cover. During 1996 the Company expects to spend approximately $2.5 million in further exploration work, and $4.5 million in development activity and equipment purchases. This will enable the Company to return the mine to full production by the end of 1996 should sufficient economic mineralization be found in the targeted areas of the West Chance. 1 11 The Company has successfully tested the potential to introduce trackless mining methods using diesel powered equipment in the development and stoping (ore-extraction) operations at the Sunshine Mine. Through the use of specially built low profile front-end loaders, certain ore reserves can now be accessed and mined more productively at lower cost than the Company's traditional mining methods. As a result of the demonstrated success of these front-end loaders, commonly referred to as LHD (load-haul- dump) units, and the expected additions to production from the West Chance area in 1996, the Company anticipates silver production to increase from approximately 1.7 million ounces in 1995 to between 2.7 and 3.2 million ounces in 1996. The Company is also studying the potential for the LHD units to support various trackless mining methods to allow for the economic reopening at current silver prices of the presently inactive eastern portion of the Sunshine Mine. Production was curtailed in this portion of the mine in June of 1991 when the Company went to its reduced operating plan. The Company is actively engaged in exploration in Argentina and Peru, as well as in other parts of the United States. Argentina is a highly prospective geologic region, which, due to political and economic problems in this century, has not had the necessary investment in exploration to fully evaluate its mineral potential. Peru, a major mining area since colonial times, had until recent years seen investments in mine maintenance and development decline due to political and economic chaos. Both countries are presently actively pursuing foreign investment, particularly in mining, and have apparently stable, democratically elected governments. The Company has recently opened exploration and development offices in Mendoza, Argentina and in Lima, Peru. In Argentina, the majority of the Company's exploration projects will be of a "grass roots" nature. However, the major project at this time is Pirquitas, which has been a producing property in the past. The Company has obtained data which suggests that the Pirquitas deposit could contain more than 130 million ounces of silver. The Company will immediately commence the work to verify this resource estimate and to do the engineering and metallurgical testwork necessary to determine if this deposit can be brought into production. In Peru, many previously nationalized properties are being returned to the private sector through a privatization process. The Company is aware of certain properties scheduled for privatization in 1996 on which it would have an interest in bidding. In addition, the Company believes its metallurgical technology may have application in Peru to activate certain inactive properties whose ores contain elevated levels of arsenic and antimony. See "CERTAIN RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." SUNSHINE MERGER COMPANY Sunshine Merger Company, a Delaware corporation ("Sunshine Merger Company"), is a wholly owned subsidiary of the Company, and was formed for the purpose of effectuating the Merger. The Certificate of Incorporation and Bylaws of Sunshine Merger Company are identical in all material terms to those of the Company. Upon consummation of the Merger, Sunshine Merger Company's name will be changed to Sunshine Mining and Refining Company. THE MERGER This Proxy Statement/Prospectus relates to the proposed merger of Sunshine into Sunshine Merger Company with Sunshine Merger Company being the surviving corporation (the "Merger"). 2 12 The purpose of the Merger is to convert the Company's outstanding ($11.94) Stated Value Cumulative Redeemable Preferred Stock (the "Preferred Stock") into Common Stock. Due to the losses the Company has experienced, the dividends on the Preferred Stock have not been declared or paid since December 1990. As a result of the dividends in arrears, the Company has also been prohibited from making annual partial redemptions of 10% of the original issue amount of the Preferred shares which, pursuant to the Certificate of Preferences, were to have begun in July, 1991. At the present time, the Company does not expect to resume the payment of dividends until it has earnings sufficient to support such payments. Management and the Directors of the Company have determined that it is in the best interest of the Common stockholders, the Preferred Stockholders, and the Company, to eliminate the Preferred Stock from the Company's capital structure. This will improve the book value per Common share and the results of operations per Common share, while providing the Preferred stockholders a security with more liquidity than the Preferred Stock. See "CAPITALIZATION" AND "COMPARATIVE PER SHARE DATA." The Merger will become effective (the "Effective Date") immediately upon the filing of a Certificate of Merger in accordance with Delaware General Corporation Law ("DGCL") and upon satisfaction or waiver of the conditions to the Merger. On the Effective Date, the name of Sunshine Merger Company will be changed to Sunshine Mining and Refining Company. On the Effective Date, each share of Sunshine's common stock, $.01 par value (the "Existing Common Stock") outstanding immediately prior to the Merger will be converted, by reason of the Merger, pursuant to the Merger Agreement and without any action by the holder thereof, into a share of the common stock, $.01 par value of Sunshine Merger Company (the "New Common Stock"). The relative powers, designations, preferences, rights and qualifications of the New Common Stock, as in effect on the Effective Date, will be substantially equivalent in all material respects to the Existing Common Stock so converted. Holders of Preferred Stock will, upon consummation of the Merger, receive for each share of Preferred Stock held [______] shares of New Common Stock and either an additional .9 (9/10) share of New Common Stock or, at the option of the holders, two (2) Warrants, each to purchase one share of New Common Stock. The number of shares of New Common Stock and the exercise price of the Warrants are subject to modification as described elsewhere herein. See "THE MERGER PROPOSAL"; "DESCRIPTION OF THE WARRANTS." Based on the closing price of the Common Stock on [______] of [$______] per share, the total value of the [______] shares of Common Stock plus the option to receive .9 (9/10) share of Common Stock (in lieu of two Warrants), has an estimated value of [$______], which is [______%] below the liquidation preference of $17.89 per share at December 31, 1995. However, it is a [______%] premium to the trading price of the Preferred Stock of $8.00 per share immediately prior to the announcement of the Transaction. There can be no assurance that the New Common Stock and Warrants will not decline in value. The number of shares of New Common Stock and the exercise price of Warrants to be issued for each share of Preferred Stock, is subject to adjustment if the average price of the New Common Stock declines in the 120 trading days after the Merger. See "THE MERGER PROPOSAL -- CONVERSION OF SECURITIES IN THE MERGER." However, if the average NYSE composite closing price of the Common Stock for the 120 trading days following the Effective Date is less than $1.25, the value of the securities received for each share of Preferred Stock will be significantly lower, as the maximum number of New Common Shares issuable per Preferred Share pursuant to the adjustment formula is 8.4. On the Effective Date, the Preferred Stock of the Company will be canceled and all dividend, redemption, liquidation and voting rights thereunder will be terminated and will cease to exist. The three largest holders of Preferred Stock, Elliott Associates, L.P., Grace Holdings, L.P., and Lloyd I. 3 13 Miller, III (collectively the "Consenting Shareholders") have stated to the Company that they will support the Merger. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." As a result of the Merger, the litigation initiated by Grace Holdings, L.P. against the Company, currently pending in the United States District Court for the District of Delaware, will be dismissed with prejudice. See "SUNSHINE MINING AND REFINING COMPANY - LEGAL PROCEEDINGS- OTHER LITIGATION." As a result of the Merger, the capital structure of Sunshine Merger Company, as the surviving corporation, will be substantially identical to the Company with the exception that the Preferred Stock will have been retired in its entirety, and initially, up to [___________] shares of New Common Stock and up to 14,332,372 Warrants to purchase up to an additional 14,332,372 shares of New Common Stock will have been issued. See "THE MERGER PROPOSAL" "DESCRIPTION OF SUNSHINE MERGER COMPANY" "DESCRIPTION OF THE WARRANTS" "DESCRIPTION OF CAPITAL STOCK." Reference is made to, and holders should consider prior to voting on the Merger, the matters set forth under "CERTAIN RISK FACTORS." TERMS OF THE MERGER Each holder of Preferred Stock will receive [_________] shares (subject to adjustment) of New Common Stock and either an additional .9 (9/10) shares of New Common Stock or, at the option of the holder, two (2) Warrants to purchase New Common Stock for each share of Preferred Stock held on [_________] (the "Record Date"). At the NYSE Composite closing price of Existing Common Stock of $______ per share on ________, a total of up to __________shares of New Common Stock, and up to 14,332,372 Warrants each to purchase one share of New Common Stock, will be issued incident to the retirement of the Preferred Stock. The number of shares of New Common Stock issued may be increased. If the average closing price of the New Common Stock as reported on the NYSE Composite Transactions for the first 120 NYSE trading days after the Effective Date is less than [$_____________], the additional number of shares issuable will be determined by the following formula: $10.50 - Y ------ X Where, X = Average New Common Stock closing price on NYSE Composite for the first 120 NYSE trading days after the Effective Date; and Y = Common Shares initially issuable per Preferred Share In no event will the total number of shares of New Common Stock issuable upon conversion of a share of Preferred Stock, exclusive of shares issuable upon exercise of Warrants or in lieu of Warrants, exceed 8.4. Each Warrant will entitle the holder thereof to purchase one (1) share of New Common Stock at an exercise price of [______]. The Exercise Price is subject to adjustment to 110% of the average closing price of the Existing Common Stock on the NYSE Composite for the first 120 NYSE trading days after the Effective Date, if that price is less than ______________. The Warrants will expire on the fifth anniversary of the Effective Date. The Warrants will be separately transferrable upon issuance. See "THE MERGER PROPOSAL" AND "DESCRIPTION OF THE WARRANTS." If no holders accepted Warrants, and the price of the Common Stock declines to average $1.25 or less during the 120 trading days after the Effective Date, the maximum New Common Stock issuable 4 14 for the Preferred Stock would total approximately 66.6 million shares (approximately 25.6% of the New Common Stock outstanding after the Merger). Warrants to purchase up to 14.3 million shares of New Common Stock could be issuable in lieu of the issuance of 6.4 million shares of New Common Stock referred to above. If all such Warrants are exercised, the total shares issuable would be 74.5 million, representing approximately 28% of the Common Stock outstanding after the merger (the "Maximum Dilution"). Record Date . . . . . . . . . . . [ ] ---------------- Procedure for Exchanging Shares Following the Effective Date of the Merger, holders of Preferred of Preferred Stock for New Common Stock will receive a Transmittal Letter instructing them on the Stock and Warrants . . . . . . . submission of their Preferred Stock Certificates in exchange for New Common Stock and, if selected, Warrants. It will not be necessary for holders of Common Stock to surrender or exchange their certificates for new certificates representing New Common Stock. See "MERGER PROPOSAL" and "EXCHANGE OF PREFERRED STOCK CERTIFICATES." Exchange Agent and Warrant Agent: . . . . . . . . . . . . . American Stock Transfer & Trust Company, New York, New York, will act as the Exchange Agent. See "EXCHANGE AGENT." American Stock Transfer & Trust Company will also act as the Warrant Agent. See DESCRIPTION OF THE WARRANTS. Information Agent . . . . . . . . The Herman Group, Dallas, Texas, will act as Information Agent. Its toll free telephone number is (800) 747-2967. See "INFORMATION AGENT." Use of Proceeds . . . . . . . . . The net cash proceeds received by Sunshine Merger Company from the exercise of Warrants offered hereby, when received, will be used for general corporate purposes and possible acquisition or development of mining properties. Risk Factors . . . . . . . . . . There are substantial risks in connection with this offering that should be considered by prospective purchasers. See "CERTAIN RISK FACTORS."
5 15 CERTAIN RISK FACTORS In addition to the other information in this Proxy Statement/Prospectus, the following risk factors should be carefully considered before voting on the Merger Proposal. OPERATING LOSSES Sunshine's revenues have historically been derived from sales of silver and, from 1985 to 1991, from sales of oil and natural gas. In 1991 and 1992, Sunshine sold substantially all of the assets of its subsidiary Argent Energy, Inc., previously Woods Petroleum Corporation ("Woods"), which was engaged in the production of oil and natural gas. As a result, substantially all of the Company's revenues are now derived from the sale of silver mined from its Sunshine Mine in Kellogg, Idaho. Accordingly, the Company's earnings are directly related to the price of silver. Silver prices have been depressed since 1985, and as a result the Company has experienced losses from operations for each of the last ten years. The Company reported losses from continuing operations of $4.9 million, $28.6 million and $40.3 million in fiscal 1994, 1993 and 1992 respectively. The Company expects to fund its losses for fiscal 1995 from the Company's cash and cash equivalents and silver bullion held for investment. At September 30, 1995, Sunshine's cash and silver bullion held for investment totalled approximately $28 million. The operating losses and cash flow deficiencies of the Company are expected to continue until silver prices recover substantially or the Company's exploration efforts at the Sunshine Mine or its other properties are successful in developing significant additional production. Absent the foregoing, the Company may eventually be required to further curtail operations or cease its mining activities at the Sunshine Mine altogether. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" "BUSINESS AND PROPERTIES," and the Consolidated Financial Statements (including the Notes thereto) of the Company appearing elsewhere herein. VOLATILITY OF SILVER PRICES The Company's earnings are directly related to the price of silver, and the value of the Common Stock has historically moved in correlation with movements in silver prices. Silver prices are subject to fluctuation and are affected by numerous factors beyond the control of the Company, which alone or in combination may cause the price of silver to rise or fall. These factors include, among others, expectations for inflation, speculative activities, levels of silver production and demand for silver as a component of manufactured goods. The following table sets forth for the periods indicated the high, low and average closing prices per ounce of silver on the Commodity Exchange, Inc. ("COMEX") and also translate the average price as stated into constant 1994 dollars.
Constant Nominal Dollars 1994 Dollars --------------- ------------ Year High Low Avg. Avg. - ---- ---- --- ---- ---- 1983 . . . . . . . . . . . . . . . . . . . . . . $14.74 $8.38 $11.46 $18.13 1984 . . . . . . . . . . . . . . . . . . . . . . 10.17 6.25 8.15 12.11 1985 . . . . . . . . . . . . . . . . . . . . . . 6.89 5.48 6.14 8.71 1986 . . . . . . . . . . . . . . . . . . . . . . 6.32 4.85 5.49 7.58 1987 . . . . . . . . . . . . . . . . . . . . . . 11.25 5.35 6.99 9.41 1988 . . . . . . . . . . . . . . . . . . . . . . 8.06 6.01 6.53 8.41 1989 . . . . . . . . . . . . . . . . . . . . . . 6.20 5.02 5.47 6.68 1990 . . . . . . . . . . . . . . . . . . . . . . 5.35 3.94 4.82 5.49 1991 . . . . . . . . . . . . . . . . . . . . . . 4.55 3.51 4.03 4.37 1992 . . . . . . . . . . . . . . . . . . . . . . 4.32 3.63 3.94 4.13 1993 . . . . . . . . . . . . . . . . . . . . . . 5.44 3.52 4.31 4.41 1994 . . . . . . . . . . . . . . . . . . . . . . 5.78 4.61 5.28 5.28 1995* . . . . . . . . . . . . . . . . . . . . . . 6.10 4.38 5.22 -
*Through December 18, 1995. 6 16 On [_____________], the closing price of silver reported on the COMEX was [$______] per ounce. In constant 1994 dollars, the average silver price from 1967 through 1994 has been approximately $11.48. DEPENDENCE ON EXPLORATION SUCCESS Substantially all of the Company's revenues are derived from the Sunshine Mine which at current silver prices is not profitable. Therefore, the future earnings of the Company are presently dependent on the success of exploration at the Sunshine Mine and at the Company's other exploration projects. No assurance can be given that the Company's exploration program will prove successful. See "BUSINESS AND PROPERTIES -- OPERATIONS -- EXPLORATION ACTIVITIES AT THE SUNSHINE MINE." IMPRECISION OF RESERVE ESTIMATES The ore reserve estimates presented in this Prospectus are estimates made by the Company's geologic personnel, and no assurance can be given that the indicated quantity of in situ silver will be realized. No independent consultants have been retained by Sunshine to review and verify such estimates. 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 1, 2 or 3 sides, sampling and similar examinations. Reserve estimates may change as ore bodies are mined and additional data is derived. The Company's estimates of proven and probable reserves for the Sunshine Mine are as of January 1, 1995. MINING RISKS AND INSURANCE The Company's operations may be affected by risks and hazards generally associated with the mining industry, including fires, cave-ins, rock bursts, flooding, industrial accidents, mechanical or electrical failures, and unusual or unexpected rock formations. 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. Although the Company maintains insurance at levels consistent with its historical experience and industry practice, no assurance can be given that such insurance will continue to be available at economically feasible premiums. Insurance for environmental risks (including potential for pollution or other hazards as a result of the disposal of waste products occurring from production) is not generally available to the Company or to other companies within the industry. GOVERNMENT REGULATION The Company's activities are subject to extensive federal, state, and local laws and regulations controlling not only the mining of and exploration for mineral properties, but also the possible effects of such activities upon the environment. Except as described under "LEGAL PROCEEDINGS -- ENVIRONMENTAL MATTERS," the Company is not aware of any material violations of environmental laws, regulations, permits or licenses issued with respect to the Company's operations. Future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the mining, production or development of the Company's properties, the extent of which cannot be predicted. POTENTIAL LOSS OF NYSE LISTING The NYSE has approved, subject to shareholder approval, the listing of the Sunshine Common Stock to be issued incident to the Merger. Sunshine's Common Stock is listed on the NYSE under the symbol "SSC," and its Preferred Stock is listed on the NYSE under the symbol "SSCPr." The Company is below certain of the NYSE's original listing criteria and is currently below certain of the NYSE's continued listing standards. Upon consummation of the Merger and the retirement of the Preferred Stock, the Company will no longer be below continued listing standards of the NYSE, but will continue to fall below certain original listing standards. However, if the Merger is not consummated, there can be no assurance that any future issuance of Common Stock would be listed on the NYSE. 7 17 NO PRIOR MARKET FOR WARRANTS Prior to this offering, there has been no market for the Warrants. The Company has been advised that the Warrants will be traded on the NNM, under the symbol "SILVZ." There can be no assurance that a market for the Warrants will develop or, if a market develops, how liquid a market it will be. The liquidity of any market for the Warrants will depend on a number of factors, including the interest of broker-dealers in making a market. DILUTION Holders of Common Stock will have their ownership interest in the Company diluted by the issuance of New Common Stock to holders of Preferred Stock incident to the Merger, and incident to the exercise of Warrants. Because the ultimate number of shares of New Common Stock that will be so issued is dependent upon the future market price of the Common Stock, up to [_____] additional shares of New Common Stock may be issued, and up to 14,332,372 additional shares of New Common Stock may be issuable upon exercise of Warrants. Therefore, if all Warrants are exercised and the maximum number of shares of New Common Stock is issued, the Preferred Stock would have been converted into New Common Stock representing 28% of the New Common Stock outstanding after the Merger. VALUE OF SECURITIES EXCHANGED FOR PREFERRED STOCK Based on the composite closing price of the Common Stock on the New York Stock Exchange ("NYSE") of $[_____] per share on [_____], 1996, it is estimated that the value of the [______] shares of New Common Stock plus an additional .9 share of New Common Stock have an aggregate value of approximately [$______]. It is also estimated that the option of receiving two (2) Warrants in lieu of .9 share of New Common Stock has the same value. However, there can be no assurance that the New Common Stock and Warrants will not decline in value. The actual value of the shares of New Common Stock and Warrants to be issued for each share of Preferred Stock, and their comparative value to the redemption value and trading range of the Preferred Stock, is subject to fluctuation. If the average NYSE composite closing price of the Common Stock for the 120 trading days following the Effective Date is less than $1.25, the value of the securities received for each share of Preferred Stock will be significantly lower, as the maximum number of shares of New Common Stock issuable per share of Preferred Stock pursuant to the adjustment formula is 8.4. On the Effective Date of the Merger, the Preferred Stock will be canceled and all dividend, redemption, liquidation, and voting rights thereunder will be terminated. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" "DESCRIPTION OF THE MERGER," "DESCRIPTION OF THE WARRANTS" and "DESCRIPTION OF CAPITAL STOCK." THE MERGER PROPOSAL At the Special Meeting of shareholders, holders of Sunshine's Common Stock and Sunshine's Preferred Stock will be asked to approve the Merger Agreement, pursuant to which the Company will be merged with and into Sunshine Merger Company, with Sunshine Merger Company being the surviving corporation. The purpose of the Merger is to retire all of the outstanding shares of Sunshine's Preferred Stock. Due to continuing low silver prices, the Company has generated operating losses for a number of years. Prospects for improvement in the operating results appear positive based on the outlook for increased production from the Sunshine Mine, the Company's outlook for silver prices, which are expected to improve, and the Company's exploration program. However, there are significant risks to the positive outcome of any and all of the above potential improvements in the Company's outlook, and the improvements may take a considerable amount of time. 8 18 Based on its evaluation of the Company's future prospects, the relative market values of the Common Stock and the Preferred Stock, the liquidation preferences held by the Preferred Stockholders (which will total $128 million at December 31, 1995), and the ongoing $10.5 million annual charge against earnings to Common Stock which is added to the liquidation preference, the Board determined that the proposed structure was in the best interests of the Company, the Preferred Stockholders, and the Common Stockholders at this time. The transaction will remove concerns held by the investment community about the Company's future outlook as a result of the Preferred Stock being outstanding. The transaction moves forward the date at which the Company will be able to report earnings attributable to Common Stock, while limiting the dilution of the Common Stock against other potential alternatives, such as the redemption of the Preferred Stock. The Merger must be approved by the holders of a majority of the outstanding shares of Sunshine's Common Stock and by the holders of a majority of the outstanding shares of Sunshine's Preferred Stock. THE COMPANY'S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE MERGER PROPOSAL. Approval of the Merger Proposal by such holders will also constitute approval of the related matters described herein, which include, without limitation: (i) the Certificate of Incorporation of Sunshine Merger Company, including, its authorized capital stock, and an amendment thereto upon consummation of the Merger to change Sunshine Merger Company's name to Sunshine Mining and Refining Company; (ii) The assumption by Sunshine Merger Company of the Company's obligations under the Convertible Subordinated Debentures, the warrants of the Company, the employee benefit and stock option plans, and all amendments thereto necessary to implement such assumptions; and (iii) all other matters relating to the Merger Proposal, and the transactions contemplated thereby substantially as described in this Proxy Statement/Prospectus. BACKGROUND OF THE MERGER The Company had been contacted from time to time by various Preferred Stockholders regarding the interest of the Company in eliminating the outstanding Preferred Stock in exchange for Common Stock and/or common stock derivatives such as rights or warrants. The management and Board of Directors of the Company did not pursue these discussions until the third quarter of 1995. At that time, discussions with the three largest Preferred Stockholders centered on structures fairly similar to the one proposed. The primary negotiation centered on the targeted value of the package of securities to be issued. Because of fluctuations in the value of the securities to be issued, the actual value of the securities to be issued may be more or less than the targeted value. Management believes that the three largest Preferred Stockholders, being sophisticated investors, aggressively negotiated on behalf of themselves, and the same benefits are being provided to all holders of Preferred Stock. BENEFITS OF THE MERGER The purpose of the Merger is to convert all of the Company's outstanding Preferred Stock into Common Stock and Warrants to purchase Common Stock. Due to the losses the Company has experienced, the dividends on Preferred Stock have not been declared or paid since December 1990. As a result of the arrearage, the Company has also been prohibited from making annual partial redemptions of 10% of the original issue amount, which were to have begun in July 1991. Currently, accumulated dividends in arrears and redemptions in arrears total $79,948,859. Management and the directors of the Company believe it is in the best interest of the Company, the holders of Common Stock and the holders of Preferred Stock to eliminate the Preferred Stock from the Company's capital structure. A maximum of 66,645,530 (60,195,962 if all holders of Preferred Stock elect to receive Warrants) shares of Common Stock will be issued, representing up to 26% (24% if all holders of Preferred Stock elect to receive Warrants) of the outstanding shares of Common Stock after the Merger. This is far less than the number of shares that would be required to eliminate the Preferred Stock pursuant to the terms 9 19 of the Certificate of Preferences. As a result of the elimination of the Preferred Stock, the book value per Common share and the results of operations per Common share will be improved. In addition, upon consummation of the Merger and the retirement of the Preferred Stock, the Company will no longer be below continued listing standards of the NYSE, but will continue to fall below certain original listing standards. Holders of Preferred Stock, although receiving securities having an aggregate value less than the Liquidation Preference for the Preferred Stock ($17.89 as of December 31, 1995), will receive securities having potentially greater liquidity and value than the Preferred Stock. This is reflected by the increase of approximately 25% in the trading price of the Preferred Stock immediately after the announcement of the transaction. Management and the Directors of the Company have determined that it is in the best interest of the Common Stockholders, the Preferred Stockholders, and the Company, to eliminate the Preferred Stock from the Company's capital structure. This will improve the book value per Common share and the results of operations per Common share, while providing the Preferred Stockholders a security with more liquidity than the Preferred Stock. See "CAPITALIZATION" AND "COMPARATIVE PER SHARE DATA." Based on the closing price of the Common Stock on [______] of [$______] per share, the total value of the [______] share of Common Stock plus the option to receive .9 (9/10) share of Common Stock (in lieu of two Warrants), has an estimated value of [$______], which is [______%] below the liquidation preference of $17.89 per share at December 31, 1995. However, it is a [______%] premium to the trading price of the Preferred Stock of $8.00 per share immediately prior to the announcement of the Transaction. However, there can be no assurance that the New Common Stock and Warrants will not decline in value . The number of shares of New Common Stock and the exercise price of Warrants to be issued for each share of Preferred Stock, is subject to adjustment. See "THE MERGER PROPOSAL -- CONVERSION OF SECURITIES IN THE MERGER. If the average NYSE composite closing price of the Common Stock for the 120 trading days following the Effective Date is less than $1.25, the value of the securities received for each share of Preferred Stock will be significantly lower, as the maximum number of Common Shares issuable per Preferred Share pursuant to the adjustment formula is 8.4. See "CERTAIN RISK FACTORS - DILUTION, VALUE OF PREFERRED STOCK EXCHANGED." In the event that the Merger is not approved by the Company's Common Stockholders and Preferred Stockholders, the Preferred Stock will continue to accrue dividends in arrears. The Company does not know when it will resume the payment of dividends on, and the partial redemption of, the Preferred Stock. At the present time, the Company does not expect to resume payments of dividends until it has earnings sufficient to support such payments. EFFECTIVE DATE OF THE MERGER The Merger will become effective immediately upon the filing of a Certificate of Merger in accordance with the Delaware General Corporation Law (the "DGCL") and upon the satisfaction or waiver of the conditions to the Merger (the "Effective Date"). It is presently contemplated that the Certificate of Merger will be filed, and the Effective Date will occur, on [___________], or as soon as practicable thereafter as the conditions to the Merger may be satisfied. MERGER STRUCTURE The Merger will be accomplished under the DGCL pursuant to the Merger Agreement by and between the Company and Sunshine Merger Company. Pursuant to the Merger Agreement, the Company will be merged with and into Sunshine Merger Company, with Sunshine Merger Company being the surviving corporation. Upon consummation of the Merger, Sunshine Merger Company will become the successor in interest to the Company in all respects and the name of Sunshine Merger Company will be changed, pursuant to the Merger Agreement, to Sunshine Mining and Refining Company. The Merger Agreement has been approved by each of the Company's and Sunshine Merger Company's Board of 10 20 Directors and is included as Annex A to this Proxy Statement/Prospectus. The Merger Agreement is incorporated herein in its entirety by this reference. Sunshine Merger Company's Board of DIRECTORS immediately after the Merger will consist of the persons serving on the Company's Board of Directors immediately prior to the Merger, with the exception of Messrs. Elvin, Kaback and Stewart, who were elected to the Company's Board of Directors by holders of Preferred Stock and who, incident to the elimination of the Preferred Stock, will not be Directors of Sunshine Merger Company. Sunshine Merger Company's executive officers immediately after the Merger will consist of persons serving as the Company's executive officers immediately prior to the Merger in their respective positions. See "DIRECTORS" AND "EXECUTIVE OFFICERS." There are no other material contracts between the Company and Sunshine Merger Company other than the Merger Agreement. Pursuant to Section 251(d) of the DGCL, the Board of Directors of the Company and Sunshine Merger Company, by mutual consent, may amend, modify or supplement the Merger Agreement in such manner as may be agreed at any time before or after approval thereof by the stockholders of the Company, and either of the respective Boards of Directors may terminate the Merger Agreement or abandon the Merger at any time prior to the Effective Date, even following stockholder approval; provided, however, that after the approval of the Merger Agreement by the stockholders of the Company no such amendment may be made which (i) alters or changes the amount or kind of securities to be delivered upon the Merger (ii) alters or changes any term of the Certificate of Incorporation of Sunshine Merger Company to be effected by the Merger, or (iii) alters or changes any of the terms and conditions of the Merger Agreement if such alteration or change would adversely affect the holders of any shares of any series of stock to be issued upon the Merger. CONDITIONS TO CONSUMMATION OF THE MERGER Consummation of the Merger is subject to approval by the holders of a majority of the outstanding shares of Existing Common Stock and by the holders of a majority of the outstanding shares of Preferred Stock, and receipt of all orders, consents or approvals, governmental or otherwise, that may be required or advisable. The Company and Sunshine Merger Company believe that no material federal or state regulatory approvals are necessary other than registrations in connection with securities laws. Directors, executive officers and their affiliates of the Company own less than one percent (1%) of the outstanding shares of Existing Common Stock and Preferred Stock entitled to vote on the Merger Proposal. All of the shares of New Common Stock outstanding immediately prior to the Merger and entitled to vote on the Merger Proposal are owned by the Company. Management believes that all of the conditions precedent to the Merger will be satisfied prior to the anticipated Effective Date. APPRAISAL RIGHTS Pursuant to Section 262 of the DGCL, no holder of the Company's securities will have appraisal rights in connection with the Merger. SUNSHINE MERGER COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS Sunshine Merger Company's Certificate of Incorporation contains articles substantially the same as those in the Company's Certificate of Incorporation, with the following exceptions: Article First in the Company's Certificate of Incorporation, as amended, provides that the corporate name is Sunshine Mining and Refining Company, while Article First in Sunshine Merger Company's Certificate of Incorporation provides that the corporate name is Sunshine Merger Company. A copy of Sunshine Merger Company's Certificate of Incorporation is included as Annex B to this Proxy 11 21 Statement/Prospectus. All summaries of the provisions of that document in this Proxy Statement/Prospectus are qualified by reference to the provisions set forth therein. Upon consummation of the Merger, the name of Sunshine Merger Company, as the surviving corporation, will be changed to Sunshine Mining and Refining Company. The Bylaws of Sunshine Merger Company will be identical to the Company's Bylaws. Approval by stockholders of the Merger Proposal also constitutes approval of the Certificate of Incorporation of Sunshine Merger Company. The books, records and accounts of the Company, upon consummation of the Merger, will become the books, records and accounts of Sunshine Merger Company. CONVERSION OF SECURITIES IN THE MERGER Each share of the Company's Existing Common Stock outstanding immediately prior to the Merger will be converted, by reason of the Merger, pursuant to the Merger Agreement and without any action by the holder thereof, into one share of Common Stock of Sunshine Merger Company (the "New Common Stock"). The relative powers, designations, preferences, rights and qualifications of the New Common Stock, as in effect upon consummation of the Merger, will be substantially equivalent in all material respects to the Existing Common Stock so converted. It will not be necessary for holders of Existing Common Stock to surrender or exchange their certificates for new certificates representing New Common Stock. Each share of the Company's existing Preferred Stock outstanding immediately prior to the Merger will be converted, by reason of the Merger and pursuant to the Merger Agreement, upon delivery of the Preferred Stock certificates to American Stock Transfer & Trust Company, New York, New York, (the "Exchange Agent") pursuant to the Transmittal Letter, into [______] shares of New Common Stock and either an additional .9 (9/10) share of New Common Stock or, at the option of the holder, two (2) Warrants, each to purchase one (1) additional share of New Common Stock. Fractional shares will not be issued. Shares of New Common Stock issued will be rounded-up to the nearest whole number. On the Effective Date, the Preferred Stock of the Company, and the Certificate of Designation, Rights and Preferences governing the same, will be canceled and all dividends, redemption, liquidation and voting rights thereunder will be extinguished and will cease to exist. The number of shares of New Common Stock to be issued upon conversion of Preferred Stock is subject to adjustment. If the average closing price of the New Common Stock as reported on the NYSE Composite transactions for the first 120 NYSE trading days after the Effective Date is less than [$______], then additional shares of New Common Stock will be issued as soon as practical after the end of the 120-trading day period as determined pursuant to the following formula: $10.50 - Y ------ X Where, X = Average New Common Stock closing price on NYSE Composite Transactions for the first 120 NYSE trading days after the Effective Date; and Y= Common Shares initially issuable per Preferred Share In no event will the total number of shares of New Common Stock issuable upon conversion of a share of Preferred Stock, exclusive of shares issuable upon exercise of Warrants or in lieu of Warrants, exceed 8.4. 12 22 The exercise price of the Warrants has been set as [$_____] and is subject to adjustment. The Exercise Price will be reset to 110% of the average closing price of the New Common Stock as reported on the NYSE Composite transactions for the first 120 NYSE trading days after the Effective Date if such average price is less than [$______]. The Warrants will expire 5 years from the Effective Date. See "DESCRIPTION OF THE WARRANTS." In the examples below the initial Common Stock price (used to calculate the initial shares issuable) is assumed to be: Examples 1 and 2 - $1.50; Example 3 $2.00; Example 4 - $1.25. The average trading price of the Common Stock for the first 120 trading days after the merger Effective Date is assumed to be: Example 1 - $1.75; Example 2 - $1.00; Example 3 - $1.25; Example 4 - $1.00.
Example 1 Example 2 Example 3 Example 4 Initial shares issuable 7 7 5.25 8.4 Initial Warrant exercise price $1.65 $1.65 $ 2.20 $1.375 Additional shares issuable 0 1.4 3.15 0 Adjusted warrant exercise price $1.65 $1.10 $1.375 $ 1.10
All outstanding rights to acquire Existing Common Stock by reason of Warrants, Options, rights to purchase stock, rights to convert other instruments into stock, and options or other rights to acquire any such interest (collectively "Rights") will be converted immediately upon consummation of the Merger, without any action taken by the holder of such Rights and as a matter of law, and pursuant to the documents governing such Rights, into Rights with respect to the same number of shares of New Common Stock and on the same terms and conditions as previously were applicable to such Rights. All pension and employee benefit plans of the Company will continue in effect following the effectiveness of the Merger. The following categories of Rights currently exist with respect to the Existing Common Stock: (i) Warrants ($2.12 exercise price) to purchase up to 10,086,076 shares of Existing Common Stock issued under the Warrant Agreement dated as of February 3, 1994, by and among the Company and American Stock Transfer & Trust Company as Warrant Agent; (ii) options to purchase up to 171,000 shares of Existing Common Stock under the Company's 1987 Employee Non-Qualified Stock Option Plan; (iii) options to purchase up to 1,438,500 shares of Existing Common Stock under the Company's 1993 Incentive Stock Option Plan; (iv) up to 915,060 shares of Existing Common Stock issuable upon conversion of the Company's 8-7/8% Convertible Subordinated Debentures. See "DESCRIPTION OF THE WARRANTS"; "CERTAIN RISK FACTORS-NO PRIOR MARKET FOR WARRANTS." After effectiveness of the Merger Proposal, each certificate previously representing shares of Common Stock of the Company will automatically represent an equal number of shares of New Common Stock of Sunshine Merger Company. IT WILL NOT BE NECESSARY FOR THE HOLDERS OF COMMON STOCK TO SURRENDER OR EXCHANGE THEIR CERTIFICATES FOR NEW CERTIFICATES REPRESENTING NEW COMMON STOCK IN SUNSHINE MERGER COMPANY. ALTERNATIVES TO HOLDERS OF PREFERRED STOCK Upon consummation of the Merger, holders of Preferred Stock will be allowed the Option of receiving, for each share of Preferred Stock held, Common Stock and either .9 additional shares of Common Stock or two Warrants, each to purchase one share of Common Stock. Holders of Preferred Stock electing to receive .9 shares of New Common Stock, in lieu of two Warrants, will not benefit from any subsequent reduction in the exercise price of the Warrants pursuant 13 23 to the above formula. However, because a market for the Warrants does not currently exist, holders of Preferred Stock electing to receive two Warrants will bear the risk that a trading market in the Warrants may not develop. EXCHANGE OF PREFERRED STOCK CERTIFICATES Following the Merger, Sunshine Mining and Refining Company will furnish a letter of transmittal to stockholders for use in exchanging their Preferred Stock certificates (each a "Letter of Transmittal"), which will contain instructions with respect to the surrender of Preferred Stock certificates, and the Distribution of New Common Stock certificates and, if selected, Warrant certificates to holders of Preferred Stock. Holders of the Company's Preferred Stock should send in certificates with the Letter of Transmittal. The Company's stockholders who fail to exchange their Preferred Stock certificates after the Effective Date by surrendering such certificates, together with a properly completed Letter of Transmittal, to the Exchange Agent, will not receive their New Common Stock and Warrants until such time as their existing certificates are later surrendered to the Exchange Agent for transfer, accompanied by such instruments of transfer and supporting evidence as Sunshine Merger Company may reasonably require. No interest will accrue or be payable with respect to any dividends or distributions retained on unissued New Common Stock certificates. On the Effective Date, public trading of Preferred Stock will cease. On the Effective Date, holders of certificates representing Preferred Stock will cease to have any rights with respect to such shares and each such certificate will be deemed for all corporate purposes to evidence only the right of holders of Preferred Stock to receive New Common Stock and, if selected, Warrants for which such shares may be exchanged. The stock transfer books of the Company will be closed at the close of business on the business day immediately preceding the Effective Date, and the holders of record of Preferred Stock as of the Effective Date will be the stockholders entitled to exchange their shares of Preferred Stock for shares of New Common Stock and Warrants, as provided in the Merger Agreement. No transfer or assignment of any shares of Preferred Stock will take place after the Effective Date until the certificates for such shares are exchanged pursuant to the Merger Agreement. In the event of a transfer of ownership of any such shares which is not registered in the stock transfer records of the Company, no shares of New Common Stock exchangeable for such shares will be issued to the transferee until the certificate or certificates representing such transferred shares are delivered to the Exchange Agent together with all documents required to evidence and effect such transfer. In addition, it will be a condition to the issuance of any certificate for any shares of New Common Stock in a name other than the name in which the surrendered Preferred Stock is registered that the person requesting the issuance of such certificate either pay to the Exchange Agent any transfer or other taxes required by reason of the issuance of a certificate of New Common Stock and, if selected, Warrant certificate in a name other than the registered holder of the certificate surrendered, or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. In no event will the Exchange Agent, the Company or Sunshine Merger Company be liable to any holder of Preferred Stock for shares of New Common Stock, or dividends or distributions thereon, or Warrants, delivered in good faith to a public official pursuant to any applicable abandoned property, escheat or similar law. All shares of New Common Stock and Warrants issued upon the surrender of shares of Preferred Stock shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Preferred Stock. DESCRIPTION OF THE WARRANTS The Warrants are to be issued under a Warrant Agreement (the "Warrant Agreement") between Sunshine Merger Company and American Stock Transfer & Trust Company, as warrant agent (the "Warrant Agent"). The following summaries of certain provisions of the Warrant Agreement do not 14 24 purport to be complete and are subject to, and are qualified in their entirety by reference to, the Warrant Agreement, a copy of which may be obtained from Sunshine Merger Company. GENERAL Each Warrant will entitle the holder thereof to purchase one share of New Common Stock at an exercise price (the "Exercise Price") equal to [$______], subject to adjustment to 110% of the average closing price of the New Common Stock as reported on the NYSE Composite Transactions for the first 120 NYSE trading days after the Effective Date, if such average price is less than [$______]. The Warrants will expire at 5:00 p.m., New York City time, on the fifth anniversary of the Effective Date (the "Expiration Date"). The Warrants are exercisable at any time after issuance and will be immediately transferable separately from the New Common Stock. Sunshine Merger Company anticipates that the Warrants will trade on the NNM under the symbol "SILVZ." See "CERTAIN RISK FACTORS-NO PRIOR MARKET FOR WARRANTS." American Stock Transfer & Trust Company is the transfer agent for the Warrants. EXERCISE OF WARRANTS Warrants may be exercised by tendering the aggregate Exercise Price and any other amounts required to be paid under the Warrant Agreement and surrendering to the Warrant Agent a Warrant certificate with the form of election to purchase the New Common Stock, duly completed and signed by the registered holder or such holder's duly appointed legal representative or by a duly authorized attorney. Upon surrender of a Warrant certificate for exercise, the Warrant Agent will deliver or cause to be delivered, to or upon the written order of the holder, certificates representing the shares of New Common Stock issued upon the exercise of the Warrants, together with Warrant certificates evidencing any Warrants not exercised. No fractional shares will be issued upon exercise of Warrants. Certificates for the Warrants will be exchangeable without service charge for similar certificates of different denominations at the office of the Warrant Agent maintained for that purpose. Sunshine Merger Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Warrant Certificates. Sunshine Merger Company has authorized and reserved for issuance such number of shares of New Common Stock as shall be issuable upon the exercise of all outstanding Warrants. Such shares of New Common Stock, when issued, will be validly issued, fully paid and nonassessable. OTHER PROVISIONS The number of shares of New Common Stock issuable upon the exercise of each Warrant is subject to adjustment in the event Sunshine Merger Company pays a dividend on its New Common Stock in New Common Stock, subdivides its outstanding shares of New Common Stock into a greater number of shares, combines its outstanding shares of New Common Stock into a lesser number of shares, or issues by reclassification of its New Common Stock any other shares of its capital stock. Sunshine Merger Company may, at its option, increase the number of shares purchasable upon exercise of the Warrants by any amount and for any period of time or reduce the exercise price by any amount and for any period of time (provided that such period is not less than 20 business days). In case of consolidation, merger or sale of all or substantially all of the assets of Sunshine Merger Company, the holder of each outstanding Warrant shall have the right to exercise such Warrant for the kind and amount of securities, cash or other assets, if any, receivable by a holder of the number of shares of Common Stock into which such Warrants were exercisable immediately prior thereto. ACCOUNTING TREATMENT 15 25 The Merger will be accounted for as a reorganization of entities under common control and, accordingly, the consolidated assets, liabilities, stockholders' equity and results of operations will not be affected. See "CAPITALIZATION." FEDERAL INCOME TAX CONSEQUENCES The Company has received an opinion from Hawley Troxell Ennis & Hawley regarding the material Federal income tax consequences of the Merger, which is summarized below, these consequences will be different depending on whether the holder of Preferred Stock receives in exchange solely New Common Stock or receives both New Common Stock and Warrants pursuant to the Merger. This discussion is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed United States Treasury Regulations promulgated thereunder, and the administrative and judicial interpretations thereof, all as in effect as of the date of this Proxy Statement/Prospectus. Such laws or interpretations may differ at the Effective Time or thereafter. The effectiveness of the Merger is not conditioned upon the receipt of any ruling from the Internal Revenue Service. CONSEQUENCES TO HOLDERS OF PREFERRED STOCK RECEIVING SOLELY NEW COMMON STOCK. If the holder of Preferred Stock chooses to receive only New Common Stock in exchange for such Preferred Stock, the following tax consequences will result, unless the holder is deemed to be in constructive receipt of new Warrants in Sunshine Merger Company: 1. The Merger will be treated as a reorganization under Section 368(a) of the Code. 2. The holder of Preferred Stock will recognize no loss on the exchange of such holder's Preferred Stock for New Common Stock. Except to the extent explained in paragraph 3 below, the holder of Preferred Stock will recognize no gain on the exchange of such holder's Preferred Stock for New Common Stock. 3. The amount by which the fair market value of the New Common Stock received in the exchange exceeds the issue price (fair market value at time of original issuance) of $7.625 of the Preferred Stock given up in the exchange will be deemed a distribution to which Section 301 of the Code applies (the "Deemed Distribution")1 The Deemed Distribution will be treated as a return of the holder's adjusted tax basis in such holder's Preferred Stock.2 To the extent the Deemed Distribution exceeds the holder's adjusted tax basis, the holder will recognize a gain from the sale or exchange of property3 4. The holder's tax basis in the New Common Stock received in exchange for Preferred Stock will be made up of two portions. First, the tax basis in the Deemed Distribution portion __________________________________ 1 The Deemed Distribution is generally limited to the extent of the Preferred Stock Dividends in arrears, which is, as of December 31, 1995, $5.95. 2 The Deemed Distribution is treated as a dividend, reportable as ordinary income, from the Company to the extent of the Company's earnings and profits available for distribution. Because the Company has no accumulated earnings and profits and anticipates no distributable earnings and profits for the 1995 tax year, the Deemed Distribution should not be treated as a dividend. 3 The Company made distributions to the holders of Preferred Stock in 1985, 1986, 1987, 1988, 1989, and 1990. Except for the distribution in the year 1989 (when the Company had distributable earnings and profits), the adjusted tax basis in the Preferred Stock would be reduced for holders who received these distributions. 16 26 of the New Common Stock received will be equal to the amount of such Deemed Distribution. Second, the holder's tax basis in the remaining portion of the New Common Stock received will 17 27 be the same as the holder's adjusted tax basis in the Preferred Stock given up in the exchange, reduced by the amount of the Deemed Distribution (but in no event less than $0). 5. The holder of New Common Stock received in exchange for Preferred Stock will have two separate holding periods for such New Common Stock. First, the holder will have a new holding period as of the Effective Date of the Merger for the Deemed Distribution portion of the New Common Stock received. Second, the holder holding period in the remaining portion of the New Common Stock received will include the holder's holding period in the Preferred Stock given up by such holder in the exchange, provided the Preferred Stock was held by such holder as a capital asset at the time of the Merger. If a holder of Preferred Stock is deemed to have chosen to receive both New Common Stock and Warrants in exchange for such Preferred Stock under constructive receipt principles, then the tax consequences discussed in the following section would apply and the holder would be deemed to have purchased additional New Common Stock with the new Warrants. CONSEQUENCES TO HOLDERS OF PREFERRED STOCK RECEIVING BOTH NEW COMMON STOCK AND WARRANTS. If the holder of Preferred Stock chooses to receive both New Common Stock and Warrants in exchange for such Preferred Stock, the following tax consequences will result: 1. The Merger will be treated as a reorganization under Section 368(a) of the Code. 2. The holder of Preferred Stock will recognize no loss on the exchange of such holder's Preferred Stock for New Common Stock and Warrants. 3. If a holder of Preferred Stock has an adjusted tax basis in such stock that is less than the fair market value of the New Common Stock and Warrants such holder receives in exchange for each share of Preferred Stock, such holder will realize a tax gain in the amount of the difference, computed on a per share basis. However, such gain realized per share of Preferred Stock exchanged that is recognized and reportable by such holder is limited to the fair market value of the Warrants received in the exchange. The holder of Preferred Stock with an adjusted tax basis in such stock that is equal to or greater than the estimated fair market value will recognize no gain on the exchange of such holder's Preferred Stock for New Common Stock and Warrants. 4. The amount by which the fair market value of the New Common Stock and Warrants received in the exchange exceeds the issue price (fair market value at time of original issuance) of $7.625 of the Preferred Stock given up in the exchange will be deemed a distribution to which Section 301 of the Code applies (the "Deemed Distribution"). The Deemed Distribution will be treated as a return of the holder's adjusted tax basis in such holder's Preferred Stock. To the extent the Deemed Distribution exceeds the holder's adjusted tax basis, the holder will recognize a gain from the sale or exchange of property (refer to footnotes 1, 2 and 3 in the prior section for a more complete explanation). 5. A holder's tax basis in the New Common Stock received in exchange for Preferred Stock will be made up of two portions. First, the tax basis in the Deemed Distribution portion of the New Common Stock received will be equal to the amount of such Deemed Distribution. Second, the holder's tax basis in the remaining portion of the New Common Stock received will be the same as the holder's adjusted tax basis in the Preferred Stock given up in the exchange, increased by the amount of the gain such holder recognizes as a result of the exchange (as explained in paragraph 3, above), and decreased by both the amount of the Deemed Distribution and by the fair market value of the Warrants received by the holder in the exchange (but in no event less than $0). The holder's adjusted tax basis in the Warrants received in the exchange will be the fair market value of the Warrants at the time of the Merger. 18 28 6. The holder of New Common Stock received in exchange for Preferred Stock will have two separate holding periods for such New Common Stock. First, the holder will have a new holding period as of the Effective Date of the Merger for the Deemed Distribution portion of the New Common Stock received. Second, the holder's holding period in the remaining portion of the New Common Stock received will include the holder's holding period in the Preferred Stock given up by such holder in the exchange, provided the Preferred Stock was held by such holder as a capital asset at the time of the Merger. The holder will also receive a new holding period as of the date of the Merger for the Warrants they receive in the exchange. CONSEQUENCES TO HOLDERS OF THE COMPANY'S COMMON STOCK. No gain or loss will be recognized by the holder of Common Stock of the Company as a result of the conversion of such shares for New Common Stock pursuant to the Merger. The holder's tax basis and holding period in the New Common Stock received in exchange for the Company's Common Stock will be the same as the holder's adjusted tax basis and holding period in the Company's Common Stock given up in the exchange. CONSEQUENCES TO HOLDERS OF THE WARRANTS TO PURCHASE EXISTING COMMON STOCK. Subject to the discussion in the following paragraph, the conversion of any Warrants to purchase Existing Common Stock in the Company that were issued before the Merger ("$2.12 Warrants") for converted warrants in Sunshine Merger Company, and that have an adjusted tax basis equal to or less than the fair market value of the converted warrants, will be treated as a taxable exchange separate from the Merger. The holder of $2.12 Warrants will recognize gain to the extent that the fair market value of the converted warrants exceeds the holder's adjusted tax basis in the $2.12 Warrants. The holder's tax basis in the converted warrants will be the fair market value of such converted warrants as of the Effective Date of the Merger. The holder will also receive a new holding period for such converted warrants as of the Effective Date of the Merger. The conversion of $2.12 Warrants in the Company for converted warrants in Sunshine Merger Company, and which have an adjusted tax basis more than the fair market value of the converted warrants, will result in a realized loss. However, the holder of the $2.12 Warrants, except for certain dealers in stocks and securities, will be prohibited from recognizing such loss. The holder's tax basis in the converted warrants will be the adjusted tax basis in the $2.12 Warrants adjusted for differences, if any, between the fair market value of the $2.12 Warrants and of the converted warrants as of the Effective Date of the Merger. The holder's holding period in the converted warrants will include the holder's holding period in the $2.12 Warrants given up by such holder in the exchange, provided the $2.12 Warrants were held by such holder as a capital asset at the time of the Merger. If it was determined that the converted warrants do not differ materially in either kind or extent from the $2.12 Warrants, then the holder would have no recognizable gain or loss on the exchange and the holder's tax basis and holding period in the converted warrants would be the same as the holder's adjusted tax basis and holding period in the $2.12 Warrants. CONSEQUENCES TO THE COMPANY. The Company will not recognize gain or loss upon the transfer of its assets to Sunshine Merger Company pursuant to the Merger, and Sunshine Merger Company will not recognize gain or loss on the receipt of the Company's assets and Sunshine Merger Company's assumption of the Company's liabilities. The tax basis of the Company's assets acquired by Sunshine Merger Company will be the same as the basis of those assets in the Company's hands immediately prior to the Merger, and the Sunshine Merger Company's holding period will include the Company's holding period with respect to the assets. The above discussion does not include any state, local and foreign tax consequences, and does not specifically address the Federal income tax consequences to the shareholders other than individual United States citizens who hold the Company's securities as a capital asset. This discussion is for general 19 29 information only, and each shareholder should consult with his or her own tax advisor as to the consequences of the Merger. SUNSHINE MERGER COMPANY Sunshine Merger Company, a corporation organized under the laws of the State of Delaware, is a wholly owned subsidiary of the Company created specifically for the purpose of effectuating the Merger. Upon consummation of the Merger, the business, properties, assets, liabilities and capital structure of Sunshine Merger Company will be substantially identical to that of the Company, with the exception that the Preferred Stock of the Company will have been retired in its entirety, and approximately ______________ million shares of New Common Stock will have been issued. Up to [______] additional shares of New Common Stock may be issuable depending on the average closing price of New Common Stock as reported on the NYSE Composite transactions for the 120 NYSE trading days immediately following the Effective Date. Also, up to an additional 14,337,372 million shares of New Common Stock may be issuable upon exercise of up to 14,332,372 newly issued Warrants. On the Effective Date, the name of Sunshine Merger Company will be changed to Sunshine Mining and Refining Company. See "THE MERGER PROPOSAL." Pro forma and comparative financial information regarding Sunshine Merger Company and its consolidated subsidiaries giving effect to the Merger, and reflecting the issuance of additional New Common Stock and the elimination of the Preferred Stock and its attendant redemption and accrued dividend obligations, is set forth below. Immediately following the consummation of the Merger, the consolidated financial statements of Sunshine Merger Company will be the same as the consolidated financial statements of the Company immediately prior to the Merger, except as changed incident to the issuance of additional New Common Stock and Warrants, and the elimination of the Preferred Stock. SUNSHINE MINING AND REFINING COMPANY BUSINESS. GENERAL Sunshine, through its principal subsidiary, Sunshine Precious Metals, Inc. ("SPMI"), owns and operates the Sunshine Mine located in the Coeur d'Alene Mining District near Kellogg, Idaho. The Sunshine Mine began operations in 1884 and has produced in excess of 340 million ounces of silver since that time. The mine also produces significant amounts of copper, lead and antimony as by-products. The Sunshine Mine and Refinery Complex consists of the Sunshine Mine, a 1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and associated facilities. These facilities form 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. SPMI estimates that, as of January 1, 1995 the proven and probable ore reserves at the Sunshine Mine were 1,320,600 tons of ore, at a weighted average grade of 21.8 ounces per ton silver, containing 28,836,500 ounces of silver of which SPMI's share is approximately 97%. Significant portions of the Sunshine Mine remain unexplored and undeveloped, and the Company is presently actively exploring one such area, the West Chance. The Company's earnings are directly related to the price of silver, which has been depressed since 1985. As a result, the Company has reported operating losses and negative cash flow from operations for the last ten years. In response to low silver prices, in June 1991 the Company curtailed its annual silver production from approximately 1,000 tons of ore per day to approximately 450-500 tons of ore per day. At low silver prices, curtailed operations result in lower aggregate operating losses and cash requirements than either full operations or the maintenance and holding costs associated with a complete mine shutdown. However, production costs per ounce of silver increased as a result of the curtailment. 20 30 The Company is actively exploring to develop new production sources to achieve positive earnings and cash flow. As a result of exploration of previously undeveloped areas of the Sunshine Mine and the successful testing of a trackless mining method in the Sunshine Mine, the Company has recently accelerated its development program at the Sunshine Mine, and is planning to return the mine to full production by the end of 1996. The Company has also initiated exploration programs at other locations than the Sunshine Mine in an attempt to develop new sources of reserves and cash flow. As a result, the Company is presently active in exploration projects in Argentina, Peru, Colorado, and Arizona. Of particular significance is the Company's recent acquisition of the Pirquitas property in Argentina for $1.7 million. Exploration at its Sunshine Mine is currently focused on an area called the West Chance, where the Company has identified at least two new vein systems. Prior to June, 1995, the Company had drifts on four levels in various stages of completion, from which it is conducting an extensive drilling program to better delineate the ore bodies. In June of 1995, because of encouraging results from exploration work in the area, the Company decided to accelerate the pace of exploration work by commencing two new exploration drifts and more than doubling the rate of diamond drilling. The present status of the West Chance project is described in detail in the map inset in the prospectus cover. The total proven and probable reserves developed to date in the West Chance area total 150 thousand tons at an average grade of 22.5 ounces per ton, containing a total of 3.4 million ounces of silver. Only a small portion of the potential ore body has been explored at this time. The Company has successfully tested the potential to introduce trackless mining methods using diesel powered equipment in the development and stoping (ore-extraction) operations at the Sunshine Mine. Through the use of specially built low profile front-end loaders, certain ore reserves can now be accessed and mined more productively at lower cost than the Company's traditional mining methods. As a result of the demonstrated success of these front-end loaders, commonly referred to as LHD (load-haul- dump) units, and the expected additions to production from the West Chance area in 1996, the Company anticipates silver production to increase from approximately 1.7 million ounces in 1995 to between 2.7 and 3.2 million ounces in 1996. The Company is also studying the potential for the LHD units supporting various trackless mining methods to allow for the economic reopening at current silver prices of the presently inactive eastern portion of the Sunshine Mine. Production was curtailed in this portion of the mine in June of 1991 when the Company went to its reduced operating plan. The Company is also actively engaged in exploration in Argentina and Peru, as well as in other parts of the United States. Argentina is a highly prospective geologic region, which, due to political and economic problems in this century, has not had the necessary investment in exploration to fully evaluate its mineral potential. Peru, a major mining area since colonial times, had until recent years seen investments in mine maintenance and development decline due to political and economic chaos. Both countries are presently actively pursuing foreign investment, particularly in mining, and have apparently stable, democratically elected governments. The Company has recently opened exploration and development offices in Mendoza, Argentina and in Lima, Peru. In Argentina, the majority of the Company's exploration will be of a "grass roots" nature. In Peru, many previously nationalized properties are being returned to the private sector through a privatization process. The Company will be actively participating in future privatizations in Peru. In addition, the Company believes its metallurgical technology may have application in Peru to restart certain inactive properties whose ores contain elevated levels of arsenic and antimony. 21 31 On March 9, 1994, the Company completed a Rights Offering to holders of Common Stock, pursuant to which shareholders received one Right for each 17 shares of Common Stock held of record on February 7, 1994. Each Right entitled the holder to purchase a Unit consisting of two shares of Common Stock and one warrant to purchase an additional share of Common Stock. Each warrant entitles the holder to purchase one share of Common Stock at a price of $2.12. The warrants will expire on March 9, 1999, and are callable by the Company at any time after March 9, 1996, at a price of $.50 each. A total of 10.1 million Rights were exercised at a price of $3.08 each, resulting in net proceeds from the offering of approximately $30 million. As a result of the Rights Offering, the Company issued 20.2 million new shares of Common Stock and 10.1 million warrants to purchase Common Stock. See "MANAGEMENT'S DISCUSSION AND ANALYSIS - LIQUIDITY AND CAPITAL RESOURCES." For information regarding Sunshine's business, certain classes of products or services and sales to certain significant customers of Sunshine, see Notes 13 and 14 of Notes to Consolidated Financial Statements included elsewhere herein. SILVER SUPPLY, DEMAND, AND PRICES According to studies published by the Silver Institute in its World Silver Survey and/or by CPM Group (precious metal industry consultants), approximately 837 million ounces of silver surplus to the market's needs were generated in the period from 1979 to 1989. These surpluses were generated in response to high silver prices, which, in constant 1994 dollars, averaged approximately $18.38 per ounce in the eleven year period from 1974 to 1984, inclusive. As a result, demand for silver dropped significantly, and supplies increased during the period, resulting in production of surplus silver. However, according to these same sources, since 1990 demand for silver has exceeded supply, with the surplus silver generated previously available to supply the market's needs. This availability has contributed to the continuing low price of silver, which, for the ten years from 1985 through 1994 averaged, in constant 1994 dollars, approximately $6.44, and in the five years ending 1994 averaged approximately $4.73 in constant 1994 dollars. According to industry data, the cumulative deficits in the silver market from 1990 to 1994 has totaled approximately 400 million ounces, with projections for the deficit in supplies to the market to continue. The deficit in 1994 has been estimated at between 150 to 220 million ounces by various industry sources, and the projection for the 1995 deficit is in the same range. This data suggests to the Company that, if deficits to the market continue in the 150 million ounce per annum range, the cumulative deficit since 1990 would approximately equal the 837 million ounce surpluses previously generated by approximately the fourth quarter of 1997. The Company believes that as the silver market approaches this point, it will be more difficult for the deficits which are being accumulated to be supplied from above-ground stocks, and that the silver price will be forced to increase in response, and that such an increase could be significant. OPERATIONS THE SUNSHINE MINE AND REFINERY COMPLEX The Sunshine Mine and Refinery Complex located in the Coeur d'Alene Mining District near Kellogg, Idaho, is comprised of the Sunshine Mine, a 1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and associated facilities. The facility is an integrated operation which can produce refined silver with 99.99% purity. SPMI owns substantially all of the mining claims comprising the Sunshine Mine. Electrical power from a local utility is utilized in the Sunshine Mine and Refinery Complex. The facilities are in good and operable condition. Access to the property is by paved roads maintained by the county. 22 32 The Sunshine Mine is a primary silver-producing underground mine which began operations in 1884 and has produced approximately 340 million ounces of silver since that time. Mining operations are currently focused at depths from 3,100 feet to 4,600 feet although the Mine's workings extend to 5,600 feet. The ore extracted from the Sunshine Mine is introduced to the 1,000-ton-per-day flotation concentrator, where a high-grade silver concentrate is produced and transferred to the antimony refinery for antimony removal. After antimony removal, the concentrate can be either transferred to the silver refinery for recovery of silver and copper, or sold to a commercial smelter. Factors which influence the Company'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. The refinery has also processed dore' metal (an impure alloy of silver, gold and other metals) produced by third parties. The refinery produced approximately 2.7 and 2.5 million ounces of fine silver in 1994 and 1993, respectively, including approximately 813,000 and 426,000 ounces of custom material. As a result of the low level of through-put in recent years, the silver refinery operations have become less efficient than optimum. Therefore, the Company in 1995 temporarily suspended operations at the silver refinery until higher levels of through-put are achievable either through increased production from the Sunshine Mine or through the reopening of other mines in the district. Until the refinery reopens, the Company will sell its silver-copper concentrates to a nearby smelter for processing. This change is not expected to have a material impact on the Company's results of operations or cash flows. To minimize cash used by operations, the Sunshine Mine adopted a curtailed operating plan on June 1, 1991, reducing annual production from approximately 1,000 tons per day to approximately 450-500 tons per day. At present silver prices, curtailed mining operations result in lower aggregate operating losses and cash requirements than either full operations or maintenance and holding costs associated with a complete mine shutdown. Ore and metals produced during 1994 and 1993 were as follows:
1994 1993 Tons of Ore . . . . . . . . . . . . . . . . . . . . . . . 107,056 100,441 Metals Recovered: Ounces of Silver . . . . . . . . . . . . . . . . . 2,079,290 2,298,155 Pounds of Copper . . . . . . . . . . . . . . . . . 826,058 770,616 Pounds of Antimony . . . . . . . . . . . . . . . . 474,271 587,137
These metals were recovered from ore containing an average of 20.08 and 23.49 ounces of silver per ton, in 1994 and 1993, respectively. Production levels in 1993 and in 1994 were adversely affected by rock burst activity in areas of major production. Proven and probable ore reserves at the Sunshine Mine, as estimated by its in-house technical personnel at January 1, 1995, were as follows:(1) Tons of Ore . . . . . . . . . . . . . . . . . . . . . . . 1,320,600 Metals Contained: Ounces of Silver . . . . . . . . . . . . . . . . . 28,836,500 Pounds of Copper . . . . . . . . . . . . . . . . . 10,762,600 - ----------------
(1) Includes mining dilution but is not reduced for estimated metallurgical recovery of 97%. The weighted average ore grades are 21.8 ounces per ton silver and .4% copper. 23 33 The Sunshine Mine accounted for all of SPMI's 1993 and 1994 silver production, and [_____%] of SPMI's silver reserves at [________], 1995. See Note 14 of Notes to Consolidated Financial Statements included elsewhere herein. EXPLORATION ACTIVITIES AT THE SUNSHINE MINE Significant portions of the Sunshine Mine remain unexplored and undeveloped. Accordingly, given the nature of the mine's ore bodies, it is believed that the proven and probable reserves set forth above do not necessarily represent all of the economic mineralization (ore) which may be recovered from the mine. Historically, the largest ore bodies discovered in the Sunshine Mine have been the Sunshine and Chester Vein systems, which have produced a total of 205 million ounces. Three other major veins have produced approximately 60 million ounces. Production from some of these areas began as early as 1884 and all still contain ore reserves, some of which are being mined today. The Company's geologic staff has analyzed the unexplored areas of the Sunshine Mine which contain geologic characteristics analogous to the Sunshine and Chester Vein systems and therefore offer the highest probabilities for similar major discoveries. These projects included an analysis of structural and stratigraphic controls responsible for developing the silver-rich tetrahedrite siderite veins. As a result, current exploration activity is focused on the West Chance area, which offers potential for developing significant new ore reserves as it is a large mineralized structure in a geologic environment analogous to the Sunshine and Chester Veins. The West Chance area exploration program is primarily being carried out from the underground workings. The West Chance vein was initially delineated by drifting operations on the 4200 Level between March 1992 and May 1993. The 4200 Level drift was advanced nearly due west from the mine's No. 12 shaft for a distance of 3,550 feet, exposing a heavily mineralized siderite vein in excess of 800 feet in length in a previously unexplored area of the Sunshine Mine. Core drilling from stations south of the drift established vein continuity above, as well as below the 4200 Level. The exploration program has expanded to five additional Levels beyond the 4200 Level and continues to delineate the vein system between 2700 and the 4600 Levels. The 4400 and 4600 Levels' exploration activity consists of advancing lateral drifts in the walls of the vein west from 12 Shaft, providing drilling platforms for delineating the vein systems on these Levels. Drifting west from the Jewell Shaft on 3700, 3100, and 2700 Levels provides direct access to the vein system on these mine Levels. Parallel and adjacent to the West Chance structure is a footwall vein system which includes the `413 Vein' and `140 Vein' reserve blocks, which are being developed on the 4400 and 4600 levels. A stope, 44-CF2, was developed and mining began in early 1994 on the "140 Vein" reserve block above the 4400 Level. Currently, an intermediate stope drift (I-drift) on the "413 Vein," has exposed two very high-grade veins above the 4400 Level and below the 4200 Level. This I-drift from the 44-CF4 raise has delineated an ore body consisting of a narrow vein system with vein widths from a few inches to nearly two feet. To date, the vein averages 0.75 feet wide, with an average assay of 412 ounces silver per ton across the vein width and has been extended to 290 feet in strike length. Reserves in the 44-CF4 are estimated to be 598,000 ounces, contained in 13,500 tons at an average grade of 44 ounces per ton. The 3100 level drift, commenced in the latter part of 1993, has presently been driven 2800 feet and remains 575 feet from the Sunshine Mine western property boundary. Two stopes, 31-E9 and 31-E10, have been developed and commenced production in September and November, 1995. Close spaced (less than 50 feet c-c) core drilling of the E10 ore block and initial I-drifting of the E9 block has delineated an ore reserve of 101,000 tons containing 2,143,000 ounces of silver with an average grade of 21.2 ounces per ton. 24 34 Two drill stations have been constructed on the 3100 Level, and drilling from these stations above and below the level is continuing. Two new exploration drifts on the 2700 foot and 3700 foot Levels were commenced in July/August of 1995. A long-range drill station has been established on the 3700 Level, and drilling commenced in November, 1995. Based on values recovered from drill intercepts (see map insert in prospectus cover) and the demonstrated success of LHD mining methods, the Company expects significant production increases in the 2700 Level and 3700 Level upon the completion of the drifts and ramp development in late 1996 and early 1997. The Company has also commenced core drilling from the surface into the West Chance to determine if the vein extends into the areas nearer the surface. To date, no mineralization in the West Chance area has been encountered in this effort. At September 30, 1995, total reserves added by the Company's efforts in the West Chance area total approximately 3.4 million ounces of proven and probable silver with mine grades of 22.5 ounces of silver per ton of ore (net of 178,000 ounces mined in 1994 and 269,000 mined in 1995). Although the Company's drilling program and drifting operations have yielded encouraging results to date, including samples containing significant ore concentrations, the Company's exploration program in the West Chance area is still considered to be in the preliminary stage. No assurance can be given that significant ore bodies of a consistent high grade will be discovered and available for profitable commercial production. OTHER EXPLORATION PROJECTS PIRQUITAS The Company acquired the Pirquitas property, located in the Jujuy province of northwest Argentina, in November, 1995 for $1.7 million. Pirquitas is Argentina's largest historic producer of silver and tin, producing 27 million ounces of silver and 20 thousand tonnes of tin from its underground workings from 1936 to 1990. Historic production was confined to a system of closely-spaced sheeted veins. The Company has obtained data prepared by a third-party geologist in 1992 which indicates the property could host a vein and disseminated resource totalling 35 million tonnes with grades ranging between 120 to 180 grams per tonne silver and 0.2 and 0.4% tin. This indicates total contained metal of between 134 million to 202 million ounces of silver, and 154 to 308 million pounds of tin. The data also indicates that the limits of the deposit have not yet been defined. Immediate plans are being made to verify and, if possible, expand the above resource potential. The Company's plans for the property include drilling the property from the surface in a 7000 meter drilling program that is expected to be completed in the first quarter of 1996. If the results of the drilling is positive, after dewatering the underground workings, the Company will conduct an underground program of resampling to verify the work which was the source of the resource estimate cited above, and core drilling from underground to attempt to further delineate the deposit. The Company also expects to conduct metallurgical testing on sample material recovered from underground. Additional work is planned to determine optimum extraction methods, but Sunshine anticipates that, should development proceed, it could develop the deposit using low cost open pit methods. A significant amount of work remains to define processing economics and determine if the material can be recovered economically. 25 35 The Pirquitas property will receive the bulk of the Company's exploration emphasis away from the Sunshine Mine in 1996, with a budget of approximately $2 million allocated to evaluate the property. REVENUE-VIRGINIUS The Revenue-Virginius project is located eight miles southwest of the town of Ouray in southwestern Colorado. Primarily an underground silver property, it also contains values in gold, base metals and antimony in narrow veins in volcanics. Sunshine controls the property by virtue of a mining lease which calls for minimal property payments and work commitment, with a sliding scale net smelter revenue royalty to the owner based on silver price. The property currently reports a reserve of over five million ounces of silver, with excellent potential existing for expanding this figure. ZEBRA The Zebra project is located a few miles east of the historic mining town of Tombstone in southern Arizona. The property is a gold exploration project with widespread, anomalous gold values of the surface. The main target here is a sediment-hosted gold deposit lying at moderate depths. The project, which is on State lease land, is a 50-50 joint venture with an industry partner and calls for Sunshine to spend not less than $300,000 in exploration at the project over the three years commencing 1995 in order to maintain its interest in the project. Sunshine has the option to discontinue work at any time and drop its interests in the property. Sunshine plans to drill the property in the near future. MISHKI Sunshine was recently chosen as the successful bidder on the Mishki property, located about 115 miles northwest of Arequipa in Southern Peru. Mishki is a former producing underground gold mine and currently reports a resource of some 100,000 ounces in narrow, high grade veins. Once the agreement is finalized, Sunshine will have the right to purchase the property at any time during a three-year period from Minero Peru for $1.0 million, during which time certain work requirements will have to be met. An underground exploration program is planned for the property. HUEMULES The Huemules project is located 17 miles northwest of the town of Esquel, Province of Chubut, in southern Argentina. Included in the large land position (25,700 acres) is an underground gold property which has produced a small quantity of very high grade ore in the past from veins in volcanics. The project is a joint venture with an Argentine company, Empresa Argentina de Cemento Armado, and requires that Sunshine spend $2.1 million over three years to earn a 50% interest in the joint venture. Trenching and drilling conducted by Sunshine in 1994 has uncovered previously unknown gold-bearing structures with ore-grade mineralization, and the results of this work are presently being evaluated. Sunshine has spent approximately $1 million on the project to date. RINCONADA The Rinconada project is located near the town of the same name, Province of Jujuy, in northern Argentina. The property is a gold exploration project with significant past production from both placer and vein workings. Potential is believed to exist here for a large, open pit as well as a high grade underground vein deposit. The central portion of the property is controlled by way of a three-year, $300,000 purchase option with the owner. Sunshine also holds two concessions adjacent to this central parcel. Detailed geological mapping and sampling work followed by initial drilling is planned. 26 36 OTHER EXPLORATION IN ARGENTINA AND PERU Sunshine obtained seven additional concessions in Argentina it believes could host economic gold mineralization. Four of these, Cerro Choique, Loma Blanca, Don Gregorio and Maria Sol are located in Rio Negro Province. Two concessions, Abra Rabon and Abra Huacar are located in Jujuy Province, while one known as Cobre is located in Salta. Evaluation work is currently being conducted on these concessions, which cover a total of approximately 121,700 acres. In Peru, the Company is aware of properties scheduled for privatization in 1996, on which it has a interest in bidding. It is also evaluating other previously producing properties which have been inactive due to lack of access to capital and technology. Both privatizations and reopening other inactive properties may present significant turnaround opportunities. In addition to exploration at the Sunshine Mine, the Company expects to spend approximately $5 million annually for exploration in Peru, Argentina and in other exploration, in 1996 and 1997. See "CERTAIN RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." REFINING TECHNOLOGY Numerous ore bodies worldwide contain antimony and arsenic which, due to environmental concerns, often must be removed before shipment to a smelter for processing or the ore will be subject to significantly increased processing costs. The Company possesses patented technology to safely remove these materials, and in the case of antimony, to produce a marketable product. The Company believes this technology may give it an advantage as a joint venture partner in such mining operations. The Company is presently evaluating mining projects which would make use of this technology in Peru. MARKETING The Company's primary product can be either refined silver which is sold to industrial customers or precious metals dealers, or a silver-copper concentrate which is sold to smelters. Prices received for refined silver are based on market prices at the time of shipment. Prices received for the silver-copper concentrate are based on prices for silver and copper during a Quotational Period shortly after shipment. The Company bases its decisions on whether to refine its products internally or sell them to a smelter based on internal production costs versus available smelter contract terms. The Company's refined antimony and copper products are generally marketed directly to industrial customers. See Note 13 of Notes to Consolidated Financial Statements included elsewhere herein. OTHER BUSINESS AND REGULATORY FACTORS The Company's precious metals operations are intensely competitive and subject to risks and regulations inherent in and applicable to mining generally and the precious metals industry specifically. Competition in the precious metals mining industry, and particularly the silver mining industry, is very volatile. The market for gold and silver is international and there is no significant marketing advantage in domestic production versus international production. No single source of silver is significant to the world market, and many of the principal sources of silver as a primary metal have been forced to close 27 37 as a result of continued low silver prices over the past several years. As a result, the largest sources of silver are presently gold, copper, lead, and zinc mines which produce silver as a by-product. In connection with its mining and other operations, the Company is subject to a variety of extensive and changing federal, state and local laws, regulations, and ordinances. These laws and regulations control exploration and mining and the actual and potential effects of the Company's activities on the environment, which directly and indirectly affect the operations of the Company and could result in potential liability to the Company. No material effect on the Company is currently anticipated from compliance with any such provisions or controls. ENVIRONMENTAL AND SAFETY MATTERS In connection with its operations and properties, the Company is subject to extensive and changing federal, state and local laws, regulations and ordinances governing health and safety and the protection of the environment, including, without limitation, laws and regulations relating to air and water quality, mine reclamation, waste handling and disposal, the protection of certain species, and the preservation of certain lands. These environmental laws and regulations may require the acquisition of permits or other authorizations for certain activities. These laws and regulations may also limit or prohibit activities on certain lands lying within a wilderness area, wetland area, area providing habitat for certain species, or other protected area. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue in the future. The operations and activities of the Company require compliance with such laws, regulations and ordinances. One example of an environmental law affecting the Company is the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"). CERCLA imposes liability (without regard to fault) on certain categories of persons for response and certain costs related to releases of hazardous substances at a facility into the environment, and for liability for natural resource damages. Liability under CERCLA is strict and generally is joint and several. In addition to CERCLA, similar state or other laws and regulations may impose the same or even broader liability for discharges, releases, or the mere presence of certain substances into and in the environment. For a discussion of potential liability under CERCLA at specific sites, see "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS." Another example of an environmental law that affects the Company is the federal Resource Conservation and Recovery Act ("RCRA"), which is the primary federal statute governing the management of solid wastes and which includes stringent regulation of solid waste that is considered hazardous waste. The Company's operations generate solid wastes, including certain mining waste streams. Currently, certain solid wastes generated from particular activities related to the extraction and processing of ores and minerals are excluded from regulation as hazardous wastes under RCRA. 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 years 1995 and 1996. See Note 12 of Notes to Consolidated Financial Statements included elsewhere herein; and "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS." The Company also does not anticipate any material effect from compliance with environmental, health, and safety laws, regulations and ordinances. 28 38 DISCONTINUED OPERATIONS The Company sold substantially all of its domestic oil and gas operations in 1991 for approximately $144 million. The remainder, consisting principally of Canadian oil and natural gas properties, was sold in June and October 1992 for approximately $10 million. During 1992, the Company discontinued fabricating and marketing precious metal bullion for retail sale and returned all properties in East Tintic Mining District including the Burgin Mine, to the respective lessors. As a result, the Company's investment in these properties, and related inventories of $7.4 million, was written off as of September 30, 1992. EMPLOYEES At December 31, 1994, Sunshine and its subsidiaries, including SPMI, employed approximately 229 persons; 220 of whom are located at the Kellogg facilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES." PROPERTIES. The information regarding the properties of Sunshine is set forth under BUSINESS, above, and in the Notes to Consolidated Financial Statements included in Part II hereof. LEGAL PROCEEDINGS. ENVIRONMENTAL MATTERS The EPA has identified the Company and SPMI as Potentially Responsible Parties ("PRPs") at one site and SPMI as a PRP at another site under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), alleging that the Company and SPMI at one site and SPMI at the other site arranged for the disposal of hazardous substances. One of the sites is located in Kellogg, Idaho and the other site is located in Spokane, Washington. The EPA has named the Company and SPMI as PRPs at the Bunker Hill Superfund Site in Kellogg, Idaho ("Bunker Hill"). Bunker Hill is on EPA's National Priorities List under CERCLA. EPA, the State of Idaho, and several of the PRPs, including the Company and SPMI, have agreed to a site-wide clean-up plan, separating the site into two distinct areas for remediation: the Bunker Hill Smelter Complex (the "Smelter Area") and the residential and certain commercial areas primarily in the cities of Kellogg, Smelterville and Pinehurst, Idaho encompassed by the Site (the "Residential Areas"). Without admitting liability, the Company and several PRPs have agreed to do the remediation work in the Residential Areas pursuant to an EPA and State of Idaho approved work plan. In exchange therefor, EPA and the State of Idaho released the settling PRPs from all liability for cleanup of the Smelter Area, reduced the EPA's claim for reimbursement of past costs from $17 million to $1 million plus a percentage of proceeds received by the PRPs from insurance companies, if any, and agreed that the work orders from 1990 through 1993 were deemed satisfied and discharged. The remediation undertaken by the Company and the PRPs is expected to take approximately seven years and the Company estimates its (including SPMI's) share (12.4%) of the remediation costs will be approximately $3 million, of which approximately $1.0 million has been spent to date. On November 17, 1994, the United States District Court for the District of Idaho entered a Consent Decree containing the terms of this agreement. The liability for remediation costs under the consent decree is joint and several. Thus, if any other settling party or parties does not comply with the 29 39 consent decree, the exposure for the Company and SPMI could increase proportionately. The parties have reserved their claims and defenses with respect to natural resource damages, except for the State of Idaho which has agreed that its claim has been settled. On July 31, 1991, the Coeur d'Alene Indian Tribe (the "Tribe") filed an action in the United States District Court, District of Idaho against the Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory judgment that the Tribe has five years in which to file a natural resource damage claim under CERCLA against the PRPs and others or, alternatively, for damages in an unspecified amount resulting from the loss, destruction or injury to natural resources allegedly caused by the defendants. The Company believes that a settlement by SPMI of all natural resources claims with the State of Idaho in May 1986 bars the Tribe's action. On October 30, 1992, the United States District Court for the District of Idaho issued an Order of Administrative Termination in the Tribe's action. The case was administratively terminated because of the court's ruling in a prior action that the State of Idaho has title to the beds and banks of all navigable water courses and that the Tribe had no claim thereto. The decision in the prior action between the State of Idaho and the Tribe, which was adverse to the Tribe, was appealed to the Ninth Circuit Court of Appeals, which affirmed in part and reversed in part the decision of the district court. The Tribe's action against Sunshine, however, remains administratively terminated. By letter dated July 17, 1995, Sunshine and SPMI were notified that they have been identified by the United States Department of the Interior, Fish and Wildlife Service, as PRPs for alleged natural resource damage in the Coeur d'Alene Basin. The letter further served as notice that the Department of the Interior intends to bring suit against Sunshine, SPMI and other identified PRPs to recover natural resource damages under CERCLA. The Department of Interior has not set forth any amount of damages. The Company believes that the settlement by SPMI of all natural resource claims with the State of Idaho in May, 1986, bars these claims. The second site where EPA has identified SPMI as a PRP under CERCLA is the Spokane Junkyard Site near Spokane, Washington. In November 1988, the EPA notified SPMI that it is a PRP at that site. The EPA has documented the threatened release of hazardous substances at the site and has initiated response actions under CERCLA. The Company does not believe that the designation of SPMI as a PRP at the Spokane Junkyard Site will have a material impact on the Company's results of operations and financial condition or on its liquidity or capital resources. SPMI does not believe it will be required to pay any clean-up costs at the Spokane Junkyard Site. No records of SPMI have been discovered by it or the EPA showing SPMI ever sent any material to the site. The EPA's designation of SPMI as a PRP was based on the oral statement of a former employee at the junkyard that sometime in the 1940's or 1950's, he recalled a SPMI truck on the site. To date, the EPA has not filed any action against SPMI or the Company in relation to the Spokane Junkyard Site. OTHER LITIGATION On January 25, 1995, a complaint was filed against the Company in The United States District Court for the District of Delaware by Grace Holdings, L.P., a major holder of the Company's Preferred Stock, alleging that the rights issued incident to the Company's rights offering were an impermissible distribution or dividend under the Certificate of Designation, Rights, and Preferences (the "Certificate") governing the Preferred Stock. Grace Holdings, L.P. alleges damages of $3 million. The Company believes that the rights issued were not a prohibited distribution or dividend under the terms of the Certificate, and that the complaint is without merit. Grace Holdings, L.P. has agreed with the Company that this litigation will be dismissed, with prejudice, upon consummation of the Merger. On March 29, 1995, a similar complaint was filed against the Company in Delaware Chancery Court, New Castle County, by Harbor Finance Partners, a Colorado Partnership, requesting class action 30 40 status and alleging that the rights and warrants issued incident to the Company's rights offering were an impermissible distribution or dividend under the Certificate. Harbor Finance seeks injunctive relief to compel the Company to pay dividends to holders of Preferred Stock and to otherwise comply with the Certificate, and to prohibit any further distribution to holders of Common Stock. The Company believes that the rights and warrants issued were not a prohibited distribution or dividend under the terms of the Certificate, and that the complaint is without merit. The Consenting Shareholders have agreed not to join, participate in nor benefit from this lawsuit. MARKET FOR THE SUNSHINE'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Sunshine's Common Stock is listed for trading on the New York Stock Exchange (symbol "SSC"). Sunshine currently does not pay cash dividends on its Common Stock and has not paid any since the third quarter of 1981. At December 18, 1995, Sunshine had approximately 36,000 holders of record of its Common Stock. The following table sets forth the range of high and low sales prices for the Common Stock as reported on the New York Stock Exchange, Inc., composite tape for the periods indicated. Such quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.
1995 QUARTERS 1994 QUARTERS 1993 QUARTERS ------------------------------------------------------------------- HIGH LOW HIGH LOW HIGH LOW - ----------------------------------------------------------------------------------------------------------------- 1st Quarter 2 1 1/2 3 1/8 1 3/4 1 1/4 7/16 - ----------------------------------------------------------------------------------------------------------------- 2nd Quarter 2 3/8 1 3/4 2 1/4 1 5/8 2 1/2 1 - ----------------------------------------------------------------------------------------------------------------- 3rd Quarter 2 1/8 1 5/8 2 1/2 1 1/2 4 2 - ----------------------------------------------------------------------------------------------------------------- 4th Quarter* 1 7/8 1 1/2 2 1/2 1 5/8 3 2 1/8 - -----------------------------------------------------------------------------------------------------------------
*Through December 18, 1995 Sunshine's $11.94 (Stated Value) Cumulative Redeemable Preferred Stock (the "Preferred Stock") is also traded on the New York Stock Exchange (symbol "SSC PR") with high and low sales prices as reported on the New York Stock Exchange, Inc., composite tape during 1995, as of December 18, 1995 of $10.375 and $6.375, respectively. At December 18, 1995, Sunshine had approximately 2,831 holders of record of its Preferred Stock. The Company's common stock purchase warrants are traded on the NASDAQ National Market System (symbol "SILVW") with high and low sales prices as reported by NASDAQ during 1995, as of December 18, 1995, of $1.0625 and $.50, respectively. The indenture governing Sunshine's outstanding Convertible Subordinated Reset Debentures due July 15, 2008, imposes certain restrictions on Sunshine's ability to declare or pay cash dividends and make certain distribution on its capital stock (including Sunshine's Common Stock). Pursuant to these restrictions, at September 30, 1995, the Company was prohibited from paying cash dividends on shares of its Common Stock and its Preferred Stock. 31 41 CAPITALIZATION The following table sets forth the historical capitalization of the Company at September 30, 1995, and the pro forma capitalization reflecting the Merger, assuming the conversion of each share of Existing Common Stock into one share of New Common Stock and the conversion of each share of Preferred Stock into seven (7) shares of New Common Stock and two Warrants, each to purchase one share of New Common Stock and transaction costs of $500,000. The pro forma capitalization is presented for informational purposes only and is not necessarily indicative of the capitalization that would have occurred if the Merger had been consummated on September 30, 1995, nor is it necessarily indicative of the future capitalization of the Company.
Historical Pro Forma(1) ----------- ------------ (Dollar Amounts in Thousands) Long-term debt - 9% Convertible Subordinated Reset Debentures due July 15, 2008 $ 1,519 $ 1,519 Stockholders' equity: Preferred Stock -- aggregate redemption value: Historical - $126,071 Pro forma - $0 81,928 - Common stock -- $.01 par value; 400,000,000 shares authorized 1,967 2,432 Paid-in capital 623,325 704,788 Deficit (617,737) (618,237) ----------- ------------ 89,483 88,983 Less treasury stock, at cost: 3,664,289 shares 37 37 ----------- ------------ Total stockholders' equity 89,446 88,946 ----------- ------------ Total capitalization $ 90,965 $ 90,465 =========== ============ Shares outstanding: Preferred stock 7,166,186 - Common stock 193,056,641 243,219,943 Warrants ($2.12 exercise price) 10,092,716 10,092,716 Warrants ($1.65 exercise price) - 14,332,372 Pro Forma Shares Outstanding Under Alternative Assumptions Shares outstanding(2): Preferred stock 7,166,186 Common stock 193,056,641 253,252,603 Warrants ($2.12 exercise price) 10,092,716 10,092,716 Warrants ($1.65 exercise price) - 14,332,372 Shares outstanding(3): Preferred stock 7,116,186 - Common Stock 193,056,641 249,669,510 Warrants ($2.12 exercise price) 10,092,716 10,092,716 Shares outstanding(4): Preferred stock 7,166,186 - Common Stock 193,056,641 259,702,171 Warrants ($2.12 exercise price) 10,092,716 10,092,716
_________________ (1) Assumes all holders of Preferred Stock choose to convert their shares into 7 shares New Common Stock and two Warrants, resulting in the issuance of 50,163,302 of New Common Stock and 14,332,372 Warrants upon the conversion of all outstanding shares of Preferred Stock pursuant 32 42 to the Merger, based on the closing of the Company's Common Stock on December 18, 1995 of $1.50 per share. (2) Assumes all holders of Preferred Stock choose to convert their shares into the maximum of 8.4 shares of New Common Stock and two Warrants, resulting in the issuance of 60,195,962 shares of New Common Stock and 14,332,372 Warrants upon the conversion of all outstanding shares of Preferred Stock pursuant to the Merger, assuming the average closing price of the Company's common stock for the 120 NYSE trading days after the Effective Date is $1.25 or less per share. (3) Assumes all holders of Preferred Stock choose to convert their shares into 7.9 shares of New Common Stock and no Warrants, resulting in the issuance of 56,612,869 of New Common Stock and no Warrants, upon the conversion of all outstanding shares of Preferred Stock pursuant to the Merger, based on the closing price of the Company's Common Stock on December 18, 1995 of $1.50 per share. (4) Assumes all holders of Preferred Stock choose to convert their shares into the maximum of 9.3 shares of New Common Stock and no Warrants, resulting in the issuance of 66,645,530 of New Common Stock and no Warrants upon the conversion of all outstanding shares of Preferred Stock pursuant to the Merger, assuming the average closing price of the Company's common stock for the first 120 NYSE trading days after the Effective Date is $1.25 or less per share. COMPARATIVE PER SHARE DATA The following table sets forth certain historical per share data of the Company and on a pro forma basis after giving effect to the Merger on a retroactive basis.
Historical Pro Forma(1)(2) ---------- --------- Income (loss) from continuing operations per common share before extraordinary item and cumulative effect of change in accounting principle: Fiscal year ended: December 31, 1992 $(0.44) $(0.24) December 31, 1993 (0.25) (0.14) December 31, 1994 (0.08) (0.02) Nine months ended: September 30, 1994 (0.05) 0.00 September 30, 1995 (0.10) (0.05) Book value per outstanding common share: December 31, 1994 (0.10) 0.43 September 30, 1995 (0.19) 0.37
_________________ (1) Assumes the issuance of 50,163,302 shares of New Common Stock and 14,332,372 Warrants upon the conversion of all outstanding shares of Preferred Stock pursuant to the Merger, resulting in the cancellation of the dividend and redemption rights of the Preferred Stock. Should all holders of Preferred Stock choose to convert their shares into 7.9 shares of New Common Stock, Pro Forma book value per outstanding common share would be $0.40 and $0.36 at December 31, 1994, (aggregating 56,612,869 shares of New Common Stock and no Warrants) and September 30, 1995, respectively. The number of shares of New Common Stock assumed to be issued in these computations was based upon the closing price of the Company's Common Stock on December 18, 1995, of $1.50 per share. The number of shares of New Common Stock to be issued is subject to adjustment. See "CAPITALIZATION" and "THE MERGER PROPOSAL - CONVERSION OF SECURITIES IN THE MERGER." (2) Excludes the positive contribution to income applicable to common share of the difference between the carrying value of the Preferred Stock, plus the amount of cumulative dividends in arrears, and the aggregate fair value of common stock and warrants issued. Such difference, 33 43 which is currently estimated to exceed $30 million, would increase income applicable to common shares in the period the Merger is consummated. SELECTED FINANCIAL DATA The following table sets forth summary historical financial information of Sunshine as of the dates and the periods set forth in the table below. All amounts are in thousands, except price and production statistics and per share amounts.
========================================================================== YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1994(5) 1993(4) 1992(3) 1991 1990 -------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Operating revenues . . . . . . . . . . . . . . . $ 17,412 $ 17,581 $ 12,926 $ 13,344 $ 31,918 Loss from continuing operations . . . . . . . . (4,923) (28,611) (40,261) (39,917) (71,793) Loss before extraordinary item and cumulative effect of change in accounting principle . . . . . . . . . . . . . (4,923) (28,611) (40,664) (40,128) (102,533) Net loss . . . . . . . . . . . . . . . . . . . . (4,923) (42,257) (13,372) (40,128) (102,533) Loss applicable to common shares . . . . . . . . (15,383) (53,077) (24,860) (52,721) (115,473) Loss per common share: Continuing operations . . . . . . . . . . . . (.08) (.25) (.44) (.47) (.87) Discontinued operations . . . . . . . . . . . -- --- --- --- (.32) Extraordinary item . . . . . . . . . . . . . . -- (.09) .33 --- --- Cumulative effect of change in accounting principle . . . . . . . . . . . . -- --- (.10) --- --- Net loss . . . . . . . . . . . . . . . . . . . (.08) (.34) (.21) (.47) (1.19) Weighted average common shares . . . . . . . . . 185,634 155,383 118,740 111,258 96,736 PRICE AND PRODUCTION STATISTICS: Sunshine Mine: Average Silver prices received . . . . . . . . $ 5.29 $ 4.34 $ 3.95 $ 4.06 $ 4.82 Tons . . . . . . . . . . . . . . . . . . . . . 107,056 100,441 104,602 159,907 235,071 Silver grade (ounces per ton) . . . . . . . . 20.08 23.49 24.77 22.54 22.90 Silver ounces . . . . . . . . . . . . . . . . 2,079,290 2,298,155 2,540,363 3,495,885 5,260,452 Cash cost per ounce(6) . . . . . . . . . . . . $ 5.83 $ 5.10 $ 4.40 $ 4.76 $ 4.14
========================================================================== AT DECEMBER 31, -------------------------------------------------------------------------- BALANCE SHEET DATA: 1994 1993 1992 1991 1990 -------------------------------------------------------------------------- Cash and cash investments . . . . . . . . . . . . $ 26,581 $ 4,304 $ 4,654 $ 14,330 $ 19,019 Working capital . . . . . . . . . . . . . . . . . 38,537 15,651 13,399 22,389 40,423 Total assets . . . . . . . . . . . . . . . . . . 116,657 100,360 113,036 154,004 221,620 Long-term debt and capital lease obligations . . . . . . . . . . . . . . . . . 1,519 9,493 19,669 71,012 80,355 Stockholders' equity: Preferred Stock . . . . . . . . . . . . . . . 80,707 78,774 76,482 75,590 79,624 Other . . . . . . . . . . . . . . . . . . . . 19,701 (11,531) (9,282) (20,177) (1,407) Book value per common share . . . . . . . . . . . (.10) (.26) (.24) (.36) (.18) Common shares outstanding . . . . . . . . . . . . 192,995 168,559 146,478 115,080 101,576
34 44
================================== NINE MONTHS ENDED SEPTEMBER 30 ================================== 1995 1994(5) ---------------------------------- STATEMENT OF OPERATIONS DATA: Operating revenues . . . . . . . . . . . . . . . . . $ 13,178 $ 12,492 Net loss . . . . . . . . . . . . . . . . . . . . . . (11,106) (692) Loss applicable to common shares . . . . . . . . . . (13,323) (3,175) Loss per common share . . . . . . . . . . . . . . . . (.07) (.02) Weighted average common shares . . . . . . . . . . . 193,017 181,519 PRICE AND PRODUCTION STATISTICS: Sunshine Mine: Average silver prices received . . . . . . . . $ 5.12 $ 5.34 Tons . . . . . . . . . . . . . . . . . . . . . . 49,969 53,056 Silver grade (ounces per ton) . . . . . . . . . 15.99 22.65 Silver ounces . . . . . . . . . . . . . . . . . 772,996 1,162,296 Cash cost per ounce(6) . . . . . . . . . . . . . $ 7.67 $ 5.37 BALANCE SHEET DATA:
================================== AS OF SEPTEMBER 30, 1995 ---------------------------------- Cash and cash investments . . . . . . . . . . . . . . $ 20,122 Working capital . . . . . . . . . . . . . . . . . . . 32,882 Total assets . . . . . . . . . . . . . . . . . . . . 108,695 Long-term debt and capital lease obligations . . . . . . . . . . . . . . . . . . . 1,519 Stockholders' equity: Preferred Stock . . . . . . . . . . . . . . . . . 81,560 Other . . . . . . . . . . . . . . . . . . . . . . 10,774 Book value per common share . . . . . . . . . . . . . (.16) Common shares outstanding . . . . . . . . . . . . . . 193,057 - ----------------
(1) All amounts reflect the oil and gas activities of Sunshine as discontinued operations. The net loss for 1990 includes a $23.5 million loss on the disposal of discontinued operations. The loss from continuing operations in 1990 includes a loss of approximately $27.2 million on crude oil option contracts. (2) Cash cost per ounce includes all expenditures related to the operation of the Sunshine Mine and Refinery Complex, less any by-product revenues. Such costs include non-capital development costs, production and maintenance costs, ad valorem taxes, insurance, and postemployment benefit costs incurred on site. Cash costs per ounce increased from 1990 to 1991, largely due to the fact that mine production was curtailed in June 1991. Cash costs increased in 1993 and 1994 due primarily to rock bursts at the Sunshine Mine which reduced production in each year. (3) In 1992, the Company recorded an extraordinary gain of $38.6 million on the extinguishment of eight series of silver indexed bonds issued between 1980 and 1986 by SPMI (the "Old Silver Indexed Bonds") and an $11.3 million charge due to the cumulative effect on prior years of a change in the method of accounting for postretirement benefits other than pensions. See Notes 2, 7 and 11 of Notes to Consolidated Financial Statements. (4) In 1993, the Company recorded a charge of $12.5 million resulting from an induced conversion of the 8% Silver Indexed Bonds, and extraordinary losses aggregating $13.6 million resulting from redemptions of the 8% Silver Indexed Bonds. See Note 7 of Notes to Consolidated Financial Statements. (5) In 1994, the Company recorded gains totalling $6.9 million due to the curtailment of postretirement medical benefits for certain of its employees and retirees. See Note 11 of Notes to Consolidated Financial Statements. 35 45 (6) Cash costs per ounce increased from 1994 to 1995 primarily due to a decline in silver production. Production declined due to a reduction in mill head grades as a result of extensive underground development activities and adverse mining conditions in many of the mine's productive stopes. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES RIGHTS OFFERING On March 9, 1994, the Company completed a Rights Offering to its Shareholders, raising approximately $30 million in new equity capital after expenses of the offering. Pursuant to the offering, shareholders were offered one Right for each 17 shares of Common Stock owned. Each Right entitled the holder to purchase a Unit consisting of two shares of Common Stock and a warrant to purchase an additional share of Common Stock. A total of 10.1 million Rights were issued, and 100% of the issued Rights were exercised at a final price of $3.08 per Unit. As a result, 20.2 million shares of Common Stock and 10.1 million Warrants were issued on March 9, 1994. The Warrants expire on March 9, 1999, and are callable by the Company after March 9, 1996 at a price of $.50 each. Each Warrant entitles the holder to acquire one share of Common Stock at a fixed price of $2.12. At September 30, 1995, the Company had approximately $30.7 million of working capital, including approximately $28.0 million of cash and silver bullion held for investment. These balances are deemed adequate to fund the Company's expected cash requirements for several years. DEBT RETIREMENT In 1992, the Company and its subsidiary, Sunshine Precious Metals, Inc. ("SPMI"), restructured $71.5 million principal amount of Old Silver Indexed Bonds issued by SPMI and $9 million of associated accrued interest, through the prepackaged bankruptcy plan of SPMI. Pursuant to the plan $57.2 million principal amount of 8% Silver Indexed Bonds and 28.9 million shares of Common Stock were issued in satisfaction of the Old Silver Indexed Bonds and accrued interest obligations of approximately $9 million. Principal of and interest on the 8% Silver Indexed Bonds were payable in cash or Common Stock of Sunshine in accordance with a formula in the Bond Indenture. During 1993 and 1994, all of the 8% Silver Indexed Bonds were retired in exchange for 20.7 million shares of Common Stock. EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE. As the price of silver since 1985 has been only slightly in excess of, or less than, the Company's cash cost to produce an ounce of silver, the Company's operations have not been able to generate cash flow sufficient to cover its costs of exploration, research, general and administrative expenses, and interest, as well as non-cash charges such as depreciation, depletion, and amortization. In order to minimize losses at the Sunshine Mine, in June of 1991 the Company reduced ore tonnage produced from the Mine to about one-half its 1,000 tons-per-day capacity. While this reduction in output has caused an increase in the per-unit cash cost of silver production due to certain fixed costs which are not variable with production, it has served to minimize the aggregate losses at the Sunshine Mine, while allowing the Company to pursue its new exploration program in the western sections of the Mine. 36 46 The Company periodically, and at least annually, evaluates its mining properties for permanent impairment based on undiscounted expected future cash flows. Such estimates are based on assumptions as to future silver prices, mining costs, and recoverable reserves which management believes are reasonable based on historical silver prices and production. In constant 1994 dollars, the price of silver averaged approximately $11.48 per ounce over the 28 year period since silver has been allowed to trade on an essentially free market basis, including the most recent five-year period during which the price of silver averaged only $4.74 per ounce. The Company currently believes that the price of silver will increase to a more normal historical trading range in constant dollars and that additional reserves of higher grades than have been mined recently are present in the Sunshine Mine. Accordingly, the Company does not believe it is probable that its investment in the Sunshine Mine has been permanently impaired at December 31, 1994. However, unless the price of silver increases or the cost of production per ounce is reduced, the Company will not be able to recover its investment in the Sunshine Mine. Beginning in 1996, the Company will be subject to the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets, and for Long-Lived Assets to be Disposed of" ("SFAS 121"). The adoption of SFAS 121 will have no impact on the Company's financial condition as the Company's methodology for evaluating its mining properties for impairment is consistent with SFAS 121. LABOR AGREEMENTS AT THE SUNSHINE MINE The hourly employees at the Sunshine Mine are represented by the United Steelworkers of America (which represents the majority of the employees) and the International Brotherhood of Electrical Workers Union (the "Unions"). Effective May 1, 1994, the Unions and SPMI entered into new six-year labor agreements. The salient features of the agreements are (1) continuation of the flexible wage scale making wages variable with silver prices, with some increase in direct hourly wages; (2) the ability of either party to reopen negotiations on wages and benefits at the end of the third year, subject to mandatory arbitration if agreement is not reached; and (3) an increase in pension benefits in exchange for the elimination of Company-provided retiree medical benefits for the current work force. As a result of the elimination of the Company's obligation to provide retiree medical benefits for the current employees, the Company realized a gain of $6.2 million. Pursuant to the labor agreements with the Unions, this gain resulted in a profit sharing payment and related expenses for the hourly work force of approximately $675 thousand, and a net gain to the Company of $5.5 million in the first quarter of 1994. See "RESULTS OF OPERATIONS." The Company believes that the agreements with the Unions will result in no significant increase or decrease in its future cost of production. Union-represented employees will realize an increase in direct wages and pension benefits, but these will be largely offset by the reduction in future medical costs. The Company also believes the agreement will produce the basis for a stable working relationship with its employees for its six year term. OTHER POSTRETIREMENT MEDICAL BENEFITS In the second quarter of 1994, the Company eliminated its commitment to provide postemployment retiree medical benefits for its staff employees, resulting in a net gain of $580 thousand. The commitment to provide such benefits by the Company was not contractual and was done unilaterally by the Company. The Company's Union retirees since 1987 have retired under bargaining agreements which limit the Company's obligation to provide postemployment medical benefits to the period of time covered under each successive bargaining agreement. These retirees were offered the option to eliminate retiree medical coverage in exchange for increased pension benefits. Of the total 36 eligible 37 47 personnel, 19 elected to eliminate such coverage in exchange for the increased pension benefits, resulting in a gain to the Company of $1 million. PREFERRED STOCK Upon consummation of the Merger, the Preferred Stock of the Company, and the Designation of Rights and Preferences governing the same, will be canceled and all dividends, redemption, liquidation, voting and other rights thereunder will be extinguished and will cease to exist. See "THE MERGER PROPOSAL." The dividend on Sunshine's $11.94 (Stated Value) Cumulative Redeemable Preferred Stock (the "Preferred Stock") has neither been declared nor paid since December 31, 1990. Given current silver prices, the Company does not expect any resumption of dividends in the foreseeable future. Dividends are cumulative. The amount of aggregate redemption value disclosed on the September 30, 1995, balance sheet includes $40.5 million in dividends in arrears. The Certificate governing the Preferred Stock prohibits partial redemptions while dividends are in arrears. Therefore, the Company has not made annual redemptions of approximately 808 thousand shares of the Preferred Stock since 1991. Pursuant to the Certificate, the Company may make dividend payments and redemptions of the Preferred Stock using cash or by issuing shares of its Common Stock valued in accordance with a specified formula. If the Merger is not consummated, the Company has stated that it intends to make dividend and redemption payments, when and if resumed, using shares of its Common Stock. There are no penalties for the Company failing to make dividend payments or partial redemptions. Holders of Preferred Stock are entitled to elect three directors to the Company's board of directors. Upon consummation of the Merger, all directors will thereafter be elected by holders of New Common Stock. See "DESCRIPTION OF CAPITAL STOCK - PREFERRED STOCK"; "MANAGEMENT - DIRECTORS AND EXECUTIVE OFFICERS"; "DIRECTORS AND OFFICERS OF SUNSHINE." FUTURE CAPITAL AND EXPLORATION EXPENDITURES Subject to positive confirmation of economic mineralization in the West Chance area of the Sunshine Mine, the Company will attempt to restore the Sunshine Mine to full production by the end of 1996. This advances the schedule about one year ahead of when the Company previously expected to return to full production. The expedited schedule is the result of the successful testing of a trackless mining method in the Sunshine Mine using front-end loaders. Testing indicated the LHD (short for load-haul-dump) cut-and-fill method allows for greater productivity and quicker reserve access than the traditional raise-up cut-and-fill mining method utilized at the Sunshine Mine. As a result of the expedited schedule, the Company expects to spend approximately $4.5 million in 1996 at the Sunshine Mine to acquire the necessary LHD equipment, develop ventilation and ore passes in the area, and expand the mill capacity in order to handle the increasing levels of lead which are expected from the West Chance area. Additionally, $2.5 million is expected to be spent on exploration activities involving completion of the 2700 and 3700 Level Drifts, commencement of a new drift on the 2300 Level, and drilling 50,000 feet of new core drill holes into the West Chance area. An important assumption in the plan to return the mine to full production is that the 2700 and 3700 Level drifts will encounter significant quantities of ore grade mineralization when they reach the target areas. While assays from core drilling indicate the presence of ore-grade mineralization, there can be no assurance that the mineralization will be present in sufficient quantity or with sufficient continuity to support the return to full production in the time frame called for. In that event, certain of the capital expenditures outlined above would be delayed or canceled. 38 48 The Company has budgeted $5 million in other exploration expenditures for 1996. Of that amount, $2 million is allocated to the evaluation of the Pirquitas property in Argentina, which was purchased for $1.7 million in November, 1995. It is expected that this will allow the Company to do the necessary work to confirm or refute the presence of the large resource which appears to be present, and to do the necessary engineering and metallurgical testing to determine if the property can be economically placed into production. If the property is determined to be commercially viable, a significant capital expenditure, currently estimated at in excess of $50 million, will be required for development. This would require the Company to raise additional funds through debt or equity financing and/or joint venture with industry partners to develop the property. OTHER The Company and SPMI have has been identified by the EPA as a PRP at the Bunker Hill Superfund Site and SPMI has been identified as a PRP at the Spokane Junkyard Site. The Company believes that its status as a PRP will not have a material adverse effect on its consolidated financial position or results of operations. See "LEGAL PROCEEDINGS -- ENVIRONMENTAL MATTERS" and Note 12 of Notes to Consolidated Financial Statements. OPERATING, INVESTING AND FINANCING ACTIVITIES Cash used in operating activities in the first nine months of 1995 was $5.1 million compared to $7.2 million in the first nine months of 1994. Cash operating losses increased in the first nine months of 1995 by $1.4 million. This was offset by changes in working capital components, principally inventories. Cash used in operating activities in 1994 was $8.4 million compared to $7.6 million in 1993. This is primarily due to an increase in cash operating losses in 1994 of $2.3 million, offset by changes in working capital components. Cash used by investing activities during the nine month periods ended September 30, 1995 and 1994 was $2.5 million and $1.5 million respectively, including $4 million and $1.4 million, respectively, for exploration expenditures offset in the 1995 period by $1.8 million of cash proceeds from the sale of certain marketable securities. In 1993, investing activities provided $5.2 million of cash through the liquidation of certain marketable securities, offset by investment of approximately $1 million in new plant and equipment. There were no cash financing activities during the nine months ended September 30, 1995. Cash provided by financing activities was $31.1 million in 1994 ($29.7 million during the nine months ended September 30, 1994), principally as a result of the Company's rights offering. Financing activities provided $2.0 million of cash in 1993 as a result of the release of approximately $3.0 million of previously restricted cash, offset by the retirement of approximately $1.0 million of debt. In 1993, cash used in operating activities declined to $7.6 million from $12.0 million in 1992, principally as a result of the decrease in operating losses, excluding non-cash charges, of $8.0 million, partially offset by working capital changes, principally in-process inventories and accrued expenses. The Company's discontinued oil and gas operations provided $1.2 million of cash in 1992, prior to their sale. Investing activities produced $9.4 million of cash in 1992, principally from the sale of the Company's remaining oil and gas operations. Such activities provided $5.2 million in 1993, principally through the liquidation of marketable securities, partially offset by investment in plant and equipment of approximately $1 million. 39 49 Financing activities used $7.0 million in cash in 1992, as $2.0 million of debt was repaid, and $5.0 million of cash was reclassified as restricted as it was used to secure certain debt obligations. In 1993, financing activities provided $2.0 million of cash, as $1.0 million principal amount of debt was retired, and $3.0 million of previously restricted cash was released. RESULTS OF OPERATIONS THE NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 Consolidated operating revenues increased approximately $686 thousand (5.5%) for the first nine months of 1995 compared to the first nine months of 1994 due to higher sales volume (2.0 million ounces in the first nine months of 1995 compared to 1.9 million ounces in the same period of 1994) due to the inventory drawdown discussed below. During the first quarter of 1995 the Company suspended operation of its silver refinery. As a result, the Company began selling silver and copper concentrate to a third-party smelter instead of refining silver bullion and copper metal for sale to commercial and industrial customers. This result in a shorter processing time before sales recognition, causing a drawdown of work-in-process inventories versus an inventory buildup in the first nine months of 1994. Cost of sales increased $2.2 million from the first nine months of 1995 compared to 1994, due to this drawdown in inventories and an increase in unit production costs. Unit production costs increased primarily due to declines in silver production from 1994 to 1995 (1.3 million ounces produced from 79,025 tons at 17.46 ounces per ton in 1995 versus 1.6 million ounces from 78,655 tons at 21.44 ounces per ton in 1994). Mine production declined due to a reduction in mill head grades as a result of extensive underground development activities. Additionally, the operation experienced earlier than expected mineout and adverse mining conditions in many of the mine's productive stopes. Production levels have been improving gradually since April, and the third quarter production more nearly approximates production objectives during this exploration period. Exploration expense increased $2.6 million (187%) for the first nine months of 1995 compared to the same period in 1994 in keeping with the Company's plan to increase exploration spending at the Sunshine mine and as well as other sites in Arizona, Colorado, Argentina, and Peru. Depreciation, depletion, and amortization declined by approximately $508 thousand. Lower depletion expense is a result of lower production figures in the nine month period. Interest income increased by $232 thousand (29.3%) due to higher cash balances after the Company's rights offering in March, 1994. Interest expenses was reduced $378 thousand (39.7%) due to the reduction of approximately $8 million (84%) in the aggregate principal amount of debt outstanding in the first quarter of 1994. Sunshine's net income in 1994 included a $6.9 million gain on the curtailment of certain postretirement medical benefits for certain of its employees and retirees. 1994 COMPARED TO 1993 Consolidated operating revenues decreased approximately $.2 million (1%) in 1994 compared to 1993. Price increases on silver sold ($5.29 per ounce in the 1994 period versus $4.34 per ounce in 1993), which increased revenues by $2.0 million, and increased sales of custom material (813 thousand ounces in 1994 versus 426 thousand in 1993), which increased revenues by $1.9 million, were offset by reductions in sales volumes of Sunshine Mine material (2.1 million ounces in 1994 versus 2.3 million ounces in 1993), which decreased revenues by $1.2 million, and by mark-to-market adjustments in the value of the Company's in-process inventories and silver bullion held for investment. 40 50 In 1994, due to the decline in silver prices from the beginning of the year of $5.09 per ounce to the year end price of $4.88, the Company posted a mark-to-market writedown of $.3 million. During 1993, due to an increase in silver prices from $3.67 to $5.09, the Company posted a favorable mark-to-market adjustment of $3.3 million. Consolidated operating costs increased $2.7 million from 1993 due primarily to increases in sales volumes of custom materials as discussed above. Depreciation, depletion and amortization declined by approximately $1.8 million principally as a result of increasing the remaining useful life of the Company's silver refinery. Selling, general and administrative expense increased approximately $370 thousand over the 1993 period due primarily to expenses incurred in studying potential foreign joint venture opportunities. During 1994, the Company recognized gains totalling $6.9 million due to the curtailment of post retirement medical benefits for certain of its employees and retirees, net of associated profit sharing payments and related expenses to the affected employees aggregating $803 thousand. SEE "LIQUIDITY AND CAPITAL RESOURCES." Interest income increased $800 thousand due to higher cash balances after the Company's Rights Offering. Interest expense was reduced $4.2 million (77%) primarily due to elimination of the 8% Silver Indexed Bonds. Sunshine's net loss in 1993 included a $12.5 million charge for the loss associated with the modified "put" terms of the 8% Silver Indexed Bonds which were offered to induce conversion of the Bonds to Common Stock, and an extraordinary charge of $13.6 million related to the Company's decision to call the remaining Bonds. 1993 COMPARED TO 1992 The loss from continuing operations for 1993 was $28.6 million, or $0.25 per share, an improvement of 29.7% when compared to the loss from continuing operations for 1992 of $40.3 million, or $0.44 per share. Included in the loss from continuing operations for 1993 is a charge of approximately $12.5 million representing a loss on the induced conversion of the 8% Silver Indexed Bonds. See Note 7 of Notes to Consolidated Financial Statements. Operating revenues increased approximately $4.7 million (36.0%) from 1992 to 1993, principally as a result of (1) an increase of approximately $3.3 million in the mark-to-market adjustment on silver inventories in 1993; (2) an increase of approximately 268 thousand ounces (9.9%) in silver sales volume in 1993; and (3) an increase of $0.44 (11.3%) in the average price received per ounce of silver sold in 1993; all of which were partially offset by decreased production resulting from the suspension of all operations in the East Tintic Mining District in 1992. Cost of revenues increased approximately $1.4 million (9.9%) from 1992 to 1993, primarily due to increased silver sales from inventory and an increase of approximately $0.70 in the cash cost per ounce of silver produced in 1993. The higher unit costs at the Sunshine Mine resulted from a decrease in silver production due to a rock burst in the fourth quarter of 1993 which reduced production by approximately 200 thousand ounces. These increases in the cost of revenues were partially offset by the suspension of operations and the return of the Trixie Mine to the lessors in 1992. Other operating costs and expenses decreased approximately $13.2 million (51.1%) from 1992 to 1993, principally as a result of (1) a decrease of approximately $0.5 million (23.8%) in exploration 41 51 costs related to projects other than the Sunshine Mine in 1993; (2) a decrease of approximately $1.9 million (27.6%) in selling, general and administrative expenses in 1993, reflecting the cost savings associated with the completion of the Company's restructuring program in 1992; (3) a decrease of approximately $0.4 million in depreciation, depletion and amortization in 1993, primarily due to lower production volumes at the Sunshine Mine; (4) a restructuring charge of $3.0 million in the third quarter of 1992 representing severance costs associated with the relocation of the Company's headquarters from Dallas, Texas to Boise, Idaho, and the expenses incurred in the renegotiation and cancellation of the former Chief Executive Officer's employment contract; and (5) a charge of approximately $7.4 million for the write-off of SPMI's investment in the properties held in the East Tintic Mining District in the third quarter of 1992. Interest income decreased by approximately $0.4 million (52.6%) from 1992 to 1993 due to the reduction in the Company's average cash balances. Interest expense decreased by approximately $5.8 million (51.8%) from 1992 to 1993 as a result of (1) the restructuring of approximately $57.2 million and the retirement of approximately $14.3 million of the Old Silver Indexed Bonds in December of 1992; (2) a decrease of approximately $49.6 million (86.8%) of the 8% Silver Indexed Bonds outstanding principal amount through redemptions for Common Stock in 1993; and (3) a decrease of approximately $5.1 million (72.0%) in other long term debt in 1993. In the fourth quarter of 1993, the Company recorded a charge of approximately $13.6 million as a result of its decision to call the remaining 8% Silver Indexed Bonds. See Note 7 of Notes to Consolidated Financial Statements. In the fourth quarter of 1992, the Company recorded an extraordinary gain of approximately $38.6 million representing the completion of the restructuring of the Old Silver Indexed Bonds. See Note 2 of Notes to Consolidated Financial Statements. In 1992, the Company recorded a charge of approximately $11.3 million representing Sunshine's estimate of the cumulative effect on prior years of a change in the method of accounting for postretirement benefits other than pensions. See Note 12 of Notes to Consolidated Financial Statements. THE EFFECTS OF CHANGING PRICES 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 prices received. As previously discussed, the price of silver in recent years has been depressed. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements filed herewith begin on page F-1 hereof. 42 52 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT To the knowledge of the Company, the following persons own five percent (5%) or more of the Preferred Stock of the Company:
(1) (2) (3) (4) TITLE OF NAME & ADDRESS OF AMOUNT & NATURE OF PERCENT CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS - ------------------------------------------------------------------------------------------------------------- $11.94 Preferred Stock Grace Holdings, L.P.(1) 844,200 shares - direct 11.78% 1000 W. Diversey Pkwy., Ste. 233 Chicago, IL 60614 - ------------------------------------------------------------------------------------------------------------- $11.94 Preferred Stock Elliott Associates, L.P.(2) 635,800 shares - direct 8.87% 712 5th Avenue, 36th Fl. New York, NY 10019 - ------------------------------------------------------------------------------------------------------------- $11.94 Preferred Stock Lloyd I. Miller III 430,100(3) 6% 4550 Gordon Drive Naples, Florida 33940
(1) Bun Partners, Inc. is the general partner of Grace Holdings, L.P. (2) Paul E. Singer and Braxton Associates, L.P. are the general partners of Elliott Associates, L.P. Paul E. Singer is the General Partner of Braxton Associates, L.P. (3) Mr. Miller has sole voting power and sole dispositive power with respect to 190,500 shares and shared voting power and shared dispositive power with respect to 239,600 shares, based upon his Schedule 13D dated July 24, 1995. To the knowledge of the Company, no other person owns five percent (5%) or more of any class of the Company's voting securities. The following table presents certain information regarding the number of shares of each class of the Company's equity securities beneficially owned by each director, Named Executive Officer, and by all directors and officers as a group as of December 5, 1995. All individuals have sole voting and investment power with respect to the shares owned. To the best knowledge of the Company, all of the officers and directors of the Company intend to vote their shares of stock in favor of the Merger Proposal.
AMOUNT AND NATURE OF PERCENT NAME OF INDIVIDUAL TITLE OF CLASS BENEFICIAL OWNERSHIP OF CLASS ------------------ -------------- -------------------- -------- G. Chris Andersen Common Stock 30,517(1) --(2) Preferred Stock -0- -- V. Dale Babbitt Common Stock 11,264(1) --(2) Preferred Stock 500 --(2) Fred C. Humphreys Common Stock 19,050(1) --(2) Preferred Stock -0- -- Daniel D. Jackson Common Stock 19,927(1) --(2) Preferred Stock -0- -- John S. Simko Common Stock 167,805(1) --(2) Preferred Stock -0- --
43 53
AMOUNT AND NATURE OF PERCENT NAME OF INDIVIDUAL TITLE OF CLASS BENEFICIAL OWNERSHIP OF CLASS ------------------ -------------- -------------------- -------- Robert B. Smith. Jr. Common Stock 10,000(1) --(2) -- Preferred Stock 20,000 (2) Oren G. Shaffer Common Stock 22,625(1) --(2) Preferred Stock -0- -- William W. Davis Common Stock 126,153(1) --(2) Preferred Stock -0- -- Robert H. Peterson Common Stock 69,551(1) --(2) Preferred Stock -0- -- Hoffer Kaback Common Stock 5,000 --(2) Preferred Stock -0- -- Douglas K. Stewart Common Stock 5,000 --(2) Preferred Stock -0- -- George M. Elvin Common Stock 5,000 --(2) Preferred Stock -0- -- Harry F. Cougher Common Stock 109,416(1) -(2) Preferred Stock -0- -- All officers and Common Stock 601,308(3) --(2) directors as a group Preferred Stock 20,500 --(2) - ------------------------------------------
(1) Includes the following shares subject to purchase pursuant to stock options and warrants exercisable within sixty days: Mr. Andersen, 19,339 shares; Mr. Babbitt, 10,088 shares; Mr. Cougher, 100,300 shares; Mr. Davis, 101,218 shares; Mr. Elvin, 5,000 shares; Mr. Humphreys, 10,000 shares; Mr. Jackson, 18,809 shares; Mr. Kaback, 5,000 shares; Mr. Peterson, 50,750 shares; Mr. Simko, 116,873 shares; Mr. Shaffer, 10,875 shares; Mr. Smith, 10,000 shares; and Mr. Stewart, 5,000 shares. (2) Less than 1%. (3) Includes 448,252 shares subject to purchase pursuant to stock options and warrants exercisable within 60 days. DIRECTORS AND OFFICERS OF SUNSHINE The Board of Directors of the Company consists of the following ten directors. Upon consummation of the Merger, the Board of Directors of Sunshine Merger Company will consist of the same directors, with the exception of Messrs. Elvin, Kaback and Stewart, who were elected to the Company's Board of Directors by holders of Preferred Stock and who, incident to the elimination of the Preferred Stock, will not be directors of Sunshine Merger Company.
Position(s) with Company, Principal Occupation Name Age and Business Histories ---- --- ---------------------- G. Chris Andersen . . . . . . 57 Director since May 1983; until [August 3, 1995], was Vice Chairman -- PaineWebber Incorporated for more than five years prior thereto. V. Dale Babbitt . . . . . . . 59 Director since December 1992; President (for more than the pastfive years) and CEO of N.L. Terteling Family Interest, Inc. (dba) J.A. Terteling & Sons Co., the Managing General Partner for investments consisting of mining interests, oil & gas, real estate and securities. Fred C. Humphreys . . . . . . 71 Director since May 1981; Previously was Chairman of the Board and Chief Executive Officer (1984 to 1987) of West One Bancorp, a regional bank holding company with operations in Idaho, Utah, Oregon and Washington.
44 54
Position(s) with Company, Principal Occupation Name Age and Business Histories ---- --- ---------------------- Daniel D. Jackson . 67 Director since May 1983; Managing Director of Hambrecht & Quist, Inc., a San Francisco, California based investment banking firm since February 1990. Oren G. Shaffer . 53 Director since June 1993. Since October 1994, Executive Vice-President and Chief Financial Officer of Ameritech; previously was President of Vigrocap, a venture capital company (October 1991 to October 1994); and was Executive Vice President, Chief Financial Officer and Director of Goodyear Tire and Rubber Co. from January, 1990 to October 1992. John S. Simko . . . 56 Director and President since October 1992, and Chief Executive Officer of the Company since December, 1992; previously (since 1984) served the Company as Senior Vice President and General Counsel. Robert B. Smith, Jr. 58 Director since June 1993. Mr. Smith has been a private investor since 1984 and Trustee of the Dalkon Shield Trust since 1989. George M. Elvin . . 53 Director since June 1994. Financial Consultant (for more than the past five years) and since August 1992 is the owner and President of Windsor IBC, Inc., a brokerage firm member of the NASD. Hoffer Kaback . . 45 Director since June, 1994. President (for more than the past five years) of Gloucester Capital Corporation (financial consulting); and General Partner, Bosworth Partners (investments). Douglas K. Stewart 43 Director since June, 1994. President (for more than five years) of Stewart & Smith, Inc., a consulting firm providing securities analysis for institutional investors.
CERTAIN OTHER MATTERS No family relationship exists among the directors or executive officers of the Company or its subsidiaries or divisions. Mr. Andersen is a director of Terex Corporation; Mr. Jackson is a director of InfoVest Corporation; Mr. Kaback is a director of Biotechnology General Corporation and Lewis Galoob Toys, Inc.; Mr. Shaffer is a director of Taiwan Equity Fund, Inc.; and Mr. Stewart is a director of Grant Geophysical, Inc. Each of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. The following are the executive officers of the Company (the "Named Executive Officers"). Upon consummation of the Merger, these individuals will continue in their respective positions as executive officers of Sunshine Merger Company.
Position(s) with Company, Principal Occupation Name Age and Business Histories ---- --- ---------------------------------------------- John S. Simko 56 Director and President since October 1992, and Chief Executive Officer of the Company since December 1992; previously (since 1984) served the Company as Senior Vice President and General Counsel. William W. Davis 42 Executive Vice President and Chief Financial Officer since December, 1995, and Senior Vice President and Chief Financial Officer of the Company since September 1992. Previously, from 1983, served in various capacities as an employee of the Company. Robert H. Peterson 58 Senior Vice President and Chief Operating Officer-Refining of the Company since September 1992. Previously since 1980, served in various capacities as an employee of the Company. Harry F. Cougher 53 Senior Vice President and Chief Operating Officer-Mining since January 1994. Previously, since 1984, served in various capacities as an employee of the Company. - ------------------------------------------
45 55 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS PAYOUTS -------------------------------------------------------------- --------- ------- (A) (B) (C) (D) (G) (H) (I) SECURITIES UNDERLYING LTIP ALL OTHER SALARY BONUS OPTIONS/SARS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($)(3) --------------------------- ---- ------- --- ------------ ------- ------------ John S. Simko, 1994 271,527 0 65,000 0 14,370 CEO and President 1993 258,086 38,727(1) 50,000 52,500(4) 11,103 1992 267,215 0 0 52,500(4) 4,740 William W. Davis, 1994 166,096 25,000(2) 50,000 0 14,370 Exec. Vice Pres. & Chief 1993 161,260 24,406(1) 50,000 0 4,308 Financial Officer 1992 168,278 0 0 0 0 Robert H. Peterson, 1994 169,861 0 0 0 14,250 Sr. Vice Pres. & Chief 1993 162,586 24,163(1) 50,000 0 4,497 Operating Officer-Refining 1992 168,062 0 0 39,150(5) 6,820 Harry F. Cougher 1994 100,677 0 50,000 0 8,925 Sr. Vice Pres. & Chief Operating Officer- Mining - ------------------------------------------
(1) Consists of stock bonuses awarded to Messrs. Simko, Davis and Peterson valued at $38,727, $24,406, and $24,163 respectively. Stock distributed was adjusted to account for estimated taxes, resulting in net stock issuance of 13,676 shares, 9,752 shares, and 8,533 shares to Messrs. Simko, Davis and Peterson respectively. The sale of these shares was restricted until June 16, 1994. (2) Cash bonus paid to Mr. Davis in December, 1994. (3) Includes income received pursuant to the Company's Employees Savings and Security Plan (the "Savings Plan") and the Sunshine Defined Contribution Plan (the "DC Plan"). Payments to Mr. Simko under the Savings Plan were $4,620, $4,497 and $4,740, in 1994, 1993 and 1992, respectively; payment to Mr Simko under the DC Plan was $9,750 in 1994. In 1993, Mr. Simko received reimbursement for moving expenses, pursuant to Company policy of $6,606. Payments to Mr. Davis under the Savings Plan were $4,620 and $4,308, in 1994 and 1993, respectively; payment to Mr Davis under the DC Plan was $9,750 in 1994. Payments to Mr. Peterson under the Savings Plan were $4,500, $4,497 and $6,820, in 1994, 1993 and 1992, respectively; payment to Mr. Peterson under the DC Plan was $9,750 in 1994. Mr. Cougher received payments of $2,945 and $5,980 under the Savings Plan and DC Plan, respectively. The Savings Plan is an individual account plan which provides for deferred compensation as described in Section 401(k) of the Internal Revenue Code and is subject to and complies with all of the principal protective provisions of Titles I and II of the Employee Retirement Income Security Act of 1974 ("ERISA"). The DC Plan replaced the Company's Defined Benefit Pension Plan as of January 1, 1994, and is subject to and complies with ERISA. All employees of the Company, other than those covered by a collective bargaining agreement, may elect to participate in the Savings Plan and systematically save a portion of their compensation and defer federal income taxes on such portion. In addition, the Company may, at its discretion, match a portion of the individuals employee's elected deferrals. For 1994, the Company chose to match employee deferrals up to a maximum of 6% of their salary at a rate of 50% of the amount so deferred. Employees' elective deferrals may be used to purchase shares of Common Stock and the Company may make its contribution to the Savings Plan in cash or Common Stock. Unless otherwise elected, distributions from the Savings Plan are made in lump sum payments. Employees may not withdraw funds from the Savings Plan except upon termination of employment or special hardship. 46 56 At December 31, 1994, there were approximately 60 participants in the Savings Plan and DC Plan which together held 150,574 shares (less than 1% of the outstanding) of Common Stock in addition to its other investments. Shares purchased in accordance with the direction of participating employees are voted in accordance with their instructions. Shares contributed by the Company are voted by the Trustee. (4) Payments received by Mr. Simko as a result of the termination of the Deferred Performance Incentive Compensation ("DPIC") Plan. In December 1992, that plan, which had been frozen since 1991 at 1990 levels, was terminated as to all employees other than Mr. Simko; with respect to Mr. Simko, that plan was terminated in February 1993. The DPIC Plan was established in 1989 with a term of six (6) years, and provided for the annual vesting of benefits after 1991. Upon termination of the DPIC Plan, only those benefits that had vested were paid to participants. No specified performance target, goal or condition to payment was waived with respect to the payment of benefits under the DPIC Plan. (5) Includes $19,575 payment to Mr. Peterson that was accelerated as a result of termination of the Deferred Performance Incentive Compensation Plan. OPTIONS/SAR GRANTS IN LAST FISCAL YEAR Incentive stock options were granted to the Named Executive Officers in the year ended December 31, 1994, as follows:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERMS --------------------------------------- ----------------------- (A) (B) (C) (D) (E) (F) (G) ----- -------------------------------------------------------------------------------------- % OF TOTAL OPTIONS/SARS NUMBER OF SECURITIES GRANTED TO EXERCISE OR UNDERLYING OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION NAME GRANTED (#) FISCAL YEAR ($/SH)(1) DATE 5%($) 10%($) ---- ------------------------ ------------------------------------------------------------- John Simko, CEO . . . . 65,000 shares - Common 11.6 1.625 12/08/04 $66,426 $168,339 William W. Davis . . . . 50,000 shares - Common 8.9 1.625 12/08/04 $51,097 $129,491 Harry F. Cougher . . . . 50,000 shares - Common 8.9 1.625 12/08/04 $51,097 $129,491 - ------------------------------------------
(1) The options are exercisable on or after December 8, 1995. AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES The following table provides information on option/SAR exercises in fiscal 1994 by the Named Executive Officers and the value of such officers' unexercised options/SARs at December 31, 1994.
(A) (B) (C) (D) (E) ----- ---------- --------- ------------------------------ ---------------------------- SHARES VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED ACQUIRED ON REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS EXERCISE (#) ($) OPTIONS/SARS AT FY-END (#) AT FY-END ($) ------------ --------- ----------------------------- ---------------------------- NAME EXERCISABLE(1)UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE (3) ---- ------------------------------ ----------- ----------------- John S. Simko, CEO . . 0 0 50,000 65,000 0 0 William W. Davis . . . 0 0 50,000 50,000 0 0 Robert H. Peterson . . 0 0 50,000 0 0 0 Harry F. Cougher . . . 0 0 50,000 50,000 0 0
47 57 - ------------------------------------------ (1) Options were granted on June 22, 1993, at the most recent closing sale price of the Common Stock of $1.625. (2) Options were granted on December 8, 1994, at the most recent closing sale price of the Common Stock of $1.625. (3) Based on the NYSE closing per share sale price of the Common Stock on December 30, 1994 of $1.625. LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR The Company did not grant any long-term incentive plan awards in 1994, and currently does not maintain a long-term incentive plan. See footnote 4 to the Summary Compensation Table with respect to the termination of the Company's Deferred Performance Incentive Compensation Plan. 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. The following table shows the estimated annual benefits payable under the Pension Plan as in effect on December 31, 1993; after that date benefits ceased to accrue under the Pension Plan. The examples assume retirement at normal retirement age of 65 after assumed periods of service, and a fixed level of social security benefits.
RETIREMENT BENEFIT AT AGE 65(1)(2) ------------------------------------------------------------------------------------------------- YEARS OF SERVICE ---------------------------------------------------------------------------------- REMUNERATION 5 10 15 20 25 30 ------------ ------- -------- -------- -------- -------- -------- 75,000 $ 6,000 $ 12,000 $ 18,500 $ 24,000 $ 30,000 $ 36,500 100,000 8,000 16,000 25,000 33,000 41,000 49,000 150,000 13,000 25,000 38,000 51,000 64,000 76,000 200,000 17,000 34,000 52,000 69,000 86,000 103,000 250,000 22,000 43,000 65,000 87,000 109,000 115,641 300,000 26,000 52,000 79,000 105,000 115,641 115,641 350,000 31,000 61,000 92,000 115,641 115,641 115,641 - ------------------------------------------
(1) On December 31, 1993, the maximum allowable annual benefit was $115,641 under the 1982 Tax Equity and Fiscal Responsibility Act ("TEFRA"), as adjusted. (2) Because of the termination of the Company's previous defined benefit retirement plan during 1986, salaried employees received annuities. Messrs. Simko, Peterson, Davis, and Cougher received annuities providing for annual payments of $10,572, $15,803, $7,320, and $4,638, respectively, at age 65. All officers as a group who were participants (4 persons, Messrs. Simko, Peterson, Davis and Cougher) would receive a minimum of $38,333 per year in the aggregate at their normal retirement date. Upon retirement, the annuity payments will be offset against the retirement benefits payable pursuant to the above table. At the time that benefits ceased to accrue under the Pension Plan (December 31, 1993), the covered compensation of the person listed in the Summary Compensation Table above who participated in the Pension Plan did not differ substantially from the aggregate cash compensation set forth in the table and footnotes thereto, except that Mr. Simko's compensation for pension purposes was limited to $235,840, the then maximum recognizable pay for tax-qualified retirement plans. The 48 58 years of credited service at December 31, 1993, for Mr. Simko was nine years; for Mr. Davis was ten years; for Mr. Peterson was thirteen years; and for Mr. Cougher was nine years. Pursuant to the early retirement program, employees who are age 55 and who have fifteen 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. Mr. Simko's employment contract provides that he shall be eligible for early retirement notwithstanding that he will have less than fifteen years of service with the Company upon expiration of his employment contract. See EMPLOYMENT CONTRACTS. OPTIONS GRANTED TO MANAGEMENT The Company currently has in effect two stock option plans, the 1987 Employee Non-Qualified Stock Option Plan ("the 1987 Plan") and the 1993 Incentive Stock Option Plan (the "1993 Plan"). The 1987 Plan provides for the granting from time to time of options to purchase shares of Common Stock to key employees or potential key employees of the Company and its subsidiaries. The 1987 Plan also provides that all non-employee directors automatically receive an option for 5,000 shares of Common Stock on August 30 each year during the term of the 1987 Plan. Options granted under 1987 Plan vest on, and are exercisable on and after, the first anniversary of the date granted. Options granted under 1987 Plan prior to June 20, 1994, expire 5 years following the date of the grant; options granted under the 1987 Plan after that date expire 10 years following the date of grant. The 1993 Plan provides for the granting, from time to time, to key employees (including officers and directors who are employees) of the Company and its subsidiaries of options including Incentive Stock Options ("ISOs") to purchase up to an aggregate of 2,000,000 shares of the Common Stock. Under the 1993 Plan, the Compensation and Transaction Committee of the Company is authorized to determine the individuals to whom and the time or times at which options will be granted, the number of shares to be subject to each option and to interpret the provisions and supervise the administration of the 1993 Plan. Subject to adjustment in the event of stock dividends, stock splits or similar recapitalization, the shares of Common Stock subject to option under the 1993 Plan are purchased at a price which will not be less than 100% of the fair market value of the Common Stock on the date of the grant. Each option granted under the 1993 Plan vests one year from the date of grant, and shall be for a term not in excess of ten years from the date the option is granted. On December 8, 1994, the Company issued stock options to certain key employees of the Company for a total of 560,000 shares of Common Stock; 556,500 under the 1993 Plan and 3,500 under the 1987 Plan. The per share exercise price for those options is $1.625. COMPENSATION OF DIRECTORS Directors of the Company who are full-time employees do not receive any additional compensation for their services on the Board of Directors or committees thereof. Each non-employee director receives an annual retainer of 3,350 troy ounces of silver or 50 troy ounces of gold, in addition to 235 troy ounces of silver or 3.5 troy ounces of gold per day for each Board or committee meeting attended. During 1994, non-employee directors received gold valued as follows: Messrs. Andersen ($22,026), Babbitt ($27,420), Humphreys ($24,721), Jackson ($27,420), Shaffer ($24,721), Smith ($24,721), Stewart ($23,393), Elvin ($23,393), and Kaback ($26,092). In addition, pursuant to the 1987 Plan, all non- employee directors automatically receive an option for 5,000 shares of Common Stock on August 30 of each year during the term of the 1987 Plan. EMPLOYMENT CONTRACTS Effective January 1, 1994, Mr. Simko, Mr. Davis, Mr. Peterson and Mr. Harry F. Cougher entered into written employment agreements (the "Employment Agreements") with the Company. Each of the Employment Agreements is for a term of three years. In 1995, the Employment Agreements for Mr. Semko, Mr. Davis and Mr. Cougher were amended to extend the term for each agreement for an additional three years to December 31, 1999. 49 59 Pursuant to the Employment Agreements, Messrs. Simko, Davis, Peterson, and Cougher (collectively the "Contracting Employees") are to receive annual base compensation of $250,000, $160,000, $156,000 and $92,000, respectively, which may be increased by the Board of Directors. In the event of the disability or death of a Contracting Employee, the Employment Agreement provides for the continued payment of the base compensation for the remaining term of the agreement, subject to reduction for disability payments separately provided by the Company. In addition, the Contracting Employees may receive such annual incentive compensation based on the performance of the Company or other criteria as may be awarded in the discretion of the Board of Directors, and will participate in any employee benefit plan, employee welfare plan, deferred compensation plan, stock option plan, or any other plan or arrangement of the Company now or hereafter adopted for the benefit of officers or employees generally. In addition, Mr. Simko's agreement provides that he is deemed to have qualified for early retirement under the Company's pension plan for staff employees, notwithstanding that at the expiration of the agreement he shall have less than 15 years of service with the Company. Pursuant to the Employment Agreements, the Company will indemnify each Contracting Employee in the event that he is made, or threatened to be made, a party to any action or proceeding, including any action by or in the right of the Company by reason of the provision of services by him to the Company. Claims or controversies arising under the Employment Agreement will be resolved through arbitration, and all resulting legal and accounting fees and other expenses will be paid by the Company. Pursuant to the Employment Agreements, a Contracting Employee's employment may be terminated by mutual agreement between the Contracting Employee and the Company, by the death of the Contracting Employee, or for cause. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since the beginning of the last fiscal year, the following transactions occurred between the Company and certain officers and directors or affiliates thereof. With respect to each transaction, the Company has determined that the terms of each arrangement were as fair as could have been obtained from unaffiliated persons. PaineWebber, Incorporated was retained by the Company to act as a financial advisor in connection with the Company's Rights Offering in 1994. The Company paid a fee of $250,000 to PaineWebber in connection with those services (plus reimbursement of certain expenses). Mr. G. Chris Andersen, a director of the Company, was, until August of 1995, Vice Chairman of PaineWebber, Incorporated. Effective January 1, 1994, the Company entered into employment agreements with Messrs. Simko, Davis, Peterson and Cougher. See "EMPLOYMENT CONTRACTS." COMPENSATION AND TRANSACTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The following non-employee directors served on the Compensation and Transaction Committee of the Company's Board of Directors during the last completed fiscal year: Daniel D. Jackson, Chairman, V. Dale Babbitt and Hoffer Kaback. There are no compensation committee interlocks. 50 60 LEGAL OPINION The validity of the authorization and issuance of the securities of Sunshine Merger Company offered hereby is being passed upon for Sunshine Merger Company by Evans, Keane, of Boise, Idaho. The Company has received an opinion from Hawley, Troxell, Ennis & Hawley, of Boise, Idaho, regarding the material Federal income tax consequences of the Merger. EXPERTS The consolidated financial statements of Sunshine at December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, appearing in this Proxy Statement/Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. EXCHANGE AGENT Sunshine Merger Company has appointed American Stock Transfer & Trust Company, as Exchange Agent for the Merger. Certificates representing shares of Preferred Stock should not be submitted for exchange until the holder thereof receives a letter of transmittal from the Exchange Agent following the Effective Date of the Merger. It will not be necessary for the holders of Common Stock to surrender or exchange their Common Stock certificates for new certificates representing New Common Stock. Sunshine Mining and Refining Company will pay the fees and expenses of the Exchange Agent. INFORMATION AGENT Sunshine Merger Company has appointed The Herman Group, Dallas, Texas, as Information Agent for the Merger. Any questions regarding or requests for additional copies of this Proxy Statement/Prospectus may be directed to the Information Agent at the telephone number and address below: The Herman Group, Inc. 13760 Noel Road, Suite 320 Dallas, Texas 75240 Telephone: (800) 747-2967 Telecopier: (214) 991-4422 (214) 991-4432 Sunshine Mining and Refining Company will pay the fees and expenses of the Information Agent. SHAREHOLDER PROPOSALS Shareholder proposals submitted for inclusion in Sunshine Merger Company's (the corporate name of which will be changed to Sunshine Mining and Refining Company upon consummation of the Merger) 1996 proxy materials and consideration at its 1996 annual meeting must be received on or before January 6, 1996. Proposals should be sent to: Sunshine Mining and Refining Company, Attention Corporate Secretary, 877 West Main Street, Suite 600, Boise, Idaho 83702. VOTING SECURITIES AND RECORD DATE The Common Stock and Preferred Stock constitute the only classes of the Company's capital stock entitled to vote at the Special Meeting. 51 61 The close of business on [______], 1996, has been fixed as the record date (the "Record Date") for the determination of stockholders entitled to notice of and to vote at the Special Meeting. At the Record Date, [__________ ] shares of Common Stock of the Company and [______________] shares of Preferred Stock of the Company were outstanding and entitled to vote. Each stockholder is entitled to one vote for each share of Common Stock and one vote for each share of Preferred Stock held on the Record Date. Unless otherwise indicated, all information herein concerning ownership of the Company's securities is as of the Record Date. The favorable vote of the holders of a majority of the shares of Common Stock outstanding and entitled to vote at the Special Meeting, and the favorable vote of the holders of a majority of the shares of Preferred Stock outstanding and entitled to vote at the Special Meeting are required for the approval of the Merger Proposal. Holders of the Company's capital stock have no appraisal or similar rights with respect to any of the matters being voted on at the Special Meeting. Votes may be cast for or against the Merger Proposal or shareholders may abstain from voting. Abstentions will be counted as present for purposes of establishing a quorum, and will have the effect of a vote against the Merger Proposal. FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER PROPOSAL. Under the rules of the New York Stock Exchange, Inc. ("NYSE"), brokers who hold shares in street name for customers will not have authority to vote on the Merger Proposal if they have not received instructions from beneficial owners. Proxies are revocable prior to the date of the special meeting. Shareholders giving proxies who attend the special meeting may withdraw their proxies and vote their shares. OTHER MATTERS At the date of this Proxy Statement/Prospectus, the Board of Directors knows of no other matters which will be presented for consideration at the Special Meeting. If any such other matters are properly presented for action at the Special Meeting, it is the intention of the persons named in the accompanying form of proxy to vote the shares represented by the proxy in accordance with their judgment on such matters. All expenses in connection with this solicitation of proxies will be borne by the Company. In addition to solicitation by mail, directors, officers and regular employees of the Company may solicit proxies by telephone, telegram, mail or in person. The Company may also reimburse brokers and other custodians, nominees and fiduciaries holding shares in their names, for their reasonable expenses in sending material to the beneficial owners of shares and obtaining their proxies. Copies of the Company's annual report on Form 10-K for the year ended December 31, 1994, may be obtained without charge by writing to the Company at 877 West Main Street, Suite 600, Boise, Idaho 83702, Attn: Rebecca L. Saunders, Secretary, or by telephone request to (208) 345-0660. The Company has engaged The Herman Group, Dallas, Texas to solicit proxies. The Herman Group will be paid a fee of [$______] plus actual expenses incurred, for this service. BY ORDER OF THE BOARD OF DIRECTORS ----------------------------------- Rebecca L. Saunders, Secretary [________], 1996 52 62 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated financial statements: Consolidated balance sheets at December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated statements of operations for the years ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated statements of cash flows for the years ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Consolidated statements of stockholders' equity for the years ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8 Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
F-1 63 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Sunshine Mining and Refining Company We have audited the accompanying consolidated balance sheets of Sunshine Mining and Refining Company (the "Company") as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunshine Mining and Refining Company at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas February 28, 1995 F-2 64 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
1994 1993 ------------ --------- Current assets: Cash and cash investments . . . . . . . . . . . . . . . . . $ 26,581 $ 4,304 Silver bullion (Note 4) . . . . . . . . . . . . . . . . . . 8,408 8,873 Accounts receivable . . . . . . . . . . . . . . . . . . . . 416 308 Inventories (Note 4) . . . . . . . . . . . . . . . . . . . . 3,151 3,664 Marketable securities . . . . . . . . . . . . . . . . . . . 1,097 - Restricted cash (Note 2) . . . . . . . . . . . . . . . . . . - 1,486 Other current assets . . . . . . . . . . . . . . . . . . . . 1,367 1,225 ------------ --------- Total current assets . . . . . . . . . . . . . . . . . 41,020 19,860 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 4,229 5,150 Property, plant, and equipment, at cost (Note 5) . . . . . . . 137,798 137,573 Less accumulated depreciation, depletion, and amortization . (66,390) (62,223) ------------ --------- 71,408 75,350 ------------ --------- Total assets . . . . . . . . . . . . . . . . . . . . . $ 116,657 $ 100,360 ============ =========
The accompanying notes are an integral part of the financial statements. F-3 65 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED BALANCE SHEETS - (CONTINUED) DECEMBER 31, 1994 AND 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) LIABILITIES AND STOCKHOLDERS' EQUITY
1994 1993 ------------ --------- Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 435 $ 1,035 Accrued expenses (Note 6) . . . . . . . . . . . . . . . . . 2,048 3,109 Current portion of long-term debt (Note 8) . . . . . . . . . - 65 ------------ --------- Total current liabilities . . . . . . . . . . . . . . . 2,483 4,209 8% Silver Indexed Bonds (Notes 2 and 7) . . . . . . . . . . . - 7,571 Other long-term debt (Note 8) . . . . . . . . . . . . . . . . . 1,519 1,922 Accrued pension and other postretirement benefits (Note 11) . . 6,811 14,348 Other long-term liabilities and deferred credits (Notes 9 and 12) . . . . . . . . . . . . . . . . . . 5,436 5,067 Commitments and contingencies (Notes 4, 5, 9, and 12) Stockholders' equity (Notes 8 and 10): Cumulative redeemable preferred stock - aggregate redemption value: 1994 - $119,675; 1993 - $111,148 . . 80,707 78,774 Common stock - par value: $0.01; 400,000 shares authorized; shares issued: 1994 - 196,659; 1993 - 172,223 . . . . . 1,967 1,722 Paid-in capital . . . . . . . . . . . . . . . . . . . . . . 623,181 585,338 Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (605,410) (598,554) ------------ --------- 100,445 67,280 Less treasury stock, 3,664 shares, at cost . . . . . . . . . (37) (37) ------------ --------- 100,408 67,243 ------------ --------- Total liabilities and stockholders' equity . . . . . . $ 116,657 $ 100,360 ============ =========
The accompanying notes are an integral part of the financial statements. F-4 66 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1993 1992 -------- -------- -------- Operating revenues (Note 13) . . . . . . . . . . . . . . . . $ 17,412 $ 17,581 $ 12,926 Costs and expenses: Cost of revenues . . . . . . . . . . . . . . . . . . . . . 18,530 15,817 14,398 Depreciation, depletion, and amortization (Note 5) . . . . 4,167 5,916 6,291 Exploration . . . . . . . . . . . . . . . . . . . . . . . 1,888 1,480 1,942 Metallurgical research . . . . . . . . . . . . . . . . . . 230 201 239 Selling, general, and administrative expense . . . . . . . 5,449 5,080 7,017 Curtailment gain on postretirement benefits other than pensions (Note 11) . . . . . . . . . . . . . . . . . . (6,936) - - Restructuring expense . . . . . . . . . . . . . . . . . . - - 3,000 Loss on disposal of mineral interests (Note 5) . . . . . . - - 7,411 -------- -------- -------- 23,328 28,494 40,298 -------- -------- -------- Operating loss . . . . . . . . . . . . . . . . . . . . . . . (5,916) (10,913) (27,372) Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . 1,134 338 713 Interest expense . . . . . . . . . . . . . . . . . . . . . (1,222) (5,401) (11,210) Loss on induced conversion of 8% Silver Indexed Bonds (Note 7) . . . . . . . . . . . . . . . . . . . . . . . - (12,467) - Other, net . . . . . . . . . . . . . . . . . . . . . . . . 1,081 (168) (2,392) -------- -------- -------- 993 (17,698) (12,889) -------- -------- -------- Loss from continuing operations . . . . . . . . . . . . . . . (4,923) (28,611) (40,261) Discontinued operations, net of applicable income taxes (Note 3) . . . . . . . . . . . . . . . . . . - - (403) Loss before extraordinary item and cumulative effect of a change in accounting principle . . . . . . . . . . . . . . (4,923) (28,611) (40,664) Extraordinary item - gain (loss) on extinguishments of Silver Indexed Bonds (Notes 2 and 7) . . . . . . . . . . . . . . - (13,646) 38,638 Cumulative effect on prior years of a change in the method of accounting for postretirement benefits other than pensions (Note 11) . . . . . . . . . . . . . . . . . . . . - - (11,346) -------- -------- -------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (4,923) (42,257) (13,372) Preferred dividend requirements (Note 10) . . . . . . . . . . 10,460 10,820 11,488 -------- -------- -------- Loss applicable to common shares . . . . . . . . . . . . . . $(15,383) $(53,077) $(24,860) ======== ======== ======== Loss per common share: Continuing operations . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.25) $ (0.44) Discontinued operations . . . . . . . . . . . . . . . . . - - - Extraordinary items . . . . . . . . . . . . . . . . . . . - (0.09) .33 Cumulative effect of change in accounting principle . . . - - (0.10) -------- -------- -------- Loss per common share . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.34) $ (0.21) ======== ======== ======== Weighted average common shares outstanding . . . . . . . . . 185,634 155,383 118,740 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-5 67 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 (IN THOUSANDS)
1994 1993 1992 ------- -------- -------- Cash used by operating activities: Loss from continuing operations . . . . . . . . . . . . . $(4,923) $(28,611) $(40,261) Adjustments to reconcile loss from continuing operations to net cash used by continuing operations: Depreciation, depletion, and amortization . . . . . . 4,167 5,916 6,291 Curtailment gain on postretirement benefits other than pension (Note 11) . . . . . . . . . . . . . . . . (6,936) - - Amortization of discount on Silver Indexed Bonds . . - 682 2,992 Loss on induced conversion of 8% Silver Indexed Bonds (Note 7) . . . . . . . . . . . . . . . . . . - 12,467 - Interest accrued but not paid . . . . . . . . . . . . - - 6,559 Provision for restructuring expense . . . . . . . . . - - 3,000 Realized and unrealized (gains) losses: Disposal of mineral interests (Note 5) . . . . . . - - 7,411 Disposal of other property . . . . . . . . . . . . - - 644 Marketable equity securities . . . . . . . . . . . - 324 215 Issuances of common stock: Interest on 8% Silver Indexed Bonds . . . . . . . 449 3,519 - Services provided and other . . . . . . . . . . . - 780 178 Net (increase) decrease in: Silver bullion . . . . . . . . . . . . . . . . . . 465 (2,051) (2,464) Accounts receivable . . . . . . . . . . . . . . . (109) 1,146 791 Inventories . . . . . . . . . . . . . . . . . . . 513 (704) 4,204 Other current assets . . . . . . . . . . . . . . . (142) (578) 492 Other assets and deferred charges . . . . . . . . - - 396 Net increase (decrease) in: Accounts payable . . . . . . . . . . . . . . . . . (600) 232 137 Accrued expenses . . . . . . . . . . . . . . . . . (1,061) 266 (4,634) Accrued pension and other postretirement benefits (601) 595 (336) Other liabilities and deferred credits . . . . . . 369 (1,581) 1,150 ------- -------- -------- Net cash used by continuing operations . . . . . . . (8,409) (7,598) (13,235) Net cash provided by discontinued operations . . . . - - 1,217 ------- -------- -------- Net cash used by operating activities . . . . . . . . $(8,409) $ (7,598) $(12,018) ------- -------- --------
F-6 68 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 (IN THOUSANDS)
1994 1993 1992 --------- -------- -------- Cash provided (used) by investing activities: Additions to property, plant, and equipment . . . . . . . $ (225) $ (1,047) $ (90) Proceeds from the disposal of property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . - - 5 Other, principally sale of marketable equity securities and investments . . . . . . . . . . . . . . . . . . . . . . (175) 6,258 122 Investing activities of discontinued operations: Proceeds from sale of oil and gas properties (Note 3) . - - 10,043 Expenses of sale . . . . . . . . . . . . . . . . . . . - - (725) --------- -------- -------- Net cash provided (used) by investing activities . . (400) 5,211 9,355 --------- -------- -------- Cash provided (used) by financing activities: Proceeds from issuance of common stock and warrants upon sale of units, net (Note 10) . . . . . . . . . . . 29,763 - - Proceeds from issuance of common stock upon exercise of stock options and warrants . . . . . . . . . . . . . 142 - - Principal repayments and retirements of long-term debt . . (305) (1,026) (1,950) Decrease (increase) in restricted cash . . . . . . . . . . 1,486 3,063 (5,063) --------- -------- -------- Net cash provided (used) by financing activities . . 31,086 2,037 (7,013) --------- -------- -------- Increase (decrease) in cash and cash investments . . . . . . 22,277 (350) (9,676) Cash and cash investments, January 1 . . . . . . . . . . . . 4,304 4,654 14,330 --------- -------- -------- Cash and cash investments, December 31 . . . . . . . . . . . $ 26,581 $ 4,304 $ 4,654 ========= ======== ======== Supplemental cash flow information: Interest paid in cash - continuing operations . . . . . . $ 329 $ 425 $ 914 ========= ======== ========
The accompanying notes are an integral part of the financial statements. F-7 69 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 (IN THOUSANDS)
CUMULATIVE REDEEMABLE PREFERRED STOCK COMMON STOCK PAID-IN TREASURY STOCK ---------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL ---------------------------------------------------------------------------- Balances at December 31, 1991 . . . . . . . . . . . . 7,366 $75,590 115,084 $57,542 $459,985 $(537,674) 4 $(30) $ 55,413 Issuance of common stock for Cumulative Redeemable Preferred Stock (Note 10) . (200) (2,067) 600 300 1,767 - - - - Issuance of common stock upon conversion of Convertible Subordinated Reset Debentures . . . . . . - - 382 191 478 - - - 669 Issuance of common stock for services and other, net . . - - 227 113 60 - 3 5 178 Issuance of common stock upon conversion of note payable to former officer . . . . . . . . . . - - 1,333 667 333 - - - 1,000 Issuance of common stock pursuant to restructuring of Old Silver Indexed Bonds (Note 2) . . . . . . . . . . - - 28,858 14,429 8,883 - - - 23,312 Net loss . . . . . . . . . . . - - - - - (13,372) - - (13,372) Amortization of difference between carrying amount and redemption value of preferred stock . . . . . . - 2,959 - - - (2,959) - - - ---------------------------------------------------------------------------- Balances at December 31, 1992 . . . . . 7,166 $76,482 146,484 $73,242 $471,506 $(554,005) 7 $(25) $ 67,200
F-8 70 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 (IN THOUSANDS)
CUMULATIVE REDEEMABLE PREFERRED STOCK COMMON STOCK PAID-IN TREASURY STOCK ----------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL ----------------------------------------------------------------------------------- Decrease in par value of common stock from $0.50 per share to $0.01 per share (Note 10) - $ - - $(71,777) $ 71,777 $ - - $ - $ - Issuance of common stock upon redemption of 8% Silver Indexed Bonds (Note 7) . . . - - 16,921 169 33,290 - - - 33,459 Issuance of common stock for interest on 8% Silver Indexed Bonds . . . . . . . . . . . - - 2,747 28 3,491 - - - 3,519 Issuance of common stock upon conversion of Convertible Subordinated Reset Debentures - - 922 9 1,604 - - - 1,613 Issuance of common stock to retire notes payable . . . . - - 4,825 48 2,917 - 3,613 (36) 2,929 Issuance of common stock for services and other, net . . - - 324 3 753 - 44 24 780 Net loss . . . . . . . . . . . - - - - - (42,257) - - (42,257) Amortization of difference between carrying amount and redemption value of preferred stock . . . . . . . . . . . - 2,292 - - - (2,292) - - - ----------------------------------------------------------------------------------- Balances at December 31, 1993 . . . . . 7,166 78,774 172,223 1,722 585,338 (598,554) 3,664 (37) 67,243 Issuance of common stock and warrants upon sale of units (Note 10) . . . . . . . . . - - 20,200 202 29,561 - - - 29,763 Issuance of common stock upon exercise of stock options and warrants . . . . . . . . . . - - 84 1 141 - - - 142 Issuance of common stock upon redemption of 8% Silver Indexed Bonds (Note 7) . . . - - 3,824 39 7,532 - - - 7,571 Issuance of common stock for interest on 8% Silver Indexed Bonds . . . . . . . . . . . - - 221 2 447 - - - 449 Issuance of common stock upon conversion of Convertible Subordinated Reset Debentures - - 94 1 162 - - - 163 Other, net . . . . . . . . . . - - 13 - - - - - - Net loss . . . . . . . . . . . - - - - - (4,923) - - (4,923) Amortization of difference between carrying amount and redemption value of preferred stock . . . . . . . . . . . - 1,933 - - - (1,933) - - - ----------------------------------------------------------------------------------- Balance at December 31, 1994 . . . . . . . . . . . . 7,166 $80,707 196,659 $ 1,967 $623,181 $(605,410) 3,664 $(37) $100,408 ===================================================================================
The accompanying notes are an integral part of the financial statements. F-9 71 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Statement Presentation Sunshine Mining and Refining Company ("Sunshine" or the "Company") is a holding company whose principal subsidiary is Sunshine Precious Metals, Inc. ("Sunshine Precious Metals"). Sunshine Precious Metals mines, refines, and markets silver and certain byproduct metals to commercial customers. 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. During 1992, the Company sold substantially all of the remaining assets of its other principal subsidiary, Woods Research and Development Corporation ("Woods"), which was engaged in the development and production of oil and natural gas. On March 9, 1992, Sunshine Precious Metals filed a proceeding under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. The plan of reorganization, as amended, was consummated on December 2, 1992. In December 1992, the Company discontinued minting and marketing precious metal bullion for retail sale. See Notes 2 and 3. Certain previously reported amounts have been reclassified to conform to the 1994 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 Precious metals inventories and silver bullion are stated at estimated net realizable prices. Materials and supplies are carried at the lower of cost (principally average cost) or market. Revenue Recognition Sales of refined metals are recognized as revenue at the time of shipment to the customer. Sales of refinery residue sold directly to smelters are recorded upon settlement with the smelters. Adjustments to the carrying value of inventories held for sale or investment are included in revenues. F-10 72 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Marketable Securities and Investments Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Adoption of SFAS No. 115 did not have a significant effect on the Company's financial position at January 1, 1994, or the results of its operations for the year ended December 31, 1994. All marketable securities are classified as available-for-sale securities under SFAS No. 115. Unrealized holding gains and losses on securities available-for-sale have not been significant. Other investments are carried at cost, which does not exceed net realizable value. 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 5. Depletion of precious metal mineral interests is computed using the unit-of-production method based on estimated mineral 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. Income Taxes The Company has adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, 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 future tax benefit only to the extent, based on available evidence, it is more likely than not it will be realized. The effect on deferred taxes, of a change in income tax rates, is recognized in the period that includes the enactment date. Environmental Expenditures Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals will coincide with completion of a feasibility study or the Company's commitment to a formal plan of action. F-11 73 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings (Loss) Per Share Earnings (loss) per common share is computed by dividing the loss applicable to common stockholders by the weighted average number of common shares and common share equivalents represented by options and warrants, if such common share equivalents have a dilutive effect. Fully diluted earnings (loss) per common share computations also assume conversion of the Convertible Subordinated Reset Debentures and the 8% Silver Indexed Bonds, if such conversion has a dilutive effect. For the years ended December 31, 1994, 1993, and 1992, neither the common share equivalents nor the assumed conversion of the debentures had a dilutive effect on the loss per share calculations. Accordingly, the loss per share calculations for such periods are based on the weighted average number of common shares outstanding during each year. 2. BANKRUPTCY PLAN OF SUNSHINE PRECIOUS METALS AND RESTRUCTURING On March 9, 1992, Sunshine Precious Metals filed a prepackaged bankruptcy plan of reorganization (the "Plan") with the objective of restructuring eight separate series of silver indexed bonds (the "Old Silver Indexed Bonds") issued from 1980 to 1986 by Sunshine Precious Metals. The Plan, as amended, was consummated on December 2, 1992. Pursuant to the amended Plan, holders of the Old Silver Indexed Bonds received: (i) $800 principal amount of a new issue of silver indexed bonds of Sunshine Precious Metals, bearing interest at an annual rate of 8%, due December 1, 2006 (the "8% Silver Indexed Bonds"), and (ii) shares of common stock having a value of $200, as determined by the Plan, for each outstanding $1,000 principal amount of Old Silver Indexed Bonds, and (iii) additional shares of common stock in satisfaction of accrued and unpaid interest. As a result, an aggregate of approximately 28.9 million shares of common stock were issued upon consummation of the Plan. See Note 7 for a summary of the terms of the 8% Silver Indexed Bonds. No other liabilities were compromised as a result of the consummation of the Plan. Under the Plan, the Company established a special deposit of $1 million to fund the operating deficits of Sunshine Precious Metals, in certain circumstances. These funds were released to the Company upon redemption of the remaining 8% Silver Indexed Bonds in 1994. As a result of the restructuring of the Old Silver Indexed Bonds in 1992, the Company recognized an extraordinary gain of approximately $38.6 million, representing the difference between the aggregate carrying value of the Old Silver Indexed Bonds and related liability for accrued interest extinguished, and the estimated aggregate fair value of the 8% Silver Indexed Bonds and the Company's common stock issued to the bondholders. During 1992, the Company recorded a restructuring charge of $3.0 million representing severance costs associated with the relocation of the Company's headquarters from Dallas, Texas to Boise, Idaho and costs incurred in connection with the renegotiation and cancelation of the former chief executive officer's employment contract. F-12 74 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 3. DISCONTINUED OPERATIONS In 1992, substantially all of Woods' remaining oil and natural gas operations, consisting principally of Canadian oil and natural gas properties, were sold for approximately $10.0 million. In 1992, the Company also discontinued fabricating, minting, and marketing precious metal bullion for retail sale. The results of operations of Woods' and the retail precious metal bullion business are presented as "Discontinued operations" in the accompanying consolidated statements of operations. The loss from discontinued operations for the year ended December 31, 1992 is comprised of the following (in thousands):
1992 ------- Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,097 Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,500) ------- Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . $ (403) =======
4. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS Inventories at December 31 consist of the following (in thousands):
1994 1993 ------ ------ Precious metals inventories: Work in process . . . . . . . . . . . . . . . . . . . . . . $2,241 $2,766 Finished goods . . . . . . . . . . . . . . . . . . . . . . 173 210 Materials and supplies inventories . . . . . . . . . . . . 737 688 ------ ------ $3,151 $3,664 ====== ======
Beginning in 1991, management of the Company decided to hold as an investment, a portion of Sunshine Precious Metals' silver production, pending the recovery of silver prices. As a result, the Company held as an investment, $8.4 million and $8.9 million of silver bullion, in excess of normal operating requirements at December 31, 1994 and 1993, respectively. At December 31, 1994, the Company had sold covered call options on 500,000 ounces of the silver bullion held for investment. The options had strike prices ranging from $6.00 per ounce to $6.50 per ounce and were exercisable by the holders between January 31 and February 28, 1995. Option premiums received, which have not been material, are deferred and recognized at the end of the option period. At February 28, 1995, the Company had no open options outstanding. F-13 75 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 5. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31 are summarized as follows (in thousands):
1994 1993 --------- --------- Precious metals mineral interests . . . . . . . . . . . . . $ 82,847 $ 82,847 Mine improvements . . . . . . . . . . . . . . . . . . . . . 16,849 16,849 Buildings, leasehold improvements, and equipment . . . . . 37,052 36,833 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050 1,044 --------- --------- 137,798 137,573 Less accumulated depreciation, depletion, and amortization (66,390) (62,223) --------- --------- $ 71,408 $ 75,350 ========= =========
The principal mineral interest of the Company at December 31, 1994, is the Sunshine Mine located in Kellogg, Idaho. The Company curtailed operations at the Sunshine Mine in 1991, reducing production to approximately 500 tons of ore per day, resulting in an annual production rate of approximately 2.2 to 2.5 million ounces of silver. The Company is presently exploring new areas of the Sunshine Mine with the intent of significantly improving the grade of ore mined, which, if successful, would significantly reduce the cost of production per ounce. Since 1982, the Company owned leasehold interests in the Burgin and Trixie Mines located in the East Tintic Mining District (the "District") near Eureka, Utah. In 1992, the Company suspended operations at the Trixie Mine and returned all properties held in the District, including the Burgin Mine, to the respective lessors. As a result, the investment in these properties ($7.1 million) and related inventories ($.3 million) was written-off as of September 30, 1992. Effective January 1, 1994, the Company extended the estimated remaining useful lives of the buildings and equipment of the silver refinery six to ten years based upon available technology and anticipated severity of service. The effect of this change in accounting estimate was to decrease depreciation expense and the net loss for the year ended December 31, 1994, by approximately $1.1 million or $.01 per common share. The Company periodically, and at least annually, evaluates its mining properties for permanent impairment, based on undiscounted expected future cash flows. Such estimates are based on assumptions as to future silver prices, mining costs, and recoverable reserves which management believes are reasonable, based on historical silver prices and production. The Company currently believes that the price of silver will increase to its normal historical trading range and that additional reserves of higher grades than have been mined recently are present in the Sunshine Mine. Accordingly, the Company does not believe it is probable that its investment in its mining properties, including the Sunshine Mine, has been permanently impaired at December 31, 1994. However, unless the price of silver increases or the cost of production per ounce is reduced, the Company will not be able to recover its investment in the Sunshine Mine. As a result of low through-put resulting from curtailed operations at the Sunshine Mine, the Company expects to temporarily suspend operation of the silver refinery in 1995. Operations will be F-14 76 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 5. PROPERTY, PLANT, AND EQUIPMENT (CONTINUED) suspended until higher levels of through-put are achievable either through increased production from the Sunshine Mine or through the reopening of other mines in the Coeur d'Alene Mining District. 6. ACCRUED EXPENSES Accrued expenses at December 31 consist of the following (in thousands):
1994 1993 ------- ------- Compensation, vacation, and severance . . . . . . . . . . . $ 788 $ 762 Interest . . . . . . . . . . . . . . . . . . . . . . . . . 63 126 Taxes, other than income taxes . . . . . . . . . . . . . . 182 1,138 Environmental remediation (Note 12) . . . . . . . . . . . . 400 400 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 615 683 ------- ------- $ 2,048 $ 3,109 ======= =======
7. 8% SILVER INDEXED BONDS During 1993 and 1994, the Company retired all of its outstanding 8% Silver Indexed Bonds through various redemption transactions for the Company's common stock, which are described below. As a result of these transactions, in 1993, the Company recorded a charge of $12.5 million, representing the loss on an induced conversion, and an extraordinary charge of $13.6 million, relating to the redemption of the remaining outstanding bonds. Bondholders had the right on each quarterly interest payment date to put each $1,000 principal amount 8% Silver Indexed Bond to Sunshine Precious Metals for, initially, 300 shares of the Company's common stock. During 1993, 2.6 million shares of the Company's common stock were issued to redeem $8.4 million principal amount ($2.1 million carrying amount) of 8% Silver Indexed Bonds tendered pursuant to such put option. During 1993, the Company and Sunshine Precious Metals amended the indenture governing the 8% Silver Indexed Bonds to allow bondholders to put the bonds to the Company on August 16, 1993 and September 1, 1993, in exchange for $1,000 of the Company's common stock valued pursuant to a formula in the indenture. As a result of the modification, 10.0 million shares of the Company's common stock were issued to redeem $30.2 million principal amount ($7.8 million carrying amount) of 8% Silver Indexed Bonds that were put to the Company, resulting in a loss from the induced conversion of $12.5 million. Sunshine Precious Metals was entitled to call the 8% Silver Indexed Bonds at par, plus accrued interest, in cash or in stock. However, no more than 20% of the amount initially issued could be called during any 12-month period. In December 1993, 4.2 million shares of the Company's common stock were issued to redeem $11.0 million principal amount ($2.9 million carrying amount) of 8% Silver Indexed Bonds that were called by Sunshine Precious Metals, resulting in an F-15 77 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 7. 8% SILVER INDEXED BONDS (CONTINUED) extraordinary loss of $8.1 million. In addition, in November 1993, the Company's Board of Directors determined that the remaining $7.6 million principal amount of 8% Silver Indexed Bonds would be called on December 1, 1994, and the Company communicated this decision to the bondholders. As a result, the Company accrued an extraordinary charge of $5.5 million in 1993 related to its obligation to call the bonds in 1994. In December 1994, 3.8 million shares of the Company's common stock were issued to redeem the remaining $7.6 million principal amount of 8% Silver Indexed Bonds. No gain or loss was recognized in 1994 as a result of the call and redemption of these bonds. Interest expense for 1994 includes interest on the outstanding bonds at their stated rate of 8% through the date of redemption. If the loss had not been recorded until the bonds were actually redeemed, the loss from continuing operations and the net loss for the year ended December 31, 1994, would have increased approximately $180,000 and $5.5 million ($0.03 per common share), respectively, and the net loss for the year ended December 31, 1993 would have decreased approximately $5.5 million ($0.04 per share). Interest on the 8% Silver Indexed Bonds was payable quarterly in cash or, at the option of Sunshine Precious Metals, in shares of the Company's common stock. 8. OTHER LONG-TERM DEBT Other long-term debt at December 31 consists of the following (in thousands):
1994 1993 ------ ------ 9% Convertible Subordinated Reset Debentures, due July 15, 2008 . . . . . . . . . . . . . . . . . . . . . . $1,519 $1,682 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . - 305 ------ ------ 1,519 1,987 Less current maturities . . . . . . . . . . . . . . . . . . - (65) ------ ------ $1,519 $1,922 ====== ======
The Convertible Subordinated Reset Debentures due July 15, 2008 (the "Debentures") are convertible at any time prior to maturity or redemption into shares of common stock of the Company at a conversion price of $1.66 per share, subject to adjustment. The Debentures are redeemable, at the option of the Company, in whole or in part, at redemption prices declining from 103% in 1995 to 100% in 1998, together with accrued and unpaid interest. The Debentures are unsecured and subordinated in right of payment to senior indebtedness (as defined). The indenture governing the Debentures contains certain covenants restricting the ability of the Company to declare or pay cash dividends and make certain distributions on its capital stock. Pursuant to these covenants, the Company is prohibited from paying cash dividends on shares of its common stock and its preferred stock. F-16 78 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 9. INCOME TAXES Revenue Canada has examined Woods' tax returns for various prior years and has proposed certain adjustments for additional taxes. The proposed adjustments are being contested by the Company; therefore, no payments have been made for the proposed additional taxes. Based on an analysis of the proposed adjustments, the Company has accrued $1.0 million for additional income taxes, plus interest at December 31, 1994. Management believes that such provision is adequate to cover the additional income taxes that may ultimately result from the resolution of these matters. The Company has incurred losses during each of the three years in the period ended December 31, 1994, and accordingly, provisions for income taxes were not required. The computation of the net deferred tax asset (liability) at December 31 is as follows (in thousands):
1994 1993 -------- -------- Deferred tax liabilities: Property, plant, and equipment . . . . . . . . . . . . . $(19,399) $(20,062) Deferred tax assets: Accrued pension and other postretirement benefits . . . . 2,384 5,257 Net operating loss carryforward . . . . . . . . . . . . . 82,250 70,000 -------- -------- 84,634 75,257 Less valuation allowance . . . . . . . . . . . . . . . . . (65,235) (55,195) -------- -------- $ - $ - ======== ========
At December 31, 1994, the Company had net operating loss carryforwards for federal income tax purposes of approximately $235 million. The loss carryforwards expire principally in the years 1997 through 2009. 10. STOCKHOLDERS' EQUITY The Company has authorized 20.0 million shares of preferred stock, of which 7.2 million shares, designated as the $11.94 (Stated Value) Cumulative Redeemable Preferred Stock ("Preferred Stock"), were issued and outstanding at December 31, 1994 and 1993. The Preferred Stock accrues dividends at an annual rate of $1.19 per share, payable quarterly. If a dividend is not paid in cash, the Company may issue to the holders of Preferred Stock, shares of the Company's common stock, having a value of 111% of the amount of the cash dividend requirement. The Company has not made any dividend payments subsequent to 1990, either in cash or in shares of its common stock. At December 31, 1994, dividends in arrears aggregated approximately $34.1 million. The Preferred Stock is subject to optional redemption at any time and mandatory annual redemptions of 808,279 shares. In the event a mandatory redemption payment is not timely-made in cash, the Company is required, in certain circumstances, to redeem such shares by issuance of common stock, utilizing the same valuation method as is applied in the payment of F-17 79 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 10. STOCKHOLDERS' EQUITY (CONTINUED) dividends. As a result, the Company has the unconditional right to redeem the Preferred Stock for shares of its common stock, pursuant to the terms of the Preferred Stock agreement. The Company intends to make dividend and redemption payments, when paid, through the issuance of shares of its common stock. Accordingly, the Preferred Stock is included as a component of stockholders' equity in the accompanying consolidated balance sheets. The Company has not made any mandatory redemption payments either in cash or in shares of its common stock because the terms of the Preferred Stock do not permit such mandatory redemption if any dividends are in arrears. There are no penalties to the Company for failing to make such mandatory redemptions. Pursuant to the Certificate of Designation, Rights, and Preferences, the final mandatory redemption is to be made by the Company, on or prior to, July 31, 2000. The Company takes no position as to whether dividend arrearages at July 31, 2000 would also prohibit the redemption of the Preferred Stock. Holders of the Preferred Stock are entitled to vote as a class to elect one director of the Company, if dividends are paid in common stock for four consecutive dividend payments. Holders of the Preferred Stock are also entitled to vote, as a class, to elect two additional directors upon the failure of the Company to pay two consecutive dividend payments. As a result of the quarterly dividends being paid in common stock through 1990 and because the Company elected not to declare a dividend for any quarter subsequent to 1990, holders of the Preferred Stock are entitled to elect three members of the Company's Board of Directors. The difference between the carrying amount and the stated value of the Preferred Stock is being accrued ratably over the period the Preferred Stock is expected to be outstanding under the provisions of the mandatory redemption requirements. Accordingly, $1.9 million, $2.3 million, and $3.0 million has been charged to the deficit for the years ended December 31, 1994, 1993, and 1992, respectively, and added to the carrying amount of the Preferred Stock. In February 1994, the Company distributed to holders of its common stock, transferable rights to purchase units, each unit consisting of two shares of the Company's common stock and one warrant to purchase one share of common stock. Stockholders received one right for each 17 shares of common stock held. Pursuant to the offering, the Company issued 20.2 million shares of common stock and 10.1 million warrants and received net proceeds of approximately $29.8 million. The initial exercise price of the warrants is $2.12 per share. The exercise price and number of shares purchasable upon exercise of the warrants are subject to antidilution adjustments. The warrants expire on March 9, 1999 and may be redeemed at the option of the Company, in whole or in part, at any time on or after March 9, 1996, at a redemption price of $0.50 per warrant. F-18 80 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 10. STOCKHOLDERS' EQUITY (CONTINUED) The Company has two stock option plans under which options may be granted to key members of management. The stock option plans, as amended, cover a total of 3.0 million shares of the Company's common stock, with 1.6 million options being available for grant at December 31, 1994. The option price may not be less than the market price of the common stock on the date granted. Payment of the exercise price may be made in cash or by delivery of shares of the Company's common stock, having a market value equal to the exercise price. Stock option activity for the years ended December 31, 1994, 1993, and 1992, is summarized as follows (dollar amounts in thousands, except per share amounts):
OPTION PRICE ------------------------------------- NUMBER OF PRICE RANGE PER SHARES SHARE TOTAL ------------ --------------------- ---------- Options outstanding, December 31, 1991 (401,250 exercisable) . . . . . . . . . . . 611,400 $1.375-$6.375 $ 2,215 Options canceled . . . . . . . . . . . . (481,400) $2.625-$6.375 (1,797) Options granted . . . . . . . . . . . . . 20,000 $0.875 17 ------------ ---------- Options outstanding, December 31, 1992 (100,000 exercisable) . . . . . . . . . . . 150,000 $ 0.875-$4.00 435 Options canceled . . . . . . . . . . . . (90,000) $ 0.875-$4.00 (309) Options granted . . . . . . . . . . . . . 821,000 $1.625-$2.875 1,371 ------------ ---------- Options outstanding, December 31, 1993 (50,000 exercisable) . . . . . . . . . . . 881,000 $0.875-$3.125 1,497 Options canceled . . . . . . . . . . . . (76,000) $1.625-$3.125 (146) Options exercised . . . . . . . . . . . . (70,000) $1.625 (113) Options granted . . . . . . . . . . . . . 605,000 $1.625-$1.875 994 ------------ ---------- Options outstanding, December 31, 1994 (723,750 exercisable) . . . . . . . . . . . 1,340,000 $0.875-$3.00 $ 2,232 ============ ==========
11. EMPLOYEE BENEFIT PLANS Pensions have been under trusteed defined benefit plans covering substantially all employees. The benefits under the plans are based on years of service and, for employees not covered by a collective bargaining agreement, compensation levels. The plan for hourly employees covered by collective bargaining agreements also includes provisions that would apply in the event of the permanent shutdown of the Sunshine Mine for present employees who were also covered by a predecessor plan terminated in 1986. F-19 81 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 11. EMPLOYEE BENEFIT PLANS (CONTINUED) Net periodic pension costs relating to continuing operations for the Company's defined benefit plans for the years ended December 31, 1994, 1993, and 1992, consist of the following (in thousands):
1994 1993 1992 ----- ------ ----- Service cost . . . . . . . . . . . . . . . . . . $ 294 $ 255 $ 427 Interest cost . . . . . . . . . . . . . . . . . . 343 185 247 Actual return on plan assets . . . . . . . . . . 162 (123) (56) Net amortization and deferrals . . . . . . . . . (230) (137) (264) Curtailment gain . . . . . . . . . . . . . . . . - (241) - ----- ------ ----- Net periodic pension cost . . . . . . . . . . . . $ 569 $ (61) $ 354 ===== ====== =====
The following table sets forth the funded status of the Company's trusteed defined benefit plans and the related amounts included in other long-term liabilities and deferred credits at December 31 (in thousands):
1994 1993 ------- ------ Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,165 $ 2,510 Actuarial present value of projected benefit obligation: Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,283 2,352 Nonvested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 349 ------- ------ Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . 3,581 2,701 ------- ------ Plan assets less than projected benefit obligation . . . . . . . . . . . . (1,416) (191) Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . 1,461 198 Unrecognized net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . (653) (594) Unrecognized transition net asset . . . . . . . . . . . . . . . . . . . . . (171) (199) Additional minimum liability . . . . . . . . . . . . . . . . . . . . . . . (1,002) (437) ------- ------ Accrued pension liability recognized in the consolidated balance sheets . . . . . . . . . . . . . . . . . . . . . . $(1,781) $(1,223) ======= ======
The following significant assumptions were used in computing pension costs for the Company's trusteed defined benefit plans:
1994 1993 1992 ----- ------- ------- Discount rate . . . . . . . . . . . . . . . . . . . . . . 8.25% 7.00% 7.00% Rate increase in compensation . . . . . . . . . . . . . . 0% 0%-4.8% 0%-6.5% Expected long-term rate of return on assets . . . . . . . 9.0% 9.0% 9.0%
F-20 82 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 11. EMPLOYEE BENEFIT PLANS (CONTINUED) 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. Trusteed assets of the plans consist of pooled fixed income securities, pooled equity securities, and cash or cash equivalents. The Company's pension plan for employees not covered by a collective bargaining agreement was amended to freeze all participants' benefits as of December 31, 1993. The Company recognized a $241,000 curtailment gain as a result of this plan amendment. In 1994, the Company negotiated the termination of certain postretirement medical and dental benefits in exchange for amendments to pension benefits. Such amendments resulted in an increase in pension costs in 1994 of $524,000. Effective January 1, 1994, the Company established a defined contribution plan ("DC Plan") for employees not covered by a collective bargaining agreement. The Company's Board of Directors will determine annually if a contribution will be made, and if so, what percentage will be contributed. For 1994, the Company contributed approximately 6.5% of each employee's eligible 1993 compensation to the DC Plan, resulting in a charge to continuing operations of $164,000. The Company also sponsors a plan to provide retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for all employees not covered by a collective bargaining agreement who have completed a specified term of service. Company contributions may range from 0% to 100% of employee contributions, up to a maximum 6% of eligible employee compensation, as defined. Employees may elect to contribute up to 10% of their eligible compensation on a pretax basis. Benefits under the 401(k) Plan are limited to the assets of the 401(k) Plan. Company contributions charged to continuing operations during 1994, 1993, and 1992 were $64,000, $59,000, and $121,000, respectively. In 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106"). The effect of adopting the new standard was to increase accrued postretirement benefit costs and the accumulated deficit at January 1, 1992, by $11.3 million and to increase net periodic postretirement benefit cost and the net loss for 1992 by $.7 million. During 1994, the Company negotiated the termination of postretirement medical and dental benefits for the Company's existing hourly workforce and certain retired hourly employees and eliminated such benefits for salaried employees. As a result, the Company recognized net curtailment gains aggregating $6.9 million in 1994. Postretirement medical and dental benefits are currently provided only to certain employees who retired before 1997. The Company's policy is to fund the cost of these plans as claims are incurred. F-21 83 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 11. EMPLOYEE BENEFIT PLANS (CONTINUED) The following table sets forth the computation of the accrued liability for postretirement medical, dental, and life insurance benefits at December 31 (in thousands):
1994 1993 ------- -------- Accumulated postretirement benefit obligation: Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,368 $ 6,739 Fully eligible active participants . . . . . . . . . . . . . 62 1,405 Other active plan participants . . . . . . . . . . . . . . . 93 5,254 ------- -------- 5,523 13,398 Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . (493) (273) ------- -------- Accrued postretirement benefit cost . . . . . . . . . . . . . . . $ 5,030 $13,125 ======= ========
Net periodic postretirement benefit cost for these plans includes the following components for the years ended December 31, 1994, 1993, and 1992 (in thousands):
1994 1993 1992 ---- ------ ------ Service cost . . . . . . . . . . . . . . . . . . $115 $ 318 $ 300 Interest cost . . . . . . . . . . . . . . . . . . 608 945 889 ---- ------ ------ Net periodic cost . . . . . . . . . . . . . . . . $723 $1,263 $1,189 ==== ====== ======
The weighted-average annual assumed rate of increase in the per capita cost of covered medical and dental benefits is 8.5% for 1995 (9.0% for 1994) and is assumed to decrease gradually to 5% for 2003 and remain at that level thereafter. 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 change the accumulated postretirement benefit obligation as of December 31, 1994, by $347,600 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1994 by $56,200. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.5% at December 31, 1994, and 7% at December 31, 1993. 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. F-22 84 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 12. COMMITMENTS AND CONTINGENCIES In December 1989, the United States Environmental Protection Agency ("EPA") notified Sunshine Precious Metals that it is a "Potentially Responsible Party" ("PRP") at the Bunker Hill Superfund Site in Kellogg, Idaho. During 1990 and 1991, the Company and other PRPs, without admitting liability, funded soil removal and remediation programs at the site. The Company's share of the cost of these programs totaled approximately $239,000. Without admitting liability, the Company and several PRPs have agreed to do remediation work in the residential and certain commercial areas encompassed by the Bunker Hill Superfund Site pursuant to an EPA and State of Idaho approved work plan. In exchange, the EPA and the State of Idaho released the settling PRPs from all liability for cleanup of the Bunker Hill Smelter Complex, reduced the EPA's claim for reimbursement of past costs from $17 million to $1 million, plus a percentage of proceeds received by the PRPs from insurance companies, if any, and agreed that the work orders from 1990 through 1993 were deemed satisfied and discharged. The remediation to be undertaken by the Company and the PRPs is expected to take approximately seven years. On November 17, 1994, the United States District Court for the District of Idaho agreed to enter a Consent Decree containing the terms of this agreement. At December 31, 1994, the Company has accrued $2.5 million representing management's estimate of the remaining liability for its share (12.4%) of the remediation costs at the Bunker Hill Superfund Site. The liability for remediation costs under the Consent Decree is, however, joint and several. Thus, if any other settling party or parties does not comply with the Consent Decree, the exposure for the Company and Sunshine Precious Metals could increase. However, management does not believe that the ultimate liability that may result from this matter will have a material adverse effect on the Company's consolidated financial position or results of operations. In November 1988, the EPA notified Sunshine Precious Metals that it is a PRP at the Spokane Junkyard site near Spokane, Washington. The Company does not believe it will be required to pay any cleanup costs at the Spokane Junkyard site. No records of Sunshine Precious Metals have been discovered by it or the EPA showing that Sunshine Precious Metals ever transmitted any material to the site. The Company is subject to certain other legal proceedings and claims that arise in the conduct of its business. Although it is not possible to predict the outcome of such matters, in the opinion of management, the ultimate outcomes of these matters will not have a material adverse effect on the Company's consolidated financial position or consolidated results of operations. In September 1994, the Company entered into an agreement with Empresa Argentina de Cemento Armado, S.A., whereby the Company will earn a 50% interest in certain mineral concessions in the Chubut province of Argentina by spending $2.1 million in exploration and development on the concessions during the next three years. The Company can terminate the agreement at any time. F-23 85 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) In August 1994, the Company entered into a lease agreement with American Gold Resources Corporation in which the Company agreed to spend a minimum of $3 million over a five-year period in exploration, development, or mining on certain gold mining properties in Colorado. The Company can terminate the agreement at any time. 13. SIGNIFICANT CUSTOMERS In 1994, two customers accounted for sales of refined silver aggregating approximately $12.5 million. In 1993, one customer accounted for sales of refined silver aggregating approximately $9.9 million. In 1992, one customer accounted for sales of refined silver aggregating approximately $4.8 million, and one other customer accounted for sales of ore aggregating approximately $2.0 million. 14. PRECIOUS METALS RESOURCES (UNAUDITED) The table below presents data on proved and probable ore reserves, production and average prices for each of the years in the five-year period ended December 31, 1994 (in thousands, except average prices):
1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Sunshine Mine: Reserves at December 31: Ounces of silver . . . . 27,908 29,961 29,461 30,584 36,537 Pounds of copper . . . . 10,266 10,969 10,855 11,253 13,359 Production: Tons of ore . . . . . . . 107 100 105 160 235 Ounces of silver . . . . 2,079 2,298 2,540 3,496 5,260 Pounds of copper . . . . 722 813 883 1,272 1,807 Revenue - Virginius Mine: Reserves at December 31: Ounces of silver . . . . 5,098 - - - - East Tintic Mining District: Reserves at December 31: Ounces of silver . . . . - - - 24,246 24,284 Ounces of gold . . . . . - - - 7 9 Pounds of copper . . . . - - - 1,324 1,412 Production: Tons of ore . . . . . . . - - 37 41 31 Ounces of silver . . . . - - 159 201 208 Ounces of gold . . . . . - - 6 8 9 Pounds of copper . . . . - - 221 281 231 Average prices: Ounce of silver . . . . . . $ 5.29 $ 4.30 $ 3.94 $ 4.04 $ 4.82 Ounce of gold . . . . . . . $ 384.03 $ 359.77 $ 343.73 $ 362.08 $ 383.59 Pound of copper . . . . . . $ 1.07 $ 0.85 $ 1.03 $ 1.06 $ 1.18
F-24 86 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 14. PRECIOUS METALS RESOURCES (UNAUDITED) (CONTINUED) The ore reserves and production information relate to mines in operation or development. In June 1991, the Company curtailed its mining operations at the Sunshine Mine, reducing production to approximately 500 tons per day, which has resulted in an annual production rate of approximately 2.1 to 2.5 million ounces of silver. During October 1992, the Company suspended operations at the Trixie Mine and returned all properties held in the East Tintic Mining District, including the Burgin Mine, to the respective lessors. See Note 5. The decrease in silver reserves of the Sunshine Mine in 1991, resulted principally from the reclassification of certain ore bodies as a result of mining activities and certain areas not being fully developed because of the curtailed operations. 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1994 and 1993 is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED -------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ---------- ----------- 1994: Operating revenues . . . . . . . . . . . . $ 4,026 $ 3,458 $ 5,009 $ 4,919 Operating income (loss) . . . . . . . . . . 3,505 (1,971) (2,894) (4,556) Income (loss) from continuing operations . 3,196 (1,060) (2,828) (4,231) Income (loss) applicable to common shares . 540 (3,715) (5,419) (6,789) Income (loss) per common share . . . . . . .00 (.02) (.03) (.03) 1993: Operating revenues . . . . . . . . . . . . $ 2,913 $ 4,408 $ 3,150 $ 7,110 Operating income (loss) . . . . . . . . . . (3,912) (3,069) (4,157) 225 Loss from continuing operations . . . . . . (5,322) (4,365) (17,413) (1,511) Loss applicable to common shares . . . . . (8,030) (7,129) (20,105) (17,813) Loss per common share . . . . . . . . . . . (.05) (.05) (.13) (.11)
Operating income for the three months ended March 31, 1994, includes a gain of $5.5 million resulting from the negotiated termination of postretirement medical and dental benefits for the Company's existing hourly workforce. See Note 11. The loss from continuing operations for the three months ended September 30, 1993, includes a loss of $12.5 million resulting from an induced conversion of the 8% Silver Indexed Bonds. See Note 7. The loss applicable to common shares for the three months ended December 31, 1993, includes extraordinary losses aggregating $13.6 million resulting from redemptions of the 8% Silver Indexed Bonds. See Note 7. F-25 87 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands) ASSETS
September 30,1995 ----------------- Current assets: Cash and cash investments $ 18,993 Silver bullion 8,987 Accounts receivable 2,013 Inventories (Note 2) 1,698 Marketable securities 39 Other current assets 1,455 ---------------- Total current assets 33,185 Property, plant and equipment, at cost 138,002 Less accumulated depreciation, depletion and amortization (69,113) ---------------- 68,889 Investments and other assets 3,415 ---------------- Total assets $ 105,489 ================
See accompanying notes. F-26 88 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Amounts) LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,1995 ----------------- Current liabilities: Accounts payable 719 Accrued expenses $ 1,804 ---------------- Total current liabilities 2,523 Long-term debt 1,519 Accrued pension and other postretirement benefits 6,561 Other long-term liabilities and deferred credits 5,440 Stockholders' equity: Cumulative redeemable preferred stock-- aggregate redemption value- $126,071 81,928 Common stock--$.01 par value; 400,000 shares authorized; shares issued- 196,726 1,967 Paid-in capital 623,325 Deficit (617,737) ---------------- 89,483 Less treasury stock, at cost: 3,664 shares 37 ---------------- 89,446 ---------------- Total liabilities and stockholders' equity $ 105,489 ================
See accompanying notes F-27 89 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED September 30, 1995 AND 1994 (In Thousands, Except Per Share Amounts) (Unaudited)
NINE MONTHS ----------------------------- 1995 1994 ------------- ------------- Operating revenues $ 13,178 $ 12,492 Costs and expenses: Cost of sales 14,203 12,035 Depreciation, depletion and amortization 2,724 3,232 Exploration 4,045 1,408 Selling, general and administrative expense 4,263 4,114 Curtailment gain on postretirement benefits other than pensions (Note 3) - (6,936) ------------- ------------- 25,235 13,853 ------------- ------------- Operating income (loss) (12,057) (1,361) Other income (expense): Interest income 1,024 792 Interest expense (575) (953) Other, net 502 830 ------------- ------------- 951 669 ------------- ------------- Net income (loss) (11,106) (692) Preferred dividend requirements (7,617) (7,902) ------------- ------------- Income (loss) applicable to common shares $ (18,723) $ (8,594) ============= ============= Income (loss) per common share $ ($0.10) $ ($0.05) ============= ============= Weighted average common shares outstanding 193,031 184,188 ============= =============
See accompanying notes. F-28 90 SUNSHINE MINING AND REFINING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, 1995 AND 1994 (In Thousands) (Unaudited)
1995 1994 ------------ ---------- Cash used by operating activities: Net loss $ (11,106) $ (692) Adjustments to reconcile loss from operations to net cash used by operations: Depreciation, depletion and amortization 2,724 3,232 Exploration Expenditures 4,045 1,408 Curtailment gain on postretirement benefits - (6,936) Realized and unrealized (gains) losses on marketable equity securities (134) - Issuances of common stock for interest on Silver Indexed Bonds and other 143 379 Net (increase) decrease in: Silver bullion (579) 102 Accounts receivable (1,597) (751) Inventories 1,453 (2,252) Other assets and deferred charges 148 (63) Net increase (decrease) in: Accounts payable and accrued expenses 40 (1,331) Accrued pension and other postretirement benefits (250) 79 Other liabilities and deferred credits 4 (415) ------------ ---------- Net cash used by operations (5,109) (7,240) ------------ ---------- Cash provided (used) by investing activities: Additions to property, plant and equipment and exploration expenditures (4,249) (1,512) Proceeds from investments 1,770 52 ------------ ---------- Net cash provided by investing activities (2,479) (1,460) ------------ ---------- Cash provided by financing activities: Issuance of common stock (Note 4) - 29,735 Decrease in restricted cash - 236 Principal repayments and retirements of long-term debt - (305) ------------ ---------- Net cash provided by financing activities - 29,666 ------------ ---------- Increase (decrease) in cash and cash investments (7,588) 20,966 Cash and cash investments, January 1 26,581 4,304 ------------ ---------- Cash and cash investments, September 30 $ 18,993 $ 25,270 ============ ========== Supplemental cash flow information - Interest paid in cash $ 146 $ 329 ============ ==========
See accompanying notes. F-29 91 SUNSHINE MINING AND REFINING COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS September 30, 1995 1. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Sunshine Mining and Refining Company ("Sunshine" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain previously reported amounts have been reclassified to conform to the September 1995 presentation. Operating results for the nine month period ended September 30, 1995 are not necessarily indicative of the results that may be expected for the year ended December 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in Sunshine's report on Form 10-K for the year ended December 31, 1994. 2. INVENTORIES The components of inventory consist of the following:
September 30 December 31 1995 1994 ------------ ----------- Precious Metals Inventories: Work in process $ 723 $ 2,241 Finished goods 256 173 Materials and supplies inventories 719 737 --------- --------- $ 1,698 $ 3,151 ========= =========
F-30 92 3. CURTAILMENT GAIN During the first nine months of 1994, the Company recognized a curtailment gain of $6.9 million due to the termination of certain employee postretirement medical benefits. See "Management's Discussion and Analysis of Financial Condition." 4. COMMON STOCK OFFERING During the first nine months of 1994, the Company realized net proceeds of $30.1 million from a Rights Offering of Units to its stockholders. See "Management's Discussion and Analysis of Financial Condition." 5. CONTINGENCIES In December 1989, the United States Environmental Protection Agency ("EPA") notified Sunshine Precious metals, Inc. ("SPMI"), a wholly owned subsidiary of the Company, that it is a "Potentially Responsible Party" ("PRP") at the Bunker Hill Superfund Site in Kellogg, Idaho. During 1990 and 1991, the Company and other PRPs, without admitting liability, funded soil removal and remediation programs at the site. The Company's share of the cost of these programs totaled approximately $239,000. Without admitting liability, the Company and several PRPs have agreed to do remediation work in the residential and certain commercial areas encompassed by the Bunker Hill Superfund Site pursuant to an EPA and State of Idaho approved work plan. In exchange, the EPA and the State of Idaho released the settling PRPs from all liability for cleanup of the Bunker Hill Smelter Complex, reduced the EPA's claim for reimbursement of past costs from $17 million to $1 million, plus a percentage of proceeds received by the PRPs from insurance companies, if any, and agreed that the work orders from 1990 through 1993 were deemed satisfied and discharged. The remediation to be undertaken by the Company and the PRPs is expected to take approximately seven years. On November 17, 1994, the United States District Court for the District of Idaho agreed to enter a Consent Decree containing the terms of this agreement. At December 31, 1994, the Company has accrued $2.5 million representing management's estimate of the remaining liability for its share (12.4%) of the remediation costs at the Bunker Hill Superfund Site. The liability for remediation costs under the Consent Decree is, however, joint F-31 93 and several. Thus, if any other settling party or parties does not comply with the Consent Decree, the exposure for the Company and SPMI could increase. However, management does not believe that the ultimate liability that may result from this matter will have a material adverse effect on the Company's consolidated financial position or results of operations. In November 1988, the EPA notified Sunshine Precious Metals that it is a PRP at the Spokane Junkyard site near Spokane, Washington. The Company does not believe it will be required to pay any cleanup costs at the Spokane Junkyard site. No records of SPMI have been discovered by it or the EPA showing that SPMI ever transmitted any material to the site. By letter dated July 17, 1995, The Company and SPMI were notified that they have been identified by the United States Department of the Interior, Fish and Wildlife Service, as PRPs for alleged natural resource damage in the Coeur d'Alene Basin. The letter further served as notice that the Department of the Interior intends to bring suit against the Company, SPMI and other identified PRPs to recover natural resource damages under CERCLA. The Department of Interior has not set forth any amount of damages. The Company believes that the settlement by SPMI of all natural resource claims with the State of Idaho in May, 1986, bars these claims. The Company is subject to certain other legal proceedings and claims that arise in the conduct of its business. Although it is not possible to predict the outcome of such matters, in the opinion of management, the ultimate outcomes of these matters will not have a material adverse effect on the Company's consolidated financial position or consolidated results of operations. F-32 94 ANNEX A AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of [____________________], among SUNSHINE MERGER COMPANY, a Delaware corporation ("New Company") and SUNSHINE MINING AND REFINING COMPANY, a Delaware corporation ("Sunshine"). WITNESSETH: WHEREAS, each of New Company and Sunshine is a corporation duly organized and existing under the laws of the State of Delaware; and WHEREAS, the respective Boards of Directors of New Company and Sunshine deem it advisable that Sunshine merge with and into New Company, which shall be the surviving corporation, upon the terms and conditions set forth herein and in accordance with the laws of the State of Delaware, and that the shares of stock of Sunshine shall be converted upon such merger (the "Merger") as set forth herein. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1 TERMS 1.1 At the Effective Time (as hereinafter defined) of the Merger, Sunshine shall be merged with and into New Company, which shall be the surviving corporation (hereinafter sometimes called the "Surviving Corporation"). 1.2 Shares of Sunshine shall be converted into shares of New Company at the Effective Time in the following manner. Shares of capital stock of Sunshine issued and outstanding immediately prior to the Effective Time shall be converted into shares of capital stock of New Company as follows: (a) Each share of Common Stock of Sunshine shall by virtue of the Merger and without any action by the holder thereof, be converted into one share of Common Stock of New Company; (b) Each share of $11.94 (Stated Value) Cumulative Redeemable Preferred Stock (the "Redeemable Preferred Stock") of Sunshine shall be converted into (i) a number of shares of Common Stock of New Company, the number of such shares of Common Stock to be determined as set forth in paragraph 1.2(b)(i) below, and (ii) .9 (9/10) of an additional share of Common Stock of New Company, or at the option of the holder, two (2) Warrants, each for the purchase of one (1) share of Common Stock of New Company as described in paragraph 1.2(b)(ii): i. The number of shares of Common Stock will be that number of shares determined by dividing the closing price of Sunshine Common Stock on the latest date practical prior to mailing the prospectus into $10.50 (at $1 7/8 Common Stock price, 5.6 shares). If the average closing price of the Common Stock on the NYSE Composite for the first 120 trading days after the Effective Date of the Merger is less than the initial price used to determine the number of shares issuable, additional Common Shares will be issued as soon as practical after the end of the 120-trading day period. The additional number of shares issuable will be determined by the following formula, 10.50 - Y. ----- X where: 95 ANNEX A X = Average Common Stock closing price on the NYSE Composite for 120 NYSE trading days after issuance, and Y = Common shares initially issuable per Preferred share In no event will the total number of shares of New Common Stock issuable upon conversion of a share of Preferred Stock, exclusive of shares issuable upon exercise of Warrants or in lieu of Warrants, exceed 8.4. and, ii. The holder will also receive, for each share of Preferred Stock held, either .9 (9/10) of another share of Common Stock in addition to the share of Common Stock determined by the above formula or, at the option of the holder, two (2) Warrants, each having the following terms and conditions: Shares purchasable: One (1) Exercise Price: 110% of the Common Stock NYSE Composite closing price on the latest date practical prior to mailing the prospectus; resettable to 110% of average closing price of the Common Stock on the NYSE Composite for the first 120 trading days after the Effective Date on the Merger, if such price is less than the initial price. Expiration: 5 years from issuance. 1.3 Prior to the Effective Time, New Company will execute and deliver, in form satisfactory to Sunshine, (i) a supplemental warrant agreement to the Warrant Agreement dated as of February 3, 1994, between Sunshine and American Stock Transfer and Trust Company relating to Sunshine's redeemable Warrants to purchase Common Stock, and (ii) a supplemental indenture to the Indenture (the "Convertible Indenture") between Sunshine and MTrust Corp., N.A., as Trustee, relating to Sunshine's Convertible Subordinated Debentures Due April 15, 2008. The Convertible Indenture, as supplemented, shall allow the holder of each outstanding debenture thereunder shall have the right (until expiration of the respective conversion rights therein) to convert such debentures into the same number of shares of New Company Common Stock as the number of shares of Sunshine Common Stock into which such debenture would have been convertible immediately prior to the Effective Time. 1.4 At the Effective Time, each outstanding stock option, convertible debenture, warrant or any other right to acquire shares of Common Stock of Sunshine (but not including any such rights existing prior to the Effective Time incident to the Redeemable Preferred stock) outstanding immediately prior to the Effective Time shall be converted into a stock option, convertible debenture, warrant or other right to acquire the shares of Common Stock of New Company, giving the holder the same rights with respect to the same number of shares of Common Stock of New Company as such AGREEMENT AND PLAN OF MERGER - 2 96 ANNEX A holder had with respect to Common Stock of Sunshine under such outstanding stock option, convertible debenture, security, warrant or other right. 1.5 At the Effective Time, each outstanding share of Common Stock of Sunshine held as treasury stock by Sunshine shall automatically, and without any action by Sunshine or New Company, be converted into one share of Common Stock of New Company. 1.6 Each outstanding certificate which immediately prior to the Effective Time represented shares of Common Stock or warrants to purchase Common Stock of Sunshine shall be deemed for all purposes to evidence ownership of an equal number of shares of Common Stock or warrants to purchase Common Stock of New Company, respectively. No exchange of such certificates will be required in order to evidence such ownership. Immediately after the Effective Time, the transfer books of Sunshine will be deemed closed, and no transfer of shares of Common Stock, Redeemable Preferred Stock, or warrants to purchase Common Stock shall thereafter be made or consummated. 1.7 If any certificate representing stock of New Company is to be issued in a name other than that in which a surrendered certificate theretofore representing stock of Sunshine is registered, it shall be a condition of such issuance that the surrendered certificate shall be properly endorsed or otherwise in proper form for transfer, and that the person requesting such issuance shall either pay to New Company or its transfer agents any transfer or other taxes required by reason of the issuance of a certificate or certificates representing New Company stock in a name other than that of the registered holder of the certificate surrendered, or establish to the satisfaction of New Company or its transfer agents that such tax has been paid or is not applicable. 1.8 Unless otherwise provided for by the parties to this Agreement and Plan of Merger, upon and after the Effective Time of the Merger, the Surviving Corporation shall possess all the rights, privileges, powers and franchises, and be subject to all the restrictions, disabilities and duties, of Sunshine; and all rights, privileges, powers and franchises of Sunshine, and all property, real, personal and mixed, and all debts due to Sunshine shall be vested in and be the property of the Surviving Corporation; and all debts, liabilities and duties of Sunshine shall thenceforth attach to the Surviving Corporation and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by it. SECTION 2 EFFECTIVE TIME 2.1 Subsequent to the execution of this Agreement and Plan of Merger, Sunshine shall submit this Agreement and Plan of Merger to its stockholders for their approval pursuant to the applicable provisions of the General Corporation Law of the State of Delaware. 2.2 Following the approval of the Merger by the stockholders of Sunshine and upon fulfillment or waiver of the conditions specified in Section 5.1 hereof, and provided that this Agreement and Plan of Merger has not been terminated and abandoned pursuant to Section 5.3 hereof, Sunshine will cause a Certificate of Merger to be executed, acknowledged and filed with the Secretary of State of the State of Delaware as provided in Section 251 of the General Corporation Law of the State of Delaware and a copy of the Certificate of Merger, certified by the Secretary of State of the State of Delaware, to be recorded thereafter in the Office of the Recorder of New Castle AGREEMENT AND PLAN OF MERGER - 3 97 ANNEX A County in the State of Delaware, all in accordance with the provisions of Section 103 of the General Corporation Law of the State of Delaware. 2.3 The Merger shall become effective immediately upon the filing of the Certificate of Merger with the Secretary of State of the State of Delaware (the date and time of such filing being herein sometimes referred to as the "Effective Time"). SECTION 3 COVENANTS AND AGREEMENTS 3.1 Sunshine (i) shall present this Agreement and Plan of Merger for adoption or rejection by vote of the stockholders of Sunshine at a special Meeting of Stockholders; (ii) shall furnish to such holders such documents and information in connection therewith as is required by law, (iii) shall recommend approval of this Agreement by such holders, and (iv) shall, as sole stockholder of New Company, vote all shares of New Company Common Stock owned by it to approve this Agreement and Plan of Merger as provided by law. 3.2 New Company (i) shall not, prior to the Effective Time of the Merger, without obtaining the written consent of Sunshine, permit any change in the Certificate of Incorporation of New Company or its capital stock. 3.3 Unless otherwise provided for by the parties to this Agreement and Plan of Merger, New Company as the Surviving Corporation shall be liable for all the obligations of Sunshine outstanding as of the Effective Time and hereby expressly assumes all such obligations as of the Effective Time. 3.4 At the Effective Time, the Certificate of Incorporation of New Company shall be amended to change the name of New Company to "Sunshine Mining and Refining Company." 3.5 From and after the Effective Time, the directors of Sunshine elected at its 1995 Annual Meeting of Stockholders, with the exception of Messrs. George M. Elvin, Hoffer Kaback and Douglas K. Stewart, who were elected as directors by the holders of Sunshine's Redeemable Preferred Stock and who will cease to be directors incident to the elimination of the Redeemable Preferred Stock, and the officers of Sunshine at the Effective Time shall become the directors and officers of New Company, to hold office until the expiration of their current terms, or their prior resignation, removal or death. SECTION 4 CERTIFICATE OF INCORPORATION, BYLAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION 4.1 The Certificate of Incorporation of Sunshine Merger Company as constituted at the Effective Time shall thereafter be the Certificate of Incorporation of the Surviving Corporation, until it shall be amended as provided by law; provided, however, that Article First of the Certificate of Incorporation of Sunshine Merger Company, at the Effective Time and upon the filing of the Certificate of Merger, shall be amended to read as follows: AGREEMENT AND PLAN OF MERGER - 4 98 ANNEX A "First: The name of the corporation is Sunshine Mining and Refining Company." 4.2 The Bylaws of Sunshine as in effect at the Effective Time, but subject to alteration, amendment or repeal from time to time by the Board of Directors or the stockholders of the Surviving Corporation, shall govern the Surviving Corporation. 4.3 From and after the Effective Time the members of the Board of Directors of the Surviving Corporation shall consist of the following persons, to hold office until the expiration of their current terms, or their prior resignation, removal or death: G. Chris Andersen, V. Dale Babbitt, Fred C. Humphreys, Daniel D. Jackson, Oren G. Shaffer, John S. Simko and Robert B. Smith, Jr. From and after the Effective Time the officers of the Surviving Corporation shall consist of those persons serving as officers of Sunshine, and in their respective positions, to hold office until the expiration of their current terms, or their prior resignation, removal or death. AGREEMENT AND PLAN OF MERGER - 5 99 ANNEX A SECTION 5 CONDITIONS, AMENDMENTS, TERMINATION AND MISCELLANEOUS 5.1 The respective obligations of New Company and Sunshine to consummate the Merger under this Agreement and Plan of Merger are subject to the following conditions, any and all of which (other than the conditions set forth in Section 5.1 (c) or (d)), may be waived by New Company and Sunshine: (a) All third-party consents which are required in order to consummate the Merger and to effectuate the contemplated transactions incidental or related thereto shall have been obtained. (b) The shares of Common Stock and Warrants of New Company to be issued or reserved for issuance pursuant to the Merger shall have been approved for listing, upon official notice of issuance, by the New York Stock Exchange and the Nasdaq National Market, respectively. (c) Sunshine shall have received either an opinion of Hawley, Troxell, Ennis & Hawley, legal counsel to the Company or a ruling of the Internal Revenue Service (or, at the option of Sunshine, an opinion of counsel) in form and substance satisfactory to Sunshine with respect to the tax consequences of the Merger. (d) The stockholders of Sunshine shall have adopted and approved this Agreement and Plan of Merger. 5.2 New Company and Sunshine, by mutual consent of their respective Boards of Directors, may amend, modify or supplement this Agreement and Plan of Merger in such manner as may be agreed upon by them in writing at any time before or after approval hereof by the stockholders of Sunshine; provided, however, that after the adoption and approval of this Agreement and Plan of Merger by the stockholders of Sunshine no such amendment, modification or supplement shall: (a) alter or change the amount or kind of securities to be received in exchange for or upon conversion of all or any of the shares of any class or series of stock of such Constituent Corporation; (b) alter or change any term of the Certificate of Incorporation of New Company to be effected by the Merger, or (c) alter or change any of the terms and conditions of this Agreement and Plan of Merger if such alteration or change would adversely affect the holders of any shares of any class or series of stock of such Constituent Corporation. 5.3 This Agreement and Plan of Merger may be terminated and the Merger may be terminated and abandoned for any reason by resolution adopted by either of the respective Boards of Directors of New Company and Sunshine at any time prior to the Effective Time, even though this Agreement and Plan of Merger shall have been approved by the Stockholders of New Company and Sunshine or of either thereof. AGREEMENT AND PLAN OF MERGER - 6 100 ANNEX A 5.4 From time to time on and after the Effective Time, each party hereto agrees that it will execute and deliver or cause to be executed and delivered all such further assignments, assurances or other instruments, and shall take or cause to be taken all such further actions as may be necessary or desirable to consummate the Merger provided for herein and the other transactions contemplated by this Agreement and Plan of Merger. 5.5 This Agreement and Plan of Merger shall be construed under and in accordance with the laws of the State of Delaware. 5.6 This Agreement and Plan of Merger shall be binding upon and inure to the benefit of the respective successors and assigns of the parties hereto. 5.7 For the convenience of the parties hereto, this Agreement and Plan of Merger may be executed in separate counterparts, each of which, when so executed, shall be deemed to be an original, and all such counterparts when taken together shall constitute but one and the same instrument. SUNSHINE MINING AND REFINING COMPANY By: ---------------------------------- ATTEST: John S. Simko, President - ------------------------------ SUNSHINE MERGER COMPANY By: ---------------------------------- ATTEST: John S. Simko, President - ------------------------------ AGREEMENT AND PLAN OF MERGER - 7 101 ANNEX B CERTIFICATE OF INCORPORATION OF SUNSHINE MERGER COMPANY FIRST: The name of the Corporation is Sunshine Merger Company. SECOND: The registered office of the Corporation in the state of Delaware is located at 1013 Centre Road in the City of Wilmington, County of New Castle. The name and address of its registered agent is Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. THIRD: The nature of the business, objects and purposes to be transacted, promoted or carried on by the Corporation are as follows: To engage in and carry on the business of exploring for, developing and utilizing natural resources of every kind and description; to explore for, to develop and to mine, mill, concentrate, convert, smelt, treat, refined, prepare for market, manufacture, buy, sell, exchange, and otherwise to produce, process and deal in natural resources of every kind and description, including without limitation, ores, metals, minerals, oil, natural gas, timber, water, and all other natural products and the products and by-products thereof of every kind and description and by whatever means the same can be and may hereafter be bought, sold, conveyed, transferred, produced, processed, handled or otherwise dealt in; to buy, sell, exchange, lease, acquire and otherwise deal in real property, mines, mineral rights and claims of any nature whatsoever, timber rights, and interests of any nature whatsoever in oil and gas; to own, lease, hire, rent, as lessee or lessor, operate and manage all types of real property, buildings and fixtures, and the machinery, equipment and other personal property and facilities necessary to the conduct, operation and management of such business and all other activity in connection therewith; To manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and with goods, wares and merchandise and personal property of every class and description; To acquire, and pay for in cash, stock, or bonds of this Corporation or otherwise, the goodwill, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, partnership, trust, joint stock company, syndicate, firm, association or corporation; To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage or otherwise dispose of letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trademarks and trade names, relating to or useful in connection with any business of this Corporation; To acquire by purchase, subscription or otherwise, and to receive, hold, own, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts and other securities, obligations, chooses in action and evidences of indebtedness or interest issued or created by any corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government of the United States of America, or by any foreign government, or by any state, territory, province municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all rights, powers and privileges of ownership, including the right to execute consents and vote thereon, 102 ANNEX B and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof; To borrow or raise moneys for any of the purposes of the Corporation and, from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the Corporation, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations of the Corporation for its corporate purposes; To purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with, real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of the Corporation's property and assets, or any interest therein, wherever situated; and To engage in any lawful act or activities for which corporations may be organized under the General Corporation Law of Delaware. The business and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this Certificate of Incorporation, but the business and purposes specified in each of the foregoing clauses of this Article shall be regarded as independent business and purposes. FOURTH: The total number of shares which the Corporation shall have authority to issue is Four Hundred Twenty Million (420,000,000), of which stock Four Hundred Million (400,000,000) shares of the par value of $0.01 each shall be designated Common Stock and of which Twenty Million (20,000,000) shares of the par value of $1.00 each shall be designated Preferred Stock. Section 1. Power of Board to Issue Preferred Stock. Shares of Preferred Stock may be issued from time to time in one or more series, each of such series to have distinctive serial designations, which may be by distinguishing number, letter or title, as shall hereafter be determined in the resolution or resolutions providing for the issue of such Preferred Stock from time to time adopted by the Board of Directors of the Company at a regularly called meeting without dissenting vote, pursuant to authority so to do which is hereby conferred upon and vested in the Board of Directors. Section 2. Terms of Preferred Stock. Each series of Preferred Stock (i) may have such number of shares; (ii) may have such voting powers, including, without limitation, the right to vote as a class in connection with a Business Combination (as defined in Article Fifth), full or limited, or may be without voting powers; (iii) may be subject to redemption at such time or times and at such price or prices; (iv) may be entitled to receive dividends, which may be cumulative or noncumulative, at such rate or rates, on such conditions, from such date or dates, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or series of stock; (v) may have such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; (vi) may be convertible into, or exchangeable for, shares of any other class or classes of CERTIFICATE OF INCORPORATION - 2 103 ANNEX B stock of the Corporation at such price or prices or at such rates of exchange, and with such adjustments; (vii) may be entitled to the benefit of a sinking fund or purchase fund to be applied to the purchase or redemption of shares of such series in such amount or amounts; (viii) may be entitled to the benefit of conditions and restrictions upon the creation of indebtedness of the Corporation or any subsidiary, upon the issue of any additional stock (including, without limitation, additional shares of such series or of any other series) and upon the payment of dividends or the making of other distributions on and the purchase redemption or other acquisition by the Corporation or any subsidiary of any outstanding stock of the Corporation; and (ix) may have such other relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof; all as shall be stated in said resolution or resolutions adopted by the Board of Directors providing for the issue of such Preferred Stock. Except where otherwise set forth in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, the number of shares comprising such series may be increased or decreased (but not below the number of share then outstanding) from time to time by like action of the Board of Directors. Section 3. Redemption or Purchase of Preferred Stock. Shares of any series of Preferred Stock which have been redeemed (whether through the operation of a sinking fund or otherwise) or purchased by the Corporation, or of which, if convertible or exchangeable, have been converted into or exchanged for shares of stock of any other class or classes, shall have the status of authorized and unissued shares of Preferred Stock and may be reissued as a part of the series of which they were originally a part or may be reclassified and reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors or as part of any other series of Preferred Stock, all subject to the conditions or restrictions on issuance set forth in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock and to any filing required by law. Section 4. Voting Rights. Except as otherwise provided by law or by the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, each holder of the Common Stock being entitled to one vote for each share held. Section 5. Dividends. Subject to all the rights of the Preferred Stock or any series thereof, the holders of the Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable in cash, stock or otherwise. Section 6. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, and after the holders of the Preferred Stock of each series shall have been paid in full the amounts to which they respectively shall be entitled, or a sum sufficient for such payments in full shall have been set aside, the remaining net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights in interest, to the exclusion of the holders of the Preferred Stock. FIFTH: Vote Required to Approve Business Combinations. In addition to the vote of stockholders otherwise required by law or by the terms of any other Article of this Certificate of Incorporation, the affirmative vote or consent of the holders of a majority of all shares of outstanding stock entitled to vote thereon, and a majority of each series or class of Preferred Stock which under this Certificate of Incorporation or by the resolution or resolutions of the Board of Directors authorizing the issuance of such Preferred Stock is entitled to vote thereon as a class, shall be required to approve any Business Combination. As used in this Article Fifth, the term "Business Combina- CERTIFICATE OF INCORPORATION - 3 104 ANNEX B tion" shall include any merger or consolidation of the Corporation with or into any other corporation, firm or entity which under the applicable provisions of Delaware law is required to be submitted to a vote of stockholders, or the sale, lease, exchange or other disposition (including, without limitation, any disposition in connection with any dissolution, liquidation or winding up of the Corporation) of all or substantially all of the property and assets of the Corporation (including its good will and corporate franchises) to any other corporation, firm or entity. SIXTH: The Corporation is to have perpetual existence. SEVENTH: In furtherance and not in limitation of the powers conferred by statute, the power to adopt, amend or repeal the bylaws of the Corporation is hereby conferred upon and vested in the Board of Directors. EIGHTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the state of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provision of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. NINTH: Meetings of stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of this Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of the Corporation. Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide. TENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation; provided, however, that no amendment to this Certificate of Incorporation shall, directly or indirectly, amend, alter, change or repeal any of the provisions of Article Fourth, Section 1 or any of the provisions of Article Fifth, unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote or consent of the holders of (i) 66 2/3% of the outstanding stock of the Corporation entitled to vote thereon, and (ii) 66 2/3% of each class or series of Preferred Stock which under this Certification of Incorporation or by the resolution or resolutions of the Board of Directors authorizing the issuance of such class of Preferred Stock is entitled to vote thereon as a separate class. CERTIFICATE OF INCORPORATION - 4 105 ANNEX B ELEVENTH: The name and mailing address of the incorporator is as follows:
Name Mailing Address ---- --------------- Rebecca L. Saunders 877 W. Main St., Suite 600 Boise, ID 83702
TWELFTH: To the fullest extent permitted by the Delaware General Corporation Law, as it now exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same exists or may hereafter be amended. Any repeal or modification of this paragraph by the stockholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. THIRTEENTH: Any director may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote thereon. THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, does make this Certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 25th day of October, 1995. /s/ Rebecca L. Saunders Rebecca L. Saunders, Incorporator CERTIFICATE OF INCORPORATION - 5 106 GLOSSARY OF CERTAIN MINING TERMS ASSAY -- To analyze the proportions of metals in ore, to test an ore or mineral for composition, purity, weight, or other properties of commercial interest. The word "assay" also refers 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. CONCENTRATOR -- A plant for recovery of valuable minerals from ore. Ore in the form of concentrate must then be treated in some other type of plant, such as a smelter, to effect recovery of the pure metal. 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 -- A device with an edged or pointed end or compound contacts, used for making circular holes in rock or earth. "Diamond drill" refers to a cylindrical drill, with a diamond-surfaced cutting edge, used to extract samples of ore for analysis. DRILL INTERCEPT -- The distance, measured in feet, from the initial contact by a diamond drill of a vein of ore to the diamond drill's exit from that vein. EXPLORATION -- Work involved in searching for ore, usually by drilling or driving a drift. FAULT -- A fracture or a zone of fractures along which there has been displacement of the sides relative to one another parallel to the fracture. FOOTWALL -- The underlying side of a fault, orebody, 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. GRADE THICKNESS -- The average grade of a drill hole intersection(s) multiplied by the thickness of the intersection(s). The resulting figure indicates the concentration of mineralization in that hole. When the value for each hole is plotted, the mineral intensity of a deposit can be identified. 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. MINERALIZATION - A valuable or potentially valuable deposit of a mineral or minerals. It is a general term, incorporating deposits resulting from various types of process or processes by which a mineral or minerals are intro- duced into a rock, e.g. fissure filling, impregnation, replacement. ORE BODY -- An economically recoverable deposit of minerals, the extent and grade of which has been defined through exploration and development work. ORE RESERVE -- That part of a mineral deposit which at the time of the reserve determination could be economically and legally extracted or produced. PROBABLE RESERVES -- Resources for which tonnage and grade are computed primarily from specific measurements, samples or production data, and partly from projection for a reasonable distance on geologic evidence. The sites available for in- spection, measurement and sampling are too widely or otherwise inappropriately spaced to permit the mineral bodies to be outlined completely, or the grade established throughout. PROVEN RESERVES -- Resources for which tonnage is computed from dimensions revealed in workings and drill holes and for which the grade is computed from the results of detailed sampling. The sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape and mineral content are all established. The computed tonnage and grade are judged to be accurate, within limits which are stated, and no such limit is judged to be different from the computed tonnage or grade by more than 20%. RESERVES -- That part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination. Reserves are customarily stated in terms of "ore" when dealing with metals. ROCK BURST -- Explosive rock failures caused by the pressure exerted by rock adjacent to mine openings far below the surface. STOPE -- An excavation from which ore has been excavated in a series of steps. To excavate ore in a vein by driving horizontally upon it a series of workings, one immediately over the other, or vice versa. Each horizontal working is called a stope because when a number of them are in progress, each working face under attack assumes the shape of a flight of stairs. TON -- A short ton of 2,000 pounds, dry weight basis. TONNE -- Metric ton, equal to 2,204.62 pounds. TROY OUNCE -- Unit if 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. 107 TABLE OF CONTENTS Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Certain Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Merger Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Description of the Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Sunshine Merger Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Sunshine Mining and Refining Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Comparative Per Share Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Directors and Officers of Sunshine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Compensation and Transaction Committee Inter locks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Exchange Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Information Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Voting Securities and Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
INFORMATION AGENT THE HERMAN GROUP, INC. 13760 NOEL ROAD, SUITE 320 DALLAS, TEXAS 75240 TELEPHONE: (800) 747-2967 TELECOPIER: (214) 991-4422 (214) 991-4432 NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR SUNSHINE MERGER COMPANY. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER, SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY OR SUNSHINE MERGER COMPANY OR ANY OF THEIR RESPECTIVE SUBSIDIARIES SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. 108 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law gives corporations the right to indemnify their directors, officers and agents. With respect to Sunshine Merger Company, Article Twelfth of Sunshine Merger Company's Certificate of Incorporation provides as follows: Twelfth: To the fullest extent permitted by the Delaware General Corporation Law, as it now exists or may hereafter be amended, a director of the Corporation shall not liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same exists or may hereafter be amended. Any repeal or modification of this paragraph by the stockholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. In addition, Article X of Sunshine Merger Company's Bylaws provides as follows: ARTICLE X Indemnification Section 10.1 Third Party Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful. Section 10.2 Derivative Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in the corporation's favor by reason of the fact that such person is or was a director, II-1 109 trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to amounts paid in settlement, the settlement of the suit or action was in the best interests of the corporation, provided, however, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for gross negligence or willful misconduct in the performance of such person's duty to the corporation unless and only to the extent that, the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. The termination of any action or suit by judgment or settlement shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation. Section 10.3. Successful Defense. To the extent that a director, trustee, officer, employee or agent of the corporation has been successful on the merits or otherwise, in whole or in part, in defense of any action, suit or proceeding referred to in Sections (1) and (2) of this Article X, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 10.4. Authorization. Any indemnification under Sections (1) and (2) of this Article X (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth above in Sections (1) and (2) of this Article X. Such determination shall be made (a) by the Board of Directors of the corporation by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, by a majority vote of directors who were not parties to such action, suit or proceeding, or (c) by independent legal counsel (selected by one or more of the directors, whether or not a quorum and whether or not disinterested) in a written opinion, or (d) by the shareholders. Anyone making such a determination under this Section (4) may determine that a person has met the standard therein set forth as to some claims, issues or matters but not as to others, and may reasonably prorate amounts to be paid as indemnification. Section 10.5. Advances. Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation, at any time or from time to time in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in Section 10.4 of this Article X upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this Article X. Section 10-6. Non-Exclusivity. The indemnification provided by this Article X shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, by-law, agreement, vote of shareholders or disinterested II-2 110 directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 10.7. Insurance. The corporation shall have the powers to purchase and maintain insurance on behalf of any person who is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability. Section 10.8. "Corporation" Defined. For purposes of this Article X, references to the "corporation" shall include, in addition to the corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, trustees, officers, employees or agents, so that any person who is or was a director, trustee, officer, employee or agent of such constituent corporation or of any entity a majority of the voting stock of which is owned by such constituent corporation, or is or was serving at the request of such constituent corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand the same position under the provisions of this Article X with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. A. EXHIBITS.
EXHIBIT NO. EXHIBIT ------- ------- 2.1 Form of Agreement and Plan of Merger to be entered into by and among Sunshine and Sunshine Merger Company, annexed as Exhibit A to the Prospectus/Proxy Statement and incorporated herein by reference. 3.1 Form of Certificate of Incorporation of Sunshine Merger Company annexed as Exhibit B to the Prospectus/Proxy Statement and incorporated herein by reference. *3.2 Form of Bylaws of Sunshine Merger Company. *4.1 Form of Warrant Agreement, dated as of [ ], between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent. 4.2 Form of Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as amended and incorporated herein by reference. **4.3 Form of Warrant Certificate. 4.4 Form of Warrant Certificate, filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as amended and incorporated herein by reference.
II-3 111
EXHIBIT NO. EXHIBIT ------- ------- 4.5 Certificate of Designation, Rights and Preferences of $11.94 Cumulative Redeemable Preferred Stock of Sunshine, filed as Exhibit 3.3 to Sunshine's Registration Statement on Form S-4 (Registration No. 33-22250) and incorporated herein by reference. 4.6 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine, filed as Exhibit 4.2 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446) as amended, and incorporated herein by reference. 4.7 Form of Indenture dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008, filed as Exhibit 4.25 to Sunshine's Registration Statement on Form S-3 (Registration No. 33-21159) and incorporated herein by reference. 4.8 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture dated as of November 10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, by and between the Company and Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of the Debentures, filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference. *4.9 Form of Supplemental Warrant Agreement dated as of [________] between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, relating to the Warrants ($2.12 exercise price). *5.1 Opinion of Evans, Keane. *8.1 Opinion of Hawley, Troxell, Ennis & Hawley. 10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, and incorporated herein by reference. 10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446), as amended and incorporated herein by reference. 10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, and incorporated herein by reference. 10.4 1993 Incentive Stock Option Plan of Sunshine, filed as Exhibit 10.18 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446), as amended and incorporated herein by reference. 10.5 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S. Simko, filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1 (Registration No. 33- 73608), as amended and incorporated herein by reference. 10.6 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis, filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as amended and incorporated herein by reference. 10.7 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Robert H. Peterson, filed as Exhibit 10.10 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as amended and incorporated herein by reference.
II-4 112
EXHIBIT NO. EXHIBIT ------- ------- 10.8 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F. Cougher, filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-k for the fiscal year ended December 31, 1993, and incorporated herein by reference. 10.9 Mining Lease, dated March 15, 1994, by and between Revenue-Virginius Mines Corporation, a Colorado corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, and incorporated herein by reference. 10.10 Agreement dated March 24, 1994, by and between Diamond Field Resources, Inc., and Sunshine, filed as Exhibit No. 10.2 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, and incorporated herein by reference. 10.11 Mining Lease, dated August 18, 1994, by and between American Gold Resources Corporation, a Delaware corporation, as lessor, and Sunshine Precious Metals, Inc., as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended September 30, 1994, and incorporated herein by reference. 10.12 Agreement dated September 23, 1994 by and between Sunshine Argentina, Inc. and Empresa Argentina de Cemento Armado S.A., filed as Exhibit No. 10.12 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. 10.13 Agreement dated July 1, 1995 by and between Consolidated Silver Corporation and Sunshine Precious Metals, Inc., as purchaser, for the purchase of a certain mining property, filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1995, and incorporated herein by reference. 22.1 Subsidiaries of Sunshine, filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference. *23.1 Consent of Ernst & Young LLP. ***24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof. 99.1 Agreement dated October 19, 1995, by and between Sunshine and Elliott Associates, L.P., filed as Exhibit 99.1 to Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein by reference. 99.2 Agreement dated October 23, 1995, by and between Sunshine and Grace Holdings, L.P., filed as Exhibit 99.2 to Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein by reference. 99.3 Agreement dated October 20, 1995, by and between Sunshine and Lloyd I. Miller, III, filed as Exhibit 99.3 to Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein by reference. *99.4 Form of Proxy for holders of Common Stock. *99.5 Form of Proxy for holders of $11.94 (Stated Value) Cumulative Redeemable Preferred Stock. *99.6 Form of Transmittal Letter to Common and Preferred Stockholders.
__________________________________ * Filed herewith/** To be filed/*** Previously filed. II-5 113 b. FINANCIAL STATEMENT SCHEDULES Schedules other than those included in the Consolidated Financial Statements, if any, are omitted for the reason that they are either not required, not applicable or the required information is included in the Consolidated Financial Statements or notes thereto. ITEM 22. UNDERTAKINGS. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) 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. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) 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 represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) 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 (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8, or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the 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. (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. (1) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who maybe II-6 114 deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes 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. 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 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 Act and will be governed by the final adjudication of such issue. II-7 115 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement or amendment thereto, as the case may be, to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Dallas, State of Texas, on December 27, 1995. SUNSHINE MERGER COMPANY By: /s/ William W. Davis ---------------------------------- William W. Davis Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities indicated December 27, 1995.
SIGNATURE TITLE * John S. Simko Director, President and - --------------------------- John S. Simko Chief Executive Officer Director - --------------------------- - G. Chris Andersen * Fred C. Humphreys Director - -------------------------- Fred C. Humphreys * Daniel D. Jackson Director - --------------------------- Daniel D. Jackson * V. Dale Babbitt Director - --------------------------- V. Dale Babbitt /s/ William W. Davis Executive Vice President, - --------------------------- William W. Davis Chief Financial and Accounting Officer Director - --------------------------- Robert B. Smith, Jr. * Oren G. Shaffer Director - --------------------------- Oren G. Shaffer /s/ William W. Davis - --------------------------- William W. Davis Attorney-in-Fact
II-8 116 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT ------- ------- 2.1 Form of Agreement and Plan of Merger to be entered into by and among Sunshine and Sunshine Merger Company, annexed as Exhibit A to the Prospectus/Proxy Statement and incorporated herein by reference. 3.1 Form of Certificate of Incorporation of Sunshine Merger Company annexed as Exhibit B to the Prospectus/Proxy Statement and incorporated herein by reference. *3.2 Form of Bylaws of Sunshine Merger Company. *4.1 Form of Warrant Agreement, dated as of [ ], between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent. 4.2 Form of Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as amended and incorporated herein by reference. **4.3 Form of Warrant Certificate. 4.4 Form of Warrant Certificate, filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as amended and incorporated herein by reference. 4.5 Certificate of Designation, Rights and Preferences of $11.94 Cumulative Redeemable Preferred Stock of Sunshine, filed as Exhibit 3.3 to Sunshine's Registration Statement on Form S-4 (Registration No. 33-22250) and incorporated herein by reference. 4.6 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine, filed as Exhibit 4.2 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446) as amended, and incorporated herein by reference. 4.7 Form of Indenture dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008, filed as Exhibit 4.25 to Sunshine's Registration Statement on Form S-3 (Registration No. 33-21159) and incorporated herein by reference. 4.8 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture dated as of November 10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, by and between the Company and Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of the Debentures, filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference. *4.9 Form of Supplemental Warrant Agreement dated as of [________] between Sunshine Merger Company and American Stock Transfer & Trust Company, as Warrant Agent, relating to the Warrants ($2.12 exercise price). *5.1 Opinion of Evans, Keane. *8.1 Opinion of Hawley, Troxell, Ennis & Hawley. 10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.9 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, and incorporated herein by reference. 10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446), as amended and incorporated herein by reference.
117
EXHIBIT NO. EXHIBIT ------- ------- 10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, and incorporated herein by reference. 10.4 1993 Incentive Stock Option Plan of Sunshine, filed as Exhibit 10.18 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446), as amended and incorporated herein by reference. 10.5 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S. Simko, filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1 (Registration No. 33- 73608), as amended and incorporated herein by reference. 10.6 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis, filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as amended and incorporated herein by reference. 10.7 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Robert H. Peterson, filed as Exhibit 10.10 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as amended and incorporated herein by reference. 10.8 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F. Cougher, filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-k for the fiscal year ended December 31, 1993, and incorporated herein by reference. 10.9 Mining Lease, dated March 15, 1994, by and between Revenue-Virginius Mines Corporation, a Colorado corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, and incorporated herein by reference. 10.10 Agreement dated March 24, 1994, by and between Diamond Field Resources, Inc., and Sunshine, filed as Exhibit No. 10.2 to Sunshine's Quarterly Report on Form 10-Q for the period ended March 31, 1994, and incorporated herein by reference. 10.11 Mining Lease, dated August 18, 1994, by and between American Gold Resources Corporation, a Delaware corporation, as lessor, and Sunshine Precious Metals, Inc., as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended September 30, 1994, and incorporated herein by reference. 10.12 Agreement dated September 23, 1994 by and between Sunshine Argentina, Inc. and Empresa Argentina de Cemento Armado S.A., filed as Exhibit No. 10.12 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. 10.13 Agreement dated July 1, 1995 by and between Consolidated Silver Corporation and Sunshine Precious Metals, Inc., as purchaser, for the purchase of a certain mining property, filed as Exhibit 10.1 to Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1995, and incorporated herein by reference. 22.1 Subsidiaries of Sunshine, filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference. *23.1 Consent of Ernst & Young LLP. ***24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof. 99.1 Agreement dated October 19, 1995, by and between Sunshine and Elliott Associates, L.P., filed as Exhibit 99.1 to Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein by reference.
118
EXHIBIT NO. EXHIBIT ------- ------- 99.2 Agreement dated October 23, 1995, by and between Sunshine and Grace Holdings, L.P., filed as Exhibit 99.2 to Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein by reference. 99.3 Agreement dated October 20, 1995, by and between Sunshine and Lloyd I. Miller, III, filed as Exhibit 99.3 to Sunshine's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995, and incorporated herein by reference. *99.4 Form of Proxy for holders of Common Stock. *99.5 Form of Proxy for holders of $11.94 (Stated Value) Cumulative Redeemable Preferred Stock. *99.6 Form of Transmittal Letter to Common and Preferred Stockholders.
__________________________________ * Filed herewith/** To be filed/*** Previously filed. EX-3.2 2 FORM OF BYLAWS OF SUNSHINE MERGER CO. 1 EXHIBIT 3.2 BYLAWS OF SUNSHINE MERGER COMPANY ARTICLE I OFFICES Section 1.1 Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, and the name of its registered agent shall be The Corporation Trust Company. Section 1.2 Other offices. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1 Place of Meeting. All meetings of stockholders for the election of directors shall be held at such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Section 2.2 Annual Meeting. The annual meeting of stockholders shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Section 2.3 Voting List. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this Section 2.3 or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. 2 Section 2.4 Special Meeting. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board, the President or by the Board of Directors or by written order of a majority of the directors. The President or directors so calling any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting. Section 2.5 Notice of Meeting. Written notice of each meeting of stockholders, stating the place, date and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote thereat not less than ten (10) nor more than sixty (60) days before the meeting. Section 2.6 Quorum. The holders of a majority of the shares of capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at any meeting of stockholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation. Notwithstanding the other provisions of these bylaws, the holders of a majority of the shares of capital stock entitled to vote thereat, present in person or represented by proxy, whether or not a quorum is present, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the original meeting. Section 2.7 Voting. When a quorum is present at any meeting of the stockholders, the vote of the holders of a majority of the shares of capital stock entitled to vote thereon, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes, of the Certificate of Incorporation or of these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. Every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder, bearing a date not more than three years prior to voting, unless such instrument provides for a longer period, and filed with the Secretary of the corporation before, or at the time of, the meeting. If such instrument shall designate two or more persons to act as proxies, unless such instrument shall provide to the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby BYLAWS - 2 3 conferred, or if only one be present, then such powers may be exercised by that one, or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of the shares proportionately. Section 2.8 Consent of Stockholders. Any action required by statute to be taken at any annual or special meeting of stockholders, or any action which may be taken, at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be required by statute, the Certificate of Incorporation or these bylaws to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 2.9 Voting of Stock of Certain Holders. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe, or in the absence of such provision, as the Board of Directors or a duly authorized managing director of such corporation may determine. Shares standing in the name of a deceased person may be voted by the executor or administrator of such deceased person, either in person or by proxy. Shares standing in the name of a guardian, conservator or trustee may be voted by such fiduciary, either in person or by proxy, but no such fiduciary shall be entitled to vote shares held in such fiduciary capacity without a transfer of such shares into the name of such fiduciary. Shares standing in the name of a receiver may be voted by such receivers. A stockholder whose shares are pledged shall be entitled to vote such shares, unless in the transfer by the pledgor on the books of the corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent the stock and vote thereon. Section 2.10 Treasury Stock. The corporation shall not vote, directly or indirectly, shares of its own stock owned by it; and such shares shall not be counted in determining the total number of issued and outstanding shares for the purposes of determining the presence of a quorum at any meeting of stockholders. Section 2.11 Fixing Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or BYLAWS - 3 4 exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting no more than sixty (60) days prior to any other action, for the determination of the stockholders entitled to notice of and to vote at, any such meeting or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action. If the Board of Directors fix, in advance, a record date as herein provided, then, in such case, such stockholders, and only such stockholders, as shall be stockholders of record on the date so fixed shall be entitled to such notice of , and to vote at, any such meeting or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date is fixed as aforesaid. ARTICLE III BOARD OF DIRECTORS Section 3.1 Powers. The business and affairs of the corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these bylaws directed or required to be exercised or done by the stockholders. Section 3.2 Number, Selection and Term. The number of directors which shall constitute the whole Board shall from time to time be fixed and determined by resolution adopted by the Board of Directors. The number to be elected at any meeting of stockholders shall be set forth in the notice of any meeting of stockholders held for such purpose. The directors shall be elected at the annual meeting of stockholders, except as provided in Section 3.3, and each director elected shall hold office until his successor shall be elected and shall qualify, or until his earlier death, resignation, retirement, disqualification or removal. Directors need not be residents of Delaware or stockholders of the corporation. Section 3.3 Vacancies, Additional Directors and Removal From Office. If any vacancy occurs in the Board of Directors caused by the death, resignation, retirement, disqualification or removal from office of any director, or otherwise, or if any new BYLAWS - 4 5 directorship is created by an increase in the authorized number of directors, a majority of the directors then in office, though less than a quorum, or a sole remaining director, may choose a successor to fill such vacancy or the newly created directorship, and a director so chosen shall hold office for a term that shall coincide with the term of the class, if any, to which such director shall have been elected and until his successor is duly elected and qualified, or until his earlier resignation or removal. Any director may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors at any special meeting of stockholders duly called and held for such purpose. Section 3.4 Resignation. Any director may resign at any time by written notice to the corporation. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any director who does not, for any reason whatsoever, stand for election at any meeting of stockholders called for such purpose shall be conclusively deemed to have resigned, effective as of the date of such meeting, for the purposes of these bylaws, and the corporation need not receive any written notice to evidence such resignation. Section 3.5 Regular Meeting. A regular meeting of the Board of Directors shall be held each year, without other notice then this bylaw, at the place of, and immediately following, the annual meeting of stockholders, and other regular meetings of the Board of Directors shall be held each year, at such time and place as the Board of Directors may provide, by resolution, either within or without the State of Delaware, without other notice than such resolution. Section 3.6 Special Meeting. A special meeting of the Board of Directors may be called by the Chairman of the Board or by the President. The Chairman or President so calling any such meeting shall fix the time and any place, either within or without the State of Delaware, as the place for holding such meeting. Section 3.7 Notice of Special Meeting. Written notice of special meetings of the Board of Directors shall be given to each director at least forty-eight (48) hours prior to the time of such meeting. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting solely for the purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting, except that notice shall be given with respect to any matter to be acted upon at such special meeting where notice is required by statute. BYLAWS - 5 6 Section 3.8 Quorum. A majority of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these bylaws. If a quorum shall not be present at any meeting of the Board of Directors, a majority of the directors present thereat, though less than a quorum, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.9 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof as provided in Article IV of these bylaws, may be taken without a meeting, if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. Section 3.10 Compensation. Directors, as such, shall not be entitled to any stated salary for their services unless voted by the stockholders or the Board of Directors; but by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors or any meeting of a committee of directors. No provision of these bylaws shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE IV COMMITTEE OF DIRECTORS Section 4.1 Designation, Powers and Name. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, including, if they shall so determine, an Executive Committee, each such committee to consist of two or more of the directors of the corporation. The committee shall have and may exercise such of the powers of the Board of Directors in the management of the business and affairs of the corporation as may be provided in such resolution, provided, however, that no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, provided further, that, unless the resolution establishing the committee expressly so provides, no such committee shall have the power BYLAWS - 6 7 or authority to declare a dividend or to authorize the issuance of stock. The committee may authorize the seal of the corporation to be affixed to all papers which may require it. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting. Section 4.2 Minutes. Each committee of directors shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. Section 4.3 Compensation. Members of special or standing committees may be allowed compensation for attending committee meetings, if the Board of Directors shall so determine. ARTICLE V NOTICE Section 5.1 Methods of Giving Notice. Whenever under the provisions of any statute, the Certificate of Incorporation or these Bylaws notice is required to be given to any director, member of any committee or stockholder, such notice shall be in writing and delivered personally or mailed to such director, member or stockholder; provided, however, that in the case of a director or a member of any committee, such notice, unless required by statute, the Certificate of Incorporation or these bylaws to be in writing, may be given orally or by telephone or telegram. If mailed, notice to a director, member of a committee or stockholder shall be deemed to be given when deposited in the United States mail first class in a sealed envelope, with postage thereon prepaid, addressed, in the case of a stockholder, to the stockholder at the stockholder's address as it appears on the records of the corporation or, in the case of a director or a member of a committee, to such person at his business address. If sent by telegraph, notice to a director or member of a committee shall be deemed to be given when the telegram, so addressed, is delivered to the telegraph company. Section 5.2 Written Waiver. Whenever any notice is required to be given under the provisions of any statute, the Certificate of Incorporation or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. BYLAWS - 7 8 ARTICLE VI OFFICERS Section 6.1 Officers. The officers of the corporation shall be a Chairman of the Board (who may be designated the Chief Executive Officer or the Chief Operating Officer) and a Vice Chairman of the Board (if such office be created by resolution adopted by the Board), a President (who may also be designated the Chief Executive Officer or the Chief Operating Officer), one or more Vice Presidents (any one or more of whom may be designated Executive Vice President or the Senior vice President and any one of whom may also be designated as the Chief Operating Officer or the Chief Financial Officer), a Secretary and a Treasurer. The Board of Directors may by resolution create the office of Vice Chairman of the Board and define the duties of such office. The Board of Directors may appoint such other officers and agents, including Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined by the Board. Any two or more offices, other than the offices of President and Secretary, may be held by the same person. No officer shall execute, acknowledge, verify or countersign any instrument on behalf of the corporation in more than one capacity, if such instrument is required by law, by these bylaws or by any act of the corporation to be executed, acknowledged, verified or countersigned by two or more officers. The Chairman and Vice Chairman of the Board and the President shall be elected from among the directors. With the foregoing exceptions, none of the other officers need be a director, and none of the officers need be a stockholder of the corporation. Section 6.2 Election and Term of Office. The officers of the corporation shall be elected annually by the Board of Directors at its first regular meeting held after the annual meeting of stockholders or as soon thereafter as conveniently practicable. Each officer shall hold office until his successor shall have been elected or appointed and shall have qualified or until his death or the effective date of his resignation or removal, or until he shall cease to be a director in the case of the Chairman and Vice Chairman of the Board or the President. Section 6.3 Removal and Resignation. Any officer or agent elected or appointed by the Board of Directors may be removed without cause by the affirmative vote of a majority of the Board of Directors whenever, in its judgment, the best interests of the corporation shall be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the BYLAWS - 8 9 date of the receipt of such notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6.4 Vacancies. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. Section 6.5 Salaries. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors or pursuant to its direction; and no officer shall be prevented from receiving such salary by reason of his also being a director. Section 6.6 Chairman of the Board. The Chairman of the Board (who may also hold the office of President or other offices) shall preside at all meetings of the Board of Directors or of the stockholders of the corporation. In the Chairman's absence, such duties shall be attended to by the Vice Chairman of the Board or the President. The Chairman shall formulate and submit to the Board of Directors or the Executive Committee matters of general policy for the corporation and shall perform such other duties as usually appertain to the office and such other duties as may be prescribed by the stockholders, the Board of Directors or the Executive Committee from time to time. If the Chairman be so designated, he shall also serve as the Chief Executive Officer of the corporation and shall perform such other duties exercise such other powers as usually appertain to such title, including, without limitation, the power to appoint and remove subordinate officers, agents and employees, including Assistant Secretaries and Assistant Treasurers, except that the Chairman may not remove those elected or appointed by the Board of Directors. The Chairman of the Board may sign, with the Secretary or any other. officer of the corporation thereunto authorized by the Board of Directors, certificates for shares of the corporation and any deed, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. Section 6.7 President. In the absence of the Chairman of the Board or the Vice Chairman of the Board (if such office be created by the Board), or in the event of their inability or refusal to act, the President shall preside at all meetings of the Board of Directors and of the stockholders. The President may also preside at any such meeting attended by the Chairman or Vice Chairman of the Board if so designated by the Chairman, or in the Chairman's absence, by the Vice Chairman. If the President be designated as the Chief Executive Officer of the corporation, the President shall perform BYLAWS - 9 10 such duties and exercise such powers as usually appertain to such title and such other duties as may be prescribed by the stockholders, the Board of Directors or the Executive Committee from time to time. The President, if designated as the Chief Executive Officer of the corporation, shall have the power to appoint and remove subordinate officers, agents and employees, including Assistant Secretaries and Assistant Treasurers, except that the President may not remove those elected or appointed by the Board of Directors. The President shall keep the Board of Directors and the Executive Committee fully informed and shall consult them concerning the business of the corporation. The President may sign, with the Secretary or any other officer of the corporation thereunto authorized by the Board of Directors, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. The President shall vote, or give a proxy to any other officer of the corporation to vote, all shares of stock of any other corporation standing in the name of the corporation. In general, the President shall perform all other duties normally incident to or as usually appertain to the office of the President and such other duties as may be prescribed by the stockholders, the Board of Directors of the Executive Committee from time to time. Section 6.8 Vice Presidents. In the absence of the President, or in the event of his inability or refusal to act, the Executive Vice President (or in the event there shall be no Vice President designated Executive Vice President, any Vice President designated by the Board) shall perform the duties and exercise the powers of the President. Any Vice President may sign, with the Secretary or Assistant Secretary, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. The Vice Presidents shall perform such other duties as from time to time may be assigned to them by the Chairman of the Board, the President, the Board of Directors or the Executive Committee. Section 6.9 Secretary. The Secretary shall (a) record the proceedings of the meetings of the stockholders, the Board of Directors and committees of directors in the permanent minute books of the corporation kept for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws and as required by law; (c) be custodian of the corporate records and of the seal of the corporation, and see that the seal of the corporation or a facsimile thereof is affixed to all certificates for shares BYLAWS - 10 11 of the corporation prior to the issue thereof and to all documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these bylaws; (d) keep or cause to be kept a register of the post office address of each stockholder which shall be furnished by such stockholder; (e) sign with the Chairman of the Board, the President, or an Executive Vice President or Vice President, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed; (f) have general charge of the stock transfer books of the corporation; and (g) in general, perform all duties normally incident to the office of Secretary and such other duties as from time to time may be assigned by the Chairman of the Board, the President, the Board of Directors or the Executive Committee. Section 6.10 Treasurer. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine. The Treasurer shall (a) have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for moneys due and payable to the corporation from any source whatsoever and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of Section 7.3 of these bylaws; (b) prepare, or cause to be prepared, for submission at each regular meeting of the Board of Directors, at each annual meeting of the stockholders, and at such other times as may be required by the Board of Directors, the Chairman of the Board, the President or the Executive Committee, a statement of financial.condition of the corporation in such detail as may be required; (c) sign with the Chairman of the Board, the President, or an Executive Vice President or Vice President, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed, and (d) in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the Chairman of the Board, the President, the Board of Directors or the Executive Committee. Section 6.11 Assistant Secretary or Treasurer. The Assistant Secretaries and Assistant Treasurers shall, in general, perform such duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the Chairman of the Board, the President, the Board of Directors or the Executive Committee. The Assistant Secretaries BYLAWS - 11 12 and Assistant Treasurers shall, in the absence of the Secretary or Treasurer, respectively, or in their respective inability or refusal to act, perform all functions and duties which such absent officers may delegate, but such delegation shall not relieve the absent officer from the responsibilities and liabilities of their office. The Assistant Secretaries may sign, with the Chairman of the Board, the President or Executive Vice President, certificates for shares of the corporation and any deeds, bonds, mortgages, contracts, checks, notes, drafts or other instruments the issue or execution of which shall have been authorized by a resolution of the Board of Directors, except in cases where the signing and execution thereof has been expressly delegated by these bylaws or by the Board of Directors to some other officer or agent of the corporation, or shall be required by law to be otherwise executed. The Assistant Treasurers shall respectively, if require by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. Section 6.12 General Counsel. The General Counsel shall be the chief legal officer of the corporation; shall advise the Board of Directors and officers on all legal matters, and shall perform such other additional duties as may be assigned to him by the Board of Directors, Chairman or Chief Executive Officer. ARTICLE VII CONTRACTS, CHECKS AND DEPOSITS Section 7.1 Contracts. Subject to the provisions of Section 6.1, the Board of Directors may authorize any officer, officers, agent or agents, to enter into any contract or execute and deliver any instrument for and in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. Section 7.2 Checks, etc. All checks, demands, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers or such agent or agents of the corporation, and in such manner, as shall be determined by the Board of Directors. Section 7.3 Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select. BYLAWS - 12 13 ARTICLE VIII CERTIFICATES OF STOCK Section 8.1 Insurance. Each stockholder of this corporation shall be entitled to a certificate or certificates showing the number of shares of stock registered in such stockholder's name on the books of the corporation. The certificates shall be in such form as may be determined by the Board of Directors, shall be issued in numerical order and shall be entered in the books of the corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary. Any or all the signatures on the certificate may be a facsimile. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided by statute, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests a copy of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in the case of a lost, stolen, destroyed or mutilated certificate a new one may be issued therefor upon such terms and with such indemnity, if any, to the corporation as the Board of Directors may prescribe. Certificates shall not be issued representing fractional shares of stock. Section 8.2 Lost Certificates. The corporation may issue a new certificate or certificates in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. The corporation may in its discretion and a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a bond sufficient to indemnify it against any claim that may be made against the corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed or the issuance of such new certificate. BYLAWS - 13 14 Section 8.3 Transfers. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Transfers of shares shall be made only on the books of the corporation by the registered holder thereof, or by such holder's attorney thereunto authorized by power of attorney and filed with the Secretary of the corporation or the transfer agent. Section 8.4 Registered Stockholders. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. ARTICLE IX DIVIDENDS Section 9.1 Declaration. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the Certificate of Incorporation. Section 9.2 Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INDEMNIFICATION Section 10.1 Third Party Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or BYLAWS - 14 15 investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contenders or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful. Section 10.2 Derivative Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in the corporation's favor by reason of the fact that such person is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to amounts paid in settlement, the settlement of the suit or action was in the best interests of the corporation, provided, however, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for gross negligence or wilful misconduct in the performance of such person's duty to the corporation unless and only to the extent that, the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. The termination of any action or suit by judgment or settlement shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation. BYLAWS - 15 16 Section 10.3 Successful Defense. To the extent that a director, trustee, officer, employee or agent of the corporation has been successful on the merits or otherwise, in whole or in part, in defense of any action, suit or proceeding referred to in Sections (1) and (2) of this Article X, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 10.4. Authorization. Any indemnification under Sections (1) and (2) of this Article X (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth above in Sections (1) and (2) of this Article X. Such determination shall be made (a) by the Board of Directors of the corporation by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, by a majority vote of directors who were not parties to such action, suit or proceeding, or (c) by independent legal counsel (selected by one or more of the directors, whether or not a quorum and whether or not disinterested) in a written opinion, or (d) by the shareholders. Anyone making such a determination under this Section (4) may determine that a person has met the standard therein set forth as to some claims, issues or matters but not as to others, and may reasonably prorate amounts to be paid as indemnification. Section 10.5 Advances. Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the corporation, at any time or from time to time in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in Section 10.4 of this Article X upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized in this Article X. Section 10.6 Non-Exclusivity. The indemnification provided by this Article X shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 10.7 Insurance. The corporation shall have the powers to purchase and maintain insurance on behalf of any person who is or was a director, trustee, officer, employee or agent of the corporation, or is or was serving at the request of the BYLAWS - 16 17 corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability. Section 10.8 "Corporation" Defined. For purposes of this Article X, references to the "corporation" shall include, in addition to the corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, trustees, officers, employees or agents, so that any person who is or was a director, trustee, officer, employee or agent of such constituent corporation or of any entity a majority of the voting stock of which is owned by such constituent corporation, or is or was serving at the request of such constituent corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article X with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. ARTICLE XI MISCELLANEOUS Section 11.1 Seal. The corporate seal shall have inscribed thereon the name of the corporation, and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. Section 11.2 Books. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at the offices of the corporation at Dallas, Texas, or at such other place or places as may be designated from time to time by the Board of Directors. ARTICLE XII AMENDMENT These, bylaws may be altered, amended or repealed at any regular or special meeting of the Board of Directors, without prior notice, by resolution adopted thereat. BYLAWS - 17 EX-4.1 3 FORM OF WARRANT AGREEMENT 1 EXHIBIT 4.1 SUNSHINE MERGER COMPANY AND AMERICAN STOCK TRANSFER & TRUST COMPANY ------------------------------------------------ AS WARRANT AGENT ------------------------------------------------ WARRANT AGREEMENT DATED AS OF [ ] ------------------------------------------------ 2 WARRANT AGREEMENT TABLE OF CONTENTS RECITALS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1. Appointment of Warrant Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. Issuance. Form and Execution of Warrant Certificates. . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Issuance of Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Form of Warrant Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Execution of Warrant Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 Temporary Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 Procedures for Global Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 3. Registration: Countersignature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.1 Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2 Countersignature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 4. Transfer and Registration of Warrants and Warrant Shares. . . . . . . . . . . . . . . . . . . . . . 4 4.1 Disposition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.2 Registration Undertakings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 5. Registration of Transfers: Exchanges of Warrant Certificates. . . . . . . . . . . . . . . . . . . . 4 5.1 Registration of Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.2 Exchanges of Warrant Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 SECTION 6. Term of Warrants; Exercise of Warrants; Exercise Price. . . . . . . . . . . . . . . . . . . . . . . 5 6.1 Term of Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.2 Exercise of Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.3 Exercise Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 7. Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 8. Mutilated or Missing Warrant Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 9 Reservation of Warrant Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9.1 Reservation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9.2 Covenant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 10. Adjustments to Exercise Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10.1 Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (a) Reclassification, Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (b) Adjustment for Change in Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (c) Adjustments to Exercise Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 10.2 Notice of Adjustment to Exercise Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 10.3 Voluntary Reduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 10.4 Deferral of Issuance or Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10.5 Form of Warrant Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10.6 No Impairment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 11. Fractional Interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(i) 3 SECTION 12. Notices to Warrantholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 13. Reports to Warrantholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 14. Concerning the Warrant Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 14.1 Warrant Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 14.2 Conditions of Warrant Agent's Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 14.3 Resignation and Appointment of Successor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 15. Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 16. Identity of Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 17. Notices and Demands to the Company and Warrant Agent. . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 18. Notices to Company and Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 19. Notices to Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 20. Provision of Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 21. Amendment; Merger; Consolidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 22. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 23. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 24. Benefits of this Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 25. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 26. Severability of Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 27. Obtaining of Governmental Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 28. Delivery of Prospectus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(ii) 4 WARRANT AGREEMENT WARRANT AGREEMENT, dated as of [ ] ("Agreement"), between SUNSHINE MERGER COMPANY, a Delaware corporation (the "Company"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York corporation, as Warrant Agent (with any successor warrant agent, the "Warrant Agent"). RECITALS: WHEREAS, the Company entered into an Agreement and Plan of Merger dated [ , 1995] with Sunshine Mining and Refining Company, upon the consummation of which the Company will be the surviving entity (the "Merger"), incident to which all of the $11.94 (Stated Value) Preferred Stock (the "Preferred Stock") of Sunshine Mining and Refining Company will be canceled and extinguished in its entirety; WHEREAS, incident to the Merger, the Company is issuing to the holders Preferred Stock, for each share of Preferred Stock held, [ ] shares of the Company's common stock, par value $.01 (the "Common Stock") and, at the option of the holder, either .9 shares of Common Stock or two warrants each to purchase one share of Common Stock (such warrants being herein referred to as the "Warrants" and the certificates evidencing the Warrants being herein referred to as "Warrant Certificates") at the exercise price and on the terms and subject to the conditions set forth herein. The shares of Common Stock and, pursuant to Section 10 hereof, other securities issuable upon exercise of the Warrants, are referred to herein as the "Warrant Shares"; WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance, transfer, exchange and exercise of Warrants and other matters as provided herein; and WHEREAS, the Company and the Warrant Agent wish to define the terms and provisions of the Warrants and the respective rights and obligations thereunder of the Company and the registered holders of the Warrants (such registered holders being herein referred to as the "Warrantholders"). NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company in accordance with the instructions set forth hereinafter in this Agreement, and the Warrant Agent hereby accepts such appointment. SECTION 2. Issuance. Form and Execution of Warrant Certificates. 2.1 Issuance of Warrants. Warrants shall be originally issued by the Company in connection with the Merger. Each Warrant Certificate shall evidence the number of Warrants specified therein, and each Warrant evidenced thereby shall represent the right, subject to the provisions contained herein and therein, to purchase from the Company (and the Company shall issue and sell to the registered holder of such Warrant) one fully paid and nonassessable share of Common Stock and, pursuant to Section 10 hereof, such other securities as may be issuable to the Warrantholder upon exercise of such Warrant, at the price specified herein and therein. 2.2 Form of Warrant Certificates. The certificates evidencing the Warrants (the "Warrant Certificates" shall be in registered form only and shall be substantially in the form set forth in Annex I attached hereto, shall be dated the date on which countersigned by the Warrant Agent and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed, engraved or otherwise affixed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required 5 to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of the NSM or of any stock exchange or inter-dealer quotation system on which the Warrants may from time to time be listed or quoted, or to conform to usage. 2.3 Execution of Warrant Certificates. Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President, any Vice President or its Treasurer, and signed by its Secretary or any Assistant Secretary and have affixed thereon the Company's seal. Each such signature and such seal may be manual or facsimile. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before countersignature and delivery by the Warrant Agent, such Warrant Certificates, nevertheless, may be countersigned, issued and delivered with the same force and effect as though such person had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be a proper officer of the Company to sign such Warrant Certificate, although at the date of the execution of this Agreement any such person was not such an officer. Upon countersignature by the Warrant Agent and delivery, the Warrant Certificate shall be valid and binding upon the Company, and the Warrantholder thereof shall be entitled to all of the benefits of this Agreement. 2.4 Temporary Certificates. Until definitive Warrant Certificates are ready for delivery, the Company may prepare and execute and the Warrant Agent shall countersign and deliver temporary Warrant Certificates. Temporary Warrant Certificates shall be substantially in the form of the definitive Warrant Certificates but may have variations that the Company considers appropriate for temporary Warrant Certificates. After the preparation of definitive Warrant Certificates, the temporary Warrant Certificates shall be exchangeable for definitive Warrant Certificates upon surrender of the temporary Warrant Certificates at the corporate trust office or agency of the Warrant Agent in the Borough of Manhattan, The City of New York (the "Office"). Except as set forth in Section 7 hereof, such exchange shall be without charge to the holders. Upon surrender for cancellation of any one or more temporary Warrant Certificates, the Company shall execute and the Warrant Agent shall countersign and deliver in exchange therefor one or more definitive Warrant Certificates representing in the aggregate a like number of Warrants. Until exchanged, the temporary Warrant Certificates, if any, shall in all respects be entitled to the same benefits under this Agreement as definitive Warrant Certificates. 2.5 Procedures for Global Warrants. Upon issuance, the Warrants may be represented by one or more fully registered Warrants in global form ("Global Warrants") as well as by Warrant Certificates registered in the name of individual purchasers or their nominees. If the Warrants are to be represented by one or more Global Warrants, the Company shall execute, and the Warrant Agent shall countersign and deliver, such Global Warrant which (i) shall represent, and shall be denominated in an amount equal to, the aggregate number of Warrants to be represented by such Global Warrant, (ii) shall be registered in the name of the Depositary or in the name of Cede & Co. or of another nominee, as nominee of the Depositary, (iii) shall be delivered by the Warrant Agent to the Depositary or pursuant to the Depositary's instructions and (iv) shall bear a legend substantially to the following effect: Unless and until it is exchanged in whole or in part for Warrants in definitive form, this Warrant may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this WARRANT AGREEMENT - 2 6 certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange, exercise or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. A Global Warrant may be transferred, in whole but not in part, only to a nominee of the Depositary for such Global Warrant, or to the Depositary, or to a successor Depositary selected or approved by the Company, or to a nominee of such successor Depositary. If at any time the Depositary for a Global Warrant notifies the Company that it is unwilling or unable to continue as Depositary for such Global Warrant or if at any time the Depositary for such Global Warrant shall no longer be eligible or in good standing under the Exchange Act, or other applicable statute or regulation, the Company shall appoint a successor Depositary with respect to such Global Warrant. If a successor Depositary for such Global Warrant is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, the Company will execute, and the Warrant Agent will countersign and deliver, definitive Warrant Certificates in exchange for such Global Warrant, an aggregate amount equal to the number of Warrants represented by the Global Warrant exchanged for such definitive Warrant Certificates. The Company may at any time and in its sole discretion determine that the Warrants or any portion thereof issued or issuable in the form of one or more Global Warrants shall no longer be represented by such Global Warrant or Warrants. In such event the Company will execute, and the Warrant Agent, at the Office, will countersign and deliver, definitive Warrant Certificates in exchange in whole or in part for such Global Warrant or Warrants in an aggregate amount equal to the number of Warrants represented by such Global Warrant or Warrants or portion thereof exchanged for such definitive Warrant Certificates. In any exchange provided for in either of the two preceding paragraphs, the Company will execute and the Warrant Agent, at the Office, will countersign and deliver definitive Warrant Certificates. Upon the exchange of the entire number of Warrants represented by a Global Warrant, such Global Warrant shall be canceled by the Warrant Agent. Except as provided in the preceding paragraph, definitive Warrant Certificates issued in exchange for a Global Warrant pursuant to this Section shall be registered in such names and in such amounts as the Depositary for such Global Warrant shall instruct the Warrant Agent The Warrant Agent shall deliver such definitive Warrant Certificates to the Persons in whose names such Warrant Certificates are so registered. SECTION 3. Registration: Countersignature. 3.1 Registration. The Warrant Agent, on behalf of the Company, shall number and register the Warrant Certificates in a register (the "Warrant Register") maintained at the Office as they are issued by the Company. The Company and the Warrant Agent may deem and treat the registered holder of any Warrant as the absolute owner thereof (notwithstanding any notation of ownership or other writing thereon made by anyone), for all purposes, and neither the Company nor the Warrant Agent shall be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, notwithstanding any notice to the Company or the Warrant Agent to the contrary. The Warrant Agent shall keep copies of this Agreement available for inspection by the Warrantholders during normal business hours at the Office. The Company shall supply the Warrant WARRANT AGREEMENT - 3 7 Agent from time to time with such number of copies of this Agreement as the Warrant Agent may request. 3.2 Countersignature. The Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. The Warrant Agent shall, upon written instructions of the Chairman of the Board, the President, a Vice President or the Treasurer of the Company, initially countersign, issue and deliver Warrant Certificates entitling the holders thereof to purchase not more than 14,332,372 Warrant Shares and shall countersign and deliver Warrant Certificates as otherwise provided in this Agreement. The Warrant Agent's countersignature on all Warrant Certificates shall be in substantially the form set forth in Annex I hereto. SECTION 4. Transfer and Registration of Warrants and Warrant Shares. 4.1 Disposition. The Warrants and the Warrant Shares, and any interest in either, may be sold, assigned, pledged, encumbered or in any other manner transferred or disposed of, in whole or in part only in accordance with Section 5 hereof and in compliance with applicable United States federal and state securities laws and the terms and conditions hereof. 4.2 Registration Undertakings. The offer and sale of the Warrants and the Warrant Shares have been registered under the Securities Act pursuant to the Company's registration statement on Form S-4 Registration No. 33- 98876, initially filed by the Company with the SEC on November 1, 1995 and declared effective under the Securities Act on [ ] (the "Registration Statement"). The Company covenants and agrees: (a) to prepare and file with the SEC such amendments and supplement to each Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective through the Expiration Date or until such earlier time as no Warrants remain outstanding; (b) to maintain the registration or qualification of the Warrants and the Warrant Shares to be delivered upon exercise of the Warrants under the securities or "blue-sky" laws of each state or jurisdiction in which such Warrants and Warrant Shares have been so registered or qualified; and (c) to pay all expenses incurred by the Company in complying with this Section 4.2, including, without limitation, (i) all registration and filing fees, (ii) all printing expenses, (iii) all fees and disbursements of counsel and independent public accountants for the Company, (iv) all blue-sky fees and expenses (including fees and expenses of counsel in connection with any blue-sky surveys), and (v) the entire expense of any special audits incident to or required by any such registration. SECTION 5. Registration of Transfers: Exchanges of Warrant Certificates. 5.1 Registration of Transfers. Subject to Section 7 hereof, the Warrant Agent shall from time to time register the transfer of any outstanding Warrant Certificate on the Warrant Register maintained at the Office, upon surrender thereof accompanied by a written instrument or instruments of transfer in form satisfactory to the Warrant Agent, duly endorsed by the registered holder thereof or by such Warrantholder's appointed legal representative or attorney-in-fact, or accompanied by proper evidence of succession, assignment or authority to transfer. The signature of such Warrantholder, legal representative or attorney-in-fact shall be guaranteed by an "eligible guarantor institution" (an "Eligible Guarantor Institution") within the meaning of Rule 17Ad-15 under the Exchange Act. In all cases of transfer by an attorney, the original power of attorney, duly approved, WARRANT AGREEMENT - 4 8 or an official copy thereof, duly certified, shall be deposited and remain with the Warrant Agent. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and remain with the Warrant Agent in its discretion. Upon any such registration of transfer in such name or names as may be directed in writing, by the Warrantholder, the Company shall execute and the Warrant Agent shall countersign and deliver (or cause to be delivered) a new Warrant Certificate(s) without charge to such Warrantholder, except as set forth in Section 7 hereof, to the person or persons entitled to receive the same, and the surrendered Warrant Certificate shall be canceled by the Warrant Agent. Canceled Warrant Certificates shall thereafter be disposed of in a manner satisfactory to the Company and in compliance with applicable rules and regulations promulgated by the SEC. 5.2 Exchanges of Warrant Certificates. Each Warrant Certificate may be exchanged at the option of the Warrantholder without charge to such Warrantholder when surrendered to the Warrant Agent at the Office properly endorsed in the manner described in subsection 5.1 hereof for another Warrant Certificate(s) of like tenor and representing in the aggregate a like number of Warrants. Thereupon, the Warrant Agent shall countersign and deliver to the person(s) entitled thereto a new Warrant Certificate(s) as so requested. Warrant Certificates surrendered for exchange shall be canceled by the Warrant Agent. Such canceled Warrant Certificates shall then be disposed of by such Warrant Agent in a manner satisfactory to the Company and in compliance with applicable SEC rules and regulations. SECTION 6. Term of Warrants; Exercise of Warrants; Exercise Price. 6.1 Term of Warrants. Subject to the provisions of this Agreement, each Warrantholder shall have the right, which may be exercised during the period commencing at the time of original issuance of the Warrants and ending (the "Expiration Date") at 5:00 p.m., New York City time on the fifth anniversary of the Effective Date of the Merger, to purchase from the Company the number of fully paid and-nonassessable Warrant Shares that the Warrantholder may at the time be entitled to purchase on exercise of such Warrants and payment of the Exercise Price (as defined below) for such Warrant Shares. To the extent the Expiration Date does not fall on a business day, the Expiration Date shall occur on the next following business day. The Company shall certify to the Warrant Agent the Effective Date of the Merger as promptly as practicable following such date, and the Warrant Agent shall, in reliance on such certification, insert the Expiration Date in the form of Warrant Certificate. Each Warrant not exercised prior to 5:00 p.m., New York City time, on the Expiration Date shall automatically become void and no longer outstanding. 6.2 Exercise of Warrants. Subject to the provisions of this Agreement, a Warrant may be exercised by the Warrantholder in whole or in part upon surrender at the Office to the Warrant Agent of the Warrant Certificate(s) evidencing the Warrants to be exercised, together with the form of election to purchase (the "Election to Purchase"), in the form set forth on the reverse side of the Warrant Certificate, duly completed and signed by such Warrantholder or by such Warrantholder's appointed legal representative or attorney-in-fact, which signature shall be guaranteed by an Eligible Guarantor Institution, and upon payment in full to the Warrant Agent, for the account of the Company, of the Exercise Price for each Warrant exercised and any other amounts required to be paid pursuant to Section 7 hereof. Payment of the aggregate Exercise Price and such additional amounts, if any, shall be made by certified or official bank check payable to the order of the Company. Subject to the provisions of Section 7 hereof, upon due exercise of the Warrants and surrender of the Warrant Certificate, duly completed and signed, and payment of the exercise Price as aforesaid, the Company shall cause to be issued and delivered with all reasonable dispatch to or upon the written order of the Warrantholder and in such name or names as the Warrantholder may designate in the Election to Purchase, a certificate or certificates for the number of full Warrant Shares so purchased, WARRANT AGREEMENT - 5 9 together with cash in respect of any fractional Warrant Shares otherwise issuable upon exercise in accordance with Section 11. If all of the items referred to in the first sentence of the preceding paragraph are received by the Warrant Agent at or prior to 2:00 p.m., New York City time, on a business day, the exercise of the Warrant to which such items relate will be effective on such business day. If all of such items are received after 2:00 p.m., New York City time, on a business day, the exercise of the Warrants to which such items relate will be effective the next business day. Notwithstanding the foregoing, in the case of any exercise of Warrants on the Expiration Date, if all of such items are received by the Warrant Agent at or prior to 5:00 p.m., New York City time, on the Expiration Date, the exercise of the Warrants to which such items relate will be effective on the Expiration Date. The number and kind of Warrant Shares for which a Warrant may be exercised shall be subject to adjustment from time to time as set forth in Section 10. The Warrants shall be exercisable as provided herein at the election of the Warrantholder either in whole or from time to time in part. Only whole numbers of Warrants may be exercised. In the event that prior to the Expiration Date the holder of a Warrant Certificate shall exercise fewer than all of the Warrants evidenced thereby, a new Warrant Certificate(s) evidencing the remaining unexercised Warrants shall be issued to such Warrantholder, and the Warrant Agent is hereby irrevocably authorized to countersign and to deliver the required new Warrant Certificate(s) pursuant to the provisions of this Section 6 and subsection 3.2 hereof, and the Company, whenever required by the Warrant Agent, shall supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purpose. All Warrant Certificates surrendered upon exercise of Warrants shall be canceled by the Warrant Agent. Such canceled Warrant Certificates shall then be disposed of by the Warrant Agent in a manner satisfactory to the Company. The Warrant Agent shall (i) account promptly to the Company with respect to Warrants exercised, and concurrently pay to the Company all monies received by the Warrant Agent for the purchase of the Warrant Shares through the exercise of such Warrants and (ii) as soon as practicable, advise the Company in writing of the number of Warrants exercised in accordance with the provisions of this Agreement and the Warrant Certificates and the instructions of each exercising holder of the Warrant Certificates with respect to the issuance and delivery of the Warrant Shares to which such holder is entitled upon such exercise. 6.3 Exercise Price. The price per share at which each Warrant Share shall be purchased upon exercise of the Warrant (the "Exercise Price") shall be [ ], subject to adjustment to 110% of the average closing price of the Company's Common Stock as reported on the NYSE Composite Transactions for the first 120 NYSE trading days after the Effective Date of the Merger, if such average price is less than [$ ]. In the event the Exercise Price is required to be adjusted as provided in this Paragraph 6.3, the Company shall forthwith compute the adjusted Exercise Price and shall prepare a certificate setting forth such adjusted Exercise Price and showing in reasonable detail the facts upon which such adjustment is based. A copy of such certificate, accompanied by a certification of the independent public accountants regularly employed by the Company to the effect that they have reviewed the Company's certificate and are in agreement with the computations set forth therein, shall forthwith be filed with the Warrant Agent and the Transfer Agent; and thereafter, until the same may be further adjusted pursuant to Section 10.3(b), the adjusted Exercise Price shall be as set forth in such certificate. Neither the Warrant Agent nor the Transfer Agent shall be under any duty or responsibility with respect to any such certificate except to exhibit the same to any Warrantholder desiring inspection thereof. In the event that the Exercise Price is adjusted, the Company shall mail, or cause to be mailed, to the Warrantholders a statement setting forth the adjustment and the reason for such adjustment. SECTION 7. Payment of Taxes. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other taxes attributable to the issuance or delivery of the WARRANT AGREEMENT - 6 10 Warrant Certificates or of the Warrant Shares purchasable upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax or taxes that may be payable in respect of any transfer involving the issue of any Warrant Certificate(s) or any certificate(s) for Warrant Shares in a name other than that of the Warrantholder of such exercised Warrant Certificate(s), and the Company shall not be required to issue or deliver such Warrant Certificate(s) or such certificate(s) for Warrant Shares unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the reasonable satisfaction of the Company that such has been paid. SECTION 8. Mutilated or Missing Warrant Certificates. In the event that any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall execute, and the Warrant Agent shall countersign and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing a like number of Warrants, but only, in case of a lost, stolen or destroyed Warrant Certificate, upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction and the absence of notice to the Company or the Warrant Agent that such Warrant Certificate has been acquired by a bona fide purchaser or holder in due course. A Warrantholder applying for such substitute Warrant Certificate shall also comply with such other reasonable requests (including, without limitation, in the case of a lost, stolen or destroyed Warrant Certificate, a request to provide a letter of indemnification or an indemnity bond sufficient in the reasonable judgment of the Company and the Warrant Agent to protect the Company and the Warrant Agent from any loss that either of them may suffer if a Warrant Certificate is replaced) and pay such other reasonable charges as the Company or the Warrant Agent may reasonably prescribe. Every substitute Warrant Certificate executed and delivered pursuant to this Section in lieu of any lost, stolen or destroyed Warrant Certificate shall constitute an additional contractual obligation of the Company, whether or not the lost, stolen or destroyed Warrant Certificate shall be at any time enforceable by anyone, and shall be entitled to the benefits of (but shall be subject to all the limitations of rights set forth in) this Agreement equally and proportionately with any and all other Warrant Certificates duly executed and delivered hereunder. The provisions of this Section 8 are exclusive with respect to the replacement of mutilated, lost, stolen or destroyed Warrant Certificates and shall preclude (to the extent lawful) any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of mutilated, lost, stolen or destroyed securities certificates. SECTION 9. Reservation of Warrant Shares. 9.1 Reservation. The Company shall at all times keep reserved, free from preemptive rights, out of its authorized Common Stock or other securities of the Company issuable upon the exercise of the Warrants, a number of shares of Common Stock or such other securities sufficient to provide for the exercise of the right of purchase represented by all outstanding Warrants. The Company covenants that the transfer agent for the Common Stock or other securities of the Company issuable upon the exercise of the Warrant (the "Transfer Agent") will be irrevocably authorized and directed at all times to reserve such number of shares of Common Stock or such other securities as shall be required for such purpose. The Company shall keep a copy of this Agreement on file with the Transfer Agent. The Company shall furnish the Transfer Agent a copy of all notices of adjustments and certificates related thereto that are delivered to the Warrant Agent or transmitted to each Warrantholder pursuant to subsection 10.2 and Section 12 hereof. 9.2 Covenant. The Company covenants that all Warrant Shares will, upon issuance, be fully paid, nonassessable, free of preemptive rights and free from all taxes payable by the Company, liens, charges and security interests (except any liens, charges or security interests created or suffered to be created by any of the Warrantholders), and will not be subject to any restrictions on voting or WARRANT AGREEMENT - 7 11 transfer thereof that are created by the Company except for such restrictions on voting or transfer provided in this Agreement, the Certificate of Incorporation or as otherwise provided by law. SECTION 10. Adjustments to Exercise Rate. 10.1 Adjustments. The number and kind of Warrant Shares purchasable upon the exercise of each Warrant (the "Exercise Rate") shall be subject to adjustment from time to time as follows: (a) Reclassification, Merger, etc. If, after the date hereof, the Company, in a single transaction or through a series of related transactions, consolidates with or merges with or into any other entity or transfers (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets to another entity or group of affiliated entities (other than a sale of all or substantially all of the assets of the Company in a transaction in which the holders of Common Stock immediately prior to such transaction do not receive securities, cash, or other assets of the Company or any other entity) or is a party to a merger or binding share exchange which reclassifies or changes its outstanding Common Stock, the entity thereafter obligated to deliver securities, cash or other assets upon exercise of Warrants shall enter into a supplemental warrant agreement with the Warrant Agent. If the issuer of securities deliverable upon exercise of Warrants is an Affiliate of the successor to the Company, that issuer shall join in the supplemental warrant agreement. The supplemental warrant agreement shall provide that the holder of a Warrant may exercise such Warrant for the kind and amount of securities, cash or other assets which such holder would have received immediately after the consolidation, merger, binding share exchange or transfer if such holder had exercised such Warrant immediately before the effective date of the transaction, assuming (to the extent applicable) that such holder (i) is not a constituent person or an Affiliate of a constituent person to such transaction; (ii) made no election with respect thereto; and (iii) was treated alike with the plurality of non-electing holders. The supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 10. The successor to the Company shall mail to the holders of Warrants at the addresses appearing on the Warrant Register a notice briefly describing the supplemental warrant agreement. If this subsection 10.1(a) applies, subsection 10.1(b) shall not apply. The provisions of this subsection 10.1(a) shall similarly apply to successive consolidations, mergers, binding share exchanges or transfers. (b) Adjustment for Change in Capital Stock. If, after the date hereof, the Company: (i) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock; (ii) subdivides its outstanding shares of Common Stock into a greater number of shares; (iii) combines its outstanding shares of Common Stock into a smaller number of shares; or (iv) issues by reclassification of its Common Stock any other shares of its capital stock, then the Exercise Rate in effect immediately prior to such action shall be adjusted so that the holder of a Warrant thereafter exercised shall receive the number of shares of Common Stock or other shares WARRANT AGREEMENT - 8 12 of capital stock of the Company which such holder would have received immediately following such action if such holder had exercised such Warrant immediately prior to such action. An adjustment to the Exercise Rate pursuant to this Section 10.1 (b) shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. In the event that such dividend or distribution is not so paid or made or such subdivision, combination or reclassification is not effected, the Exercise Rate shall again be adjusted to be the Exercise Rate which would then be in effect if such record date or effective date had not been so fixed. (c) Adjustments to Exercise Rate. If after an adjustment pursuant to this Section 10.1 a holder of a Warrant upon exercise of such Warrant may receive shares of two or more classes of capital stock of the Company, the Exercise Rate shall thereafter be subject to adjustment upon the occurrence of an action taken with respect to any such class of capital stock as is contemplated by this Section 10 with respect to the Common Stock, on terms comparable to those applicable to the Common Stock in this Section 10.1. 10.2 Notice of Adjustment to Exercise Rate. Whenever the Exercise Rate is required to be adjusted as provided in this Section 10, the Company shall forthwith compute the adjusted Exercise Rate and shall prepare a certificate setting forth such adjusted Exercise Rate and showing in reasonable detail the facts upon which such adjustment is based. A copy of such certificate, accompanied by a certification of the independent public accountants regularly employed by the Company to the effect that they have reviewed the Company's certificate and are in agreement with the computations set forth therein, shall forthwith be filed with the Warrant Agent and the Transfer Agent; and thereafter, until further adjusted, the adjusted Exercise Rate shall be as set forth in such certificate. Neither the Warrant Agent nor the Transfer Agent shall be under any duty or responsibility with respect to any such certificate except to exhibit the same to any Warrantholder desiring inspection thereof. Whenever the Exercise Rate is adjusted, the Company shall promptly mail, or cause to be mailed, to the Warrantholders a statement setting forth the adjustment and the reasons for such adjustment. 10.3 Voluntary Reduction. (a) The Company may at its option, but shall not be obligated to, at any time during the term of the Warrants provided for in subsection 6.1 hereof, increase the then current Exercise Rate by any amount selected by the Board; provided, that if the Company elects so to increase the then current Exercise Rate, such increase shall be irrevocable during its effective period and remain in effect for a minimum of 20 business days following the date of such election, after which time the Company may, at its option, reinstate the Exercise Rate in effect prior to such increase. Whenever the Exercise Rate is increased, the Company shall mail or cause to be mailed to the Warrantholders a notice of the increase at least 15 days before the date the increased Exercise Rate takes effect, stating the increased Exercise Rate and the period for which such increased Exercise Rate will be in effect. (b) The Company may at its option, but shall not be obligated to, at any time during the term of the Warrants provided for in subsection 6.1 hereof, decrease the then current Exercise Price by any amount selected by the Board; provided, that if the Company elects so to decrease the then current Exercise Price, such decrease shall be irrevocable during its effective period and remain in effect for a minimum of 20 business days following the date of such election, after which time the Company may, at its option, reinstate the Exercise Price in effect prior to such decrease. Whenever the Exercise Price is decreased pursuant to this Section 10.3(b), the Company shall mail or cause to be mailed to the Warrantholders a notice of the decrease at least 15 days before the date the decreased Exercise Price takes effect, stating the decreased Exercise Price and the period for which such decreased Exercise Price will be in effect. WARRANT AGREEMENT - 9 13 (c) The Company may make such increases in the Exercise Rate or decreases in the Exercise Price, as the case may be, in addition to those required or allowed by this Section 10 or Section 6, as shall be determined by it, as evidenced by a certified resolution of the Board delivered to the Warrant Agent, to be advisable in order to avoid or diminish any income tax to Warrantholders resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. 10.4 Deferral of Issuance or Payment. In any case in which subsection 10.1 hereof shall require that an adjustment in the Exercise Rate be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event (i) issuing to the holder of any Warrant exercised after such record date the Warrant Shares issuable upon such exercise over and above the Warrant Shares issuable upon such exercise on the basis of the Exercise Rate in effect immediately prior to such adjustment and (ii) paying to such Warrantholder any amount in cash in lieu of a fractional share pursuant to Section 11 hereof; provided, however, that the Company shall deliver to such Warrantholder a due bill or other appropriate instrument evidencing such Warrantholder's right to receive such additional Warrant Shares and cash upon the occurrence of the event requiring such adjustment. 10.5 Form of Warrant Certificates. Irrespective of any adjustments in the Exercise Rate, the kind of Warrant Shares purchasable upon the exercise of the Warrants, or the Exercise Price, Warrant Certificates evidencing such Warrants theretofore or thereafter issued may continue to express the same number and kind of Warrant Shares, and Exercise Price, as are stated in the Warrant Certificates initially issuable pursuant to this Agreement. 10.6 No Impairment. Without limiting the generality of the foregoing, the Company (i) shall take all such action as may be necessary or appropriate in order that the Warrant Shares to be issued upon the exercise of the Warrants from time to time outstanding will, when issued, be fully paid and nonassessable, and (ii) will not take any action that results in any adjustment to the Exercise Rate if after such adjustment the total number of shares of Common Stock issuable upon the exercise of all of the outstanding Warrants would exceed the total number of shares of Common Stock or other capital stock of the Company then authorized by the Amended Certificate of Incorporation and available for the purpose of issuance upon such exercise. SECTION 11. Fractional Interests. The Company shall not issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise at the same time by the same Warrantholder, the number of full Warrant Shares that shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would be issuable on the exercise of any Warrants, the Company shall pay to the Warrantholder an amount in cash equal to the product of such fraction times the Quoted Price for such Warrant Share on the business day next preceding the latest of the date of the surrender of the Warrant Certificate(s) evidencing the Warrants to be exercised, with the Election to Purchase duly completed and signed, and payment of the Exercise Price and any other amounts required to be paid pursuant to Section 7 hereof. "Quoted Price" means, for any given day, the last reported per share sale price (or, if no sale price is reported, the average of the bid and ask prices or, if more than one, in either case, the average of the average bid and average ask prices) on such day of such Warrant Share on the principal national or regional securities exchange upon which such Warrant Share is listed, or if such Warrant Share is not listed on a national or regional securities exchange, as quoted on the National Association of Securities Dealers Automated Quotation System or by the National Quotation Bureau Incorporated. In the absence of one or more such quotations, the Board shall be entitled to determine the Quoted Price on the basis of such quotations as it considers appropriate. SECTION 12. Notices to Warrantholders. In the event: WARRANT AGREEMENT - 10 14 (i) of any consolidation or merger or binding share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance or sale of all or substantially all of the assets of the Company, or of any reclassification or change of the Common Stock or other securities issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or a tender offer or exchange offer for shares of Common Stock (or other securities issuable upon the exercise of the Warrants); or (ii) the Company shall declare any dividend or distribution, other than regular cash dividends, on the Common Stock or other securities; or (iii) the Company shall authorize the granting to the holders of Common Stock of rights or warrants to subscribe for or purchase any shares of any class or series of the Company; or (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Company. then the Company shall cause to be filed with the Warrant Agent and shall cause to be sent to each Warrantholder at such Warrantholder's address appearing on the Warrant Register, at least 30 days prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first class mail, postage prepaid, written notice stating (x) the date for the determination of the holders of record of shares of Common Stock (or other securities issuable upon the exercise of the Warrants) entitled to receive any such dividends or other distribution, (y) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock (or other securities issuable upon the exercise of the Warrants) or (z) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of Common Stock (or other securities issuable upon the exercise of the Warrants) shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. Failure to give such notice or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, issuance, consolidation, merger, conveyance, transfer, dissolution, liquidation, or winding up, or the vote upon any action. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the Warrantholder thereof any rights of a shareholder of the Company. SECTION 13. Reports to Warrantholders. The Company will cause to be delivered, by first-class mail, postage prepaid, to each Warrantholder at such Warrantholder's address appearing on the Warrant Register, a copy of any reports delivered by the Company to the holders of Common Stock or other securities of the Company. SECTION 14. Concerning the Warrant Agent. 14.1 Warrant Agent. The Company hereby appoints American Stock Transfer & Trust Company as Warrant Agent of the Company in respect of the Warrants and the Warrant Certificates upon the terms and subject to the conditions herein and in the Warrant Certificates; and American Stock Transfer & Trust Company hereby accepts such appointment. The Warrant Agent shall have the powers and authority granted to and conferred upon it in the Warrant Certificates and hereby. All of the terms and provisions with respect to such powers and authority contained in the Warrant Certificates are subject to and governed by the terms and provisions hereof. The Warrant Agent shall WARRANT AGREEMENT - 11 15 at all times hereunder satisfy all of the requirements of Rule 496 or any successor rule thereof of the NYSE and all applicable rules and regulations of the NSM. 14.2 Conditions of Warrant Agent's Obligations. The Warrant Agent accepts its obligations herein set forth upon the terms and conditions hereof and in the Warrant Certificates, including the following, to all of which the Company agrees and to all of which the rights hereunder of the holders from time to time of the Warrant Certificates shall be subject: (a) The Warrant Agent shall be entitled to compensation at its applicable rates in effect from time to time for all services rendered by it and the Company agrees promptly to pay such compensation and to reimburse the Warrant Agent for its reasonable out-of-pocket expenses (including reasonable fees and expenses of counsel) incurred without gross negligence or willful misconduct on its part in connection with the services rendered by it hereunder. The Company also agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence or willful misconduct on the part of the Warrant Agent, including the costs and expenses of defending itself against any claim or liability arising out of or in connection with its acting as such Warrant Agent hereunder. The obligations of the Company under this subsection 14.2 shall survive the exercise and the expiration of the Warrant Certificates and the resignation and removal of the Warrant Agent. (b) In acting under this Agreement and in connection with the Warrant Certificates, the Warrant Agent is acting solely as agent of the Company and does not assume any obligation or relationship of agency or trust for or with any of the owners or holders of the Warrant Certificates and owes no fiduciary duty to any Person by reason of this Agreement. (c) The Warrant Agent may consult with counsel and any advice or written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. (d) The Warrant Agent shall be protected and shall incur no liability for or in respect of any action taken or omitted to be taken or thing suffered by it in reliance upon any Warrant Certificate, notice, direction, consent, certificate, affidavit, opinion of counsel, instruction, statement or other paper or document reasonably believed by it to be genuine and to have been presented or signed by the proper parties. In the absence of bad faith or negligence on its part, the Warrant Agent shall not be liable for any action taken, suffered or omitted or for any error of judgment made by it in the performance of its duties under this Agreement. The Warrant Agent shall not be so liable for any error of judgment made in good faith unless the Warrant Agent shall have been negligent in ascertaining the pertinent facts. (e) The Warrant Agent, and its officers, directors and employees, may become the owners of, or acquire any interest in, Warrant Certificates, shares or other obligations of the Company with the same rights that it or they would have if it were not the Warrant Agent hereunder and, to the extent permitted by applicable law, it or they may engage or be interested in any financial or other transaction with the Company and may act on, or as depositary, trustee or agent for, any committee or body of holders of shares or other obligations of the Company as freely as if it were not the Warrant Agent hereunder. Nothing in this Agreement shall be deemed to prevent the Warrant Agent from acting in any other capacity for the Company. (f) The Warrant Agent shall not be under any liability for interest on, and shall not be required to invest, any monies at any time received by it pursuant to any of the provisions of this Agreement or of the Warrant Certificates. (g) The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by WARRANT AGREEMENT - 12 16 the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof). (h) The recitals and other statements contained herein and in the Warrant Certificates (except as to the Warrant Agent's countersignature thereon) shall be taken as the statements of the Company and the Warrant Agent assumes no responsibility for the correctness of the same. The Warrant Agent does not make any representation as to the validity or sufficiency of this Agreement or the Warrant Certificates, except for its due execution and delivery of this Agreement; provided, however, that the Warrant Agent shall not be relieved of its duty to countersign the Warrant Certificates as authorized by this Agreement. The Warrant Agent shall not be accountable for the use or application by the Company of the proceeds of the exercise of any Warrant. (i) The Warrant Agent shall be obligated to perform such duties as are herein and in the Warrant Certificates specifically set forth and no implied duties or obligations shall be read into this Agreement or the Warrant Certificates against the Warrant Agent. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company shall furnish the Warrant Agent with reasonable security and indemnity for any costs or expenses which may be incurred. The Warrant Agent shall not be accountable or under any duty or responsibility for the use by the Company of any of the Warrant Certificates countersigned by the Warrant Agent and delivered by it to the Company pursuant to this Agreement. (j) The Warrant Agent shall have no duty or responsibility in case of any default by the Company in the performance of its covenants or agreements contained in the Warrant Certificates or in the case of the receipt of any written demand from a holder of a Warrant Certificate with respect to such default, including, without limiting the generality of the foregoing, any duty or responsibility to initiate or attempt to initiate any proceedings at law or otherwise or, except as provided in Section 17 hereof, to make any demand upon the Company. (k) The Warrant Agent shall have no responsibility in respect of any adjustment pursuant to Section 10 hereof. (l) The Company agrees that it will perform, execute, acknowledge and deliver, or cause to be performed, executed, acknowledged and delivered, all such further and other acts, instruments and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing by the Warrant Agent of the provisions of this Agreement. (m) The Warrant Agent is hereby authorized and directed to accept written instructions with respect to the performance of its duties hereunder from any one of the chairman of the board, any vice chairman of the board, the president, the treasurer, the controller, any vice president or the secretary of the Company and to apply to such officers or officials for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer or official. At any time the Warrant Agent may apply to the Company for written instructions with respect to any matter arising in connection with the Warrant Agent's duties and obligations arising under this Agreement. Such application by the Warrant Agent for written instructions from the Company may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent with respect to its duties or obligations under this Agreement and the date on or after which such action shall be taken and the Warrant Agent shall not be liable for any action taken or omitted in accordance with a proposal included in any such application on or after the date specified (which date shall be not less than three business days after the Company receives such application unless the Company consents to a shorter period) unless, prior to taking or omitting any such action, the Warrant Agent has received written instructions in response to such application specifying the action to be taken or omitted. WARRANT AGREEMENT - 13 17 (n) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the chairman of the board, any vice chairman of the board, the president, the treasurer, the controller, any vice president or the secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (o) The Warrant Agent shall not be required to risk or expend its own funds in the performance of its obligations and duties hereunder. (p) The Warrant Agent is hereby authorized to requisition from time to time from the Transfer Agent stock certificates required to honor outstanding Warrants. The Company hereby authorizes any Transfer Agent to comply with all such requests. The Company will supply such Transfer Agent with duly executed stock certificates for such purpose and will provide or otherwise make available any cash which may be payable as provided in Section 11 hereof, and the Warrant Agent shall not be responsible for any delay or failure by such Transfer Agent in supplying such stock certificates. (q) Anything in this Agreement to the contrary notwithstanding, in no event shall the Warrant Agent be liable for special, indirect or consequential loss or damages of any kind whatsoever (including but not limited to lost profits), even if the Warrant Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. 14.3 Resignation and Appointment of Successor. (a) The Company agrees, for the benefit of the holders, from time to time, of the Warrant Certificates, that there shall at all times be a Warrant Agent hereunder. (b) The Warrant Agent may at any time resign as Warrant Agent by giving written notice to the Company of such intention on its part, specifying the date on which its desired resignation shall become effective, provided that such date shall be at least 30 calendar days after the date on which such notice is given unless the Company agrees to accept less notice. Upon receiving such notice of resignation, the Company shall promptly appoint a successor Warrant Agent, qualified as provided in subsection 14.3(d), by written instrument in duplicate signed on behalf of the Company, one copy of which shall be delivered to the resigning Warrant Agent and one copy to the successor Warrant Agent. As provided in subsection 14.3(d), such resignation shall become effective upon the acceptance of the appointment by the successor Warrant Agent. The Company may, and upon any event set forth in the next succeeding sentence shall, remove the Warrant Agent and appoint a successor Warrant Agent by written instrument in duplicate, specifying such removal and the date on which it is intended to become effective, signed on behalf of the Company, one copy of which shall be delivered to the Warrant Agent being removed and one copy to the successor Warrant Agent. The Warrant Agent shall be removed if it shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Warrant Agent or of its property shall be appointed, or any public officer shall take charge or control of it or of its property or affairs for the purpose of rehabilitation, conservation or liquidation. Any removal of the Warrant Agent and any appointment of a successor Warrant Agent shall become effective upon acceptance of appointment by the successor Warrant Agent as provided in subsection 14.3(d). As soon as practicable after appointment of the successor Warrant Agent, the Company shall cause written notice of the change in the Warrant Agent to be given to each of the registered holders of the Warrants in the manner provided for in Section 18. WARRANT AGREEMENT - 14 18 (c) Upon resignation or removal of the Warrant Agent, if the Company shall fail to appoint a successor Warrant agent within a period of 30 days after receipt of such notice of resignation or removal, then the holder of any Warrant Certificate or the Warrant Agent may apply to a court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. (d) Any successor Warrant Agent, whether appointed by the Company or by a court, shall be a bank or trust company in good standing, incorporated under the laws of the United States of America or any State thereof and satisfying, at the time of its appointment, all of the requirements of Rule 496 or any successor rule thereof of the NYSE and all applicable rules and regulations of the NSM. Such successor Warrant agent shall execute and deliver to its predecessor and to the Company an instrument accepting such appointment hereunder and all the provisions of this Agreement, and thereupon such successor Warrant agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Warrant Agent hereunder, and such predecessor, upon payment of any amounts then due it pursuant to subsection 14.2(a), shall thereupon become obligated to transfer, deliver and pay over, and such successor Warrant Agent shall be entitled to receive, all moneys, securities, records or other property on deposit with or held by such predecessor as Warrant Agent hereunder. (e) Any corporation or bank into which the Warrant Agent hereunder may be merged or converted, or any corporation or bank with which the Warrant Agent may be consolidated, or any corporation or bank resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation or bank to which the Warrant Agent shall sell or otherwise transfer all or substantially all of its corporate trust business, shall be the successor to the Warrant Agent under this Agreement (provided that such corporation or bank shall be qualified as aforesaid) without the execution or filing of any document or any further act on the part of any of the parties hereto. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases, such Warrant Certificates shall have the full force and effect provided in the Warrant Certificates and in this Agreement. SECTION 15. Certain Definitions. As used in this Agreement, the following terms have the meanings specified below: "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to-the foregoing; provided, that, in any event, any "person" or "group" (each as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) that is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 10% of the capital stock having or voting power in the election of directors of such Person (if a corporation) or more than 10% of the partnership or other ownership interests of such Person (if other than a corporation) will be deemed to control such Person. WARRANT AGREEMENT - 15 19 "Certificate of Incorporation" means the Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on [ ], 1995, as such certificate may be amended, modified, changed or restated from time to time in accordance with its terms, this Agreement and the applicable provisions of the General Corporation Law of the State of Delaware. "Board" means the Board of Directors of the Company, as such Board may be constituted from time to time. "business day" means any Monday, Tuesday, Wednesday, Thursday or Friday on which (1) banking institutions in the City of New York, (ii) the principal national securities exchange or inter-dealer quotation system, if any, on which the Common Stock is listed or quoted and (iii) the principal national securities exchange or inter-dealer quotation system, if any, on which the Warrants are listed or quoted, are open for business and not authorized or obligated by law, regulation or executive order to close. "Deposit" means, unless otherwise specified by the Company pursuant to subsection 2.5, The Depositary Trust Company, New York, New York, or any successor thereto registered as a clearing agency under the Exchange Act or other applicable statute or regulation. "Effective Date of the Merger" means the date on which the Merger becomes effective under the Delaware General Corporation Law. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "NSM" means The Nasdaq Stock Market, Inc. or, if the Warrants are not then traded on The Nasdaq Stock Market, Inc., the principal national securities exchange on which the Warrants are then traded or, if the Warrants are not then traded on The Nasdaq Stock Market, Inc., the national securities exchange or principal over-the-counter market in which the Warrants are then traded. "NYSE" means the New York Stock Exchange, Inc., or, if the Common Stock is not then traded on the New York Stock Exchange, Inc., the principal national securities exchange on which the Common Stock is then traded or, if the Common Stock is not then traded on any national securities exchange, the principal over-the-counter market in which the Common Stock is then traded. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity. "Prospectus" means the prospectus, dated [ ] included as part of the Registration Statement, as such prospectus may be supplemented or amended from time to time. "SEC" means the Securities and Exchange Commission or any successor thereof. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. SECTION 16. Identity of Transfer Agent. Forthwith upon the appointment of any Transfer Agent for the Common Stock or any other securities of the Company issuable upon the exercise of the Warrants or any successor thereto, the Company shall file with the Warrant Agent a statement setting forth the name and address of such Transfer Agent. SECTION 17. Notices and Demands to the Company and Warrant Agent. If the Warrant Agent shall receive any notice or demand addressed to the Company by the holder of a Warrant WARRANT AGREEMENT - 16 20 Certificate pursuant to the provisions of the Warrant certificates, the Warrant Agent shall promptly forward such notice or demand to the Company. SECTION 18. Notices to Company and Warrant Agent. Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by any Warrantholder to or on the Company shall be delivered in person or by facsimile transmission, by courier guaranteeing overnight delivery or mailed by first-class mail or registered mail postage prepaid, (i) to the Company (until another address is filed in writing by the Company with the Warrant Agent) as follows: Sunshine Mining and Refining Company 877 W. Main St., Suite 600 Boise, ID 83702 Attention: President With a copy to: Sunshine Mining and Refining Company P.O. Box 1080 Big Creek Road Kellogg, Idaho 83837 Attention: Randal L. Hardy And to: Evans, Keane 1101 W. River Street, Suite 200 P.O. Box 959 Boise, Idaho 83701-0959 Attention: James D. Hovren and (ii) to the Warrant Agent (until another address is filed in writing by the Warrant Agent with the Company) as follows: American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005 Attention: Executive Vice President With a copy to: American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005 Attention: General Counsel Notices delivered personally shall be effective at the time delivered by hand, notices sent by mail shall be effective four days after mailing, notices sent by facsimile transmission shall be effective when receipt is acknowledged and notices sent by courier guaranteeing next day delivery shall be effective on the next business day after timely delivery to such courier. SECTION 19. Notices to Holders. Notices to holders of Warrants shall be mailed to such holders at the addresses of such holders as they appear in the Warrant Register. Any such notice be sufficiently given if sent by first-class mail, postage prepaid. SECTION 20. Provision of Information. The Company shall provide the holders of Warrants, on the same day it files with the SEC, copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and WARRANT AGREEMENT - 17 21 regulations prescribe) which the Company is required to file with the SEC pursuant to Sections 13 or 15(d) of the Exchange Act. SECTION 21. Amendment; Merger; Consolidation. This Agreement and the terms of the Warrants may be amended by the Company and the Warrant Agent, without the consent of the holder of any Warrant Certificate, for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective or inconsistent provision contained herein or therein, or to effect any assumptions of the Company's obligations hereunder and thereunder by a successor corporation under the circumstances described in Section 10.1 (a) or in any other manner which the Company may deem necessary or desirable and which shall not adversely affect in any material respect the interests of the holders of the Warrant Certificates. The Company and the Warrant Agent may modify this Agreement and the terms of the Warrants with the consent of not less than a majority in number of the then outstanding Warrants for the purpose of adding any provision to or changing in any manner or eliminating any of the provisions of this Agreement or modifying in any manner the rights of the holders of the outstanding Warrants; provided, however, that no such modification that (i) decreases the Exercise Rate, changes the Exercise Period, or otherwise materially or adversely affects the exercise rights of the holders of the Warrants, (ii) amends this Section or (iii) reduces the percentage required for modification, may be made without the consent of the holder of each outstanding Warrant. Any such modification or amendment will be conclusive and binding on all present and future holders of Warrant Certificates whether or not they have consented to such modification or amendment or waiver and whether or not notation of such modification or amendment is made upon such Warrant Certificates. Any instrument given by or on behalf of any holder of a Warrant Certificate in connection with any consent to any modification or amendment will be conclusive and binding on all subsequent holders of such Warrant Certificate. Except as otherwise provided herein, the Company will not merge into or consolidate with any other person, or sell or otherwise transfer its property, assets and business substantially as an entirety to a successor of the Company, unless the person resulting from such merger or consolidation (if other than the Company), or such successor of the Company, shall expressly assume, by supplemental agreement satisfactory in form to the Warrant Agent and executed and delivered to the Warrant Agent, the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company. SECTION 22. Termination. This Agreement shall terminate on the fifteenth day following the first to occur of (i) the Expiration Date, (ii) the date on which Warrant Shares have been issued upon the exercise of all Warrants pursuant hereto or (iii) the date on which all Warrants have been redeemed or are otherwise no longer outstanding. SECTION 23. Governing Law. The laws of the State of New York shall govern this Agreement and the Warrant Certificates without regard to principles of conflict of law. SECTION 24. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Warrant Agent, the Warrantholders and the holders of shares of Common Stock any legal or equitable right, remedy or claim under this Agreement; this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent, the Warrantholders and the holders of Warrant Shares. SECTION 25. Counterparts. This Agreement may be executed in any number of counterparts, and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. WARRANT AGREEMENT - 18 22 SECTION 26. Severability of Provisions. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. SECTION 27. Obtaining of Governmental Approvals. The Company will from time to time take all action which may be necessary to obtain and keep effective any and all permits, consents and approvals of governmental agencies and authorities and securities acts filings under United States Federal and State laws, and the rules and regulations of all stock exchanges on which the Warrants are listed which may be or become requisite in connection with the issuance, sale, transfer, and delivery of the Warrant Certificates, the exercise of the Warrants or the issuance, sale, transfer and delivery of the Warrant Shares issued or delivered upon exercise of the Warrants. SECTION 28. Delivery of Prospectus. The Company shall furnish to the Warrant Agent sufficient copies of the most recent Prospectus relating to the Warrant Shares, and the Warrant Agent shall, upon the exercise of any Warrant Certificate by the holder thereof, deliver to such holder, prior to or concurrently with the delivery of the Warrant Share issued upon such exercise, a copy of such Prospectus. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SUNSHINE MERGER COMPANY [Corporate Seal] By: ----------------------------------- John S. Simko, President AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent [Corporate Seal] By: ----------------------------------- Name: ----------------------------- Title: -------------------------- WARRANT AGREEMENT - 19 EX-4.9 4 FORM OF SUPPLEMENTAL WARRANT AGREEMENT 1 EXHIBIT 4.9 SUNSHINE MERGER COMPANY AS SUCCESSOR TO SUNSHINE MINING AND REFINING COMPANY AND AMERICAN STOCK TRANSFER & TRUST COMPANY _______________________________________ AS WARRANT AGENT _______________________________________ SUPPLEMENTAL WARRANT AGREEMENT DATED AS OF [___________] 2 SUPPLEMENTAL WARRANT AGREEMENT, dated as of [____________] ("Agreement"), between SUNSHINE MERGER COMPANY, a Delaware corporation (the "Company") and successor by merger (the "Merger") to Sunshine Mining and Refining Company, a Delaware corporation ("Sunshine"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, a New York corporation, as Warrant Agent (with any successor warrant agent, the "Warrant Agent"). RECITALS: WHEREAS, the Company was organized as a wholly-owned subsidiary of Sunshine; and WHEREAS, pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated [_________], Sunshine was merged with and into the Company, with the Company being the surviving entity, and upon the effective date of which the Company changed its name to Sunshine Mining and Refining Company; WHEREAS, pursuant to the terms of the Merger Agreement, on the effective date of the Merger, each share of Common Stock, par value $.01 of Sunshine became one share of Common Stock, par value $.01 of the Company, without any action by the holder thereof; WHEREAS, pursuant to the terms of the Merger Agreement, each warrant to purchase Common Stock, par value $.01, of Sunshine became a warrant to purchase a like number of shares of Common Stock, par value $.01, of the Company on the same terms and conditions; and WHEREAS, pursuant to the terms of that certain Warrant Agreement dated as of February 3, 1994, between Sunshine and Warrant Agent (the warrants identified therein are herein referred to as the "Warrants"), the Company, as the entity under the Merger Agreement obligated to deliver securities upon exercise of Warrants, is required to enter into this Supplemental Warrant Agreement with Warrant Agent. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Consent to Warrant Agreement. The Company, upon the effective date of the Merger, consents to and agrees to be bound by all of the terms and conditions of the Warrant Agreement and all of Sunshine's duties and obligations thereunder. SECTION 2. Exercise of Warrants. On and after the effective date of the Merger, each Warrant shall represent the right, subject to the provisions specified in the Warrant Agreement and Warrant Certificate, to purchase from the Company (and the Company shall issue and sell to the registered holder of such 3 Warrant) one fully paid and nonassessable share of Common Stock, par value $.01, of the Company, together with such additional securities as may thereafter be issuable to the Warrantholder pursuant to Section 11 of the Warrant Agreement, at the price and on the terms specified in the Warrant Agreement and Warrant Certificate. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SUNSHINE MERGER COMPANY By:____________________ Its:___________________ AMERICAN STOCK TRANSFER & TRUST COMPANY, As Warrant Agent By:____________________ Its:___________________ EX-5.1 5 OPINION OF EVANS, KEANE 1 EXHIBIT 5.1 [EVANS, KEANE LETTERHEAD] JAMES D. HOVREN December 27, 1995 Sunshine Mining and Refining Company 877 W. Main Street, Suite 600 Boise, ID 83702 Gentlemen: We have acted as counsel to Sunshine Mining and Refining Company, a Delaware corporation (the "Company"), in connection with the preparation of the Registration Statement on Form S-4 (Registration No. 33-98876, the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to the merger of the Company with and into its wholly-owned subsidiary Sunshine Merger Company, and the resulting issuance of the following securities of Sunshine Merger Company: up to 206,917,404 shares of Common Stock, par value $.01, issuable in exchange for existing shares of Common Stock, par value $.01 of the Company, including shares issuable upon exercise of existing Warrants ($2.12 exercise price), 8 7/8% Convertible Subordinated Debentures and stock options of the Company; 10,086,076 Warrants ($2.12 exercise price) to purchase Common Stock and 1,519,000 8 7/8% Convertible Subordinated Debentures issuable in exchange for existing Warrants ($2.12 exercise price) and Convertible Subordinated Debentures of the Company; up to 66,645,531 shares of Common Stock to be issued in exchange for existing Preferred Stock of the Company; up to 14,332,372 Warrants to purchase Common Stock to be issued in exchange for existing Preferred Stock of the Company, together with up to 14,332,372 shares of Common Stock to be issued on exercise of such Warrants (collectively, the "Securities"). In connection therewith, we have examined and relied upon the original, or copies certified to our satisfaction, of (i) the Certificate of Incorporation and the Bylaws of the Company, as amended and of Sunshine Merger Company; (ii) minutes and records of the corporate proceedings of the Company with respect to the Merger of the Company with and into Sunshine Merger Company, and the resulting issuance of shares of Common Stock and Warrants to purchase Common Stock in exchange for Preferred Stock of the Company; (iii) the Registration Statement and any and all exhibits thereto; and (iv) such other documents as we have deemed necessary for the expression of the opinions contained herein. 2 Sunshine Mining and Refining Company December 27, 1995 Page 2 In making the foregoing examinations, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or photostatic copies. As to various questions of fact material to this opinion, where such facts have not been independently established, and as to the content and form of the Certificate of Incorporation, Bylaws, minutes, records, resolutions and other documents or writings of the Company, we have relied, to the extent we deemed reasonably appropriate, upon representations or certificates of officers or directors of the Company, without independent check or verification of their accuracy. Based upon the foregoing, and having due regard for such legal considerations as we deem relevant, we are of the opinion that, upon approval of the holders of the Company's Common Stock and Preferred Stock and upon consummation of the Merger as described in the Registration Statement, the Securities, when issued, will be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement and to the reference to our firm under "Legal Matters" in the Prospectus forming a part of such Registration Statement. Very truly yours, EVANS, KEANE James D. Hovren JDH:kmp #7-1 EX-8.1 6 OPINION OF HAWLEY, TROXELL, ENNIS & HAWLEY 1 EXHIBIT 8.1 [HAWLEY TROXELL ENNIS & HAWLEY LETTERHEAD] ROBERT S. ERICKSON December 27, 1995 Sunshine Mining and Refining Company c/o John S. Simko President and Chief Executive Officer 877 W. Main Street, Suite 600 Boise, Idaho 83702 Re: Merger Of Sunshine Mining and Refining Company Into Its Wholly Owned Subsidiary, Sunshine Merger Company Ladies and Gentlemen: We have acted as counsel to Sunshine Mining and Refining Company, a Delaware corporation (the "Company"), in connection with the transaction contemplated by the Merger Agreement (the "Merger Agreement") between the Company and its wholly owned subsidiary, Sunshine Merger Company, a Delaware corporation (the "Merger Company"), pursuant to which the Company is being merged with and into the Merger Company, which will be the surviving corporation (the "Merger"), as described in the Registration Statement on Form S-4 filed or to be filed by the Company with the Securities and Exchange Commission (the "Registration Statement"). All capitalized terms herein, unless otherwise specified, have the meanings assigned thereto in the Registration Statement. This opinion is being rendered pursuant to the requirements of Item 21(a) of Form S-4 under the Securities Act of 1933, as amended. In connection with our opinion, we have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of the Merger Agreement, Registration Statement, and such other documents as we have deemed necessary or appropriate for the opinion set forth below. As to any facts material to this opinion which we did not independently establish or verify, we have relied upon the foregoing documents and statements and representations of officers and other representatives of the Company, including certain written representations of the Company. In rendering our opinion, we have considered the applicable provisions of the Internal Revenue Code of 1986, as amended, (the "Code"), Treasury Regulations, pertinent 2 Sunshine Mining and Refining Company December 27, 1995 Page 2 judicial authorities, interpretive rulings of the Internal Revenue Service (the "Service"), and such other authorities as we have considered relevant. In addition, we give no opinion as to any state, local and foreign tax consequences or as to the consequences to stockholders other than individual United States citizens who hold their shares in the Company stock as a capital asset. Based solely upon the foregoing and upon the assumptions set forth herein, and subject to the caveats set forth herein, the discussion contained in the prospectus included as part of the Registration Statement (the "Prospectus") under the caption "Federal Income Tax Consequences," except as otherwise indicated, expresses our opinion as to the material federal income tax consequences of the Merger. You should be aware, however, that the discussion under the caption "Federal Income Tax Consequences" in the Prospectus represents our conclusions as to the application of existing law, as of the date of this letter, to the instant transactions. There can be no assurance that contrary positions may not be taken by the Internal Revenue Service or that the laws affecting the consequences of the Merger will not change. Except as set forth above, we express no other opinion as to the tax consequences of the Merger. We hereby consent to the reference to the undersigned under the heading "Federal Income Tax Consequences" in the Prospectus included in the Registration Statement, and in all amendments thereto, and to the filing of this opinion by the Company as an exhibit to the Registration Statement. We are furnishing this opinion to you solely for use in connection with the Registration Statement, and this opinion is not to be used, circulated, quoted or otherwise referred to for any other purpose. Very truly yours, HAWLEY TROXELL ENNIS & HAWLEY /s/ ROBERT S. ERICKSON Robert S. Erickson RSE/mlv enclosure cc: James Hovren EX-23.1 7 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 28, 1995, in the Registration Statement (Form S-4 No. 33-98876) and related Prospectus of Sunshine Mining and Refining Company filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Dallas, Texas December 27, 1995 EX-99.4 8 FORM OF PROXY 1 Exhibit 99.4 PROXY FOR COMMON STOCK SUNSHINE MINING AND REFINING COMPANY SPECIAL MEETING OF STOCKHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints John S. Simko, William W. Davis and Robert H. Peterson, or any of them, with full power of substitution, as Proxies and hereby authorizes them to represent and to vote as designated on the reverse side of this proxy all of the shares of Common Stock, par value $.01, of Sunshine Mining and Refining Company (the "Company") held of record by the undersigned on __________________, 1996, at the Special Meeting of Stockholders to be held on ___________, 1996 or any adjournment(s) thereof. The Proposal to authorize is: 1. Approval to merge the Company with and into Sunshine Merger Company, a wholly owned subsidiary of the Company, with Sunshine Merger Company being the surviving entity. You may vote on the Proposal described above by marking one of the following boxes: [ ] For [ ] Against [ ] Abstain 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE ON THIS CARD, THE PROXY WILL BE VOTED "FOR" PROPOSAL NO. 1. (Please See Reverse Side) PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED PRE-PAID ENVELOPE OR DELIVER TO: The Herman Group, Inc., 13760 Noel Road, Suite 320, Dallas, Texas 75240. If you have any questions, please call (800) 747-2967. Facsimile copies of the front and reverse sides of this Proxy, properly completed and duly executed, will be accepted at (214) 991-4422 or (214) 991-4432. Dated: , 1996 -------------------- --------------------------------- Signature --------------------------------- Signature (if held jointly) --------------------------------- Title Please sign exactly as name appears hereon. When interests are held by joint tenants, both should sign. When signing as an attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. EX-99.5 9 FORM OF PROXY 1 Exhibit 99.5 PROXY FOR PREFERRED STOCK SUNSHINE MINING AND REFINING COMPANY SPECIAL MEETING OF STOCKHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints John S. Simko, William W. Davis and Robert H. Peterson, or any of them, with full power of substitution, as Proxies and hereby authorizes them to represent and to vote as designated on the reverse side of this proxy all of the shares of $11.94 (Stated Value) Cumulative Redeemable Preferred Stock of Sunshine Mining and Refining Company (the "Company") held of record by the undersigned on __________________, 1996, at the Special Meeting of Stockholders to be held on ___________, 1996 or any adjournment(s) thereof. The Proposal to authorize is: 1. Approval to merge the Company with and into Sunshine Merger Company, a wholly owned subsidiary of the Company, with Sunshine Merger Company being the surviving entity. You may vote on the Proposal described above by marking one of the following boxes: [ ] For [ ] Against [ ] Abstain 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE ON THIS CARD, THE PROXY WILL BE VOTED "FOR" PROPOSAL NO. 1. (Please See Reverse Side) PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED PRE-PAID ENVELOPE OR DELIVER TO: The Herman Group, Inc., 13760 Noel Road, Suite 320, Dallas, Texas 75240. If you have any questions, please call (800) 747-2967. Facsimile copies of the front and reverse sides of this Proxy, properly completed and duly executed, will be accepted at (214) 991-4422 or (214) 991-4432. Dated: , 1996 --------------------- --------------------------------- Signature --------------------------------- Signature (if held jointly) --------------------------------- Title Please sign exactly as name appears hereon. When interests are held by joint tenants, both should sign. When signing as an attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person. EX-99.6 10 TRANSMITTAL LETR. TO COMMON PREFERRED STOCKHOLDERS 1 Exhibit 99.6 _____, 1996 To Our Common and Preferred Stockholders: The enclosed Proxy Statement/Prospectus is being sent to you with respect to a Special Meeting of Stockholders to be held on ______________, 1996. It discusses an important transaction in the future development of your Company. PLEASE READ AND CAREFULLY CONSIDER THE PROPOSAL BEING SUBMITTED FOR YOUR APPROVAL BY THE BOARD OF DIRECTORS OF THE COMPANY. The purpose of the transaction is to convert all of the preferred stock of the Company into common stock and warrants. To accomplish this requires your approval of a merger of Sunshine Mining and Refining Company into a wholly- owned special-purpose subsidiary, Sunshine Merger Company (the "Merger Proposal"). After the Merger is effective, Sunshine Merger Company, the new surviving parent company, will immediately change its name to Sunshine Mining and Refining Company (the "New Sunshine"). Your shares of Common stock will automatically convert after the Merger into an equal number of shares of Common Stock of New Sunshine, with no further action required on your part. Each share of Preferred Stock will be converted into ___________ shares of New Common Stock and, either two Warrants to purchase shares of the New Common Stock at a price of $________ for a period of five years, or, at the holder's option, .9 additional shares of New Common Stock. Other provisions provide for a limited number of additional shares of New Common Stock to be issued to the Preferred stockholders should the trading price of the New Common Stock fall below certain minimum trading levels during the first 120 trading days following the Effective Date of the Merger. In the last three years, the Company has made a great deal of progress in positioning itself to survive and prosper despite the prolonged slump in silver prices. We have eliminated substantially all of the Company's debt, raised significant new capital, embarked on a very promising program of exploration and development at the Sunshine Mine, and begun an intensive search for new reserves in Argentina and Peru. Our exciting new Pirquitas property, which potentially contains more than 140 million ounces of silver, is an example of the type of property we are looking for in South America. During 1996 we will gain significantly improved access to the West Chance area, and as a result, we expect to increase silver production at the Sunshine Mine by over 1 million ounces from 1995 levels. We also expect to do the development work and acquire the equipment necessary, to return the mine to its full production rate of 1,000 tons of ore per day by the end of this year. In South America, we will do the work necessary to determine if the Pirquitas property can be placed into production economically. The proposed Merger will allow the benefit of these operational improvements to flow more directly to the stockholders. The following additional benefits will be derived as a result of the Merger: o IMPROVED BOOK VALUE AND EARNINGS TO COMMON. Elimination of the Preferred Stock from the Company's capital structure will improve the book value and the results of operations per common share, by eliminating the annual $10.5 million charge to earnings of the Preferred stock dividend. 2 Additionally, in the period the transaction is effective, it will generate a positive contribution to earnings attributable to common stock estimated to exceed $30 million. o NYSE LISTING - The Company has been below continued listing standards at the New York Stock Exchange for several years, and as a result, in danger of being delisted from the Exchange. Upon completion of this transaction, the Company has been advised by the Exchange that it will no longer be on the "watch" list and, therefore, no longer in danger of delisting. o ENHANCEMENT OF THE COMPANY'S FINANCIAL FLEXIBILITY. By eliminating the $128 million Preferred Stock liquidation preference through this transaction we strengthen the Company's balance sheet and improve its financial alternatives with a minimum of dilution. For the Company to redeem the Preferred Stock pursuant to its terms would require the issuance of 50% or more shares of Common Stock than anticipated in the proposed transaction. o GREATER LIQUIDITY AND VALUE FOR PREFERRED STOCKHOLDERS. The combination of both New Common Stock and Warrants to be received by the Preferred Stockholders should enable them to realize greater liquidity and value than the current Preferred Stock provides. The market price for the Preferred Stock increased by approximately 25% immediately after the announcement of the Merger, reflecting this benefit. The Company has reached agreement with the three largest Preferred Stockholders, holding approximately 25% of the issue, to vote "For" the proposal. YOUR VOTE IS IMPORTANT To be approved, the Merger Proposal must receive the affirmative vote of the majority of the outstanding shares of both Common and Preferred Stock, voting separately as a class. As a result, the failure to vote or an "Abstain" vote will have the same effect as a "No" vote. Therefore, it is important that you sign the enclosed Proxy card quickly and return it to the Proxy Agent, so that your vote will be received in time to be voted at the Meeting. A business reply envelope has been provided for your mailing convenience or proxies can be delivered by hand or overnight to: The Herman Group, Inc., 13760 Noel Road, Suite 320, Dallas, TX 75240. Facsimiles of your proxy will also be accepted at (214) 991-4422 or (214) 991-4432. Delivery of your proxy does not prohibit you from attending the Special Meeting. For further information regarding the Merger transaction or procedures for submitting your proxy call (800) 747-2967. Very truly yours, John S. Simko President & Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----