ITEM 3 LEGAL PROCEEDINGS
Not applicable.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The company's common shares were traded on the NASDAQ National Market under the symbol "PGMS" from December 16, 1994 to June 4, 1997. Effective June 5, 1997, the company began trading on the American Stock Exchange, Inc. ("AMEX") under the trading symbol "SWC". For the period from January 1, 1996 through December 31, 1998 the high and low sales prices for the company's common stock for each quarter as reported by NASDAQ or AMEX, as applicable, were:
The prices for the company's common stock have been retroactively adjusted to reflect a three-for-two stock split effective December 31, 1998.
STOCKHOLDERS. As of March 1, 1999, the company had 396 stockholders of record.
DIVIDENDS. The company has never paid any dividends on its common stock and expects for the foreseeable future to retain all of its earnings from operations for use in expanding and developing its business. Any future decision as to the payment of dividends will be at the discretion of the company's Board of Directors and will depend upon the company's earnings, financial position, capital requirements, plans for expansion, loan covenants and such other factors as the Board of Directors deems relevant. Covenants in the Scotiabank Credit Facility significantly restrict the payment of dividends on common stock.
ITEM 6
ITEM 6 SELECTED FINANCIAL AND OPERATING DATA
(1) Revenues consist of the sales revenue for palladium and platinum, including any hedging gain or loss. By-product metals revenue and secondary materials processing revenue are included as a reduction of cost of metals sold. (2) Capitalized interest for the years ended December 31, 1998, 1997 and 1996 totaled $2.1 million, $1.5 million and $2.2 million, respectively. (3) Upon early extinguishment of notes issued in connection with the 1994 private placement, the unamortized balance of deferred debt issue costs of $925,000 ($568,000 net of taxes) was charged against income as an extraordinary item. (4) Net income for 1996 reflects a change in accounting policy which became effective January 1, 1996. Pursuant to this policy, the company changed its method of accounting for mine development expenditures by capitalizing certain direct and indirect costs related to development activities, which were previously expensed. The effect of the accounting change on 1996 results was to increase net income by approximately $5.2 million ($0.17 per share). Assuming the accounting change had been applied retroactively, the unaudited pro forma effect would have been an increase in net income of $3.0 million ($0.10 per share) in 1995. (5) In 1997, the company adopted SFAS No. 128, Earnings per Share, which requires the presentation of basic and diluted earnings per share. All prior period per share data presented have been restated to conform with the provisions of this statement. (6) Aggregate capital expenditures related to the 1994 and 1998 Expansion Plans were $9.3 million, $39.5 million, $35.9 million, $2.9 million, and $49.9 million in 1994, 1995, 1996, 1997 and 1998. (7) Tons milled represent the number of grade-bearing tons of ore fed to the concentrator. (8) Mill head grade is presented as ounces of palladium and platinum combined per ton. (9) Ounces produced is defined as the number of ounces produced from the concentrator during the period reduced by losses expected to be incurred in subsequent smelting and refining processes. Differences in ounces produced and ounces sold are caused by the length of time required by the smelting and refining processes. (10) A combined average realized price of palladium and platinum is reported at the same ratio as ounces are produced from the base metals refinery. Cash costs include cash costs of mining, processing and administrative expenses at the mine site (including overhead, taxes other than income taxes, royalties and credits for metals produced other than palladium and platinum.) Total costs of production include cash costs plus depreciation and amortization. Income taxes, corporate general and administrative expenses and interest income and expense are not included in either total or cash costs.
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the company's Consolidated Financial Statements and Notes, included elsewhere in this report, and the information contained in "Selected Financial and Operating Data."
PRODUCTION
The company mines, processes and refines palladium, platinum, and associated metals from the J-M Reef in Montana. The company conducts its mining operations at the Stillwater Mine, and recently announced its 1998 Expansion Plan intended to reach an annualized rate of PGM production of 1.2 million ounces before year end 2001. The company plans to expand existing operations at the Stillwater Mine and develop the East Boulder site. See "Business and Properties--1998 Expansion Plan."
The company's production of palladium and platinum is determined by the tons of ore mined, the mill head grade (ounces of precious metal per ton of mined ore) and metallurgical recovery. The company defines its mine production as those ounces contained in concentrate when it is shipped to the company's smelter, which generally occurs within four days of the ore being mined. The company records revenue when partially-refined ounces are shipped from its base metals refinery to a third-party refiner for final processing. Shipment from the base metals refinery to a third-party refiner generally occurs within 15 to 18 days of mining. Approximately 40 days elapse between the time ore is extracted from the Stillwater Mine and the time ounces of precious metal contained in that ore are made available to the company by a third-party refiner. Because of the length of the processing cycle and the different cutoff points for identifying production and sales, production may not always correspond to sales in a particular accounting period. However, any production not shipped from the base metals refinery at the end of an accounting period is generally shipped during the first two weeks of the subsequent period.
In 1994, the company commenced a major expansion project designed to double ore throughput at its Nye, Montana operation to 2,000 tons of ore per day. This expansion effort was completed in mid-1997, and during the fourth quarter of that year, the company successfully attained its 2,000 tons of ore per day goal. Increases in ore tonnage in 1997 and 1998 were achieved by the company as a result of the operation of the new 1950-foot shaft and the underground crusher and conveyor system. Also, the company added manpower, increased the number of active stopes and improved productivity, principally through the increase of mechanized mining methods.
The ore grade of the company's reserves is generally consistent, but, as is common in an underground mine, the grade mined and the recovery rate achieved will vary from period to period. In particular, mill head grade can be expected to vary by up to 10% from quarter to quarter. During 1998, the average mill head grade of ore processed was 0.69 ounce of PGMs per ton of ore. During 1997, the average mill head grade of ore processed was 0.70 ounce of PGMs per ton of ore, compared to the 1996 average mill head grade of 0.67 ounce of PGMs per ton of ore.
REVENUE
The company's revenue and earnings are significantly influenced by worldwide prices of palladium and platinum, which can be volatile and over which the company has no control. Sales to significant customers represented approximately 60%, 90% and 98% of total revenues for the years ended December 31, 1998, 1997 and 1996, respectively. The company sells its metals to a small number of customers and brokers; however, the company may, if the need were to arise, readily sell its metal in markets throughout the world.
Until the second quarter of 1997, the company used basic hedging techniques involving spot deferred forward contract commitments and put and call options to attempt to lock in prices for its production, benefit from price increases and protect against price decreases. During the first quarter of 1997 the company entered into significant hedge positions, particularly for palladium, for 1997 and 1998. These hedging contracts, which expired in 1998 precluded the company from obtaining the benefit of increased market palladium prices in 1997 and 1998. As a result, the company's revenues were unfavorably impacted, in 1998 with the company's combined average 1998 realized price for palladium falling about 29% below the combined average 1998 market price. These below market hedge contracts matured and the metal was delivered by the close of 1998. The objective of the company's hedging policy in the future will be to benefit from upward price movements while providing floor prices to reduce the company's exposure to downside price movements. Pursuant to this policy, the company entered into sales contracts to sell approximately 90% to 100% of its palladium production and 20% of its platinum production from 1999 through 2003. Palladium sales under these contracts will be at a slight discount to market prices. These contracts provide for an average floor price of approximately $225 per ounce on substantially all of the company's annual production and an average maximum price of $400 per ounce on approximately 30% of production. The 20% of the company's platinum production covered by these contracts will be sold at a slight discount to market prices, subject to floor of $350 per ounce and a cap of $425 per ounce. See "Risk Factors--Dependence on Agreements with Significant Customers."
COST STRUCTURE
The company's current operating costs per ounce have improved significantly as a result of increased production at the Stillwater Mine. Cash costs of production include cash costs of mining, processing, general and administrative expenses at the minesite, royalties and taxes other than income taxes and are net of byproduct metals revenue. Mine site general and administrative expenses include overhead, taxes other than income, and royalties. Operating efficiencies were achieved through economies of scale as production increased. In addition, material handling and material processing efficiencies were realized once the underground shaft was commissioned in June 1997, as the shaft provided a more automated method for transporting ore and waste underground. Finally, the successful implementation of controls to minimize mine dilution also had a favorable impact on the company's cost structure. Management expects these operating efficiencies will continue to be realized in the future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
PGM Production. Total ore tons mined in the year ended December 31, -------------- 1998 increased 24% to 720,000 tons, from 580,000 tons for the year ended December 31, 1997. Tons milled in 1998 averaged about 2,000 tons of ore per day compared with an average of 1,600 tons of ore per day milled in 1997. Increases in ore tonnage were achieved as a result of the mine expansion, primarily through operating efficiencies gained by commencing underground ore crushing, adding mine manpower and improving stoping productivity. Enhanced stoping productivity was driven by an increase in mechanized mining to almost 85% of 1998 tons mined, up from 80% in 1997.
The average head grade of ore delivered to the mill was 0.69 ounces per ton in 1998, compared to 0.70 ounce per ton achieved in 1997. Metallurgical recovery was 91% in 1998, compared to 89% in 1997 and is the result of the use of additional flotation cells installed to increase retention time in flotation.
Palladium and platinum production increased 25% to 444,000 ounces for the year ended December 31, 1998 from 355,000 ounces in 1997. Once again, this substantial improvement in production was primarily the result of the mine expansion and, more specifically, was driven by the increase in tons milled during 1998, coupled with an improvement in the recovery rate resulting from the installation of three additional flotation cells earlier in the year.
Revenues. Revenues were $106.7 million for the year ended December -------- 31, 1998 compared with $76.9 million in 1997, an increase of 39% and were the result of higher production levels and higher realized PGM prices.
Palladium sales increased to 337,000 ounces in 1998 from 288,000 ounces in 1997. Platinum sales increased to 103,000 ounces in 1998 from 91,000 ounces in 1997. Total sales of metal increased 16% to 440,000 ounces in 1998 from 379,000 ounces in 1997, primarily due to significantly higher production levels achieved in 1998.
The combined average realized price per ounce of palladium and platinum sold in 1998 was $243 per ounce, compared to $203 per ounce in 1997, while the combined average market price rose about 32% to $304 per ounce in 1998, compared with $230 per ounce in 1997. The company was unable to realize the average market price for palladium in 1998 because of its inability to defer delivery upon favorable terms on its market deferred palladium forward contracts due to continued severe backwardation in the palladium markets during 1997 and 1998. The average realized price per ounce of platinum sold was $377 per ounce in 1998, a decline of 3% compared with $388 per ounce in 1997. The platinum market price was $372 per ounce in 1998 compared to $395 per ounce in 1997. The average realized price per ounce of palladium was $202 per ounce in 1998 compared to $144 per ounce for 1997, while the average market price increased 61% to $286 per ounce in 1998 from $178 per ounce in 1997.
Costs and Expenses. Cash production costs per ounce in the year ended ------------------ December 31, 1998 decreased $23, or 13%, to $151 per ounce from $174 per ounce in the year ended December 31, 1997, primarily the result of a 25% increase in metal production. Total production costs per ounce in the year ended December 31, 1998 decreased $29, or 14% to $178 per ounce from $207 per ounce in the year ended December 31, 1997. This decrease is also primarily due to increased metal production.
Operating Income (Loss). The company reported operating income of ----------------------- $23.2 million for the year ended December 31, 1998, compared with an operating loss of $6.2 million for 1997. The higher operating income was mainly the result of increased metal production and higher realized prices. For 1998, general and administrative costs were $5.1 million compared with $3.5 million in 1997.
Net Income (Loss). Primarily as a result of increased operating ----------------- income, the company has provided for income taxes of $8.4 million compared to a reported benefit of $3.4 million for the year ended December 31, 1997. As a result the company reports net income of $13.4 million for the year ended December 31, 1998 compared with net loss of $5.4 million in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
PGM Production. Total ore tons mined in the year ended December 31, -------------- 1997 increased 37% to 580,000 tons from 424,000 tons for the year ended December 31, 1996. Tons milled in 1997 averaged about 1,600 tons of ore per day compared with an average of 1,200 tons of ore per day milled in 1996. Increases in ore tonnage were achieved as a result of the mine expansion, primarily through operating efficiencies gained by commencing underground ore crushing, adding mine manpower and improving stoping productivity. Enhanced stoping productivity was driven by an increase in mechanized mining to almost 80% of 1997 tons mined, up from 60% in 1996.
The average head grade of ore delivered to the mill was 0.70 ounce per ton in 1997, an increase over the 0.67 ounce per ton achieved in 1996. The mill head grade increased primarily due to successful implementation of controls to minimize mining dilution. Additionally, commissioning of the production shaft in June 1997 produced greater efficiencies in material handling and subsequent material processing through the mill.
Palladium and platinum production increased 39% to 355,000 ounces for the year ended December 31, 1997 from 255,000 ounces in 1996. Once again, this substantial improvement in production was primarily
the result of the mine expansion and, more specifically, was driven by the increase in tons milled during 1997 and a higher average mill head grade, coupled with an improvement in the recovery rate resulting from the installation of three additional flotation cells earlier in the year .
Revenues. Revenues were $76.9 million for the year ended December 31, -------- 1997 compared with $56.2 million in 1996, an increase of 37%.
Palladium sales increased to 288,000 ounces in 1997 from 214,000 ounces in 1996. Platinum sales increased to 91,000 ounces in 1997 from 62,000 ounces in 1996. Total sales of metal increased 37% to 379,000 ounces in 1997 from 276,000 ounces in 1996, primarily due to significantly higher production levels achieved in 1997 as a result of the 1994 mine expansion. Effective January 1, 1997, the company changed its method of revenue recognition whereby revenue is recognized when product is shipped from the company's base metals refinery to an external refiner. This change made the company's revenue recognition policy more comparable with other precious metals producers. The cumulative effect of this change as of January 1, 1997 was to increase revenue by approximately $2.7 million in the first quarter of 1997; the effect on net income was not material.
The combined average realized price per ounce of palladium and platinum sold in 1997 was $203 per ounce, roughly the same as 1996, while the combined average spot price rose about 20% to $230 per ounce in 1997, compared with $191 per ounce in 1996. The average realized price per ounce of palladium remained constant at $144 per ounce for both 1997 and 1996, while the average spot price increased 39% to $178 per ounce in 1997 from $128 per ounce in 1996. The average realized price per ounce of platinum sold was $388 per ounce in 1997, a decline of 5% compared with $410 per ounce in 1996. The platinum spot price remained about the same in both years at $395 per ounce. The company was unable to realize the average spot price for palladium in 1997 because of its inability to defer delivery upon favorable terms on its spot deferred palladium forward contracts due to continued severe backwardation in the palladium markets during 1997.
Costs and Expenses. Cash costs per ounce of metal produced in the ------------------ year ended December 31, 1997 decreased $10 to $174 per ounce from $184 per ounce in the year ended December 31, 1996, primarily the result of a 39% increase in metal production. Total costs per ounce of metal produced in the year ended December 31, 1997 decreased $12 to $207 per ounce from $219 per ounce in the year ended December 31, 1996. This decrease is also primarily due to increased metal production.
Operating Income (Loss). The company incurred an operating loss of ----------------------- $6.2 million for the year ended December 31, 1997, compared with an operating loss of $5.2 million for 1996. The higher operating loss was mainly the result of a $1.1 million increase in general and administrative costs. For 1997, general and administrative costs were $2.9 million compared with $1.8 million in 1996. The $2.9 million of expenses for 1997 included approximately $1.6 million of non-recurring severance costs and professional fees related to changes in the company's business processes and management structure and the reorganization of the company's Board of Directors. The decrease in costs per ounce for the current year was driven by significantly higher production in 1997, about 39% more than in 1996. Operating efficiencies also contributed to the lower cost per ounce.
Net Income (Loss). The company realized a net loss of $5.4 million for ----------------- the year compared with net income of $11.1 million in 1996, when results included the cumulative effect of an accounting change. Absent this accounting change, the net loss for 1996 was $2.8 million. The larger net loss in 1997 was driven by lower realized platinum prices, reduced interest income on lower cash balances and increased net interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital at December 31, 1998 was $58.8 million compared to $23.1 million at December 31, 1997. The ratio of current assets to current liabilities was 3.2 at December 31, 1998, compared to 2.9 at December 31, 1997.
Net cash provided by operations for the year ended December 31, 1998 was $31.4 million compared with cash used in operations of $1.3 million in 1997, an increase of $32.7 million. The increase is a result of increased net income of $18.8 million and an increase in the provision for deferred income taxes of $11.7 million in 1998 as compared to 1997.
A total of $54.8 million of cash was used in investing activities in 1998 compared to $12.1 million in 1997. The increased usage was primarily due to an increase in capital expenditures as a result of the development of the East Boulder project and the Stillwater Mine expansion.
For the year ended December 31, 1998, cash flow from financing activities was $69.0 million compared to $1.2 million for the year ended December 31, 1997. The increase is primarily due to the completion in the fourth quarter of 1998 of 2.3 million common share offering which provided approximately $67 million.
As a result of the above, cash and cash equivalents increased by $45.6 million for the year ended December 31, 1998, compared with a decrease of $12.2 million in the comparable period of 1997.
In September 1998, the company completed the sale leaseback of a tunnel boring machine and miscellaneous other mining equipment. The leases are classified as operating leases for financial reporting purposes and are non-cancellable with terms of seven years. The annual rental payments during the term of the leases are approximately $1.6 million.
In 1998, the company announced plans to expand the Stillwater Mine and to develop East Boulder. Total capital to fund the expansion is expected to approximate $385 million. Of this, the Stillwater Mine expansion is expected to cost about $75 million; East Boulder is expected to cost approximately $270 million; and approximately $40 million is designated for the expansion of the company's smelter and base metals refinery located in Columbus, Montana. During 1999, the company expects to invest approximately $200 million on capital items, including capitalized interest of $6 million.
Cash flow from operating activities is not expected to be sufficient to cover 1999 capital expenditures. Based on cash and short-term investments on hand and expected cash flows from operations, along with existing credit facilities of $175 million, management believes there is sufficient liquidity to meet 1999 operating and capital needs. The company may, from time to time, also seek to raise additional capital from the public or private securities markets or from other sources for general corporate purposes and for investments beyond the scope of the current phase of its current expansion plans.
The company has obtained a seven-year $175 million credit facility from a syndicate of banks led by the Bank of Nova Scotia. The facility provides for a $125 million term loan facility and a $50 million revolving credit facility. Borrowings may be made under the term loan facility until December 31, 2000 and amortization of the term loan facility will commence on March 31, 2001. The final maturity of the term loan facility and revolving credit facility will be December 31, 2005.
The loans will be required to be prepaid from excess cash flow, proceeds from asset sales and the issuance of debt or equity securities, subject to specified exceptions. Proceeds of the term loan facility will be used to finance a portion of the 1998 Expansion Plan. Proceeds of the revolving credit facility will be used for general corporate and working capital needs. At the company's option, the Scotiabank Credit Facility will bear
interest at LIBOR or an alternate base rate, in each case plus a margin. The interest rate may be adjusted depending upon the company's ratio of debt to operating cash flow. Substantially all the property and assets of the company and its subsidiaries and the stock of the company's subsidiaries have been pledged as security for the Scotiabank Credit Facility.
Conditions precedent to both initial and subsequent borrowing under the term loan facility and revolving credit term loan facility and revolving credit facility include: (1) continued performance of the marketing contracts; (2) receipt of satisfactory milestone reports regarding the 1998 Expansion Plan; and (3) receipt of all government and third party approvals necessary or advisable for the 1998 Expansion Plan.
Covenants in the Scotiabank Credit Facility restrict: (1) additional indebtedness; (2) payment of dividends or redemption of capital stock; (3) liens; (4) investment, acquisitions, dispositions or mergers; (5) transactions with affiliates; (6) capital expenditures (other than those associated with the 1998 Expansion Plan); (7) refinancing or prepayment of subordinated debt (excluding an underwritten call or conversion of the company's 7% Convertible Subordinated Notes Due 2003); (8) changes in the nature of business conducted or ceasing operations at the principal operating properties; and (9) commodities hedging to no more than 90% of annual palladium production and 75% of annual platinum production (excluding the sales covered by the company's marketing contracts and similar agreements). The company also is subject to financial covenants including a debt to operating cash flow ratio, is debt service coverage ratio and a debt to equity ratio.
Events of default include: (1) a cross-default to other indebtedness of the company or its subsidiaries; (2) any material modification to the life-of-mine plan for the Stillwater Mine; (3) a change of control of the company; (4) the failure to maintain annual palladium production of at least 315,000 ounces in the year 2000 and at least 490,000 ounces each year thereafter or (5) any breach or modification of any of the sales contracts. Default under the Scotiabank Credit Facility may constitute a default under the indenture associated with the Convertible Notes. The indenture for the Convertible Notes also contains standard covenants and provisions for events of default.
In addition, the company had an unsecured working capital line of credit with N M Rothschild & Sons Limited, with a maximum borrowing capacity of $15 million. As of December 31, 1998, there were no borrowings against this credit line, and the company could borrow up to $9.3 million based upon quarterly borrowing calculations under the terms of the agreement. This facility was cancelled concurrent with completion of the Scotiabank Credit Facility.
MARKET RISK -----------
The company may from time to time utilize derivative instruments to financial risk. The company has no material derivative position as of December 31, 1998. During the third quarter of 1998, the company entered into sales contracts with General Motors Corporation, Ford Motor Company, Mitsubishi Corporation and KEMET Corp. These contracts cover the company's PGM production over the five-year period from January 1999 through December 2003. During this period, the company has committed between 90% to 100% of its actual palladium production and approximately 20% of its planned annual platinum production. Palladium and platinum sales are priced at a slight discount to market, with floor prices on substantially all of the company's production committed under these contracts averaging $225 per ounce of palladium and $350 per ounce of platinum. The company has also agreed to an average maximum price of approximately $400 per ounce on approximately 30% of its palladium production and $425 per ounce on approximately 20% of its planned annual platinum production.
ENVIRONMENTAL OBLIGATIONS
The company focused on one significant environmental project during 1998. This project involved securing an amendment to the company's existing permit from the Montana Department of Environmental Quality which provided for a substantial increase in throughput at the Stillwater Mine site and construction of
a tailings facility on a tract of land owned by the company in Stillwater County, Montana. The costs associated with this permitting effort were $0.3 million in 1998 and $0.3 million in 1997. The company does not expect to incur additional costs in connection with the project. The company does not anticipate incurring any significant capital or unusual operating expenditures for other environmental compliance within the next 12 months. In the first quarter of 1999, an environmental group filed a complaint against the Montana Department of Environmental Quality challenging the adequacy of the Environmental Impact Statement and reclamation provisions developed in connection with the permit amendment. The company believes the complaint is without merit. In 1998, the company's environmental expenses were $0.6 million and capital expenditures for environmental equipment were $0.1 million. The company incurred $1.0 million in environmental-related costs during 1997, of which half were expensed and half were for purchases of environmental equipment. The company's ongoing operating expenditures for environmental compliance are expected to be approximately $0.8 million per year.
The company is presently required to post surety bonds with the State of Montana in the amount of $11.1 million, which also represents the company's best estimate of mine closure and reclamation costs for current operations. The company does not believe that costs will materially exceed this estimate. The company is accruing for reclamation costs over the life of the Stillwater Mine based on current production levels and estimated proven and probable reserves. On December 31, 1998 and 1997, the accrued liability was $0.7 million. The company periodically reviews the adequacy of its reclamation and mine closure obligations in light of current laws and regulations and will adjust its estimate as necessary.
YEAR 2000 ISSUES
Year 2000 will impact computer programs written using two digits rather than four to define the applicable year. Any programs with time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operation, including a temporary inability to process transactions, send invoices or engage in other ordinary activities. This problem largely affects software programs written years ago, before the issue came to prominence. The company primarily uses third-party software programs written and updated by outside firms, and the company is in the process of determining whether this software is Year 2000 compliant. In May 1996, the company began the implementation of a new information technology infrastructure that the company believes will be fully Year 2000 compliant. This infrastructure will be in place by the fourth quarter of 1999. The company does not believe that the costs associated with additional Year 2000 compliance will be material.
The company has set in motion an effort to obtain written assurances from its material suppliers regarding their Year 2000 compliance. As a result of this effort, the company expects to generate by the second quarter of 1999 a validated list of suppliers that are Year 2000 compliant, and will use the entities on this list to obtain its supplies.
The company has also begun the process of obtaining written assurances from the company's material customers regarding their Year 2000 compliance. The company's goal is to obtain by the second quarter of 1999 written assurances from customers that they are Year 2000 compliant or that they are expecting to become Year 2000 compliant before December 31, 1999. In addition, the company is developing contingency plans to deal with potential Year 2000 risks that could occur as a result of power failures or the failure of other critical systems.
Although the company has taken significant steps to address the Year 2000 problem, there can be no assurance that the failure of the company and/or its material customers or suppliers to timely attain Year 2000 compliance will not materially reduce the company's revenues or income, or that these failures and/or the impacts of broader compliance failures by telephone, mail, data transfer or other utility or general service providers or government or private entities will not have a material adverse effect on the company.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
Some statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, therefore, involve uncertainties or risks that could cause actual results to differ materially. Such statements include comments regarding expansion plans, costs, grade, production and recovery rates, permitting, financing needs, the terms of future credit facilities and capital expenditures, increases in processing capacity, cost reduction measures, safety, timing for engineering studies, and environmental permitting and the palladium and platinum market. Factors that could cause actual results to differ materially from those anticipated include:
. worldwide economic and political events affecting the supply and demand of palladium and platinum;
. price volatility of PGMs;
. potential cost overruns, difficulty in making reliable estimates in the early stages of expansion, uncertainties involved in developing a new mine and other factors associated with a major expansion;
. fluctuations in ore grade, tons mined, crushed or milled;
. variations in concentrator, smelter or refinery operations
. geological, technical, permitting, mining or processing problems;
. availability of experienced employees;
. financial market conditions;
. compliance of the company and significant customers with marketing contracts; and
. the other factors discussed under "Risk Factors."
Investors are cautioned not to put undue reliance on forward-looking statements. The company disclaims any obligation to update forward-looking statements.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying financial statements and for other financial and operating information in this report. Management believes that its accounting systems and internal accounting controls, together with other controls, provide assurance that all accounts and records are maintained by qualified personnel in requisite detail, and accurately and fairly reflect transactions of Stillwater Mining Company in accordance with established policies and procedures.
The Board of Directors has an Audit Committee, none of whose members are officers or employees of the company or its affiliates. The Audit Committee recommends independent accountants to act as auditors for the company; reviews the company's financial statements; confers with the independent accountants with respect to the scope and results of their audit of the company's financial statements and their reports thereon; reviews the company's accounting policies, tax matters and internal controls; and oversees compliance by the company with the requirements of federal regulatory agencies. Access to the Audit Committee is given to the company's financial and accounting officers and independent accountants.
William E. Nettles Chairman of the Board and Chief Executive Officer
James A. Sabala Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Stillwater Mining Company
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of cash flows and of changes in shareholders' equity present fairly in all material respects, the financial position of Stillwater Mining Company and its subsidiary at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2, the company changed its method of accounting for mine development expenditures in 1996.
PRICEWATERHOUSECOOPERS, LLP Denver, Colorado February 3, 1999
STILLWATER MINING COMPANY - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET (in thousands, except share and per share amounts)
The accompanying notes are an integral part of these financial statements.
STILLWATER MINING COMPANY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data)
The accompanying notes are an integral part of these financial statements.
STILLWATER MINING COMPANY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
STILLWATER MINING COMPANY - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
NOTE 1 NATURE OF OPERATIONS
Stillwater Mining Company, a Delaware corporation, is engaged in the exploration, development, extraction, processing and refining of palladium, platinum and associated minerals from the J-M Reef located in Stillwater and Sweet Grass Counties, Montana. The J-M Reef is a twenty-eight (28) mile long geologic formation containing the highest known grade deposit of platinum group metals in the world.
The company's operations consist of the Stillwater Mine, a fully permitted minesite located on the J-M Reef in Nye, Montana, the East Boulder project, a fully permitted development project located at the western end of the J-M Reef in Sweet Grass County, Montana and a smelter and base metals refinery located in Columbus, Montana.
During 1998, the company announced plans to accelerate the expansion of the Stillwater Mine, development of the East Boulder project and expansion of the smelter and base metals facilities. Key components of the expansion are development of the Stillwater Mine and concentrator facilities to expand production from 2,000 tons per day to 3,000 tons per day, development of the East Boulder mine and ancillary facilities to provide for an initial production rate of 2,000 tons per day and expansion of the smelter and base metals refinery. The company plans to reach an annual production rate of approximately 1.2 million ounces of palladium and platinum during 2001.
The company's operations can be significantly impacted by risks and uncertainties associated with the mining industry as well as those specifically related to its operations. The risks and uncertainties that can impact the company include but are not limited to the following: price volatility of palladium and platinum, economic and political events affecting supply and demand for these metals, reserve estimation, exploration and development, environmental obligations, government regulations and ownership of and access to mineral reserves.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Stillwater Mining Company and its wholly owned subsidiary (collectively referred to as the "company"). All intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with current year presentation.
USE OF ESTIMATES
The preparation of the company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. The more significant areas requiring the use of management's estimates relate to mineral reserves, reclamation and environmental obligations, valuation
allowance for deferred tax assets, useful lives for depreciation and amortization, and future cash flows from long-lived assets. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The company considers all highly-liquid investments purchased with a maturity of three months or less to be cash equivalents. As of December 31, 1998 and 1997, cash and cash equivalents included $4.1 and $4.2 million of cash, respectively. The balance of reported amounts consist principally of investment grade commercial paper. Amounts reported represent cost which approximates fair value.
SHORT-TERM INVESTMENTS
Short-term investments may consist of corporate bonds and commercial paper. Short-term investments are carried at amortized cost, which approximates fair value, as the company has the ability and intent to hold to maturity.
INVENTORIES
Metals inventories are carried at the lower of current market value or cost. Production costs include the cost of direct labor and materials, depreciation and amortization, as well as administrative expenses relating to mining and processing activities. Materials and supplies inventories are valued at the lower of average cost or fair market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over estimated useful lives ranging from five to twenty years or, for capital leases, the term of the related leases. Maintenance and repairs are charged to operations as incurred. Mine development expenditures incurred to increase existing production, develop new ore bodies or develop mineral property substantially in advance of production are capitalized and amortized using a units-of-production method over the proven and probable reserves. Interest is capitalized on expenditures related to construction or development projects and amortized using the same basis of depreciation as the related asset. Capitalization is discontinued when the asset is placed into operation or development ceases. Exploration costs are expensed as incurred.
Effective January 1, 1996, the company changed its method of accounting for mine development expenditures whereby certain direct and indirect costs related to development activities, which were previously expensed as incurred, are now capitalized. This change is believed to better present current income from mining activities because it results in a better matching of expenses with the revenue generated as a result of those expenses. The effect of the accounting change on 1996 results was to increase net income by approximately $5.2 million ($0.17 per share).
The company follows SFAS No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 prescribes that an impairment loss is recognized in the event that
facts and circumstances indicate that the estimated carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment is recorded based on an estimate of future discounted cash flows. As of December 31, 1998, the company does not believe that any impairments have occurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The company's non-derivative financial instruments consist primarily of cash and short-term investments, accounts receivable and debt. The carrying amounts of cash, short-term investments and accounts receivable approximate fair value due to their short maturities. At December 31, 1998 and 1997, based on rates available for similar types of obligations, the fair values of long-term debt and capital lease obligations were not materially different from their carrying amounts.
REVENUE RECOGNITION
Revenues consist of the sales of palladium and platinum, including any hedging gain or loss. Byproduct metals revenue and secondary materials processing revenue are included as a reduction to the cost of metals sold. Effective January 1, 1997, the company changed its method of revenue recognition whereby revenue is recognized when product is shipped from the company's base metals refinery to an external refiner. Sales and receivables are provisionally valued and later adjusted when sales prices are finalized and weight and assay calculations are completed. The cumulative effect of this change as of January 1, 1997 was to increase revenue by approximately $2.7 million in the first quarter of 1997; the effect on net income was not material. Prior to 1997, the company recognized revenue when product was delivered and transferred to the buyer.
HEDGING PROGRAM
The company enters into forward sales contracts and option contracts from time to time to manage the effect of price changes in palladium and platinum on the company's sales. The results of these transactions are included in sales revenue at the same time as the hedged production.
RECLAMATION AND ENVIRONMENTAL COSTS
Post-closure reclamation and site restoration costs are estimated based on environmental regulatory requirements and are accrued ratably over the life of the mine using a units-of-production method. Current expenditures related to ongoing environmental and reclamation programs are expensed as incurred, although the ultimate amount of the obligations to be incurred is uncertain at December 31, 1998 and 1997, the company has posted $8.9 million in reclamation bonds for state and federal requirements. The accrued reclamation liability was approximately $0.7 million at December 31, 1998 and 1997.
INCOME TAXES
Income taxes are determined using the asset and liability approach in accordance with the provisions set forth in SFAS No. 109, Accounting for Income Taxes. This method gives consideration to the future tax consequences
of temporary differences between the financial reporting basis and the tax basis of assets and liabilities based on currently enacted tax rates.
STOCK-BASED COMPENSATION
The company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and therefore continues to account for stock options in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, because options are granted at fair market value, no compensation expense has been recognized for options issued under the company's stock option plans. The company has made pro forma disclosures of net income and earnings per share as if the fair value based method of accounting, as defined in SFAS No. 123, had been applied.
EARNINGS PER SHARE
The company follows SFAS No. 128, Earnings per Share, which requires the presentation of basic and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
NOTE 3 NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the company adopted SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and presentation of comprehensive income and its components.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for the fiscal year beginning January 1, 2000 and establishes accounting and reporting standards for derivative instruments and hedging activities. The company is currently assessing the impact of this statement.
Additionally in June 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. SOP 98-5 is effective for fiscal year 1999 and requires that the costs of start-up activities be expensed as incurred. The company believes that the effect of this statement on the company's financial statements will not be material.
NOTE 4 INVENTORIES
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
NOTE 6 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
SPECIAL INDUSTRIAL EDUCATION IMPACT REVENUE BONDS
These bonds were issued by the company in 1989 in three series to finance impact payments to local school districts. The bonds bear interest at varying rates between 6.5% and 7.8% and mature in increasing annual principal amounts through 2009. The balance outstanding at December 31, 1998 and 1997 was $1.3 million and $1.6 million, respectively, of which approximately $0.1 million was classified as current in each year. The bonds, which are collateralized by the company's real estate, are secured by guarantees from Chevron Corporation and Manville Corporation. Scheduled principal repayments during the years 1999 through 2003 are approximately $0.1 million in each year. Scheduled principal repayments subsequent to 2003 total $0.9 million.
CONVERTIBLE SUBORDINATED NOTES
In April 1996, the company sold $51.5 million of 7% Convertible Subordinated Notes (the "Convertible Notes"), maturing on May 1, 2003. The Convertible Notes are unsecured, subordinated obligations. As of December 31, 1998 and 1997, $51.4 and $51.5 million were classified as long-term debt, respectively.
The Convertible Notes are convertible into shares of common stock on or before May 1, 1999, unless previously redeemed, at a conversion price of $17.87 per share as adjusted to reflect the three-for-two stock split ($26.80 per share at original issuance). The company is required to make semi-annual interest payments. The Convertible Notes are redeemable at the option of the company on or after May 1, 1999, having no other funding requirements until maturity.
In connection with the offering of the Convertible Notes, the company filed a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, relating to the resale of the Convertible Notes and the common stock issuable upon conversion. This registration statement was declared effective by the Securities and Exchange Commission on December 19, 1996.
The company made cash payments for interest expense of $4.6, $3.3 and $0.8 million for the years ended December 31, 1998, 1997 and 1996, respectively.
EQUIPMENT LEASE AGREEMENTS
During 1997, pursuant to the terms of the 1995 Senstar Capital Corporation Master Lease Agreement, the company entered into its fifth five-year equipment leasing agreement for $0.8 million. This agreement was preceded by a $7.5 million leasing agreement with Senstar, signed in October 1995, and by three additional agreements executed in 1996 totaling $3.8 million. The latest contract brings the total capitalized lease transactions with Senstar to $12.1 million. These agreements cover new underground mining equipment and each contains a two-year renewal option that can be exercised at the end of five years. Based upon the provisions of the leasing agreement, all leases are capital leases, and the renewal options qualify as extensions of the base lease term. As a result, all leased equipment has been capitalized and is being depreciated over seven years. Future minimum payments under the equipment leases are as follows (in thousands):
ROTHSCHILD CREDIT AGREEMENT
As of April 19, 1994, the company established an unsecured working capital line of credit with N M Rothschild & Sons Limited, having a maximum borrowing capacity of $15 million, subject to a borrowing base computation. The line of credit is scheduled to expire on April 30, 1999. Interest on amounts drawn is payable at
1.5% per annum over the prevailing London Interbank Offered Rate or 0.5% over the prevailing prime rate. Fees of 1.5% per annum are levied on the aggregate amount of any letters of credit issued under the facility and a commitment fee of 0.5% per annum is payable on available but unused amounts. These fees were $0.1 million in 1998, 1997 and 1996. As of December 31, 1998, the company has approximately $9.3 million available, is in compliance with all financial covenants and has no debt outstanding under this facility. This facility will be cancelled concurrent with completion of the credit facility with the Bank of Nova Scotia.
SCOTIABANK CREDIT FACILITY
The company has a commitment for a $175 million credit facility with the Bank of Nova Scotia ("the Scotiabank Credit Facility"). The Scotiabank Credit Facility provides for a $125 million term loan facility and a $50 million revolving credit facility. The Scotiabank Credit Facility is expected to mature on December 31, 2005. Proceeds of the term loan facility will be used to finance a portion of the company's development of the East Boulder project, Stillwater Mine expansion and processing facilities expansion (1998 Expansion Plan). Proceeds of the revolving credit facility will be used for general corporate and working capital needs. At the company's option, the Scotiabank Credit Facility will bear interest at LIBOR or an alternate base rate, in each case plus a margin of 1.00% to 1.75% which may be adjusted depending upon the company's ratio of debt to operating cash flow. Substantially all the property and assets of the company and its subsidiaries and the stock of the company's subsidiaries will be pledged as security for the Scotiabank Credit Facility. The commitment is also subject to numerous operating, financial and reporting covenants customary for agreements of this type.
NOTE 7 EMPLOYEE BENEFIT PLANS
On June 1, 1993, the company established the Stillwater Mining Company 401(k) Plan and Trust (the "existing plan"). From June 1, 1993 through September 30, 1996, all eligible employees could participate in this plan. On October 1, 1996, the company established the Stillwater Mining Company 401(k) Plan and Trust for Bargaining Unit Employees ("the new plan"). All bargaining unit employees' assets were transferred to the new plan, while all non-bargaining unit employees continue participation under the existing plan. Employees of the company with at least six months of consecutive service are eligible to participate in their respective plan. Other than the differentiation between bargaining unit employees and non-bargaining unit employees, the plans are identical. The company matches employee contributions at a 2:1 ratio up to 3% of the employee's gross wages. Both plans have a three-year cliff vesting period. Monthly contributions are made to separate trust funds administered by an independent investment manager. Total plan expenses charged to operations were $1.2 million, $1.0 million and $0.9 million in 1998, 1997 and 1996, respectively.
NOTE 8 COMMON AND PREFERRED STOCK PLANS AND AGREEMENTS
STOCK PLAN
The company sponsors the stock option plans that enable the company to grant stock options or restricted stock to employees, non-employee directors and consultants. There are 4,050,000 shares of common stock authorized for issuance under the plans.
Awards granted under the plans may consist of either incentive stock options (ISO) or non-qualified stock options (NSO), stock appreciation rights (SAR), restricted stock, or other stock-based awards, with the exception that non-employee directors may not be granted SARs and only employees of the company may be granted ISOs.
The plans are administered by the Compensation Committee of the company's Board of Directors, which determines the exercise price, exercise period, vesting period and all other terms. Unexercised options expire ten years after the date of grant.
There are approximately 784,000 shares available for grant as of December 31, 1998. Stock option activity for the years ended December 31, 1998, 1997 and 1996 is summarized as follows:
The following table summarizes information for outstanding and exercisable options as of December 31, 1998:
The company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net earnings and earnings per share is required by SFAS 123, and has been determined as if the company had accounted for its stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The company's pro forma information follows (in thousands, except for per share amounts):
Additionally, 9,950 shares and 30,000 shares of restricted stock were granted in 1997 and 1994, respectively. Deferred compensation related to restricted stock was recorded as a component of paid-in capital and is amortized over the two-year vesting period.
Outstanding options to purchase 1,938,607, -0- and -0- shares of common stock were included in the computation of diluted earnings per share for the years ended December 31, 1998, 1997 and 1996, respectively. Outstanding options to purchase 264,111, 1,220,549 and 1,005,805 shares of common stock were excluded from the computation of diluted earnings per share for the years ended December 31, 1998, 1997 and 1996, respectively, because the effect of inclusion would have been antidilutive using the treasury stock method.
In addition, 2,878,656 million shares (1,919,104 million prior to stock split) of common stock issuable under the terms of the company's Convertible Subordinated Notes were excluded from the computation of diluted earnings per share for the years ended December 31, 1997 and 1996, respectively, because the effect of inclusion would have been antidilutive using the treasury stock method.
SHAREHOLDERS' RIGHTS AGREEMENT
In October 1995, the Board of Directors of the company adopted a Rights Agreement under which Stillwater shareholders of record as of November 15, 1995 received a dividend in the form of Preferred Stock Purchase Rights (the "Rights"). The Rights permit the holder to purchase one one-thousandth of a share (a unit) of Series A Preferred Stock, par value $0.01 per share (the "Preferred Stock"), at a purchase price of $80 per unit, subject to adjustment. All outstanding Rights may be redeemed by the company at any time until such time the Rights become exercisable. Until a Right is exercised, the holder thereof has no rights as a shareholder of the company, including the right to vote or receive dividends. Subject to certain conditions, the Rights become exercisable ten business days after a person or group acquires or commences a tender or exchange offer to acquire a beneficial ownership of 15% or more of the company's outstanding common stock. The Rights expire on October 26, 2005 unless earlier redeemed or exercised.
NOTE 9 INCOME TAXES
The total income tax provision (benefit) has been allocated as follows (in thousands):
The components of the income tax provision (benefit) consisted of the following (in thousands):
The deferred tax (assets) liabilities are comprised of the tax effect of the following (in thousands):
The following is a reconciliation between the tax provision determined by applying the federal statutory income tax rate of 35% in 1998, 1997 and 1996 to pre-tax income, and the company's tax provision (benefit) (in thousands):
At December 31, 1998, the company had approximately $69.9 million of regular tax net operating loss carryforwards expiring during 2009 through 2018. The company made cash payments of $316,000, $0 and $0 for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 10 CAPITAL TRANSACTIONS
COMMON STOCK OFFERING
On October 20, 1998, 2,000,000 shares of the company's common stock were sold under the company's existing $200 million universal shelf registration statement, which was declared effective by the Securities and Exchange Commission (SEC) on July 17, 1998. On November 4, 1998, 300,000 additional shares were sold pursuant to the underwriter's over-allotment option. The $66.6 million of net proceeds will be used to finance a portion of the costs of the company's expansion plan.
COMMON STOCK SPLIT
On December 8, 1998, the Board of Directors declared a three-for-two stock split on the company's common stock effected in the form of a stock dividend to shareholders of record on December 21, 1998. This stock split was recorded as of the close of business on December 31, 1998 by transferring par value of $115,158 from additional paid in capital to common stock. All per share data, including stock option information, have been restated to reflect this stock split.
NOTE 11 COMMODITY INSTRUMENTS
The company may use forward sales or other commodity instruments to manage its exposure to market risk from changes in palladium and platinum commodity prices. The company may also lease metal to counterparties to earn interest on excess metal balances.
As of December 31, 1998, the company had 9,550 ounces of its December palladium production sold forward for delivery in January 1999 at an average price of $284 per ounce. At December 31, 1998, the company had 13,100 ounces of platinum sold forward at an average price of $375 per ounce, with maturities in 1999.
The company has entered into long-term sales contracts with General Motors Corporation, Ford Motor Company, Mitsubishi Corporation and KEMET Corp. The contracts cover the company's production over the five-year period from January 1999 through December 2003. Under the contracts, the company has committed between 90% to 100% of its palladium production. Palladium sales are priced at a slight discount to market, with a floor price averaging approximately $225 per ounce. The company has agreed to an average maximum palladium price of approximately $400 per ounce on approximately 30% of its production. The remaining 70% of the company's palladium production is not subject to any price cap. In addition, the company has committed approximately 20% of its planned annual platinum production over the next five years. Platinum sales are priced
at a slight discount to market, subject to an average minimum price of $350 per ounce with an average maximum price of $425 per ounce. The remaining 80% of the company's planned annual platinum production is not committed under these contracts. Such platinum production remains available for sale at prevailing market prices. The sales contracts contain termination provisions that allow the purchasers to terminate in the event the company breaches and the breach is not cured within periods ranging from ten to thirty days of notice by the purchaser. In addition, the contracts contain force majeure provisions that allow for the suspension and, in one instance, the termination of the contract upon the occurrence of an event of force majeure.
NOTE 12 COMMITMENTS AND CONTINGENCIES
REFINING AGREEMENTS
The company has contracted with threefour entities to refine its filter cake production. Even though there are limited number of PGM refiners, the company is not economically dependent upon any one refiner.
OPERATING LEASES
In September 1998, the company completed the sale and leaseback of a tunnel boring machine and miscellaneous other mining equipment. The leases are classified as operating leases for financial reporting purposes and are non-cancelable with terms of seven years. Rental/lease expense, including all leases, amounted to approximately $0.1 million in 1998. Rental expense in prior years was insignificant.
Future minimum lease payments for non-cancelable leases with terms in excess of one year are $1.6 million in each of the years 1999 - 2003, and $2.7 million thereafter.
SIGNIFICANT CUSTOMERS
Sales to significant customers represented approximately 60%, 90% and 98% of total revenues for the years ended December 31, 1998, 1997 and 1996, respectively. The company sells its metals to a small number of customers and brokers; however, the company is not economically dependent upon these customers since palladium and platinum can be readily sold in numerous markets throughout the world.
ELECTRIC SERVICE AGREEMENT
During 1996, Montana Power Company (MPC) upgraded the company's transmission line and substation facilities. The cost of this upgrade to MPC totaled approximately $2.9 million. In a contract between MPC and the company, the company agrees to reimburse MPC for these costs through additional electric revenues produced from the company's increased load in excess of 8,000 kilowatts. At the completion of the five-year agreement, if the total additional revenues, as defined in the contract between MPC and the company, has not met or exceeded MPC's investment cost, the company will be required to pay MPC the difference.
NOTE 13 QUARTERLY DATA (UNAUDITED)
Quarterly earnings data for the years ended December 31, 1998 and 1997 were as follows (in thousands, except per share data):
NOTE 14 MINERAL RESERVES AND PRODUCTION DATA (UNAUDITED)
Proven and probable palladium and platinum reserves (1) consisted of the following:
SUMMARY OPERATING INFORMATION WAS AS FOLLOWS:
(1) Derived from mineral reserve estimates reviewed by independent consultants as of December 31, 1998, 1997, December 31, 1995 and July 1, 1992 and adjusted for production, additional drilling and development. The increases in reserves can be attributed to additional drilling and development, the use of a lower cut-off grade and adjustment for historical mining experience. (2) Expressed in contained ounces of palladium and platinum per ton. (3) Based on the ratio of 1.0 part of platinum to 3.3 parts of palladium for 1996 through 1998 and 1.0 part of platinum to 3.5 parts of palladium for 19943 and through 1995.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the company's executive officers, reference is made to the information set forth under the caption "Executive Officers of the Registrant" located in Item 1 of this Form 10-K. For information concerning the company's directors and compliance by the company's directors, executive officers and significant stockholders with the reporting requirements of Section 16 of the Securities Exchange Act of 1934, as amended, reference is made to the information set forth under the captions "Election of Directors" and "Compliance with Section 16(a) - Beneficial Ownership Reporting Compliance," respectively, in the company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1999, to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
ITEM 11
ITEM 11 EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption "Executive Compensation and Other Information" in the company's Proxy Statement for the Annual Meeting of Stockholders, to be held on May 27, 1999, to be filed pursuant to Regulation 14A, which information (except for the Report of the Compensation Committee of the Board of Directors and the Performance Graph) is incorporated herein by reference.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information set forth under the caption "Security Ownership of Principal Stockholders and Management" in the company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1999, to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
ITEM 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption "Certain Transactions" contained in the company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 1999, to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
PART IV
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K
1. Financial Statements Page Report of Management 30 Report of Independent Accountants 31 Balance Sheet 32 Statement of Operations 33 Statement of Cash Flows 34 Statement of Changes in Stockholders' Equity 35 Notes to Financial Statements 36 2. Financial Statement Schedules (not applicable)
(b) Reports on Form 8-K
1 On April 22, 1998 the company filed a Form 8-K to correct executive compensation disclosure in the company's proxy statement for its 1997 Annual Meeting of Stockholders.
2 On September 29, 1998 the company filed a Form 8-K to announce that it had entered into long-term marketing contracts covering the sale of palladium and platinum.
3 On October 1, 1998, the company filed a Form 8-K to announce the acceleration of the expansion of the Stillwater Mine and the development of the East Boulder project and to announce plans for financing of the expansion.
4 On December 30, 1998, the company filed a Form 8-K to announce the issuance of a 50% stock dividend.
(c) Exhibits.
EXHIBITS
Number Description - ---------------------
2.1 Exchange Agreement for 10,000 shares of common stock dated October 1, 1993 (incorporated by reference to Exhibit 2.1 to the company's Registration Statement on Form S-1 (File No. 33-85904) as declared effective by the Commission on December 15, 1994 (the "1994 S-1"")). 3.1 Amended and Restated Certificate of Incorporation of the company dated December 2, 1995 (incorporated by reference to Exhibit 3.4 to the 1994 S-1). 3.2 Amended and Restated Bylaws of the company (incorporated by reference to Exhibit 3.2 to the 1994 S-1). 4.1 Form of Indenture, dated April 29, 1996, between the company and Colorado National Bank with respect to the company's 7% Convertible Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1 of the company's Form 8-K dated April 29, 1996). 4.2 Rights Agreement, dated October 26, 1995 (incorporated by reference to Form 8-A filed on October 30, 1995). 10.1 1998 Equity Incentive Plan (incorporated by reference to Appendix A to the Proxy statement dated April 6, 1998)
10.2 Employment Agreement with John E. Andrews dated as of September 19, 1994 (incorporated by reference to Exhibit 10.4 to the 1994 S-1). 10.3 Amended and Restated Employment Agreement with William E. Nettles, dated as of August 10, 1998 (incorporated by reference to Exhibit 10.1 to the company's Form 10-Q filed on October 13, 1998). 10.4 Credit Agreement between Stillwater Mining Company as borrower and N. M. Rothschild & Sons Limited as Lender, dated as of April 19, 1994 (incorporated by reference to Exhibit 10.7 to the 1994 S-1). 10.5 Mining and Processing Agreement dated March 16, 1984 regarding the Mouat family; and Compromise of Issues Relating to the Mining and Processing Agreement (incorporated by reference to Exhibit 10.8 to the 1994 S-1). 10.6 Conveyance of Royalty Interest and Agreement between the company and Manville Mining Company, dated October 1, 1993 (incorporated by reference to Exhibit 10.9 to the 1994 S-1). 10.7 Agreement for Electric Service between the Montana Power Company and Stillwater Mining Company dated June 1, 1996 (incorporated by reference to Exhibit 10.8.1 of the company's 1996 Form 10-K). 10.8 Stock Redemption Agreement by and between the company and Chevron USA Inc. and Manville Mining Company, dated July 28, 1994 (incorporated by reference to Exhibit 10.11 to the 1994 S-1). 10.9 Registration Rights Agreement dated August 23, 1995, amending Shareholders Agreement (incorporated by reference to Exhibit 4.1 to Form 8-K filed on August 28, 1995). 10.10 Amendment to William E. Nettles employment agreement dated December 15, 1998. 10.11 Residue Refining Agreement between Stillwater Mining Company and Johnson Matthey, dated as of February 8, 1996 (incorporated by reference to Exhibit 10.16 of the company's 1995 Form 10-K). 10.12 Equipment Lease Agreement between Stillwater Mining Company and Senstar Capital Corporation dated October 5, 1995. (incorporated by reference to Exhibit 10.17 of the company's 1995 Form 10-K). 10.13 Purchase Agreement between Stillwater Mining Company and Senstar Capital Corporation dated October 5, 1995 (incorporated by reference to Exhibit 10.17.1 of the Registrant's 1995 Form 10-K). 10.14 Purchase Agreement between Stillwater Mining Company and The Westaim Corporation, dated October 14, 1996 (incorporated by reference to Exhibit 10.16 of the Registrant's 1996 Form 10-K). 10.15 PGM Concentrate Refining Agreement between the company and Union Miniere dated May 8, 1996 (incorporated by reference to Exhibit 10.15 of the company's 1998 Form 10-K). 10.16 Articles of Agreement between Stillwater Mining Company and Oil, Chemical and Atomic Workers International Union dated July 1, 1996, as amended by Tentative Agreement between O.C.A.W. Local Union Number 2-1 and the company, dated May 7, 1997 (incorporated by reference to Exhibit 10.16 to the Company's 1998 Form 10-K). 10.17 Palladium Sales Agreement, made as of August 13, 1998, among Stillwater Mining Company and Ford Motor Company (portions of the agreement have been omitted pursuant to a confidential treatment request) (incorporated by reference to Exhibit 10.1 to the Form 8-K dated July 21, 1998). 10.18 Palladium Sales Agreement, made as of July 21, 1998, among Stillwater Mining Company and KEMET Corp. (portions of the agreement have been omitted pursuant to a confidential treatment request) (incorporated by reference to Exhibit 10.2 to the Form 8-K dated July 21, 1998.) 10.19 Palladium and Platinum Sales Agreement, made as of August 17, 1998, among Stillwater Mining Company and General Motors Corporation (portions of the agreement have been omitted pursuant to a confidential treatment request) (incorporated by reference to Exhibit 10.3 to the Form 8-K dated July 21, 1998). 10.20 Palladium and Platinum Sales Agreement, made as of August 27, 1998, among Stillwater Mining Company and Mitsubishi Corporation (portions of the agreement have been omitted pursuant to a confidential treatment request) (incorporated by reference to Exhibit 10.4 to the Form 8-K dated July 21, 1998).
10.21 Credit Agreement, dated March 4, 1999 between Stillwater Mining Company and the Bank of Nova Scotia.
23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Behre Dolbear & Company, Inc. 27 Financial Data Schedule
SIGNATURES ----------
Pursuant to the requirements of Section 13 OR 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STILLWATER MINING COMPANY ("Registrant")
Dated: March 30, 1999 By: /s/ William E. Nettles ------------------------------------ William E. Nettles Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant, in the capacities, and on the dates, indicated.
Signature and Title Date - ------------------- ----
/s/ William E. Nettles March 30, 1999 - ------------------------------------ William E. Nettles Chairman, Chief Executive Officer and Director (Principal Executive Officer)
/s/ James A. Sabala March 30, 1999 - ------------------------------------ James A. Sabala Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ John E. Andrews March 30, 1999 - ------------------------------------ John E. Andrews President, Chief Operating Officer and Director
/s/ Douglas Donald March 30, 1999 - ------------------------------------ Douglas Donald, Director
/s/ Richard Gilbert March 30, 1999 - ------------------------------------ Richard Gilbert, Director
/s/ Lawrence Glaser March 30, 1999 - ------------------------------------ Lawrence Glaser, Director
/s/ Apolinar Guzman March 30, 1999 - ------------------------------------ Apolinar Guzman, Director
/s/ Ted Schwinden March 30, 1999 - ------------------------------------ Ted Schwinden, Director
/s/ Peter Steen March 30, 1999 - ------------------------------------ Peter Steen, Director
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K
1. Financial Statements Page Report of Management 30 Report of Independent Accountants 31 Balance Sheet 32 Statement of Operations 33 Statement of Cash Flows 34 Statement of Changes in Stockholders' Equity 35 Notes to Financial Statements 36 2. Financial Statement Schedules (not applicable)
(b) Reports on Form 8-K
1 On April 22, 1998 the company filed a Form 8-K to correct executive compensation disclosure in the company's proxy statement for its 1997 Annual Meeting of Stockholders.
2 On September 29, 1998 the company filed a Form 8-K to announce that it had entered into long-term marketing contracts covering the sale of palladium and platinum.
3 On October 1, 1998, the company filed a Form 8-K to announce the acceleration of the expansion of the Stillwater Mine and the development of the East Boulder project and to announce plans for financing of the expansion.
4 On December 30, 1998, the company filed a Form 8-K to announce the issuance of a 50% stock dividend.
(c) Exhibits.
EXHIBITS
Number Description - ---------------------
2.1 Exchange Agreement for 10,000 shares of common stock dated October 1, 1993 (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (File No. 33-85904) as declared effective by the Commission on December 15, 1994 (the "1994 S-1"")). 3.1 Amended and Restated Certificate of Incorporation of the company dated December 2, 1995 (incorporated by reference to Exhibit 3.4 to the 1994 S-1). 3.2 Amended and Restated Bylaws of the company (incorporated by reference to Exhibit 3.2 to the 1994 S-1). 4.1 Form of Indenture, dated April 29, 1996, between the company and Colorado National Bank with respect to the company's 7% Convertible Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1 of the company's Form 8-K dated April 29, 1996). 4.2 Rights Agreement, dated October 26, 1995 (incorporated by reference to Form 8-A filed on October 30, 1995). 10.1 1998 Equity Incentive Plan (incorporated by reference to Appendix A to the Proxy statement dated April 6, 1998) 10.2 Employment Agreement with John E. Andrews dated as of September 19, 1994 (incorporated by reference to Exhibit 10.4 to the 1994 S-1). 10.3 Amended and Restated Employment Agreement with William E. Nettles, dated as of August 10, 1998 (incorporated by reference to Exhibit 10.1 to the company's Form 10-Q filed on October 13, 1998). 10.4 Credit Agreement between Stillwater Mining Company as borrower and N. M. Rothschild & Sons Limited as Lender, dated as of April 19, 1994 (incorporated by reference to Exhibit 10.7 to the 1994 S-1). 10.5 Mining and Processing Agreement dated March 16, 1984 regarding the Mouat family; and Compromise of Issues Relating to the Mining and Processing Agreement (incorporated by reference to Exhibit 10.8 to the 1994 S-1). 10.6 Conveyance of Royalty Interest and Agreement between the company and Manville Mining Company, dated October 1, 1993 (incorporated by reference to Exhibit 10.9 to the 1994 S-1). 10.7 Agreement for Electric Service between the Montana Power Company and Stillwater Mining Company dated June 1, 1996 (incorporated by reference to Exhibit 10.8.1 of the company's 1996 Form 10-K). 10.8 Stock Redemption Agreement by and between the company and Chevron USA Inc. and Manville Mining Company, dated July 28, 1994 (incorporated by reference to Exhibit 10.11 to the 1994 S-1). 10.9 Registration Rights Agreement dated August 23, 1995, amending Shareholders Agreement (incorporated by reference to Exhibit 4.1 to Form 8-K filed on August 28, 1995). 10.10 Amendment to William E. Nettles employment agreement dated December 15, 1998. 10.11 Residue Refining Agreement between Stillwater Mining Company and Johnson Matthey, dated as of February 8, 1996 (incorporated by reference to Exhibit 10.16 of the company's 1995 Form 10-K). 10.12 Equipment Lease Agreement between Stillwater Mining Company and Senstar Capital Corporation dated October 5, 1995. (incorporated by reference to Exhibit 10.17 of the company's 1995 Form 10-K). 10.13 Purchase Agreement between Stillwater Mining Company and Senstar Capital Corporation dated October 5, 1995 (incorporated by reference to Exhibit 10.17.1 of the Registrant's 1995 Form 10-K). 10.14 Purchase Agreement between Stillwater Mining Company and The Westaim Corporation, dated October 14, 1996 (incorporated by reference to Exhibit 10.16 of the Registrant's 1996 Form 10-K). 10.15 PGM Concentrate Refining Agreement between the company and Union Miniere dated May 8, 1996 (incorporated by reference to Exhibit 10.15 of the company's 1998 Form 10-K). 10.16 Articles of Agreement between Stillwater Mining Company and Oil, Chemical and Atomic Workers International Union dated July 1, 1996, as amended by Tentative Agreement between O.C.A.W. Local Union Number 2-1 and the company, dated May 7, 1997 (incorporated by reference to Exhibit 10.16 to the Company's 1998 Form 10-K). 10.17 Palladium Sales Agreement, made as of August 13, 1998, among Stillwater Mining Company and Ford Motor Company (portions of the agreement have been omitted pursuant to a confidential treatment request) (incorporated by reference to Exhibit 10.1 to the Form 8-K dated July 21, 1998). 10.18 Palladium Sales Agreement, made as of July 21, 1998, among Stillwater Mining Company and KEMET Corp. (portions of the agreement have been omitted pursuant to a confidential treatment request) (incorporated by reference to Exhibit 10.2 to the Form 8-K dated July 21, 1998.) 10.19 Palladium and Platinum Sales Agreement, made as of August 17, 1998, among Stillwater Mining Company and General Motors Corporation (portions of the agreement have been omitted pursuant to a confidential treatment request) (incorporated by reference to Exhibit 10.3 to the Form 8-K dated July 21, 1998). 10.20 Palladium and Platinum Sales Agreement, made as of August 27, 1998, among Stillwater Mining Company and Mitsubishi Corporation (portions of the agreement have been omitted pursuant to a confidential treatment request) (incorporated by reference to Exhibit 10.4 to the Form 8-K dated July 21, 1998). 10.21 Credit Agreement, dated March 4, 1999 between Stillwater Mining Company and the Bank of Nova Scotia.
23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Behre Dolbear & Company, Inc. 27 Financial Data Schedule