ITEM 3
LEGAL PROCEEDINGS
The company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the company’s consolidated financial position, results of operations or liquidity.
STOCKHOLDER SUITS
During the second quarter of 2002, seven lawsuits were filed against the company and certain senior officers in United States District Court, Southern District of New York. These actions purport to be a class action filed on behalf of all persons who purchased
or otherwise acquired common stock of the company between April 20, 2001 through and including April 1, 2002, and asserts claims against the company and certain of its officers under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs challenge the accuracy of certain public disclosures made by the company regarding its financial performance, and in particular, its accounting for probable ore reserves. On September 23, 2002, an amended complaint was filed which has consolidated the cases and lead counsel was appointed to represent the plaintiff. In October 2002 defendants moved to dismiss the complaint and to transfer the case to federal district court in Montana. These motions are pending.
On June 24, 2002, a stockholder derivative lawsuit was filed against the company and its directors in state court in Delaware. It arises out of allegations similar to the class actions for the period from April 20, 2001 through and including April 20, 2002 and seeks damages allegedly on behalf of the stockholders of Stillwater for breach of fiduciary duties by the directors.
The company considers the lawsuits without merit and intends to vigorously defend itself in both of these actions.
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
On January 31, 2002, the company completed a $60 million private placement of its common stock involving approximately 4.3 million shares or approximately 10% of the outstanding shares after such issuance. The Company filed a registration statement for the resale of such shares, which was declared effective as of June 7, 2002.
The company’s common shares are traded on the New York Stock Exchange (“NYSE”) under the trading symbol “SWC.” For the period from January 1, 2001 through December 31, 2002, the high and low sales prices for the company’s common stock for each quarter as reported by the American Stock Exchange prior to June 26, 2001 and by the New York Stock Exchange from and after June 26, 2001, were:
STOCKHOLDERS. As of March 24, 2003, the company had 507 stockholders of record.
DIVIDENDS. The company has never paid any dividends on its common stock and expects for the foreseeable future to use all of its cash flow 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 company’s credit facility and its exempt facility revenue bond indenture significantly restrict the payment of dividends on common stock.
ITEM 6
ITEM 6
SELECTED FINANCIAL AND OPERATING DATA
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’s production of palladium and platinum is a result of the tons of ore mined, the mill head grade and metallurgical recovery. The company measures its mine production by ounces contained in concentrate reduced by subsequent processing losses expected to be incurred when shipped to the company’s smelter, which generally occurs within four days of the ore being mined. Shipment from the company’s refinery to a third-party refiner generally occurs within 14 days of mining. Approximately 35 days elapse between the time ore is extracted from the mines and the time ounces of recovered precious metal contained in that ore are made available by a third-party refiner to the company for sale. 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 metal refinery at the end of an accounting period is generally shipped during the first two weeks of the subsequent period and the material is included in the company’s in-process inventory. The company records revenue when title passes to its customers.
The ore grade of the company’s ore reserves is an average of the composite of all samples. As is common in an underground mine, the grade mined and the recovery rate achieved will vary depending on the area being mined. In particular, mill head grade can be expected to vary by up to 10% depending on the area of the mine where extraction is occurring. During 2002, 2001 and 2000, the average mill head grade of total tons processed from the Stillwater Mine was 0.56, 0.62, and 0.64 ounce of PGMs per ton of ore, respectively. During 2002, the average mill head grade of total tons processed from the East Boulder Mine was 0.37 ounce per ton of
ore. During 2001, comparable mill head grade for the East Boulder Mine was 0.31 ounce per ton, however, the proceeds of all production of PGM’s was credited against capitalized mine development as the mine was in the pre-production phase.
During 2002, the company’s operations produced a total of 617,000 ounces, which included 476,000 ounces of palladium and 141,000 ounces of platinum. PGM production increased 22% from 2001, but was 3.6% below the company’s September 4, 2002 revised forecast PGM production for 2002. The company’s production was effected by several issues during 2002. In an effort to reduce costs, in June 2002, the company amended certain provisions of the incentive bonus contract with its labor unions regarding the Stillwater Mine to correct an unintended prior increase in the amount of incentive bonus paid to affected employees in January 2002. As a result, the company experienced industrial relations problems in the third quarter, including reduced production by affected employees from historical levels. In 2002 the company increased the level of production at the Stillwater Mine in an area of the mine known as the upper west. The ore grade from the upper west was lower than the grade for the other ore mined by the company, thus reducing the company’s ability to produce ore in line with its prior forecasts. In addition, during the fourth quarter production was affected by several issues arising from increased MSHA enforcement activity, which primarily dealt with machinery noise levels, new interpretations of standards and renewed emphasis on explosives use and handling driven by the U.S. Department of Homeland Security.
CAPITALIZED MINE DEVELOPMENT
The Stillwater Mine currently uses its 28 footwall laterals, totaling approximately 220,000 feet, and 6 primary ramps, totaling approximately 57,000 feet, and the East Boulder Mine currently uses its two levels of footwall lateral drives totaling approximately 11,600 feet, and two primary ramps, totaling approximately 5,100 feet, to provide men and equipment access, supply haulage and drainage, intake and exhaust ventilation systems, muck haulage, backfill plant access, powder storage and/or emergency egress. To date, no footwall lateral has exhausted its requirement to support mining activities. The footwall lateral and primary ramp systems will continue to provide support of production and ongoing development activities. Currently, all underground infrastructure, including footwall laterals, are located within the company’s proven and probable reserve area and are intended to be used for the life of the mine. The company’s capitalized mine development, including footwall laterals and ramps, consist of permanent infrastructure that is integral and necessary not only for current operations, but also for all future planned operations. Accordingly, these costs (which only includes the costs incurred to date) are being amortized over the proven and probable ore reserves to be benefited utilizing the unit of production method. Significant additional development costs will be required to access the company’s probable ore reserves. These estimated future costs are not reflected in the amortization rate; however, the company includes all of its proven and probable ore reserves in its determination of its amortization rate.
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 97%, 96% and 91% of total revenues for the years ended December 31, 2002, 2001, and 2000, respectively. Sales to these customers were pursuant to long-term sales contracts which provide floor and ceiling price structures. For a description of these contracts see “Business and Properties-Current Operations - Sales and Hedging Activities”. Although the company sells its metals to a small number of customers and brokers; the company could, if the need were to arise, readily sell its metal on PGM markets throughout the world.
From time to time, the company uses basic hedging techniques involving fixed forwards, cashless put and call option collars and financially settled forwards, attempts to lock in prices for its production, benefit from price increases and protect against price decreases for a portion of its production within the floor and ceiling prices which exist with its customers. Terminal markets exist for both metals and prices are established as metal is traded each day. Such hedging contracts will also preclude the company from obtaining the benefit of increased market prices for its contracted metals. As a result, the company’s revenues were favorably impacted in 2002 and 2001 by $9.2 million and $5.5 million, respectively, and negatively impacted in 2000 by $15.8 million. See “Business and Properties - Sales and Hedging Activities.”
The company may continue to use forward contract and put and call option strategies to manage the potential negative effects of metal price volatility on its financial results. As of December 31, 2002, the company had no metal committed under either forward delivery contracts or put and call option strategies for delivery in future years. The company’s put and call options are financially settled at maturity. The company has credit agreements with its major trading partners that provide for margin deposits in the event that forward prices for metals exceed the company’s hedge contract prices by a predetermined margin limit.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
PGM Production. During 2002, the company produced approximately 617,000 ounces of palladium and platinum, which included 476,000 ounces of palladium and approximately 141,000 ounces of platinum, respectively, compared with approximately 388,000 ounces of palladium and approximately 116,000 ounces of platinum during 2001, which excludes the development ounces recovered from the East Boulder Mine in 2001 of approximately 17,000 ounces of palladium and 5,000 ounces of platinum. The increase was primarily due to the East Boulder Mine, which commenced commercial production in 2002 and produced 97,000 ounces of palladium and 28,000 ounces of platinum in 2002. This was partially offset by a 2% decrease in production at the Stillwater Mine primarily due to the lower mill head grade as a result of an increased emphasis in mining the upper west area, which produced 379,000 ounces of palladium and 113,000 ounces of platinum in 2002.
The company’s PGM production increased 113,000 ounces from 2001, or 22%, but was 23,000 ounces, or 3.6% below the company’s September 4, 2002 revised forecast PGM production for 2002. At the Stillwater Mine, the production shortfall was a result of an industrial relations problem experienced during the third quarter of 2002, interruptions arising from increased Mine Safety and Health Administration enforcement activity during the fourth quarter of 2002 and a lower ore grade than plan as a result of mining in the upper west area. At the East Boulder Mine, production was affected by ore grade, which was below the company’s target.
Revenues. Revenues were $275.6 million for the year ended December 31, 2002, compared with $277.4 million in 2001, a 1% decrease, and were the result of a decrease in combined realized PGM prices of 18%, offset by a 21% increase in the quantity of metal sold.
Palladium sales increased to approximately 469,000 ounces in 2002 from approximately 391,000 ounces in 2001. Platinum sales increased to approximately 143,000 ounces in 2002 from approximately 114,000 ounces in 2001. As a result, the total quantity of metal sold increased 21% to approximately 612,000 ounces in 2002 from approximately 505,000 ounces in 2001.
The company has long-term contracts with its customers for the majority of the production of the mines. These contracts have floor and ceiling prices which mitigate somewhat the price volatility evident in PGM markets.
The company’s combined average realized price per ounce of palladium and platinum sold in 2002 decreased 18% to $454 per ounce, compared to $554 per ounce in 2001. The combined average market price, as determined in the PGM markets, decreased 34% to $384 per ounce in 2002, compared with $586 per ounce in 2001. The company’s average realized price per ounce of palladium was $436 per ounce in 2002, a 24% decrease, compared to $570 per ounce for 2001, while the average market price decreased 44% to $338 per ounce in 2002 from $604 per ounce in 2001. The company’s average realized price per ounce of platinum sold was $511 per ounce in 2002, compared with $498 per ounce in 2001. The platinum average market price was $539 per ounce in 2002 compared to $529 per ounce in 2001.
Production Costs. Total consolidated cash costs per ounce produced in the year ended December 31, 2002 increased $23, or 9%, to $287 per ounce from $264 per ounce in the year ended December 31, 2001. The increase in total consolidated cash costs per ounce is attributed to a $22 per ounce increase in operating costs primarily related to placing the East Boulder Mine into commercial production in 2002 and lower production ounces at the Stillwater Mine due to lower grade.
Total consolidated production costs per ounce in the year ended December 31, 2002 increased $40, or 13%, to $351 per ounce from $311 per ounce in the year ended December 31, 2001. The increase is due to the $23 increase in operating costs per ounce and an increase in depreciation and amortization costs of $17 per ounce, due to lower production ounces at the Stillwater Mine and the impact of placing the East Boulder Mine assets into commercial production during 2002, combined with changes in ore reserve estimates used in calculating depreciation.
Expenses. General and administrative expenses decreased $8.1 million, or 36%, during the year ended December 31, 2002, primarily as a result of; (i) lower costs of $2.5 million related to reduced project management and recruiting activities associated with the company’s previous expansion plan and (ii) during the year ended December 31, 2001, the company incurred $1.7 million of severance costs attributable to a management realignment and consulting fees of $3.3 million. During the year ended December 31 2001, the company incurred $1.7 million related to a settlement of a legal dispute with a terminated refining contract.
During the year ended December 31, 2002, the company revised its estimate of accrued restructuring costs as a result of negotiations of certain termination clauses of construction contracts cancelled. The company made adjustments to reduce the accrual by $7.0 million during 2002. Also, during 2002, the company made an addition to its restructuring accrual of $1.1 million to reflect the decision to eliminate six management positions, which resulted in a net adjustment to increase pre-tax income by $5.9 million.
Interest expense increased $17.6 million as a result of placing the East Boulder Mine into production in 2002, which resulted in interest being expensed rather than capitalized.
Income Taxes. The company has provided for income taxes of $8.9 million, or 22% of pretax income, for the year ended December 31, 2002 compared to $20.3 million, or 23.6% of pretax income, for the year ended December 31, 2001.
Net Income. The company’s net income for 2002 was $31.7 million, or $0.74 per diluted share, compared with net income of $65.8 million, or $1.68 per diluted share in 2001.
Other Comprehensive Loss. For the year ended December 31, 2002, other comprehensive loss of $7.1 million, net of tax, includes a decline in the market value of the interest rate swaps of $2.3 million and a decline in the market value of commodity instruments of $0.2 million. Other comprehensive loss also includes reclassification adjustments to earnings of $5.6 million associated with deferred gains on commodity instruments and $0.9 million associated with losses on interest rate swaps. For 2002, the company recorded other comprehensive income of $12.9 million, net of tax, due to the increase in the market value of commodity derivative instruments of $16.5 million, off set by reclassification adjustments to earnings of $3.6 million associated with the gains on commodity instruments.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
PGM Production. During 2001, the Stillwater Mine produced approximately 388,000 ounces of palladium and approximately 116,000 ounces of platinum, respectively, compared with approximately 330,000 ounces of palladium and approximately 100,000 ounces of platinum during 2000. The increase was due to a 21% increase in tons milled at the Stillwater Mine in 2001 compared to 2000, offset by a 3% decrease in the average grade of material milled.
Revenues. Revenues were $277.4 million for the year ended December 31, 2001, compared with $225.2 million in 2000, an increase of 23% and were the result of an increase in higher combined average realized PGM prices of 2% and a 19% increase in the quantity of metal sold.
Palladium sales increased to approximately 391,000 ounces in 2001 from approximately 324,000 ounces in 2000. Platinum sales increased to approximately 114,000 ounces in 2001 from approximately 100,000 ounces in 2000. As a result, the total quantity of metal sold increased 19% to approximately 505,000 ounces in 2001 from approximately 424,000 ounces in 2000.
The company’s combined average realized price per ounce of palladium and platinum sold in 2001 increased 2% to $554 per ounce, compared to $541 per ounce in 2000. The combined average market price, as determined in the PGM markets, decreased 10% to $586 per ounce in 2001, compared with $649 per ounce in 2000. The company’s average realized price per ounce of palladium was $570 per ounce in 2001, compared to $560 per ounce for 2000, while the average market price decreased 11% to $604 per ounce in 2001 from $680 per ounce in 2000. The company’s average realized price per ounce of platinum sold was $498 per ounce in 2001, compared with $481 per ounce in 2000. The platinum average market price was $529 per ounce in 2001 compared to $544 per ounce in 2000.
Production Costs. Total cash costs per ounce produced in the year ended December 31, 2001 were $264 per ounce and were comparable to the cash costs per ounce in the year ended December 31, 2000. The total cash costs per ounce are comparable as a result of increased production and lower royalties and taxes associated with lower average market prices, offset by increased mine overhead costs and decreased byproduct credits. Total production costs per ounce increased $6, or 2% to $311 per ounce from $305 per ounce due to an increase in non-cash costs of $6 per ounce related to increased production and a higher depreciable capital base.
Expenses. General and administrative expenses increased $12.6 million primarily as a result of $7.5 million of increased administrative support required to transition the company from a single site producer to a double location producer, $3.3 million related to consulting services and $1.7 million associated with management realignment. The company incurred a $1.7 million expense related to a settlement of a legal dispute with a terminated refining contract. The company also accrued $11 million in restructuring costs associated with the revised plan implemented during the year.
Income Taxes. The company provided for income taxes of $20.3 million, or 23.6% of pretax income, for the year ended December 31, 2001 compared to $27.2 million, or 28.5% of pretax income, for the year ended December 31, 2000. The reduction in the effective tax rate is the result of a change in the treatment of mine development costs that will allow the company to increase depletion expense for tax purposes.
Net Income. The company’s net income for 2001 was $65.8 million, or $1.68 per diluted share, compared with net income of $61.5 million, or $1.57 per diluted share in 2000.
Other Comprehensive Income. For the year ended December 31, 2001, other comprehensive income of $12.9 million, net of tax, includes an increase in the market value of commodity derivative instruments of $16.5 million, offset by reclassification adjustments to earnings of $3.6 million associated with the gains on commodity instruments.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
At December 31, 2002, the company’s available cash was $25.9 million and it had $186.9 million outstanding under its term loan facility and $7.5 million outstanding as letters of credit under the revolving credit facility. During 2003, the company will be required to make total payments of approximately $21.5 million in principal reductions to its debt outstanding at December 31, 2002 which includes $20.9 million in schedule principal payments on the outstanding borrowings under the credit facility. The company will also be required to pay approximately $17.3 million in total interest payments.
At December 31, 2002, cash and cash equivalents had increased by $11.0 million to $25.9 million, compared with a decrease of $3.3 million to $14.9 million at December 31, 2001. For the year ended December 31, 2002, net cash provided by operations was $52.1 million compared to $106.8 million for 2001. The decrease of $54.7 million was primarily a result of decreased net income of $34.1 million, a decrease in non-cash expenses of $16.5 million, payments on the restructuring accrual of $3.1 million and a decrease in net operating assets and liabilities of $0.9 million.
A net total of $55.9 million of cash was used in investing activities in 2002, compared to a net total of $195.6 million in 2001, a decrease of $139.7 million. The decrease is primarily due to a reduction of capital expenditures. Capital expenditures primarily relating to mine activities for 2002 were $57.2 million a decrease of $140.0 million, compared to $197.2 million in 2001. The decrease is due to a reduction of capital expenditures in accordance with the company’s optimization plan put in place after the company suspended its expansion program in late 2001, in response to rapidly eroding commodity prices. During 2003, the company expects to invest approximately $56 million in capital items.
For the year ended December 31, 2002, cash flow from financing activities was $14.8 million compared to $85.6 million for the year ended December 31, 2001. The cash provided by financing activities in 2002 were primarily attributed to net proceeds of $55.3 million from a stock offering, offset by payments of $37.1 million on the company’s credit facility. For the same period of 2001, cash flow from financing activities of $85.6 million was primarily attributed to net borrowings of $225.0 million under the company’s credit facility, offset by a repayment of $125.0 million on the company’s prior credit facility and a net reduction in metals repurchase agreements of $9.4 million.
CREDIT AGREEMENT
In February 2001, the company entered into a $250 million credit facility with a syndicate of financial institutions which replaced a previous $175 million bank facility. The facility has been amended or waivers have been obtained seven times with the most recent amendment effective March 20, 2003. The credit facility provides for a $65 million five-year term loan facility (Term A), a $135 million seven-year term loan facility (Term B) and a $25 million revolving credit facility (reduced from $50 million at the company’s request as of March 20, 2003). Amortization of the term loan facilities commenced on March 31, 2002. The final maturity of the Term A facility and revolving credit facility is December 30, 2005. The Term B facility’s final maturity date is December 31, 2007.
As of December 31, 2002, the company has $57.1 million and $129.8 million outstanding under the Term A and Term B facilities, respectively, bearing interest at 5.06% and 6.75%, respectively. During 2002, the company entered into a letter of credit in the amount of $7.5 million, which reduces amounts available under the revolving credit facility at December 31, 2002, bearing interest at 3.375%.
The revolving credit facility requires an annual commitment fee of 0.5% on the remaining unadvanced amount. Of the $25 million revolving credit facility, $17.5 million remains available to the company.
The required principal payments for the Term A loan total $19.5 million in 2003 and 2004 and $18.1 million in 2005. The required principal payments for the Term B loan total $1.4 million in 2003, 2004 and 2005, $60.8 million in 2006 and $65 million in 2007. Any outstanding balance under the revolving credit facility will be due in its entirety on December 30, 2005.
The loans are 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 were used to finance a portion of the company’s expansion plan. Proceeds of the revolving credit facility are being used for general corporate and working capital needs. For further information on the credit facility see “Business and Properties - Current Operations - Credit Agreement.”
During the fourth quarter of 2002, the company determined that it would likely not be in compliance with a minimum production covenant for 2002 in its credit agreement. As a result, the company obtained a waiver from its lenders dated December 31, 2002, which reduced the trailing four quarters production covenant requirement from 620,000 ounces to 612,500 ounces of palladium and platinum. As a result of the waiver, the company was in compliance with all production and financial covenants of the credit agreement as of December 31, 2002.
In the first quarter of 2003, the company began implementing a long-range operating plan, which focuses on reducing its operating and capital costs. Therefore, the company lowered its 2003 PGM production target to 615,000 ounces. As a result, it determined that it would not likely be in compliance with its covenants under the credit agreement at March 31, 2003. Despite historically achieving positive net income, the company requires substantial funds for its necessary capital expenditures and to make the interest and principal payments under its credit facility. At December 31, 2002, the company’s available cash was $25.9 million. At the current palladium prices and without access to additional capital or borrowings under the revolving credit facility, management did not believe that the company’s cash would be sufficient to maintain its projected liquidity requirements through 2003. Consequently, the company began working with its lead banks to obtain amendments or waivers of various covenants under the credit agreement and to obtain access to additional borrowings under the revolving credit facility.
On March 20, 2003, the company obtained an amendment to the credit agreement that, among other things, modifies certain production and financial covenants for the remaining term of the agreement and allows for the Norilsk Nickel transaction. The amendment also provides the company with access to the $17.5 million of availability under the revolving credit facility. For further information on the amendment to the credit agreement, see “Business and Properties - Current Operations-Credit Agreement.”
Management believes with the amendments and access to undrawn $17.5 million under the revolving credit facility, together with the cash expected to be generated from operations will be adequate to meet the company’s liquidity needs through 2003.
OTHER
Working capital at December 31, 2002 was $46.7 million, compared to $22.3 million at December 31, 2001. The ratio of current assets to current liabilities was 1.7 at December 31, 2002, compared to 1.4 at December 31, 2001.
On January 31, 2002, the company completed a $60 million private placement of its common stock involving approximately 4.3 million shares or approximately 10% of the outstanding shares after such issuance. The price per share represents an approximate 10% discount from the closing price of $15.61 on January 29, 2002. Proceeds from the offering were approximately $54.0 million, net of offering costs of $6.0 million. The proceeds were used to pay down the $25 million revolving credit facility and the remaining used for general corporate purposes.
The company anticipates that a substantial rise in the cost of posting surety bonds or collateral, due to changing surety bond markets, may also adversely affect its liquidity in the future.
NORILSK NICKEL TRANSACTION
On November 20, 2002, the company and Mining and Metal Company Norilsk Nickel (Norilsk Nickel), a Russian mining company, signed a definitive agreement whereby Norimet, a wholly-owned subsidiary of Norilsk Nickel, will acquire a 51% majority
ownership in Stillwater through the issuance of 45.5 million newly issued shares of Stillwater common stock in exchange for $100 million cash and approximately 877,000 ounces of palladium, valued at $241 million, or $275 per ounce, based on the November 19, 2002, London PM fix and valued at $189 million, or $216 per ounce, based on the March 24, 2003 London PM fix. Additionally, after the closing of the transaction and subject to certain conditions, Norilsk Nickel would commence a tender offer to acquire additionally up to 4.3 million Stillwater shares, 10% of the currently outstanding shares, from the public at a cash price of $7.50 per share. If completed, the tender offer could increase Norilsk Nickel’s ownership in Stillwater to approximately 56% of the outstanding shares. For further information on the stock purchase transaction, see “Business and Properties - Current Operations- Pending Transaction with MMC Norilsk Nickel.”
MARKET RISK
The company may from time to time utilize derivative instruments to manage financial risk. The company has entered into long-term sales contracts with General Motors Corporation, Ford Motor Company, and Mitsubishi Corporation. The contracts apply to a significant portion of the company’s production over the eight-year period through December 2010 and to provide floor and ceiling price structure. See “Business and Properties - Current Operations - Sales and Hedging Activities”.
ENVIRONMENTAL OBLIGATIONS
The company’s environmental expenses were $1.8 million, $1.1 million, and $0.8 million for 2002, 2001, and 2000, respectively. The company had capital expenditures for environmental facilities during 2002, 2001 and 2000 of $0.3 million, $3.7 million and $22.0 million, respectively. The company’s ongoing operating expenditures for environmental compliance are expected to exceed approximately $2.0 million per year and are expensed as incurred.
The company is required to post reclamation surety bonds with the State of Montana which are jointly held by the Montana Department of Environmental Quality and the United States Forest Service. Current bonding liabilities total approximately $20.3 million. The current bond amount is an estimate of reclamation and closure costs as projected 5 years into the future. As such, the regulatory Agencies will review the bonding requirements and reclamation estimates on a 5-year rotation or anytime a major amendment to the operating permits is approved. The company expects that the Stillwater bond will be reviewed and adjusted by the Agencies during 2003 and will, in all likelihood, be increased. The company is accruing for reclamation costs over the life of the Stillwater Mine based on current production levels and estimated proven and probable ore reserves. As of December 31, 2002, the accrued liability was $1.9 million compared to $1.4 million at December 31, 2001. 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.
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 compliance, litigation and the palladium and platinum market. Additional information regarding factors which could cause results to differ materially is found in the section entitled “Risk Factors” above.
The company intends that the forward-looking statements contained herein be subject to the above-mentioned statutory safe harbors. Investors are cautioned not to put undue reliance on forward-looking statements. The company disclaims any obligation to update forward-looking statements.
CRITICAL ACCOUNTING POLICIES
Mine Development Expenditures - Capitalization and Amortization
Mine development expenditures incurred to date to increase existing production, develop new orebodies 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. Mine development expenditures consist of a vertical shaft, multiple surface adits and underground infrastructure development including footwall laterals, ramps, rail and transportation, electrical and ventilation systems, shop facilities, material handling areas, ore handling facilities, dewatering and pumping facilities. These facilities are required not only for current operations, but also for all future planned operations. Accordingly, these costs are amortized over the company’s estimated proven and probable ore reserves. The company’s proven reserves are generally expected to be extracted utilizing its existing mine development infrastructure. Additional capital expenditures will be required to access the company’s estimated probable ore reserves. These anticipated capital expenditures are not included in the current calculation of depreciation and amortization.
The company calculates amortization of capitalized mine development by the application of an amortization rate to current production. The amortization rate is based upon un-amortized expenditures and proven and probable ore reserves, as defined by the Securities and Exchange Commission industry guidelines, as of the beginning of the period. Capital expenditures are added to un-amortized capitalized cost as the assets are placed into service. Changes in proven and probable ore reserves are accounted for, in calculating the amortization rate, as a prospective change in estimate. Proven and probable ore reserves and the future benefit of capitalized mine development expenditures are based on significant management assumptions. Any changes in these assumptions, such as a change in the mine plan or a change in estimates of proven and probable reserves, could have a material effect on the expected period of benefit resulting in a potentially significant change in the amortization rate and/or the valuation of the related assets.
Mine development expenditures, ore reserves and mine development amortization expense are separately determined for each of the company’s mines. Based on current mining rates, and existing ore reserves, the Stillwater Mine and the East Boulder Mine have estimated productive lives of approximately 24 and 48 years respectively, at December 31, 2002.
As the company’s mines approach their closing stages, the remaining un-amortized mine development expenditures in addition to future development expenditures necessary to access all remaining proven and probable reserves will be amortized over a declining amount of reserves and, accordingly, the amortization rate per unit of production is expected to increase. The anticipated increase in the amortization rate per unit of production is reflective of the increasing accumulated cost of accessing ore in new areas of the mine. The company expects that future capitalized development expenditures necessary to access these remaining proven and probable ore reserves will decline as the properties reach the end of the expected mine lives. The expected decrease in the level of capitalized mine development expenditures during the closing stages may moderate increases in the amortization rate per unit of production.
Expenditures incurred to sustain existing production and access specific reserve blocks or stopes provide benefit to ore reserve production over limited periods of time and, accordingly, are charged to operations as incurred. These costs include ramp and stope access excavations from primary haulage levels (footwall laterals), stope material rehandling/laydown excavations, stope ore and waste pass excavations and chute installations, stope ventilation raise excavations and stope utility and pipe raise excavations.
Mining operations are inherently capital intensive, generally requiring substantial capital investment for the initial and concurrent development and preparation of the mine. Many of these expenditures are necessarily incurred well in advance of actual extraction of ore. Other development costs occur contemporaneously with mining activities. Underground mining operations such as those conducted by the company require driving tunnels and sinking shafts that provide access to the underground orebody and construction and development of infrastructure, including electrical and ventilation systems, rail and other forms of transportation, shop facilities, material handling areas and hoisting systems. Ore mining and removal operations require significant underground facilities used to conduct mining operations and to transport the ore out of the mine to processing facilities located above ground at the mine mouth.
Contemporaneously, as ore is mined, additional ongoing development is undertaken to provide access to the extension of the ore body, allowing additional ore to be produced. In addition to the development costs that have been previously incurred, these ongoing development expenditures are necessary to access all ore that is expected to be mined.
The company’s proven ore reserves are based on interpolation between closely spaced diamond drill holes which intersect the J-M Reef and reflect the information required for detailed mine planning. Probable ore reserves are based on interpolation between sample
points where sample spacing is greater than that for proven reserves or extrapolation from sample points. A significant portion of the probable ore reserves are based on extrapolation. The probable ore reserve areas are expected to be converted to proven ore reserves as the mine is developed. The factors used for determining the amount of probable ore reserves are estimated based on statistical analysis of the diamond drilling adjacent to these areas. The actual results for specific reserve blocks may be different than that estimated in the determination of probable ore reserves. Any changes in these assumptions could have a material effect on the estimates of probable ore reserves to be recovered over the life of the mine resulting in a potentially significant change in the amortization rate and/or the valuation of the related assets.
Asset Impairment
The company follows Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured as the amount by which the asset-carrying value exceeds fair value. Fair value is determined using estimated discounted future cash flow analysis. Future cash flows include estimates of recoverable ounces, platinum and palladium prices (considering current and historical prices, price trends and related factors), production levels, capital and reclamation expenditures, all based on detailed life-of-mine plans derived from engineering reports. In estimating future cash flows, assets are grouped together at each individual mine property which is the lowest level for which there are identifiable cash flows that are largely independent of cash flows from other asset groups. Assumptions underlying future cash flows are subject to risks and uncertainties. Any differences between significant assumptions and market conditions such as declining PGM prices, lower than expected recoverable ounces, and/or the company’s performance could have a material effect on the company’s ability to recover the carrying amounts of its long lived assets resulting in potential impairment charges. As of December 31, 2002, the company does not believe that any impairments of its long-lived assets have occurred.
For the calendar years ended December 31, 2002, 2001 and 2000, the company realized combined PGM prices of $454, $554 and $541 per ounce, respectively. Based upon the company’s mine plans, an asset impairment could potentially be required at a combined realized PGM price below a three-year average of approximately $400 per ounce. However, should estimated projected prices fall below that level, the company would expect to modify its mine plans to optimize its operations, and thereby the recovery of its capitalized costs. During the first two months of 2003, based upon market prices and giving effect to the company’s marketing contracts, it realized a combined PGM price of $416 per ounce sold.
Income Taxes
Income taxes are determined using the asset and liability approach in accordance with the provisions of 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The company expects the deferred tax assets at December 31, 2002 to be realized as a result of projected income from future operations and reversal of existing taxable temporary differences. Any differences between the assumptions used in management’s analysis and market conditions, such as declining PGM prices and lower recoverable ounces, that would effect the company’s future taxable income could have a material effect on the ability of the company to fully realize the benefit of its deferred tax assets. There was no valuation allowance recorded at December 31, 2002 because it is more likely than not that all deferred tax assets will be realized.
Reclamation Liabilities
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 bonding liabilities total approximately $20.3 million. The current bond amount is an estimate of reclamation and closure costs as projected five years into the future. As such, the regulatory agencies will review the bonding requirements and reclamation estimates on a 5-year rotation or anytime a major
amendment to the operating permits is approved. The company expects that the Stillwater bond will be reviewed and adjusted by the Agencies during 2003 and will, in all likelihood, be increased. Any differences between the required bonded amounts and actual post-closure reclamation and site restoration costs could have a material effect on the company’s estimated liability resulting in an increase in the recorded amount. The accrued reclamation liability was approximately $1.9 million at December 31, 2002.
Hedging Program
Effective January 1, 2001, the company adopted the FASB SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 138, Accounting for Derivative Instruments and Certain Hedging Activities, an amendment to SFAS No. 133. SFAS Nos. 133 and 138 require that derivatives be reported on the balance sheet at fair value and, if the derivative is not designated as a hedging instrument, changes in fair value must be recognized in earnings in the period of change. If the derivative is designated as a hedge and to the extent such hedge is determined to be effective, changes in fair value are either (a) offset by the change in fair value of the hedged asset or liability (if applicable) or (b) reported as a component of other comprehensive income in the period of change, and subsequently recognized in the determination of net income in the period the offsetting hedged transaction occurs. The company primarily uses derivatives to hedge metal prices and manage interest rate risk. As of December 31, 2002 there are no outstanding derivatives associated with commodity instruments. As of December 31, 2002, the outstanding interest rate swaps are valued at an unrealized loss of $1.4 million, net of tax, and are reported as a component of accumulated other comprehensive income.
ITEM 7A
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The company is exposed to market risk, including the effects of adverse changes in metal prices and interest rates as discussed below.
COMMODITY PRICE RISK
The company produces and sells palladium, platinum and associated byproduct metals directly to its customers and also through third parties. As a result, financial risks are materially affected when prices for these commodities fluctuate. In order to manage commodity price risk and to reduce the impact of negative fluctuation in prices, the company enters into long-term contracts and uses various derivative financial instruments. Because the company hedges only with instruments that have a high correlation with the value of the hedged transactions, changes in derivatives’ fair value are expected to be offset by changes in the value of the hedged transaction.
The company has entered into long-term sales contracts with General Motors Corporation, Ford Motor Company and Mitsubishi Corporation. The contracts apply to the portions of the company’s production over the period through December 2010 and provide for a floor and ceiling price structure. See “Business and Properties- Sales and Hedging Activities”.
As of December 31, 2002, the company had no metal committed for future delivery under either forward delivery contracts or under put and call option strategies. The company utilizes financially settled forwards and cashless put and call option collars. Under financially settled forwards, at each settlement date, the company receives the difference between the forward price and the market price if the market price is below the forward price and the company pays the difference between the forward price and the market price if the market price is above the forward price. The company’s financially settled forwards are settled at maturity. Under cashless put and call option collars, at each settlement, the company receives the difference between the put price and the market price if the market price is below the put price and the company pays the difference between the call price and the market price of the market price is above the call price. See Note 12 to the consolidated financial statements attached hereto for additional information about long-term sales contracts.
INTEREST RATE RISK
During the first quarter of 2002, the company entered into two identical interest rate swap agreements. These swaps fixed the interest rate on $100 million of the company’s debt. The interest rate swap agreements were effective March 4, 2002 and mature on March 4, 2004. The agreements require the company to pay interest at a fixed rate of 3.67% and receive interest at a rate based on London Interbank Offered Rate (LIBOR), which is adjusted on a quarterly basis. The adjusted quarterly rate at December 31, 2002 was 1.43%. Therefore, the company is exposed to changes in interest rates on the portion of its credit facility in excess of $100 million, since the credit facility carries a variable interest rate based upon LIBOR. As of December 31, 2002, the company had $57.1
million and $129.8 million outstanding under the Term A and Term B loan facilities, respectively, bearing interest at 5.06% and 6.75% for the Term A and Term B loan facilities, respectively. During 2002, the company entered into a letter of credit in the amount of $7.5 million, which reduces amounts available under the revolving credit facility at December 31, 2002, bearing interest at 3.375% on the unadvanced amount.
ITEM 8
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying consolidated 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 and its subsidiary 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 and state regulatory agencies. Access to the Audit Committee is given to the company’s financial and accounting officers and independent accountants.
Francis R. McAllister
Chairman of the Board and Chief Executive
Officer
Thomas T. Angelos
Controller and Principal Accounting Officer
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The company’s Audit Committee is comprised of three independent members. Each member is able to read and understand fundamental financial statements and at least one such member has past employment experience in finance or accounting or other comparable experience. The Audit Committee reviews the accounting principles and procedures of the company and its annual financial reports and statements, recommends to the Board of Directors the engagement of the company’s independent accountants, reviews with the independent accountants the plans and results of the auditing engagement and considers the independence of the company’s auditors.
The main function of the Audit Committee is to ensure that effective accounting policies are implemented and that internal controls are put in place in order to deter fraud, anticipate financial risks and promote accurate, high quality and timely disclosure of financial and other material information to the public markets, the Board and the stockholders. The Audit Committee also reviews and recommends to the Board the approval of the annual financial statements and provides a forum, independent of management, where the company’s auditors can communicate any issues of concern.
The independent members of the Audit Committee believe that the present composition of the Committee accomplishes all of the necessary goals and functions of an audit committee as recommended by the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees and adopted by the U.S. stock exchanges and the Securities & Exchange Commission. In accordance with the promulgated new rules regarding audit committees, the Audit Committee has adopted a formal, written charter approved by the full Board of Directors of the company. The charter specifies the scope of the Audit Committee’s responsibilities and how it should carry out those responsibilities. The Audit Committee has reviewed and discussed the audited consolidated financial statements of the company for the fiscal year ended December 31, 2002, with the company’s management. The Audit Committee has discussed with KPMG LLP, the company’s independent public accountants, the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees) as amended by SAS No. 90 (Audit Committee Communications). The Audit Committee has also received the written disclosures from KPMG LLP required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees), has considered whether the provision of non-audit services provided by KPMG LLP to the company is compatible with maintaining KPMG LLP’s independence and has discussed the independence of KPMG LLP with that firm.
In reliance on the reviews and discussions referred to above, and subject to the limitations on the role and responsibilities of the committee set forth in its charter, based on the review of the company’s financial statements, accounting system and its accounting policies and procedures and discussions with the company’s auditors for the fiscal year ended December 31, 2002, the Audit Committee recommended to the Board of Directors that the consolidated financial statements for the fiscal year ended December 31, 2002 be included in the company’s Annual Report on Form 10-K.
Sheryl K. Pressler, Chairperson
Richard E. Gilbert
Patrick M. James
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Stillwater Mining Company:
We have audited the accompanying consolidated balance sheets of Stillwater Mining Company and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stillwater Mining Company and subsidiary as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Billings, Montana
January 17, 2003, except for the first, fifth and sixth paragraphs of note 6, the third paragraph of note 15 and note 17 for which the date is March 20, 2003
STILLWATER MINING COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
The accompanying notes are an integral part of the consolidated financial statements.
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
STILLWATER MINING COMPANY
NOTES TO THE CONSOLIDATED 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 one of the largest deposits of platinum group metals (PGMs) in the world.
The company’s operations consist of the Stillwater Mine located on the J-M Reef in Nye, Montana, the East Boulder Mine, which commenced commercial production during 2002, located at the western end of the J-M Reef in Sweet Grass County, Montana and a smelter and refinery located in Columbus, Montana.
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, mineral reserve estimation, environmental obligations, government regulations, ownership of and access to mineral reserves and compliance with credit agreement.
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 the current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all cash balances and all highly liquid investments purchased with a maturity of three months or less.
RESTRICTED CASH EQUIVALENTS
Restricted cash equivalents consist of cash equivalents which have been pledged as collateral on two letters of credit issued during 2002. The restrictions on the balances lapse upon expiration of the letters of credit, which currently have terms of less than one year.
INVENTORIES
Metals inventories are carried at the lower of current market value or average unit cost. Production costs include the cost of direct labor and materials, depreciation and amortization, as well as overhead costs 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
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 if shorter. Maintenance and repairs are charged to operations as incurred. Mine development expenditures incurred to date 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, as defined by the Securities and Exchange Commission industry guidelines. Mine development expenditures consist of a vertical shaft, multiple surface adits and underground infrastructure development including footwall laterals, rail and
transportation, electrical, ventilation, shop facilities, material handling areas, ore handling facilities, dewatering and pumping facilities. These facilities are required not only for current operations, but also for all future planned operations. Accordingly, these costs are amortized over the company’s estimated proven and probable reserves. The company’s proven reserves are generally expected to be extracted utilizing its existing mine development infrastructure. Additional capital expenditures will be required to access the company’s estimated probable reserves.
The company calculates amortization of capitalized mine development by the application of an amortization rate to current production. The amortization rate is based upon un-amortized expenditures and proven and probable reserves, as defined by the U.S. Securities and Exchange Commission industry guidelines, as of the beginning of the period. Capital expenditures are added to un-amortized capitalized cost as the assets are placed into service. Changes in proven and probable reserves are accounted for, in calculating the amortization rate, as a prospective change in estimate. Proven and probable reserves and the future benefit of capitalized mine development expenditures are based on significant management assumptions. Any changes in these assumptions, such as a change in mine plan or a change in estimated proven and probable reserves, could have a material effect on the expected period of benefit resulting in a potentially significant change in the amortization rate and/or the valuation of the related assets.
Mine development expenditures, ore reserves and mine development amortization expense are separately determined for each of the company’s mines. Based on current mining rates and existing ore reserves, the Stillwater Mine and East Boulder Mine have estimated productive lives of approximately 24 and 48 years, respectively, at December 31, 2002.
Expenditures incurred to sustain existing production and access specific reserve blocks or stopes provide benefit to ore reserve production over limited periods of time and, accordingly, are charged to operations as incurred. Interest is capitalized on expenditures related to construction or development projects and amortized using the same method as the related asset. Interest capitalization is discontinued when the asset is placed into operation or development ceases. Exploration costs are expensed as incurred.
ASSET IMPAIRMENT
Effective January 1, 2002, the company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, it retains many of the fundamental provisions of that Statement. The adoption of SFAS No. 144 did not have an impact on the company’s financial position or results of operations as of and for the year ended December 31, 2002. In accordance with SFAS No. 144, the company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. An impairment loss is measured as the amount by which the asset-carrying value exceeds fair value. Fair value is determined using an estimated discounted future cash flow analysis. Future cash flows include estimates of recoverable ounces, platinum and palladium prices (considering current and historical prices, price trends, price guarantees under marketing contracts (See Note 12 - Long-Term Sales Contracts) and related factors), production levels, capital and reclamation expenditures, all based on detailed life-of-mine plans derived from engineering reports. In estimating future cash flows, assets are grouped together at each individual mine property which is the lowest level for which there are identifiable cash flows that are largely independent of cash flows from other asset groups. Assumptions underlying future cash flows are subject to risks and uncertainties. Any differences between significant assumptions and market conditions and/or the company’s performance could have a material effect on the company’s financial position and results of operations. As of December 31, 2002, the company does not believe that any impairment of its long-lived assets have occurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The company’s non-derivative financial instruments consist primarily of cash, accounts receivable, metals repurchase agreements payable, debt and capital lease obligations. The carrying amounts of cash, accounts receivable and metals repurchase agreements payable approximate fair value due to their short maturities. The carrying amounts of long-term debt approximate fair values as interest rates on the majority of such debt are variable. At December 31, 2002 and 2001, based on rates available for similar types of obligations, the fair values of capital lease obligations were not materially different from their carrying amounts.
REVENUE RECOGNITION
Revenues consist of the sales of palladium and platinum, including any realized hedging gains or losses, and are reduced by sales discounts associated with long-term sales contracts. Byproduct metals revenue and secondary materials processing revenue are included as a reduction to the cost of metals sold rather than an increase in revenue.
Effective January 1, 2000, the company changed its method of accounting for revenue recognition. Pursuant to the guidance in Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition for Financial Statements, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectability is probable. Under the terms of sales contracts and purchase orders received from customers, the company recognizes revenue when the product is in a refined and saleable form and title passes, which is typically when the product is transferred from the account of the company to the account of the customer. Sales discounts are recognized when the related revenue is recorded.
The company previously recognized revenue when product was shipped from the company’s refinery to an external refiner. The implementation of SAB No. 101 was treated as a change in accounting principle with the cumulative effect of the change on retained earnings at the beginning of 2000 included in restated net income of the first interim period of 2000. The effect of the accounting change on 2000 was to decrease net income by approximately $10.3 million ($0.26 per basic and diluted share), which includes the cumulative effect of $6.4 million ($0.16 per basic and diluted share). The $6.4 million cumulative effect adjustment includes $26 million of revenue previously recognized in 1999, which is reflected as revenue in 2000 under the company’s new method of accounting.
Effective January 1, 2000, the company also implemented Issue No. 00-14 of the FASB’s Emerging Issues Task Force (EITF), Accounting for Certain Sales Incentives. The consensus reached by the FASB EITF requires a company to classify any cash sales discounts as a reduction in revenue. Prior to the implementation of EITF 00-14, the company classified sales discounts associated with long-term sales contracts as a component of cost of metals sold.
HEDGING PROGRAM
From time to time, the company enters into derivative financial instruments, including fixed forwards, cashless put and call option collars and financially settled forwards to manage the effect of changes in the prices of palladium and platinum on the company’s revenue. These instruments are accounted for as hedges when the instrument is designated as a hedge of the related production and there exists a high degree of correlation between the fair value of the instrument and the fair value of the hedged production. The degree of correlation is assessed periodically for effectiveness or ineffectiveness. In the event that an instrument no longer meets the criteria for hedge designation, any subsequent gain or loss on the instrument is recognized immediately in earnings. Otherwise, gains or losses related to hedging transactions are recognized as adjustments to the revenue recorded for the related production. If an instrument is settled early, any gains or losses are deferred and recognized as adjustments to the revenue recorded for the related hedged production. Costs associated with the purchase of certain hedging instruments are deferred and amortized against revenue related to the hedged production.
Effective January 1, 2001, the company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 138, Accounting for Derivative Instruments and Certain Hedging Activities, an amendment to SFAS No. 133. SFAS Nos. 133 and 138 require that derivatives be reported on the balance sheet at fair value and, if the derivative is not designated as a hedging instrument, changes in fair value must be recognized in earnings in the period of change. If the derivative is designated as a hedge and to the extent such hedge is determined to be effective, changes in fair value are either (a) offset by the change in fair value of the hedged asset or liability (if applicable) or (b) reported as a component of other comprehensive income in the period of change, and subsequently recognized in earnings when the offsetting hedged transaction occurs. In accordance with the transition provisions of SFAS No. 133, the company recorded a net-of-tax cumulative-effect-type loss adjustment of $7.1 million in accumulated other comprehensive loss to recognize at fair value all derivatives that are designated as cash-flow hedging instruments at January 1, 2001.
METALS REPURCHASE TRANSACTIONS
The company may enter into transactions for the sale and repurchase of excess metals held in the company’s account at third party refineries. Under these transactions, the company will enter into an agreement to sell a certain number of ounces to counter parties at the then current market price. The company will simultaneously enter into a separate agreement with the same counter party, to repurchase the same number of ounces at the same price at the repurchase date. The company records a liability for the amount to be
paid to repurchase the metals upon entering into the agreement.
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. At December 31, 2002, the company was required to post surety bonds with the State of Montana in the amount of $20.3 million, which also represents the company’s current estimate of mine closure and reclamation costs for current operations. The accrued reclamation liability, included in other noncurrent liabilities, was approximately $1.9 million and $1.4 million, respectively at December 31, 2002 and 2001. Effective January 1, 2003, the company will account for reclamation liabilities under SFAS No. 143, Accounting for Asset Retirement Obligations. See Note 3 for a description of SFAS No. 143.
INCOME TAXES
Income taxes are determined using the asset and liability approach in accordance with the provisions of 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
STOCK-BASED COMPENSATION
The company has elected to account for stock options and other stock-based compensation awards using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, because stock options are granted at fair market value, no compensation expense has been recognized for stock options issued under the company’s stock option plans. The company records compensation expense for other stock-based compensation awards over the vesting periods. The company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the company has made pro forma disclosures of net income and earnings per share as if the fair value based method of accounting, as set forth 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 is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. No adjustments were made to reported net income in the computation of earnings per share.
COMPREHENSIVE INCOME
Comprehensive income includes net income, as well as other changes in stockholders’ equity that result from transactions and events other than those with stockholders. The company’s only significant element of other comprehensive income is unrealized gains and losses on derivative financial instruments.
START-UP COSTS
The costs of start-up activities, including organization costs, are expensed as incurred.
DEBT ISSUANCE COSTS
Costs associated with the issuance of debt are included in other noncurrent assets and are amortized over the term of the related debt using the effective interest method.
STOCK ISSUANCE COSTS
Payment of specific costs directly attributable to a proposed sale of the company’s common stock are capitalized and included in other current assets. Upon issuance of the common stock, the capitalized costs are reclassified to equity as an offset to the proceeds.
USE OF ESTIMATES
The preparation of the company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 utilized for depreciation, amortization and accretion calculations, future cash flows from long-lived assets and accruals for restructuring costs. Actual results could differ from these estimates.
NOTE 3
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the company will recognize a gain or loss on settlement.
SFAS No. 143 will be adopted on January 1, 2003. Upon adoption, the company will increase its post-closure reclamation liability by approximately $1.9 million, increase the carrying value of its assets by approximately $1.2 million and record a cumulative effect adjustment to decrease income by $0.7 million ($0.4 million net of tax).
NOTE 4
INVENTORIES
NOTE 5
PROPERTY, PLANT AND EQUIPMENT
The company’s total capital expenditures were as follows:
All capital expenditures related to East Boulder for fiscal years ending December 31, 2001 and 2000 were included in construction-in-progress prior to the start-up of the East Boulder Mine on January 1, 2002. For fiscal year ending December 31, 2001, East Boulder capital expenditures are net of proceeds of $7.1 million generated during construction and development activities.
NOTE 6
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
CREDIT FACILITY
In February 2001, the company entered into a $250 million credit facility with a syndicate of financial institutions which replaced a previous $175 million bank facility. The credit facility has been amended or waivers have been obtained seven times with the most recent amendment effective March 20, 2003. The credit facility provides for a $65 million five-year term loan facility (Term A), a $135 million seven-year term loan facility (Term B) and a $25 million revolving credit facility (reduced from $50 million at the company’s request as of March 20, 2003). Amortization of the term loan facilities commenced on March 31, 2002. The final maturity of the Term A facility and revolving credit facility is December 30, 2005. The Term B facility final maturity date is December 31, 2007.
As of December 31, 2002, the company has $57.1 million and $129.8 million outstanding under the Term A and Term B facilities, respectively, bearing interest at 5.06% and 6.75%, respectively. During 2002, the company obtained a letter of credit in the amount of $7.5 million, which reduces amounts available under the revolving credit facility at December 31, 2002, bearing interest at 3.375%. The revolving credit facility requires an annual commitment fee of 0.5% on the remaining unadvanced amount. Of the $25 million revolving credit facility, $17.5 million remains available to the company.
The loans are 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 were used to finance a portion of the company’s expansion plan. Proceeds of the revolving credit facility are being used for general corporate and working capital needs. At the company’s option, the Term A facility bears interest at the London Interbank Offered Rate (LIBOR) plus a margin of 3.0% to 3.375% or an alternate base rate plus a margin of 2.0% to 2.375%, in each case where the margin is adjusted depending upon the company’s ratio of debt to operating cash flow. The Term B facility bears interest at LIBOR, subject to a 2.5% minimum, plus a margin of 4.25% or an alternate base rate plus a margin of 3.25%. Substantially all the property and assets of the company and its subsidiaries and the stock of the company’s subsidiaries are pledged as security for the credit facility.
Covenants in the credit facility include restrictions on: (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 company’s mine plan); (7) refinancing or prepayment of subordinated debt; (8) changes in the nature of business conducted or ceasing operations at the principal operating properties; and (9) commodities hedging based upon annual palladium and platinum production. The company is also subject to financial covenants including a debt to operating cash flow ratio, a debt service coverage ratio and a debt to equity ratio.
Events of default in the credit facility include: (1) a cross-default to other indebtedness of the company; (2) any material modification to the life-of-mine plans; (3) a change of control of the company other than the Norilsk Nickel transaction (see note 15); (4) the failure to maintain agreed-upon annual PGM production levels; (5) any breach or modification of any of the sales contracts; and (6) failure to consummate by January 2, 2004 the Norilsk Nickel transaction (see notes 15 and 17) or an alternate transaction which provides adequate levels of funding to the company through the issuance of equity or subordinated debt.
During the fourth quarter of 2002, the company determined that it would likely not be in compliance with a minimum production covenant for 2002 in its credit agreement. As a result, the company obtained a waiver from its lenders dated December 31, 2002, which reduced the trailing four quarters production covenant requirement from 620,000 ounces to 612,500 ounces of palladium and platinum. As a result of the waiver, the company was in compliance with all production and financial covenants of the credit agreement as of December 31, 2002. Subsequent to year-end, the company amended its credit agreement (see note 17).
The following is a schedule by year of required principal payments to be made in quarterly installments on the amounts outstanding under the credit facility at December 31, 2002:
EQUIPMENT LEASE AGREEMENTS
The company leases certain underground mining equipment under seven-year leasing agreements containing purchase options that can be exercised at the end of the original lease terms. The following is a schedule by year of future minimum lease payments under capital leases together with the present value of the net minimum lease payments:
EXEMPT FACILITY REVENUE BONDS
On July 6, 2000, the company completed a $30 million offering of Exempt Facility Revenue Bonds, Series 2000, through the State of Montana Board of Investments. The bonds were issued by the State of Montana Board of Investments to finance a portion of the costs of constructing and equipping certain sewage and solid waste disposal facilities at both the Stillwater Mine and the East Boulder Mine. The bonds mature on July 1, 2020 and have a stated interest rate of 8.00% with interest paid semi-annually. The bonds have an effective interest rate of 8.57%. Net proceeds from the offering were $28.7 million. The balance outstanding at December 31, 2002 and 2001 was $29.3 million, which is net of the unamortized discount of $0.7 million.
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, 2002 and 2001 was $1.0 million and $1.1 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 2003 and 2004 are approximately $0.1 million in each year and during the years 2005 through 2007 are approximately $0.2 million in each year. Scheduled principal repayments thereafter total $0.2 million.
CASH PAID FOR INTEREST
The company made cash payments for interest of $15.4 million, $17.0 million and $11.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE 7
RESTRUCTURING COSTS
In the fourth quarter of 2001, the company began implementing a revised operating plan, which included a reduction of the company’s previously planned capital expenditures and production levels. In accordance with the plan, the company terminated certain contracts related to ongoing mine development and accrued a pre-tax charge of approximately $11.0 million for early contract termination costs. The accrual was based on the termination provisions of the related contracts. During 2002, the company reduced its accrued restructuring costs resulting in a net gain of $7.0 million primarily as a result of negotiations of certain termination clauses of the construction contracts. Any adjustments to the original estimate of the accrual have been included in the company’s results of operations when determined.
In accordance with the revised operating plan, during the second quarter of 2002, the company eliminated six management positions and recorded an addition to the restructuring accrual of $1.1 million.
The following summary sets forth the changes of the restructuring accrual during 2002:
NOTE 8
EMPLOYEE BENEFIT PLANS
The company has adopted two savings plans, which qualify under section 401(k) of the U.S. Internal Revenue Code covering all non-bargaining and bargaining employees. Effective January 1, 2002, the company amended the provisions of these plans. Under the amended provisions, employees may elect to contribute up to 20% of their cash compensation, subject to the Employee Retirement Income Security Act of 1974 (ERISA) limitations effective January 1, 2002. The company is required to make matching contributions equal to 100% of the employee’s contribution up to 6% of the employee’s compensation. Matching contributions can be paid with common stock of the company. During 2002, the company issued 353,976 shares of common stock with a market value of approximately $3.4 million to match employees’ contributions of $3.4 million. Cash contributions made to the plans were $0.4 million, $3.8 million and $2.4 million in 2002, 2001 and 2000, respectively.
NOTE 9
COMMON STOCK PLANS AND AGREEMENTS
STOCK PLAN
The company sponsors stock option plans that enable the company to grant stock options or restricted stock to employees and non-employee directors. As of December 31, 2002, there were 5,550,000 shares of common stock authorized for issuance under the plans.
Awards granted under the plans may consist of incentive stock options (ISOs) or non-qualified stock options (NQSOs), stock appreciation rights (SARs), 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. Officers’ and directors’ options expire ten years after the date of grant. All other options expire five to ten years after the date of grant, depending upon the original grant date.
There were approximately 640,000 shares available for grant as of December 31, 2002. During 2002, the company granted 135,119 shares of restricted stock to certain of its officers and employees, of which 46,344 shares vested during 2002. The remaining shares will vest January 2, 2005. The market value of the restricted stock awarded totaled approximately $2.6 million on the grant date and was recorded as a separate component of stockholders’ equity. Approximately 17,000 shares of restricted stock were forfeited during 2002. The company is amortizing unearned compensation over the vesting periods. During 2002, approximately $464,000 was recognized as compensation expense and approximately $874,000 was amortized against a liability that had been recorded at December 31, 2001.
Stock option activity for the years ended December 31, 2002, 2001 and 2000 is summarized as follows:
The following table summarizes information for outstanding and exercisable options as of December 31, 2002:
The company has elected to follow the intrinsic value method of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock options. Under APB Opinion 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 income and earnings per share is required by SFAS No. 123 and has been determined as if the company had accounted for its stock options under the fair value method of SFAS No. 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.
The estimated fair value of the options is amortized to expense over the vesting period of the options for purposes of the following pro forma disclosures:
The effect of outstanding stock options on diluted weighted average shares outstanding was 74,248, 481,442 and 743,060 shares for 2002, 2001 and 2000, respectively. Outstanding options to purchase 2,416,238, 820,616 and 65,575 shares of common stock were excluded from the computation of diluted earnings per share for the years ended December 31, 2002, 2001 and 2000, respectively, because the effect of inclusion would have been antidilutive using the treasury stock method.
The effect of outstanding restricted stock was to increase diluted weighted average shares outstanding by 29,661 shares for 2002.
RIGHTS AGREEMENT
In October 1995, the Board of Directors of the company adopted a Rights Agreement under which Stillwater stockholders 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 $53 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 stockholder 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 company amended the Rights Agreement effective November 20, 2002, whereby the transaction with MMC Norilsk Nickel will not cause the Rights to become exercisable. The Rights expire on October 26, 2005 unless earlier redeemed or exercised.
NOTE 10
INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
The components of the company’s deferred tax liabilities (assets) are comprised of the following temporary differences and carryforwards:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The company expects the deferred tax assets at December 31, 2002 to be realized as a result of projected income from future operations and reversal of existing taxable temporary differences. There was no valuation allowance recorded in 2002 or 2001 because it is more likely than not that all deferred tax assets will be realized. A reconciliation from the federal income tax provision at the applicable statutory income tax rate to the effective rate is as follows:
At December 31, 2002, the company had approximately $187 million of regular tax net operating loss carryforwards expiring during 2009 through 2022. The company believes that it is more likely than not that these carryforwards will be utilized to reduce future federal income tax liabilities. Management can and would implement tax planning strategies to prevent these carryforwards from expiring.
The company made cash payments for income taxes of $0.4 million, $0.4 million and $0.7 million for the years ended December 31, 2002, 2001 and 2000, respectively.
NOTE 11
CAPITAL TRANSACTIONS
On January 31, 2002, the company completed a $60 million private placement of its common stock involving approximately 4.3 million shares or approximately 10% of the outstanding shares after such issuance. The price of $14 per share represents an approximate 10% discount from the closing price of $15.61 on January 29, 2002. Proceeds from the offering were approximately $54.0 million, net of offering costs of $6.0 million. The proceeds were used to pay down $25 million under the revolving credit facility and the remaining proceeds were used for general corporate purposes.
NOTE 12
LONG-TERM SALES CONTRACTS
In September 1998, the company entered into long-term sales contracts with General Motors Corporation, Ford Motor Company and Mitsubishi Corporation. In 2000 and 2001, the company amended these contracts to extend the terms and to modify the pricing mechanisms. Under the revised terms, the company committed between 80% to 100% of its annual palladium production. Palladium sales are priced at a discount to market, with various floor prices averaging approximately $339 to $400 per ounce on 80% to 100% of its production from 2003 to 2010. The company agreed to various maximum palladium prices averaging approximately $400 to $975 per ounce on 16% to 39% of its production from 2003 to 2010.
In addition, the company committed between 70% to 100% of its annual platinum production. Platinum sales are priced at a discount to market, subject to minimum prices averaging approximately $401 to $425 per ounce on 70% to 100% of its production from 2003 to 2010. The company agreed to various maximum prices averaging approximately $554 to $856 per ounce on 14% to 33% of its production from 2003 to 2010.
The sales contracts provide for adjustments to ounces committed based on actual production. The sales contracts contain
termination provisions that allow the purchasers to terminate in the event the company breaches certain provisions of the contracts and the breach is not cured within periods ranging from ten to thirty days after notice by the purchaser. The long-term sales contracts are not subject to the requirements of SFAS No. 133 as the contracts qualify for the normal sales exception provided in SFAS No. 138 since they will not settle net and will result in physical delivery. The floors and ceilings embedded within the long-term sales contracts are treated as part of the host contract, not a separate derivative instrument and are therefore also not subject to the requirements of SFAS No. 133. The floor and ceiling price structures are summarized below:
NOTE 13
COMMODITY INSTRUMENTS
The company uses various derivative financial instruments to manage the company’s exposure to market prices associated with changes in palladium and platinum commodity prices and interest rates. Because the company hedges only with instruments that have a high correlation with the value of the hedged transactions, changes in derivatives’ fair value are expected to be offset by changes in the value of the hedged transaction.
The company utilizes the following types of derivative financial instruments: fixed forwards, cashless put and call option collars, financially settled forwards and interest rate swaps. For derivative instruments, the company designates derivatives as a hedge of a forecasted transaction (“cash flow” hedge). Currently, all derivatives have been assessed as highly effective cash-flow hedges that link to a specific firm commitment or forecasted transaction. Changes in fair value of derivatives that are highly effective as hedges and that are designated and qualified as a cash-flow hedge are reported in other comprehensive income until the related specific firm commitments or forecasted transactions occur. Hedging gains or (losses) on commodity instruments of $9.2 million, $5.5 million and ($15.8) million were recognized as an adjustment to revenue in 2002, 2001 and 2000, respectively. Hedging losses on interest rate swaps of $1.5 million were recognized as additional interest expense during 2002.
The company enters into cashless put and call option collars under which the company receives the difference between the put price and the market price only if the market price is below the put price and the company pays the difference between the call price and the market price only if the market price is above the call price. The company’s put and call options are financially settled at maturity. Since the put/call instruments hedge forecasted transactions, they qualify for cash flow hedge accounting. They are considered to be highly effective since the intrinsic value of the put/call will offset the change in value associated with future production not subject to the long-term sales contract. The company recorded $2.4 million and $13.3 million in losses for the settlement of cashless put and call option collars in 2001 and 2000, respectively.
The company may enter into fixed forward contracts to sell metals at a future date and at a fixed price in order to reduce the risk associated with future metals prices for ounces produced in excess of the company’s long-term sales contracts. These instruments are considered to be highly effective derivatives that will qualify for cash flow hedge accounting since they are an “all-in-one-hedge” instrument, meaning that all of the components (ounces, delivery date, and price) are fixed as part of the original commitment. No fixed forward contracts were settled during 2002 and 2001. The company recorded $2.5 million in losses for the settlement of fixed forward contracts in 2000.
The company also enters into financially settled forwards. They differ from fixed forwards in that they are settled net in cash. The company uses the financially settled forwards as a mechanism to hedge the fluctuations in metal prices associated with future
production not subject to the long-term sales contracts. The financially settled forwards qualify as a cash flow hedge and are considered to be highly effective, since the change in the value of the financially settled forward will offset changes in the expected future cash flows related to future production not subject to the long-term sales contracts. The company recorded $9.2 million and $7.9 million in gains on the settlement of financially settled forwards in 2002 and 2001, respectively. No financially settled forwards were settled in 2000.
During the first quarter of 2002, the company entered into two identical interest rate swap agreements with a combined notional amount totaling $100 million. The interest rate swap agreements were effective March 4, 2002 and mature on March 4, 2004. The agreements require the company to pay interest at a fixed rate of 3.67% and receive interest at a rate based on London Interbank Offered Rate (LIBOR), which is adjusted on a quarterly basis. The adjusted quarterly rate at December 31, 2002 was 1.42%. The interest rate swap agreements qualify as a cash flow hedge and are considered to be highly effective since the change in the value of the interest rate swap will offset changes in the future cash flows related to interest payments on the company’s debt. As of December 31, 2002, the fair value of the interest rate swaps was a loss of $2.3 million ($1.4 million net of tax) of which the company expects to reclassify approximately $2.0 million to interest expense during the next 12 months.
In accordance with the transition provisions of SFAS No. 133, the company recorded a cumulative-effect-type loss adjustment of $10.0 million ($7.1 million net of tax) in accumulated other comprehensive loss to recognize at fair value all derivatives that are designated as cash-flow hedging instruments at January 1, 2001. At December 31, 2001, substantially all financially settled forwards outstanding were closed and cash had been received. The gains were deferred until the 2002 original contract settlement dates. The company reclassified to earnings the entire $9.5 million ($5.7 million net of tax) of unrealized gains that existed at December 31, 2001. The following summary sets forth the changes in other comprehensive income (loss) accumulated in stockholders’ equity during 2001 and 2002:
The net of tax balances in other accumulated comprehensive income (loss) at December 31, 2002 and 2001 were ($1.4) million and $5.7 million, respectively.
NOTE 14
COMMITMENTS AND CONTINGENCIES
REFINING AGREEMENTS
The company has contracted with two entities to refine its filter cake production. Even though there is a limited number of PGM refiners, the company believes that it 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 non-cancelable with terms of seven years and are classified as operating leases for financial reporting purposes. In September 2000, the company entered into an additional operating lease through the sale and leaseback of mining
equipment. The lease is non-cancelable with a term of five years and is classified as an operating lease for financial reporting purposes. In December 2001, the company entered into an additional operating lease through the sale and leaseback of mining equipment. The lease is cancelable after one year with a term of seven years and is classified as an operating lease for financial reporting purposes. Rental expense amounted to approximately $5.0 million, $2.1 million and $1.6 million in 2002, 2001 and 2000, respectively.
Future minimum lease payments for non-cancelable leases with terms in excess of one year are $3.4 million, $3.3 million, $2.5 million, $0.2 million and $0.5 million in 2003, 2004, 2005, 2006 and 2007 and thereafter, respectively.
SIGNIFICANT CUSTOMERS
Sales to significant customers represented approximately 97%, 96% and 91% of total revenues for the years ended December 31, 2002, 2001 and 2000, respectively.
LABOR UNION CONTRACT
As of December 31, 2002, the company had approximately 62% and 16% of its labor forces covered by collective bargaining agreements expiring June 30, 2004, and June 30, 2005, respectively.
LEGAL PROCEEDINGS
The company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the company’s consolidated financial position, results of operations or liquidity.
NOTE 15
STOCK PURCHASE AGREEMENT
On November 20, 2002, the company and MMC Norilsk Nickel (Norilsk Nickel), a Russian mining company, signed a definitive agreement whereby Norimet, a wholly-owned subsidiary of Norilsk Nickel, will acquire a 51% majority ownership in the company through the issuance of 45.5 million newly issued shares of the company’s common stock in exchange for $100 million cash and approximately 877,000 ounces of palladium, valued at $241 million based on the November 19, 2002, London PM fix of $275 per ounce. Under the agreement Norilsk Nickel will also commence a cash tender offer within 30 days of the closing to acquire additionally up to 10% of the currently outstanding shares of the company at a price of $7.50 per share if the company share price is below $7.50 per share during the 15 trading days after closing, which additional share purchase would increase Norilsk Nickel’s ownership in the company to approximately 56%. The total investment by Norilsk Nickel will be approximately $341 million as of November 19, 2002, which represents a value of $7.50 for each company share.
The agreement provides that the company and Norilsk Nickel will negotiate in good faith to enter into a PGM agreement within six months of the closing, whereby the company and Norilsk Nickel expect to enter into a PGM agreement, whereby the company will purchase at least one million ounces of palladium annually from Norilsk Nickel. The company intends that the metal received from Norilsk Nickel, as well as the metal purchased under the PGM agreement, will be sold to customers, depending upon market condition and the ability to place the metal pursuant to new long-term contracts. In an effort to minimize market risk, the company does not intend to agree to purchase any palladium from Norilsk Nickel before such long-term contracts are in place.
The transaction is subject to a number of conditions, including the expiration of the Hart-Scott-Rodino antitrust waiting period and other customary approvals. On March 20, 2003, the company received the necessary amendment under its credit agreement in connection with the transaction. The company is required to use 50% of the net cash proceeds from the sale of the palladium received in connection with the transaction to prepay the term loans. The remaining proceeds will be used, among other things, for general corporate purposes including the possible expansion of its East Boulder Mine. The transaction is anticipated to close in 2003.
NOTE 16
QUARTERLY DATA (UNAUDITED)
Quarterly earnings data for the years ended December 31, 2002 and 2001 were as follows:
NOTE 17
SUBSEQUENT EVENT
After December 31, 2002 the company began working with its lead banks to obtain waivers and amendments of various covenants under the credit facility due to: (1) the requirement to obtain lender approval of transactions which result in a change of control of the company, such as the Norilsk Nickel transaction (see note 15); (2) implementing a new long-range operating plan in the first quarter of 2003, which focuses on reducing operating and capital costs and, therefore, requiring the company to lower its 2003 PGM production target to 615,000 ounces. As a result of the modified operating plan and lower forecast production levels, the company determined that it would not likely be in compliance with certain of its covenants under the credit facility at March 31, 2003; (3) management’s concern that at the current low palladium prices and without access to additional capital provided by borrowings under the revolving credit facility, the company did not believe that its cash would be sufficient to maintain its projected liquidity requirements, including interest and principal payments required under the credit facility, through 2003.
On March 20, 2003, the company obtained an amendment to the credit agreement that, among other things, modifies certain production and financial covenants for the remaining term of the agreement and allows for the Norilsk Nickel transaction. The amendment also provides the company with access to the $17.5 million of availability under the revolving credit facility. This amendment modified covenants relating to the debt to EBITDA ratio, the debt service coverage ratio, production ounces and the minimum average primary development for the Stillwater and East Boulder Mines. During the first quarter of 2003, the company’s debt to EBITDA ratio may not be greater than 3.55:1.0, annual production for the company may not be less than 565,000 ounces, its debt service coverage ratio may not be less than 2.20:1.0, its average primary development with respect to the Stillwater Mine may not be less than 5,000 feet and its average primary development with respect to the East Boulder Mine may not be less than 1,900 feet. All such covenants thereafter change quarterly as further set forth in the credit agreement as amended. The amendment did not alter the debt to equity ratio, which, during the term of the credit agreement shall not be greater than 1.0:1.0. This amendment also modified the maximum capital expenditures permitted; during the fiscal year 2003, the company is permitted to make capital expenditures up to $57 million. Additionally, the developed proven ore reserves measure based on equivalent months of production was modified.
Pursuant to the credit agreement and further detailed in the amendment, the company is required to use $50 million of the $100 million cash proceeds received in the Norilsk Nickel transaction to prepay the term loan. In addition, the company must use 50% of the net proceeds from the sale of palladium received in the Norilsk Nickel transaction to prepay its term loans. In connection with this amendment, the company agreed to an amendment fee of 0.5% (approximately $1.1 million), and a 0.5% increase in the interest rate payable on the loans. As a result of the amendments, the company believes it will remain in full compliance with the credit agreement throughout 2003.
The company is currently working with regulatory authorities to obtain approval of the Norilsk Nickel transaction; however, no assurances can be given that this stock purchase transaction will be consummated. If the company is unable to consummate this transaction by January 2, 2004, or an alternate transaction which provides adequate levels of funding to the company through the issuance of equity or subordinated debt, it will be in default on the credit facility and the loan would become due immediately.
Management believes with the amendments and access to undrawn $17.5 million under the revolving credit facility, together with cash expected to be generated from operations will be adequate to meet the company’s liquidity needs through 2003.
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
Set forth below is certain information concerning the individuals who were executive officers of the company as of December 31, 2002.
Name
Age
Position
Francis R. McAllister
Chairman of the Board and Chief Executive Officer
James A. Sabala (1)
Vice President and Chief Financial Officer
John R. Stark
Vice President, Human Resources, Secretary and Corporate Counsel
Robert M. Taylor
Vice President, Mine Operations
Terrell I. Ackerman
Vice President, Planning and Process Operations
The following are brief biographies of the company’s executive officers and directors:
EXECUTIVE OFFICERS
Francis R. McAllister (age 60) was appointed Chairman of the Board and Chief Executive Officer of the company effective February 12, 2001. Mr. McAllister was appointed a Director of the company on January 9, 2001. Prior to his appointment to the Board, Mr. McAllister was with ASARCO Incorporated from 1966 to 1999, most recently serving as Chairman and Chief Executive Officer in 1999, Chief Operating Officer from 1998 to 1999, Executive Vice President - Copper Operations from 1993 to 1998, Chief Financial Officer from 1982 to 1993 and in various professional and management positions from 1966 to 1982. He currently serves on the Board of Directors of Cleveland Cliffs, Incorporated, an iron ore mining company. Mr. McAllister received his MBA from New York University, his Bachelor of Science - Finance from the University of Utah, and attended the Advanced Management Program at Harvard Business School.
John R. Stark (age 50) was appointed Vice President, Human Resources on September 21, 1999 and was subsequently appointed Secretary and Corporate Counsel on May 29, 2001 and July 17, 2001, respectively. Mr. Stark has a varied background in corporate administrations and human resources. He was previously with Molycorp, Inc. since 1996 as Manager of Sales and Administration; Western Mobile, Inc., an international construction material supplier, from 1992 to 1996; and with AMAX Inc. for 13 years until 1992. Mr. Stark received his Juris Doctor degree from the University of Denver School of Law and holds a Bachelor of Arts degree in economics from the University of Montana.
Robert M. Taylor (age 51) is currently Vice President, Mine Operations. Mr. Taylor joined the company in May 2000 after 6 years at MRDI, a division of AGRA - Simons Ltd. From 1994 to 2000, as Vice President, Mr. Taylor conducted feasibility studies, operational and planning reviews and mine planning, and from 1994 through 1996, Mr. Taylor was assigned to Zambia Consolidated Copper Mines Ltd. as Mine Manager of the Baluba Flat Mine. From 1991 to 1994, Mr. Taylor was an independent consultant, managing project evaluations and due diligence reviews. Mr. Taylor was employed by Freeport Indonesia in various engineering and superintendent roles at the Grasberg copper mine in Indonesia from 1986 through 1991. Mr. Taylor’s past positions included chief engineer at Federal American Partners, senior production engineer at United Nuclear Corp. and shift boss and associate engineer at AMAX Inc.’s molybdenum mines. Mr. Taylor received a Bachelor of Science degree in Mine Engineering from the Colorado School of Mines.
Terrell I. Ackerman (age 49) is currently Vice President, Planning and Process Operations. Mr. Ackerman joined the company in March 2000 as Director of Corporate Planning after 2 years as an independent consultant. During 1998 and 1999 Mr. Ackerman conducted feasibility studies, operational and mine planning reviews for various underground operations. Prior to this time, Mr. Ackerman was VP and General Manager of BHP Copper’s San Manuel Operation in Arizona. Mr. Ackerman held increasing roles of accountability for Magma Copper Company starting as an underground engineer in training in 1976. Mr. Ackerman received a Bachelor of Science degree in Mine Engineering from the University of Idaho College of Mines.
DIRECTORS
Richard E. Gilbert (age 62). Mr. Gilbert has been a director of the company since January 1999. Mr. Gilbert most recently served as a Managing Director of Robert Fleming, Inc., an investment banking firm, from 1997 until his retirement in 1998. From 1991 to 1997, Mr. Gilbert served as Managing Director of Everen Securities, an investment banking firm. Previously he was the founder, President and Chief Executive Officer of Resource Bank & Trust.
Apolinar Guzman (age 69). Mr. Guzman has been a director of the company since July 1998. Mr. Guzman is presently an independent project development and operation consultant. Since April 1998, Mr. Guzman has been a director of Rio Tinto Limited, an international mining and metals company. From August 1998 to July 2001, he was a Project Director for Compañia Minera Antamina, a South American mining company. From 1976 until his retirement in 1998, Mr. Guzman served in various projects and operating positions with Rio Tinto Limited.
Patrick M. James (age 58). Mr. James is the company’s Lead Director. Mr. James was appointed a director of the company on January 9, 2001. Since February 2001, Mr. James has been an independent natural resource management consultant. Mr. James was the President and Chief Executive Officer of Rio Algom Limited from June 1997 through February 2001. Prior to joining Rio Algom Limited, Mr. James spent 18 years with Santa Fe Pacific Gold Corporation, becoming President and Chief Operating Officer in 1994 and Chairman, President and Chief Executive Officer in 1995. Mr. James is currently a director of Dynatec Corporation, a Canadian mining company and a Director and Executive Chairman of Constellation Copper Corp., a Canadian mining company.
Stephen V. Kearney (age 44). Mr. Kearney was appointed a director of the company on July 18, 2001. Mr. Kearney is currently executive chairman of Royal Bafokeng Resources Holdings (Pty) Limited, a South African minerals and metals resources company. From December 31, 2001 until December 31, 2002, Mr. Kearney was an advisor of the company to provide operational oversight and to assist the company in its efforts to increase productivity and reduce operating costs and capital. Currently Mr. Kearney is a non-executive director of the company. Mr. Kearney served as Chief Executive Officer of Impala Platinum Holdings Limited, a South African producer of platinum group metals from 1998 to 2000. Mr. Kearney previously held various positions of increasing responsibility within Impala from November 1990 to 1998, including that of Managing Director from December 1996 to 1998. From 1983 to November 1990, Mr. Kearney held various operational and management positions with General Mining, Metals and Minerals, a division of Gencor, a South African mining company. Mr. Kearney is currently the non-executive chairman of Jubilee Platinum PLC, a platinum exploration company, listed on Alternative Investment Market (AIM) in London.
Joseph P. Mazurek (age 54). Mr. Mazurek has been a director of the company since May 2001. Mr. Mazurek is currently a partner in the law firm of Crowley, Haughey, Hanson, Toole & Dietrich, PLLP located in Helena, Montana. He was the Attorney General for the State of Montana from January 1993 until December 2000. From 1975 through 1992, he was an attorney with the Helena, Montana law firm of Gough, Shanahan, Johnson and Waterman.
Francis R. McAllister (age 60). Mr. McAllister became a director of the company on January 9, 2001 and the Chairman of the Board and Chief Executive Officer of the company on February 12, 2001. Prior to his appointment to the Board, Mr. McAllister was with ASARCO Incorporated from 1966 to 1999, serving as Chairman and Chief Executive Officer in 1999, Chief Operating Officer from 1998 to 1999, Executive Vice President - Copper Operations from 1993 to 1998, Chief Financial Officer from 1982 to 1993 and in various professional and management positions from 1966 to 1982. He currently serves on the board of directors of Cleveland Cliffs, Incorporated, an iron ore mining company.
Sheryl K. Pressler (age 52). Ms. Pressler has been a director of the company since May 9, 2002. She has been a self-employed investment and strategy consultant in Atlanta, Georgia since 2001. From 2000 to 2001, she was the Chief Executive Officer for Lend Lease Real Estate Investments - United States, a subsidiary of Lend Lease Corporation, an Australian real estate services company. From 1994 to 2000, she was the Chief Investment Officer for the California Public Employees’ Retirement System (CalPERS), the
nation’s largest public pension fund. From 1981 to 1994, she was responsible for the management of the Retirement Funds for the McDonnell Douglas Corporation. Ms. Pressler is currently a director of Nuevo Energy Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the company’s directors and executive officers and persons who own more than 10% of a registered class of the company’s equity securities to file with the Securities and Exchange Commission and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the company. Based solely on its review of copies of the Section 16(a) reports and written representations the company has received, the company believes that during 2002, all of its directors, executive officers and greater than 10% beneficial owners had timely filed all required reports.
ITEM 11
ITEM 11
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the company’s Chief Executive Officer and other executive officers for the years 2002 through 2000.
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock options to the company’s Chief Executive Officer and other executive officers during 2002. The company has not granted any stock appreciation rights.
(1)
The options vest and become 100% exercisable in three years on the anniversary date of the date of grant.
(2)
The exercise price for each grant is equal to 100% of the fair market value of a share of Common Stock on the date of grant.
(3)
Assumed values result from the indicated prescribed rates of stock price appreciation through the expiration date. The actual value of these option grants is dependent on the future performance of the Common Stock.
(4)
Mr. Sabala was the company’s Vice President and CFO until his resignation, effective January 24, 2003. Includes 25,000 stock options that expired upon Mr. Sabala’s resignation.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table sets forth information with respect to the Named Executive Officers concerning options exercised during 2002, the value realized upon exercise and the number and value of unexercised options held as of December 31, 2002. The company has not granted any stock appreciation rights.
(1) Amounts shown in this column represent the market value of the underlying Common Stock at December 31, 2002 of $5.35 per share less the exercise price. The actual value, if any, that an executive officer may realize will depend upon the amount by which the market price of the Common Stock exceeds the exercise price when the options are exercised.
Securities Authorized for Issuance Under Equity Compensation Plans
(1) Excludes 71,570 shares of restricted stock issued during the year which have an exercise price of $0.00 and vest on January 5, 2005. See Note 9 - Common Stock Plans and Agreements.
Employment Agreements
The company has employment agreements with Messrs. McAllister, Stark, Taylor and Ackerman. The company also had an employment agreement with Mr. Sabala.
Francis R. McAllister. The company entered into an employment agreement with Mr. McAllister, which became effective on February 12, 2001 and was amended on July 17, 2001. The agreement has an initial term ending February 11, 2004, which term is continued for subsequent one-year periods unless terminated, provided that following a change of control, the term will continue for no less than 24 additional months. It is terminable by the company or Mr. McAllister at any time upon written notice. Mr. McAllister’s agreement provides for, among other things:
If Mr. McAllister is terminated by the company without cause (as defined in the agreement) or if he resigns voluntarily for good reason (as defined in the agreement), at any time other than within two years following a change of control (as defined in the agreement), he is entitled upon signing a release of claims against the company, to the following:
•
a pro rata portion of the target bonus for the year in which his termination occurs;
•
an amount equal to two times the sum of his annual base salary and target annual bonus, each as in effect as of the date of his termination, which amount will be paid in equal installments over 24 months from the date of termination;
•
continued participation in the company’s employee benefit plans and policies for a period of 24 months or until he receives similar coverage from a subsequent employer; and
•
accelerated vesting of any unvested stock options.
If Mr. McAllister is terminated by the company without cause or he resigns voluntarily for good reason, within two years following a change of control, then in lieu of the payments and benefits described above, Mr. McAllister will be entitled to the following:
•
a lump sum cash payment in an amount equal to three times his annual base salary and three times the higher of (x) his target bonus or (y) his annual bonus paid or payable for the most recently completed calendar year during his employment;
•
continued participation in the company’s benefit plans and policies for a period of three years or less if he receives similar benefits from subsequent employment; and
•
full vesting of options, with the options remaining exercisable for a period of ten years from the grant date.
Mr. McAllister will be entitled to receive a tax gross-up payment to fully offset the effect of any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”), if his after-tax benefit (assuming he received such payment) is at least $20,000 greater than the after-tax benefit he would have received if he did not receive the tax gross-up payment. The employment agreement also contains a customary nondisclosure covenant, a one-year covenant not to compete and not to solicit employees of the company, an agreement by the company to indemnify Mr. McAllister, as permitted by law, against any claim resulting from the performance of his duties as an officer or director of the company, and an agreement by the company to use commercially reasonable efforts to obtain and maintain customary directors’ and officers’ liability insurance covering Mr. McAllister.
John R. Stark. Mr. Stark’s employment agreement became effective on July 17, 2001 and had an initial term ending on December 31, 2001. An Addendum to Employment Agreement was made November 18, 2002, increasing his base salary from $170,000 to $220,000. The agreement is to be continued from year to year unless altered or terminated; provided that, following a change of control (as defined in the agreement), the term will continue for no less than 24 additional months. The agreement provides for:
If the company terminates Mr. Stark’s employment without cause (as defined in the agreement) or if he resigns voluntarily for good reason (as defined in the agreement), at any time other than within two years following a change of control, Mr. Stark is entitled to:
•
an amount equal to the sum of his annual base salary and target annual bonus, each as in effect as of the date of his termination, which amount will be paid in equal installments over 12 months from the date of termination; and
If the company terminates Mr. Stark’s employment without cause, or if Mr. Stark resigns for good reason, within two years of the change of control, Mr. Stark will be entitled to:
•
a lump sum payment equal to 150% the sum of (x) his annual base salary at a rate in effect immediately prior to the change of control or on the date of termination, whichever is higher and (y) his target bonus in effect immediately prior to the change of control or on the termination date, whichever is higher; and
•
continued participation in the company’s employee benefit plans and policies for a period of 18 months or until he receives similar coverage for subsequent employment.
Mr. Stark will be entitled to receive a tax gross-up payment to fully offset the effect of any excise tax imposed under Section 4999 of the Code if his after-tax benefit (assuming he received such payment) is at least $20,000 greater than the after-tax benefit he would have received if he did not receive the tax gross-up payment. The employment agreement also contains a customary nondisclosure covenant and a one-year covenant not to compete. Mr. Sabala received his base salary for 2002, but did not receive any other benefits pursuant to his employment agreement, due to his voluntary resignation.
Robert M. Taylor. The agreement of Mr. Taylor became effective on July 17, 2001 and had initial terms ending on December 31, 2001. The terms are to be continued from year to year unless altered or terminated; provided that, following a change of control, the terms will continue for no less than 24 additional months. The agreement entitles Mr. Taylor to receive:
If the company terminates either executive’s employment without cause or if they resign voluntarily for good reason, at any time other than within two years following a change of control, such executive is entitled to:
•
an amount equal to the sum of his annual base salary and target annual bonus, each as in effect as of the date of his termination. This amount will be paid in equal installments over 12 months from the date of termination.
If the company terminates either executive’s employment without cause, or if such executive resigns for good reason, within two years of the change of control, he will be entitled to:
•
a lump sum payment equal to 1.5 times the sum of (x) his annual base salary at a rate in effect immediately prior to the change of control or on the date of termination, whichever is higher, plus (y) target bonus in effect immediately prior to the change of control or on the termination date, whichever is higher; and
•
continued participation in all employee benefit plans and policies for a period of 18 months or until he receives similar coverage from a subsequent employer.
Mr. Taylor will be entitled to receive a tax gross-up payment to fully offset the effect of any excise tax imposed under Section 4999 of the Code if his after-tax benefit (assuming they received such payment) is at least $20,000 greater than the after-tax benefit he would have received if he did not receive the tax gross-up payment. The employment agreements also contain a customary nondisclosure covenant and a one-year covenant not to compete.
Terrell I. Ackerman. The agreement of Mr. Ackerman became effective on May 8, 2002 and had initial terms ending on December 31, 2002. The terms are to be continued from year to year unless altered or terminated; provided that, following a change of control, the terms will continue for no less than 24 additional months. The agreement entitles Mr. Ackerman to receive:
If the company terminates either executive’s employment without cause or if they resign voluntarily for good reason, at any time other than within two years following a change of control, such executive is entitled to:
•
an amount equal to the sum of his annual base salary and target annual bonus, each as in effect as of the date of his termination. This amount will be paid in equal installments over 12 months from the date of termination.
If the company terminates either executive’s employment without cause, or if such executive resigns for good reason, within two years of the change of control, he will be entitled to:
•
a lump sum payment equal to 1.5 times the sum of (x) his annual base salary at a rate in effect immediately prior to the change of control or on the date of termination, whichever is higher, plus (y) target bonus in effect immediately prior to the change of control or on the termination date, whichever is higher; and
•
continued participation in all employee benefit plans and policies for a period of 18 months or until he receives similar coverage from a subsequent employer.
Mr. Ackerman will be entitled to receive a tax gross-up payment to fully offset the effect of any excise tax imposed under Section 4999 of the Code if his after-tax benefit (assuming they received such payment) is at least $20,000 greater than the after-tax benefit he would have received if he did not receive the tax gross-up payment. The employment agreements also contain a customary nondisclosure covenant and a one-year covenant not to compete.
Stephen V. Kearney. On December 31, 2001, the company retained Mr. Kearney, a member of its Board, as an advisor of the company to provide operational oversight and to assist the company in its efforts to increase productivity and reduce operating costs and capital. The company agreed to pay Mr. Kearney’s living and moving expenses and reimburse him for meals. The company’s arrangement with Mr. Kearney provided for:
Mr. Kearney will be required to agree to a customary nondisclosure covenant effective during his term and for 12 months after termination of the agreement. The company also provided Mr. Kearney with customary directors’ and officers’ liability insurance. Mr. Kearney’s arrangement was terminated on December 31, 2002.
James A. Sabala. Mr. Sabala was the company’s Vice President and Chief Financial Officer until his resignation, effective January 24, 2003, at which date his employment agreement was terminated. Prior to his resignation, Mr. Sabala’s employment agreement became effective on July 17, 2001 and had an initial term ending on December 31, 2001. An Addendum to the Employment Agreement was made November 18, 2002, which increased his base salary from $200,000 to $260,000. The agreement was to be continued from year to year unless altered or terminated; provided that, following a change of control (as defined in the agreement), the term will continue for no less than 24 additional months. The agreement, as amended, provided for:
If the company terminated Mr. Sabala’s employment without cause (as defined in the agreement) or if he resigns voluntarily for good reason (as defined in the agreement), at any time other than within two years following a change of control, Mr. Sabala would have been entitled to:
•
a pro rata portion of the target bonus for the year in which their termination occurred;
•
an amount equal to the sum of his annual base salary and target annual bonus, each as in effect as of the date of his termination, which amount will be paid in equal installments over 24 months from the date of termination; and
•
continued participation in the company’s employee benefit plans and policies for a period of 24 months or until he receives similar coverage from a subsequent employer.
If the company had terminated Mr. Sabala’s employment without cause, or if Mr. Sabala resigned for good reason, within two years of the change of control, Mr. Sabala would have been entitled to:
•
a lump sum payment equal to two times the sum of (x) his annual base salary at a rate in effect immediately prior to the change of control or on the date of termination, whichever is higher and (y) his target bonus in effect immediately prior to the change of control or on the termination date, whichever is higher; and
•
continued participation in the company’s employee benefit plans and policies for a period of 24 months or until he receives similar coverage for subsequent employment.
Mr. Sabala would have been entitled to receive a tax gross-up payment to fully offset the effect of any excise tax imposed under Section 4999 of the Code if his after-tax benefit (assuming he received such payment) was at least $20,000 greater than the after-tax benefit he would have received if he did not receive the tax gross-up payment. The employment agreement also contains a customary nondisclosure covenant and a one-year covenant not to compete, which survive until January 24, 2004.
Report of the Compensation Committee of the Board
Policy. The Compensation Committee of the Board is responsible for establishing and administering the Company’s compensation policies and plans for the Chief Executive Officer and the other executive officers of the Company (collectively, the “executive officers”), and for making recommendations to the full Board with respect to executive compensation matters. The objectives of the compensation plan are to ensure the Company is able to attract and retain the highest caliber executives and promote the alignment of management’s interests with those of the stockholders, while also ensuring that corporate and individual performance parameters represent a significant component of the total compensation package. The Compensation Committee in terms of both corporate and individual contributions to the Company gauges performance. These include safety, net earnings to common stockholders, metal
production volumes and costs, successful implementation of risk mitigation and management programs, environmental stewardship, progress in the expansion program and other factors.
The Compensation Committee’s policy is to construct a compensation package that works to the benefit of stockholders and management through balancing both short and long-term components of the compensation plan. The Compensation Committee believes that through a properly balanced plan, management can be motivated to continually outperform the Company’s operating plan and their “comparator” group, without sacrificing long-term performance and growth. The compensation plan adopted by the Board integrates a combination of base salary and annual quantitative performance incentives with additional discretionary awards, plus restricted stock and option grants.
Basis of Compensation. The Compensation Committee is responsible for retaining and using outside independent compensation consultants and uses various mining industry compensation surveys in its establishment of and amendments to executive compensation plans. The Compensation Committee’s policy is to align executive officers’ base salaries at the approximate median for the Company’s primary comparator group, comprised of certain mining, metal/chemical processing and environmental product companies.
Base Salary. Base salaries for new executive officers are determined by individual experience and planned responsibilities within the Company and are set in relation to a comparator group median. Base salary adjustments are made annually based on merit and when substantive changes occur in the responsibilities of an executive officer. Base salaries are generally reviewed in January of each year
Short-term Incentive Compensation. Executives may be eligible for participation in the annual incentive plan at the discretion of the Compensation Committee. Annual incentives are based upon a quantitative formula, although the Compensation Committee maintains the right to recommend increases or decreases in these amounts. Executive officers’ annual incentives have targets and maximum caps as a percentage of the annual base salary. Maximum caps are twice the target values. During 2002, targets included both safety and financial targets. Annual target incentive opportunities are set each year relative to the annual business plan and a comparator group median and vary with each executive officer’s position within the Company. No annual incentive payouts were made for 2002 performance.
Long-term Incentive Compensation. The Company may provide additional incentive through discretionary grants of stock options or restricted stock under the Company’s stock incentive plans. The purpose of the stock option grant is to reward and provide incentives for executive officers, employees, non-employee directors and consultants of the Company. Such stock options are the dominant component of long-term remuneration within the total compensation package. Stock options granted to executive officers generally have a term of ten years, and vest in equal installments over three years. Stock options are granted at an exercise price equal to the market price of the stock on the date of grant. In 2001, the Company granted restricted shares to provide motivation to achieve 2002 quarterly goals. The restrictions are scheduled to lapse in 2005, but restrictions on portions of these grants could have lapsed at the end of each quarter of 2002 if certain performance targets were met in each quarter. The targets were not achieved. Stock options were not granted in 2002.
Chairman and Chief Executive Officer’s 2002 Compensation. Mr. McAllister’s base salary of $500,000 during 2002 was positioned at approximately the median level of the comparator group. An annual incentive payout was not earned for 2002. In 2001, Mr. McAllister received an incentive award of 11,823 shares of restricted stock. No stock options were granted to Mr. McAllister in 2002.
Section 162(m). Under Section 162(m) of the Code, federal income tax deductions of publicly traded companies may be limited to the extent total compensation (including base salary, annual incentive, restricted stock awards, stock options exercises, and non-qualified benefits) for certain executive officers exceeds $1 million in any one year. Any gain realized by an executive officer upon the exercise of a stock option granted under the 1998 Plan should be exempt from such limit. The Compensation Committee considers it highly unlikely that the total compensation paid to any employee under the company’s other compensation vehicles would exceed $1 million in any one year in the near future. In making future compensation decisions, the Compensation Committee will take into account the cost to the company of exceeding the deduction limit of Section 162(m).
Richard E. Gilbert, Chairman
Apolinar Guzman
Patrick James
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was, at any time during 2002, an officer or employee of the company. No executive officer of the company has served on the Board or compensation committee of any other entity that has or has had one or more executive officers serving as a member of the Board.
DIRECTOR COMPENSATION
Each non-employee director receives an annual fee of $15,000. In addition, the company pays each non-employee director $1,000 per meeting of the Board attended. Non-employee members of all committees of the Board (with the exception of the chairman of each standing committee), receive fees of $1,000 for each committee meeting attended; however, the chairman of each standing committee of the Board receives a fee of $1,500 for each committee meeting attended. All directors are reimbursed for reasonable travel expenses.
The 1998 Equity Incentive Plan (the “1998 Plan”) provides that each non-employee director will be granted nonqualified stock options (“NSOs”) to purchase 10,000 shares of Common Stock, vesting in six months, upon his or her initial election to the Board. An additional NSO to purchase 5,000 shares of Common Stock will be granted to each non-employee director on his or her next three reappointments or re-elections, vesting six months after each such grant. The exercise price of options granted to non-employee directors under the 1998 Plan will be the fair market value of one share of Common Stock on the date of grant. A non-employee director may elect not to accept such options.
Performance Graph
The following graph compares the yearly percentage change in the company’s cumulative total stockholder return on Common Stock, with the cumulative total return on the following indices, assuming an initial investment of $100 on December 31, 1997 and the reinvestment of all dividends: (i) the S&P 500, (ii) NYSE Composite, (iii) Russell 2000 and (iv) Peer Group. The performance shown is not necessarily indicative of future performance.
*$100 invested on December 31, 1997 in stock or index including reinvestment of dividends. Fiscal year ended December 31.
*According to the new classification by Standard and Poors (S&P) the only comparable industry index that Stillwater Mining Company would fall into is the S&P SmallCap Precious Metals & Minerals Index which contains only Stillwater Mining Company for this reason, the Company has decided to transition to a custom peer group index designed by the Company. The custom peer group includes Stillwater Mining Company, North American Palladium Ltd., Aquarius Platinum Limited, Anglo American Platinum Corporation Limited, Impala Platinum Holdings Limited, and Lonmin PLC.
Notwithstanding anything to the contrary set forth in any of the company’s previous or future filings made under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this Form 10-K or future filings made by the company under those statutes, neither the preceding Stock Performance Graph nor the Compensation Committee Report is to be incorporated by reference into any such prior filings, nor shall such graph or report be incorporated by reference into any future filings made by the company under those statutes.
ITEM 12
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table includes information available to the company as of February 14, 2003 concerning the beneficial ownership of Common Stock by: (i) stockholders known to the company to beneficially own more than 5 % of the Common Stock; (ii) each person that in the past fiscal year was a director or executive officer of the company; and (iii) all directors and executive officers of the company as a group. Unless otherwise indicated, all beneficial owners have sole voting and investment power over the shares held.
ITEM 13
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as provided in this Form 10-K under the heading “Executive Compensation and Other Information-Employment Agreements” and in Exhibits 10.31 and 10.34 to this form 10-K filed herewith, since January 1, 2002 there has not been at any time any relationship or related transaction which the company would be required to disclose under Item 404 of Regulation S-K, and no such relationship or related transaction is proposed as of the date of this Form 10-K.
ITEM 14
ITEM 14
CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Controller have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-14(c)) as of a date within 90 days before the filing date of this annual report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Controller have concluded that our disclosure controls and procedures are effective, timely providing them with material information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934.
(b)
Changes in Internal Controls
There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the review and evaluation. There were no significant deficiencies or material weaknesses identified in the review and evaluation, and therefore no corrective actions were taken.
PART IV
ITEM 15
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
1.
Financial Statements and Supplementary Data
2.
Financial Statement Schedules (not applicable)
EXHIBITS
10.1
1998 Equity Incentive Plan (incorporated by reference to Appendix A to the Proxy statement, dated April 6, 1998).
10.2
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).
10.3
Conveyance of Royalty Interest and Agreement between Stillwater Mining Company and Manville Mining Company, dated October 1, 1993 (incorporated by reference to Exhibit 10.9 to the 1994 S-1).
10.4
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 Registrant’s 1996 10-K).
10.5
Equipment Lease Agreement between Stillwater Mining Company and Senstar Capital Corporation, dated October 5, 1995. (incorporated by reference to Exhibit 10.17 of the Registrant’s 1995 10-K).
10.6
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 10-K).
10.7
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 10-K).
10.8
PGM Concentrate Refining Agreement between Stillwater Mining Company and Union Miniere, dated May 8, 1996. (incorporated by reference to Exhibit 10.15 of the Registrant’s 1998 10-K).
10.9
Articles of Agreement between Stillwater Mining Company and Oil, Chemical and Atomic Workers International Union, dated July 1, 1999 (incorporated by reference to Exhibit 10.10 of the Registrant’s 1999 10-K).
10.10
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 Registrant’s Form 8-K, dated July 21, 1998).
10.11
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 Registrant’s Form 8-K, dated July 21, 1998).
10.12
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).
10.13
Employment Agreement between James A. Sabala and Stillwater Mining Company, dated July 23, 2001 (incorporated by reference to Exhibit 10.3 to the Form 10-Q for the quarterly period ended September 30, 2001).
10.14
Employment Agreement between Robert M. Taylor and Stillwater Mining Company, dated July 23, 2001 (incorporated by reference to Exhibit 10.5 to the Form 10-Q for the quarterly period ended September 30, 2001).
10.15
Employment Agreement between Francis R. McAllister and Stillwater Mining Company, dated July 23, 2001 (incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarterly period ended September 30, 2001).
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.
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.
CERTIFICATION
I, Francis R. McAllister certify that;
1.
I have reviewed this annual report on Form 10-K of Stillwater Mining Company (Stillwater),
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Stillwater as of, and for, the periods presented in this annual report;
4.
Stillwater’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Stillwater and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to Stillwater, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)
evaluated the effectiveness of Stillwater’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
Stillwater’s other certifying officer and I have disclosed, based on our most recent evaluation, to Stillwater’s auditors and audit committee of Stillwater’s Board of Directors:
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect Stillwater’s ability to record, process, summarize and report financial data and have identified for Stillwater’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in Stillwater’s internal controls; and
6.
Stillwater’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/S/ FRANCIS R. McALLISTER
Dated: March 28, 2003
Francis R. McAllister
Chairman and Chief
Executive Officer
CERTIFICATION
I, Thomas T. Angelos certify that;
1.
I have reviewed this annual report on Form 10-K of Stillwater Mining Company (Stillwater),
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Stillwater as of, and for, the periods presented in this annual report;
4.
Stillwater’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Stillwater and we have:
a)
designed such disclosure controls and procedures to ensure that material information relating to Stillwater, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)
evaluated the effectiveness of Stillwater’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
Stillwater’s other certifying officer and I have disclosed, based on our most recent evaluation, to Stillwater’s auditors and audit committee of Stillwater’s Board of Directors:
a)
all significant deficiencies in the design or operation of internal controls which could adversely affect Stillwater’s ability to record, process, summarize and report financial data and have identified for Stillwater’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in Stillwater’s internal controls; and
6.
Stillwater’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 28, 2003
/S/ THOMAS T. ANGELOS
Thomas T. Angelos
Controller and Principal Accounting
Officer
EXHIBIT INDEX
10.1
1998 Equity Incentive Plan (incorporated by reference to Appendix A to the Proxy statement, dated April 6, 1998).
10.2
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).
10.3
Conveyance of Royalty Interest and Agreement between Stillwater Mining Company and Manville Mining Company, dated October 1, 1993 (incorporated by reference to Exhibit 10.9 to the 1994 S-1).