EXHIBIT 99.2
*Note: Inserts A, B & C and D (referenced herein) are
to the end of this document.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data," "Financial Statements" and the notes thereto. To the
extent the Company makes forward-looking statements, actual results may vary
materially therefrom. All of the information set forth in this report,
including, without limitation, the "Cautionary Safe Harbor Statement" included
in this report should be considered and evaluated.
GENERAL
The Company derives its revenues primarily from the sale of coal to electric
utilities and other industrial users under long-term sales contracts. The
Company sells a substantial portion of its coal under long-term sales contracts
and sells the remainder under short-term contracts and on the spot market.
Sales pursuant to long-term sales contracts accounted for 72% of the Company's
pro forma coal sales revenues during 1998, with the remainder being accounted
for by sales pursuant to short-term contracts and on the spot market.
The principal components of the Company's expenses are costs relating to the
production and transportation of its coal, including labor expenses, royalty and
lease payments, reclamation expenditures and rail, barge and trucking costs.
Other expenses include depletion, depreciation, amortization, selling, general
and administrative and interest expenses.
CERTAIN FACTORS AFFECTING CURRENT AND FUTURE OPERATING RESULTS
The Company's current and future operating results will likely be affected by
the following events and factors:
Certain Contract Revenues. Under certain long-term sales contracts, in relation
to contract revenues from coal sales, the Company has been receiving additional
periodic payments with such payments included in revenues as coal shipments
occur pursuant to contract terms. Such proceeds amounted to $9.7 million in
1998. The contracts call for $46.4 million of additional payments to be paid to
the Company in 1999. The contracts call for $91.0 million of additional
payments over the following four years.
Recent Acquisitions. In connection with its recent acquisitions, the Company
expects to incur certain one-time acquisition charges aggregating approximately
$22.1 million, approximately $3.8 million of which has been paid as of December
31, 1998. The costs relate primarily to severance plan obligations and change of
control provisions contained in employment agreements assumed by the Company in
connection with its acquisition of Zeigler Coal Holding Company on September 2,
1998. The Company also wrote off $16.3 million of deferred financing costs
related to the bridge financing for the acquisitions of the Cyprus Subsidiaries
and Zeigler. Other integration costs are expected to include closing redundant
facilities and relocating certain business processes of the businesses acquired
in the recent acquisitions.
Increased Interest Costs. As a result of increased indebtedness incurred by the
Company in connection with its recent acquisitions, the Company's interest
expense increased substantially from 1997 to 1998 and is expected to further
increase in 1999. Interest costs will increase further if the Company acquires
additional coal companies or coal reserves financed through debt.
Reclamation and Mine Accruals. Annually, the Company reviews its entire
reclamation liability and makes necessary adjustments, including mine plan and
permit changes and revisions to production levels to optimize mining reclamation
and efficiency. The financial impact of any such adjustment is recorded to cost
of coal sales. Although the Company's management believes it is making adequate
provisions for all expected reclamation and other costs associated with mine
closures, future operating results would be adversely affected if such accruals
were later determined to be insufficient.
RESULTS OF OPERATIONS
AEI RESOURCES HOLDING, INC. (INCLUDING THE COMPANY'S PREDECESSOR)
The following table sets forth, for the periods indicated, certain operating and
other data of AEI Resources Holding, Inc., including the Company's predecessor
(AEI Holding Company, Inc.) presented as a percent of revenues.
FISCAL YEAR
-----------
1995 1996 1997 1998
---- ---- ---- ----
Operating Data:
Revenues.................................................. 100.0% 100.0% 100.0% 100%
Cost of operations........................................ (84.1) (78.8) (82.8) (80.6)
Depreciation, depletion and amortization.................. ( 5.3) ( 5.6) ( 6.2) (10.5)
Selling, general and administrative....................... ( 7.7) ( 7.4) ( 7.9) ( 4.4)
Writedowns and special items.............................. -- -- -- ( 2.2)
----- ----- ----- -----
Income from operations.................................... 2.9 8.2 3.1 2.3
Interest expense.......................................... ( 1.8) ( 4.5) ( 5.2) ( 8.9)
Other income (expense), net............................... ( 0.4) 0.4 0.2 0.6
----- ----- ----- -----
Income (loss) before income tax provision (benefit)....... 0.7 4.1 ( 1.9) ( 6.0)
----- ----- ----- -----
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Due to the completion of the Company's recent acquisitions, the changes in
results of operations discussed below may not be illustrative of operations if
the Company had operated the businesses acquired in the recent acquisitions from
January 1, 1998.
Revenues. Revenues were $733.4 million for the year ended December 31, 1998,
compared to $175.3 million for the year ended December 31, 1997, an increase of
$558.1 million or 318%. The increase in revenues is attributable to mining
revenues from recently acquired businesses included in the results of operations
in the year ended December 31, 1998, and not in the results of operations in the
year ended December 31, 1997, which primarily consisted of $20.8 million from
Ikerd-Bandy; $94.2 million from Leslie Resources; $177.5 million from the
Company's subsidiaries it acquired from Cyprus Amax Coal Company; and $199.4
million from Zeigler. Revenues exclusive of the acquirees increased from $169.0
million to $193.4 million ($24.4 million or 14%). The increase is due to
increased tonnage delivery (6.2 million tons to 7.3 million tons or 18%) offset
by a decrease in revenue per ton ($27.07 to $26.15 or 3%).
Cost of Operations. The cost of operations totaled $590.9 million for the year
ended December 31, 1998, compared to $145.2 million for the year ended December
31, 1997, an increase of $445.7 million or 307%. The increase is primarily
attributable to acquirees included in 1998 and not in 1997, including Ikerd-
Bandy ($28.6 million), Leslie Resources ($95.6 million), the Cyprus Subsidiaries
($162.2 million), and Zeigler ($148.2 million). Cost of operations exclusive of
the acquirees increased from $139.2 million to $160.8 million ($21.6 million or
16%). This increase is due primarily to the increased production volumes brought
about by increased sales opportunities.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1998, totaled $76.8 million
compared to $10.8 million for the year ended December 31, 1997, an increase of
$66.0 million or 611%. The increase in depreciation, depletion and amortization
resulted primarily from: (i) increased depreciation from the property and
equipment acquired in the Company's recent acquisitions, and (ii) additional
depreciation and amortization from 1997 and 1998 capital expenditures, and (iii)
increased depletion of mineral reserves.
Writedowns and Special Items. In connection with integrating acquired
operations, the Company closed certain of its non-acquiree mines during the year
ended December 31, 1998. As a result, estimated non-recoverable assets of $2.0
million were written off and additional estimated reclamation and mine closure
costs of $14.4 million were recorded. There were no such charges for the year
ended December 31, 1997.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses for the year ended December 31, 1998, were $32.5 million
compared to $13.9 million for the year ended December 31, 1997, an increase of
$18.6 million or 134%. The increase in such expenses primarily resulted from
acquirees included in 1998 and not in 1997 and the expansion of management and
administrative functions to support the recent growth.
Interest Expense. Interest expense for the year ended December 31, 1998, was
$65.2 million compared to $9.2 million for the year ended December 31, 1997, an
increase of $56.0 million or 609%. The increase resulted primarily from interest
associated with: (i) the increase in debt levels from $217.0 million as of
December 31, 1997, to $1.2 billion as of December 31, 1998, brought about by the
recent acquisitions, (ii) the related amortization of debt financing costs.
Other Income (Expense), Net. Other income (expense) increased $4.3 million in
1998, primarily due to a $1.0 million gain on the sale of an aircraft and an
increase in interest income resulting from the investment of excess debt
proceeds from the 1997 Notes.
Provision for Income taxes. There was a $20.4 million income tax benefit for
the year ended December 31, 1998, as compared to a $17.5 million provision for
the year ended December 31, 1997. During the year ended December 31, 1997, the
Company operated primarily under S Corporation tax status. During April of 1997,
Bowie Resources, Limited, experienced a change in the tax status from an S
corporation to a C corporation, which resulted in the recording of a $1.6
million provision and deferred tax liability. In addition, during November of
1997, the mining businesses transferred from Addington Enterprises (as an S
Corporation) to the Company (as a C corporation) initially recorded a net
deferred tax liability of $18.0 million, with an increase to the income tax
provision for the differences in book and tax bases in assets and liabilities.
Prior to 1998, a deferred tax benefit was not recorded, due to uncertainties in
realization, until after the acquisitions of Zeigler and Kindill and the
establishment of a deferred tax liability in September 1998. This will allow the
utilization of certain tax benefits, including NOL's and AMT credits, which
resulted in a deferred tax benefit for 1998.
Extraordinary Loss From Debt Refinancing. For the year ended December 31, 1998,
the Company incurred an extraordinary loss of $10.2 million (net of $6.8 million
tax benefit) compared to $1.3 million (net of a $0.9 million tax benefit) for
the year ended December 31, 1997. During the year ended December 31, 1998, the
Company retired a $25 million credit facility early and extinguished the Cyprus
and Zeigler Bridge Facilities. All unamortized debt issuance costs associated
with the retired facilities were written off.
Net Loss (Income). For the year ended December 31, 1998, the Company had a net
loss of $33.6 million compared to a net loss of $22.2 million for the year ended
December 31, 1997, an increase of $11.4 million. The increase primarily was due
to increased depreciation associated with the Company's recent acquisitions,
increased interest expense associated with financing those acquisitions and the
extraordinary loss related to the write-off of unamortized debt issuance costs.
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Revenues. Revenues were $175.3 million for the year ended December 31, 1997,
compared to $123.2 million for the year ended December 31, 1996, an increase of
$52.1 million or 42%. The increase in revenues is attributable to a 56% increase
in coal mining revenues (up $59.2 million from $104.8 million to $164.0
million), partially offset by a 49% decrease in equipment sales, rental and
repair (down $7.9 million from $16.0 million to $8.1 million). Coal sales
tonnage increased 55% from 4.2 million tons for the year ended December 31,
1996, to 6.5 million tons for the year ended December 31, 1997. This increased
volume resulted primarily from increased sales from the eastern Kentucky
operations. Revenue per ton also increased $0.35 or 1% (from $24.84 for the year
ended December 31, 1996, to $25.19 for the year ended December 31, 1997). This
increase in revenues per ton is attributable to the expiration of lower priced
contracts and the inclusion of new higher priced contracts.
Equipment sales, rental and repair declined in 1997 from 1996 due to (i)
revenues from highwall miner equipment repair and sales to Mining Technologies
Australia, Pty. Ltd. ("MTA") (an Australian entity formerly majority owned by
Larry Addington) in 1996 exceeding 1997 revenues by $3.2 million due to
decreased operations in Australia in 1997, and (ii) rental of four Addcar/TM/
highwall mining systems by Mining Technologies, Inc. and Bowie (totaling $5.4
million in revenue) during 1996 which were instead deployed to internal jobs in
1997.
Cost of Operations. The cost of operations totaled $145.2 million for the year
ended December 31, 1997, compared to $97.1 million for the year ended December
31, 1996, an increase of $48.1 million or 50%. The increase was primarily due to
the increase in tons produced from 4.2 million in 1996 to 6.3 million in 1997
which correspond with the increased sales volume in 1997. The average cost per
ton sold for the Company was $22.08 per ton for the year ended December 31,
1997, compared to $21.32 per ton for the year ended December 31, 1996, an
increase of $0.76 per ton or 4%. This increase was attributable primarily to an
increase in adverse mining conditions, primarily increased stripping ratios.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1997, totaled $10.8 million
compared to $6.9 million for the year ended December 31, 1996, an increase of
$3.9 million or 57%, which is consistent with the increase in cost of
operations. The increase in depreciation, depletion and amortization primarily
resulted from the use of an Addcar/TM/ highwall mining system and the
amortization of mine development costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1997, were $13.9 million
compared to $9.1 million for the year ended December 31, 1996, an increase of
$4.8 million or 53%. The increase in such expenses primarily resulted from
increased costs associated with organizational growth, a 1997 employee bonus and
other sales-related costs.
Interest Expense. Interest expense for the year ended December 31, 1997, was
$9.2 million compared to $5.5 million for the year ended December 31, 1996, an
increase of $3.7 million or 67%. This increase resulted primarily from interest
associated with the 1997 Notes and increased stockholder loans used to fund the
development of the Company's operations.
Provision for Income Taxes. The provision for income taxes for the year ended
December 31, 1997, was $17.5 million compared to no provision for the year ended
December 31, 1996. The increase in the provision for income taxes is due
primarily to the provision for deferred income taxes resulting from the change
in tax status from an S corporation to a C corporation.
Net Income (Loss). For the year ended December 31, 1997, the Company had a net
loss of $22.2 million compared to net income of $5.1 million for the year ended
December 31, 1996, a decrease of $27.3 million or 535%. The decrease primarily
resulted from increased tax expenses caused by the change in tax status from an
S corporation to a C corporation in 1997 and the increase in selling, general
and administrative and interest expense.
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Revenues. Revenues were $123.2 million for 1996 compared to $112.3 million for
1995, an increase of $10.9 million or 10%. The increase in revenues is
attributable to a 150% increase in equipment sales, rental and repair (up $9.6
million from $6.4 million to $16.0 million) and a 335% increase in coal mining
revenues (up $80.7 million from $24.1 million to $104.8 million). Equipment
sales, rental and repairs increased in 1996 due to (i) revenues from highwall
miner equipment repair and sales to MTA in 1996 exceeding 1995 revenues by $9.7
million as operations in Australia accelerated in 1996, (ii) equipment rental
income in 1996 exceeded 1995 revenues by $3.6 million due to equipment deployed
to internal jobs in 1995 being leased to third parties in 1996 offset by a $6.0
million sale of an Addcar/TM/ highwall mining system in 1995 for which there was
no comparable sale in 1996. The coal mining revenue increase is due to a 27%
increase in tonnage sold (up 0.9 million tons from 3.3 million tons to 4.2
million tons) offset by a 5% decrease in revenue per ton (down $1.43 from $26.27
to
$24.84). Tonnage increased due to opening new mines while the revenue per ton
decrease is due to the expiration of higher than average contracts and the
addition of lower priced contracts.
Cost of Operations. The cost of operations totaled $97.1 million for 1996
compared to $94.5 million for 1995, an increase of $2.6 million or 3%. The
increase primarily resulted from an increase in total production from 3.3
million tons in 1995 to 4.2 million tons in 1996 partially offset by a decrease
in average cost per ton sold of $2.88 or 12% (from $24.20 in 1995 to $21.32 in
1996). The cost per ton decrease is due to the use of Addcar/TM/ highwall mining
systems. The cost of operations also declined in 1996 as a result of decreased
contract mining and increased equipment leasing.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for 1996 totaled $6.9 million compared to $6.0 million for 1995, an
increase of $0.9 million or 15%. The increase in depreciation, depletion and
amortization primarily resulted from an increase in amortization associated with
additional equipment purchased for the Company's Colorado mining operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 were $9.1 million compared to $8.6 million for
1995, an increase of $0.5 million or 6%. The increase in selling, general and
administrative expenses was attributable to expanded operations.
Interest Expense. Interest expense for 1996 was $5.5 million compared to $2.0
million for 1995, an increase of $3.5 million or 175%. The primary reason for
the increase was the incurrence of a $30.0 million term loan by Addington
Enterprises, Inc. in connection with the purchase of certain coal mining
subsidiaries from Addington Resources, Inc.
Provision for Income Taxes. There was no income tax provision for 1996 compared
to a benefit of $0.4 million for 1995, a decrease in the benefit of $0.4 million
due to a change in the corporate tax status.
Net Income. For 1996, the Company had net income of $5.1 million compared to
net income of $1.1 million for 1995, an increase of $4.0 million or 364%. The
increase primarily resulted from a higher margin on coal sales, increased
equipment sales and increased equipment rental, which was partially offset by
higher depreciation and interest expense in 1996.
LIQUIDITY
Cash flow from operations was ($49.4 million), ($10.2 million) and $4.8 million
for the years ended December 31, 1998, 1997 and 1996, respectively. During the
year ended December 31, 1998, the Company had a net loss of $33.6 million,
compared to a net loss of $22.2 million for the year ended December 31, 1997,
and net income of $5.1 million for the year ended December 31, 1996. During the
year ended December 31, 1998, cash flow from operations was decreased by the
increase in the net loss of $11.3 million, a decrease in non-current liabilities
of $65.7 million primarily due to increased reclamation activities resulting
from the closure of higher-cost operations. Partially offsetting were decreases
in accounts receivable of $13.3 million and an increase in accounts payable of
$5.1 million. During the year ended December 31, 1997, cash flow from
operations was decreased due to an increase in accounts receivable of $8.0
million, an increase in inventories of $6.2 million, an increase in other non-
current assets of $2.2 million and a decrease in other non-current liabilities
of $2.7 million which was more than offset by a provision for deferred income
tax of $16.6 million, prepayment penalties on debt refinancing of $1.6 million,
depreciation of $10.8 million and an increase in accounts payable of $4.2
million. During the year ended December 31, 1996, cash flow from operations was
decreased by an increase in accounts receivable of $6.1 million, an increase in
inventories of $3.1 million, a decrease in other non-current liabilities of $5.7
million which was partially offset by an increase in accounts payable of $9.5
million and depreciation of $6.9 million.
At various times during the first nine months of 1998, events of default existed
under the prior $25 million credit facility of the Company as a result of non-
compliance with certain financial covenants contained therein and under the
indenture governing the 1997 Notes (the "Old Indenture") as a result of cross
default provisions. In addition, a default existed under the Old Credit Facility
and the Old Indenture because the Company failed to timely provide certain
required notices, reports and certificates. The Company remedied its non-
compliance by obtaining a waiver and amendment to the Old Credit Facility (which
has subsequently been retired) providing the required information and curing the
other defaults under the Old Indenture.
The Company has substantial indebtedness and significant debt service
obligations. As of December 31, 1998, the Company had total long-term
indebtedness, including current maturities, aggregating $1.2 billion. The loan
agreement and the guaranty related to Zeigler's industrial revenue bonds and the
indentures governing the Company's Senior Notes and its Senior Subordinated
Notes will permit the Company to incur substantial additional indebtedness in
the future, including secured indebtedness, subject to certain limitations. Such
limitations will include certain covenants that, among other things: (i) limit
the incurrence by the Company of additional indebtedness and the issuance of
certain preferred stock; (ii) restrict the ability of the Company to make
dividends and other restricted payments (including investments); (iii) limit
transactions by the Company with affiliates; (iv) limit the ability of the
Company to make asset sales; (v) limit the ability of the Company to incur
certain liens; (vi) limit the ability of the Company to consolidate or merge
with or into, or to transfer all or substantially all of its assets to, another
person and (vii) limit the ability of the Company to engage in other lines of
business. The Senior Credit Facility will contain additional and more
restrictive covenants as compared to the guaranty and the loan agreement related
to Zeigler's industrial revenue bonds and will require the Company to maintain
specified financial ratios and satisfy certain tests relating to its financial
condition.
The Company may continue to engage in evaluating potential strategic
acquisitions. The Company expects that funding for any such future acquisitions
may come from a variety of sources, depending on the size and nature of such
acquisition. Potential sources of capital include cash generated from
operations, borrowings under the Senior Credit Facility, or other external debt
or equity financings. There can be no assurance that such additional capital
sources will be available to the Company on commercially reasonable terms or at
all.
On December 14, 1998, the Company amended and restated the Senior Credit
Facility, which currently provides for aggregate borrowings of up to $875.0
million. As of December 31, 1998, the Company had approximately $47.0 million of
borrowings available under the Senior Credit Facility (after giving effect to
approximately $178.0 million of outstanding letters of credit). On April 1,
1999, Zeigler converted its industrial revenue bonds, in the aggregate
principal amount of $145.8 million, from a daily interest rate to a fixed
interest rate for the term of the bonds. In connection with the conversion,
the Company and its majority-owned subsidiaries, other than Yankeetown Dock
Corporation, guaranteed the bonds and created a mechanism whereby, upon the
satisfaction of certain conditions, the letters of credit issued by the
Company's lender in support of the bonds will be released. If all of the
letters of credit supporting the bonds are released, the Company will have
approximately $168.9 million of borrowings available under the Senior Credit
Facility (after giving effect to approximately $26.1 million of outstanding
letters of credit). Interest rates on the revolving loans under the Senior
Credit Facility will be based, at the Company's option, on the Base Rate (as
defined therein) or LIBOR (as defined therein). The revolving loan portion ($300
million) of the Senior Credit Facility will mature on the last business day of
December 2003, and the repayment of the term loan portion ($575 million) of the
Senior Credit Facility will occur in unequal installment payments between
September 1999 and December 2004. The Senior Credit Facility will contain
certain restrictions and limitations, including financial covenants that will
require the Company to maintain and achieve certain levels of financial
performance and limit the payment of cash dividends and similar restricted
payments.
The Company made capital expenditures of $14.1 million, $32.2 million and $40.9
million for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company currently anticipates a total of $108.0 million of capital
expenditures in the year ending December 31, 1999, $38.0 million for replacement
of and improvements to equipment and facilities, $22.0 million for expansion at
Mid-vol, $38.0 million for expansion at Bowie,
$6.0 million for the manufacture of an additional Addcar/TM/ highwall mining
system and $4.0 million for expansion of Zeigler's operations.
Since September 30, 1998, the Company's principal liquidity requirements have
been for debt service requirements under the industrial revenue bonds, the
Senior Notes, the Senior Subordinated Notes, the Senior Credit Facility, other
outstanding indebtedness, and for working capital needs and capital
expenditures, including future acquisitions. The Company's ability to make
scheduled payments of principal of, or to pay the interest or Liquidated
Damages, if any, on, or to refinance, its indebtedness (including each issue of
the industrial revenue bonds, the Senior Notes and the Senior Subordinated
Notes), or to fund planned capital expenditures will depend on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Based upon the current level of operations and anticipated
cost savings and operating improvements, the Company believes that cash flow
from operations and available cash, together with available borrowings under the
Senior Credit Facility, will be adequate to meet the Company's liquidity needs
for the reasonably foreseeable future. The Company will likely need to
refinance the Senior Credit Facility, the Senior Notes and the Senior
Subordinated Notes upon or prior to their respective maturities. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations, that anticipated cost savings and operating improvements will be
realized or that future borrowings will be available under the Senior Credit
Facility in an amount sufficient to enable the Company to service its
indebtedness, including the industrial revenue bonds, the Senior Notes and the
Senior Subordinated Notes, or to fund its other liquidity needs. In addition,
there can be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms or at all.
HEDGING POLICY
The Company has not historically purchased or sold coal future contracts or
engaged in financial hedging transactions to any material extent, although it
may do so in the future. A subsidiary of Zeigler was actively engaged in
financial hedging transactions through June 2, 1998, however, that subsidiary
will wind down its operations during the fourth quarter of 1999 and the first
quarter of 2000. The Company may from time to time enter into contracts to
supply coal to utilities or other customers prior to acquiring the coal reserves
necessary to meet all of its obligations under these contracts but it does not
expect this practice to impact its results of operations materially in the near
term.
INFLATION
Due to the capital-intensive nature of the Company's activities, inflation may
have an impact on the development or acquisition of mining operations, or the
future costs of final mine reclamation and the satisfaction of other long-term
liabilities, such as health care or pneumoconiosis (black lung) benefits.
However, inflation in the United States has not had a significant effect on the
Company's operations in recent years.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued which
establishes new rules for the reporting and display of comprehensive income and
its components in the financial statements. Comprehensive income generally
represents all changes in shareholder's equity except those resulting from
investments by or distributions to shareholders. The Company adopted this
statement in 1998 with no impact on the Company as the Company currently has no
transactions which give rise to differences between Net Income and Comprehensive
Income.
Also in June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131") was issued which establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard was adopted for the
Company's 1998 fiscal year-end, comparative information from earlier years were
restated to conform to requirements of this standard.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued which improves and standardizes disclosures
by eliminating certain existing reporting requirements and adding new
disclosures. The statement addresses disclosure issues only and does not change
the measurement of recognition provisions specified in previous statements. The
statement supersedes SFAS No. 87, "Employers' Accounting for Pensions," SFAS No.
88, "Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Company adopted this
statement for its 1998 fiscal year-end.
Effective January 1, 1999, the Company will adopt Statement of Position (SOP)
98-5 "Reporting on the Costs of Start-Up Activities." The new statement
requires that the costs of start-up activities be expensed as incurred. The
Company has not yet evaluated the impact of this statement on the results of
operations or financial position.
IMPACT OF YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations and the ability to
engage in normal business activities. Based on the Company's ongoing assessment
of its business systems, the Company determined that its key business systems
are substantially compliant with year 2000 requirements. The Company has
deployed portions of a new Company-wide management and accounting system with
remaining portions to be deployed by the end of the third quarter. These
systems are year 2000 compliant and are being installed due to additional
functionality needed as a result of the growth of the Company. Non-information
technology components could have an impact on the Company's operations.
Management has substantially completed a review of all non-information
technology components, including embedded technology, equipment-related hardware
and software, as well as communication systems. Remediation efforts have begun
and are expected to be completed by mid-summer. A third-party review is being
scheduled to take place during the month of August to ensure that all required
remediation has been performed. The Company is not materially reliant on third-
party systems (e.g., electronic data interchange) to conduct business.
The Company presently believes that the year 2000 issue will not pose
significant operational problems for its business systems. However, if any
needed modifications and conversions were not made, or were not completed
timely, the year 2000 issue would likely have a material impact on the
operations of the Company. The Company's total year 2000 project cost is not
expected to be material, based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems. The Company has determined it has no
exposure to contingencies related to the year 2000 issue for the majority of the
products it has sold. If any of the Company's suppliers or customers do not, or
if the Company itself does not, successfully deal with the year 2000 issue, the
Company could experience delays in receiving or shipping coal and equipment that
would increase its costs and that could cause the Company to lose revenues and
even customers and could subject the Company to claims for damages. Customer
problems with the year 2000 issue could also result in delays in the Company
invoicing its customers or in the Company receiving payments from them that
would affect the Company's liquidity. Problems with the year 2000 issue could
affect the activities of the Company's customers to the point that their demand
for the Company's products is reduced. The severity of these possible problems
would depend on the nature of the problem and how quickly it could be corrected
or an alternative implemented, which is unknown at this time. In the extreme,
such problems could bring the Company to a standstill.
The Company, based on its normal interaction with its customers and suppliers
and the wide attention the year 2000 issue has received, believes that its
suppliers and customers will be prepared for the year 2000 issue. There can,
however, be no assurance that this will be so. The Company has not yet seen any
need for contingency plans for the year 2000 issue, but this need will be
continuously monitored as the Company acquires more information about the
preparations of its suppliers and customers. Some risks of the year 2000 issue
are beyond the control of the Company and its suppliers and customers. For
example, the Company does not believe that it can develop a contingency plan
which will protect the Company from a downturn in economic activity caused by
the possible ripple effect throughout the entire economy that could be caused by
problems of others with the year 2000 issue.
The Company will utilize both internal and external resources to test its
business systems for year 2000 compliance. The Company anticipates completing
its year 2000 testing this year, which is prior to any anticipated impact on its
operating systems. The time spent by employees of the Company on the year 2000
issue will be expensed as incurred, and is not expected to be material to the
Company. The Company does not expect there to be any other significant costs as
a result of the year 2000 issue.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the ability to locate and
correct all relevant computer codes, the ability to successfully integrate the
business systems of newly acquired entities and similar uncertainties.
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from projected results. In addition,
other written or oral statements which constitute forward-looking statements
have been made and may in the future be made by or on behalf of the Company.
Such forward-looking statements include statements regarding expected
commencement dates of mining operations, projected quantities of future coal
production, estimated reserves and recovery rates, anticipated production rates,
costs and expenditures as well as projected demand or supply for the products
the Company produces, which will affect both sales levels and prices realized by
the Company. Factors that could cause actual results to differ materially
include, among others: risks and uncertainties relating to general domestic and
international economic and political conditions; the cyclical and volatile
prices of coal; the risks associated with having or not having price protection
programs; unanticipated ground and water conditions; unanticipated grade and
geological problems; processing problems; availability of materials and
equipment; the timing of receipt of necessary governmental permits; the ability
to retain and obtain favorable coal contracts; the occurrence of unusual weather
or operating conditions; force majeure events; the
failure of equipment or processes to operate in accordance with specifications
or expectations; labor relations; accidents; delays in anticipated start-up
dates; environmental risks; and the results of financing efforts and financial
market conditions. Many of such factors are beyond the Company's ability to
control or predict. Readers are cautioned not to put undue reliance on forward-
looking statements. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.