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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1998
REGISTRATION NO. 333-39643
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ANKER COAL GROUP, INC.
(EXACT NAME OF REGISTRANT ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 1222 52-1990183
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------
2708 CRANBERRY SQUARE
MORGANTOWN, WEST VIRGINIA 26505
(304)594-1616
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
BRUCE SPARKS
2708 CRANBERRY SQUARE
MORGANTOWN, WEST VIRGINIA 26505
(304)594-4216
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
JOHN B. TEHAN, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212)455-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION
STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
===========================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER NOTE OFFERING PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------
9 3/4% Series B Senior Notes due
2007................................. $125,000,000 100% $125,000,000 $37,878.79(2)
- -----------------------------------------------------------------------------------------------------------
Guarantees of 9 3/4% Series B Senior
Notes(3)............................. $125,000,000 100% $125,000,000 $0(4)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
(3) See inside facing page for table of additional registrant guarantors.
(4) Pursuant to Rule 457(n), no separate filing fee is required for the
guarantees.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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TABLE OF ADDITIONAL REGISTRANT GUARANTORS
ADDRESS INCLUDING ZIP
CODE, AND TELEPHONE
STATE OR OTHER NUMBER INCLUDING
EXACT NAME OF REGISTRANT JURISDICTION OF I.R.S. EMPLOYER AREA CODE, OF
GUARANTOR INCORPORATION OR IDENTIFICATION REGISTRANT GUARANTOR'S PRINCIPAL
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER EXECUTIVE OFFICES
- ------------------------------ ---------------- --------------- --------------------------------
Anker Group, Inc. Delaware 13-2961732 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Anker Energy Corporation Delaware 51-0217205 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Bronco Mining Company, Inc. West Virginia 22-2094405 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Anker Power Services, Inc. West Virginia 55-0700346 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Anker West Virginia Mining West Virginia 55-0699931 2708 Cranberry Square
Company, Inc. Morgantown, West Virginia 26505
(304) 594-1616
Juliana Mining Company, Inc. West Virginia 55-0568083 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
King Knob Coal Co., Inc. West Virginia 55-0488823 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Vantrans, Inc. Delaware 22-2093700 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Melrose Coal Company, Inc. West Virginia 55-0746947 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Marine Coal Sales Company Delaware 13-3307813 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Hawthorne Coal Company, Inc. West Virginia 55-0742562 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Upshur Property, Inc. Delaware 95-4484172 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Heather Glen Resources, Inc. West Virginia 55-0746946 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
New Allegheny Land Holding West Virginia 31-1568515 2708 Cranberry Square
Company, Inc. Morgantown, West Virginia 26505
(304) 594-1616
Patriot Mining Company, Inc. West Virginia 55-0550184 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Vindex Energy Corporation West Virginia 55-0753903 2708 Cranberry Square
Morgantown, West Virginia 26505
(304) 594-1616
Anker Virginia Mining Company, Virginia 54-1867395 2708 Cranberry Square
Inc. Morgantown, West Virginia 26505
(304) 594-1616
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 12, 1998
PRELIMINARY PROSPECTUS
, 1998
$125,000,000
[ANKER LOGO] ANKER COAL GROUP, INC.
OFFER TO EXCHANGE $125,000,000 OF ITS 9 3/4% SERIES B SENIOR NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR $125,000,000 OF ITS OUTSTANDING 9 3/4% SENIOR NOTES DUE 2007
---------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY, ON
, 1998, UNLESS EXTENDED.
Anker Coal Group, Inc. (the "Company"), hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange an aggregate of up to $125,000,000 principal amount of 9 3/4% Series B
Senior Notes due 2007 (the "Exchange Notes") of the Company for an identical
face amount of the issued and outstanding 9 3/4% Senior Notes due 2007 (the "Old
Notes" and together with the Exchange Notes, the "Senior Notes") of the Company
from the Holders (as defined) thereof. As of the date of this Prospectus, there
is $125,000,000 aggregate principal amount of the Old Notes outstanding. The
terms of the Exchange Notes are identical in all material respects to the Old
Notes, except that the Exchange Notes have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and therefore will not bear
legends restricting their transfer and will not contain certain provisions
providing for Liquidated Damages in respect of the Old Notes under certain
circumstances described in the Registration Rights Agreement (as defined), which
provisions will terminate as to all of the Notes upon the consummation of the
Exchange Offer.
Interest on the Senior Notes is payable semiannually in cash in arrears on
April 1 and October 1 of each year, commencing April 1, 1998. The Senior Notes
mature on October 1, 2007. The Senior Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after October 1, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined), if any, to the date of redemption.
Notwithstanding the foregoing, at any time prior to October 1, 2000, the Company
may redeem up to 35% of the original aggregate principal amount of the Senior
Notes with the net proceeds of one or more offerings of common stock of the
Company at a redemption price equal to 109.75% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, to the date of
redemption; provided, that after any such redemption, at least 65% of the
original aggregate principal amount of the Senior Notes remains outstanding.
Upon the occurrence of a Change of Control (as defined), the Company is required
to offer to purchase the Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase. See "Description of Senior
Notes--Repurchase at the Option of Holders--Change of Control."
The Senior Notes are senior unsecured obligations of the Company and rank
pari passu in right of payment with all current and future unsecured senior
indebtedness of the Company and senior to all future subordinated indebtedness
of the Company. The Company's obligations under the Senior Notes are jointly and
severally guaranteed, fully and unconditionally on a senior unsecured basis by
each existing and future Restricted Subsidiary (as defined) (the "Guarantors")
of the Company. Each of the Guarantors is a wholly owned subsidiary of the
Company. As of September 30, 1997, the aggregate principal amount of secured
indebtedness of the Company and the Guarantors which would have effectively
ranked senior to the Senior Notes and the Guarantors' guarantees (the
"Subsidiary Guarantees") was approximately $1.7 million. In addition, the
Company's and the Guarantors' obligations under the Amended and Restated
Revolving Credit Facility (as defined) are secured by a first priority lien on
substantially all of the assets of the Company and the Guarantors and
effectively rank prior to the Senior Notes and the Subsidiary Guaranty. As of
September 30, 1997, the Company had approximately $4.6 million of outstanding
indebtedness under the Amended and Restated Revolving Credit Facility and had an
additional $20.4 million of undrawn availability (which total availability may
be increased to up to $75.0 million upon the achievement of certain financial
tests) thereunder. In addition, as of September 30, 1997, the Company's
subsidiaries had trade liabilities aggregating $28.6 million which would
effectively rank prior to the Senior Notes and the Subsidiary Guarantees. The
Indenture governing the Senior Notes (the "Indenture") permits the Company and
its Restricted Subsidiaries to incur additional indebtedness, including secured
indebtedness, subject to certain limitations. See "Description of Senior
Notes--Certain Covenants."
The Old Notes were issued and sold on September 25, 1997 in a transaction not
registered under the Securities Act in reliance upon an exemption from the
registration requirements thereof. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act. The
Exchange Notes are being offered hereby in order to satisfy certain obligations
of the Company contained in the Registration Rights Agreement. Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 promulgated under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business, such holder has no arrangement
with any person to participate in the distribution of such Exchange Notes and
neither such holder nor any such other person is engaging in or intends to
engage in a distribution of such Exchange Notes. However, the Company has not
sought, and does not intend to seek, its own no-action letter, and there can be
no assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Notwithstanding the foregoing, each
broker-dealer that receives Exchange Notes for its own account as a result of
market making or trading activities (each, a "Participating Broker-Dealer")
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with any resale of Exchange Notes received in exchange for such Old
Notes where such Old Notes were acquired by such Participating Broker-Dealer as
a result of market-making activities or other trading activities (other than Old
Notes acquired directly from the Company). The Company has agreed to make
available for a period equal to the lesser of (i) 180 days from the date on
which the Exchange Offer Registration Statement is declared effective or (ii)
the period ending on the date when all broker dealers holding Old Notes have
sold all Old Notes held by them, this Prospectus to any Participating Broker
Dealer and any other persons, if any, with similar prospectus delivery
requirements for use in connection with any resale of Exchange Notes. See "Plan
of Distribution."
The Company does not intend to apply for listing of the Exchange Notes on any
securities exchange or for inclusion of the Exchange Notes in any automated
quotation system. The Old Notes have been designated for trading in the Private
Offering, Resales and Trading through Automated Linkages (PORTAL) market of the
National Association of Securities Dealers, Inc.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The date of acceptance and
exchange of the Old Notes (the "Exchange Date") will be the fourth business day
following the Expiration Date (as defined). Old Notes tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. The
Company will not receive any proceeds from the Exchange Offer. The Company will
pay all of the expenses incident to the Exchange Offer.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION WITH AN
INVESTMENT IN THE SENIOR NOTES.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
contained elsewhere herein. Unless the context indicates otherwise, references
herein to the "Company" or "Anker" mean Anker Coal Group, Inc. and its
consolidated subsidiaries and predecessors. The estimates of the Company's
recoverable reserves as of June 1, 1997 set forth herein have been audited by
John T. Boyd Company ("Boyd") as of such date. All references to "tons" are
references to short tons. For definitions of certain coal-related terms see
"Industry Overview" and "Glossary of Selected Terms."
THE COMPANY
Anker is a growth-oriented producer of coal used principally for
electricity generation and steel production with a focus on selected niche coal
markets in the eastern United States. The Company currently owns and operates a
diverse portfolio of thirteen non-unionized deep and surface coal mines
strategically located in West Virginia and Maryland. In 1996, approximately 67%
of the Company's revenues from coal sales (including brokered and commission
sales) were made under long-term contracts. The Company's long-term contracts
had a weighted average term of approximately 7.4 years as of June 30, 1997.
Based on contracts currently in place and purchase orders and sales made to
date, the Company expects 1997 coal sales (including brokered and commission
sales) to exceed 13.0 million tons, a 14% increase over 1996 coal sales of 11.6
million tons. Through both acquisitions and development of the Company's
existing reserves, the Company's annual coal production has grown at a compound
annual rate of approximately 15%, from 4.2 million tons per year in 1992 to 7.7
million tons per year in 1996, and the Company's coal reserves have grown at a
compound annual rate of approximately 41%, from 147 million recoverable product
tons as of December 31, 1992 to approximately 664 million recoverable product
tons as of June 1, 1997.
The Company attributes its growth in reserves, production, revenues and
cash flow to its focus on serving niche coal markets and its cost-efficient
operations. The Company believes it has a competitive advantage due to, among
other things, the geographic location of its reserves and the diverse qualities
of its coal. For example, in 1996, the Company sold 2.3 million tons of steam
coal, or approximately 20% of shipments, to independent power producers ("IPPs")
and was the largest supplier of coal to IPPs in the eastern United States.
Because transportation costs can significantly increase the delivered cost of
coal over the mine price of coal, the Company believes its proximity to these
IPPs and other customers provides it with a competitive advantage over other
coal producers. The Company's strategy has been to enter into long-term supply
contracts with its customers, which it may initially fulfill with brokered coal
and subsequently replace with lower-cost coal from its own production. The
Company believes that its ability to supply customers with brokered coal permits
it to secure long-term contracts, which provide the stable source of revenues
and cash flow required to support the opening, expansion or maintenance of mines
to service such contracts.
The Company's niche market strategy has also focused on supplying specific
qualities of coal to satisfy customers' demands in the most cost efficient
manner. The Company supplies premium quality, lower volatility metallurgical
coal ("low vol met coal") to certain integrated steel and merchant coke
producers, for whom this quality of coal is an essential component of coke
production. Low vol met coal sales accounted for approximately 12% of the
Company's coal sales and related revenue for 1996, and the Company believes it
has an approximate 14% share of the domestic low vol met coal market. In
addition, the Company believes that its lower cost, high sulfur reserves are
strategically located near electric generation facilities which can economically
utilize high sulfur coal due to their use of sulfur-reduction technologies and
lower transportation costs.
Approximately 80% of the Company's 1996 shipments were to electric
generation facilities and, consequently, the Company believes that it is well
positioned to benefit from favorable trends in the electric generation industry.
Over the last ten years, coal consumption in the United States has generally
experienced steady annual growth, reaching a record level of 1.0 billion tons in
1996. This steady growth in coal consumption is attributable to similar growth
in the electric generation industry, which accounts for more than 89% of
domestic coal consumption. In 1996, coal-fired facilities generated
approximately 56% of the nation's
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electricity, followed by nuclear (22%), hydroelectric (11%) and gas-fired (9%)
facilities. Because coal is one of the least expensive and most abundant
resources for the production of electricity and imports of coal have not
historically exceeded 1% of domestic coal consumption, domestically produced
coal is expected to continue to play a significant role in the production of
electricity in the future.
The Company further believes that it will benefit from increasing federal
deregulation among electricity producers, which has primarily affected the
wholesale market for electricity. Since 1935, domestic electricity utilities
have operated in a regulated environment, with prices and return on investment
being determined by state utility and power commissions. In April 1996, the
Federal Energy Regulatory Commission (the "FERC") issued orders establishing
rules providing for open access to electricity transmission systems, thereby
initiating consumer choice in electricity purchasing on the wholesale level and
encouraging competition in the generation of electricity. The Company believes
that this trend towards wholesale deregulation will likely (i) increase the
popularity of coal as a source of electricity generation due to its relatively
low cost and (ii) favor coal producers, such as the Company, with diverse
reserves and cost and transportation advantages.
COMPETITIVE STRENGTHS
The Company believes that it possesses the following competitive strengths:
PORTFOLIO OF LONG-TERM CONTRACTS. The Company has secured long-term coal
supply contracts with a weighted average term of approximately 7.4 years as of
June 30, 1997. The Company's long-term contracts have accounted for an average
of approximately 65% of the Company's coal sales revenues (including brokered
and commission sales) from 1992 to 1996. Over the same period, approximately 3.4
million tons of the Company's annual coal shipments covered by long-term
contracts were up for renewal and contracts for 76% of this coal were rolled
over into new long-term contracts upon their expiration. In addition, over the
same period, the Company entered into new long-term contracts for 4.0 million
tons of annual coal shipments. The Company has been successful in negotiating
long-term contracts for its high sulfur coal with IPPs and utilities equipped
with sulfur-reduction technologies. As of June 30, 1997, of the Company's twenty
long-term contracts, eight were for its high sulfur coal.
EFFICIENT OPERATIONS. Historically, the Company has been successful in
reducing its cash cost of operations per ton produced. The Company's cash cost
of operations and selling expenses per ton of coal shipped has declined
approximately 13%, from $25.65 per ton in 1992 to $22.40 per ton in 1996. The
Company has achieved this decrease in costs by retaining a highly motivated,
non-unionized workforce that, with management, has developed and instituted more
efficient mining techniques.
DEMONSTRATED RECORD OF RESERVES AND PRODUCTION EXPANSION. The Company has
demonstrated its ability to increase production from its existing reserve base
as well as grow through acquisitions. The Company has increased its reserve base
approximately 352%, from 147 million recoverable product tons as of December 31,
1992 to approximately 664 million recoverable product tons as of June 1, 1997,
substantially all of which increase was due to acquisitions of reserves. For the
nine months ended September 30, 1997, the Company increased its captive coal
production by approximately 17% over production levels for the same period in
1996. Approximately 21% of this increase was due to increased production from
the Company's existing reserves as of September 30, 1996 and approximately 79%
was due to acquisitions made subsequent to September 30, 1996.
DIVERSE PORTFOLIO OF OPERATIONS AND RESERVES. With a diverse reserve base
of approximately 664 million recoverable product tons, the Company believes that
its results of operations are not dependent on any one of its thirteen mines and
that it is well positioned to meet the varying needs of its customers. As of
June 1, 1997, approximately 22% of the Company's coal reserves met the rigorous
compliance standards for Phase II of the federal Clean Air Act ("compliance
coal"), 29% of its reserves was low sulfur (less than 1.0% sulfur) coal
(including compliance coal) and another 63% of its reserves was medium sulfur
(between 1.0% and 1.8% sulfur) coal. Many of the Company's current customers
that possess the technology to scrub high sulfur coal prefer such coal due to
its lower cost. All of the Company's coal is of a quality suitable for use in
electricity generating facilities. At June 1, 1997, the Company's reserve life
index (defined as total recoverable reserves divided by production for 1996) was
approximately 86.7 years.
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EXPERIENCED MANAGEMENT TEAM. Bruce Sparks, the Company's President and
Chief Executive Officer, has 19 years of experience in the coal industry, has
worked at the Company for the past 12 years and owns 5.1% of the Company's
Common Stock (as defined). Prior to his death, John J. Faltis, the Company's
President, Chief Executive Officer and Chairman of the Board of Directors, had
worked at the Company for the past 22 years and owned 30.4% of the Company's
Common Stock, all of which currently is beneficially owned by his estate. See
"--Recent Developments."
GROWTH STRATEGY
In August 1996, members of senior management and certain funds managed by
First Reserve Corporation (collectively, "First Reserve"), a private investment
firm specializing in the energy industry, acquired the outstanding Common Stock
of the Company (the "Recapitalization"). As a result of the Recapitalization,
First Reserve owns approximately 54.1% of the Company's Common Stock. Senior
management and First Reserve have adopted a business strategy to maintain and
enhance the Company's leading position in certain niche markets by increasing
revenues, cash flow and profitability. To implement this strategy, the Company
will:
EXPAND PRODUCTION FROM RECENTLY ACQUIRED RESERVES. Through the Company's
recent acquisitions and subsequent mine expansion or development, production is
expected to reach 8.5 million tons in 1997, an increase of approximately 10%
from the 7.7 million tons produced in 1996. Specifically, the majority of the
increased production in 1997 has resulted and will result from the operations
acquired in Shelby County, Alabama (0.2 million tons) and Grant County, West
Virginia (0.4 million tons) and from the operations recently developed in
Harrision County, West Virginia (0.4 million tons) and Upshur County, West
Virginia (0.3 million tons). See "Business--Recent Acquisitions and Development
Plans."
EXPAND NICHE MARKETS. The Company has demonstrated its ability to enter
new markets and become a low-cost supplier of coal to end users in these
markets. The Company seeks to leverage this expertise by expanding in its niche
markets where it believes it has a competitive advantage due to coal quality,
proximity to end users, lower production costs or a combination of these and
other factors. The Company believes that its coal trading and brokering
operations will permit it to identify and create new development and acquisition
opportunities.
GROW THROUGH ACQUISITIONS. From June 1, 1996 to May 31, 1997, the Company
acquired 310.3 million tons of recoverable reserves, increasing its reserve base
by approximately 89%. The Company believes that its niche strategy, together
with its proven ability to reduce cash operating costs, positions it to exploit
the increasing trend towards asset rationalization by larger coal mining
companies. The Company presently focuses on building upon its existing market
strength in the mid-Atlantic utility and IPP market in the vicinity of its
existing coal mines, but will also consider the acquisition of mines outside its
primary geographic area of focus if the market and mine fit the Company's niche
strategy. The Company is currently evaluating several acquisition possibilities.
RECENT DEVELOPMENTS
On October 12, 1997, John J. Faltis, the Company's President, Chief
Executive Officer and Chairman of the Board of Directors, was killed in a
helicopter accident in West Virginia. While Mr. Faltis' death may have an
adverse effect on the future direction of the Company, the Company does not
expect that his death will adversely affect the Company's operations, growth or
financial prospects due to the presence of a core management team focused on the
Company's operations. The Company's Board of Directors has elected John Shober,
presently a director of the Company, to succeed Mr. Faltis as Chairman of the
Board. The Company's Board of Directors also has elected Bruce Sparks, formerly
Executive Vice-President, Treasurer and Secretary, to succeed Mr. Faltis as
President of the Company. The Board of Directors also has elected Michael M.
Matesic as Treasurer and B. Judd Hartman as Secretary. As of January 1, 1998,
the seat on the Board of Directors held by Mr. Faltis was vacant. Under the
stockholders' agreement, dated as of August 12, 1996, among the Company, Mr.
Faltis, JJF Group Limited Liability Company, a West Virginia limited liability
company formerly controlled by Mr. Faltis and now controlled by his estate ("JJF
Group"), and
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others (the "Stockholders' Agreement"), for so long as JJF Group owns at least
2% of the Company's Common Stock, it will have the right to nominate and have
elected by stockholders one member of the Company's Board of Directors to fill
the vacancy created by Mr. Faltis' death.
In accordance with the Stockholders' Agreement, the Company has maintained
key man life insurance on the life of Mr. Faltis in the amount of $15 million.
Under the Stockholders' Agreement, the Company must use proceeds from the key
man policy to repurchase as much of the Company's Common Stock owned by JJF
Group as possible, based on the fair market value of such Common Stock,
determined in the manner discussed below.
For the eight month period following Mr. Faltis' death, the Company has the
option under the Stockholders' Agreement to repurchase for cash all (but not
less than all) of the remaining Common Stock held by JJF Group following the
Company's repurchase of Common Stock with proceeds of the key man life
insurance. If the Company does not exercise its option to repurchase JJF Group's
remaining Common Stock, then, for a period of 120 days following the expiration
of the foregoing eight month period, JJF Group has the option under the
Stockholder's Agreement to require the Company to repurchase any of the Common
Stock still held by JJF Group (the "JJF Group Put Option"). If JJF Group
exercises the JJF Group Put Option, the Company has the choice under the
Stockholders' Agreement to pay the repurchase price either in cash or pursuant
to a subordinated note (the principal amount of which would be required to be
payable in seven equal annual installments and interest on which would be
required to be payable annually in arrears).
The purchase price under the Stockholders' Agreement for the repurchase of
Common Stock from JJF Group is fair market value. In accordance with the
Stockholders' Agreement, the Company and JJF Group have engaged The Chase
Manhattan Bank to determine the fair market value of the Common Stock.
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THE EXCHANGE OFFER
THE EXCHANGE OFFER......... The Company is offering to exchange pursuant to the
Exchange Offer up to $125,000,000 aggregate
principal amount of its new 9 3/4% Series B Senior
Notes due 2007 (the "Exchange Notes") for a like
aggregate principal amount of its outstanding
9 3/4% Senior Notes due 2007 (the "Old Notes" and
together with the Exchange Notes, the "Senior
Notes"). The terms of the Exchange Notes are
identical in all material respects (including
principal amount, interest rate and maturity) to
the terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, except
that the Exchange Notes are freely transferrable by
Holders (as defined) thereof (other than as
provided herein), and are not subject to any
covenant regarding registration under the
Securities Act. See "The Exchange Offer."
INTEREST PAYMENTS.......... Interest on the Exchange Notes shall accrue from
the last interest payment date (April 1 or October
1) on which interest was paid on the Notes so
surrendered or, if no interest has been paid on
such Notes, from September 25, 1997 (the "Interest
Payment Date").
MINIMUM CONDITION.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered for exchange.
EXPIRATION DATE; WITHDRAWAL
OF TENDER................ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, unless the
Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to
which the Exchange Offer is extended. Tenders may
be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal Rights."
EXCHANGE DATE.............. The date of acceptance for exchange of the Old
Notes will be the fourth business day following the
Expiration Date.
CONDITIONS TO THE EXCHANGE
OFFER.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. The
Company currently expects that each of the
conditions will be satisfied and that no waivers
will be necessary. See "The Exchange Offer--Certain
Conditions to the Exchange Offer." The Company
reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration
Date upon the occurrence of any such condition.
PROCEDURES FOR TENDERING
OLD NOTES................ Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes and any other required
documentation to the Exchange Agent (as defined) at
the address set forth therein. See "The Exchange
Offer--Procedures for Tendering Old Notes" and
"Plan of Distribution."
USE OF PROCEEDS............ There will be no proceeds to the Company from the
exchange of Notes pursuant to the Exchange Offer.
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FEDERAL INCOME TAX
CONSEQUENCES............. The exchange of Notes pursuant to the Exchange
Offer will not be a taxable event for federal
income tax purposes. See "Certain United States
Federal Income Tax Considerations."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such
beneficial owner's own behalf, such beneficial
owner must, prior to completing and executing the
Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such beneficial
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time.
See "The Exchange Offer--Procedures for Tendering
Old Notes."
GUARANTEED DELIVERY
PROCEDURES............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF EXCHANGE
NOTES.................... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Acceptance of Old Notes
for Exchange; Delivery of Exchange Notes."
EFFECT ON HOLDERS OF
OLD NOTES................ As a result of the making of, and upon acceptance
for exchange of all validly tendered Old Notes
pursuant to the terms of this Exchange Offer, the
Company will have fulfilled a covenant contained in
the Registration Rights Agreement (the
"Registration Rights Agreement") dated September
25, 1997 among the Company and Donaldson, Lufkin &
Jenrette Securities Corporation and Chase
Securities Inc. (the "Initial Purchasers") and,
accordingly, there will be no Liquidated Damages in
respect of the Old Notes pursuant to the terms of
the Registration Rights Agreement, and the holders
of the Old Notes will have no further registration
or other rights under the Registration Rights
Agreement. Holders of the Old Notes who do not
tender their Old Notes in the Exchange Offer will
continue to hold such Old Notes and will be
entitled to all the rights and limitations
applicable thereto under the Indenture between the
Company and Marine Midland Bank relating to the Old
Notes and the Exchange Notes (the "Indenture"),
except for any such rights under the Registration
Rights Agreement that by their terms terminate or
cease to have further effectiveness as a result of
the making of, and the acceptance for exchange of
all validly tendered Old Notes
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pursuant to, the Exchange Offer. All untendered Old
Notes will continue to be subject to the
restrictions on transfer provided for in the Old
Notes and in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered Old Notes
could be adversely affected.
CONSEQUENCE OF FAILURE TO
EXCHANGE................. Holders of Old Notes who do not exchange their Old
Notes for Exchange Notes pursuant to the Exchange
Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set
forth in the legend thereon as a consequence of the
offer or sale of the Old Notes pursuant to an
exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act
and applicable state securities laws. In general,
the Old Notes may not be offered or sold, unless
registered under the Securities Act, except
pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable
state securities laws. The Company does not
currently anticipate that it will register the Old
Notes under the Securities Act.
EXCHANGE AGENT............. Marine Midland Bank is serving as exchange agent
(the "Exchange Agent") in connection with the
Exchange Offer. See "The Exchange Offer--Exchange
Agent."
RISK FACTORS
Prospective investors in the Senior Notes should carefully consider the
matters set forth herein under "Risk Factors."
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical and unaudited pro forma
consolidated financial data of the Company and Anker Group, Inc., the Company's
predecessor ("Anker Group" or the "Predecessor"), at the dates and for the
periods indicated. Historical data for the periods January 1, 1996 to July 31,
1996 and August 1, 1996 to December 31, 1996 have been derived from consolidated
financial statements of the Predecessor and the Company, respectively, audited
by Coopers & Lybrand L.L.P., independent certified public accountants, appearing
elsewhere herein. Historical data for the two years ended December 31, 1995 have
been derived from consolidated financial statements of the Predecessor audited
by Ernst & Young LLP, independent certified public accountants, appearing
elsewhere herein. Historical data for the nine months ended September 30, 1996
and as of and for the nine months ended September 30, 1997 have been derived
from unaudited interim consolidated financial statements of the Predecessor and
the Company, respectively, which, in the opinion of management, have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the information. Data as of and for the nine months
ended September 30, 1997 do not purport to be indicative of results to be
expected for the full year. The adjusted combined statement of operations data,
other data and operating data for the nine months ended September 30, 1996 and
the year ended December 31, 1996 combine the audited results of operations of
the Predecessor for the period January 1, 1996 to July 31, 1996 and of the
Company for the period August 1, 1996 to September 30, 1996 and to December 31,
1996, respectively. The adjusted combined statement of operations data, other
data and operating data for the nine months ended September 30, 1996 and the
year ended December 31, 1996 do not purport to represent what the Company's
consolidated results of operations would have been if the Recapitalization had
actually occurred on January 1, 1996.
The pro forma statement of operations data and other data for the year
ended December 31, 1996 give effect to (i) the Company's acquisition of a 32%
interest in Oak Mountain Energy, L.L.C. which acquired substantially all of the
assets and assumed certain liabilities of Oak Mountain Energy Corporation, Boone
Resources, Inc. and certain of their affiliates (collectively, "Oak Mountain")
in April 1997 (the "Oak Mountain Acquisition"), (ii) the Recapitalization and
(iii) the offering of the Old Notes and the application of the net proceeds
therefrom as if each such transaction had occurred on January 1, 1996, and the
pro forma statement of operations data and other data for the nine months ended
September 30, 1997 give effect to (i) the Oak Mountain Acquisition and (ii) the
offering of the Old Notes and the application of the net proceeds therefrom as
if each such transaction had occurred on January 1, 1997.
The unaudited pro forma adjustments are based upon available information
and certain assumptions which management believes are reasonable. The pro forma
consolidated financial data do not purport to represent what the Company's
consolidated results of operations would have been had the transactions
described above actually occurred at the beginning of the relevant period. In
addition, the unaudited pro forma financial data do not purport to project the
Company's consolidated results of operations for the current year or any future
date or period.
The following information should be read in conjunction with "Unaudited Pro
Forma Consolidated Financial Statements," "Selected Consolidated Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, Oak Mountain Energy, L.L.C. and Oak Mountain and related notes thereto
(the "Consolidated Financial Statements") included elsewhere herein.
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(UNAUDITED)
-------------------------------------------------------------
PRO FORMA(1)
THE PREDECESSOR ADJUSTED THE COMPANY ----------------------------
------------------- ADJUSTED COMBINED ----------- ADJUSTED
COMBINED FOR THE NINE MONTHS COMBINED
YEAR ENDED FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS
DECEMBER 31, YEAR ENDED ENDED SEPTEMBER YEAR ENDED ENDED
------------------- DECEMBER 31, SEPTEMBER 30, 30, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997 1996 1997
(DOLLARS IN THOUSANDS, EXCEPT PER TON DATA)
STATEMENT OF OPERATIONS DATA:
Captive coal sales
revenue............. $170,792 $194,348 $211,675 $159,480 $ 177,630
Brokered coal sales
revenue............. 50,470 49,333 74,218 51,100 60,549
Other revenue......... 6,237 5,216 4,262 3,266 2,639
-------- -------- -------- -------- --------
Total coal sales and
related revenue....... 227,499 248,897 290,155 213,846 240,818 $300,314 $244,240
Gross profit............ 24,325 27,582 30,576 21,314 23,298 33,027 23,457
Total operating
expenses.............. 18,021 18,575 21,853 15,515 19,695 26,119 20,263
Operating income........ 6,304 9,007 8,723 5,799 3,603 6,908 3,194
OTHER DATA:
Adjusted EBITDA(2)...... $ 20,008 $ 23,847 $ 24,522 $ 17,303 $ 17,576(3) $ 26,595 $ 17,580(4)
Depreciation, depletion
and amortization...... 12,083 11,732 14,319 10,464 12,909 18,169 13,316
Other income............ 1,621 3,108 1,480 1,040 1,064 1,518 1,070
Capital expenditures.... 8,950 9,353 9,815 4,598 35,949
Interest expense........ 12,293 9,011
Ratio of Adjusted EBITDA
to interest expense... 2.2x 2.0x
Ratio of net debt to
Adjusted EBITDA(5).... 4.7x
Cash Flow Data:
Net cash provided by
(used in) operating
activities............ 13,421 2,168 19,144 18,048 2,112
Net cash provided by
(used in) investing
activities............ (32,434) 5,021 (86,732) (73,590) (47,884)
Net cash provided by
(used in) financing
activities............ 17,808 4,992 54,509 43,739 45,440
OPERATING DATA:
Captive coal sales(6)... 5,891 6,736 7,804 5,852 6,367
Brokered coal
sales(6).............. 1,442 1,769 2,404 1,656 1,931
Average captive sales
price per ton......... $ 28.99 $ 28.85 $ 27.12 $ 27.25 $ 27.90
Average brokered sales
price per ton......... 35.00 27.89 30.87 30.86 31.36
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................................................... $ 9,427
Total assets...................................................... 312,383
Long-term debt(7)................................................. 135,889
Mandatorily redeemable preferred stock............................ 22,182
Total stockholders' equity........................................ 74,098
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- ------------------------------
(1) The pro forma statement of operations data and other data for the year ended
December 31, 1996 give effect to (i) the Oak Mountain Acquisition, (ii) the
Recapitalization and (iii) the offering of the Old Notes (at an interest
rate of 9.75% per annum) and the application of the net proceeds therefrom
as if each such transaction had occurred on January 1, 1996, and the pro
forma statement of operations data and other data for the nine months ended
September 30, 1997 give effect to (i) the Oak Mountain Acquisition and (ii)
the offering of the Old Notes and the application of the net proceeds
therefrom as if each such transaction had occurred on January 1, 1997.
(2) The Company's earnings before interest, taxes, depreciation, depletion,
amortization, non-cash stock compensation and non-recurring related expenses
and extraordinary item ("Adjusted EBITDA"), for the historical and pro forma
Adjusted Combined Year Ended December 31, 1996 and the Adjusted Combined
nine months ended September 30, 1996 excludes $3.0 million of one-time
charges for non-cash stock compensation and non-recurring related expenses.
Adjusted EBITDA should not be considered as an alternative to operating
earnings (loss) or net income (loss) (as determined in accordance with
generally accepted accounting principles) as a measure of the Company's
operating performance or to net cash provided by operating, investing and
financing activities (as determined in accordance with generally accepted
accounting principles) as a measure of the Company's ability to meet cash
needs. Adjusted EBITDA is included herein as it is a basis upon which the
Company assesses its financial performance and certain covenants in its
borrowing arrangements are tied to similar measures. Since all companies and
analysts do not necessarily calculate Adjusted EBITDA in the same fashion,
Adjusted EBITDA as presented in this Prospectus may not be comparable to
similarly titled measures reported by other companies.
(3) In the nine months ended September 30, 1997 the Company experienced a
decrease in Adjusted EBITDA which was attributable to $1.7 million in
increased costs related to adverse geological conditions at two of the
Company's mines. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(4) For a discussion of the factors affecting pro forma Adjusted EBITDA for the
nine months ended September 30, 1997, see "Notes to Unaudited Pro Forma
Consolidated Financial Statements."
(5) Net debt is defined as total debt less cash and cash equivalents of $6.1
million as of June 30, 1997, on an as adjusted basis.
(6) In thousands of tons.
(7) Includes current portion of long-term debt. See the Consolidated Financial
Statements included elsewhere herein.
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RISK FACTORS
Holders of Old Notes should consider carefully the risk factors set forth
below, as well as the other information set forth herein, before deciding to
tender Old Notes in the Exchange Offer. The risk factors set forth below are
generally applicable to the Old Notes as well as the Exchange Notes.
This Prospectus contains statements which constitute forward-looking
statements. Those statements appear in a number of places herein and include
statements regarding the intent, belief or current expectations of the Company,
primarily with respect to the future operating performance of the Company or
related industry developments. Holders of Old Notes are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ from those described
in the forward-looking statements as a result of various factors, many of which
are beyond the control of the Company. The information contained herein,
including, without limitation, the information set forth below and the
information under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations," identifies important factors that could
cause such differences.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
Old Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. The Company does not currently intend to register the Old Notes under the
Securities Act. Based on interpretations by the staff of the Commission, the
Company believes that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Old Notes were acquired in the
ordinary course of such Holders' business and such Holders have no arrangement
with any person to participate in the distribution of such Exchange Notes. Each
Participating Broker-Dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes will be
adversely affected.
LEVERAGE AND DEBT SERVICE REQUIREMENTS
The Company has substantial indebtedness and significant debt service
obligations. As of September 30, 1997, the Company had total long-term
indebtedness, including the Old Notes and current maturities, in aggregate
principal amount of $135.9 million. The Indenture permits the Company and its
Restricted Subsidiaries to incur additional indebtedness, including secured
indebtedness, subject to certain limitations. See "Capitalization" and
"Description of Senior Notes--Certain Covenants." For the nine month period
ended September 30, 1997, on a pro forma basis, after giving effect to the
offering of the Old Notes and the application of the net proceeds therefrom, the
Company's earnings would have been insufficient to cover fixed charges in the
amount of approximately $4.7 million.
The Company's high degree of leverage could have important consequences to
the holders of the Senior Notes including, without limitation, (i) a substantial
portion of the Company's cash provided from operations will be committed to the
payment of debt service and will not be available to the Company for other
purposes, (ii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures or acquisitions may be limited
and (iii) the Company's levels of indebtedness may limit the Company's
flexibility in reacting to changes in its business environment. See "Description
of Certain Indebtedness" and "Description of Senior Notes."
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The Company's ability to pay principal and interest on the Senior Notes and
to satisfy its other debt service obligations will depend upon the future
operating performance of its subsidiaries, which will be affected by prevailing
economic conditions in the markets they serve and financial, business and other
factors, certain of which are beyond their control, as well as the availability
of borrowings under the Amended and Restated Revolving Credit Facility or
successor facilities. To satisfy its debt service obligations, the Company may
be required to refinance all or a portion of its existing indebtedness,
including the Senior Notes, at or prior to maturity or sell assets or seek to
raise additional equity capital. No assurance can be given that any such debt or
equity financing will be available to the Company on acceptable terms, if at
all.
HOLDING COMPANY STRUCTURE; RANKING OF SENIOR NOTES
The Company is a holding company that conducts all of its operations
exclusively through its subsidiaries. The Company's only significant assets are
the capital stock of its wholly owned subsidiaries. As a holding company, the
Company is dependent on dividends or other distributions of funds from its
subsidiaries to meet the Company's debt service and other obligations, including
its obligations under the Senior Notes. The Guarantors guarantee the
indebtedness under the Amended and Restated Revolving Credit Facility, under
which all obligations are secured by a first priority lien on substantially all
of the assets of the Company and the Guarantors. As of September 30, 1997, the
Company had approximately $4.6 million of outstanding indebtedness under the
Amended and Restated Revolving Credit Facility and had an additional $20.4
million of undrawn availability (which total availability may be increased to up
to $75.0 million upon the achievement of certain financial tests) thereunder
which would effectively rank prior to the Senior Notes and the Subsidiary
Guarantees. See "Description of Certain Indebtedness."
As of September 30, 1997, the aggregate principal amount of secured
indebtedness of the Company and the Guarantors which would have effectively
ranked senior to the Senior Notes and the Subsidiary Guarantees would have been
approximately $1.7 million. In addition, as of September 30, 1997, the Company's
subsidiaries had trade liabilities aggregating $28.6 million which would
effectively rank prior to the Senior Notes and the Subsidiary Guarantees.
RELIANCE ON MAJOR CONTRACTS; CUSTOMER CONCENTRATION
A substantial portion of the Company's coal is sold pursuant to long-term
coal supply contracts which are significant to the stability and profitability
of the Company's operations. The execution of a satisfactory long-term contract
is frequently the basis on which the Company undertakes the development of coal
reserves required to be supplied under the contract. In 1996, approximately 67%
of the Company's revenues from coal sales (including brokered and commission
sales) were made under long-term contracts. The Company's long-term contracts
had a weighted average term of approximately 7.4 years as of June 30, 1997.
Twenty long-term and seven short-term contracts with twenty-one customers
collectively are expected to account for approximately 67% of revenues from coal
sales in 1997. As of the Issue Date of the Old Notes, most of the Company's
contracts provided for coal to be sold at a price which exceeded the price at
which such coal could be sold in the spot market.
The Company's long-term contracts with affiliates of AES Corporation
("AES") accounted for more than 16.0% of the Company's revenues in 1996 and are
expected to account for approximately 18% of revenues in 1997. In addition, the
Company's long-term contracts with Virginia Electric and Power Company ("VEPCO")
accounted for approximately 6.0% of the Company's revenues in 1996 and are
expected to account for approximately 8% of revenues in 1997. The loss of these
and other long-term contracts could have a material adverse effect on the
Company's financial condition and results of operations. See
"Business--Long-Term Coal Supply Contracts."
Virtually all of the Company's long-term coal supply contracts are subject
to price adjustment provisions which permit an increase or decrease at specified
times (typically annually) in the contract price to reflect changes in certain
price or other economic indices, taxes and other charges. Three of the Company's
twenty long-term coal supply contracts also contain price reopener provisions
which provide for the contract price to be adjusted upward or downward at
specified times on the basis of market factors. Failure of the parties to
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agree on a price pursuant to such price adjustment and reopener provisions can
lead to early termination of the contracts. The long-term contracts also
typically contain force majeure provisions allowing suspension of performance by
the Company or the customer to the extent necessary during the duration of
certain events beyond the control of the affected party, including labor
disputes and changes in government regulations. See "Business--Long-Term Coal
Supply Contracts."
The operating profit margins realized by the Company under its long-term
coal supply contracts depend on a variety of factors. In addition, price
adjustment, price reopener and other provisions may reduce the insulation from
short-term coal price volatility provided by such contracts. If any of the
Company's long-term contracts were modified or terminated, the Company could be
adversely affected to the extent that it is unable to find alternate customers
at the same level of profitability. The Company is currently involved in
discussions relating to the possible restructuring of a major contract pursuant
to which a lump-sum payment would be made in advance in exchange for a reduction
in per ton pricing for the remaining term of the contract. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Long-Term Coal Supply Contracts" and "Business--Legal Proceedings."
CSX, NORFOLK SOUTHERN ("NS") AND CONRAIL DEPENDENCE
Approximately 70% of the Company's coal shipments travel via rail on the
CSX, NS and Conrail railroad lines, while the remaining 30% travel by truck or
by barge. The Company's ability to deliver coal and reach its markets is to a
large extent dependent on the CSX, NS and Conrail railroad lines. Major work
stoppages or substantial increases in the cost of their services could adversely
affect the Company's ability to deliver coal shipments and the Company's
financial condition and results of operations.
CSX and NS are presently negotiating the acquisition of Conrail, which may
affect the Company's rail rates and access to markets. Further, those of the
Company's competitors who were only served by Conrail's MGA rail line prior to
the CSX/NS acquisition and merger with Conrail will be jointly served by CSX and
NS following the acquisition and merger. As a result of the acquisition and
merger, certain of the Company's competitors will be able to transport coal
without incurring switching costs between railroads ("single rail line hauls")
to most of the northeastern and southeastern coal markets. Access to single rail
line hauls may provide these competitors with improved market access and a
transportation cost advantage over the Company and other eastern coal producers.
IMPORTANCE OF ACQUISITIONS AND RELATED RISKS
The Company has grown through the acquisition of coal companies, coal
properties, coal leases and related assets, and management believes that such
acquisitions will continue to be important to the Company. The inability of the
Company to make such acquisitions in the future, due to restrictions under the
Company's existing or future debt agreements, competition from other coal
companies for such properties or the lack of suitable acquisition candidates,
could limit the Company's future growth. Further, acquisitions involve a number
of special risks, including possible adverse effects on the Company's operating
results, diversion of management's attention, failure to retain key acquired
personnel and risks associated with unanticipated events or liabilities, some or
all of which could have a material adverse effect on the Company's financial
condition and results of operations. There can be no assurance that the Company
will be successful in the development of such acquisitions or joint ventures or
that the acquired companies or other businesses acquired in the future will
achieve anticipated revenues and earnings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
HIGHLY COMPETITIVE INDUSTRY
The United States coal industry is highly competitive, with numerous
producers in all coal producing regions. The Company competes with other large
producers and hundreds of small producers in the United States and abroad. Many
of the Company's customers are also customers of the Company's competitors. The
markets in which the Company sells its coal are highly competitive and affected
by factors beyond the Company's control. Continued demand for the Company's coal
and the prices that the Company will be able
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to obtain will depend primarily on coal consumption patterns of the domestic
electric utility industry, which in turn are affected by the demand for
electricity, coal transportation costs, environmental and other governmental
regulations and orders, technological developments and the availability and
price of competing coal and alternative fuel supply sources such as oil, natural
gas, nuclear energy and hydroelectric energy. See "Business--Regulation and
Laws" and "Business--Competition." In addition, during the mid-1970's and early
1980's, a growing coal market and increased demand attracted new investors to
the coal industry and spurred the development of new mines and added production
capacity throughout the industry. Although demand for coal has grown over the
recent past, the industry has since been faced with over-capacity, which in turn
has increased competition and lowered prevailing coal prices. Moreover, because
of greater competition for electricity and increased pressure from customers and
regulators to lower electricity prices, public utilities are lowering fuel costs
by buying higher percentages of spot coal through a competitive bidding process
and by only buying the amount of coal necessary to meet their requirements.
TRANSPORTATION
The United States coal industry depends on rail, trucking and barge
transportation to deliver shipments of coal to customers. Disruption of these
transportation services could temporarily impair the Company's ability to supply
coal to its customers and thus adversely affect the Company's business and
operating results. Transportation costs are a significant component of the total
cost of supplying coal to customers and can affect significantly a coal
producer's competitive position and profitability. Increases in the Company's
transportation costs, or changes in such costs relative to transportation costs
incurred by providers of competing coal or of other fuels, could have an adverse
effect on the Company's operations and business.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture contains certain covenants that, among other things: (i)
limit the incurrence by the Company and its Restricted Subsidiaries of
additional indebtedness and the issuance of certain preferred stock; (ii)
restrict the ability of the Company and its Restricted Subsidiaries to make
dividends and other restricted payments (including investments); (iii) limit the
ability of the Restricted Subsidiaries to incur dividend and other payment
restrictions; (iv) limit transactions by the Company and its Restricted
Subsidiaries with affiliates; (v) limit the ability of the Company and its
Restricted Subsidiaries to make asset sales; (vi) limit the ability of the
Company and its Restricted Subsidiaries to incur certain liens; (vii) 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 (viii) limit the
ability of the Company to engage in other lines of business. See "Description of
Senior Notes--Certain Covenants." In addition, the Amended and Restated
Revolving Credit Facility contains additional and more restrictive covenants as
compared to the Indenture and requires the Company to maintain specified
financial ratios and satisfy certain tests relating to its financial condition.
See "Description of Certain Indebtedness--Amended and Restated Revolving Credit
Facility."
The Company's ability to comply with the covenants in the Indenture and the
Amended and Restated Revolving Credit Facility may be affected by events beyond
its control, including prevailing economic, financial, competitive, legislative,
regulatory and other conditions. The breach of any such covenants or
restrictions could result in a default under the Indenture and/or the Amended
and Restated Revolving Credit Facility which would permit the holders of the
Senior Notes and/or the lenders under the Amended and Restated Revolving Credit
Facility, as the case may be, to declare all amounts borrowed thereunder to be
due and payable, together with accrued and unpaid interest, and the commitments
of the lenders to make further extensions of credit under the Amended and
Restated Revolving Credit Facility could be terminated. If the Company were
unable to repay its indebtedness to the lenders under the Amended and Restated
Revolving Credit Facility, such lenders could proceed against any or all of the
collateral securing the indebtedness under the Amended and Restated Revolving
Credit Facility, which collateral will consist of substantially all of the
assets of the Company and the Guarantors. In addition, if the Company fails to
comply with the financial and operating covenants contained in the Amended and
Restated Revolving Credit Facility, such failure could result in an event of
default thereunder, which could permit the acceleration of the debt incurred
thereunder and, in some cases, cross-acceleration and cross-default of
indebtedness outstanding under other debt
14
18
instruments of the Company, including the Senior Notes. See "Description of
Senior Notes" and "Description of Certain Indebtedness--Amended and Restated
Revolving Credit Facility."
CONTROL BY PRINCIPAL STOCKHOLDER
Approximately 54.1% of the Company's outstanding common stock is owned by
First Reserve. Accordingly, First Reserve is able to control the election of the
directors of the Company and to determine the corporate and management policies
of the Company, including decisions relating to any mergers or acquisitions of
the Company, sales of all or substantially all of the Company's assets and other
significant corporate transactions, which transactions may result in a Change of
Control under the Indenture. See "Ownership of Common Stock."
PURCHASE OF SENIOR NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, the Company is required, subject to certain
conditions, to offer to purchase all outstanding Senior Notes at a purchase
price equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase. The
source of funds for any such purchase would be the Company's available cash or
cash generated from other sources, including borrowings, sales of assets, sales
of equity or funds provided by a new controlling person. The Amended and
Restated Revolving Credit Facility restricts the purchase of Senior Notes upon a
Change of Control. A Change of Control likely would constitute an event of
default under the Amended and Restated Revolving Credit Facility that would
permit the lenders to accelerate the debt thereunder. In such event, the Company
likely would attempt to refinance the indebtedness outstanding under the Amended
and Restated Revolving Credit Facility and the Senior Notes. There can be no
assurance that sufficient funds will be available at the time of any Change of
Control to make any required purchases of Senior Notes tendered and to repay
indebtedness outstanding under the Amended and Restated Revolving Credit
Facility. See "Description of Certain Indebtedness--Amended and Restated
Revolving Credit Facility" and "Description of the Senior Notes--Repurchase at
the Option of the Holders--Change of Control."
RISKS INHERENT TO MINING
The Company's mining operations are subject to conditions beyond the
Company's control which can negatively or positively affect the cost of mining
at particular mines for varying lengths of time. These conditions include
weather conditions, unexpected maintenance problems, variations in coal seam
thickness, variations in the amount of rock and soil overlying the coal deposit,
variations in rock and other natural materials, disruption of transportation
services, variations in geological conditions and other conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GOVERNMENT REGULATION OF THE MINING INDUSTRY
The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, permitting and
licensing requirements, air quality standards, water pollution, the reclamation
and restoration of mining properties after mining is completed, the discharge of
materials into the environment, surface subsidence from underground mining and
the effects that mining has on groundwater quality and availability. In
addition, the industry is affected by significant legislation mandating certain
benefits for current and retired coal miners. Numerous governmental permits and
approvals are required for mining operations. The Company believes all permits
required to conduct its present mining operations have been obtained. The
Company may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed
exploration for or production of coal may have upon the environment. All
requirements imposed by any such authority may be costly and time-consuming and
may delay commencement or continuation of exploration or production operations.
The possibility exists that new legislation and/or regulations and orders may be
adopted which may significantly impact the Company's mining operations, its cost
structure and/or its customers' ability to use coal. New legislation, including
proposals related to the protection of the environment which would further
regulate and tax the coal industry, may also require the Company or its
customers to change their operations significantly or incur increased
15
19
costs. Such factors and legislation (if enacted) could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Employees and Labor Relations" and "Business--Regulation and Laws."
IMPACT OF CLEAN AIR ACT AMENDMENTS ON COAL CONSUMPTION
The federal Clean Air Act ("Clean Air Act"), including the Clean Air Act
Amendments ("Clean Air Act Amendments"), and corresponding state laws which
regulate the emissions of materials into the air, affect coal mining operations
both directly and indirectly. Coal mining and processing operations may be
directly affected by Clean Air Act permitting requirements and/or emissions
control requirements relating to particulate matter (e.g., "fugitive dust").
Coal mining and processing may also be impacted by future regulation of fine
particulate matter measuring 2.5 micrometers in diameter or smaller. Regulations
relating to fugitive dust and coal emissions may restrict the Company's ability
to develop new mines or could require the Company to modify its existing
operations. The Clean Air Act indirectly affects coal mining operations by
extensively regulating the air emissions of coal-fueled electric power
generating plants. Title IV of the Clean Air Act Amendments places limits on
sulfur dioxide emissions from electric power generation plants. The limits set
baseline emission standards for such facilities. Reductions in such emissions
will occur in two phases: the first began in 1995 ("Phase I") (applicable to
certain identified facilities) and the second will begin in 2000 ("Phase II")
(applicable to all facilities, including those subject to the 1995
restrictions). The affected utilities have been and may be able to meet these
requirements by, among other ways, switching to lower sulfur fuels, installing
pollution control devices such as scrubbers, reducing electricity generating
levels or purchasing or trading "pollution credits." Specific emissions sources
will receive these credits which utilities and industrial concerns can trade or
sell to allow other units to emit higher levels of sulfur dioxide.
The effect of the Clean Air Act Amendments on the Company cannot be
completely ascertained at this time. The Company believes that implementation of
Phase II will likely exert a downward pressure on the price of high sulfur coal,
as additional coal-burning electric power plants become subject to the
restrictions of Title IV. This price effect is expected to result after the
large bank of pollution credits which has developed in connection with Phase I
has been reduced and before utilities electing to comply with Phase II by
installing scrubber sulfur-reduction technologies are able to implement this
compliance strategy. The extent to which this expected price decrease will
adversely affect the Company will depend upon a number of factors, including the
Company's ability to secure long-term contracts for its high sulfur coal. See
"--Reliance on Major Contracts; Customer Concentration," "Business--Long-Term
Coal Supply Contracts" and "Business--Regulation and Laws."
The Clean Air Act Amendments also require that existing major sources of
nitrogen oxides in moderate or higher ozone non-attainment areas install
reasonably available control technology ("RACT") for nitrogen oxides, which are
precursors of ozone. In addition, stricter ozone standards are expected to be
implemented by the United States Environmental Protection Agency (the "EPA") by
2003. The area from northern Virginia through Maine was designated as an ozone
transport region ("OTR"). The Ozone Transport Assessment Group ("OTAG"), formed
to make recommendations to the EPA for addressing ozone problems in the eastern
United States, submitted its final recommendations to the EPA in June 1997.
OTAG's recommendations regarding strategies for reducing ozone and precursor
emissions may result in even more stringent emissions limits for eastern states
such as West Virginia. Installation of RACT, and any control measures beyond
RACT, that the Ozone Transport Commission, states and the EPA may require will
make it more costly to operate coal fired power plants and, depending on the
requirements of individual state attainment plans and the development of revised
new source performance standards, could make coal a less attractive fuel
alternative in the planning and building of power plants in the future. If
coal's share of the capacity for power generation were to be reduced, a material
adverse effect on the Company's financial condition and results of operations
could result. The effect such legislation or other legislation that may be
enacted in the future could have on the coal industry in general and on the
Company in particular cannot be predicted with certainty. Such legislation
limits the ability of some of the Company's customers to burn high sulfur coals
unless these customers have or are willing to install scrubbers, to blend coal
or to bear the cost of acquiring emission credits
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20
which permit them to burn high sulfur coal. No assurance can be given that the
implementation of the Clean Air Act Amendments will not adversely affect the
Company.
REPLACEMENT AND RECOVERABILITY OF RESERVES
The Company's future success depends upon its ability to find, develop or
acquire additional coal reserves that are economically recoverable. The
recoverable reserves of the Company will generally decline as reserves are
depleted, except to the extent that the Company conducts successful exploration
or development activities or acquires properties containing recoverable
reserves, or both. In order to increase reserves and production, the Company
must continue its development and exploration and recompletion programs or
undertake other replacement activities. The Company's current strategy includes
increasing its reserve base through acquisitions of producing properties and by
continuing to exploit its existing properties. There can be no assurance,
however, that the Company's planned development and exploration projects and
acquisition activities will result in significant additional reserves or that
the Company will have continuing success developing additional mines. For a
discussion of the Company's reserves, see "Business--Coal Reserves."
PRICE FLUCTUATIONS AND MARKETS
The Company's results of operations are highly dependent upon the prices
received for the Company's coal. Although 67% of the Company's sales in 1996
were made pursuant to long-term fixed-price contracts, the balance of sales in
1996 were made in the spot market, or pursuant to contracts based on spot market
prices and not pursuant to long-term, fixed-price contracts. Accordingly, the
prices received by the Company for a portion of its coal production are
dependent upon numerous factors beyond the control of the Company. These factors
include, but are not limited to, the level of consumer product demand for
electricity, governmental regulations and taxes, the price and availability of
alternative energy sources, and the overall economic environment. Furthermore,
virtually all of the Company's long-term contracts include price adjustment
provisions which permit an increase or decrease at specified times in the
contract price to reflect changes in certain price or other economic indices,
taxes and other charges, and three of the Company's twenty long-term coal supply
contracts contain price reopener provisions which provide for the contract price
to be adjusted upward or downward at specified times on the basis of market
factors. See "--Reliance on Major Contracts; Customer Concentration." Any
significant decline in prices for coal could have a material adverse effect on
the Company's financial condition, results of operation and quantities of
reserves recoverable on an economic basis. Should the industry experience
significant price declines from current levels or other adverse market
conditions, the Company may not be able to generate sufficient cash flow from
operations to meet its obligations and make planned capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Regulation and
Laws."
The availability of a ready market for the Company's coal production also
depends on a number of factors, including the demand and supply of low sulfur
coal, and the availability of pollution credits. See "--Impact of Clean Air Act
Amendments on Coal Consumption."
RELIANCE ON ESTIMATES OF RECOVERABLE RESERVES
There are numerous uncertainties inherent in estimating quantities of
recoverable reserves, including many factors beyond the control of the Company.
The reserve data set forth herein represent only engineering estimates of the
Company audited by Boyd. Estimates of economically recoverable coal reserves and
future net cash flows necessarily depend upon a number of variable factors and
assumptions, such as geological and mining conditions (which may not be fully
identified by available exploration data and/or differ from experience in
current working faces), historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future coal prices, future
operating costs, severance and excise taxes, development costs and reclamation
costs, all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of coal
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of future net cash flows
expected
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21
therefrom prepared by different engineers or by the same engineers at different
times may vary substantially. Actual coal tonnage recovered from identified
reserve areas or properties, revenues and expenditures with respect to the
Company's reserves may vary from estimates, and such variances may be material.
See "Business--Coal Reserves."
DEPENDENCE UPON MANAGEMENT
On October 12, 1997, John J. Faltis, the Company's President, Chief
Executive Officer and Chairman of the Board of Directors, was killed in a
helicopter accident in West Virginia. While Mr. Faltis' death may have an
adverse effect on the future direction of the Company, the Company does not
expect that his death will adversely affect the Company's operations, growth or
financial prospects due to the presence of a core management team focused on the
Company's operations. The Company's Board of Directors has elected John Shober,
presently a director of the Company, to succeed Mr. Faltis as Chairman of the
Board. The Company's Board of Directors also has elected Bruce Sparks, formerly
Executive Vice-President, Treasurer and Secretary, to succeed Mr. Faltis as
President of the Company. The Board of Directors also has elected Michael M.
Matesic as Treasurer and B. Judd Hartman as Secretary. As of January 1, 1998,
the seat on the Board of Directors held by Mr. Faltis was vacant. With Mr.
Faltis' death, the success of the Company will become increasingly dependent on
Mr. Sparks and other key personnel. If Mr. Sparks becomes unwilling or unable to
serve in his new role, the Company's business, operations and prospects would
likely be further adversely affected. Mr. Sparks entered into an employment
agreement with the Company and several of its subsidiaries in connection with
the Recapitalization. See "Management -- Employment Agreements." The Company
maintains key person life insurance for Mr. Sparks.
UNIONIZATION OF LABOR FORCE
The Company is not a party to any collective bargaining agreement and
considers its relations with its employees to be good. If some or all of the
Company's currently non-union operations were to become unionized, the Company
could incur higher labor costs and an increased risk of work stoppages. There
can be no assurance that the Company's workforce will not unionize in the
future. In addition, even if the Company remains non-unionized, its operations
may still be adversely affected by work stoppages at unionized companies.
ABSENCE OF A PUBLIC MARKET FOR EXCHANGE NOTES AND RESTRICTIONS ON TRANSFER
The Exchange Notes will constitute a new issue of securities for which
there is no established trading market. The Company does not intend to list the
Exchange Notes on any national securities exchange or to seek the admission of
the Exchange Notes for quotation through the National Association of Securities
Dealers Automated Quotation System. Although the Initial Purchasers have advised
the Company that they currently intend to make a market in the Exchange Notes,
they are not obligated to do so and may discontinue such market making activity
at any time without notice. In addition, such market making activity will be
subject to the limits imposed by the Securities Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and may be limited during the
Exchange Offer and the pendency of any shelf registration statement. Although
the Old Notes have been designated for trading in the PORTAL market, there can
be no assurance as to the development or liquidity of any market for the
Exchange Notes, the ability of the holders of the Exchange Notes to sell their
Exchange Notes or the price at which the holders would be able to sell their
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including among other things, prevailing interest rates, the Company's
operating results and the market for similar securities.
FRAUDULENT TRANSFER CONSIDERATIONS
Under federal or state fraudulent transfer laws, if a court were to find
that, at the time the Old Notes and Subsidiary Guarantees were issued, the
Company or a Guarantor, as the case may be, (i) issued the Old Notes or a
Subsidiary Guarantee with the intent of hindering, delaying or defrauding
current or future creditors or (ii)(A) received less than fair consideration or
reasonably equivalent value for incurring the indebtedness represented by the
Old Notes or a Subsidiary Guarantee, and (B)(1) was insolvent or was rendered
insolvent by reason of the issuance of the Old Notes or such Subsidiary
Guarantee, (2) was engaged, or about to engage, in a business or transaction for
which its assets were unreasonably small or (3) intended to
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incur, or believed (or should have believed) it would incur, debts beyond its
ability to pay as such debts mature (as all of the foregoing terms are defined
in or interpreted under such fraudulent transfer statutes), such court could
avoid all or a portion of the Company's or a Guarantor's obligations to the
holders of Senior Notes, subordinate the Company's or a Guarantor's obligations
to the holders of the Senior Notes to other existing and future indebtedness of
the Company or such Guarantor, as the case may be, the effect of which would be
to entitle such other creditors to be paid in full before any payment could be
made on the Senior Notes, and take other action detrimental to the holders of
the Senior Notes, including in certain circumstances, invalidating the Senior
Notes. In that event, there would be no assurance that any repayment on the
Senior Notes would ever be recovered by the holders of the Senior Notes.
The definition of insolvency for purposes of the foregoing considerations
varies among jurisdictions depending upon the federal or state law that is being
applied in any such proceeding. However, the Company or a Guarantor generally
would be considered insolvent at the time it incurs the indebtedness
constituting the Old Notes or a Subsidiary Guarantee, as the case may be, if (i)
the fair market value (or fair saleable value) of its assets is less than the
amount required to pay its total existing debts and liabilities (including the
probable liability on contingent liabilities) as they become absolute or matured
or (ii) it is incurring debts beyond its ability to pay as such debts mature.
There can be no assurance as to what standard a court would apply in order to
determine whether the Company or a Guarantor was "insolvent" as of the date the
Old Notes and Subsidiary Guarantees were issued, or that, regardless of the
method of valuation, a court would not determine that the Company or a Guarantor
was insolvent on that date. Nor can there be any assurance that a court would
not determine, regardless of whether the Company or a Guarantor was insolvent on
the date the Old Notes and Subsidiary Guarantees were issued, that the payments
constituted fraudulent transfers on another ground.
The Company believes that it and each Guarantor will not be insolvent at
the time of or as a result of the consummation of the Offering, that it and each
Guarantor will not engage in a business or transaction for which its remaining
assets constitute unreasonably small capital and that it and each Guarantor did
not and does not intend to incur, or believes that it will incur, debts beyond
its ability to pay such debts as they mature. There can be no assurance,
however, that a court passing on such questions would agree with the Company.
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THE COMPANY
The Company is a growth-oriented producer of coal used principally for
electricity generation and steel production with a focus on selected niche coal
markets in the eastern United States. The Company currently owns and operates a
diverse portfolio of thirteen non-unionized deep and surface coal mines
strategically located in West Virginia and Maryland.
Prior to the Recapitalization, Anker Holding B.V., a trading company
incorporated in the Netherlands ("Anker Holding"), owned approximately 94% of
the common stock of the Predecessor. Willem G. Rottier owns 100% of the stock of
Anker Holding through various subsidiaries.
The Company was formed in August 1996 to effect the acquisition of the
Predecessor. The Company was capitalized with $50 million in cash from First
Reserve, in exchange for approximately 54.1% of the Common Stock of the Company
and 10,000 shares of Class B Preferred Stock (as defined). In addition, John J.
Faltis (through JJF Group), Anker Holding and Bruce Sparks (through PPK Group
Limited Liability Company ("PPK Group")) contributed an aggregate of 7.5% of the
common stock of the Predecessor in exchange for 30.4%, 10.4% and 5.1%,
respectively, of the Common Stock of the Company. The Company then acquired the
remaining 92.5% of common stock of the Predecessor from Anker Holding for
approximately $87 million, which was funded by the issuance of $25 million of
Class A Preferred Stock (as defined) to Anker Holding and the payment of $62
million in cash, $12 million of which was borrowed under the Credit Facility. In
addition, the Company assumed $152 million of the Predecessor's outstanding
liabilities.
The Company has accounted for the Recapitalization using the purchase
method of accounting as prescribed under Accounting Principles Bulletin No. 16,
"Accounting for Business Combinations." The Company has designated August 1,
1996 as the effective date of the Recapitalization.
The Company's principal offices are located at 2708 Cranberry Square,
Morgantown, West Virginia 26505 and its telephone number is (304) 594-1616.
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USE OF PROCEEDS
There will be no proceeds to the Company from the exchange of Senior Notes
pursuant to the Exchange Offer.
The net proceeds from the offering of the Old Notes were $119.8 million,
which was used to repay bank indebtedness of the Company under the Credit
Facility outstanding at the time of the offering of the Old Notes. Such
indebtedness was incurred (i) to finance acquisitions made by the Company, (ii)
for capital expenditures and (iii) for working capital purposes. As of September
30, 1997, the Company had approximately $4.6 million of outstanding indebtedness
under the Amended and Restated Revolving Credit Facility and had an additional
$20.4 million of undrawn availability (which total availability may be increased
to up to $75.0 million upon the achievement of certain financial tests)
thereunder for working capital purposes, including acquisitions. See
"Description of Certain Indebtedness."
The Company's indebtedness under the Credit Facility accrued interest at an
average rate of (i) with respect to term loan Tranche A, 8.4% per annum,
maturing in June 2003, (ii) with respect to term loan Tranche B, 8.9% per annum,
maturing in June 2004, and (iii) with respect to the revolving component, 8.4%
per annum, maturing in June 2004.
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CAPITALIZATION
The following table sets forth the historical cash and cash equivalents and
capitalization of the Company as of September 30, 1997 and includes the effect
of the offering of the Old Notes and the application of the net proceeds
therefrom, and the Company entering into the Amended and Restated Revolving
Credit Facility. This table should be read in conjunction with "Use of
Proceeds," "Unaudited Pro Forma Consolidated Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere herein.
SEPTEMBER 30,
1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
----------------------
Cash and cash equivalents................................................. $ 228
========
Long-term debt (including current portion):
Amended and Restated Revolving Credit Facility(1)....................... 4,600
Senior Notes............................................................ 125,000
Other debt(2)........................................................... 6,289
--------
Total debt...................................................... 135,889
--------
Mandatorily redeemable preferred stock(3)................................. 22,182
Total stockholders' equity:
Preferred stock(4)...................................................... 23,000
Common stock............................................................ --
Paid-in-capital......................................................... 57,900
Retained earnings (deficit)............................................. (6,802)
--------
Total stockholders' equity...................................... 74,098
--------
Total capitalization...................................................... $232,169
========
- ------------------------------
(1) Subject to restrictions contained in the Amended and Restated Revolving
Credit Facility, on September 30, 1997, the Company had approximately $4.6
million of outstanding indebtedness under the Amended and Restated Revolving
Credit Facility and had an additional $20.4 million of undrawn availability
(which total availability may be increased to up to $75.0 million upon the
achievement of certain financial tests) thereunder. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness--Amended and Restated Revolving Credit Facility."
(2) Other debt consists primarily of approximately $4.6 million of obligations
of Oak Mountain Energy, L.L.C., which are non-recourse to the Company, but
are required to be stated on the Company's balance sheet in accordance with
the proportionate consolidation method of accounting, and other notes
payable.
(3) Consists of 10,000 shares of Class A preferred stock, par value $2,500 per
share (the "Class A Preferred Stock"), and 1,000 shares of Class D preferred
stock, par value $7,000 per share (the "Class D Preferred Stock"). The Class
A Preferred Stock is recorded on the Company's Consolidated Financial
Statements at estimated fair market value, which is less than book value.
The difference of approximately $12 million will be accrued over the
remaining life of the Class A Preferred Stock. See "Description of Capital
Stock" and the notes to the Consolidated Financial Statements.
(4) Consists of 10,000 shares of Class B preferred stock, par value $1,000 per
share (the "Class B Preferred Stock"), and 1,000 shares of Class C preferred
stock, par value $13,000 per share (the "Class C Preferred Stock"). See
"Description of Capital Stock" and the notes to the Consolidated Financial
Statements.
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Financial Statements are
based on the Consolidated Financial Statements included elsewhere herein.
The Unaudited Pro Forma Adjusted Combined Statement of Operations for the
year ended December 31, 1996 gives effect to (i) the Oak Mountain Acquisition,
(ii) the Recapitalization and (iii) the offering of the Old Notes and the
application of the net proceeds therefrom as if each such transaction had
occurred on January 1, 1996.
The Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1997 gives effect to (i) the Oak Mountain Acquisition
and (ii) the offering of the Old Notes and the application of the net proceeds
therefrom as if each such transaction had occurred on January 1, 1997.
The unaudited pro forma adjustments are based upon available information
and certain assumptions which management believes are reasonable. The Unaudited
Pro Forma Consolidated Financial Statements do not purport to represent what the
Company's consolidated results of operations would have been had the
transactions described above actually occurred at the beginning of the relevant
period. In addition, the Unaudited Pro Forma Consolidated Financial Statements
do not purport to project the Company's consolidated results of operations for
the current year or any future date or period.
The Unaudited Pro Forma Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements included elsewhere
herein.
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UNAUDITED PRO FORMA ADJUSTED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------
OAK MOUNTAIN
ACTUAL ACTUAL RECAPITALIZATION ACQUISITION PRO OFFERING AS
COMPANY(1) PREDECESSOR(2) ADJUSTMENTS(3) ADJUSTMENTS(4) FORMA ADJUSTMENTS(5) ADJUSTED
(DOLLARS IN THOUSANDS)
Total coal sales and related
revenue...................... $123,246 $166,909 $ 10,159 $300,314 $300,314
Expenses:
Cost of operations and
selling expenses........... 110,215 149,364 $ (729)(a) 8,907 267,287 267,287
(470)(b)
Depreciation, depletion and
amortization............... 6,437 7,882 507(c) 1,700 18,437 $ (268)(a) 18,169
1,741(d)
170(e)
General and administrative... 3,738 3,796 416 7,950 7,950
-------- -------- ------- ------- -------- ------- --------
Operating income........... 2,856 5,867 (1,219) (864) 6,640 268 6,908
Non-cash stock compensation
and non-recurring related
expenses................... -- 2,969 -- 2,969 2,969
Interest expense............. 2,090 2,796 1,050(f) 106 6,042 6,251(b) 12,293
Other income (expense)....... 373 1,107 38 1,518 1,518
-------- -------- ------- ------- -------- ------- --------
Income before income
taxes.................... 1,139 1,209 (2,269) (932) (853) (5,983) (6,836)
Income taxes (tax benefit)... 485 (134) (635)(g) (261)(a) (545 (a) (1,675) (2,220)
-------- -------- ------- ------- -------- ------- --------
Net income (loss).......... 654 1,343 (1,634) (671) (308) (4,308) (4,616)
Preferred stock dividends.... 512 116 729(h) -- 1,241 -- 1,241
(116)(i)
-------- -------- ------- ------- -------- ------- --------
Net income (loss) available
to common stockholders... $ 142 $ 1,227 $ (2,247) $ (671) $ (1,549) $ (4,308) $ (5,857)
======== ======== ======= ======= ======== ======= ========
OTHER DATA:
Adjusted EBITDA(6)........... $ 26,595
Depreciation, depletion and
amortization............... 18,169
Other income................. 1,518
Interest expense............. 12,293
Ratio of Adjusted EBITDA to
interest expense........... 2.2x
Ratio of net debt to Adjusted
EBITDA(7).................. 4.7x
Ratio of earnings to fixed
charges(8)................. --
24
28
NOTES TO UNAUDITED PRO FORMA ADJUSTED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(1) Reflects results of the Company for the period from August 1, 1996 to
December 31, 1996.
(2) Reflects results of the Predecessor for the period from January 1, 1996 to
July 31, 1996.
(3) Reflects the Recapitalization as if the transaction had taken place
effective January 1, 1996.
(a) Reflects the elimination of reclamation expense related to acquired
properties, which was fully reserved at the time of the
Recapitalization.
(b) Reflects the elimination of expense related to the Coal Industry
Retiree Health Benefit Act of 1992 which was fully reserved at the
time of Recapitalization.
(c) Reflects the additional amortization of goodwill in connection with
the Recapitalization.
(d) Reflects the additional depreciation expense resulting from the
Recapitalization and the recorded basis of machinery and equipment.
(e) Reflects the additional depletion and amortization expense resulting
from the Recapitalization and the recorded basis of coal lands and
mineral rights.
(f) Reflects an increase in interest expense resulting from borrowings
under the Credit Facility at an assumed interest rate of 9%.
(g) Reflects the income tax effects of the pro forma adjustments at an
assumed tax rate of 28%.
(h) Reflects preferred stock dividends related to mandatorily redeemable
preferred stock after the Recapitalization.
(i) Reflects the elimination of existing preferred stock dividends.
(4) Reflects the Oak Mountain Acquisition as if the transaction had taken place
effective January 1, 1996. The Company's ownership percentage is 32.0% and
has been reflected on the proportionate consolidation method of accounting.
(a) Reflects the income tax effects of the pro forma adjustments at an
assumed tax rate of 28%.
(5) Reflects the offering of the Old Notes and the application of the net
proceeds therefrom.
(a) Reflects the additional amortization expense resulting from the
capitalization of fees and other deferred financing costs in
conjunction with the offering of the Old Notes in the amount of $520,
net of write-off of fees and other deferred financing costs related to
the Credit Facility in the amount of $788.
(b) Reflects the increase in interest expense resulting from the offering
of the Old Notes (at an interest rate of 9.75% per annum) in the amount
of $12,187, net of the decrease in interest expense resulting from the
prepayment of the outstanding Credit Facility in the amount of $5,936
on a pro forma basis.
(6) Adjusted EBITDA represents earnings before interest, taxes, depreciation,
depletion, amortization, non-cash stock compensation and non-recurring
related expenses. Adjusted EBITDA excludes $2,969 of one-time charges for
noncash stock compensation and non-recurring related expenses. Adjusted
EBITDA should not be considered as an alternative to operating earnings
(loss) or net income (loss) (as determined in accordance with generally
accepted accounting principles) as a measure of the Company's operating
performance or to net cash provided by operating, investing and financing
activities (as determined in accordance with generally accepted accounting
principles) as a measure of the Company's ability to meet cash needs.
Adjusted EBITDA is included herein as it is a basis upon which the Company
assesses its financial performance and certain covenants in the Company's
borrowing arrangements are tied to similar measures. Since all companies and
analysts do not necessarily calculate Adjusted EBITDA in the same fashion,
Adjusted EBITDA as presented in this Prospectus may not be comparable to
similarly titled measures reported by other companies.
(7) Net debt is defined as total debt less cash and cash equivalents of $6,118
as of June 30, 1997 on an as adjusted basis.
(8) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represents income (loss) from continuing operations before income
taxes and cumulative effects of accounting changes and extraordinary items
plus fixed charges. "Fixed charges" consist of interest expense,
amortization of deferred financing costs and the component of rental expense
that management believes is representative of the interest component of
rental expense. For the pro forma year ended December 31, 1996, earnings
were insufficient to cover fixed charges in the amount of $6,836.
25
29
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------------
OAK MOUNTAIN
ACQUISITION OFFERING
ACTUAL ADJUSTMENTS(1) PRO FORMA ADJUSTMENTS(2) AS ADJUSTED
(DOLLARS IN THOUSANDS)
Total coal sales and related
revenue........................ $240,818 $ 3,422 $ 244,240 $ 244,240
Expenses:
Cost of operations and selling
expenses.................... 217,520 3,263 220,783 220,783
Depreciation, depletion and
amortization................ 12,909 580 13,489 $ (173)(a) 13,316
General and administrative..... 6,786 161 6,947 6,947
-------- ------ -------- ------ --------
Operating income
(loss)............... 3,603 (582) 3,021 173 3,194
Interest expense............... 6,646 70 6,716 2,295(b) 9,011
Other income (expense)......... 1,064 6 1,070 1,070
-------- ------ -------- ------ --------
Loss before income
taxes................ (1,979) (646) (2,625) (2,122) (4,747)
Income tax benefit............. (554) (181)(a) (735) (594)(c) (1,329)
-------- ------ -------- ------ --------
Net loss............... (1,425) (465) (1,890) (1,528) (3,418)
======== ====== ======== ====== ========
Preferred stock dividends........ (957) -- (957) -- (957)
-------- ------ -------- ------ --------
Net income (loss) available to
common stockholders............ $ (2,382) $ (465) $ (2,847) $ (1,528) $ (4,375)(6)
======== ====== ======== ====== ========
OTHER DATA:
Adjusted EBITDA(3)(4).......... $ 17,580
Depreciation, depletion and
amortization................ 13,316
Interest expense............... 9,011
Ratio of Adjusted EBITDA to
interest expense............ 2.0
Ratio of earnings to fixed
charges(5).................. --
26
30
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(1) Reflects the Oak Mountain Acquisition as if the transaction had taken place
effective January 1, 1997. The Company's ownership percentage is 32.0% and
has been reflected on the proportionate consolidation method of accounting.
Effective January 1, 1997, Oak Mountain changed its method of accounting so
that certain expenses which had previously been capitalized were expensed.
Subsequent to the Company's acquisition of its interest in Oak Mountain,
this policy was reversed. Cost of operations and selling expenses have been
reduced by $332 representing the effects of the Company's accounting method
on Oak Mountain for the period prior to the Oak Mountain Acquisition.
(a) Reflects the income tax effects of the pro forma adjustments at an
assumed rate of 28%.
(2) Reflects the offering of the Old Notes and the application of the net
proceeds therefrom.
(a) Reflects the additional amortization expense resulting from the
capitalization of fees and other deferred financing costs in
conjunction with the offering of the Old Notes in the amount of $390,
net of write-off of fees and other deferred financing costs related to
the Credit Facility in the amount of $568.
(b) Reflects the increase in interest expense resulting from the offering
of the Old Notes (at an interest rate of 9.75% per annum) in the amount
of $9,141, net of the decrease in interest expense resulting from the
prepayment of the outstanding Credit Facility in the amount of $6,846.
(c) Reflects the income tax effects of the pro forma adjustments at an
assumed rate of 28%.
(3) Adjusted EBITDA represents earnings before interest, taxes, depreciation,
depletion, amortization, non-cash stock compensation, and non-recurring
related expenses and extraordinary item. Adjusted EBITDA should not be
considered as an alternative to operating earnings (loss) or net income
(loss) (as determined in accordance with generally accepted accounting
principals) as a measure of the Company's operating performance or to net
cash provided by operating, investing and financing activities (as
determined in accordance with generally accepted accounting principals) as a
measure of the Company's ability to meet cash needs. Adjusted EBITDA is
included herein as it is a basis upon which the Company assesses its
financial performance and certain covenants in the Company's borrowing
arrangements are tied to similar measures. Since all companies and analysts
do not necessarily calculate Adjusted EBITDA in the same fashion, Adjusted
EBITDA as presented in this Prospectus may not be comparable to similarly
titled measures reported by other companies.
(4) In the nine months ended September 30, 1997 the Company experienced a
decrease in Adjusted EBITDA, which was attributable to $1,700 in increased
costs related to adverse geological conditions at two of the Company's
mines.
(5) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represents income (loss) from continuing operations before income
taxes and cumulative effects of accounting changes and extraordinary items
plus fixed charges. "Fixed charges" consist of interest expense,
amortization of deferred financing costs and the component of rental expense
that management believes is representative of the interest component of
rental expense. For the nine months ended September 30, 1997, earnings were
insufficient to cover fixed charges in the amount of $4,747.
(6) Excludes a non-recurring charge of $3.9 million, net of income taxes,
related to the Company's debt refinancing.
27
31
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company and the Predecessor at the dates and for the periods
indicated. Data as of December 31, 1996 and for the periods January 1, 1996 to
July 31, 1996 and August 1, 1996 to December 31, 1996 have been derived from
consolidated financial statements of the Predecessor and the Company, audited by
Coopers & Lybrand L.L.P., independent certified public accountants, appearing
elsewhere herein. Data as of December 31, 1992, 1993, 1994, 1995 and for the
years then ended have been derived from consolidated financial statements of the
Predecessor audited by Ernst & Young LLP, independent certified public
accountants. The audited financial statements as of December 31, 1996 and for
the periods January 1, 1996 to July 31, 1996 and August 1, 1996 to December 31,
1996, and as of December 31, 1995 and 1994, and for the years then ended, appear
elsewhere herein. Data for the nine months ended September 30, 1996 and as of
and for the nine months ended September 30, 1997 have been derived from
unaudited interim consolidated financial statements of the Predecessor and the
Company, respectively, which, in the opinion of management, have been prepared
on the same basis as the audited consolidated financial statements and include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the information. Data as of and for the nine months ended
September 30, 1997 do not purport to be indicative of results to be expected for
the full year. The adjusted combined statements of operations data, other data
and operating data for the nine months ended September 30, 1996 and the year
ended December 31, 1996 combine the audited results of operations of the
Predecessor for the period January 1, 1996 to July 31, 1996 and of the Company
for the period August 1, 1996 to September 30, 1996 and to December 31, 1996,
respectively. The adjusted combined statements of operations data, other data
and operating data for the nine months ended September 30, 1996 and the year
ended December 31, 1996 do not purport to represent what the Company's
consolidated results of operations would have been if the Recapitalization had
actually occurred on January 1, 1996.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere herein.
28
32
THE PREDECESSOR
------------------------------------------------------------ THE COMPANY
------------
YEAR ENDED JANUARY 1, AUGUST 1,
DECEMBER 31, 1996 TO 1996 TO
---------------------------------------------- JULY 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996
(DOLLARS IN THOUSANDS, EXCEPT PER TON DATA)
STATEMENT OF OPERATIONS DATA:
Captive coal sales revenue............. $121,483 $143,753 $170,792 $194,348 $126,500 $ 85,175
Brokered coal sales revenue............ 51,145 21,538 50,470 49,333 37,697 36,521
Other revenue.......................... 2,997 3,601 6,237 5,216 2,712 1,550
Total coal sales and related revenue.... 175,625 168,892 227,499 248,897 166,909 123,246
Operating expenses:
Cost of operations and selling
expenses............................. 152,278 147,418 203,174 221,315 149,364 110,215
Depreciation, depletion and
amortization......................... 10,028 10,238 12,083 11,732 7,882 6,437
General and administrative............. 5,053 5,193 5,938 6,843 3,796 3,738
-------- -------- -------- -------- -------- -------
Operating income (expense)............. 8,266 6,043 6,304 9,007 5,867 2,856
Interest expense........................ 2,824 2,718 3,523 6,612 2,796 2,090
Non-cash stock compensation and non-
recurring related expenses............. -- -- -- -- 2,969 --
Other income............................ 1,368 832 1,621 3,108 1,107 373
-------- -------- -------- -------- -------- -------
Income (loss) from continuing
operations before income taxes and
cumulative effect of accounting
changes and extraordinary item....... 6,810 4,157 4,402 5,503 1,209 1,139
Income taxes (tax benefit).............. 1,989 1,368 1,940 2,270 (134) 485
-------- -------- -------- -------- -------- -------
Income (loss) before cumulative effect
of accounting changes and
extraordinary item................... 4,821 2,789 2,462 3,233 1,343 654
Cumulative effect of accounting
changes(1)............................. -- 978 -- -- -- --
Extraordinary item(2)................... (1,363) -- -- -- -- --
-------- -------- -------- -------- -------- -------
Net income (loss)...................... 6,184 3,767 2,462 3,233 1,343 654
Preferred stock dividends(3)............ 161 215 215 215 116 512
-------- -------- -------- -------- -------- -------
Net income (loss) available to common
stockholders......................... $ 6,023 $ 3,552 $ 2,247 $ 3,018 $ 1,227 $ 142
======== ======== ======== ======== ======== =======
Ratio of earnings to fixed charges(4)... 2.6x 1.9x 1.8x 1.6x 1.3x 1.4x
OTHER DATA:
Adjusted EBITDA(5)...................... $ 19,662 $ 17,113 $ 20,008 $ 23,847 $ 14,856 $ 9,666
Depreciation, depletion and
amortization........................... 10,028 10,238 12,083 11,732 7,882 6,437
Other income............................ 1,368 832 1,621 3,108 1,107 373
Capital expenditures.................... 8,977 17,344 8,950 9,353 3,046 6,769
CASH FLOW DATA:
Net cash provided by operating
activities............................. $ 14,952 $ 10,381 $ 13,421 $ 2,168 $ 19,022 $ 1,220
Net cash provided by (used in) investing
activities............................. (14,294) (17,077) (32,434) 5,021 (1,764) (84,968)
Net cash provided by (used in) financing
activities............................. (1,559) 9,222 17,808 4,992 (29,795) 84,304
OPERATING DATA:
Captive coal sales(7)................... 4,397 5,361 5,891 6,736 4,635 3,169
Brokered coal sales(7).................. 1,539 725 1,442 1,769 1,212 1,192
Average captive sales price per ton..... $ 27.63 $ 26.81 $ 28.99 $ 28.85 $ 27.29 $ 26.87
Average brokered sales price per ton.... 33.23 29.71 35.00 27.89 31.10 30.63
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)............... $ 2,194 $ 8,310 $ 12,576 $ 27,599 $ 7,410
Total assets............................ 99,374 109,145 161,372 187,026 259,683
Total long-term debt(8)................. 36,526 45,748 69,910 74,902 88,029
Mandatorily redeemable preferred
stock.................................. 1,600 1,600 1,600 8,600 20,775
Total stockholders' equity.............. 35,386 38,938 41,185 57,203 80,779
(UNAUDITED)
------------------------------
ADJUSTED
ADJUSTED COMBINED THE COMPANY
COMBINED FOR THE -------------
FOR THE NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
<
STATEMENT OF OPERATIONS DATA:
Captive coal sales revenue............. $211,675 $ 159,480 $ 177,630
Brokered coal sales revenue............ 74,218 51,100 60,549
Other revenue.......................... 4,262 3,266 2,639
Total coal sales and related revenue.... 290,155 213,846 240,818
Operating expenses:
Cost of operations and selling
expenses............................. 259,579 192,532 217,520
Depreciation, depletion and
amortization......................... 14,319 10,464 12,909
General and administrative............. 7,534 5,051 6,786
-------- -------- --------
Operating income (expense)............. 8,723 5,799 3,603
Interest expense........................ 4,886 3,702 6,646
Non-cash stock compensation and non-
recurring related expenses............. 2,969 2,969 --
Other income............................ 1,480 1,040 1,064
-------- -------- --------
Income (loss) from continuing
operations before income taxes and
cumulative effect of accounting
changes and extraordinary item....... 2,348 168 (1,979)
Income taxes (tax benefit).............. 351 60 (554)
-------- -------- --------
Income (loss) before cumulative effect
of accounting changes and
extraordinary item................... 1,997 108 (1,425)
Cumulative effect of accounting
changes(1)............................. -- -- --
Extraordinary item(2)................... -- -- 3,849
-------- -------- --------
Net income (loss)...................... 1,997 108 (5,274)
Preferred stock dividends(3)............ 628 324 957
-------- -------- --------
Net income (loss) available to common
stockholders......................... $ 1,369 $ (216) $ (6,231)
======== ======== ========
Ratio of earnings to fixed charges(4)... 1.3x -- --
OTHER DATA:
Adjusted EBITDA(5)...................... $ 24,522 $ 17,303 $ 17,576(6)
Depreciation, depletion and
amortization........................... 14,319 10,464 12,909
Other income............................ 1,480 1,040 1,064
Capital expenditures.................... 9,815 4,598 35,949
CASH FLOW DATA:
Net cash provided by operating
activities............................. $ 2,112
Net cash provided by (used in) investing
activities............................. (47,880)
Net cash provided by (used in) financing
activities............................. 45,440
OPERATING DATA:
Captive coal sales(7)................... 7,804 5,852 6,367
Brokered coal sales(7).................. 2,404 1,656 1,931
Average captive sales price per ton..... $ 27.12 $ 27.25 $ 27.90
Average brokered sales price per ton.... 30.87 30.86 31.36
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)............... $ 9,427
Total assets............................ 312,383
Total long-term debt(8)................. 135,889
Mandatorily redeemable preferred
stock.................................. 22,182
Total stockholders' equity.............. 74,098
29
33
- ------------------------------
(1) Represents the cumulative effect recorded relating to the Company's adoption
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
(2) Represents the Company's utilization of its operating loss carryforwards
recorded as an extraordinary item in 1992 in accordance with the Company's
accounting method and the write-off of unamortized debt issuance costs
related to the Credit Facility in 1997.
(3) Represents accrued and unpaid dividends on Class A Preferred Stock
subsequent to the Recapitalization. See "Description of Capital Stock."
(4) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represents income (loss) from continuing operations before income
taxes and cumulative effects of accounting changes and extraordinary items
plus fixed charges. "Fixed charges" consist of interest expense,
amortization of deferred financing costs and the component of rental expense
that management believes is representative of the interest component of
rental expense. For the nine months ended September 30, 1997, earnings were
insufficient to cover fixed charges in the amount of $2.0 million.
(5) Adjusted EBITDA represents earnings before interest, taxes, depreciation,
depletion, amortization, non-cash stock compensation, non-recurring related
expenses and extraordinary item. Adjusted EBITDA for the Adjusted Combined
Nine Months ended September 30, 1996, for the period from January 1, 1996 to
July 31, 1996 and for the Adjusted Combined Year Ended December 31, 1996
excludes $3.0 million of one-time charges for non-cash stock compensation
and non-recurring related expenses. Adjusted EBITDA should not be considered
as an alternative to operating earnings (loss) or net income (loss) (as
determined in accordance with generally accepted accounting principles) as a
measure of the Company's operating performance or to net cash provided by
operating, investing and financing activities (as determined in accordance
with generally accepted accounting principles) as a measure of the Company's
ability to meet cash needs. Adjusted EBITDA is included herein as it is a
basis upon which the Company assesses its financial performance and certain
covenants in the Company's borrowing arrangements are tied to similar
measures. Since all companies and analysts do not necessarily calculate
Adjusted EBITDA in the same fashion, Adjusted EBITDA as presented in this
Prospectus may not be comparable to similarly titled measures imported by
other companies.
(6) In the nine months ended September 30, 1997, the Company experienced a
decrease in Adjusted EBITDA, which was attributable to $1.7 million in
increased costs related to adverse geological conditions at two of the
Company's mines.
(7) In thousands of tons.
(8) Includes current portion of long-term debt. See the Consolidated Financial
Statements included elsewhere herein.
30
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements included elsewhere herein.
GENERAL
Anker is a growth-oriented producer of coal used principally for
electricity generation and steel production with a focus on selected niche coal
markets in the eastern United States. The Company currently owns and operates a
diverse portfolio of thirteen non-unionized deep and surface coal mines
strategically located in West Virginia and Maryland. In 1996, approximately 67%
of the Company's revenues from coal sales (including brokered and commission
sales) were made under long-term contracts. The Company's long-term contracts
had a weighted average term of approximately 7.4 years as of June 30, 1997.
Based on contracts currently in place and purchase orders and sales made to
date, the Company expects 1997 coal sales (including brokered and commission
sales) to exceed 13.0 million tons, a 14% increase over 1996 coal sales of 11.6
million tons. Through both acquisitions and development of the Company's
existing reserves, the Company's annual coal production has grown at a compound
annual rate of approximately 15%, from 4.2 million tons per year in 1992 to 7.7
million tons per year in 1996, and the Company's coal reserves have grown at a
compound annual rate of approximately 41%, from 147 million recoverable product
tons as of December 31, 1992 to approximately 664 million recoverable product
tons as of June 1, 1997.
The Company was formed in August 1996 to effect the acquisition of the
Predecessor. The Company was capitalized with $50 million in cash from First
Reserve, in exchange for approximately 54.1% of the Common Stock of the Company
and 10,000 shares of Class B Preferred Stock. In addition, John J. Faltis
(through JJF Group), Anker Holding and P. Bruce Sparks (through PPK Group)
contributed an aggregate of 7.5% of the common stock of the Predecessor in
exchange for 30.4%, 10.4% and 5.1%, respectively, of the Common Stock of the
Company. The Company then acquired the remaining 92.5% of the common stock of
the Predecessor from Anker Holding for approximately $87 million, which was
funded by the issuance of $25 million of Class A Preferred Stock to Anker
Holding and the payment of $62 million in cash, $12 million of which was
borrowed under the Credit Facility. In addition, the Company assumed $56 million
of the Predecessor's outstanding indebtedness. The Company has accounted for the
Recapitalization using the purchase method of accounting as prescribed under
Accounting Principles Bulletin No. 16, "Accounting for Business Combinations."
The Company has designated August 1, 1996 as the effective date of the
Recapitalization.
31
35
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations and other data of the Company and the Predecessor.
UNAUDITED
-----------------------------
ADJUSTED
COMBINED
ADJUSTED FOR THE
YEAR ENDED DECEMBER COMBINED FOR NINE MONTHS NINE MONTHS
31, YEAR ENDED ENDED ENDED
------------------- DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996(1) 1996(1) 1997
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Captive sales revenue................ $170,792 $194,348 $211,675 $ 159,480 $ 177,630
Brokered sales revenue............... 50,470 49,333 74,218 51,100 60,549
Other revenue........................ 6,237 5,216 4,262 3,266 2,639
-------- -------- -------- -------- -------
Total coal sales and related
revenues............................. 227,499 248,897 290,155 213,846 240,818
Cost of operations and selling
expenses............................. 203,174 221,315 259,579 192,532 217,520
-------- -------- -------- -------- -------
Gross profit........................... 24,325 27,582 30,576 21,314 23,298
Operating expenses..................... 18,021 18,575 21,853 15,515 19,695
-------- -------- -------- -------- -------
Operating income....................... 6,304 9,007 8,723 5,799 3,603
Interest expense....................... 3,523 6,612 4,886 3,702 6,646
Non-cash stock compensation and non-
recurring related expenses........... -- -- 2,969 2,969 --
Other income........................... 1,621 3,108 1,480 1,040 1,064
Income taxes (tax benefit)............. 1,940 2,270 351 60 (554)
-------- -------- -------- -------- -------
Net income (loss) before extraordinary
item................................. 2,462 3,233 1,997 108 (1,425)
Extraordinary item, net of income taxes
of $1,497............................ -- -- -- -- 3,849
-------- -------- -------- -------- -------
Net income (loss)...................... $ 2,462 $ 3,233 $ 1,997 $ 108 $ (5,274)
======== ======== ======== ======== =======
OTHER DATA:
Adjusted EBITDA........................ $ 20,008 $ 23,847 $ 24,522 $ 17,303 $ 17,576
======== ======== ======== ======== =======
- ------------------------------
(1) The adjusted combined statement of operations data and other data for the
nine months ended September 30, 1996 and the year ended December 31, 1996
combine the audited results of operations of the Predecessor for the period
January 1, 1996 to July 31, 1996 and of the Company for the period August 1,
1996 to September 30, 1996 and to December 31, 1996, respectively. The
adjusted combined statement of operations data and other data for the nine
months ended September 30, 1996 and the year ended December 31, 1996 do not
purport to represent what the Company's consolidated results of operations
would have been if the Recapitalization had actually occurred on January 1,
1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
ADJUSTED COMBINED NINE MONTHS ENDED SEPTEMBER 30, 1996
COAL SALES AND RELATED REVENUES. Coal sales and related revenues were
$240.8 million for the nine months ended September 30, 1997 compared to $213.8
million for the nine months ended September 30, 1996, an increase of 12.6%. Coal
sales volume was 9.9 million tons for the nine months ended September 30, 1997
compared to 8.4 million tons for the nine months ended September 30, 1996, an
increase of 17.9%. The increased volume resulted primarily from an increase in
commission sales of 0.7 million tons and recent acquisitions and mine expansion
and development. The average price received for captive and brokered sales
increased by $0.65 per ton.
32
36
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and
selling expenses totalled $217.5 million for the nine months ended September 30,
1997 compared to $192.5 million for the nine months ended September 30, 1996, an
increase of 13.0%. The increase primarily resulted from an increased volume of
shipments, an increase in sales of higher cost brokered coal, and increased
costs of approximately $1.7 million related to adverse geological conditions at
two of the Company's mines. The cost of operations and selling expenses for the
Company was $21.95 per ton shipped for the nine months ended September 30, 1997
compared to $22.91 per ton for the nine months ended September 30, 1996, a
decrease of 4.2%.
OPERATING EXPENSES. Operating expenses for the nine months ended September
30, 1997 were $19.7 million compared to $15.5 million for the nine months ended
September 30, 1996, an increase of 27.1%. General and administrative expenses
increased 33.3%, to $6.8 million for the nine months ended September 30, 1997
compared to $5.1 million for the nine months ended September 30, 1996. The
increase in general and administrative costs primarily resulted from the
increase in the Company's management staff necessary to manage the additional
five mines developed or acquired since September 30, 1996. Depreciation,
depletion and amortization was $12.9 million for the nine months ended September
30, 1997 compared to $10.4 million for the nine months ended September 30, 1996,
an increase of 24.0%. The increase in depreciation, depletion and amortization
primarily resulted from purchase accounting adjustments relating to the
Recapitalization and from acquisitions made by the Company in the nine months
ended September 30, 1997.
INTEREST EXPENSE. Interest expense was $6.6 million for the nine months
ended September 30, 1997 compared to $3.7 million for the nine months ended
September 30, 1996, an increase of 78.4%. The primary reason for the increase
was the incurrence of debt under the Credit Facility in connection with the
Company's acquisitions and development costs of approximately $40.0 million
during the last twelve months.
NON-CASH STOCK COMPENSATION AND NON-RECURRING RELATED EXPENSES. During
June 1996 the Company made a non-cash common stock grant to one of its executive
officers in the amount of $1.5 million. This grant was intended to reward such
executive officer for past service and to ensure the continued top management of
the Company. In conjunction with that transaction, a cash bonus and related
expenses were awarded in the amount of $1.5 million. These transactions resulted
in an expense of $3.0 million in 1996 which did not reoccur in 1997.
INCOME TAXES. Income taxes from operations were $0.6 million in benefits
for the nine months ended September 30, 1997 compared to $0.06 million in
expense for the nine months ended September 30, 1996, a decrease of $0.54
million. This primarily resulted from the deductibility of the Company's taxable
loss for the nine months ended September 30, 1997. Pursuant to the United States
Internal Revenue Code of 1986, as amended, an economic interest in a mineral
property is available for a depletion tax deduction. The depletion deduction is
determined by either the cost of the mineral property or the income produced
from the property. The deduction relating to the income produced is equal to the
lesser of 10% of revenue and 50% of net taxable income (a "Percentage Depletion
Deduction"). When applicable, the Company utilizes the Percentage Depletion
Deduction, which can result in significant fluctuations in the Company's
effective tax rate from year to year.
NET INCOME. For the nine months ended September 30, 1997, the Company's
loss was $5.3 million compared to earnings of $0.1 million for the nine months
ended September 30, 1996. The primary reasons for the decrease in earnings by
the Company were the costs related to the write-off of unamortized debt cost
related to the Credit Facility, the additional costs at two of the Company's
mines related to adverse geological conditions and the increase in
administrative staff required to prepare for the Company's continuing growth.
EXTRAORDINARY ITEM. For the nine months ended September 30, 1997, the
Company wrote-off of the unamortized portion of debt issuance costs relating to
the Credit Facility in the amount of $3.9 million, net of income taxes.
ADJUSTED EBITDA. The Company's Adjusted EBITDA was $17.6 million for the
nine months ended September 30, 1997 compared to $17.3 million for the nine
months ended September 30, 1996, an increase of 1.7%, which was attributable to
increased revenues, partially offset by approximately $1.7 million in increased
costs related to adverse geological conditions at two of the Company's mines.
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ADJUSTED COMBINED YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER
31, 1995
COAL SALES AND RELATED REVENUES. Coal sales and related revenues were
$290.2 million in 1996 compared to $248.9 million in 1995, an increase of 16.6%.
Coal sales volume was 11.6 million tons in 1996 compared to 9.7 million tons in
1995, an increase of 19.6%. These increases resulted primarily from increased
production at the Company's captive mines and an increase in tonnage brokered
from third party producers. The average price received decreased by $0.71 per
ton from $25.75 to $25.04, reflecting an increased percentage of the Company's
sales being made on a unprocessed coal basis, which is sold at lower sales
prices but similar profit margins.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and
selling expenses totaled $259.6 million in 1996 compared to $221.3 million in
1995, an increase of 17.3%. This increase resulted from an increased volume of
sales and production of 1.9 million tons in 1996 compared to 1995. The cost of
operations and selling expenses for the Company was $22.40 per ton shipped in
1996 compared to $22.90 per ton in 1995, a decrease of 2.2%. This decrease was a
direct result of improvements in productivity and reductions in operating costs.
OPERATING EXPENSES. Operating expenses for 1996 were $21.9 million
compared to $18.6 million for 1995, an increase of 17.7%. General and
administrative expenses for 1996 were $7.5 million compared to $6.8 million for
1995, an increase of 10.3%. This increase resulted primarily from an increase in
management staff. However, on a per ton basis, general and administrative
expenses for 1996 were $0.65 per ton sold compared to $0.71 per ton sold in
1995. Depreciation, depletion and amortization totaled $14.3 million in 1996
compared to $11.7 million for 1995, an increase of 22.2%. The increase in
depreciation, depletion and amortization was primarily attributable to purchase
accounting adjustments relating to the Recapitalization. Other income was $1.5
million in 1996 compared to $3.1 million in 1995. In 1995, the Company had $3.2
million of income from the sale of assets and a payment by AES for the delay of
the contract with the AES Warrior Run plant in Cumberland, Maryland (the
"Warrior Run Contract").
INTEREST EXPENSE. Interest expense was $4.9 million in 1996 compared to
$6.6 million in 1995, a decrease of 25.8%. In connection with the acquisitions
of certain assets from Phillips Resources, Inc. and all of the outstanding stock
of Upshur Property, Inc. (the "Upshur Acquisition"), the Company received a cash
payment, the present value of which exceeds the liabilities assumed by the
Company, which was then used to reduce the Company's outstanding bank debt
which, in turn, reduced the Company's interest expense in 1996.
NON-CASH STOCK COMPENSATION AND NON-RECURRING RELATED EXPENSES. During
June 1996 the Company made a non-cash common stock grant to one of its executive
officers in the amount of $1.5 million. This grant was intended to reward such
executive officer for past service and to insure the continued top management of
the Company. In conjunction with that transaction, a cash bonus and related
expenses were awarded in the amount of $1.5 million. These transactions resulted
in an expense of $3.0 million in 1996 which did not occur in 1995.
INCOME TAXES. Income taxes were $0.4 million in 1996 compared to $2.3
million in 1995, a decrease of $1.9 million. This was the result of a Percentage
Depletion Deduction, which decreased the Company's effective income tax rates to
14.9% for 1996 from 41.3% for 1995.
NET INCOME. In 1996, the Company's earnings were $2.0 million compared to
$3.2 million in 1995, a decrease of 37.5%. The primary reasons for the decrease
in earnings by the Company were the costs related to stock compensation and
related expenses and the Recapitalization in 1996, and the increase in
administrative staff required to prepare for the Company's continuing growth.
ADJUSTED EBITDA. The Company's Adjusted EBITDA was $24.5 million in 1996,
compared to $23.9 million in 1995 an increase of 2.5%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
COAL SALES AND RELATED REVENUES. Coal sales and related revenues were
$248.9 million in 1995 compared to $227.5 million in 1994, an increase of 9.4%.
Coal sales volume totaled 9.7 million tons in 1995
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compared to 9.6 million tons in 1994. The average price received was $25.04 per
ton in 1995 as compared to $23.69 per ton in 1994, an increase of 8.3%. This
increase resulted primarily from (i) price escalations in certain of the
Company's long-term contracts and (ii) the Company's entry into the higher
priced low vol met coal market, which commands a price above the average price
for the Company's other products.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and
selling expense totaled $221.3 million in 1995, compared to $203.2 million in
1994, an increase of 8.9%. This increase was the result of an increase in the
volume of captive shipments and brokered shipments, and a decrease in commission
shipments. Captive shipments (which represent tons produced from the Company's
operations) and brokered shipments (which represent tons purchased from third
party producers resold by the Company) have a higher cost of operations and
selling expense than commission shipments (which represent tons shipped by the
Company for a third party for a commission).
OPERATING EXPENSES. Operating expenses were $18.6 million for 1995
compared to $18.0 million for 1994, an increase of 3.3%. General and
administrative expenses were $6.8 million for 1995 compared to $5.9 million for
1994, an increase of 15.3%. This increase primarily related to the continued
growth of the Company's captive operations and the related development of the
administrative, human resource and management information systems for such
operations. Depreciation, depletion and amortization totaled $11.7 million in
1995 compared to $12.1 million in 1994, a decrease of 3.3%. This decrease
related to lower depletion rates on new mines developed as compared to higher
depletion rates on older mines that had been closed. Other income for 1995 was
$3.1 million compared to $1.6 million in 1994, an increase of 93.8%. In 1995,
the Company had $3.2 million of income from the sale of assets and a payment by
AES for the delay of the Warrior Run Contract.
INTEREST EXPENSE. Interest expense was $6.6 million in 1995 compared to
$3.5 million in 1994, an increase of 88.6%. This increase resulted from the
incurrence of $17.1 million of debt under the Credit Facility in connection with
acquisitions during the period.
INCOME TAXES. Income taxes were $2.3 million in 1995 compared to $1.9
million in 1994, an increase of $0.4 million. This increase was the result of
higher earnings in 1995 than in 1994, although as a result of a Percentage
Depletion Deduction, the Company's effective income tax rate decreased to 41.3%
in 1995 compared to 44.1% in 1994.
NET INCOME. In 1995, the Company's earnings were $3.2 million, compared to
$2.5 million in 1994, an increase of 28.0%. The primary reason for the increase
in earnings was the Company's continued expansion in profitable niche markets.
ADJUSTED EBITDA. The Company's Adjusted EBITDA was $23.9 million in 1995,
compared to $20.0 million in 1994, an increase of 19.5%. This increase primarily
resulted from the Company's increase in coal sales and related revenues.
INFLATION
Inflation in the United States has not had a significant effect on the
Company's business or operations during recent periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has substantial indebtedness and significant debt service
obligations. As of September 30, 1997, the Company had total long-term
indebtedness, including the Old Notes and current maturities, in aggregate
principal amount of $135.9 million. The Indenture permits the Company and its
Restricted Subsidiaries to incur additional indebtedness, including secured
indebtedness, subject to certain limitations. Such limitations will include
certain covenants that, among other things: (i) limit the incurrence by the
Company and its Restricted Subsidiaries of additional indebtedness and the
issuance of certain preferred stock; (ii) restrict the ability of the Company
and its Restricted Subsidiaries to make dividends and other restricted payments
(including investments); (iii) limit the ability of the Restricted Subsidiaries
to incur dividend and other payment restrictions; (iv) limit transactions by the
Company and its Restricted
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Subsidiaries with affiliates; (v) limit the ability of the Company and its
Restricted Subsidiaries to make asset sales; (vi) limit the ability of the
Company and its Restricted Subsidiaries to incur certain liens; (vii) 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 (viii) limit the
ability of the Company to engage in other lines of business. In addition, the
Amended and Restated Revolving Credit Facility contains additional and more
restrictive covenants as compared to the Indenture and requires the Company to
maintain specified financial ratios and satisfy certain tests relating to its
financial condition. See "Capitalization," "Description of Senior Notes--Certain
Covenants" and "Description of Certain Indebtedness--Amended and Restated
Revolving Credit Facility." As of September 30, 1997 the Company had
insufficient earnings to cover fixed charges in the amount of $2.0 million.
The Company's principal liquidity requirements are for debt service
requirements under the Senior Notes, the Amended and Restated Revolving Credit
Facility, other outstanding indebtedness, and for working capital needs and
capital expenditures. Historically, the Company has funded its capital and
operating requirements with a combination of operating cash flow, borrowings
under credit facilities and equity investments. The Company has utilized these
sources of funds to make acquisitions, to fund significant capital investments
in its properties, to fund operations and to service debt under credit
facilities. The indebtedness under the Credit Facility paid down with the
proceeds from the offering of the Old Notes was incurred (i) to finance
acquisitions made by the Company, (ii) for capital expenditures and (iii) for
working capital purposes.
In 1996, the Company used $9.8 million for capital expenditures. Excluding
capital expenditures relating to the Company's interest in Oak Mountain Energy,
L.L.C., the Company has budgeted approximately $37.0 million for capital
expenditures in 1997, $36.0 million of which has been spent as of September 30,
1997, and expects to fund its budgeted capital expenditures through a
combination of borrowings under the Amended and Restated Revolving Credit
Facility and cash generated from operations. Of the $37.0 million budgeted for
capital expenditures in 1997, approximately $26.1 million relates to the
acquisition of new properties and the development of previously non-producing
properties.
The Company is continually engaged in evaluating potential acquisitions.
The Company expects that funding for future acquisitions may come from a variety
of sources, depending on the size and nature of any such acquisitions. Potential
sources of capital include cash generated from operations, borrowings under the
Amended and Restated Revolving Credit Facility, additional equity investments
from First Reserve or other external debt or equity financings. There can be no
assurance that such additional capital sources will be available to the Company
on terms which the Company finds acceptable, or at all.
In connection with the offering of the Old Notes, the Company entered into
the Amended and Restated Revolving Credit Facility, under which, on September
30, 1997 it had approximately $4.6 million of outstanding indebtedness and
additional undrawn availability of approximately $20.4 million (which total
availability may be increased to up to $75.0 million upon the achievement of
certain financial tests). Interest rates on the revolving facility credit loans
are based, at the Company's option, on the Base Rate (as defined in the Amended
and Restated Revolving Credit Facility) or LIBOR (as defined in the Amended and
Restated Revolving Credit Facility). The Amended and Restated Revolving Credit
Facility commitment will mature six years after the Closing Date (as defined).
The Amended and Restated Revolving Credit Facility contains certain restrictions
and limitations, including financial covenants that require the Company to
maintain and achieve certain levels of financial performance and limitations on
the payment of cash dividends and similar restricted payments. See "Description
of Certain Indebtedness--Amended and Restated Revolving Credit Facility."
The Company believes that, in the absence of future acquisitions, its
liquidity, capital resources and cash flows from existing operations will be
sufficient to fund budgeted capital expenditures, working capital requirements
and interest and principal payments on its indebtedness for the foreseeable
future. However, the Company currently expects that it will make additional
acquisitions and in connection therewith, expects to incur additional
indebtedness. In the event that the Company incurs such additional indebtedness,
its ability to make principal and interest payments on its indebtedness,
including the Senior Notes, may be adversely affected.
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INDUSTRY OVERVIEW
According to preliminary data compiled by the United States Department of
Energy's Energy Information Administration (the "EIA"), United States coal
production totaled approximately 1.1 billion tons in 1996, a 7.6% increase from
the 1.0 billion tons produced in 1995 and a record high. Most of the coal
consumed in the United States is used for the generation of electricity. In
1996, coal production levels were driven by an unusually large increase in coal
consumption for electricity generation resulting from the confluence of
increased natural gas prices, negligible growth in nuclear-powered generation,
colder-than-normal weather, and strong economic growth. Total United States coal
consumption reached approximately 1.0 billion tons in 1996, a 4.1% increase from
1995. In 1996, coal continued to be the principal energy source for United
States utilities, with its share of total utility generation rising to 56.4%
from 55.2% in 1995. In the last three years, coal prices have remained steady,
except for seasonal variations and supply and demand caused by weather.
Companies with improving productivity and efficient mines have filled the
increasing demand without price increases. Over the last ten years, many
inefficient mines have closed, thus bringing supply and demand into closer
balance. Coupled with increased competition in the generation of electricity,
utility buyers have been forced to operate and purchase coal in a more fiscally
responsible manner. This has led to lower stockpiles, increased spot market
activity and shorter contract terms, which has created greater price volatility
than has been experienced in the past.
The following table presents five year United States coal production by
region and consumption by sector (the United States coal industry data set forth
above and in the following table are derived from publications of the EIA):
FIVE YEAR COAL PRODUCTION AND CONSUMPTION
---------------------------------------------------
1992 1993 1994 1995 1996
(IN MILLIONS OF TONS)
PRODUCTION BY REGION
Appalachia................................... 456.6 409.7 445.4 434.9 445.1
Interior..................................... 195.2 167.2 179.9 168.5 172.2
Western...................................... 345.3 368.5 408.3 429.6 494.5
----- ----- ------- ------- -------
Total................................ 997.1 945.4 1,033.6 1,033.0 1,111.8
===== ===== ======= ======= =======
CONSUMPTION BY SECTOR
Utilities.................................... 779.9 813.5 817.3 829.0 873.7
Independent Power Producers.................. 14.8 17.8 20.9 21.2 24.0
Coke Plants.................................. 32.4 31.3 31.7 33.0 31.7
Other Industrial Plants...................... 74.0 74.9 75.2 72.8 70.6
Residential/Commercial Users................. 6.2 6.2 6.0 5.8 5.8
----- ----- ------- ------- -------
Total................................ 907.3 943.7 951.1 968.1 1,005.8
===== ===== ======= ======= =======
Productivity gains, environmental legislation and a shift in the relative
importance of utility consumption compared to metallurgical and industrial usage
have worked together to exert pressures on the fundamental structure of the coal
industry. According to statistics compiled by the federal government, the number
of operating mines has declined 47% over the last ten years even though
production has increased 31%. During this period, work practice and
technological improvements, as well as the rapid expansion of surface mining in
Wyoming, have allowed production per man day to increase by 95% while industry
employment declined 42%. These productivity gains and resulting excess
productive capacity in most segments of the industry have contributed to the
stability of coal prices in recent years at levels lower than the 1970's and
early 1980's. Clean air concerns and legislation have increased consumption of
low sulfur products mined in Appalachia and the Western United States, and the
Company expects this trend to continue. Although the United States coal
industry's production has consolidated to some degree in recent years, the top
ten producers accounted for 44% of total production in 1996 and no company held
a market share of more than 10%.
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COAL QUALITIES
In general, coals are classified by heat value and sulfur content. In
ascending order of heat values, there are four basic varieties of coal: lignite,
subbituminous, bituminous and anthracite. Lignite is a brownish-black coal with
a heat value that is less than 8,300 Btu per pound. Major lignite operations are
located in Texas, North Dakota, Montana and Louisiana. Subbituminous coal is a
dull black coal with a heat value that ranges from approximately 8,300 to 11,500
Btu per pound. Most subbituminous reserves are located in Montana, Wyoming,
Colorado, New Mexico, Washington and Alaska. Bituminous coal is a "soft" coal
with a heat value that ranges from 10,500 to 14,000 Btu per pound. This coal is
located primarily in Appalachia and the Midwest, and is the type most commonly
used for electric power generation in the United States. Bituminous coal also is
used for utility and industrial steam purposes as well as for making the coke
necessary for steel production. Coal used in metallurgical processes has higher
expansion/contraction characteristics than steam coal. Anthracite coal is a
"hard" coal with a heat value that can be as high as 15,000 Btu per pound.
Anthracite deposits are located primarily in the Appalachian region of
Pennsylvania. 100% of the Company's reserves are bituminous and are located east
of the Mississippi River.
Due to the importance of sulfur in environmental regulations, coal is
commonly described with reference to its sulfur content. Coal that emits no more
than 1.2 lb./MBtu of sulfur dioxide when burned is compliance coal.
Also relevant in determining the utilization and marketability of coals is
the percentage of ash (small particles of inert material), the percentage of
moisture, and the percentage of volatile matter (volatility). The percentage of
ash is important because its inert nature takes away from the heating value
(i.e., the higher the percentage of ash, the lower the heating value).
Metallurgical coal ("met coal") customers typically require coal containing less
than 8% ash. For utilities, the percentage of ash is relevant because of both
its effect on heating value and its effect on the amount of combustion
byproducts that must be disposed. Utility customers typically require 6% to 15%
ash, depending on individual power plant specifications.
The percentage of moisture is relevant because the higher the moisture, the
lower the heating value and because a high percentage of moisture will cause
handling problems with the coal.
Volatility, the percentage of matter which is volatized in the combustion
process, is particularly important for the creation of a stable and premium
quality coke. Although lower volatility and percentage of ash in coal generally
increase the yield and carbon content of the coke, too much low vol coal may
cause coke to stick in the coke ovens. Therefore, coke producers carefully blend
low vol and high vol met coals to create the proper coke characteristics. In
addition, although a plant's boiler can be designed to burn low vol coal, most
utilities consume high vol coals.
MINING METHODS
Coal is mined using either surface or underground methods. The method
utilized depends upon several factors, including, in particular, the proximity
of the target coal seam to the earth's surface and the geology of the
surrounding area. Surface techniques generally are employed when a coal seam is
within 200 feet of the earth's surface, and underground techniques are used for
deeper seems. In 1996, surface mining accounted for approximately 62% of total
United States coal production, with underground mining accounting for the
balance of production. The Company estimates that approximately 64% of the coal
it produced in 1996 was mined using underground mining techniques, with the
balance produced using surface mining methods. Surface mining generally is less
expensive and has a higher recovery percentage than underground mining, with
surface mining typically resulting in the removal of 80 to 90% and underground
mining resulting in the removal of 50 to 60% of the total coal from a particular
deposit.
Strip mining and auger mining constitute the two most common methods of
surface mining. Strip mining consists essentially of a large-scale earth moving
operation, with the rock and soil overlying a coal deposit (the "overburden")
being "stripped" away by means of large earth-moving machines. The coal exposed
by stripping is fractured by blasting and is loaded onto haul trucks or overland
conveyors for transportation to processing and loading facilities. The site then
is backfilled with the overburden and otherwise restored to its approximate
original contour and condition (the process of "reclamation"). Federal law
mandates the
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reclamation of all new strip mining sites. In the auger mining method, miners
remain outside of the mine and a large, corkscrew-like machine (the "auger")
bores into the side of a hill and extracts coal by "twisting" it out.
Underground mining operations are used when a coal seam is too deep to
permit surface mining. Underground mines can be divided into three basic
classifications: (i) slope mines, where a coal seam is relatively close to the
earth's surface, and accessed through a sloped tunnel, (ii) shaft mines, for
deeper deposits, which are accessed through a vertical tunnel, and (iii) drift
mines, which are accessed through a horizontal entry.
COAL PREPARATION
After mining, coal can be prepared for shipment in a preparation plant.
This facility crushes the coal and cleans it by washing it in a liquid solution,
separates it into higher and lower grades and removes non-coal materials.
Cleaning upgrades the quality and heating value of the coal by removing or
reducing pyritic sulfur content, rock, clay and other ash-producing materials.
Coal blending or mixing of various sulfur types is often performed in order to
meet the specific combustion and environmental needs of customers. Depending on
its quality and customer requirements, coal may be shipped without being
prepared.
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BUSINESS
OVERVIEW
Anker is a growth-oriented producer of coal used principally for
electricity generation and steel production with a focus on selected niche coal
markets in the eastern United States. The Company currently owns and operates a
diverse portfolio of thirteen non-unionized deep and surface coal mines
strategically located in West Virginia and Maryland. In 1996, approximately 67%
of the Company's revenues from coal sales (included brokered and commission
sales) were made under long-term contracts. The Company's long-term contracts
had a weighted average term of approximately 7.4 years as of June 30, 1997.
Based on contracts currently in place and purchase orders and sales made to
date, the Company expects 1997 coal sales (including brokered and commission
sales) to exceed 13.0 million tons, a 14% increase over 1996 coal sales of 11.6
million tons. Through both acquisitions and development of the Company's
existing reserves, the Company's annual coal production has grown at a compound
annual rate of approximately 15%, from 4.2 million tons per year in 1992 to 7.7
million tons per year in 1996, and the Company's coal reserves have grown at a
compound annual rate of approximately 41%, from 147 million recoverable product
tons as of December 31, 1992 to approximately 664 million recoverable product
tons as of June 1, 1997.
The Company attributes its growth in reserves, production, revenues and
cash flow to its focus on serving niche coal markets and its cost-efficient
operations. The Company believes it has a competitive advantage due to, among
other things, the geographic location of its reserves and the diverse qualities
of its coal. For example, in 1996, the Company sold 2.3 million tons of steam
coal, or approximately 20% of shipments, to IPPs and was the largest supplier of
coal to IPPs in the eastern United States. Because transportation costs can
significantly increase the delivered cost of coal over the mine price of coal,
the Company believes its proximity to these IPPs and other customers provides it
with a competitive advantage over other coal producers. The Company's strategy
has been to enter into long-term supply contracts with its customers, which it
may initially fulfill with brokered coal and subsequently replace with
lower-cost coal from its own production. The Company believes that its ability
to supply customers with brokered coal permits it to secure long-term contracts,
which provide the stable source of revenues and cash flow required to support
the opening, expansion or maintenance of mines to service such contracts.
The Company's niche market strategy has also focused on supplying specific
qualities of coal to satisfy customers' demands in the most efficient manner.
The Company supplies premium quality, low vol met coal to certain integrated
steel and merchant coke producers, for whom this quality of coal is an essential
component of coke production. Low vol met coal sales accounted for approximately
12% of the Company's coal sales and related revenue for 1996, and the Company
believes it has an approximate 14% share of the domestic low vol met coal
market. In addition, the Company believes that its lower cost, high sulfur
reserves are strategically located near electric generation facilities which can
economically utilize high sulfur coal due to their use of sulfur-reduction
technologies and lower transportation costs.
Approximately 80% of the Company's 1996 shipments were to electric
generation facilities and, consequently, the Company believes that it is well
positioned to benefit from favorable trends in the electric generation industry.
Over the last ten years coal consumption in the United States has generally
experienced steady annual growth, reaching a record level of 1.0 billion tons in
1996. This steady growth in coal consumption is attributable to similar growth
in the electric generation industry, which accounts for more than 89% of
domestic coal consumption. In 1996, coal-fired facilities generated
approximately 56% of the nation's electricity, followed by nuclear (22%),
hydroelectric (11%) and gas-fired (9%) facilities. Because coal is one of the
least expensive and most abundant resources for the production of electricity
and imports of coal have not historically exceeded 1% of domestic coal
consumption, domestically produced coal is expected to continue to play a
significant role in the production of electricity in the future.
The Company further believes that it will benefit from increasing federal
deregulation among electricity producers, which has primarily affected the
wholesale market for electricity. Since 1935, domestic electricity utilities
have operated in a regulated environment, with prices and return on investment
being determined by state utility and power commissions. In April 1996, the FERC
issued orders establishing rules providing for open access to electricity
transmission systems, thereby initiating consumer choice in electricity
purchasing on the wholesale level and encouraging competition in the generation
of electricity. The Company believes that
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44
this trend towards wholesale deregulation will likely (i) increase the
popularity of coal as a source of electricity generation due to its relatively
low cost and (ii) favor coal producers, such as the Company, with diverse
reserves and cost and transportation advantages.
COMPETITIVE STRENGTHS
The Company believes that it possesses the following competitive strengths:
PORTFOLIO OF LONG-TERM CONTRACTS. The Company has secured long-term coal
supply contracts with a weighted average term of approximately 7.4 years as of
June 30, 1997. The Company's long-term contracts have accounted for an average
of approximately 65% of the Company's coal sales revenues (including brokered
and commission sales) from 1992 to 1996. Over the same period, approximately 3.4
million tons of the Company's annual coal shipments covered by long-term
contracts were up for renewal and contracts for 76% of this coal were rolled
over each year into new long-term contracts upon their expiration. In addition,
over the same period, the Company entered into new long-term contracts for 4.0
million tons of annual coal shipments. The Company has been successful in
negotiating long-term contracts for its high sulfur coal with IPPs and utilities
equipped with sulfur-reduction technologies. As of June 30, 1997, of the
Company's twenty long-term contracts, eight were for its high sulfur coal.
EFFICIENT OPERATIONS. Historically, the Company has been successful in
reducing its cash cost of operations per ton produced. The Company's cash cost
of operations and selling expenses per ton of coal shipped has declined
approximately 13% from $25.65 per ton in 1992 to $22.40 per ton in 1996. The
Company has achieved this decrease in costs by retaining a highly motivated,
non-unionized, workforce that, with management, has developed and instituted
more efficient mining techniques.
DEMONSTRATED RECORD OF RESERVES AND PRODUCTION EXPANSION. The Company has
demonstrated its ability to increase production from its existing reserve base
as well as grow through acquisitions. The Company has increased its reserve base
approximately 352%, from 147 million recoverable products tons as of December
31, 1992 to approximately 664 million recoverable product tons as of June 1,
1997, substantially all of which increase was due to acquisitions of reserves.
For the nine months ended September 30, 1997, the Company increased its captive
coal production by approximately 17% over production levels for the same period
in 1996. Approximately 21% of this increase was due to increased production from
the Company's existing reserves as of September 30, 1996 and approximately 79%
was due to acquisitions made subsequent to September 30, 1996.
DIVERSE PORTFOLIO OF OPERATIONS AND RESERVES. With a diverse reserve base
of approximately 664 million recoverable product tons, the Company believes that
its results of operations are not dependent on any one of its thirteen mines and
that it is well positioned to meet the varying needs of its customers. As of
June 1, 1997, approximately 22% of the Company's coal reserves was compliance
coal, 29% of its reserves was low sulfur (less than 1.0% sulfur) coal (including
compliance coal) and another 63% of its reserves was medium sulfur (between 1.0%
and 1.8% sulfur) coal. Many of the Company's current customers that possess the
technology to scrub high sulfur coal prefer such coal due to its lower cost. All
of the Company's coal is of a quality suitable for use in electricity generating
facilities. At June 1, 1997, the Company's reserve life index (defined as total
recoverable reserves divided by production for 1996) was approximately 86.7
years.
EXPERIENCED MANAGEMENT TEAM. Bruce Sparks, the Company's President and
Chief Executive Officer, has 19 years of experience in the coal industry, has
worked at the Company for the past 12 years and owns 5.1% of the Company's
Common Stock. Prior to his death, John J. Faltis, the Company's President, Chief
Executive Officer and Chairman of the Board of Directors, had worked at the
Company for the past 22 years and owned 30.4% of the Company's Common Stock, all
of which currently is beneficially owned by his estate. See "Prospectus
Summary--Recent Developments."
GROWTH STRATEGY
In August 1996, members of senior management and First Reserve, a private
investment firm specializing in the energy industry, acquired the outstanding
Common Stock of the Company. As a result of the Recapitalization, First Reserve
owns approximately 54.1% of the Company's Common Stock. Senior
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management and First Reserve have adopted a business strategy to maintain and
enhance the Company's leading position in certain niche markets by increasing
revenues, cash flow and profitability. To implement this strategy, the Company
will:
EXPAND PRODUCTION FROM RECENTLY ACQUIRED RESERVES. Through the Company's
recent acquisitions and subsequent mine expansion or development, production is
expected to reach 8.5 million tons in 1997, an increase of approximately 10%
from the 7.7 million tons produced in 1996. Specifically, the majority of the
increased production in 1997 has resulted and will result from the operations
acquired in Shelby County, Alabama (0.2 million tons) and Grant County, West
Virginia (0.4 million tons) and from the operations recently developed in
Harrison County, West Virginia (0.4 million tons) and Upshur County, West
Virginia (0.3 million tons). See "Business--Recent Acquisitions and Development
Plans."
EXPAND NICHE MARKETS. The Company has demonstrated its ability to enter
new markets and become a low-cost supplier of coal to end users in these
markets. The Company seeks to leverage this expertise by expanding in its niche
markets where it believes it has a competitive advantage due to coal quality,
proximity to end users, lower production costs or a combination of these and
other factors. The Company believes that its coal trading and brokering
operations will permit it to identify and create new development and acquisition
opportunities.
GROW THROUGH ACQUISITIONS. From July 1, 1996 to May 31, 1997, the Company
acquired 310.3 million tons of recoverable reserves, increasing its reserve base
by approximately 89%. The Company believes that its niche strategy, together
with its proven ability to reduce cash operating costs, positions it to exploit
the increasing trend towards asset rationalization by larger coal mining
companies. The Company presently focuses on building upon its existing market
strength in the mid-Atlantic utility and IPP market in the vicinity of its
existing coal mines, but will also consider the acquisition of mines outside its
primary geographic area of focus if the market and mine fit the Company's niche
strategy. The Company is currently evaluating several acquisition possibilities.
RECENT ACQUISITIONS AND DEVELOPMENT PLANS
Recently, the Company has developed or acquired mines in the following
locations which have begun production, or are scheduled to begin production, in
1997.
SHELBY COUNTY, ALABAMA. In April 1997, the Company, Anker Holding, Kiewit
Alabama Mining Company and certain members of management of Oak Mountain
acquired 32%, 16%, 48% and 4% interests, respectively, in Oak Mountain Energy,
L.L.C. to exploit a 108 million ton reserve of premium quality, low sulfur coal
with an average of 10% ash, 0.7% sulfur, 32 vol and 12,500 Btu per pound to
serve the Southern Company's Plant Gaston, which is situated in close proximity
to the mine, and other regional Southern Company power plants as well as local
industrial customers. The Company plans to increase the current production of
800,000 tons per year to 2.2 million tons per year to serve this market.
GRANT COUNTY, WEST VIRGINIA. In February 1997, the Company purchased the
assets of New Allegheny, Inc. ("New Allegheny") consisting of approximately 18
million tons of recoverable reserves with an average of 14% ash, 1.8% sulfur, 19
vol and 12,800 Btu per pound, a 200 tons per hour preparation plant, an
operating surface mine and related mine equipment, as well as a long-term coal
supply contract for 500,000 tons annually with VEPCO. Since February 1997, the
Company has increased the surface mine production from 11,000 tons per month to
30,000 tons per month.
UPSHUR COUNTY, WEST VIRGINIA. In 1996 and 1997, as part of the Spruce Fork
Project, the Company purchased an aggregate of approximately 15 million tons of
recoverable reserves in the Upper Freeport Seam and in the Middle Kittanning
Seam with an average of 8% ash, 1.2% sulfur, 33 vol and 13,000 Btu per pound, as
well as a 700 tons per hour preparation plant, warehouse and other surface
facilities. The Company began deep mine production in the Upper Freeport seam in
July 1997 and plans to produce up to 1.4 million tons per year from this mine.
HARRISON COUNTY, WEST VIRGINIA. In 1996, the Company acquired
approximately 5.6 million tons of recoverable reserves in Harrison County. The
Company owns 50% of a limited liability company organized in West Virginia which
operates the Sycamore Creek mine to service the nearby Harrison Power Station
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("Harrison Power"), which burns over 5 million tons of coal per year. Harrison
Power, a division of Allegheny Power Service Corporation ("APS") recently
completed a scrubber addition which allows it to utilize the lower cost, high
sulfur coal produced at Sycamore Creek. Consequently, the Company is currently
shipping 960,000 tons annually into Harrison Power under its 1996/1997 contract
and is negotiating a new contract with APS for the future, the terms of which
have not yet been determined. The Sycamore Creek mine has approximately 5.6
million tons of recoverable reserves with an average of 10% ash, 3.6% sulfur, 35
vol and 13,000 Btu per pound. The Company began deep mine production in May 1997
and plans to produce up to 750,000 tons per year from this mine.
Recently, the Company has developed or acquired mines in the following
locations which are expected to begin production after 1997.
BUCHANAN AND TAZEWELL COUNTIES, VIRGINIA. In 1996, the Company, through a
lease with a subsidiary of NS, acquired a 100% interest in the Big Creek
Project, a premium quality, mid volatility metallurgical coal ("mid vol met
coal") project with approximately 40 million tons of recoverable reserves. This
new complex, which is to be serviced by NS, is scheduled to be constructed over
the next two years and is expected to produce over 1.2 million tons per year.
The coal quality will be 5% ash, 0.7% sulfur and 25 vol, which will permit it to
be sold in the mid vol met coal and steam coal markets. Currently, detailed
engineering, mine planning and permitting are underway with construction
beginning during 1998.
UPSHUR COUNTY, WEST VIRGINIA. In addition to the Spruce Fork deep mine,
the Company has acquired other assets in Upshur County, West Virginia, which it
plans to develop in the next five years. These mines will be developed in the
Sewell Seam which averages 8% ash, 0.8% sulfur, 33 vol and 13,300 Btu per pound.
The Company controls 15 million tons of recoverable reserves in the Sewell Seam
and plans to develop two mines, Area F East and Area F West. This coal will be
processed at the Upshur Property, Inc. preparation plant that was acquired as
part of the Upshur Acquisition at a favorable price when a larger competitor
ceased operations in the northern West Virginia coal fields. This 550 tons per
hour modern preparation plant will be refurbished as the Area F mines are
developed. With the Sewell Seam mines and this preparation plant, the Company
will be able to ship either a premium quality compliance steam coal or a high
volatility metallurgical coal ("high vol met coal"), which the Company believes
will provide strong market support for these mines.
HARRISON COUNTY, WEST VIRGINIA. In addition to the Sycamore Creek mine,
the Company acquired in May 1997 approximately 15.5 million tons of recoverable
reserves of the Pittsburgh seam reserves to further service Harrison Power
Station with an average of 10% ash, 3.6% sulfur, 35 vol and 13,000 Btu per
pound.
COAL RESERVES
As of June 1, 1997, the Company had an estimated reserve base totaling
approximately 664 million recoverable product tons, with approximately 22% being
compliance coal, 29% being low sulfur coal (including compliance coal) and
another 63% being medium sulfur coal. Approximately 94% of these reserves are
classified as deep and 6% as surface minable. Moreover, premium quality met coal
constitutes approximately 132 million tons, or 19%, of the Company's reserves.
Reserve estimates are prepared by the Company's engineers and geologists
and are reviewed periodically to reflect data received and developments
affecting the reserves. Accordingly, reserve estimates will change from time to
time in reflection of mining activities, analysis of new engineering and
geological data, acquisition or divestment of reserve holdings, modification of
mining plans or mining methods and other factors. The Company has engaged Boyd,
independent mining and geological consultants, to audit the Company's estimates
of its coal reserves. This audit includes a review of the procedures used by the
Company to prepare its internal reserve estimates, verifying the accuracy of
selected property reserve estimates and retabulating reserve groups according to
standard classifications of reliability. The following table summarizes the
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Company's coal reserves as of June 1, 1997 and is based upon the reserve
information contained in the reserve report by Boyd. See Annex A-2--Boyd Report.
(IN MILLIONS OF TONS)
UNDERGROUND TOTAL
(UG) OR RECOVERABLE
COUNTY AND STATE SURFACE(S) MEASURED(1) INDICATED(2) RESERVES
Barbour, West Virginia.......................... UG 39.73 5.58 45.31
Braxton, West Virginia.......................... S/UG 5.87 19.18 25.05
Grant, West Virginia............................ S/UG 21.28 19.07 40.35
Harrison, West Virginia......................... UG 15.64 14.70 30.34
Monongalia, West Virginia....................... S 6.89 2.11 9.00
Preston, West Virginia.......................... UG 34.10 11.98 46.08
Raleigh, West Virginia.......................... UG 21.86 17.01 38.87
Taylor, West Virginia........................... UG 42.83 167.99 210.82
Upshur, West Virginia........................... UG 30.78 39.60 70.38
Webster, West Virginia.......................... S/UG 10.85 6.20 17.05
Allegany, Maryland.............................. S 4.45 1.20 5.65
Garrett, Maryland............................... S/UG 19.30 6.52 25.82
Muhlenberg, Kentucky............................ S/UG 3.08 5.02 8.10
Tazewell, Virginia.............................. S/UG 23.56 16.18 39.74
Shelby, Alabama................................. UG 40.55 11.30 51.85
Greene, Pennsylvania............................ S 0.08 -- 0.08
------ ------ ------
Totals................................ 320.85 343.64 664.49
====== ====== ======
- ------------------------------
(1) "Measured" refers to coal tonnages computed from seam measurements as
observed and recorded in drill holes, mine workings, and/or seam outcrop
prospect openings. The sites for measurement are so closely spaced and the
geologic character so well-defined that the thickness, areal extent, size,
shape and depth of coal are well-established. The maximum acceptable
distance for projection from seam data points varies with the geologic
nature of the coal seam being studied, but generally a radius of 1/4 mile is
recognized as the standard.
(2) "Indicated" refers to coal tonnages computed by projection of data from
available seam measurements for a distance beyond coal classed as measured.
The assurance, although lower than for measured, is high enough to assume
continuity between points of measurement. The maximum acceptable distance
for projection of indicated tonnage is 1/2 to 3/4 mile from points of
observation. Further exploration is necessary to place these reserves in a
measured category.
Of the total of the Company's reserves, approximately 49% are owned by the
Company or its subsidiaries, and approximately 51% are leased from third
parties. The Company's reserve leases from third parties generally have terms of
between 10 and 20 years, although they generally allow the Company the right to
renew the lease for a stated period or to maintain the lease in force until the
exhaustion of minable and merchantable coal. These leases provide for royalties
to be paid to the lessor either as a fixed amount per ton or as a percentage of
the sales price. Many leases also require payment of a lease bonus or minimum
royalties, payable either at the time of the execution of the lease or in
periodic installments. In most cases, the minimum royalty payments are applied
to reduce future production royalties. The loss of certain leases could
adversely affect the Company's ability to develop the corresponding mines.
Consistent with industry practices, the Company conducts limited
investigation of title to third-party coal properties prior to the Company's
leasing of such properties. The title of the lessors or grantors and the
boundaries of the Company's leased properties are not fully verified until such
time as the Company prepares to mine such reserves. If defects in title or
boundaries of undeveloped reserves arise in the future, the Company's control,
and right to mine, such reserves could be materially adversely affected.
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MINING OPERATIONS
COAL PRODUCTION
The Company currently conducts mining operations at ten deep mines and
three surface mines in seven counties in West Virginia and in Garrett County,
Maryland. Approximately 70% of the Company's production originates from its ten
deep mines, and approximately 30% originates from its three surface mines. The
following table presents each mining region's production (including coal
purchased for blending), for the previous five years:
(IN THOUSANDS OF TONS)
COUNTY AND STATE 1992 1993 1994 1995 1996
Webster County, West Virginia..................... 975 1,592 2,108 1,889 1,998
Barbour County, West Virginia..................... 1,281 1,223 1,497 1,883 1,787
Monongalia County, West Virginia.................. 803 925 917 1,288 1,743
Raleigh County, West Virginia..................... -- -- 123 641 948
Preston County, West Virginia..................... 1,175 1,272 1,021 893 886
Garrett County, Maryland.......................... -- 14 156 293 300
Grant County, West Virginia(1).................... -- -- -- -- --
Upshur County, West Virginia(1)................... -- -- -- -- --
----- ----- ----- ----- -----
Total................................... 4,234 5,026 5,822 6,887 7,662
===== ===== ===== ===== =====
- ------------------------------
(1) Production commenced in 1997.
WEBSTER COUNTY, WEST VIRGINIA
The Company produced approximately 2.0 million tons in 1996 of low sulfur
steam coal and has approximately 42.1 million tons of recoverable reserves in
Webster and adjacent Braxton Counties. The Company operates the Camp Creek
mountaintop surface mine utilizing various techniques of surface mining. The
Company sells approximately 90% of Camp Creek's production to Baltimore Gas &
Electric Company ("BGE"), Delmarva Power & Light Company ("Delmarva"), AES,
Atlantic City Electric Company ("ACE Company") and Salt City Energy Venture,
L.P. ("Salt City"). Coal from Camp Creek's Kittanning and Upper Freeport Seams
averages 0.8% sulfur, 10% ash, 12,800 Btu per pound, 6.0% moisture and 34 vol.
A contract mining company operates the Camp Creek #2 deep mine. In 1996,
the Camp Creek #2 deep mine produced approximately 976,000 tons of premium
quality coal. The Company blends and sells the Camp Creek #2's production with
the Camp Creek surface mine production. Coal from Camp Creek #2's Kittanning
Seam averages 0.75% sulfur, 8% ash, 12,800 Btu per pound, 6.0% moisture and 34
vol.
The Company owns and operates a computer-controlled 500 tons per hour
modern preparation plant located in close proximity to Camp Creek. It also owns
and operates an on-site, modern laboratory that allows for the precise blending
of the Camp Creek surface and deep mined coal. This allows the Company the
flexibility to sell various qualities of coal and ensures that the precise
quality of coal will be shipped for each contract. The site has a 100,000 ton
unprocessed coal storage capacity and a 100,000 ton processed coal storage
capacity. The total cost of the Company's plant and equipment associated with
its Webster County operations was approximately $8.7 million at September 30,
1997 and its net book value was approximately $7.4 million.
BARBOUR COUNTY, WEST VIRGINIA
The Company operates the Sentinel Deep Mine Complex in Barbour County which
produced approximately 1.8 million tons in 1996 of low to medium sulfur steam
coal and premium quality, high vol met coal. The Sentinel Deep Mine Complex has
approximately 45 million tons of recoverable reserves. The Company sells
approximately 95% of the Sentinel Mine Complex's production to Potomac Electric
Power Company of Washington, D.C. ("PEPCO"), BGE, AES and Logan Generating
Company L.P., formerly known as Keystone Energy Service Company, L.P. ("Logan
Generating"). Coal from the Sentinel Deep Mine Complex's Kittanning Seam
averages 1.3% sulfur, 8% ash, 13,200 Btu per pound, 6.0% moisture and 33 vol.
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In addition to its Sentinel Deep Mine Complex, the Company has the ability
to purchase coal from surrounding smaller producers to provide additional sales
at various qualities for utility and industrial customers. With the Company's
preparation plant capacity, blending ability, on-site laboratory and large
stockpile area, the Company has the ability to blend the purchased coal with the
Sentinel Deep Mine Complex production to serve a variety of customers.
The Company owns and operates an on-site, 1,100 tons per hour modern
preparation plant. The plant is fed from a 100,000 ton open stockpile which
facilitates the shipment of coal through the attached 3,000 tons per hour train
loading facility. The Company also owns and operates an on-site modern
laboratory that provides sampling and blending capabilities. The total cost of
the Company's plant and equipment associated with its Barbour County operations
was approximately $12.4 million at September 30, 1997 and its net book value was
approximately $10.6 million.
MONONGALIA COUNTY, WEST VIRGINIA
The Monongalia County surface mine (the "Osage" mine) produced
approximately 1.2 million tons of coal in 1996. Approximately 15% of Osage's
production is shipped by truck to the Morgantown Energy Associates ("MEA") Power
Plant in Morgantown, West Virginia to be blended with coal refuse pursuant to a
long-term contract with MEA. The balance of Osage's production is shipped to the
Company's Anker Rail & River Terminal ("ARRT") in Monongalia County, where it is
shipped by rail and barge to various utilities. Coal from Osage's Waynesburg
Seam averages 1.7% sulfur, 14% ash and 11,700 Btu per pound. The Company's
Waynesburg Seam has approximately 9.0 million tons of recoverable reserves.
However, the Company is currently negotiating and intends to enter into leases
for additional reserves in order to meet future mining requirements.
The Company owns and operates ARRT in Monongalia County. ARRT is situated
such that the Company simultaneously is able to load trains in excess of 100
cars ("unit trains") on the Conrail rail line at a rate of 1,500 tons per hour
and onto barges on the Monongahela River at a rate of 1,200 tons per hour. The
loading facility will be served equally by CSX and NS after the pending merger
of the two rail companies and acquisition of Conrail. The facility is equipped
with modern crushing, screening and blending equipment, as well as quality
control and automated sampling systems. The Company operates ARRT for coal from
the Osage mine, as well as third-party brokered coal. The Company earns
additional revenue from ARRT by loading coal for non-affiliated enterprises.
The Company also owns the Rosedale and Dippel river facilities, adjacent to
ARRT, which the Company uses for barge staging and additional ground storage.
The total cost of the Company's plant and equipment associated with its
Monongalia County operations was approximately $2.7 million at September 30,
1997 and its net book value was approximately $2.5 million.
RALEIGH COUNTY, WEST VIRGINIA
The Raleigh County Baybeck deep mine produced approximately 950,000 tons of
premium quality, low vol met coal in 1996. The Company sells approximately 85%
of the Baybeck production to LTV Steel, Citizens Gas and Coke Utility, Drummond
Coal Sales, Inc., Koppers Industries, Inc. and U.S. Steel Group. Coal from
Baybeck's Beckley Seam averages 0.7% sulfur, 6% ash, 6.0% moisture and 19 vol.
The Baybeck mine has approximately 9.8 million tons of recoverable reserves.
The Company has acquired approximately 29 million tons of premium quality
Pocahontas #3 Seam low vol met coal reserves that are known as the Bayhill
Project and are adjacent to the Baybeck mine and have already been substantially
prepared for production. The project is jointly served by NS and CSX.
The Company owns and operates a 300 tons per hour modern preparation plant,
with an on-site CSX train loading facility, capable of fast-loading a unit train
in four hours. The loading facility is fed by the attached 60,000 ton open
stockpile area adjacent to the preparation plant. The total cost of the
Company's plant and equipment associated with its Raleigh County operations was
approximately $11.2 million at September 30, 1997 and its net book value was
approximately $9.6 million.
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PRESTON COUNTY, WEST VIRGINIA
The Company operates three deep mines in Preston County, West Virginia.
Each of these mines uses contract mining companies which provide the labor,
equipment, supplies and other materials needed to mine the coal and deliver it
to a stockpile at the mine site for the production of coal. The Company pays
each contract mining company a fixed price per ton for its mining services.
In 1996, the three deep mines collectively produced approximately 886,000
tons of coal. The Company sells approximately 95% of the production of these
mines to PEPCO, APS and AES. These three mines extract coal from the Upper
Freeport Seam, which averages 1.5% sulfur, 11% ash, 13,300 Btu per pound, 6.0%
moisture and 28 vol on a fully-washed basis. The Company controls in excess of
46 million tons of recoverable reserves in Preston County, West Virginia which
will require additional development costs.
The Company owns and operates a 250 tons per hour modern plant in Preston
County, where the coal from its three contracted mines is processed. The plant
has blending capabilities and a sophisticated sampling system, with coal
preparation recovery averaging 80%. The Company also owns and operates a
fully-equipped coal and water quality laboratory and a 1,200 tons per hour CSX
unit train loading facility. The plant has a 60,000 ton storage capacity. The
total cost of the Company's plant and equipment associated with its Preston
County operations was approximately $2.7 million at September 30, 1997 and its
net book value was approximately $2.5 million.
The Company intends to cease operations in Preston County in 1998 due to
the depletion of reserves and its ability to service its markets from lower cost
mining operations currently being developed. The remaining plant and equipment
located in Preston County will be used in other operations of the Company.
GARRETT COUNTY, MARYLAND
The Garrett County deep mine (the "Steyer" mine) produced 300,000 tons of
processed coal in 1996, which were shipped primarily to MAPCO Coal Company. Coal
from Steyer's Bakerstown Seam averages 0.6% sulfur, 25% ash, 10,500 Btu per
pound, 5.0% moisture and 19 vol. The Steyer mine has approximately 11.4 million
tons of recoverable reserves. The total cost of the Company's plant and
equipment associated with its Garrett County operations was approximately $0.7
million at September 30, 1997 and its net book value was approximately $0.6
million.
GRANT COUNTY, WEST VIRGINIA
The Company acquired the assets of New Allegheny in February 1997,
consisting of 18 million tons of recoverable reserves, a 200 tons per hour
preparation plant, a long-term coal supply contract with VEPCO and an operating
surface mine. The Company also acquired, in a separate transaction, long-term
mining leases for an additional 32 million tons of recoverable deep mine
reserves adjacent to the assets acquired from New Allegheny. The Company has
expanded the surface mine and currently is increasing production in order to
service recently acquired long-term contracts with VEPCO. The Company currently
has two contracts with VEPCO to supply approximately 900,000 tons per year. A
new deep mine has been developed in the Bakerstown seam near the preparation
plant so the deep mine coal and the surface mine production can be blended to
service the Company's contracts with VEPCO. The surface mine production and deep
mine production will be blended to ship coal with 1.4% sulfur, 14% ash, 11,600
Btu per pound, 5.0% moisture and 19 vol. The surface and deep mines contain
approximately 40.4 million tons of recoverable reserves, all of which are
located within several miles of VEPCO's generating station.
The preparation plant that was acquired in the acquisition of assets from
New Allegheny has been upgraded with modern circuitry to improve the plant's
performance and is being used to process and blend the surface mine and deep
mine coal for the VEPCO contract shipments. The total cost of the Company's
plant and equipment associated with its Grant County operations was
approximately $8.1 million at September 30, 1997 and its net book value was
approximately $7.7 million.
UPSHUR COUNTY, WEST VIRGINIA
The Company recently commenced production from its Spruce Fork deep mine
complex located in Upshur County, West Virginia, which includes the development
of a 15 million ton reserve in the Upper
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Freeport Coal Seam and the Middle Kittanning Seam. The Company believes the deep
mine will produce 1.4 million tons per year of coal. Based on preliminary
estimates by the Company, coal from the Upper Freeport Coal Seam averages 1.2%
sulfur, 9% ash, 13,000 Btu per pound, 6.0% moisture and 33 vol. The Company has
plans to develop the nearby Spruce Fork #2 and Spruce Fork #3 deep mines in the
future. These mines will be developed in the Middle Kittanning Seam in reserves
currently owned by the Company. These reserves contain 28.0 million tons of
recoverable coal with an average quality of 1.1% sulfur, 10% ash, 13,000 Btu per
pound and 34 vol.
The Upshur County coal from the Spruce Fork deep mine and the planned
Spruce Fork #2 and #3 deep mines will be processed and loaded at the Sawmill Run
preparation plant and loading facility that was recently acquired with the
Spruce Fork deep mine from a subsidiary of Pittston Coal Company. The Company
believes that the acquisition of these assets was made at favorable prices,
which will allow it to refurbish the preparation plant and develop the deep mine
at a lower cost than building a new mine complex. However, the sellers of these
properties have retained certain residual interests in such properties. See
"Description of Capital Stock." The 700 tons per hour preparation plant has been
upgraded with modern circuitry and the loading facility has been converted to a
high-speed unit-train loading facility with an automatic coal sampling system.
The total cost of the Company's plant and equipment associated with its Upshur
County operations was approximately $29.8 million at September 30, 1997 and its
net book value was approximately $29.5 million.
COAL TRANSPORTATION
Transportation costs range from 10 to 15% of the cost of a customer's coal
for coal trucked to power plants located in coal fields and from 25 to 40% of
the cost of a customer's coal for eastern utilities supplied by rail. Customers
typically directly incur the transportation costs from the mine to the place of
use (e.g., a customer's power plant). Consequently, the availability and cost of
transportation constitute important factors for the marketability of coal.
In 1996, approximately 70% of the Company's tonnage travelled by rail on
NS, CSX and Conrail, with the remaining 30% traveling by truck and inland
waterway barges. Although all of the Company's mines are served by a single
railroad, the Company believes that the freight charges it pays are competitive
with the charges paid by other coal producers served by multiple railroads. The
practices of and rates set by the railroad serving a particular mine might
affect, either adversely or favorably, the Company's marketing efforts with
respect to coal produced from the relevant mine. See "Risk Factors--CSX, Norfolk
Southern ("NS") and Conrail Dependence."
COAL MARKETING AND SALES
The Company currently conducts its marketing and sales operations primarily
in the eastern and mid-western United States.
The Company's sales and marketing staff in Morgantown, West Virginia
focuses on steam coal sales in the Northeast and mid-Atlantic region and on met
coal sales across the entire United States, the Company's sales and marketing
staff in Carmel, Indiana focuses on sales in the midwestern United States and
the individual staff member in Knoxville, Tennessee focuses on sales in the
southeastern United States. Sales of coal in 1996 were 11.6 million tons,
including 4.4 million tons shipped under long-term contracts with utilities, 1.5
million tons under long-term contracts with IPPs, 1.6 million tons under spot
market contracts with utilities and 1.5 million tons to metallurgical and
industrial customers.
In February 1996, the Company established a joint marketing agreement (the
"CMS Agreement") with CMS Gas and CMS Electric (collectively, "CMS") pursuant to
which the Company and CMS cooperatively market electricity and natural gas in
the eastern United States to industrial, local distribution utility, municipal
utility and other customers. CMS is the nonutility energy marketing unit of CMS
Energy Corporation, an international energy company which owns a large United
States electric utility, Consumers Power, as well as a natural gas pipeline and
other energy-related businesses. During the first year of this arrangement, the
Company's share of revenue was $50,000.
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Anker Holding, through its affiliates, purchases coal from the Company for
its international trading operations. These purchases amounted to $7.2 million
of coal in 1994, $11.7 million in 1995 and $16.2 million in 1996. Sales to Anker
Holding and its affiliates represented 5.6% of the Company's 1996 sales. The
Company believes that Anker Holding's expertise in the international arena
facilitates such sales.
LONG-TERM COAL SUPPLY CONTRACTS
The Company supplies coal to more than fifty customers on a regular basis.
The Company has entered into various long-term coal supply contracts with its
customers, particularly with its regional utility and IPP customers. The Company
has secured long-term coal supply contracts with a weighted average life of
approximately 7.4 years as of June 30, 1997. The Company's long-term contracts
have accounted for approximately 65% of the Company's coal sales revenues from
1992 to 1996. Over the same period, approximately 3.4 million tons of annual
coal shipments covered by long-term contracts were up for renewal and contracts
for 76% of this coal were rolled over into new long-term contracts upon their
expiration. In addition, over the same period, the Company entered into new
long-term contracts for 4.0 million tons of annual coal shipments. The Company
believes that customers enter into such long-term contracts principally to
secure a reliable source of coal at predictable prices. The Company enters into
such contracts to obtain stable sources of revenues required to support the
large expenditures needed to open, expand and maintain the mines servicing such
contracts. The Company's long-term contracts with affiliates of AES accounted
for more than 16.0% of the Company's revenues in 1996 and are expected to
account for approximately 18% of revenues in 1997. In addition, the Company's
long-term contracts with VEPCO accounted for approximately 6.0% of the Company's
revenues in 1996 and are expected to account for approximately 8% of revenues in
1997. The loss of these and other of its long-term contracts could have a
material adverse effect on the Company's financial condition and results of
operations.
The following table sets forth information regarding the Company's
long-term coal supply contracts as of June 30, 1997:
APPROXIMATE CURRENT
CURRENT ANNUAL
CONTINUOUS EXPIRATION CONTRACT CONTRACT
YEARS OF DATE OF CURRENT TERM TONNAGE
CUSTOMER SERVICE CONTRACT(1) (NUMBER OF YEARS) (IN THOUSANDS)
BGE-Wagner Station.................... 8 1997 2 300
APS-Harrison Power Plant.............. 7 1997 2 960
Anker Coal Company B.V./CPPE.......... 14 1997 13 220
BGE-Crane Station..................... 3 1997 2 300
Delmarva-Edge Moor Station............ 5 1998 2 300
VEPCO-Mt. Storm Station............... 6 1998 3 456
PEPCO-Dickerson Station............... 15 1999 4 336
American Electric Power-Philip Sporn
Station............................. 5 1999 3 300
PEPCO-Dickerson Station............... 15 1999 5 336
Delmarva-Indian River Station......... 6 1999 3 100
Alabama Power-Plant Gaston............ 3 1999 3 332
Atlantic City Electric................ 15 2001 6 200
VEPCO-Mt. Storm Station............... 6 2002 8 432
AES-Thames Plant...................... 9 2005 16 600(2)
Salt City-Hydraco Plant............... 5 2007 13 385(2)
MEA-Beechurst Plant................... 6 2007 15 120(2)
AES-Shady Point Plant................. 7 2007 18 600(2)
Logan Generating-Keystone Plant....... 3 2014 21 400(2)
AES-Beaver Valley Plant............... 12 2016 20 576(2)
AES-Warrior Run Plant(3).............. 0 2019 20 650(2)
- ------------------------------
(1) Reflects stated term of contract and does not assume the exercise by the
Company of unilateral options to extend.
(2) Reflects shipments under a "total requirements" contract. Amounts are
averages of what the customer has asked for and is expected to ask for in
the future. A total requirements contract is a contract whereby the seller
agrees to supply all of the specific goods which the purchaser will need
during a certain period at an agreed price, and the purchaser agrees to
purchase all such goods exclusively from the seller.
(3) Contract commences in 1999 and the tonnage shown is expected from such date.
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The terms of long-term coal supply contracts result from applicable bidding
procedures and extensive negotiations with customers. Consequently, the terms of
such contracts typically vary significantly in many respects, including price
adjustment features, price reopener terms, coal quality requirements, quantity
parameters, flexibility and adjustment mechanics, permitted sources of supply,
treatment of environmental constraints, options to extend, and force majeure,
termination and assignment provisions.
Virtually all of the Company's long-term coal supply contracts are subject
to price adjustment provisions which permit an increase or decrease at specified
times in the contract price to reflect changes in certain price indices or other
economic indices, taxes and other charges. Three of the Company's twenty
long-term coal supply contracts also contain price reopener provisions which
provide for the contract price to be adjusted upward or downward at specified
times on the basis of market factors. Price reopener provisions might specify an
index or other market pricing mechanism on which a new contract price is to be
based. Frequently, bid solicitations are sent by the customer to other suppliers
for use in establishing a new price or for the purpose of establishing a right
of first refusal. Some price reopener provisions contain limitations on the
magnitude of the price change that may result from application of the
provisions. Contract prices under long-term coal supply agreements frequently
vary from the price at which a customer could acquire and take delivery of coal
of similar quality in the spot market.
The Company's long-term coal supply contracts specify Btu, sulfur, ash,
moisture, volatility and other qualities. Most of the Company's contracts
specify the approved seams and/or approved locations from which the coal is to
be mined.
The Company's long-term coal supply contracts contain force majeure
provisions allowing suspension of performance by the Company and/or the customer
to the extent necessary during the duration of certain events beyond the
reasonable control of the affected party.
From time to time, the Company has become involved in contract disputes
relating to, among other things, coal quality, pricing and quantity. While
customer disputes, if unresolved, could result in the termination or
cancellation of the applicable contract, the Company's experience has been that
curative and/or dispute resolution measures decrease the likelihood of
termination or cancellation. In addition, the Company's development of long-term
business relationships with many of its customers has generally permitted it to
resolve business disputes in a mutually acceptable manner. Nonetheless, the
Company from time to time has been involved in arbitration and other legal
proceedings regarding its long-term contracts, and there can be no assurance
that existing and future disputes can be resolved in a mutually satisfactory
manner. See "--Legal Proceedings."
Operating profit margins realized by the Company under its long-term coal
supply contracts vary from contract to contract and depend upon a variety of
factors, including, without limitation, price reopener and other price
adjustment provisions and the Company's production costs. Termination or
suspension of deliveries under a high-price contract could have a material
adverse effect on earnings and operating cash flow disproportionate to the
percentage of production represented by the tonnage delivered under contract.
Anker is party to a coal purchase agreement with Salt City under which it
supplies Salt City with all of its coal requirements at its co-generation plant
near Syracuse, New York. Under this contract, Anker shipped 340,000 tons in
1994, 349,600 tons in 1995, and 319,800 tons in 1996. Salt City sells the
electricity produced to Niagara Mohawk Power Corporation ("Niagara Mohawk").
Recent published reports indicate that Niagara Mohawk has reached a preliminary
agreement with several IPPs to buy out or restructure the current electric and
steam sales agreements between certain co-generation plants and Niagara Mohawk,
and that Salt City is among the co-generation plants that may be closed as a
result of the Niagara Mohawk offer. If the Salt City plant is closed, Salt City
has indicated that it will seek to terminate the contract with Anker.
Anker is party to a coal supply agreement with Logan Generating, under
which it supplies Logan Generating with all of its coal requirements at its
Logan Township, New Jersey co-generation facility. Under this contract, Anker
shipped 170,000 tons in 1994, 388,354 tons in 1995, and 415,113 tons in 1996.
Logan Generating sells the electricity that is generated at the Logan Township
plant to ACE Company. ACE Company and the Company are discussing the possible
restructuring of the contract pursuant to which a lump-sum payment would
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be made in advance in exchange for a reduction in per ton pricing for the
remaining term of the contract. No assurance can be given that the parties will
reach an agreement, and any such agreement must be approved by the New Jersey
Board of Public Utilities. The Company is unable to predict what impact, if any,
resolution of this situation will have on the Company's results of operations
and financial condition.
OTHER
In addition to its mining operations, the Company provides ash handling and
utilization services. The Company believes that its customers afford a high
priority to the disposal and recycling of combustion by-products in a careful
and environmentally sound manner. In 1996, ash disposal services generated $4.3
million, or 1% of the Company's total revenues.
REGULATION AND LAWS
The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, permitting and
licensing requirements, air quality standards, water pollution, the reclamation
and restoration of mining properties after mining is completed, the discharge of
materials into the environment, surface subsidence from underground mining and
the effects that mining has on groundwater quality and availability. In
addition, the industry is affected by significant legislation mandating certain
benefits for current and retired coal miners. Numerous federal, state and local
governmental permits and approvals are required for mining operations. The
Company believes that all permits currently required to conduct its present
mining operations have been obtained. The Company may be required to prepare and
present to federal, state or local authorities data pertaining to the effect or
impact that a proposed exploration for or production of coal may have on the
environment. Such requirements could prove costly and time-consuming, and could
delay commencement or continuation of exploration or production operations.
Future legislation and administrative regulations may emphasize the protection
of the environment and, as a consequence, the activities of the Company may be
more closely regulated. Such legislation and regulations, as well as future
interpretations and more rigorous enforcement of existing laws, may require
substantial increases in equipment and operating costs to the Company and
delays, interruptions or a termination of operations, the extent of which cannot
be predicted. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--Employees and Labor Relations."
The Company's independent operating subsidiaries endeavor to conduct mining
operations in compliance with all applicable federal, state and local laws and
regulations. However, because of extensive and comprehensive regulatory
requirements, violations during mining operations occur from time to time in the
industry. Notwithstanding compliance efforts, the Company does not believe such
violations can be completely eliminated. None of the violations to date or the
monetary penalties assessed upon the Company's subsidiaries have been material.
While it is not possible to quantify the costs of compliance with all
applicable federal and state laws, those costs have been and are expected to
continue to be significant.
The remainder of the "Regulation and Laws" section provides a brief
description of the general purpose and impact of the principal federal, state
and local laws and regulations that affect the coal mining industry. These
descriptions do not address every material aspect or possible impact of the
applicable law or regulation.
MINING HEALTH AND SAFETY STANDARDS
Stringent safety and health standards have been imposed by federal
legislation since 1969 when the federal Coal Mine Health and Safety Act of 1969
(the "1969 Act") was adopted. The 1969 Act resulted in increased operating costs
and reduced productivity. The Federal Mine Safety and Health Act of 1977 (the
"1977 Act") significantly expanded the enforcement of health and safety
standards. The 1977 Act imposes safety and health standards on all mining
operations. Regulations are comprehensive and affect numerous aspects of mining
operations, including training of mine personnel, mining procedures, blasting,
the equipment used in mining operations and other matters. The Mine Safety and
Health Administration ("MSHA") monitors compliance with these federal laws and
regulations. The Black Lung Benefits Act of 1969 and the
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Black Lung Benefits Reform Act of 1977 constitute parts of the 1969 Act and the
1977 Act. See "Regulation and Laws--Black Lung Benefits." In addition to the
federal framework, most of the states in which the Company operates impose
regulatory and legal parameters for mine safety and health.
One of the Company's long-term goals is to achieve excellent health and
safety performance as measured by accident frequency rates and other measures.
The Company believes that attainment of this goal is inherently tied to the
attainment of productivity and financial goals. The Company seeks to implement
this goal by, among other measures, training employees in safe work practices;
openly communicating with employees; establishing, following and improving
safety standards; involving employees in establishing safety standards; and
recording, reporting and investigating all accidents, incidents and losses to
avoid reoccurrences. As evidence of the effectiveness of the Company's safety
program, the Company's Osage operation was awarded the Bart Lay Award by the
West Virginia Office of Miners' Health, Safety and Training as the safest coal
mine in West Virginia during 1996.
BLACK LUNG BENEFITS
In order to compensate miners who were last employed as miners prior to
1970, the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits
Reform Act of 1977, as amended by the Black Lung Benefits Revenue Act of 1981
and the Black Lung Benefits Amendments of 1981 (the "1981 Acts"), levy a tax on
production of $1.10 per ton for deep-mined coal and $0.55 per ton for
surface-mined coal, neither amount to exceed 4.4% of the sales price. In
addition, the 1981 Acts provide that certain claims for which coal operators had
previously been responsible will be obligations of a government trust funded by
the tax. The Revenue Act of 1987 extended the termination date of the tax from
January 1, 1996 to the earlier of January 1, 2014 or the first January on which
the government trust becomes solvent. The Company maintains a fully insured
program covering all black lung claims through the West Virginia Workers
Compensation and the West Virginia Coal Workers' Pneumoconiosis Funds. The
Company has not received any notice of claims for black lung disease which would
not be covered by the plans.
Legislation is currently pending in Congress on black lung reform. A bill
is currently pending in Congress that would restrict the evidence that can be
offered by a mining company, establish a standard for evaluation of evidence
that greatly favors black lung claimants, allow claimants who have been denied
benefits at any time since 1981 to refile their claims for consideration under
the new law, make surviving spouse benefits significantly easier to obtain and
retroactively waive repayment of preliminarily awarded benefits that are later
determined to have been improperly paid. If this or similar legislation is
passed, the number of claimants who are awarded benefits could significantly
increase. There can be no assurance that such proposed legislation or other
proposed changes in black lung legislation will not have an adverse effect on
the Company.
The United States Department of Labor has issued proposed amendments to the
regulations implementing the federal black lung laws which, among other things,
establish a presumption in favor of a claimant's treating physician and limit a
coal operator's ability to introduce medical evidence regarding the claimant's
medical condition. If adopted, the amendments could have an adverse impact on
the Company, the extent of which cannot be accurately predicted.
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT OF 1992
The Coal Industry Retiree Health Benefit Act of 1992 (the "Health Benefits
Act") was enacted in October 1992 to provide for the funding of health benefits
for United Mine Workers Association ("UMWA") retirees. The Health Benefits Act
was enacted to eliminate the funding deficits of the 1950 and 1974 UMWA Benefit
Trusts by establishing a trust fund to which "signatory operators," are
obligated to pay annual premiums for assigned beneficiaries, together with a pro
rata share for certain beneficiaries ("unassigned beneficiaries") who never
worked for such employers, in amounts to be determined by the Secretary of
Health and Human Services on the basis set forth in the Health Benefits Act.
"Signatory operators" include operators who are signatory to the current NBCWA
or prior NBCWA's, and "related persons," including entities at one time owned by
the Company which were signatory operators. The Company's cash cost under the
Health Benefits Act amounts to approximately $470,000 per year. In 1996, the
Company contributed approximately
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$1.2 million under this legislation, which represented payments which accrued
and were owing in respect of prior years. Based upon independent actuarial
estimates, the Company believes that the amount of its obligation under the new
plan will be approximately $5.5 million as of December 31, 1996, using a 10%
discount rate, and this amount is recorded on the Consolidated Financial
Statements.
ENVIRONMENTAL LAWS
The Company is subject to various Federal environmental laws, including the
Surface Mining Control and Reclamation Act, the Clean Air Act, the Comprehensive
Environmental Response Compensation and Liability Act, the Clean Water Act and
the Resource Conservation Recovery Act, as well as state laws of similar scope
in each state in which the Company operates. These laws require approval of many
aspects of coal mining operations, and both federal and state inspectors
regularly visit the Company's mines and other facilities in order to assure
compliance.
SURFACE MINING CONTROL AND RECLAMATION ACT. The federal Surface Mining
Control and Reclamation Act of 1977 ("SMCRA"), administered by the Office of
Surface Mining ("OSM"), establishes mining and reclamation standards for all
aspects of surface mining as well as many aspects of deep mining. SMCRA and
similar state statutes, among other things, require that mined property be
restored in accordance with specified standards and an approved reclamation
plan. In addition, the Abandoned Mine Lands Act ("AML"), which is part of SMCRA,
imposes a tax on all current mining operations the proceeds of which are used to
restore mines closed before 1977. The maximum tax is $0.35 per ton on
surface-mined coal and $0.15 per ton on underground-mined coal.
SMCRA also requires that comprehensive environmental protection and
reclamation standards be met during the course of and upon completion of mining
activities. For example, SMCRA requires the Company to restore a surface mine to
approximate original contour as contemporaneously as practicable with surface
coal mining operations. The mine operator must submit a bond or otherwise secure
the performance of these reclamation obligations. Permits for surface mining
operations must be obtained from the federal Office of Surface Mining
Reclamation and Enforcement or, where state regulatory agencies have adopted
federally approved state programs under SMCRA, the appropriate state regulatory
authority. The Company accrues for the liability associated with all end of mine
reclamation on a ratable basis as the coal reserve is being mined. The estimated
cost of reclamation, and the corresponding accrual on the Company's financial
statements, is updated periodically. The earliest a reclamation bond can be
released is five years after reclamation to the approximate original contour has
been achieved. The Company recently received an award for its reclamation
efforts at the Company's Osage operation in 1996 and has received other similar
awards in previous years.
All states in which the Company's active mining operations are located have
achieved primary jurisdiction for SMCRA enforcement through approved state
programs. Under SMCRA, responsibility for any coal operator which is currently
in violation of SMCRA can be imputed to other companies which are deemed,
according to regulations, to "own or control" the coal operator. Sanctions can
include being blocked from receiving new permits and rescission or suspension of
existing permits. Because of a recent federal court action invalidating the
SMCRA ownership and control regulations, the scope and potential impact of the
"ownership and control" requirements on the Company are unclear. OSM has
responded to the court action by promulgating interim regulations, which more
narrowly apply the ownership and control standards to coal companies. Although
the federal action should have a precedential effect on state regulations
dealing with "ownership and control," which are in many instances similar to the
invalidated federal regulations, it is not certain what impact the federal court
decision will have on these state regulations.
CLEAN AIR ACT. The Clean Air Act, including the Clean Air Act Amendments,
and corresponding state laws which regulate the emissions of materials into the
air, affect coal mining operations both directly and indirectly. Coal mining and
processing operations may be directly affected by Clean Air Act permitting
requirements and/or emissions control requirements relating to particulate
matter (e.g., "fugitive dust"). Coal mining and processing may also be impacted
by future regulation of fine particulate matter measuring 2.5 micrometers in
diameter or smaller. Regulations relating to fugitive dust and coal emissions
may restrict the Company's ability to develop new mines or require the Company
to modify its existing operations. The Clean
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Air Act indirectly affects coal mining operations by extensively regulating the
air emissions of coal-fueled electric power generating plants. Title IV of the
Clean Air Act Amendments places limits on sulfur dioxide emissions from electric
power generation plants. The limits set baseline emission standards for such
facilities. Reductions in such emissions will occur in two phases: Phase I began
in 1995 (applicable to certain identified facilities) and Phase II will begin in
2000 (applicable to all facilities, including those subject to the 1995
restrictions). The affected utilities may be able to meet these requirements by,
among other things, switching to lower sulfur fuels, installing pollution
control devices such as scrubbers, reducing electricity generating levels or by
purchasing or trading "pollution credits." Specific emissions sources will
receive these credits which utilities and industrial concerns can trade or sell
to allow other units to emit higher levels of sulfur dioxide.
The effect of the Clean Air Act Amendments cannot be completely ascertained
at this time. Although it was generally anticipated that Phase I of the Clean
Air Act Amendments would increase prices for low sulfur coal, because of
over-investment in low sulfur production capacity and related transportation
facilities in the western United States (and to a lesser degree in Central
Appalachia) in reaction to the anticipated price increase, this effect did not
materialize. When the Clean Air Act Amendments were enacted, many plants
switched to low sulfur coal supplied from the Powder River Basin, located
predominately in Wyoming. This compliance strategy generated an unexpectedly
large number of pollution credits, which were then marketed together with lower
cost, higher sulfur coal and sold in competition with Central Appalachian
production. The Company believes these factors reduced or capped the anticipated
price increase for Central Appalachian low sulfur coal in Phase I.
The Company believes that in Phase II the price for low sulfur coal is more
likely to increase, and the price for high sulfur coal to decrease, because
additional coal-burning electric power plants will be affected by Phase II.
However, this is not expected to occur until well into Phase II, after the large
bank of pollution credits which has developed in connection with Phase I has
been reduced and before utilities electing to comply with Phase II by installing
scrubber sulfur-reduction technologies are able to implement this compliance
strategy. The Company does not believe that compliance strategies utilizing
scrubbers will result in significant downward pressure on compliance coal prices
during initial phases of Phase II. However, if the prices of compliance coal
and/or pollution credits rise, scrubber compliance strategies may become more
competitive. The expected reduction of the existing bank of pollution credits
during Phase II should also help to rationalize the market for compliance coal
during the long-term to the extent utilities are unable to utilize strategies to
create a new bank of pollution credits.
The Clean Air Act Amendments also require that existing major sources of
nitrogen oxides in moderate or higher ozone non-attainment areas install RACT
for nitrogen oxides, which are precursors of ozone. In addition, stricter ozone
standards are expected to be implemented by the EPA by 2003. The area from
northern Virginia through Maine was designated as an OTR. OTAG, formed to make
recommendations to the EPA for addressing ozone problems in the eastern United
States, submitted its final recommendations to the EPA in June 1997. OTAG's
recommendations regarding strategies for reducing ozone and precursor emissions
may result in even more stringent emissions limits for eastern states such as
West Virginia. Installation of RACT, and any control measures beyond RACT, that
the Ozone Transport Commission, states and the EPA may require will make it more
costly to operate coal fired power plants and, depending on the requirements of
individual state attainment plans and the development of revised new source
performance standards, could make coal a less attractive fuel alternative in the
planning and building of power plants in the future. If coal's share of the
capacity for power generation were to be reduced, a material adverse effect on
the Company's financial condition and results of operations could result. The
effect such legislation or other legislation that may be enacted in the future
could have on the coal industry in general and on the Company in particular
cannot be predicted with certainty. Such legislation limits the ability of some
of the Company's customers to burn higher sulfur coals unless these customers
have or are willing to install scrubbers, to blend coal or to bear the cost of
acquiring emission credits which permit them to burn higher sulfur coal. The
Company has endeavored to mitigate the potential adverse effects of the
legislation's limitations on sulfur dioxide emissions through the acquisition
and development of compliance and low sulfur coal reserves and
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operations in Appalachia. No assurance can be given that the implementation of
the Clean Air Act Amendments will not adversely affect the Company.
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT. The
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and similar state laws affect coal mining operations by imposing
clean-up requirements for threatened or actual releases of hazardous substances
that may endanger public health or welfare or the environment. Under CERCLA,
joint and several liability may be imposed on waste generators, site owners and
operators and others regardless of fault or the legality of the original
disposal activity. Waste substances generated by coal mining and processing are
generally not regarded as hazardous substances for purposes of CERCLA.
CLEAN WATER ACT. Both the federal Clean Water Act and corresponding state
statutes affect coal mining operations by imposing restrictions on effluent
discharge, including acid mine drainage, into waters. Permits for such
discharges must be obtained from the EPA and/or similar state agencies. Regular
monitoring, as well as compliance with reporting requirements and performance
standards, are requirements under the Clean Water Act and preconditions for the
renewal of such permits. In addition, to the extent not otherwise regulated by
applicable law, West Virginia's Groundwater Protection Act may affect coal
mining operations by imposing restrictions on groundwater quality.
RESOURCE CONSERVATION RECOVERY ACT. The federal Resource Conservation
Recovery Act ("RCRA"), and corresponding state statutes, affects coal mining
operations by imposing requirements for the treatment, storage and disposal of
hazardous wastes. Although many mining wastes are excluded from the regulatory
definition of hazardous waste, and coal mining operations covered by SMCRA
permits are exempted from regulation under RCRA by statute, the EPA is studying
the possibility of expanding regulation of mining wastes under RCRA.
TOXIC SUBSTANCES CONTROL ACT. The Toxic Substances Control Act ("TSCA")
regulates, among other things, the use and disposal of polychlorinated biphenyls
("PCBs"), a substance which in the past was commonly found in coolants and
hydraulic fluids utilized by the mining industry. The penalties imposed under
TSCA for the improper disposal of PCBs can be significant.
COMPETITION
The United States coal industry is highly competitive, with numerous
producers in all coal producing regions. The Company competes with other large
producers and hundreds of small producers in the United States and abroad. Many
of the Company's customers are also customers of the Company's competitors. The
markets in which the Company sells its coal are highly competitive and affected
by factors beyond the Company's control. Continued demand for the Company's coal
and the prices that the Company will be able to obtain will depend primarily on
coal consumption patterns of the domestic electric utility industry, which in
turn are affected by the demand for electricity, coal transportation costs,
environmental and other governmental regulations and orders, technological
developments and the availability and price of competing coal and alternative
fuel supply sources such as oil, natural gas, nuclear energy and hydroelectric
energy. See "--Regulation and Laws." In addition, during the mid-1970's and
early 1980's, a growing coal market and increased demand attracted new investors
to the coal industry and spurred the development of new mines and added
production capacity throughout the industry. Although demand for coal has grown
over the recent past, the industry has since been faced with over-capacity,
which in turn has increased competition and lowered prevailing coal prices.
Moreover, because of greater competition for electricity and increased pressure
from customers and regulators to lower electricity prices, public utilities are
lowering fuel costs by buying higher percentages of spot coal through a
competitive bidding process and by only buying the amount of coal necessary to
meet their requirements.
EMPLOYEES AND LABOR RELATIONS
As of September 30, 1997, the Company and its subsidiaries employed
approximately 768 non-union employees, with an average employee age of 42 years.
The Company is not a party to any collective bargaining agreement and considers
its relations with its employees to be good. If some or all of the Company's
currently
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non-union operations were to become unionized, the Company could incur higher
labor costs and an increased risk of work stoppages. There can be no assurance
that the Company's workforce will not unionize in the future.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is involved in certain
pending or threatened legal proceedings. The Company believes that none of such
proceedings of which it currently is aware will have a material adverse effect
on the financial position or results of operations of the Company.
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MANAGEMENT
Set forth below are the names, ages (as of November 1, 1997) and positions
of the directors and executive officers of the Company. The terms of each of the
directors will expire annually upon the election and qualification of his
successor at the annual meeting of stockholders.
NAME AGE POSITION
Bruce Sparks................ 42 President, Director
Michael M. Matesic.......... 32 Treasurer
B. Judd Hartman............. 34 Secretary
James A. Walls.............. 35 Assistant Secretary
John Shober................. 64 Chairman of the Board
Willem G. Rottier........... 58 Director
William Macaulay............ 51 Director
Bruce Rothstein............. 45 Director
John Hill................... 55 Director
On October 12, 1997, John J. Faltis, the Company's President, Chief
Executive Officer and Chairman of the Board, was killed in a helicopter accident
in West Virginia. On October 28, 1997, the Company's Board of Directors elected
John Shober, presently a director, to succeed Mr. Faltis as Chairman of the
Board. The Company's Board also elected Bruce Sparks, formerly Executive Vice
President, Treasurer and Secretary to succeed Mr. Faltis as President. The Board
also elected Michael M. Matesic as Treasurer and B. Judd Hartman as Secretary.
As of January 1, 1998, the seat on the Board of Directors held by Mr. Faltis was
vacant. See "Prospectus Summary--Recent Developments."
MANAGEMENT BIOGRAPHIES
P. BRUCE SPARKS. Mr. Sparks has been President of Anker since October 28,
1997, and has been a stockholder of the Company since 1996. From 1988 to October
1997, he was Executive Vice President of Anker. Mr. Sparks was the Vice
President of Administration and Chief Financial Officer from 1985 until 1988. A
1976 business graduate from Concord College, he spent seven years in various
management positions with CoalARBED, Inc. (a coal company), the last of which
was as Vice President and Chief Financial Officer before joining Anker. Mr.
Sparks has been with Anker for 12 years.
MICHAEL M. MATESIC. Mr. Matesic is a Certified Public Accountant and has
been Treasurer of Anker since October 28, 1997 and Secretary/Treasurer of
certain of its subsidiaries since 1996. From 1990 to October 1997, he was
Controller of Anker. A 1987 graduate of Duquesne University with a B.S. in
Business Administration, he spent two years on the audit staff of Ernst & Young
LLP (certified public accountants). Mr. Matesic's responsibilities include
accounting, tax, financial administration, human resources and risk management.
Mr. Matesic is a member of the American Institute of Certified Public
Accountants, Pennsylvania Institute of Certified Public Accountants, and the
West Virginia Society of Certified Public Accountants. Mr. Matesic has been with
Anker for 8 years.
B. JUDD HARTMAN. Mr. Hartman was appointed Secretary effective November 1,
1997. He graduated from Washington and Lee University in 1985 with a B.A. in
Economics and received his J.D. Degree in 1989 from the Wake Forest University
School of Law. Prior to November 1997, Mr. Hartman was employed by Spilman,
Thomas and Battle (a law firm) in Charleston, West Virginia.
JAMES A. WALLS. Mr. Walls has been Assistant Secretary of Anker since
1993. He graduated from West Virginia University with a B.S./B.A. and J.D.
Degree in 1989. Prior to March of 1993, he was employed by Spilman, Thomas and
Battle in Charleston, West Virginia. Mr. Walls has been with Anker for 4 years.
JOHN SHOBER. Mr. Shober was elected Chairman of the Board on October 28,
1997 and has served as a Director of the Company since 1996. Mr. Shober is a
private investor and corporate director. Mr. Shober serves as a director of Penn
Virginia Corporation (a natural resources company), Airgas, Inc. (a distributor
of industrial gas and industrial gas supplies), BetzDearborn, Inc. (a
manufacturer of performance chemicals),
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C&D Technologies, Inc. (a manufacturer of stored power systems), Ensign-Bickford
Industries, Inc. (a manufacturer of detonation devices) and MIBRAG mbH (a German
coal mining company). He serves as a member of the Advisory Board of First
Reserve, which oversees the investment activities and decisions of First Reserve
acting in its capacity as manager for the Funds' investment portfolios.
WILLEM G. ROTTIER. Mr. Rottier has served as a Director of the Company
since 1996. Mr. Rottier was a director of Anker Group from 1982 to 1996, and
Chairman of the Board of Anker Group from 1988 to 1996. Mr. Rottier also serves
as a managing director of Anker Holding.
WILLIAM MACAULAY. Mr. Macaulay has served as a Director of the Company
since 1996. Mr. Macaulay has been the President and Chief Executive Officer of
First Reserve since 1983. Mr. Macaulay serves as a director of Weatherford
Enterra, Inc. (an oilfield service company), Maverick Tube Corporation (a
manufacturer of steel pipe and casing), TransMontaigne Oil Company (an oil
products distribution and refining company), National-Oilwell, Inc. (a
manufacturer and distributor of equipment and products used in oil and gas
drilling and production), Hugoton Energy Corporation (an independent oil and gas
exploration and production company), Cal Dive International, Inc. (a provider of
subsea services in the Gulf of Mexico), James River Coal Corporation (a coal
producer) and Domain Energy Corporation (an oil and gas exploration company).
BRUCE ROTHSTEIN. Mr. Rothstein has served as a Director of the Company
since 1996. Mr. Rothstein has been a Managing Director of First Reserve since
1996 and served as a Vice-President of First Reserve from 1991 to 1996. Mr.
Rothstein serves as a director of National-Oilwell, Inc.
JOHN HILL. Mr. Hill has served as a Director of the Company since 1996.
Mr. Hill has been Chairman of First Reserve since 1983. Mr. Hill serves as a
director of Weatherford Enterra, Inc., a director of TransMontaigne Oil Company,
a director of James River Coal Corporation, a director of Snyder Oil (an
independent oil and gas company) and a director of Putnam Mutual Funds (an
investment manager of mutual funds and institutional accounts).
The following directors have been appointed to serve on the Company's
Executive Committee during 1997: Messrs. Shober and Macaulay. The following
directors have been appointed to serve on the Company's newly created Audit
Committee during 1997: Messrs. Sparks and Rothstein.
BOARD COMPENSATION
All directors are reimbursed for their usual and customary expenses
incurred in attending all Board and committee meetings. Each director receives
an aggregate annual fee of $12,000 for serving on the Company's Board of
Directors.
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EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for the year ended December 31, 1996 for (i) the chief executive
officer of the Company and (ii) each of the four other most highly compensated
executive officers of the Company, determined as of December 31, 1996
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
--------------------------------------
ANNUAL COMPENSATION SECURITIES
---------------------------------- RESTRICTED UNDERLYING
NAME AND FISCAL OTHER ANNUAL STOCK OPTIONS/SARS LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS (#) PAYMENTS COMPENSATION
John J. Faltis........ 1996 $ 311,371 $ 138,257 $4,116 -- -- -- --
President and Chief
Executive Officer(1)
P. Bruce Sparks....... 1996 $ 210,005 $ 157,757 $1,600 -- -- -- $2,885,000(2)
Executive Vice
President, Chief
Financial Officer and
Secretary
Terrence J. Jackson... 1996 $ 61,250 $ 22,500 $ 268 -- -- -- --
Senior Vice
President(3)
Kim A. Burke.......... 1996 $ 136,615 $ 35,000 $4,841 -- -- -- --
Senior Vice President
Richard A. Bolen...... 1996 $ 152,000 $ 20,000 $3,036 -- -- -- --
Senior Vice President
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(1) On October 12, 1997, Mr. Faltis was killed in a helicopter accident in West
Virginia. See "Prospectus Summary--Recent Developments."
(2) In 1996, Mr. Sparks received a one-time bonus. Such amount consists of
$1,385,000 cash and $1,500,000 recognized compensation for stock received
pursuant to the Recapitalization.
(3) Mr. Jackson was hired by the Company on July 11, 1996. The listed amounts
represent only compensation received from July 11, 1996 through December 31,
1996. His annual compensation for the full year would have been: salary,
$175,000; bonus, $22,500; other annual compensation, $4,841.
EMPLOYMENT AGREEMENTS
Mr. Faltis had employment agreements with each of the Company, Anker Group,
Inc. ("Anker Group"), Anker Energy Corporation ("Anker Energy") and Simba Group,
Inc. ("Simba"). The agreement with Anker Energy is dated as of August 1, 1996
and was due to expire on July 31, 2001 (the "Anker Energy Agreement"). The Anker
Energy Agreement provides for Mr. Faltis' employment as President and Chief
Executive Officer of Anker Energy at an annual salary of $330,000 for the period
August 1, 1996 through July 31, 1997, $339,900 for the period August 1, 1997
through July 31, 1998, $350,100 for the period August 1, 1998 through July 31,
1999, $360,600 for the period August 1, 1999 through July 31, 2000, and $371,400
for the period August 1, 2000 through July 31, 2001, a quarterly bonus of
$10,000 for each calendar quarter for its duration, and a yearly bonus based on
the financial performance of the Company. Mr. Faltis' yearly bonus for the
period August 1, 1996 through July 31, 1997 was $124,410.
Upon Mr. Faltis' death, the Anker Energy Agreement terminated. Such
agreement provided for the payment to Mr. Faltis' estate of any accrued but
unpaid salary, any amounts Mr. Faltis was entitled to receive under applicable
employee benefit plans, and any amounts due pursuant to the reimbursement
provisions of such agreement. Except for the indemnification provisions of such
agreement, which survive the termination of the Agreement without limit, the
Company is not required to make further payments to Mr. Faltis' estate. Each of
the employment agreements with Anker Group and Simba Group terminated upon the
termination of the Anker Energy Agreement, and neither one of such agreements
provided for compensation or benefits upon Mr. Faltis' death.
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Mr. Sparks has an employment agreement with each of the Company, Anker
Group, Anker Energy and Simba. The agreement with Anker Energy is dated as of
August 1, 1996 and expires on July 31, 2002 (the "Sparks Anker Energy
Agreement"). The Sparks Anker Energy Agreement provides for Mr. Sparks'
employment as Executive Vice-President of Anker Energy at an annual salary of
$250,000 for the period August 1, 1996 through July 31, 1997, $257,500 for the
period August 1, 1997 through July 31, 1998, $265,200 for the period August 1,
1998 through July 31, 1999, $273,200 for the period August 1, 1999 through July
31, 2000, $281,200 for the period August 1, 2000 through July 31, 2001, and
$289,600 for the period August 1, 2001 through July 31, 2002, a quarterly bonus
of $3,750 for each calendar quarter during its duration, and a yearly bonus
based on the financial performance of the Company. Mr. Sparks' yearly bonus for
the period August 1, 1996 through July 31, 1997 was $75,400. Mr. Sparks'
employment may be terminated by him upon 30 days' notice. In the event Anker
Energy were to terminate Mr. Sparks other than for cause at any time prior to
August 1, 2000, Mr. Sparks would be entitled to receive the annual salary,
bonuses, and benefits which he would have received under the Sparks Anker Energy
Agreement through July 31, 2002, had Anker Energy not terminated his employment.
In the event Anker Energy were to terminate Mr. Sparks other than for cause at
any time on or after August 1, 2000, Mr. Sparks would have the option to receive
either (i) 250% of his then current annual salary or (ii) the compensation,
bonuses and other benefits he would have been entitled to receive pursuant to
the Sparks Anker Energy Agreement, had Anker Energy not terminated him, for a
period of two years. In addition, Mr. Sparks is entitled to participate in any
of Anker Energy's pension plans for which he is eligible. The Sparks Anker
Energy Agreement also provides that Mr. Sparks will not compete with Anker
Energy during the employment term and for a period of one year following its
termination. Mr. Sparks also has employment agreements, each without
compensation, with the Company, providing for his employment as a member of the
Board of Directors of Anker Group and Simba and as the Executive Vice-President
of the Company; with Anker Group, providing for his employment as a member of
the Board of Directors of Anker Energy and as Executive Vice-President of Anker
Group; and with Simba, providing for his employment as the Executive
Vice-President of Simba.
1997 OMNIBUS STOCK INCENTIVE PLAN
The Company adopted the 1997 Omnibus Stock Incentive Plan (the "Plan"),
providing for the issuance to certain officers and key employees of the Company
or an Affiliate (as defined therein) of the Company (the "Optionees") of up to
300 shares of authorized but unissued or reacquired shares of Common Stock of
the Company, subject to adjustment to reflect certain events such as stock
dividends, stock split-ups, subdivisions or consolidations of shares or other
events that, in the judgment of the Board of Directors, necessitates a similar
adjustment. The Plan is intended to, among other things, motivate, reward and
retain officers and key employees of the Company or an Affiliate (as defined
therein) for contributing to its long-term success by providing an opportunity
for meaningful capital accumulation linked to the future success of the Company
and appreciation in shareholder value.
The President and Executive Vice President of the Company will administer
the Plan. The President and Executive Vice President have the authority to
determine the forms and awards made to Optionees (each, a "Grant"). Such Grants
are subject to various limitations and conditions specified in the Plan
(including certain legal restrictions), and may take the form of restricted
stock or stock options subject to certain restrictions.
All key employees of the Company or an Affiliate (as defined therein) are
eligible to be granted awards under the Plan. The President and Executive Vice
President have the authority to designate the employees to whom shares of
Restricted Stock are to be awarded and to whom Options are to be granted and
will specify the number of shares of Common Stock subject to each award or
grant.
The President and Executive Vice President jointly have the authority to
make such amendments to any terms and conditions applicable to outstanding
Grants as are consistent with the Plan, except that no modification shall become
effective without prior approval of the Optionees if such approval is necessary
and
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comply with any tax or regulatory requirement or rule of any exchange or system
upon which the stock may be listed. No amendment shall, without an Optionee's
consent, adversely affect any rights of such Optionee under any Grant
outstanding at the time such amendment is made.
None of the Company's employees have been granted any options pursuant to a
Stock Option Grant Agreement or any shares of Common Stock pursuant to a
Restricted Stock Award Agreement.
STOCK OPTION GRANT AGREEMENTS
The exercise price of any options granted in the future would be determined
by the Stock Option Grant Agreement. In addition, such options would be
exercised based upon a schedule which referred to a date set forth in each
Optionee's Stock Option Grant Agreement (the "Option Trigger Date"). Generally,
an Optionee's options would vest 100% on the third anniversary date of such
Optionee's Option Trigger Date. Each Stock Option Grant Agreement will provide
for acceleration of exercisability of some or all of an Optionee's options upon
termination of employment because of death, permanent disability or retirement
of the Optionee, the Optionee's involuntary termination of employment with the
Company or an Affiliate (as defined therein) during the 90-day period
immediately following the date the Company merges with another entity, the
Optionee's voluntary termination of employment at any time after the expiration
of the 1-year period immediately following the date the Company merges with
another entity or a "change of control." A "change of control" will occur if any
person or group becomes the beneficial owner, directly or indirectly, in the
aggregate of securities of the Company representing seventy-five percent (75%)
or more of the total combined voting power of all classes of the Company's then
outstanding securities.
Options granted under the Plan pursuant to a Stock Option Agreement expire
at 5:00 p.m. Eastern Time on the day prior to the tenth (10th) anniversary of
its Grant Date.
RESTRICTED STOCK AWARD AGREEMENT
Pursuant to each Restricted Stock Award Agreement, the Award Recipient may
not transfer any shares of Common Stock acquired thereby or upon exercise of
vested options granted under the Plan (collectively, the "Plan Shares") within
five years after the date set forth in his or her Restricted Stock Award
Agreement (the "Purchase Trigger Date"), except as described below and except
for transfers to an Award Recipient's estate upon his or her death and transfers
to a trust whose beneficiaries are the Award Recipient, his or her spouse and
his or her lineal descendants (an "Award Recipient Trust").
Each Restricted Stock Award Agreement also provides the Company with the
right of first refusal to buy Plan Shares owned by each Award Recipient on
essentially the same terms and conditions as such Award Recipient proposes in a
sale of his or her Plan Shares to another bona fide third party purchaser.
Upon a change of control, the transfer restrictions, right of first
refusal, and certain other rights with respect to sale and repurchase of the
Plan Shares and cancellation of Options as described above will lapse.
MANAGEMENT INCENTIVE BONUSES
Certain members of management of the Company and its subsidiaries,
including the Named Executive Officers, are eligible to receive cash bonuses in
addition to their annual salary compensation. Such awards are based on the
performance of such individuals as determined by their direct supervisors and
other senior management and the financial performance of the Company and its
subsidiaries.
COMMON STOCK PURCHASED BY MANAGEMENT
Mr. Faltis and Mr. Sparks, in connection with the Recapitalization,
purchased 3,039 and 514 shares of Common Stock, respectively, by exchanging
shares they owned in Anker Group for shares in the Company. See "The Company."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At a meeting of the Company's Board of Directors on May 22, 1997, Mr.
Shober and Mr. Macaulay were appointed to serve on the newly created
Compensation Committee. Mr. Shober was appointed the chairman of such committee.
At the same meeting, Mr. Rothstein and Mr. Sparks were appointed to serve on the
newly created Audit Committee.
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OWNERSHIP OF COMMON STOCK
The following table sets forth, as of November 1, 1997, certain information
concerning the ownership of shares of Common Stock of the Company by: (i)
persons who own beneficially more than 5% of the outstanding shares of Common
Stock; (ii) each person who is a director or a nominee of the Company; (iii)
each person who is a Named Executive Officer; and (iv) all directors and
executive officers of the Company as a group. As of November 1, 1997, there were
10,000 shares of Common Stock outstanding.
AMOUNT AND PERCENT
NATURE OF BENEFICIAL OF SHARES
NAME AND ADDRESS OWNERSHIP OUTSTANDING
First Reserve Corporation
475 Steamboat Road, Greenwich, Connecticut 06830(1)............ 5,407 54.07%
William Macaulay(2).............................................. 5,407 54.07
John Hill(2)..................................................... 5,407 54.07
Bruce Rothstein.................................................. -- --
John Shober...................................................... -- --
JJF Group Limited Liability Company(3)........................... 3,039 30.39
Anker Holding B.V................................................ 1,040 10.40
PPK Group Limited Liability Company(4)........................... 514 5.14
Estate of John J. Faltis(5)...................................... 3,039 30.39
Bruce Sparks(6).................................................. 514 5.14
Michael M. Matesic............................................... -- --
B. Judd Hartman.................................................. -- --
James A. Walls................................................... -- --
Terence J. Jackson............................................... -- --
Kim A Burke...................................................... -- --
Richard A. Bolen................................................. -- --
Willem G. Rottier(7)............................................. 1,040 10.40
All executive officers and directors as a group ((13)
persons)(8).................................................... 10,000 100.00%
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(1) Shares of Common Stock shown as owned by First Reserve are owned of record
by American Oil & Gas Investors, Limited Partnership ("American Oil & Gas"),
AmGO II, Limited Partnership ("AmGO II"), First Reserve Fund V, Limited
Partnership ("First Reserve Fund V"), First Reserve Fund V-2, Limited
Partnership ("First Reserve Fund V-2"), First Reserve Fund VI, Limited
Partnership ("First Reserve Fund VI") and First Reserve Fund VII, Limited
Partnership ("First Reserve Fund VII", and together with American Oil & Gas,
AmGO II, First Reserve Fund V, First Reserve Fund V-2, First Reserve Fund
VI, and First Reserve Fund VII, the "Funds") each of which First Reserve is
the sole general partner and as to which it possesses sole voting and
investment power.
(2) Messrs. Macaulay and Hill may be deemed to share beneficial ownership of the
shares shown as beneficially owned by First Reserve as a result of their
ownership of common stock of First Reserve. Messrs. Macaulay and Hill
disclaim beneficial ownership of such shares. Their addresses are c/o First
Reserve Corporation, 475 Steamboat Road, Greenwich, Connecticut 06830.
(3) JJF Group is a limited liability company controlled by the estate of Mr.
Faltis. The estate of Mr. Faltis has the sole authority to exercise all
rights and remedies of JJF Group and all voting rights of the shares owned
by JJF Group.
(4) PPK Group is a limited liability company controlled solely by Mr. Sparks.
Mr. Sparks has the sole authority to exercise all rights and remedies of PPK
Group and all voting rights of the shares owned by PPK Group.
(5) The estate of Mr. Faltis may be deemed to share beneficial ownership of the
shares shown as being owned by JJF Group as a result of its ownership of
membership interests therein.
(6) Mr. Sparks may be deemed to share beneficial ownership of the shares shown
as being owned by PPK Group as a result of his ownership of common stock
therein.
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(7) Mr. Rottier may be deemed to share beneficial ownership of the shares shown
as owned by Anker Holding B.V. as a result of his ownership of common stock
of Anker Holding. Mr. Rottier disclaims beneficial ownership of such shares.
His address is c/o Anker Holding B.V., Vasteland 4, 3011 BK, Rotterdam, The
Netherlands.
(8) Includes 5,407 shares beneficially owned by First Reserve.
STOCKHOLDERS' AGREEMENT
In connection with the Recapitalization, the Company, Mr. Faltis, JJF
Group, Mr. Sparks, PPK Group, Anker Holding and First Reserve and the Funds
entered into the Stockholders' Agreement. Pursuant to the Stockholders'
Agreement, the parties thereto agreed, among other things, as follows:
NOMINATION OF DIRECTORS. The Funds shall nominate (i) four of the seven
members of the Board of Directors for so long as they hold in the aggregate more
than 50% of the issued and outstanding Common Stock of the Company, (ii) three
of the seven members of the Board of Directors, for so long as they hold in the
aggregate more than 10% of the issued and outstanding Common Stock of the
Company or (iii) one of the seven members of the Board of Directors for so long
as they hold in the aggregate more than 2% of the issued and outstanding Common
Stock of the Company. The Stockholders' Agreement also provides that each of JJF
Group, PPK Group and Anker Holding shall nominate one director for so long as
such stockholder holds at least 2% of the issued and outstanding Common Stock of
the Company.
FUNDAMENTAL ISSUES. So long as the Funds in the aggregate own 10% or more
of the issued and outstanding Common Stock, or so long as JJF Group and PPK
Group in the aggregate own 10% or more of the issued and outstanding Common
Stock, the Company shall not take, and the Company and the Stockholders (as
defined below) shall not permit to be taken any actions constituting a
"Fundamental Issue" without the favorable vote or written consent of at least
five-sevenths of the whole number of the Directors of the Company. Fundamental
Issues include, but are not limited to, the sale, lease or exchange of 50% or
more of the assets of the Company, any merger or consolidation of the Company,
any amendment to the Certificate of Incorporation of the Company and the
authorization, issuance or sale of shares of capital stock, any other type of
equity or debt securities or options, warrants or other rights to acquire equity
or debt securities of the Company.
ANTI-DILUTION. The Company shall not issue any additional shares of Common
Stock unless all Stockholders are offered on identical terms and conditions such
percentage of each type or class of such shares being offered in the aggregate,
subject to certain provisions of the Stockholders' Agreement.
RESTRICTIONS ON DISPOSITIONS OF STOCK. JJF Group, PPK Group, Anker Holding
and the Funds (each, a "Stockholder" and collectively, the "Stockholders") shall
not transfer any shares of Common Stock except pursuant to the Stockholders'
Agreement. Restrictions on dispositions of stock include, but are not limited
to, the following provisions:
LOCK-UP PERIOD. Prior to August 12, 2001, except as set forth in the
Stockholders' Agreement, no Stockholder shall transfer any shares without
the prior written approval of all of the other Stockholders.
RIGHT OF FIRST REFUSAL. Beginning on August 12, 2001, if a
Stockholder receives a bona fide offer (a "Purchase Offer") to purchase any
or all of its shares of Common Stock, the Company and the remaining
Stockholders shall have the opportunity to purchase such shares at the same
price per share and on the same terms and conditions as the Stockholder's
Purchase Offer.
TAG-ALONG RIGHTS. Each Stockholder has the right to participate in
the sale of Common Stock by another Stockholder (the "Initiating
Stockholder") to any third party at the same price per share and on the
same terms and conditions as the Initiating Stockholder.
REGISTRATION RIGHTS. Upon the written request of JJF Group, PPK Group,
Anker Holding or the Funds, the Company shall, as expeditiously as possible, use
its best efforts to effect the registration, pursuant to the Securities Act, of
the shares of Common Stock outstanding as of August 12, 1996 or acquired
thereafter by any of JJF Group, PPK Group, Anker Holding or the Funds.
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RELATED PARTY TRANSACTIONS
Anker Holding, through its affiliates, purchases coal from the Company for
its trading operations at prices which the Company believes are no less
favorable to the Company than those that would have been obtained in a
comparable transaction with an unrelated person. These purchases amounted to
$7.2 million of coal in 1994, $11.7 million in 1995 and $16.2 million in 1996.
See "Business--Mining Operations--Coal Marketing and Sales."
Mr. Faltis, owned 100% of an investment company, Resource Venture Analysis,
Inc., ("Resource Venture") which purchased the stock of University Tire Company
("University Tire") in August 1997. The Company has purchased off-road tires for
its mining operations from University Tire in the past, amounting to $738,197 in
1994, $632,167 in 1995 and $244,697 in 1996. Anker expects to continue buying
off-road tires from University Tire at prices which the Company believes are no
less favorable to the Company than those that would have been obtained in a
comparable transaction with an unrelated person. Pursuant to his employment
agreement with the Company, Mr. Faltis devoted substantially all of his time to
the Company. See "Management--Employment Agreements."
In addition, the Company made a $100,000 interest-free loan to Mr. Faltis,
the proceeds of which were used by Resource Venture in connection with certain
investments. The loan matures on December 31, 1999.
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THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the Exchange Offer), to exchange up to $125 million
aggregate principal amount of Exchange Notes for a like aggregate principal
amount of Old Notes properly tendered on or prior to the Expiration Date and not
withdrawn as permitted pursuant to the procedures described below. The Exchange
Offer is being made with respect to all of the Old Notes.
As of the date of this Prospectus, $125 million aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1998, to all
holders of Old Notes known to the Company. The Company's obligation to accept
Old Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions set forth under "Certain Conditions to the Exchange Offer" below. The
Company currently expects that each of the conditions will be satisfied and that
no waivers will be necessary.
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were issued on September 25, 1997 in a transaction exempt
from the registration requirements of the Securities Act. Accordingly, the Old
Notes may not be reoffered, resold, or otherwise transferred unless so
registered or unless an applicable exemption from the registration and
prospectus delivery requirements of the Securities Act is available.
In connection with the issuance and sale of the Old Notes, the Company
entered into the Registration Rights Agreement, which requires the Company to
file with the Commission a registration statement relating to the Exchange Offer
and to use its reasonable best efforts to cause the registration statement
relating to the Exchange Offer to become effective under the Securities Act
within 180 days after the date of issuance of the Old Notes. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Exchange Offer is being made by the Company to satisfy its obligations
with respect to the Registration Rights Agreement. The term "holder," with
respect to the Exchange Offer, means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by The Depository Trust Company. Other than
pursuant to the Registration Rights Agreement, the Company is not required to
file any registration statement to register any outstanding Old Notes. Holders
of Old Notes who do not tender their Old Notes or whose Old Notes are tendered
but not accepted would have to rely on exemptions from registration requirements
under the securities laws, including the Securities Act, if they wish to sell
their Old Notes.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
Staff, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. See "--Resale of Exchange Notes." Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."
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TERMS OF THE EXCHANGE
The Company hereby offers to exchange to each Holder, subject to the
conditions set forth herein and in the Letter of Transmittal accompanying this
Prospectus, Exchange Notes in an aggregate principal amount equal to the
aggregate principal amount of the Old Notes held by such Holder. The terms of
the Exchange Notes are identical in all material respects to the terms of the
Old Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the Exchange Notes will generally be freely transferable by holders
thereof and will not be subject to any covenant regarding registration. The
Exchange Notes will evidence the same indebtedness as the Old Notes and will be
entitled to the benefits of the Indenture. See "Description of Senior Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on an interpretation by the staff of the
Commission set forth in a series of no-action letters issued to third parties,
the Company believes that Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for sale, resold and otherwise
transferred by any holder of such Exchange Notes (other than any such holder
that is a broker-dealer or is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes and neither such holder nor any other
such person is engaging in or intends to engage in a distribution of such
Exchange Notes. Since the Commission has not considered the Exchange Offer in
the context of a no action letter, there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer. Any holder who is an affiliate of the Company or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes cannot rely on such interpretation by the staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each holder, other
than a broker-dealer, must acknowledge that it is not engaged in, and does not
intend to engage in, a distribution of Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. Broker-dealers
who acquired the Old Notes directly from the Company in the initial offering and
not as a result of market making activities must, in the absence of an
exemption, comply with the registration and prospectus delivery requirements of
the Securities Act in connection with secondary resales of the Exchange Notes
and cannot rely on such interpretation by the Staff. In addition, such
broker-dealers cannot use this Prospectus for the Exchange Offer in connection
with resales of the New Notes. See "Plan of Distribution."
Interest on the Exchange Notes will accrue from the last Interest Payment
Date on which interest was paid on the Old Notes so surrendered or, if no
interest has been paid on such Notes, from September 25, 1997.
Tendering holders of the Old Notes shall not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Old Notes
pursuant to the Exchange Offer.
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENT
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, has extended
the period of time for which the Exchange Offer is open (such date, as it may be
extended, is referred to herein as the "Expiration Date"). The Expiration Date
will be at least 20 business days after the commencement of the Exchange Offer
in accordance with Rule 14e-1(a)
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under the Exchange Act. The Company expressly reserves the right, at any time or
from time to time, to extend the period of time during which the Exchange Offer
is open, and thereby delay acceptance for exchange of any Old Notes, by giving
oral or written notice to the Exchange Agent and by timely public announcement
no later than 9:00 a.m. New York City time, on the next business day after the
previously scheduled Expiration Date. During any such extension, all Old Notes
previously tendered will remain subject to the Exchange Offer unless properly
withdrawn.
The Company expressly reserves the right to (i) terminate or amend the
Exchange Offer and not to accept for exchange any Old Notes not theretofore
accepted for exchange upon the occurrence of any of the events specified below
under "--Certain Conditions to the Exchange Offer" which have not been waived by
the Company and (ii) amend the terms of the Exchange Offer in any manner which,
in its good faith judgment, is advantageous to the holders of the Old Notes,
whether before or after any tender of the Notes. If any such termination or
amendment occurs, the Company will notify the Exchange Agent and will either
issue a press release or give oral or written notice to the holders of the Old
Notes as promptly as practicable.
For purposes of the Exchange Offer, a "business day" means any day other
than Saturday, Sunday or a date on which banking institutions are required or
authorized by New York State law to be closed, and consists of the time period
from 12:01 a.m. through 12:00 midnight, New York City time. Unless the Company
terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date, the Company will exchange the Exchange Notes for the Old Notes
on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees
and any other documents required by the Letter of Transmittal, to the Exchange
Agent at its address set forth below on or prior to the Expiration Date (or
complying with the procedure for book-entry transfer described below) or (ii)
complying with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
INSURE TIMELY DELIVERY. NO OLD NOTES OR LETTERS OF TRANSMITTAL SHOULD BE SENT TO
THE COMPANY.
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Old Notes are to be reissued) in the name
of the registered holder (which term, for the purposes described herein, shall
include any participant in The Depository Trust Company (also referred to as a
"book-entry transfer facility") whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by a bank, broker, dealer, credit union, savings
association, clearing agency or other institution (each an "Eligible
Institution") that is a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Exchange Act. If the
Exchange Notes and/or Old Notes not exchanged are to be delivered to an address
other than that of the registered holder appearing on the note register for the
Old Notes, the signature in the Letter of Transmittal must be guaranteed by an
Eligible Institution.
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The Exchange Agent will make a request within two business days after the
date of receipt of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the book-entry transfer facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the book-entry transfer facility's
procedures for such transfer. Although delivery of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the book-entry
transfer facility, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its address set forth below on or prior to the Expiration Date, a letter,
telegram or facsimile transmission (receipt confirmed by telephone and an
original delivered by guaranteed overnight courier) from an Eligible Institution
setting forth the name and address of the tendering holder, the names in which
the Old Notes are registered and, if possible, the certificate numbers of the
Old Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that within three business days after the Expiration Date, the Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the book-entry transfer
facility), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly completed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of the notice of guaranteed delivery ("Notice of Guaranteed
Delivery") which may be used by Eligible Institutions for the purposes described
in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided above)
from an Eligible Institution is received by the Exchange Agent. Issuances of
Exchange Notes in exchange for Old Notes tendered pursuant to a Notice of
Guaranteed Delivery or letter, telegram or facsimile transmission to similar
effect (as provided above) by an Eligible Institution will be made only against
deposit of the Letter of Transmittal (and any other required documents) and the
tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
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If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company, or if it is an affiliate it will
comply with the registration and prospectus requirements of the Securities Act
to the extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire Exchange Notes
issuable upon the exchange of such tendered Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Exchange Agent or the Company to be necessary or desirable to complete
the exchange, assignment and transfer of tendered Old Notes or transfer
ownership of such Old Notes on the account books maintained by a book-entry
transfer facility. The Transferor further agrees that acceptance of any tendered
Old Notes by the Company and the issuance of Exchange Notes in exchange therefor
shall constitute performance in full by the Company of certain of its
obligations under the Registration Rights Agreement. All authority conferred by
the Transferor will survive the death or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
The Transferor certifies that it is not an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act and that it is acquiring
the Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes. Each holder, other than
a broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of Exchange Notes. Each Transferor which is a
broker-dealer receiving Exchange Notes for its own account must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. By so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company will make available, for a period equal to the lesser of
(i) 180 days from the date on which the
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Exchange Offer Registration Statement is declared effective or (ii) the period
ending on the date when all broker dealers holding Old Notes have sold all Old
Notes held by them, this Prospectus to any Participating Broker-Dealer and any
other persons, if any, with similar prospectus delivery requirements for use in
connection with any resale of Exchange Notes.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal sent by
telegram, facsimile transmission (receipt confirmed by telephone) or letter must
be received by the Exchange Agent at the address set forth herein prior to the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having tendered the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) specify the principal
amount of Notes to be withdrawn, (iv) include a statement that such holder is
withdrawing his election to have such Old Notes exchanged, (v) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered or as otherwise described above (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee under the Indenture register the transfer of such
Old Notes into the name of the person withdrawing the tender and (vi) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. The Exchange Agent will return the properly withdrawn Old
Notes promptly following receipt of notice of withdrawal. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the book-entry
transfer facility to be credited with the withdrawn Old Notes or otherwise
comply with the book-entry transfer facility procedure. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Company and such determination will be final and binding on
all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the book-entry transfer facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account with such
book-entry transfer facility specified by the holder) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Exchange Date, all Old Notes properly
tendered and will issue the Exchange Notes promptly after such acceptance. See
"--Certain Conditions to the Exchange Offer" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
book-entry confirmation of such Old Notes into the Exchange Agent's account at
the book-entry transfer facility, a properly completed and duly executed Letter
of Transmittal and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount than
the holder desires to exchange, such unaccepted or non-exchanged Old Notes will
be returned without expense to the tendering holder thereof (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange
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Agent's account at the book-entry transfer facility pursuant to the book-entry
transfer procedures described above, such non-exchanged Old Notes will be
credited to an account maintained with such book-entry transfer facility) as
promptly as practicable after the expiration of the Exchange Offer.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or to issue Exchange Notes in exchange for, any Old Notes and may terminate or
amend the Exchange Offer (by oral or written notice to the Exchange Agent or by
a timely press release) if at any time before the acceptance of such Old Notes
for exchange or the exchange of the Exchange Notes for such Old Notes, any of
the following conditions exist:
(a) any law, statute, rule or regulation or applicable interpretation
of the staff of the Commission is issued or promulgated which, in the good
faith determination of the Company, does not permit the Company to effect
the Exchange Offer; or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which permits the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such
Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to
participate in the distribution of such Exchange Notes; or
(c) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency or regulatory authority or any
injunction, order or decree is issued with respect to the Exchange Offer
which, in the sole judgment of the Company, would prohibit the Company from
proceeding with or consummating the Exchange Offer.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. If the Company waives or amends the foregoing
conditions, it will, if required by law, extend the Exchange Offer for a minimum
of five business days from the date that the Company first gives notice, by
public announcement or otherwise, of such waiver or amendment, if the Exchange
Offer would otherwise expire within such five business-day period. Any
determination by the Company concerning the events described above will be final
and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended. In any such event the Company is required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange.
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EXCHANGE AGENT
Marine Midland Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below:
By Hand/Overnight Courier: By Mail:
Marine Midland Bank Marine Midland Bank
Attention: Attention:
Corporate Trust Department Corporate Trust Department
140 Broadway, Level A 140 Broadway, Level A
New York, New York 10005-1180 New York, New York 10005-1180
By Facsimile:
212-658-2292
Attention: Corporate Trust Department
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the address and
telephone number set forth in the Letter of Transmittal.
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ON THE LETTER OF
TRANSMITTAL, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE OR TELEX NUMBER
OTHER THAN THE ONES SET FORTH ON THE LETTER OF TRANSMITTAL, WILL NOT CONSTITUTE
A VALID DELIVERY.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this and other related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for their customers.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $ , which includes fees and expenses of the Exchange
Agent, Trustee, registration fees, accounting, legal, printing and related fees
and expenses.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Old Notes
in such jurisdiction. In any jurisdiction in which the securities laws or blue
sky laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
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TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the exchange of Exchange Notes for Old Notes. Expenses incurred in
connection with the issuance of the Exchange Notes will be amortized over the
term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. Old Notes not
exchanged pursuant to the Exchange Offer will continue to remain outstanding in
accordance with their terms. In general, the Old Notes may not be offered or
sold unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act.
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of Old Notes are urged
to consult their financial and tax advisors in making their own decision on what
action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture, except for
any such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire, subject to the terms of the
Indenture, untendered Old Notes in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plan to acquire any Old Notes which are not tendered in the Exchange
Offer.
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff, the Company believes that the Exchange Notes issued pursuant to the
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Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by a Holder (other than any Holder who is a broker-dealer
or an "affiliate" of the Company within the meaning of Rule 405 of the
Securities Act) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such Holder's business and that such
Holder is not participating, and has no arrangement or understanding with any
person to participate, in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder who is an "affiliate" of the
Company or who has an arrangement or understanding with respect to the
distribution of the Exchange Notes to be acquired pursuant to the Exchange
Offer, or any broker-dealer who purchased Old Notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(i) could not rely on the applicable interpretations of the staff and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act. A broker-dealer who holds Old Notes that were acquired for its
own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes. Each such broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
In addition, to comply with the securities laws of certain jurisdictions,
if applicable, the Exchange Notes may not be offered or sold unless they have
been registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the Exchange Notes for
offer or sale under the securities or blue sky laws of such jurisdictions as any
holder of the Exchange Notes reasonably requests. Such registration or
qualification may require the imposition of restrictions or conditions
(including suitability requirements for offerees or purchasers) in connection
with the offer or sale of any Exchange Notes.
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DESCRIPTION OF SENIOR NOTES
GENERAL
The Old Notes were issued and the Exchange Notes offered hereby will be
issued under an indenture dated as of September 25, 1997 (the "Indenture")
between the Company, as issuer, the Subsidiary Guarantors and Marine Midland
Bank, as trustee (the "Trustee"). The terms of the Exchange Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Exchange Notes are subject to all such terms, and holders of the Exchange Notes
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. Each of the Indenture and the Registration Rights Agreement is an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary of the material provisions of the Indenture does not purport
to be complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
proposed form of Indenture and Registration Rights Agreement are available as
set forth herein under "--Available Information." The definitions of certain
terms used in the following summary are set forth under "--Certain Definitions."
For purposes of this summary, the term "Company" refers only to Anker Coal
Group, Inc. and not to any of its Subsidiaries.
On September 25, 1997, the Company issued $125 million aggregate principal
amount of Old Notes under the Indenture. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except for certain transfer
restrictions and registration and other rights relating to the exchange of the
Old Notes for Exchange Notes. The Trustee will authenticate and deliver Exchange
Notes for original issue only in exchange for a like principal amount of Old
Notes. Any Old Notes that remain outstanding after the consummation of the
Exchange Offer, together with the Exchange Notes, will be treated as a single
class of securities under the Indenture. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Senior
Notes shall be deemed to mean, at any time after the Exchange Offer is
consummated, such percentage in aggregate principal amount of the Old Notes and
Exchange Notes then outstanding.
The indebtedness evidenced by the Senior Notes are senior unsecured
obligations of the Company, ranking pari passu in right of payment with all
existing and future senior indebtedness of the Company and ranking senior in
right of payment to all existing and future indebtedness of the Company that is,
by its terms, expressly subordinated to the Senior Notes.
Holders of secured indebtedness of the Company, including the lenders under
the Amended and Restated Revolving Credit Facility, will have claims with
respect to the assets constituting collateral for such indebtedness that are
prior to the claims of holders of the Senior Notes. In the event of a default on
the Senior Notes, or a bankruptcy, liquidation or reorganization of the Company,
such assets will be available to satisfy obligations with respect to the
indebtedness secured thereby before any payment therefrom could be made on the
Senior Notes. To the extent that the value of such collateral is not sufficient
to satisfy the indebtedness secured thereby, amounts remaining outstanding on
such indebtedness would be entitled to share with the Senior Notes and their
claims with respect to any other assets of the Company. As of September 30,
1997, the Company and its Restricted Subsidiaries would have had secured
indebtedness of approximately $1.7 million outstanding. The Company's and the
Guarantors' obligations under the Company's Amended and Restated Revolving
Credit Facility are secured by substantially all of the assets of the Company
and the Guarantors. On September 30, 1997, the Company had approximately $4.6
million of outstanding indebtedness under the Amended and Restated Revolving
Credit Facility and had an additional $20.4 million of undrawn availability
(which total availability may be increased to up to $75.0 million upon the
achievement of certain financial tests) thereunder. The Indenture permits the
Company and its Restricted Subsidiaries to incur additional Indebtedness,
including secured Indebtedness, subject to certain limitations.
Under certain circumstances, the Company will be able to designate current
or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to the restrictive covenants set forth in the Indenture. As
of the date of the Indenture, (i) all of the Company's Subsidiaries other than
Anker Capital Corporation, Anker Alabama L.L.C., Simba Group, Inc., U.S. Coal
Sales Company, L.L.C. and Oak
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Mountain Group, Inc. and (ii) Sycamore Group, L.L.C., a joint venture in which
the Company owns a 50% interest, were Restricted Subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
$125.0 million in aggregate principal amount of Senior Notes were issued in
the Offering of the Old Notes. The Senior Notes mature on October 1, 2007.
Interest on the Senior Notes accrues at the rate of 9 3/4% per annum and is
payable semi annually in arrears on April 1 and October 1, commencing on April
1, 1998, to Holders of record on the immediately preceding March 15 and
September 15, respectively. Interest on the Senior Notes accrues from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Interest is computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest and Liquidated Damages, if any, on the Senior Notes is payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of interest and
Liquidated Damages, if any, may be made by check mailed to the Holders of the
Senior Notes at their respective addresses set forth in the register of Holders
of Senior Notes; provided that all payments of principal, premium, if any,
interest and Liquidated Damages, if any, with respect to Senior Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Senior Notes will be issued in
denominations of $1,000 and integral multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Notes are jointly and
severally guaranteed (the "Subsidiary Guarantees") fully and unconditionally, on
a senior unsecured basis, by the Guarantors, each of which is wholly owned. Each
of the Guarantors has guaranteed the Company's indebtedness under the Amended
and Restated Revolving Credit Facility on a senior secured basis. The Subsidiary
Guarantee of each Guarantor is effectively subordinated to the prior payment in
full of all secured indebtedness of such Guarantors, including secured
indebtedness under the Amended and Restated Revolving Credit Facility. The
obligations of each Guarantor under its Subsidiary Guarantee will be limited so
as not to constitute a fraudulent conveyance under applicable law. See, however,
"Risk Factors--Fraudulent Conveyance Considerations."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation (other than the Company or any other Guarantor), Person or entity
unless (i) subject to the provisions described in the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Guarantor) assumes all the obligations of such Guarantor, pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Senior Notes, the Indenture, the Subsidiary Guarantee and the
Registration Rights Agreement; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; and (iii) the Company would
be permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all or substantially all of the assets of such
Guarantor) will be released and relieved of any obligations under its Subsidiary
Guarantee and the Indenture; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "--Repurchase at the Option of Holders--Asset Sales."
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OPTIONAL REDEMPTION
The Senior Notes are not redeemable at the Company's option prior to
October 1, 2002. Thereafter, the Senior Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on October 1 of the
years indicated below:
YEAR PERCENTAGE
2002........................................ 104.875%
2003........................................ 103.250%
2004........................................ 101.625%
2005 and thereafter......................... 100.000%
Notwithstanding the foregoing, at any time on or prior to October 1, 2000,
the Company may (but shall not have the obligation to) redeem, on one or more
occasions, up to an aggregate of 35% of the aggregate principal amount of Senior
Notes originally issued at a redemption price equal to 109.75% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the redemption date, with the net cash proceeds of one or more Equity
Offerings; provided that at least 65% of the aggregate principal amount of
Senior Notes originally issued remain outstanding immediately after the
occurrence of such redemption; and provided further, that such redemption shall
occur within 45 days of the date of the closing of such Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed or repurchased in
an offer to purchase at any time, selection of Senior Notes for redemption or
repurchase will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Senior Notes
are listed, or, if the Senior Notes are not so listed, on a pro rata basis;
provided that no Senior Notes of $1,000 or less shall be redeemed or repurchased
in part. Notices of redemption or repurchase shall be mailed by first class mail
at least 30 but not more than 60 days before the redemption date or repurchase
date to each Holder of Senior Notes to be redeemed or repurchased at its
registered address. If any Senior Note is to be redeemed or repurchased in part
only, the notice of redemption or repurchase that relates to such Senior Note
shall state the portion of the principal amount thereof to be redeemed or
repurchased. A new Senior Note in principal amount equal to the unredeemed or
unrepurchased portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Senior Note. On and after the redemption or
repurchase date, interest ceases to accrue on Senior Notes or portions of them
called for redemption or repurchase.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Senior Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Senior Notes
will have the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof), of such Holder's Senior Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase (the "Change of Control Payment"). Within 30 days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Senior Notes on the date specified in such notice, which date
shall be no earlier than 30 days and no later than 60 days from the date
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such notice is mailed (the "Change of Control Payment Date"), pursuant to the
procedures required by the Indenture and described in such notice. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior Notes
as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all Senior
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the Senior Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Senior Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each Holder of Senior Notes so tendered the Change of Control Payment for such
Senior Notes, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book-entry) to each Holder a new Senior Note equal in
principal amount to the unpurchased portion of the Senior Notes surrendered, if
any; provided that each such new Senior Note will be in a principal amount of
$1,000 or an integral multiple thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Senior
Notes to require that the Company repurchase or redeem the Senior Notes in the
event of a takeover, recapitalization or similar transaction.
The Amended and Restated Revolving Credit Facility prohibits the Company
from purchasing any Senior Notes, and also provides that certain change of
control events with respect to the Company would constitute a default
thereunder. Any future credit agreements or other agreements to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Senior Notes, the Company could seek the consent of its lenders to
the purchase of Senior Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing Senior
Notes. In such case, the Company's failure to purchase tendered Senior Notes
would constitute an Event of Default under the Indenture, which would, in turn,
constitute a default under the Amended and Restated Revolving Credit Facility.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Senior Notes validly tendered and not withdrawn under such Change
of Control Offer.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act), other than to the Permitted Holders, (ii) the adoption of a
plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Permitted Holders, becomes the "beneficial owner" (as such term
is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of 50% or more of the Voting Stock of the Company (measured by
voting power rather than number of shares), (iv) at any time during any period
of 12 consecutive months, the individuals who at the beginning of any such
12-month period were Continuing Directors cease to constitute a majority of the
members of the Board of Directors of the Company or (v) the Company consolidates
with, or merges with or into, any Person, other than the Permitted Holders, or
any Person, other than the Permitted Holders, consolidates with, or merges with
or into, the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where the Voting
Stock of the Company outstanding immediately
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prior to such transaction is converted into or exchanged for Voting Stock (other
than Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee person (immediately after giving effect to such issuance).
"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"PERMITTED HOLDERS" means First Reserve Corporation, Anker Holding B.V.,
the estate of John J. Faltis, P. Bruce Sparks and any of their respective
Affiliates.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Senior Notes to require the Company
to repurchase such Senior Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (as determined in good faith by the Board of Directors) of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 75%
of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of (a) cash or Cash Equivalents or (b) property or
assets referred to in clause (b) or (c) of the following paragraph; provided
that the amount of (x) any liabilities (as shown on the Company's or such
Restricted Subsidiary's most recent balance sheet) of the Company or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Senior Notes or any guarantee thereof)
that are assumed by the transferee of any such assets pursuant to an agreement
that releases the Company or such Restricted Subsidiary from further liability
and (y) any securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into cash within 90 days after such Asset
Sale (to the extent of the cash received), shall be deemed to be cash for
purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or such Restricted Subsidiary may apply such Net Proceeds, at its
option, (a) to repay Senior Indebtedness or Guarantor Senior Indebtedness (and
to correspondingly permanently reduce commitments with respect thereto in the
case of revolving borrowings), or (b) to the acquisition of a controlling
interest in another Person primarily engaged in a Permitted Business, or (c) to
the making of a capital expenditure in a Permitted Business or the acquisition
of other long-term assets, to be used in a Permitted Business. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce
Indebtedness under the Credit Facilities or invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will be required to
make an offer to all Holders of Senior Notes (an "Asset Sale Offer") to purchase
the maximum principal amount of Senior Notes that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of purchase, in accordance with the procedures set
forth in the Indenture. To the extent that the aggregate amount of Senior Notes
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds, the
Company may use any remaining Excess Proceeds for general corporate purposes. If
the aggregate principal amount of Senior Notes surrendered by Holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Senior Notes
to be
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purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any dividend or distribution in connection with any merger
or consolidation involving the Company) or to the direct or indirect holders of
the Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem
or otherwise acquire or retire for value (including, without limitation, in
connection with any merger or consolidation involving the Company) any Equity
Interests of the Company or any direct or indirect parent of the Company; (iii)
make any principal payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is subordinated
to the Senior Notes, except a scheduled repayment of principal or a payment of
principal at Stated Maturity; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under caption "--Incurrence of Indebtedness
and Issuance of Disqualified Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix) and
(x)) is less than the sum (without duplication) of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds and the fair market value of
marketable securities (as determined in good faith by the Company) received
by the Company from the issue or sale since the date of the Indenture of
Equity Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Restricted
Subsidiary of the Company, other than Disqualified Stock or convertible
debt securities that have been converted into Disqualified Stock, in each
case pursuant to the terms of such securities, and other than Equity
Interests to the extent the cash proceeds of which have been applied to the
making of Restricted Payments by virtue of clause (v)(A) of the next
succeeding paragraph), plus (iii) 100% of the aggregate net cash proceeds
and the fair market value of marketable securities (as determined in good
faith by the Company) received by the Company as an equity contribution
from a holder or holders of Equity Interests of the Company (other than
Disqualified Stock), plus (iv) to the extent that any Restricted Investment
that was made after the date of the Indenture is sold or otherwise
liquidated or repaid, the aggregate amount of cash and the fair market
value of marketable securities (as determined in good faith by the
Company), received as the return of capital with respect to such Restricted
Investment (less the cost of disposition, if any), plus (v) the amount
resulting from redesignations of Unrestricted Subsidiar-
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ies, such amount not to exceed the amount of Investments made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary since
the date of the Indenture that was treated as a Restricted Payment under
the Indenture, plus (vi) the amount of the net reduction in Investments in
Unrestricted Subsidiaries resulting from the payment of cash dividends
received by the Company or any Restricted Subsidiary of the Company from
such Unrestricted Subsidiaries, plus (vii) $5.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Restricted Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of Subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the
payment of any dividend by a Subsidiary of the Company to the holders of its
common Equity Interests on a pro rata basis; (v) the repurchase, retirement or
other acquisition or retirement for value of common Equity Interests of the
Company held by any future, present or former employee or director of the
Company or any of the Company's Restricted Subsidiaries or the estate, heirs or
legatees of, or any entity controlled by, any such employee or director,
pursuant to any management equity plan or stock option plan or any other
management or employee benefit plan or agreement in connection with the
termination of such person's employment for any reason (including by reason of
death or disability); provided, however, that the aggregate Restricted Payments
made under this clause (v) does not exceed in any calendar year $2.5 million
(with unused amounts in any calendar year being carried over to succeeding
calendar years subject to a maximum (without giving effect to the following
proviso) of $7.5 million in any calendar year); provided further that such
amount in any calendar year may be increased by an amount not to exceed (A) the
cash proceeds received by the Company from the sale of Equity Interests of the
Company to members of management or directors of the Company and its Restricted
Subsidiaries that occurs after the Issue Date (to the extent the cash proceeds
from the sale of such Equity Interests have not otherwise been applied to the
payment of Restricted Payments by virtue of the preceding paragraph (c)), plus
(B) the cash proceeds of key man life insurance policies received by the Company
and its Restricted Subsidiaries after the Issue Date, less (C) the amount of any
Restricted Payments previously made pursuant to clauses (A) and (B) of this
subparagraph (v); (vi) so long as no Default or Event of Default shall have
occurred and be continuing, the declaration and payment of dividends to the
extent permitted thereby on, and the making of scheduled mandatory redemptions
commencing on May 31, 2006 of, the Company's Class A Preferred Stock, par value
$2,500 per share (the "Class A Preferred Stock"), in accordance with the terms
thereof as in effect on the Issue Date; (vii) in the event of a Change of
Control under the Indenture, the making of mandatory redemptions on the
Company's Class A Preferred Stock and the Company's Class B Preferred Stock, par
value $1,000 per share, in each case in accordance with the terms of the change
of control provisions thereof as in effect on the Issue Date; provided, however,
that (A) no such redemption shall be made until after the applicable Change of
Control Payment Date and (B) on the applicable Change of Control Payment Date no
restrictions shall exist on the repurchase of Senior Notes pursuant to a Change
of Control Offer; (viii) the declaration and payment of dividends on, and the
making of scheduled mandatory redemptions of, the Company's Coal Acquisition
Preferred Stock in accordance with the terms thereof; (ix) so long as no Default
or Event of Default shall have occurred and be continuing, the declaration and
payment of dividends to holders of any such class or series of Disqualified
Stock of the Company issued in accordance with the covenant entitled
"--Incurrence of Indebtedness and Issuance of Disqualified Stock", (x)
repurchases of Equity Interests deemed to occur upon exercise of stock options
if such Equity Interests represent a portion of the exercise price of such
options; and (xi) so long as no Default or Event of Default shall have occurred
and be continuing, the payment of dividends on the Company's Common Stock,
following the first public offering of the Company's Common Stock after the
Issue Date, of up to 6% per annum of the net proceeds received by the Company in
such public offering, other than public offerings with respect to the
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Company's Common Stock registered on Form S-8 in connection with employee
benefit plans or Form S-4 in connection with an acquisition.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation is permitted by this covenant and
otherwise would not cause a Default. For purposes of making such determination,
all outstanding Investments by the Company and its Restricted Subsidiaries
(except to the extent repaid in cash) in the Subsidiary so designated will be
deemed to be Restricted Payments at the time of such designation and will reduce
the amount available for Restricted Payments under the first paragraph of the
covenant. All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be based on the good faith determination of
the Board of Directors. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "--Restricted Payments"
were computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not, and will
not permit any of its Restricted Subsidiaries to issue any shares of
Disqualified Stock; provided, however, that the Company or any Guarantor may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock if the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2.00 to 1, if such
incurrence or issuance is on or prior to the second anniversary of the Issue
Date or 2.25 to 1, if such incurrence or issuance is thereafter, in each case,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The Indenture also provides that neither the Company and nor any Guarantor
will incur any Indebtedness (other than Existing Indebtedness) that is
contractually subordinated to any other Indebtedness of the Company or such
Guarantor, respectively, unless such Indebtedness is also contractually
subordinated to the Senior Notes or the Subsidiary Guarantee of such Guarantor,
respectively, on substantially identical terms; provided, however, that no
Indebtedness of the Company or any Guarantor shall be deemed to be contractually
subordinated to any other Indebtedness of the Company or such Guarantor,
respectively, solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company (and the guarantee thereof by
Guarantors) of Indebtedness and letters of credit (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of the Company and the Guarantors thereunder) under all Credit
Facilities; provided that the aggregate principal amount of all
Indebtedness and letters of credit outstanding under all Credit Facilities
after giving effect to such incurrence, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (i), does not exceed an
amount equal to the greater of (A) $40.0 million and (B) the amount
permitted by the terms thereof to be borrowed thereunder up to a maximum of
$75.0 million, less the aggregate amount of
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all Net Proceeds of Asset Sales applied to repay any such Indebtedness (or
any such Permitted Refinancing Indebtedness) pursuant to the covenant
described above under the caption "--Asset Sales";
(ii) the incurrence by the Company and the Guarantors of Existing
Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Senior Notes and the incurrence by the Guarantors of the Subsidiary
Guarantees;
(iv) the incurrence by the Company or any of the Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price, lease or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Guarantor, in an aggregate principal amount
not to exceed $5.0 million at any time outstanding;
(v) the incurrence by the Company or any of the Guarantors of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinancing or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred;
(vi) the incurrence by the Company or any of the Guarantors of
intercompany Indebtedness between or among the Company and any of the
Guarantors; provided, however, that (i) if the Company is the obligor on
such Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all Obligations with respect to the Senior Notes
and (ii)(A) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Guarantor and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Guarantor
shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Guarantor, as the case may be;
(vii) incurrence by the Company or any of the Guarantors of Hedging
Obligations;
(viii) Indebtedness incurred in respect of performance, surety and
similar bonds and completion guarantees provided by the Company or any
Restricted Subsidiary in the ordinary course of business;
(ix) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt; provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company;
(x) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Guarantor of the Company that was
permitted to be incurred by another provision of this covenant; and
(xi) the incurrence by the Company or any of the Guarantors of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (xi), not to exceed $10.0
million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xi) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest, the accretion of accreted
value and the payment of interest in the form of additional Indebtedness will
not be deemed to be an incurrence of Indebtedness for purposes of this covenant.
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LIENS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien securing Indebtedness or trade payables on any asset
now owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens, unless the
Senior Notes are secured equally and ratably with (or prior to in the case of
Subordinated Indebtedness) the obligation or liability secured by such Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
consensual restriction on the ability of any Restricted Subsidiary to (i)(a) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries, (ii)
make loans or advances to the Company or any of its Restricted Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of the
Indenture, (b) the Amended and Restated Revolving Credit Facility as in effect
as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Amended and Restated Revolving
Credit Facility as in effect on the date of the Indenture, (c) the Indenture and
the Senior Notes, (d) applicable law, rules or regulations, or any order or
ruling by a governmental authority, (e) any instrument of a Person acquired by
the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (but not created in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) customary non-assignment provisions in leases, licenses,
encumbrances, contracts or similar agreements entered into or acquired in the
ordinary course of business, (g) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) on the property so acquired, (h) contracts for
the sale of assets, including, without limitation, customary restrictions with
respect to a Subsidiary pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Subsidiary, (i) restrictions on cash or other deposits imposed by
customers under contracts entered into in the ordinary course of business, (j)
customary provisions in joint venture agreements at the time of creation of such
joint venture and other similar agreements entered into in the ordinary course
of business; and (k) any encumbrances or restrictions of the type referred to in
clauses (i), (ii) and (iii) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of the contracts, instruments or obligations referred to in clauses
(a) through (j) above, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are, in the good faith judgment of the Company's Board of
Directors, no more restrictive with respect to such dividend and other payment
restrictions than those contained in the dividend or other payment restrictions
prior to such amendment, modification, restatement, renewal, increase,
supplement, refunding, replacement or refinancing.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or
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entity unless (i) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under the Senior
Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after such transaction
no Default or Event of Default exists; and (iv) except in the case of a merger
of the Company with or into a Wholly Owned Subsidiary of the Company, the
Company or the entity or Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made will, at the time of
such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Disqualified Stock." Notwithstanding the foregoing clause (iv), (a)
any Restricted Subsidiary may consolidate with, merge into or transfer all or
part of its properties and assets to the Company and (b) the Company may merge
with an Affiliate incorporated solely for the purpose of reincorporating the
Company in another State of the United States so long as the amount of
Indebtedness of the Company and its Restricted Subsidiaries is not increased
thereby.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to or Investment in, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction") unless (i) such Affiliate Transaction is on terms that are no less
favorable to the Company or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an Independent Financial Advisor.
The foregoing provisions will not apply to the following: (i) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business of the Company or such
Restricted Subsidiary; (ii) transactions between or among the Company and/or its
Restricted Subsidiaries; (iii) Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption "--Restricted
Payments": (iv) the payment of reasonable and customary fees paid to, and
indemnity provided on behalf of, officers, directors or employees of the Company
or any Restricted Subsidiary; (v) transactions in which the Company or any of
its Restricted Subsidiaries, as the case may be, delivers to the Trustee a
letter from an Independent Financial Advisor stating that such transaction meets
the requirements of clause (i) of the preceding paragraph; (vi) loans to
employees which are approved by a majority of the Board of Directors of the
Company in good faith; (vii) any agreement as in effect as of the Issue Date or
any amendment thereto (so long as any such amendment is no less favorable to the
holders of the Senior Notes in any material respect than the original agreement
as in effect on the Issue Date) or any transaction contemplated thereby; (viii)
the existence of, or the performance by the Company or any of its Restricted
Subsidiaries of its obligations under the terms of, the Stockholders' Agreement,
dated as of August 12, 1996, as in effect on the Issue Date, and any similar
agreements which it may enter into thereafter; provided, however, that the
existence of, or the performance by the Company or any of its Restricted
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Subsidiaries of obligations under any future amendment to any such existing
agreement or under any similar agreement entered into after the Issue Date shall
only be permitted by this clause (viii) so long as the terms of any such
amendment or new agreement are no less favorable to the holders of the Senior
Notes in any material respect than the original agreement as in effect on the
Issue Date; and (ix) coal supply agreements with Anker Holding B.V. and its
Affiliates in the ordinary course of business and otherwise in compliance with
the terms of the Indenture which comply with the requirements of clause (i) of
the preceding paragraph.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Subsidiary to, engage in any
business other than Permitted Businesses, except to such extent as would not be
material to the Company and its Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any Holder of any Senior Notes for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Senior Notes unless such consideration is
offered to be paid or is paid to all Holders of the Senior Notes that consent,
waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Restricted Subsidiary (other than a
Foreign Subsidiary) after the date of the Indenture, then such newly acquired or
created Restricted Subsidiary (other than a Foreign Subsidiary) shall execute a
Subsidiary Guarantee and deliver an opinion of counsel, in accordance with the
terms of the Indenture.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Senior Notes are outstanding, the Company will furnish to the
Holders of Senior Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its consolidated Subsidiaries and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods set forth in the Commission's rules and
regulations. In addition, whether or not required by the rules and regulations
of the Commission, at any time after the effectiveness of the Exchange Offer
contemplated by the Registration Rights Agreement, the Company will file a copy
of such information and report with the Commission for public availability
within the time periods set forth in the Commission's rules and regulations
(unless the Commission will not accept such a filing). In addition, the Company
and the Guarantors have agreed that, until the effectiveness of the registration
statement relating to the Exchange Offer pursuant to the Registration Rights
Agreement, they will furnish to the Holders and to prospective investors, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default; (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Senior Notes; (ii) default in
payment when due of the principal of or premium, if any, on the Senior Notes;
(iii) failure by the Company or any of its Restricted Subsidiaries to comply
with the provisions described under the captions
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"--Repurchase at the Option of the Holders--Change of Control," "--Repurchase at
the Option of the Holders--Asset Sales" or "--Certain Covenants--Merger,
Consolidation or Sale of Assets"; (iv) failure by the Company or any of its
Restricted Subsidiaries for 60 days after notice by the Trustee or by the
Holders of at least 25% of Senior Notes then outstanding to comply with any of
its other agreements in the Indenture or the Senior Notes; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries), other than
Indebtedness owed to the Company or a Restricted Subsidiary, whether such
Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness,
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) failure by
the Company or any of its Subsidiaries to pay final judgments aggregating in
excess of $5.0 million, which judgments are not paid, discharged or stayed for a
period of 60 days (net of applicable insurance coverage which is acknowledged in
writing by the insurer); (vii) except as permitted by the Indenture, any
Subsidiary Guarantee by a Significant Subsidiary or any Subsidiaries that, taken
together, would constitute a Significant Subsidiary shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any reason
to be in full force and effect or any Guarantor that is a Significant Subsidiary
or any Guarantors that taken together would constitute a Significant Subsidiary,
or any Person acting on behalf of any such Guarantor or Guarantors, shall deny
or disaffirm its obligations under its Subsidiary Guarantee; and (viii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Senior Notes
may declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Guarantor constituting a Significant Subsidiary or any group of Guarantors that,
taken together, would constitute a Significant Subsidiary, all outstanding
Senior Notes will become due and payable without further action or notice.
Holders of the Senior Notes may not enforce the Indenture or the Senior Notes
except as provided in the Indenture. Subject to certain limitations, Holders of
a majority in principal amount of the then outstanding Senior Notes may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Senior Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Senior Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of interest on, or the principal of, the Senior Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Senior Notes, the Indenture or the Subsidiary Guarantee or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
Holder of Senior Notes by accepting a Senior Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Senior Notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Senior Notes ("Legal Defeasance") except for (i) the rights of
Holders of outstanding Senior Notes to receive payments in respect of the
principal of, premium, if any, and interest and Liquidated Damages, if any, on
such Senior Notes when such payments are due from the trust referred to below,
(ii) the Company's obligations with respect to the Senior Notes concerning
issuing temporary Senior Notes, registration of Senior Notes, mutilated,
destroyed, lost or stolen Senior Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Senior Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in United States dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages, if any, on the outstanding Senior Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Senior Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Senior Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Senior Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for in the Indenture relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Senior Note selected for redemption. Also, the Company is not required to
transfer or exchange any Senior Note for a period of 15 days before a selection
of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture,
the Subsidiary Guarantees or the Senior Notes may be amended or supplemented
with the consent of the Holders of at least a majority in principal amount of
the Senior Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Senior Notes), and any existing default or compliance with any provision of
the Indenture, the Subsidiary Guarantees or the Senior Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Senior Notes (including consents obtained in connection with a
tender offer or exchange offer for Senior Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Senior Note or alter the provisions with respect to the redemption of the
Senior Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holder"), (iii) reduce the rate
of or change the time for payment of interest on any Senior Note, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Senior Notes (except a rescission of acceleration of the
Senior Notes by the Holders of at least a majority in aggregate principal amount
of the Senior Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Senior Note payable in money other than that stated
in the Senior Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of Senior Notes to
receive payments of principal of or premium, if any, or interest on the Senior
Notes, (vii) waive a redemption payment with respect to any Senior Note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"), (viii) release any Guarantor
from any of its obligations under its Subsidiary Guarantee or the Indenture, or
amend the provisions of the Indenture relating to the release of Guarantors, or
(ix) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Subsidiary Guarantees or the Senior Notes to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Senior Notes in addition
to or in place of certificated Senior Notes, to provide for the assumption of
the Company's or a Guarantor's obligations to Holders of Senior Notes in the
case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of Senior Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
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The Holders of a majority in principal amount of the then outstanding
Senior Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Senior Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
BOOK-ENTRY DELIVERY AND FORM
The certificates representing the Exchange Notes will be issued in fully
registered form. Except as described in the next paragraph, the Exchange Notes
initially will be represented by a single, permanent global Exchange Note, in
definitive, fully registered form without interest coupons (the "Global Exchange
Note") and will be deposited with the Trustee as custodian for The Depository
Trust Company, New York, New York ("DTC") and registered in the name of a
nominee of DTC.
Exchange Notes held by persons who elect to take physical delivery of their
certificates instead of holding their interest through the Global Exchange Note
(collectively referred to herein as the "Non-Global Holders") will be issued in
registered certificated form (a "Certificated Exchange Note"). Upon the transfer
of any Certificated Exchange Note initially issued to a Non-Global Holder, such
Certificated Exchange Note will, unless the transferee requests otherwise or a
Global Exchange Note has previously been exchanged in whole for Certificated
Exchange Notes, be exchanged for an interest in such Global Exchange Note.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
Upon the issuance of the Global Exchange Note, DTC or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Exchange Note to the
accounts of persons who have accounts with such depositary. Such accounts
initially will be designated by or on behalf of the Initial Purchasers.
Ownership of beneficial interests in the Global Exchange Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the Global
Exchange Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global Exchange Note, DTC or such nominee, as the case may be, will be
considered the sole record owner or holder of the Exchange Notes represented by
such Global Exchange Note for all purposes under the Indenture and the Exchange
Notes. No beneficial owners of an interest in the Global Exchange Note will be
able to transfer that interest except in accordance with DTC's applicable
procedures.
The Company understands that, under existing industry practices, in the
event that the Company requests any action of Holders, or an owner of a
beneficial interest in such permanent Global Exchange Note desires to give or
take any action (including a suit for repayment of principal, premium or
interest) that a Holder is entitled to give or take under the Notes, DTC would
authorize the participants holding the relevant beneficial
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interests to give or take such action, and such participants would authorize
beneficial owners owning through such participants to give or take such action
or would otherwise act upon the instruction of beneficial owners owning through
them.
Payments of the principal of, premium, if any, and interest on the Global
Exchange Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company, the Trustee, nor any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Exchange Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Exchange Note
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial ownership interests in the principal amount of such
Global Exchange Note, as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
such Global Exchange Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a Holder requires physical delivery of
Certificated Exchange Notes for any reason, including to sell Exchange Notes to
persons in states which require such delivery of such Exchange Notes or to
pledge such Exchange Notes, such holder must transfer its interest in the Global
Exchange Note, in accordance with the normal procedures of DTC and the
procedures set forth in the Indenture.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to certain conditions, any person having a beneficial interest in
the Global Exchange Note may, upon request to the Trustee, exchange such
beneficial interest for Exchange Notes in the form of Certificated Exchange
Notes. Upon any such issuance, the Trustee is required to register such
Certificated Exchange Notes in the name of, and cause the same to be delivered
to, such person or persons (or the nominee of any thereof). In addition, if DTC
is at any time unwilling or unable to continue as a depositary for the Global
Exchange Note and a successor depositary is not appointed by the Company within
90 days, the Company will issue Certificated Exchange Notes in exchange for the
Global Exchange Note.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
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"AMENDED AND RESTATED REVOLVING CREDIT FACILITY" means that certain credit
facility, to be entered into on or prior to the Issue Date, by and among the
Company and The Chase Manhattan Bank, as agent, and the lenders' party thereto,
including any related notes, guarantees, collateral documents, instruments,
agreements executed in connection therewith, and in each case as amended,
extended, modified, renewed, refunded, replaced or refinanced from time to time.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of (A) a sale and
leaseback or (B) a Contract Settlement) other than in the ordinary course of
business (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Subsidiaries taken as
a whole will be governed by the provisions of the Indenture described above
under the caption "--Redemption at the Option of Holders--Change of Control"
and/or the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions of
the Asset Sale covenant), and (ii) the issue or sale by the Company or any of
its Restricted Subsidiaries of Equity Interests of any of the Company's
Restricted Subsidiaries, in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions that have a fair market
value (as determined in good faith by the Board of Directors) in excess of $1.0
million or for net cash proceeds in excess of $1.0 million. Notwithstanding the
foregoing: (i) a transfer of assets by the Company to a Guarantor or by a
Guarantor to the Company or to another Guarantor, (ii) an issuance of Equity
Interests by a Guarantor to the Company or to another Guarantor, (iii) a
Restricted Payment that is permitted by the covenant described above under the
caption "--Certain Covenants-- Restricted Payments," (iv) a disposition of Cash
Equivalents; (v) a disposition in the ordinary course of business of either
obsolete equipment or equipment otherwise no longer useful in the business; (vi)
any sale of Equity Interests in, or Indebtedness or other securities of, an
Unrestricted Subsidiary and (vii) any sale and leaseback of an asset within 90
days after the completion of construction or acquisition of such asset shall not
be considered an Asset Sale.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the full faith and credit of the
United States government or any agency or instrumentality thereof having
maturities of not more than six months from the date of acquisition, (iii)
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any lender party to the Amended and Restated Revolving Credit Facility or
with any domestic commercial bank having capital and surplus in excess of $500.0
million and a Keefe Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") and
in each case maturing within six months after the date of acquisition, (vi)
investment funds investing substantially all of their assets in securities of
the types described in clauses (i)-(v) above and (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P.
"COAL ACQUISITION PREFERRED STOCK" means preferred stock which (i) is
issued to a seller of coal properties or assets or the entire equity interest in
a Person owning such properties or assets, as part of the consideration or
financing of the acquisition thereof and (ii) provides for the payment of
dividends in an
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amount not to exceed a percentage of the revenues from coal production of the
properties or assets referred to in clause (i), which percentage is determined
in good faith by the Board of Directors of the Company to yield, together with
any other consideration paid by the Company therefor an aggregate purchase price
that is fair to the Company. For purposes of the Indenture, the Company's Class
C Preferred Stock, par value $13,000 per share, and Class D Preferred Stock, par
value $7,000 per share, each as in effect on the Issue Date, are each Coal
Acquisition Preferred Stock.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net Income,
plus (iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, depletion and amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, minus (v) non-cash revenues
increasing such Consolidated Net Income for such period (excluding any non-cash
income to the extent it represents an accrual of cash revenues in any future
period), in each case, on a consolidated basis and determined in accordance with
GAAP. Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash charges
of, a Subsidiary of a Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent (and in the same proportion)
that the Net Income of such Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount would
be permitted at the date of determination to be dividended to the Company by
such Subsidiary without prior approval (that has not been obtained), pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Subsidiary or its stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash (or to the extent converted into cash) to the referent Person or a Wholly
Owned Restricted Subsidiary thereof, (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of its Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders unless waived), (iii) the Net Income
of any Person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition shall be excluded, (iv) the cumulative
effect of a change in accounting principles shall be excluded and (v) any net
after-tax extraordinary gains or losses shall be excluded.
"CONTRACT SETTLEMENT" means the termination (direct or indirect, in one
transaction or a series of transactions), for which the Company or any of its
Restricted Subsidiaries receives any cash consideration, of any agreement under
which the Company or any of its Restricted Subsidiaries is to sell coal.
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"CREDIT FACILITIES" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Amended and Restated Revolving
Credit Facility) or commercial paper facilities with banks or other
institutional lenders providing for revolving credit loans, term loans or
letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Senior Notes mature.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any public or private offering of common stock by
the Company other than (i) issuances of Disqualified Stock, (ii) issuances in
payment of or to finance the purchase price of an acquisition or (iii) issuances
of common stock pursuant to employee benefit plans of the Company or otherwise
as compensation to employees of the Company.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Amended and Restated Revolving
Credit Facility) in existence on the date of the Indenture, until such amounts
are repaid.
"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or banker's acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (a) all cash dividend payments, on any series of
preferred stock of such Person or any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity Interests (other
than Disqualified Stock) of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local effective tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio for the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions and Investments that have been made by the Company or any of
its Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period
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and Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"FOREIGN SUBSIDIARY" means a Restricted Subsidiary that is incorporated in
a jurisdiction other than the United States or a state thereof or the District
of Columbia and with respect to which more than 80% of any of its sales,
earnings or assets (determined on a consolidated basis in accordance with GAAP)
are located in, generated from or derived from operations located in territories
outside the United States of America and jurisdictions outside the United States
of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accounts and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTORS" means each of the Subsidiaries of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture, and
their respective successors and assigns.
"GUARANTOR SENIOR INDEBTEDNESS" means all Indebtedness of a Guarantor other
than Guarantor Subordinated Indebtedness.
"GUARANTOR SUBORDINATED INDEBTEDNESS" means all Indebtedness of a Guarantor
that is subordinated in right of payment to the Guarantee of such Guarantor.
"HEDGING OBLIGATIONS" means with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements with respect to Indebtedness that
is permitted by the terms of the Indenture and (ii) other agreements or
arrangements designed to protect such Person against fluctuation in interest
rates or the value of foreign currencies purchased or received by such Person in
the ordinary course of business.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit or
reimbursement agreements in respect thereof (other than letters of credit
securing obligations not constituting Indebtedness that are issued in the
ordinary course of business by a Person to the extent not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following receipt by such Person of a demand for reimbursement
following payment on the letter of credit) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness that does not require current payment
of interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
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"INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal or
investment banking firm of national standing, which does not have any financial
interest in the Affiliate Transaction upon which it is opining.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or such other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Restricted Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"ISSUE DATE" means the date on which the Senior Notes are originally
issued.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any extraordinary
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions) or
(b) the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain (but not loss),
together with any related provision for taxes on such extraordinary gain (but
not loss); provided further, that in determining Consolidated Net Income for the
purpose of the covenant described under the caption "--Certain
Covenants--Limitation on Restricted Payments" only, items (i) and (ii) shall not
be so excluded.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), or, in the case of a
Contract Settlement, 65% of such aggregate cash proceeds, net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sale commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements), amounts required to be applied to the repayment of
Indebtedness (other than Indebtedness under the Credit Facilities) secured by a
Lien on the asset or assets that were the subject of such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), as reflected in the express terms of the instrument governing such
Indebtedness, or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any Indebtedness (other than the
Senior Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity.
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"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED BUSINESS" means coal producing, coal mining, coal brokering or
mine development, or any business that is reasonably similar thereto or a
reasonable extension, development or expansion thereof or ancillary thereto
(including ash disposal and/or environmental remediation).
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Guarantor; (b) any Investment in Cash Equivalents; (c) any Investment by the
Company or any Guarantor in a Person, if as a result of such Investment (i) such
Person becomes a Guarantor or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Guarantor; (d) any Investment
made as a result of the receipt of non-cash consideration from an Asset Sale
that was made pursuant to and in compliance with the covenant described above
under the caption "--Repurchase at the Option of Holders--Asset Sales"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of the Company; (f) any Investment existing on
the Issue Date; (g) any Investment acquired by the Company or any of its
Restricted Subsidiaries (A) in exchange for any other Investment or accounts
receivable held by the Company or any such Restricted Subsidiary in connection
with or as a result of a bankruptcy, workout, reorganization or recapitalization
of the issuer of such other Investment or accounts receivable or (B) as a result
of the transfer of title with respect to any secured investment in default as a
result of a foreclosure by the Company or any of its Restricted Subsidiaries
with respect to such secured Investment; (h) Hedging Obligations permitted under
the "--Certain Covenants; Limitation of Incurrence of Indebtedness and Issuance
of Disqualified Stock" covenant; (i) loans and advances to officers, directors
and employees for business-related travel expenses, moving expenses and other
similar expenses, in each case, incurred in the ordinary course of business; (j)
any guarantees permitted to be made pursuant to the covenant entitled "Certain
Covenants--Limitations on Incurrence of Indebtedness and Issuance of
Disqualified Stock"; and (k) other Investments in any Person (including, without
limitation, Investments in Unrestricted Subsidiaries) primarily engaged in a
Permitted Business having an aggregate fair market value (measured on the date
each such Investment was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made pursuant to this
clause (k) that are at the time outstanding, not to exceed $10.0 million.
"PERMITTED LIENS" means (i) Liens on assets of the Company or any of its
Subsidiaries securing Senior Indebtedness that was permitted by the terms of the
Indenture to be incurred (including pursuant to the Credit Facilities); (ii)
Liens in favor of the Company; (iii) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory or regulatory obligations, leases, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (iv) of the second paragraph of
the covenant entitled "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Disqualified Stock" covering only the assets acquired with such
Indebtedness; (vii) Liens existing on the date of the Indenture; (viii) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (ix) Liens incurred in the ordinary course of business of
the Company or any Subsidiary of the Company with respect to obligations that do
not exceed $5.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Subsidiary; (x) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries; and (xi) Liens on assets of
Guarantors to secure Guarantor Senior Indebtedness of such Guarantors that was
permitted by the Indenture to be incurred.
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"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith including
premiums paid, if any, to the holders thereof); (ii) such Permitted Refinancing
Indebtedness has a final maturity date at or later than the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Senior Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Senior Notes on terms at least
as favorable to the Holders of Senior Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. Notwithstanding the definition of
"Subsidiary" herein, Sycamore Group, L.L.C. shall be deemed to be a Restricted
Subsidiary on the Issue Date for all purposes hereunder; except that such entity
shall not be required to be a Guarantor of the Senior Notes pursuant to the
covenant entitled "Additional Subsidiary Guarantees" until such time as it
satisfies the first sentence of this definition of "Restricted Subsidiary."
"SENIOR INDEBTEDNESS" means all Indebtedness of the Company other than
Subordinated Indebtedness.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBORDINATED INDEBTEDNESS" means all Indebtedness of the Company that is
subordinated in right of payment to the Senior Notes.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"SUBSIDIARY GUARANTEE" means, individually and collectively, the Guarantees
given by the Guarantors pursuant to the Indenture, including a notation in the
Senior Notes substantially in the form attached to the Indenture as an exhibit.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such
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agreement, contract, arrangement or understanding are no less favorable to the
Company or such Restricted Subsidiary than those that might be obtained at the
time from Persons who are not Affiliates of the Company; (c) is a Person with
respect to which neither the Company nor any of its Restricted Subsidiaries has
any direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and (d)
has not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing conditions as an Unrestricted Subsidiary, it shall thereafter cease to
be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness
of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified
Stock," the Company shall be in default of such covenant). The Board of
Directors of the Company may at any time designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that such designation shall be deemed to
be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of
any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Disqualified Stock," calculated on a pro forma
basis as if such designation had occurred at the beginning of the four-quarter
reference period, and (ii) no Default or Event of Default would be in existence
following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description of certain material provisions of certain
indebtedness of the Issuer does not purport to be complete, and is subject to,
and is qualified in its entirety by reference to, the forms of such instruments,
copies of which may be obtained as described under "Available Information."
AMENDED AND RESTATED REVOLVING CREDIT FACILITY
The Amended and Restated Revolving Credit Facility is provided by a
syndicate of banks and other financial institutions (the "Lenders") for which
The Chase Manhattan Bank acts as administrative agent (the "Administrative
Agent"), and Chase Securities Inc., acts as arranger. The Amended and Restated
Revolving Credit Facility provides for revolving borrowings of up to $75
million, subject to certain reductions based on certain financial performance
tests. The commitments under the Amended and Restated Revolving Credit Facility
will be reduced to $67.5 million on the third anniversary of the closing date of
the Offering of the Old Notes (the "Closing Date"), to $60 million on the fourth
anniversary of the Closing Date and $50 million on the fifth anniversary of the
Closing Date; provided, however, that at the Company's request not less than 30
and not more than 60 days prior to any such anniversary, any lender may elect
not to require its pro rata share of any such reduction. The commitments under
the Amended and Restated Revolving Credit Facility will terminate on the sixth
anniversary of the Closing Date.
The interest rate under the Amended and Restated Revolving Credit Facility
will be, for the period from the Closing Date through March 31, 1998, LIBOR plus
1.75% or ABR plus 0.75%, at the option of the Company. Thereafter, the interest
rate will be, subject to change based on the ratio of (i) total indebtedness
minus the amount of cash and permitted investments of the Company and the
Restricted Subsidiaries to (ii) EBITDA (the "net leverage ratio") of the
Company, in a range of LIBOR plus 1.00% to 2.50% or ABR to ABR plus 1.50%, the
type of borrowing to be determined at the option of the Company. The Company may
elect interest periods of one, two, three or six months (or nine or 12 months,
to the extent available under the Amended and Restated Revolving Credit
Facility) for LIBOR borrowings. ABR is the highest of (i) the Administrative
Agent's Prime Rate and (ii) the Federal Funds Effective Rate plus one-half of
1.0%. LIBOR will at all times include statutory reserves to the extent actually
incurred.
For the period from the Closing Date through March 31, 1998, the Company
will pay a commitment fee at a rate equal to 0.375% per annum on the undrawn
portion of the commitments in respect of the Amended and Restated Revolving
Credit Facility, which began to accrue on the Closing Date, payable quarterly in
arrears. Thereafter, the Company will pay a commitment fee based on the net
leverage ratio of the Company in a range equal to 0.25% to 0.50% per annum on
the undrawn portion of the commitments in respect of the Amended and Restated
Revolving Facility, payable quarterly in arrears.
The Amended and Restated Revolving Credit Facility contains provisions
under which commitment fees and interest rates for the Amended and Restated
Revolving Credit Facility will be adjusted in increments based on the
achievement of certain financial performance goals.
Voluntary prepayments and Amended and Restated Revolving Credit Facility
commitment reductions are permitted in whole or in part at the option of the
Issuer, in minimum principal amounts, without premium or penalty, subject to
reimbursement of certain of the Lenders' costs under certain conditions.
The Amended and Restated Revolving Credit Facility provides that the
Company must meet or exceed a net interest coverage ratio and must not exceed
the net leverage ratio. The Amended and Restated Revolving Credit Facility also
contains customary covenants including but not limited to the delivery of
financial statements, reports, notices, and other information, access to
information and properties, maintenance of insurance, payment of taxes,
maintenance of properties, nature of business, corporate existence and rights,
compliance with applicable laws, prohibitions on fundamental changes,
limitations on investments, minimum shareholders equity, limitations on capital
expenditures in excess of $15 million, certain restrictions relating to
Subsidiary Guarantors, transactions with affiliates, use of proceeds,
limitations on indebtedness, limitations on liens, limitations on dividends and
other distributions and limitations on debt payments, including prepayment or
redemption of the Senior Notes.
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The Amended and Restated Revolving Credit Facility permits dividend
payments on the Class A Preferred Stock after August 12, 2001, provided that no
Event of Default (as defined therein) exists or would result therefrom and the
Fixed Charges Ratio (as defined therein) is greater than 1.25 to 1.00 on a pro
forma basis. On such date, there would be approximately $7.7 million of accrued
and unpaid dividends on the Class A Preferred Stock.
The Amended and Restated Revolving Credit Facility includes customary
events of default.
On December 26, 1997, the Company, the Guarantors, the Lenders and The
Chase Manhattan Bank, as administrative agent, entered into an amendment to the
Amended and Restated Revolving Credit Facility which (i) increased the net
leverage ratio for the period from October 1, 1997 through September 30, 1998,
(ii) reduced the net interest coverage ratio for the period from January 1, 1998
through September 30, 1998 and (iii) established a limit on the amount of
capital expenditures in 1998 and reduced the amount of such expenditures with
respect to reserves acquired after the closing of the Amended and Restated
Revolving Credit Facility. In addition, the amendment increased (i) the interest
rate on borrowings (a) for the period from January 1, 1998 through March 31,
1998, to LIBOR plus 2.75% or ABR plus 1.75%, and (b) thereafter, to a range of
LIBOR plus 1.00% to 3.00% or ABR to ABR plus 2.00%, depending on the net
leverage ratio, and (ii) increased the commitment fee (a) for the period from
January 1, 1998 through March 31, 1998, to 0.5% per annum, and (b) thereafter,
to a range of 0.25% to 0.50%, depending on the net leverage ratio.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation.
The authorized capital stock of the Company consists of (i) 10,000 shares
of common stock, par value $0.01 per share (the "Common Stock"), (ii) 10,000
shares of Class A Preferred Stock, (iii) 10,000 shares of Class B Preferred
Stock, (iv) 1,000 shares of Class C Preferred Stock, and (v) 1,000 shares of
Class D Preferred Stock (collectively the "Preferred Stock"). As of August 31,
1997, all of the authorized shares of Common Stock and Preferred Stock were
issued and outstanding.
COMMON STOCK
Each share of Common Stock has equal voting, dividend, distribution and
liquidation rights. Each share of Common Stock is not redeemable and has no
preemptive, conversion or cumulative voting rights. The declaration and payment
of dividends are restricted by certain covenants in the Indenture and the
Amended and Restated Revolving Credit Facility. In the event of a liquidation,
dissolution or winding-up of the Company, the holders of the Common Stock are
entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all debts and liabilities of the Company
(including the Senior Notes) and the liquidation preference of any outstanding
Preferred Stock.
PREFERRED STOCK
CLASS A PREFERRED STOCK
In connection with the Recapitalization, the Company issued 10,000 shares
of Class A Preferred Stock to Anker Holding. The Class A Preferred Stock is
generally non-voting. The Class A Preferred Stock is entitled to annual
cumulative cash dividends payable on each December 31 in an amount per share
equal to 5% of the sum of (i) $2,500 plus (ii) all accrued and unpaid dividends.
As of September 30, 1997, there would be approximately $1.5 million of accrued
and unpaid dividends on the Class A Preferred Stock. In the event of the
Company's public offering of Common Stock, each holder of Class A Preferred
Stock has the right to convert its holdings into Common Stock in accordance with
a specified formula, subject to certain restrictions. In addition, 10% of the
Class A Preferred Stock outstanding on May 31, 2006 is mandatorily redeemable on
such date and on each subsequent May 31 until all the Class A Preferred Stock is
redeemed, at a price per share equal to (i) $2,500 plus (ii) all accrued and
unpaid dividends. In addition, all of the Class A Preferred Stock is mandatorily
redeemable in the event of (i) a bankruptcy of the Company or (ii) a merger or
the transfer of all the Company's Common Stock to a single person. However, the
Company has no obligation to redeem the Class A Preferred Stock to the extent
(i) such redemption would violate the Credit Facility, (ii) the Company has no
funds legally available therefor or (iii) there are any accrued and unpaid
dividends on the Class C Preferred Stock or Class D Preferred Stock. The Class A
Preferred Stock is recorded on the Company's Consolidated Financial Statements
at estimated fair market value, which is less than book value. The difference of
approximately $12 million will be accrued over the remaining life of the Class A
Preferred Stock. See the Consolidated Financial Statements included elsewhere
herein. For a discussion of certain limitations on payment of dividends on the
Class A Preferred Stock, see "Description of Certain Indebtedness."
CLASS B PREFERRED STOCK
In connection with the Recapitalization, the Company issued 10,000 shares
of Class B Preferred Stock to First Reserve. The Class B Preferred Stock is
generally non-voting and is entitled to no dividends. The Class B Preferred
Stock is mandatorily redeemable for cash at a price per share of $1,375 in the
event of (i) a bankruptcy of the Company or (ii) a Sale (as defined in the
Certificate of Designation, Preferences and Rights of Class B Preferred Stock of
Anker Coal Group, Inc.) of the Company; provided, however, that the Class B
Preferred Stock is not redeemable upon a Sale for so long as First Reserve is
entitled to designate a majority of the Board of Directors, unless the Sale is
approved by a majority of the directors not so designated; provided, further,
that the Class B Preferred Stock is not redeemable to the extent that (A) such
redemption
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would violate the Credit Facility, (B) all redemptions of the Company's Class A
Preferred Stock and Class D Preferred Stock required by the Company have not
been effected prior to or simultaneously with the redemption of the Class B
Preferred Stock, (C) there are any accrued but unpaid dividends on the Class A
Preferred Stock, Class C Preferred Stock or Class D Preferred Stock, or (D) the
Company has no funds legally available therefor. The Class B Preferred Stock is
also redeemable at the option of the Company for cash at a price of $1,375 in
whole but not in part; provided, however, that the Company may not elect to
redeem the Class B Preferred Stock for so long as First Reserve is entitled to
designate a majority of the Board of Directors, unless such redemption is
approved by majority of the directors of the Company not so designated. In
addition, in the event of a public offering of Common Stock, the Class B
Preferred Stock is redeemable for Common Stock at the option of the Company or
the holders of the Class B Preferred Stock; provided, however, that the Company
may not elect to redeem the Class B Preferred Stock for so long as First Reserve
is entitled to designate a majority of the Board of Directors, unless such
redemption is approved by a majority of the directors of the Company not so
designated; provided, further, that the holders of the Class B Preferred Stock
may not elect to have the Company redeem the Class B Preferred Stock for so long
as First Reserve is entitled to designate a majority of the Board of Directors,
unless the public offering is approved by a majority of the directors of the
Company not so designated.
CLASS C PREFERRED STOCK
In connection with its purchase of the common stock of Upshur Property,
Inc. from Glenn Springs Holdings, Inc. ("Glenn Springs"), a wholly owned
subsidiary of Occidental Petroleum Company, the Company issued 1,000 shares of
Class C Preferred Stock to Glenn Springs. The Class C Preferred Stock is
generally non-voting and is entitled to annual cumulative cash dividends payable
on February 15 in an amount equal to 4% of the gross realization from coal sales
from certain coal reserves in Upshur County, West Virginia for the immediately
preceding calendar year. In addition, in the event that the Company sells,
leases, subleases or otherwise transfers certain mineral property in Upshur
County for $500,000 or more (a "Mineral Property Transfer"), the Class C
Preferred Stock is entitled to receive special dividends calculated by dividing
the total acreage of mineral property originally transferred to the Company by
Glenn Springs (28,051 acres) into the number of acres transferred as part of the
Mineral Property Transfer, and multiplying the result by the sales price
received by the Company as a result of the Mineral Property Transfer. The Class
C Preferred Stock is not mandatorily redeemable. However, the Class C Preferred
Stock is redeemable for cash at the option of the Company at a price per share
equal to (i) $13,000 plus (ii) all accrued and unpaid dividends (other than the
aggregate amount of any special dividends payable). No dividends have been paid
on the Class C Preferred Stock as of the date hereof.
CLASS D PREFERRED STOCK
In connection with the purchase of assets from Phillips Resources, Inc.
("Phillips"), the Company issued 1,000 shares of Class D Preferred Stock to
Glenn Springs, which also owns Phillips. The Class D Preferred Stock is
generally non-voting and is entitled to receive, (i) for a period of fifteen
years from and after January 1, 1996, quarterly cumulative cash dividends in an
amount equal to 2 1/2% of the gross realization from coal sales from certain
properties in Upshur and Randolph Counties for the immediately preceding
calendar quarter, and (ii) thereafter, quarterly cumulative cash dividends equal
to 1 1/2% of the gross realization from such sales for the immediately preceding
calendar quarter. If aggregate dividends of $5,000,000 or more on the Class D
Preferred Stock are not paid on or before December 31, 2005, then the Company,
if requested by a holder of Class D Preferred Stock, must redeem such holder's
shares over the five year period beginning December 31, 2006 by redeeming 20% of
such holder's shares on such date and on December 31 of the succeeding four
years, at a price, per share, equal to (i) $7,000 plus (ii) all accrued and
unpaid dividends (the "Class D Redemption Price"). If aggregate dividends of
$5,000,000 or more on the Class D Preferred Stock are paid on or before December
31, 2005, then the Company must redeem the Class D Preferred Stock over the five
year period beginning December 31, 2011 by redeeming 20% of the issued and
outstanding shares of Class D Preferred Stock on such date and on December 31 of
each succeeding year, at the Class D Redemption Price. Furthermore, the Class D
Preferred Stock is redeemable at any time at the option of the Company at a
price per share equal to the Redemption Price. No dividends have been paid on
the Class D Preferred Stock as of the date hereof.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The exchange of Old Notes for Exchange Notes will not constitute
recognition events for federal income tax purposes. Consequently, no gain or
loss should be recognized by Holders upon receipt of the Exchange Notes. For
purposes of determining gain or loss upon the subsequent sale or exchange of
Exchange Notes, a Holder's basis in Exchange Notes should be the same as such
Holder's basis in the Old Notes exchanged therefor. Holders should be considered
to have held the Exchange Notes from the time of their original acquisition of
the Old Notes.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OLD NOTES FOR EXCHANGE
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTIONS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. To the extent any such
broker-dealer participates in the Exchange Offer and so notifies the Company, or
causes the Company to be so notified in writing, the Company has agreed that
during the period equal to the lesser of (i) 180 days from the date on which the
Exchange Offer Registration Statement is declared effective or (ii) the period
ending on the date when all broker dealers holding Old Notes have sold all Old
Notes held by them, it will make this Prospectus, as amended or supplemented,
available to any Participating Broker Dealer and any other persons, if any, with
similar prospectus delivery requirements, for use in connection with any resale
of Exchange Notes, and will promptly send additional copies of this Prospectus
and any amendment or supplement to this Prospectus to any broker-dealer that
requests such documents in the Letter of Transmittal.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at prevailing market prices at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers or any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
(other than commissions and concessions of any broker-dealers), subject to
certain prescribed limitations, and will indemnify the holders of the Old Notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act.
By its acceptance of the Exchange Offer, any broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby acknowledges and agrees
that, upon receipt of notice from the Company of the happening of any event
which makes any statement in the Prospectus untrue in any material respect or
which requires the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has notified such broker-dealer that delivery of
the
104
108
Prospectus may resume and has furnished copies of any amendment or supplement to
the Prospectus to such broker-dealer.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Simpson
Thacher & Bartlett (a partnership which includes professional corporations), New
York, New York.
EXPERTS
The consolidated financial statements of the Predecessor as of December 31,
1995 and 1994, and for the years then ended, included herein have been audited
by Ernst & Young LLP, independent auditors, as stated in their report appearing
herein. The consolidated financial statements of the Company as of December 31,
1996 and for the period from August 1, 1996, to December 31, 1996, and the
consolidated financial statements of the Predecessor for the period from January
1, 1996 to July 31, 1996 included herein have been audited by Coopers & Lybrand
L.L.P., independent auditors, as stated in their report appearing herein. The
combined financial statements of Oak Mountain as of December 31, 1996, and for
the year then ended, included herein have been audited by Coopers & Lybrand
L.L.P., independent auditors, as stated in their report appearing herein. The
audited consolidated and combined financial statements referred to above have
been so included in reliance upon such reports given upon the authority of the
firms as experts in accounting and auditing.
In July 1996, the Company terminated its relationship with Ernst & Young
LLP and engaged Coopers & Lybrand L.L.P. as its new independent accountants. The
reports of Ernst & Young LLP on the financial statements of the Predecessor as
of December 31, 1995 and 1994, and for the years then ended, contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principle. In connection with its
audits of the financial statements of the Predecessor for the two years ended
December 31, 1994 and 1995 and through July 1996, there have been no
disagreements with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Ernst & Young LLP would
have caused them to make reference thereto in their report on the financial
statements of the Predecessor for such years. During the two years ended
December 31, 1994 and 1995 and through July 1996, there were no reportable
events (as defined in Regulation S-K Item 304 (a)(l)(v)).
The reserve reports and estimates of the Company's net proved coal reserves
included herein have, to the extent described herein, been prepared by the
Company and audited by Boyd. Summaries of these estimates contained in the audit
letter of Boyd have been included herein as Appendix A-2 in reliance upon such
firm as an expert with respect to such matters.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes, reference is made to the Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the Registration Statement, each such statement is
qualified in all respects by the provisions in such exhibit, to which reference
is hereby made. The Registration Statement can be inspected and copied at the
Public Reference Section of the Commission located at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at regional public
reference facilities maintained by the Commission located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material
including copies of all or any portion of the Registration Statement, can be
obtained from the Public Reference Section of the Commission
105
109
at prescribed rates. Such material may also be accessed electronically by means
of the Commission's home page on the Internet (http://www.sec.gov).
From and after the effective date of the Registration Statement of which
the Prospectus is a part, so long as the Exchange Notes are outstanding, the
Company will be required to file periodic reports and other information with the
Commission pursuant to certain provisions of the Exchange Act. During such
period, the Company will furnish to the holders of Exchange Notes copies of all
periodic reports filed by the Company with the Commission.
106
110
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1996:
Report of Independent Accountants.................................................. F-2
Report of Independent Accountants.................................................. F-3
Consolidated Balance Sheet at December 31, 1996.................................... F-4
Consolidated Statement of Operations for the period August 1, 1996 (date of
acquisition) through December 31, 1996 and for the period January 1, 1996
through July 31, 1996........................................................... F-5
Consolidated Statement of Stockholders' Equity for the period August 1, 1996 (date
of acquisition) through December 31, 1996....................................... F-6
Consolidated Statement of Stockholders' Equity for the period January 1, 1996
through July 31, 1996........................................................... F-7
Consolidated Statement of Cash Flows for the period from August 1, 1996 (date of
acquisition) through December 31, 1996 and for the period January 1, 1996
through July 31, 1996........................................................... F-8
Notes to Consolidated Financial Statements......................................... F-9
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet at September 30, 1997......................... F-17
Condensed Consolidated Statement of Operations for the nine months ended September
30, 1997 and for the period August 1, 1996 (date of acquisition) through
September 30, 1996 and January 1, 1996 through July 31, 1996.................... F-18
Condensed Consolidated Statement of Cash Flows for the nine months ended September
30, 1997 and for the period August 1, 1996 (date of acquisition) through
September 30, 1996 and January 1, 1996 through July 31, 1996.................... F-19
Notes to Condensed Consolidated Financial Statements............................... F-20
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWO YEARS ENDED DECEMBER 31,
1995:
Report of Independent Auditors..................................................... F-23
Consolidated Balance Sheet at December 31, 1995 and 1994........................... F-24
Consolidated Statement of Operations for years ended December 31, 1995 and 1994.... F-25
Consolidated Statement of Stockholders' Equity for the years ended December 31,
1995 and 1994................................................................... F-26
Consolidated Statement of Cash Flows for the years ended December 31, 1995 and
1994............................................................................ F-27
Notes to Audited Consolidated Financial Statements................................. F-28
OAK MOUNTAIN ENERGY, L.L.C.
Report of Independent Accountants.................................................. F-35
Combined Balance Sheet at December 31, 1996 and September 30, 1997................. F-36
Combined Statement of Operations for the year ended December 31, 1996 and for the
period January 1, 1997 through April 16, 1997 and April 17, 1997 through
September 30, 1997.............................................................. F-37
Combined Statement of Stockholders' Equity for the year ended December 31, 1996 and
for the period January 1, 1997 through April 16, 1997........................... F-38
Combined Statement of Stockholders' Equity for the period April 17, 1997 through
September 30, 1997.............................................................. F-39
Combined Statement of Cash Flows for the year ended December 31, 1996 and for the
period January 1, 1997 through April 16, 1997 and April 17, 1997 through
September 30, 1997.............................................................. F-40
Notes to Combined Financial Statements............................................. F-41
F-1
111
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Anker Coal Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Anker Coal
Group, Inc. and Subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period August 1, 1996 (date of acquisition) through December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Anker Coal Group, Inc. and Subsidiaries as of December 31, 1996 and the
consolidated results of their operations and their cash flows for the period
August 1, 1996 (date of acquisition) through December 31, 1996 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
February 28, 1997
F-2
112
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Anker Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated statement of operations,
stockholders' equity and cash flows of Anker Group, Inc. and Subsidiaries
(Predecessor) for the period January 1, 1996 through July 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of their
operations and their cash flows of Anker Group, Inc. and Subsidiaries
(Predecessor) for the period January 1, 1996 through July 31, 1996 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
February 28, 1997
F-3
113
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 556
Accounts receivable:
Trade........................................................................ 28,526
Affiliates................................................................... 1,137
Inventories..................................................................... 6,085
Current portion of long-term notes receivable................................... 415
Prepaid expenses and other...................................................... 2,127
Deferred income taxes........................................................... 303
--------
Total current assets.................................................... 39,149
Properties:
Coal lands and mineral rights................................................... 80,899
Machinery and equipment......................................................... 67,732
--------
148,631
Less allowances for depreciation, depletion and amortization.................... 5,685
--------
142,946
Other assets:
Advance minimum royalties....................................................... 15,473
Goodwill, net of accumulated amortization of $362............................... 39,270
Other intangible assets, net of accumulated amortization of $390................ 7,644
Notes receivable, including $4,500 with an affiliate............................ 9,019
Other assets.................................................................... 6,182
--------
Total assets............................................................ $259,683
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ 17,508
Accrued expenses and other...................................................... 10,032
Current maturities of long-term debt............................................ 4,199
--------
Total current liabilities............................................... 31,739
Long-term debt.................................................................... 83,830
Other liabilities:
Accrued reclamation expenses.................................................... 18,861
Deferred income taxes........................................................... 17,576
Other........................................................................... 6,123
--------
Total liabilities....................................................... 158,129
Mandatorily redeemable preferred stock............................................ 20,775
Stockholders' equity:
Preferred stock................................................................. 23,000
Common stock.................................................................... --
Paid-in capital................................................................. 57,900
Accumulated Deficit............................................................. (121)
--------
Total stockholders' equity.............................................. 80,779
--------
Total liabilities and stockholders' equity.............................. $259,683
========
The accompanying notes are an integral
part of the consolidated financial statements.
F-4
114
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THE COMPANY PREDECESSOR
------------ -----------
PERIOD PERIOD
AUGUST 1 JANUARY 1
THROUGH THROUGH
DECEMBER 31, JULY 31,
1996 1996
Coal sales and related revenue........................................ $123,246 $ 166,909
Expenses:
Cost of operations and selling expenses............................. 110,215 149,364
Depreciation, depletion and amortization............................ 6,437 7,882
General and administrative.......................................... 3,738 3,796
------------ -----------
Operating income............................................ 2,856 5,867
Stock compensation and related expenses............................... -- 2,969
Interest.............................................................. 2,090 2,796
Other income, net..................................................... 373 1,107
------------ -----------
Income before income taxes.................................. 1,139 1,209
Income tax expense (benefit).......................................... 485 (134)
------------ -----------
Net income.................................................. 654 1,343
Less: redeemable preferred stock dividends............................ 512 116
------------ -----------
Net income available to common stockholders................. $ 142 $ 1,227
========== ========
The accompanying notes are an integral
part of the consolidated financial statements.
F-5
115
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD AUGUST 1, 1996 THROUGH DECEMBER 31, 1996
(IN THOUSANDS)
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
Balance at August 1, 1996.................. -- -- -- -- --
Initial Company capitalization............. $ 23,000 -- $ 57,900 -- $80,900
Net income................................. -- -- -- $ 654 654
Redeemable preferred stock dividends....... -- -- -- (512) (512)
Preferred stock accretion.................. -- -- -- (263) (263)
--------- ------- -------- ----------- -------
Balance at December 31, 1996............... $ 23,000 -- $ 57,900 $(121) $80,779
======= ======= ======= ========= =======
The accompanying notes are an integral
part of the consolidated financial statements.
F-6
116
PREDECESSOR
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 THROUGH JULY 31, 1996
(IN THOUSANDS)
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
Balance at December 31, 1995............... $ 14,122 $ 50 $40,007 $3,024 $57,203
Stock compensation......................... -- -- 1,500 -- 1,500
Net income................................. -- -- -- 1,343 1,343
Redeemable preferred stock dividends....... -- -- -- (116) (116)
--------- ------ ------- -------- -------
Balance at July 31, 1996................... $ 14,122 $ 50 $41,507 $4,251 $59,930
======= ====== ======= ====== =======
The accompanying notes are an integral
part of the consolidated financial statements.
F-7
117
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THE COMPANY PREDECESSOR
----------- -----------
PERIOD PERIOD
AUGUST 1 JANUARY 1
THROUGH THROUGH
DECEMBER JULY 31,
31, 1996 1996
Operating activities:
Net income........................................................ $ 654 $ 1,343
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization....................... 6,437 7,882
Minority interest.............................................. 31 (5)
Deferred taxes................................................. 485 (257)
Gain on sale of equipment...................................... (203) (806)
Stock compensation............................................. -- 2,969
Changes in operating assets and liabilities (net of assets and
liabilities acquired):
Accounts receivable.......................................... (434) 2,153
Inventories, prepaid expenses and other...................... 5,515 (1,258)
Advance minimum royalties.................................... (2,095) (706)
Accounts payable, accrued expenses and other................. (8,303) 8,095
Other liabilities............................................ (867) (388)
----------- -----------
Net cash provided by operating activities................. 1,220 19,022
----------- -----------
Investing activities:
Purchase of Anker Group, Inc., including related acquisition cost
of $7,534, net of cash acquired of $6,980 and liabilities
assumed of $151,873............................................ (66,554) --
Acquisitions (net of $4,214 for liabilities assumed).............. (4,262) --
Purchases of properties........................................... (6,769) (3,046)
Proceeds from sale of properties.................................. 213 1,560
Issuances of notes receivable..................................... (4,991) (671)
Payments received on notes receivable............................. 518 889
Intangible assets................................................. (277) --
Other assets...................................................... (2,846) (496)
----------- -----------
Net cash used in investing activities..................... (84,968) (1,764)
----------- -----------
Financing activities:
Proceeds from revolving line of credit and long-term debt......... 79,676 49,389
Principal payments on revolving line of credit and long-term
debt........................................................... (45,372) (79,184)
Proceeds from issuance of preferred and common stock.............. 50,000 --
----------- -----------
Net cash provided by (used in) financing activities....... 84,304 (29,795)
----------- -----------
Increase (decrease) in cash and cash equivalents.................... 556 (12,537)
Cash and cash equivalents at beginning of period.................... -- 13,526
----------- -----------
Cash and cash equivalents at end of period.......................... $ 556 $ 989
========== ========
Supplemental information:
Cash paid for interest............................................ $ 2,747 $ 2983
========== ========
Cash paid for taxes............................................... $ 202 $ 8
========== ========
Supplemental non-cash financing activities:
Stock exchanged in purchase of Anker Group, Inc................... $ 50,900 --
========== ========
Redeemable preferred stock dividends.............................. $ 512 $ 116
========== ========
The accompanying notes are an integral
part of the consolidated financial statements.
F-8
118
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Anker Coal Group, Inc. and subsidiaries (the Company) is a newly formed
company that was capitalized with approximately $50 million in cash and $14.1
million of preferred and common stock exchanged for similar stock in the
predecessor company. Subsequently, the Company acquired the remaining 92.5% of
the common stock of Anker Group, Inc. and subsidiaries (the Predecessor) for
approximately $87 million, which was funded by the issuance of $25 million of
Class A Preferred Stock and the payment of $62 million in cash, $12 million of
which was borrowed under the Company's credit facilities. The acquisition was
effective on August 12, 1996 but for accounting purposes, the Company has
designated August 1, 1996 as the effective date of the acquisition. The
acquisition of the Predecessor was accounted for using the purchase method of
accounting as prescribed under Accounting Principles Bulletin No. 16,
"Accounting for Business Combination."
The operating results of this acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The following
unaudited adjusted results have been prepared to illustrate results of
operations had the acquisition been made on January 1, 1996 and do not purport
to be indicative of what would have occurred had the acquisition been made as of
those dates or of results which may occur in the future.
1996
(IN THOUSANDS)
(UNAUDITED)
Coal sales and related revenue................. $290,155
===========
Income before interest, depletion and
amortization................................. $ 21,553
===========
Net income..................................... $ 1,997
===========
The Company's principal operations, which are located in West Virginia and
Maryland, consist of mining and selling coal from mineral rights which it owns
and/or leases, as well as brokering coal from other producers.
The accompanying consolidated financial statements present the Company's
consolidated operations and cash flows from the acquisition effective date of
August 1, 1996 through December 31, 1996 and the consolidated operations and
cash flows of the Predecessor for the period January 1, 1996 through July 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements as of December 31, 1996 and for the
period August 1, 1996 through December 31, 1996 include the accounts of Anker
Coal Group, Inc. and its wholly and majority-owned subsidiaries. The
consolidated financial statements for the period January 1, 1996 through July
31, 1996 include the accounts of the Predecessor. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid investments with original
purchase maturities of three months or less. Approximately $543,000 of the cash
and cash equivalents balance at December 31, 1996 relates to the Company's
venture capital subsidiary and is restricted for the purchase of qualified
investments in accordance with requirements of the State of West Virginia
venture capital laws.
F-9
119
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES:
Inventories consist of coal and mining supplies. Coal inventories are
stated at the lower of average cost or market. Supply inventories are stated at
the lower of cost (first in, first out) or market.
PROPERTIES:
Properties are recorded at cost, which includes the allocated purchase
price for the acquisition described in Note 1. Provisions for depreciation are
based upon the estimated useful lives of the respective assets and are computed
by the straight-line method.
Coal lands represent the investment in land and related mineral and/or
surface rights, including capitalized mine development costs, which are being
mined or will be mined. Mine development costs of $22.7 million represent
expenditures incurred, net of revenue received, in development of coal mines
until the principal operating activity becomes coal production. Depletion and
amortization of coal lands is computed on a tonnage basis calculated to amortize
its costs fully over the estimated recoverable reserves.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Intangible assets consist of the excess of the purchase price over the fair
value of the net assets acquired (goodwill), organization costs, debt issuance
costs, and various noncompete agreements, which are being amortized on the
straight-line method over the useful lives of these assets. Goodwill,
principally related to the acquisition described in Note 1, is being amortized
over 40 years in conjunction with the expected useful life of existing mineral
rights. The Company periodically evaluates the carrying value of goodwill based
on whether the goodwill is recoverable from expected future undiscounted
operating cash flows. Additionally, the Company periodically reviews the
carrying value of other intangible assets and will recognize impairments when
the expected future operating cash flow derived from such intangible assets is
less than their carrying value.
ACCRUED RECLAMATION EXPENSES:
Provisions to reclaim disturbed acreage remaining after production has been
completed and related mine closing costs are accrued during the life of the
mining operation or recorded in conjunction with the acquisition of related
properties. The annual provision is made at a rate per ton equivalent to the
estimated reclamation cost divided by the estimated tonnage to be mined.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on temporary
differences between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements.
Estimates also affect the amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
F-10
120
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, long-term debt and the
interest rate collar agreements approximate fair value. The fair value of the
Company's borrowings under its credit agreement and other notes payable is
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
3. COAL SALES AND RELATED INCOME
Coal sales and related income consist of the following:
THE COMPANY PREDECESSOR
------------ -----------
PERIOD PERIOD
AUGUST 1 JANUARY 1
THROUGH THROUGH
DECEMBER 31, JULY 31,
1996 1996
(IN THOUSANDS)
Coal mining revenue................................. $ 85,175 $ 126,500
Brokered coal revenue............................... 36,521 37,697
Ash disposal and waste fuel revenue................. 1,550 2,712
------------ -----------
$123,246 $ 166,909
========== ========
Included in revenue are sales to unconsolidated affiliated companies
aggregating approximately $9.2 million for the period August 1, 1996 through
December 31, 1996 and approximately $7 million for the period January 1, 1996
through July 31, 1996.
The Company recognizes revenue either upon shipment or customer receipt of
coal, based on contractual terms. The Company's coal mining revenue is
substantially generated from long-term coal supply contracts with domestic
utilities throughout the United States. These contracts range from one to twenty
years with fixed based prices which change based on certain industry and
government indices. Receivables generally are due within 30 to 45 days. Sales to
one customer represented 26% of total revenue for the two periods ended December
31, 1996. The Company performs credit evaluations on all new customers, and
credit losses have historically been minimal.
4. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
1996
(IN THOUSANDS)
Credit agreement:
Term loan A.................................................. $ 66,000
Term loan B.................................................. 19,900
Notes payable to seller........................................ 1,934
Other notes payable............................................ 195
--------------
88,029
Less current maturities of long-term debt...................... (4,199)
--------------
$ 83,830
===========
The Company's credit agreement provides for two term loans amounting to $70
and $20 million, respectively, which are payable in quarterly installments of
principal and interest through 2003 and 2004, respectively.
The Company also has a $25 million revolving line of credit under the
credit facilities agreement, which is available through June 30, 2004.
Borrowings under the line of credit are subject to established levels of trade
receivables and inventory. There were no borrowings outstanding on the line of
credit at December 31, 1996.
F-11
121
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Borrowings under the credit agreement bear interest at the Company's option
at either a base rate or Eurodollar rate. Borrowings under the base rate are
subject to interest at the higher of the banks' prime rate (8.25% at December
31, 1996) or the Federal Funds rate (8.0% at December 31, 1996) plus 1/2%.
Borrowings under the Eurodollar rate are subject to interest at the rate
available on the London Interbank Offered Rate (LIBOR) (5.56% at December 31,
1996). All borrowings are subject to an additional margin based on established
leverage ratios. For the period August 1, 1996 through December 31, 1996, the
Company's average interest rate was approximately 8.30% and the rate at December
31, 1996 was 8.32%.
In addition, term loan A and the revolving line of credit are subject to a
1/2% annual commitment fee, payable quarterly, on the unused portion of the
available borrowings.
In October 1996, the Company entered into an interest rate collar
agreement, which expires October 1, 1998, to mitigate the fluctuations of
variable interest rates. The collar agreement is on a $50 million notional
amount of the term loans which converts the variable interest rate to a fixed
LIBOR rate of 8% in the event LIBOR rates exceed 8%.
The credit agreement is collateralized by substantially all of the
Company's present and future assets. The credit agreement also contains
covenants which, among other matters, restrict or limit the ability of the
Company to pay dividends, incur indebtedness, merge, acquire or sell assets and
make capital expenditures. The Company must also maintain certain financial
ratios regarding interest, leverage, fixed charges and net worth among other
restrictions.
In conjunction with an acquisition, the Company assumed an outstanding note
payable with the seller, which bears interest at 7.47% and is payable in monthly
installments through April 1, 2000.
Future required principal payments on long term debt over the next five
years are: $4,199,000 in 1997; $8,479,000 in 1998; $9,830,000 in 1999;
$11,421,000 in 2000; and $12,700,000 in 2001.
5. MANDATORILY REDEEMABLE PREFERRED AND CAPITAL STOCK
Mandatorily redeemable preferred and capital stock consists of the
following:
TOTAL
NUMBER OF SHARES DECEMBER 31,
AUTHORIZED, ISSUED 1996
DESCRIPTION AND OUTSTANDING PAR VALUE (IN THOUSANDS)
Common Stock:
Class A..................................... 10,000 $ 0.01 --
============= ===========
Preferred Stock:
Class B..................................... 10,000 1,000 $ 10,000
Class C..................................... 1,000 13,000 13,000
------- --------------
11,000 $ 23,000
============= ===========
Mandatorily Redeemable Preferred Stock:
Class A..................................... 10,000 2,500 25,512
Class D..................................... 1,000 7,000 7,000
Less: preferred stock discount................ -- (11,737)
------- --------------
11,000 $ 20,775
============= ===========
PREFERRED STOCK:
Class B preferred stock is nonvoting, with no dividends, redeemable at
$1,375 per share upon the event of liquidation or other action described in the
preferred stock agreement.
F-12
122
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Class C preferred stock is nonvoting with 4% cumulative dividends,
calculated on the gross realization from certain coal sales, redeemable at par
value upon the event of liquidation or other action described in the preferred
stock agreement.
MANDATORILY REDEEMABLE PREFERRED STOCK:
Class A preferred stock is nonvoting with 5% cumulative dividends,
mandatorily redeemable at par value over ten years beginning May 31, 2006.
Dividends are predicated on meeting certain established debt covenants.
Class D preferred stock is nonvoting with 2 1/2% cumulative dividends
through 2011, reducing to 1 1/2% cumulative dividends thereafter, calculated on
the gross realization from certain coal sales, redeemable at par value over five
years beginning December 31, 2006, if aggregate dividends paid on or before
December 31, 2005 are less than $5,000,000; otherwise mandatorily redeemable at
par value over five years beginning December 31, 2011.
The mandatorily redeemable preferred stock is recorded at estimated fair
market value, which is less than book value. This difference of $12 million will
be accreted over the remaining life of the preferred stock.
6. INCOME TAXES:
The provision (benefit) for income taxes is comprised of the following:
THE COMPANY PREDECESSOR
----------- -----------
PERIOD PERIOD
AUGUST 1 JANUARY 1
THROUGH THROUGH
DECEMBER JULY 31,
31, 1996 1996
(IN THOUSANDS)
Current:
Federal........................................... -- $ 123
Deferred:
Federal........................................... $ 1,253 (45)
Tax benefit from recognition of net operating
losses......................................... (768) (212)
----------- -----------
Total..................................... $ 485 $(134)
========== ========
In the predecessor period, the Predecessor was subject to alternative
minimum taxes, accordingly, the $123,000 represents amounts payable under the
alternative tax structure, which is a creditable tax that can be used to reduce
any future regular income taxes.
The Company has tax net operating losses in the current and predecessor
periods, which can be carried forward for fifteen years and used to offset any
future taxable income.
F-13
123
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of the federal statutory tax rate to the consolidated
effective tax rate is as follows:
THE COMPANY PREDECESSOR
----------- -----------
PERIOD PERIOD
AUGUST 1 JANUARY 1
THROUGH THROUGH
DECEMBER JULY 31,
31, 1996 1996
Federal statutory tax rate.......................... 34.0% 34.0%
Goodwill............................................ 10.7 --
Business meals exclusion............................ 4.4 0.7
Use of percentage depletion......................... (8.3) (50.0)
Other............................................... 1.8 4.2
----- -----------
42.6% (11.1)%
========== ========
The components of net deferred tax assets and liabilities are as follows:
DECEMBER 31,
1996
(IN THOUSANDS)
Deferred tax assets (liabilities)--current:
Inventory.................................................... $ 50
Other current assets......................................... 253
--------------
$ 303
===========
Deferred tax assets (liabilities)--noncurrent:
Depreciation, depletion and amortization..................... (11,558)
Other long-term liabilities.................................. (2,965)
Accrued reclamation.......................................... 1,208
Acquisition assets........................................... 1,059
Fair market value adjustments................................ (6,088)
Net operating loss carryforward.............................. 768
--------------
$(17,576)
===========
Based upon the Company's current and historical taxable income, the
anticipated level of future taxable income and existing taxable temporary
differences, management believes it is more likely than not that all of the
deferred tax assets will be realized. Accordingly, no valuation allowance has
been established against the deferred tax assets.
7. RETIREMENT BENEFITS
The Company has a contributory defined contribution retirement plan
covering all employees who meet eligibility requirements. The plan provides for
employer contributions representing 5% of compensation. The Company's
contributions amounted to $577,000 for the period August 1, 1996 through
December 31, 1996 and $547,000 for the period January 1, 1996 through July 31,
1996.
The Company also has a 401(k) savings plan which is a contributory defined
contribution plan for all employees who meet eligibility requirements. The plan
provides for mandatory employer contributions to match 50% of employee
contributions up to a maximum of 2% of each participant's compensation. In
addition, the Company may make discretionary contributions up to 5% of employee
compensation. The Company's contributions amounted to $185,000 for the period
August 1, 1996 through December 31, 1996 and $182,000 for the period January 1,
1996 through July 31, 1996.
F-14
124
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, the Company has a 401(h) savings plan for the purpose of
providing retiree health care benefits. The plan is a defined contribution plan
for all employees who meet eligibility requirements and provides for mandatory
employer contributions between .237% and 1.66% of each participant's
compensation, based on years of service. The Company's contributions amounted to
$143,000 for the period August 1, 1996 through December 31, 1996 and $150,000
for the period January 1, 1996 through July 31, 1996.
8. COMMITMENTS AND CONTINGENCIES
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT:
Current and projected operating deficits in the United Mine Workers of
America Benefit Trust Funds (the Funds) resulted in the Coal Industry Retiree
Health Benefit Act of 1992 (the Act). The Act created a multiemployer benefit
plan called the United Mine Workers of America Combined Benefit Fund (the
Combined Fund). The Combined Fund provides medical and death benefits for all
beneficiaries of the earlier trusts who were actually receiving benefits as of
July 20, 1992. The Act provides for the assignment of beneficiaries to former
employers and the allocation of any unassigned beneficiaries (referred to as
orphans) to companies using a formula included in the legislation. The Act
requires that responsibility for funding those payments be assigned to companies
that had been signatories to the National Bituminous Coal Wage Agreement
(Agreement). Although the Company does not currently have any operations which
are signatory to the Agreement, it is subject to certain liabilities as a result
of being signatory to a prior agreement.
A company's annual cost of benefits is based on the number of beneficiaries
assigned to the company plus a percentage of the cost of unassigned
beneficiaries, which is a function of the number of orphans times the
per-beneficiary premium. As part of the acquisition described in Note 1, the
Company recorded a liability of approximately $6.5 million to recognize the
anticipated unfunded obligations under this act. The Company contributed
$725,000 for the period August 1, 1996 through December 31, 1996 and $470,000
for the period January 1, 1996 through July 31, 1996.
ADVANCE MINIMUM ROYALTIES:
Tonnage royalty payments on leased properties range from 2% to 10% of the
realization. The 1997 through 2001 leases require minimum royalty payments
aggregating approximately: $3,962,000 in 1997; $4,258,000 in 1998; $4,453,000 in
1999; $4,367,000 in 2000; and $4,367,000 in 2001.
OPERATING LEASES:
The Company has office and mining equipment operating lease agreements.
Total rent expense approximated $3,277,998 for the period August 1, 1996 through
December 31, 1996 and $5,002,472 for the period January 1, 1996 through July 31,
1996. Minimum annual rentals for office and equipment leases for the next five
years are approximately $6,530,000 in 1997; $5,346,000 in 1998; $3,158,000 in
1999; $1,444,000 in 2000; and $726,000 in 2001.
CONTINGENCIES:
The Company is a party to various lawsuits and claims incidental to its
business. While it is not possible to predict accurately the outcome of these
matters, management believes that none of these actions will have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
F-15
125
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSIDIARY GUARANTEES
All of the guarantor subsidiaries are wholly owned and the securities are
guaranteed on a full, unconditional and joint and several basis by all of the
subsidiaries. The following table summarizes the financial position, results of
operations and cash flows for the Company and its guarantor and nonguarantor
subsidiaries as of December 31, 1996 and for the period August 1, 1996 through
December 31, 1996.
ANKER
COAL
ANKER COAL GUARANTOR NONGUARANTOR CONS. GROUP
GROUP SUBS. SUBS. ADJUST. CONS.
BALANCE SHEET
Total current assets...................... $ 303 $ 38,277 $ (1,215) $ 1,784 $ 39,149
Investment in subsidiaries................ 45,925 -- -- (45,925) --
Properties, net........................... -- 141,700 1,246 -- 142,946
Other assets.............................. -- 72,770 4,818 -- 77,588
------- -------- ------- --------- --------
Total assets.................... $ 46,228 $ 252,747 $ 4,849 $ (44,141) $259,683
======= ======== ======= ========= ========
Total current liabilities................. 3,700 25,565 690 1,784 31,739
Long-term debt............................ 9,300 73,155 1,375 -- 83,830
Intercompany payable, net................. (85,248) 87,291 (2,043) -- --
Other long-term liabilities............... 17,576 24,984 -- -- 42,560
Mandatorily redeemable preferred stock.... 20,775 -- -- -- 20,775
Total stockholders equity................. 80,125 41,752 4,827 (45,925) 80,779
------- -------- ------- --------- --------
Total liabilities and stockholders
equity.................................. $ 46,228 $ 252,747 $ 4,849 $ (44,141) $259,683
======= ======== ======= ========= ========
STATEMENT OF OPERATIONS
Coal sales and related revenues........... $ -- $ 231,957 $ 4,170 $(112,881) $123,246
Cost of operations and operating
expenses................................ -- 231,393 4,282 (113,195) 122,480
------- -------- ------- --------- --------
Operating income.......................... -- 564 (112) 314 766
Other (income) expense.................... -- (580) (107) 314 (373)
------- -------- ------- --------- --------
Income (loss) before taxes................ -- 1,144 (5) -- 1,139
Income tax expense (benefit).............. -- 523 (38) -- 485
------- -------- ------- --------- --------
Net income (loss)......................... $ -- $ 621 $ (33) $ -- $ 654
======= ======== ======= ========= ========
STATEMENT OF CASH FLOWS
Net cash (used in) provided by operating
activities.............................. $ -- $ (3,925) $ 5,145 $ -- $ 1,220
======= ======== ======= ========= ========
Net cash used in investing activities..... $ -- $ (80,379) $ (4,589) $ -- $(84,968)
======= ======== ======= ========= ========
Net cash provided by financing
activities.............................. $ -- $ 84,304 $ -- $ -- $ 84,304
======= ======== ======= ========= ========
F-16
126
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
ASSETS
(UNAUDITED)
Current assets:
Cash and cash equivalents...................................................... $ 228
Accounts receivable:
Trade....................................................................... 32,523
Inventories.................................................................... 15,213
Current portion of long-term notes receivable.................................. 420
Prepaid expenses and other..................................................... 5,370
Deferred income taxes.......................................................... 303
--------
Total current assets................................................... 54,057
Properties:
Coal lands and mineral rights.................................................. 105,619
Machinery and equipment........................................................ 85,465
--------
191,084
Less: allowances for depreciation, depletion and amortization.................. 14,879
--------
176,205
Other assets:
Advance minimum royalties...................................................... 18,965
Goodwill, net of accumulated amortization of $1,122............................ 45,181
Other intangible assets, net of accumulated amortization of $242............... 5,626
Notes receivable............................................................... 5,183
Other assets................................................................... 7,166
--------
Total assets........................................................... $ 312,383
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade....................................................................... $ 27,664
Affiliates.................................................................. 945
Accrued expenses and other..................................................... 10,868
Current maturities of long-term debt........................................... 5,153
--------
Total current liabilities.............................................. 44,630
Long-term debt................................................................... 130,736
Other liabilities:
Accrued reclamation expenses................................................... 18,836
Deferred income taxes.......................................................... 15,905
Other.......................................................................... 5,996
--------
Total liabilities...................................................... 216,103
Mandatorily redeemable preferred stock........................................... 22,182
Stockholders' equity:
Preferred stock................................................................ 23,000
Common stock................................................................... --
Paid-in capital................................................................ 57,900
Accumulated deficit............................................................ (6,802)
--------
Total stockholders' equity............................................. 74,098
--------
Total liabilities and stockholders' equity............................. $ 312,383
========
The accompanying notes are an integral
part of the consolidated financial statements.
F-17
127
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
THE COMPANY THE COMPANY PREDECESSOR
------------- ------------- -----------
PERIOD PERIOD PERIOD
JANUARY 1 AUGUST 1 JANUARY 1
THROUGH THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, JULY 31,
1997 1996 1996
Coal sales and related revenue........................ $ 240,818 $46,937 $ 166,909
Expenses:
Cost of operations and selling expenses............. 217,520 43,168 149,364
Depreciation, depletion and amortization............ 12,909 2,582 7,882
General and administrative.......................... 6,786 1,255 3,796
-------- ------- --------
Operating income............................ 3,603 (68) 5,867
Interest.............................................. 6,646 906 2,796
Stock compensation and related expenses............... -- -- 2,969
Other income (expense), net........................... 1,064 (67) 1,107
-------- ------- --------
Income (loss) before income taxes and
extraordinary item........................ (1,979) (1,041) 1,209
Income tax expense (benefit).......................... (554) 194 (134)
-------- ------- --------
Income (loss) before extraordinary item..... (1,425) (1,235) 1,343
Extraordinary item, net of income taxes of $1,497..... 3,849 -- --
-------- ------- --------
Net income (loss)........................... (5,274) (1,235) 1,343
Less: Redeemable preferred stock dividends............ 957 208 116
-------- ------- --------
Net income (loss) applicable to common
stockholders.............................. $ (6,231) $(1,443) $ 1,227
======== ======= ========
The accompanying notes are an integral
part of the consolidated financial statements.
F-18
128
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THE COMPANY THE COMPANY PREDECESSOR
------------- ------------- -----------
PERIOD PERIOD PERIOD
JANUARY 1 AUGUST 1 JANUARY 1
THROUGH THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, JULY 31,
1997 1996 1996
Operating activities:
Net income (loss)...................................................... $ (5,274) $ (1,235) $ 1,343
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary item................................................... 3,849 -- --
Depreciation, depletion and amortization............................. 12,909 2,582 7,882
Minority interest.................................................... -- 32 (5)
Deferred taxes....................................................... -- (325) (257)
Gain on sale of equipment............................................ -- -- (806)
Stock compensation and related expenses.............................. -- -- 2,969
Changes in operating assets and liabilities (net of assets and
liabilities acquired):
Accounts receivable................................................ (2,154) 3,378 2,153
Inventories, prepaid expenses and other............................ (12,057) 2,831 (1,258)
Advance minimum royalties.......................................... (3,692) (1,216) (706)
Accounts payable, accrued expenses and other....................... 8,658 (7,050) 8,095
Other liabilities.................................................. (127) 29 (388)
--------- -------- --------
Net cash provided by (used in) operating activities............. 2,112 (974) 19,022
--------- -------- --------
Investing activities:
Purchase of Anker Group, Inc. including related acquisition costs of
$7,543, net of cash acquired of $6,980 and liabilities assumed of
$151,873............................................................. -- (66,554) --
Acquisitions (including related acquisition cost of $185, net of cash
acquired of $117 and liabilities and seller note assumed of
$8,752).............................................................. (9,883) -- --
Purchases of properties................................................ (35,949) (1,552) (3,046)
Proceeds from sale of properties....................................... -- -- 1,560
Issuances of notes receivable.......................................... (751) (4,500) (671)
Payments received on notes receivable.................................. 4,582 12 889
Intangible assets...................................................... (4,792) -- --
Other assets........................................................... (1,087) 768 (496)
--------- -------- --------
Net cash used in investing activities........................... (47,880) (71,826) (1,764)
--------- -------- --------
Financing activities:
Proceeds from issuance of Senior Notes................................. 125,000 -- --
Proceeds from revolving line of credit and long term debt.............. 135,902 68,676 49,389
Principal payments on revolving line of credit and long-term debt...... (215,462) (45,142) (79,184)
Proceeds from issuance of preferred common stock....................... -- 50,000 --
--------- -------- --------
Net cash provided by (used in) financing activities............. 45,440 73,534 (29,795)
--------- -------- --------
(Decrease) increase in cash and cash equivalents......................... (328) 734 (12,537)
Cash and cash equivalents at beginning of period......................... 556 -- 13,526
--------- -------- --------
Cash and cash equivalents at end of period............................... $ 228 $ 734 $ 989
========= ======== ========
Supplemental non-cash financing activities:
Redeemable preferred stock dividends................................... $ 957 $ 208 $ 116
========= ======== ========
Non-cash Transaction: During the period January 1 through July 31, 1997,
adjustments were made to goodwill due to changes in assumptions or
underestimates relating to certain preacquisition, contingent assets and
liabilities, respectively. Accordingly, goodwill was adjusted by $4,296, net of
income taxes.
The accompanying notes are an integral
part of the consolidated financial statements.
F-19
129
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
Reference is made elsewhere in the document which includes additional
information about the Company, its operations and its consolidated financial
statements, and contains a summary of major accounting policies followed by the
Company in preparation of its consolidated financial statements. These policies
were also followed in preparing the quarterly condensed consolidated financial
statements included herein.
The management of the Company believes that all adjustments necessary to
make a fair statement of the results in these interim periods have been made.
All adjustments reflected in the financial statements are of a normal recurring
nature except as described in the Notes to Condensed Consolidated Financial
Statements. Net results for the nine month period ended September 30, 1997 and
1996 are not necessarily indicative of the results to be expected for the full
year.
2. INCOME TAX
Income taxes are provided for financial reporting purposes based on
management's best estimate of the effective tax rate expected to be applicable
for the full calendar year.
3. ACQUISITION
On April 17, 1997, the Company, an affiliate and unrelated parties entered
into a joint venture agreement to acquire substantially all of the assets and
assume certain liabilities of Oak Mountain Energy Corporation and its affiliates
for approximately $40.3 million of which $10.0 million was provided by the
Company. (See historical financial statements included herein.)
The Company owns an undivided interest in each of the assets and is
proportionately liable for its share of each liability of Oak Mountain Energy
L.L.C. In connection with industry practice and purchase accounting, the Company
has presented their proportionate ownership, amounting to 32.0%, in Oak Mountain
Energy L.L.C. in the unaudited consolidated financial statements from the date
of acquisition. As described in the historical financial statements included
herein, total outstanding indebtedness and total liabilities amounted to $17.1
million and $20.8 million, respectively, at September 30, 1997.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if Oak Mountain Energy Corporation and its
affiliates had been acquired as of the beginning of the periods presented, after
including the impact of certain adjustments:
THE COMPANY PREDECESSOR
AUGUST 1, 1996 JANUARY 1
THE COMPANY THROUGH THROUGH
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 JULY 31, 1996
Total coal sales and related revenue.............. $244,240 $ 48,115 $ 173,491
============== ============== =========
Net loss.......................................... $ (5,739) $ (1,395) $ (1,028)
============== ============== =========
Net loss available to common stockholders......... $ (6,696) $ (1,603) $ (912)
============== ============== =========
4. STOCK BENEFIT PLANS
In February 1997, the Company's Board of Directors approved a Stock
Incentive Plan (the Plan) which provides for grants of restricted stock and
nonqualified, compensatory stock options to key employees of the Company of
affiliates. The Company accounts for the Plan in accordance with the
disclosure-only provision of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." As of September 30, 1997 no
restricted stock or compensatory stock options have been granted.
F-20
130
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SUBSIDIARY GUARANTEES
All of the guarantor subsidiaries are wholly owned and the securities are
guaranteed on a full, unconditional and joint and several basis by all of the
subsidiaries. The following tables summarize the financial position, results of
operations and cash flow for the Company and its guarantor and nonguarantor
subsidiaries as of and for the period ended September 30, 1997:
ANKER ANKER COAL
COAL GUARANTOR NONGUARANTOR CONSOLIDATING GROUP
GROUP SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
(IN THOUSANDS)
BALANCE SHEET
Total current assets.............. $ 303 $ 44,942 $ 1,468 $ 7,344 $ 54,057
Investment in subsidiaries........ 55,925 -- -- (55,925) --
Properties, net................... -- 156,175 20,030 -- 176,205
Other assets...................... -- 78,241 3,880 -- 82,121
------- -------- ------- -------- --------
Total assets............ $ 56,228 $279,358 $ 25,378 $ (48,581) $312,383
======= ======== ======= ======== ========
Total current liabilities......... (2,051) 32,715 6,622 7,344 44,630
Long-term debt.................... 13,000 109,362 8,374 -- 130,736
Intercompany payable, net......... (75,248) 78,967 (3,719) -- --
Other long-term liabilities....... 17,576 23,087 74 -- 40,737
Mandatorily redeemable preferred
stock........................... 22,182 -- -- -- 22,182
Total stockholders' equity........ 80,769 35,227 14,027 (55,925) 74,098
------- -------- ------- -------- --------
Total liabilities and
stockholders'
equity................ $ 56,228 $279,358 $ 25,378 $ (48,581) $312,383
======= ======== ======= ======== ========
STATEMENT OF OPERATIONS
Coal sales and related revenue.... -- 386,232 7,177 (152,591) 240,818
Cost of operations and operating
expenses........................ -- 381,879 7,927 (152,591) 237,215
------- -------- ------- -------- --------
Operating income................ -- 4,353 (750) -- 3,603
Other expense (income)............ -- 5,533 49 -- 5,582
------- -------- ------- -------- --------
Loss before income taxes and
extraordinary item........... -- (1,180) (799) -- (1,979)
Income tax benefit................ -- (330) (224) -- (554)
------- -------- ------- -------- --------
Net loss before extraordinary
item............................ -- (850) (575) -- (1,425)
Extraordinary item.............. -- 3,849 -- -- 3,849
------- -------- ------- -------- --------
Net loss........................ $ -- $ (4,699) $ (575) $ -- $ (5,274)
======= ======== ======= ======== ========
STATEMENT OF CASH FLOWS
Net cash provided by (used in)
operating activities............ $ -- $ 6,604 $ (4,492) $ -- $ 2,112
======= ======== ======= ======== ========
Net cash provided by (used in)
investing activities............ $ -- $(45,210) $ (2,670) $ -- $(47,880)
======= ======== ======= ======== ========
Net cash provided by financing
activities...................... $ -- $ 38,606 $ 6,834 $ -- $ 45,440
======= ======== ======= ======== ========
F-21
131
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. REFINANCING
On September 25, 1997, the Company issued $125,000,000 of 9 3/4% Series B
Senior Notes due 2007. In connection therewith, the Company repaid all
outstanding indebtedness together with accrued interest and fees associated with
such repayment under the Credit Facility. The Company incurred a loss on the
refinancing of approximately $3.9 million, net of income taxes of $1.5 million.
The loss has been classified as an extraordinary item in the condensed
consolidated financial statements.
7. ADJUSTMENTS TO GOODWILL
During the period January 1 through July 31, 1997, adjustments were made to
goodwill due to changes in assumptions or underestimates relating to certain
preacquisition, contingent assets and liabilities, respectively. Accordingly,
goodwill was adjusted by $4,296, net of income taxes.
8. SUBSEQUENT EVENTS
On October 12, 1997, John J. Faltis, the Company's President, Chief
Executive Officer and Chairman of the Board of Directors, was killed in a
helicopter accident in West Virginia. The Company has maintained key man life
insurance on the life of Mr. Faltis in the amount of $15 million. The Company
will classify this amount as other income when received.
F-22
132
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Anker Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Anker
Group, Inc. and Subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Anker Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 18, 1996
F-23
133
ANKER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
1995 1994
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 13,526 $ 1,345
Accounts receivable:
Trade............................................................ 31,323 27,531
Affiliates....................................................... 59 445
Inventories......................................................... 10,229 12,227
Current portion of long-term notes receivable....................... 1,125 679
Prepaid expenses and other.......................................... 2,740 3,779
Deferred income taxes............................................... 1,655 2,274
-------- --------
Total current assets........................................ 60,657 48,280
Properties:
Coal lands and mineral rights....................................... 66,590 64,237
Machinery and equipment............................................. 83,297 68,459
-------- --------
149,887 132,696
Less allowances for depreciation, depletion and amortization........ (52,062) (45,926)
-------- --------
97,825 86,770
Other assets:
Advance minimum royalties........................................... 13,141 11,420
Other intangible assets............................................. 1,406 2,577
Notes receivable.................................................... 9,385 9,364
Other assets........................................................ 4,612 2,961
-------- --------
Total assets................................................ $187,026 $161,372
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade............................................................ $ 12,273 $ 20,460
Affiliate........................................................ 583 --
Accrued expenses and other.......................................... 8,424 11,356
Current maturities of long-term debt................................ 11,778 3,888
-------- --------
Total current liabilities................................... 33,058 35,704
Long-term debt........................................................ 58,124 61,022
Other liabilities:
Accrued reclamation expenses........................................ 15,728 7,612
Deferred income taxes............................................... 8,229 6,740
Other............................................................... 721 2,209
-------- --------
Total liabilities..................................................... 115,860 113,287
Minority interest..................................................... 363 300
Subordinated debt..................................................... 5,000 5,000
Mandatorily redeemable preferred stock (Note 5)....................... 8,600 1,600
Stockholders' equity:
Preferred stock..................................................... 14,122 1,122
Common stock, $100 par value, authorized 500 shares each of Class A
and B; issued and outstanding 250 shares each of Class A and B... 50 50
Paid-in capital..................................................... 40,007 40,007
Retained earnings................................................... 3,024 6
-------- --------
Total stockholders' equity.................................. 57,203 41,185
-------- --------
Total liabilities and stockholders' equity.................. $187,026 $161,372
======== ========
The accompanying notes are an integral
part of the consolidated financial statements.
F-24
134
ANKER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
1995 1994
Coal sales and related revenue.......................................... $248,897 $227,499
Expenses:
Cost of operations and selling expenses............................... 221,315 203,174
Depreciation, depletion and amortization.............................. 11,732 12,083
General and administrative............................................ 6,843 5,938
-------- --------
Operating income.............................................. 9,007 6,304
Interest................................................................ 6,612 3,523
Other income, net....................................................... 3,108 1,621
-------- --------
Income before income taxes.................................... 5,503 4,402
Income tax expense...................................................... 2,270 1,940
-------- --------
Net income.................................................... 3,233 2,462
Less: redeemable preferred stock dividends.............................. 215 215
-------- --------
Net income available to common stockholders................... $ 3,018 $ 2,247
======== ========
The accompanying notes are an integral
part of the consolidated financial statements.
F-25
135
ANKER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
RETAINED
PREFERRED CAPITAL PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
Balance at January 1, 1994..................... $ 1,122 $50 $40,007 $ (2,241) $38,938
Net income..................................... -- -- -- 2,462 2,462
Redeemable preferred stock dividends........... -- -- -- (215) (215)
--------- ------- ------- -------- -------
Balance at December 31, 1994................... 1,122 50 40,007 6 41,185
Issuance of preferred stock.................... 13,000 -- -- -- 13,000
Net income..................................... -- -- -- 3,233 3,233
Redeemable preferred stock dividends........... -- -- -- (215) (215)
--------- ------- ------- -------- -------
Balance at December 31, 1995................... $ 14,122 $50 $40,007 $ 3,024 $57,203
======= ===== ======= ======= =======
The accompanying notes are an integral
part of the consolidated financial statements.
F-26
136
ANKER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
1995 1994
Operating activities:
Net income............................................................ $ 3,233 $ 2,462
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and depletion........................... 11,732 12,083
Minority interest.................................................. 63 300
Deferred income taxes.............................................. 2,108 1,897
Gain on sale of equipment.......................................... (955) (376)
Changes in operating assets and liabilities (net of assets and
liabilities acquired):
Accounts receivable.............................................. (3,406) (10,527)
Inventories, prepaid expenses and other.......................... 3,037 (5,939)
Advance minimum royalties........................................ (1,521) (1,989)
Accounts payable, accrued expenses and other..................... (11,009) 14,640
Other liabilities................................................ (1,114) 870
-------- -------
Net cash provided by operating activities..................... 2,168 13,421
-------- -------
Investing activities:
Acquisitions (net of $12,154 in 1994 for liabilities assumed)......... 15,000 (17,100)
Purchases of properties............................................... (9,353) (8,950)
Proceeds from sale of properties...................................... 2,232 681
Issuance of notes receivable.......................................... (744) (3,290)
Payments received on notes receivable................................. 586 79
Other assets.......................................................... (2,700) (3,854)
-------- -------
Net cash provided by (used in) investing activities........... 5,021 (32,434)
-------- -------
Financing activities:
Proceeds from revolving line of credit and long-term debt............. 111,394 93,724
Principal payments on revolving line of credit and long-term debt..... (106,402) (75,916)
-------- -------
Net cash provided by financing activities..................... 4,992 17,808
-------- -------
Increase (decrease) in cash and cash equivalents........................ 12,181 (1,205)
Cash and cash equivalents at beginning of year.......................... 1,345 2,550
-------- -------
Cash and cash equivalents at end of year................................ $ 13,526 $ 1,345
======== =======
Supplemental non-cash financing activities:
Redeemable preferred stock dividends.................................. $ 215 $ 215
======== =======
The accompanying notes are an integral
part of the consolidated financial statements.
F-27
137
ANKER GROUP, INC. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION:
At December 31, 1995, the outstanding common stock of Anker Group, Inc.
("Anker") is substantially owned by Anker Holding B.V., a foreign corporation,
with the President of Anker owning a minority interest.
The consolidated financial statements include the accounts of Anker and its
wholly and majority owned subsidiaries ("Company"). All significant intercompany
accounts and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid investments with original
purchase maturities of three months or less. Approximately $2,632,000 and
$1,190,000 of the cash and cash equivalents balance at December 31, 1995 and
1994, respectively, relates to the Company's venture capital subsidiary and is
restricted for the purchase of qualified investments in accordance with
requirements of the State of West Virginia venture capital laws.
INVENTORIES:
Inventories consist of coal and mining supplies. Coal inventories are
stated at the lower of average cost or market. Supply inventories, which are
stated at lower of cost (first in, first out) or market, amounted to $2,441,000
and $2,887,000 on December 31, 1995 and 1994, respectively.
PROPERTIES:
Properties are stated at cost. Provisions for depreciation are based upon
the estimated useful lives of the respective assets and are computed by the
straight-line method.
Coal lands represent the investment in land and related mineral and/or
surface rights, including mine development costs, which are being mined or will
be mined. Depletion of coal lands is computed on a tonnage basis calculated to
amortize its costs fully over the estimated recoverable reserves.
NONCOMPETE AGREEMENTS:
Noncompete agreements are amortized on a straight-line basis over the term
of the related agreements. Accumulated amortization amounted to $4,995,000 and
$3,637,000 at December 31, 1995 and 1994, respectively.
ACCRUED RECLAMATION EXPENSES:
Provisions to reclaim disturbed acreage remaining after production has been
completed and related mine closing costs are accrued during the life of the
mining operation or recorded in conjunction with the acquisition of related
properties. The provision is made at a rate per ton equivalent to the estimated
reclamation cost divided by the estimated tonnage to be mined.
INCOME TAXES:
Deferred income taxes are provided for temporary differences between
financial and tax accounting relating principally to certain accrued expenses,
depreciation, depletion, mine development, reclamation, investment tax credits
and alternative minimum taxes.
F-28
138
ANKER GROUP, INC. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. OPERATIONS
The Company's principal operations consist of mining and selling coal from
mineral rights which it owns and/or leases, as well as brokering coal from other
producers. In addition, the Company receives revenue for the disposal of ash.
Following is a summary of coal sales and related income:
DECEMBER 31,
---------------------
1995 1994
(IN THOUSANDS)
Coal mining revenue.................................... $194,348 $170,792
Brokered coal revenue.................................. 49,333 50,470
Ash disposal revenue................................... 5,216 6,237
-------- --------
$248,897 $227,499
======== ========
Included in coal mining revenue are sales to companies affiliated through
common ownership aggregating approximately $11,668,000 in 1995 and $7,232,000 in
1994.
The Company's coal mining revenue is substantially generated from long-term
coal supply contracts with domestic utilities throughout the United States.
These contracts range from one to twenty years with fixed base prices which
change based on certain industry and government indices. Receivables generally
are due within 30 to 45 days. The Company performs credit evaluations on all new
customers, and credit losses have historically been minimal.
In 1995 and 1994, other income-net includes approximately $1,500,000 and
$4,300,000, respectively, related to the modification of long-term contracts.
The amount in 1994 represents the present value, discounted at 8% of the
$500,000 annual cash payments to be received in years 1995 through 2004. At
December 31, 1995 and 1994, receivables of approximately $3,585,000 and
$3,310,000 are recorded which are net of unearned discounts of $1,415,000 and
$1,690,000, respectively.
3. ACQUISITIONS
On December 30, 1995, the Company acquired coal reserves and cash from
Phillips Resources, Inc. through the issuance of mandatorily redeemable
preferred stock valued at $7,000,000 based on estimated cash flows for dividend
and mandatory redemption payments (see Note 5) discounted at approximately 10%.
Also, on December 30, 1995, the Company acquired the outstanding stock of Upshur
Property, Inc. ("Upshur") through the issuance of preferred stock valued at
$13,000,000. The net assets of Upshur consist of a preparation plant, machinery
and cash less a reclamation liability. The effects of these acquisitions have
been excluded from the consolidated statement of cash flows, except for the $15
million of cash acquired in connection with the transactions.
Effective January 1, 1994, the Company acquired the outstanding stock of
Marine Coal Sales Company ("Marine") for $2,700,000 in cash. Marine's activities
consist primarily of brokering coal in the midwest United States.
Through various transactions beginning March 7, 1994, and culminating
August 10, 1994, the Company acquired, through a newly formed subsidiary, 95% of
the outstanding stock of Beckley Smokeless Limited Liability Company, a start-up
deep mining operation, for $4,900,000.
F-29
139
ANKER GROUP, INC. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 28, 1994, the Company acquired certain coal reserves and leases
from Reserve Coal Properties Company for approximately $2,700,000.
On October 31, 1994, the Company acquired mineral rights and other related
mining assets from Westmoreland Coal Company for $3,800,000 and assumed a
reclamation liability estimated at $1,500,000.
On November 10, 1994, the Company acquired certain coal reserves and leases
from the Endres Company and two individuals for approximately $3,000,000.
These acquisitions have been accounted for using the purchase method of
accounting with results of operations of the acquired entities included in the
Company's consolidated statement of operations from the respective date of
acquisition.
4. LONG-TERM DEBT
DECEMBER 31,
-------------------
1995 1994
(IN THOUSANDS)
Revolving note payable to bank................................... $57,000 $45,205
Note payable to bank, due in monthly principal installments of
$243,435 plus interest at 7.51% through January 5, 1999,
secured by property and equipment.............................. 9,007 11,928
Note payable to bank, due in monthly principal installments of
$71,430 with a balloon payment of $1,571,370 due on June 1,
1998, plus interest at various rate options chosen by the
Company (8.07% at December 31, 1995), secured by property and
equipment...................................................... 3,714 4,500
Note payable to a foreign affiliated company, unsecured, due
January 31, 1996, plus interest at the prime rate (8.5% at
December 31, 1994) refinanced through a revolving note payable
to a bank in March 1995........................................ -- 3,000
Miscellaneous notes payable...................................... 181 277
------- -------
69,902 64,910
Less current maturities of long-term debt........................ 11,778 3,888
------- -------
$58,124 $61,022
======= =======
A description of the terms of the revolving note payable to a bank is as
follows:
- Revolving credit loan with a total availability of $30,000,000 subject
to a borrowing base formula, expiring March 30, 1998. At December 31,
1995 and 1994, $12,000,000 and $205,000, respectively, was outstanding.
- Reducing revolving credit loan with a total availability of
$45,000,000 reducing by $8,000,000 beginning in 1996, $-0- in 1997,
$6,500,000 in 1998, $7,000,000 in 1999 and $23,500,000 in 2000. At
December 31, 1995 and 1994, $45,000,000 was outstanding.
- A $20 million standby line of credit becomes available on March 30,
1996 if the Company achieves certain financial performance and may only
be used for acquisitions. Borrowings under the line of credit have a
term of five years beginning at the time of each borrowing, with equal
quarterly principal repayments. All outstanding borrowings are due
March 31, 2000.
Interest on the revolving note payable is charged at various interest
options periodically chosen by the Company (ranging from 8.16% to 8.07% at
December 31, 1995 and expiring on January 11, 1996 and May 6, 1996,
respectively). Equipment, property and working capital is pledged as security.
In connection with the revolving note payable and both notes payable to a
bank, the Company is required to maintain certain financial ratios consistent
with these types of financing.
F-30
140
ANKER GROUP, INC. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future required principal payments on long-term debt are: $11,778,000 in
1996; $3,778,000 in 1997; $23,603,000 in 1998; $7,243,000 in 1999; and
$23,500,000 in 2000.
Under the terms of the bank debt agreements, the Class A Mandatorily
Redeemable Preferred Stock (Note 5), which is with a foreign affiliate may be
repaid provided that such payment is part of a transaction in which additional
preferred stock and/or loans are made to the Company in amounts at least equal
to the face value of the preferred stock and are subordinated to the bank debt.
The subordinated debt, which is with a foreign affiliate, is due December 31,
1996 and bears interest at a floating rate (8.0% at December 31, 1995), based on
the lender's borrowing rate, and is secured by certain equipment and property.
Under the bank debt agreements, the subordinated debt may not be repaid until
all amounts outstanding under the bank debt agreements have been repaid and is
therefore classified as long term as of December 31, 1995.
Total interest paid by the Company was $6,305,000 and $3,701,000 for the
years ended December 31, 1995 and 1994, respectively.
5. PREFERRED STOCK
The following is a description of the terms of outstanding mandatorily
redeemable and other preferred stock:
DECEMBER 31,
------------------
1995 1994
(IN THOUSANDS)
Mandatorily Redeemable Preferred Stock:
Class A, authorized 200 shares; issued and outstanding
160 shares; nonvoting, 9.9% cumulative dividend,
mandatorily redeemable at $10,000 per share on
December 31, 1996, subject to restrictions under the
revolving note payable (Note 4)...................... $ 1,600 $1,600
Class D, par value $7,000, authorized 1,000 shares;
issued and outstanding 1,000 shares; nonvoting, 2.5%
cumulative dividend, reducing to 1.5% after January
1, 2011, calculated on the gross realization from
certain coal sales, mandatorily redeemable beginning
December 31, 2006 at $1,400,000 per year through
December 31, 2010 if aggregate dividends paid on or
before December 31, 2005 are not $5,000,000 or more,
otherwise mandatorily redeemable beginning December
31, 2011 at $1,400,000 per year through December 31,
2015................................................. 7,000 --
Preferred Stock:
Class B, par value $2,500, authorized 10,000 shares;
issued and outstanding 449 shares; nonvoting, 5.0%
cumulative dividend.................................. 1,122 1,122
Class C, par value $13,000, authorized 1,000 shares;
issued and outstanding 1,000 shares; nonvoting,
cumulative dividend payment calculated on 4.0% of the
gross realization from certain coal sales, redeemable
at par value upon the event of liquidation or other
action described in the preferred stock agreement.... 13,000 --
F-31
141
ANKER GROUP, INC. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The reconciliation of the federal statutory rate to the consolidated
effective rate is as follows:
DECEMBER 31,
---------------
1995 1994
(IN THOUSANDS)
Federal statutory tax rate................................... 34.0% 34.0%
Permanent differences........................................ 8.0 10.7
Other........................................................ (0.7) (0.6)
---- ----
41.3% 44.1%
==== ====
The components of net deferred tax assets and liabilities are as follows:
DECEMBER 31,
-------------------
1995 1994
(IN THOUSANDS)
Deferred tax asset (liabilities)--current:
Net operating loss carryforward........................ $ 1,305 --
Other current assets................................... 22 --
Other current liabilities.............................. 228 $ 1,872
Investment tax credits................................. 100 402
------- -------
$ 1,655 $ 2,274
======= =======
Deferred tax assets (liabilities) -- noncurrent:
Depreciation, depletion and amortization............... $(7,422) $(6,263)
Other long-term assets................................. (2,955) (2,316)
Other long-term liabilities............................ -- 311
Alternative minimum tax................................ 2,958 2,485
Investment tax credits................................. 352 491
Accrued reclamation.................................... 1,193 1,193
Acquisition assets and liabilities..................... (2,355) (2,641)
------- -------
$(8,229) $(6,740)
======= =======
At December 31, 1995, the Company has cumulative alternative minimum tax
credits of $2,958,000 which may be carried forward indefinitely, and investment
tax credits of $452,000 which expire at various dates through the year 2000. For
the year ended December 31, 1995, the Company incurred a net operating loss of
$3,267,000 for tax purposes to be utilized against future federal and state
income taxes. These amounts are recorded as deferred tax assets.
Total income taxes paid by the Company were $263,000 and $738,000 for the
years ended December 31, 1995 and 1994, respectively.
7. RETIREMENT BENEFITS
The Company has a contributory defined contribution retirement plan
covering all employees who meet eligibility requirements. The plan provides for
employer contributions representing 5% of compensation. The Company
contributions amounted to $1,034,000 and $1,060,000 for the years ended December
31, 1995 and 1994, respectively.
The Company also has a 401(k) savings plan which is a contributory defined
contribution plan for all employees who meet eligibility requirements. The Plan
provides for mandatory employer contributions to match 50% of employee
contributions up to a maximum of 2% of each participant's compensation. In
addition,
F-32
142
ANKER GROUP, INC. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company may make discretionary contributions up to 5% of employee
compensation. The Company contributions amounted to $351,000 and $372,000 for
the years ended December 31, 1995 and 1994, respectively.
The Company also has a 401(h) savings plan for the purpose of providing
retiree health care benefits. The plan is a defined contribution plan for all
employees who meet eligibility requirements and provides for mandatory employer
contributions between .237% and 1.66% of each participant's compensation, based
on years of service. The Company contributions amounted to $287,000 and $265,000
for the years ended December 31, 1995 and 1994, respectively.
8. STATE TAX CREDITS
The Company has Business Investment and Jobs Expansion Tax Credits which
are available to reduce certain taxes payable to West Virginia. The Company
recorded credits amounting to $1,165,000 and $1,103,000 for the years ended
December 31, 1995 and 1994, respectively, and the Company expects to realize
similar tax credits for the next 12 years.
In December 1993, the Company formed and qualified a venture capital
subsidiary with the State of West Virginia for the purpose of investing in
emerging businesses. During 1995, the Company made an additional contribution to
the capital base of the subsidiary. This entitled the Company to a tax credit of
$1,250,000 which reduced severance tax in 1995.
9. COMMITMENTS AND CONTINGENCIES
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT:
Current and projected operating deficits in the United Mine Workers of
America Benefit Trust Funds (the "Funds") resulted in the Coal Industry Retiree
Health Benefit Act of 1992 (the "Act"). The Act created a multiemployer benefit
plan called the United Mine Workers of America Combined Benefit Fund (the
"Combined Fund"). The Combined Fund provides medical and death benefits for all
beneficiaries of the earlier trusts who were actually receiving benefits as of
July 20, 1992. The Act provides for the assignment of beneficiaries to former
employers and the allocation of any unassigned beneficiaries (referred to as
orphans) to companies using a formula included in the legislation. The Act
requires that responsibility for funding those payments be assigned to companies
that had been signatories to the National Bituminous Coal Wage Agreement
("Agreement"). Although the Company does not currently have any operations which
are signatory to the Agreement, it is subject to certain liabilities as a result
of being signatory to a prior agreement.
A company's annual cost of benefits is based on the number of beneficiaries
assigned to the company plus a percentage of the cost of unassigned
beneficiaries, which is a function of the number of orphans times the
per-beneficiary premium. The Company's annual cost for 1995 was approximately
$450,000 and, during 1995, the Company was assigned certain additional
beneficiaries under the Act which will result in total cost of approximately
$1,388,000 in 1996, based on some retroactive assessments. Thereafter, the
Company's annual cost relating to the Act is approximately $478,000. The Company
has taken action to attempt to reduce this assessment and accounts for the cost
incurred relating to this Act on a pay-as-you-go basis.
ADVANCE MINIMUM ROYALTIES:
Tonnage royalty payments on leased properties range from 2% to 10% of the
realization. The leases require minimum royalty payments aggregating
approximately: $1,678,000 in 1996; $1,794,000 in 1997; $1,789,000 in 1998;
$1,784,000 in 1999 and $1,791,000 in 2000.
In connection with a prior year acquisition of assets and assumption of
certain liabilities, the Company entered into a royalty agreement requiring
minimum royalty payments of $200,000 per year for the next ten years. A deferred
credit with a balance of $721,000 at December 31, 1995 is recorded in other
long-term
F-33
143
ANKER GROUP, INC. AND SUBSIDIARIES
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liabilities related to the royalty agreement representing the net present value
of the payments discounted at 12.0%.
OPERATING LEASES:
The Company has office and mining equipment operating lease agreements with
minimum annual rentals for the next five years of approximately $7,622,000 in
1996; $4,101,000 in 1997; $2,489,000 in 1998; $1,206,000 in 1999; and $499,000
in 2000. Total rent expense approximated $8,213,000 in 1995 and $7,988,000 in
1994.
CONTINGENCIES:
In February 1995, the Company lost its final appeal on a lawsuit related to
an alleged agreement to purchase coal and paid $3,731,000 representing total
damages and interest. This amount is included in accrued expenses and other on
the consolidated balance sheet and in other income-net on the consolidated
statement of operations for the year ended December 31, 1994.
During 1995, the Company settled a severance tax appeal with the State of
West Virginia for approximately $507,000. In prior years, a liability of
$1,375,000 was recorded. The reduction in the liability is recorded as a
reduction of cost of operations in 1995.
Additionally, the Company is a party to various lawsuits and claims
incidental to its business. While it is not possible to predict accurately the
outcome of these matters, management believes that none of these actions will
have a material effect on the Company's consolidated financial position.
Upon the occurrence of certain events, Anker Holding B.V. or the Company
has the obligation to buy back current outstanding common stock of the President
and any additional shares obtained through the exercise of outstanding stock
options. The buy-back price escalates annually based on a formula defined in the
shareholder agreement ("Agreement"). In the event there is a change in control
of Anker Group, Inc., such obligation is eliminated under the Agreement.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, "Disclosures About
Fair Value of Financial Instruments" requires disclosure of information
regarding the fair value of financial instruments for which it is practicable to
estimate and value, whether or not such value is recognized in the balance
sheet.
The carrying amounts of cash and cash equivalents and long-term debt
approximates fair value. The fair value of the Company's borrowings under its
revolving and other notes payable to a bank was estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
It was not practicable to estimate the fair value of the Company's notes
receivable without incurring excessive costs. The notes carry interest rates
applicable to the nature of the transaction and the borrower. The carrying
amount ($7,090,000) represents the outstanding balance, which management
believes is not impaired.
F-34
144
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Oak Mountain Energy
Corporation and Affiliates:
We have audited the accompanying combined balance sheet of Oak Mountain
Energy Corporation and Affiliates (Predecessor) as of December 31, 1996 and the
related combined statements of operations, stockholders' equity and cash flows
for the year then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Oak
Mountain Energy Corporation and Affiliates as of December 31, 1996, the combined
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
August 8, 1997
F-35
145
OAK MOUNTAIN ENERGY, L.L.C. AND PREDECESSOR
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(IN THOUSANDS)
PREDECESSOR THE COMPANY
------------ -------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 276 $ 29
Accounts receivable:
Trade......................................................... 1,513 1,647
Others........................................................ 9 428
Inventories...................................................... 951 824
Prepaid expenses and other....................................... 147 564
------- -------
Total current assets..................................... 2,896 3,492
Properties:
Coal lands and mineral rights.................................... 8,408 26,245
Machinery and equipment.......................................... 18,360 11,317
------- -------
26,768 37,562
Less allowances for depreciation, depletion and amortization..... 6,813 963
------- -------
19,955 36,599
Other assets:
Goodwill, net of accumulated amortization of $29 in 1997......... -- 7,352
Intangibles and other assets, net of accumulated amortization of
$40 in 1996 and $33 in 1997................................... 90 1,229
------- -------
Total assets............................................. $ 22,941 $48,672
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. 2,009 3,955
Accrued expenses and other....................................... 1,815 2,062
Current maturities of long-term debt............................. 9,552 11,037
------- -------
Total current liabilities................................ 13,376 17,054
Long-term debt..................................................... 9,027 3,508
Accrued reclamation expenses....................................... 218 229
------- -------
Total liabilities........................................ 22,621 20,791
Stockholders' equity:
Common stock..................................................... 6 --
Paid-in capital.................................................. 644 31,278
Notes receivable -- members...................................... -- (1,277)
Treasury stock................................................... (245) --
Accumulated deficit.............................................. (85) (2,120)
------- -------
Total stockholders' equity............................... 320 27,881
------- -------
Total liabilities and stockholders' equity............... $ 22,941 $48,672
======= =======
The accompanying notes are an integral
part of the combined financial statements.
F-36
146
OAK MOUNTAIN ENERGY, L.L.C. AND PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
---------------------------
PREDECESSOR THE COMPANY
-------------------------- -------------
FOR THE PERIOD PERIOD
YEAR JANUARY 1 APRIL 17
ENDED THROUGH THROUGH
DECEMBER 31, APRIL 16, SEPTEMBER 30,
1996 1997 1997
Coal sales and related revenue......................... $ 31,748 $10,693 $14,350
Expenses:
Cost of operations and selling expenses.............. 27,834 11,233 13,774
Depreciation, depletion and amortization............. 3,636 1,314 1,670
General and administrative........................... 1,300 504 506
-------- -------- --------
Operating loss............................... (1,022) (2,358) (1,600)
Interest............................................... 1,458 546 520
Other income, net...................................... 118 18 --
-------- -------- --------
Net loss..................................... $ (2,362) $(2,886) $(2,120)
======== ======== ========
The accompanying notes are an integral
part of the combined financial statements.
F-37
147
PREDECESSOR TO OAK MOUNTAIN ENERGY, L.L.C.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE PERIOD JANUARY 1, 1997 THROUGH APRIL 16, 1997
(IN THOUSANDS)
COMMON PAID-IN TREASURY ACCUMULATED
STOCK CAPITAL STOCK DEFICIT TOTAL
Balance at December 31, 1995............. $6 $ 644 $ (245) $ 2,277 $ 2,682
Net loss................................. -- -- -- (2,362) (2,362)
--- ---- ----- ------- -------
Balance at December 31, 1996............. 6 644 (245) (85) 320
Net loss (unaudited)..................... -- -- -- (2,886) (2,886)
--- ---- ----- ------- -------
Balance at April 16, 1997 (unaudited).... $6 $ 644 $ (245) $(2,971) $(2,566)
=== ==== ===== ======= =======
The accompanying notes are an integral
part of the combined financial statements.
F-38
148
OAK MOUNTAIN ENERGY, L.L.C.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE PERIOD APRIL 17, 1997 THROUGH SEPTEMBER 30, 1997
(IN THOUSANDS)
NOTES
PAID-IN RECEIVABLE ACCUMULATED
CAPITAL MEMBERS DEFICIT TOTAL
Balance at April 17, 1997........................ -- -- -- --
Initial capitalization........................... $31,278 $ (1,277) -- $30,001
Net loss......................................... -- -- $(2,120) (2,120)
------- ------- ------- -------
Balance at September 30, 1997.................... $31,278 $ (1,277) $(2,120) $27,881
======= ======= ======= =======
The accompanying notes are an integral
part of the combined financial statements.
F-39
149
OAK MOUNTAIN ENERGY, L.L.C. AND PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
-------------------------
THE COMPANY
PREDECESSOR -----------
-------------------------- PERIOD
PERIOD APRIL 17
FOR THE JANUARY 1 THROUGH
YEAR ENDED THROUGH SEPTEMBER
DECEMBER 31, APRIL 16, 30,
1996 1997 1997
Operating activities:
Net loss.............................................. $ (2,362) $(2,886) $ (2,120)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation, depletion and amortization........... 3,636 1,314 1,670
Gain on sale of properties......................... (77) (49) --
Changes in operating assets and liabilities (net of
assets and liabilities acquired):
Accounts receivable.............................. 129 (634) 382
Inventories, prepaid expenses and other.......... (667) 118 (411)
Accounts payable, accrued expenses and other..... 1,413 1,206 1,509
-------- ------- --------
Net cash provided by (used in) operating
activities.................................. 2,072 (931) 1,030
-------- ------- --------
Investing activities:
Purchase of Predecessor, including related acquisition
cost of $577, net of cash acquired of $367 and
liabilities and seller note assumed of $27,350..... -- -- (13,210)
Purchases of properties............................... (11,730) (514) (8,829)
Proceeds from sale of properties...................... 100 65 --
Intangible assets..................................... (68) (10) (154)
Other assets.......................................... 19 (8) (164)
-------- ------- --------
Net cash used in investing activities......... (11,679) (467) (22,357)
-------- ------- --------
Financing activities:
Proceeds from long-term debt.......................... 11,876 2,400 15,200
Principal payments on long-term debt.................. (2,929) (911) (23,845)
Proceeds from issuance of common stock................ 3 -- --
Proceeds from issuance of member units................ -- -- 30,001
-------- ------- --------
Net cash provided by financing activities..... 8,950 1,489 21,356
-------- ------- --------
(Decrease) increase in cash and cash equivalents........ (657) 91 29
Cash and cash equivalents at beginning of period........ 933 276 --
-------- ------- --------
Cash and cash equivalents at end of period.............. $ 276 $ 367 $ 29
======== ======= ========
Supplemental information:
Cash paid for interest................................ $ 1,255 $ 345 $ 1,060
======== ======= ========
Supplemental non-cash financing activities:
Acquisition of equipment under capital leases......... $ 793 -- --
======== ======= ========
Noncash Transactions: During 1997, the Company entered into various sale
leaseback agreements whereby they sold certain fixed assets and in exchange the
buyer assumed the related debt and accrued interest on the assets. The realized
loss was recorded as an adjustment to goodwill.
The accompanying notes are an integral
part of the combined financial statements.
F-40
150
OAK MOUNTAIN ENERGY, L.L.C. AND PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Oak Mountain Energy, L.L.C. (the Company or Companies), is a newly formed
joint venture used to acquire the assets of Oak Mountain Energy Corporation and
its Affiliates (Predecessor). The acquisition was effective on April 17, 1997
and was accounted for using the purchase method of accounting as prescribed
under Accounting Principles Bulletin No. 16, "Accounting for Business
Combinations." The allocation of the purchase price related to the acquisition
was as follows (in thousands):
Properties......................................................... $36,182
Current assets..................................................... 4,168
-------
40,350
Liabilities and seller note assumed................................ 27,350
-------
Cash paid.......................................................... 13,000
Less cash acquired................................................. 367
-------
Net cash paid for acquisition...................................... $12,633
=======
The Company's principal operations, which are located in Alabama, consist
of mining and selling coal from mineral rights which it owns and/or leases.
Sales to one customer represented 66% of total revenue for the year ended
December 31, 1996, 70% for the period January 1, 1997 through April 16, 1997 and
85% for the period April 17, 1997 through September 30, 1997.
The accompanying combined financial statements present the Company's
unaudited combined operations and cash flows from the acquisition effective date
of April 17, 1997 through September 30, 1997 and the unaudited combined
operations and cash flows of the Predecessor for the period January 1, 1997
through April 16, 1997. These unaudited combined financial statements, in the
opinion of management, have been prepared on the same basis as the audited
combined financial statements and include all significant adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the results of the interim periods. The data disclosed in these
notes to the combined financial statements for these periods are also unaudited.
Operating results for the interim periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION:
The accompanying combined financial statements as of December 31, 1996 and
for the period January 1, 1997 through April 16, 1997 present the accounts of
the Predecessor (see Note 9). The combined financial statements for the period
April 17, 1997 (date of acquisition) through September 30, 1997 present the
combined financial statements of the Company. The financial statements present
the combined operations due to common ownership. All significant intercompany
accounts and transactions have been eliminated in combination.
REVENUE RECOGNITION:
The Company recognizes revenue either upon shipment or customer receipt of
coal, based on contractual terms. The Company's coal mining revenue is
substantially generated from long-term coal supply contracts with domestic
utilities principally in Alabama. These contracts typically are one-year
renewable with fixed based prices which change based on certain industry and
government indices. Receivables generally are due within 30 to 45 days. The
Company performs credit evaluations on all new customers, and credit losses have
historically been minimal.
F-41
151
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid investments with original
purchase maturities of three months or less.
INVENTORIES:
Inventories consist of coal and mining supplies. Coal inventories are
stated at the lower of average cost or market. Supply inventories are stated at
the lower of cost (first in, first out) or market.
PROPERTIES:
Properties are recorded at cost, which includes the allocated purchase
price for the acquisition described in Note 1. Provisions for depreciation are
based upon the estimated useful lives of the respective assets and are computed
by the straight-line method.
Coal lands represent the investment in land and related mineral and/or
surface rights, including capitalized mine development costs, which are being
mined or will be mined. Mine development costs of 9.5 million at September 30,
1997 and $8 million at December 31, 1996 represent expenditures incurred, net of
revenue received, in development of coal mines until the principal operating
activity becomes coal production. Depletion and amortization of coal lands is
computed on a tonnage basis calculated to amortize its costs fully over the
estimated recoverable reserves.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Intangible assets consist of the excess of the purchase price over the fair
value of the net assets acquired (goodwill), organization costs, and debt
issuance costs, which are being amortized on the straight-line method over the
useful lives of these assets. Goodwill, principally related to the acquisition
described in Note 1, is being amortized over 30 years in conjunction with the
expected useful life of existing mineral rights. The Company periodically
evaluates the carrying value of goodwill based on whether the goodwill is
recoverable from expected future undiscounted operating cash flows.
Additionally, the Company periodically reviews the carrying value of other
intangible assets and will recognize impairments when the expected future
operating cash flow is less than their carrying value.
ACCRUED RECLAMATION EXPENSES:
Provisions to reclaim disturbed acreage remaining after production has been
completed and related mine closing costs are accrued during the life of the
mining operation or recorded in conjunction with the acquisition of related
properties. The annual provision is made at a rate per ton equivalent to the
estimated reclamation cost divided by the estimated tonnage to be mined.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements.
Estimates also affect the amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
INCOME TAX STATUS:
The Company and its Predecessor are not subject to federal and state income
taxes. Accordingly, net income or loss are allocated to the members in
proportion to their income and loss rates of participation.
F-42
152
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. RELATED PARTY TRANSACTIONS
Interest expense includes interest on notes receivable to stockholders
amounting to $377,589 in 1996 and $107,138 for the period January 1, 1997
through April 16, 1997.
As compensation for personal guarantees on loans and letters of credit, the
Company paid the stockholders a fee of 1.5% of the outstanding balances. Such
fees amounted to $110,768 for the year ended December 31, 1996 and $28,610 for
the period January 1, 1997 through April 16, 1997.
Accrued expenses and other includes $211,953 at 1996 and $276,203 at April
16, 1997, related to the above referenced interest and fees.
Accounts payable includes $834,000 of financing costs payable to a
shareholder. In addition, general and administrative expenses include $84,000
for management fees payable to the shareholders.
4. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1996 and
September 30, 1997:
DECEMBER 31, SEPTEMBER 30,
1996 1997
(UNAUDITED)
------------------------------
(IN THOUSANDS)
Equipment notes payable(A)......................... $ 2,121 $ 52
Notes payable to shareholders(B)................... 11,823 --
Line of credit(C).................................. 500 --
Term loan(D)....................................... 2,000 --
Credit agreement(E)................................ -- 9,300
Other notes payable(F)............................. 95 5,131
Capital leases(G).................................. 2,040 62
------- -------
18,579 14,545
Less: current maturities of long-term debt......... (9,552) (11,037)
------- -------
$ 9,027 $ 3,508
======= =======
- ------------------------------
(A) Represents a note payable, which bears interest at a rate of 7.92% and is
payable in June 1998.
(B) Note payable to shareholder in the amount of $7.5 million. Interest only is
payable quarterly at the prime rate (8.25% at December 31, 1996) plus 1%.
Principal is payable upon maturity in February 1999. In connection with the
acquisition described in Note 1, the remaining outstanding principal was
repaid on April 16, 1997.
Three notes payable to stockholders. The notes bear interest at prime rate
(8.25% at December 31, 1996) and are payable in August 1997. These notes
are collateralized by the Company's current and future accounts
receivable, inventory and equipment.
(C) Line of credit with a bank which provides for borrowings of up to $3 million
based on specified levels of accounts receivable. Interest is payable
monthly at the bank's prime rate (8.25% at December 31, 1996) plus 1%. The
commitments entered into under the agreement expired on March 31, 1997.
(D) Term loan in the amount of $2 million. Interest only is payable monthly at
the bank's prime rate (8.25% at December 31, 1996) and the principal is
payable in March 1997. This loan was collateralized by the personal assets
of the stockholders.
(E) The Company's credit agreement provides for a revolving credit facility and
a term loan amounting to $3 million and $27 million, respectively.
Borrowings under the credit agreement bear interest at the LIBOR rate
(5.66% at September 30, 1997) plus 2% until April 1999. From that time
until the
F-43
153
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
expiration of the agreement, April 2004, borrowings will bear interest at a
variable rate based on the Company's option of the bank's prime rate or the
LIBOR rates based upon the ratio of funded debt to earnings before income,
depreciation, depletion and amortization. The agreement is subject to a
variable monthly commitment fee on the unused portion of the available
borrowings.
(F) A note payable with an original amount of $4,035,604. The Company has
approximately $1,923,750 outstanding at September 30, 1997. The note bears
interest at the prime rate (8.5% at September 30, 1997) plus 1%. A
principal payment of $961,875 is due on December 1, 1997, plus interest
accrued. On December 1, 1998, the remaining principal balance together with
all accrued and unpaid interest is due.
A note payable with an original amount of $3,500,000. The Company has
approximately $3,208,335 outstanding at September 30, 1997. The note bears
interest at the prime rate (8.5% at September 30, 1997). Principal and
interest payments are due in monthly installments over a five year period
ending on April 30, 2002.
Four notes for various equipment. The notes bear interest from 8% to 11.5%
and principal and interest payments were due monthly over periods ending
at various dates through March 2000. The remaining balance on these notes
was paid during 1997.
(G) The Company has one capital lease outstanding at September 30, 1997. The
lease bears interest of 10.45% annually. Principal and interest payments are
due monthly through December, 1999.
The equipment notes and capital leases are collateralized by the related
equipment. The credit agreement is collateralized by substantially all of the
Company's present and future assets.
The credit agreement contains covenants which require the Company to
maintain certain levels of income before interest, depreciation, depletion, and
amortization maintain a certain minimum net worth, maintain a minimum level of
production tons, limit capital expenditures, and not exceed a maximum level of
production costs per ton.
As of September 30, 1997, the Company is in default of various covenants of
the credit agreement. The Company has requested waivers of the covenant
violations and is in the process of renegotiating certain covenants.
Accordingly, the entire balance outstanding on the credit agreement at September
30, 1997 has been classified as current on the balance sheet.
Future required principal payments at September 30, 1997 are:
October 1, 1997 - December 31,
1997............................................................ $10,459,882
1998............................................................ 1,722,902
1999............................................................ 729,220
2000............................................................ 700,000
2001............................................................ 700,000
2002............................................................ 233,333
A financial institution has issued four letters of credit totaling $709,011
on the Companies' behalf. As of September 30, 1997 and December 31, 1996 no
amounts were outstanding on these letters of credit. The collateral consists of
the personal guarantee of the Predecessor's majority stockholder at December 31,
1996 and the guarantee of the Companies.
5. PROFIT SHARING PLAN
The Companies have a deferred compensation 401(k) plan for the benefit of
their employees. All employees who have obtained one year of service and worked
1,000 hours are eligible to participate.
F-44
154
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Companies' contributions to the plan are entirely voluntary. The
Companies' contributions for any plan year are allocated to all eligible
employees based upon the ratio of the employee's compensation to the
compensation of all eligible employees. During the periods presented the
Companies made no contribution to the plan.
6. ROYALTIES
The Predecessor and the Company operate under royalty agreements. Royalty
costs were $2,365,525 for 1996, $642,346 for the period January 1, 1997 through
April 16, 1997 and $1,056,871 for the period April 17, 1997 through September
30, 1997. Several of these royalty agreements require future minimum royalty
payments aggregating approximately: $129,000 for the period October 1, 1997
through December 31, 1997, $548,000 in 1998, $612,000 in 1999, $537,000 in 2000,
$352,000 in 2001, $432,000 in 2002 and $2,291,000 in years thereafter.
7. OPERATING LEASES
The Companies have various noncancelable leases for equipment and
facilities which are classified as operating leases. Rent expense under these
noncancelable leases was $821,000 in 1996, $382,000 for the period January 1,
1997 through April 16, 1997 and $1,160,751 for the period April 17, 1997 through
September 30, 1997.
The approximate remaining annual minimum lease payments under the
noncancelable operating leases existing as of September 30, 1997 are:
October 1, 1997 - December 31,
1997............................................................ $ 943,931
1998............................................................ 3,945,454
1999............................................................ 3,284,858
2000............................................................ 1,716,818
2001............................................................ 204,873
-----------
$10,095,934
===========
8. COMMON STOCK
Common stock of the Predecessor at December 31, 1996 is comprised of the
following:
PAR SHARES SHARES SHARES
VALUE AUTHORIZED ISSUED OUTSTANDING
Oak Mountain Energy Corporation........ $ 1 1,000 1,000 1,000
Boone Resources, Inc................... 1 5,000 1,000 625
Kodiak Coal, Inc....................... 1 1,000 1,000 1,000
Coal Handling and Processing, Inc...... 1 1,000 1,000 1,000
Cahaba Coal Engineering and Land
Surveying, Inc....................... 1 1,000 1,000 1,000
Mountaineer Management, Inc............ 1 1,000 1,000 1,000
Boone Resources, Inc. includes 375 shares of stock held in treasury at
cost.
F-45
155
ANNEX A-1
GLOSSARY OF SELECTED TERMS
BTU-BRITISH THERMAL UNIT. A measure of the energy required to raise the
temperature of one pound of water one degree Fahrenheit.
COAL SEAM. Coal deposits occur in layers. Each such layer is called a
"seam."
COKE. A hard, dry carbon substance produced by heating coal to a very high
temperature in the absence of air. Coke is used in the manufacture of iron and
steel. Its production results in a number of useful byproducts.
COMPLIANCE COAL. Coal which, when burned, emits less than 1.2 pounds of
sulfur dioxide per million Btu.
DEEP MINE. An underground coal mine.
DRIFT MINE. A coal mine entered directly through a horizontal opening
mined into the side of a hill or mountain.
INDICATED RESERVES. Coal tonnages computed by projection of data from
available seam measurements for a distance beyond coal classed as measured. The
assurance, although lower than for measured, is high enough to assume continuity
between points of measurement. The maximum acceptable distance for projection of
indicated tonnage is 1/2 to 3/4 mile from points of observation. Further
exploration is necessary to place these reserves in a measured category.
MEASURED RESERVES. Tonnages computed from seam measurements as observed
and recorded in drill holes, mine workings, and/or seam outcrop prospect
openings. The sites for measurement are so closely spaced and the geologic
character so well-defined that the thickness, areal extent, size, shape and
depth of coal are well-established. The maximum acceptable distance for
projection from seam data points varies with the geologic nature of the coal
seam being studied, but generally a radius of 1/4 mile is recognized as the
standard.
METALLURGICAL COAL. The various grades of coal suitable for carbonization
to make coke for steel manufacture. Also known as "met" coal, it possesses four
important qualities: volatility, which affects coke yield; the level of
impurities, which affects coke quality; composition, which affects coke
strength; and basic characteristics, which affect coke oven safety. Met coal has
a particularly high Btu, but low ash content.
OVERBURDEN. Layers of earth and rock covering a coal seam. In surface
mining operations, overburden is removed prior to coal extraction.
PREPARATION PLANT. Usually located on a mine site, although one plant may
serve several mines. A preparation plant is a facility for crushing, sizing and
washing coal to prepare it for use by a particular customer. The washing process
has the added benefit of removing some of the coal's sulfur content.
RECLAMATION. The restoration of land and environmental values to a mining
site after the coal is extracted. Reclamation operations are usually underway
where the coal has already been taken from a mine, even as mining operations are
taking place elsewhere at the site. The process commonly includes "recontouring"
or reshaping the land to its approximate original appearance, restoring topsoil
and planting native grass and ground covers. Reclamation is closely regulated by
both state and federal law.
RECOVERABLE RESERVES. The amount of coal that can be recovered from the
reserve base. The average recovery factor for underground mines is about 57
percent, and about 80 percent from surface mines. Using these percentages, there
are about 300 billion tons of recoverable reserves in the United States, enough
to last more than 300 years at current consumption levels.
SCRUBBER. Any of several forms of chemical/physical devices which operate
to neutralize sulfur compounds formed during coal combustion. These devices
combine the sulfur in gaseous emissions with other chemicals to form inert
compounds, such as gypsum, which must then be removed for disposal. Although
156
effective in substantially reducing sulfur from combustion gases, scrubbers
require about 6 to 7 percent of a power plant's electrical output and thousands
of gallons of water to operate.
SPOT MARKET. Sales of coal pursuant to an agreement for shipments over a
period of one year or less. Spot market sales are generally obtained via a
competitive bidding process.
STEAM COAL. Coal used by power plant and industrial steam boilers to
produce electricity or process steam. It generally is lower in Btu content and
higher in volatile matter than metallurgical coal.
SULFUR CONTENT. Coal is commonly described by its sulfur content due to
the importance of sulfur in environmental regulations. "Compliance" coal, when
burned, emits no more than 1.2 pounds of sulfur dioxide per million Btu. This
term originated as a description of coal as it related to the Clean Air Act.
"Low sulfur" coal has a variety of definitions but typically is used to describe
coals consisting of 1.0% or less sulfur. A majority of the Company's Appalachian
Powder River Basin reserves are of compliance and low sulfur grades.
SURFACE MINE. A mine in which the coal lies near the surface and can be
extracted by removing the covering layer of soil (see "Overburden"). About 60
percent of total United States coal production comes from surface mines.
TONS. A "short" or net ton is equal to 2,000 pounds. A "long" or British
ton is 2,240 pounds; a "metric" ton is approximately 2,205 pounds. The short ton
is the unit of measure referred to in this document.
UNDERGROUND MINE. Also known as a "deep" mine. Usually located several
hundred feet below the earth's surface, an underground mine's coal is removed
mechanically and transferred by shuttle car or conveyor to the surface. Most
underground mines are located east of the Mississippi River and account for
about 40 percent of annual United States coal production.
UNIT TRAIN. A train of 100 or more cars, carrying only coal. A typical
unit train can carry at least 10,000 tons of coal in a single shipment.
157
ANNEX A-2
AUDIT OF ESTIMATED COAL RESERVES
Alabama, Kentucky, Maryland, Pennsylvania,
Virginia and West Virginia
Prepared For
ANKER COAL GROUP, INC.
Morgantown, West Virginia
By
JOHN T. BOYD COMPANY
MINING AND GEOLOGICAL CONSULTANTS
Pittsburgh, Pennsylvania
[Logo]
Report No. 2175.11
AUGUST 1997
158
[JOHN T. BOYD COMPANY LETTERHEAD]
JOHN T. BOYD COMPANY
Mining and Geological Consultants
August 26, 1997
File: 2175.11
Anker Coal Group, Inc.
2708 Cranberry Square
Morgantown, WV 26505
Attention: Mr. Bruce Sparks
Executive Vice President
Subject: Audit of Estimated Coal Reserves
Gentlemen:
John T. Boyd Company (BOYD) has completed an overview audit of coal
reserve estimates prepared and presented by Anker Group, Inc. (Anker) and its
subsidiaries as of June 1, 1997. These coal reserve estimates are the
responsibility of Anker management. The assignment of this report is to express
an independent opinion on these estimates based on our audit review,
familiarity with the properties, and knowledge of the coal mining industry in
the regions being studied.
159
CONCLUSIONS
- -----------
It is our professional opinion that:
1. Reserve estimates presented by Anker are properly calculated in
accordance with Anker's stated procedures and parameters, which comply with
practices and standards generally employed by industry.
2. As of June 1, 1997, Anker controlled an estimated 664 million recoverable
product tons of demonstrated coal reserves as summarized on Tables 1 and 2
which follow.
TABLE 1
-------
RESERVE SUMMARY BY STATE AND STATUS
-----------------------------------
Demonstrated Product Tons (000)
-----------------------------------------------------
By Reserve Classification By Mining Method
------------------------------ ------------------
Demon- Under-
State Status Measured Indicated strated Surface ground
----- ------ -------- --------- ------- ------- ------
Alabama Active 11,181 1,864 13,045 - 13,045
Inactive 29,366 9,436 38,802 - 38,802
------- ------- ------- ------- -------
40,547 11,300 51,847 - 51,847
Kentucky Inactive 3,076 5,020 8,096 - 8,096
Maryland Active 11,359 - 11,359 - 11,359
Inactive 12,397 7,719 20,116 12,979 7,137
------- ------- ------- ------- -------
23,756 7,719 31,475 12,979 18,496
Pennsylvania Inactive 77 - 77 77 -
Virginia Inactive 23,556 16,182 39,738 1,221 38,517
West Virginia Active 75,799 20,634 96,433 8,884 87,549
Inactive 158,470 278,239 436,709 19,804 416,905
------- ------- ------- ------- -------
234,269 298,873 533,142 28,688 504,454
Grand Total Active 98,339 22,498 120,837 8,884 111,953
Inactive 226,942 316,596 543,538 34,081 509,457
------- ------- ------- ------- -------
325,281 339,094 664,375 42,965 621,410
160
TABLE 2
-------
RESERVE SUMMARY BY STATE AND COUNTY
-----------------------------------
Demonstrated Product Tons (000)
-------------------------------------
Mining
State County Method Measured Indicated Total
----- ------- -------- -------- --------- -------
Alabama Shelby UG 40,457 11,300 51,847
Kentucky Muhlenberg UG 3,076 5,020 8,096
Maryland Allegany S 4,451 1,204 5,655
Garrett S/UG 19,305 6,515 28,820
Pennsylvania Greene S 77 - 77
Virginia Tazewell S/UG 23,556 16,182 39,738
West Virginia Barbour UG 39,732 5,579 45,311
Braxton S/UG 5,866 19,179 25,045
Grant S/UG 21,284 19,071 40,355
Harrison UG 15,641 14,703 30,344
Monongalia S 6,888 2,108 8,996
Preston UG 34,099 11,977 46,076
Raleigh UG 26,305 12,465 38,770
Taylor UG 42,831 167,988 210,819
Upshur UG 30,776 39,600 70,376
Webster S/UG 10,847 6,203 17,050
Total 325,281 339,094 664,375
S = Surface
UG = Underground
DEFINITIONS
Definitions of terms and criteria applied in our study follow:
Reserve Base -- Defined as that portion of the resource that meets
------------
specified minimum physical and analytical criteria related to
demonstrated mining and production practices. Reserve base may include
tonnages which are economic
161
and marginally economic. The terms reserve base and reserve are used
interchangeably in this report. Economic viability of any reserve is
directly related to current market conditions or sales commitments,
location, and the mining operator's technical and managerial
capabilities.
Reserve Classification -- Refers to the reliability or accuracy of the
----------------------
reserve estimate and is defined in three categories: measured,
indicated, and inferred (in descending order of geologic assurance).
Measured -- Tonnages computed from seam measurements as observed and
--------
recorded in drill holes, mine workings, and/or seam outcrop prospect
openings. The sites for measurement are so closely spaced and the
geologic character so well-defined that the thickness, areal extent,
size, shape and depth of coal are well-established. The maximum
acceptable distance for projection from seam data points varies with
the geologic nature of the coal seam being studied, but generally a
raduis of 1/4 mile is recognized as the standard.
Indicated -- Coal tonnages computed by projection of data from
---------
available seam measurements for a distance beyond coal classed as
measured. The assurance, although lower than for measured, is high
enough to assume continuity between points of measurement. The maximum
acceptable distance for projection of indicated tonnage is 1/2 to 3/4
mile from points of observation. Further exploration is necessary to
place these reserves in a measured category.
Demonstrated -- The sum of coal tonnage classified as measured and
------------
indicated.
In preparing this report we have relied on property information
provided by Anker. We have not independently investigated property ownership,
verified such data or examined any agreements in regard to Anker reserve
ownership or control.
QUALIFICATIONS
BOYD is familiar with anker's coal holdings having prepared:
. Previous audits of Anker reserve estimated for properties
controlled in 1994 and 1995.
. Independent reserve estimate of Anker controlled properties in
1985.
162
. Independent reserve estimate in 1991 of Oneida Coal Company
properties subsequently acquired by Anker.
. Review of selected property coal reserves as specific assignments
for others (e.g., Anker's Maryland Property, Baylor Mine, "Area F,"
etc.).
Our audit was planned and performed to obtain reasonable assurance on
the reserve estimates. The audit included examining, on a test basis, evidence
supporting the reserve estimates as well as assessing the methodology and
practices applied in formulating the estimates. We judge our audit provides a
reasonable basis for our opinion.
We believe our findings are reasonable and realistic and have been
developed using accepted engineering practices. All findings are subject to the
accuracy and reliability of the source data as the basis of this report.
Respectfully submitted,
JOHN T. BOYD COMPANY
By:
Russell P. Moran
---------------------------
Russell P. Moran
Vice President
Ronald L. Lewis
---------------------------
Ronald L. Lewis
Senior Vice President
James W. Boyd
---------------------------
James W. Boyd
President
163
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY THE NOTES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary.................. 1
Risk Factors........................ 11
The Company......................... 20
Use of Proceeds..................... 21
Capitalization...................... 22
Unaudited Pro Forma Consolidated
Financial Statements.............. 23
Selected Consolidated Historical
Financial Data.................... 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 31
Industry Overview................... 37
Business............................ 40
Management.......................... 57
Ownership of Common Stock........... 62
Related Party Transactions.......... 64
The Exchange Offer.................. 65
Description of Senior Notes......... 75
Description of Certain
Indebtedness...................... 100
Description of Capital Stock........ 102
Certain U.S. Federal Income Tax
Consequences...................... 104
Plan of Distribution................ 104
Legal Matters....................... 105
Experts............................. 105
Available Information............... 105
Index to Consolidated Financial
Statements........................ F-1
Glossary of Selected Terms.......... ANNEX A-1
Report of John T. Boyd Company...... ANNEX A-2
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
[ANKER LOGO]
ANKER COAL GROUP, INC.
OFFER TO EXCHANGE $125,000,000 OF ITS 9 3/4% SERIES B SENIOR NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR $125,000,000 OF ITS
OUTSTANDING 9 3/4% SENIOR NOTES DUE 2007.
, 1998
======================================================
164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
for, among other things:
a. permissive indemnification for expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by designated persons, including directors and officers
of a corporation, in the event such persons are parties to litigation other
than stockholder derivative actions if certain conditions are met;
b. permissive indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including directors
and officers of a corporation, in the event such persons are parties to
stockholder derivative actions if certain conditions are met;
c. mandatory indemnification for expenses (including attorneys' fees)
actually and reasonably incurred by designated persons, including directors
and officers of a corporation, in the event such persons are successful on
the merits or otherwise in defense of litigation covered by a. and b.
above; and
d. that the indemnification provided for by Section 145 is not deemed
exclusive of any other rights which may be provided under any by-law,
agreement, stockholder or disinterested director vote, or otherwise.
In addition to the indemnification provisions of the DGCL described above,
the Registrant's restated certificate of incorporation (the "Restated
Certificate of Incorporation") authorizes indemnification of each person, and
his heirs, distributees, next of kin, successors, appointees, executors,
administrators, legal representatives and assigns, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, domestic or foreign, against expenses,
attorney's fees, court costs, judgments, fines, amounts paid in settlement and
other losses actually and reasonably incurred by him in connection with such
action, suit or proceeding.
The Restated Certificate of Incorporation also requires the advancement of
expenses (including attorney's fees) incurred by an officer or director in
defending such civil, criminal, administrative or investigative action, suit or
proceeding of the fullest extent authorized or permitted by the laws of the
State of Delaware upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the Corporation as authorized by
Section 145 of the DGCL. In addition, as permitted by the DGCL, the Registrant
has entered into an Employment Agreement with Bruce Sparks that provide contract
rights substantially identical to the rights to indemnification and advancement
of expenses set forth in the Restated Certificate of Incorporation, as described
above, except that the Company is not required to indemnify Mr. Sparks for gross
negligence or willful or wanton misconduct.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index included immediately preceding the exhibits to this
Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration
II-1
165
form with respect to reofferings by persons who may be deemed to be
underwriters, in addition to the information called for by the other items of
the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding undertaking or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
166
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
ANKER COAL GROUP, INC.
By: /s/ BRUCE SPARKS
------------------------------------
President
Pursuant to the requirements of the Securities Act, this Registration
Statement, or amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
/s/ BRUCE SPARKS President and Director (Principal Executive Officer)
- -----------------------------------
Bruce Sparks
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer)
Michael M. Matesic
* Director
- -----------------------------------
William G. Rottier
* Director
- -----------------------------------
William Macaulay
* Director
- -----------------------------------
Bruce Rothstein
* Director
- -----------------------------------
John Hill
* Chairman
- -----------------------------------
John Shober
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-3
167
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
ANKER GROUP, INC.
By: /s/ BRUCE SPARKS
------------------------------------
President
Pursuant to the requirements of the Securities Act, this Registration
Statement, or amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
/s/ BRUCE SPARKS President (Principal Executive Officer) and Director
- -----------------------------------
Bruce Sparks
/s/ MICHEAL M. MATESIC Treasurer (Principal, Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
* Director
- -----------------------------------
Bruce Rothstein
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-4
168
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
ANKER ENERGY CORPORATION
By: /s/ BRUCE SPARKS
------------------------------------
President
Pursuant to the requirements of the Securities Act, this Registration
Statement, or amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
/s/ BRUCE SPARKS President (Principal Executive Officer) and Director
- -----------------------------------
Bruce Sparks
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
II-5
169
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
BRONCO MINING COMPANY, INC.
By: /s/ BRUCE SPARKS
------------------------------------
President
Pursuant to the requirements of the Securities Act, this Registration
Statement, or amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
/s/ BRUCE SPARKS President (Principal Executive Officer) and Director
- -----------------------------------
Bruce Sparks
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer)
Michael M. Matesic
II-6
170
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
ANKER POWER SERVICES, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Kenneth James
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-7
171
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
ANKER WEST VIRGINIA MINING COMPANY,
INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Richard Bolen
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-8
172
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
JULIANA MINING COMPANY, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Charles Dunbar
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-9
173
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
KING KNOB COAL CO., INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
President and Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
/s/ MICHAEL M. MATESIC President (Principal Executive Officer), Treasurer
- ----------------------------------- (Principal Financial and Accounting Officer) and
Michael M. Matesic Director
II-10
174
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
VANTRANS, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
President and Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
/s/ MICHAEL M. MATESIC President (Principal Executive Officer), Treasurer
- ----------------------------------- (Principal Financial and Accounting Officer) and
Michael M. Matesic Director
/s/ BRUCE SPARKS Director
- -----------------------------------
Bruce Sparks
II-11
175
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
MELROSE COAL COMPANY, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Jeffrey P. Kelley
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-12
176
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
MARINE COAL SALES COMPANY
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Larry Kaelin
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
/s/ BRUCE SPARKS Director
- -----------------------------------
Bruce Sparks
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-13
177
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
HAWTHORNE COAL COMPANY, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Kim A. Burke
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-14
178
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
UPSHUR PROPERTY, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Ronald L. Hamric
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-15
179
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
HEATHER GLEN RESOURCES, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Ronald L. Hamric
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-16
180
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
NEW ALLEGHENY LAND HOLDING COMPANY,
INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Mark A. Lantz
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-17
181
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
PATRIOT MINING COMPANY, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Ronald L. Hamric
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-18
182
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
VINDEX ENERGY CORPORATION
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Mark A. Lantz
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-19
183
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement, or an amendment thereto, to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 12, 1998.
ANKER VIRGINIA MINING COMPANY, INC.
By: /s/ MICHAEL M. MATESIC
------------------------------------
Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement, or an amendment thereto, has been signed on the 12th day of January,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ----------------------------------- ----------------------------------------------------
* President (Principal Executive Officer) and Director
- -----------------------------------
Richard B. Bolen
/s/ MICHAEL M. MATESIC Treasurer (Principal Financial and Accounting
- ----------------------------------- Officer) and Director
Michael M. Matesic
*By: /s/ MICHAEL M. MATESIC
- -----------------------------------
Michael M. Matesic
Attorney-in-Fact
II-20
184
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ----------------------------------------------------------------------------------
1 Senior Notes Purchase Agreement dated as of September 22, 1997 among the Company,
the Guarantors, and Donaldson Lufkin & Jenrette Securities Corporation and Chase
Securities, Inc.
* 3.1 Certificate of Incorporation of the Company.
* 3.2 Bylaws of the Company.
3.3 Certificate of Designation, Preferences and Rights of Class A Preferred Stock of
the Company.
3.4 Certificate of Designation, Preferences and Rights of Class B Preferred Stock of
the Company.
3.5 Certificate of Designation, Preferences and Rights of Class C Preferred Stock of
the Company.
3.6 Certificate of Designation, Preferences and Rights of Class D Preferred Stock of
the Company.
* 3.7 Certificate of Incorporation of Anker Group, Inc.
* 3.8 Bylaws of Anker Group, Inc.
* 3.9 Certificate of Incorporation of Anker Energy Corporation.
* 3.10 Bylaws of Anker Energy Corporation.
* 3.11 Articles of Incorporation of Bronco Mining Company, Inc.
* 3.12 Bylaws of Bronco Mining Company, Inc.
* 3.13 Articles of Incorporation of Anker Power Services, Inc.
* 3.14 Bylaws of Anker Power Services, Inc.
* 3.15 Articles of Incorporation of Anker West Virginia Mining Company, Inc.
* 3.16 Bylaws of Anker West Virginia Mining Company, Inc.
* 3.17 Articles of Incorporation of Juliana Mining Company, Inc.
* 3.18 Bylaws of Juliana Mining Company, Inc.
* 3.19 Articles of Incorporation of King Knob Coal Co., Inc.
* 3.20 Bylaws of King Knob Coal Co., Inc.
* 3.21 Certificate of Incorporation of Vantrans, Inc.
* 3.22 Bylaws of Vantrans, Inc.
* 3.23 Articles of Incorporation of Melrose Coal Company, Inc.
* 3.24 Bylaws of Melrose Coal Company, Inc.
* 3.25 Certificate of Incorporation of Marine Coal Sales Company.
* 3.26 Bylaws of Marine Coal Sales Company.
* 3.27 Articles of Incorporation of Hawthorne Coal Company, Inc.
* 3.28 Bylaws of Hawthorne Coal Company, Inc.
* 3.29 Certificate of Incorporation of Upshur Property, Inc.
* 3.30 Bylaws of Upshur Property, Inc.
* 3.31 Articles of Incorporation of Heather Glen Resources, Inc.
* 3.32 Bylaws of Heather Glen Resources, Inc.
* 3.33 Articles of Incorporation of New Allegheny Land Holding Company, Inc.
* 3.34 Bylaws of New Allegheny Land Holding Company, Inc.
* 3.35 Articles of Incorporation of Patriot Mining Company, Inc.
* 3.36 Bylaws of Patriot Mining Company, Inc.
* 3.37 Articles of Incorporation of Vindex Energy Corporation.
185
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ----------------------------------------------------------------------------------
* 3.38 Bylaws of Vindex Energy Corporation.
* 3.39 Articles of Incorporation of Anker Virginia Mining Company, Inc.
* 3.40 Bylaws of Anker Virginia Mining Company, Inc.
4.1 Senior Notes Indenture, dated as of September 25, 1997, among the Company, the
Guarantors, and Marine Midland Bank.
4.2 Form of 9 3/4% Senior Note due 2007. (Included as part of Senior Notes Indenture
filed as Exhibit 4.1 hereto).
4.3 Form of 9 3/4% Series B Senior Note due 2007. (Included as part of Senior Notes
Indenture filed as Exhibit 4.1 hereto).
4.4 Senior Notes Registration Rights Agreement, dated as of September 25, 1997, by and
among the Company, the Guarantors and Donaldson Lufkin & Jenrette Securities
Corporation and Chase Securities, Inc. as initial purchasers.
5.1 Opinion of Simpson Thacher & Bartlett.
10.1 Credit Agreement dated as of September 25, 1997, among The Chase Manhattan Bank,
as Administrative Agent, and the other financial institutions party thereto.
10.2 Security Agreement dated as of August 12, 1996, as amended by Amendment No. 1,
dated as of April 1, 1997, and Amendment No. 2, dated as of September 25, 1997.
10.3 Stockholders Agreement among Anker Coal Group, Inc., John J. Faltis, JJF Group
Limited Liability Company, P. Bruce Sparks, PPK Group Limited Liability Company,
Anker Holding B.V., First Reserve Corporation, American Oil & Gas Investors,
Limited Partnership, AMGO II, Limited Partnership, First Reserve Fund V, Limited
Partnership, First Reserve Fund V-2, Limited Partnership, First Reserve Fund VI,
Limited Partnership and First Reserve Fund VII, Limited Partnership, dated as of
August 12, 1996.
* 10.4 Employment Agreement, between P. Bruce Sparks, Anker Energy Corporation and the
Company, dated August 1, 1996.
* 10.5 Employment Agreement between John J. Faltis, Anker Energy Corporation and the
Company, dated August 1, 1996.
* 10.6 Anker Coal Group, Inc. Omnibus Stock Incentive Plan.
* 10.7 Form of Restricted Stock Award Agreement.
* 10.8 Form of Stock Option Grant Agreement.
* 10.9 Asset Purchase Agreement among Oak Mountain Energy, L.L.C. and Oak Mountain Energy
Corporation, Boone Resources, Inc., Kodiak Coal, Inc., Cahaba Coal Engineering &
Land Surveying, Inc., Coal Handling and Processing, Inc., Mountaineer Management,
Inc. and Jimmie R. Ryan and Duane Stranahan, Jr., dated February 1997.
* 10.10.1 Operating Agreement of Oak Mountain Energy, L.L.C.
* 10.10.2 Amendment No. 1 to Operating Agreement of Oak Mountain Energy, L.L.C.
* 10.11.1 Operating Agreement of Shelby Energy, L.L.C.
* 10.11.2 Amendment No. 1 to Operating Agreement of Shelby Energy, L.L.C.
* 12 Computation of ratio of earnings to fixed charges.
**21 List of Subsidiaries of the Company.
23.1 Consent of Simpson Thacher & Bartlett (Included as part of its opinion filed as
Exhibit 5.1 hereto).
23.2 Consent of Coopers & Lybrand LLP, independent auditors for the Company and Oak
Mountain. (Filed herewith).
186
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ----------------------------------------------------------------------------------
23.3 Consent of Ernst & Young LLP, independent public accountants. (Filed herewith).
**23.4 Consent of John T. Boyd Company.
**24 Powers of Attorney.
**25 Statement of Eligibility of Marine Midland Bank on Form T-1.
* 27 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
- ---------------
* To be filed by amendment.
**Previously filed.