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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Quarter Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-39643
ANKER COAL GROUP, INC.
----------------------
(Exact Name Of Registrant As Specified in Its Charter)
Delaware 52-1990183
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2708 Cranberry Square
Morgantown, West Virginia 26505
------------------------- -----
(Address Of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (304) 594-1616
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares of each of the registrant's classes of
common stock, as of the latest practicable date: Common Stock, $.01 per share
par value, 10,000 shares (May 11, 1998)
DOCUMENTS INCORPORATED BY REFERENCE: None
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ANKER COAL GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I
ITEM 1. Financial Statements:
Consolidated Statements of Operations - Three Months
Ended March 31, 1998 and 1997. . . . . . . . . . . . . . . 1
Consolidated Balance Sheet -
March 31, 1998 and December 31, 1997. . . . . . . . . . . 2
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997. . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements. . . . . . . . . . . 4-6
ITEM 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations. . . . . . . . . . . . 7-8
PART II
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . .8
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
This report contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Those statements appear in a number of places herein and include
statements regarding the intent, belief of current expectations of the
performance of the Company or related industry developments. Readers 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 materially from those described or implied in the forward-looking
statements as a result of various factors, many of which are beyond the control
of the Company. The most important factors include, but are not limited to,
weather, unexpected maintenance problems, variations in coal seam thickness,
variations in rock and soil overlying the coal deposit, variations in rock and
other natural minerals, a disruption in or an increase in the cost of
transportation services, early modification or termination of the Company's
long-term coal supply contracts, competition within the coal production and
electricity generation industries, regulatory uncertainties, price fluctuations
and labor disruptions.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months
Ended
March 31,
1998 1997
---------- -----------
(unaudited)
Coal sales and related revenue $ 71,574 $ 69,980
Expenses:
Cost of operations and selling expenses 68,037 61,476
Depreciation, depletion and amortization 3,778 4,240
General and administrative 2,631 2,034
Loss on impairment of investment 333 --
-------- --------
Total expenses 74,779 67,750
Operating (loss) income (3,205) 2,230
Interest, net of $280 and $53 capitalized in
1998 and 1997, respectively (2,867) (1,442)
Other income, net 231 300
-------- --------
(Loss) income before income taxes (5,841) 1,088
Income tax (benefit) expense (1,635) 305
-------- --------
Net (loss) income (4,206) 783
Less mandatorily redeemable preferred stock dividends 335 319
Less mandatorily redeemable preferred stock accretion 150 150
-------- --------
Net (loss) income available to common
stockholders $ (4,691) $ 314
======== ========
The accompanying notes are an integral
part of the consolidated financial statements.
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ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
ASSETS
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 15 --
Accounts receivable:
Trade 31,922 $ 31,029
Affiliates 621 223
Inventories 11,282 10,717
Current portion of long-term notes receivable 596 791
Life insurance proceeds receivable -- 10,000
Prepaid expenses and other 5,766 4,659
Deferred income taxes 399 399
--------- ---------
Total current assets 50,601 57,818
Properties:
Coal lands and mineral rights 101,795 101,324
Machinery and equipment 86,696 83,370
--------- ---------
188,491 184,694
Less allowances for depreciation, depletion and amortization 20,560 17,333
--------- ---------
167,931 167,361
Other assets:
Advance minimum royalties 19,977 19,050
Goodwill, net of accumulated amortization of $1,686 and $1,408 at
March 31, 1998 and December 31, 1997, respectively 42,732 43,010
Other intangible assets, net of accumulated amortization of $640 and $432 at
March 31, 1998 and December 31, 1997, respectively 6,620 6,553
Notes receivable 4,452 5,056
Other assets 6,008 5,802
--------- ---------
Total assets $ 298,321 $ 304,650
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 19,263 20,173
Affiliates 733 1,572
Accrued interest 6,352 3,530
Accrued expenses and other 10,390 9,029
Current maturities of long-term debt 810 799
--------- ---------
Total current liabilities 37,548 35,103
Long-term debt 128,546 132,800
Other liabilities:
Accrued reclamation expenses 18,305 18,619
Deferred income taxes 12,976 12,976
Other 6,771 6,771
--------- ---------
Total liabilities 204,146 206,269
Commitments and contingencies -- --
Mandatorily redeemable preferred stock 23,136 22,651
Stockholders' equity:
Preferred stock 23,000 23,000
Common stock -- --
Paid-in capital 57,900 57,900
Accumulated deficit (9,861) (5,170)
--------- ---------
Total stockholders' equity 71,039 75,730
--------- ---------
Total liabilities and stockholders' equity $ 298,321 $ 304,650
========= =========
The accompanying notes are an integral
part of the consolidated financial statements.
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ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months
Ended
March 31,
1998 1997
-------------- -------------
(unaudited)
Cash flows from operating activities:
Net (loss) income $ (4,206) $ 783
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Impairment loss 333 --
Depreciation, depletion and amortization 3,778 4,240
Gain on sale of property, plant and equipment (9) --
Changes in operating assets and liabilities:
Accounts receivable (1,291) 725
Inventories, prepaid expenses and other (1,672) (8,390)
Advance minimum royalties (927) (1,978)
Accounts payable, accrued expenses and other 292 881
-------- --------
Net cash used in operating activities (3,702) (3,739)
-------- --------
Cash flows from investing activities:
Purchases of properties (3,522) (16,054)
Proceeds from sales property, plant and equipment 52 --
Payments received on notes receivable 799 126
Other assets (309) (457)
Investment in affiliate (333) --
-------- --------
Net cash used in investing activities (3,313) (16,385)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit and long-term
debt 8,548 29,254
Principal payments on revolving line of credit and
long-term debt (11,243) (9,183)
Debt issuance costs (275) --
Proceeds received from life insurance 10,000 --
-------- --------
Net cash provided by financing activities 7,030 20,071
-------- --------
Increase (decrease) in cash and cash equivalents 15 (53)
Cash and cash equivalents at beginning of period -- 556
-------- --------
Cash and cash equivalents at end of period $ 15 $ 503
======== ========
The accompanying notes are an integral
part of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITIED)
1. Accounting Policies
The unaudited interim consolidated financial statements presented herein
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q and do not include
all of the information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles.
In the opinion of management, these consolidated financial statements contain
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position, results of operations and
cash flows. These unaudited interim consolidated financial statements should be
read in conjunction with the other disclosures contained herein and with the
Company's audited consolidated financial statements and notes thereto contained
in the Company's Special Financial Report on Form 10-K, filed pursuant to Rule
15d-2, for the year ended December 31, 1997. Operating results for interim
periods are not necessarily indicative of results that may be expected for the
entire fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
2. Income Taxes
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. Inventories
Coal inventories are stated at the lower of average cost or market and
amounted to approximately $9,321,000 and $8,822,000 at March 31, 1998 and
December 31, 1997, respectively. Supply inventories are stated at the lower of
cost (first in, first out) or market and amounted to approximately $1,961,000
and $1,895,000 at March 31, 1998 and December 31, 1997, respectively.
4. Oak Mountain Energy, L.L.C.
On April 17, 1997, the Company, an affiliate and unrelated parties
acquired substantially all of the assets and assumed certain liabilities of Oak
Mountain Energy Corporation and its affiliates for approximately $40 million, of
which $10 million was provided by the Company. Subsequent to the initial
capitalization, the Company contributed an additional $255,000.
During 1997, Oak Mountain Energy, L.L.C. ("Oak Mountain") experienced
higher than anticipated capital development costs, which resulted in increased
borrowings under Oak Mountain's credit facilities. By early December 1997, Oak
Mountain had borrowed under its credit facilities the maximum amount available
for the development of its operations and was continuing to incur additional
capital development costs. At that time the Company and the other owners of Oak
Mountain attempted to raise additional capital for the project and also
considered the possible sale of the investment. In addition, on December 13,
1997, Oak Mountain experienced a methane ignition in its mine, which halted all
production for one week and reduced the level of operation at the mine. Rather
than commit the additional funds needed in the project, the Company decided to
terminate its investment.
On February 26, 1998, the Company sold its investment in Oak Mountain to
an affiliate for $1. The Company tried unsuccessfully to sell its investment to
other unrelated parties during December, 1997 and January and February, 1998.
The Company recorded an impairment loss of $8,267,000 to adjust the Company's
investment to its fair market value less cost to sell as of December 31, 1997.
During January, 1998, the Company contributed an additional $333,000 to Oak
Mountain to facilitate its effort to sell its investment. The Company then
recorded an impairment loss of $333,000 to adjust the Company's investment to
its fair market value.
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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 disposed of as of the beginning of the periods presented,
after including the impact of certain adjustments:
Three Months
Ended
March 31,
1998 1997
-------- --------
(In thousands)
Total coal sales and related revenue $ 71,574 $ 69,980
======== ========
Net (loss) income $ (3,873) $ 783
======== ========
Net (loss) income available to common stockholders $ (4,358) $ 314
======== ========
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5. Subsidiary Guarantees
All of the guarantor subsidiaries to the $125 million Senior Notes, due
October 2007 are wholly owned and the Senior Notes 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 flows for the Company and its guarantor and nonguarantor subsidiaries. The
Company has not presented separate financial statements and other disclosures
concerning its guarantor subsidiaries because management has determined that
such information is not material to investors. As of March 31, 1998 there were
no restrictions affecting the ability of the guarantor subsidiaries of the
Senior Notes to make distributions to the Company or other guarantor
subsidiaries except to the extent provided by law generally (eg, adequate
capital to pay dividends under corporate law).
As of and for the year
ended March 31, 1998
------------------------------------------------------------------
(In thousands)
Anker Coal
Anker Coal Guarantor Non-guarantor Cons. Group
Group Subs. Subs. Adjust. Cons.
---------- --------- ------------- --------- ----------
Balance Sheet
Total current assets $ 2,034 $ 48,558 $ 9 -- $ 50,601
Investment in subsidiaries 55,925 -- -- $ (55,925) --
Properties, net -- 160,641 7,290 -- 167,931
Other assets -- 79,764 25 -- 79,789
--------- --------- --------- --------- ---------
Total assets $ 57,959 $ 288,963 $ 7,324 $ (55,925) $ 298,321
========= ========= ========= ========= =========
Total current liabilities -- 37,474 74 -- 37,548
Long-term debt -- 128,546 -- -- 128,546
Intercompany payable (receivable), net (62,942) 54,418 8,524 -- --
Other long-term liabilities 14,473 23,579 -- -- 38,052
Mandatorily redeemable preferred stock 23,136 -- -- -- 23,136
Total stockholders' equity 83,292 44,946 (1,274) (55,925) 71,039
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 57,959 $ 288,963 $ 7,324 $ (55,925) $ 298,321
========= ========= ========= ========= =========
Statement of Operations
Coal sales and related revenues -- 71,574 -- -- 71,574
Cost of operations and operating expenses -- 74,739 40 -- 74,779
--------- --------- --------- --------- ---------
Operating income (loss) -- (3,165) (40) -- (3,205)
Other expense -- 2,303 333 -- 2,636
--------- --------- --------- --------- ---------
Income (loss) before taxes -- (5,468) (373) -- (5,841)
Income tax benefit expense (1,635) -- -- -- (1,635)
--------- --------- --------- --------- ---------
Net income (loss) $ 1,635 $ (5,468) $ (373) -- $ (4,206)
========= ========= ========= ========= =========
Statement of Cash Flows
Net cash (used in) provided by operating
activities -- $ (4,035) 333 -- $ (3,702)
========= ========= ========= ========= =========
Net cash used in investing activities -- $ (2,980) (333) -- $ (3,313)
========= ========= ========= ========= =========
Net cash provided by financing activities -- $ 7,030 -- -- $ 7,030
========= ========= ========= ========= =========
6. Commitments and 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.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended March 31, 1998 compared to the Three Months Ended March 31,
1997
Results of Operations
Coal Sales and Related Revenues. Coal sales and related revenues were
$71.6 million for the first quarter ended March 31, 1998 compared to $70.0
million for the first quarter ended March 31, 1997, an increase of 2.3%. Coal
sales volume remained constant at approximately 3.0 million tons for the
quarters ended March 31, 1998 and 1997.
1) Tonnage levels for the first quarter of 1998 were down at the
Monongalia County surface operations which resulted from the move of
mining locations from one finished mining area to a new permitted
area.
2) Tonnage levels were down in the first quarter of 1998 at the Preston
County operations due to the completion of one contract mining
operation in the fourth quarter of 1997 and a general scaling down
of production of the other contract mining operations. Production is
expected to cease at the current contract underground operations in
later quarters of 1998 due to the depletion of the reserve base.
3) Tonnage levels were down at the Barbour County operations due to the
implementation of a new mining plan during the fourth quarter 1997,
which resulted in lower expected production for the quarter ended
March 31, 1998.
4) To offset the declines mentioned above, there were increases at
mines acquired or developed during 1997, including the Grant County
and Upshur County operations and additional brokered sales during
the period.
Cost of Operations and Selling Expenses. The cost of operations and
selling expenses totaled $68.0 million for the first quarter ended March 31,
1998 compared to $61.5 million for the first quarter ended March 31, 1997, an
increase of 10.6%. Severe weather during January and February, 1998 negatively
impacted the Company's operations in Webster and Raleigh Counties, West
Virginia. The effect of the severe weather on these operations is described
below:
1) The Company's Webster County surface mine experienced significant
rainfall which reduced its ability to dispose of preparation plant
refuse causing an increase in inventory. The inventory handling
issues eventually prevented the mine from operating efficiently
according to its mine plan. During March 1998, the Company idled
this mine to reduce inventory. The mine restarted operations in May
at reduced levels.
2) The Company's Raleigh County underground operation was shut down for
one week due to a power outage created by a record snowfall in
January. The shut down resulted in reduced coal production.
The cost of operations and selling expenses for the Company was $22.51 per ton
shipped for the first quarter ended March 31, 1998 compared to $20.30 per ton
for the first quarter ended March 31, 1997, an increase of 10.9%.
Other Operating Expenses. Other operating expenses for the first quarter
ended March 31, 1998 were $6.4 million compared to $6.3 million for the first
quarter ended March 31, 1997, an increase of 1.6%. General and administrative
expenses increased 30%, to $2.6 million for the first quarter ended March 31,
1998 compared to $2.0 million for the first quarter ended March 31, 1997. The
increase in general and administrative costs primarily resulted from the
increase in the Company's management staff necessary to manage the additional
mines developed or acquired since March 31, 1997. The Company has initiated
steps to reduce general and administrative expenses. Depreciation, depletion and
amortization was $3.8 million for the first quarter ended March 31, 1998
compared to $4.2 million for the first quarter ended March 31, 1997, a decrease
of 9.5%. The decrease in depreciation, depletion and amortization primarily
resulted from a decrease in the amortization of non-compete agreements due to
the agreements being fully amortized in subsequent quarters of 1997 and a
decrease in the depletion and amortization resulting from decreased tonnage
production levels described above.
Loss on Impairment of Investment. The Company recorded an additional
impairment loss of $0.3 million to adjust the Company's investment in Oak
Mountain to its fair market value.
Interest Expense. Interest expense was $2.9 million for the first quarter
ended March 31, 1998 compared to $1.4 million for the first quarter ended March
31, 1997, an increase of 107.1%. The increase was due to an increase in the
average outstanding indebtedness and average effective interest rate in the
first quarter of 1998 as compared to the first quarter of 1997.
Income Taxes. Income tax benefit from operations for the first quarter
ended March 31, 1998 was $1.6 million compared to $0.3 million in income tax
expense for the first quarter ended March 31, 1997, a decrease of $1.9 million.
The income tax benefit for the period is based on the effective tax rate
expected to be applicable for the full year.
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Net Income. For the first quarter ended March 31, 1998, the Company's loss
was $4.2 million compared to $0.8 million of income for the first quarter ended
March 31, 1997, a decrease of $5.0 million. The decrease in net income is
primarily due to the increase in total operating expenses.
Liquidity and Capital Resources
The Company has budgeted approximately $24.0 million for capital
expenditures in 1998. Of the $24 million budgeted for capital expenditures in
1998, approximately $14.0 million relates to the development of recently opened
or acquired properties and to the acquisition of new properties. As of March 31,
1998 the Company incurred $3.5 million of capital expenditures with $2.3 million
relating to the development of recently opened or acquired properties and to the
acquisition of new properties.
On September 25, 1997, the Company issued a $125,000,000 of unsecured 9
3/4% Senior Notes due October 1, 2007. Interest on the Senior Notes is payable
semiannually on April 1 and October 1 of each year commencing April 1, 1998.
On March 31, 1998, the Company's Amended and Restated Revolving Credit
Facility (the "Credit Facility") had approximately $2.9 million of outstanding
indebtedness and additional undrawn availability of approximately $68.1 million.
The 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. One such covenant that controls the Company's
availability of borrowings is a net leverage ratio based on cashflow for a
rolling twelve month period. Due to the death of John J. Faltis (the Company's
President, Chief Executive Officer and Chairman of the Board of Directors) on
October 12, 1997, the Company recorded $15 million of key man life insurance
proceeds in December 1997, which reduced the Company's net leverage ratio and
created additional availability of borrowings. The rolling twelve month period
for the net leverage ratio covenant will provide the Company with the additional
borrowing availability during the first three quarters of 1998. During the
fourth quarter of 1998 the life insurance proceeds will no longer be included in
the calculation of the net leverage ratio and will not result in increased
borrowing availability.
In accordance with 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 others (the "Stockholders'
Agreement") the Company 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 the 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. The Company has received the $15 million in
key man life insurance proceeds, which it has used to temporarily reduce the
outstanding indebtedness under the Credit Facility. As soon as the fair market
value of the Common Stock owned by JJF Group is determined, such proceeds will
be reborrowed under the Credit Facility and applied to the purchase of such
Common Stock.
The Company's ability to fund its operations and make planned capital
expenditures, to make scheduled debt payments and to remain in compliance with
all of the financial covenants under its debt agreements depends on its future
operating performance and cash flow, which, in turn, are subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond the Company's control. There can be no assurance that the Company's
operating results, cash flow and capital resources will be sufficient to satisfy
these obligations. If the Company cannot generate sufficient cash flow from
operations or call upon other resources, the Company could face liquidity
problems and might be required to take certain actions, including to reduce or
delay planned expansion and capital expenditures, sell assets, obtain additional
equity capital or restructure its debt. There can be no assurance that any of
these actions could be effected on terms satisfactory to the Company, if at all.
Dividend Restrictions Affecting Subsidiaries
As of March 31, 1998 there were no restrictions affecting the ability of
the guarantor subsidiaries of the Senior Notes to make distributions to the
Company or other guarantor subsidiaries except to the extent provided by law
generally (eg, adequate capital to pay dividends under corporate law).
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit number 27, Financial Data Schedule, is filed herewith on Form
10-Q.
(b) No items were filed on Form 8-K during the first quarter 1998.
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANKER COAL GROUP, INC.
/s/ Bruce Sparks
------------------------------------
Bruce Sparks
President and Chief Executive Officer
/s/ Michael Matesic
------------------------------------
Michael Matesic
Treasurer and Chief Financial Officer
DATE: May 13, 1998
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