1
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 June 30, 1999
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 26508
(Address Of Principal Executive Offices)
(304) 594-1616
(Registrant's telephone number, including area code)
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 outstanding shares of each of the registrant's
classes of common stock, as of the latest practicable date: Common Stock, $.01
per share par value, 9,150 shares (August 13, 1999)
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ANKER COAL GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1999 and 1998 .... 1
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 .................. 2
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 .............. 3
Notes to Consolidated Financial Statements .................. 4-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................... 7-12
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 13
SIGNATURE PAGE .......................................................... 14
FORWARD-LOOKING DISCLAIMER
This report contains statements which constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements include statements regarding the intent, belief or current
expectations of the performance of the Company, the ability of the Company to
implement its business plan or related industry developments. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Readers are further cautioned
that actual results, levels of activity, performance or achievements of the
Company, or industry 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. These factors include, but are
not limited to: general economic and business conditions; the ability of the
Company to implement its business plan; the availability of liquidity and
capital resources; the ability of the Company to achieve anticipated cost
savings; the ability of the Company to secure new mining permits; changes in the
industry; 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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
----- ----- ----- ----
(unaudited) (unaudited)
Coal sales and related revenue $ 57,271 $ 76,320 $ 114,223 $ 147,894
Expenses:
Cost of operations and selling expenses 53,114 72,894 103,448 140,931
Depreciation, depletion and amortization 4,447 4,439 8,839 8,217
General and administrative 2,010 2,457 3,945 5,088
Loss on impairment and restructuring 3,461 -- 3,461 1,829
--------- --------- --------- ---------
Total expenses 63,032 81,286 119,693 156,065
Operating loss (5,761) (4,966) (5,470) (8,171)
Interest, net of $106 capitalized for the three months
ended June 30, 1998 and net of $386 capitalized
for the six months ended June 30, 1998 (3,854) (3,253) (7,479) (6,120)
Other income, net 831 317 1,421 548
--------- --------- --------- ---------
Loss before income taxes (8,784) (7,902) (11,528) (13,743)
Income tax benefit -- 2,213 200 3,848
--------- --------- --------- ---------
Net loss (8,784) (5,689) (11,328) (9,895)
Less mandatorily redeemable preferred stock dividends (351) (334) (703) (669)
Less mandatorily redeemable preferred stock accretion (150) (150) (300) (300)
--------- --------- --------- ---------
Net loss available to common
stockholders $ (9,285) $ (6,173) $ (12,331) $ (10,864)
========= ========= ========= =========
The accompanying notes are an integral
part of the consolidated financial statements.
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ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
------------ ----
(unaudited)
Current assets:
Cash and cash equivalents $ 8 $ 15
Accounts receivable:
Trade 25,304 27,845
Affiliates 116 42
Inventories 6,134 5,876
Current portion of long-term notes receivable 682 986
Prepaid expenses and other 2,858 1,989
Deferred income taxes 3,683 3,683
--------- ---------
Total current assets 38,785 40,436
Properties:
Coal lands and mineral rights 62,799 62,398
Machinery and equipment 72,093 72,355
--------- ---------
134,892 134,753
Less allowances for depreciation, depletion and amortization 31,002 26,161
--------- ---------
103,890 108,592
Other assets:
Assets held for sale 10,000 10,000
Advance minimum royalties 5,498 4,453
Goodwill, net of accumulated amortization of $3,305 and $2,517 at
June 30, 1999 and December 31, 1998, respectively 20,784 21,572
Other intangible assets, net of accumulated amortization of $1,159 and $694
At June 30, 1999 and December 31, 1998, respectively 6,261 6,268
Notes receivable 3,548 3,735
Other assets 6,510 6,664
--------- ---------
Total assets $ 195,276 $ 201,720
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 10,571 10,982
Affiliates 634 480
Cash overdraft 2,960 5,111
Accrued interest 3,711 3,365
Accrued expenses and other 12,677 11,287
Accrued leasehold termination 3,957 3,957
Accrued reclamation expenses 4,815 5,234
Current maturities of long-term debt 2,631 2,777
Common stock available for repurchase 1,505 1,505
--------- ---------
Total current liabilities 43,461 44,698
Long-term debt 149,650 139,934
Other liabilities:
Accrued reclamation expenses 15,627 17,367
Deferred income taxes 8,242 8,242
Other 4,417 6,272
--------- ---------
Total liabilities 221,397 216,513
Commitments and contingencies -- --
Mandatorily redeemable preferred stock 25,591 24,588
Common stock available for repurchase 8,495 8,495
Stockholders' equity:
Preferred stock 23,000 23,000
Common stock -- --
Paid-in capital 47,900 47,900
Treasury stock (5,100) (5,100)
Accumulated deficit (126,007) (113,676)
--------- ---------
Total stockholders' equity (60,207) (47,876)
--------- ---------
Total liabilities and stockholders' equity $ 195,276 $ 201,720
========= =========
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)
SIX MONTHS
ENDED
JUNE 30,
1999 1998
----- ----
(UNAUDITED)
Cash flows from operating activities:
Net loss $ (11,328) $ (9,895)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Loss on impairment and restructuring 3,461 1,829
Depreciation, depletion and amortization 8,839 8,217
Loss on sale of property, plant and equipment 27 1,312
Changes in operating assets and liabilities:
Accounts receivable 2,467 (2,794)
Inventories, prepaid expenses and other (1,127) (90)
Advance minimum royalties (1,428) (1,357)
Accounts payable, accrued expenses and other (272) (3,313)
Accrued reclamation (2,159) --
Other liabilities (1,855) (142)
--------- ---------
Net cash used in operating activities (3,375) (6,233)
--------- ---------
Cash flows from investing activities:
Purchases of properties (4,079) (5,390)
Proceeds from sales of property, plant and equipment 184 145
Payments received on notes receivable 491 911
Other assets 61 (442)
Investment in affiliate -- (333)
--------- ---------
Net cash used in investing activities (3,343) (5,109)
--------- ---------
Cash flows from financing activities:
Proceeds from revolving line of credit and
long-term debt 129,809 44,100
Principal payments on revolving line of credit and
long-term debt (120,239) (43,793)
Cash overdraft (2,151) 1,465
Debt issuance costs (708) (421)
Proceeds received from life insurance -- 10,000
--------- ---------
Net cash provided by financing activities 6,711 11,351
--------- ---------
(Decrease) increase in cash and cash equivalents (7) 9
Cash and cash equivalents at beginning of period 15 --
--------- ---------
Cash and cash equivalents at end of period $ 8 $ 9
========= =========
The accompanying notes are an integral
part of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Annual Form 10-K for the year ended December 31, 1998.
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. The Company has established a full valuation
allowance on the net operating loss carryforwards, capital loss carryforwards
and contribution carryforwards because the realization of these assets are
uncertain.
3. INVENTORIES
Coal inventories are stated at the lower of average cost or market and
amounted to approximately $5,635,000 and $4,415,000 at June 30, 1999 and
December 31, 1998, respectively. Supply inventories are stated at the lower of
average cost or market and amounted to approximately $499,000 and $1,461,000 at
June 30, 1999 and December 31, 1998, respectively.
4. LOSS ON IMPAIRMENT AND RESTRUCTURING
During the second quarter of 1999 the Company reviewed the carrying
value of computer software and determined that with the addition of contract
miners at the deep mine operations certain software would not be utilized in
operations. The Company recorded an impairment loss of $1.1 million in
connection with the discontinuance of the use of the software. In addition, the
Company recorded an impairment of $2.4 million relating to properties located
in Tazwell County, Virginia.
5. SUBSEQUENT EVENTS
In July, 1999, the Company sold certain coal reserves in Preston and
Taylor Counties, West Virginia for $1.25 million in cash plus royalties on
future production. A gain of approximately $492,000 from this sale will be
recognized in the third quarter of 1999.
Under the Put Agreement, dated August 25, 1999, between the Company
and JJF Group Limited Liability Company ("JJF Group"), JJF Group has the right
to require the Company to purchase shares of its common stock at a specified
price per share in August, 1999, 2000 and 2001. If exercised, the total purchase
price to be paid by the Company to JJF Group on each of those dates is
approximately $1,505,000, $1,604,000 and $6,891,000, respectively, plus accrued
interest. On July 20, 1999, JJF Group exercised its right to require the Company
to purchase 305 shares of common stock for an aggregate price of approximately
$2.1 million including interest. Closing of the purchase was scheduled to occur
on August 15, 1999. However, the Company and JJF Group have agreed to extend the
required closing date until September 30, 1999. The Company and JJF Group have
also agreed to continue negotiations regarding a possible restructuring of the
Put Agreement on terms satisfactory to the Company and JJF Group. There can be
no assurance that the Company and JJF Group will reach agreement on terms
acceptable to the Company, if at all.
The Foothill Loan Agreement provides that in order to advance funds to
the Company and other Guarantors, the borrowers under such Agreement must have
borrowing availability of at least $5 million after giving effect to such
advances and for the thirty days immediately preceding such advances. During the
month of July, 1999 the Company's borrowing base declined below $5 million on
five separate days. The borrowers have continued to advance funds to the Company
and the Guarantors, which advances constitute a violation of the intercompany
loan covenant under the Foothill Loan Agreement. Foothill is aware of the
violation and is currently discussing this matter with the Company. Foothill
has not declared a default under the Foothill Loan Agreement as a result of
this covenant violation.
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6. SUBSIDIARY GUARANTEES
The Company is a holding company with no assets other than its
investments in its subsidiaries. The Company's $125 million Senior Notes due
October 2007 (the "Senior Notes") are guaranteed by certain subsidiaries of the
Company (collectively, the "Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries is a wholly-owned subsidiary of the Company and has fully and
unconditionally guaranteed the Senior Notes on a joint and several basis. The
following tables summarize the financial position, results of operations and
cash flows for the Company, the Guarantor Subsidiaries and the subsidiaries of
the Company which did not guarantee the Senior Notes (collectively,
"Non-Guarantor Subsidiaries"). The Company has not presented separate financial
statements and other disclosure regarding the Guarantor Subsidiaries because
management has determined that such information is not material to investors.
The restrictions affecting the ability of the Guarantor Subsidiaries to make
distributions to the Company or other Guarantor Subsidiaries are set forth in
the Loan and Security Agreement dated November 21, 1998, among the Company,
Foothill Capital Corporation and others (the "Foothill Loan Agreement"). The
ability of the Guarantor Subsidiaries to make distributions is also affected by
law generally (e.g., adequate capital to pay dividends under corporate law).
AS OF AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999
-----------------------------------------------------------------------
(IN THOUSANDS)
ANKER COAL
ANKER COAL GUARANTOR NON-GUARANTOR CONS. GROUP
GROUP SUBS. SUBS. ADJUST. CONS.
----- ----- ----- ------- -----
BALANCE SHEET
Total current assets $ 3,683 $ 32,142 $ -- $ 2,960 $ 38,785
Investment in subsidiaries 55,925 -- -- (55,925) --
Properties, net -- 96,600 7,290 -- 103,890
Other assets
-- 52,601 -- -- 52,601
--------- --------- --------- --------- ---------
Total assets $ 59,608 $ 181,343 $ 7,290 $ (52,965) $ 195,276
========= ========= ========= ========= =========
Total current liabilities 1,950 38,225 326 2,960 43,461
Long-term debt -- 149,650 -- -- 149,650
Intercompany payable (receivable), net (54,169) 46,280 7,889 -- --
Other long-term liabilities 6,745 21,541 -- -- 28,286
Mandatorily redeemable preferred stock 25,591 -- -- -- 25,591
Common stock available for repurchase 8,495 -- -- -- 8,495
Total stockholders' equity 70,996 (74,353) (925) (55,925) (60,207)
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 59,608 $ 181,343 $ 7,290 $ (52,965) $ 195,276
========= ========= ========= ========= =========
STATEMENT OF OPERATIONS
Coal sales and related revenues -- $ 114,223 -- -- $ 114,223
Cost of operations and operating expenses -- 119,573 $ 120 -- 119,693
--------- --------- --------- --------- ---------
Operating loss -- (5,350) (120) -- (5,470)
Other expense $ (279) (5,779) -- -- (6,058)
--------- --------- --------- --------- ---------
Loss before taxes (279) (11,129) (120) -- (11,528)
Income tax benefit 200 -- -- -- 200
--------- --------- --------- --------- ---------
Net loss $ (79) $ (11,129) $ (120) -- $ (11,328)
========= ========= ========= ========= =========
STATEMENT OF CASH FLOWS
Net cash used in operating activities -- $ (3,375) -- -- $ (3,375)
========= ========= ========= ========= =========
Net cash used in investing activities -- $ (3,343) -- -- $ (3,343)
========= ========= ========= ========= =========
Net cash provided by financing activities -- $ 6,711 -- -- $ 6,711
========= ========= ========= ========= =========
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7. COMMITMENTS AND CONTINGENCIES
In 1998, certain subsidiaries of the Company (the "Plantiffs") sued
Consolidation Coal Company ("Consol"), the Social Security Administration (the
administrator of the 1992 Coal Act, also known as the Rockefeller Bill), and
the Trustees of the United Mine Workers of America Combined Benefit fund (the
"Trustees") in the United States District for the Western District of
Pennsylvania claiming that (i) Consol is responsible for paying certain of the
Plantiffs 1992 Coal Act premiums relating to employees that were affected by
Consol's breach of several contract mining agreements in the early 1980's
(approximately 1/3 of the Plantiffs entire premium); (ii) the Social Security
Administration should be enjoined from continuing to invoice the Company for
these payments that should be made by Consol; and (iii) the 1992 Coal Act is
unconstitutional. The Trustee's filed a counterclaim against the Plantiffs for
the amount of premiums they have failed to pay as a result of their claim
against Consol. The court granted the Trustees motion for summary judgment on
their counterclaim, and the court granted the motions to dismiss filed by
Consol and the Social Security Administration.
The Plaintiffs appealed to the United States Third Circuit Court of
Appeals. The appeals court reversed the trial court ruling with respect to
Consol. However, the appeals court affirmed all other trial court rulings.Thus,
the appeals court ruled that the Plaintiffs can pursue their reimbursement
claim against Consol, but while that claim is proceeding they must pay the
disputed portion of their 1992 Coal Act premiums. At this time, the disputed
portion of premiums, including interest and penalties, is approximately $1.3
million. Interest accrues at the post judgment rate of 9% per year.
The Plaintiffs filed a writ of certiorari with the United States
Supreme Court on August 12, 1999. The Third Circuit's judgment has been stayed
pending the Supreme Court's denial of the writ or otherwise ruling against the
Plaintiffs. Because the Supreme Court is currently in recess until October,
1999, it is unlikely that the Plaintiffs will be required to pay the judgment
before October, 1999. The entire judgement has been fully accrued by the
Company in prior years. In the event the Plaintiffs are required to pay the
judgment, the Plaintiffs will fund the judgment with borrowings under the
Foothill Loan Agreement, if available.
The Plaintiffs is a party to various other 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
LIQUIDITY AND CAPITAL RESOURCES; GOING CONCERN OPINION
The Company's independent public accountants issued a going concern
opinion with respect to the Company's Consolidated Financial Statements for the
year ended December 31, 1998. Specifically, the independent public accountants
stated that because the Company has, among other things, experienced recurring
losses and negative cash flow from operations and has a retained deficit, they
had substantial doubt about its ability to continue as a going concern. See Item
8, Consolidated Financial Statements, of the Company's Form 10-K for the period
ended December 31, 1998, for the opinion of the Company's independent public
accountants.
The Foothill Loan Agreement contains a covenant that requires the
Company to deliver an unqualified audit opinion on its annual financial
statements. The issuance of the going concern opinion by the Company's
independent public accountants for the year ended December 31, 1998 constituted
a default of that covenant. Foothill has waived that default. It should be noted
that the failure of the Company to obtain an unqualified audit opinion does not
constitute a default under the indenture governing the Senior Notes.
Under the indenture governing the Senior Notes, the Company was
obligated to make a semi-annual interest payment in the approximate amount of
$6.1 million on April 1, 1999. The Company elected to defer making the interest
payment at that time. However, on April 29, 1999, prior to the expiration of the
grace period under the indenture, the Company made the interest payment due
under the Senior Notes.
The following table sets forth the amounts outstanding and borrowing
availability under the Foothill Loan Agreement as of certain dates:
REVOLVING REVOLVING
CREDIT CREDIT
DATE TERM LOAN BORROWINGS AVAILABILITY
---- --------- ---------- ------------
(IN MILLIONS)
12/31/98 $ 15.0 $ 1.9 $ 15.5
01/31/99 14.8 4.5 14.3
02/28/99 14.6 1.9 14.3
03/31/99 14.4 1.4 16.5
04/30/99 14.2 12.9 6.3
05/31/99 14.1 11.8 5.4
06/30/99 13.9 12.9 6.9
07/31/99 12.5 11.0 7.0
08/13/99 12.3 12.4 5.9
The term loan changes are based on the normal amortization of the loan and the
application of $1,250,000 from the sale of certain assets in Preston County,
West Virginia. The increase in the revolving credit borrowings is primarily
related to the Company's borrowing to make the interest payment under the Senior
Notes on April 29, 1999, performing reclamation in Webster County, West Virginia
and capital expenditures. Revolving credit availability has been reduced as a
result of increases in borrowings and lower coal production and coal shipments.
Future revolving credit availability will be impacted by changes in coal
production and the resulting changes in coal inventory and accounts receivable.
In accordance with the Company's business plan, the Company has been
implementing contract mining services at its underground operations. The
transition from company run mines to contractor run mines may result in
decreased coal production. In addition, the contract miner for the Company's
Barbour County operation is moving the production units from the eastern
portion of the reserve to the western portion. This may also result in lower
coal production. The Company believes it can manage this transition to avoid
any material decline in production. However, no assurance can be made that coal
production will remain stable during this transition and in the future. A
decrease in coal production will cause a decline in revolving credit
availability.
The Foothill Loan Agreement provides that in order to advance funds to
the Company and other Guarantors, the borrowers under such Agreement must have
borrowing availability of at least $5 million after giving effect to such
advances and for the thirty days immediately preceding such advances. During
the month of July, 1999, the Company's borrowing base declined below $5 million
on five separate days. The borrowers have continued to advance funds to the
Company and the Guarantors, which advances constitute a violation of the
intercompany loan covenant under the Foothill Loan Agreement. Foothill is aware
of the violation and is currently discussing this matter with the Company.
Foothill has not declared a default under the Foothill Loan Agreement as a
result of this covenant violation.
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The Company has budgeted approximately $9.3 million for capital
expenditures for 1999. Of this amount, approximately $1.4 million relates to the
development of new mining operations in Upshur County, West Virginia. As of June
30, 1999, the Company has incurred approximately $4.1 million of capital
expenditures. With the transition to contractor run mines certain capital
expenditures will no longer be necessary resulting in lower expected capital
expenditures.
In addition to capital expenditures, operating expenses and debt
service requirements, the Company expects to incur exit costs with respect to
its Webster County operations, equipment leasehold termination costs, potential
cash security requirements to obtain reclamation bonds for new mining permits
and payments required under the Put Agreement.
Under the Put Agreement, JJF Group has the right to require the Company
to purchase shares of its common stock at a specified price per share in August,
1999, 2000 and 2001. If exercised, the total purchase price to be paid by the
Company to JJF Group on each of those dates is approximately $1,505,000,
$1,604,000 and $6,891,000, respectively plus accrued interest. On July 20, 1999,
JJF Group exercised its right to require the Company to purchase 305 shares of
common stock for an aggregate price of approximately $2.1 million including
interest. Closing of the purchase was scheduled to occur on August 15, 1999.
However, the Company and JJF Group have agreed to extend the required closing
date until September 30, 1999. The Company and JJF Group have also agreed to
continue negotiations regarding a possible restructuring of the Put Agreement on
terms satisfactory to the Company and JJF Group. There can be no assurance that
the Company and JJF Group will reach an agreement on terms acceptable to the
Company, if at all.
In late 1998, the Company developed a plan designed to improve its
financial performance and provide adequate short and long-term liquidity. The
Company's plan consists of four components: (1) obtain more flexible senior
financing; (2) improve cash flow from operations; (3) raise cash by selling
certain assets; and (4) reduce the Company's debt and secure additional
liquidity.
The first component of the plan was completed in November 1998, upon
the closing of the Foothill Loan Agreement. As more fully described in the Form
10-K for the year ended December 31, 1998, the Foothill Loan Agreement provides
for up to a $40 million working capital revolver and a $15 million term loan.
Commitments under the Foothill Loan Agreement will expire in 2002. Borrowings
are secured by a lien on substantially all of the assets of the Company. The
working capital revolver is an "asset based" facility, meaning that borrowings
are based on 85% of eligible accounts receivable and 65% of eligible inventory,
subject to certain limitations and qualifications. In addition to regularly
scheduled amortizing principal and interest payments, the Foothill Loan
Agreement requires that the Company apply the first $5 million of proceeds from
certain designated asset sales to the repayment of the $15 million term loan
facility. Proceeds from the designated asset sales in excess of $5 million may
be used by the Company for working capital. Proceeds used to repay the term loan
cannot be reborrowed.
The second component of the Company's plan is to improve cash flow by
using contract mining services for its underground mining operations. The
Company believes that by utilizing contract miners it will reduce operating
expenses, general and administrative expenses and month-to-month cost
fluctuations. In addition, the Company will have reduced capital costs because
the contract miners will be responsible for mine development and maintenance
capital expenditures. The Company has made progress on this component of the
plan. In early April, the Company entered into a contract mining agreement for
the operations in Garrett County, Maryland, and the contract miner began
operations on April 12, 1999. In addition, the Company entered into contract
mining agreements for its mining operations in Upshur County and Barbour County,
West Virginia. The contract miner for these mines began operations on June 1,
1999. The Company has also entered into a contract mining agreement with another
contract miner for the operations in Raleigh County, West Virginia. The contract
miner began operations at that mine on July 5, 1999.
The third component of the Company's plan involves the sale of certain
non-operating assets and non-strategic operating properties. The non-operating
assets which the Company is seeking to sell are those that require substantial
development costs and/or have significant holding costs. The operating
properties which the Company plans to sell either complement non-operating
assets being held for sale or are not integral to the Company's long-term
operating strategy. The Company has been discussing the sale of these properties
with third parties. In July 1999, the Company sold coal reserves in Preston and
Taylor Counties, West Virginia for $1.25 million in cash plus royalties on
future production. The cash proceeds from this asset sale were applied to reduce
the term loan facility. The Company believes that its efforts to market other
properties to date have been hampered by its financial condition. The Company
plans to continue its efforts to dispose of these assets and believes that it
will be successful in selling all or a part of these assets during the next
twelve to twenty-four months. However, there can be no assurance that asset
sales will be completed on terms acceptable to the Company, if at all. The
Company is also planning to evaluate reasonable offers on other assets as
opportunities develop. The coal reserves in Preston and Taylor Counties, West
Virginia which the Company recently sold were not included in the designated
asset sales. Therefore, cash proceeds from this sale were not credited against
the $5 million asset sale basket.
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The fourth and final component of the plan involves reducing the
Company's overall debt level has been and securing additional liquidity. To
that end, since mid-April, 1999, the Company has been in discussion with
Rothschild Recovery Fund, L.P. ("Rothschild") regarding a restructuring
of its Senior Notes. The transaction initially under discussion was aimed
primarily at reducing the Company's outstanding debt by offering holders of
Senior Notes an incentive, in the form of collateral and advance funding of
three semi-annual interest payments, to exchange them for a smaller principal
amount of new notes. In the course of those discussions, however, the Company
determined that it required approximately $15 million of additional liquidity
to implement its business plan and meet working capital needs. In order to
accomplish these needs, the Company is currently negotiating with Rothschild
and various other parties concerning a transaction in which (i) the Company
would privately issue new senior secured notes ("New Money Notes") and (ii) as
previously disclosed, existing Senior Notes would be exchanged for newly issued
12.50% senior secured notes due 2007 (the "Exchange Notes") with a principal
amount equal to 75% of the principal amount of the Senior Notes being
exchanged. The New Money Notes and the Exchange Notes would be secured by liens
on certain assets of the Company and its subsidiaries junior to the lien under
the Foothill Loan Agreement. The lien securing the Exchange Notes would be
junior to the lien securing the New Money Notes. Exchanging holders will be
asked to consent to certain modifications of the covenants contained in the
indenture for the Senior Notes. The Company expects to offer the opportunity to
exchange Senior Notes for Exchange Notes initially to certain qualified buyers
in a private transaction and subsequently to all remaining holders of Senior
Notes in accordance with applicable securities laws under which the Exchange
Notes issued in the subsequent exchange would be freely tradable.
A portion of the proceeds of sale of the New Money Notes would be (i)
used to pay accrued interest on the Senior Notes exchanged for Exchange Notes;
(ii) escrowed with the indenture trustee for the Exchange Notes to pay the
first three interest payments on the Exchange Notes; and (iii) escrowed with
the indenture trustee for the New Money Notes to pay the first 18 months
interest payments on the New Money Notes. All remaining proceeds would be used
by the Company to pay down outstanding amounts under the revolving credit
facility under the Foothill Loan Agreement and for the Company's working
capital and cash flow needs. Purchasers of the New Money Notes would also
receive warrants to purchase a minority equity stake in the Company.
As noted above, the Company has not completed negotiations of this
potential restructuring and sale of New Money Notes. Moreover, it should be
noted that consummation of the proposed exchange, indenture amendments and
private sale will be subject to a number of conditions, including, without
limitation, approval of the modifications to the indenture for the Senior Notes
by holders of a majority of the outstanding Senior Notes, negotiation of
definitive documentation satisfactory to the Company and participation in the
private exchange offer of a satisfactory level of holders of Senior Notes.
There can be no assurance that the Company will complete the restructuring of
the Senior Notes or the sale of the New Money Notes as described above. The
Company is currently evaluating the accounting and tax implications of this
restructuring.
The Company structured and is currently implementing the plan as
described above to address its liquidity needs. Pending completion of the
proposed restructuring and the infusion of additional capital, the Company
requires additional short-term funding for its operations. The Company is in
negotiations to secure $3 million of interim funding structured as a
participation in the Foothill Loan Agreement. The Company cannot predict
whether or not these negotiations will be successfully completed. In the
absence of the availability of interim funding or the closing of the proposed
restructuring and private placement, the Company expects its borrowing ability
and cash reserves to be exhausted within the next 30 days. The Company will be
monitoring the borrowing availability under the Foothill Loan Agreement and the
Company's liquidity position, and evaluating financial and operating
alternatives to stabilize its borrowing availability.
Even assuming the Company overcomes its current liquidity problems
outlined above, the Company's ability to generate sufficient liquidity for 1999
and comply with financial covenants under its debt arrangements will depend on
the successful implementation of all aspects of the Company's plan as outlined
above, the improvement of future operating performance, the consummation of
asset sales, and the waiver of conditions under the Foothill Loan Agreement, as
well as prevailing economic conditions and financial, business and other
factors, many of which are beyond the Company's control. There can be no
assurance that the Company can accomplish these objectives or that it will not
be adversely affected by matters beyond its control.
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The description of the proposed restructuring of the Senior Notes and
the issuance of New Money Notes is not and shall not be deemed to constitute an
offer to sell or the solicitation of an offer to buy any security or the
solicitation of any consent. The Exchange Notes and the New Money Notes have not
been registered under the Securities Act of 1933 and will not be offered or sold
in the United States absent registration or an applicable exemption from
registration, nor shall there be any sale of such 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.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1998
COAL SALES AND RELATED REVENUES. Coal sales and related revenues were
$57.3 and $114.2 million for the three and six months ended June 30, 1999
compared to $76.3 and $147.9 million for the same periods of 1998, decreases of
24.9% and 22.8%, respectively. Coal sales volume was 2.6 and 5.2 million tons
for the three and six months ended June 30, 1999 compared to 3.2 and 6.2 million
tons for the same periods a year ago, decreases of 18.8% and 16.1%,
respectively. The decreases are due to the following:
1) Tonnage levels were lower in the first and second quarters of
1999 due to idling the Company's Webster County surface mine
in December 1998. The Company is currently reclaiming the
properties associated with the idled surface mine. The
contract deep mine in Webster County continues to operate;
however, production from the deep mine is expected to cease in
the third quarter of 1999 as the reserves are fully depleted.
2) Tonnage levels were lower in the first and second quarters of
1999 due to idling the Grant County surface mine in December
1998. This surface mine was idled because the Company had
mined all of its then permitted reserves and was not able to
obtain a new mining permit for its adjacent properties which
would have allowed for the continuation of the surface mining
operation. Moreover, with the idling of the surface mine, the
Company was unable to sell the portion of production from its
Grant County deep mine which had previously been blended with
coal from the surface mine. As a result of this and other
factors, the Company idled the deep mine in February 1999,
which also caused an additional decline in coal production.
The Company is currently working with the appropriate
regulatory agencies to secure the new mining permit for the
surface operation. The issuance of this permit will depend on
numerous factors, many of which are beyond the control of the
Company. There can be no assurance that this will occur or
that the operations in Grant County will resume.
3) Tonnage levels were lower in the first and second quarters of
1999 due to the completion of one contract mining operation in
Preston County during the fourth quarter of 1998. Production
is expected to cease at the remaining contract deep mine in
Preston County at the end of 1999 due to the depletion of the
reserve base.
4) Tonnage levels were lower in the first and second quarters of
1999 due to the implementation of a reduced production
schedule at the Company's Raleigh County deep mine. The
reduced production schedule became necessary to control
growing inventory levels resulting from the weak metallurgical
coal market. The Raleigh County deep mine will continue to
produce at a reduced tonnage level throughout 1999.
While the Company experienced lower production at certain mines as
described above, tonnage levels during the first and second quarters of 1999 as
compared to the same periods for 1998 increased at the Company's Upshur County,
West Virginia deep mine and Garrett County, Maryland deep mine.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and
selling expenses totaled $53.1 and $103.4 million for the three and six months
ended June 30, 1999 compared to $72.9 and $140.9 million for the same periods of
1998, decreases of 27.2% and 26.6%, respectively. The cost of operations and
selling expenses was $20.42 per ton shipped for the three months ended June 30,
1999 compared to $22.78 per ton for the three months ended June 30, 1998, a
decrease of 10.4% and for the six months ended June 30, 1999 the cost of
operations and selling expenses was $19.88 per ton shipped compared to $22.73
for the six months ended June 30, 1998, a decrease of 12.5%. The decreases
resulted from the implementation of the Company's plans to restructure the
operation of its underground mining operation, and the idling of some of the
Company's higher cost mines.
OTHER OPERATING EXPENSES. Other operating expenses for the three and
six months ended June 30, 1999 were $6.5 and $12.8 million compared to $6.9 and
$13.3 million for the three and six months ended June 30, 1998. Included in
other operating expenses are general and administrative expenses and
depreciation, depletion and amortization.
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General and administrative expenses decreased 20% for the three months
ended June 30, 1999 to $2.0 million compared to $2.5 million for the three
months ended June 30, 1998. In addition, general and administrative expenses
decreased 23.5% for the six months ended June 30, 1999 to $3.9 million compared
to $5.1 million for the six months ended June 30, 1998. The decrease in general
and administrative expenses primarily resulted from management changes made as
the Company restructured its mining operations.
Remaining consistent for the three months ended June 30, 1999 and 1998
were depreciation, depletion and amortization of $4.4 million. For the six
months ended June 30, 1999, depreciation, depletion and amortization increased
7.3% to $8.8 million compared to $8.2 million for the six months ended June 30,
1998. Due to the restructuring of the Company's mining operations that took
place in 1998, the Company reviewed the carrying value of long-lived assets,
based on whether they are recoverable from future undiscounted operating cash
flows and appropriately impaired the necessary assets in 1998 and adjusted
prospectively the remaining asset life based on the cash flow analysis.
Accordingly, the useful life of goodwill was reduced from 40 years to a
prospective period ranging from 3 to 20 years and certain fixed assets had a
reduction in the useful life resulting in a higher depreciation, depletion and
amortization.
LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES. During the first quarter
of 1998, 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. There
were no additional investments in Oak Mountain in the second quarter of 1998.
Also during the second quarter of 1998, the Company initiated steps to reduce
general and administrative expenses and restructure the mine operating plans. In
connection with this effort, the Company recorded $0.1 million of restructuring
charges relating to management changes and $1.4 million relating to impairment
losses on certain pieces of mining equipment.
During the second quarter of 1999 the Company reviewed the carrying
value of computer software and determined that with the addition of contract
miners at the deep mine operations certain software would not be utilized in
operations. The Company recorded an impairment loss of $1.1 million in
connection with the discontinuance of the use of the software. In addition, the
Company recorded an impairment of $2.4 million relating to properties located
in Tazwell County, Virginia.
INTEREST EXPENSE. Interest expense was $3.9 and $7.5 million for the
three and six months June 30, 1999 compared to $3.3 and $6.1 million for the
three and six months ended June 30, 1998, an increase of 18.2% and 23%,
respectively. The increases were due to an increase in the average outstanding
indebtedness and average effective interest rate in the respective periods.
INCOME TAXES. The income tax benefit for the three and six months ended
June 30, 1999 is based on the effective tax rate expected to be applicable for
the full year. The Company has established a full valuation allowance on the net
operating loss carryforwards, capital loss carryforwards and contribution
carryforwards because the realization of these assets is uncertain. In addition,
the Company received a refund of $0.2 million in the first quarter of 1999
related to a prior year federal tax deposit.
NET LOSS. For the three and six months ended June 30, 1999, the
Company's net loss was $8.8 and $11.3 million compared to a net loss of $5.7 and
$9.9 million for the same periods of 1998, a decrease of $3.1 and $1.4 million,
respectively. The decreases in net loss are primarily due to the reduction of
operating and selling expenses as mentioned above.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs that
were written using two digits, rather than four, to define the applicable year.
Any of the Company's computers, computer programs, mining or administration
equipment that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If any of the Company's systems or
equipment has date-sensitive software using only two digits, system failures or
miscalculations may result causing disruptions of operations or disruptions in
normal business activities.
During 1998, the Company created an internal project team to assess the
Y2K issue and identified risks in four general categories: internal business
software and systems, mine operating equipment, coal processing facilities and
other.
Internal Business Software and Systems. During July and August of 1998,
file servers, hubs, switches, routers and individual PCs and workstations, were
tested for Y2K compliance. As of June 30, 1999, the process was substantially
complete. A final review of all internal systems as described in the initial Y2K
plan is to be conducted during the beginning of the fourth quarter of 1999. The
Company's estimated cost for 1999 is $0.2 million and will be funded through
normal operating cash.
Mine Operating Equipment. The Y2K project team has evaluated each piece
of operational mining equipment to ensure compliance for the Y2K issue. In this
process, a person from the project team is serving as the coordinator between
the mining operations and vendors to assess compliance. At the mining locations,
a person familiar with the equipment has been chosen to assess any computer
embedded chips within each piece of equipment. The coordinator has compiled a
list from each location. The assessment and remediation on mine operating
equipment has been completed as of June 30, 1999.
Coal Processing Facilities. The Y2K project team has also identified a
person to serve as coordinator between the mine sites and vendors to assess Y2K
compliance in relation to the Company's coal processing facilities. Coal
processing facilities are composed of various components such as electronic belt
scales, analyzers and controllers. Each plant and its components have been
assessed. The Company's estimated cost has been estimated not to exceed budgeted
amounts. As of June 30, 1999 the assessment has been completed at all coal
processing facilities. The remediation on coal processing facilities should be
complete by September 30, 1999.
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Other. In addition to the three major categories above, the Company is
in the process of identifying and contacting its critical suppliers, customers
and service providers to ensure their readiness for the year 2000. As of March
31, 1999, the Company had completed its identification process and is in the
process of contacting these critical parties with respect to their Y2K
compliance. As of June 30, 1999, 85% of critical suppliers, customers and
service providers have been reviewed. This process is continuing as planned.
Delays have been attributed to obtaining responses from non critical vendors and
the transfer to contract mining operations. The process is expected to be
completed by the end of the third quarter 1999.
Currently, the Company, due to compliance of Y2K issues, does not
expect to develop contingency plans for any operation. To date, expenditures on
Y2K have been minimal and funded by operating cash. Based on preliminary
information, the majority of the project cost will be attributed to the purchase
of new software to meet future industry requirements and will be capitalized.
The total remaining project cost will be expended as incurred over the next five
months. Management believes that the Company is devoting the necessary resources
to identify and resolve significant Y2K issues in a timely manner.
DIVIDEND RESTRICTIONS AFFECTING SUBSIDIARIES
For a discussion of dividend restrictions affecting subsidiaries, see
notes 5 and 6 to the financial statements contained in Item 1 of the Form 10-Q
and Item 2 "Liquidity and Capital Resources; Going Concern Opinion."
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description of Exhibit
10.1 Amendment No. 1 to Loan Documents dated as of August
4, 1999 amending the Loan and Security Agreement,
dated as of November 21, 1998 by and among certain
Subsidiaries of Anker Coal Group, Inc. (the
"Borrowers"), certain financial institutions party
thereto (the "Lenders") and Foothill Capital
Corporation, as agent (the "Agent")
10.2 Contract Mining Agreement dated as of June 25, 1999
by and between Anker West Virginia Mining Company,
Inc. ("AWVMC") and Baylor Mining, Inc. for contract
mining services to be provided at the underground
coal mining operation and related surface facilities
in Raleigh County, West Virginia, known as the
"BayBeck Mine."*
10.3 Contract Mining Agreement dated as of June 24, 1999
by and between AWVMC and BJM Coal Company for
contract mining services to be provided in connection
with coal reserves in the Middle Kittanning seam in
Upshur County, West Virginia.*
10.4 Contract Mining Agreement dated as of April 9, 1999
by and between AWVMC and Steyer Fuel, Inc. for
contract mining services to be provided at the
underground mining operation in the Bakerstown seam
of coal in Garrett County, Maryland, known as the
"Steyer Mine."*
10.5 Employment Agreement dated as of May 1, 1999 by and
between Anker Energy Corporation and William D.
Kilgore.
27 Financial Data Schedule
* A portion of the exhibit, as indicated therein, has be
redacted pursuant to a request for confidential treatment
filed with the Commission.
(b) Reports on Form 8-K.
Form 8-K, dated April 1, 1999, reporting on Item 5, regarding an agreement in
principle with Rothschild Recovery Fund, L.P.
Form 8-K, dated April 16, 1999, reporting on Item 5, regarding negotiations with
Rothschild Recovery Fund, L.P. in connection with a proposed exchange
transaction with respect to the Company's 9-3/4% Senior Notes due 2007.
Form 8-K, dated April 30, 1999, reporting on Item 5, regarding appointment of
William D. Kilgore as Chairman and Chief Executive Officer.
Form 8-K, dated May 5, 1999, reporting on Item 5, regarding contract mining
agreements entered into by the Company.
Form 8-K, dated May 28, 1999, reporting on Item 5, regarding the Company's
decision to explore alternatives to obtain additional sources of liquidity.
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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
/s/ Michael Matesic
-------------------------------------
Michael Matesic
Treasurer and Chief Financial Officer
DATE: August 16, 1999
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