1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1999.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ANKER COAL GROUP, INC.
(EXACT NAME OF REGISTRANT 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 26508
(304) 594-1616
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
B. JUDD HARTMAN, ESQ.
VICE PRESIDENT OF LEGAL AFFAIRS
ANKER COAL GROUP, INC.
2708 CRANBERRY SQUARE
MORGANTOWN, WEST VIRGINIA 26508
(304) 594-1616
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
WITH A COPY TO:
MEREDITH B. CROSS, ESQ.
WILMER, CUTLER & PICKERING
2445 M STREET, N.W.
WASHINGTON, D.C. 20037
(202) 663-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
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. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ]
CALCULATION OF REGISTRATION FEE
=======================================================================================================
Title Of Each Class Of Securities To Be Amount Proposed Maximum
Registered To Be Offering Price Per
Registered Unit
- -------------------------------------------------------------------------------------------------------
14.25% Series B Second Priority Senior
Secured Notes due 2007 (PIK through $113,556,000 (2) 100%
April 1, 2000)........................................
- -------------------------------------------------------------------------------------------------------
Guarantees of 14.25% Series B Second
Priority Senior Secured Notes due 2007 $113,556,000 (2) 100%
(PIK through April 1, 2000) (3).......................
=======================================================================================================
=======================================================================================================
Title Of Each Class Of Securities To Be Proposed Maximum Amount of
Registered Aggregate Offering Registration Fee
Price (1)
- -------------------------------------------------------------------------------------------------------
14.25% Series B Second Priority Senior
Secured Notes due 2007 (PIK through $113,556,000 (2) $29,979
April 1, 2000)........................................
- --------------------------------------------------------------------------------------------------------
Guarantees of 14.25% Series B Second
Priority Senior Secured Notes due 2007 $113,556,000 (2) $0 (4)
(PIK through April 1, 2000) (3).......................
==========================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes $7,553,000 principal amount of notes that will be paid in
lieu of the April 1, 2000 cash interest payment on the notes.
(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.
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 OR UNTIL THE 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
STATE OR OTHER ADDRESS INCLUDING ZIP CODE, AND
JURISDICTION OF I.R.S. EMPLOYER TELEPHONE NUMBER INCLUDING AREA CODE, OF
EXACT NAME OF REGISTRANT GUARANTOR INCORPORATION OR IDENTIFICATION REGISTRANT GUARANTOR'S
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
------------------------------------ ------------------- ------------------ ----------------------------------------
Anker Energy Corporation Delaware 51-0217205 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Anker Group, Inc. Delaware 13-2961732 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Anker Power Services, Inc. West Virginia 55-0700346 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Anker Virginia Mining Company, Inc. Virginia 54-1867395 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Anker West Virginia Mining Company, West Virginia 55-0699931 2708 Cranberry Square
Inc. Morgantown, West Virginia 26508
(304) 594-1616
Bronco Mining Company, Inc. West Virginia 22-2094405 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Hawthorne Coal Company, Inc. West Virginia 55-0742562 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Heather Glen Resources, Inc. West Virginia 55-0746946 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Juliana Mining Company, Inc. West Virginia 55-0568083 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
King Knob Coal Co., Inc. West Virginia 55-0488823 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Marine Coal Sales Company Delaware 13-3307813 645 West Carmel Drive
Carmel, Indiana 46032
(317) 844-6628
Melrose Coal Company, Inc. West Virginia 55-0746947 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
New Allegheny Land Holding Company, West Virginia 31-1568515 2708 Cranberry Square
Inc. Morgantown, West Virginia 26508
(304) 594-1616
Patriot Mining Company, Inc. West Virginia 55-0550184 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Simba Group, Inc. Delaware 55-0753900 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
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STATE OR OTHER ADDRESS INCLUDING ZIP CODE, AND
JURISDICTION OF I.R.S. EMPLOYER TELEPHONE NUMBER INCLUDING AREA CODE, OF
EXACT NAME OF REGISTRANT GUARANTOR INCORPORATION OR IDENTIFICATION REGISTRANT GUARANTOR'S
AS SPECIFIED IN ITS CHARTER ORGANIZATION NUMBER PRINCIPAL EXECUTIVE OFFICES
------------------------------------ ------------------- ------------------ ----------------------------------------
Upshur Property, Inc. Delaware 95-4484172 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Vantrans, Inc. Delaware 22-2093700 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Vindex Energy Corporation West Virginia 55-0753903 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
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SUBJECT TO COMPLETION, DATED DECEMBER 3, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
[ANKER LOGO]
ANKER COAL GROUP, INC.
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EXCHANGE OFFER FOR
14.25% SECOND PRIORITY SENIOR SECURED NOTES DUE 2007 (PIK THROUGH APRIL 1, 2000)
This is an offer to exchange up to $106,003,000 in principal amount of our
outstanding, unregistered 14.25% Second Priority Senior Secured Notes Due 2007
(PIK through April 1, 2000) for a like amount of new, substantially identical
14.25% Second Priority Senior Secured Notes that will be free of the transfer
restrictions that apply to the outstanding notes. We will also issue, when due,
up to $7,553,000 in principal amount of additional new notes in payment of the
April 1, 2000 interest payment on the notes. This offer will expire at 5:00
p.m., New York City time, on , unless we extend it. The new notes will
not trade on any established exchange.
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PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF FACTORS YOU
SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES TO BE DISTRIBUTED IN
THIS EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PAGE
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Summary...............................................................................................................3
Risk Factors.........................................................................................................10
Use of Proceeds......................................................................................................20
Capitalization.......................................................................................................21
Unaudited Pro Forma Consolidated Financial Statements................................................................23
Selected Financial Data..............................................................................................28
Historical and Pro Forma Ratio of Earnings to Fixed Charges..........................................................30
Management's Discussion and Analysis of Financial Condition and Results of Operation.................................31
The Coal Industry....................................................................................................42
Business.............................................................................................................47
Management...........................................................................................................62
Security Ownership of Certain Beneficial Owners and Management.......................................................67
Certain Relationships and Related Transactions.......................................................................69
The Exchange Offer...................................................................................................73
Description of the New Notes.........................................................................................79
Description of the Old Notes........................................................................................106
Description of Other Indebtedness...................................................................................108
Description of the Capital Stock....................................................................................112
Description of the Warrants.........................................................................................115
Material United States Federal Income Tax Consequences..............................................................119
Plan of Distribution................................................................................................125
Where You Can Find More Information.................................................................................125
Legal Matters.......................................................................................................125
Experts.............................................................................................................126
Index to Consolidated Financial Statements..........................................................................F-1
Report of Marshall Miller & Associates......................................................................... Annex A
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SUMMARY
This summary highlights information contained elsewhere in this prospectus. It
may not contain all the information that is important to you. We encourage you
to read this entire prospectus carefully.
ABOUT ANKER COAL GROUP
We are a producer of coal that is used principally to generate electricity and
to produce coke for use in making steel. We currently own or control substantial
coal reserves in West Virginia, Maryland, Virginia and Kentucky. We currently
operate a portfolio of seven deep mines and one surface mine that are located in
West Virginia and Maryland. We recently changed from operating our deep mines
with our own employees to using contract miners to operate these deep mines for
us. Our coal mines and reserves are located in close proximity to rail and water
transportation services or are within short trucking distances to power plants.
We primarily market and sell our coal to electric utilities located in the
Northeastern and mid-Atlantic states. The utilities that we currently sell our
coal to use modern generating processes that will allow them to continue using
our coal after implementation of Phase II of the Clean Air Act.
In addition to selling coal that we produce from our own mines, we also sell
coal that we purchase from other producers, which is referred to as brokered
coal. In addition, we arrange for coal that others produce to be sold to third
parties, which is referred to as commission coal.
Based on recent data published by the National Mining Association, we are one of
the 30 largest coal producers and one of the 30 largest holders of coal reserves
in the United States.
We believe that we have the following competitive strengths:
- PORTFOLIO OF LONG-TERM CONTRACTS. Our long-term contracts accounted
for an average of approximately 75% of our coal sales revenues from
1994 to 1998. Our portfolio of long-term contracts provides us with
stable sources of revenues to support the large expenditures needed to
open, expand and maintain the mines that service those contracts.
- DIVERSE PORTFOLIO OF RESERVES. We have increased our reserve base
approximately 246% since 1992. We had approximately 508 million
recoverable tons of coal as of October 1, 1999. The majority of our
coal reserves are medium sulfur, and we also have coal reserves that
comply with the requirements of the Clean Air Act, known as compliance
coal. All of our coal is of a quality suitable for use in electricity
generating facilities.
- EXPERIENCED SENIOR MANAGEMENT TEAM. Our senior management team has
many years of experience in the coal industry. Bruce Sparks, our
president, has 21 years of experience in the coal industry and has
worked with us for the past 14 years. William Kilgore, our chief
executive officer and chairman of our board of directors, has 42 years
of experience in the coal industry.
We were organized as a Delaware corporation in August 1996 in order to effect a
recapitalization of Anker Group, Inc., our predecessor. Anker Group, Inc. had
been engaged in coal production since 1975. See "Business--Organization."
---------------
Our common stock is not publicly traded. Our principal executive offices are
located at 2708 Cranberry Square, Morgantown, West Virginia 26508, and our
telephone number is (304) 594-1616.
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THE EXCHANGE OFFER
We summarize below the terms of the exchange offer. You should read the detailed
description of the offer under "The Exchange Offer."
GENERAL.................................. We are offering up to $106,003,000 aggregate principal amount of new
14.25% second priority senior secured notes, the interest on which will
be paid-in-kind with additional new notes instead of cash through April
1, 2000, in exchange for a like principal amount of outstanding,
unregistered notes. We will also issue up to $7,553,000 aggregate
principal amount of additional new notes as payment for the April 1,
2000 interest payment on the new notes. We issued the old notes on
October 28, 1999 in a private exchange, private placement and private
stockholder exchange. We are making the exchange offer in order to
satisfy our obligations under a registration rights agreement with the
holders of the old notes.
EXPIRATION DATE.......................... 5:00 p.m., New York City time, on , or any
subsequent date to which the exchange offer is extended.
CONDITIONS TO THE EXCHANGE OFFER......... The exchange offer is not subject to any conditions other than that the
offer does not violate applicable law or any applicable interpretation of
the staff of the SEC. The offer is not conditioned upon any minimum
principal amount of notes' being tendered. We reserve the right
- to delay the acceptance of the notes for exchange,
- to terminate the exchange offer,
- to extend the expiration date of the exchange offer and retain all
tendered notes, subject to the right of tendering holders to withdraw
their tendered notes or
- to waive any condition or otherwise amend the terms of the exchange
offer in any respect.
WITHDRAWAL RIGHTS........................ You may withdraw a tender of notes at any time on or prior to the
expiration date by delivering a written notice of withdrawal to the
exchange agent.
PROCEDURES FOR TENDERING OLD NOTES....... In order to tender your notes, you must complete and sign a letter of
transmittal in accordance with the letter's instructions. You must
forward the letter of transmittal and any other required documents to
the exchange agent, together with the notes to be tendered.
Brokers, dealers, commercial banks, trust companies and other
nominees may also tender notes by book-entry transfer. If your notes are
registered in the name of one of these entities, you are urged to contact that
person promptly if you wish them to tender notes.
Please do not send letters of transmittal and certificates representing
notes to us. Send them only to the exchange agent. The exchange agent
can answer your questions regarding how to tender your notes.
RESALES OF NEW NOTES..................... We believe that the new notes issued in the exchange offer may be
offered for resale, resold and otherwise transferred by you without
compliance with the registration and prospectus delivery requirements of
the Securities Act, if
- you are acquiring the new notes in the ordinary
course of your business,
- you are not participating, and have no arrangement or understanding
to participate, in the distribution of the new notes and
- you are not an affiliate of us. An "affiliate" of us is a person that
"controls or is controlled by or is under common control with" us.
Our belief is based on SEC staff interpretations in no-action letters
issued to third parties unrelated to us. The staff has not considered our
exchange offer in the context of a no-action letter, and we cannot assure
you that the staff would make a similar determination with respect to this
exchange offer.
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Each broker-dealer that receives new notes for its own account in
exchange for old notes that it acquired as a result of market-making
or other trading activities must agree to deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale
of the new notes. See "The Exchange Offer -- Resale of New Notes" and
"Plan of Distribution."
INTEREST.......................................... We will pay accrued interest on old notes you exchange to, but not
including, the issuance date of the new notes. We will pay this interest
to you with the first interest payments on the new notes. As noted above,
we will make this interest payment by issuing notes.
EXCHANGE AGENT.................................... The exchange agent is The Bank of New York. The exchange agent's
address and telephone and facsimile numbers are set forth in "The
Exchange Offer -- Exchange Agent" and in the letter of transmittal.
USE OF PROCEEDS................................... We will not receive any cash proceeds from the issuance of the new
notes. The proceeds from the initial sale of notes in the private
placement were approximately $11.2 million, which was used to repay
outstanding amounts under our senior credit facility. We issued the
remaining old notes in a private exchange for $108.5 million in
principal amount of our 9 3/4% Series B Senior Notes due 2007 and
cancellation of our obligations to a former stockholder. See "Use of
Proceeds."
MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES...................................... We have received a tax opinion from our tax counsel, Wilmer, Cutler &
Pickering, on the material United States federal income tax
consequences of the exchange offer. You should review the information
set forth in "Material United States Federal Income Tax Consequences"
prior to tendering old notes in the exchange offer.
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THE NEW NOTES
We summarize below the key terms of the new notes. You should read the detailed
description of the notes under "Description of the New Notes."
ISSUER................................. Anker Coal Group, Inc.
TERMS OF NOTES OFFERED................. The terms of the new notes will be identical in all material respects to
the old notes, except that the new notes will not contain transfer
restrictions.
MATURITY............................... September 1, 2007.
INTEREST............................... Payable semi-annually in cash on April 1 and October 1 of each year.
We will pay the interest payment on the new notes due April 1, 2000 in
kind by issuing $71.25 principal amount of additional new notes in lieu
of cash interest due on each $1,000 principal amount of new notes on
that date. After that, interest payments will be made in cash.
SECURITY............................... The new notes will have a security interest in substantially all of our
assets other than
- mobile equipment;
- cash and cash equivalents, except that there will be a security interest in
proceeds of collateral and cash held by the trustee for the new notes; and
- real property located in Maryland and those real property interests located
in West Virginia that currently cannot be used in our mining operations, as
specified in the indenture that governs the new notes, and related coal
reserves, fixtures, equipment, improvements, structures, buildings and
water processing equipment and systems.
If and when we grant a lien on our Maryland real property to secure our
senior credit facility, we will also grant a junior lien on the same
property to secure the new notes. The lien securing payment of the new
notes will rank junior to the lien securing our senior credit facility.
While our senior credit facility or any amended or replacement credit
facility is outstanding, holders of new notes will be prohibited from
exercising remedies against the collateral that secures both the new notes
and indebtedness under the senior credit facility. See "Description of the
New Notes--Security," "Description of Other Indebtedness--Credit Facility"
and "Description of Other Indebtedness--Intercreditor Agreement."
RANKING................................ The new notes will rank equally in right of payment with any of our
existing and future senior indebtedness and will rank senior to all of our
subordinated indebtedness. The lien securing payment of the new notes
will rank junior to the lien securing our senior credit facility. While our
senior credit facility or any amended or replacement credit facility is
outstanding, holders of new notes will be prohibited from exercising
remedies against the collateral that secures both the new notes and
indebtedness under the senior credit facility. See "Description of the
New Notes--Security," "Description of Other Indebtedness--Credit
Facility" and "Description of Intercreditor Agreement."
GUARANTEES............................. Our obligations under the new notes will be jointly and severally
guaranteed, fully and unconditionally, by each of our existing and future
wholly-owned subsidiaries, other than those subsidiaries that, both
individually and in the aggregate, are inconsequential to our business
and financial condition.
OPTIONAL REDEMPTION.................... We may redeem any of the notes at any time. If we voluntarily redeem
any notes on or before September 30, 2000, the redemption price will be
104% of the principal amount, plus accrued interest. The redemption
price will decline each year after 2000 and will be 100% of the principal
amount, plus accrued interest, beginning on October 1, 2003.
CHANGE OF CONTROL...................... Upon a change of control, as defined later in this prospectus, we are
required to make an offer to purchase the notes. The purchase price will
equal 101% of the principal amount of the notes on the date of
purchase, plus accrued interest. We may not have sufficient funds available at
the time of any change of control to make any required debt repayment,
including repurchases of the notes.
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COVENANTS.............................. The indenture governing the notes contains covenants with which we
must comply, including:
- We may not sell assets unless we receive fair market value and at
least 75% of the consideration is in cash or assets to be used in
our coal mining business. We must use proceeds of permitted
assets sales for permitted purposes or to redeem notes.
- We may not make restricted payments -- such as cash dividends on
capital stock, repurchases or redemptions of stock or investments
in or loans to unrestricted entities in which we have an interest
-- unless we meet a series of requirements or an exemption
applies. These requirements include that there be no default
under the indenture either before or after the payment, that we
meet a financial test and that all payments in question not
exceed a cap calculated based on our income and cash receipts.
- We may not incur additional indebtedness or issue stock that we
can be required to redeem sooner than 91 days after the notes
mature if, treating the transaction as if it had occurred at the
beginning of the previous four fiscal quarters, our consolidated
cash flow for that four-quarter period would be less than 2.25
times the sum of our consolidated interest expense and the pretax
amount necessary to pay cash dividends on our preferred stock.
- We may not incur indebtedness that ranks below our senior debt
but ahead of the notes.
- We may not pledge our assets as collateral for any debt for
borrowed money that ranks equally with or below the notes, unless
the notes also get the benefit of the pledge. If we grant a lien
on real property located in Maryland to secure our senior credit
facility, we must also grant a junior lien on the same property
to secure the notes.
- We generally may not allow our subsidiaries to be subject to
restrictions on their ability to pay money or transfer assets to
us.
- We and our subsidiaries may not enter into transactions with
major stockholders or persons they control, are controlled by or
are under common control with, unless the transaction is fair and
we comply with specified procedures.
- Neither we nor our subsidiaries may engage in any business that
is not a permitted business, as defined in the indenture, unless
that other business would not be material to our subsidiaries and
us, taken as a whole.
- We may not pay noteholders to waive their rights under, or modify
terms of, the indenture unless we make the same offer to all
noteholders.
Each of these covenants is subject to other qualifications and
exceptions, which are set forth in detail in "Description of the New
Notes -- Covenants." In addition, our senior credit facility contains
covenants that are more restrictive than these.
BOOK-ENTRY: DELIVERY AND FORM......... New notes exchanged for old notes will be held in book-entry form by
The Depository Trust Company. DTC and its participants will maintain
the records of beneficial ownership of the notes and of transfers of notes.
RISK FACTORS
You should consider carefully the matters relating to us, our business and an
investment in the notes described in "Risk Factors."
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SUMMARY OF HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table is a summary of our historical and unaudited pro forma
consolidated financial data for the three years ended December 31, 1998 and for
the nine months ended September 30, 1999 and 1998. We derived the historical
consolidated financial data for each of the three years in the period ended
December 31, 1998 from our audited consolidated financial statements appearing
elsewhere in this prospectus. We derived the historical consolidated financial
data as of September 30, 1999 and for the nine months ended September 30, 1999
and 1998 from our unaudited consolidated financial statements. The unaudited
adjusted combined statements of operations data and other data for the year
ended December 31, 1996 combine the audited results of operations of our
predecessor, Anker Group, Inc., for the period January 1, 1996 to July 31, 1996,
and of us for the period from August 1, 1996 to December 31, 1996.
The pro forma statement of operations data and other data for the year ended
December 31, 1998 and the nine months ended September 30, 1999 give effect to
the following transactions as if each transaction had occurred on January 1,
1998:
- the private placement of the old notes and the application of the
proceeds from the private placement,
- the private stockholder exchange of old notes in exchange for
cancellation of the shares of our common stock owned by a stockholder
and that stockholder's relinquishment of its right to require us to
buy that stock over time and
- the private exchange of old notes for our previously issued 9 3/4%
notes.
We have based the unaudited pro forma adjustments upon available information and
assumptions that we believe are reasonable. The pro forma consolidated data do
not purport to represent what our 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 our consolidated results of operations for the current year
or any future date or period.
The adjustments set forth in the following table do not reflect a one-time
increase in general and administrative expenses related to the write-off of
approximately $1.2 million of fees and other financing costs incurred in
connection with the private exchange and private placement. The adjustments also
do not include a one-time projected income tax liability of $7.0 million
associated with the private exchange.
Adjusted EBITDA and Pro Forma Adjusted EBITDA represent our earnings before
interest, taxes, depreciation, depletion, amortization, non-cash stock
compensation and non-recurring related expenses, loss on impairment of
investment and restructuring charges, life insurance proceeds, financial
restructuring charges and extraordinary items. Adjusted EBITDA and Pro Forma
Adjusted EBITDA should not be considered as alternatives to operating earnings
(loss) or net income (loss), as determined in accordance with generally accepted
accounting principles, as a measure of our operating performance. Nor should
they be considered as alternatives to net cash provided by operating, investing
and financial activities, as determined in accordance with generally accepted
accounting principles, as a measure of our ability to meet cash needs. We have
included Adjusted EBITDA and Pro Forma Adjusted EBITDA because we use Adjusted
EBITDA and Pro Forma Adjusted EBITDA to assess our financial performance and
some of the covenants in our loan agreement and indentures are tied to similar
measures. Since all companies and analysts do not necessarily calculate Adjusted
EBITDA and Pro Forma Adjusted EBITDA in the same fashion, Adjusted EBITDA and
Pro Forma Adjusted EBITDA as presented in this prospectus may not be comparable
to similarly titled measures other companies report.
You should read the following information together with "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and our
consolidated financial statements and related notes included elsewhere in this
prospectus.
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ANKER COAL GROUP, INC.
----------------------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------------- ------------------------------
1999 1998 1998 1997
---------- ---------- -------------- ----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Coal sales and related revenue $174,293 $226,111 $291,426 $322,979
Operating expenses:
Cost of operations and selling expenses 157,419 214,443 276,469 295,387
Depreciation, depletion and amortization 13,430 13,009 18,150 17,470
General and administrative 6,781 7,767 9,076 9,462
Loss on impairment of investment and
restructuring charges 4,526 7,346 90,717 8,267
Stock compensation and related expenses - - - -
------------ ------------- ------------ -----------
Operating (loss) income (7,863) (16,454) (102,986) (7,607)
Interest expense (10,911) (9,421) (13,066) (10,042)
Other income, net 2,579 821 2,805 2,083
Life insurance proceeds - - - 15,000
------------ ------------- ------------ -----------
(Loss) income before income taxes
and extraordinary item (16,195) (25,054) (113,247) (566)
Income tax (benefit) (200) (7,015) (7,643) (1,242)
----------- ------------ ----------- -----------
(Loss) income before extraordinary item (15,995) (18,039) (105,604) 676
Extraordinary item (1) - - 965 3,849
------------ ------------- ---------- -----------
Net (loss) income (15,995) (18,039) (106,569) (3,173)
Preferred stock dividends and accretion (2) (1,505) (1,454) (1,937) (1,876)
Common stock available for repurchase
accretion (421) - - -
----------- ------------- ---------- -----------
Net (loss) income available to common
stockholders $ (17,921) $ (19,493) $ (108,506) $ (5,049)
=========== ============ =========== ============
OTHER DATA:
Adjusted EBITDA $ 13,428(3) $ 4,722 $ 8,686 $ 20,213
CASH FLOW DATA:
Net cash provided by (used in) operating
activities $ (1,543) $ (1,446) $ (5,465) $ ( 5,047)
Net cash (used in) provided by investing
activities (2,194) (7,442) (8,134) (47,025)
Net cash (used in) provided by financing
activities 3,743 9,819 13,614 51,516
BALANCE SHEET DATA (AT PERIOD END):
Working (deficit) capital $ (8,283) $ (4,262) $ 21,499
Total assets 187,042 201,720 304,650
Total long-term debt (4) 149,591 142,711 133,599
Mandatorily redeemable preferred stock 26,093 24,588 22,651
Common stock available for repurchase (4) 10,586 10,000 -
Total stockholder's (deficit) equity (65,797) (47,876) 75,730
ANKER COAL GROUP, INC.
PRO FORMA
---------------------------------------------
ADJUSTED COMBINED NINE MONTHS
FOR THE YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1998 1999
------------------------ -------------------- --------------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Coal sales and related revenue $290,155 $291,426 $174,293
Operating expenses:
Cost of operations and selling expenses 259,579 276,469 157,419
Depreciation, depletion and amortization 14,319 18,150 13,430
General and administrative 7,534 9,076 6,025
Loss on impairment of investment and
restructuring charges - 90,717 4,526
Stock compensation and related expenses 2,969 - -
----------- --------- ---------
Operating (loss) income 5,754 (102,986) (7,107)
Interest expense (4,886) (15,932) (13,313)
Other income, net 1,480 2,805 2,579
Life insurance proceeds - - -
----------- --------- ---------
(Loss) income before income taxes
and extraordinary item 2,348 (116,113) (17,841)
Income tax (benefit) 351 (7,643) (200)
----------- ---------- ----------
(Loss) income before extraordinary item 1,997 (108,470) (17,641)
Extraordinary item (1) - 965 -
----------- --------- ---------
Net (loss) income 1,997 (109,435) (17,641)
Preferred stock dividends and accretion (2) (891) (1,937) (1,505)
Common stock available for repurchase
accretion - - -
----------- --------- ---------
Net (loss) income available to common
stockholders $ 1,106 $(111,372) $ (19,146)
=========== ========= =========
OTHER DATA:
Adjusted EBITDA $ 24,522 $ 8,686 $ 13,428
CASH FLOW DATA:
Net cash provided by (used in) operating
activities $ (564)
Net cash (used in) provided by investing
activities (84,968)
Net cash (used in) provided by financing
activities 86,088
BALANCE SHEET DATA (AT PERIOD END):
Working (deficit) capital $ 7,410
Total assets 259,683
Total long-term debt (4) 88,029
Mandatorily redeemable preferred stock 20,775
Common stock available for repurchase (4) -
Total stockholder's (deficit) equity 80,779
- -----------------------------
(1) Represents the write-off of unamortized debt issuance costs related to our
credit facility in 1997 and our amended and restated credit facility in
1998.
(2) Represents accrued and unpaid dividends and accretion on Class A
mandatorily redeemable preferred stock.
(3) Adjusted for $0.8 million of financial restructuring charges included in
general and administrative expenses.
(4) Includes current portion. See our consolidated financial statements
included elsewhere in this prospectus.
RATIO OF EARNINGS TO FIXED CHARGES
Our earnings were insufficient to cover fixed charges for the years ended
December 31, 1998 and 1997, and for the nine months ended September 30, 1999 and
1998. See "Historical and Pro Forma Ratio of Earnings to Fixed Charges."
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RISK FACTORS
You should consider carefully the risks below, as well as other information
included in this prospectus, before making a decision to participate in the
exchange offer.
RISKS RELATED TO THE EXCHANGE OFFER
THERE IS CURRENTLY NO PUBLIC TRADING MARKET FOR THE NOTES. IF AN ACTIVE TRADING
MARKET DOES NOT DEVELOP FOR THESE NOTES, YOU MAY NOT BE ABLE TO RESELL THEM.
No active trading market currently exists for the notes and none may develop.
The notes will not be listed on any securities exchange. The trading price may
depend upon prevailing interest rates, the market for similar securities, and
other factors, including general economic conditions and our financial
condition, performance and prospects. If an active trading market does not
develop, you may not be able to resell your notes at their fair market value or
at all.
NOTES THAT YOU DO NOT EXCHANGE WILL CONTINUE TO BE SUBJECT TO TRANSFER
RESTRICTIONS AND MIGHT BECOME LESS LIQUID.
We did not register the old notes under the Securities Act or any state
securities laws. As a result, you may not offer, sell or otherwise transfer the
old notes except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or in compliance with
an exemption from those registration requirements. Old notes that you do not
tender will, after the exchange offer, continue to bear a legend reflecting
these restrictions on transfer. If you still hold notes that you have not
tendered after the exchange offer, you will not be entitled to any rights to
have those notes registered under the Securities Act. See "Description of the
Old Notes." We do not intend to register any notes that you have not tendered
after the exchange offer. Accordingly, it may be difficult for you to resell
your old notes. The old notes are currently, and will remain, eligible for sale
pursuant to Rule 144A through the Private Offerings, Resale and Trading through
Automated Linkages market of the National Association of Securities Dealers,
Inc.
Your ability to sell unregistered notes that you have not tendered in the
exchange offer could be adversely affected by other holders' tendering and
receiving registered notes. We anticipate that most holders of old notes will
exchange them for new notes. As more holders of old notes participate in the
exchange, the liquidity of the market for any old notes that remain after the
completion of the exchange offer may be substantially limited. Any old notes
tendered and exchanged in the exchange offer will reduce the aggregate principal
amount of the old notes outstanding.
RISKS RELATED TO ANKER
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND CASH FLOW PROBLEMS, AND THE OPINION
OF OUR INDEPENDENT ACCOUNTANTS CONTAINS A GOING CONCERN EXPLANATORY PARAGRAPH
WITH RESPECT TO OUR 1998 CONSOLIDATED FINANCIAL STATEMENTS.
We recorded net losses of approximately $106.6 million for the year ended
December 31, 1998 and approximately $16.0 million for the nine months ended
September 30, 1999. The net losses include a loss on impairment of investment
and restructuring charges of approximately $90.7 million for the year ended
December 31, 1998, and approximately $4.5 million for the nine months ended
September 30, 1999. Our independent public accountants have issued an opinion on
our consolidated financial statements for the year ended December 31, 1998 that
includes an explanatory paragraph as to our ability to continue as a going
concern.
As a result of the going concern explanatory paragraph, we will be required to
provide security in order to obtain the reclamation bonds required before
regulators will issue us new mining permits. This could include posting cash or
cash equivalents for all or a part of the amount of the bonds. We have been and
will continue to meet with our principal customers and suppliers to explain our
financial condition. However, we may not be able to avoid adverse impacts caused
by changes in the terms on which we do business with customers and suppliers.
WE ARE IN THE PROCESS OF REVALUING OUR NON-OPERATING ASSETS AND WE CONTINUE TO
EVALUATE THE CARRYING AMOUNT OF OTHER LONG-LIVED ASSETS, INCLUDING GOODWILL,
WHICH COULD RESULT IN DOWNWARD ADJUSTMENTS OF THE VALUE OF THOSE ASSETS ON OUR
BALANCE SHEET.
In light of our financial condition, we have begun a review of the carrying
values of our non-operating assets. We continue to review the carrying value of
our other long-lived assets including goodwill by analyzing future cash flows
compared to our carrying amounts.
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Although we cannot predict the outcome of these reviews, we may make downward
adjustments to the amounts recorded for those assets on our balance sheet.
WE ARE HIGHLY LEVERAGED AND HAVE SIGNIFICANT DEBT SERVICE REQUIREMENTS.
We have substantial indebtedness and significant debt service obligations. As of
November 11, 1999, we had total long-term indebtedness in the amount of $135.9
million including current portion. For the nine-month period ended September 30,
1999, our earnings were insufficient to cover fixed charges in the amount of
approximately $16.2 million. The indentures governing our debt securities permit
us and our subsidiaries to incur additional indebtedness, including secured
indebtedness, subject to limitations.
Our high degree of leverage could have important consequences to the holders of
our notes, including that
- beginning October 1, 2000, a substantial portion of our cash from
operations will be committed to the payment of debt service,
- our ability to obtain additional financing in the future for working
capital, capital expenditures or acquisitions is substantially
limited,
- our levels of indebtedness and interest expense limit our flexibility
in reacting to changes in the business environment and
- on September 1, 2007, the entire unpaid principal of our 14.25% Second
Priority Senior Secured Notes will be due and payable.
As of November 11, 1999, the total amount of our secured indebtedness and that
of our subsidiaries that have guaranteed our indebtedness which would have
effectively ranked senior to the notes was approximately $13.4 million. This
includes our obligations and the subsidiary guarantors' obligations under our
loan agreement with Foothill Capital Corporation, as agent, as well as other
indebtedness secured by permitted liens. The obligations under the loan
agreement with Foothill are secured by a first priority lien on substantially
all of our assets and those of the subsidiary guarantors, other than real
property located in Maryland. Amounts outstanding under the loan agreement with
Foothill may be as much as $55.0 million, and the indentures governing our notes
would permit us to incur up to $10.0 million of secured purchase money
indebtedness with priority over the notes. As of November 11, 1999, the amount
outstanding under the loan agreement with Foothill was $13.0 million, all of
which was outstanding under the term loan portion. As of that date, there was
$17.0 million of undrawn availability under the revolving credit portion of the
loan agreement. Any amounts outstanding under our loan agreement with Foothill
would effectively rank senior to the new notes and the guarantees of the
subsidiaries guaranteeing the obligations under the new notes.
Our ability to pay principal and interest on the notes and to satisfy our other
debt service obligations, including the payments under the loan agreement with
Foothill, will depend upon the future operating performance of our subsidiaries.
The operating performance of our subsidiaries could be affected by many factors,
including the availability of borrowings under the loan agreement with Foothill
or successor facilities. To satisfy our debt service obligations, we may be
required to refinance all or a portion of our existing indebtedness, including
the notes, at or prior to maturity. We may also satisfy our debt servicing
obligations by selling assets or raising equity capital. Additional financing to
satisfy our debt service obligations may not be available to us on acceptable
terms, if at all.
OUR CURRENT FINANCIAL CONDITION HAS HAMPERED OUR DIVESTITURE STRATEGY. IN
ADDITION, OUR EXISTING CREDIT FACILITY AND NOTES INDENTURES LIMIT OUR ABILITY TO
USE ASSET SALE PROCEEDS IN OUR BUSINESS.
Our business plan involves the sale of some of our non-operating assets and
selected non-strategic operating properties. The non-operating assets that we
are seeking to sell are those that we believe require substantial development
costs or have significant holding costs. In our opinion, the operating
properties that we plan to sell either complement non-operating assets being
held for sale or are not integral to our long-term operating strategy. We have
been discussing the sale of these properties with third parties. We believe that
our financial condition has hampered our efforts to market these properties to
date. Although we believe that we will be successful in selling all or a part of
these assets during the next 12 to 24 months, we may not be able to complete
these asset sales on terms acceptable to us, if at all.
In addition, the loan agreement with Foothill requires us to use the first $5.0
million of asset sale proceeds to reduce our term loan from Foothill. Payments
against the term loan cannot be reborrowed and therefore cannot be used to fund
our operating costs or other expenses. As a result of this provision, we will
not be able to use the first $5.0 million of asset sale proceeds to reinvest in
our business, fund operations or service the indebtedness on our outstanding
notes.
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15
Furthermore, the indenture that governs the old notes and new notes requires
that, twice per year, we offer to redeem the notes using 60% of excess proceeds,
if any, after the first $1.0 million that we receive from asset sales, unless we
use the proceeds within 120 days of our receiving them for specified purposes
under the indenture. See "Description of the New Notes--Mandatory Redemption
From Excess Asset Sale Proceeds." As a result of this provision, we may not be
able to use these excess asset sale proceeds to fund operations or in our
business, other than for capital expenditures made within 120 days of our
receipt of the proceeds.
THE TERMS OF THE AGREEMENTS GOVERNING OUR INDEBTEDNESS CONTAIN SIGNIFICANT
RESTRICTIONS ON OUR OPERATIONS.
The indentures governing our outstanding notes contain covenants that, among
other things:
- limit our ability and our subsidiaries' ability to incur additional
indebtedness and issue preferred stock;
- restrict our ability and the ability of our subsidiaries to pay
dividends and make other restricted payments, including investments;
- limit the ability of our subsidiaries to incur dividend and other
payment restrictions that other parties impose;
- limit our ability and that of our subsidiaries to conduct transactions
with affiliates;
- limit our ability and that of our subsidiaries to make asset sales;
- limit our ability and that of our subsidiaries to incur liens;
- limit our ability and that of our subsidiaries to use proceeds from
permitted asset sales;
- limit our ability to consolidate or merge with or into, or to transfer
all or substantially all of our assets to, another person; and
- limit our ability to engage in other lines of business. See
"Description of the New Notes--Covenants."
In addition, the loan agreement with Foothill contains additional and more
restrictive covenants than the indentures and requires us to maintain specified
financial ratios and satisfy various tests relating to our financial condition.
Our ability to comply with the covenants in the indentures and the loan
agreement may be affected by events beyond our control. The breach of any
covenants or restrictions, if not cured within any applicable cure period, could
result in a default under an indenture or the loan agreement, which would permit
the holders of the notes, or the lenders under the loan agreement, to declare
all amounts borrowed to be due and payable, together with accrued and unpaid
interest. In the case of the lenders under the loan agreement, a default may
allow the lenders to terminate their commitments to make further extensions of
credit under the loan agreement.
If we were unable to repay our indebtedness to the lenders under the loan
agreement with Foothill, the lenders could proceed against any or all of the
collateral securing the indebtedness under the loan agreement. The collateral
consists of substantially all of our assets and those of the subsidiaries
guaranteeing amounts borrowed under the loan agreement, other than real property
located in Maryland, and includes all of the collateral securing the notes. In
addition, if we fail to comply with the financial and operating covenants
contained in the loan agreement, we may trigger an event of default under the
loan agreement. An event of default could permit the acceleration of the debt
incurred under the loan agreement and, in some cases, cross-acceleration and
cross-default of indebtedness outstanding under other of our debt instruments,
including the notes. See "Description of the New Notes--Covenants."
WE ARE ORGANIZED AS A HOLDING COMPANY, AND WE DEPEND ON THE SUCCESS OF OUR
OPERATING SUBSIDIARIES. OUR OPERATING SUBSIDIARIES ALSO HAVE SIGNIFICANT
INDEBTEDNESS.
We are a holding company and conduct all of our operations exclusively through
our subsidiaries. Our only significant assets are the capital stock of our
wholly-owned subsidiaries. As a holding company, we are dependent on dividends
or other distributions of funds from our subsidiaries to meet our debt service
and other obligations, including our obligations under the notes. Substantially
all of our subsidiaries are guarantors under our outstanding notes. In addition,
all of our operating subsidiaries are borrowers under, and other of our
subsidiaries guarantee the indebtedness under, the loan agreement with Foothill.
All obligations under the loan agreement are secured by a first priority lien on
substantially all of our assets and those of our subsidiaries.
WE DEPEND ON KEY CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND THE
LOSS OF ONE OR MORE OF THEM COULD ADVERSELY AFFECT US.
A substantial portion of our coal is sold under long-term coal supply contracts
with a few key customers that are important to the stability and profitability
of our operations. Our shipments to Potomac Electric Power Company accounted for
10% of our revenues in 1998, and we expect shipments to that customer to account
for approximately 27% of our revenues in 1999. Our long-term contracts with
companies related to AES Corporation accounted for more than 18% of our revenues
in 1998, and we expect them to account for
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approximately 18% of revenues in 1999. Our long-term contract with Virginia
Electric Power Company accounted for approximately 11% of our revenues in 1998,
and we expect them to account for approximately 10% of revenues in 1999. The
loss of these or other long-term contracts could have a material adverse effect
on our financial condition and results of operations. See "Business--Coal
Marketing and Sales."
In August 1999, to resolve disputes under one of our agreements with Virginia
Electric Power Company, referred to as VEPCO, we entered into an amendment to
that agreement. The amendment, among other things, gives VEPCO the right, but
not the obligation, to terminate its contract to purchase coal from us since the
West Virginia Division of Environmental Protection did not issue a permit for
the resumption of operations at our Grant County surface mine by October 15,
1999. As of the date of this prospectus, the West Virginia Division of
Environmental Protection has not issued the permit, although it has indicated by
letter to us that it anticipates a favorable consideration of our application
for the permit. By letter to us dated October 19, 1999, VEPCO informed us that
it was not, as of that date, exercising its right to terminate its contract and
that it expects not to do so if the permit is approved and issued in the near
term. We do not know how long VEPCO will be willing to wait for us to receive
the permit, how long it will take us to get the permit or whether we will
ultimately get it. If the West Virginia Division of Environmental Protection's
failure to issue the permit continues, however, and VEPCO exercises its right to
cancel the contract, we intend to seek replacement buyers for the coal that is
the subject of the contract with VEPCO. We cannot assure you, however, that any
replacement sales would occur on terms as favorable to us as those of the VEPCO
contract, if at all. An official of the West Virginia Division of Environmental
Protection has advised us orally that it has decided to issue a permit covering
a portion of the Grant County surface mine operation. We have not yet received
written confirmation that the permit has been granted. See "--We have been
unable to obtain a new mining permit for one of our important properties, which
has caused reduced levels of coal production. We are uncertain if or when we
will be able to obtain the permit" below.
TRANSPORTATION COSTS REPRESENT A SIGNIFICANT PORTION OF THE DELIVERED COST OF
COAL, AND INCREASES IN TRANSPORTATION COSTS COULD MAKE OTHER ENERGY SOURCES MORE
COMPETITIVE WITH COAL. TRANSPORTATION DISRUPTIONS COULD IMPAIR OUR ABILITY TO
SELL COAL.
We depend on rail, trucking and barge transportation to deliver shipments of
coal to customers. In 1998, we shipped approximately 60% of our coal tonnage by
rail and 40% by truck and barge. Disruption of these transportation services,
particularly rail, could temporarily impair our ability to supply coal to our
customers and adversely affect our business and operating results.
Transportation costs are a significant component of the total cost of supplying
coal to customers and can affect significantly our competitive position and
profitability. Increases in our transportation costs, or changes in our
transportation costs relative to transportation costs that providers of
competing coal or of other fuels incur, could have an adverse effect on our
operations and business.
CSX Transportation, Inc. currently ships all of our coal delivered by rail. CSX
Transportation, Inc. and Norfolk Southern Corporation recently acquired Conrail,
which had been one of our rail transportation providers. The integration of
Conrail into CSX Transportation and Norfolk Southern began on June 1, 1999.
Although we have not yet experienced any service disruptions because of the
merger, disruptions in service may occur during the transition period. We do not
know how long the transition period will last. Disruption of transportation
services because of problems arising from the integration process or from
weather-related problems, strikes, lock-outs or other events could impair our
ability to supply coal to customers and could have a material adverse effect on
our business, financial condition and results of operations. See "Business--Coal
Transportation."
OUR USE OF CONTRACT MINERS POSES BUSINESS RISKS, INCLUDING THE RISK OF A DECLINE
IN COAL PRODUCTION.
Our business plan includes improving cash flow by using contract mining services
for all of our underground mining operations. We have converted all of our deep
mines to contract mining. There is a risk that the contract miners will not be
able to perform their obligations, including the requirements to produce
specified amounts of coal, over the life of the contract mining agreements.
While we have taken care in selecting the contract miners for our underground
mines, each of our contract miners is owned by a single individual. In addition,
as a general matter, contract mining companies are usually not well capitalized.
If the owner of one of our contract mining companies were to die or if a
contract miner began experiencing financial difficulties for any reason, there
is a risk that the contract mining company would not be able to perform its
obligations to us. In that event, we could experience a material decline in coal
production, which could adversely affect our financial position.
WE HAVE BEEN UNABLE TO OBTAIN A NEW MINING PERMIT FOR ONE OF OUR IMPORTANT
PROPERTIES, WHICH HAS CAUSED REDUCED LEVELS OF COAL PRODUCTION. WE ARE UNCERTAIN
IF OR WHEN WE WILL BE ABLE TO OBTAIN THE PERMIT.
Coal production tonnage levels were lower in 1999 due in part to the idling of
our Grant County surface mine in December 1998. We idled this surface mine
because we had mined all of our then permitted coal reserves and were not able
to obtain a new mining permit for our adjacent properties. A new mining permit
for our adjacent properties would have allowed for the continuation of the
surface
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mining operation. With the idling of the surface mine, we have been unable to
sell the portion of production from our Grant County deep mine that we
previously had blended with coal from the surface mine. As a result of this and
other factors, we idled the deep mine in February 1999, which further reduced
tonnage levels. We are working with the appropriate regulatory agencies to try
to get the necessary permits for the Grant County surface mine. An official with
the West Virginia Division of Environmental Protection has advised us orally
that this governmental agency has decided to issue a permit covering a portion
of the Grant County surface mine operation so that we can resume mining at that
operation. We have not yet received written confirmation that the permit has
been granted. At this point, we are uncertain of when we will actually receive
the necessary permit for the Grant County surface mine. Also, there is a risk
that this agency will not issue the permit even though we have been advised that
it will. Because this agency did not issue permit by October 15, 1999, VEPCO has
the right, but not the obligation, to terminate one of its long-term coal
contract with us. See "--We depend on key customers for a significant portion of
our revenues, and the loss of one or more of them could adversely affect us"
above.
WE COULD HAVE INCOME TAX LIABILITY AS A RESULT OF THE RESTRUCTURING OF OUR 9
3/4% SERIES B SENIOR NOTES.
As a result of the private restructuring of our 9 3/4% Series B Senior Notes, we
may recognize significant cancellation of debt income. As a result of that
income, we may incur income tax liabilities. We expect to be required to
recognize cancellation of debt income in an amount equal to the difference
between the face amount of the 9 3/4% notes and the issue price of the notes
issued in exchange for the 9 3/4% notes.
We expect to have accumulated net operating losses that would offset a portion
of the cancellation of debt income that could result from the private
restructuring. As of October 28, 1999, we had estimated that the tax liability
could be as much as $7.0 million. That estimate is subject to uncertainty, and
the actual tax liability may be less than that amount. We are currently
finalizing our determination of the tax liability that will result from the
private restructuring transaction. If we are required to pay tax, it will be due
and payable on March 15, 2000. We intend to borrow the funds to pay any tax due
from the revolving credit facility under the loan agreement with Foothill, which
will materially reduce our borrowing availability that would have been available
for our business operations.
THE COAL MARKETS ARE HIGHLY COMPETITIVE AND AFFECTED BY FACTORS BEYOND OUR
CONTROL.
The coal industry is highly competitive, with numerous producers in all coal
producing regions. Historically, we have competed with many other large
producers as well as smaller producers in our region. However, because of
significant consolidation in the coal industry over the past few years and other
factors, we now compete against producers in other regions. In addition, some of
our larger competitors have both the size of reserves and capital resources to
utilize mining technologies we cannot which provide low cost production.
In addition, the coal markets we serve are affected by many variables beyond our
control. The coal markets are presently being affected by:
- environmental and other governmental regulations,
- deregulation of electric utilities,
- consolidation within the rail transportation industry,
- the increased role of electricity-based futures trading and
- reduced term lengths of long-term sales contracts and a greater
proportion of coal being purchased on a spot basis.
In addition to these recent developments, other long-term factors will affect
the continued demand for our coal and the prices that we will be able to obtain.
These long-term factors include
- the demand for electricity,
- coal transportation costs,
- technological developments and
- the availability and price of alternative fuel supply sources, such as
oil, natural gas, nuclear energy and hydroelectric energy.
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WE ARE CONTROLLED BY ONE GROUP OF SHAREHOLDERS THAT HAS SIGNIFICANT INFLUENCE ON
OUR DECISIONS.
Approximately 53.24% of our fully-diluted outstanding common stock is owned by
American Gas and Oil Investors, L.P., AmGo II, L.P., First Reserve Fund V-2,
L.P., First Reserve Fund V, L.P., First Reserve Fund VI, L.P. and First Reserve
Fund VII, L.P., all of which are under the common management of First Reserve
Corporation. Accordingly, these funds are able to
- elect a majority of our directors,
- determine our corporate and management policies and
- subject to the terms of agreements among our existing shareholders and
other investors and with the concurrence of one additional director,
make decisions relating to fundamental corporate actions, including
any mergers or acquisitions and sales of all or substantially all of
our assets.
Although the funds managed by First Reserve Corporation have, and will continue
to have, substantial control, until the earlier to occur of an initial public
offering of our common stock and October 30, 2002, the investor agreement will
require a vote of at least 85% of the total outstanding shares of common stock
to sell all or a majority of our assets, enter into a merger with or into
another entity or sell a majority of our common stock. See "Description of the
Warrants."
COAL MINING IS DEPENDENT UPON MANY FACTORS AND CONDITIONS BEYOND OUR CONTROL.
Coal mining is subject to conditions beyond our control which can affect our
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,
- disruption, or increase in the cost of, of transportation services,
- variations in geological conditions, the ability to secure new mining
permits,
- regulatory uncertainties,
- price fluctuations, and
- labor disruptions.
Over the past 18 months, we have been adversely affected by many of the
conditions. For example, severe rain forced us to close temporarily one of our
surface mining operations, we have been unable to obtain a mining permit for our
Grant County surface mine, and we have experienced variations in geological
conditions at most of our deep mines and variations in coal seam thickness and
in the amount of rock and soil overlying our coal deposits.
GOVERNMENT REGULATIONS COULD INCREASE OUR COSTS OF DOING BUSINESS AND MAY
DISCOURAGE OUR CUSTOMERS FROM BUYING OUR COAL.
We are subject to regulation by federal, state and local authorities on matters
including
- employee health and safety,
- permit and licensing requirements,
- air quality standards,
- water pollution,
- plant and wildlife protection,
- reclamation and restoration of mining properties after mining is
completed,
- the discharge of materials into the environment,
- surface subsidence, which is the sinking or settling of the earth's
surface from underground mining,
- the effects that mining has on groundwater quality and availability
and
- benefits for current and retired coal miners.
Numerous governmental permits and approvals are required for mining operations.
We may be required to prepare and present to federal, state and local
authorities data pertaining to the effect or impact that any proposed
exploration for, or production of, coal may
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have on the environment. Requirements that any governmental authority imposes
may be costly and time-consuming and may delay commencement or continuation of
exploration or production operations.
Furthermore, new legislation or regulations and orders may be adopted that may
materially adversely affect our mining operations, our cost structure or our
customers' ability to use coal. New legislation and new regulations under
existing laws related to the protection of the environment, which would further
regulate or tax the coal industry, may also require us or our customers to
change operations significantly or incur increased costs. New environmental
legislation or regulations could have a material adverse effect on our business,
financial condition and results of operations.
In particular, we may be required to modify our operations to comply with permit
and emission requirements under the federal Clean Air Act and corresponding
state laws that regulate emissions into the air affecting coal mining
operations. Direct impact on coal mining and processing operations may occur
through the Clean Air Act permit and emissions control requirements relating to
particulate matter, including, without limitation, fugitive dust. In July 1997,
the U.S. Environmental Protection Agency adopted new, more stringent National
Ambient Air Quality Standards for particulate matter and ozone, which were
initially expected to be implemented by 2003. The District of Columbia Court of
Appeals partially overturned these standards on appeal. We expect there to be
further appeals, but we cannot predict at this time what the outcome of any
further appeals will be. The impact of any new National Ambient Air Quality
Standards on the coal industry will depend on the policies and control
strategies that states implement under the Clean Air Act, but it could have a
material adverse effect on our business, financial condition and results of
operations.
In order to comply with limitations on emissions, our customers may buy
low-sulfur coal or switch to other fuels. The Clean Air Act affects coal mining
operations indirectly by extensively regulating the emission into the air of
sulfur dioxide and other compounds, including nitrogen oxides, emitted by
coal-fired power plants. The Clean Air Act places limits on sulfur dioxide
emissions from electric power generation plants. The initiation of a second
phase of emission reductions beginning in 2000 could affect adversely the demand
for non-compliant coal as additional coal-burning electric power generation
plants become subject to the restrictions of the Clean Air Act. The extent to
which the switch by utilities to lower sulfur coal or other low-sulfur fuels
would materially adversely affect us would depend upon a number of factors,
including the utilities' ability to cost effectively convert non-compliant coal
that we produce to compliance coal.
The Clean Air Act also affects coal mining operations by requiring utilities
that currently are major sources of nitrogen oxides in moderate or higher ozone
nonattainment areas to install reasonably available control technology. The
Environmental Protection Agency announced a proposal that would require 22
eastern states to reduce substantially nitrogen oxide emissions by the year
2003. We cannot predict the effect that these regulations or other requirements
that may be imposed in the future could have on the coal industry in general,
and on us in particular. The implementation of the Clean Air Act, the new
National Ambient Air Quality Standards or any other future regulatory provisions
may materially adversely affect our business, financial condition and results of
operation.
WE DEPEND ON THE SELECTION, ACQUISITION, DEVELOPMENT AND RETENTION OF COAL
RESERVES CONTAINING ECONOMICALLY RECOVERABLE COAL OF QUALITIES THAT WE CAN SELL
TO OUR CUSTOMERS. WE MAY NOT BE SUCCESSFUL IN DEVELOPING OR OBTAINING ACCEPTABLE
COAL RESERVES.
Our future success depends primarily upon our ability to develop our existing
coal reserves that are economically recoverable and, to a lesser extent, on our
ability to find and develop new coal reserves. Our recoverable reserves will
generally decline as reserves are depleted, unless we are able to
- prove up existing reserves,
- conduct successful exploration or development activities, or
- acquire properties containing recoverable reserves.
In order to increase reserves and production, we must continue our development
and exploration programs or undertake other replacement activities. Our current
strategy is to exploit our existing reserve base and to acquire additional
reserves where needed to expand or supplement existing operations. Our limited
capital resources hamper our ability to acquire new coal reserves. Our planned
development, our existing reserves or our exploration projects and acquisition
activities may not result in significant additional reserves. In addition, we
may not have success developing additional mines. For a discussion of our
reserves, see "Business--Coal Reserves."
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A SIGNIFICANT DECLINE IN THE PRICE WE RECEIVE FOR OUR COAL COULD ADVERSELY
AFFECT OUR OPERATING RESULTS AND CASH FLOWS.
Our results of operations are highly dependent upon the prices we receive for
our coal and our ability to improve productivity and reduce costs. The
expiration of long-term contracts with prices above current market prices
requires that we continue to improve productivity and reduce costs in order to
sustain operating margins. Prices for export coal have declined. In addition,
demand for coal has decreased because of the warm winters in the northeastern
United States in 1998 and 1999. This has resulted in increased inventories that
have caused pricing pressures in 1999. All of these factors adversely affected
our operating results in the first three quarters of 1999 and may adversely
affect operating results for future periods. The declining prices have also
adversely affected our ability to generate cash flows necessary to improve
productivity and expand operations.
The price of coal sold under many of our long-term contracts is above current
market prices. Our customers may not extend existing long-term contracts or
enter into new long-term contracts. This could adversely affect the stability
and profitability of our operations. In addition, changes in regulations
governing the electric utility industry may make it more difficult for us to
enter into long-term contracts with our electric utility customers, as these
customers may become more sensitive to long-term price or quantity commitments
in a more competitive environment. A substantial decrease in the amount of coal
we sell pursuant to long-term contracts could subject our revenue stream to
increased volatility and adversely affect our financial position. See
"Business--Coal Contracts."
THE EXPIRATION OF LONG-TERM CONTRACTS WITH FAVORABLE PRICING OR CONTRACT
PROVISIONS ALLOWING FOR THE RENEGOTIATION OF PRICES COULD REDUCE OUR
PROFITABILITY.
The profitability of our long-term coal supply contracts depends on a variety of
factors. Profitability varies from contract to contract and fluctuates during
the contract term, depending on contract provisions, our actual production costs
and other factors. In addition, provisions for adjustment or renegotiation of
prices and other contractual provisions may increase our exposure to short-term
coal price volatility. Virtually all of our long-term contracts include price
adjustment provisions that permit an increase or decrease at specified times in
the contract price to reflect changes in price or other economic indices, taxes
and other charges; and one of our 15 long-term coal supply contracts contains
price reopener provisions that provide for the contract price to be adjusted
upward or downward at specified times on the basis of market factors. If a
substantial portion of our long-term contracts were modified or terminated, we
would be affected adversely to the extent that we are unable to find other
customers to purchase coal at the same level of profitability. All of our
long-term contracts are for prices above current spot market prices. The loss of
some our long-term contracts could have a material adverse effect on our
business, financial condition and results of operations.
Between 1994 and 1998, approximately 75% of our revenues from coal sales were
made under long-term contracts, and we expect approximately 80% of our revenues
in 1999 to be attributable to coal sales under long-term contracts. Our
long-term contracts had a weighted average term of approximately 5.5 years as of
October 1, 1999.
The balance of sales not made under long-term contracts are made in the spot
market, or under contracts based on spot market prices and not under long-term,
fixed-price contracts. Accordingly, the prices we receive for a portion of our
coal production are dependent upon numerous factors beyond our control. These
factors include, but are not limited to,
- the level of consumer demand for electricity,
- governmental regulations and taxes,
- the price and availability of alternative energy sources and
- the overall economic environment.
Any significant decline in prices for coal could have a material adverse effect
on our 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, we may
not be able to generate sufficient cash flow from operations to meet our
obligations and make planned capital expenditures.
The availability of a ready market for our coal production also depends on a
number of factors beyond our control, including the demand and supply of low
sulfur coal and the availability of pollution credits.
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21
WE RELY ON ESTIMATES OF ECONOMICALLY RECOVERABLE COAL RESERVES, AND WE CANNOT BE
CERTAIN OF THE TRUE EXTENT OF COAL ASSETS WE HAVE AVAILABLE TO FULFILL
OBLIGATIONS UNDER OUR CONTRACTS AND SECURE PAYMENT OF OUR SECURED INDEBTEDNESS.
There are uncertainties inherent in estimating quantities of recoverable
reserves, including many factors beyond our control. Estimates of economically
recoverable coal reserves and future net cash flows depend upon a number of
variable factors and assumptions, including
- geological and mining conditions, which may not be fully identified by
available exploration data or may differ from experience,
- 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 reserves
based on risk of recovery and estimates of future net cash flows expected from
reserves 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 our
reserves may vary materially from estimates. See "Business--Coal Reserves."
WE DEPEND ON THE LEADERSHIP OF KEY EXECUTIVES, AND IF THEY LEFT US IT COULD HAVE
AN ADVERSE EFFECT UPON US.
On October 12, 1997, John J. Faltis, who was then our President, Chief Executive
Officer and Chairman of the Board of Directors, was killed in a helicopter
accident in West Virginia. With Mr. Faltis' death, our success has become
increasingly dependent on Bruce Sparks, who succeeded Mr. Faltis as President,
and other key personnel. If Mr. Sparks becomes unwilling or unable to serve in
his new role, our business, operations and prospects would likely be further
adversely affected. Mr. Sparks entered into an employment agreement with us and
several of our subsidiaries. See "Management."
To address our need for increased depth in management and operations, we hired
William D. Kilgore, Jr. to be Chairman of our board of directors and Chief
Executive Officer, effective May 1, 1999. Mr. Kilgore has 42 years experience in
the coal business, including as a coal mining consultant for several central
Appalachian companies, as President/Chief Executive Officer and Director of
Agipcoal and as Vice President/General Manager of Enoxy Coal, Inc. Mr. Kilgore
entered into an employment agreement with us and several of our subsidiaries.
See "Management." If we lost Mr. Kilgore's services, our business, operations
and prospects would likely be adversely affected.
THE COAL INDUSTRY IS LABOR-INTENSIVE, AND WORK STOPPAGES OR UNIONIZATION WOULD
HAVE AN ADVERSE EFFECT UPON US.
We are not a party to any collective bargaining agreement and consider our
relations with employees to be good. However, some or all of our workforce may
unionize in the future. If some or all of our currently non-union operations
were to become unionized, we could incur higher labor costs and an increased
risk of work stoppages. We recently changed from operating our deep mines
ourselves to utilizing contract miners to operate these mines. The labor force
for our contract miners is currently not unionized. If some or all of our
contract miners' employees were to become unionized, the contract miners could
incur higher labor costs and have an increased risk of work stoppages, which
could adversely affect our business and costs of operations.
THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS. IF OUR EXPECTATIONS
REFLECTED IN THESE FORWARD-LOOKING STATEMENTS PROVE TO BE INCORRECT, OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THESE EXPECTATIONS.
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. The words "anticipates," "believes," "estimates," "expects,"
"plans," "intends" and similar expressions are intended to identify these
forward-looking statements, but are not the exclusive means of identifying them.
These forward-looking statements are subject to risks, uncertainties and
assumptions, including, among other things:
- the success or failure of our efforts to implement our business plan;
- the availability of liquidity and capital resources;
- our ability to achieve anticipated cost savings;
- whether we are able to obtain new mining permits;
18
22
- adverse geologic conditions;
- changes in the industry;
- the weather;
- unexpected maintenance problems;
- reliance on major customers and long-term contracts;
- actions our competitors take and our ability to respond to those
actions;
- risks inherent to mining; and the effects of government regulation.
Other matters set forth in this prospectus may also cause actual results in the
future to differ materially from those described in the forward-looking
statements. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
19
23
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes. On
October 28, 1999, we received proceeds of $11.2 million from the sale of $13.2
million principal amount of old notes in a private placement, all of which we
used to repay outstanding indebtedness under the revolving credit portion of our
senior credit facility. We issued the remaining old notes in a private exchange
for $108.5 million in principal amount of our 9 3/4% Series B Senior Notes due
2007 and cancellation of our obligations to a former stockholder. We incurred
expenses of approximately $1.2 million in connection with the private placement
and the private exchange.
20
24
CAPITALIZATION
This table sets forth our consolidated capitalization as of September 30, 1999
and as adjusted to reflect the private exchange, private placement and private
stockholder exchange we consummated on October 28, 1999. In the private
exchange, 86.8% of the holders of our 9 3/4% notes exchanged $108.5 million in
aggregate principal amount of their 9 3/4% notes for old notes, and we issued to
the exchanging noteholders warrants to purchase 20% of our fully diluted common
stock at an initial exercise price of $0.01 per share. In the private placement,
we sold to Rothschild Recovery Fund L.P., for $11.2 million in cash, $13.2
million in principal amount of old notes and warrants to purchase 10% of our
common stock at an initial exercise price of $0.01 per share. We have estimated
that the fair value of the warrants issued in the private exchange and private
placement approximates par value of $0.01 per share. In the private stockholder
exchange, we issued $6.0 million in principal amount of old notes to JJF Group
Limited Liability Company in cancellation of shares of our common stock JJF
Group owned and in full settlement and satisfaction of JJF Group's right to
require us to buy that stock over time for approximately $10.5 million.
The "as adjusted" column of the following table does not include (1) the
additional notes we will issue to pay interest in kind on the notes due April 1,
2000 or (2) notes that Rothschild Recovery Fund may purchase, at our option and
subject to various conditions, on or before October 1, 2000 to fund up to $6.3
million of the October 1, 2000 interest payment on the notes. Since this
exchange offer will involve an exchange of outstanding securities for a like
amount of new, substantially identical securities, it will have no effect on
capitalization. You should read the information set forth below together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," "The Exchange Offer--Accounting Treatment" and our interim condensed
consolidated financial statements and consolidated financial statements and the
related notes included elsewhere in this prospectus.
SEPTEMBER 30, 1999
(UNAUDITED)
---------------------------
(DOLLARS IN MILLIONS)
ACTUAL AS ADJUSTED
----------- -----------
Cash and cash equivalents ........................................ $ -- $ --
------ ------
Accrued Interest ................................................. 6.3 1.0(2)
Long-term debt (including current portion):
Borrowings under Credit Facility ................................ 24.2 13.0(1)
9 3/4% Series B Senior Notes due 2007 .......................... 125.0 16.5
14.25% Series A Second Priority Senior Secured Notes due 2007 -- 113.8(2)
Issued in Private Exchange.................................
14.25% Series A Second Priority Senior Secured Notes due 2007 -- 13.2
Issued for cash............................................
Original Issue Discount.......................................... -- (2.0)
14.25% Series A Second Priority Senior Secured Notes due 2007 -- 6.0(3)
issued to JJF Group........................................
Other debt....................................................... 0.4 0.4
Total debt -------- -------
149.6 160.9
Common stock available for repurchase (including current portion) 10.6 --
Mandatorily redeemable preferred stock (4) 26.1 26.1
Total stockholders' equity
Preferred stock ........................................ 23.0 23.0
Common stock............................................ -- --
Paid-in-capital......................................... 47.9 52.5(3)
Paid-in-capital -- stock warrants....................... -- --
Treasury stock ......................................... (5.1) (5.1)
Accumulated deficit..................................... (131.6) (139.0)(5)
------ ------
Total stockholder's equity ........................................ (65.8) (68.6)
------ ------
Total capitalization............................................... $ 126.8 $ 119.4
======== =======
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- -------------------------------------
(1) We used the proceeds of the private placement to reduce outstanding amounts
under the revolving credit facility under our loan agreement with Foothill.
See "Use of Proceeds."
(2) In connection with the accounting treatment for the private exchange, we
are required to keep the current carrying amounts recorded on our balance
sheet and include those amounts for accrued interest not paid as part of
the private exchange. Our calculation of interest expense in future periods
will be altered for the difference between the carrying amount and the
principal amount of the old notes issued in the private exchange. Our as
adjusted principal obligations on the new notes are less than the amounts
presented.
(3) In connection with the accounting treatment for the private stockholder
exchange, we recorded the new notes issued at fair value. The difference
between the new notes and the common stock available for repurchase,
including current portion, increased paid-in-capital.
(4) Redemption of our Class A preferred stock, which is a class of our
preferred stock that is mandatorily redeemable, is limited by the
restricted payments covenant in the Indenture. See "Description of the New
Notes-- Covenants."
(5) The as adjusted accumulated deficit includes projected income tax expense
of $7 million associated with the private exchange and expected additional
costs of $0.4 million relating to the private exchange. See "Risk
Factors--Risks Related to Anker--We could have income tax liability as a
result of the restructuring of our 9 3/4% Series B Senior Notes" and
"Material United States Federal Income Tax Consequences."
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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 in this prospectus.
The unaudited pro forma consolidated statements of operations for the year ended
December 31, 1998 and the nine months ended September 30, 1999 give effect to
the following transactions as if each transaction had occurred on January 1,
1998:
- the private placement of the old notes and the application of the
proceeds from the private placement,
- the private stockholder exchange of old notes in exchange for
cancellation of the shares of our common stock owned by a stockholder
and that stockholder's relinquishment of its right to require us to
buy that stock over time and
- the private exchange of old notes for our previously issued 9 3/4%
notes.
We have based the unaudited pro forma adjustments upon available information and
assumptions that we believe are reasonable. The pro forma consolidated data do
not purport to represent what our 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 our consolidated results of operations for the current year
or any future date or period.
The adjustments set forth in the following table do not reflect a one-time
increase in general and administrative expenses related to the write-off of
approximately $1.2 million of fees and other financing costs incurred in
connection with the private exchange and private placement. The adjustments also
do not include a one-time projected income tax liability of $7.0 million
associated with the private exchange.
Pro Forma Adjusted EBITDA represents our earnings before interest, taxes,
depreciation, depletion, amortization, non-cash stock compensation and
non-recurring related expenses, loss on impairment of investment and
restructuring charges, life insurance proceeds, financial restructuring charges
and extraordinary items. Pro Forma 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 our
operating performance. Nor should it be considered as an alternative to net cash
provided by operating, investing and financial activities, as determined in
accordance with generally accepted accounting principles, as a measure of our
ability to meet cash needs. We have included Pro Forma Adjusted EBITDA because
we use Pro Forma Adjusted EBITDA to assess our financial performance and some of
the covenants in our loan agreement and indentures are tied to similar measures.
Since all companies and analysts do not necessarily calculate Pro Forma Adjusted
EBITDA in the same fashion, Pro Forma Adjusted EBITDA as presented in this
prospectus may not be comparable to similarly titled measures other companies
report.
You should read the unaudited pro forma consolidated financial statements
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operation," "The Exchange Offer--Accounting Treatment" and the
consolidated financial statements included elsewhere in this prospectus.
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ANKER COAL GROUP, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
ADJUSTMENTS
---------------------------------------------------
PRIVATE PRIVATE STOCKHOLDER PRIVATE AS
ACTUAL PLACEMENT (1) EXCHANGE (2) EXCHANGE (3) ADJUSTED
------ ------------- ------------ ------------ --------
(DOLLARS IN THOUSANDS)
Coal sales and
related revenue $ 291,426 - - - $ 291,426
Operating expenses:
Cost of operations and selling
expenses 276,469 - - - 276,469
Depreciation, depletion and
amortization 18,150 - - - 18,150
General and administrative 9,076 - - - 9,076
Loss on impairment
of investment and restructuring
charges 90,717 - - - 90,717
-------- --------- --------- -------- ----------
Operating loss (102,986) - - - (102,986)
Interest expense (13,066) $ (2,201)(a) $ (885)(a) 220(a) (15,932)
Other income, net 2,805 - - - 2,805
-------- --------- --------- -------- ---------
Loss before income taxes and
extraordinary item (113,247) (2,201) (885) 220 (116,113)
Income tax expense (benefit) (7,643) - (b) - (b) - (b) (7,643)
-------- --------- --------- -------- ---------
Net loss before extraordinary item (105,604) (2,201) (885) 220 (108,470)
Extraordinary item 965 - - - 965
-------- --------- --------- -------- ---------
Net loss (106,569) (2,201) (885) 220 (109,435)
Preferred stock dividends and accretion (1,937) - - - (1,937)
Common stock available for repurchase
accretion - - - - -
--------- --------- --------- -------- ---------
Net loss available to common
stockholders $(108,506) $ (2,201) $ (885) $ 220 $(111,372)
========= ========= ========= ========= =========
OTHER DATA:
Pro Forma Adjusted EBITDA - - - - 8,686
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NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(1) Reflects the private placement of old notes and the application of the
proceeds from the private placement as if the transaction occurred on
January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the notes at an assumed rate of 14.25% with an increase in
principal after six months for the interest that will be paid in kind
by issuing additional notes in lieu of cash at that time.
(b) Reflects the income tax effects of the pro forma adjustments assuming
that the interest that is paid in kind is non-deductible, a 39% tax
rate and the establishment of a 100% valuation allowance on all net
operating losses.
(2) Reflects the private stockholder exchange of old notes to a stockholder in
exchange for the relinquishment of that stockholder's right as if the
transaction occurred on January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the notes at an assumed rate of 14.25% with an increase in
principal after six months for the interest that will be paid in kind
by issuing additional notes in lieu of cash at that time.
(b) Reflects the income tax effects of the pro forma adjustments assuming
that the interest that is paid in kind is non-deductible, a 39% tax
rate and the establishment of a 100% valuation allowance on all net
operating losses.
(3) Reflects the private exchange of old notes for our previously issued 9 3/4%
notes as if the transaction occurred on January 1, 1998.
(a) Reflects the reduction of interest expense resulting from the exchange
of 9 3/4% notes for old notes at an assumed effective interest rate of
8.76% and an increase in principal after six months for the interest
that will be paid in kind by issuing additional notes in lieu of cash
at that time.
(b) Reflects the income tax effects of the pro forma adjustments assuming
that the interest that is paid in kind is non-deductible, a 39% tax
rate and the establishment of a 100% valuation allowance on all net
operating losses.
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ANKER COAL GROUP, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
ADJUSTMENTS
-------------------------------------------------------------
PRIVATE PRIVATE STOCKHOLDER PRIVATE AS
ACTUAL PLACEMENT (1) EXCHANGE (2) EXCHANGE (3) ADJUSTED
------ ------------- ------------ ------------ --------
(dollars in thousands)
Coal sales and
related revenue $ 174,293 - - - $ 174,293
Operating expenses:
Cost of operations and selling
expenses 157,419 - - - 157,419
Depreciation, depletion and
amortization 13,430 - - - 13,430
General and administrative 6,781 - - $ (756)(a) 6,025
Loss on impairment of investment
and restructuring charges 4,526 - - - 4,526
--------- --------- --------- --------- ---------
Operating loss (7,863) - - (756) (7,107)
Interest expense (10,911) $ (1,701)(a) $ (687)(a) (14)(b) (13,313)
Other income, net 2,579 - - - 2,579
--------- --------- --------- --------- ---------
Loss before income taxes and
extraordinary item (16,195) (1,701) (687) (770) (17,841)
Income tax expense (benefit) (200) -(b) -(b) -(c) (200)
--------- --------- --------- --------- ---------
Net loss (15,995) (1,701) (687) (770) (17,641)
Preferred stock dividends and accretion (1,505) - - - (1,505)
Common stock available for repurchase
accretion (421) - 421 (c) - -
--------- --------- --------- --------- ---------
Net loss available to common
stockholders $ (17,921) $ (1,701) $ (266) $ (770) $ (19,146)
========= ========= ========= ========= =========
OTHER DATA:
Pro Forma Adjusted EBITDA - - - - 13,428
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NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(1) Reflects the private placement of old notes and the application of the
proceeds from the private placement as if the transaction occurred on
January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the notes at an assumed rate of 14.25%.
(b) Reflects the income tax effects of the pro forma adjustments assuming
a 39% tax rate and the establishment of a 100% valuation allowance on
all net operating losses.
(2) Reflects the private stockholder exchange of old notes to a stockholder in
exchange for the relinquishment of that stockholder's right as if the
transaction occurred on January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the notes at an assumed rate of 14.25%.
(b) Reflects the income tax effects of the pro forma adjustments assuming
a 39% tax rate and the establishment of a 100% valuation allowance on
all net operating losses.
(c) Reflects a decrease in the common stock available for repurchase
accretion resulting from a stockholder's relinquishment of it rights
before we would have been further obligated to that stockholder.
(3) Reflects the private exchange of old notes for our previously issued 9 3/4%
notes as if the transaction occurred on January 1, 1998.
(a) Reflects a decrease in general and administrative expenses resulting
from the $0.8 million of financial restructuring charges.
(b) Reflects an increase of interest expense resulting from the exchange
of the 9 3/4% notes for old notes at an assumed effective interest
rate of 8.76%.
(c) Reflects the income tax effects of the pro forma adjustments assuming
a 39% tax rate and the establishment of a 100% valuation allowance on
all net operating losses.
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SELECTED FINANCIAL DATA
The following table is a summary of our historical consolidated financial data
for the five years ended December 31, 1998 and for the nine months ended
September 30, 1999 and 1998. We derived the historical consolidated financial
data for each of the five years in the period ended December 31, 1998 from our
audited consolidated financial statements, audited by PricewaterhouseCoopers
LLP, independent accountants, appearing elsewhere in this prospectus. We derived
the historical consolidated financial data as of September 30, 1999 and for the
nine months ended September 30, 1999 and 1998 from our unaudited consolidated
financial statements. The unaudited adjusted combined statements of operations
data and other data for the year ended December 31, 1996 combine the audited
results of operations of our predecessor, Anker Group, Inc., for the period
January 1, 1996 to July 31, 1996, and of us for the period August 1, 1996 to
December 31, 1996. You should read the following information together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and our consolidated financial statements and related notes included
elsewhere in this prospectus.
Anker Coal Group, Inc.
---------------------------------------------------------------
Nine Months Ended Year Ended
September 30, December 31,
----------------------------- -----------------------------
1999 1998 1998 1997
--------- --------- --------- ---------
(unaudited)
STATEMENT OF OPERATIONS DATA:
(dollars in thousands)
Coal sales and related revenue $ 174,293 $ 226,111 $ 291,426 $ 322,979
Operating expenses:
Cost of operations and selling
expenses 157,419 214,443 276,469 295,387
Depreciation, depletion and
amortization 13,430 13,009 18,150 17,470
General and administrative 6,781 7,767 9,076 9,462
Loss on impairment of investment
and restructuring charges 4,526 7,346 90,717 8,267
Stock compensation and related
expenses - - - -
--------- --------- --------- ---------
Operating (loss) income (7,863) (16,454) (102,986) (7,607)
Interest expense, net (10,911) (9,421) (13,066) (10,042)
Other income, net 2,579 821 2,805 2,083
Life insurance proceeds - - - 15,000
--------- --------- --------- ---------
(Loss) income before income
taxes and extraordinary item (16,195) (25,054) (113,247) (566)
Income tax (benefit) (200) (7,015) (7,643) (1,242)
--------- --------- --------- ---------
(Loss) income before
extraordinary item (15,995) (18,039) (105,604) 676
Extraordinary item (1) - - 965 3,849
--------- --------- --------- ---------
Net (loss) income (15,995) (18,039) (106,569) (3,173)
Preferred stock dividends and
accretion (2) (1,505) (1,454) (1,937) (1,876)
Common stock available for
repurchase accretion (421) - - -
--------- --------- --------- ---------
Net (loss) income available to
common stockholders $ (17,921) $ (19,493) $(108,506) $ (5,049)
========= ========= ========= =========
OTHER DATA:
Adjusted EBITDA $ 3,428(3) $ 4,722 $ 8,686 $ 20,213
CASH FLOW DATA:
Net cash provided by (used in)
operating activities $ (1,543) $ (1,446) $ (5,465) $ ( 5,047)
Net cash (used in) provided by
investing activities (2,194) (7,442) (8,134) (47,025)
Net cash (used in) provided by
financing activities 3,743 9,819 13,614 51,516
BALANCE SHEET DATA (AT PERIOD END):
Working (deficit) capital $ (8,283) $ (4,262) $ 21,499
Total assets 187,042 201,720 304,650
Total long-term debt (4) 149,591 142,711 133,599
Mandatorily redeemable preferred
stock 26,093 24,588 22,651
Common stock available for
repurchase (4) 10,586 10,000 -
Total stockholder's (deficit) equity (65,797) (47,876) 75,730
Anker Coal Anker Group, Inc.
Group, Inc. (Our Predecessor)
Adjusted ----------- ----------------------------------------------
Combined
for the Year Ended
Year Ended August 1, 1996 to January 1, 1996 December 31,
December 31, December 31, to July 31, --------------------------
1996 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(unaudited)
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
Coal sales and related revenue $ 290,155 $ 123,246 $ 166,909 $ 248,897 $ 227,499
Operating expenses:
Cost of operations and selling
expenses 259,579 110,215 149,364 221,315 203,174
Depreciation, depletion and
amortization 14,319 6,437 7,882 11,732 12,083
General and administrative 7,534 3,738 3,796 6,843 5,938
Loss on impairment of investment
and restructuring charges - - - - -
Stock compensation and related
expenses 2,969 - 2,969 - -
--------- --------- --------- --------- ---------
Operating (loss) income 5,754 2,856 2,898 9,007 6,304
Interest expense, net (4,886) (2,090) (2,796) (6,612) (3,523)
Other income, net 1,480 373 1,107 3,108u 1,621
Life insurance proceeds - - - - -
--------- --------- --------- --------- ---------
(Loss) income before income
taxes and extraordinary item 2,348 1,139 1,209 5,503 4,402
Income tax (benefit) 351 485 (134) 2,270 1,940
--------- --------- --------- --------- ---------
(Loss) income before
extraordinary item 1,997 654 1,343 3,233 2,462
Extraordinary item (1) - - - - -
--------- --------- --------- --------- ---------
Net (loss) income 1,997 654 1,343 3,233 2,462
Preferred stock dividends and
accretion (2) (891) (775) (116) (215) (215)
Common stock available for
repurchase accretion - - - - -
--------- --------- --------- --------- ---------
Net (loss) income available to
common stockholders $ 1,106 $ (121) $ 1,227 $ 3,018 $ 2,247
========= ========= ========= ========= =========
OTHER DATA:
Adjusted EBITDA $ 24,522 $ 9,666 $ 14,856 $ 23,847 $ 20,008
CASH FLOW DATA:
Net cash provided by (used in)
operating activities $ (564) $ 19,022 $ 2,168 $ 13,421
Net cash (used in) provided by
investing activities (84,968) (1,764) 5,021 (32,434)
Net cash (used in) provided by
financing activities 86,088 (29,795) 4,992 17,808
BALANCE SHEET DATA (AT PERIOD END):
Working (deficit) capital $ 7,410 $ 27,599 $ 12,576
Total assets 259,683 187,026 161,372
Total long-term debt (4) 88,029 74,902 69,910
Mandatorily redeemable preferred
stock 20,775 8,600 1,600
Common stock available for
repurchase (4) - - -
Total stockholder's (deficit) equity 80,779 57,203 41,185
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(1) Represents the write-off of unamortized debt issuance costs related to our
credit facility in 1997 and our amended and restated credit facility in
1998.
(2) Represents accrued and unpaid dividends and accretion on Class A
mandatorily redeemable preferred stock.
(3) Adjusted for $0.8 million of financial restructuring charges included in
general and administrative expenses.
(4) Includes current portion. See our consolidated financial statements
included elsewhere in this prospectus.
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33
HISTORICAL AND PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
Our consolidated ratios of earnings to fixed charges for each of the periods
indicated are set forth below. 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" consists of interest
expense, amortization of deferred financing costs and the component of rental
expense that we believe is representative of the interest component of rental
expense.
Anker Coal
-----------------
Anker Group, Inc. Group, Inc.
---------------------------------------------------- -----------------
Years Ended January 1, 1996 August 1, 1996
December 31, to to
1994 1995 July 31, 1996 December 31, 1996
---- ---- ------------- -----------------
(unaudited)
Historical
Ratio of earnings to
fixed charges(a).... 1.8x 1.6x 1.3x 1.4x
Pro Forma
Ratio of earnings to
fixed charges(b)....
Anker Coal Group, Inc.
----------------------------------------------
Years Ended Nine Months Ended
Adjusted Combined December 31, September 30,
for the Year Ended ------------------ --------------------
December 31, 1996(c) 1997 1998 1998 1999
-------------------- ---- ---- ---- ----
(unaudited) (unaudited)
Historical
Ratio of earnings to
fixed charges(a).... 1.3x -- -- -- -
Pro Forma
Ratio of earnings to
fixed charges(b).... -- --
-- --
- -----------------------------
(a) Earnings were insufficient to cover fixed charges for the years ended
December 31, 1997 and 1998, and for the nine months ended September 30,
1998 and 1999. Additional earnings of approximately $0.6 million, $113.2
million (which includes loss on impairment of investment and restructuring
of $90.7 million), $16.2 million and $25.1 million would have been required
to cover fixed charges in the years ended December 31, 1997 and 1998 and
the nine months ended September 30, 1998 and 1999, respectively.
(b) Pro forma earnings were inadequate to cover pro forma fixed charges for the
year ended December 31, 1998 and the nine months ended September 30, 1999
after giving pro forma effect to the private exchange, private placement
and private stockholder exchange of old notes on October 28, 1999 and the
application of the net proceeds from the private placement as set forth in
"Use of Proceeds" as if they had occurred on January 1, 1998 and 1999,
respectively; additional pro forma earnings of $117.1 million, which
includes loss on impairment of investment and restructuring of $90.7
million, and $19.3 million would have been required to cover pro forma
fixed charges for the year ended December 31, 1998 and the nine months
ended September 30, 1999, respectively.
(c) The adjusted combined statements of operations data and other data for the
year ended December 31, 1996 combine the results of operations of our
predecessor, Anker Group, Inc., for the period January 1, 1996 to July 31,
1996, and of us for the period August 1, 1996 to December 31, 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
We have continued to experience liquidity problems during the calendar year
1999. To address these liquidity problems, on October 28, 1999, we completed a
private restructuring of our 9 3/4% Series B Senior Notes due 2007 and a private
placement to raise additional capital. As discussed in more detail below, in the
transactions, a limited number of qualified noteholders exchanged $108.5 million
of their 9 3/4% notes for $86.8 million of the old notes being exchanged in this
exchange offer, as well as warrants to purchase our common stock. Exchanging
noteholders waived their right to receive the October 1, 1999 interest payment
on their notes and also consented to various amendments to the indenture
governing the 9 3/4% notes. In addition, we raised $11.2 million in cash through
the sale to Rothschild Recover Fund L.P. in a private placement of $13.2 million
principal amount of the old notes being exchanged in this exchange offer. The
funds raised in the private placement were applied against the revolving credit
facility under our loan agreement with Foothill. As a result, as of November 11,
1999, we had $17.0 million of availability under our revolving credit facility.
Our loan agreement with Foothill provides us with up to a $55.0 million credit
facility. The credit facility consists of a commitment for a $40.0 million
working capital revolver and a term loan with an original principal amount of
$15.0 million. Commitments under the credit facility will expire in 2002. The
credit facility is secured by substantially all of our present and future
assets.
Borrowings under the revolver are limited to 85% of eligible accounts receivable
and 65% of eligible inventory and bear interest, at our option, at either 1%
above the prime interest rate or at 3 3/4% above the adjusted Eurodollar rate.
For the year ended December 31, 1998, the average interest rate under the
revolver was approximately 8.75%. The term loan bears interest at 2 1/2% above
the prime interest rate and is payable in monthly installments through 2002. The
average interest rate for the term loan for the year ended December 31, 1998 was
approximately 10.25%.
The following table sets forth the amounts outstanding and borrowing
availability under our loan agreement with Foothill as of the dates shown below:
REVOLVING REVOLVING ADDITIONAL
CREDIT CREDIT INTERIM
DATE TERM LOAN BORROWINGS AVAILABILITY AVAILABILITY
---- --------- ---------- ------------ ------------
(in millions)
12/31/98 $ 15.0 $ 1.9 $ 15.5 --
03/31/99 14.4 1.4 16.5 --
06/30/99 13.9 12.9 6.9 --
09/30/99 13.3 10.9 6.7 2.0
10/31/99 13.2 3.0 14.9 2.0
11/11/99 13.0 -- 17.0 --
The term loan changes are based on the normal amortization of the loan, except
that
- in July 1999, the term loan was paid down through the application of
approximately $1.25 million of asset sale proceeds, and
- in September 1999, under the terms of an amendment to the loan
agreement, Foothill reversed this payment, which caused the term loan
to increase by the same amount, and reapplied the proceeds to reduce
revolving credit borrowings in order to provide us with additional
liquidity
The increase in the revolving credit borrowings since March 31, 1999 is
primarily related to
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35
- our borrowing to make the interest payment on our 9 3/4% notes on
April 29, 1999,
- performing reclamation in Webster County, West Virginia and
- capital expenditures.
Revolving credit availability also had been reduced as a result of lower coal
production and coal shipments. Changes in coal production and the resulting
changes in coal inventory and accounts receivable will impact future revolving
credit availability.
The loan agreement with Foothill contains covenants that, among other matters,
restrict or limit our ability
- to pay interest and dividends,
- incur indebtedness,
- acquire or sell assets and
- make capital expenditures.
We must also maintain specified cash flow ratios. In particular, the loan
agreement provides that in order to advance funds to the guarantors and us under
the loan agreement, the borrowers under the loan agreement must have borrowing
availability of at least $5.0 million after giving effect to the advances and
for the 30 days immediately preceding the advances. With respect to the term
loan, in addition to regularly scheduled amortizing principal and interest
payments, the loan agreement requires that we apply the first $5.0 million of
proceeds from designated asset sales to the repayment of the term loan. As of
November 11, 1999, no amounts have been applied to the $5.0 million requirement.
Proceeds used to repay the term loan cannot be reborrowed.
Our independent public accountants included a going concern explanatory
paragraph in their accountants' report on our consolidated financial statements
for the year ended December 31, 1998. Specifically, the independent public
accountants stated that because we have, among other things, experienced
recurring losses and negative cash flow from operations and have a retained
deficit, they had substantial doubt about or ability to continue as a going
concern. See the consolidated financial statements for the period ended December
31, 1998 included elsewhere in this prospectus for the report of our independent
public accountants. The issuance of the explanatory paragraph by our independent
public accountants in their report on our consolidated financial statements for
the year ended December 31, 1998 caused a default under our agreement with
Foothill. Foothill, however, waived this default.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS AND CONTINGENCIES
We budgeted approximately $9.3 million for capital expenditures for 1999. As of
September 30, 1999, we had incurred approximately $5.2 million of capital
expenditures. With the transition from operating our own deep mines to
contracting with others to run our deep mines, some of the capital expenditures
previously budgeted will no longer be necessary. As a result of this and other
factors, we expect that capital expenditures for 1999 will be less than the $9.3
million budgeted amount.
As a result of the private exchange transaction discussed below, we may incur
income tax liabilities. As of October 28, 1999, we estimated that our tax
liability could be as much as $7.0 million. That estimate is subject to
uncertainty, and the actual tax liability may be less than that amount. We are
currently finalizing our determination of the tax liability that will result
from the private exchange transaction. If we are required to pay tax, it will be
due and payable on March 15, 2000. We intend to borrow the funds to pay any tax
due from the revolving credit facility under our loan agreement with Foothill.
BUSINESS PLAN
In late 1998, in response to poor operating and financial performance during
1998, we developed a plan to improve our operating performance and improve short
and long-term liquidity. The plan has four objectives:
- obtain more flexible senior financing;
- improve cash flow from operations;
- raise cash by selling selected assets; and
- reduce our debt and secure additional liquidity.
We achieved the first objective of the plan in November 1998, when we and our
subsidiaries entered into a loan and security agreement with Foothill Capital
Corporation, as agent, and other lenders. The credit facilities issued under the
loan agreement refinanced and replaced the amended and restated credit facility
with The Chase Manhattan Bank and others that had provided for a $71 million
line of credit. Our ability to borrow funds under the prior credit facility with
Chase was limited by financial ratios we
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36
were required to meet. Due to our poor financial performance during 1998, we
thus had insufficient borrowing availability under that credit facility. The new
credit facility with Foothill, on the other hand, provides us with additional
flexibility because availability under the facility is based on the value of our
assets. As a result, we have additional borrowing availability. For a
description of the credit facility, see "Description of Other
Indebtedness--Credit Facility."
The second objective of our plan is to improve cash flow from operations through
the use of contract mining services for our underground mining operations. We
believe that our use of contract miners will reduce operating expenses, general
and administrative expenses and month-to-month cost fluctuations. In addition,
because the contract miners are responsible for mine development and
maintenance, we will have reduced capital costs. We have completed this
objective of the plan. In early April 1999, we 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, we have entered into contract
mining agreements for our mining operations in Upshur, Barbour and Raleigh
counties in West Virginia. The contract miners for the Upshur and Barbour county
mines began operations on June 1, 1999, and the contractor for the Raleigh
County mine began operations on July 5, 1999. We have also signed a contract
mining agreement for our new deep mine in Upshur County, which began operations
on September 20, 1999.
The third objective of our plan involves the sale of selected non-operating
assets and non-strategic operating properties. The non-operating assets that we
are seeking to sell are those that require substantial development costs and/or
have significant holding costs. The operating properties that we plan to sell
either complement non-operating assets being held for sale or are not integral
to our long-term operating strategy. We have been discussing the sale of these
properties with third parties. In July 1999, we sold selected coal reserves in
Preston and Taylor counties, West Virginia for net proceeds of $1.25 million
plus royalties on future production. The cash proceeds from this asset sale were
applied to reduce the amounts outstanding under the revolving credit facility
under our loan agreement with Foothill.
We believe that our financial condition has hampered our efforts to market other
properties, but we believe that we will be successful in selling all or a part
of these assets during the next 12 to 24 months. However, we cannot assure you
that asset sales will be completed on terms acceptable to us, if at all. We are
also planning to evaluate reasonable offers on other assets as opportunities
develop. For a description of requirements under our loan agreement with
Foothill regarding our use of asset sale proceeds, see "Description of Other
Indebtedness--Credit Facility."
The fourth and final objective of the plan involves reducing our overall debt
level and securing additional liquidity. We believe that this objective of the
plan will be achieved in part through the success of the other objectives of the
plan. This objective has also been furthered, in part, through our consummation,
on October 28, 1999, of a private restructuring of our 9 3/4% Senior Notes due
2007, a private placement to raise additional capital and a private stockholder
exchange. In the private restructuring, a limited number of qualified
noteholders exchanged $108.5 million in principal amount of our 9 3/4% Series B
Senior Notes due 2007 they held for $86.8 million in principal amount of 14.25%
Series A Second Priority Senior Secured Notes due 2007 (PIK through April 1,
2000). Exchanging noteholders waived their right to receive the October 1, 1999
interest payment on the exchanged notes, and they also received warrants to
purchase an aggregate of 20% of our common stock at an initial exercise price of
$0.01 per share. See "Description of the Warrants." We believe the exercise
price represents the fair value of the warrants at the issue date. In connection
with the private exchange, the exchanging holders consented to amendments to the
indenture governing the remaining $16.5 million outstanding 9 3/4% notes, which,
among other things, modify or eliminate various covenants of that indenture. In
the private placement, we raised $11.2 million in cash through the sale to
Rothschild Recovery Fund L.P., also one of the exchanging noteholders, of $13.2
million principal amount of old notes and warrants to purchase 10% of our common
stock at an initial exercise price of $0.01. We plan to conduct a public
exchange offer of new notes for the remaining outstanding 9 3/4 % notes, either
as an exchange offer registered under the Securities Act or under an exemption
from Securities Act registration for exchanges with existing security holders.
In the public exchange offer, we plan to offer holders of 9 3/4 % notes $743 in
principal amount of new notes for each $1,000 in principal amount of 9 3/4 %
notes exchanged.
The private stockholder exchange consisted of our issuing $6.0 million aggregate
principal amount of old notes to JJF Group Limited Liability Company in exchange
for cancellation of the shares of our common stock that JJF Group owned and in
full settlement and satisfaction of JJF Group's right to require us to buy that
stock over time for approximately $10.5 million, including accrued interest. JJF
Group is an entity controlled by the estate of John J. Faltis, our former
President and Chief Executive Officer who was killed in a helicopter accident on
October 12, 1997 in Upshur County, West Virginia.
As a part of the closing of the restructuring of the 9 3/4% notes, Foothill
consented to the restructuring transactions and waived existing defaults under
the loan agreement.
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37
The private exchange transaction reduced the stated principal amount of our
long-term debt by $21.7 million, and we eliminated approximately $4.0 million of
additional obligations through the transaction with JJF Group. However, the
additional principal amount of notes issued in the private placement to
Rothschild Recovery Fund and the notes to be issued in lieu of the April 1, 2000
interest payment will partially offset the principal reduction accomplished in
the private exchange. That principal reduction will also be offset if we issue
notes to Rothschild in connection with the October 1, 2000 interest payment as
discussed below.
The need to make interest payments on the 9 3/4% notes had significantly limited
our operating flexibility and substantially reduced our ability to grow or
replenish our production base. By completing the restructuring, we believe we
have adequate capital resources to meet our short-term liquidity needs. As we
continue to implement our business plan, we intend to increase cash flow and
improve profitability to the point that we will be able to service the new notes
and any remaining 9 3/4% notes, without impairing operations, but our strategy
may not be successful. Beginning with the October 1, 2000 interest payment, we
will need to fund payments of interest on the new notes from
- operating cash flow,
- borrowings under credit facilities,
- asset sale proceeds or
- other sources.
Rothschild has agreed to purchase, at our option and subject to various
conditions, including the absence of a material adverse change or material liens
on the collateral securing the new notes arising after the closing of the
private placement, additional new notes to fund up to $6.3 million of the
October 1, 2000 interest payment on the notes. Our ability to service our
long-term debt on October 1, 2000 and beyond will depend upon a variety of
factors, some of which are beyond our control.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
COAL SALES AND RELATED REVENUES. Coal sales and related revenues decreased 23.3%
from $78.2 million for the three months ended September 30, 1998 to $60.0
million for the three months ended September 30, 1999. For the nine-month
periods ended September 30, the decrease was 22.9% from $226.1 million for 1998
to $174.3 million for 1999. The decreases in coal sales and related revenues
were due in part to lower tonnage levels, as discussed below, and a reduction in
the proportionate share of sales of our higher-priced metallurgical coal to
total sales.
Coal sales volume decreased 12.5% from 3.2 million tons for the three months
ended September 30, 1998 to 2.8 million tons for the three months ended
September 30, 1999. For the nine-month periods ended September 30, the decrease
was 16.0% from 9.4 million tons for 1998 to 7.9 million tons for 1999. These
decreases in coal sales volume were due to the following:
- We idled our Webster County surface mine in December 1998. In
addition, we completed operations at the contract deep mine in Webster
County in the third quarter of 1999, because the mine's reserve base
had been depleted.
- We idled the Grant County surface mine in December 1998. This surface
mine was idled because we had mined all of its then permitted reserves
and were not able to obtain a new mining permit for the adjacent
properties. We would have been able to continue the surface mining
operation with a new mining permit. See "Risk Factors--Risks Related
to Anker--We have been unable to obtain a new mining permit for one of
our important properties, which has caused reduced levels of coal
production. We are uncertain if or when we will be able to obtain the
permit." With the idling of the surface mine at Grant County, we were
unable to sell the portion of production from the Grant County deep
mine that had previously been blended with coal from the idled surface
mine. As a result of this and other factors, we idled the deep mine in
February 1999, which caused an additional decline in coal production.
- We completed one contract mining operation in Preston County during
the fourth quarter of 1998. We expect production to cease at the
remaining contract deep mine in Preston County at the end of 1999,
because the mine's reserve based will be depleted.
- We implemented a reduced production schedule at our Raleigh County
deep mine. We made this reduction in response to changing geologic and
market conditions and to more effectively mine the remaining reserves.
The Raleigh County deep mine will continue to produce at a reduced
tonnage level throughout 1999.
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38
While we experienced lower production at the mines, as described above, tonnage
levels during 1999 as compared to the same periods for 1998 increased at our
Upshur County, West Virginia deep mine and Garrett County, Maryland deep mine.
These increases partially offset the decreases described above.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and selling
expenses decreased 26.5% from $73.5 million for the three months ended September
30, 1998 to $54.0 million for the three months ended September 30, 1999. During
the nine-month periods ended September 30, the decrease was 26.6% from $214.4
million for 1998 to $157.4 million for 1999. The cost of operations and selling
expenses decreased 13.5% from $22.65 per ton shipped for the three months ended
September 30, 1998 to $19.60 per ton shipped for the three months ended
September 30, 1999. For the nine-month periods ended September 30, the decrease
was 12.9% from $22.73 per ton shipped for 1998 to $19.80 per ton shipped for
1999. The decreases resulted from the implementation of our business plan to
transition from operating our own deep mines to contracting with third parties
to operate our deep mines and from the idling of some of our higher cost mines.
OTHER OPERATING EXPENSES. Other operating expenses decreased from $7.5 million
for the three months ended September 30, 1998 to $7.4 million for the three
months ended September 30, 1999. For the nine-month periods ended September 30,
other expenses decreased from $20.8 million for 1998 to $20.2 million for 1999.
Other operating expenses includes general and administrative expenses and
depreciation, depletion and amortization.
General and Administrative Expenses. General and administrative expenses
increased 3.7% from $2.7 million for the three months ended September 30, 1998
to $2.8 million for the three months ended September 30, 1999. However, general
and administrative expenses decreased 12.8% from $7.8 million for the nine
months ended September 30, 1998 to $6.8 million for the nine months ended
September 30, 1999. The decrease in general and administrative expenses during
the nine-month period primarily resulted from management changes we made as we
restructured our mining operations. The increase for the three-month period is
primarily related to the costs we incurred in connection with the private
restructuring discussed above and are not expected to continue beyond 1999. We
recorded approximately $0.8 million as of September 30, 1999, for costs in
connection with the private restructuring.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased 4.2% from $4.8 million for the three months ended
September 30, 1998 to $4.6 million for the three months ended September 30,
1999. However, depreciation, depletion and amortization increased 3.1% from
$13.0 million for the nine months ended September 30, 1998 to $13.4 million for
the nine months ended September 30, 1999. As a result of the restructuring of
our deep mining operations that took place in 1998, we reviewed the carrying
value of long-lived assets to determine whether that value was recoverable from
future undiscounted operating cash flows. Based on the results of that review,
we impaired those 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 the useful life of various fixed assets was also reduced. These reductions
in useful life resulted in higher depreciation, depletion and amortization.
LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES. We recorded loss on impairment and
restructuring charges of $1.1 million for the three months ended September 30,
1999, and $4.5 million for the nine months ended September 30, 1999.
The loss on impairment and restructuring recorded in the third quarter consisted
of three items. First, the operating sections of our Barbour County deep mine
were moved from one area of the reserve to another. As a result of the move,
various unamortized assets were no longer useful in the mining operation, and we
recorded a $0.6 million charge. Other unamortized assets associated with this
area of the Barbour County operation totaling $1.7 million were not impaired
because we believe these assets will be used for future mining activities.
Second, in connection with the close down of our operations in Webster County,
we recorded $1.0 million of additional charges for reclamation and other close
down costs to be incurred over the next seven months. The third component of the
loss consists of an income offset of $0.5 million relating to the disposition of
coal reserves in Preston and Taylor counties, West Virginia, that were
previously impaired during the fourth quarter of 1998.
During the second quarter of 1999, we reviewed the carrying value of computer
software and determined that, in connection with the use of contract miners at
our deep mines, some software would no longer be utilized. As a result, we
recorded an impairment loss of $1.1 million. In addition, we recorded an
impairment of $2.4 million relating to properties located in Tazewell County,
Virginia.
We recorded loss on impairment and restructuring charges of $5.5 million for the
three months ended September 30, 1998 and $7.3 million for the nine months ended
September 30, 1998. As discussed in more detail below, during the first nine
months of 1998, we
- impaired our remaining investment in Oak Mountain,
- initiated steps to reduce general and administrative expenses,
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39
- recorded an impairment relating to impairment losses on pieces of
mining equipment and
- recorded a reclamation charge relating to a change in the mine plan
for the Webster County.
During the third quarter of 1998, we recorded a reclamation charge of $5.1
million relating to a change in the mine plan for our Webster County operation.
INTEREST EXPENSE. Interest expense increased 12.1% from $3.3 million for the
three months ended September 30, 1998 to $3.7 million for the three months ended
September 30, 1999. For the nine-month periods, the increase was 16.0% from $9.4
million for 1998 to $10.9 million for 1999. The increases were due to an
increase in the average outstanding indebtedness and average effective interest
rate from the periods in 1998 to the same periods in 1999.
OTHER INCOME AND EXPENSE. Other income increased 300% from $0.3 million for the
three months ended September 30, 1998 to $1.2 million for the three months ended
September 30, 1999. For the nine-month periods, the increase was 225% from $0.8
million for 1998 to $2.6 million for 1999. Other income and expense includes
- gain or loss from the sale of assets,
- interest income,
- royalty income,
- production tax credits,
- timber sales and
- miscellaneous income and expense items.
INCOME TAXES. The income tax benefit for the three and nine months ended
September 30, 1999 is based on the effective tax rate expected to be applicable
for the full year. We have 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,
we received a refund of $0.2 million in the first quarter of 1999 related to a
prior year federal tax deposit. We established a valuation allowance for these
items because we were not certain that we would be able to realize these items.
In connection with the expected income tax consequences relating to the
restructuring transactions, we may use the carryforwards, which will result in
the recognition of a tax benefit. See "Risk Factors--Risks Related to Anker--We
could have income tax liability as a result of the restructuring of our 9 3/4%
Series B Senior Notes."
NET LOSS. Our net loss decreased $3.2 million from $8.1 million for the three
months ended September 30, 1998 to $4.9 million for the three months ended
September 30, 1999. For the nine-month periods, the decrease was $2.0 million
from $18.0 million for 1998 to $16.0 million for 1999. The decreases in net loss
are primarily the result of the reduction of operating and selling expenses
discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
COAL SALES AND RELATED REVENUES. Coal sales and related revenues decreased 9.8%
from $323.0 million for the year ended December 31, 1997 to $291.4 million for
the year ended December 31, 1998. Coal sales volume decreased 8.2% from 13.4
million tons for the year ended December 31, 1997 to 12.3 million tons for the
year ended December 31, 1998. The decreases were due to the following:
- We completed one contract mining operation in Preston County during
the fourth quarter of 1997.
- We implemented a new mining plan at our Barbour County operations
during the fourth quarter of 1997, which, as expected, resulted in
lower production for 1998.
- We experienced significant rainfall at our Webster Country surface
mine during the first quarter of 1998, which reduced our ability to
dispose of preparation plant refuse and caused an increase in
inventory. The inventory handling issues eventually prevented the mine
from operating efficiently according to its mine plan. During March
1998, we idled this mine to reduce inventory. The mine restarted
operations in May 1998 at reduced levels and continued to produce at
reduced levels through the third quarter of 1998. During the fourth
quarter of 1998, we idled the surface mining activities in Webster
County.
- On February 26, 1998, we sold our interest in Oak Mountain, which
owned and operated an underground mine in Shelby County, Alabama.
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Increases in production at mines we previously acquired or developed during
1997, including the Grant County and Upshur County operations, and additional
sales of coal that we purchased from other producers, partially offset the
decline in coal sales described above.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and selling
expenses decreased 6.4% from $295.4 million for the year ended December 31, 1997
to $276.5 million for the year ended December 31, 1998. The cost of operations
and selling expenses increased from $22.00 per ton shipped for the year ended
December 31, 1997 to $22.43 per ton shipped for the year ended December 31,
1998. This increase was due to a reduction in production as described above and
higher operating costs at our Barbour and Raleigh county underground mines.
During 1998, we made significant changes in the management of our operations,
with an emphasis on adding experienced underground mine managers. Once in place,
the new management initiated efforts to
- improve safety,
- tighten capital expenditure requirements,
- improve operational tracking,
- revamp budgeting and forecasting processes, and
- initiate training programs to improve communications and productivity.
These efforts resulted in cost savings in our underground operations that we
began realizing in late 1998. We did not believe, however, that the realized
savings were large enough or sustainable. As a result, during 1999, we changed
from operating these mines ourselves to using contract miners to operate these
mines.
OTHER OPERATING EXPENSES. Other operating expenses increased from $26.9 million
for the year ended December 31, 1997 to $27.2 million for the year ended
December 31, 1998. Other operating expenses includes general and administrative
expenses and depreciation, depletion and amortization.
General and Administrative Expenses. General and administrative expenses
decreased 4.4% from $9.5 million for the year ended December 31 1997 to $9.1
million for the year ended December 31, 1998. The decrease in general and
administrative costs primarily resulted from changes in our staff necessary to
manage the lower mine production in 1998.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased 4.1% from $17.4 million for the year ended December 31,
1997 to $18.1 million for the year ended December 31, 1998. The increase was due
to depreciation, depletion and amortization starting in 1998 on the mine
developed in Upshur County in 1997 and early 1998. The increase was partially
offset by reductions in production at other locations. As indicated below, we
recorded losses on impairment and restructuring charges that will impact future
depreciation, depletion and amortization. Accordingly, the useful life of
goodwill was reduced from 40 years to a prospective period ranging from three to
20 years, and the useful life of various fixed assets was also reduced.
LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES. The major components of loss on
impairment and restructuring charges were as follows:
1998 1997
------- ---------
(In thousands)
Impairment of properties and investment $44,416 $ 8,267
Exit costs 25,411 -
Assets to be disposed 15,983 -
Equipment leasehold termination costs 3,957 -
Other 950 -
------- ---------
$90,717 $ 8,267
======= =========
During 1998, the operational managers at each mine were changed, and the new
managers analyzed various operating plans. This reevaluation resulted in a
determination that carrying values exceeded the expected discounted cash flows
from the market and cost assumptions. As a result, in 1998 we recorded losses on
impairments for properties and investments. The properties affected and the
related asset categories are as follows:
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ADVANCED
PROPERTY, PLANT MINIMUM
DESCRIPTION AND EQUIPMENT ROYALTIES GOODWILL TOTAL
----------- ------------- --------- -------- -----
(In thousands)
Raleigh County, WV - - $ 5,705 $ 5,705
Upshur County, WV $ 6,036 - - 6,036
Grant County, WV and
Garrett County, MD 11,113 $ 7,009 - 18,122
Monongalia County, WV
and Preston County, WV 2,652 2,895 9,006 14,553
------- ------- ------- -------
$19,801 $ 9,904 $14,711 $44,416
======= ======= ======= =======
Also, in conjunction with the reevaluation, we decided to exit our investment in
Webster and Braxton counties in West Virginia. This decision was based on
current market conditions and expected mining costs. The exit charges consist of
the following:
ASSET CATEGORY AMOUNT
- -------------- ------
(In thousands)
Property, plant and equipment $ 13,569
Reclamation accrual 5,100
Advanced minimum royalties 1,651
Goodwill 4,896
Other 195
---------
$ 25,411
=========
As part of our liquidity planning, some of our assets have been identified to be
held for sale. These assets have been reclassified to a separate asset account
and were adjusted to their fair market value. We established the fair market
values based on current offers, third party appraisals and other information we
believe is relevant to establish these values. The charges for assets held for
sale consist of the following:
PROPERTY, ADVANCED
PLANT AND MINIMUM ADJUSTMENT
DESCRIPTION EQUIPMENT ROYALTIES TOTAL
- ----------- --------- --------- -----
(In thousands)
Raleigh County $ 1,353 $ 2,419 $ 3,772
Preston County 7,721 4,026 11,747
Other Property 464 - 464
------- ---------- -------
Total $ 9,538 $ 6,445 $15,983
======= ========== =======
In conjunction with the mining operational changes described above, we will also
incur losses on equipment currently covered by operating leases. These losses
were estimated by comparing lease buyout costs with the expected fair market
value of the underlying equipment. These differences of approximately $3,957,000
have been recorded as equipment leasehold termination costs.
On April 17, 1997, we entered into a joint venture agreement to acquire
substantially all of the assets and assume specified liabilities of Oak Mountain
Energy Corporation and its affiliates for approximately $40 million, of which we
provided $10 million. Subsequent to the initial capitalization, we contributed
an additional $255,000. Solely for financial accounting purposes, we identified
that we owned an undivided interest in each of the assets and were
proportionately liable for our share of each liability of Oak Mountain up to our
capital investment. In accordance with industry practice and purchase
accounting, we presented our proportionate ownership, amounting to 32.0%, in Oak
Mountain in the consolidated financial statements from the date of acquisition.
In February 1998, we sold our indirect minority ownership interest in Oak
Mountain to a related party for one dollar. We tried unsuccessfully to sell our
investment to other unrelated parties during December 1997 and January and
February 1998. We recorded an impairment loss of $8,267,000 to adjust our
investment to its fair market value less cost to sell as of December 31, 1997.
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INTEREST EXPENSE. Interest expense increased 29.8% from $10.0 million for the
year ended December 31, 1997 to $13.0 million for the year ended December 31,
1998. The increase was due to an increase in our average outstanding
indebtedness and average effective interest rate from 1997 to 1998.
INCOME TAXES. Income tax benefit from operations increased from $1.2 million for
the year ended December 31, 1997 to $7.6 million for the year ended December 31,
1998. The change in tax benefit is due to the impairment of the non-deductible
goodwill and the increase in the valuation allowance for our state and federal
net operating loss carry forwards, contribution carry forwards and capital loss
carry forwards. In 1998, we established a valuation allowance for these items
because we were not certain that we would be able to realize these items. In
connection with the expected income tax consequences relating to the
restructuring transactions, we may use the carry forwards, which will result in
the recognition of a tax benefit. See "Risk Factors--Risks Related to Anker--We
could have income tax liability as a result of the restructuring of our 9 3/4%
Series B Senior Notes."
EXTRAORDINARY ITEM. For the year ended December 31, 1998, we wrote-off the
unamortized portion of debt issuance costs relating to the refinancing of our
amended and restated credit facility with The Chase Manhattan Bank and other
lenders. The amount written-off was $965,000, net of income taxes.
NET LOSS. Our loss increased from $3.2 million for the year ended December 31,
1997 to $106.6 million for the year ended December 31, 1998. The increase in
loss was primarily due to the loss on impairment and restructuring charges,
increases in operating expenses and decreases in production levels described
above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO ADJUSTED COMBINED YEAR ENDED DECEMBER
31, 1996
COAL SALES AND RELATED REVENUES. Coal sales and related revenues increased 11.3%
from $290.2 million for the year ended December 31, 1996 to $323.0 million for
the year ended December 31, 1997. Coal sales volume increased 15.4% from 11.6
million tons for the year ended December 31, 1996 to 13.4 million tons for the
year ended December 31, 1997. The increased volume resulted primarily from
- an increase in the sales of coal we arrange between other producers
and third parties,
- acquisitions of mining operations,
- mine expansion and development and
- our investment in Oak Mountain.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and selling
expenses increased 13.8% from $259.6 million for the year ended December 31,
1996 to $295.4 million for the year ended December 31, 1997. The increase
primarily resulted from an increased volume of shipments and increased costs
related to adverse geological conditions at two of our mines. The cost of
operations and selling expenses decreased 1.4% from $22.40 per ton for the year
ended December 31, 1996 to $22.09 per ton shipped for the year ended December
31, 1997.
OTHER OPERATING EXPENSES. Operating expenses increased 22.8% from $21.9 million
for the year ended December 31, 1996 to $26.9 million for the year ended
December 31, 1997.
General and Administrative Expenses. General and administrative expenses
increased 25.6% from $7.5 million for the year ended December 31, 1996 to $9.5
million for the year ended December 31, 1997. The increase in general and
administrative costs primarily resulted from the increase in our management
staff necessary to manage the additional mines we developed or acquired since
December 31, 1996.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased 22.0% from $14.3 million for the year ended December 31,
1996 to $17.5 million for the year ended December 31, 1997. The increase in
depreciation, depletion and amortization primarily resulted from the
amortization of purchase accounting adjustments and goodwill relating to our
recapitalization and from acquisitions we made in the year ended December 31,
1997.
LOSS ON IMPAIRMENT OF INVESTMENT. On April 17, 1997, we entered into a joint
venture agreement to acquire substantially all of the assets and assume
specified liabilities of Oak Mountain Energy Corporation and its affiliates for
approximately $40 million, of which we provided $10 million. Subsequent to the
initial capitalization, we contributed an additional $255,000. Solely for
financial accounting purposes, we identified that we owned an undivided interest
in each of the assets and were proportionately liable for our share of each
liability of Oak Mountain up to our capital investment. In accordance with
industry practice and purchase accounting,
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we presented our proportionate ownership, amounting to 32.0%, in Oak Mountain in
the consolidated financial statements from the date of acquisition.
In February 1998, we sold our indirect minority ownership interest in Oak
Mountain to a related party for one dollar. We tried unsuccessfully to sell our
investment to other unrelated parties during December 1997 and January and
February 1998. We recorded an impairment loss of $8,267,000 to adjust our
investment to its fair market value less cost to sell as of December 31, 1997.
NON-CASH STOCK COMPENSATION AND NON-RECURRING RELATED EXPENSES. During June
1996, we made a non-cash common stock grant to one of our executive officers in
the amount of $1.5 million. This grant was intended to reward the executive
officer for past service and to ensure the continuity of our top management. In
conjunction with that transaction, we awarded a cash bonus and related expenses
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.
INTEREST EXPENSE. Interest expense increased 105.5% from $4.9 million for the
year ended December 31, 1996 to $10.0 million for the year ended December 31,
1997. The increase was due to an increase in our average outstanding
indebtedness and average effective interest rate from 1996 to 1997.
LIFE INSURANCE PROCEEDS. On October 12, 1997, John J. Faltis, our President,
Chief Executive Officer and Chairman of our Board of Directors, was killed in a
helicopter accident in West Virginia. In accordance with a stockholders'
agreement, dated as of August 12, 1996, among us, Mr. Faltis, JJF Group and
other holders of our capital stock, we maintained key man life insurance on the
life of Mr. Faltis in the amount of $15.0 million. Under the stockholders'
agreement, we were to use the proceeds from the key man policy to repurchase as
much of our common stock that JJF Group owned as possible, based on the fair
market value of the common stock. In December 1997, we received $5.0 million in
life insurance proceeds, which we used to temporarily reduce the outstanding
indebtedness under our amended and restated credit facility with The Chase
Manhattan Bank and others. In connection with our recent private exchange, we
exchanged $6.0 million in principal amount of notes with JJF Group to settle our
obligation to repurchase our common stock from JJF Group.
INCOME TAXES. Income taxes decreased from an income tax expense for the year
ended December 31, 1996 of $0.4 million to an income tax benefit from operations
for the year ended December 31, 1997 of $1.2 million. This decrease was
primarily the result of the exclusion of life insurance proceeds and the
deductibility of our taxable loss from income. These decreases were partially
offset by a valuation allowance established for the Oak Mountain capital loss.
EXTRAORDINARY ITEM. For the year ended December 31, 1997, we wrote-off the
unamortized portion of debt issuance costs relating to our credit facility dated
August 12, 1996. We incurred a loss on the refinancing of approximately $3.9
million, net of income taxes of $1.5 million.
NET INCOME. Our net income decreased from $2.0 million of income for the year
ended December 31, 1996 to a loss of $3.2 million for the year ended December
31, 1997. The decrease in net income is primarily due to
- the increase in operating expenses for items, including (1) adverse
geological conditions at two of our mines, (2) general and
administrative costs related to increase in management staff and (3)
depreciation, depletion and amortization,
- the extraordinary loss related to the write off of unamortized debt
costs and
- the impairment of the Oak Mountain investment.
These decreases in net income were partially offset by the recognition of life
insurance proceeds.
YEAR 2000
The Year 2000, or Y2K, issue is the result of computer programs that were
written using two digits, rather than four, to define the applicable year. Any
of our 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 our systems or equipment has date-sensitive
software using only two digits, system failures or miscalculations may result.
These failures or miscalculations may cause disruptions of operations or
disruptions in normal business activities.
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During 1998, we created an internal project team to assess the Y2K issue. The
team 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 personal computers and
workstations were tested for Y2K compliance. As of September 30, 1999, the
process was 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. Our estimated cost for 1999 is $0.2 million and will be funded through
normal operating cash.
COAL PROCESSING FACILITIES. The Y2K project team has identified a person to
serve as coordinator between the mine sites and vendors to assess Y2K compliance
in relation to our coal processing facilities. Coal processing facilities are
composed of various components, including electronic belt scales, analyzers and
controllers. Each plant and its components have been assessed. As of September
30, 1999, the assessment was completed at all coal processing facilities. The
remediation of any Y2K problems at our coal processing facilities should be
completed by November 30, 1999.
Although we believe our systems and facilities are Y2K compliant, we have
developed contingency plans. 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. We believe that we are devoting
the necessary resources to identify and resolve significant Y2K issues in a
timely manner.
DIVIDEND RESTRICTIONS AFFECTING SUBSIDIARIES
As of September 30, 1999, there were no restrictions affecting the ability of
the guarantor subsidiaries of our notes to make distributions to us or other
guarantor subsidiaries, except for restrictions in our loan agreement with
Foothill and those restrictions provided by law generally, e.g., adequate
capital to pay dividends under corporate law. The loan agreement with Foothill
provides that, in order to advance funds to us, the borrowers under the loan
agreement must have borrowing availability of at least $5.0 million after giving
effect to the advances of funds.
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THE COAL INDUSTRY
According to data compiled by the Energy Information Administration of the U.S.
Department of Energy, U.S. coal production totaled 1.13 billion tons in 1998, a
3.7% increase from the 1.09 billion tons produced in 1997 and a record high.
Most of the coal consumed in the United States is used to generate electricity.
Factors driving the increase in 1998 coal production include:
- the lower cost of generating electricity with coal compared to oil,
natural gas and nuclear power;
- volatile natural gas prices; and
- strong economic growth.
Total U.S. coal consumption reached 1.09 billion tons in 1998, a nominal
increase from 1997. In 1998, utilities used approximately 83.0% of the coal
consumed in the United States for the generation of electricity. Coal continues
to be the principal energy source for U.S. utilities, with 55.2% of total
electricity generation in 1998, as compared with 21.1% from nuclear, 10.1% from
hydroelectric and 9.8% from gas-fired facilities in 1998.
Despite the increased consumption and the many inefficient mines that have
closed in the last 10 years, coal mining companies with improving productivity
have filled the increasing demand without price increases. As a result of
increased competition among generators of electricity, utility buyers must
purchase coal more selectively. This heightened fiscal responsibility has led to
lower stockpiles, increased spot market activity and shorter contract terms,
which may create greater price volatility than in the past.
According to statistics compiled by the federal government, the number of
operating mines has declined 55% from 1988 through 1998, even though production
during that same time has increased 17.7%. The United States coal industry has
undergone significant consolidation since 1988. The 10 largest coal producers in
1988 accounted for 37.3% of total domestic coal production. The 10 largest coal
companies accounted for 61.9% of total domestic coal production in 1998.
The following table presents five year U.S. coal consumption by sector. We
derived this information from publications of the Energy Information
Administration of the U.S. Department of Energy.
FIVE YEAR COAL CONSUMPTION BY SECTOR
-------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN MILLIONS OF TONS)
Utilities .................. 817.3 829.0 873.7 900.3 910.9
Independent Power Producers 20.9 21.2 24.0 21.6 28.1
Coke Plants ................ 31.7 33.0 31.7 30.2 28.2
Other Industrial Plants .... 75.2 72.8 70.6 70.6 69.2
Residential/Commercial Users 6.0 5.8 5.8 6.5 6.4
----- ----- ------- ------ -------
Total ....... 951.1 968.1 1,005.8 1029.2 1,042.8
===== ===== ======= ====== =======
COAL TYPES
In general, coal is classified by heat value and sulfur content. In ascending
order of heat values, measured in British Thermal units or "Btus," the four
basic types of coal are lignite, subbituminous, bituminous and anthracite. Coal
of all geological composition may be used as steam coal. Bituminous coals must
have various characteristics to qualify for use as a metallurgical coal, which
is used in coke production.
Lignite Coal. Lignite coal is a brownish-black coal with a heat
value that generally ranges from 3,500 to 8,300 Btus per pound.
Major lignite operations are located in Texas, North Dakota, Montana
and Louisiana. Lignite coal is used almost exclusively in power
plants adjacent to the mine because the addition of any
transportation costs to the mining costs would exceed the price a
customer would pay for this low-Btu coal.
Subbituminous Coal. Subbituminous coal is a dull black coal with a
heat value that ranges from approximately 8,300 to 11,500 Btus per
pound. Most subbituminous reserves are located in Montana, Wyoming,
Colorado, New Mexico, Washington and Alaska. Subbituminous coal is
used almost exclusively by electric utilities and some industrial
consumers.
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Bituminous Coal. Bituminous coal is a "soft" black coal with a heat
value that ranges from 10,500 to 14,000 Btus per pound. This coal is
found in Appalachia, the Midwest, Colorado and Utah, and it is the
type most commonly used for electric power generation in the United
States. Bituminous coal is used to generate steam by utility and
industrial customers and is also used as a feedstock for
metallurgical purposes in steel production. Coal used in
metallurgical processes has higher expansion/contraction
characteristics than steam coal.
Anthracite Coal. Anthracite coal is a "hard" coal with a heat value
that can be as high as 15,000 Btus per pound. Anthracite deposits
are found primarily in the Appalachian region of eastern
Pennsylvania and are used primarily for utility, industrial and home
heating purposes.
One hundred percent of our reserves are bituminous and are located east of the
Mississippi River.
COAL QUALITIES
The primary factors considered in determining the value and marketability of
coal that utility and industrial customers use to generate steam include the Btu
content, the sulfur content and the percentage of small particles of inert
material known as ash, moisture and volatile matter.
BTU CONTENT. The Btu content provides the basis for satisfying the
heating requirements of boilers. Coal having a lower Btu content
frequently must be blended with coal having a higher Btu content to
allow the consumer to use the coal efficiently in its operations.
SULFUR CONTENT. Due to the restrictive environmental regulations
regarding sulfur dioxide emissions, coal is commonly described with
reference to its sulfur content, measured by pounds of sulfur
dioxide produced per million Btus (lbs.SO2/MMBtu).
Sulfur Content
Classification (lbs.SO2/MMBtus)
- -------------- ----------------
Compliance Up to 1.2
Low sulfur Up to 1.6
Medium sulfur Over 1.6 and up to 2.8
High sulfur Over 2.8
Coal that emits no more than 1.2lbs.SO2/MMBtu of sulfur dioxide when
burned complies with the Clean Air Act Amendment of 1990 and is
referred to as compliance coal. Medium sulfur coal is burned in
power plants that have equipment to limit sulfur emissions in the
production of electricity. These power plants will be able to
continue to burn medium sulfur coal after implementation of Phase II
of the Clean Air Act.
ASH CONTENT. The non-combustible nature of ash diminishes the
heating value of the coal. Therefore, coal with a higher percentage
of ash will have a lower heating value. For electric utilities, the
percentage of ash is important not only for its effect on heating
value, but also because it affects the amount of combustion
by-products. Electric utilities typically require coal with an ash
content ranging from 6% to 15%, depending on individual power plant
specifications. More stringent ash standards apply for metallurgical
coal, typically requiring less than 8% ash. Moisture content also
diminishes the heating value of coal. A high percentage of moisture
also may cause customers to experience problems handling the coal.
Moisture concerns arise principally with coal from the Powder River
Basin in northeastern Wyoming and southeastern Montana. Volatile
matter, which is combustible matter that vaporizes easily during
combustion, is important for electric utilities because most utility
power plant boilers are designed to burn coal having a medium to
high percentage of volatile matter.
METALLURGICAL COAL
Sulfur content, ash content, volatility, carbon content and other coking
characteristics are especially important for determining the value and
marketability of metallurgical coal. Metallurgical coal is fed into a coke oven
where it is heated in an oxygen deficient environment, producing porous coke
with a high carbon content which is then used to fuel blast furnaces. It is
important in the coking process to create a stable and high strength coke. This
is done by carefully blending low volatile and high volatile metallurgical coals
to create the proper coking characteristics. The lower the volatile
characteristics and percentage of ash in coal, the higher the yield
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and carbon content of the coke. However, too much low volatility coal may cause
coke to stick in the coke oven if it is an expanding coal.
COAL REGIONS
The majority of U.S. coal production comes from six regions: Northern
Appalachia, Central Appalachia, Southern Appalachia, the Illinois Basin, the
Rocky Mountains and the Powder River Basin.
NORTHERN APPALACHIA. Northern Appalachia includes northern West
Virginia, Pennsylvania, Maryland and Ohio. Coal from this region
generally has a sulfur content ranging from low sulfur to high sulfur
and has a Btu content of about 12,000 to 13,000 Btus per pound of
coal.
CENTRAL APPALACHIA. Central Appalachia includes southern West
Virginia, eastern Kentucky and Virginia. Coal from this region
generally has a low sulfur content and a high Btu content of about
12,000 to 13,500 Btus per pound of coal.
SOUTHERN APPALACHIA. Southern Appalachia includes Tennessee and
Alabama. Coal from this region also has a low sulfur content and a
high Btu content of about 12,000 to 13,000 Btus per pound of coal.
THE ILLINOIS BASIN. The Illinois Basin includes western Kentucky,
Illinois and Indiana. Coal from this region varies in Btu content from
10,000 to 12,000 Btus per pound of coal and has a high sulfur content.
THE ROCKY MOUNTAINS. The Rocky Mountain region consists of Utah and
Colorado. The coal from this region has a low sulfur content and
varies in Btu content from about 10,500 to 12,800 Btus per pound of
coal.
THE POWDER RIVER BASIN. The Powder River Basin consists mainly of
northeastern Wyoming and southeastern Montana. This coal has a very
low sulfur content and a low Btu content of about 8,000 to 9,200 Btus
per pound of coal.
All of our coal reserves are bituminous and are located east of the Mississippi
River in the Northern and Central Appalachian and the Illinois Basin regions of
the United States.
MINING METHODS
Coal is mined using either surface or underground methods. The method used
depends upon several factors, including the proximity of the target coal seam to
the earth's surface and the geology of the surrounding area. In general, surface
techniques are usually employed when a coal seam is within 200 feet of the
earth's surface, and underground techniques are used for deeper seams. We
describe the mining methods used at each of our mining operations under
"Business--Mining Operations."
Surface techniques generally require a favorable ratio of the amount of rock and
soil overlying a coal deposit, or overburden, that must be removed to excavate a
given quantity of coal. Underground techniques are used for deeper seams. In
1998, surface mining accounted for approximately 61.0% of total U.S. coal
production, with underground mining accounting for the balance of production. We
estimate that approximately 75.0% of our coal production in 1998 originated from
our deep mines, with the balance originating from our surface mines. Surface
mining generally costs less and has a higher seam recovery percentage than
underground mining. Surface mining typically results in the recovery of 80.0% to
90.0% of the total coal from a particular deposit, while underground mining
typically results in the recovery of 50.0% to 60.0%.
SURFACE MINING METHODS
Surface mining consists essentially of a large-scale earth moving operation in
which the overburden is removed by means of large earth-moving machines. The
coal exposed by removing the overburden is loaded onto haul trucks or overland
conveyers for transportation to processing and loading facilities. The site is
then backfilled with the overburden and otherwise restored to its approximate
original contour and condition, a process known as "reclamation." Federal law
mandates reclamation of all surface mining sites. The most common forms of
surface mining are:
Mountaintop Removal Mining. Mountaintop removal mining involves removing
all material above the coal seam before removal of the coal, leaving a
relative level plateau in place of the hilltop after mining. This method
achieves a more
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complete recovery of the coal. However, its feasibility depends on the
amount of overlying material in relation to the coal to be removed.
Contour Mining. Contour mining is conducted on coal seams where mountaintop
removal is not feasible because of the high overburden ratios. Mining
proceeds laterally around a hillside, at essentially the same elevation,
assuming the seam is fairly flat. The contour cut in a coal seam provides a
flat surface that can be used to facilitate auger mining. This is a common
surface mining method in the steeper slopes of the Appalachian coalfields.
Auger Mining. In auger mining, the miners remain outside of the mine and an
auger, which is a large, corkscrew-like machine, bores into the side of a
hill and extracts coal by "twisting" it out. Auger mining generally permits
the extraction of coal to depths of only 300 feet or less.
DEEP MINING METHODS
Underground or deep mining operations are used when a coal seam is too deep to
permit surface mining. There are three basic classifications of deep mining
based on the way the coal seam is accessed:
- slope mines, where a coal seam is relatively close to the earth's
surface and is accessed through a sloped tunnel,
- shaft mines, for deeper deposits, which are accessed through a
vertical tunnel, and
- drift mines, which are accessed through a horizontal entry.
Once the coal seam is accessed, there are two types of mining methods to extract
coal from deep mines:
Room and Pillar Mining. Room and pillar mining uses continuous miners or
conventional mining equipment that cut a network of interconnected passages
as high as the coal seam. Roof bolters stabilize the mine roof and pillars
are left to provide overall roof support. As a result of significant
technological advances, this mining method has become the most common
method of deep mining.
Longwall Mining. Longwall mining uses powerful hydraulic jacks to support
the roof of the mine while mobile shearing machines extract the coal. High
capacity chain conveyors then move the coal to a high capacity mine belt
system for delivery to the surface. The longwall machine generally cuts
blocks of coal, referred to as longwall panels, that have a width of
approximately 900 feet and a length ranging from 9,000 to 11,000 feet.
Longwall mining is a low-cost, high-output method of deep mining. After a
longwall panel is cut, the longwall machine must be disassembled and moved
to the next panel location, a process which generally takes one to two
weeks. We do not use the long wall mining method in any of our deep mines.
COAL PREPARATION AND BLENDING
Depending on coal quality and customer requirements, raw coal may be shipped
directly from the mine to the customer. However, the quality of most raw coal
does not allow it to be shipped directly to the customer without processing it
first in a preparation plant. Preparation plants separate impurities from coal
using a gravity process. This processing upgrades the quality and heating value
of the coal by removing or reducing sulfur and ash-producing materials, but it
entails additional expense and results in some loss of coal. Coals of various
sulfur and ash contents can be mixed or "blended" at a preparation plant or
loading facility to meet the specific combustion and environmental needs of
customers. Coal blending helps increase profitability by reducing the cost of
meeting the quality requirements of specific customer contracts, thereby
optimizing contract revenue.
ENVIRONMENTAL LAWS
Various federal, state and local environmental laws have had, and will continue
to have, a significant effect on the domestic coal industry. These laws govern
matters including employee health and safety, limitations on land use,
permitting and licensing requirements, air quality standards, water pollution,
plant and wildlife protection, reclamation and restoration of mining properties
after mining is completed, discharge of materials into the environment, surface
subsidence, which is the sinking or settling of the earth's surface from
underground mining and the effects of mining on groundwater quality and
availability. In addition, the electric utility industry is subject to extensive
regulation regarding the environmental impact of electricity generation
activities which could affect demand for coal. New legislation or regulations
could be adopted that may have a significant impact on coal mining operations
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or the ability of coal customers to use coal. See "Risk Factors--Risks Related
to Anker--Government regulations could increase our costs of doing business and
may discourage our customers from buying our coal" and "Business--Regulation and
Laws."
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BUSINESS
OVERVIEW
We are a producer of coal that is used principally to generate electricity and
to produce coke for use in making steel. We currently own or control substantial
coal reserves in West Virginia, Maryland, Virginia and Kentucky. We currently
operate a portfolio of seven deep mines and one surface mine that are located in
West Virginia and Maryland. We recently changed from operating our deep mines
with our own employees to using contract miners to operate these deep mines for
us. Our coal mines and reserves are located in close proximity to rail and water
transportation services or are within short trucking distances to power plants.
We primarily market and sell our coal to electric utilities located in the
Northeastern and mid-Atlantic states. The utilities that we currently sell our
coal to use modern generating processes that will allow them to continue using
our coal after implementation of Phase II of the Clean Air Act. See
"--Regulation and Law--Environmental Laws--Clean Air Act" for a discussion of
Phase II of Title IV of the Clean Air Act.
In addition to selling coal that we produce from our own mines, we also sell
coal that we purchase from other producers, which is referred to as brokered
coal. We also arrange for coal that others produce to be sold to third parties,
which is referred to as commission coal.
Based on the most recent data published by the National Mining Association, we
are one of the 30 largest coal producers and one of the 30 largest holders of
coal reserves in the United States.
ORGANIZATION
We were organized as a corporation in August 1996 under the laws of the State of
Delaware. This was done in order to effect a recapitalization of our
predecessor, Anker Group, Inc. Anker Group, Inc. had been engaged in the
production of coal since 1975. To effect the recapitalization, First Reserve
Corporation purchased approximately 54.1% of our common stock and 10,000 shares
of our Class B preferred stock for $50 million in cash. In addition, senior
management and Anker Holding B.V. exchanged an aggregate of 7.5% of Anker
Group's common stock for shares of Anker Coal Group's common stock. Anker Coal
Group then acquired the remaining 92.5% of Anker Group's common stock from Anker
Holding for approximately $87 million. We partially funded the $87 million by
issuing $25 million of Class A preferred stock to Anker Holding. We paid the
remaining $62 million in cash, $12 million of which we borrowed under our then
existing credit agreement. That credit agreement was subsequently amended and
restated on September 25, 1997 and replaced with our current credit facility on
November 21, 1998. See "Description of Other Indebtedness." In addition, we
assumed $152 million of Anker Group's outstanding liabilities.
Our principal offices are located at 2708 Cranberry Square, Morgantown, West
Virginia 26508 and our telephone number is (304) 594-1616.
COMPETITIVE STRENGTHS
We believe that we possess the following competitive strengths:
PORTFOLIO OF LONG-TERM CONTRACTS. We have secured long-term coal supply
contracts with a weighted average term of approximately 5.5 years as of October
1, 1999. Our long-term contracts have accounted for an average of approximately
75% of our coal sales revenues from 1994 to 1998. Over the same period,
approximately 2.6 million tons of our annual coal shipments covered by long-term
contracts were up for renewal, and contracts for approximately 2.0 million tons
of this coal were rolled over into new long-term contracts upon their
expiration. In addition, over the same period, we entered into new long-term
contracts for 2.3 million tons of annual coal shipments. We have been successful
in negotiating long-term contracts for our medium and high sulfur coal with
independent power producers and utilities equipped with sulfur-reduction
technologies. As of October 1, 1999, of our 18 long-term contracts, 14 were for
our medium and high sulfur coal. These long-term contracts provide us with
stable sources of revenues to support the large expenditures needed to open,
expand and maintain the mines servicing these contracts.
DIVERSE PORTFOLIO OF RESERVES. We have increased our reserve base approximately
246%, from 147 million recoverable products tons as of December 31, 1992 to
approximately 508 million recoverable product tons as of October 1, 1999,
substantially all of which was due to acquisitions of reserves. As of October 1,
1999, approximately 14% of our coal reserves were compliance coal, and 68% of
our reserves were medium sulfur coal. Many of our current customers that possess
the technology to scrub higher sulfur coal prefer that
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coal due to its lower cost. All of our coal is of a quality suitable for use in
electricity generating facilities. At December 31, 1998, our reserve life index,
defined as total recoverable reserves divided by production for 1998, was
approximately 76.1 years.
EXPERIENCED MANAGEMENT TEAM. Bruce Sparks, our President, has 21 years of
experience in the coal industry, has worked at Anker for the past 14 years and
owns approximately 8.5% of our fully diluted common stock. William Kilgore, our
Chief Executive Officer and the Chairman of our Board of Directors, has 42 years
experience in the coal industry, including as a coal mining consultant for
several Central Appalachian coal companies. See "Management."
COAL RESERVES
As of October 1, 1999, we had an estimated reserve base totaling approximately
508 million recoverable product tons. Approximately 14% of that amount consists
of compliance coal, 18% of that amount consists of low sulfur coal, which
includes the 14% of compliance coal, and 68% of that amount consists of medium
sulfur coal. Approximately 96% of these reserves are classified as deep, and 4%
are classified as surface mineable. Moreover, steam coal represents
approximately 443 million tons, or 87%, of our reserves. Premium quality
metallurgical coal, on the other hand, constitutes approximately 65 million
tons, or 13%, of our reserves. Assigned reserves, which consist of coal that
could reasonably be expected to be processed in existing plants, represent
approximately 46% of our reserves. Unassigned reserves, which consist of coal
for which additional expenditures will be required for processing facilities,
represent the remaining 54% of our reserves.
Our engineers and geologists prepare reserve estimates, which are reviewed
periodically to reflect additional data obtained and developments affecting the
reserves. Accordingly, reserve estimates will change from time to time in
response to:
- mining activities
- analysis of new engineering and geological data
- acquisition or divestment of reserve holdings
- modification of mining plans or mining methods
- market conditions
- other factors
We engaged Marshall Miller & Associates, an independent mining and geological
consultant, to audit our estimates of our coal reserves. The audit verified that
we properly estimated our reserve base according to industry-accepted standards.
The audit also verified the accuracy of our reserve estimates. The following
table summarizes our coal reserves as of October 1, 1999. Estimates of measured,
indicated and total recoverable reserves are based on the reserve information
contained in the reserve audit report of Marshall Miller & Associates. See Annex
A -- Report of Marshall Miller & Associates.
ESTIMATES OF MEASURED, INDICATED AND TOTAL RECOVERABLE COAL RESERVES
--------------------------------------------------------------------
Underground Total
(UG) or Surface Measured Indicated Recoverable
(S) (1) (2) Reserves Surface Underground
--- ----- ----- --------- ------- -----------
(in millions of tons)
County and State
- ----------------
Barbour County, West Virginia UG 23.00 6.98 29.98 29.98
Grant County, West Virginia S/UG 16.21 13.69 29.90 1.30 28.60
Harrison County, West Virginia UG 18.45 38.15 56.60 56.60
Monongalia County, West Virginia S 2.03 0.02 2.05 2.05
Preston County, West Virginia UG 0.68 0.00 0.68 0.68
Raleigh County, West Virginia UG 18.60 12.83 31.43 31.43
Taylor County, West Virginia UG 73.57 144.41 217.98 217.98
Upshur County, West Virginia UG 41.11 24.76 65.87 65.87
Webster County, West Virginia S/UG 2.83 0.11 2.94 2.08 0.86
Allegany County, Maryland S 4.15 0.10 4.25 4.25
Garrett County, Maryland S/UG 19.43 3.26 22.69 9.55 13.14
Muhlenberg County, Kentucky S/UG 7.08 0.83 7.91 0.34 7.57
Tazewell County, Virginia S/UG 25.26 10.44 35.70 0.90 34.80
----- ----- ----- ---- -----
Totals 252.40 255.58 507.98 20.47 487.51
====== ====== ====== ===== ======
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Avg.
Avg. Mine Avg. Mine Wash Avg. Wash
Recovery Recovery Recovery Recovery
County and State Surface Underground Surface Underground MET STEAM
- ---------------- ------- ----------- -------- ----------- --- -----
Barbour County, West Virginia 54% 73% 29.98
Grant County, West Virginia 85% 55% 76% 65% 29.90
Harrison County, West Virginia 57% 100% 56.60
Monongalia County, West 85% 100% 2.05
Virginia
Preston County, West Virginia 55% 73% 0.68
Raleigh County, West Virginia 55% 76% 31.43
Taylor County, West Virginia 60% 70% 217.98
Upshur County, West Virginia 54% 72% 65.87
Webster County, West Virginia 85% 55% 61% 66% 2.94
Allegany County, Maryland 85% 100% 4.25
Garrett County, Maryland 85% 55% 100% 94% 22.69
Muhlenberg County, Kentucky 85% 55% 100% 91% 7.91
Tazewell County, Virginia 85% 64% 100% 87% 33.40 2.30
----- ------
Totals 64.83 443.15
===== ======
County and State Assigned Unassigned
- ---------------- -------- ----------
Barbour County, West Virginia 29.98
Grant County, West Virginia 29.90
Harrison County, West Virginia 56.60
Monongalia County, West 2.05
Virginia
Preston County, West Virginia 0.68
Raleigh County, West Virginia 31.43
Taylor County, West Virginia 217.98
Upshur County, West Virginia 65.87
Webster County, West Virginia 2.94
Allegany County, Maryland 4.25
Garrett County, Maryland 11.38 11.31
Muhlenberg County, Kentucky 0.34 7.57
Tazewell County, Virginia 35.70
------- --------
Totals 231.17 276.81
======= ========
(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. Losses
for extraction recovery and wash recovery have been factored into
measured reserves.
(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 1/4 to 3/4
mile from points of observation. Further exploration is necessary to
place these reserves in a measured category. Losses for extraction
recovery and wash recovery have been factored into indicated reserves.
We or our subsidiaries own approximately 59% of our total reserves. We lease
approximately 41% of our total reserves from third parties. Our reserve leases
with third parties generally have terms of between 10 to 20 years. We generally
have the right to renew the leases for a stated period or to maintain the lease
in force until the exhaustion of mineable and merchantable coal. These leases
provide that we must pay royalties to the lessor, either as a fixed amount per
ton or as a percentage of the sales price. Many leases also require us to pay a
lease bonus or minimum royalties. These lease bonuses and minimum royalties must
be paid either at the time the lease is executed or in periodic installments. In
most cases, the minimum royalty payments are applied to reduce future production
royalties.
Consistent with industry practices, we conduct limited investigation of title to
third-party coal properties prior to our leasing of these properties. The title
of the lessors or grantors and the boundaries of our leased properties are not
fully verified until we prepare to mine the reserves. If defects in title or
boundaries of undeveloped reserves arise in the future, our control and right to
mine these reserves could be materially affected.
MINING OPERATIONS
COAL PRODUCTION
During 1998, we conducted mining operations at nine deep mines and three surface
mines in eight counties in West Virginia and in Garrett County, Maryland.
Approximately 75% of our production originated from our deep mines, and
approximately 25% of our production originated from our surface mines. The
following table presents the production, including coal purchased from third
parties for blending, from each of the counties in which we produced coal for
the previous five years:
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(in thousands of tons)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Webster County, West Virginia 2,108 1,889 1,998 2,012 1,271
Barbour County, West Virginia 1,497 1,883 1,787 1,555 1,222
Monongalia County, West Virginia 917 1,288 1,743 1,299 1,134
Raleigh County, West Virginia 123 641 948 1,016 941
Preston County, West Virginia 1,021 893 886 694 512
Garrett County, Maryland 156 293 300 305 286
Harrison County, West Virginia - - - 725 316
Grant County, West Virginia - - - 623 703
Upshur County, West Virginia - - - 204 960
Shelby County, Alabama (1) - - - 182 -
----- ----- ----- ----- -----
Total 5,822 6,887 7,662 8,615 7,345
===== ===== ===== ===== =====
(1) We indirectly owned a minority interest in Oak Mountain Energy, L.L.C.
Oak Mountain operated a deep mine in Shelby County, Alabama. We sold
our investment in Oak Mountain in the first quarter of 1998 and
recorded an impairment loss of $8,267,000 to adjust our investment to
its fair market value as of December 31, 1997.
The following is a description of our mining operations. In 1998, we recorded
impairment losses and restructuring charges with respect to our operations in
Webster, Monongalia, Raleigh, Preston and Grant counties, West Virginia and
Garrett County, Maryland. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WEBSTER COUNTY, WEST VIRGINIA. In 1998, we operated a mining complex in Webster
County, West Virginia. The complex consisted of a multiple seam surface mine and
a deep mine in the Kittanning Seam operated by a contract miner. Coal from the
surface and deep mines were blended to make two products. The first was a
premium grade steam coal, the contents of which average 1.33 lbs.SO2/MMBtu, 10%
ash, 12,800 Btu per pound, 6.0% moisture and 34 volatility. The second product
was a lesser grade steam coal, the contents of which average 1.0% sulfur, 15%
ash and 12,000 Btu per pound. Production from the surface and deep mines totaled
approximately 1.3 million tons in 1998. We sold approximately 66% of this
production to Baltimore Gas & Electric Company, Delmarva Power & Light Company,
Atlantic City Electric Company, AES Corporation and Salt City Energy Venture,
L.P.
As a part of our mining complex, we operated a computer-controlled,
500-tons-per-hour preparation plant located in close proximity to the mines. We
also operated an on-site laboratory that allowed us to precisely blend the coal
from the surface and deep mines. The complex also had a 100,000 ton unprocessed
coal storage capacity and a 100,000 ton processed coal storage capacity.
During the second half of 1998, the coal mined at the surface operation began to
thin, and the quality of the mined coal began to deteriorate. At the same time,
the cost of production began to rise, and the prices at which we could sell the
coal began to decrease. As a result, the surface operation became uneconomical,
and we idled the mine in December 1998. We are currently reclaiming the
properties associated with the idled surface mine and expect to complete the
reclamation in the first quarter of 2000. The deep mine continued to operate
through September 1999, at which time the reserves in the deep mine were
exhausted.
In late 1998 and early 1999, we reevaluated our coal reserves in Webster and
Braxton counties. Our ability to economically mine these reserves had been
adversely affected by the rising cost of production, which is due to the
thinning of the seams and the deteriorating quality of the coal. As a result, we
determined that we could not economically mine these reserves at that time.
Consequently, we impaired the entire carrying value of the properties and have
recorded exit costs associated with these operations.
BARBOUR COUNTY, WEST VIRGINIA. We own a deep mine complex in Barbour County,
West Virginia, known as the Sentinel Mine. The Sentinel Mine produces coal from
the Kittanning Seam. This mine produced approximately 1.1 million tons of coal
in 1998. We sold approximately 85% of the 1998 production to Potomac Electric
Power Company, AES Corporation and Logan Generating Company L.P. Coal from the
Sentinel Mine's Kittanning Seam averages 2.0 lbs.SO2/MMBtu, 9% ash, 13,000 Btu
per pound, 7.0% moisture and 33 volatility on a fully-washed basis. We entered
into a contract mining agreement for the Sentinel Mine, and the contract miner
began operation on June 1, 1999.
The Barbour County operation has approximately 30.0 million tons of recoverable
reserves. All of these recoverable reserves are steam coal, assigned reserves
and are classified as deep mineable.
In addition to the mining operation, we have an on-site, 1,100 tons-per-hour
preparation plant. The plant is fed from a 100,000 ton open stockpile that
facilitates the shipment of coal through an attached 3,000 tons-per-hour train
loading facility. We also have an on-site
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laboratory that provides sampling and blending capabilities. The total cost of
our plant and equipment associated with our Barbour County operations was
approximately $13.0 million at December 31, 1998, and its net book value was
approximately $8.8 million.
We are able to purchase coal from surrounding smaller producers to provide
additional sales at various qualities for our utility and industrial customers.
With our preparation plant capacity, blending ability, on-site laboratory and
large stockpile area, we have the ability to blend the purchased coal with the
production from the Sentinel Mine to serve a variety of customers. In 1998, we
blended approximately 164,000 tons of brokered coal with production from the
Sentinel Mine for shipment to customers.
MONONGALIA COUNTY, WEST VIRGINIA. We operate a surface mine in the Waynesburg
seam in Monongalia County, West Virginia. This surface mine produced
approximately 900,000 tons of coal in 1998. Approximately 10% of this production
was shipped by truck to the Morgantown Energy Associates power plant in
Morgantown, West Virginia, where it was blended with coal refuse. This was done
under a long-term contract with Morgantown Energy Associates. The balance of the
production from the surface mine was shipped to our rail and river terminal
located on the nearby Monongahela River, known as Anker Rail & River Terminal.
The coal was then blended with other brokered coal and shipped by rail and barge
to various utilities. Shipments from Anker Rail & River Terminal averaged 2.5 to
4.3 lbs.SO2/MMBtu, 14 to 16% ash and 11,800 to 12,200 Btu per pound.
We control approximately 2.0 million tons of recoverable reserves in the
Waynesburg seam in Monongalia County with an average quality of 2.3% sulfur,
16.5% ash and 12,500 Btu per pound. All of these reserves are steam coal,
assigned reserves and are surface mineable.
Anker Rail & River Terminal is designed to enable us to simultaneously load
trains of up to 100 cars, referred to as unit trains, on rail lines jointly
served by CSX Transportation, Inc. and Norfolk Southern Corporation 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 facility is equipped with crushing, screening and blending
equipment, as well as quality control and automated sampling systems. We operate
Anker Rail & River Terminal for coal from our surface mine and for third-party
brokered coal.
We also own the Rosedale and Dippel river facilities. These facilities are
adjacent to the Anker Rail & River Terminal and are used for barge staging and
additional ground storage. The total cost of the plant and equipment associated
with our Monongalia County operations was approximately $3.0 million at December
31, 1998, and its net book value was approximately $2.5 million.
RALEIGH COUNTY, WEST VIRGINIA. We own a deep mine in the Beckley seam in Raleigh
County, West Virginia, known as the Baybeck Mine. In 1998, this mine produced
approximately 941,000 tons of premium quality, low volatility metallurgical
coal, which is used in coke production and is known as met coal. We sold the
1998 production from this mine to Citizens Gas and Coke Utility, Drummond Coal
Sales, Inc., Koppers Industries, Inc., A.K. Steel, U.S. Steel Corporation and
Dofasco Steel Company. Coal from the Baybeck Mine averages 1.0 lbs.SO2/MMBtu,
5.5% ash, 6.0% moisture and 19 vol. We have entered into a contract mining
agreement for our mining operations in Raleigh County, and the contract miner
began operations on July 5, 1999.
The Baybeck Mine has approximately 1.9 million tons of recoverable reserves. We
previously controlled an additional block of reserves in the Beckley seam
adjacent to our current mine. However, these reserves were separated from our
current mining area by a zone of very thin or no coal. In order to access and
mine these additional reserves, we would have been required to spend additional
capital. As a result of this and other factors, we surrendered these reserves to
the lessor in July 1999.
We also control approximately 29.0 million tons of coal in the Pocahontas #3
Seam. This is a low volatility metallurgical coal reserve and is adjacent to our
Baybeck Mine. This reserve is jointly served by Norfolk Southern and CSX
railroads. We are holding this reserve for sale, and, accordingly, it has been
adjusted to its estimated fair market value.
All of the reserves in Raleigh County are metallurgical coal, assigned reserves
and are classified as deep mineable.
We own and operate a 300-tons-per-hour 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 from a 150,000 ton open stockpile area adjacent to the
preparation plant. The total cost of the plant and equipment associated with our
Raleigh County operations was approximately $11.1 million at December 31, 1998,
and its net book value was approximately $7.1 million.
PRESTON COUNTY, WEST VIRGINIA. In 1998, we operated two deep mines through
contract miners in the Upper Freeport seam in Preston County, West Virginia.
These deep mines produced a total of 501,000 tons of coal in 1998. We sold
approximately 82% of the production from these mines to Potomac Electric Power
Company, Allegheny Power Service Corporation and AES Corporation. Coal
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produced from these deep mines averages 2.3 lbs.SO2/MMBtu, 11% ash, 12,800 Btu
per pound, 6.0% moisture and 28 volatility on a fully-washed basis.
We own and operate a 250-tons-per-hour preparation plant in Preston County,
where the coal from our contract mines is processed. The plant has blending
capabilities, a sophisticated sampling system and a 1,200-tons-per-hour CSX unit
train loading facility. The plant has a 60,000 ton storage capacity.
One of the two deep mines ceased production in December 1998 due to the
exhaustion of its reserves. The other deep mine is currently operating. However,
its reserves are expected to be depleted at the end of 1999. We expect to serve
our customers with coal produced from our Barbour and Upshur County mining
operations.
In July 1999, we sold substantially all of the coal reserves we controlled in
Preston County for $1.25 million in cash plus royalties on future production. A
gain of approximately $0.5 million from this sale was recognized in the third
quarter of 1999. As a result of that sale, we now control 0.68 million tons in
Preston County.
The total cost of the plant and equipment associated with our Preston County
operations was approximately $3.2 million at December 31, 1998, and its net book
value was approximately $300,000.
GARRETT COUNTY, MARYLAND. We own a deep mine in the Bakerstown seam in Garrett
County, Maryland, known as the Steyer Mine. The Steyer Mine produced 286,000
tons of coal in 1998. That coal was shipped by truck to Mettiki Coal Corporation
and to our Vindex Mine in Grant County, West Virginia, where it was blended and
shipped to Virginia Electric Power Company's Mount Storm Power Station. Coal
mined from the Bakerstown seam averages 1.76 lbs.SO2/MMBtu, 25% ash, 10,200 Btu
per pound, 5.0% moisture and 15 vol. The Steyer Mine has approximately 10.6
million tons of recoverable reserves. The total cost of the plant and equipment
associated with the Steyer Mine was approximately $2.1 million at December 31,
1998, and its net book value was approximately $700,000.
We control a total of 22.7 million tons of reserves in Garrett County. All of
these reserves are steam coal reserves. Approximately 50% are assigned reserves.
Approximately 13.0 million tons, or 58%, of these reserves are deep mineable.
We entered into a contract mining agreement for our operations in Garrett
County, and the contract miner began operations on April 12, 1999.
HARRISON COUNTY, WEST VIRGINIA. We own 50% of a limited liability company that
operates a deep mine in the Pittsburgh seam in Harrison County, West Virginia,
known as the Sycamore Mine. Production from the Sycamore Mine began in May 1997.
The Sycamore Mine has approximately 5.1 million tons of recoverable reserves
with an average of 11% ash, 5.8 lbs.SO2/MMBtu, 35 volatility and 12,500 Btu per
pound.
Coal mined from the Sycamore Mine is sold and delivered by truck to the nearby
Harrison Power Station. Allegheny Power Service Corporation owns the Harrison
Power Station, which burns more than 5.0 million tons of coal per year. The
Harrison Power Station was recently equipped with a scrubber addition, which
allows the Harrison Power Station to burn the high sulfur coal produced at the
Sycamore Mine. In 1998, the Sycamore Mine shipped by truck a total of
approximately 630,000 tons to the Harrison Power Station.
We control a total of 56.6 million tons of reserves in Harrison County. All of
these reserves are steam coal, assigned reserves and are classified as deep
mineable.
GRANT COUNTY, WEST VIRGINIA. We own a surface mine in the Kittanning and
Freeport seams and a deep mine in the Bakerstown seam in Grant County, West
Virginia. The surface mine, known as the Vindex Mine, produced 312,000 tons of
coal in 1998. This coal was sold to Virginia Electric Power Company's Mount
Storm Power Station. The deep mine, known as the Stony River Mine, produced
approximately 333,000 tons of coal in 1998. The coal from the Stony River Mine
was sold to Mettiki Coal Corporation and to the Vindex Mine, where it was
blended and shipped to Virginia Electric Power Company's Mount Storm Power
Station. The blended product averages 3.0 lbs.SO2/MMBtu, 16% ash, 12,000 Btu per
pound, 5.0% moisture and 15 volatility. The reserves for the Vindex Mine and the
Stony River Mine contain approximately 16.2 million tons of recoverable coal,
all of which are located within several miles of the Mount Storm Power Station.
All of these reserves are steam coal, assigned reserves. Approximately 1.0
million tons, or 7.0%, of these reserves are surface mineable.
We operate a 200-tons-per-hour preparation plant located at the Vindex Mine. The
preparation plant processes coal from the Vindex, Steyer and Stony River mines
for shipment to Virginia Electric Power Company, referred to as VEPCO. The total
cost of the plant and
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equipment associated with our Grant County operations was approximately $6.8
million at December 31, 1998, and its net book value was approximately $5.3
million.
In December 1998, we were forced to idle the Vindex Mine because we had mined
all of its then permitted coal reserves, and we were unable to secure a new
mining permit for our adjacent properties. With the closing of the Vindex Mine,
we were unable to sell that portion of the production from the Stony River Mine
which had previously been blended with coal from the Vindex Mine and shipped to
VEPCO's Mount Storm Power Station. As a result of this and other factors, we
idled the Stony River Mine in February 1999. We are working with the appropriate
regulatory agencies to try to get the necessary permits for the Grant County
surface mine. We have been advised orally by an official of the West Virginia
Division of Environmental Protection that this governmental agency has decided
to issue a permit covering a portion of the Grant County surface mine operation
so that we can resume mining at that operation. The governmental agency has also
indicated by letter to us that it anticipates a favorable consideration of our
application for the permit. We have not yet, however, received written
confirmation that the permit has been granted. At this point, we are uncertain
of when we will actually receive the necessary permit with respect to the Grant
County surface mine. Also, there is a risk that the agency will not issue the
permit even though we have been advised that it will. Because the permit was not
issued by October 15, 1999, VEPCO has the right, but not the obligation, to
terminate its long-term coal contract with us. Nevertheless, VEPCO has indicated
by letter to us dated October 19, 1999, that, in view of the progress being made
in obtaining the permit, VEPCO anticipates that it will not terminate its
contract as long as we receive the permit in the near term.
We control a total of 29.9 million tons of reserves in Grant County. All of
these reserves are steam coal and assigned reserves. Approximately 27.4 million
tons, or 96.4%, of these reserves are deep mineable.
UPSHUR COUNTY, WEST VIRGINIA. In July 1997, we commenced production from a deep
mine in the Upper Freeport seam in Upshur County, West Virginia. As of October
1, 1999, the deep mine, known as the Spruce Fork Mine No. 1, had approximately
6.7 million tons of recoverable reserves in the Upper Freeport seam. In 1998,
the Spruce Fork Mine No. 1 produced 743,000 tons of coal. We sold approximately
81% of the production from this mine to Baltimore Gas & Electric Company, Lehigh
Portland Cement, Logan Generating and Potomac Electric Power Company. The
quality of the reserves at the Spruce Fork Mine No. 1 averages 1.8
lbs.SO2/MMBtu, 9% ash, 13,000 Btu per pound, 6.0% moisture and 33 volatility. We
entered into a contract mining agreement for our Spruce Fork Mine No. 1, and the
contract miner began operations on June 1, 1999.
In September 1999, a contract miner commenced production from a new deep mine in
the Kittanning seam in Upshur Country. This deep mine, known as the Spruce Fork
Mine No. 2, has approximately 16.8 million tons of recoverable reserves. The
quality of these reserves averages 1.90 lbs.SO2/MMBtu, 9% ash, 13,000 Btu per
pound and 33 volatility.
We own and operate a 700-tons-per-hour preparation plant known as the Sawmill
Run Plant. We acquired the plant from a subsidiary of Pittston Coal Company, and
we have upgraded the plant. We also own and operate a train loading facility on
the CSX railroad which is adjacent to the Sawmill Run Plant. The loading
facility is a high-speed unit train loading facility with an automatic sampling
system. The total cost of the plant and equipment associated with our Upshur
County operations was approximately $ 28.0 million at December 31, 1998, and its
net book value was approximately $26.0 million.
We control approximately 65.9 million tons of recoverable reserves in Upshur
County. All of these reserves are steam coal, assigned reserves and classified
as deep mineable.
OTHER RESERVES. In addition to the reserves discussed above in connection with
our existing mining operations, we own or control substantial additional
reserves, including approximately 218 million tons of reserves in Taylor County,
West Virginia. All of the reserves in Taylor County are steam coal, unassigned
and classified as deep mineable. They have an average quality of 1.92
lbs.SO2/MMBtu, 10% ash, 13,000 Btu and 31 volatility. We are not currently
producing coal from these reserves and are holding them for future production.
CONTRACT MINING
We recently converted from operating our deep mines ourselves to using contract
miners to operate these mines for us. In each case, the contract miner is a
third party that provides coal extraction services at our mines. The contract
miner uses its own employees and supplies to mine the coal from our reserves.
The contract miner is responsible for making all capital expenditures to advance
the mine and continue coal production. As a service provider, the contract miner
produces the coal for us, and we own the coal at all times.
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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. For eastern utilities
supplied by rail, on the other hand, transportation costs range from 25 to 40%
of the cost of a customer's coal. Typically, customers receiving coal by truck
purchase the coal on a delivered basis, freight included. Customers receiving
coal by rail and generally by barge are responsible for transportation charges.
As a result, the availability and cost of transportation constitute important
factors for the marketability of coal.
In 1998, approximately 60% of our tonnage traveled by rail on CSX and Conrail,
with the remaining 40% traveling by truck and inland waterway barges. Although
all of our mines are currently served only by CSX, we believe that the freight
charges we pay are competitive with the charges that other coal producers served
by multiple railroads pay. The practices of, and rates set by, the railroad
serving a particular mine might affect, either adversely or favorably, our
marketing efforts with respect to coal produced from the relevant mine.
Effective on or about June 1, 1999, Conrail was divided between CSX and Norfolk
Southern. We anticipate that the division of Conrail will give us access to
affected markets without having to incur switching costs between railroads, as
we have in the past. Thus, we may be able to supply coal into various markets
more competitively because of lower rail transportation costs. We also expect
that our competitors will similarly benefit from the division of Conrail since
they will be able to supply coal into markets where we have in the past had a
transportation advantage because there was a single rail line haul into those
markets.
COAL MARKETING AND SALES
We currently conduct our marketing and sales operations primarily in the eastern
and mid-western United States.
Our sales and marketing staff in Morgantown, West Virginia focus on steam coal
sales in the Northeast and mid-Atlantic regions and on metallurgical coal sales
across the entire United States and Canada. Our sales and marketing staff in
Carmel, Indiana focus on sales in the mid-western United States. Sales of coal
in 1998 were 12.3 million tons, including 5.0 million tons shipped under
long-term contracts with utilities, 3.1 million tons under long-term contracts
with independent power producers, 2.4 million tons under spot market contracts
with utilities and 1.8 million tons to metallurgical and industrial customers.
Sales of coal in 1997 were 13.4 million tons, and sales of coal in 1996 were
11.6 million tons.
Anker Holding BV, which currently owns 6.84% of our fully-diluted common stock,
through related parties purchases coal from us for its international trading
operations. These purchases amounted to $131,000 in 1998, $9.7 million in 1997
and $16.2 million in 1996.
LONG-TERM COAL SUPPLY CONTRACTS
During 1999, we have supplied coal to approximately 26 different customers on a
regular basis. We have entered into various long-term coal supply contracts with
our customers, particularly with our regional utilities and independent power
producers. We have secured long-term coal supply contracts with a weighted
average remaining life of approximately 5.5 years as of October 1, 1999. Our
long-term contracts have accounted for approximately 75% of our coal sales
revenues from 1994 to 1998. Over the same period, approximately 2.6 million tons
of annual coal shipments covered by long-term contracts were up for renewal, and
contracts for approximately 2.0 million tons of this coal were rolled over into
new long-term contracts upon their expiration. In addition, over the same
period, we entered into new long-term contracts for 2.3 million tons of annual
coal shipments. We believe that customers enter into these long-term contracts
principally to secure a reliable source of coal at predictable prices. We enter
into these contracts to obtain stable sources of revenues required to support
the large expenditures we need to open, expand and maintain the mines servicing
the contracts. Our long-term contracts with companies related to AES Corporation
accounted for approximately 18% of our revenues in 1998 compared to 17% of our
revenues in 1997 and 16% of our revenues in 1996, and we expect shipments to
these customers to account for approximately 18% of our revenues in 1999. Our
shipments to VEPCO accounted for approximately 11% of our revenues in 1998,
compared to 6% of our revenues in 1997 and 5% of our revenues in 1996, and we
expect shipments to VEPCO to account for approximately 10% of our revenues in
1999. In addition, our shipments to Potomac Electric Power Company accounted for
approximately 10% of our revenues in 1998 and 1997 compared to 11% of our
revenues in 1996, and we expect shipments to that customer to account for
approximately 27% of our revenues in 1999. The loss of these customers and other
of our long-term contracts could have a material adverse effect on our financial
condition and results of operations. See "Risk Factors--Risks Related to
Anker--We depend on key customers for a significant portion of our revenues, and
the loss of one or more of them could adversely affect us."
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The following table sets forth information regarding our long-term coal supply
contracts as of October 1, 1999:
CONTINUOUS APPROXIMATE EXPIRATION CURRENT ANNUAL
YEARS OF TERM OF CURRENT DATE OF CONTRACT
SERVICE WITH CONTRACT CURRENT TONNAGE
CUSTOMER CUSTOMER (NUMBER OF YEARS) CONTRACT (1) (IN THOUSANDS)
- -------- -------- ----------------- ------------ --------------
Allegheny Energy - Harrison Plant 9 2 12/31/99 720
BG&E - Wagner Plant 10 3 12/31/99 300
BG&E - Crane Plant 5 3 12/31/99 300
Citizens Gas 3 2 12/31/99 144
PEPCO - Chalk Point & Morgantown 17 2 12/31/00 2150
Plants
Lehigh Portland - Union Bridge Plant 1 2 06/30/01 192 (2)
Atlantic Electric - Deepwater Plant 17 6 06/30/01 160 (3)
AKSteel - Ashland & Middletown Plants 3 2 12/31/01 480 (2)
VEPCO - Mt. Storm Station -Vindex 8 3 12/31/01 360
Contract
PP&L - Brunner Island Plant 1 3 12/31/01 320 (4)
VEPCO Mt. Storm Plant - Mastellar 8 8 12/31/02 432
Contract
Mettiki Coal Corp. 5 7 12/31/02 432
ER&L/AES Thames Plant 11 16 03/03/05 650 (2)
MEA Plant 8 15 09/14/07 120 (2)
AES Shady Point Plant 9 18 12/31/07 600 (2)
Logan Generating Plant 5 21 12/31/14 400 (2)
AES Beaver Valley Plant 14 20 12/31/16 576 (5)
AES Warrior Run Plant (6) 0 20 12/31/19 650 (2)
- --------------------------------
(1) Reflects existing term of contract and does not assume the customer's
exercise of 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 in which
the seller agrees to supply all of the specific goods that the
purchaser will need during a specified period at an agreed price, and
the purchaser agrees to purchase all of those goods exclusively from
the seller.
(3) Reflects an 85% requirements contract.
(4) Shipments for 2000 at 324,000 tons and 2001 at 162,000 tons.
(5) As of April 1, 1999 this contract changed from a coal supply agreement
to an agency agreement under which the customer pays a fee to us for
all tons delivered to the plant.
(6) Contract term is for 20 years from the commercial operation date,
which has yet to occur. We are currently shipping coal and expect the
commercial operation date to occur before the end of 1999.
The terms of long-term coal supply contracts are based on bidding procedures and
extensive negotiations with customers. Consequently, the terms of these
contracts typically vary significantly from each other in many respects,
including their 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 our long-term coal supply contracts are subject to price
adjustment provisions. These price adjustment provisions permit an increase or
decrease in the contract price at specified times to reflect changes in market
price indices or other economic indices, taxes and other charges. Two of our 18
long-term coal supply contracts also contain price reopener provisions. These
price reopener provisions 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.
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Frequently, customers send bid solicitations to other suppliers to establish a
new price or to establish a right of first refusal. Some price reopener
provisions contain limitations on the magnitude of the price change permitted.
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.
Our long-term coal supply contracts specify Btu, sulfur, ash, moisture,
volatility and other quality requirements for the coal to be supplied. Most of
our contracts specify the approved seams and/or approved locations from which
the coal is to be mined.
Our long-term coal supply contracts contain "force majeure" provisions that
allow us and/or the customer to suspend performance under the contract to the
extent necessary while events beyond the reasonable control of the affected
party are occurring.
From time to time, we have become involved in contract disputes relating to,
among other things, coal quality, pricing, source of the coal and quantity.
While customer disputes, if unresolved, could result in the termination or
cancellation of the contracts to which they relate, our experience has been that
curative and/or dispute resolution measures decrease the likelihood of
termination or cancellation. In addition, our development of long-term business
relationships with many of our customers has generally permitted us to resolve
business disputes in a mutually acceptable manner. Nonetheless, we have from
time to time been involved in arbitration and other legal proceedings regarding
our long-term contracts, and we cannot assure you that existing and future
disputes can be resolved in a mutually satisfactory manner. In August 1999, to
resolve disputes under an agreement with VEPCO, we entered into an amendment to
that agreement. The amendment, among other things, gives VEPCO the right, but
not the obligation, to terminate that contract to purchase coal from us if the
West Virginia Division of Environmental Protection does not issue a permit for
the resumption of operations at our Grant County surface mine. See "Risk
Factors--Risks Related to Anker--We depend on key customers for a significant
portion of our revenue, and the loss of one or more of them could adversely
affect us."
The operating profit margins we realize under our long-term coal supply
contracts vary from contract to contract and depend upon a variety of factors,
including price reopener and other price adjustment provisions, as well as our
production costs and the cost of brokered coal. 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 the tonnage delivered under contract represents.
REGULATION AND LAWS
Federal, state and local authorities regulate the coal mining industry on
matters including 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, which is the sinking or
settling of the earth's surface from underground mining and the effects that
mining has on groundwater quality and availability. In addition, significant
legislation mandating benefits for current and retired coal miners affects the
industry. Mining operations require numerous federal, state and local
governmental permits and approvals.
Our 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, we do not believe these violations can be
completely eliminated.
While it is not possible to quantify the costs of compliance with all applicable
laws, those costs have been and continue to be significant.
MINING HEALTH AND SAFETY STANDARDS
Federal legislation has imposed stringent safety and health standards since
1969, when Congress adopted the federal Coal Mine Health and Safety Act of 1969.
The 1969 Coal Mine Health and Safety Act resulted in increased operating costs
and reduced productivity. The Federal Mine Safety and Health Act of 1977
significantly expanded the enforcement of health and safety standards. The 1977
Federal Mine Safety and Health 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 monitors compliance with these federal laws and
regulations. The Black Lung Benefits Act of 1969 and the Black Lung Benefits
Reform Act of 1977 constitute parts of the 1969 Coal Mine Health and Safety Act
and the 1977 Federal Mine Safety and Health Act, respectively. In addition to
the federal framework, most of the states in which we operate impose regulatory
and legal parameters for mine safety and health.
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One of our long-term goals is to achieve excellent health and safety
performance, as measured by accident frequency rates and other measures. We
believe that our attainment of this goal is inherently tied to our attainment of
productivity and financial goals. We seek to implement this goal by, among other
measures
- training employees in safe work practices;
- carrying out periodical safety audits at each operation;
- 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 recurrences.
As evidence of the effectiveness of our safety program, the West Virginia Office
of Miners' Health, Safety and Training awarded our Osage Mine in Monongalia
County, West Virginia the Bart Lay Award. The Osage Mine was recognized as the
safest coal mine in West Virginia during 1996 and 1997. In addition, the Mine
Safety and Health Administration awarded the Webster County surface mine and the
Steyer Mine the Pacesetter Award for lowest accident frequency for 1998. The
State of West Virginia awarded the preparation plant associated with the
Sentinel Mine the Mountain Guardian Award for lowest accident and violation
frequency for 1998.
BENEFITS UNDER BLACK LUNG LEGISLATION
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, 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 some
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 and the first January on which the government trust becomes
solvent. We maintain a fully-insured program covering all black lung claims
through the West Virginia Workers Compensation and the West Virginia Coal
Workers' Pneumoconiosis Funds. We have not received any notice of claims for
black lung disease which the plans would not cover.
The United States Department of Labor has issued proposed amendments to the
regulations implementing the federal black lung laws which, among other things,
- expand the definition of coal works pneumoconiosis,
- liberalize the standards for entitlement to living miners' and widows'
benefits,
- restrict the number of medical reports a party may use in defending a
claim and
- expand the types of medical conditions for which treatment must be
provided.
If adopted, the amendments could have an adverse impact on us, the extent of
which we cannot accurately predict.
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT OF 1992
Congress enacted the Coal Industry Retiree Health Benefit Act of 1992 in October
1992 to provide for the funding of health benefits for United Mine Workers
Association retirees. The Health Benefits Act was enacted to eliminate the
funding deficits of the 1950 and 1974 United Mine Workers Association 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 unassigned beneficiaries who never worked for those employers.
The Secretary of Health and Human Services is to determine the amounts of the
premiums to be paid on the basis set forth in the Health Benefits Act.
"Signatory operators" include operators who are signatory to the current or
prior National Bituminous Coal Wage Agreements and "related persons," including
entities that we at one time owned which were signatory operators. For the plan
year from October 1, 1998 through September 30, 1999, we contributed
approximately $386,000 under this legislation, which represented payments that
accrued and were owing with respect to prior years. Based upon independent
actuarial estimates, we believe that the amount of our obligation under the new
plan will be approximately $7.3 million as of December 31, 1998, using a 7%
discount rate. This amount is recorded on our consolidated financial statements
included elsewhere in this prospectus. We will fund amounts paid in connection
with this obligation with cash from operations or borrowings under our credit
facility. We are also involved in a lawsuit concerning a dispute over a portion
of the premiums we allegedly owe. See "--Legal Proceedings."
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ENVIRONMENTAL LAWS
We are 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 and Recovery Act. We are also subject to state laws of
similar scope in each state in which we operate. These laws require governmental
approval of many aspects of coal mining operations. As a result, both federal
and state inspectors regularly visit our 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, administered by the Office of Surface Mining,
establishes mining and reclamation standards for all aspects of surface mining
as well as many aspects of deep mining. The Surface Mining Control and
Reclamation Act and similar state statutes require, among other things, that
mined property be restored in accordance with specified standards and an
approved reclamation plan. In addition, the Abandoned Mine Lands Act, which is
part of the Surface Mining Control and Reclamation Act, imposes a tax on all
current mining operations. The proceeds of the tax 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.
The Surface Mining Control and Reclamation Act also requires that we meet
comprehensive environmental protection and reclamation standards during the
course of, and upon completion of, mining activities. For example, the Surface
Mining Control and Reclamation Act requires that we restore a surface mine to
approximate original contour as contemporaneously as practicable. The mine
operator must submit a bond or otherwise secure the performance of these
reclamation obligations. We must obtain permits for surface mining operations
from the federal Office of Surface Mining Reclamation and Enforcement. On the
other hand, where state regulatory agencies have adopted federally approved
state programs under the Surface Mining Control and Reclamation Act, we must
obtain the permits from the appropriate state regulatory authority. We accrue
for the liability associated with all end of mine reclamation on a ratable basis
as the coal reserve is being mined. We periodically update the estimated cost of
reclamation, and the corresponding accrual, on our financial statements. The
earliest a reclamation bond can be released is five years after reclamation to
the approximate original contour has been achieved.
All states in which our active mining operations are located have achieved
primary jurisdiction for Surface Mining Control and Reclamation Act enforcement
through approved state programs. Under the Surface Mining Control and
Reclamation Act, responsibility for any coal operator that is currently in
violation of the Act can be imputed to other companies that 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 federal court action invalidating the Surface
Mining Control and Reclamation Act ownership and control regulations, the scope
and potential impact of the "ownership and control" requirements on us are
unclear. The Office of Surface Mining 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, we
are 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 that 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, such as 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 our ability to develop new mines or require us to modify our
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 these facilities. Reductions in these sulfur
dioxide emissions will occur in two phases. Phase I began in 1995 and currently
applies to 445 utility units. Phase II will begin in 2000 and will apply 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.
We cannot ascertain completely the effect of the Clean Air Act Amendments at
this time. It was generally anticipated that Phase I of Title IV of the Clean
Air Act Amendments would increase prices for low sulfur coal. This price
increase, however, 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 predominantly 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
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production. We believe these factors reduced or capped the anticipated price
increase for Central Appalachian low sulfur coal in Phase I.
We believe 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. We do 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. This legislation limits the ability of some of our
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 that permit them to burn higher sulfur coal. We have endeavored to
mitigate the potential adverse effects of the legislation's limitations on
sulfur dioxide emissions through our acquisition and development of compliance
and low sulfur coal reserves and operations in Appalachia.
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 for nitrogen oxides, which are
precursors of ozone. In addition, the Environmental Protection Agency is
expected to implement stricter ozone ambient air quality standards by 2003. In
September 1998, the EPA issued its final rule on regional nitrogen oxide
emission reductions directed at 22 eastern states and the District of Columbia.
This rule is intended to further reduce nitrogen oxide emissions by the year
2003. In estimating the impact of this rule on emissions sources, the EPA
assumed reductions of approximately 85% from electric generating units, although
it is up to the individual states to determine how the reductions are to be
imposed on sources within their borders. In addition, in response to petitions
filed under Section 126 of the Clean Air Act Amendments, the EPA has proposed to
apply additional restrictions on nitrogen oxide emissions from specified
individual sources, including electric generating facilities, in various states,
including West Virginia. Because the EPA's actions have been challenged, we do
not know what the ultimate impact of these actions will be. The installation of
reasonably available control technology, and any control measures beyond the
reasonably available control technology that the states and the EPA may require,
will make it more costly to operate coal-fired power plants. In addition,
depending on the requirements of individual state attainment plans and the
development of revised new source performance standards, the installation of
these measures could make coal a less attractive fuel or 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
our financial condition and results of operations could result. We cannot
predict with certainty the effect this legislation, regulatory action and
pending litigation, as well as other legislation that may be enacted in the
future, could have on the coal industry in general and on us in particular. We
cannot assure you that implementation of the Clean Air Act Amendments, new or
revised ambient air quality standards or any other current or future regulatory
provision, will not materially adversely affect us.
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT. The
federal Comprehensive Environmental Response, Compensation and Liability Act and
similar state laws may 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 the Comprehensive
Environmental Response, Compensation and Liability Act, 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 the Comprehensive Environmental
Response, Compensation and Liability Act.
CLEAN WATER ACT. Both the federal Clean Water Act and corresponding state
statutes affect coal mining operations by imposing restrictions on discharges,
including acid mine drainage, into surface waters, ground water and wetlands.
The Clean Water Act permitting requirements can impact coal mining operations in
two primary ways. First, under Section 404 of the Clean Water Act, the dredging,
filling or impoundment of waters of the United States requires a permit from the
U.S. Army Corps of Engineers. In addition, under Section 402 of the Clean Water
Act, a permit must be obtained for a discharge from any point source into waters
of the United States. State laws have similar permitting requirements. Regular
monitoring, as well as compliance with reporting requirements and performance
standards, are included under the Clean Water Act and are preconditions for the
renewal of required 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 to protect groundwater quality.
RESOURCE CONSERVATION AND RECOVERY ACT. The federal Resource Conservation and
Recovery Act, and corresponding state statutes, may affect 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 Surface
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Mining Control and Reclamation Act permits are exempted from regulation under
the Resource Conservation Recovery Act by statute, the EPA is studying the
possibility of expanding regulation of mining wastes under the Resource
Conservation Recovery Act.
TOXIC SUBSTANCES CONTROL ACT. The Toxic Substances Control Act regulates, among
other things, the use and disposal of polychlorinated biphenyls, a substance
that, in the past, was commonly found in coolants and hydraulic fluids utilized
by the mining industry. The penalties imposed under the Toxic Substances Control
Act for the improper disposal of polychlorinated biphenyls can be significant.
COMPETITION
The U.S. coal industry is highly competitive, with numerous producers in all
coal-producing regions. Competition in the coal industry is based on a variety
of factors, including price, location, transportation, quality and stability of
supply. Historically, we have competed with many other larger producers, as well
as small producers in our region. Many of our customers are also customers of
our competitors. In addition, some of our larger competitors have both the size
of reserves and capital resources to utilize mining technologies providing low
cost production, which we cannot. The markets in which we sell our coal are
highly competitive and affected by factors beyond our control. Continued demand
for our coal and the prices that we 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, deregulation of electric
utilities, coal transportation costs and consolidation within the rail
transportation industry, environmental and other governmental regulations,
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.
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, the term lengths of long-term sales contracts generally have
decreased and public utilities are lowering fuel costs by buying higher
percentages of spot coal through a competitive bidding process and by buying
only the amount of coal necessary to meet their requirements.
EMPLOYEES AND LABOR RELATIONS
We recently changed from operating our deep mines ourselves to utilizing
contract miners to operate these mines. As a result, our employee base has been
significantly reduced from 668 employees as of December 31, 1998 to 162 as of
September 30, 1999. We are not a party to any collective bargaining agreement.
We consider our relations with our employees to be good. If some or all of our
currently non-union operations were to become unionized, we could incur higher
labor costs and an increased risk of work stoppages. We cannot assure you that
our workforce will not unionize in the future. The labor force for our contract
miners is currently not unionized. If some or all of our contract miners'
employees were to become unionized, the contract miners could incur higher labor
costs and have an increased risk of work stoppages, which could adversely affect
our business and costs of operations.
LEGAL PROCEEDINGS
In 1998, two of our subsidiaries, Anker Energy Corporation and King Knob Coal
Co., Inc., sued Consolidation Coal Company, known as Consol, the Social Security
Administration, which is the administrator of the Coal Industry Retiree Health
Benefit Act of 1992, and the Trustees of the United Mine Workers of America
Combined Benefit Fund in the U.S. District for the Western District of
Pennsylvania. Our subsidiaries claimed that:
- Consolis responsible for paying approximately one-third of the
subsidiaries' 1992 Coal Act premiums that relate to employees affected
by Consol's breach of several contract mining agreements in the early
1980's;
- the Social Security Administration should be prohibited from
continuing to invoice Anker Energy and King Knob for these payments,
which Consol should have made; and
- the 1992 Coal Act is unconstitutional.
The trustees filed a counterclaim against Anker Energy and King Knob for the
amount of premiums they have failed to pay as a result of their claim against
Consol. The trial court granted the trustees' motion for summary judgment on
this counterclaim, as well as the motions to dismiss that Consol and the Social
Security Administration filed.
Anker Energy and King Knob appealed to the U.S. Court of Appeals for the Third
Circuit. The appeals court reversed the trial court's ruling with respect to
Consol but affirmed all of the trial court's other rulings. As a result, Anker
Energy and King Knob can pursue
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their claim for reimbursement against Consol, but they must pay the disputed
portion of their 1992 Coal Act premiums while the claim is pending. The disputed
portion of premiums, including interest and penalties, is currently
approximately $1.3 million. Interest accrues at the post judgment rate of nine
percent per year.
On August 12, 1999, Anker Energy and King Knob filed for a writ of certiorari to
the U.S. Supreme Court. The court of appeals' judgment was stayed pending the
Supreme Court's disposition of the writ. On November 16, 1999, the Supreme Court
denied the writ of certiorari, and we anticipate that Anker Energy and King Knob
will have to pay all or a portion of the disputed premiums within the next six
months. We have fully accrued the entire judgment in prior years. Anker Energy
and King Knob will fund the judgment from borrowings under our revolving credit
facility.
We and our subsidiaries are also involved in various legal proceedings
incidental to our normal business activities. Our management does not believe
that the outcome of any of these proceedings will have a material adverse effect
on our operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
NAME AGE POSITION
- ---- --- --------
William D. Kilgore 63 Chief Executive Officer and Chairman of the Board
P. Bruce Sparks 44 President and Director
John A. H. Shober 66 Director
Thomas R. Denison 39 Director
Willem H. Hartog 37 Director
Michael M. Matesic 34 Treasurer and Chief Financial Officer
Richard B. Bolen 51 Senior Vice President - Sales, Anker Energy Corporation
Gerald Peacock 44 Vice President, Anker Energy Corporation
B. Judd Hartman 36 Secretary
James A. Walls 37 Assistant Secretary
The term of each of the directors expires annually upon the election and
qualification of a successor at the annual meeting of our stockholders.
MANAGEMENT BIOGRAPHIES
WILLIAM D. KILGORE. Mr. Kilgore was named Chairman of our Board and our Chief
Executive Officer, as well as Chief Executive Officer of Anker Energy
Corporation, our subsidiary, on May 1, 1999. Mr. Kilgore has 42 years experience
in the coal industry. Over the past five years, Mr. Kilgore has served as a
consultant to Kanawha Eagle, LLC, Double Eagle, LLC, New Eagle, LLC and Mossy
Eagle, LLC, all of which are Central Appalachian coal companies. Mr. Kilgore
served as President/Chief Executive Officer and Director of Agipcoal from 1989
to 1994 and as Vice President/General Manager of Enoxy Coal, Inc. from 1985 to
1989.
P. BRUCE SPARKS. Mr. Sparks has been our President since October 28, 1997, and
he has been a stockholder since 1996. From 1988 to October 1997, he was
Executive Vice President of Anker and our predecessor, Anker Group, Inc. Mr.
Sparks was the Vice President of Administration and Chief Financial Officer of
Anker Group 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 us. Mr. Sparks has been with us for 14 years.
JOHN A. H. SHOBER. Mr. Shober was elected Chairman of the Board on October 28,
1997, and he served as Chairman until June 8, 1999. He has served as one of our
Directors 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; Hercules, Inc., a manufacturer of performance chemicals; 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 and power company. He serves as a member of the Advisory Board of
First Reserve Corporation, which oversees the investment activities and
decisions of First Reserve acting in its capacity as manager for the First
Reserve Funds' investment portfolios.
THOMAS R. DENISON. Mr. Denison became one of our Directors in August 1998. Mr.
Denison is a Managing Director and General Counsel of First Reserve. He joined
the firm in January 1998 and opened its Denver office. Prior to joining First
Reserve, he was a partner in the international law firm of Gibson, Dunn &
Crutcher LLP, which he joined in 1986 as an associate. Mr. Denison received his
Bachelor of Science degree in Business Administration from the University of
Denver and his Juris Doctorate from the University of Virginia. Mr. Denison also
serves as a Director of TransMontaigne, Inc. and Patina Oil & Gas Corporation.
WILLEM H. HARTOG. Mr. Hartog was elected one of our Directors on December 31,
1998. Mr. Hartog has been Senior Vice President Finance and Administration of
Anker Holding, B.V. and various of its subsidiaries since 1998 and has worked
for Anker Holding in various capacities since 1994. Prior to joining Anker
Holding, Mr. Hartog was employed by KPMG as a member of its audit staff.
MICHAEL M. MATESIC. Mr. Matesic is a Certified Public Accountant and has been
our Treasurer and Chief Financial Officer since October 28, 1997 and
Secretary/Treasurer of various of our subsidiaries since 1996. From 1990 to
October 1997, he was Controller of
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Anker Energy. 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 us for 10
years.
RICHARD B. BOLEN. Mr. Bolen has been Senior Vice President - Sales of Anker
Energy since June 8, 1998. Mr. Bolen joined an affiliate of Anker Energy in 1979
and served as its President from 1980 through 1994. In 1994, he became President
of another affiliate, and, in 1995, he assumed the additional duties of Vice
President Operations, Southern Region, for Anker Energy. From October 1996 -
June 1998, Mr. Bolen was Senior Vice President of Operations of Anker Energy.
Mr. Bolen is a 1970 graduate of Virginia Polytechnic Institute with a degree in
Mining Engineering. Prior to joining Anker Energy, he served in various
management capacities with Consolidation Coal Company, Virginia Electric and
Power Company, Jewell Smokeless Coal Corporation and Jno. McCall Coal Company.
GERALD PEACOCK. Mr. Peacock joined Anker Energy in June 1998, as Vice President
of Operations. He graduated from Southern Illinois University with a B.S. in
Mechanical Engineering in 1976. Prior to June, 1998, he was employed by Arch
Mineral Corporation for 20 years, serving in several senior positions, including
President and Vice President of Catenary Coal Holdings, Inc., one of Arch's
operating subsidiaries.
B. JUDD HARTMAN. Mr. Hartman was elected as our Secretary effective November 1,
1997. Prior to joining us, Mr. Hartman was a partner with the law firm of
Spilman, Thomas & Battle in Charleston, West Virginia, a firm that he joined in
1989 as an associate. Mr. Hartman graduated from Washington and Lee University
in 1985 with a Bachelor of Arts degree in Economics and received his Juris
Doctorate degree in 1989 from Wake Forest University School of Law. Mr. Hartman
has been with us for two years.
JAMES A. WALLS. Mr. Walls has been our Assistant Secretary since 1993. He
graduated from West Virginia University with a Bachelor of Science/Bachelor of
Arts and Juris Doctorate degree in 1989. Prior to March of 1993, he was employed
by Spilman, Thomas & Battle in Charleston, West Virginia. Mr. Walls has been
with us for six years.
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EXECUTIVE COMPENSATION
The following table presents summary information of the compensation that we
paid or accrued for services rendered in all capacities for the last three
completed fiscal years for our Chief Executive Officer and each of the four
other most highly compensated executive officers of us or Anker Energy
Corporation, determined as of December 31, 1998.
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long-Term Compensation and Awards
------------------- ---------------------------------
Securities
Underlying
Restricted Options/
Name and Other Annual Stock SARs LTIP All Other
Principal Position Fiscal Year Salary Bonus Compensation Awards (#) Payments Compensation
- ------------------ ----------- ------ ----- ------------ ------ --- -------- ------------
P. Bruce Sparks 1998 $267,404 $ 15,000 $ 2,391 -- -- -- --
President, Chief Executive 1997 252,885 90,953 3,625 -- -- -- --
Officer(1) 1996 210,005 157,757 1,600 -- -- -- $2,885,000(2)
Ben H. Daud(3) 1998 181,731 -- 224 (3) 25(4) -- -- --
Chief Operating Officer 1997 23,557 20,750 450 -- -- -- --
(Anker Energy) 1996 -- -- -- -- -- -- --
Richard B. Bolen(4) 1998 172,115 - 761 25(4) -- -- --
Senior Vice President 1997 175,000 18,052 5,126 -- -- -- --
(Anker Energy) 1996 152,000 20,000 3,036 -- -- -- --
Kim A. Burke(5) 1998 170,192 -- 5,723 -- -- -- --
Senior Vice President 1997 175,000 15,166 4,143 -- -- -- --
(Anker Energy) 1996 136,615 35,000 4,841 -- -- -- --
Gerald Peacock(6) 1998 93,654 15,000 -- 20(4) -- -- --
Vice President 1997 -- -- -- -- -- -- --
(Anker Energy) 1996 -- -- -- -- -- -- --
- ------------------------
(1) Mr. Sparks resigned as Chief Executive Officer and Mr. Kilgore was named
Chief Executive Officer and Chairman of our board of directors on May 1,
1999. See "-- Employment Agreements" below for a description of Mr.
Kilgore's compensation arrangements.
(2) In 1996, Mr. Sparks received a one-time bonus. The bonus consists of
$1,385,000 cash and $1,500,000 recognized compensation for stock received
in connection with our recapitalization.
(3) Mr. Daud was hired by Anker Energy Corporation on November 1, 1997. The
listed amounts for 1997 represent only compensation he received from
November 1, 1997 through December 31, 1997. We estimate that his annual
compensation for 1997 would have been: salary, $175,000; bonus, $22,500;
and other annual compensation, $4,841. Mr. Daud resigned from Anker Energy
Corporation on July 2, 1999.
(4) On October 1, 1998, Mr. Daud, Mr. Bolen and Mr. Peacock received restricted
stock awards of common stock under our 1997 Omnibus Stock Incentive Plan.
Awards were valued for purposes of the plan at the par value of the common
stock, which is $0.01 per share.
(5) Mr. Burke's employment with Anker Energy Corporation ended on May 8, 1999.
(6) Anker Energy Corporation hired Mr. Peacock on May 11, 1998. The listed
amounts for 1998 represent only compensation he received from May 11, 1998
through December 31, 1998. We estimate that his annual compensation for
1998 would have been: salary, $150,000; bonus, $15,000; and other annual
compensation, $0.
BOARD COMPENSATION
All directors are reimbursed for their usual and customary expenses incurred in
attending all board and committee meetings. Each director who is not also an
officer receives an aggregate annual fee of $12,000 for serving on our board of
directors. In addition to the annual fee of $12,000, Mr. Shober received an
additional $57,000 for serving as Chairman of the Board in 1998.
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EMPLOYMENT AGREEMENTS
Mr. Sparks has an employment agreement with us and our subsidiaries, Anker
Group, Inc., Anker Energy Corporation and Simba Group, Inc. The agreement with
Anker Energy is dated as of August 1, 1996 and expires on July 31, 2002. The
agreement with Anker Energy provides for Mr. Sparks' employment as an executive
officer 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.
The agreement with Anker Energy also provides for a quarterly bonus of $3,750
for each calendar quarter during its duration, and a yearly bonus based on our
financial performance. Mr. Sparks may terminate his employment 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 that he would have received
under the agreement with Anker Energy 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
- 250% of his then current annual salary or
- the compensation, bonuses and other benefits he would have been
entitled to receive under the agreement with Anker Energy, 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. Mr. Spark's agreement with Anker Energy
also requires him not to compete with Anker Energy during the employment term
and for a period of one year following the termination of the agreement. Mr.
Sparks also has employment agreements, each without compensation, with us, Anker
Group and Simba Group, Inc., providing for his seat on the board of directors of
those companies and his employment as an executive officer of those companies.
Mr. Kilgore also has an employment agreement with us and Anker Energy
Corporation, dated as of May 1, 1999. The term of the agreement ends on December
31, 2002. The agreement provides for Mr. Kilgore's employment as Chief Executive
Officer and Chairman of the Board of Directors at an annual salary of $315,000.
Mr. Kilgore is entitled to participate in any of Anker Energy's benefits plans
for which he is eligible and may be reimbursed for costs of relocating his
residence, not to exceed $125,000. Mr. Kilgore also may receive cash bonuses, at
Anker Energy's discretion, and an incentive bonus in the event we undergo a
change of control. The incentive bonus, which would be calculated based on
specified financial tests' being met, can be as much as $2.5 million, and could
include an option for Mr. Kilgore to purchase as much as five percent of our
then-outstanding common stock at an exercise price of $1.00 per share.
In the event that Anker Energy were to terminate Mr. Kilgore's employment other
than for cause on or before May 1, 2001, Mr. Kilgore would be entitled to
receive, in addition to the salary and bonus he had earned to that date, the
amount of his annual salary he would have received for an additional 36 months
less the number of months that have elapsed since Mr. Kilgore's employment. In
the event that Anker Energy were to terminate Mr. Kilgore's employment other
than for cause after May 1, 2001 but before May 1, 2002, Mr. Kilgore would be
entitled to the annual salary he would have received for an additional year had
he not been terminated. In the event that Anker Energy were to terminate Mr.
Kilgore's employment other than for cause after December 31, 2002, Mr. Kilgore
would be entitled to the annual salary he would have received for an additional
year had he not been terminated. Mr. Kilgore's agreement with Anker Energy also
requires him not to compete with Anker Energy during the employment term and for
a period of two years following the termination of the agreement.
None of our other employees has an employment contract with us or any of our
subsidiaries.
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1997 OMNIBUS STOCK INCENTIVE PLAN
GENERAL
Our 1997 Omnibus Stock Incentive Plan provides for the issuance of restricted
stock awards or stock options to designated officers and key employees of us or
our affiliates of up to a maximum of 300 shares of authorized but unissued or
reacquired shares of our common stock. The plan is intended to motivate, reward
and retain participants in the plan for contributing to our long-term success.
It does so by providing an opportunity for meaningful capital accumulation
linked to our future success and appreciation in shareholder value.
Our president is responsible for administering the plan. Subject to the approval
of our board of directors, the president has the authority to designate who may
participate in the plan and the number of shares of common stock subject to each
restricted stock award or stock option. Awards and options are granted based on
the fair market value of the common stock as of the date of the award or option.
Fair market value is determined by the board of directors.
As long as our common stock is not publicly traded, the plan provides that we
have a call right, which is the right to purchase at fair market value any
vested option and any shares that a participant in the plan owns as a result of
the exercise of an option or the grant of an award. We also have a right of
first refusal with respect to these shares.
The board of directors has the authority to amend the plan, including with
respect to the acceleration of vesting of options and awards. No modification
will become effective, however, without the prior approval of the participants
in the plan if the approval is necessary to comply with any tax or regulatory
requirement or rule of any exchange or system on which the stock may be listed.
In addition, no amendment may, without a participant's consent, adversely affect
any rights that a participant has under any award or grant that is outstanding
at the time the amendment is made.
RESTRICTED STOCK AWARDS
When a participant in the 1997 Omnibus Stock Incentive Plan is granted a
restricted stock award, he or she must sign a restricted stock award agreement.
Under the agreement and the plan, the shares of common stock subject to the
award will be nontransferable, other than by will or the laws of descent and
distribution, and subject to forfeiture until the shares are vested. Unless the
board of directors accelerates the vesting period, the shares subject to an
award will become fully vested on the sixth anniversary of the award if the
participant in the plan has been in our continuous employ during that six-year
period. Vesting will be accelerated upon the termination of the participant's
employment due to
- death, disability or retirement
- the involuntary termination of the participant's employment during the
90-day period following our merger with another entity
- the voluntary termination of the participant's employment at any time
after one year following our merger with another entity or
- a change of control.
Under the plan, a change of control is deemed to occur if any person or group
that is not a beneficial owner of our voting securities as of the date of the
adoption of the plan becomes the beneficial owner, directly or indirectly, of
our securities that represent in the aggregate 75% or more of the total combined
voting power of all classes of our then-outstanding securities. Once vested, the
shares of common stock are no longer subject to forfeiture and may be
transferred. However, the shares will continue to be subject to our call rights
and right of first refusal.
STOCK OPTIONS
When a participant in the 1997 Omnibus Stock Incentive Plan is granted a stock
option, he or she must sign a stock option grant agreement. Under the agreement
and the plan, the participant's options would become fully vested on the third
anniversary of the date the option is granted if the participant has been in our
or an affiliate's continuous employ during that three-year period. Vesting for
an option will be accelerated on the same basis as vesting is accelerated for
restricted stock awards, as discussed above. Once an option is vested, a
participant may exercise the option as provided in the plan. Options granted
under the plan will expire on the tenth anniversary of the option. After common
stock is purchased pursuant to an option, the shares will continue to be subject
to our call rights and right of first refusal.
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OUTSTANDING AWARDS AND OPTIONS
As of October 31, 1999, a total of 147 shares of common stock were outstanding
under the plan. Twelve participants hold these shares, and these shares are
fully vested. We have not granted any options under the plan.
MANAGEMENT INCENTIVE BONUSES
Designated members of our and our subsidiaries' management, including the
executive officers set forth under "--Executive Officers and Directors" above,
are eligible to receive cash bonuses in addition to their annual salary
compensation. These awards are based on the performance of these individuals, as
determined by their direct supervisors and other senior management, and our
financial performance and that of our subsidiaries. In addition, Mr. Kilgore and
Mr. Sparks are entitled to incentive bonuses as described under "--Employment
Agreements."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At a meeting of our board of directors on May 22, 1997, a compensation committee
was established. Mr. Macaulay, a former director of Anker, and Mr. Shober were
appointed members of the committee. Mr. Shober is currently the only member of
the compensation committee. The compensation committee did not hold any meetings
in 1998 or 1999. Other than Mr. Sparks, no current or former executive officer
or employee of us or any of our subsidiaries participated in deliberations of
the board of directors concerning executive officer compensation. Mr. Sparks'
compensation is established in accordance with his employment agreement. See
"--Employment Agreements" above.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the ownership of our
common stock, as of November 11, 1999, except as otherwise noted, by:
- each person known by us to own beneficially more than 5% of the
outstanding common stock
- each person who is a director or a nominee of Anker
- each person who is identified on the executive compensation table
above and
- all of our directors and executive officers as a group.
The percentage of beneficial ownership of common stock is based on 7,108 shares
outstanding as of November 11, 1999. In addition, we issued warrants to purchase
common stock in connection with the private exchange and private placement
consummated on October 28, 1999. The warrants are exercisable immediately, and
holders of these warrants are included in the following table to the extent
applicable. See "Description of Warrants."
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AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF SHARES
- ------------------------------------ --------- ---------
First Reserve Corporation
475 Steamboat Road, Greenwich, Connecticut 06830 (1) 5,407 76.07%
Anker Holding B.V. 695 9.78
P.O. Box 1334
3000 BH
Rotterdam, The Netherlands
Rothschild Recovery Fund L.P.
1251 Avenue of the Americas, New York, New York 10020 1,782(2) 20.04(2)
William D. Kilgore -- --
Thomas Denison -- --
John Shober -- --
Willem H. Hartog -- --
PPK Group Limited Liability Company(3) 859 12.08
Bruce Sparks(4) 859 12.08
Richard B. Bolen 25 0.35
Gerald Peacock 20 0.28
All executive officers and directors as 6,311 88.79
a group ((10) persons)(5)
- ------------------------
(1) Shares of common stock shown as owned by First Reserve are owned of record
by 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. First Reserve is the sole general partner
of, and possesses sole voting and investment power for, each of the funds.
(2) Represents shares issuable upon exercise of warrants. See "Description of
the Warrants."
(3) PPK Group Limited Liability Company is a limited liability company
controlled 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.
(4) 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 voting units of
PPK Group.
(5) Includes 5,407 shares beneficially owned by First Reserve.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS' AGREEMENT
On August 12, 1996, we entered into a stockholders' agreement with holders of
our capital stock. The stockholder's agreement was amended on October 26, 1999
as part of the restructuring of our 9 3/4% Series B Senior Notes. The following
is a summary description of the stockholders' agreement, as amended. It does not
restate the entire stockholders' agreement. For a more detailed understanding of
the rights of the stockholders that are parties to the agreement, you should
read the stockholders' agreement. A copy of the stockholders' agreement is
available from us upon request.
NOMINATION OF DIRECTORS
The funds that First Reserve Corporation manages are entitled to nominate
- four of the seven members of our board of directors for as long as
they hold in the aggregate more than 50% of our issued and outstanding
common stock,
- three of the seven members of our board of directors for as long as
they hold in the aggregate more than 10% of our issued and outstanding
common stock, or
- one of the seven members of our board of directors for as long as they
hold in the aggregate more than 2% of our issued and outstanding
common stock.
The stockholders' agreement also provides that PPK Group Limited Liability
Company and Anker Holding B.V. may each nominate one director for as long as it
holds at least 2% of our issued and outstanding common stock.
FUNDAMENTAL ISSUES
As long as the funds that First Reserve Corporation manages in the aggregate own
10% or more of our issued and outstanding common stock, or as long as PPK Group
in the aggregate owns 10% or more of our issued and outstanding common stock, we
may not take, and may 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 our directors. Fundamental issues include,
but are not limited to,
- the sale, lease or exchange of 50% or more of our assets;
- any merger, consolidation, liquidation or dissolution;
- any amendment to our certificate of incorporation;
- the authorization, issuance or sale of shares of our capital stock,
any other type of equity or debt securities or options, warrants or
other rights to acquire equity or debt securities, except issuances
upon conversion of our convertible securities issued prior to the date
of the stockholders' agreement and issuances to key members of our
management under a stock purchase, stock option or similar plan;
- any redemption, repurchase or other acquisition of our capital stock
or other equity securities, including any option, warrant or other
right to acquire our capital stock or other equity securities, except
purchases or redemptions under the terms of securities issued prior to
the date of the stockholders' agreement; and
- entering into or engaging in business or entering into any
transactions with any stockholder that is a party to the stockholders'
agreement or any affiliate of those stockholders, except for our
inter-company transactions and transactions at arm's length and in the
ordinary course of business involving the sale, purchase, exchange or
trading of coal or coal-related products.
In the event the funds that First Reserve manages own in the aggregate 50% or
less of our issued and outstanding common stock and for as long as those funds
in the aggregate own at least 10% of our issued and outstanding common stock,
each of the following additional actions will be fundamental issues:
- any sale, lease, exchange, transfer or disposition by us of (1) any
outstanding capital stock or other equity security of any of our
subsidiaries or (2) assets or other rights for consideration in excess
of $2.0 million, other than dispositions in the ordinary course of
business;
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- any purchase, lease, exchange or other acquisition of assets or other
rights, including securities, by us for consideration in excess of
$2.0 million;
- any financing, refinancing or other incurrence of indebtedness by us
with a principal amount in excess of $2.0 million;
- any capital expenditure by us not provided in an annual budget for our
then-current fiscal year approved by our board of directors in
accordance with specified procedures if the expenditure is either (1)
in excess of $1.0 million or (2) together with the aggregate of all of
our and our subsidiaries other non-budgeted capital expenditures in
the fiscal year, in excess of $2.0 million;
- any amendment to or modification or repeal of any provision of our
by-laws which would materially alter the rights of any of the
stockholders that are parties to the stockholders' agreement;
- any amendment to the employment agreement of Bruce Sparks;
- dissolution of Anker Coal Group, the adoption of a plan of liquidation
with respect to Anker Coal Group, or any action by us to commence a
bankruptcy, receivership or similar proceeding;
- the investment of additional funds in, or extension of additional
credit to, Anker Capital Corporation or any subsidiary of Anker
Capital Corporation or other investment; and
- our entry, other than through Anker Capital Corporation, into any
business other than mining, processing, shipping, purchasing and
selling coal.
Furthermore, if we redeem, repurchase or otherwise acquire our capital stock or
other of our equity securities, or any option, warrant or other right to acquire
capital stock or other equity securities, from any stockholder that is a party
to the stockholder's agreement or its affiliate, except purchases or redemptions
under the terms of securities issued prior to the date of the stockholders'
agreement, the redemption, repurchase or acquisition, and any transactions
relating the redemption, repurchase or acquisition, must be approved by a
majority of our board of directors, excluding for these purposes any director
nominated by a stockholder who is a party to the stockholders' agreement and is
interested in the transaction being approved.
NON-COMPETITION
Each stockholder that is a party to the stockholders' agreement must prevent
entities under its control from engaging in specified activities that are
competitive with our business. In addition, if any of these stockholders becomes
aware of an existing or potential business opportunity in one of these
activities, the stockholder must offer the opportunity to us on an exclusive
basis.
ANTI-DILUTION
If we issue any equity securities of any type, class or series, then we must
offer all stockholders that are parties to the stockholders' agreement the right
to purchase a portion of the securities on the same terms and conditions as we
are offering to the purchaser of the securities. However, this right does not
apply in the case of
- issuances of Class C preferred stock and Class D preferred stock,
- securities offered to the public in an initial public offering,
- issuances upon conversion of our convertible securities issued prior
to the date of the stockholders' agreement,
- issuances to key members of our management under a stock purchase,
stock option or similar plan,
- any issuance of securities as consideration in connection with an
acquisition and
- except with respect to Anker Holding, issuances of common stock in
satisfaction of specified pre-existing contractual obligations.
Each stockholder will be entitled to purchase that percentage of the
newly-issued securities equal to
- if the newly-issued securities are of a type, class or series
previously issued, the stockholder's percentage ownership of the total
outstanding number of the previously-issued securities, or
- in all other events, the stockholder's percentage ownership of the
total outstanding number of shares of common stock.
RESTRICTIONS ON DISPOSITIONS OF STOCK
The stockholders that are parties to the stockholders' agreement may not
transfer any shares of common stock except in accordance with the stockholders'
agreement. Restrictions on dispositions of stock include the following
provisions:
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- Lock-Up Period. Prior to August 12, 2001, except for specified
permitted transfers set forth in the stockholders' agreement, no
stockholder may transfer any shares without the prior written approval
of all the other stockholders that are parties to the stockholders'
agreement.
- Right of First Refusal. Beginning on August 12, 2001, if a stockholder
receives a bona fide offer to purchase any or all of its shares of
capital stock and wishes to accept the offer, we and the remaining
stockholders that are parties to the stockholders' agreement have the
opportunity to purchase the shares offered at the same price per share
and on the same terms and conditions as the offer the stockholder
received.
- Tag Along Rights. Except with respect to specified permitted transfers
and in connection with an initial public offering of our common stock,
each stockholder has the right to participate in the sale of common
stock by another stockholder that is a party to the stockholders'
agreement to any third party at the same price per share and on the
same terms and conditions as the stockholder initiating the sale to
the third party.
SALES OF SHARES
In the event of the death, total disability, retirement after age 60 or
termination of employment of Bruce Sparks, we have obligations and rights to
purchase shares of capital stock that PPK Group owns. If Mr. Sparks dies, we are
required to use all proceeds from the "key man" life insurance policy we
maintain with respect to Mr. Sparks to purchase shares of capital stock that PPK
Group owns at fair market value. The indentures governing our notes would permit
this repurchase as an exception to the limitation on restricted payments. See
"Description of the New Notes--Covenants--Limitation on Restricted Payments."
During the eight months following the death of Mr. Sparks, we would have the
option to purchase all, but not some, of the shares PPK Group owns at fair
market value and, during the 120-day period following expiration of the eight
month period, PPK Group would have the right to require us to purchase shares
PPK Group owns at fair market value. In the event of the total disability,
retirement after age 60 or termination of employment, other than for cause prior
to August 12, 2001, of Mr. Sparks, we have the option, for a period of time
ranging from three months to nine months depending upon the circumstances, to
purchase all, but not some, of the shares of capital stock PPK Group holds at
fair market value. In the event of termination of Mr. Sparks' employment for
cause prior to August 12, 2001, we have the option, for a period of one year, to
purchase the shares of common stock PPK Group holds for the lower of book value
and fair market value.
In the event of a change of control of any stockholder that is a party to the
stockholders' agreement, we have the right but not the obligation, for a period
of 60 days after we become aware of the change of control, to purchase all of
the stockholder's shares of capital stock at fair market value.
SALE OF ALL OF OUR COMMON STOCK
After August 12, 2001, under specified circumstances, the funds that First
Reserve Corporation manages may compel all stockholders that are parties to the
stockholders' agreement to participate in the sale of all of our outstanding
common stock to a buyer or buyers that are not our affiliates or affiliates of
any of the stockholders that are parties to the stockholders' agreement. Until
the earlier to occur of an initial public offering of our common stock and
October 30, 2002, however, any sale of a majority of our common stock must be
approved by holders of at least 85% of our outstanding common stock. All shares
of common stock will be sold at an identical price and on identical terms. In
addition, a sale may only be consummated if the buyer or buyers either redeem or
purchase the Class A preferred stock and Class B preferred stock.
REGISTRATION RIGHTS
At any time following an initial public offering of our common stock, upon the
written request of PPK Group, Anker Holding B.V. or the funds that First Reserve
Corporation manages, we are required, as expeditiously as possible, to use our
best efforts to effect the registration, under the Securities Act, of the shares
of common stock outstanding as of August 12, 1996 or that any of PPK Group,
Anker Holding or the funds that First Reserve Corporation manages acquired after
that date.
INVESTOR AGREEMENT
In connection with the restructuring of our 9 3/4% notes, we entered into an
investor agreement with the stockholders that are parties to the stockholders'
agreement and the initial holders of our warrants. Some of the parties to the
investor agreement, including the funds that First Reserve Corporation manages,
PPK Group, Anker Holding B.V. and Rothschild Recovery Fund, L.P., are each
beneficial owners of more than 5% of our fully-diluted common stock. The
investor agreement contains provisions regarding tag along rights, restrictions
on dispositions of shares of common stock issued upon exercise of warrants and
restrictions on mergers and
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sales of assets and stock. For a more complete summary of the investor
agreement, please see "Description of Warrants -- Investor Agreement."
TRANSACTIONS WITH RELATED PARTIES
Anker Holding B.V., through parties related to it, purchases coal from us for
its trading operations. These purchases are at prices that we believe are no
less favorable to us then those that we would have obtained in a comparable
transaction with an unrelated person. These purchases amounted to $100,000 in
1998, $9.7 million in 1997 and $16.2 million in 1996.
In February 1998, one of our subsidiaries sold its ownership interest in
Anker-Alabama, L.L.C., which indirectly owned an interest in Oak Mountain, to a
party related to of Anker Holding B.V. for one dollar. We had tried but were
unsuccessful in selling our investment to unrelated parties during December 1997
and January and February 1998. We recorded an impairment loss of $8,267,000 to
adjust our investment to its fair market value less cost to sell as of December
31, 1997.
On October 28, 1999, we issued $6.0 million principal amount of notes to JJF
Group in exchange for cancellation of all of our shares of common stock that JJF
Group owned up and in full settlement and satisfaction of JJF Group's rights
under a put agreement entered into in August 1998. The put agreement required us
to purchase the shares of our common stock that JJF Group owned in installments
over time for a total of approximately $10.5 million. As part of the October 28,
1999 private restructuring transaction, JJF Group ceased to be a party to the
stockholders' agreement.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
When we sold the old notes, we entered into a registration rights agreement with
the holders of the old notes. We agreed, among other things, to file a
registration statement under the Securities Act for an offer to exchange the old
notes for new notes with terms identical in all material respects and to have
the registration statement remain effective until the closing of the exchange
offer. This exchange offer is being made to satisfy our contractual obligations
under the registration rights agreement.
We will be required to pay penalties to the holders of the old notes in the
following cases:
- If we fail to file the registration statement under which the exchange
offer is made within 20 days from October 26, 1999;
- if the registration statement is not declared effective within 45 days
from October 26, 1999 if the SEC does not review the registration
statement;
- if the registration statement is not declared effective within 90 days
from October 26, 1999 if the SEC does review the registration
statement; or
- if the exchange offer is not consummated on or before 30 days after
the registration statement has become effective.
The penalties start to accrue when we miss a deadline for meeting one of the
registration requirements above and continue to accrue until we are no longer in
violation of any of the registration requirements. The amount of penalties we
will have to pay to each holder of old notes if we do not meet any of the
registration requirements above within the time periods specified will be
- $.03 per week per $1,000 principal amount of old notes for the first
90 days after we fail to meet a specified time limit;
- $.12 per week per $1,000 principal amount of old notes for the second
90-day period after we fail to meet a specified time limit;
- $.15 per week per $1,000 principal amount of old notes for the third
90-day period after we fail to meet a specified time limit; and
- after the third 90-day period, an additional $.05 per week per $1,000
principal amount of old notes for each subsequent 90-day period until
the registration requirement or requirements in question are met.
Since we did not meet the 20-day time limit specified above for filing the
registration statement, we incurred penalties totaling approximately $9,540
between the 21st day and the date the registration statement was filed. If the
registration statement is not declared effective within the time periods
specified above, then the penalties will begin to accrue again in the amounts
set forth above, and they will continue to accrue until the registration
statement is declared effective. After the registration statement is declared
effective, if the exchange offer is not consummated within the time period
specified above, then these penalties will again begin to accrue and will
continue to accrue until the exchange offer is consummated.
TERMS OF THE EXCHANGE
We offer, upon the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal, to exchange up to
$106,003,000 in aggregate principal amount of 14.25% Series B Second Priority
Senior Secured Notes due 2007 (PIK through April 1, 2000) for a like aggregate
principal amount of 14.25% Series A Second Priority Senior Secured Notes due
2007 (PIK through April 1, 2000). In addition, in April 2000, we will issue up
to $7,553,000 in aggregate principal amount of additional new notes in payment
of the April 1, 2000 interest payment on the notes. The form and terms of the
new notes are identical in all material respects to the form and terms of the
old notes, except that the new notes have been registered under the Securities
Act and therefore will not contain transfer restrictions. We will exchange new
notes for old notes properly tendered on or prior to the expiration date and not
properly withdrawn in accordance with the procedures described below. We will
issue the new notes promptly after the expiration date, and the new notes in
payment of the April 1, 2000 interest payment on the notes will be issued when
due. The exchange offer is not conditioned upon any minimum principal amount of
old notes' being tendered.
The exchange offer is not being made to, and we will not accept tenders for
exchange from, holders of old notes in any jurisdiction in which the exchange
offer or the acceptance of the offer would not be in compliance with the
securities or blue sky laws of that jurisdiction.
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Old notes that are not tendered for, or are tendered but not accepted, will
remain outstanding and be entitled to the benefits of the note indenture, but
those old notes will not be entitled to any further registration rights under
the registration rights agreement.
We will be considered to have accepted validly tendered old notes if and when we
give oral or written notice to the exchange agent. The exchange agent will act
as the tendering holders' agent for purposes of receiving the new notes from us.
If we do not accept any tendered notes for exchange because of an invalid tender
or the occurrence of other events, the exchange agent will return the
certificates for unaccepted old notes, without expense, to the tendering holder
promptly after the expiration date, or, if unaccepted old notes are
uncertificated, those securities will be returned, without expense to the
tendering holder, promptly after the expiration date via book entry transfer.
Our board of directors does not make any recommendation to holders of old notes
as to whether or not to tender all or any portion of their old notes. In
addition, no one has been authorized to make any recommendation. Holders of old
notes must make their own decision whether to tender their old notes and, if so,
the amount of old notes to tender.
EXPIRATION DATE
The expiration date for the offer is 5:00 p.m., New York City time, on ,
unless we extend the exchange offer. In that case, the expiration date will be
the latest date and time to which the exchange offer is extended.
CONDITIONS; EXTENSIONS; AMENDMENTS
The exchange offer is not subject to any conditions other than that the offer
does not violate applicable law or any applicable interpretations of the SEC
staff. The offer is not conditioned upon any minimum principal amount of notes
being tendered.
We reserve the right in our sole discretion:
- to delay the acceptance of the old notes for exchange,
- to terminate the exchange offer,
- to extend the expiration date and retain all old notes that have been
tendered, subject, however, to the right of holders of old notes to
withdraw their tendered notes, and
- to waive any condition or otherwise amend the terms of the exchange
offer in any respect.
If we amend the exchange offer in a manner we consider material, or if we waive
a material condition of the exchange offer, we will promptly disclose the
amendment by means of a prospectus supplement, and we will extend the exchange
offer for a period of five to ten business days.
Following any delay in acceptance, extension, termination or amendment, we will
notify the exchange agent and make a public announcement. In the case of an
extension, we will make the announcement no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
We will communicate any public announcement by issuing a release to an
appropriate news agency.
PROCEDURES FOR TENDERING OLD NOTES
To tender in the exchange offer, a holder must, unless the tender is being made
in book-entry form,
- complete, sign and date the letter of transmittal, or a facsimile of
it,
- have the signatures guaranteed if required by the letter of
transmittal and
- mail or otherwise deliver the letter of transmittal or the facsimile,
the old notes and any other required documents to The Bank of New
York, which is the exchange agent, prior to 5:00 p.m., New York City
time, on the expiration date.
Any financial institution that is a participant in The Depository Trust
Company's Book-Entry Transfer Facility system may make book-entry delivery of
the old notes by causing DTC to transfer the old notes into the exchange agent's
account. Although delivery of old notes may be effected in this way, the letter
of transmittal, or facsimile, with any required signature guarantees and any
other required documents must be transmitted to and received or confirmed by the
exchange agent at its addresses set forth under the caption "Exchange Agent,"
below, prior to 5:00 p.m., New York City time, on the expiration date. Delivery
of documents to DTC in accordance with its procedures does not constitute
delivery to the exchange agent.
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A holder's tender of old notes will constitute an agreement between us and the
holder to the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal.
The method of delivery of old notes and the letter of transmittal and all other
required documents to the exchange agent is at the election and risk of the
holders. Instead of delivery by mail, we recommend that holders use an overnight
or hand delivery service. In all cases, holders should allow sufficient time to
assure delivery to the exchange agent before the expiration date. No letter of
transmittal of old notes should be sent to us.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the tenders for them. 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 the registered
holder promptly and instruct the registered holder to tender on behalf of the
beneficial owner. If the beneficial owner wishes to tender on that owner's own
behalf, the owner must, prior to completing and executing the letter of
transmittal and delivery of the owner's old notes, either make appropriate
arrangements to register ownership of the old notes in the owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signature on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution within the meaning of Rule
17Ad-15 under the Securities Exchange Act, unless the old notes are tendered
- by a registered holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the letter
of transmittal, or
- for the account of an eligible guarantor institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, the guarantee must be by
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.,
- a commercial bank or trust company having an office or correspondent
in the United States or
- an eligible guarantor institution.
If the letter of transmittal for any old notes is signed by a person other than
the registered holder, the old notes must be endorsed by the registered holder
or accompanied by a properly completed bond power, in each case signed or
endorsed in blank by the registered holder. If the letter of transmittal or any
old notes or bond powers are signed or endorsed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, they should so indicate when
signing. In addition, these persons must submit evidence satisfactory to us of
their authority to act in that capacity with the letter of transmittal. We can
waive this requirement.
We will determine in our sole discretion all questions as to the validity, form,
eligibility, including time of receipt, and acceptance and withdrawal of
tendered old notes. We reserve the absolute right to reject any and all old
notes not properly tendered or any old notes whose acceptance by us would, in
the opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to any particular old notes
either before or after the expiration date. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of old notes must be cured
within a time period we will determine. Although we intend to request the
exchange agent to notify holders of defects or irregularities relating to
tenders of old notes, neither we, the exchange agent nor any other person will
have any duty or incur any liability for failure to give that notification.
Tenders of old notes will not be considered to have been made until any defects
or irregularities have been cured or waived. Any old notes that the exchange
agent receives which are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
By tendering, each holder represents to us that, among other things
- the new notes acquired in connection with the exchange offer are being
obtained in the ordinary course of business of the person receiving
the new notes, whether or not that person is the holder;
- that neither the holder nor any other person receiving the new notes
has an arrangement or understanding with any person to participate in
the distribution of the new notes; and
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- that neither the holder nor any other person receiving the new notes
is an "affiliate" of ours. An affiliate is a person that controls, is
controlled by or is under common control with us.
GUARANTEED DELIVERY PROCEDURES
Holders that wish to tender their old notes and:
- whose old notes are not immediately available;
- that cannot deliver their old notes, the letter of transmittal or any
other required documents, to The Bank of New York, which is the
exchange agent; or
- that cannot complete the procedures for book-entry transfer, prior to
the expiration date,
may effect a tender if:
(1) the tender is made through a firm that is a member of a registered
national securities exchange or of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company having
an office or correspondent in the United States;
(2) prior to the expiration date, the exchange agent receives from an
institution listed in clause (1) above a properly completed and duly
executed notice of guaranteed delivery, by facsimile transmission,
mail or hand delivery, setting forth the name and address of the
holder, the certificate number(s) of the old notes and the principal
amount of old notes tendered, stating that the tender is being made
this way and guaranteeing that, within three New York Stock Exchange
trading days after the expiration date, the letter of transmittal, or
a facsimile of it, together with the certificate(s) representing the
old notes, or a confirmation of book-entry transfer of the old notes
into the exchange agent's account at the book-entry transfer facility,
and any other documents required by the letter of transmittal, will be
deposited by the institution with the exchange agent; and
(3) the exchange agent receives, no later than three New York Stock
Exchange trading days after the expiration date, the certificate(s)
representing all tendered old notes in proper form for transfer, or a
confirmation of book-entry transfer of the old notes into the exchange
agent's account at the book-entry transfer facility, together with a
letter of transmittal, or a facsimile of it, properly completed and
duly executed, with any required signature guarantees, and all other
documents required by the letter of transmittal.
Holders that wish to tender their old notes according to the guaranteed delivery
procedures set forth above may request that the exchange agent send them a
notice of guaranteed delivery.
RESALES OF NEW NOTES
We believe that the new notes issued in the exchange offer for old notes may be
offered for resale, resold and otherwise transferred by the holder without
compliance with the registration and prospectus delivery requirements of the
Securities Act, if
- the holder is acquiring the new notes in the ordinary course of its
business,
- the holder is not participating, and has no arrangement or
understanding to participate, in the distribution of the new notes,
and
- the holder is not an affiliate of ours.
Our belief is based on interpretations by the SEC staff in no-action letters
issued to third parties unrelated to us. The staff has not considered this
exchange offer in the context of a no-action letter, and we cannot assure you
that the staff would make a similar determination with respect to this exchange
offer.
Any holder of the old notes using the exchange offer to participate in a
distribution of new notes cannot rely on the no-action letters referred to
above. This includes a broker-dealer that acquired old notes directly from us,
but not as a result of market-making activities or other trading activities.
Consequently, the holder must comply with the registration and prospectus
delivery requirements of the Securities Act in the absence of an exemption from
these requirements. Each broker-dealer that receives new notes for its own
account in exchange for old notes that it acquired as a result of market-making
activities or other trading activities, must acknowledge
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that it will deliver a prospectus in connection with any resale of those new
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 new notes received
in exchange for old notes where the old notes were acquired by the broker-dealer
as a result of market-making activities or other trading activities. The letter
of transmittal states that by acknowledging that it will deliver a prospectus, a
broker-dealer will not be considered to admit that it is an "underwriter" within
the meaning of the Securities Act. We have agreed that for a period of 180 days
after the date the registration statement under which the exchange offer is made
is declared effective, we will make this prospectus available to broker-dealers
for use in connection with any resale covered by these rules. See "Plan of
Distribution." Except as described above, this prospectus may not be used for an
offer to resell, resale or other retransfer of new notes.
WITHDRAWAL RIGHTS
Except as otherwise provided in this prospectus, tenders of old notes may be
withdrawn at any time on or prior to 5:00 p.m., New York City time, on the
expiration date.
For a holder to withdraw a tender of old notes, the exchange agent must receive
a written or facsimile transmission notice of withdrawal at its address below
before 5:00 p.m., New York City time, on the expiration date. Any notice of
withdrawal must
- specify the name of the person who deposited the old notes to be
withdrawn;
- identify the old notes to be withdrawn, including the certificate
number or numbers and principal amount of the old notes;
- be signed by the depositor in the same manner as the original
signature on the letter of transmittal by which the old notes were
tendered, including any required signature guarantees, or be
accompanied by documents of transfer sufficient to have the trustee
register the transfer of the old notes into the name of the person
withdrawing the tender; and
- specify the name of which any withdrawn old notes are to be
registered, if different from that of the depositor.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of withdrawal notices. Any old notes so withdrawn
will be considered not to have been validly tendered for purposes of the
exchange offer, and no new notes will be issued unless the old notes withdrawn
are validly re-tendered. Any old notes that have been tendered but that are not
accepted for exchange or that are withdrawn will be returned to the holder
without cost to the holder as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn old notes may be
re-tendered by following one of the procedures described above under the caption
"Procedures for Tendering" at any time prior to the expiration date.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Delivery of the letter of transmittal and any other required documents,
questions, requests for assistance, requests for additional copies of this
prospectus or of the letter of transmittal and requests for notice of guaranteed
delivery should be directed to the exchange agent as follows:
BY OVERNIGHT COURIER OR BY FACSIMILE TO CONFIRM BY TELEPHONE
BY HAND DELIVERY: REGISTERED/CERTIFIED MAIL: TRANSMISSION: OR FOR INFORMATION:
The Bank of New York The Bank of New York (212) 815-6339 (212) 815-6331
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
Ground Level Attn: Reorganization Unit -- 7E
Corporate Trust Services Window
Attn: Reorganization Unit -- 7E
Delivery other than to the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay other expenses to be incurred in
the exchange offer, including the fees and expenses of the exchange agent,
accounting fees and legal fees. Holders who tender their old notes for exchange
will not be obligated to pay any transfer taxes. If, however, new notes are to
be delivered to,
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or issued in the name of, any person other than the registered holder of the old
notes tendered, tendered old notes are registered in the name of any person
other than the person signing the letter of transmittal or a transfer tax is
imposed for any reason other than the exchange of old notes in connection with
the exchange offer, then the amount of any 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 these taxes or exemption from
them is not submitted with the letter of transmittal, the amount of these
transfer taxes will be billed directly to the tendering holder.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as that of the old
notes as reflected in our accounting records on the date of the exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes upon
completion of the exchange offer. The expenses related to the issuance of the
notes and of the exchange offer will be capitalized and amortized over the term
of the notes.
We recorded the private placement, the private exchange and the private
stockholder exchange in accordance with FAS-15 "Accounting By Debtors and
Creditors For Troubled Debt Restructurings." In the private exchange, the
carrying amount of $125.0 million principal amount of 9 3/4% notes and the
accrued and unpaid interest of approximately $6.1 million will be compared to
the principal and interest payments on the old notes over time. To the extent
the carrying amount is less than the interest and principal on the old notes, we
will adjust the carrying amount. We do not expect to change our carrying amount
in connection with the private exchange. The private exchange had tax
ramifications that we expect to result in the recording of income tax expense on
our financial statements. See "Risk Factors--Risks Related to Anker--We could
have income tax liability as a result of the restructuring of our 9 3/4% Series
B Senior Notes."
The issuance of old notes for cash in the private placement is expected to
result in financial statement recognition of original issue discount. This
discount will be accreted over the term of the notes. We recorded the private
stockholder exchange in a manner similar to the private exchange described
above. All of these transactions will have an effect on our recorded annual
interest expense.
In connection with the accounting treatment for the private stockholder
exchange, we recorded the notes we issued at their face value. The difference
between the notes and the common stock available for repurchase, including
current portion, increased paid-in capital.
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DESCRIPTION OF THE NEW NOTES
The new notes will be issued under the Indenture between us and The Bank of New
York, as Trustee. The terms of the notes include those terms stated in the
Indenture and those terms made part of the Indenture by reference to the Trust
Indenture Act of 1939. You can find the definitions of capitalized terms used in
this description below under "-- Definitions." This section contains a summary
and a more detailed description of the material provisions of the Indenture. It
does not restate the Indenture in its entirety. We urge you to read the
Indenture because it, and not this description, defines your rights as holders
of these notes. You may obtain a copy of the Indenture from us.
GENERAL
We are a holding company that owns stock of subsidiary corporations. All of our
wholly owned subsidiaries have guaranteed payment of the notes and performance
of our other obligations under the Indenture and related security documents. The
have also granted liens on their assets to secure those obligations. These liens
do not apply to all of their assets and are junior to the liens that Foothill
holds. The scope and terms of these liens are described in more detail below
under the heading "Security."
The notes are being issued in two series: Series A, which are the old notes and
Series B, which are the new notes. The terms and conditions of the two series of
notes are identical. The difference between the two series is that the Series A
old notes have not been registered under the Securities Act of 1933 and are not
freely tradable, while the Series B new notes will be either registered or
issued under an exemption from registration that will permit them to be freely
tradable. The old notes were issued on October 28, 1999 to holders of our 9 3/4%
Series B Senior Notes due 2007 in exchange for cancellation of most of those
notes; to Rothschild Recovery Fund L.P. in return for approximately $13.2
million in cash; and to JJF Group Limited Liability Company in return for
cancellation of its shares of our common stock and its right to require us to
purchase those shares in installments over time for approximately $10 million
plus accrued interest. The new notes will be issued
- in this exchange offer,
- under an exemption from registration requirements or in a registered
exchange under the Securities Act in exchange for cancellation of any
remaining 9 3/4% notes that holders of those notes wish to exchange;
and
- at our option, to Rothschild Recovery Fund L.P. in return for an
additional cash payment of up to $6.3 million on or about October 1,
2000.
The interest payment due April 1, 2000 on the new notes will be paid in kind in
the form of additional notes. The amount of additional notes issued as payment
of interest will be $71.25 for each $1,000 principal amount of notes
outstanding. The notes issued as payment of interest will be of the same series
as the notes on which the interest is being paid.
PRINCIPAL, MATURITY AND INTEREST
The notes
- have a maximum aggregate principal amount of $118.3 million plus the
amount of notes issued to pay interest on April 1, 2000 and the amount
of notes to be sold to Rothschild Recovery Fund L.P. on October 1,
2000;
- will mature on September 1, 2007; and
- accrue interest at a rate of 14.25% per year, payable semi-annually on
April 1 and October 1.
We can issue up to $118,258,800 million of notes under the Indenture. This
amount does not include the additional notes that we will issue to pay interest
due April 1, 2000 or the additional notes that we may sell to Rothschild
Recovery Fund L.P. on October 1, 2000. The amount of these additional notes
cannot be calculated in advance. The amount of the April 1, 2000 interest
payment will depend on the total amount of old and new notes outstanding on that
date. The amount of notes to be sold to Rothschild Recovery Fund L.P. will
depend upon the price at which the notes trade during a period of approximately
30 days before October 1, 2000. The sale to Rothschild Recovery Fund L.P. is
intended to raise a fixed amount of cash, and the notes will be sold at 95% of
the average trading price, so we will need to issue more notes if the average
trading price is lower than we will if the price is higher.
The new notes mature on September 1, 2007. Interest on the new notes accrues at
the rate of 14.25% per annum and is payable twice each year -- on April 1 to
persons who held notes on March 15 of that year, and on October 1 to persons who
held notes on September 15 of that year. The first interest payment is due April
1, 2000 and will be made in the form of additional notes with a face amount of
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$71.25 for each $1,000 of notes on which interest is being paid. All other
interest payments will be made in cash. Except for the notes that are issued in
payment of interest due April 1, 2000 and the notes that are to be sold to
Rothschild Recovery Fund L.P. on October 1, 2000, interest on the notes accrues
from October 1, 1999. Interest on the notes to be issued in payment of the
interest due April 1, 2000 will accrue from that date. Interest on the notes to
be sold to Rothschild Recovery Fund L.P. on October 1, 2000 will accrue from the
date those notes are issued. 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
notes is payable, and the notes may be presented for transfer or exchange, at
our office or agency maintained for that purpose within the city and state of
New York. At our option, payment of interest may be made by check mailed to
registered holders of the notes at the addresses set forth on the registry books
maintained by the Trustee, who will initially act as registrar for the notes.
However, payments to holders that have provided wire transfer instructions will
be made according to those instructions. No service charge will be made for any
exchange or registration of transfer of notes, but we may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection with the exchange or registration. Unless we otherwise designate, our
office or agency will be the corporate trust office of the Trustee.
Except for the notes issued in payment of interest due April 1, 2000, the
secured notes will be issued in denominations of $1,000, $800 or $743 or
integral multiples of those amounts. Notes issued in payment of interest will be
issued in integral multiples of $1.
NO MANDATORY SINKING FUND
We are not required to make sinking fund payments for the notes.
SECURITY
- The notes are secured by liens in favor of the Trustee on almost all
of our assets and those of our subsidiaries that have guaranteed the
notes.
- These liens do not apply to mobile equipment, coal leases and other
contracts and permits that prohibit these liens or assignments, real
property located in Maryland, and some specific parcels of real
property and related improvements located in other states.
- Although we have provided the best descriptions of real property
collateral available to us, some of those descriptions may be
inaccurate or insufficient to create valid liens on the property.
- The liens that secure the notes are junior to the liens that secure
our commercial loan facility and to all other liens that existed on
October 28, 1999. This means that holders of these senior liens are
entitled, if we default, to be paid in full from proceeds of
collateral before any payments are made on the notes.
- We have the right to obtain the release of collateral without
replacing it as long as we comply with the restrictions and procedural
requirements of the Indenture.
- The Trustee's ability to enforce the liens and to retain proceeds of
any enforcement action it takes is limited by an intercreditor
agreement with our lenders that hold senior secured debt.
- The Trustee's willingness to enforce the liens against individual
parcels of real property may also be limited by concerns about
becoming liable for dealing with environmental problems at the
property.
COLLATERAL
The collateral for the notes includes all of our and the guarantor subsidiaries'
right, title and interest in and to each of the following:
- Accounts
- books and records
- equipment, not including mobile equipment
- General Intangibles
- Inventory
- Negotiable Collateral
- cash collateral
- Investment Property, including, all capital stock in subsidiaries
- Real Property Collateral, not including real estate located in
Maryland and specified parcels of real property and related
improvements located elsewhere
- any money or other of our assets and those of the guarantor
subsidiaries which come into the possession, custody or control of the
Collateral Agent
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- the proceeds and products, whether tangible or intangible, of any of
the items above, including proceeds of insurance covering any or all
of the collateral, and any and all Accounts, books, Equipment, General
Intangibles, Inventory, Negotiable Collateral, Real Property, money,
deposit accounts, or other tangible or intangible property resulting
from the sale, exchange, collection or other disposition of any of the
items above or any portion of or interest in those items and the
proceeds of those items.
In the case, however, of any coal supply agreement, coal brokerage agreement,
other agreement or leasehold interest or permit the terms of which prohibit or
would give the other party the right to terminate if the contract or permit were
assigned or subjected to a lien, then unless the other party's consent has been
obtained or the restriction is found to be unenforceable, the liens securing the
notes apply solely to the proceeds of the contract or permit.
Furthermore, the liens securing the notes may not be effective against some
parcels of real property because (1) we do not have accurate or adequate legal
descriptions of those parcels, and (2) some of our leasehold interests or those
of the guarantor subsidiaries may not be properly recorded in the land records.
It should be noted, however, that the property descriptions that we used to
create the liens securing the notes are essentially the same as the ones we used
to create the liens securing the loan from our commercial lender, so any
problems caused by those descriptions would apply to both kinds of debt.
The collateral release provisions of the Indenture permit the release of
collateral without substitution of collateral of equal value under specified
circumstances. See "--Possession, Use and Release of Collateral-Release of
Collateral." As described under the subsection entitled "Repurchase at the
Option of Holders--Asset Sales," the net cash proceeds of specified asset sales
may be utilized for various purposes, including for the purpose of making an
offer to purchase notes. To the extent that cash proceeds remain after we have
purchased all notes that are tendered in response to a purchase offer, the
unutilized net cash proceeds may be released to us, free of the lien securing
the notes.
If an event of default occurs under the Indenture, the Collateral Agent may take
action to protect and enforce its rights in the collateral, including the
institution of foreclosure proceedings, except to the extent it is prohibited
from doing so by the terms of the intercreditor agreement between Foothill and
the Trustee. See "--Intercreditor Agreement." As long as the intercreditor
agreement remains in effect, proceeds of foreclosure on collateral must be
applied in accordance with that agreement, which generally means net proceeds
must be paid to our lenders that hold senior secured debt until their loans have
been paid in full before any proceeds can be applied by the Collateral Agent
under the Indenture. Collateral proceeds that are available to the Collateral
Agent are to be used first to pay the expenses of the foreclosure and fees and
other amounts then payable to the Trustee under the Indenture and, after that,
to pay the principal of and interest on, and other amounts due with respect to,
the notes.
Real property pledged as security for debt may be subject to known and
unforeseen environmental risks. Under federal environmental laws, a secured
lender may be held liable, in limited circumstances, for the costs of cleaning
up or preventing releases or threatened releases of hazardous substances at or
from a mortgaged property. There may be similar risks under various state laws
and common law theories. Lender liability may be imposed where the lender
actually participates in the management or operation of the mortgaged property,
with some exceptions.
Under the Indenture, the Trustee may, before taking specified actions, request
that holders of notes provide an indemnification against its costs, expenses and
liabilities. It is possible that environmental cleanup costs could become a
liability of the Trustee and cause a loss to any holders of notes that provided
indemnification. In addition, the holders may act directly rather than through
the Trustee, in specified circumstances, in order to pursue a remedy under the
Indenture. If noteholders exercised that right, they could, under some
circumstances, be subject to the risks of environmental liability discussed
above.
LIEN SUBORDINATION
The liens securing our Senior Secured Indebtedness have priority over the liens
securing the notes with respect to all collateral. The Senior Secured
Indebtedness currently consists of a term loan and a revolving credit facility
extended by Foothill and other lenders. The principal amount outstanding under
this credit facility may be as much as $55 million. The agent for our lenders
that hold senior secured debt and the Trustee have entered into an intercreditor
agreement relating to the administration, preservation and disposition of the
collateral. See "--Intercreditor Agreement" below. The Trustee and each
noteholder acknowledge that, as more fully set forth in the intercreditor
agreement, regardless of the order or manner of attachment or perfection, the
liens of the Trustee on the collateral are subject to and subordinate in all
respects to the liens of the lenders that hold senior secured debt. Until the
Senior Secured Indebtedness has been paid in full and the credit facilities have
been terminated, the Collateral Agent will be prohibited from taking any action
to enforce the liens securing the notes.
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The liens on the collateral that secure senior secured debt have priority over
the liens securing the notes. In the event we default on the notes, or enter
into bankruptcy, liquidation or reorganization, our assets would be used to pay
the Senior Secured Indebtedness before any payment from those assets could be
made on the notes. The relative priorities of the lenders that hold senior debt
and the noteholders with respect to the collateral are set forth in the
intercreditor agreement. As of November 11, 1999, we and our subsidiaries had
outstanding Senior Secured Indebtedness, including amounts outstanding under the
loan agreement with Foothill and other Indebtedness secured by prior liens, of
approximately $13.0 million. The Indenture permits us and our Restricted
Subsidiaries to incur additional Indebtedness, including secured Indebtedness,
subject to limitations. Specifically, Indebtedness under the loan agreement with
Foothill may be as much as $55 million.
Under some circumstances, we can designate current or future subsidiaries as
unrestricted subsidiaries. Unrestricted subsidiaries are not subject to the
restrictive covenants set forth in the Indenture. All of our subsidiaries
currently are restricted subsidiaries.
INTERCREDITOR AGREEMENT
The intercreditor agreement between Foothill and the Trustee provides
- the relative priorities of the parties to the agreement in and to the
collateral,
- the conditions under which the parties to the agreement will consent
to the release of or granting of any Lien in any of the collateral and
- the conditions under which the parties to the agreement will enforce
their rights with respect to the collateral and the Indebtedness
secured by the collateral.
The intercreditor agreement imposes significant limitations on the ability of
the Collateral Agent to enforce the liens securing the secured notes while
amounts remain outstanding under our credit facilities. See "Description of
Other Indebtedness--Intercreditor Agreement."
BANKRUPTCY LIMITATIONS
The rights of the Collateral Agent to repossess and dispose of the collateral
upon the occurrence of an event of default would be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were commenced by or
against us before the Collateral Agent has repossessed and disposed of the
collateral. Under the U.S. Bankruptcy Code, a secured creditor such as the
Collateral Agent is prohibited from repossessing its security from a debtor in a
bankruptcy case, or from disposing of security repossessed from the debtor,
without the bankruptcy court's approval. Moreover, the U.S. Bankruptcy Code
permits the debtor to continue to retain and to use collateral even though the
debtor is in default under the applicable debt instruments, provided that the
secured creditor is given "adequate protection." The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended in
general to protect the value of the secured creditor's interest in the
collateral and may include cash payments or the granting of additional security
to replace value of existing collateral that is lost as a result of the stay of
repossession or disposition or any use of the collateral by the debtor during
the pendency of the bankruptcy case. In view of the lack of a precise definition
of the term "adequate protection" and the broad discretionary powers of a
bankruptcy court, it is impossible to predict how long payments under the notes
could be delayed following commencement of a bankruptcy case, whether or when
the Collateral Agent could repossess or dispose of the collateral or whether or
to what extent holders of notes would be compensated for any delay in payment or
loss of value of the collateral through the requirement of "adequate
protection."
SUBSIDIARY GUARANTEES
Our payment obligations under the notes are jointly and severally guaranteed,
fully and unconditionally, on a secured basis, by our wholly owned subsidiaries.
Each of the subsidiaries that have guaranteed the secured notes is a borrower
under the loan agreement with Foothill and is liable for amounts due under the
loan agreement on a senior secured basis. As a result, the subsidiaries'
guarantees of the notes are effectively subordinated to the prior payment in
full of all Senior Secured Indebtedness. The obligations of each subsidiary
guarantor are limited in order not to constitute a fraudulent conveyance under
applicable law.
The Indenture prohibits the guarantor subsidiaries from merging with other
entities that are not guarantors unless specified tests are met and the
surviving entity becomes a guarantor of the notes. The Indenture also provides
that, in the event of a sale or other disposition of all of the stock or assets
of any guarantor subsidiary, the stock or assets will be released from the liens
securing the notes as long as the proceeds of the sale are to be applied in
accordance with the applicable provisions of the Indenture. See "--Security" and
"--Repurchase at the Option of Holders--Asset Sales."
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OPTIONAL REDEMPTION
We may redeem any of the notes at our option. The initial redemption price is
104% of the principal amount, plus accrued interest and liquidated damages, if
any. The redemption price will decline each year after 2000 and will be 100% of
the principal amount, plus accrued interest and liquidated damages, if any,
beginning on October 1, 2003.
We may redeem all or part of the notes upon our giving not fewer than 30 nor
more than 60 days' notice at the redemption prices, expressed as percentages of
principal amount, set forth below:
YEAR PERCENTAGE
---- ----------
Until October 1, 2000......................................104%
Beginning October 1, 2000..................................103%
Beginning October 1, 2001..................................102%
Beginning October 1, 2002..................................101%
Beginning October 1, 2003 and thereafter...................100%
MANDATORY REDEMPTION
We must redeem, or offer to redeem, notes from excess asset sale proceeds or
upon a change of control.
MANDATORY REDEMPTION FROM EXCESS ASSET SALE PROCEEDS
- During the first 15 days of January and July of each year, we may be
required to offer to redeem notes out of excess proceeds of asset
sales we received by the end of the immediately preceding month that
have not been previously used to make an offer to redeem.
- Asset sale proceeds do not have to be used for this purpose if they
are used within 120 days of receipt (1) to make a permanent paydown of
senior secured debt, (2) to buy back secured notes in the market at a
time when no senior secured debt is outstanding or (3) to pay for
capital expenditures relating to our coal mining activities or that of
any of the guarantor subsidiaries.
- In addition, we can use the first $1 million plus 40% of the excess
over $1 million of what would otherwise be excess asset sale proceeds
for general corporate purposes rather than to redeem notes.
- We must pay 100% of outstanding principal plus accrued interest and
any liquidated damages on notes that we redeem out of excess asset
sale proceeds.
- If the total redemption price of notes tendered in response to an
offer to redeem is less than the amount of excess proceeds, we can use
the remaining excess proceeds for general corporate purposes.
Within 120 days after the receipt of any proceeds from an asset sale, we or a
guarantor subsidiary may apply the proceeds, at our option, (1) to repay Senior
Secured Indebtedness, and to correspondingly permanently reduce commitments with
respect to that Senior Secured Indebtedness in the case of term borrowings, (2)
at any time when no Senior Secured Indebtedness is outstanding and no default or
event of default has occurred or is continuing, to offer to purchase notes in
the market in accordance with the terms of the Indenture at a price and in an
amount we determine, or (3) to the making of a capital expenditure in a
Permitted Business relating to our coal mining activities and that of the
guarantor subsidiaries if deemed necessary and appropriate for use in the
ordinary course of our business and that of our subsidiaries by our board of
directors or to reimburse the cost of a capital expenditure made during the 120
days before the proceeds were received. The property and assets that are the
subject of that capital expenditure and any other non-cash consideration
received as a result of the asset sale, however, must be made subject to the
liens securing the notes. Pending the final application of any asset sale
proceeds, we may temporarily reduce Indebtedness under our credit facilities or
invest the proceeds in any manner that is not prohibited by the Indenture.
We must use 60% of the excess over $1.0 million of net proceeds from asset sales
that are not applied or invested as provided in the preceding paragraph to make
offers to redeem notes. The amount of proceeds required to be used for this
purpose is calculated twice each year, as of June 30 and December 31. If the
amount of excess proceeds exceeds $1 million on either date, we must make an
offer to all holders of notes within 15 days after that date to purchase the
maximum principal amount of notes that may be purchased out of the excess
proceeds, at an offer price in cash in an amount equal to 100% of principal plus
accrued and unpaid interest and liquidated damages on those notes, if any, to
the date of purchase, in accordance with the applicable procedures set forth in
the Indenture. To the extent that the aggregate amount of notes tendered in
response to the offer is less than the amount of excess proceeds available to
purchase those notes, we may use any remaining excess proceeds for general
corporate purposes. If the aggregate principal amount of
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notes tendered by holders in response to the offer exceeds the amount of excess
proceeds available to purchase notes, the Trustee will select the notes to be
purchased on a pro rata basis. Upon completion of the offer to purchase, the
amount of excess proceeds will be reset at zero.
MANDATORY REDEMPTION UPON A CHANGE OF CONTROL
- Upon a change of control, holders have the right to require us to
redeem their notes at 101% of principal plus accrued interest and any
liquidated damages.
Upon the occurrence of a Change of Control, each holder of notes will have the
right to require us to repurchase all or any part of that holder's notes at an
offer price in cash equal to 101% of the aggregate principal amount of the
notes, plus accrued and unpaid interest and liquidated damages, if any, on the
notes to the date of purchase. Within 30 days following any Change of Control,
we will mail a notice to each noteholder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
notes on the date specified in the notice, which date will be no earlier than 30
days and no later than 60 days from the date the notice is mailed, in accordance
with the procedures required by the Indenture and described in the notice. We
will comply with the requirements of Rule 14e-1 under the Securities Exchange
Act of 1934 and any other securities laws and regulations to the extent those
laws and regulations are applicable in connection with the repurchase of the
notes as a result of a Change of Control.
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 our assets and those of our 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. As a
result, the ability of a noteholder to require us to repurchase those notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of our assets and those of our subsidiaries taken as a whole to another
person or entity or group may be uncertain.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the noteholders to require that we
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
- Our commercial loan agreement prohibits us from redeeming notes unless
there is no existing default and specified financial tests are met.
The loan agreement with Foothill prohibits us from purchasing any notes unless
specified conditions are satisfied. The loan agreement also provides that Change
of Control events with respect to us would constitute a default under the loan
agreement. Among other things, we are not permitted to purchase notes unless
there is no existing event of default and, after taking account of the use of
funds for the purchase, the subsidiaries would have the ability to borrow at
least $5.0 million, in the case of purchases funded by asset sale proceeds, or
$10.0 million, in all other cases, under the revolving credit facility of the
loan agreement. Any future credit agreements or other agreements to which we
become a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when we are prohibited from purchasing notes,
we could seek the consent of our lenders to the purchase of notes, or we could
attempt to refinance the borrowings that contain the prohibition. If we do not
obtain a consent or repay the borrowings, we will remain prohibited from
purchasing notes. In that case, our failure to purchase tendered notes would
constitute an event of default under the Indenture, which would, in turn,
constitute a default under the loan agreement with Foothill.
PROCEDURES FOR REDEEMING NOTES
If fewer than all of the notes are to be redeemed or repurchased in an offer to
purchase at any time, the Trustee will make the selection of notes for
redemption or repurchase in compliance with the requirements of the principal
national securities exchange, if any, on which the notes are listed. If the
notes are not so listed, the selection will be made on a pro rata basis. No
notes that have been previously reissued at less than their original principal
amount, however, will be redeemed except as part of the redemption of all notes
held by the same holder. Notices of redemption or repurchase will 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 notes to be redeemed or repurchased at
its registered address. If any note is to be redeemed or repurchased in part
only, the notice of redemption or repurchase that relates to that note will
state the portion of the principal amount of the note to be redeemed or
repurchased. A note in principal amount equal to the unredeemed or unrepurchased
portion will be issued in the name of the noteholder upon cancellation of the
original note. On and after the redemption or repurchase date, interest ceases
to accrue on notes or portions of notes called for redemption or repurchase.
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DEFINITIONS
Set forth below is a summary of some terms used in this description of the
notes. We refer you to the Indenture for the full definition of these terms.
"ACCOUNTS" means all accounts, contract rights and all other forms of
obligations owing to us and the subsidiaries that have guaranteed the notes
arising out of the sale or lease of goods or the rendition of services by us and
those subsidiaries, irrespective of whether earned by performance, and any and
all related credit insurance, guaranties or security.
"APPRAISER" means an engineer, appraiser or other expert who, except as
otherwise expressly provided in the Indenture, we may employ.
"ASSET SALE" means
(1) the sale, lease, conveyance or other disposition of any assets or
rights, including a sale and leaseback or a contract settlement, other
than in the ordinary course of business; however, the sale, lease,
conveyance or other disposition of all or substantially all of our
assets will be treated either as a Change of Control or as a merger or
consolidation rather than as an Asset Sale; and
(2) the issue or sale by us or any of our Restricted Subsidiaries of
equity interests of any of our Restricted Subsidiaries, in the case of
either clause (1) or (2), whether in a single transaction or a series
of related transactions that have a fair market value, as determined
in good faith by our board of directors, in excess of $1.0 million or
for net cash proceeds in excess of $100,000.
The following kinds of transactions are not treated as Asset Sales even if they
meet the tests described in the first sentence of this definition:
- our transfer of assets to a subsidiary that has guaranteed the notes
or a transfer by that subsidiary to us or to another guarantor
subsidiary;
- a guarantor subsidiary's issuance of equity interest to us or to
another guarantor subsidiary;
- a Restricted Payment that is permitted by the covenant described under
"--Covenants--Limitation on Restricted Payments;"
- a disposition of cash equivalents;
- a disposition in the ordinary course of business of either obsolete
equipment or equipment otherwise no longer useful in the business;
- a disposition in the ordinary course of business of mineral rights or
real property no longer useful in the business for net proceeds not to
exceed $50,000 in the aggregate in any calendar year;
- any sale of equity interests in, or Indebtedness or other securities
of, an Unrestricted Subsidiary;
- any sale and leaseback of an asset within 90 days after the completion
of construction or acquisition of the asset;
- contribution of Excluded Assets to an entity engaged in a Permitted
Business in exchange for an equity interest in that entity which is
subjected to the liens securing the notes; and
- any disposition of Inventory or Accounts in the ordinary course of our
or the guarantor subsidiaries' business.
"CAPITAL LEASE OBLIGATION" means, as of any measurement date, the amount of the
liability under a capital lease that would be required to be capitalized on a
balance sheet in accordance with generally accepted accounting principles.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, other than
by merger or consolidation, in one or a series of related
transactions, of all or substantially all of our assets and those of
our Restricted Subsidiaries taken as a whole to any "person," as that
term is used in Section 13(d)(3) of the Securities Exchange Act of
1934, other than to the Permitted Holders;
(2) the adoption of a plan relating to our liquidation or dissolution;
(3) the consummation of any transaction, including any merger or
consolidation, the result of which is that any person or entity, other
than the Permitted Holders, becomes the "beneficial owner," as that
term is defined in Rules 13d-3 and 13d-5 under the Securities Exchange
Act of 1934, directly or indirectly, of more than 80% of our voting
stock, as measured by voting power rather than number of shares; or
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(4) we consolidate with, or merge with or into, any person or entity,
other than the Permitted Holders, or any person or entity, other than
the Permitted Holders, consolidates with, or merges with or into, us
in connection with a transaction in which our outstanding voting stock
is converted into or exchanged for cash, securities or other property.
This does not include, however, any transaction in which our voting
stock outstanding immediately before the transaction is converted into
or exchanged for voting stock of the surviving or transferee entity
constituting a majority of the outstanding shares of the voting stock
of the surviving or transferee entity, immediately after giving effect
to the issuance.
"COAL ACQUISITION PREFERRED STOCK" means preferred stock that (1) is issued to a
seller of coal properties or assets as part of the consideration or financing of
the acquisition of the properties or assets and (2) provides for the payment of
dividends calculated by reference to the revenues from coal production of those
properties or assets, as long as the aggregate purchase price is fair to us. Our
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 October 1, 1999, are
each Coal Acquisition Preferred Stock.
"COLLATERAL AGENT" means the Trustee, as Collateral Agent for the noteholders,
or any successor Collateral Agent.
"CONSOLIDATED CASH FLOW" means, for any particular period, the result of the
following calculation: Start with our Consolidated Net Income for the period in
question and
(1) add back extraordinary losses and net losses in connection with Asset
Sales which were deducted in computing Consolidated Net Income for the
period;
(2) add back accrued taxes based on income or profits that were deducted
in computing Consolidated Net Income for the period;
(3) add back consolidated interest expense, including 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 with respect to letter of credit or bankers' acceptance
financings and net payments, if any, under Hedging Obligations, that
were deducted in computing Consolidated Net Income for the period;
(4) add back 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 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, that were deducted in
computing Consolidated Net Income for the period; and
(5) subtract non-cash revenues, other than non-cash income that represents
an accrual of cash revenues in any future period, that was included in
Consolidated Net Income for the period.
Notwithstanding the calculation above, taxes based on the income or profits of,
and the depreciation and amortization and other non-cash charges of, our
subsidiaries will 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
each subsidiary was included in calculating the Consolidated Net Income and only
if the subsidiary would not be prohibited from paying that amount to us as a
dividend.
"CONSOLIDATED NET INCOME" means, for any period, our Net Income and that of our
Restricted Subsidiaries, on a consolidated basis, determined in accordance with
generally accepted accounting principles, adjusted as follows:
(1) the Net Income of any subsidiary that is not a Restricted Subsidiary
or that is accounted for by the equity method of accounting will be
included only to the extent of the amount of dividends or
distributions paid in cash, or to the extent converted into cash, to
us or our wholly owned subsidiary;
(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the Restricted Subsidiary's declaration or payment of
dividends or similar distributions of its Net Income is prohibited;
(3) the Net Income of any person or entity acquired in a pooling of
interests transaction for any period before the date of the
acquisition will be excluded;
(4) the cumulative effect of a change in accounting principles will be
excluded; and
(5) any net after-tax extraordinary gains or losses will be excluded.
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"EQUIPMENT" means all of our and the guarantor subsidiaries' machinery, machine
tools, motors, equipment, furniture, furnishings, loading facilities, tipples,
processing plants and similar structures, fixtures, tools, parts, goods, other
than consumer goods, farm products or Inventory, wherever located. Equipment
does not include, however, Mobile Equipment.
"FIXED CHARGES" means, for any period, the sum, without duplication, of the
following charges or expenses:
(1) our consolidated interest expense and that of our Restricted
Subsidiaries, whether paid or accrued, including 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 in
connection with letter of credit or banker's acceptance financings and
net payments, if any, under Hedging Obligations;
(2) our consolidated interest expense and that of our Restricted
Subsidiaries which was capitalized during that period;
(3) any interest expense on Indebtedness of another person or entity which
we or one of our Restricted Subsidiaries guarantees or which is
secured by a lien on our assets or that of one of our Restricted
Subsidiaries, whether or not the guarantee or lien is called upon;
(4) the product of (a) all cash dividend payments, on any series of our
preferred stock or that of any of our Restricted Subsidiaries, other
than dividend payments on equity interests payable solely in our
equity interests, multiplied by (b) a fraction, the numerator of which
is one and the denominator of which is one minus our then current
combined federal, state and local effective tax rate, expressed as a
decimal.
"FIXED CHARGE COVERAGE RATIO" means, for any period, the ratio of our
Consolidated Cash Flow and that of our Restricted Subsidiaries to their Fixed
Charges. In the event that we or any of our Restricted Subsidiaries incurs,
assumes, guarantees or redeems any Indebtedness, other than revolving credit
borrowings, or issues or redeems preferred stock after the start of the period
for which the Fixed Charge Coverage Ratio is being calculated but before the
date as of which the Fixed Charge Coverage Ratio is being calculated, then the
Fixed Charge Coverage Ratio will be calculated as if that incurrence,
assumption, guarantee or redemption of Indebtedness, or the issuance or
redemption of preferred stock had occurred at the beginning of the applicable
four-quarter reference period. In addition, for purposes of making the
computation referred to above,
(1) acquisitions and Investments that we or any of our Restricted
Subsidiaries has made, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or between the reference period and the calculation
date, will be treated as if they had occurred on the first day of the
four-quarter reference period, and Consolidated Cash Flow for the
reference period will be calculated without giving effect to clause
(3) of the proviso set forth in the definition of Consolidated Net
Income;
(2) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with generally accepted accounting
principles, and operations or businesses disposed of before the
calculation date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with generally accepted accounting
principles, and operations or businesses disposed of before the
calculation date, will be excluded, but only to the extent that the
obligations giving rise to the Fixed Charges will not be obligations
of any of our Restricted Subsidiaries or us following the calculation
date.
"GENERAL INTANGIBLES" means all of our and the guarantor subsidiaries' present
and future general intangibles and other personal property, including rights
under coal supply contracts, coal brokerage agreements and other contract
rights, rights arising under common law, statutes or regulations, choses or
things in action, goodwill, permits, patents, trade names, trademarks,
servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists,
monies due or recoverable from pension funds, route lists, rights to payment and
other rights under any royalty or licensing agreements, infringement claims,
computer programs, information contained on computer disks or tapes, literature,
reports, catalogs, deposit accounts, insurance premium rebates, tax refunds and
tax refund claims, other than goods, Accounts and Negotiable Collateral.
"HEDGING OBLIGATIONS" means the obligations of a person or entity under (1)
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 (2) other agreements or arrangements designed to protect
against fluctuation in interest rates or the value of foreign currencies
purchased or received in the ordinary course of business.
"INDEBTEDNESS" means, for any person or entity, as of any date,
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- any indebtedness, whether or not contingent, for borrowed money or
evidenced by bonds, notes, debentures or similar instruments, letters
of credit or reimbursement agreements for letters of credit, other
than standby letters of credit issued in the ordinary course of
business that either have not been drawn upon or, if drawn upon, were
reimbursed no later than the tenth business day after the issuer of
the letter of credit demanded reimbursement, bankers' acceptances,
Capital Lease Obligations, the deferred and unpaid portion of the
purchase price of property, other than trade payables, and Hedging
Obligations, if and to the extent any of these forms of indebtedness,
other than letters of credit and Hedging Obligations, would appear as
a liability upon a balance sheet of the person or entity prepared in
accordance with generally accepted accounting principles; and
- all indebtedness of others secured by a lien on any asset of that
person or entity, whether or not that person or entity assumes the
indebtedness, and, to the extent not otherwise included, the person or
entity's guarantee of any indebtedness of any other person or entity.
The amount of any Indebtedness outstanding as of any date will be (1) the
accredited value of the Indebtedness, in the case of any Indebtedness that does
not require current payment of interest, and (2) the principal amount of the
Indebtedness, together with any interest on the Indebtedness that is more than
30 days past due, in the case of any other Indebtedness.
"INDEPENDENT" means a person or entity that
- is in fact independent,
- does not have any direct financial interest or any material indirect
financial interest in us or in any subsidiary that has guaranteed the
notes or in any affiliate of us or a guarantor subsidiary, and
- is not connected with us or any guarantor subsidiary as an officer,
employee, promoter, underwriter, trustee, partner, director or person
performing similar functions.
Whenever an opinion or certificate of an Independent person or entity is
required under the Indenture, that person or entity must be appointed by an
order signed by two of our officers and approved by the Trustee in the exercise
of reasonable care. The opinion or certificate must state that the signer has
read this definition and that the signer is independent as that term is defined
in the Indenture.
"INTERCREDITOR AGREEMENT" means the intercreditor agreement dated as of October
1, 1999, between the Collateral Agent and Foothill Credit Corporation, as
collateral agent for the senior commercial lenders, substantially in the form
attached to the Indenture, as it may be amended, waived or otherwise modified
from time to time in accordance with the provisions of the agreement, or any
similar agreement with lenders under any replacement credit facility on terms
which, taken as a whole, are not materially less favorable to the noteholders in
any material respect than the form attached as an exhibit to the Indenture.
"INVENTORY" means all of our and the guarantor subsidiaries' present and future
inventory, whether in the form of raw materials, work-in-process or finished and
semi-finished inventory of any kind, nature or description, wherever located,
including the following:
- all minerals in whatever form, including coal, fly ash, bottom ash or
other ash, methane, sulfur, sulfur dioxide and other by-products
resulting from the processing of the coal we and the subsidiaries that
have guaranteed the notes mine and other minerals and chemicals
resulting from the mining or processing of coal;
- cast iron fittings, paint, belts and hoses, bolts and nuts, wire and
wire products, welding supplies, tools, steel, rope, timber, railroad,
spikes, railroad car parts and railroad crane parts, baghouse parts,
pump parts, compressor parts, electrical parts, bearings, drills, bits
and accessories and other parts and supplies;
- all wrapping, packaging, advertising and shipping materials; and
- any other personal property held for sale, exchange or lease or
furnished or to be furnished or used or consumed in the business or in
connection with the manufacturing, packaging, shipping, advertising,
selling or finishing of goods, inventory, merchandise and other
personal property, and all names or marks affixed to or to be affixed
to these items for purposes of our and the guarantor subsidiaries
selling these items and all right, title and interest to them.
Inventory also includes all coal (1) in which we and the subsidiaries that have
guaranteed the notes have any interest which has been mined, (2) that is in a
coal stockpile and (3) that is held for sale in the ordinary course of business,
together with all other present and future goods we and the guarantor
subsidiaries hold for sale in the ordinary course of business, wherever located.
"INVESTMENT PROPERTY" means "investment property" as that term is defined in
Section 9-115 of the New York Uniform Commercial Code.
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"INVESTMENTS" means all investments by a person or entity in other persons or
entities, including affiliates, in the forms of direct or indirect loans,
including guarantees of Indebtedness or 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 and 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 generally accepted
accounting principles. If we or any of our Restricted Subsidiaries sells or
otherwise disposes of any equity interests of any of our direct or indirect
Restricted Subsidiaries so that, after giving effect to the sale or disposition,
the person or entity is no longer a Restricted Subsidiary, we will be deemed to
have made an Investment on the date of the sale or disposition equal to the fair
market value of the equity interests of the Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described below under "--Covenants --Limitation on Restricted
Payments."
"LIQUIDATED DAMAGES" means additional amounts we must pay to noteholders as a
result of delays in the registration of the notes or the consummation of the
exchange of registered notes for unregistered notes, as described under
"--Registration Rights."
"MOBILE EQUIPMENT" means all equipment that is (1) mobile, and (2) used or
useful in connection with our coal mining, extraction, development, construction
or environmental remediation activities or that of any Restricted Subsidiary.
Mobile Equipment includes any of the following, whether the equipment is on
wheels, is track mounted or is skid mounted: bulldozers, drills, pans, augers,
high wall miners, continuous miners, shuttle cars, roof bolters, mobile roof
supporters, rock dusters, man trips, scoops, backhoes, shovels, front end
loaders, continuous haulage units, underground locomotives, loaders, trailers,
trucks, other motor vehicles and other mining, construction, earthmoving or
excavating equipment of a similar nature.
"NEGOTIABLE COLLATERAL" means letters of credit, notes, drafts, instruments,
Investment Property, documents, and chattel paper issued to us or any of our
subsidiaries that have guaranteed the notes; personal property leases under
which we or our subsidiary is the lessor; and the books relating to any of these
items.
"NET INCOME" means, for any person or entity and any period, the net income
(loss) of the person or entity, determined in accordance with generally accepted
accounting principles and before deducting preferred stock dividends, excluding,
however, the following items:
(1) any extraordinary gain, but not loss, together with any related
provision for taxes on that gain, but not loss, realized in connection
with any Asset Sale or disposition of any securities or the
extinguishment of any Indebtedness; and
(2) any extraordinary gain, but not loss, together with any related
provision for taxes on the extraordinary gain, but not loss.
In determining Consolidated Net Income for the purpose of the covenant described
under "--Covenants --Limitation on Restricted Payments" only, however, items (1)
and (2) will not be so excluded.
"PERMITTED BUSINESS" means coal producing, coal mining, coal brokering or mine
development or any business that is reasonably similar or is a reasonable
extension, development or expansion or is ancillary to these activities,
including ash disposal and/or environmental remediation, and participation in
the ownership and operation of coal-fired electric power generating facilities
that purchase coal or other inventory from us or any Restricted Subsidiary.
"PERMITTED HOLDERS" means the Estate of 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, Amgo II,
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, any of the entities that received warrants on October
28, 1999 to purchase our common stock and any of their affiliates and their
successors and assigns.
"PERMITTED INVESTMENTS" means
(1) any Investment in Anker Coal Group or in a subsidiary that is a
guarantor of the notes;
(2) any Investment in cash equivalents;
(3) any Investment by us or any guarantor subsidiary in a person or
entity, if as a result of the Investment (a) the person or entity
becomes a subsidiary that guarantees the notes or (b) the person or
entity is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, us or a subsidiary that is a guarantor of the notes;
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(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made in compliance with the
covenant described under "--Mandatory Redemption--Asset Sales;"
(5) any acquisition of assets solely in exchange for the issuance of our
equity interests;
(6) any Investment existing on October 1, 1999;
(7) any Investment acquired by us or any of our Restricted Subsidiaries
(a) in exchange for any other Investment or accounts receivable held
by us or any Restricted Subsidiary in connection with or as a result
of a bankruptcy, workout, reorganization or recapitalization of the
issuer of the 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 us or any of our Restricted
Subsidiaries with respect to the secured Investment;
(8) Hedging Obligations permitted under the covenant described under
"--Covenants--Limitation on Incurrence of Indebtedness and Issuance of
Mandatorily Redeemable Stock;"
(9) 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;
(10) any guarantees permitted to be made pursuant to the covenant described
under "--Covenants--Limitation on Incurrence of Indebtedness and
Issuance of Mandatorily Redeemable Stock;"
(11) any Investment of Excluded Assets, other than Mobile Equipment, in any
person or entity engaged in the ownership and operation of a
coal-fired power generation facility that purchases coal or other
inventory from us or any Restricted Subsidiary; however, any ownership
interest in that person or entity we or a subsidiary guarantor making
the Investment receives will be subjected to the liens securing the
notes; and
(12) other Investments in any person or entity, including Investments in
Unrestricted Subsidiaries, primarily engaged in a Permitted Business
having an aggregate fair market value, measured on the date each
Investment was made and without giving effect to subsequent changes in
value, when taken together with all other Investments made pursuant to
this clause (12) that are at the time outstanding, do not exceed $10.0
million.
"PERMITTED LIENS" means
(1) liens securing senior Indebtedness that is permitted by clauses (1),
(2), (7) and (9) under "--Covenants--Permitted Debt" and the liens
securing the notes;
(2) liens in favor of us;
(3) liens on property of an entity existing at the time it is merged into
or consolidated with us or any of our subsidiaries, as long as the
liens were in existence before the contemplation of the merger or
consolidation and do not extend to any assets other than those of the
person or entity merged into or consolidated with us;
(4) liens on property existing at the time it was acquired by us or any of
our subsidiaries, as long as the liens were in existence before the
contemplation of the acquisition;
(5) liens to secure the performance of statutory or regulatory
obligations, leases, surety or appeal bonds, performance bonds or
other obligations of a similar nature incurred in the ordinary course
of business;
(6) liens to secure Indebtedness, including Capital Lease Obligations,
permitted by clause (4) under "--Covenants--Permitted Debt" covering
only the assets acquired with that Indebtedness;
(7) liens existing on October 1, 1999;
(8) 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,
as long as any reserve or other appropriate provision required in
conformity with generally accepted accounting principles has been
made;
(9) liens incurred in our ordinary course of business or that of any of
our subsidiaries with respect to obligations that do not exceed $5
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 of the property in our or
the subsidiary's operation of business;
(10) liens on assets of Unrestricted Subsidiaries which secure non-recourse
debt of Unrestricted Subsidiaries;
(11) liens on assets of subsidiaries that have guaranteed the notes which
would be Permitted Liens if they were liens or assets of us to secure
senior Indebtedness that was permitted to be incurred by clauses (1),
(2), (7) and (9) under "--Covenants--Permitted Debt;" and
(12) liens securing Permitted Refinancing Indebtedness to the same extent,
as long as the lien is not secured by any additional assets, and with
the same or lower priority as liens securing the Indebtedness that was
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exchanged or extended, refinanced, renewed, replaced, defeased or
refunded with the net proceeds of the Permitted Refinancing
Indebtedness.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of us or any of our
Restricted Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness of us
or any of our Restricted Subsidiaries, as long as
(1) the principal amount, or accreted value, if applicable, of the
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,
including premiums paid, if any, to the holders of the Indebtedness;
(2) the 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;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
the Permitted Refinancing Indebtedness has a final maturity date later
than 91 days after the final maturity date of, and is subordinated in
right of payment to, the notes on terms at least as favorable to the
noteholders as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded; and
(4) the Indebtedness is incurred either by us or by the Restricted
Subsidiary that is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"REAL PROPERTY COLLATERAL" means the parcel or parcels of real property and
related improvements described in the mortgages securing the notes and any real
property we and the subsidiaries that have guaranteed the notes acquire in the
future, including leasehold interests, together with all buildings, structures,
fixtures and other improvements relating to the property, and all metals and
minerals that are in, under, upon, or to be produced from the real property to
the extent of our rights and those of the subsidiaries that have guaranteed the
notes to the same, including all coal, but only to the extent the metals and
minerals have not been extracted from the real property, wherever located,
including our real property and related assets and that of the subsidiaries that
have guaranteed the notes, as more particularly described in the mortgages
securing the notes. Real Property Collateral will not include, however, the
specified interests in real property listed in Schedule B to the Indenture or
any non-assignable property. The Real Property Collateral also will not include
any real property located in the State of Maryland which is not subject to the
liens securing the Senior Secured Indebtedness.
"RESTRICTED SUBSIDIARY" of a person or entity means any Subsidiary of us or of
our subsidiary that is not an Unrestricted Subsidiary.
"SENIOR SECURED INDEBTEDNESS" means all amounts we and the subsidiaries that
have guaranteed the notes owe under debt or commercial paper facilities
providing for term loans, revolving credit loans or letters of credit, including
amounts arising after the filing of a bankruptcy or similar case, whether or not
allowable as a claim in the case, not to exceed an aggregate principal amount of
$55 million at any one time outstanding.
"UNRESTRICTED SUBSIDIARY" means any of our subsidiaries that our board of
directors designates as an Unrestricted Subsidiary through a board resolution,
but only to the extent that the subsidiary:
- has no Indebtedness other than non-recourse debt;
- is not party to any agreement, contract, arrangement or understanding
with us or any of our Restricted Subsidiaries, unless the terms of the
agreement, contract, arrangement or understanding are no less
favorable to us or the Restricted Subsidiary than those that might be
obtained at the time from persons or entities that are not affiliates;
- is a person or entity with respect to which neither we nor any of our
Restricted Subsidiaries has any direct or indirect obligation (1) to
subscribe for additional equity interests or (2) to maintain or
preserve the person or entity's financial condition or to cause the
person or entity to achieve any specified levels of operating results;
and
- has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of us or any of our Restricted
Subsidiaries.
If, at any time, any Unrestricted Subsidiary would fail to meet the conditions
referred to above as an Unrestricted Subsidiary, it will then cease to be an
Unrestricted Subsidiary for purposes of the Indenture, and any Indebtedness of
the subsidiary will be deemed to be incurred by our Restricted Subsidiary as of
that date. If the Indebtedness is not permitted to be incurred as of that date
under the
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covenant described under "--Covenants--Limitation on Incurrence of Indebtedness
and Issuance of Mandatorily Redeemable Stock," we will be in default of that
covenant.
Our board of directors may at any time designate any Unrestricted Subsidiary to
be a Restricted Subsidiary. In that case, the designation will be deemed to be
an incurrence of Indebtedness by our Restricted Subsidiary of any outstanding
Indebtedness of the Unrestricted Subsidiary, and the designation will only be
permitted if (1) the Indebtedness is permitted under the covenant described
under "--Covenants--Limitation on Incurrence of Indebtedness and Issuance of
Mandatorily Redeemable Stock," calculated on a pro forma basis as if the
designation had occurred at the beginning of the four-quarter reference period,
and (2) no default or Event of Default under the Indenture would exist following
the designation.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing
- the sum of the products obtained by multiplying (1) the amount of each
then-remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity,
by (2) the number of years, calculated to the nearest one-twelfth,
that will elapse between that date and the making of the payment, by
- the then-outstanding principal amount of the Indebtedness.
COVENANTS
The Indenture contains covenants with which we must comply. Here are summaries
and more detailed descriptions of the principal covenants.
LIMITATION ON ASSET SALES. We may not sell assets unless we receive fair market
value and at least 75% of the consideration is in cash or assets to be used for
our coal mining business. Proceeds of permitted Asset Sales must be used for
permitted purposes or to redeem notes, as described above under "-Mandatory
Redemption - Asset Sales."
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, consummate an Asset Sale unless
- we or the Restricted Subsidiary, as the case may be, receives
consideration at the time of the Asset Sale at least equal to the fair
market value, as determined in good faith by our board of directors,
of the assets or equity interests issued or sold or otherwise disposed
of, and
- at least 75% of the consideration we or the Restricted Subsidiary
receives is in the form of (1) cash or cash equivalents or (2)
property or assets to be used in the ordinary course of our or the
subsidiary's coal mining business.
For purposes of determining compliance with this covenant, the following types
of consideration are treated as cash or cash equivalents:
- any liabilities of the seller, other than contingent liabilities and
liabilities that are by their terms subordinated to the notes or any
guarantee of the notes, which the transferee assumes under an
agreement that releases the seller from further liability; and
- any securities, notes or other obligations the seller receives from
the transferee which are converted into cash within 90 days after the
Asset Sale.
Proceeds of permitted Asset Sales must be used for permitted purposes or to
redeem notes, as described above under a "--Mandatory Redemption--Asset Sales."
LIMITATION ON RESTRICTED PAYMENTS. We may not make restricted payments - such as
cash dividends on capital stock, repurchases or redemptions of stock or
investments in or loans to unrestricted entities in which we have an interest,
unless a series of requirements are met or a specific exemption applies. The
requirements are as follows:
- There can be no default under the Indenture either before or after the
payment;
- We must be able to meet the financial test to incur additional debt,
even if the payment is treated as having been made at the beginning of
the previous four quarters; and
- The payment in question, together with all other restricted payments,
would not exceed a cap that is calculated by reference to our income
and cash receipts.
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Even if these general requirements are not met, we can make some kinds of
payments that would otherwise be restricted as long as they qualify under one of
the specific exemptions in the covenant. Most of the exemptions apply only if
there is no existing event of default under the Indenture. The exemptions
include:
- Payments of dividends on stock that were permissible under the
Indenture when declared;
- Payments to retire debt or preferred stock which are made out of
proceeds of sale of our common stock;
- Refinancing of our 9 3/4% Series B Senior Notes due 2007 or of
subordinated debt;
- Redemption of stock our officers, directors and employees own under
specified circumstances;
- Redemption of our Series A and Series B preferred stock following a
Change of Control and redemption of all notes that are tended for
redemption as a result of the Change of Control; and
- Payment of dividends on our Coal Acquisition Preferred Stock.
The restrictions of the covenants in the Indenture apply only to us and
subsidiaries that our board of directors has designated as Restricted
Subsidiaries. Our board can change the designation of any subsidiary and make
these restrictions inapplicable, but only if our investment in, and other
transactions with, the subsidiary would be permissible under the terms of the
Indenture.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, take any of the following
actions unless the tests set forth below are satisfied:
(1) declare or pay any dividend or make any other payment or distribution
to direct or indirect shareholders on account of their equity
interests, other than dividends or distributions payable in our stock
that is not mandatorily redeemable until at least 91 days after the
notes mature;
(2) purchase, redeem or otherwise acquire or retire for value any of our
equity interests or that of any direct or indirect parent of us;
(3) make any principal payment on, or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any of our 9
3/4% Series B Senior Notes due 2007 or Indebtedness that is
subordinated to the notes, except a scheduled repayment of principal
or a payment of principal at stated maturity; or
(4) make any Investment other than a Permitted Investment.
All of the following tests must be satisfied in order for us or our Restricted
Subsidiaries to be permitted to make any of the payments specified above:
- No default or event of default under the Indenture can be continuing
or would result from the payment;
- At the time of making the payment and after giving effect to the
payment as if it had been made at the beginning of the applicable
four-quarter period, we would be permitted to incur at least $1.00 of
additional Indebtedness under the Fixed Charge Coverage Ratio test, as
set forth below under "--Limitation on Incurrence of Indebtedness and
Issuance of Mandatorily Redeemable Stock;" and
- The payment, together with the aggregate amount of all other
restricted payments we and our Restricted Subsidiaries make after
October 1, 1999, excluding restricted payments permitted by clauses
(2), (3), (4) and (6) of the next succeeding paragraph, is less than
the sum, without duplication, of the following:
(1) 50% of our Consolidated Net Income for the period, taken as one
accounting period, from the beginning of the first fiscal quarter
commencing after October 1, 1999 to the end of our most recently
ended fiscal quarter for which internal financial statements are
available at the time of the restricted payment, or, if the
Consolidated Net Income for the period is a deficit, less 100% of
that deficit, plus
(2) 100% of the aggregate net cash proceeds and the fair market value
of marketable securities, as we determine in good faith, we
receive from the issue or sale to a person or entity other than a
Restricted Subsidiary since October 1, 1999 of our stock, other
than stock that we can be required to redeem, or of our debt
securities that have been converted into stock; however, proceeds
used to acquire or redeem our 9 3/4% notes or subordinated debt
or equity interests under the exemption provided below are to be
excluded from this calculation; plus
(3) 100% of the aggregate net cash proceeds and the fair market value
of marketable securities, as we determine in good faith, we
receive as an equity contribution from a holder or holders of our
equity interests, other than a contribution with respect to stock
that we can be required to redeem; plus
(4) to the extent that any Restricted Investment that was made after
October 1, 1999 is sold or otherwise liquidated or repaid, the
aggregate amount of cash and the fair market value of marketable
securities,
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as we determine in good faith, we receive as the return of
capital with respect to the Restricted Investment, less the cost
of disposition, if any; plus
(5) the amount resulting from redesignations of Unrestricted
Subsidiaries, as long as the amount does not exceed the amount of
Investments we or any Restricted Subsidiary made in the
Unrestricted Subsidiary since October 1, 1999 which was treated
as a Restricted Payment under the Indenture, plus
(6) the amount of the net reduction in Investments in Unrestricted
Subsidiaries resulting from the payment of cash dividends we or
any of our Restricted Subsidiaries received from the Unrestricted
Subsidiaries.
The following kinds of payments are exempt from the restrictions of this
covenant even if they would otherwise be prohibited:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the payment
would have complied with the provisions of the Indenture;
(2) as long as no event of default is continuing, the redemption,
repurchase, retirement, defeasance or other acquisition of any of our
9 3/4% notes, subordinated indebtedness or equity interests in
exchange for, or out of the net cash proceeds of, the substantially
concurrent sale, other than to any of our Restricted Subsidiaries, of
our other equity interests, other than stock that we can be required
to redeem; however, the amount of any net cash proceeds that are
utilized under this exemption to make any redemption, repurchase,
retirement, defeasance or other acquisition will be excluded in
calculating the maximum amount of restricted payments permitted by the
restricted payments covenant;
(3) as long as no event of default is continuing, the defeasance,
redemption, repurchase or other acquisition of our 9 3/4% notes or
subordinated indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by any of our subsidiaries to the holders
of its common equity interests on a pro rata basis;
(5) as long as no event of default is continuing, the repurchase,
retirement or other acquisition or retirement for value of our common
equity interests held by any of our future, present or former
employees or directors or any of our Restricted Subsidiaries or the
estate, heirs or legatees of, or any entity controlled by, any of
these employees or directors, under any management equity plan or
stock option plan or any other management or employee benefit plan or
agreement in connection with the termination of that person's
employment for any reason, including by reason of death or disability.
The aggregate Restricted Payments made under this clause to any person
other than PPK Group Limited Liability Company may not exceed $100,000
in any calendar year, and the aggregate Restricted Payments made under
this clause to PPK Group may not exceed the cash proceeds of key man
life insurance policies we receive after October 1, 1999, less the
amount of any Restricted Payments previously made to PPK Group Limited
Liability Company pursuant to this clause;
(6) as long as no event of default is continuing, in the event of a Change
of Control under the Indenture, the making of mandatory redemptions on
our Class A preferred stock and our Class B preferred stock, par value
$1,000 per share, in each case in accordance with the terms of the
change of control provisions of the preferred stock as in effect on
October 1, 1999. No redemption may be made until after we have
redeemed all notes tendered under the Change of Control provisions of
the Indenture;
(7) as long as no event of default is continuing, the declaration and
payment of dividends on and the making of scheduled mandatory
redemptions of our Coal Acquisition Preferred Stock in accordance with
the terms of that stock; and
(8) repurchases of equity interests deemed to occur upon exercise of stock
options if those equity interests represent a portion of the exercise
price of the options.
The payment restrictions in this covenant apply only to us and to our Restricted
Subsidiaries. They do not apply to Unrestricted Subsidiaries. Our board of
directors may redesignate any Restricted Subsidiary as an Unrestricted
Subsidiary if the designation is permitted by this covenant and otherwise would
not cause a default under the Indenture. For purposes of determining whether
redesignation is permissible, all outstanding Investments we and our Restricted
Subsidiaries make, except to the extent repaid in cash, in the subsidiary to be
redesignated will be deemed to be Restricted Payments at the time of the
redesignation and will reduce the amount available for Restricted Payments under
the first paragraph of the covenant. The amount of the Investments will be equal
to the fair market value of the Investments at the time of the redesignation.
The redesignation will only be permitted if a Restricted Payment to an
Unrestricted Subsidiary in that amount would be permitted at that time and if
the subsidiary to be redesignated otherwise meets the definition of an
Unrestricted Subsidiary.
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The amount of all Restricted Payments, other than cash, will be the fair market
value on the date of the Restricted Payment of the asset(s) or securities we or
a Restricted Subsidiary, as the case may be, proposes to be transferred or
issued under the Restricted Payment. The fair market value of any non-cash
Restricted Payment will be based on the good faith determination of our board of
directors. Not later than the date of making any Restricted Payment, we must
deliver to the Trustee an officers' certificate stating that the Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this covenant were computed.
LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF MANDATORILY REDEEMABLE
STOCK. We may not incur additional Indebtedness or issue stock that we can be
required to redeem sooner than 91 days after the notes mature if, treating the
transaction as if it had occurred at the beginning of the previous four fiscal
quarters, our consolidated cash flow for that four-quarter period would be less
than 2.25 times the sum of our consolidated interest expense plus the pretax
amount necessary to pay cash dividends on our preferred stock. These
restrictions do not apply to Indebtedness that falls within the definition of
Permitted Debt.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to any Indebtedness, including Acquired
Debt, and that we will not, and will not permit any of our Restricted
Subsidiaries to issue any shares of stock that the issuer can be required to
redeem before the 91st day after the notes mature. We or any of the subsidiaries
that have guaranteed the notes, may incur Indebtedness, including Acquired Debt,
or issue shares of stock if the Fixed Charge Coverage Ratio for our most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which the additional
Indebtedness is incurred or the stock is issued would have been at least 2.25 to
1, determined as if the additional Indebtedness had been incurred or the stock
had been issued and the proceeds had been received and applied at the beginning
of the four-quarter period.
LIMITATION ON LAYERING. We cannot create Indebtedness that ranks below the
Senior Secured Debt but ahead of the notes.
The Indenture also provides that neither we nor any subsidiary that has
guaranteed the notes may incur any Indebtedness that is contractually
subordinated to any other Indebtedness of us or the subsidiary, unless the
Indebtedness is also contractually subordinated to the notes or the guarantee of
the subsidiary on substantially identical terms. No Indebtedness of us or any
guarantor subsidiary, however, will be deemed to be contractually subordinated
to any other Indebtedness of our or the guarantor subsidiary solely by virtue of
its being unsecured.
PERMITTED DEBT. We and our Restricted Subsidiaries can incur some kinds of
Indebtedness even if we or they do not meet the consolidated cash flow test
described above.
The restrictions on incurrence of Indebtedness do not apply to any of the
following items of Indebtedness:
(1) Indebtedness under debt or commercial paper facilities providing for
term loans, revolving credit loans or letters of credit in a principal
amount of up to $55 million;
(2) Indebtedness that existed on October 1, 1999;
(3) Indebtedness under the Indenture and related documents;
(4) 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 our business or that of a subsidiary that has guaranteed the
notes, in an aggregate principal amount not to exceed $10.0 million at
any time outstanding;
(5) Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness, other than intercompany Indebtedness, that the Indenture
permitted to be incurred;
(6) intercompany Indebtedness between or among us and any of our
subsidiaries that have guaranteed the notes; however, (a) if we are
the obligor on the Indebtedness, the Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations
with respect to the notes, and (b)(i) any subsequent issuance or
transfer of equity interests that results in any Indebtedness, being
held by a person or entity other than us or a subsidiary that has
guaranteed the notes and (ii) any sale or other transfer of any
Indebtedness to a person or entity that is not either a guarantor
subsidiary or us will be deemed, in each case, to constitute an
incurrence of Indebtedness by us or the guarantor subsidiary, as the
case may be;
(7) Hedging Obligations;
(8) Indebtedness incurred in connection with performance, surety and
similar bonds and completion guarantees we or any Restricted
Subsidiary provides in the ordinary course of business;
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(9) the issuance by our Unrestricted Subsidiaries of non-recourse debt;
however, if any of this Indebtedness ceases to be non-recourse debt of
an Unrestricted Subsidiary, that event will be deemed to constitute an
incurrence of Indebtedness by our Restricted Subsidiary; and
(10) Guarantees of Indebtedness that another provision of this covenant
permitted to be incurred.
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 (1) through (10) above or is entitled to be
incurred pursuant to the first paragraph of the covenant described under this
section, we can choose which provision will apply to the item of Indebtedness.
Accrual of interest, the accretion of accredited 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.
LIMITATION ON LIENS. We may not pledge our assets as collateral for any debt for
borrowed money that ranks equally with or below the notes, unless the notes also
get the benefit of the pledge. If we grant a lien on real property in Maryland
to secure our senior credit facility, we must also grant a junior lien on the
same property to secure the notes.
The Indenture provides that we will not, and will not permit any of our
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 acquired in the future, or any income or profits from that asset or
assign or convey any right to receive income from that asset, except Permitted
Liens, unless the notes are secured equally and ratably with, or before in the
case of subordinated indebtedness, the obligation or liability secured by the
lien. In the event that we or any subsidiary that has guaranteed the notes
grants a lien on any real property located in the state of Maryland to secure
the Senior Secured Indebtedness, that grantor must immediately grant a junior
lien in favor of the Collateral Agent to secure the obligations under the
Indenture.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. We
generally cannot allow our subsidiaries to be subject to restrictions on their
ability to pay money or transfer assets to us.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, be subject to any agreement
or other consensual arrangement that restricts our or their ability to do any of
the following:
- (1) pay dividends or make any other distributions to us or any of our
Restricted Subsidiaries based upon stock ownership or its profits, or
(2) pay any indebtedness owed to us or any of our Restricted
Subsidiaries,
- make loans or advances to us or any of our Restricted Subsidiaries,
- transfer any of our or their properties or assets to us or any of our
Restricted Subsidiaries.
The following kinds of restrictions are permissible under this covenant even if
they would otherwise fall within one of the three categories set forth above:
- restrictions imposed by the terms of Indebtedness as in effect on
October 1, 1999;
- restrictions imposed by the terms of our senior credit facility;
- restrictions imposed by the Indenture and the notes;
- restrictions imposed by applicable law, rules or regulations or any
order or ruling by a governmental authority;
- restrictions imposed by agreements to which a Restricted Subsidiary
was already subject at the time it was acquired and that do not apply
to us or any other Restricted Subsidiary;
- customary non-assignment provisions in leases, licenses, encumbrances,
contracts or similar agreements entered into or acquired in the
ordinary course of business;
- purchase money obligations for property acquired in the ordinary
course of business which impose transfer restrictions on the acquired
property;
- customary restrictions included in contracts for the sale of assets by
us or a Restricted Subsidiary;
- restrictions on cash or other deposits imposed by customers under
contracts entered into in the ordinary course of business;
- customary provisions in joint venture agreements at the time of
creation of the joint venture and other similar agreements entered
into in the ordinary course of business; and
- renewals or replacements of agreements that impose restrictions that
are otherwise permissible under this covenant.
LIMITATION ON MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. We may not merge or
consolidate with other companies unless (1) we are not in default under the
notes, (2) the surviving corporation assumes our obligations under the Indenture
and (3) we could incur
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additional Indebtedness under the debt covenant described under "-- Limitation
on Incurrence of Indebtedness and Issuance of Mandatorily Redeemable Stock."
The Indenture provides that we may not consolidate or merge with or into,
whether or not we are the surviving corporation, or sell or otherwise dispose of
all or substantially all of our properties or assets in one or more related
transactions, to another corporation, person or entity or entity unless all of
the following tests are met:
- we must be the surviving corporation or the surviving corporation or
other party to the transaction must be organized under U.S. law;
- the surviving corporation or other party to the transaction must
assume all our obligations under the notes and the Indenture;
- immediately after closing of the transaction there would be no default
under the Indenture; and
- we or the surviving corporation or other party to the transaction
would be able to incur additional Indebtedness under the covenant
described above under the heading "-- Limitation on Incurrence of
Indebtedness and Issuance of Mandatorily Redeemable Stock" with the
financial ratio specified in that covenant calculated as if the
transaction had been completed at the start of the four-quarter
measurement period.
This covenant does not prohibit (1) a Restricted Subsidiary from merging with or
transferring property to us, or (2) us from merging with an affiliate that was
incorporated solely for the purpose of reincorporating us in another state of
the United States, as long as the amount of our Indebtedness and that of our
Restricted Subsidiaries is not increased.
LIMITATION ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS. We and our
subsidiaries may not enter into transactions with major stockholders or persons
we or they control, are controlled by or are under common control with, unless
the transaction is fair and we comply with specified procedures.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, make any payment to or Investment in, or sell,
lease, transfer or otherwise dispose of any of our or 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 person or entity that directly or indirectly
controls, is controlled by, or is under common control with us or the Restricted
Subsidiary unless
- the transaction is on terms that are no less favorable to us or the
relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction with an unrelated person or
entity;
- if the total consideration involved in the transaction exceeds $5
million, the transaction must be approved by a majority of the members
of our board of directors or that of the Restricted Subsidiary who do
not have an interest in the transaction, and one of our officers must
certify that fact in writing to the Trustee; and
- if the total consideration involved in the transaction exceeds $10
million, we must deliver to the Trustee an opinion from an engineer,
appraiser or other expert who has no interest in, or connection with,
us or our subsidiaries to the effect that the transaction is fair from
a financial point of view.
The following kinds of transactions are not subject to the restrictions of this
covenant:
- any employment agreement entered into by us or any of our Restricted
Subsidiaries in the ordinary course of business;
- transactions between or among us and/or our Restricted Subsidiaries;
- Restricted Payments that are permitted by the provisions of the
Indenture described above under "--Limitation on Restricted Payments;"
- any payments made in connection with the notes, warrants to purchase
our common stock issued October 28, 1999, or any related agreements;
- the payment of reasonable and customary fees paid to, and indemnity
provided on behalf of, our officers, directors or employees or those
of any Restricted Subsidiary;
- transactions in which we or any of our Restricted Subsidiaries
delivers to the Trustee a letter from an engineer, appraiser or other
expert who has no interest in or connection with us or our
subsidiaries to the effect that the terms of the transaction are no
less favorable to us or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction with an
unrelated person or entity;
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- loans to employees (1) under our employee relocation policy as in
effect on October 1, 1999 or (2) for any other purpose, as long as the
loans are not in excess of $100,000 in the aggregate at any one time
outstanding and are approved by a majority of our or the Subsidiary's
board of directors, as applicable, in good faith;
- any agreement as in effect as of October 1, 1999 or any amendment to
that agreement, as long as the amendment is no less favorable to the
holders of the notes in any material respect than the original
agreement as in effect on October 1, 1999, or any transaction
contemplated by that agreement;
- the existence of, or the performance by us or any of our Restricted
Subsidiaries of our or its obligations under the terms of, the
stockholders' agreement, dated as of August 12, 1996, as in effect on
October 1, 1999, and any amendments or similar agreements that are no
less favorable to the noteholders and that are entered into after
October 1, 1999; and
- 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 on arms-length terms.
LIMITATION OF BUSINESS ACTIVITIES
Neither we nor any of our subsidiaries can engage in any business that does not
fall within the definition of "Permitted Business" unless that other business
would not be material to us and our subsidiaries taken as a whole.
LIMITATION ON PAYMENTS FOR CONSENT. We cannot pay noteholders to waive rights
under, or modify the terms of, the Indenture unless we make the same offer to
all noteholders.
The Indenture provides that neither we nor any of our subsidiaries may, directly
or indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any notes for, or as an inducement
to, any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the notes unless the consideration is offered to be paid or is paid
to all holders of the notes that consent, waive or agree to amend in the time
frame set forth in the solicitation documents relating to the consent, waiver or
agreement.
ADDITIONAL SUBSIDIARY GUARANTEE
The Indenture provides that if we or any of our Restricted Subsidiaries acquires
or creates another Restricted Subsidiary after October 1, 1999, then the newly
acquired or created Restricted Subsidiary must guarantee the notes.
REPORTS
As long as any of the notes are outstanding, we are required to file with the
SEC the annual reports, quarterly reports and other documents that we would have
been required to file with the SEC under Section 13(a) or 15(d) of the Exchange
Act if we were subject to these sections. We must also provide to all
noteholders and file with the Trustee copies of these reports. In addition,
until the effectiveness of a registration statement that permits holders of
unregistered notes to exchange them for registered notes or to sell their notes
without restriction, we must furnish to the holders of the notes 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
We will be in default under the notes if specified events occur. These events
include(1) failure to pay principal on the notes when due, (2) failure to pay
interest within 30 days after it is due, (3) breaches of covenants, (4) defaults
under other indebtedness, (5) failure to pay judgments and (6) bankruptcy.
Bankruptcy causes automatic acceleration of the notes. Any other event of
default will give the Trustee or 25% of the holders the right to call the notes
and take other enforcement action, including foreclosing on the collateral.
The Indenture provides that each of the following is an "Event of Default":
- failure to pay interest or Liquidated Damages on the notes within 30
days after the date due;
- failure to pay principal or premium, if any, on the notes when due;
- failure to comply with the mandatory redemption requirements
applicable to Asset Sales and Changes of Control, as described above;
- failure to comply with any other provision of the notes or the
Indenture unless cured within 60 days after written notice by the
Trustee or by the holders of at least 25% of notes then outstanding;
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- failure to comply with any provision of the documents creating the
liens that secured the notes unless cured within 30 days after written
notice by the Trustee or by the holders of at least 25% of notes then
outstanding;
- a payment default in connection with Indebtedness of $5.0 million or
more, or any other kind of default that results in the acceleration of
Indebtedness of $5.0 million or more;
- failure to pay within 60 days final judgments that exceed applicable
insurance coverage by more than $5.0 million unless those judgments
have been discharged or stayed within that 60-day period;
- if the guarantee of the notes by any significant subsidiary becomes,
or is claimed by the subsidiary to be, invalid or unenforceable;
- various events of bankruptcy or insolvency with respect to us or any
of our significant subsidiaries; and
- we or any of our subsidiaries initiates any suit or proceeding
challenging the legality, validity, or enforceability of the notes,
the Indenture or the liens that secure the notes.
The holders of a majority in amount of the notes may waive any existing default
or Event of Default and its consequences under the Indenture, except a
continuing payment default. Payment defaults can only be waived by individual
holders; waiver by a majority of the holders is not effective to bind those who
do not consent.
If an Event of Default occurs and is continuing, the Trustee or the holders of
at least 25% in principal amount of the outstanding notes may declare all of the
notes to be due and payable immediately. If the Event of Default relates to
bankruptcy of us or a significant subsidiary, the notes automatically become due
and payable immediately without any action by the Trustee or the holders.
In addition to calling the notes, the Trustee may take the following enforcement
actions as a result of an Event of Default:
- sue us and the subsidiaries that have guaranteed the notes to collect
and otherwise enforce the terms of the notes;
- except as limited by the intercreditor agreement, foreclose upon the
collateral that secures the notes or seek appointment of a receiver
for the collateral or any other assets of us and the subsidiaries that
have guaranteed the notes; or
- pursue any other remedy that is available under the Indenture or
applicable law.
No holder of a note can act to enforce the Indenture unless the following
requirements are met:
- the holder has notified the Trustee of a continuing Event of Default;
- the holders of at least 25% in amount of the notes have requested the
Trustee to take enforcement action and offered to indemnify the
Trustee in connection with that action;
- holders of a majority in amount of the notes have not instructed the
Trustee not to take enforcement action; and
- the Trustee has failed to take enforcement action within 60 days.
However, the above limitations do not apply to a suit instituted by a holder of
a note to collect unpaid amounts due under the holder's notes.
Holders of a majority in amount of the notes may direct the Trustee in its
exercise of any trust or power under the Indenture, but the Trustee can refuse
to follow those directions if they would conflict with law or the Indenture,
injure other holders or expose the Trustee to personal liability. The Trustee
may withhold from noteholders 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.
We are required to certify to the Trustee annually that we are in compliance
with the Indenture and to notify the Trustee whenever we become aware of any
default or Event of Default.
NO RECOURSE AGAINST OTHERS
Holders of notes have no legal recourse against our directors, officers,
employees or stockholders.
The Indenture provides that none of our directors, officers, employees or
stockholders, in those capacities, will have any liability for any of our
obligations under the notes or the Indenture or for any claim based on, in
respect of or by reason of those obligations or their creation. Each holder, by
accepting the notes, waives and releases all of this liability.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE.
We can be relieved of our obligations under the Indenture if we deposit with the
Trustee sufficient money or government securities to pay the principal of and
interest on the notes as they become due.
At any time while the notes are outstanding, we may be relieved of almost all of
our obligations under the Indenture or obtain a more limited release from some
covenants by delivering cash to the Trustee and complying with other procedures.
The broader release, which is referred to in the Indenture as "Legal
Defeasance," would leave us with only those obligations relating to the issuance
and replacement of notes, administration of payments and cooperation with, and
payment of the fees and expenses of, the Trustee. The narrower release, which is
referred to as "Covenant Defeasance," would relieve us of our reporting and
certification obligations, the financial covenants and restrictions on
operations and transactions, but it would leave us subject to the other
provisions of the Indenture.
In order to exercise either Legal Defeasance or Covenant Defeasance, we must
comply with all of the following requirements:
(1) We must deposit with the Trustee enough cash to pay when due all
amounts required to be paid under notes and the Indenture;
(2) Depending on whether we are seeking Legal Defeasance or Covenant
Defeasance, we must deliver to the Trustee one of the following tax
opinions:
- in order to get the narrower release from specified covenants, we
must deliver a legal opinion confirming that the deposit of funds
with the Trustee and the related release of our obligations will
not be a taxable event for the note holders; or
- in order to get the broader release from the requirements of the
Indenture, we must deliver a legal opinion stating that the lack
of tax consequences for noteholders has been confirmed by the
Internal Revenue Service or is the result of a change in
applicable law since October 1, 1999;
(3) We and the subsidiaries that have guaranteed the notes cannot be in
default under the notes or the Indenture when we make the cash
deposit;
(4) The deposit of funds and our release from obligations under the
Indenture cannot be a violation of any of our material contracts or
those of any of our subsidiaries;
(5) In addition to the tax opinion referred to above, we must deliver to
the Trustee a legal opinion to the effect that
- after the 91st day following the deposit, the funds deposited
with the Trustee will not be subject to recovery in a bankruptcy
or similar proceeding of us or any of the subsidiaries that have
guaranteed the notes; and
- all of the requirements for Legal Defeasance or Covenant
Defeasance, whichever is applicable, have been satisfied;
(6) We must deliver to the Trustee an officers' certificate stating that
- the deposit of funds was not made with the intent of preferring
the noteholders over the other creditors or with the intent of
defeating, hindering, delaying or defrauding creditors;
- all of the requirements for Legal Defeasance or the Covenant
Defeasance, whichever is applicable, have been satisfied.
POSSESSION AND USE OF COLLATERAL
Unless the notes have been accelerated, we and our subsidiaries can keep and use
the collateral as long as the use does not violate the restrictions and
covenants in the Indenture. In addition, we and they can transfer collateral
from one Restricted Subsidiary to another without the Trustee's consent.
Collateral that we or our subsidiaries use or that is transferred from one
subsidiary to another remains subject to the liens securing the notes.
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DISPOSITION AND RELEASE OF COLLATERAL
We and our subsidiaries can sell or transfer collateral free and clear of the
liens securing the notes if we and they comply with the requirements described
below. The applicable requirements depend upon the kind of collateral and its
value. In general, we must receive fair value in exchange for collateral and,
except in the case of collateral that we sell in the ordinary course of our
business, we must deliver to the Trustee evidence that the price was fair and
that the release of the collateral will not impair the liens securing the notes.
If we comply with the applicable requirements, the Trustee must release the lien
on the particular item of collateral.
DISPOSITION OF COLLATERAL WITHOUT RELEASE
As long as the notes have not been accelerated, we and our subsidiaries can take
the following actions or sell or transfer the following kinds of collateral free
and clear of the liens securing the notes without obtaining the Trustee's
consent or a formal release of liens:
(1) dispose of worn-out or obsolete machinery, equipment, furniture,
apparatus, tools or implements, materials, supplies or other similar
property or nonproductive real property, as long as the value does not
exceed the greater of $25,000 or 1% of the outstanding notes in any
given year;
(2) sell or dispose of inventory and collect or write off accounts
receivable in the ordinary course of business, as long as we certify
to the Trustee every six months that our inventory and receivables
transactions during the preceding six-month period were in the
ordinary course of business and that we used the proceeds from those
transactions for purposes that are permitted under the Indenture;
(3) grant rights-of-way, restrictions on use, subleases, easements or
other encumbrances on real estate that do not impair the usefulness of
the property or prejudice the interests of the noteholders;
(4) give up, amend or exchange contractual rights or rights in real
property, as long as any net proceeds or substitute property received
in the transaction in excess of the greater of $25,000 or 1% of the
outstanding notes becomes subject to the liens of the notes;
(5) give up or modify any franchise, license or permit, the loss of which
will not affect our continuing business operations, as long as any net
proceeds received in the transaction in excess of the greater of
$25,000 or 1% of the outstanding notes becomes subject to the liens of
the notes;
(6) alter, repair, replace, change the location or position of and add to
our plants, structures, machinery, systems, equipment, fixtures and
related property, as long as the property in question continues to be
subject to the lien of the notes; or
(7) demolish, dismantle, tear down, scrap or abandon any worthless
collateral, including mineral rights, leases and other real property
interests.
RELEASES OF COLLATERAL. We may obtain the release of collateral from the liens
of the notes either by substituting cash or other property worth at least as
much as the collateral to be released or by complying with procedures to
demonstrate that we are receiving the fair value of the collateral at issue and
the noteholders will not be harmed by the release.
Release by Substitution of Property. In order to substitute property for
collateral to be released from the liens of the notes, we must provide evidence
to the Trustee of the fair value of the property to be released and the fair
value of the substitute property. If the fair value of the collateral being
released or substituted is at least equal to the greater of $25,000 or 1% of the
outstanding notes, or if the fair value of all collateral released through
substitution of property is at least 10% of the outstanding notes, the fair
values must be certified by an engineer, appraiser or other expert who is not
employed by or affiliated with us or our subsidiaries. Otherwise, the fair
values can be established by our qualified personnel. In addition, we must
deliver to the Trustee officers' certificates, corporate resolutions, opinions
of counsel and any documents necessary to create the lien on the substitute
collateral.
Release by Substitution of Cash. We are not permitted to substitute cash
for collateral unless our senior secured credit facilities have been paid off
and terminated. At that point, we can
- obtain a release of all the collateral, other than cash, by depositing
with the Trustee an amount sufficient to pay all obligations under the
Indenture;
- obtain a release of particular items of collateral by depositing with
the Trustee an amount at least equal to the fair value of the
collateral to be released;
- obtain a release of particular items of collateral being sold for cash
equal to their fair value if all net proceeds of the sale are
deposited with the Trustee to replace the property being sold.
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Cash deposited as collateral is to be held by the Trustee in a segregated
account. As long as we and our subsidiaries are not in default under the
Indenture, we and they can select from among permissible investments of cash
deposited as collateral and are entitled to receive interest earned on
investments of that cash. We and our subsidiaries can substitute cash or cash
equivalents for other forms of cash collateral.
Release of Collateral Without Substitution. We can sell, exchange or
otherwise dispose of collateral, and the Trustee must release its liens upon the
collateral being sold, as long as we deliver the following documents to the
Trustee and, if applicable, comply with the mandatory redemption requirements
described above under "- Mandatory Redemption from Excess Asset Sale Proceeds."
- If the property to be released has a book value in excess of the
greater of $25,000 and 1% of the outstanding notes, a board resolution
requesting the release;
- An officers' certificate identifying the property to be released,
specifying its fair value, describing the terms of the proposed
transaction and stating that the transaction and release comply with
the terms of the Indenture;
- If the total fair value of all the property plus all other collateral
except inventory and accounts receivable released from the liens of
the notes in the current calendar year is at least 10% of the amount
of the outstanding notes, and the value of the property to be released
is at least equal to the greater of $25,000 and 1% of the outstanding
notes, we must provide a certificate from an engineer, appraiser or
other expert who is not employed by or affiliated with us or our
subsidiaries specifying the fair value of the property and stating
that the proposed release will not impair the liens of the notes on
the remaining collateral;
- If the book value of the collateral that is the subject of the release
is more than the greater of $25,000 and 1% of the outstanding notes, a
legal opinion that the release complies with the terms of the
Indenture and that the Trustee will have a valid lien on any
substitute collateral.
CASH HELD BY THE TRUSTEE
Cash or cash equivalents deposited with or received by the Trustee will be held
in a collateral account for the benefit of the holders and, where applicable,
the lenders that hold senior secured debt, as part of the collateral. As long as
we and our subsidiaries are not in default under the Indenture, we and they can
obtain the release of cash from the Trustee if release is permitted under the
provisions of the Indenture described above under "-- Mandatory Redemption from
Excess Asset Sale Proceeds" and "-- Disposition and Release of Collateral." We
can also obtain the release of insurance or condemnation proceeds in order to
replace the property that was destroyed or taken.
If we or any of our subsidiaries fails to perform any of the covenants in the
Indenture, the Trustee may use cash it holds as collateral to correct the
omission and, if that cash is insufficient, the Trustee may advance funds and
charge interest at 14.25% on the advance.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the Indenture. As
described under "-- Book-Entry; Delivery and Form," as long as notes are in
book-entry form, registration of transfers and exchanges of notes will be made
through direct participants and indirect participants in The Depository Trust
Company. For notes in definitive form, the Registrar and the Trustee may require
a noteholder to furnish appropriate endorsements and transfer documents. In
addition, we may require a noteholder to pay any taxes and fees required by law
or permitted by the Indenture. We are not required to register the transfer of
or exchange any note selected for redemption. Also, we are not required to
issue, register the transfer of or exchange any note for a period of 15 days
before a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except for payment provisions, most provisions of the Indenture and related
documents can be amended or waived by holders of a majority in amount of the
outstanding notes. Provisions relating to payments and similar matters cannot be
amended or waived without the consent of all holders. The Trustee can
unilaterally amend the Indenture and related documents in order to perform its
duties under the Indenture.
AMENDMENTS AND WAIVERS BY THE MAJORITY OF HOLDERS. Except as described below,
the holders of a majority in amount of the outstanding notes can permit the
Indenture, the subsidiary guarantees, the notes, the intercreditor agreement or
any of the security
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documents to be amended or supplemented and can waive any existing default or
Event of Default under those documents other than a payment default.
AMENDMENTS AND WAIVERS THE REQUIRE THE CONSENT OF ALL AFFECTED HOLDERS.
Amendments and waivers cannot do any of the following things without the consent
of each noteholder affected by the amendment or waiver:
- reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
- reduce the principal of or change the fixed maturity of any note or
alter the provisions for redemption of the notes other than mandatory
redemptions out of excess asset sale proceeds or upon a Change of
Control;
- reduce the rate of, or change the time for payment of, interest on any
note;
- waive a payment default, except a rescission of acceleration of the
notes by the holders of at least a majority in principal amount of the
outstanding notes and a waiver of the payment default that resulted
from the acceleration;
- make any note payable in money other than U.S. dollars;
- make any change in the provisions of the Indenture relating to waivers
of the rights of noteholders to receive payments of principal of or
premium, if any, or interest on the notes;
- waive a redemption payment with respect to any note, other than
mandatory redemption out of excess asset sale proceeds or upon a
Change of Control;
- release any subsidiary from any of its obligations under its guarantee
of the notes, or amend the provisions of the Indenture relating to the
release of subsidiaries that have guaranteed the notes;
- permit the release or termination of all or substantially all of the
liens for the benefit of the noteholders, other than as expressly
provided in the Indenture; or
- make any change in these amendment and waiver provisions, except to
increase the percentage of outstanding notes required for these
actions or to provide that other provisions of the Indenture cannot be
modified or waived without the consent of the holder of each
outstanding note.
AMENDMENTS BY THE TRUSTEE WITHOUT CONSENT
The Trustee can amend the Indenture, the subsidiary guarantees or the notes
without anyone's consent in order to do any of the following:
- cure any ambiguity, defect or inconsistency;
- provide for uncertificated notes in addition to, or in place of,
certificated notes;
- provide for the assumption of our or a guarantor subsidiary's
obligations to noteholders in the case of a merger or consolidation;
- make any change that would provide any additional rights or benefits
to the noteholders or that does not adversely affect the legal rights
under the Indenture of any noteholder;
- comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act of 1939;
- further secure the notes or to add guarantees with respect to the
notes;
- establish or maintain the liens securing the notes, correct or amplify
the description of the collateral, or subject additional property to
the liens; or
- add to our covenants for the benefit of the parties to the
intercreditor agreement.
In addition, the Trustee can amend or supplement any of the security documents
without anyone's consent in order to do any of the following:
- cure any ambiguity, defect or inconsistency;
- provide for the assumption of our or a guarantor subsidiary's
obligations in case of a merger or consolidation;
- make any change that would provide any additional rights or benefits
to noteholders or that does not adversely affect the legal rights and
liens of the notes;
- add holders of permitted senior secured Indebtedness as parties to the
intercreditor agreement;
- further secure or add guarantees of the notes;
- establish or maintain the liens securing the notes, correct or amplify
the description of the collateral, or subject additional property to
the liens; or
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- establish or provide for an amended, restated, modified, renewed or
replaced credit facility permitted to be incurred by the Indenture;
give holders of Permitted Refinancing Indebtedness liens with the same
or lower priority as the liens securing the indebtedness so
- refinanced; and
- add to our covenants for the benefit of the parties to the
intercreditor agreement.
THE TRUSTEE
The duties, rights, powers and limitations of the Trustee are governed by the
Indenture.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only the duties specifically set forth in the
Indenture. The holders of a majority of the notes have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to specified exceptions. The Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any noteholder unless the holder has agreed to indemnify the
Trustee against any loss, liability or expense. During the continuance of an
Event of Default, the Trustee must exercise its rights under the Indenture with
the same degree of care and skill as a prudent person would exercise under the
circumstances in the conduct of the person's own affairs.
The Indenture contains limitations on the rights of the Trustee, should it
become a creditor of ours, to obtain payment of claims in specified cases or to
realize on specified property it receives in connection with any claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with us or any of our subsidiaries or affiliates. If the Trustee acquires any
conflicting interest, as defined in the Indenture or in the Trust Indenture Act,
however, the Trustee must eliminate the conflict within 90 days or resign.
BOOK-ENTRY; DELIVERY AND FORM
New notes exchanged for old notes will be held in book-entry form by The
Depository Trust Company. DTC and its participants will maintain the records of
beneficial ownership of the notes and of transfers of the notes.
New notes exchanged for old notes will be represented by one or more permanent
global notes in definitive, fully registered form, deposited with a custodian
for, and registered in the name of a nominee of, The Depository Trust Company.
Beneficial interests in permanent global notes will be shown on, and transfers
will be effected through, records maintained by DTC and its participants.
The certificates representing the new notes will be issued in fully registered
form without interest coupons. New notes received in the exchange offer in
exchange for old notes originally issued in reliance on Rule 144A and Regulation
D will be represented by one or more permanent global notes in definitive, fully
registered form without interest coupons and will be deposited with the Trustee
as custodian for, and registered in the name of a nominee of, DTC.
New notes exchanged in offshore transactions in reliance on Regulation S under
the Securities Act will initially be represented by one or more permanent global
notes in definitive, fully registered form without interest coupons and will be
deposited with the Trustee as custodian for, and registered in the name of a
nominee of, DTC for the accounts of Euroclear and Cedel Bank.
Ownership of beneficial interests in a global note will be limited to persons
who have accounts with DTC or persons who hold interests through DTC
participants. Ownership of beneficial interests in a global note will be shown
on, and the transfer of that ownership will be effected only through, records
DTC or its nominee maintains with respect to interests of participants and the
records of participants with respect to interests of persons other than
participants. Qualified institutional buyers may hold their interests in a
global note directly through DTC if they are participants in that system or
indirectly through organizations that are participants in that system.
Investors may hold their interests in a Regulation S global note directly
through Cedel Bank or Euroclear, if they are participants in those systems, or
indirectly through organizations that are participants in those systems. Cedel
Bank and Euroclear will hold interests in the Regulation S global notes on
behalf of their participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a global
note, DTC or its nominee, as the case may be, will be considered the sole owner
or holder of the new notes represented by the global note for all purposes under
the Indenture and the new
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notes. No beneficial owner of an interest in a global note will be able to
transfer that interest except in accordance with DTC's applicable procedures, in
addition to those provided for under the Indenture and, if applicable, those of
Euroclear and Cedel Bank.
Payments of the principal of, and interest on, a global note will be made to DTC
or its nominee, as the case may be, as the registered owner of the global note.
Neither we, 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 a global note or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
We expect that DTC or its nominee, upon receipt of any payment of principal or
interest in respect of a global note, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the global note as shown on the records of DTC or its
nominee. We also expect that payments participants make to owners of beneficial
interests in the global note held through those 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 those customers. These payments will be the responsibility of those
participants.
Transfers between participants in DTC will be effected in the ordinary way in
accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
We expect that DTC will take any action permitted to be taken by a holder of new
notes, including the presentation of notes for exchange as described below, only
at the direction of one or more participants to whose account the DTC interests
in a global note is credited and only in respect of that portion of the
aggregate principal amount of new notes as to which the participant or
participants has or have given that direction. However, if there is an Event of
Default under the notes, DTC will exchange the applicable global note for
certificated notes, which it will distribute to its participants and which may
bear legends restricting their transfer.
DEPOSITORY TRUST COMPANY
DTC will facilitate the exchange of new notes for old notes in the exchange
offer using its standard procedures. Neither we nor the Trustee is responsible
for DTC's performance of its obligations.
We understand that DTC is a limited purpose trust company organized under the
laws of the State of New York, a "banking organization" within the meaning of
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 under the provisions 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, eliminating the
need for physical movement of certificates and some 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.
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a global note among
participants of DTC, Euroclear and Cedel Bank, they are under no obligation to
perform or continue to perform those procedures, and those procedures may be
discontinued at any time. Neither we nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel Bank or their
participants or indirect participants of their obligations under the rules and
procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for the
global notes and we do not appoint a successor depositary within 90 days, we
will issue certificated notes, which may bear legends restricting their
transfer, in exchange for the global notes. Holders of an interest in a global
note may receive certificated notes, which may bear legends restricting their
transfer, in accordance with the DTC's rules and procedures in addition to those
provided for under the Indenture.
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DESCRIPTION OF THE OLD NOTES
The terms of the old notes are identical in all material respects to those of
the new notes, except that the old notes
- have not been registered under the Securities Act and, accordingly,
contain transfer restrictions, and
- are entitled to registration rights under the registration rights
agreement, which rights will terminate upon consummation of the
exchange offer.
REGISTRATION RIGHTS
We agreed with the holders of the notes, that we will, at our cost, file and
cause to become effective a registration statement with respect to the exchange
offer. The exchange offer will effectuate an exchange of the old notes for an
issue of new notes with terms identical to the old notes, except that the new
notes will not bear legends restricting their transfer. Upon the registration
statement's being declared effective, we will offer the new notes in return for
surrender of the old notes. The exchange offer will remain open for not fewer
than 20 business days after the registration statement is declared effective.
For each old note surrendered under the exchange offer, the holder will receive
a new note of equal principal amount.
In the event that applicable interpretations of the SEC staff do not permit the
exchange offer, or under some other circumstances, we will, at our cost, file
and use our best efforts to cause to become effective a shelf registration
statement with respect to resales of the notes and to keep the shelf
registration statement effective until the earliest to occur of October 26,
2001, the expiration of the time period referred to in any amendment to Rule
144(k) under the Securities Act and the period that will terminate when all
notes covered by the shelf registration statement have been sold in connection
with the shelf registration statement. We will, in the event of a shelf
registration, provide to each holder copies of the prospectus, notify each
holder when the shelf registration statement for the notes has become effective
and take other actions as are required to permit resales of the notes. A holder
that sells its notes in connection with the shelf registration statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
civil liability provisions under the Securities Act in connection with those
sales and will be bound by the provisions of the registration rights agreement
which are applicable to the holder, including specified indemnification
obligations.
We will be required to pay penalties to the holders of the old notes in the
following cases:
- If we fail to file the registration statement under which the exchange
offer is made within 20 days from October 26, 1999;
- if the registration statement is not declared effective within 45 days
from October 26, 1999 if the SEC does not review the registration
statement;
- if the registration statement is not declared effective within 90 days
from October 26, 1999 if the SEC does review the registration
statement; or
- if the exchange offer is not consummated on or before 30 days after
the registration statement has become effective.
The penalties start to accrue when we miss a deadline for meeting one of the
registration requirements above and continue to accrue until we are no longer in
violation of any of the registration requirements. The amount of penalties we
will have to pay to each holder of old notes if we do not meet any of the
registration requirements above within the time periods specified will be
- $.03 per week per $1,000 principal amount of old notes for the first
90 days after we fail to meet a specified time limit;
- $.12 per week per $1,000 principal amount of old notes for the second
90-day period after we fail to meet a specified time limit;
- $.15 per week per $1,000 principal amount of old notes for the third
90-day period after we fail to meet a specified time limit; and
- after the third 90-day period, an additional $.05 per week per $1,000
principal amount of old notes for each subsequent 90-day period until
the registration requirement or requirements in question are met.
Since we did not meet the 20-day time limit specified above for filing the
registration statement, we incurred penalties totaling approximately $9,540
between the 21st day and the date the registration statement was filed. If the
registration statement is not declared effective within the time periods
specified above, then the penalties will begin to accrue again in the amounts
set forth above, and they will continue to accrue until the registration
statement is declared effective. After the registration statement is declared
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effective, if the exchange offer is not consummated within the time period
specified above, then these penalties will again begin to accrue and will
continue to accrue until the exchange offer is consummated.
TRANSFER RESTRICTIONS
The old notes have not been registered under the Securities Act and may not be
offered or sold within the United States or to, or for the account or benefit
of, U.S. persons except in accordance with an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act.
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DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
On November 21, 1998, Anker and Foothill Capital Corporation, as agent, entered
into a loan and security agreement whereby the lenders under the agreement have
provided to Anker up to a $55.0 million credit facility. The credit facility
consists of a commitment for a $40.0 million working capital revolver and a term
loan with an original principal amount of $15.0 million. Commitments under the
credit facility will expire in 2002. The credit facility is secured by
collateral that consists of substantially all of our present and future assets.
Borrowings under the revolver are limited to 85% of eligible accounts receivable
and 65% of eligible inventory. Borrowings bear interest, at our option, at
either 1% above the prime interest rate or at 3 3/4% above the adjusted
Eurodollar rate. For the year ended December 31, 1998, the average interest rate
under the revolver was approximately 8.75%. As of November 11, 1999, there was
no outstanding indebtedness under the revolver.
The term loan bears interest at 2 1/2% above the prime interest rate and is
payable in monthly installments through 2002. The average interest rate for the
term loan for the year ended December 31, 1998 was approximately 10.25%. As of
November 11, 1999, the outstanding indebtedness under the term loan was
approximately $13.0 million.
The following table sets forth the amounts outstanding and borrowing
availability under the credit facility as of the dates specified:
Revolving Revolving Additional
Credit Credit Interim
Date Term Loan Borrowings Availability Availability
---- --------- ---------- ------------ ------------
(in millions)
12/31/98 $ 15.0 $ 1.9 $ 15.5 __
03/31/99 14.4 1.4 16.5 __
06/30/99 13.9 12.9 6.9 __
09/30/99 13.3 10.9 6.7 2.0
10/31/99 13.2 3.0 14.9 2.0
11/11/99 13.0 __ 17.0 __
The term loan changes are based on the normal amortization of the loan, except
that
- in July 1999 the term loan was paid down through the application of
approximately $1.25 million of asset sale proceeds; and
- in September 1999, under the terms of the August 27, 1999 amendment to
the loan agreement with Foothill described below, Foothill reversed
this $1.25 million payment, which caused the term loan to increase by
the same amount, and Foothill reapplied the proceeds to reduce
revolving credit borrowings in order to provide us with additional
liquidity.
The increase in the revolving credit borrowings since March 31, 1999 is
primarily related to
- our borrowing to make the interest payment on April 29, 1999 on our 9
3/4% Senior Notes due 2007,
- performing reclamation in Webster County, West Virginia and
- capital expenditures.
Lower coal production and coal shipments have also reduced revolving credit
availability. Future revolving credit availability will be impacted by changes
in coal production and the resulting changes in coal inventory and accounts
receivable.
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The loan agreement with Foothill contains covenants that, among other matters,
restrict or limit our ability to
- pay interest and dividends,
- incur indebtedness,
- acquire or sell assets
- and make capital expenditures.
We must also maintain cash flow ratios specified in the loan agreement. In
particular, the loan agreement provides that, in order to advance funds to us
and the other guarantors under the loan agreement, the borrowers under the loan
agreement must have borrowing availability of at least $5.0 million after giving
effect to the advances and for the 30 days immediately preceding the advances.
With respect to the term loan, in addition to regularly scheduled amortizing
principal and interest payments, the loan agreement requires that we apply the
first $5.0 million of proceeds from designated asset sales to the repayment of
the term loan. As of November 11, 1999, no amounts have been applied to the $5.0
million requirement. Proceeds used to repay the term loan cannot be reborrowed.
On August 27, 1999, we entered into an amendment to the loan agreement with
Foothill. Under the amendment, Foothill and the other lenders agreed to provide
us with up to $3.25 million of additional liquidity, $2.0 million of which, if
drawn, we would have been required to repay on or before November 2, 1999. We
also entered into a consent and amendment to the loan agreement with Foothill as
of October 1, 1999. Under that consent and amendment, Foothill and the other
lenders consented to our issuance of the old notes in the private exchange and
the private placement, provisions of the loan agreement were amended to take
into account the issuance of the notes, and Foothill and the other lenders
waived various defaults under the loan agreement existing as of that date.
The former amended and restated credit facility, which was repaid with funds
from our existing credit facility with Foothill, provided for a line of credit
up to $71.0 million. The average interest rate on borrowings under the amended
and restated credit facility was 8.1% in 1998 and 8.89% in 1997. We incurred a
loss on the refinancing of approximately $965,000, net of income taxes of
$375,000. The loss was classified as an extraordinary item in our consolidated
financial statements in 1998.
9 3/4% SENIOR NOTES DUE 2007
On September 25, 1997, we issued $125.0 million of unsecured 9 3/4% Series A
Senior Notes due October 1, 2007. We used the proceeds from the issuance of
these notes to repay all outstanding indebtedness, together with accrued
interest and fees associated with the repayment, under our amended and restated
credit facility. We incurred a loss on the refinancing of approximately $3.9
million, net of income taxes of $1.5 million. The loss was classified as an
extraordinary item in our consolidated financial statements in 1997.
On March 11, 1998, we consummated an exchange offer registered under the
Securities Act in which we exchanged $125.0 million of our unsecured 9 3/4%
Series B Senior Notes due 2007 for the $125 million of unsecured 9 3/4% Series A
Senior Notes due 2007 we previously issued. Interest on the 9 3/4% Series B
Senior Notes is payable semiannually on April 1 and October 1 of each year,
commencing April 1, 1998. We may redeem the 9 3/4% Series B Senior Notes, in
whole or in part, at any time on or after October 1, 2002 at the redemption
price as specified in the indenture governing the notes, plus accrued and unpaid
interest and other charges. At any time on or prior to October 1, 2000, we may
redeem, with proceeds of an initial public offering, up to 35% of the aggregate
principal amount of the 9 3/4% Series B Senior Notes at a redemption price equal
to 109.75% of the principal amount plus accrued and unpaid interest and other
charges. The 9 3/4% Series B Senior Notes mature on October 1, 2007.
The 9 3/4% Series B Senior Notes contain cross-default provisions related to our
outstanding credit facility.
Our obligations under the 9 3/4% Series B Senior Notes are jointly and severally
guaranteed, fully and unconditionally on a senior unsecured basis, by each of
our wholly-owned subsidiaries, other than those subsidiaries that, both
individually and in the aggregate, are inconsequential to our business and
financial condition. See the consolidated financial statements included
elsewhere in this prospectus for information regarding the guaranteeing
subsidiaries.
On October 28, 1999, we consummated a private exchange, with a limited number of
qualified holders, of our 14.25% Second Priority Senior Secured Notes due 2007
(PIK through April 1, 2000) for outstanding unsecured 9 3/4% Series B Senior
Notes. Holders of $108.5 million aggregate principal amount of unsecured 9 3/4%
Series B Senior Notes exchanged their notes for $86.8 million aggregate
principal amount of 14.25% Second Priority Senior Secured Notes due 2007 (PIK
through April 1, 2000) and warrants to purchase their pro rata share of 20% of
our common stock at an initial exercise price of $0.01 per share. In connection
with the private exchange, the exchanging noteholders consented to amendments to
the indenture governing the 9 3/4% Series B Senior Notes
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that, among other things, modify or eliminate various covenants contained in the
indenture. As of the date of this prospectus, $16.5 million aggregate principal
amount of unsecured 9 3/4% Series B Senior Notes remain outstanding.
NOTE PAYABLE TO SELLER
In conjunction with an acquisition we made, we assumed an outstanding note
payable with an original principal amount of $2.8 million, which bears interest
at 7.47% and is payable in monthly installments through April 1, 2000. The
principal amount outstanding as of September 30, 1999 was approximately $0.4
million. The note is secured by a first lien on the coal reserve acquired in the
transaction.
INTERCREDITOR AGREEMENT
At the closing of the private placement and the private exchange of the old
notes, Foothill Capital Corporation, as agent for the lenders under the loan
agreement, and The Bank of New York, as collateral agent under the indenture
governing the notes, entered into an intercreditor agreement dated as of October
1, 1999. The intercreditor agreement defines the rights of the lenders under the
loan agreement in relation to the rights of the noteholders with respect to the
collateral that secures our and our guarantor subsidiaries' obligations under
both the loan agreement and the indenture. The following description summarizes
the material terms of the intercreditor agreement. It does not restate the
intercreditor agreement in its entirety. We urge you to read the intercreditor
agreement because it, and not this description, defines the rights of
noteholders, in relation to the senior lenders, to the collateral. You may
obtain a copy of the intercreditor agreement from us.
Under the intercreditor agreement, Foothill acknowledges the lien that the
collateral agent holds on the collateral to secure the notes and the obligations
under the indenture and related security documents. The collateral agent and
each noteholder, by accepting a note,
- acknowledge the lien that Foothill holds on the collateral to secure
the obligations under the loan agreement and related security
documents,
- agree to all of the terms of the intercreditor agreement, as it may be
amended from time to time, and
- acknowledge that the collateral agent has not been granted a lien on
some of our property and that of the subsidiary guarantors which is
subject to Foothill's lien.
Under the intercreditor agreement, Foothill and the collateral agent agree that
Foothill's lien on the collateral has priority over the collateral agent's lien
on the collateral to secure the senior debt under the loan agreement up to an
aggregate principal amount of $55.0 million, plus interest, fees, expenses and
related costs. Foothill's priority is not affected by
- the order, time or manner of attachment, perfection or recording of
Foothill or the collateral agent's lien;
- any amendments to the terms of the loan agreement or the indenture or
any other documents governing our obligations or those of the
guarantor subsidiaries to either the lenders or the noteholders; or
- any action or inaction of either Foothill or the collateral agent with
respect to the collateral.
The intercreditor agreement also provides that each of Foothill and the
collateral agent is solely responsible for perfecting and maintaining the
perfection of its lien on the collateral. In addition, neither Foothill nor the
collateral agent may contest the validity, perfection, priority or
enforceability of the liens of the other or the obligations that the liens
secure.
The intercreditor agreement provides that, until the debt under the loan
agreement has been paid in full and the commitments under the loan agreement
have been terminated,
- Foothill has the exclusive right to control, manage and liquidate the
collateral;
- the collateral agent and the holders of the notes may not seek to
foreclose or realize upon the collateral or assert any interest in the
collateral or exercise any rights to setoff, recoupment or
counterclaim or deduction against the collateral or the proceeds of
the collateral, other than to preserve the collateral agent's lien on
the collateral; and
- prior to the occurrence of a payment default under the notes
indenture, the collateral agent and the noteholders may not commence
any action or proceeding under the U.S. Bankruptcy Code or state
insolvency laws against us, the guarantor subsidiaries or any of the
collateral.
The intercreditor agreement provides that proceeds of collateral are to be
applied to pay the senior debt under the loan agreement in full. Moreover, until
the loan agreement and the related documents evidencing the senior debt have
been terminated, proceeds of
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collateral are to be used to provide for payment of our and the guarantor
subsidiaries' contingent liabilities under those agreements before payment of
any amounts owed under the notes indenture and related documents. If the
collateral agent receives any proceeds of collateral while the senior debt under
the loan agreement remains outstanding, the collateral agent must turn those
proceeds over to Foothill. Despite this requirement, to the extent a court
equitably subordinates any of the senior debt under the loan agreement to our
obligations under the notes indenture, the collateral agent may retain and apply
proceeds of collateral in payment of our obligations under the notes before the
subordinated portion of the senior debt is paid.
If we and the guarantors become debtors in a bankruptcy case and Foothill or
other lenders under the loan agreement are willing to permit the use of cash
collateral or provide bankruptcy financing on terms that contemplate the
continuation of the collateral agent's lien on the collateral during the
bankruptcy case, then, until the senior debt has been paid in full and the
commitments under the loan agreement have been terminated, the collateral agent
waives any right to object to that financing on the ground that its interest in
the collateral is not adequately protected as long as the total outstanding
principal of that financing, including amounts already outstanding under the
loan agreement, does not exceed $55.0 million.
If either Foothill or the collateral agent gives notice to us or the guarantors
of a default, event of default, acceleration of indebtedness or its intention to
exercise its enforcement rights, it must give concurrent notice to the other.
The failure to give notice to the other, however, will not affect the validity
of the notice as against us and the guarantors or the relative priorities of the
liens of Foothill and the collateral agent in the collateral.
OPTION AGREEMENT
Simultaneously with the execution of the intercreditor agreement, Foothill
entered into an option Agreement with Rothschild Recovery Fund L.P., a
participant in the private exchange and private placement. The following
description summarizes the material terms of the option agreement. It does not
restate the option agreement in its entirety. You may obtain a copy of the
option agreement from us.
The option agreement grants Rothschild or its designee an option to purchase
all, but not less than all, of the senior debt under our loan agreement with
Foothill on the following terms:
- The option to purchase the senior debt must be exercised in writing
within 10 days after the collateral agent under the notes indenture
receives a written notice from Foothill of Foothill's intention to
exercise its remedies under the loan agreement and related documents.
- Unless the notice of exercise of the option is previously revoked,
closing of the purchase of the senior debt must occur within 30 days
after Rothschild gives notice of its exercise of the option.
- During the 30-day period, Foothill must forbear from exercising its
remedies with respect to the shared collateral, other than accounts
and inventory, under the loan agreement and related documents.
At closing, Rothschild must:
- pay to Foothill the outstanding balance of the senior debt, including
early termination fees, attorneys fees of Foothill and other amounts
payable under the loan documents,
- furnish substitute letters of credit or cash collateral to replace or
secure all letters of credit outstanding under the loan documents and
- agree to reimburse Foothill and the lenders for any other fees,
expenses, or losses for which we and the guarantors would be liable
under the loan documents which Foothill or the lenders incur after
closing of the purchase.
Upon closing of the purchase, Rothschild will become the holder of the senior
debt and Foothill's liens upon, and other interests in, the collateral.
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DESCRIPTION OF THE CAPITAL STOCK
The following description of our capital stock contains a summary of the
material provisions of our certificate of incorporation and the certificates of
designations, preferences and rights of each class of our preferred stock. It
does not restate these documents in their entirety. You should read these
documents, copies of which you may obtain from us, in their entirety to
understand all of the rights that holders of our capital stock are entitled to.
In addition, the following summary is subject to applicable provisions of
Delaware law.
Our authorized capital stock consists of
- 100,000 shares of common stock with a par value of $0.01 per share
- 10,000 shares of Class A preferred stock with a par value of $2,500
per share
- 10,000 shares of Class B preferred stock with a par value of $1,000
per share
- 1,000 shares of Class C preferred Stock with a par value of $13,000
per share and
- 1,000 shares of Class D Preferred Stock with a par value of $7,000 per
share.
As of October 31, 1999,
- 7,108 shares of common stock were issued and outstanding,
- all of the authorized shares of Class A, B and D preferred stock were
issued and outstanding and
- we owned all of the authorized shares of Class C preferred stock.
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, except as described under
"Certain Relationships and Related Transactions-Stockholders' Agreement."
Covenants in the note indentures and our loan agreement with Foothill prohibit
the declaration and payment of dividends. In the event of our liquidation,
dissolution or winding up, the holders of the common stock are entitled to share
equally and ratably in our assets, if any, that remain after the payment of all
of our debts and liabilities and the liquidation preference of any outstanding
preferred stock.
PREFERRED STOCK
CLASS A PREFERRED STOCK
Holders of Class A preferred stock are generally not entitled to voting rights.
However, we may not take any of the following actions without the affirmative
vote of at least 50% of the Class A preferred stock outstanding:
- amend, alter or repeal any provision of our certificate of
incorporation or bylaws, or pass any stockholders' resolution, that
would adversely affect the preferences, special rights, or powers of
the Class A preferred stock;
- increase or decrease, other than by redemption or conversion, the
total number of authorized shares of Class A preferred stock; or
- issue any capital stock that ranks senior to, or on parity with, the
Class A preferred stock with respect to the payment of dividends or
the right to receive distributions upon liquidation.
Holders of Class A preferred stock are entitled to annual cash dividends. These
dividends are payable on December 31 and accrue whether or not they have been
declared. The dividend per share is calculated by multiplying the total of the
sum of $2,500 plus all accrued and unpaid dividends by five percent. As of
September 30, 1999, there were approximately $4.2 million of accrued and unpaid
dividends on the Class A preferred stock. Dividends cannot be paid on any of our
equity securities, other than our Class C preferred stock and Class D preferred
stock, if accrued dividends on the Class A preferred stock have not been
declared and paid.
Each share of Class A preferred stock is entitled to a liquidation preference
over the Class B preferred stock and common stock, and junior to the Class C
preferred stock and Class D preferred stock, equal to $2,500 plus accrued and
unpaid dividends. Furthermore, we must redeem all shares of Class A preferred
stock in the event of bankruptcy or if all common stock is transferred to a
single
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person. The amount paid per share will be $2,500 plus any accrued and unpaid
dividends. However, Class A preferred stock may not be redeemed until we have
paid all accrued and unpaid dividends on Class C preferred stock and Class D
preferred stock.
On May 31, 2006, we must redeem 10% of all outstanding Class A preferred stock.
After that, on every May 31, we must redeem the same number of shares of Class A
preferred stock until all outstanding shares have been redeemed. The price per
share for redemption will be $2,500 plus any accrued and unpaid dividends. The
indenture governing the notes prohibits us from making any dividend or
redemption payments on the Class A preferred stock unless we meet a coverage
test described under "Description of the New Notes--Covenants--Limitation on
Restricted Payments." We are also prohibited from making any dividend or
redemption payments on the Class A preferred stock upon the occurrence, and
during the continuance, of any default or event of default under the indenture.
In the event we conduct a public offering of our common stock, holders of Class
A preferred stock will have the right to convert their shares into shares of
common stock. The number of shares of common stock offered for each share of
Class A preferred stock will be determined by the following formula:
1.5(2,500)/offering price of the common stock. However, the number of shares of
common stock issued upon conversion of the Class A preferred stock may not
exceed 20% of the total number of shares of common stock that we offer for sale
in the public offering.
CLASS B PREFERRED STOCK
The Class B preferred stock is generally non-voting and is entitled to no
dividends. However, we may not take any of the following actions without the
affirmative vote of at least 50% of the Class B preferred stock outstanding:
- amend, alter or repeal any provision of our certificate of
incorporation or bylaws, or pass any stockholders' resolution, that
would adversely affect the preferences, special rights or powers of
the Class B preferred stock;
- increase or decrease, other than by redemption, the total number of
authorized shares of Class B preferred stock;
- issue any capital stock, other than Class A preferred stock, Class C
preferred stock or Class D preferred stock, that ranks senior to, or
on a parity with, the Class B preferred stock with respect to the
right to receive distributions upon liquidation; or
- enter into, authorize or permit any sale of Anker
A sale of Anker is deemed to have occurred at any time that
- both any third party that is not an affiliate of the First Reserve
Corporation or the First Reserve Funds acquires beneficial ownership
of a majority of our outstanding common stock and PPK Group Limited
Liability Company and Anker Holdings B.V. and their permitted
transferees beneficially own in the aggregate less than 20% of our
common stock;
- we are merged with or into any other entity and, following the
consummation of the merger, any third party that is not an affiliate
of First Reserve or the First Reserve Funds owns a majority of the
outstanding common stock, partnership interests or other comparable
securities of the resulting or surviving entity and PPK Group and
Anker Holdings B.V. and their permitted transferees beneficially own
in the aggregate less than 20% of the outstanding common stock,
partnership interests or other comparable securities of the resulting
or surviving entity; or
- there is a sale, transfer or other disposition to one or more third
parties not affiliated with First Reserve or the First Reserve Funds
in a transaction or series of transactions of more than 75% of the
assets, valued on a consolidated basis prior to the transaction or
series of transactions, of us and our direct or indirect subsidiaries.
Each share of Class B preferred stock is entitled to a liquidation preference of
$1,000 over shares of common stock and any preferred stock junior to the Class B
preferred stock. Furthermore, the Class B preferred stock is mandatorily
redeemable for cash at a price per share of $1,375 in the event we enter into
bankruptcy or there is a sale of Anker. The Class B preferred stock is not
redeemable upon a sale, however, as long as the First Reserve Funds are entitled
to designate a majority of our board of directors, unless a majority of the
directors not designated by the First Reserve Funds approves the sale. Moreover,
the Class B preferred stock is not redeemable to the extent that
- we have not effected all of the required redemptions of our Class A
preferred stock and Class D preferred stock prior to or simultaneously
with the redemption of the Class B preferred stock,
- there are any accrued but unpaid dividends on the Class A preferred
stock, Class C preferred stock or Class D preferred stock, or
- we do not have funds legally available to redeem the Class B preferred
stock.
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The Class B preferred stock is also redeemable, in whole but not in part, at our
option for cash at a price of $1,375 per share; however, we may not elect to
redeem the Class B preferred stock for so long as the First Reserve Funds are
entitled to designate a majority of our board of directors, unless a majority of
the directors not designated by the First Reserve Funds approves the redemption.
In addition, in the event of a public offering of our common stock, the Class B
preferred stock is redeemable for common stock at our option or the option of
the holders of the Class B preferred stock; however, we may not elect to redeem
the Class B preferred stock for so long as the First Reserve Funds are entitled
to designate a majority of our board of directors, unless a majority of the
directors not designated by the First Reserve Funds approves the redemption.
Moreover, the holders of the Class B preferred stock may not elect to have us
redeem the Class B preferred stock for so long as the First Reserve Funds are
entitled to designate a majority of our board of directors, unless a majority of
the directors not designated by the First Reserve Funds approves the public
offering. The indenture governing the notes prohibits the making of any dividend
or redemption payments on the Class B preferred stock unless we meet a coverage
test described under "Description of the New Notes--Covenants--Limitation on
Restricted Payments". We are also prohibited from making any dividend or
redemption payments on the Class Be preferred stock upon the occurrence, and
during the continuance, of any default or event of default under the indenture.
CLASS D PREFERRED STOCK
In connection with our purchase of assets from Phillips Resources, Inc., we
issued 1,000 shares of Class D preferred stock to Glenn Springs Holdings, Inc.,
which owns Phillips. The Class D preferred stock is non-voting, except as
required by applicable law. The Class D preferred stock is entitled to receive:
- for a period of 15 years from and after January 1, 1996, quarterly
cumulative cash dividends in an amount of equal to 2 1/2% of the gross
realization from coal sales from properties in Upshur and Randolph
counties for the immediately preceding calendar quarter and
- after that, quarterly cumulative cash dividends equal to 1 1/2% of the
gross realization from coal sales from properties in Upshur and
Randolph counties for the immediately preceding calendar quarter.
Each share of Class D preferred stock is entitled to a liquidation preference
over all other classes of our capital stock equal to the redemption price
described below.
If aggregate dividends of $5.0 million or more on the Class D preferred stock
are not paid on or before December 31, 2005, then we must, if a holder of Class
D preferred stock requests, redeem that holder's shares over the five year
period beginning December 31, 2006 by redeeming 20% of that holder's shares on
that date and on December 31 of the succeeding four years, at a price per share
equal to $7,000 plus all accrued and unpaid dividends. If aggregate dividends of
$5.0 million or more on the Class D preferred stock are paid on or before
December 31, 2005, then we 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 that date and on December 31 of
each succeeding year, at the same redemption price described in the previous
sentence. Furthermore, the Class D preferred stock is redeemable at any time at
our option at a price per share equal to this same redemption price.
No dividends have been paid on the Class D preferred stock as of the date of
this prospectus. The indenture governing the notes prohibits the payment of
dividends on the Class D preferred stock after the occurrence, and during the
continuance, of any default or event of default under the indenture.
STOCK PURCHASE WARRANT
On August 12, 1996, we issued a stock purchase warrant to the First Reserve
Funds. The stock purchase warrant is exercisable for that number of shares of
our common stock equal to 8.333% of the total number of shares of common stock
issued to the holders of Class A preferred stock upon their conversion of Class
A preferred stock into shares of our common stock. The exercise price is $0.01
per share of common stock. The First Reserve funds may exercise the stock
purchase warrant concurrently with each conversion of shares of Class A
preferred stock into shares of common stock. The stock purchase warrant expires
on the date that all of our Class A preferred stock ceases to be outstanding.
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DESCRIPTION OF THE WARRANTS
The following is summary description of the material provisions of the warrants
and the material rights of holder of warrants and shares of common stock issued
upon exercise of the warrants. It does not restate the terms of the warrants and
the rights of the holders in their entirety. For more details regarding the
rights of holders of warrants and shares of common stock issued upon exercise of
warrants, please read the warrant, the warrant agreement, the common stock
registration rights agreement, the investor agreement and the stockholders'
agreement. You may obtain copies of these agreements from us.
GENERAL
In connection with the restructuring of our 9 3/4% notes and the private
placement of the notes being exchanged in this exchange offer, we issued
warrants to purchase 3,047 shares of our common stock, which is equivalent to
30% of our fully diluted common stock. The initial exercise price of the
warrants is $0.01 per share, payable in cash. The warrants are exercisable at
any time or from time to time before October 28, 2009. We will not issue
fractional shares upon exercise of the warrants, but we will pay a cash
adjustment for any fractional share that would otherwise be issuable. The cash
amount will be equal to the same fraction of the per share exercise price.
ANTI-DILUTION
The exercise price and the number of shares of common stock for which the
warrants are exercisable are subject to adjustment upon the occurrence of any of
the following events:
- our issuance of any shares of common stock for no consideration or for
a consideration per share less than the market price, as defined
below, including
(1) our issuance of any warrants, rights or options to subscribe for
or to purchase common stock or other securities exercisable,
convertible into or exchangeable for common stock at an exercise
price per share of common stock less than the market price, but
not including grants or exercises of employee stock options; and
(2) our issuance of any securities exercisable, convertible into or
exchangeable for common stock at an exercise, conversion or
exchange price per share of common stock less than the market
price;
- the subdivision or combination of the common stock; and
- the payment in shares of common stock of a dividend or distribution.
Market price, as of any date, means
(3) the average of the closing bid prices for the shares of common
stock as reported to The Nasdaq National Market for the ten
trading days immediately preceding the relevant date;
(4) if The Nasdaq National Market is not the principal trading market
for the common stock, the average of the last reported bid prices
on the principal trading market for the common stock during the
same period, or, if there is no bid price for the period, the
average of the last reported sales price on each trading day for
the period; or
(5) if market value cannot be calculated as of the relevant date on
any of the bases above, the market price means the average fair
market value as reasonably determined by an investment banking
firm we select and reasonably acceptable to the holders of a
majority in interest of the warrants.
In the case of any transaction, including a merger, consolidation, sale of all
or substantially all of our assets, liquidation or recapitalization of the
common stock, in which the common stock is changed into or, under the operation
of law or the terms of the transaction, exchanged for other of our securities or
common stock or other securities of any other company or interests in a
non-corporate entity or other property, then each holder of warrants will be
entitled, upon exercise of warrants, to receive the aggregate amount of stock,
securities, cash and/or any other property that the holder would have received
in the transaction if it had exercised the warrants immediately prior to
consummation of the transaction. Similarly, if we declare or make any
distribution of our assets to holders of common stock, then each holder of
warrants is entitled, upon exercise of warrants, to receive the amount of assets
that would have been payable to the holder had the holder owned the shares of
common stock received upon exercise of the warrants on the record date for
determination of stockholders entitled to the distribution.
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If our Class A preferred stock is converted into common stock, each warrant will
be exercisable for additional shares of common stock in an amount equal to each
warrant's pro rata share, based on the number of warrants originally issued, of
30% of the aggregate number of shares of common stock into which the Class A
preferred stock is converted. The exercise price will be the implied conversion
price per share of common stock at which the Class A preferred stock is
converted. This exercise price will be payable in cash or by delivery by the
holder of notes.
If we redeem our Class B preferred stock at a redemption price payable in shares
of common stock, each warrant will be exercisable for additional shares of
common stock in an amount equal to each warrant's pro rata share, based on the
number of warrants originally issued, of 30% of the aggregate number of shares
for which the Class B preferred stock is redeemed. The exercise price will be
the redemption price per share of common stock at which the Class B preferred
stock is redeemed. This exercise price will be payable in cash or by delivery by
the holder of notes.
If the warrant issued to the funds that First Reserve Corporation manages
becomes exercisable upon a conversion of Class A preferred stock, each warrant
will be exercisable for additional shares of common stock in an amount equal to
each warrant's pro rata share, based on the number of warrants originally
issued, of 30% of the aggregate number of shares for which the First Reserve
funds' warrant is exercised. The exercise price will be $.01 per share of common
stock. This exercise price will be payable in cash or by delivery by the holder
of notes.
If we issue any equity securities of any type, class or series, we must offer
each holder of warrants or of shares of common stock issued upon exercise of
warrants, along with some other stockholders, the right to purchase a portion of
the securities on the same terms and conditions as we offer to the purchasers of
the newly-issued securities. Each holder of warrants or of shares of common
stock issued upon exercise of warrants would be entitled to purchase that
portion of the newly-issued securities equal to
- if the newly-issued securities are of a type, class or series
previously issued, the holder's percentage ownership of the total
outstanding number of the previously-issued securities or
- in all other events, the holder's percentage of ownership of our total
outstanding common stock.
For the purposes of this calculation, all warrants will be deemed to have been
exercised for shares of common stock, and each holder of warrants will be deemed
to hold the number of shares of common stock issuable upon exercise of the
holder's warrants and any other shares of common stock held by the holder.
The exercise price for the warrants will not, however, be adjusted
- upon the grant or exercise of any employee stock options, as long as a
majority of the non-employee members of our board of directors or a
majority of the members of a committee of non-employee directors
established for that purpose approves of the grant of exercise;
- upon the exercise of the options to purchase common stock under Mr.
Kilgore's employment agreement;
- upon the issuance of common stock or warrants in accordance with the
terms of the agreement under which the initial warrant holders
received their warrants; or
- upon exercise of the warrants.
RESTRICTIONS ON TRANSFER
We have not registered the warrants or the shares of common stock issuable upon
exercise of the warrants under the Securities Act. Each holder of warrants or
shares of common stock issuable upon exercise of the warrants agrees that it
will offer to sell the warrants or the shares of common stock only to, and will
solicit offers to buy the warrants or shares of common stock only from,
qualified institutional buyers, institutional accredited investors, or
purchasers under Regulation S. Furthermore, all initial holders of warrants have
entered into an investor agreement, and any holder of shares of common stock
issuable upon exercise of a warrant which transfers any of those shares of
common stock must require the transferee to agree in writing to be bound by all
the provisions of the investor agreement and the common stock registration
rights agreement described below.
In addition, each holder of warrants has agreed not to transfer warrants or
shares of common stock issuable upon exercise of warrants to any person or
entity that, to the knowledge of the holder, is engaged in any business in the
states of West Virginia, Maryland, Pennsylvania, Virginia or Kentucky involving
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- the purchase for resale, sale, operation or maintenance for resale of
coal, coal reserves, coal inventories, coal mines, coal mining
operations, coal processing operations or processing or disposing of
ash produced from the consumption of coal;
- the conduct or performance of coal mining, coal loading, coal
processing or contract coal mining or processing;
- the employment of independent contractors in connection with any of
the activities above;
- the conduct of coal trading; or
- the holding of any equity investment constituting a controlling equity
interest in any entity or business that, at the time the transfer is
proposed to be made, is engaged in any of the above activities.
INVESTOR AGREEMENT
The initial holders of the warrants entered into an investor agreement. Upon
exercise of the warrants and purchase of shares of common stock issued upon
exercise, the holder of the common stock must also enter into the investor
agreement. The investor agreement contains the following provisions:
RESTRICTIONS ON MERGER AND SALE OF ASSETS AND STOCK
Until the earlier to occur of an initial public offering of our common stock and
October 30, 2002, the investor agreement prohibits
- us from consolidating or merging with or into, or selling, assigning,
transferring, leasing, conveying or otherwise disposing of all or a
majority of our properties or assets in one or more related
transactions, to another corporation, person or entity, except (1) in
accordance with the terms of the indenture governing the notes and (2)
upon the affirmative written vote or consent of the holders of at
least 85% of our outstanding common stock as of the record date, as
defined below, and
- us or any of our shareholders, in one transaction or a series of
related transactions, from selling, transferring or otherwise
disposing of more than 50% of our outstanding common stock, except
upon the affirmative written vote or consent of at least 85% of the
holders of the outstanding common stock as of the record date. We or
the shareholders are required to give written notice to all holders of
warrants at least 30 days' prior to the record date.
For these purposes, the record date means the date fixed for a stockholder vote
in accordance with the terms of our certificate of incorporation and by-laws.
TAG ALONG RIGHTS
In accordance with the terms of the investor agreement, other than in connection
with permitted transfers and with an initial public offering of our common
stock, each holder of shares of common stock issuable upon exercise of warrants
has the right to participate in a sale of common stock by another holder of
common stock to any third party at the same price per share and on the same
terms and conditions as the stockholder initiating the sale to the third party.
Each stockholder is entitled to sell that number of shares of common stock so
that the ratio of the number of shares sold by the stockholder to the aggregate
number of shares sold to the third party is equal to the ratio of the number of
shares owned by the stockholder to the total number of shares of common stock
outstanding.
REGISTRATION RIGHTS
The initial holders of the warrants entered into a common stock registration
rights agreement with us. Upon exercise of the warrants and purchase of common
stock issued upon exercise, the holder of the common stock must also enter into
the common stock registration rights agreement. The agreement grants them demand
and incidental registration rights with respect to the shares of common stock
issuable upon exercise of the warrants and any other shares of common stock held
by the holders of those shares. These shares of common stock are referred to as
registrable securities.
DEMAND REGISTRATION
At any time following the earlier of October 28, 2002 or an initial public
offering of our common stock, the holders of at least 25% of the registrable
securities may demand that we register their shares of common stock under the
Securities Act. Holders of registrable securities collectively may only demand
registration of their shares twice, and we are not obligated file a registration
statement relating to a request, other than on Form S-3 or a similar short-form
registration statement, within a period of six months after the effective date
of any other registration statement that was not effected on Form S-3 or a
similar short-form registration statement. We are obligated to register all
shares of registrable securities requested to be included by the holders
initially demanding registration and
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any other holder of registrable securities that has properly notified us that
its securities should also be included. In the event of an underwritten
offering, however, we may register fewer than all shares requested to be
included if the managing underwriter advises us that the number of securities
requested to be included in the registration exceeds the maximum number that can
be offered without having an adverse effect on the offering of shares, including
the price at which the shares can be sold.
INCIDENTAL REGISTRATION
If we at any time register any of our securities under the Securities Act, other
than a registration on Form S-4 or S-8 or any successor or similar form and
other than a request for registration described in the preceding paragraph, we
are required include in the registration statement any registrable securities
owned by holders that have properly notified us that their securities should be
included. If the registration is an underwritten registration, holders of
registrable securities will sell their shares to the underwriters on the same
terms and conditions as apply to us. We are obligated to register all shares of
registrable securities requested to be included by the holders. In the event of
an underwritten offering, however, we may register fewer than all shares
requested to be included if the managing underwriter advises us that the number
of securities requested to be included in the registration exceeds the maximum
number that can be offered without having an adverse effect on the offering of
shares, including the price at which the shares can be sold.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the anticipated material U.S. federal income
tax consequences of the exchange of the old notes for new notes, as well as the
ownership and disposition of the notes. The following discussion constitutes the
opinion of Wilmer, Cutler & Pickering regarding these material tax consequences.
This discussion is based on laws, regulations, rulings and decisions now in
effect, all of which are subject to change, possibly with retroactive effect.
There can be no assurance that the Internal Revenue Service will not challenge
one or more of the tax consequences described below, and we have not obtained,
nor do we intend to obtain, a ruling from the Internal Revenue Service as to any
U.S. federal income tax consequences relating to the notes.
This discussion may not apply to all holders of new notes because:
- this discussion does not address the tax consequences to subsequent
purchasers of the new notes and is limited to investors who will hold
the new notes as capital assets, as defined in Section 1221 of the
Internal Revenue Code;
- this discussion does not discuss the tax consequences to holders that
may be subject to special tax rules, such as financial institutions,
insurance companies, tax exempt entities, dealers in securities or
foreign currencies or persons who hold the notes as a position in a
straddle or as part of a "conversion transaction" or that have hedged
the interest rate on the notes;
- this discussion does not address all aspects of U.S. federal income
taxation that may be relevant to holders of the notes in light of
their particular circumstances; and
- this discussion does not address any tax consequences arising under
the laws of any state, local or foreign taxing jurisdiction.
Because this discussion may not apply to all new note holders, prospective
holders should consult their own tax advisors as to the particular tax
consequences to them of acquiring, holding or disposing of the new notes.
DEFINITIONS
A "United States Holder" of a note means:
- a citizen or resident of the United States, including, in some cases,
former citizens and former long-time residents,
- a corporation, partnership or other entity created or organized under
the laws of the United States or any political subdivision,
- an estate if its income is subject to U.S. federal income taxation, or
- a trust if (1) a U.S. court is able to exercise primary supervision
over the administration of the trust and (2) one or more U.S. persons
have the authority to control all substantial decisions of the trust.
A "Foreign Holder" is a holder that is not a United States Holder.
The term "note(s)" by itself refers to both new notes and exchanged old notes.
CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of old notes for new notes will result in no federal income tax
consequences for holders. An exchange of old notes for new notes in connection
with the exchange offer will not be treated as an "exchange" for federal income
tax purposes because the new notes are not materially different from the old
notes. Rather, the new notes will be treated as a continuation of the old notes.
Exchanging holders will have the same tax basis and holding period in the new
notes as they had in the old notes.
QUALIFIED STATED INTEREST
United States Holders will generally be taxed on any "qualified stated interest"
as ordinary income from domestic sources at the time it is paid or accrued, in
accordance with the United States Holder's method of accounting for tax
purposes. Qualified stated interest is stated interest that is unconditionally
payable at least annually at a single fixed rate that appropriately takes into
account the length of the interval between payments.
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The new notes will pay interest semiannually at a stated rate of 14.25 percent
per annum, with the exception of the first interest payment due on April 1,
2000. We expect to satisfy the April 1, 2000 interest payment on the new notes
by issuing additional new notes. Because of the ability to make this initial
payment in kind, the annual amount of qualified stated interest on the new notes
will generally equal the combined semiannual October 1 interest payment on the
notes. The remaining interest payments made will be taken into account under the
original issue discount rules, discussed below.
ORIGINAL ISSUE DISCOUNT
For U.S. federal income tax purposes, the excess of the stated redemption price
at maturity of a note over its issue price constitutes original issue discount.
Interest payments not considered qualified stated interest are included in the
stated redemption price at maturity, and they are taken into account under the
original discount rules. Because the old notes were issued with original issue
discount, the new notes will also have original issue discount.
For U.S. federal income tax purposes, subject to the discussion below under
"High Yield Discount Obligation Rules" and "Acquisition Premium on Notes," each
United States Holder of a note must include in gross income a portion of the
original issue discount that accrues on the note during each taxable year,
determined by using a constant yield to maturity method, regardless of whether
the holder receives cash payments attributable to this original issue discount.
The original issue discount included in income for each year will be calculated
under a compounding formula that will result in the allocation of less original
issue discount to the earlier years of the term of the note and more original
issue discount to later years. Any amount included in income as original issue
discount will increase a United States Holder's tax basis in the note.
We intend to take the position that the issue price of all of the old notes is
based on the cash price Rothschild Recovery Fund paid for its notes in the
private placement, less the portion of that cash purchase price that is properly
allocable to the warrants we issued in the private placement. We cannot assure
you, however, that the Internal Revenue Service will respect this determination.
If the Internal Revenue Service were to successfully assert that the issue price
of the old notes issued in the private exchange must be separately determined,
those old notes, and the new notes issued in exchange for those old notes in the
exchange offer, could bear additional original issue discount. Holders of new
notes would be required to include this additional original issue discount in
their income under the rules described above.
HIGH YIELD DISCOUNT OBLIGATION RULES
The new notes are likely to constitute high yield discount obligations.
Accordingly, we may not be entitled to deduct a portion of the original issue
discount and may further be required to defer deductions on another portion
until amounts attributable to the original issue discount are paid in cash.
Subject to otherwise applicable limitations, a corporate holder will be entitled
to a dividend received deduction with respect to the disqualified portion of the
accrued original issue discount if we have sufficient current or accumulated
earnings and profits. To the extent that our earnings and profits are
insufficient, any portion of the original issue discount that otherwise would
have been recharacterized as a dividend for purposes of the dividend received
deduction will continue to be treated as ordinary original issue discount income
in accordance with the rules described above under "Original Issue Discount."
MARKET DISCOUNT
If a United States Holder purchases a note subsequent to its original issuance
and the note's issue price, increased by the amount of any accrued original
issue discount, exceeds the holder's purchase price, the note will be considered
to have market discount equal to that excess. Any gain recognized by the holder
on the disposition of a note having market discount generally will be treated as
ordinary income to the extent of the market discount that accrued on the note
while held by the holder. Alternatively, the holder may elect to include market
discount in income currently over the life of the note. This election will apply
to all market discount notes the holder acquires on or after the first day of
the first taxable year to which the election applies and is revocable only with
the consent of the Internal Revenue Service. Market discount will accrue on a
straight-line basis unless the holder elects to accrue the market discount on a
constant yield method. A constant yield election will apply only to notes to
which it is made and is irrevocable. Unless a holder elects to include market
discount, if any, in income on a current basis, as described above, the holder
could be required to defer the deduction of a portion of the interest paid on
any indebtedness incurred or maintained to purchase or carry notes.
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ACQUISITION PREMIUM ON NOTES
A United States Holder that purchases a note for an amount in excess of the
note's "adjusted issue price" as of the purchase date will be considered to have
purchased the note at an acquisition premium to the extent of this excess. The
"adjusted issue price" is the issue price increased by original issue discount
accrued on the note and reduced by payments on the notes other than qualified
stated interest. The amount of original issue discount the holder must include
in its gross income with respect to that note for any taxable year is generally
reduced by the portion of the acquisition premium properly allocable to that
year. Alternatively, a holder may elect to amortize and deduct the acquisition
premium over the remaining term of the note on a constant yield method. Holders
of new notes should consult their own tax advisors regarding the amount of any
acquisition premium and reduction in original issue discount with respect to the
new notes.
AMORTIZABLE BOND PREMIUM
A United States Holder that purchases a note for more than the amount payable at
maturity will be considered to have purchased the note at a "premium." A United
States Holder generally may elect to amortize the premium over the remaining
term of the note on a constant yield method. However, if the note may be
optionally redeemed for more than its amount payable at maturity at the time it
is purchased, the amortization of the premium might, depending on the timing and
pricing of the purchase relative to the redemption provisions of the notes, have
to be deferred. The amount amortized for a year will be treated as a reduction
of interest income from the note. If the United States Holder does not elect
amortization, the premium will decrease the gain or increase the loss otherwise
recognized upon the disposition of the note. The election to amortize premium on
a constant yield method, once made, applies to all debt obligations held or
acquired by the electing United States Holder on or after the first day of the
first taxable year to which the election applies and may not be revoked without
the consent of the Internal Revenue Service.
SALE, EXCHANGE AND RETIREMENT OF NOTES
When a United States Holder disposes of a note, that holder generally will
recognize capital gain or loss equal to the difference between:
(A) the amount of cash and the fair market value of any property received,
except to the extent that amount is attributable to accrued and unpaid
interest which is taxable as ordinary income, and
(B) the holder's adjusted tax basis in the note.
A United States Holder's adjusted tax basis in a note will, in general, be the
cost of the note increased by
- any amounts included in income as original issue discount and
- any market discount previously included in the holder's income
and decreased by
- any principal and non-qualified stated interest the holder receives
and
- any amortized premium previously deducted from income by that holder.
The capital gain or loss generally will be long-term capital gain or loss if the
holding period of the note exceeds one year at the time of the disposition. Some
noncorporate taxpayers, including individuals, are eligible for preferential
rates of taxation of the long-term capital gain. The deductibility of capital
losses is subject to limitations.
FOREIGN HOLDERS
Any gain or income realized on a Foreign Holder's disposition of a note
generally will not be subject to U.S. federal income tax provided
- The gain is not effectively connected with the holder's conduct of a
trade or business in the United States and
- in the case of gains realized by an individual, the individual is not
present in the United States for 183 days or more in the taxable year
of the disposition.
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Under present U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding,
(1) no U.S. federal withholding tax will be imposed with respect to
payment of principal, premium, if any, or interest, including original
issue discount, on a note owned by a Foreign Holder, provided that
- the Foreign Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of our
stock entitled to vote, within the meaning of section 871(h)(3)
of the Internal Revenue Code and the related regulations,
- the Foreign Holder is not a controlled foreign corporation that
is related, directly or indirectly, to us through stock
ownership,
- the Foreign Holder is not a bank whose receipt of interest on a
note is described in section 881(c)(3)(A) of the Internal Revenue
Code, and
- the Foreign Holder satisfies the statement requirement, described
generally below, set forth in sections 871(h) and 881(c) of the
Internal Revenue Code and the related regulations;
(2) no U.S. federal withholding tax will be imposed generally with respect
to any gain or income realized by a Foreign Holder upon the
disposition of a note; and
(3) a note beneficially owned by an individual who at the time of death is
a Foreign Holder will not be subject to U.S. federal estate tax as a
result of the individual's death, provided that:
- the individual does not actually or constructively own 10% or
more of the total combined voting power of all classes of our
stock entitled to vote, within the meaning of section 871(h)(3)
of the Internal Revenue Code, and
- the interest payments with respect to the note would not have
been, if received at the time of the individual's death,
effectively connected with the conduct of a U.S. trade or
business by the individual.
To satisfy the statement requirement referred to in (1) above, the beneficial
owner of the note, or a financial institution holding the note on behalf of the
beneficial owner, must provide, in accordance with specified procedures, our
paying agent with a statement to the effect that the beneficial owner is a
Foreign Holder. Under current Treasury regulations, this statement will satisfy
the certification requirements if (A) the beneficial owner provides its name and
address, and certifies, under penalties of perjury, that it is a Foreign Holder,
which certification may be made on an Internal Revenue Service Form W-8 or Form
W-8BEN, or (B) a financial institution holding the note on behalf of the
beneficial owner certifies, under penalties of perjury, that it has received the
statement and furnishes a paying agent with a copy.
With respect to notes held by a foreign partnership, under current law, the
foreign partnership may provide the Form W-8 or a Form W-8IMY. However, for
interest and disposition proceeds paid with respect to a note after December 31,
2000, unless the foreign partnership has entered into a withholding agreement
with the Internal Revenue Service, a foreign partnership will be required, in
addition to providing an intermediary Form W-8 or Form W-8IMY, to attach an
appropriate certification by each partner. Prospective investors, including
foreign partnerships and their partners, should consult their tax advisors
regarding possible additional reporting requirements.
If a Foreign Holder cannot satisfy the requirements of the portfolio interest
exception described in (1) above, payments on a note, including payments of
original issue discount, made to that holder will be subject to a 30%
withholding tax unless the beneficial owner of the note provides us or the
paying agent, as the case may be, with a properly executed (A) IRS Form 1001 or
Form W-8BEN claiming an exemption from, or reduction of, withholding under the
benefit of a tax treaty or (B) IRS Form 4224 or Form W-8ECI stating that
interest paid on the note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or business
in the United States.
Treasury regulations that will become generally effective for payments made
beginning January 1, 2001, modify various certification requirements described
above. In general, these new regulations do not significantly alter the
substantive withholding and information reporting requirements, but rather unify
current certification procedures and forms and clarify reliance standards. In
addition, the new regulations impose different conditions on the ability of
financial intermediaries acting for a Foreign Holder to provide certifications
on behalf of the Foreign Holder, which may include entering into an agreement
with the Internal Revenue Service to audit selected documentation with respect
to these certifications. It is possible that we and other withholding agents may
request new withholding exemption forms from holders in order to qualify for
continued exemption from withholding under the Treasury regulations when they
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become effective. Foreign Holders should consult their own tax advisors to
determine the effects of the application of the new regulations to their
particular circumstances.
If a Foreign Holder is engaged in a trade or business in the United States, and
payment on a note, including payments of original issue discount, is effectively
connected with the conduct of that trade or business, the Foreign Holder,
although exempt from U.S. federal withholding tax as discussed above, generally
will be subject to U.S. federal income tax on that payment on a net income basis
in the same manner as if it were a United States Holder. In addition, if the
Foreign Holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% or applicable lower tax treaty rate on its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, the payment on a note will be included in the foreign
corporation's earnings and profits.
INFORMATION REPORTING AND BACKUP WITHHOLDING
UNITED STATES HOLDERS. In general, information reporting requirements will apply
to payments on a note, to accrued original issue discount and to the proceeds of
the sale of a note to some noncorporate United States Holders. A 31% backup
withholding tax may apply to the payments if the United States Holder:
- fails to furnish or certify its correct taxpayer identification number
to the payer in the manner required,
- is notified by the Internal Revenue Service that it has failed to
report payments of interest and dividends properly, or
- under some circumstances, fails to certify that it has not been
notified by the Internal Revenue Service that it is subject to backup
withholding for failure to report interest and dividend payments.
Any amounts withheld under the backup withholding rules will be allowed as a
credit against the holder's U.S. federal income tax. Provided that the holder
has filed a return and the required information is furnished to the Internal
Revenue Service, the holder may be entitled to a refund of the excess of the
amount withheld over the holder's federal income tax liability.
FOREIGN HOLDERS. Under current regulations, no information reporting or backup
withholding will apply to payments to Foreign Holders if a statement described
in the previous section regarding Foreign Holders has been received and the
payor does not have actual knowledge that the beneficial owner is a U.S. person.
If these conditions are not satisfied, information reporting and backup
withholding will apply. These rules also apply to payments on a note paid to the
beneficial owner by a U.S. office of an agent or broker.
In addition, backup withholding and information reporting will not apply if
payments on a note are paid or collected by a foreign agent on behalf of the
beneficial owner of the note, or if a foreign office of a broker, as defined in
applicable U.S. Treasury regulations, pays the proceeds of the sale of a note to
the owner of the note. Information reporting, however, may be required in some
circumstances. If the agent or broker is, for U.S. federal income tax purposes:
- a United States person,
- a controlled foreign corporation,
- a foreign person that derives 50% or more of its gross income for
specified periods from the conduct of a trade or business in the
United States, or
- with respect to payments made beginning January 1, 2000, a foreign
partnership if, at any time during its tax year, one or more of its
partners are "U.S. persons," as defined in U.S. Treasury regulations,
who in the aggregate hold more than 50% of the income or capital
interest in the partnership if, at any time during the tax year, the
partnership is engaged in a U.S. trade or business,
- the payments will be subject to information reporting, but not backup
withholding, unless (1) the agent or broker has documentary evidence
in its records that the beneficial owner is not a U.S. person and
other conditions are met or (2) the beneficial owner otherwise
establishes an exemption.
The Treasury regulations that will become generally effective for payments made
beginning January 1, 2000 modify some of the certification requirements for
backup withholding. It is possible that we and other withholding agents may
request a new withholding exemption form from holders in order to qualify for
continued exemption from backup withholding under Treasury regulations when they
become effective.
THIS DISCUSSION MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. PROSPECTIVE UNITED STATES HOLDERS AND FOREIGN HOLDERS OF THE NOTES
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES
TO THEM OF THE
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ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX
CONSEQUENCES UNDER U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND
THE EFFECTS OF CHANGES IN THOSE LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in connection
with the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by broker-dealers in
connection with resales of new notes received in exchange for old notes if old
notes were acquired by broker-dealers for their own accounts as a result of
market-making activities or other trading activities. We have agreed that this
prospectus, as it may be amended or supplemented from time to time, may be used
by a participating broker-dealer in connection with resales of new notes for a
period ending on the earlier of 180 days from the date on which the registration
statement under which the exchange offer is made is declared effective and the
date when all broker-dealers receiving new notes for their own accounts in
connection with the exchange offer have sold all of those new notes held by
them. See "The exchange offer -- Resales of New Notes."
New notes that broker-dealers receive for their own accounts in connection with
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 new notes or a combination of these methods of resale. These
resales may be at market prices prevailing at the time of resale, at prices
related to the prevailing market prices or at negotiated prices. Any of these
resales 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
broker-dealer and/or the purchasers of any new notes. Any broker-dealer that
resells new notes that were received by it for its own account in connection
with the exchange offer and any broker or dealer that participates in a
distribution of new notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any resale of new notes and any
commissions or concessions received by any of these 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.
We shall not be liable for any delay by DTC or any participant or indirect
participant in identifying the beneficial owners of the related new notes, and
each of these persons may conclusively rely on, and shall be protected in
relying on, instructions from DTC for all purposes, including with respect to
the registration and delivery, and the respective principal amounts, of the new
notes to be issued.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information with the SEC
under the Securities Exchange Act of 1934. The file number for our SEC filings
is 333-39643. You can inspect and copy all of this information at the Public
Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site
that contains reports, proxy statements and information statements and other
information regarding issuers, like us, that file electronically with the SEC.
The address of this web site is http://www.sec.gov.
This prospectus is a part of a registration statement on Form S-4 that we filed
with the SEC under the Securities Act of 1933. The rules of the SEC allow us to
leave some of the information contained in the registration statement out of
this prospectus. Therefore, you should review the registration statement and its
exhibits for further information about us. Copies of the registration statement
and its exhibits are on file at the offices of the SEC and you can view them at
the SEC's website. You should read the exhibits for a more complete description
of the matters involved. You should rely only on the information or
representations provided in this prospectus and the registration statement. We
have not authorized anyone to provide you with different information.
LEGAL MATTERS
Wilmer, Cutler & Pickering, Washington, D.C., will pass upon the validity of the
new notes for us.
125
129
EXPERTS
The consolidated financial statements of Anker Coal Group, Inc. as of December
31, 1998 and 1997 and for the period from August 1, 1996 to December 31,
1996 and the consolidated financial statements of Anker Group, Inc. for the
period from January 1, 1996 to July 31, 1996 included in this prospectus have
been so included in reliance on the reports, which contain an explanatory
paragraph relating to our ability to continue as a going concern, as described
in Note 14 to the financial statements, of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The reserve reports and estimates of our coal reserves included in this
prospectus have, to the extent described in the prospectus, been prepared by us
and audited by Marshall Miller & Associates. Summaries of these estimates
contained in Marshall Miller & Associates' audit report have been included in
this prospectus as Annex A. We have relied on Marshall Miller & Associates as
an expert with respect to the matters contained in the audit report.
126
130
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants............................................................................ F-2
Report of Independent Accountants............................................................................ F-3
Consolidated Balance Sheets at December 31, 1998 and 1997.................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 and 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 Statements of Stockholders' Equity for the
years ended December 31, 1998 and 1997 and
for the period August 1, 1996 (date of acquisition)
through December 31, 1996........................................................................... F-6
Consolidated Statements of Stockholders' Equity for the period
January 1, 1996 through July 31, 1996............................................................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 and 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, 1999................................................... F-27
Condensed Consolidated Statements of Operations for the nine
and three months ended September 30, 1999 and 1998.................................................. F-28
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998................................................................... F-29
Notes to Condensed Consolidated Financial Statements......................................................... F-30
FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required
in the schedules is not applicable or is shown in the financial statements
or the notes to the financial statements.
F-1
131
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Anker Coal Group, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Anker Coal
Group, Inc. and its subsidiaries (the Company) at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1998 and the five month period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, and
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has experienced recurring losses from
operations, negative cash flows from operations and has a retained deficit that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 14. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 29, 1999
F-2
132
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 of 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.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 28, 1997
F-3
133
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
ASSETS
1998 1997
--------- ---------
Current assets:
Cash and cash equivalents $ 15 -
Accounts receivable:
Trade 27,845 $ 31,029
Affiliates 42 223
Inventories 5,876 10,717
Current portion of long-term notes receivable 986 791
Life insurance proceeds receivable - 10,000
Prepaid expenses and other 1,989 3,443
Deferred income taxes 3,683 399
--------- ---------
Total current assets 40,436 56,602
Properties:
Coal lands and mineral rights 62,398 101,324
Machinery and equipment 72,355 83,370
--------- ---------
134,753 184,694
Less allowances for depreciation, depletion and amortization 26,161 17,333
--------- ---------
108,592 167,361
Other assets:
Assets held for sale 10,000 -
Advance minimum royalties 4,453 19,050
Goodwill, net of accumulated amortization of $2,517 and $1,408 in 1998 and 1997,
respectively 21,572 43,010
Other intangible assets, net of accumulated amortization of $694 and $432 in
1998 and 1997, respectively 6,268 6,553
Notes receivable 3,735 5,056
Other assets 6,664 7,018
--------- ---------
Total assets $ 201,720 $ 304,650
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 10,982 16,254
Affiliates 480 1,572
Cash overdraft 5,111 3,919
Accrued interest 3,365 3,530
Accrued expenses and other 11,287 8,674
Accrued leasehold termination 3,957 -
Accrued reclamation expenses 5,234 355
Current maturities of long-term debt 2,777 799
Common stock available for repurchase 1,505 -
--------- ---------
Total current liabilities 44,698 35,103
Long-term debt 139,934 132,800
Other liabilities:
Accrued reclamation expenses 17,367 18,619
Deferred income taxes 8,242 12,976
Other 6,272 6,771
--------- ---------
Total liabilities 216,513 206,269
Commitments and contingencies - -
Mandatorily redeemable preferred stock 24,588 22,651
Common stock available for repurchase 8,495 -
Stockholders' equity:
Preferred stock 23,000 23,000
Common stock - -
Paid-in capital 47,900 57,900
Treasury stock (5,100) -
Accumulated deficit (113,676) (5,170)
--------- ---------
Total stockholders' equity (47,876) 75,730
--------- ---------
Total liabilities and stockholders' equity $ 201,720 $ 304,650
========= =========
The accompanying notes are an integral
part of the consolidated financial statements.
F-4
134
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
------------ ------------ ------------ -----------
Coal sales and related revenue $ 291,426 $ 322,979 $ 123,246 $ 166,909
Expenses:
Cost of operations and selling expenses 276,469 295,387 110,215 149,364
Depreciation, depletion and amortization 18,150 17,470 6,437 7,882
General and administrative 9,076 9,462 3,738 3,796
Stock compensation and related expenses - - - 2,969
Loss on impairment and restructuring charges 90,717 8,267 - -
--------- --------- --------- --------
Total expenses 394,412 330,586 120,390 164,011
Operating (loss) income (102,986) (7,607) 2,856 2,898
Interest, net of $386 and $760 capitalized in 1998
and 1997, respectively (13,066) (10,042) (2,090) (2,796)
Life insurance proceeds - 15,000 - -
Other income, net 2,805 2,083 373 1,107
--------- --------- --------- --------
(Loss) income before income taxes and
extraordinary item (113,247) (566) 1,139 1,209
Income tax (benefit) expense (7,643) (1,242) 485 (134)
--------- --------- --------- --------
Net (loss) income before extraordinary item (105,604) 676 654 1,343
Extraordinary loss, net of taxes of $375 and $1,497
in 1998 and 1997, respectively 965 3,849 - -
--------- --------- --------- --------
Net (loss) income (106,569) (3,173) 654 1,343
Less mandatorily redeemable preferred stock dividends 1,337 1,276 512 116
Less mandatorily redeemable preferred stock accretion 600 600 263 -
--------- --------- --------- --------
Net (loss) income available to common
Stockholders $(108,506) $ (5,049) $ (121) $ 1,227
========= ========= ========= ========
The accompanying notes are an integral
part of the consolidated financial statements.
F-5
135
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND
FOR THE PERIOD AUGUST 1, 1996 THROUGH DECEMBER 31, 1996
(IN THOUSANDS)
PREFERRED COMMON PAID-IN TREASURY ACCUMULATED
STOCK STOCK CAPITAL STOCK DEFICIT TOTAL
---------- -------- ----------- --------- ----------- ----------
Balance at August 1, 1996 - - - - - -
Initial Company capitalization $23,000 - $ 57,900 - - $ 80,900
Net income - - - - $ 654 654
Mandatorily redeemable preferred stock
dividends - - - - (512) (512)
Mandatorily redeemable preferred stock
accretion - - - - (263) (263)
-------- ------- --------- ------- --------- ----------
Balance at December 31, 1996 23,000 - 57,900 - (121) 80,779
Net loss - - - - (3,173) (3,173)
Mandatorily redeemable preferred stock
dividends - - - - (1,276) (1,276)
Mandatorily redeemable preferred stock
accretion - - - - (600) (600)
-------- ------- --------- ------- --------- ----------
Balance at December 31, 1997 23,000 - 57,900 - (5,170) 75,730
Net loss - - - - (106,569) (106,569)
Mandatorily redeemable preferred stock
dividends - - - - (1,337) (1,337)
Mandatorily redeemable preferred stock
accretion - - - - (600) (600)
Issuance of Class A common stock awards - - - - - -
Reclassification of Class A common stock to
common stock available for repurchase - - (15,000) - - (15,000)
Repurchase of Class A common stock - - 5,000 (5,000) - -
Repurchase of Class C preferred stock - - - (100) - (100)
-------- ------- --------- ------- --------- ----------
Balance at December 31, 1998 $23,000 - $ 47,900 $(5,100) $(113,676) $ (47,876)
======== ======= ========= ======= ========== ==========
The accompanying notes are an integral
part of the consolidated financial statements.
F-6
136
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
Mandatorily 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
137
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
YEAR YEAR PERIOD PERIOD
ENDED ENDED AUGUST 1 THROUGH JANUARY 1
DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH JULY 31,
1998 1997 1996 1996
----------- ----------- ----------- -----------
Cash flows from operating activities:
Net (loss) income $(106,569) $ (3,173) $ 654 $ 1,343
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Extraordinary item, net of taxes 965 3,849 - -
Loss on impairment and restructuring charges 90,717 8,267 - -
Depreciation, depletion and amortization 18,150 17,470 6,437 7,882
Minority interest - - 31 (5)
Life insurance proceeds - (15,000) - -
Deferred taxes (8,018) (2,739) 485 (257)
Gain on sale of property, plant and equipment (302) (352) (203) (806)
Loss on sale of investment - 1,069 - -
Stock compensation - - - 2,969
Tax refund received 722 - - -
Changes in operating assets and liabilities (net
of assets and liabilities acquired and disposed of):
Accounts receivable 3,365 (5,536) (434) 2,153
Inventories, prepaid expenses and other 5,105 (7,511) 5,515 (1,258)
Advance minimum royalties (2,915) (3,777) (2,095) (706)
Accounts payable, accrued expenses and other (6,186) 2,513 (10,087) 8,095
Other liabilities (499) (127) (867) (388)
-------- --------- -------- --------
Net cash (used in) provided by operating activities (5,465) (5,047) (564) 19,022
-------- --------- -------- --------
Cash flows from 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 - (9,883) (4,262) -
Purchases of properties (11,795) (45,203) (6,769) (3,046)
Proceeds from sales of property, plant and equipment 2,535 2,549 213 1,560
Proceeds from sale of investment - 3,551 - -
Issuances of notes receivable (38) (2,156) (4,991) (671)
Payments received on notes receivable 1,164 5,134 518 889
Intangible assets - (927) (277) -
Other assets - (90) (2,846) (496)
-------- --------- -------- --------
Net cash used in investing activities (8,134) (47,025) (84,968) (1,764)
-------- --------- -------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit and long-term debt 155,698 174,259 81,460 49,389
Principal payments on revolving line of credit and
long-term debt (146,586) (249,199) (45,372) (79,184)
Proceeds from issuance of Senior Notes - 125,000 - -
Cash overdraft 1,192 2,135 - -
Debt issuance costs (1,590) (5,679) - -
Purchase of treasury stock (5,100) - - -
Proceeds from issuance of preferred and common stock - - 50,000 -
Proceeds received from life insurance 10,000 5,000 - -
-------- --------- -------- --------
Net cash provided by (used in) financing activities 13,614 51,516 86,088 (29,795)
-------- --------- -------- --------
Increase (decrease) in cash and cash equivalents 15 (556) 556 (12,537)
Cash and cash equivalents at beginning of period - 556 - 13,526
-------- --------- -------- --------
Cash and cash equivalents at end of period $ 15 - $ 556 $ 989
======= ========= ======== ========
The accompanying notes are an integral
part of the consolidated financial statements.
F-8
138
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") was formed in August
1996. The Company was capitalized with approximately $50 million in cash and
$14.1 million of preferred and common stock exchanged for similar stock in Anker
Group, Inc. and Subsidiaries (the "Predecessor"). Subsequently, the Company
acquired the remaining 92.5% of the common stock of the Predecessor for
approximately $87 million, which was funded by the issuance of $25 million of
Class A mandatorily redeemable 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 Combinations."
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
========
Operating income $ 5,754
========
Net income $ 1,997
========
The Company's operations, which are principally 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements as of December 31, 1998, 1997 and for the
period August 1, 1996 (date of acquisition) 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:
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. The Company must maintain a lockbox
account and direct all cash receipts to this account. Control of this account
has been transferred to the Foothill Capital Corporation, as agent, under the
Company's Credit Facility.
INVENTORIES:
Coal inventories are stated at the lower of average cost or market and amounted
to approximately $4,415,000 and $8,822,000 at December 31, 1998 and 1997,
respectively. Supply inventories are stated at the lower of average cost or
market and amounted to approximately $1,461,000 and $1,895,000 at December 31,
1998 and 1997, respectively.
F-9
139
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTIES:
Properties are recorded at cost, which includes the allocated purchase price for
the acquisition described in Note 1.
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 $24.9 million and $40.7 million at
December 31, 1998 and 1997, respectively, represent expenditures incurred, net
of revenue received and amortization, in the 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.
Provisions for machinery and equipment depreciation are based upon the estimated
useful lives of the respective assets and are computed by the straight-line
method.
Upon sale or retirement of properties, the cost and related accumulated
depreciation or depletion are removed from the respective accounts, and any gain
or loss is included in other non-operating income.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired related to the acquisition described in Note 1. Due to the
restructuring of the Company's mining operations, goodwill will be prospectively
amortized over 3 to 20 years in conjunction with the expected useful lives of
existing mineral rights and sales contracts.
Other intangible assets consist of debt issuance costs which are being amortized
using the straight line method over the life of the associated debt, which
approximates the effective interest method.
During the period January 1 through July 31, 1997, adjustments were made to
increase goodwill due to changes in assumptions or underestimates relating to
certain preacquisition, contingent assets and liabilities. Accordingly, goodwill
was increased by approximately $4,789,000, net of income taxes.
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 included in cost of operations is made at a
rate per ton equivalent to the estimated end-of-mine-life reclamation cost
divided by the estimated tonnage to be mined. The estimated liability of the
Company is not discounted or reduced for possible recoveries from insurance
carriers.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on temporary
differences between the consolidated financial statements 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 the consolidated 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 consolidated
financial statements. Estimates also affect the amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
F-10
140
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents approximates fair value. The
fair value of current and long term debt is less than the carrying value by
approximately $56.3 million at December 31, 1998. The fair value of current and
long term debt exceeded the carrying value by approximately $1.3 million at
December 31, 1997. The fair value of the Company's borrowings under its senior
notes, credit agreement and other notes payable is estimated using the current
market rate and discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
ADVANCE MINIMUM ROYALTIES:
Advance minimum royalties represent payments, ranging from 2% to 10% of coal
yield, made by the Company to landowners for the right to mine on the
landowners' property. These payments are initially capitalized then expensed
over future production or are expensed as incurred when mine properties are held
for sale.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company periodically reviews the carrying value of long-lived assets, based
on whether they are recoverable from expected future undiscounted operating cash
flows and will recognize impairments when the expected future operating cash
flow derived from such long-lived assets is less than their carrying value. See
Note 13 for the results of the current year evaluation.
EARNINGS PER SHARE:
The presentation of earnings per share is not required as the Company's stock is
not publicly traded.
NEW ACCOUNTING PRONOUNCEMENTS:
In 1998, the Financial Accounting Standards Boards (FASB) issued its Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. As the Company has no items of other
comprehensive income, the requirements of SFAS No. 130 are not applicable.
In 1998, FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This pronouncements establishes standards
for reporting information about operating segments and related disclosures about
products and services, geographic areas, and major customers. The Company
operates within one industry segment only and, as such, the requirements of SFAS
No. 131 are not applicable.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 enhances the
disclosure requirements for pensions and postretirement benefits. The adoption
of SFAS No. 132 has no impact on the measurement or recognition of benefits.
In 1998, the American Institute of Certified Public Accountants issued its
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on expensing
and capitalizing the costs associated with developing or obtaining internal-use
software. This pronouncement will be effective for the year ended December 31,
1999. Management is currently assessing the impact that the adoption of this
pronouncement will have on the consolidated financial statements.
RECLASSIFICATION:
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
F-11
141
3. COAL SALES AND RELATED REVENUE
Coal sales and related revenue consists of the following:
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
----------- ----------- ----------- -----------
(IN THOUSANDS)
Coal mining revenue $207,102 $234,091 $ 85,175 $126,500
Brokered coal revenue 81,220 85,411 36,521 37,697
Ash disposal and waste fuel revenue 3,104 3,477 1,550 2,712
----------- ----------- ----------- -----------
$291,426 $322,979 $123,246 $166,909
=========== =========== =========== ===========
Included in revenue are sales to unconsolidated affiliated companies aggregating
approximately $0.1 million for the year ended December 31, 1998, $9.7 million
for the year ended December 31, 1997, $9.2 million for the period August 1, 1996
through December 31, 1996, and $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 and
Independent Power Producers throughout the northeastern 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 three customers represented 39.7%, 32.4% and
29.7% of total revenue for years ended December 31, 1998 and 1997, and for the
two periods ended December 31, 1996 combined, respectively. The Company performs
credit evaluations on all new customers, and credit losses have historically
been minimal.
4. FEDERAL EXCISE TAXES
Federal excise taxes, included in cost of operations and selling expenses,
amounted to $5,786,000 in 1998, $5,896,000 in 1997, $2,188,000 for the period
August 1, 1996 through December 31, 1996, and $3,378,000 for the period January
1, 1996 through July 31, 1996.
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, DECEMBER 31,
1998 1997
----------- ------------
(IN THOUSANDS)
Senior notes $125,000 $125,000
Foothill Credit Facility 16,911 -
Amended and Restated Credit Facility - 7,000
Notes payable to seller 800 1,388
Other notes payable to affiliates - 211
----------- ------------
142,711 133,599
Less current maturities of long-term debt 2,777 799
----------- ------------
$139,934 $132,800
=========== ============
F-12
142
5. LONG-TERM DEBT, CONTINUED
SENIOR NOTES:
On September 25, 1997, the Company issued $125,000,000 of unsecured 9 3/4%
Senior Notes due October 1, 2007. In connection therewith, the Company repaid
all outstanding indebtedness together with accrued interest and fees associated
with such repayment under the Company's existing credit agreement. 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 consolidated financial statements in 1997. Interest on the Senior Notes is
payable semiannually on April 1 and October 1 of each year, commencing April 1,
1998. The Senior Notes are redeemable by the Company, in whole or in part, at
any time on or after October 1, 2002 at the redemption price as specified in the
agreement plus accrued and unpaid charges. At any time on or prior to October 1,
2000, the Company may redeem up to 35%, through an initial public offering, of
the aggregated principal amount of the Senior Notes originally issued at a
redemption price equal to 109.75% of the principal amount plus accrued and
unpaid charges.
The Senior Notes contain certain cross-default provisions related to the
Company's outstanding Credit Facility.
The Company's obligations under the Senior Notes are jointly and severally
guaranteed fully and unconditionally on a senior unsecured basis, by the
wholly-owned subsidiaries of the Company that have executed a subsidiary
guarantee. See Note 11 for the financial statements of the Company and its
guarantor and nonguarantor subsidiaries.
CREDIT FACILITY:
On November 21, 1998, the Company and Foothill Capital Corporation, as agent,
entered into a loan and security agreement whereby the lenders will provide to
the Company a $55 million credit facility (the "Credit Facility"). The Credit
Facility consists of a $40 million working capital revolver and a $15 million
term loan. Commitments under the Credit Facility will expire in 2002. The Credit
Facility is collateralized by substantially all of the Company's present and
future assets.
Borrowings under the revolver are based on 85% of eligible accounts receivable
and 65% of eligible inventory and bear interest at the Company's option at
either 1% above the prime interest or at 3 3/4% above the adjusted Eurodollar
rate. For the year ended December 31, 1998, the average interest rate was
approximately 8.75%. As of December 31, 1998, the outstanding indebtedness under
the revolver was approximately $1.9 million.
The term loan bears interest at 2 1/2% above the prime interest rate and is
payable in monthly installments through 2002. The average interest rate for the
term loan for the year ended December 31, 1998 was approximately 10.25%. As of
December 31, 1998, the outstanding indebtedness under the term loan was
approximately $15 million.
The Credit Facility contains covenants which, among other matters, restrict or
limit the ability of the Company to pay interest, dividends, incur indebtedness,
or acquire or sell assets and make capital expenditures. The Company must also
maintain certain cash flow ratios.
The Credit Facility also contains covenants that require the Company to receive
an unqualified audit opinion on its annual financial statements. The issuance of
the going-concern opinion by the Company's independent accountants for the year
ended December 31, 1998 is a violation of this covenant. However, Foothill has
agreed to accept the going concern opinion and the Company has obtained a waiver
for this violation from Foothill.
AMENDED AND RESTATED CREDIT FACILITY:
The Amended and Restated Credit Facility, which was repaid by the Credit
Facility, provided for a line of credit up to $71 million. The average interest
rate on borrowings under the Amended and Restated Credit Facility was 8.1% in
1998 and 8.89% in 1997. The Company incurred a loss on the refinancing of
approximately $965,000, net of income taxes of $375,000. The loss has been
classified as an extraordinary item in the consolidated financial statements in
1998.
NOTE PAYABLE TO SELLER:
In conjunction with an acquisition, the Company assumed an outstanding note
payable, which bears interest at 7.47% and is payable in monthly installments
through April 1, 2000.
F-13
143
5. LONG-TERM DEBT, CONTINUED
OTHER MATTERS:
Future minimum required principal payments on long-term debt are: $2,777,000 in
1999; $2,309,000 in 2000; $2,142,900 in 2001; $10,482,000 in 2002 and
$125,000,000 thereafter.
6. MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND TREASURY STOCK
Mandatorily redeemable preferred stock, common stock and treasury stock as of
December 31, 1998 and 1997 consist of the following:
DESCRIPTION 1998 1997 PAR VALUE 1998 1997
- -------------------------------------------------- -------- -------- --------- -------- ---------
NUMBER OF SHARES (IN THOUSANDS)
AUTHORIZED, ISSUED AND
OUTSTANDING
Common Stock:
Class A 10,199 10,000 $ 0.01 - -
======= ======= ======= =======
Preferred Stock:
Class B 10,000 10,000 1,000 $ 10,000 $ 10,000
Class C - 1,000 13,000 13,000 13,000
------- ------- ------- -------
10,000 11,000 $ 23,000 $ 23,000
======= ======= ======= =======
Mandatorily Redeemable Preferred Stock:
Class A 10,000 10,000 2,500 $ 28,125 $ 26,788
Class D 1,000 1,000 7,000 7,000 7,000
Less preferred stock discount - - 10,537 11,137
------- ------- ------- -------
11,000 11,000 $ 24,588 $ 22,651
======= ======= ======= =======
Treasury Stock:
Common Stock Class A (1,013) - 4,936 $(5,000) -
Preferred Stock Class C (1,000) - 100 (100) -
------- ------- ------- -------
(2,013) - $(5,100) -
======= ======= ======= =======
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. Class B stockholders shall be entitled to receive
liquidation distributions senior to common stockholders.
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.
During 1998, the Company repurchased all of the outstanding Class C preferred
stock for $100 per share.
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. Dividends in arrears
as of December 31, 1998 and 1997 amounted to $3,125,000 and $1,788,000,
respectively, in the aggregate and $313 and $179, respectively, per share. With
regards to rights to receive distributions upon liquidation of the Company,
Class A shares rank junior to Class D preferred stockholders and senior to Class
B preferred and common stockholders. Upon public offering by the Company of its
common stock, each holder of Class A preferred stock shall have the right to
convert each Class A share to common shares based on a specified formula.
F-14
144
6. MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND TREASURY STOCK,
CONTINUED
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. With regards to rights to
receive distributions upon liquidation of the Company, Class D stockholders rank
senior to Class B and common stockholders.
The mandatorily redeemable preferred stock was recorded at estimated fair market
value, which is less than redemption value. This difference of $12 million is
being accreted over the remaining life of the preferred stock.
7. COMMON STOCK AVAILABLE FOR REPURCHASE AND LIFE INSURANCE PROCEEDS
On October 12, 1997, John Faltis, the Company's President, Chief Executive
Officer and Chairman of the Board of Directors, was killed in a helicopter
accident in West Virginia. In accordance with the Stockholders' Agreement, dated
as of August 12, 1996, among the Company, Mr. Faltis ("Faltis"), JJF Group
Limited 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. For the year ended December 31,
1997 $15 million was included within the consolidated statement of operations.
In accordance with the Stockholders' Agreement, the Company was to use proceeds
received from the insurance policy to repurchase common stock owned by JJF
Group.
In lieu of the certain provisions in the Stockholders' Agreement regarding the
purchase and sale of the Company's common stock owned by JJF Group upon the
death of Faltis, the Company and JJF Group entered into a Put Agreement dated as
of August 25, 1998 (the "Put Agreement") pursuant to which the Company granted
to JJF Group the right to require the Company to purchase such common stock. On
September 15, 1998, pursuant to the Put Agreement, the Company acquired 1,013
shares of the Company's common stock from JJF Group. The schedule for the
remaining payments under the Put Agreement is as follows:
MAXIMUM NUMBER OF
SHARES SUBJECT TO PER SHARE
PUT OPTION DATE PUT OPTION NOTICE PUT OPTION PRICE TOTAL PURCHASE PRICE
- --------------- ----------------- ---------------- --------------------
(IN THOUSANDS)
August 1, 1999 305 $ 4,936 $ 1,505
August 1, 2000 325 4,936 1,604
August 1, 2001 1,396 4,936 6,891
------- -------
2,026 $10,000
======= =======
Under the Put Agreement, if JJF Group fails or elects not to put any of its
common stock to the Company on or before the applicable date, JJF Group shall
not have the right to put those shares to the Company after that date. The Put
Agreement also requires the Company to pay interest on the outstanding balance
of the total purchase price at the "blended annual rate" established by the
Internal Revenue Service. The interest rate will be adjusted on July 25 of each
year during the term of the Put Agreement based on the blended annual rate in
effect as of that time. For the year ended December 31, 1998, the interest rate
for the Put Agreement was 5.63%.
F-15
145
8. INCOME TAXES:
The (benefit) provision for taxes is comprised of the following:
THE THE THE
COMPANY COMPANY COMPANY PREDECESSOR
----------- ---------- ------------ -------------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
----------- ---------- ------------ -------------
(IN THOUSANDS)
Current:
Federal - - - $ 123
Deferred:
Federal and state $(15,597) $ 2,557 $ 1,253 (45)
Tax benefit from recognition of net
operating losses (18,193) (7,146) (768) (212)
Valuation allowance 26,147 3,347 - -
----------- ---------- ------------ ------------
Provision for income taxes before
extraordinary item (7,643) (1,242) 485 (134)
Tax benefit of extraordinary charge (375) (1,497) - -
----------- ---------- ------------ ------------
$ (8,018) $ (2,739) $ 485 $ (134)
=========== ========== ============ =============
In the period January 1 through July 31, 1996, 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 reconciliation of the federal statutory tax rate to the consolidated
effective tax rate is as follows:
THE THE
COMPANY COMPANY THE COMPANY PREDECESSOR
---------- ----------- -------------- -------------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1,
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
------- ------- -------- --------
Federal statutory tax rate $(38,992) $ (192) $ 387 $ 411
Goodwill 377 348 122 -
Impairment of goodwill 6,667 - - 8
Business meals exclusion 42 55 50 (604)
Use of percentage depletion 85 (313) (95) -
Loss disallowance - 416 - -
Life insurance proceeds - (5,100) - -
Valuation allowance 26,147 3,347 - -
Mine development amortization - 132 - -
Other 223 644 - -
State taxes (2,567) (579) 21 51
-------- -------- -------- --------
$(8,018) $(1,242) $ 485 $ (134)
======== ======== ======== ========
F-16
146
8. INCOME TAXES, CONTINUED
The components of net deferred tax assets and liabilities as of December 31,
1998 and 1997 are as follows:
1998 1997
--------- ----------
(IN THOUSANDS)
Inventory $ 57 $ 77
Other current liabilities 532 322
Accrued reclamation 2,050 -
Leasehold termination 1,044 -
-------- ---------
$ 3,683 $ 399
======== =========
Depreciation, depletion and amortization (16,089) (14,436)
Advance minimum royalties - (611)
Accrued reclamation 884 1,071
Other long-term assets (939) 953
Fair market value (6,921) (8,663)
Capital loss 1,214 2,871
Contribution carryforwards 301 228
Other long-term liabilities (453) (453)
Impairment of assets 14,325 -
Restructuring charges 951 -
Net operating loss 27,979 9,411
-------- ---------
21,252 (9,629)
Valuation allowance (29,494) (3,347)
-------- ---------
$(8,242) $(12,976)
======== =========
The Company has a federal and state net operating loss carryforwards of
approximately $27,726,000 that is available to off set future taxable income
beginning in 1999 and will begin to expire in 2006. In addition, the Company has
alternative minimum tax credit carryforwards of approximately $253,000 as of
December 31, 1998.
The Company received a federal tax refund of $722,000 in 1998 through the
utilization of previously unrecognized net operating loss carryforwards. This
refund was allocated directly to goodwill.
The Company has established a full valuation allowance on the net operating loss
carryforwards, capital loss carryforwards and contribution carryforwards because
the future realization of these assets is uncertain.
9. BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
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 $1,452,000 for the year ended December 31, 1998, $1,218,000 for the
year ended December 31, 1997, $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 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 $473,000 for the year ended December 31, 1998, $418,000 for the year
ended December 31, 1997, $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-17
147
9. BENEFIT PLANS, 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 $309,000 for the
year ended December 31, 1998, $302,000 for the year ended December 31, 1997,
$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.
STOCK BENEFIT PLAN
In May 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 and affiliates.
During 1998, 199 shares of restricted stock were granted at par value, which
approximated fair value.
10. 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 $7.3 million to recognize the
anticipated unfunded obligations under this Act. The Company paid $352,000 for
the year ended December 31, 1998, $352,000 for the year ended December 31, 1997,
$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.
In 1997, the Company brought suit against the Combined Fund for continuing to
charge the Company for premiums which, the Company contends, should be paid by
the former employer of assigned and unassigned beneficiaries. The Combined Fund
filed a counterclaim for the amount of the premiums that the Company has refused
to pay as well as penalties and interest. As noted above, the Company has
previously recorded all anticipated unfunded obligations under this Act,
including the premiums, interest and penalties under dispute. Penalties and
interest will accrue until final resolution.
ADVANCE MINIMUM ROYALTIES:
The Company made royalty payments of approximately $12,254,000 during 1998,
$13,233,000 during 1997, $5,307,000 for the period August 1, 1996 through
December 31, 1996, and $4,687,000 for the period January 1, 1996 through July
31, 1996. Required minimum royalty payments, over the next five years, on the
leases are: $5,258,000 in 1999; $4,933,000 in 2000; $4,056,000 in 2001;
$3,066,000 in 2002; and $3,082,000 in 2003.
OPERATING LEASES:
The Company has office and mining equipment operating lease agreements. Total
rent expense approximated $12,467,000 for the year ended December 31, 1998,
$9,189,000 for the year ended December 31, 1997, $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 mining
equipment leases for the next five years, including payments for leases for in
Accrued Leasehold Termination (See note 13), are approximately $9,722,000 in
1999; $6,987,000 in 2000; $3,194,000 in 2001; $1,472,000 in 2002; and $259,000
in 2003.
F-18
148
10. COMMITMENTS AND CONTINGENCIES, CONTINUED
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.
11. 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. As of December 31, 1998, there were no
restrictions affecting the ability of the Guarantor Subsidiaries to make
distributions to the Company or other Guarantor Subsidiaries except to the
extent provided by law generally (e.g., adequate capital to pay dividends under
corporate law).
F-19
149
11. SUBSIDIARY GUARANTEES, CONTINUED
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1998
-----------------------------------------------------------------
(IN THOUSANDS)
ANKER ANKER COAL
COAL GUARANTOR NON-GUARANTOR CONS GROUP
GROUP SUBS. SUBS. ADJUST. CONS.
---------- ---------- ---------- ---------- ---------
BALANCE SHEET
Total current assets $ 3,683 $ 31,642 - $ 5,111 $ 40,436
Investment in subsidiaries 55,925 - - (55,925) -
Properties, net - 101,302 $ 7,290 - 108,592
Other assets - 52,692 - - 52,692
--------- ---------- --------- --------- ----------
Total assets $ 59,608 $ 185,636 $ 7,290 $(50,814) $ 201,720
========= ========== ========= ========= ==========
Total current liabilities 4,719 34,544 324 5,111 44,698
Long-term debt - 139,934 - - 139,934
Intercompany payable, net (54,985) 47,324 7,661 - -
Other long-term liabilities 6,745 25,136 - - 31,881
Mandatorily redeemable preferred
stock 24,588 - - - 24,588
Common stock available for repurchase 8,495 - - - 8,495
Total stockholders' equity 70,046 (61,302) (695) (55,925) (47,876)
--------- ---------- --------- --------- ----------
Total liabilities and
stockholders' equity $ 59,608 $ 185,636 $ 7,290 $(50,814) $ 201,720
========= ========== ========= ========= ==========
STATEMENT OF OPERATIONS
Coal sales and related revenues - 291,426 - - 291,426
Cost of operations and operating expenses - 393,637 775 - 394,412
--------- ---------- --------- --------- ----------
Operating income (loss) - (102,211) (775) - (102,986)
Other (income) expense 2,302 8,675 (716) - 10 ,261
--------- ---------- --------- --------- ----------
Income (loss) before taxes and
extraordinary item (2,302) (110,886) (59) - (113,247)
Income tax (benefit) expense (7,643) - - - (7,643)
--------- ---------- --------- --------- ----------
Income (loss) before
extraordinary item $ 5,341 (110,886) (59) - (105,604)
Extraordinary item, net of tax of $1,497 - 965 - - 965
--------- ---------- --------- --------- ----------
Net income (loss) $ 5,341 $(111,851) $ (59) $ - $(106,569)
========= ========== ========= ========= ==========
STATEMENT OF CASH FLOWS
Net cash (used in) provided by operating
activities $ 5,255 $ (10,565) $ (155) - $ (5,465)
========= ========== ========= ========= ==========
Net cash used in investing activities - $ (8,134) - - $ (8,134)
========= ========== ========= ========= ==========
Net cash provided by financing activities $ (5,255) $ 18,714 $ 155 - $ 13,614
========= ========== ========= ========= ==========
F-20
150
11. SUBSIDIARY GUARANTEES, CONTINUED
AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1997
----------------------------------------------------
(IN THOUSANDS)
ANKER NON- ANKER COAL
COAL GUARANTOR GUARANTOR CONS. GROUP
GROUP SUBS. SUBS. ADJUST. CONS.
--------- --------- --------- --------- ---------
BALANCE SHEET
Total current assets $ 399 $ 56,194 $ 9 $ - $ 56,602
Investment in subsidiaries 55,925 - - (55,925) -
Properties, net - 160,071 7,290 - 167,361
Other assets - 80,687 - - 80,687
--------- --------- --------- --------- ---------
Total assets $ 56,324 $ 296,952 $ 7,299 $(55,925) $ 304,650
========= ========= ========= ========= =========
Total current liabilities - 34,962 141 - 35,103
Long-term debt - 132,800 - - 132,800
Intercompany payable, net (62,167) 54,108 8,059 - -
Other long-term liabilities 14,473 23,893 - - 38,366
Mandatorily redeemable preferred stock 22,651 - - - 22,651
Total stockholders' equity 81,367 51,189 (901) (55,925) 75,730
--------- --------- --------- --------- ---------
Total liabilities and $ 56,324 $ 296,952 $ 7,299 $(55,925) $ 304,650
stockholders' equity ========= ========= ========= ========= =========
STATEMENT OF OPERATIONS
Coal sales and related revenues - 313,781 9,198 - 322,979
Cost of operations and operating expenses - 310,869 19,717 - 330,586
--------- --------- --------- --------- ---------
Operating income (loss) - 2,912 (10,519) - (7,607)
Other (income) expense - (7,403) 362 - (7,041)
--------- --------- --------- --------- ---------
Income (loss) before taxes and
extraordinary item - 10,315 (10,881) - (566)
Income tax (benefit) expense (1,242) - - - (1,242)
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item 1,242 10,315 (10,881) - 676
---------
Extraordinary item, net of tax of $1,497 - 3,849 - 3,849
--------- --------- --------- ---------
Net income (loss) $ 1,242 $ 6,466 $(10,881) - $ (3,173)
========= ========= ========= ========= =========
STATEMENT OF CASH FLOWS
Net cash (used in) provided by operating
activities $ 10,000 $(16,992) $ 1,945 - $ (5,047)
========= ========= ========= ========= =========
Net cash used in investing activities $(10,000) $(31,384) $(15,641) $ 10,000 $(47,025)
========= ========= ========= ========= =========
Net cash provided by financing activities - $ 38,400 $ 13,116 - $ 51,516
========= ========= ========= ========= =========
F-21
151
11. SUBSIDIARY GUARANTEES, CONTINUED
FOR THE PERIOD
AUGUST 1, 1996 THROUGH DECEMBER 31, 1996
---------------------------------------------------------
(IN THOUSANDS)
ANKER NON- ANKER COAL
COAL GUARANTOR GUARANTOR CONS. GROUP
GROUP SUBS. SUBS. ADJUST. CONS.
----- --------- --------- ------- ----------
STATEMENT OF OPERATIONS
Coal sales and related revenues - $ 118,997 $ 4,249 - $ 123,246
Cost of operations and operating expenses - 115,886 4,504 - 120,390
----------- ------------- -------------- -------- ----------
Operating income - 3,111 ( 255) - 2,856
Other (income) expense - 1,870 (153) - 1,717
----------- ------------- -------------- -------- ----------
Income (loss) before taxes - 1,241 (102) - 1,139
Income tax expense (benefit ) $ 485 - - - 485
----------- ------------- -------------- -------- ----------
Net (loss) income $ (485) $ 1,241 $ ( 102) - $ 654
=========== ============= ============== ======== ==========
STATEMENT OF CASH FLOWS
Net cash (used in) provided by operating
activities - $ ( 5,709) $ 5,145 - $ (564)
=========== ============= ============== ======== ==========
Net cash used in investing activities - $ (80,379) $ ( 4,589) - $ (84,968)
=========== ============= ============== ======== ==========
Net cash provided by financing activities - $ 86,088 - - $ 86,088
=========== ============= ============== ======== ==========
12. RELATED PARTIES
In July 1997, mineral reserve estimates were audited by John T. Boyd Company.
On December 1, 1997, James W. Boyd, President of John T. Boyd Company, and
executor of John Faltis' estate, was elected to the Company's Board of
Directors.
In February 1998, the Company sold its investment in Oak Mountain, LLC to an
affiliate for $1. See Note 13 for further information.
F-22
152
13. LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES
The major components of loss on impairment and restructuring charges were as
follows:
1998 1997
--------- ---------
(IN THOUSANDS)
Impairment of properties and investment $ 44,416 $ 8,267
Exit costs 25,411 -
Assets to be disposed 15,983 -
Equipment leasehold termination costs 3,957 -
Other 950 -
--------- ---------
$ 90,717 $ 8,267
========= =========
IMPAIRMENT OF PROPERTIES AND INVESTMENT:
The impairments on properties and investments became necessary when the Company
reevaluated its business plans as a result of operational and management
changes. This reevaluation has resulted in excess carrying values as compared
to the expected discounted cash flows. The properties affected and the related
asset categories are as follows:
PROPERTY, ADVANCED
PLANT AND MINIMUM
DESCRIPTION EQUIPMENT ROYALTIES GOODWILL TOTAL
- ------------------------------ --------- --------- -------- -----
(IN THOUSANDS)
Raleigh County, WV - - $ 5,705 $ 5,705
Upshur County, WV $ 6,036 - - 6,036
Grant County, WV
and Garrett County, MD 11,113 $ 7,009 - 18,122
Monongalia County, WV
and Preston County, WV 2,652 2,895 9,006 14,553
-------- --------- -------- --------
$ 19,801 $ 9,904 $ 14,711 $ 44,416
======== ========= ======== ========
EXIT COSTS:
Also, in conjunction with the reevaluation, the Company, based on current
market conditions and expected mining costs, decided to exit its investment in
Webster and Braxton Counties, West Virginia. The exit charges consist of the
following:
Asset Category AMOUNT
-------------- --------------
(IN THOUSANDS)
Property, plant and equipment $ 13,569
Reclamation accrual 5,100
Advanced minimum royalties 1,651
Goodwill 4,896
Other 195
---------
$ 25,411
=========
F-23
153
13. LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES, CONTINUED
ASSETS TO BE DISPOSED:
As part of the Company's liquidity planning, certain assets have been
identified to be held for sale. These assets have been reclassified to a
separate asset account and were adjusted to their fair market value. The fair
market values were established by management based on current offers, third
party appraisals and other information management believes relevant to
establish these values. The asset held for sale charges consist of the
following:
PROPERTY, ADVANCED
PLANT AND MINIMUM
DESCRIPTION EQUIPMENT ROYALTIES TOTAL
--------------- --------- --------- -----
(IN THOUSANDS)
Raleigh County, WV $ 1,353 $ 2,419 $ 3,772
Preston County , WV 7,721 4,026 11,747
Other Property 464 - 464
-------- -------- -------
$ 9,538 $ 6,445 $15,983
======== ======== =======
EQUIPMENT LEASEHOLD TERMINATION COSTS:
In conjunction with the mining changes described, the Company will also incur
losses on equipment currently covered by operating leases. These losses were
estimated by comparing lease buyout costs with the expected fair market value of
the underlying equipment. These differences totaling $3,957 have been recorded
as equipment leasehold termination costs.
OAK MOUNTAIN ENERGY, L.L.C.
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 million, of which $10 million was provided
by the Company. Subsequent to the initial capitalization, the Company
contributed an additional $255,000. 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. ("Oak Mountain") up to its capital
investment. In accordance with industry practice and purchase accounting, the
Company has presented their proportionate ownership, amounting to 32.0%, in Oak
Mountain in the consolidated financial statements from the date of acquisition.
In February 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 has 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.
F-24
154
14. GOING CONCERN
Beginning in late 1997 and early 1998, the Company's financial position began
to deteriorate due primarily to poor operating performance and excessive
capital expenditures. In response to its financial problems, the Company
developed a plan to improve operations. This plan consisted of reducing general
and administrative expenses and making significant changes in the management of
the Company's operations, with an emphasis on adding experienced underground
mine managers. Once in place, the new management initiated efforts to improve
safety, tighten capital expenditure requirements, improve operational tracking,
revamp budgeting and forecasting processes, and initiate training programs to
improve communications and productivity.
While these efforts improved the Company's operations, the results were not as
significant as needed and were not realized in the timeframes projected. In
light of that and its continued financial difficulties, the Company revised the
plan to insure that it would have adequate long-term liquidity. The revised 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.
The first component was achieved in November 1998 with the closing of the Credit
Facility. The new Credit Facility helps provide the needed flexibility by
enabling the Company to borrow against its asset base.
The second component of the Company's plan is to utilize contract mining
services for its underground operations. By utilizing contractors, the Company
expects to reduce both operating and general and administrative expenses, reduce
month-to-month cost fluctuations, and minimize future capital expenditures thus
improving cash flow from operations. The Company believes it will complete this
analysis and engage contractors for certain of its underground operations during
the second quarter of 1999.
The third component of the Company's plan is to sell certain non-operating
assets and select 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 the non-operating
assets being held for sale or are not integral to the Company's long-term
operating strategy. The Company believes that its efforts to date to market
these properties have been hampered by the Company's deteriorated financial
position. The Company believes it will be successful in selling all or a part
of these assets during the next twelve to eighteen months. The Company will
also evaluate reasonable offers on other assets as opportunities develop.
The final component of the plan involves reducing the Company's overall debt
level. This will be achieved in part through the success of the other
components of the plan. Based upon the expected results in the next two years,
the Company is also exploring the possibility of restructuring its Senior Notes
in order to reduce its long-term debt. The significant annual interest charges
from the Senior Notes severely limit the Company's operating flexibility and
substantially reduce the Company's ability to grow or replenish its production
base. The Company believes that a restructuring of its Senior Notes would
improve liquidity. However, there can be no assurance that the Company will be
able to restructure its Senior Notes on terms acceptable to it, if at all.
The Company and its Board of Directors are committed to this plan and believe
the results will provide the foundation for an improved financial position.
F-25
155
15. SUPPLEMENTAL CASH FLOW INFORMATION:
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
----------- ----------- ----------- ----------
(IN THOUSANDS)
Cash paid for interest $ 13,617 $ 7,641 $ 2,747 $ 2,983
Cash paid for taxes - 17 202 8
Details of acquisitions:
Fair value of assets - 14,354 8,476 -
Liabilities - 4,354 4,214 -
-------- -------- --------- -----------
Cash paid - 10,000 4,262 -
Less cash acquired - 117 - -
-------- -------- --------- -----------
- $ 9,883 $ 4,262 -
======== ======== ========= ===========
Non cash activities:
Stock exchange in purchase of Anker
Group, Inc. - - $ 50,900 -
Redeemable preferred stock dividends
and accretion $1,937 $ 1,876 $ 775 $ 116
Assets written off to goodwill - $ 4,789 - -
16. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
1998 and 1997:
1998 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ---------------------------------------------- ------------ ------------ ------------ -----------
Coal sales and related revenue $ 71,574 $ 76,320 $ 78,217 $ 65,315
Loss before extraordinary items (4,206) (5,689) (8,144) (87,565)
Net loss (4,206) (5,689) (8,144) (88,530)
Net loss available to common stockholders (4,691) (6,173) (8,628) (89,014)
1997
- ----------------------------------------------
Coal sales and related revenue $ 69,980 $ 79,927 $ 90,911 $ 82,161
Income (loss) before extraordinary items 783 (1,260) (948) 2,101
Net income (loss) 783 (1,260) (4,797) 2,101
Net income (loss) available to common
stockholders 314 (1,729) (5,269) 1,635
F-26
156
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
(UNAUDITED, IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 21
Accounts receivable 25,431
Inventories 3,279
Current portion of long-term notes receivable 682
Prepaid expenses and other 3,271
Deferred income taxes 3,683
---------------------------
Total current assets 36,367
Properties:
Coal lands and mineral rights 62,535
Machinery and equipment 71,893
---------------------------
134,428
Less allowances for depreciation, depletion and amortization 34,023
---------------------------
100,405
Other assets:
Assets held for sale 9,000
Advance minimum royalties 5,963
Goodwill, net of accumulated amortization of $3,700 at
September 30, 1999 20,389
Other intangible assets, net of accumulated amortization of $1,419 at
September 30, 1999 5,493
Notes receivable 3,495
Other assets 5,930
-----------------------------
Total assets $ 187,042
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 10,319
Affiliate 547
Cash overdraft 2,928
Accrued interest 6,310
Accrued expenses and other 10,150
Accrued leasehold termination 3,214
Accrued reclamation expenses 5,015
Current maturities of long-term debt 2,472
Common stock available for repurchase 3,695
---------------------------
Total current liabilities 44,650
Long-term debt 147,119
Other liabilities:
Accrued reclamation expenses 15,396
Deferred income taxes 8,242
Other 4,448
---------------------------
Total liabilities 219,855
Commitments and contingencies -
Mandatorily redeemable preferred stock 26,093
Common stock available for repurchase 6,891
Stockholders' equity:
Preferred stock 23,000
Common stock -
Paid-in capital 47,900
Treasury stock (5,100)
Accumulated deficit (131,597)
---------------------------
Total stockholders' equity (65,797)
---------------------------
Total liabilities and stockholders' equity $ 187,042
===========================
The accompanying notes are an integral
Part of the consolidated financial statements.
F-27
157
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- -------------- ------------- --------------
Coal sales and related revenue $ 60,070 $ 78,217 $ 174,293 $ 226,111
Expenses:
Cost of operations and selling expenses 53,971 73,512 157,419 214,443
Depreciation, depletion and amortization 4,591 4,792 13,430 13,009
General and administrative 2,836 2,679 6,781 7,767
Loss on impairment and restructuring 1,065 5,517 4,526 7,346
-------------- -------------- ------------- --------------
Total expenses 62,463 86,500 182,156 242,565
-------------- -------------- ------------- --------------
Operating loss (2,393) (8,283) (7,863) (16,454)
Interest, net of $386 capitalized for the nine months
September 30,1998 (3,711) (3,301) (10,911) (9,421)
Other income, net 1,158 273 2,579 821
-------------- -------------- ------------- --------------
Loss before income taxes (4,946) (11,311) (16,195) (25,054)
Income tax benefit - (3,167) (200) (7,015)
-------------- -------------- ------------- --------------
Net loss (4,946) (8,144) (15,995) (18,039)
Mandatorily redeemable preferred stock dividends (352) (334) (1,055) (1,004)
Mandatorily redeemable preferred stock accretion (150) (150) (450) (450)
Common stock available for repurchase accretion (142) - (421) -
-------------- -------------- ------------- --------------
Net loss available to common stockholders $ (5,590) $ (8,628) $ (17,921) $ (19,493)
============== ============== ============= ==============
The accompanying notes are an integral
part of the consolidated financial statements.
F-28
158
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
NINE MONTHS
ENDED
SEPTEMBER 30,
1999 1998
---------------- ----------------
Cash flows from operating activities:
Net loss $ (15,995) $ (18,039)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on impairment and restructuring 4,526 7,346
Depreciation, depletion and amortization 13,430 13,009
Gain on sale of property, plant and equipment (77) (101)
Debt issuance costs 756 -
Deferred taxes - (7,015)
Changes in operating assets and liabilities:
Accounts receivable 2,456 (670)
Inventories, prepaid expenses and other 1,315 4,298
Advance minimum royalties (1,893) (1,875)
Accounts payable, accrued expenses and other (1,116) 2,711
Accrued reclamation (3,121) (968)
Other liabilities (1,824) (142)
---------------- ----------------
Net cash used in operating activities (1,543) (1,446)
Cash flows from investing activities:
Purchases of properties (5,222) (8,134)
Proceeds from sales of property, plant and equipment 1,690 345
Issuance of notes receivable - (20)
Payments received on notes receivable 544 1,010
Other assets 794 (310)
Investment in affiliate - (333)
---------------- ----------------
Net cash used in investing activities (2,194) (7,442)
Cash flows from financing activities:
Proceeds from revolving line of credit and long-term debt 187,538 84,600
Principal payments on revolving line of credit and long-term debt (180,658) (75,341)
Cash overdraft (2,183) (3,919)
Payment of debt issuance costs (954) (421)
Treasury stock purchase - (5,100)
Proceeds received from life insurance proceeds - 10,000
---------------- ----------------
Net cash provided by financing activities 3,743 9,819
Increase in cash and cash equivalents 6 931
Cash and cash equivalents at beginning of period 15 -
---------------- ----------------
Cash and cash equivalents at end of period $ 21 $ 931
================ ================
The accompanying notes are an integral
part of the consolidated financial statements.
F-29
159
ANKER COAL GROUP, INC. AND SUBSIDIARIES
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.
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform with the 1999 presentation.
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 $2.9 million and $4.4 million at September 30, 1999 and
December 31, 1998, respectively. Supply inventories are stated at the lower of
average cost or market and amounted to approximately $0.4 million and $1.5
million at September 30, 1999 and December 31, 1998, respectively.
4. LOSS ON IMPAIRMENT AND RESTRUCTURING
The Company recorded loss on impairment and restructuring charges of $1.1
million and $4.5 million for the three and nine months ended September 30, 1999.
The loss on impairment and restructuring recorded in the third quarter consisted
of three items. First, the operating sections of the Company's Barbour County
deep mine were moved from one area of the reserve to another. As a result of the
move, certain unamortized assets were no longer useful in the mining operation,
and the Company recorded a $0.6 million charge. Other unamortized assets
associated with this area of the Barbour County operation totaling $1.7 million
were not impaired because the Company believes these assets will be used for
future mining activities. Second, in connection with the close down of the
Company's operations in Webster County, the Company recorded $1.0 million of
additional charges for reclamation and other close down costs to be incurred
over the next seven months. The third component of the loss consists of an
income offset of $0.5 million relating to the disposition of certain coal
reserves in Preston and Taylor Counties, West Virginia, that were previously
impaired during the fourth quarter of 1998.
During the second quarter of 1999, the Company reviewed the carrying value of
computer software and determined that, in connection with the use of contract
miners at the Company's deep mines, certain software would no longer be
utilized. As a result, the Company recorded an impairment loss of $1.1 million.
In addition, the Company recorded an impairment of $2.4 million relating to
properties located in Tazewell County, Virginia.
F-30
160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
The Company recorded loss on impairment and restructuring charges of $5.5
million and $7.3 million for the three and nine months ended September 30,
1998. During 1998, the Company impaired its remaining investment in Oak
Mountain of $0.3 million and initiated steps to reduce general and
administrative expenses by making management changes resulting in $0.2 million
of restructuring charges. In addition, the Company recorded an impairment of
$2.4 million in the second quarter of 1998 relating to impairment losses on
certain pieces of mining equipment.
During the third quarter of 1998, a reclamation charge of $5.1 million was
recorded relating to the Company's operations in Webster County. This
reclamation charge was a result of a change in the mine plan for the Webster
County surface mine.
5. SUBSIDIARY GUARANTEES
The Company is a holding company with no assets other than its investments in
its subsidiaries. The Company's $125 million principal amount of 9.75% Senior
Notes due October 2007 (the "Old 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 Old 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 Old 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 ("Foothill") and the
lenders named therein (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). See Note 7 for
information on the recent private exchange of $108.5 million of Old Notes for
New Secured Notes.
AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 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 $ 29,755 - $ 2,929 $ 36,367
Investment in subsidiaries 55,925 - - (55,925) -
Properties, net - 93,115 $ 7,290 - 100,405
Other assets - 50,270 - - 50,270
-------- --------- ------- ---------- ---------
Total assets $ 59,608 $ 173,140 $ 7,290 $(52,996) $ 187,042
======== ========= ======= ========== =========
Total current liabilities 3,696 37,965 60 2,929 44,650
Long-term debt - 147,119 - - 147,119
Intercompany payable (receivable), net (54,169) 45,954 8,215 - -
Other long-term liabilities 6,745 21,341 - - 28,086
Mandatorily redeemable preferred stock 26,093 - - - 26,093
Common stock available for repurchase 6,891 - - - 6,891
Total stockholders' equity 70,352 (79,239) (985) (55,925) (65,797)
-------- --------- ------- ---------- ---------
Total liabilities and stockholders' equity $ 59,608 $ 173,140 $ 7,290 $(52,996) $ 187,042
======== ========= ======= ========== =========
STATEMENT OF OPERATIONS
Coal sales and related revenues - $ 174,293 - - $ 174,293
Cost of operations and operating expenses - 181,976 $ 180 - 182,156
-------- --------- ------- ---------- ---------
Operating loss - (7,683) (180) - ( 7,863)
Other expense $ - (8,332) - - (8,332)
-------- --------- ------- ---------- ---------
Loss before taxes - (16,015) (180) - (16,195)
Income tax benefit 200 - - - 200
-------- --------- ------- ---------- ---------
Net income (loss) $ 200 $(16,015) $ (180) - $(15,995)
======== ========= ======= ========== =========
STATEMENT OF CASH FLOWS
Net cash provided by (used in) operating activities 200 $ (1,743) - - $ (1,543)
======== ========= ======= ========== =========
Net cash used in investing activities - $ (2,194) - - $( 2,194)
======== ========= ======= ========== =========
Net cash provided by financing activities - $ 3,743 - - $ 3,743
======== ========= ======= ========== =========
F-31
161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
6. COMMITMENTS AND CONTINGENCIES
In 1998, certain subsidiaries of the Company (the "Plaintiffs") sued
Consolidation Coal Company ("Consol"), the Social Security Administration (the
administrator of the Coal Industry Retiree Health Benefits Act of 1992 (the
"1992 Coal Act")), 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 Plaintiffs' 1992 Coal Act premiums relating to employees
that were affected by Consol's breach of several contract mining agreements in
the early 1980s (approximately 1/3 of the Plaintiffs' entire premium); (ii) the
Social Security Administration should be enjoined from continuing to invoice the
Plaintiff for these payments that should be made by Consol; and (iii) the 1992
Coal Act is unconstitutional. The Trustees filed a counterclaim against the
Plaintiffs for the amount of premiums they have failed to pay as a result of
their claim against Consol. The court granted the Trustee's 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 petition for appeal with the United States Supreme Court
on August 12, 1999. The Third Circuit's judgment has be stayed pending the
Supreme Court denial of the writ or otherwise ruling against the Plaintiffs. The
entire judgment has been fully accrued by the Company in prior years. In the
event the Plaintiffs are required to pay this judgment, the Plaintiffs will fund
the judgment from borrowings under the revolving credit facility under the
Foothill Loan Agreement.
The Company and its subsidiaries are party to various other lawsuits and claims
incidental to the conduct of their business. While it is not possible to predict
accurately the outcome of these matters, the Company's management does not
believe that these matters will have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
7. SUBSEQUENT EVENTS
On October 28, 1999, the Company completed a private restructuring of the Old
Notes and a private placement to raise additional capital. In the transactions,
a limited number of qualified noteholders exchanged $108.5 million of their Old
Notes for $86.8 million of 14.25% Series A Second Priority Senior Secured Notes
due 2007 (paid in kind ("PIK") through April 1, 2000) ("New Secured Notes").
The New Secured Notes are guaranteed by all of the subsidiaries of the Company.
Exchanging noteholders waived their right to receive the October 1, 1999
interest payment on the Old Notes. Exchanging noteholders also received
warrants to purchase 20% of the common stock of the Company at a nominal
exercise price. The Company believes that the nominal exercise price represents
the fair value of the warrants at the time of issuance. In connection with the
private exchange, exchanging noteholders consented to amendments to the
indenture for the Old Notes that, among other things, modified or eliminated
various covenants. Following the private exchange, approximately $16.5 million
of the Old Notes remain outstanding. The Company also paid the October 1, 1999
cash interest payment on the remaining Old Notes on October 28, 1999, prior to
the expiration of the grace period for that interest payment.
The Company expects to record the private exchange transaction described above
in accordance with FAS-15 "Accounting By Debtors and Creditors For Troubled
Debt Restructurings." In the private exchange, the carrying amount of the Old
Notes ($125.0 million) and the accrued and unpaid interest of approximately
$6.1 million is compared with the New Secured Notes principal and interest
payments over time. To the extent the carrying amount is less than the New
Secured Notes interest and principal, the Company can adjust its carrying
amount. The Company does not expect to change its carrying amount in connection
with the private exchange.
In conjunction with the private exchange, the Company raised $11.2 million in
cash through the sale to Rothschild Recovery Fund L.P. ("RRF") in a private
placement of $13.2 million principal amount of New Secured Notes and warrants
to purchase 10% of the common stock of the Company at a nominal exercise price.
The funds raised in the private placement were applied against the revolving
credit facility under the Foothill Loan Agreement. The issuance of the New
Secured Notes for cash in the private placement is expected to result in the
financial statement recognition of original issue discount. This discount will
be accreted over the term of the New Secured Notes.
F-32
162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
The Company also issued $6.0 million of New Secured Notes to JJF Group Limited
Liability Company ("JJF Group"), a shareholder of the Company controlled by the
estate of John J. Faltis, the former Chairman and Chief Executive Officer of
the Company. The New Secured Notes were issued to JJF Group in exchange for
cancellation of JJF Group's common stock in the Company and its rights to
require the Company to buy that stock for approximately $10.5 million under a
Put Agreement dated as of August 25, 1998 (the "Put Agreement"). In connection
with the expected accounting treatment for the private exchange with JJF Group,
the Company will record the New Secured Notes issued at their face value, and
the difference between the New Secured Notes and the common stock available for
repurchase (including current portion) will increase paid-in-capital
F-33
163
ANNEX A
AUDIT OF DEMONSTRATED RESERVES
CONTROLLED BY ANKER COAL GROUP, INC.
December 1, 1999
Prepared for
ANKER COAL GROUP, INC.
2708 Cranberry Square
Morgantown, West Virginia 26505
Prepared by
MARSHALL MILLER & ASSOCIATES
P.O. Box 848
Bluefield, Virginia 24605
164
MARSHALL MILLER & ASSOCIATES LOGO
December 1, 1999
Mr. Bruce Sparks, President
ANKER COAL GROUP, INC.
2708 Cranberry Square
Morgantown, West Virginia 26505
Dear Mr. Sparks:
MARSHALL MILLER & ASSOCIATES (MM&A) has completed an audit of reserves
controlled by ANKER COAL GROUP, INC. (ANKER). A reserve audit verifies that the
audited reserve base has been properly estimated according to industry-accepted
standards and that the reserves, as presented, may be used with reasonable
geologic assurance for mine planning and/or economic forecasting.
This audit was based on a thorough review of an extensive amount of
geologic data documenting the Anker reserves as well as Anker's in-house reserve
estimations, which were provided by Anker to facilitate the audit. The audit
demonstrated that Anker's geologic modeling and reserve estimation methodologies
are performed within industry-accepted standards. Moreover, MM&A's independent
checks verified the Anker reserve estimates, since differences between the MM&A
and Anker estimates were typically less than the generally-accepted margin of
error for the estimation of measured reserves. This letter provides a summary of
those portions of the audited reserve base that qualify as DEMONSTRATED
reserves.
- --------------------------------------------------------------------------------
CONCLUSIONS
================================================================================
Our audit of the subject coal properties has confirmed that Anker
controls a total demonstrated reserve base of 507.98 million tons of potentially
recoverable coal. The demonstrated reserves are reasonably well established by
exploration with 50 percent having measured status and 50 percent having
indicated status.
The table below presents MM&A's estimates of the Anker demonstrated
reserve base, which were prepared during the course of this audit. The reserve
estimate accounts for mine depletion through September 1999 and is therefore
based on Anker's reserves as of October 1, 1999.
165
Mr. Bruce Sparks, President
ANKER COAL GROUP, INC.
December 1, 1999
Page 2
SUMMARY OF DEMONSTRATED RESERVES
(MILLIONS OF TONS)
- --------------------------------------------------------------------------------------------------------------------------
UNDERGROUND TOTAL
(UG) OR RECOVERABLE
COUNTY AND STATE SURFACE (S) MEASURED INDICATED RESERVES SURFACE UNDERGROUND
- --------------------------------------------------------------------------------------------------------------------------
Barbour County, West Virginia UG 23.00 6.98 29.98 29.98
Grant County, West Virginia S/UG 16.21 13.69 29.90 1.30 28.60
Harrison County, West Virginia UG 18.45 38.15 56.60 56.60
Monongalia County, West Virginia S 2.03 0.02 2.05 2.05
Preston County, West Virginia UG 0.68 0.00 0.68 0.68
Raleigh County, West Virginia UG 18.60 12.83 31.43 31.43
Taylor County, West Virginia UG 73.57 144.41 217.98 217.98
Upshur County, West Virginia UG 41.11 24.76 65.87 65.87
Webster County, West Virginia S/UG 2.83 0.11 2.94 2.08 0.86
Allegheny County, Maryland S 4.15 0.10 4.25 4.25
Garrett County, Maryland S/UG 19.43 3.26 22.69 9.55 13.14
Muhlenberg County, Kentucky S/UG 7.08 0.83 7.91 0.34 7.57
Tazewell County, Virginia S/UG 25.26 10.44 35.70 0.90 34.80
- --------------------------------------------------------------------------------------------------------------------------
TOTALS 252.40 255.58 507.98 20.47 487.51
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEFINITIONS
================================================================================
Definitions(1) of key terms and criteria applied in this audit are as
follows:
- RESERVE - Reserve is defined as virgin and/or accessed parts of a
coal reserve base that could be economically extracted or produced
at the time of determination considering environmental, legal, and
technological constraints. DEMONSTRATED RESERVES are the sum of
coal reserves classified as measured and indicated as explained
below.
- RESERVE RELIABILITY CATEGORIES - The reliability categories are
related to the level of geologic assurance for the existence of a
quantity of resources. Assurance is based on the distance from
points where coal is measured or sampled and on the abundance and
quality of geologic data as related to thickness of overburden,
rank, quality, thickness of coal, areal extent, geologic history,
structure, and correlation of coal beds and enclosing rocks. The
degree of assurance increases as the proximity to points of
control, abundance, and quality of geologic data increase. The
reserve reliability categories include:
>> MEASURED COAL - Reserve estimates in this category
have the highest degree of geologic assurance.
Measured coal lies within 1/4 mile of a valid point
of measurement or point of observation (such as
previously mined areas) supporting such
measurements. The sites for thickness measurement
are so closely spaced, and the geologic character is
so well defined, that the average thickness, areal
extent, size, shape, and depth of coal beds are well
established.
- --------
(1) Source: U.S. Geological Survey Circular 891, "Coal Resource Classification
of the U.S. Geological Survey," 1983.
166
Mr. Bruce Sparks, President
ANKER COAL GROUP, INC.
December 1, 1999
Page 3
>> INDICATED COAL - Reserve estimates in this category
have a moderate degree of geologic assurance. There
are no sample and measurement sites in areas of
indicated coal. However, a single measurement can be
used to classify coal lying beyond measured as
INDICATED. Indicated coal lies more than 1/4 mile,
but less than 3/4 mile, from a point of thickness
measurement. Further exploration is necessary to
place indicated coal into the measured category.
- --------------------------------------------------------------------------------
METHODOLOGY AND QUALIFICATIONS
================================================================================
The reserve estimates presented herein are based on a thorough review and
checking of an extensive amount of geologic data provided by Anker to document
its reserve estimations. For each reserve area, seam correlations, thickness,
and mineable limits were cross-checked by MM&A to the geologic database and maps
provided by Anker. Reserve acreage by measured and indicated status, average
seam thickness, average seam density, and average mine and wash recovery
percentage were verified by MM&A to prepare a check calculation of each reserve.
MM&A has previously prepared a number of proprietary reserve reports
covering some of the subject reserve areas. A comparison of the geologic data,
coal mapping, and reserve estimations from these reports to Anker's in-house
reserve mapping and estimations demonstrated that Anker's estimates have been
performed within industry-accepted methodologies. Checking of those reserve
areas not previously evaluated by MM&A also supported this conclusion.
Our audit of the Anker's reserves was planned and performed to obtain
reasonable geologic assurance on the subject coal properties. The audit included
examination by certified professional geologists of all supplied reserve maps
and supporting data using industry-accepted standards. Although the audit
methodology is inherently not as exhaustive as a detailed reserve evaluation, in
our opinion the audit was conducted in sufficient detail and with independent
verification on a test basis of the underlying supporting evidence to provide
reasonable assurance for the subject reserves. The reserve audit did not include
independent verification of property ownership; we have relied on property
information supplied by Anker and considered this information to be accurate.
Sincerely,
MARSHALL MILLER & ASSOCIATES
ENERGY & MINERAL RESOURCES GROUP
/s/ J. Scott Nelson /s/ Peter B. Taylor
J. Scott Nelson, C.P.G. Peter B. Taylor, K.P.G.
Vice President Supervisory Geologist
167
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Anker's Amended and Restated Certificate of Incorporation provides for
indemnification of the directors, officers, employees and agents of Anker to the
full extent authorized or permitted by law.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a Delaware
corporation to indemnify any person who was or is, or is threatened to be made,
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation) by reason of the fact that such person
is or was a director, officer, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided that
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, such person had no reasonable
cause to believe his conduct was unlawful. A Delaware corporation may indemnify
such persons against expenses (including attorneys' fees) in actions brought by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and to the extent the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses as the
Court of Chancery or other such court shall deem proper. To the extent such
person has been successful on the merits or otherwise in defense of any action
referred to above, or in defense of any claim, issue or matter therein, the
corporation must indemnify such person against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
The indemnification and advancement of expenses provided for in, or granted
pursuant to, Section 145 is not exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors or otherwise.
Section 145 also provides that a corporation may maintain insurance against
liabilities for which indemnification is not expressly provided by the statute.
In addition, Anker's Amended and Restated Certificate of Incorporation, as
permitted by Section 102(b) of the DGCL, limits directors' liability to Anker
and its stockholders by eliminating liability in damages for breach of fiduciary
duty. Section 8 of Anker's Amended and Restated Certificate of Incorporation
provides that neither Anker nor its stockholders may recover damages from
Anker's directors for breach of their fiduciary duties in the performance of
their duties as directors of Anker. As limited by Section 102(b) of the DGCL,
this provision cannot, however, have the effect of indemnifying any director of
Anker in the case of liability (i) for a breach of the director's duty of
loyalty, (ii) for acts of omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL or (iv) for any transactions for which the director
derived an improper personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits to this registration statement are listed in the Exhibit Index to
this registration statement, which Exhibit Index is hereby incorporated by
reference.
ITEM 22. Undertakings.
The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of
II-1
168
securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(1) That, for the purpose 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.
(2) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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 registrants of expenses incurred
or paid by a director, officer or controlling person of the registrants 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
169
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Morgantown,
state of West Virginia, on December 3, 1999.
ANKER COAL GROUP, INC.
By: /S/ P. Bruce Sparks
-------------------------------
Title: President
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to sign
for us, in our names and in the capacities indicated below, the Registration
Statement on Form S-4 filed with the Securities and Exchange Commission, and any
and all amendments to said Registration Statement (including post-effective
amendments), and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, in connection with the registration
under the Securities Act of 1933, as amended, of debt securities and/or
guaranties of the registrant, and to file or cause to be filed the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys, and each of
them individually, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as each of them might or could do in person, and
hereby ratifying and confirming all that said attorneys, and each of them, or
their substitutes, shall do or cause to be done by virtue of this Power of
Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ---------------------------------------------------- ----------------
/S/ William D. Kilgore Chairman and Chief Executive Officer (Principal December 3, 1999
- ------------------------------------ Executive Officer)
William D. Kilgore
/S/ P. Bruce Sparks President and Director (Principal Executive Officer) December 3, 1999
- ------------------------------------
P. Bruce Sparks
/S/ Michael M. Matesic Treasurer (Principal Financial and Accounting December 3, 1999
- ------------------------------------ Officer)
Michael M. Matesic
/S/ John A. H. Shober Director December 3, 1999
- ------------------------------------
John A.H. Shober
/S/ Thomas R. Denison Director December 3, 1999
- ------------------------------------
Thomas R. Denison
/S/ Willem H. Hartog Director December 3, 1999
- ------------------------------------
Willem H. Hartog
II-3
170
SIGNATURES
Power Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Morgantown,
state of West Virginia, on December 3, 1999.
ANKER ENERGY CORPORATION
By: /S/ Michael M. Matesic
---------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to sign
for us, in our names and in the capacities indicated below, the Registration
Statement on Form S-4 filed with the Securities and Exchange Commission, and any
and all amendments to said Registration Statement (including post-effective
amendments), and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, in connection with the registration
under the Securities Act of 1933, as amended, of debt securities and/or
guaranties of the registrant, and to file or cause to be filed the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys, and each of
them individually, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as each of them might or could do in person, and
hereby ratifying and confirming all that said attorneys, and each of them, or
their substitutes, shall do or cause to be done by virtue of this Power of
Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ William D. Kilgore Chief Executive Officer (Principal December 3, 1999
- ------------------------------------ Executive Officer)
William D. Kilgore
/S/ P. Bruce Sparks President and Director (Principal Executive December 3, 1999
- ------------------------------------ Officer)
P. Bruce Sparks
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-4
171
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
ANKER GROUP, INC.
By: /S/ P. Bruce Sparks
-------------------------------
Title: President
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ P. Bruce Sparks President and Director (Principal Executive December 3, 1999
- ------------------------------------ Officer)
P. Bruce Sparks
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-5
172
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
ANKER POWER SERVICES, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Richard B. Bolen President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Richard B. Bolen
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-6
173
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
ANKER VIRGINIA MINING COMPANY, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Pat Leedy President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Pat Leedy
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-7
174
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
ANKER WEST VIRGINIA MINING COMPANY, INC.
By: /S/ Michael M. Matesic
------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Gerald Peacock President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Gerald Peacock
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
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175
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
BRONCO MINING COMPANY, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ P. Bruce Sparks President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
P. Bruce Sparks
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer)
Michael M. Matesic
II-9
176
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
HAWTHORNE COAL COMPANY, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Chuck Dunbar President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Chuck Dunbar
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-10
177
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
HEATHER GLEN RESOURCES, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Jeffrey P. Kelly President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Jeffrey P. Kelley
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-11
178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
JULIANA MINING COMPANY, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Gerald Peacock President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Gerald Peacock
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-12
179
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
KING KNOB COAL CO., INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: President
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ---------------------------------------- ----------------
/S/ Michael M. Matesic President (Principal Executive Officer), December 3, 1999
- ------------------------------------ Treasurer (Principal Financial and
Michael M. Matesic Accounting Officer) and Director
II-13
180
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Carmel,
state of Indiana, on December 3, 1999.
MARINE COAL SALES COMPANY
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Larry Kaelin President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Larry Kaelin
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
/S/ P. Bruce Sparks Director December 3, 1999
- ------------------------------------
P. Bruce Sparks
II-14
181
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
MELROSE COAL COMPANY, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: President
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ---------------------------------------- ----------------
/S/ Michael M. Matesic President (Principal Executive Officer), December 3, 1999
- ------------------------------------ Treasurer (Principal Financial and
Michael M. Matesic Accounting Officer) and Director
/S/ B. Judd Hartman Secretary (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
B. Judd Hartman
II-15
182
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Morgantown,
state of West Virginia, on December 3, 1999.
NEW ALLEGHENY LAND HOLDING COMPANY, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: President
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ---------------------------------------- ----------------
/S/ Michael M. Matesic President (Principal Executive Officer), December 3, 1999
- ------------------------------------ Treasurer (Principal Financial and
Michael M. Matesic Accounting Officer) and Director
/S/ B. Judd Hartman Secretary (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
B. Judd Hartman
II-16
183
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
PATRIOT MINING COMPANY, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Gerald Peacock President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Gerald Peacock
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-17
184
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
SIMBA GROUP, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ P. Bruce Sparks President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
P. Bruce Sparks
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
/S/ William D. Kilgore Director December 3, 1999
- ------------------------------------
William D. Kilgore
II-18
185
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
UPSHUR PROPERTY, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Jeffrey P. Kelley President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Jeffrey P. Kelley
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-19
186
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
VANTRANS, INC.
By: /S/ Michael M. Matesic
-------------------------------
Title: President
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ---------------------------------------- ----------------
/S/ Michael M. Matesic President (Principal Executive Officer), December 3, 1999
- ------------------------------------ Treasurer (Principal Financial and
Michael M. Matesic Accounting Officer) and Director
/S/ P. Bruce Sparks Director December 3, 1999
- ------------------------------------
P. Bruce Sparks
II-20
187
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Morgantown, state of West Virginia, on December 3, 1999.
VINDEX ENERGY CORPORATION
By: /S/ Michael M. Matesic
-------------------------------
Title: Treasurer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of the registrant, hereby
severally constitute and appoint P. Bruce Sparks and Michael M. Matesic, and
each of them individually, with full powers of substitution and resubstitution,
our true and lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below, the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of debt securities and/or guaranties of the registrant, and to file or cause to
be filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them individually, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------------- ----------------
/S/ Gerald Peacock President (Principal Executive Officer) and December 3, 1999
- ------------------------------------ Director
Gerald Peacock
/S/ Michael M. Matesic Treasurer (Principal Financial and December 3, 1999
- ------------------------------------ Accounting Officer) and Director
Michael M. Matesic
II-21
188
Exhibit Index
Exhibit
No. Description
- ------- -------------------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Anker Coal Group, Inc. (Anker) (b)
3.2 First Restated and Amended Bylaws of Anker (b)
3.2.2 Amendment No. 1 to First Restated and Amended By-laws of Anker (h)
3.2.3 Amendment No. 2 to First Restated and Amended Bylaws of Anker (h)
3.5 Certificate of Designation, Preferences and Rights of Class C Preferred Stock of Anker (a)
3.6 Certificate of Designation, Preferences and Rights of Class D Preferred Stock of Anker (a)
3.7 Certificate of Incorporation of Anker Group, Inc. (b)
3.8 Bylaws of Anker Group, Inc. (b)
3.9.1 Certificate of Incorporation of Anker Energy Corporation (b)
3.9.2 Certificate of Ownership and Merger merging Anker Mining and Development Co., Inc. into Anker Energy
Corporation (b)
3.9.3 Certificate of Merger of Energy Resource Management Services, Inc. into Anker Energy Corporation (b)
3.10 Bylaws of Anker Energy Corporation (b)
3.11 Articles of Incorporation of Bronco Mining Company, Inc. (b)
3.12 Bylaws of Bronco Mining Company, Inc. (b)
3.13 Articles of Incorporation of Anker Power Services, Inc. (b)
3.14 Bylaws of Anker Power Services, Inc. (b)
3.15.1 Articles of Incorporation of Anker West Virginia Mining Company, Inc. (b)
3.15.2 Articles of Merger of Anker West Virginia Mining Company, Inc. and Advantage Energy Corporation (b)
3.15.3 Articles of Merger of Anker West Virginia Mining Company, Inc. and Beckley Smokeless Limited Liability Company (b)
3.15.4 Articles of Merger of Anker West Virginia Mining Company, Inc. and Pine Valley Coal Company, Inc. (b)
3.15.5 Articles of Merger of Anker West Virginia Mining Company, Inc. and Spruce Fork Coal Company, Inc. (b)
3.16 Bylaws of Anker West Virginia Mining Company, Inc. (b)
3.17 Articles of Incorporation of Juliana Mining Company, Inc. (b)
3.18 Bylaws of Juliana Mining Company, Inc. (b)
3.19.1 Articles of Incorporation of King Knob Coal Co., Inc. (b)
3.19.2 Articles of Merger of Brook Coal Company into King Knob Coal Co., Inc. (b)
3.19.3 Articles of Merger of King Aviation Inc. into King Knob Coal Co., Inc. (b)
3.19.4 Articles of Merger of Peaser Branch Coal Company into King Knob Coal Co., Inc. (b)
3.19.5 Articles of Merger of Sparta Mining Company, Inc. into King Knob Coal Co., Inc. (b)
3.20 Bylaws of King Knob Coal Co., Inc. (b)
3.21 Certificate of Incorporation of Vantrans, Inc. (b)
3.22 Bylaws of Vantrans, Inc. (b)
3.23 Articles of Incorporation of Melrose Coal Company, Inc. (b)
3.24 Bylaws of Melrose Coal Company, Inc. (b)
3.25.1 Certificate of Incorporation of Marine Coal Sales Company (b)
3.25.2 Certificate of Merger of Leflore Energy Corporation into Marine Coal Sales Company (b)
3.26 Bylaws of Marine Coal Sales Company (b)
3.27 Articles of Incorporation of Hawthorne Coal Company, Inc. (b)
3.28 Bylaws of Hawthorne Coal Company, Inc. (b)
3.29 Certificate of Incorporation of Upshur Property, Inc. (b)
3.30 Bylaws of Upshur Property, Inc. (b)
3.31 Articles of Incorporation of Heather Glen Resources, Inc. (b)
3.32 Bylaws of Heather Glen Resources, Inc. (b)
3.33 Articles of Incorporation of New Allegheny Land Holding Company, Inc. (b)
3.34 Bylaws of New Allegheny Land Holding Company, Inc. (b)
3.35.1 Articles of Incorporation of Patriot Mining Company, Inc. (b)
3.35.2 Articles of Merger of Ajax Mining Company, Inc. into Patriot Mining Company, Inc. (b)
3.35.3 Articles of Merger of Sandy Creek Land Company, Inc. into Patriot Mining Company, Inc. (b)
3.36 Bylaws of Patriot Mining Company, Inc. (b)
3.37 Articles of Incorporation of Vindex Energy Corporation (b)
3.38 Bylaws of Vindex Energy Corporation (b)
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Exhibit
No. Description
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3.39 Articles of Incorporation of Anker Virginia Mining Company, Inc. (b)
3.40 Bylaws of Anker Virginia Mining Company, Inc. (b)
3.41 Articles of Incorporation of Simba Group, Inc.
3.42 Bylaws of Simba Group, Inc.
4.1 Indenture for 14.25% Second Priority Senior Secured Notes Due 2007 (PIK through April 1, 2000), dated as of
October 1, 1999, including form of Notes
5.1 Form of Opinion of Wilmer, Cutler & Pickering as to the legality of the securities being registered
8.1 Form of Opinion of Wilmer, Cutler & Pickering as to certain tax matters
10.1 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 VI, Limited Partnership and
First Reserve Fund VII, Limited Partnership, dated as of August 12, 1996 (a)
10.2 Employment Agreement between P. Bruce Sparks, Anker Energy Corporation and Anker Coal Group, dated August 1,
1996 (b)
10.3 Anker Coal Group, Inc. Omnibus Stock Incentive Plan (b)
10.4 Form of Restricted Stock Award Agreement (b)
10.5 Form of Stock Option Grant Agreement (b)
10.6 Asset Purchase Agreement among Oak Mountain Energy, L.L.C., 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 20, 1997 (b)
10.7.1 Operating Agreement of Oak Mountain Energy, L.L.C., dated February 20, 1997 (b)
10.7.2 Amendment No. 1 to Operating Agreement of Oak Mountain Energy, L.L.C., dated April 9, 1997 (b)
10.8.1 Operating Agreement of Shelby Energy Group, L.L.C., dated February 20, 1997 (b)
10.8.2 Amendment No. 1 to Operating Agreement of Shelby Energy Group, L.L.C., dated April 9, 1997 (b)
10.9 Registration Rights Agreement, dated as of August 12, 1996, by and among Anker Coal Group, Inc., JJF Group
Limited Liability Company, PPK Group Limited Liability Company, Anker Holding, B.V., American Oil and 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 (b)
10.10 Stock Purchase Warrant, dated as of August 12, 1996 (b)
10.11 Loan and Security Agreement dated as of November 21, 1998, among certain subsidiaries of Anker Coal Group, Inc.,
Foothill Capital Corporation and others (d)
10.12 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., certain financial institutions
party thereto and Foothill Capital Corporation, as agent (g)
10.13 Amendment No. 2 to Loan Documents dated as of August 26, 1999, amending the Loan and Security Agreement,
dated as of November 21, 1999, by and among certain Subsidiaries of Anker Coal Group, Inc., certain financial
institutions party thereto and Foothill Capital Corporation, as agent. (f)
10.14 Registration Rights Agreement, dated as of October 26, 1999, between Anker, the Guarantors listed on Schedule
A thereto and the Purchasers and Exchanging Noteholders listed on Schedule B thereto
10.15 Exchange and Purchase Agreement, dated as of October 26, 1999, by and among Anker, the Guarantors listed on
Schedule I thereto, the Exchanging Noteholders listed on Schedule III thereto and the Purchaser listed on
Schedule II thereto
10.16 JJF Group Exchange Agreement, dated as of October 26, 1999, by and among Anker, the Guarantors listed on
Schedule I thereto and JJF Group Limited Liability Company (JJF Group)
10.17 Termination and Cancellation Agreement, dated as of October 26, 1999, by and between Anker and JJF Group
10.18 Supplemental Indenture, dated as of October 1, 1999, amending and supplementing the Indenture dated as of
September 25, 1997 for 9 3/4% Senior Notes Due 2007 by and among Anker, the Guarantors signatory thereto and
HSBC Bank USA (formerly known as Marine Midland Bank), as Trustee
10.19 Form of Stock Purchase Warrant
10.20 Warrant Agreement, dated as of October 26, 1999, by and between Anker and The Bank of New York, as Warrant Agent
10.21 Common Stock Registration Rights Agreement, dated as of October 26, 1999, by and among Anker and the
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Exhibit
No. Description
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Exchanging Noteholders and Purchaser signatory thereto
10.22 Investor Agreement, dated as of October 26, 1999, by and among Anker and the Holders of Warrant Shares named therein
10.23 Intercreditor Agreement, dated as of October 1, 1999, by and between Foothill Capital Corporation (Foothill)
and The Bank of New York, as Collateral Agent
10.24 Consent and Amendment No. 3 to Loan Documents, dated as of October 1, 1999 by Foothill, the Borrowers and the Lender
Group
10.25 Option Agreement, dated as of October 1, 1999, between Foothill Capital Corporation and Rothschild Recovery Fund L.P.
10.26 General Security Agreement, dated as of October 1, 1999, by and among Anker, The Bank of New York, as Trustee
and Collateral Agent, and the Guarantors signatory thereto
10.27 Pledge and Security Agreement, dated as of October 1, 1999, among the entities set forth on Schedule A thereto,
in favor of The Bank of New York, as Trustee
10.28 Pledge and Security Agreement, dated as of October 1, 1999, by Anker West Virginia Mining Company, Inc. in
favor of The Bank of New York, as Trustee
10.29 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."* (g)
10.30 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.* (g)
10.31 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."* (g)
10.32 Contract Mining Agreement, dated May 5, 1999, between Anker West Virginia Mining Company, Inc. ("AWVMC") and
Wayne Processing, Inc. ("Independent Contractor"), for contract mining services to be provided by Independent
Contractor at the underground coal mining operation in Upshur County, West Virginia, known as the "Spruce
Mine No. 1." *(e)
10.33 Contract Mining Agreement, dated May 5, 1999, between Anker West Virginia Mining Company, Inc. ("AWVMC") and
Wayne Processing, Inc. ("Independent Contractor"), for contract mining services to be provided by Independent
Contractor at the underground coal mining operation in Barbour County, West Virginia, known as the "Spruce
Mine."*(e)
10.34 Employment Agreement dated as of May 1, 1999 by and between Anker Energy Corporation and William D. Kilgore (g)
10.35 Put Agreement dated as of August 25, 1998 between Anker Coal and JJF Group LLC (c)
10.36 Coal Sales Agreement, dated as of October 22, 1999, by and between Anker Energy Corporation and AK Steel
Corporation*
10.37 Coal Supply Agreement by and among Anker Energy Corporation, Anker West Virginia Mining Company, Inc., Juliana
Mining Company, Inc. and Potomac Electric Power Company*
10.38 Coal Sales Agreement dated as of September 15, 1989 by and between Anker Energy Corporation and Morgantown
Energy Associates*
10.39 Coal Supply Agreement dated April 1, 1992 between Anker Energy Corporation and Keystone Energy Service Company,
L.P.*
10.40 Coal Supply and Services Agreement dated as of December 1, 1990 between Anker Energy Corporation and ER&L
Thames, Inc.*
21 List of Subsidiaries of Anker
23.1 Consent of Wilmer, Cutler & Pickering (included in Exhibits 5.1 and 8.1)
23.2 Consent of PricewaterhouseCoopers LLP (successor to Coopers & Lybrand L.L.P.), as independent auditors for Anker
23.3 Consent of Marshall Miller & Associates
24 Powers of Attorney (included in the signature pages of this registration statement)
- --------
* A portion of the exhibit, as indicated therein, has been redacted
pursuant to a request for confidential treatment filed with the Commission.
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Exhibit
No. Description
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25 Form T-1 Statement of Eligibility of The Bank of New York to act as trustee under the Indenture
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Exchange Agent Agreement (i)
(a) Incorporated by reference from the registrant's Registration Statement on
Form S-4 /A (File No. 333-39643) first filed with the Commission on
January 12, 1998.
(b) Incorporated by reference from the registrant's Registration Statement on
Form S-4 /A (File No. 333-39643) first filed with the Commission on
February 10, 1998.
(c) Incorporated by reference from the registrant's Form 8-K filed with the
Commission on September 22, 1998.
(d) Incorporated by reference from the registrant's Form 8-K filed with the
Commission on December 10, 1998.
(e) Incorporated by reference from the registrant's Form 8-K filed with the
Commission on June 7, 1999.
(f) Incorporated by reference from the registrant's Form 8-K filed with the
Commission on August 27, 1999.
(g) Incorporated by reference from the registrant's Form 10-Q filed with the
Commission on August 16, 1999.
(h) Incorporated by reference from the registrant's Form 10-Q filed with the
Commission on November 15, 1999.
(i) To be filed by Amendment.
II-25