AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1998
REGISTRATION NO. 333-
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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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LODESTAR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1221, 1222 13-3903875
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
LODESTAR ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1221, 1222 95-2623858
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
EASTERN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 1221, 1222 61-1140112
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
INDUSTRIAL FUELS MINERALS COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 1221, 1222 36-3256999
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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LODESTAR HOLDINGS, INC.
30 ROCKEFELLER PLAZA, SUITE 4225
NEW YORK, NEW YORK 10112
(212) 541-6000
LODESTAR ENERGY, INC.
EASTERN RESOURCES, INC. MICHAEL E. DONOHUE
INDUSTRIAL FUELS MINERALS COMPANY CHIEF FINANCIAL OFFICER
333 WEST VINE STREET, SUITE 1700 333 WEST VINE STREET, SUITE 1700
LEXINGTON, KENTUCKY 40507 LEXINGTON, KENTUCKY 40507
(606) 255-4006 (606) 255-4006
(Address, including zip code, and telephone number, including (Name, address, including zip code, and telephone number,
area code, of registrant's principal executive offices) including area code, of agent for service)
COPIES TO:
MICHAEL C. RYAN, ESQ.
CADWALADER, WICKERSHAM & TAFT
100 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 504-6177
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE+ REGISTRATION FEE
11 1/2% Senior Notes due 2005, Series B............ $150,000,000 100% $150,000,000 $44,250
Guarantees of 11 1/2% Senior Notes due 2005, Series
B................................................ $150,000,000 100% $150,000,000 ++
+ Estimated solely for purposes of computing the registration fee pursuant to
Rule 457(f).
++ Pursuant to Rule 457(n), no additional filing fee is required, as no
separate consideration will be paid for each of the Guarantees by the
Guarantors.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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SUBJECT TO COMPLETION, DATED JULY 14, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
LODESTAR HOLDINGS, INC.
OFFER TO EXCHANGE ITS 11 1/2% SENIOR NOTES DUE 2005, SERIES B,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
11 1/2% SENIOR NOTES DUE 2005, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS EXTENDED.
Lodestar Holdings, Inc., a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and together with this Prospectus, the "Exchange Offer"), to
exchange its 11 1/2% Senior Notes due 2005, Series B (the "Exchange Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement (as defined) of which
this Prospectus is a part, for an equal principal amount of its outstanding
11 1/2% Senior Notes due 2005, Series A (the "Old Notes"), of which $150.0
million is outstanding. The Exchange Notes and the Old Notes are collectively
referred to herein as the "Senior Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
, 1998, unless the Exchange Offer is extended (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange Notes will be issued and
delivered promptly after the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer." Old Notes may be tendered only in integral
multiples of $1,000. The Company has agreed to pay the expenses of the Exchange
Offer.
The Exchange Notes will be obligations of the Company evidencing the same
debt as the Old Notes and will be entitled to the benefits of the same
indenture, dated as of May 15, 1998 (the "Indenture"), by and among the Company,
as issuer, Lodestar Energy, Inc., ("Lodestar"), Eastern Resources, Inc.
("Eastern Resources") and Industrial Fuels Minerals Company ("Industrial
Fuels"), as guarantors (the "Guarantors"), and State Street Bank and Trust
Company, as trustee (the "Trustee"). The form and terms of the Exchange Notes
are substantially the same as the form and terms of the Old Notes except that
the Exchange Notes have been registered under the Securities Act. See "The
Exchange Offer."
The Exchange Notes will bear interest from May 15, 1998. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on the Old Notes accrued
up until the date of the issuance of the Exchange Notes. Such waiver will not
result in the loss of interest income to such holders, since the Exchange Notes
will bear interest from the issue date of the Old Notes.
Interest on the Exchange Notes will be payable semi-annually on May 15 and
November 15 of each year, commencing on November 15, 1998. The Exchange Notes
will mature on May 15, 2005. Except as set forth below, the Exchange Notes will
not be redeemable prior to May 15, 2002. Thereafter, the Exchange Notes will be
redeemable at the option of the Company, in whole or in part, at the redemption
prices set forth herein, together with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time on or prior to May 15, 2001,
the Company may, subject to certain requirements, redeem up to 35% of the
original aggregate principal amount of the Exchange Notes with the net cash
proceeds of one or more Equity Offerings (as defined), at 111.5% of the
principal amount thereof, together with accrued and unpaid interest, if any, to
the date of redemption; PROVIDED that at least 65% of the original aggregate
principal amount of Senior Notes remain outstanding immediately after any such
redemption. Upon the occurrence of a Change of Control (as defined), each holder
of Exchange Notes may require the Company to repurchase such holder's Exchange
Notes at 101% of the principal amount thereof plus accrued interest to the date
of repurchase. The Company is obligated in certain instances to make offers to
repurchase the Exchange Notes with the net cash proceeds of certain sales and
other dispositions of assets. See "Description of the Senior Notes."
The Exchange Notes will be general unsecured obligations of the Company
ranking senior in right of payment to all existing and future subordinated
indebtedness of the Company and PARI PASSU in right of payment with all other
senior indebtedness of the Company. The Exchange Notes will be fully and
unconditionally guaranteed (the "Guarantees") on a senior unsecured basis by the
Guarantors. However, Lodestar's indebtedness under its $90.0 million revolving
credit facility and $30.0 million letter of credit facility (collectively, the
"New Senior Credit Facility"), and Lodestar's contingent obligations to the
surety of various performance bonds related primarily to reclamation and
workers' compensation (the "Performance Bonds"), are secured by a first and
second priority security interest, respectively, in substantially all of the
property and other assets of Lodestar. Accordingly, holders of such secured
obligations, and any other secured obligations of the Company and the
Guarantors, will have claims that effectively rank prior to those of holders of
Exchange Notes with respect to the assets securing such obligations. See
"Description of the Senior Notes--Guarantees." The Indenture permits the Company
and the Guarantors to incur additional indebtedness, including senior
indebtedness and secured indebtedness, subject to certain limitations. As of
April 30, 1998, on a consolidated pro forma basis, the Company would have had
approximately $150.0 million of indebtedness outstanding (exclusive of unused
commitments of $90.0 million and approximately $21.5 million of outstanding
letters of credit, in each case, under the New Senior Credit Facility). See
"Description of the Senior Notes" and "Description of New Senior Credit
Facility."
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a Prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that, by so acknowledging and by
delivering a Prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as a
result of market-making or other trading activities. The Company has agreed that
for a period of 180 days after consummation of the Exchange Offer, it will make
this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
There has been no public market for the Old Notes. If a market for the
Exchange Notes should develop, the Exchange Notes could trade at a discount from
their principal amount. The Company does not intend to list the Exchange Notes
on a national securities exchange or quotation system. There can be no assurance
that an active public market for the Exchange Notes will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-4 (together
with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the Exchange
Notes offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company, and the Exchange Notes offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of certain documents filed as exhibits to the Registration Statement
are not necessarily complete and, in each case, are qualified by reference to
the copy of the document so filed. The Registration Statement can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such material also can be reviewed through the Commission's Electronic
Data Gathering, Analysis, and Retrieval System, which is publicly available
through the Commission's web site (http://www.sec.gov).
The Company intends to furnish to each holder of the Exchange Notes annual
reports containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year. The Company also will furnish to each holder of the Exchange Notes such
other reports as may be required by applicable law.
The principal executive offices of the Company are located at 30 Rockefeller
Plaza, Suite 4225, New York, New York, 10112, telephone number: (212) 541-6000,
and the principal executive offices of each of the Guarantors are located at 333
West Vine Street, Suite 1700, Lexington, Kentucky 40507, telephone number: (606)
255-4006.
FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
elsewhere constitute "forward-looking statements." Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include, among others: general
economic and business conditions; industry trends, including coal pricing;
competition; the loss of any significant customers or long-term contracts; and
other factors referenced in this Prospectus. See "Risk Factors." These
forward-looking statements speak only as of the date of this Prospectus. The
Company expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
2
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY BEFORE INVESTING IN THE EXCHANGE NOTES. PRIOR TO THE
ACQUISITION (AS DEFINED), THE PREDECESSOR COMPANY'S (AS DEFINED) FISCAL YEAR
ENDED DECEMBER 31; AS OF MARCH 15, 1997, THE COMPANY ESTABLISHED A FISCAL YEAR
ENDING OCTOBER 31. REFERENCES TO RESULTS OF THE COMPANY OR LODESTAR FOR PERIODS
BEGINNING PRIOR TO THE ACQUISITION REPRESENT THE COMBINED RESULTS OF THE
PREDECESSOR COMPANY THROUGH MARCH 14, 1997 AND THE COMPANY OR LODESTAR, AS
APPLICABLE, THEREAFTER. AS USED HEREIN, "TON" MEANS A SHORT TON (2,000 POUNDS).
UNLESS THE CONTEXT INDICATES OTHERWISE, REFERENCES HEREIN TO THE "COMPANY" ARE
TO LODESTAR HOLDINGS, INC. AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS, AND
REFERENCES HEREIN TO "LODESTAR" ARE TO LODESTAR ENERGY, INC. AND ITS
SUBSIDIARIES ON A CONSOLIDATED BASIS.
THE COMPANY
The Company, through its wholly-owned subsidiary Lodestar, is engaged in the
mining and marketing of bituminous coal used principally for the generation of
electricity, as well as for other industrial applications. For the twelve months
ended April 30, 1998, the Company had coal shipments of 10.9 million tons,
resulting in coal sales and related revenue of $278.7 million.
Lodestar focuses on selected niche coal markets in the Eastern, South
Central and Great Lakes regions of the United States. Through its diverse
portfolio of seven deep and five surface coal mines located in Eastern and
Western Kentucky, Lodestar is among the largest coal producers in Kentucky, the
third largest coal producing state. Lodestar believes that it is a low cost
producer offering its customers flexibility in order quantities and
transportation methods, including barge, rail or truck. In addition, Lodestar
processes the vast majority of its coal through its washing and blending
facilities to meet customers' combustion and environmental specifications, such
as energy (as measured by British thermal units ("Btus")), ash and sulfur
content. Lodestar believes that its niche market strategy, together with its
operating flexibility, permits it to meet customer demand for quality products
and services at competitive prices, resulting in long-term contracts with its
customers.
For the twelve months ended April 30, 1998, approximately 72% of Lodestar's
coal sales and related revenue were derived from contracts which had remaining
terms exceeding one year ("long-term contracts"). As of April 30, 1998, Lodestar
had long-term contracts, including long-term contracts with the Tennessee Valley
Authority (the "TVA") and certain affiliates of U.S. Generating Company ("U.S.
Gen"), with a weighted average term of approximately 8.4 years. Lodestar
believes that the facilities to which it supplies coal generally are well
positioned to compete in a deregulated environment for electricity generation.
Lodestar's niche market strategy targets customers whose needs are
compatible with the particular coal qualities it produces. Lodestar supplies mid
to high sulfur coal (above 1.8% sulfur) from its Western Kentucky operations to
customers, such as electricity generation facilities, that can economically use
such coal by employing sulfur-reduction techniques, including scrubbers and coal
blending, in addition to utilizing emissions allowance credits. Lodestar also
supplies low sulfur coal (less than 1.0% sulfur) from its Eastern Kentucky
operations to customers that require such coal to meet environmental discharge
requirements.
Lodestar believes that the proximity of its reserves and facilities to
customers that can economically use its coal provides it a competitive
advantage. In addition, Lodestar uses its preparation and loadout facilities in
Eastern and Western Kentucky to wash and blend coal to satisfy customer needs
for Btu, ash and sulfur content. Moreover, Lodestar provides its customers
transportation flexibility by offering delivery by barge, rail or truck. For
example, Lodestar's barge loading facility at Caseyville, Kentucky (the
"Caseyville Dock") is located farther south on the Ohio River than any
comparable facility. As a result, the Caseyville Dock provides Lodestar a cost
advantage in delivering coal to customers in the Southern United
3
States over competitors that must load and ship from facilities located farther
north. Lodestar believes that its production and transportation flexibility
enables it to satisfy customer requirements, while maintaining efficient and low
cost operations.
Lodestar owns eleven of its mines, which for the twelve months ended April
30, 1998, accounted for more than 90% of its coal production. In addition,
Lodestar operates one mine owned by a third party and purchases most of the coal
produced from such mine. In excess of 90% of the coal produced at Lodestar's
mines is produced by Lodestar employees, and the balance is mined by independent
contractors. Lodestar believes that the selective use of independent contractors
lowers its costs and increases its operating flexibility to vary production in
response to market conditions. In the future, Lodestar will seek to increase its
coal purchases from third parties to maximize the utilization of its washing and
blending facilities and thus improve operating margins.
For the twelve months ended April 30, 1998, electrical power utilities and
independent power producers ("IPPs") accounted for approximately 56% and 21% of
Lodestar's coal sales and related revenue, respectively. The balance of
Lodestar's coal sales and related revenue was attributable to brokers and
industrial customers. Accordingly, Lodestar believes that it is well positioned
to benefit from favorable trends in the electricity generation industry. From
1973 to 1996, coal consumption experienced a compound annual growth rate (a
"CAGR") of 2.6%, reaching approximately 1.01 billion tons of consumption in
1996. This growth in coal consumption is directly related to the growth in
electricity consumption in the United States. Electricity generation in 1996
accounted for approximately 89% of the coal consumed in the United States.
In 1996, coal-fired facilities generated approximately 56% of the
electricity consumed in the United States, and the balance was generated by
nuclear, hydroelectric and gas-fired facilities, representing approximately 22%,
11% and 9%, respectively, of electricity consumption. Coal is one of the least
expensive and most abundant domestic resources for the production of
electricity. Accordingly, notwithstanding the alternative fuel sources,
management believes that coal will continue to be a major raw material for
electricity generation in the United States for the foreseeable future.
Lodestar further believes that it will benefit from increasing deregulation
among electricity producers. Since 1935, domestic electricity utilities have
operated in a regulated environment, with prices and return on investment
determined by state utility and power commissions. In April 1996, the Federal
Energy Regulatory Commission (the "FERC") issued orders establishing rules
providing for open access to electricity transmission systems, which are
designed to initiate consumer choice in electricity purchasing and encourage
competition in the generation of electricity. Lodestar believes that this trend
toward deregulation will likely (i) increase the desirability of coal as a raw
material for electricity generation due to its relative low cost and (ii) favor
coal producers, such as Lodestar, that have diverse reserves in addition to cost
and transportation advantages.
COMPETITIVE STRENGTHS
The Company believes its competitive strengths include the following:
PORTFOLIO OF LONG-TERM CONTRACTS
Lodestar has secured long-term coal supply contracts with a weighted average
term of approximately 8.4 years as of April 30, 1998. Lodestar's long-term
contracts have accounted for approximately 80% of its coal sales and related
revenue since 1992. Lodestar believes its strong performance history with major
customers, attributable to, among other things, its low cost structure and
customer service, will strengthen existing relationships, as well as facilitate
the development of new relationships, which will result in additional long-term
contracts.
4
HIGHLY EFFICIENT OPERATIONS
Lodestar has been successful in increasing productivity at both its Eastern
and Western Kentucky operations. Since 1993, Lodestar's deep mine operations
have improved production from 3.5 tons to 4.9 tons per manhour for the year
ended December 31, 1997. Over the same period, Lodestar's surface mine
operations in Kentucky have improved productivity from 83.7 cubic yards moved to
109.2 cubic yards moved per manhour. Lodestar has achieved such improvements by
developing and instituting more efficient mining techniques, altering its mine
plans and incorporating new mining technologies, such as the high efficiency,
high production longwall mining equipment used in Western Kentucky. Lodestar
also has invested in state-of-the-art surface mining equipment, such as the
Komatsu 575 dozer, the largest dozer in the world, and the DeMag 285S 25-cubic
yard hydraulic shovel, which is used on mountaintop surface mines, to further
improve its operating efficiencies.
FLEXIBLE OPERATIONS
Lodestar's coal reserves, along with its extensive processing infrastructure
and transportation capabilities, enable it to maintain a high degree of
operating flexibility to meet its customers' specific requirements. In
particular, Lodestar's washing and blending capabilities permit Lodestar to
provide coal with a specific Btu, sulfur and ash content. In addition,
Lodestar's diverse transportation capabilities enable it to provide delivery of
coal by barge, rail or truck in a timely manner. In response to varying market
conditions, Lodestar also has the ability, to a certain extent, to revise its
mine production. By maintaining such operating and production flexibility,
management believes that Lodestar is able to respond to changing market
conditions, as well as to meet its customers' needs.
DIVERSE PORTFOLIO OF RESERVES
Lodestar owns or operates twelve mines, four in Western Kentucky (three
underground and one surface) and eight in Eastern Kentucky (four underground and
four surface) with a total demonstrated reserve base of approximately 198.6
million recoverable tons as of January 31, 1998. As of such date, 22%, or
approximately 43.7 million recoverable tons, of its demonstrated reserves was
low sulfur coal and 78%, or 154.9 million recoverable tons, was mid to high
sulfur coal. Lodestar's demonstrated reserve life index (total demonstrated
reserves divided by production for the twelve months ended January 31, 1998) was
approximately eighteen years as of January 31, 1998. All of Lodestar's reserves
are of a quality suitable for use in the generation of electricity throughout
its market area. See "Risk Factors--Reliance on Estimates of Recoverable
Reserves" and "--Replacement of Reserves."
HIGH BARRIERS TO ENTRY
Management believes that the capital costs and environmental requirements
associated with constructing facilities comparable to those of Lodestar result
in high barriers to entry for prospective entrants. Management further believes
that its combination of mining, processing and transportation facilities
provides it significant operating flexibility that would be difficult for a
potential entrant to duplicate. In addition, management believes that the cost
and time commitment required to achieve commercial production for any new mining
or processing operation, including regulatory approvals, would be prohibitively
expensive, further heightening the barriers to entry.
EXPERIENCED MANAGEMENT
Lodestar's senior management team has an average of approximately nineteen
years of experience in coal or related industries. Lodestar believes this
experience enables it to identify and respond to important trends in the coal
industry.
5
BUSINESS STRATEGY
The Company's business strategy is to improve its operations and financial
performance by focusing on the following principal elements:
MAINTAIN OPERATIONAL FLEXIBILITY
Lodestar strives to maintain a high level of operational flexibility to
respond to customer requirements, as well as other market opportunities. With
its mining facilities in Eastern and Western Kentucky, Lodestar operates in two
distinct coal supply regions. In that regard, Lodestar has flexibility in
developing its mining and production plans in terms of volume and type of coal
to take advantage of prevailing market conditions and enhance its position with
customers. With its multiple mines and coal washing and blending capabilities,
Lodestar also is able to minimize the production costs associated with the
particular quality of coal produced. With respect to transportation, Lodestar
has available multiple options, including facilities and equipment controlled by
Lodestar, designed to provide effective coal transportation and delivery at
competitive costs.
IMPROVE OPERATING EFFICIENCIES AND CAPACITY UTILIZATION
Lodestar is committed to continuous improvement through focused capital
investment and the implementation of non-capital cost reduction programs
throughout its operations. Since 1993, Lodestar has completed approximately
$112.2 million of capital investments designed to, among other things, increase
capacity utilization, enhance productivity and lower production costs.
Management expects to spend approximately $10.0 million to $15.0 million
annually for capital expenditures, of which approximately $8.0 million is
required annually to maintain its current level of operations.
EXPAND NICHE MARKETS
By expanding the use of its extensive preparation and transportation
facilities, Lodestar will seek to enter new markets which generate higher
operating margins. Given its proximity to end users of coal, Lodestar seeks to
leverage its infrastructure to expand into niche markets for industrial
corporations, as well as to expand its relationships with IPPs. In addition,
Lodestar intends to expand its coal trading activities and recommence its
brokering operations which will permit Lodestar to optimize the use of its
facilities.
BUILD AND MAINTAIN STRONG RELATIONSHIPS WITH STRATEGIC CUSTOMERS
Through its ongoing customer service initiatives, Lodestar strives to build
and maintain strong relationships with its customers. Lodestar's sales,
transportation and production professionals work closely with customers to be
responsive to their needs, such as small order quantities, specialized sizing,
technical assistance, and flexible and reliable deliveries. As evidence of its
customer commitment, Lodestar has served the TVA for over twenty years and was
the recipient of the TVA's supplier of the year award in 1996.
ACHIEVE OPERATING IMPROVEMENTS FROM THE OLD NOTES OFFERING
Lodestar used a portion of the net proceeds of the Old Notes Offering (as
defined) to: (i) purchase certain equipment previously financed pursuant to
leases, most of which were entered into by the Predecessor Company; (ii) buy out
certain long-term royalty agreements entered into by the Predecessor Company;
and (iii) make payments to normalize accounts payable which had been extended
prior to the Acquisition. As a result of undertaking the foregoing, Lodestar
would have increased its EBITDA (as defined) by approximately $5.5 million on a
pro forma basis for the six months ended April 30, 1998, thereby improving its
operating cash flow and financial flexibility.
6
GROW THROUGH STRATEGIC ACQUISITIONS
To capitalize on the trend toward asset rationalization by coal mining
companies, Lodestar plans to pursue the acquisition of coal companies and
reserves that complement its existing operations or provide strategic expansion
opportunities. Based upon the breadth of Lodestar's operating capabilities in
Eastern and Western Kentucky, Lodestar believes opportunities exist to
consolidate coal reserves within its primary geographic areas. In addition,
Lodestar will consider the acquisition of mines outside its geographic areas
that are compatible with its niche marketing strategy. Although the Company has
discussions from time to time with respect to potential acquisitions of reserves
and/or coal companies, it currently has no commitments or other such
arrangements.
CONTROL OF THE COMPANY
The Company is a wholly-owned subsidiary of The Renco Group, Inc. ("Renco"),
which is 97.9% owned by Mr. Ira Leon Rennert, the Chairman of the Company and
Lodestar and Chairman and Chief Executive Officer of Renco, and by trusts
established by him for himself and members of his family (but of which he is not
a trustee). As a result of such ownership, Mr. Rennert controls the Company and
its subsidiaries.
THE ACQUISITION
The Company (formerly named Rencoal, Inc.) purchased all of the outstanding
shares of capital stock of Costain Coal Inc. (prior to the Acquisition, the
"Predecessor Company") from Costain America Inc. (the "Predecessor's Parent"),
effective March 14, 1997 (the "Acquisition"). After the Acquisition, Costain
Coal Inc. was renamed Lodestar Energy, Inc.
OLD NOTES OFFERING
On May 15, 1998, the Company sold and issued the Old Notes (the "Old Notes
Offering"). The Company used the net proceeds of the Old Notes Offering to (i)
repay all existing indebtedness ("the Existing Indebtedness"), (ii) purchase
certain equipment financed pursuant to leases, (iii) buy out certain long-term
royalty agreements, (iv) pay a dividend to Renco, (v) make certain contractual
payments to certain executives of Lodestar and (vi) pay related fees and
expenses and reduce accounts payable and accrued expenses and for general
corporate purposes. The Old Notes Offering and the uses of proceeds therefrom
set forth in clauses (i) through (vi) above are collectively referred to herein
as the "Transactions."
7
THE EXCHANGE OFFER
THE EXCHANGE OFFER........... $1,000 principal amount of Exchange Notes will be issued in
exchange for each $1,000 principal amount of Old Notes,
validly tendered pursuant to the Exchange Offer. As of the
date hereof, $150.0 million in aggregate principal amount of
Old Notes are outstanding. The Company will issue the
Exchange Notes to tendering holders of Old Notes promptly
after the Expiration Date.
RESALES...................... Based on an interpretation by the staff of the Commission
set forth in Morgan Stanley & Co. Incorporated, SEC
No-Action Letter (available June 5, 1991) (the "Morgan
Stanley Letter"), Exxon Capital Holdings Corporation, SEC
No-Action Letter (available May 13, 1988) (the "Exxon
Capital Letter") and similar letters, the Company believes
that Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any person receiving such Exchange
Notes, whether or not such person is the holder (other than
any such holder or other person which is (i) a broker-dealer
that receives Exchange Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making or other trading
activities, or (ii) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act (collectively,
"Restricted Holders")) without compliance with the registra-
tion and prospectus delivery provisions of the Securities
Act, PROVIDED that (a) such Exchange Notes are acquired in
the ordinary course of business of such holder or other
person (b) neither such holder nor such other person is
engaged in or intends to engage in a distribution of such
Exchange Notes and (c) neither such holder nor other person
has any arrangement or understanding with any person to
participate in the distribution of such Exchange Notes. If
any person were to be participating in the Exchange Offer
for the purposes of participating in a distribution of the
Exchange Notes in a manner not permitted by the Commission's
interpretation, such person (a) could not rely upon the
Morgan Stanley Letter, the Exxon Capital Letter or similar
letters and (b) must comply with the registration and
prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Each broker
or dealer that receives Exchange Notes for its own account
in exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of market-
making or other activities, must acknowledge that it will
deliver a Prospectus in connection with any sale of such
Exchange Notes. See "Plan of Distribution."
EXPIRATION DATE.............. 5:00 p.m., New York City time, on , 1998, unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to which
the Exchange Offer is extended.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND OLD
NOTES...................... The Exchange Notes will bear interest from May 15, 1998.
Holders of Old Notes whose Old Notes are accepted for
exchange will be deemed
8
to have waived the right to receive any payment in respect
of interest on such Old Notes accrued to the date of
issuance of the Exchange Notes.
CONDITIONS TO THE EXCHANGE
OFFER...................... The Exchange Offer is subject to certain customary
conditions. The conditions are limited and relate in general
to proceedings which have been instituted or laws which have
been adopted that might impair the ability of the Company to
proceed with the Exchange Offer. As of the date of this
Prospectus, none of these events had occurred, and the
Company believes their occurrence to be unlikely. If any
such conditions exist prior to the Expiration Date, the
Company may (a) refuse to accept any Old Notes and return
all previously tendered Old Notes, (b) extend the Exchange
Offer or (c) waive such conditions. See "The Exchange
Offer--Conditions."
PROCEDURES FOR TENDERING OLD
NOTES...................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes to be exchanged and
any other required documentation to the Exchange Agent (as
defined) at the address set forth herein and therein.
Tendered Old Notes, the Letter of Transmittal and
accompanying documents must be received by the Exchange
Agent by 5:00 p.m. New York City time, on the Expiration
Date. See "The Exchange Offer--Procedures for Tendering." By
executing the Letter of Transmittal, each holder will repre-
sent to the Company that, among other things, the Exchange
Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person
receiving such Exchange Notes, whether or not such person is
the holder, that neither the holder nor any such other
person is engaged in or intends to engage in a distribution
of the Exchange Notes or has an arrangement or understanding
with any person to participate in the distribution of such
Exchange Notes, and that neither the holder nor any such
other person is an "affiliate," as defined under Rule 405 of
the Securities Act, of the Company.
SPECIAL PROCEDURES FOR
BENEFICIAL HOLDERS......... Any beneficial holder whose Old Notes are registered in the
name of his broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender in the Exchange
Offer should contact such registered holder promptly and
instruct such registered holder to tender on his behalf. If
such beneficial holder wishes to tender on his own behalf,
such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or obtain a
properly completed bond power from the registered holder.
The transfer of record ownership may take considerable time.
See "The Exchange Offer--Procedures for Tendering."
9
GUARANTEED DELIVERY
PROCEDURES................. Holders of Old Notes who wish to tender their Old Notes and
whose Old Notes are not immediately available or who cannot
deliver their Old Notes and a properly completed Letter of
Transmittal or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the Expiration
Date may tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS............ Tenders may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF EXCHANGE
NOTES...................... Subject to certain conditions, the Company will accept for
exchange any and all Old Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered promptly
after the Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
CERTAIN U.S. FEDERAL INCOME
TAX CONSIDERATIONS......... The exchange of Old Notes for Exchange Notes pursuant to the
Exchange Offer will not be a taxable event for federal
income tax purposes. A holder's holding period for Exchange
Notes will include the holding period for Old Notes. For a
discussion summarizing certain U.S. federal income tax
consequences to holders of the Exchange Notes, see "Certain
U.S. Federal Income Tax Considerations."
EXCHANGE AGENT............... State Street Bank and Trust Company is serving as exchange
agent (the "Exchange Agent") in connection with the Exchange
Offer. The mailing address of the Exchange Agent is State
Street Bank and Trust Company, Two International Place, 4th
Floor, Boston, Massachusetts 02110, Attention: Claire
Young--Corporate Trust Department. Deliveries by hand or
overnight courier should be addressed to State Street Bank
and Trust Company, 61 Broadway, 15th Floor, New York, New
York 10016, Attention: Corporate Trust Department. For
information with respect to the Exchange Offer, call the
Exchange Agent at telephone number: (860) 244-1846 or
facsimile number: (860) 244-1881.
SUMMARY OF TERMS OF EXCHANGE NOTES
The Exchange Offer constitutes an offer to exchange up to $150.0 million
aggregate principal amount of the Exchange Notes for up to an equal aggregate
principal amount of Old Notes. The Exchange Notes will be obligations of the
Company evidencing the same indebtedness as the Old Notes, and will be entitled
to the benefit of the same Indenture. The form and terms of the Exchange Notes
are substantially the same as the form and terms of the Old Notes, except that
the Exchange Notes have been registered under the Securities Act. See
"Description of the Notes."
COMPARISON WITH OLD NOTES
FREELY TRANSFERABLE.......... The Exchange Notes will be freely transferable under the
10
Securities Act by holders who are not Restricted Holders.
Restricted Holders are restricted from transferring the
Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act. The
Exchange Notes will be identical in all material respects
(including interest rate, maturity and restrictive
covenants) to the Old Notes, with the exception that the
Exchange Notes will be registered under the Securities Act.
See "The Exchange Offer--Terms of the Exchange Offer."
REGISTRATION RIGHTS.......... The holders of Old Notes currently are entitled to certain
registration rights pursuant to the Registration Rights
Agreement, dated as of May 15, 1998 (the "Registration
Rights Agreement"), by and among the Company, the Guarantors
and Donaldson, Lufkin & Jenrette Securities Corporation and
BT Alex. Brown Incorporated, the initial purchasers of the
Old Notes (collectively, the "Initial Purchasers"),
including the right to cause the Company and the Guarantors
to register the Old Notes under the Securities Act if the
Exchange Offer is not consummated prior to the Exchange
Offer Termination Date (as defined). See "The Exchange
Offer--Conditions." However, pursuant to the Registration
Rights Agreement, such registration rights will expire upon
consummation of the Exchange Offer. Accordingly, holders of
Old Notes who do not exchange their Old Notes for Exchange
Notes in the Exchange Offer will not be able to reoffer,
resell or otherwise dispose of their Old Notes unless such
Old Notes are subsequently registered under the Securities
Act or unless an exemption from the registration
requirements of the Securities Act is available.
TERMS OF THE EXCHANGE NOTES
GUARANTORS................... Lodestar, Eastern Resources and Industrial Fuels.
MATURITY DATE................ May 15, 2005.
INTEREST PAYMENT DATES....... May 15 and November 15, commencing November 15, 1998.
OPTIONAL REDEMPTION.......... The Exchange Notes will be redeemable at the Company's
option, in whole or in part, at any time on or after May 15,
2002, at the redemption prices set forth herein, together
with accrued and unpaid interest, if any, to the date of
redemption. In addition, on or prior to May 15, 2001, in the
event of one or more Equity Offerings, the Company may, at
its option, redeem up to 35% of the principal amount of
Exchange Notes originally issued from the net proceeds
thereof at a redemption price equal to 111.5% of the
principal amount thereof, together with accrued and unpaid
interest, if any, to the date of redemption; PROVIDED that
at least 65% of the original aggregate principal amount of
Senior Notes remain outstanding immediately after such
redemption and any such redemption occurs not more than 120
days after the consummation of any such Equity Offering. See
"Description of the Senior Notes--Optional Redemption."
CHANGE OF CONTROL............ Upon a Change of Control, each holder of the Exchange Notes
will have the right to require the Company to repurchase all
or a portion of such holder's Exchange Notes at a price of
101% of the principal
11
amount thereof plus accrued interest to the repurchase date.
See "Description of the Senior Notes--Certain
Covenants--Change of Control."
ASSET SALE PROCEEDS.......... The Company is obligated in certain instances to make offers
to purchase the Exchange Notes at a redemption price of 100%
of the principal amount thereof plus accrued interest to the
repurchase date with the net cash proceeds of certain sales
or other dispositions of assets. See "Description of the
Senior Notes--Certain Covenants-- Limitation on Sale of
Assets."
RANKING...................... The Exchange Notes and the Guarantees will be general
unsecured obligations of the Company and the Guarantors,
respectively, ranking senior in right of payment to all
existing and future subordinated indebtedness of the Company
and the Guarantors, respectively, and pari passu in right of
payment with all other existing or future senior
indebtedness of the Company and the Guarantors,
respectively; however, Lodestar's indebtedness under the New
Senior Credit Facility, and Lodestar's contingent
obligations to the surety of the Performance Bonds, are
secured by a first and second priority security interest,
respectively, in substantially all of the property and other
assets of Lodestar. Accordingly, holders of such secured
obligations, and any other secured obligations of the
Company and the Guarantors, will have claims that
effectively rank prior to those of holders of the Exchange
Notes with respect to the assets securing such obligations.
CERTAIN COVENANTS............ The Indenture contains certain covenants, including, without
limitation, covenants with respect to the following matters:
(a) limitation on indebtedness, (b) limitation on liens, (c)
limitation on restricted payments, (d) limitation on
dividends and other payment restrictions affecting
restricted subsidiaries, (e) limitation on restricted
transactions with affiliates, (f) limitation on sale of
assets, (g) consolidations, mergers and transfers of all or
substantially all of the assets of the Company, (h) conduct
of business and (i) limitation on preferred stock of
subsidiaries. See "Description of the Senior Notes--Certain
Covenants."
USE OF PROCEEDS.............. The Company will not receive any proceeds from the Exchange
Offer. See "Use of Proceeds." The Company has agreed to bear
the expenses of the Exchange Offer pursuant to the
Registration Rights Agreement (as defined). No underwriter
is being used in connection with the Exchange Offer. For a
description of the use of proceeds of the Old Notes
Offering, see "--The Company--Old Notes Offering."
RISK FACTORS
Prospective purchasers of the Exchange Notes should carefully consider all
of the information set forth in this Prospectus and, in particular, should
evaluate the specific factors set forth under "Risk Factors" for risks involved
with an investment in the Exchange Notes.
12
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical and unaudited pro forma
consolidated financial data of the Company and the Predecessor Company at the
dates and for the periods indicated. The summary data presented below under the
captions "Statement of Operations Data" and "Other Data" for each of the fiscal
years in the two-year period ended December 31, 1996, for the period January 1,
1997 to March 14, 1997 and for the period March 15, 1997 to October 31, 1997 are
derived from the consolidated financial statements of the Predecessor Company
and the Company, as applicable, which consolidated financial statements have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The summary data presented below under the captions "Statement of Operations
Data" and "Other Data" for the period November 1, 1996 to December 31, 1996, for
the period March 15, 1997 to April 30, 1997 and for the six months ended April
30, 1998 and "Balance Sheet Data" as of April 30, 1998 are unaudited but, in the
opinion of management, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial and operating data
for such periods. Data as of and for the six months ended April 30, 1998 do not
purport to be indicative of results to be expected for the full year.
The unaudited summary pro forma consolidated data presented below under the
caption "Balance Sheet Data" give effect to the Transactions as if they had
occurred on April 30, 1998. The unaudited pro forma adjustments are based upon
available information and certain assumptions which management believes are
reasonable. The pro forma consolidated financial data do not purport to
represent what the Company's consolidated financial position would have been had
the Transactions actually occurred at April 30, 1998. In addition, the unaudited
pro forma financial data do not purport to be indicative of the Company's
consolidated financial position at any future period or date.
The following information should be read in conjunction with the audited
consolidated financial statements and the related notes thereto for the fiscal
years ended December 31, 1995 and 1996 and for the period January 1, 1997 to
March 14, 1997 for the Predecessor Company and for the period March 15, 1997 to
October 31, 1997 for the Company and the unaudited consolidated financial
statements for the period November 1, 1996 to December 31, 1996 for the
Predecessor Company and for the period March 15, 1997 to April 30, 1997 and for
the six months ended April 30, 1998 for the Company appearing elsewhere herein
and with the "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PREDECESSOR COMPANY(1) THE COMPANY
----------------------------------------------------------------------------
PERIOD PERIOD PERIOD PERIOD SIX
FISCAL YEAR ENDED NOVEMBER 1, JANUARY 1, MARCH 15, MARCH 15, MONTHS
DECEMBER 31, 1996 TO 1997 TO 1997 TO 1997 TO ENDED
-------------------- DECEMBER 31, MARCH 14, OCTOBER 31, APRIL 30, APRIL 30,
1995 1996 1996 1997 1997 1997 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS AND TONS IN THOUSANDS, EXCEPT PER TON DATA)
STATEMENT OF OPERATIONS DATA:
Coal sales and related revenue...... 308,370 255,386 36,910 46,486 173,881 31,387 136,238
Operating income (loss)............. 10,002 (38,867) (5,069) (5,129) 2,066 (983) 4,891
Interest expense, net............... 4,436 2,801 550 809 6,004 1,020 4,757
Net income (loss)................... 5,995 (41,668) (5,619) (5,938) (3,938) (2,003) 80
OTHER DATA:
EBITDA(2)........................... 40,834 (16,153) (1,775) (380) 16,342 1,896 16,720
Capital expenditures................ 5,785 10,705 1,820 1,149 3,771 833 2,917
Depreciation, depletion and
amortization...................... 30,832 22,714 3,294 4,749 14,276 2,879 11,829
OTHER OPERATING DATA:
Tons of coal shipped................ 11,811 10,569 1,561 1,910 6,855 1,285 5,409
Tons of coal produced per manhour
(underground)(3)(4)............... 4.4 4.4 4.9
Cubic yards moved per manhour
(surface)(3)(4)................... 92.3 107.9 109.2
13
AS OF APRIL 30, 1998
------------------------
PRO
ACTUAL FORMA(5)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash.................................................................................... $ 5,404 $ 6,904
Working capital (deficit)............................................................... (32,092) 4,372
Property, plant and equipment, net...................................................... 77,668 106,456
Total assets............................................................................ 187,510 222,710
Total debt (including current portion).................................................. 55,767 150,000
Stockholder's equity (deficit).......................................................... 1,143 (24,300)
- ------------------------
(1) Lodestar was acquired by the Company as of March 14, 1997.
(2) "EBITDA" represents earnings before net interest expense, other income
(expense), income taxes and depreciation, depletion and amortization. The
trends of EBITDA generally follow the trends of operating income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the recent trends of operating income.
Information regarding EBITDA is presented because management believes that
certain investors use EBITDA as one measure of an issuer's ability to
service its debt. EBITDA should not be considered an alternative to, or more
meaningful than, operating income, net income or cash flow as defined by
generally accepted accounting principles or as an indicator of an issuer's
operating performance. Furthermore, caution should be used in comparing
EBITDA to similarly titled measures of other companies as the definitions of
these measures may vary.
(3) Data regarding manhours is available only on a calendar year basis.
Accordingly, data for shorter periods is not presented, and the data
presented as the period March 15, 1997 to October 31, 1997, represents data
for calendar 1997.
(4) Excludes divested and idled operations.
(5) Adjusted to give effect to the Transactions as if they had occurred on April
30, 1998.
14
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH
BELOW AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
SUBSTANTIAL INDEBTEDNESS; STRUCTURAL SUBORDINATION
The Company has substantial indebtedness and debt service requirements. As
of April 30, 1998, after giving pro forma effect to the Transactions, the
Company would have had outstanding consolidated long-term debt of approximately
$150.0 million (exclusive of unused commitments of $90.0 million and
approximately $21.5 million of outstanding letters of credit, in each case,
under the New Senior Credit Facility) and a stockholder's deficit of
approximately $24.3 million.
The Company's level of indebtedness will have several important effects on
its future operations, including the following: (a) a significant portion of the
Company's cash flow from operations will be dedicated to the payment of interest
on its indebtedness and will not be available for other purposes, (b) the
financial covenants and other restrictions contained in the New Senior Credit
Facility require the Company to meet certain financial tests and limit its
ability to borrow additional funds or to dispose of assets and (c) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be impaired. In addition, the Company's ability to meet its debt service
obligations and to reduce its total debt will be primarily dependent upon
Lodestar's future performance, which will be subject to economic, financial,
political, competitive and other factors, including the demand for electricity
and the market prices for coal, many of which are beyond the Company's control.
Moreover, an inability of the Company to meet the financial covenants contained
in the New Senior Credit Facility or other indebtedness could result in an
acceleration of amounts due thereunder.
The right of the Company and its creditors, including holders of the
Exchange Notes, to participate in certain assets of the Company upon any
liquidation or reorganization of the Company would be subject to the prior
claims of Lodestar's creditors, including the lenders under the New Senior
Credit Facility and the surety of the Performance Bonds. Lodestar's obligations
under the New Senior Credit Facility and to the surety of the Performance Bonds
are secured by substantially all of the Company's property and other assets.
Holders of the Exchange Notes will be effectively subordinated to the claims of
the lenders under the New Senior Credit Facility and the surety of the
Performance Bonds to the extent of the assets securing such obligations and to
any future secured indebtedness and other obligations of the Company and
Guarantors.
HOLDING COMPANY STRUCTURE
The Company is a holding company that has no significant assets other than
the capital stock of Lodestar. The Company has no operations or assets from
which it will be able to repay the Exchange Notes. Accordingly, the Company's
cash flow and, consequently, its ability to repay the Senior Notes at maturity
or otherwise, will be primarily dependent upon the results of operations of
Lodestar and its subsidiaries and the payment of funds by Lodestar in the form
of loans, dividends or otherwise. Lodestar is, and any future subsidiaries of
the Company may be, parties to agreements which contain limitations on the
ability of such subsidiaries to pay dividends or make loans or advances to the
Company, and the Indenture may not prohibit such agreements. In addition,
Lodestar's New Senior Credit Facility imposes restrictions on Lodestar's ability
to pay dividends or make other distributions.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The terms and conditions of the New Senior Credit Facility and the Indenture
impose restrictions that affect, among other things, the ability of the Company
to incur debt, pay dividends, make acquisitions, create liens, make capital
expenditures and make certain investments.
15
The ability of the Company to comply with the foregoing provisions can be
affected by events beyond its control. The breach of any of these covenants
could result in a default under the Company's indebtedness, including the New
Senior Credit Facility and the Indenture. In the event of any such default,
depending on the actions taken by the lenders under the New Senior Credit
Facility, the Company may be unable to make any payments of principal or
interest on the Exchange Notes for a period of time. In addition, the lenders
under the New Senior Credit Facility could elect to declare all amounts
borrowed, together with accrued and unpaid interest, to be due and payable. If
the Company were unable to repay such amounts, the lenders under the New Senior
Credit Facility could proceed against certain collateral. If such indebtedness
under the New Senior Credit Facility were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and the other indebtedness of the Company, including the
Exchange Notes. See "Description of New Senior Credit Facility" and "Description
of the Senior Notes."
CERTAIN CREDITORS' RIGHTS
The Old Notes Offering and the application of the net proceeds therefrom and
the obligation of any Guarantor under the Guarantees may be subject to review
under relevant federal and state fraudulent conveyance laws if a bankruptcy,
reorganization or rehabilitation case or a lawsuit (including in circumstances
where bankruptcy is not involved) were commenced by or on behalf of unpaid
creditors of the Company or the Guarantors at some future date. These laws vary
among the various jurisdictions. In general, under these laws, if a court were
to find that, at the time an obligation (such as the Old Notes or the
Guarantees) was incurred, either (a) such obligation was incurred with the
intent of hindering, delaying or defrauding creditors or (b) the entity
incurring the obligation received less than reasonably equivalent or fair value
consideration in exchange for the incurrence of such obligation and (i) was
insolvent or was rendered insolvent by reason thereof, (ii) was engaged in a
business or transaction for which its remaining assets constituted unreasonably
small capital, (iii) intended to incur, or believed, or reasonably should have
believed, that it would incur, debts beyond its ability to pay such debts as
they matured (as all of the foregoing terms are defined in or interpreted under
the fraudulent conveyance statutes) or (iv) such entity was a defendant in an
action for money damages, or had a judgment for money damages docketed against
it (if, in either case, after final judgment, the judgment is unsatisfied) (each
of clauses (i)-(iv) above, a "Fraudulent Conveyance"), such court could impose
legal and equitable remedies, including (x) subordination of the obligation to
presently existing and future indebtedness of the entity, (y) avoidance of the
issuance of the obligation and the liens, and direction of the repayment of any
amounts paid from the proceeds thereof to a fund for the benefit of the entity's
creditors or (z) taking of other action detrimental to the holders of the Senior
Notes.
The measures of insolvency for purposes of determining whether a Fraudulent
Conveyance occurred would vary depending upon the laws of the relevant
jurisdiction and upon the valuation assumptions and methodology applied by the
court. Generally, however, a company or guarantor would be considered insolvent
for purposes of the foregoing, if the sum of the debts of the company or
guarantor, including contingent unliquidated and unmatured liabilities, is
greater than all of the property of the company or guarantor at a fair
valuation, or the present fair saleable value of the assets of the company or
guarantor is less than the amount that would be required to pay the probable
liability on its existing debts as they become absolute and matured.
The Company believes that at the time of, or as a result of, the issuance of
the Old Notes and the use of proceeds therefrom, each of the Company and the
Guarantors (a) was not insolvent or rendered insolvent under the foregoing
standards, (b) was not engaged in a business or transactions for which its
remaining assets constitute unreasonably small capital, (c) did not intend to
incur, and does not believe that it did incur debts beyond its ability to pay
such debts as they mature and (d) had sufficient assets to satisfy any probable
money judgment against it in any pending actions. Consequently, the Company
believes that even if one or more elements of the Old Notes Offering were deemed
to involve the
16
incurrence of an obligation for less than reasonably equivalent or fair value, a
Fraudulent Conveyance would not occur. The beliefs with regard to the solvency
of the Company and Lodestar are based in part on Lodestar's operating history
and management's analysis of internal cash flow projections and estimated values
of assets and liabilities of Lodestar at the time of the Old Notes Offering.
There can be no assurance, however, that a court passing on these issues would
adopt the same methodology or assumptions, or arrive at the same conclusions.
RELIANCE ON MAJOR CONTRACTS; CUSTOMER CONCENTRATION
A substantial portion of Lodestar's coal is sold pursuant to long-term coal
supply contracts with a limited number of customers which are significant to the
stability and profitability of Lodestar's operations. For the twelve months
ended April 30, 1998, approximately 72% of Lodestar's coal sales and related
revenue were derived from long-term contracts. As of such date, Lodestar's
long-term contracts had a weighted average term of approximately 8.4 years, and
since 1992, sales pursuant to long-term contracts generated approximately 80% of
Lodestar's coal sales and related revenue. Five long-term contracts with three
customers accounted for approximately 56% of coal sales and related revenue for
the twelve months ended April 30, 1998. Lodestar's long-term contracts with the
TVA accounted for, and are expected to account for, approximately 28% and 26% of
coal sales and related revenue for each of the twelve months ended April 30,
1998 and fiscal 1998, respectively. In addition, Lodestar's long-term contracts
with U.S. Gen accounted for approximately 18% of Lodestar's coal sales and
related revenue for the twelve months ended April 30, 1998 and are expected to
account for approximately 18% of coal sales and related revenue in fiscal 1998.
One of U.S. Gen's Facilities is currently involved in litigation with its
principal customer and the unfavorable resolution of such litigation could have
a material adverse effect on the U.S. Gen Facility, which, if it resulted in the
facility being unable to fulfill its obligations under its long-term contract
with Lodestar, could in turn have a material adverse effect on the Company's
business, financial condition and results of operations. Big Rivers Electric
Corporation ("Big Rivers"), which accounted for approximately 9.2% of coal sales
and related revenue for the twelve months ended April 30, 1998, has been
operating under bankruptcy court protection pursuant to Chapter 11 of the United
States Bankruptcy Code. No assurance can be given that any new ownership or
management resulting from Big Rivers' reorganization will elect to continue its
relationship with the Company subsequent to the expiration of the current
contract in June 2001. In addition, the Company currently is in negotiations
with Big Rivers concerning a portion of the coal supplied under their contracts.
The loss of these or other long-term contracts, or the curtailment of purchases
by such customers, could have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Long-Term Coal
Supply Contracts" and "--Other Services."
Certain of Lodestar's long-term coal supply contracts are subject to price
adjustment provisions which permit an increase or decrease at specified times in
the contract price to reflect changes in certain price or other economic
indices, taxes and other charges. Four of Lodestar's nine long-term coal supply
contracts, currently representing approximately 65% of tons supplied under all
long-term contracts, contain price reopener provisions, which provide for the
contract price to be adjusted upward or downward at specified times on the basis
of market factors. Price adjustment, price reopener and other provisions
contained in such contracts may increase the impact of short-term coal price
volatility. Moreover, failure of the parties to agree on a price pursuant to
such price adjustment and reopener provisions could result in modification or
termination of any of these contracts and could have a material adverse effect
on the financial condition and results of operation of Lodestar. Four of
Lodestar's nine long-term coal supply contracts, currently representing
approximately 29% of tons supplied under all long-term contracts, contain
"requirements" provisions, whereby the power plant customer orders only the
amount of coal needed to meet its electricity demand. Many contracts include
force majeure provisions, which allow the suspension of performance by Lodestar
or the customer during certain events. If force majeure provisions are triggered
or tonnage quantities required by power plant customers decrease, operating
profit margins realized by Lodestar
17
could decrease, which could have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Long-Term Coal
Supply Contracts."
OPERATING RISKS; CONCENTRATION OF COAL PRODUCTION
The business of mining is generally subject to a number of risks and
hazards, including environmental hazards, industrial accidents, labor disputes,
encountering unusual or unexpected geologic formations, cave-ins, rockbursts,
variations in coal seam thickness, variation in the amount of rock and soil
overlying the coal deposit, variations in rock and other natural materials,
disruption of transportation services, flooding and periodic interruptions due
to inclement or hazardous weather conditions. Such risks could result in damage
to, or destruction of, mineral properties or producing facilities, personal
injury, environmental damage, delays in mining, monetary losses and possible
legal liability. During 1994 and 1996, the Predecessor Company experienced a
number of geological and other problems which materially adversely affected its
EBITDA. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." There can be no assurance that Lodestar's operations
will not be so adversely affected in the future by conditions beyond Lodestar's
control. Although Lodestar maintains insurance within ranges of coverage
consistent with industry practice, no assurance can be given that such insurance
will be available at economically feasible premiums, nor that it would cover all
the hazards to which the Company is subject.
The coal shipped from the Baker mine, the largest coal mine in Kentucky, was
approximately 4.3 million tons, or approximately 39%, of Lodestar's total
shipments for the twelve months ended April 30, 1998. There can be no assurance
that if the Baker mine were to experience a significant operating risk or
hazard, including those set forth above, production at the Baker mine would not
be significantly curtailed or suspended. Any significant curtailment or
suspension of production from the Baker mine could have a material adverse
effect on the Company's financial condition and results of operations.
TRANSPORTATION
The United States coal industry depends on barge, rail and truck
transportation owned and operated by third parties to deliver shipments of coal
to customers. Overall, 45%, 40% and 15% of Lodestar's total coal shipments for
the twelve months ended April 30, 1998 traveled by barge, rail and truck,
respectively. CSX Transportation, Inc. ("CSX") and Norfolk Southern Corporation
("Norfolk Southern") are presently negotiating the acquisition of Conrail Inc.
which could adversely affect Lodestar's rail rates and access to markets.
Disruption of these transportation services could temporarily impair Lodestar's
ability to supply coal to its customers and thus adversely affect Lodestar's
financial condition and results of operations. Transportation costs are a
significant component of the total cost of supplying coal to customers and can
affect significantly a coal producer's competitive position and profitability.
Increases in Lodestar's transportation costs, or change in such costs relative
to transportation costs incurred by providers of competing coal or of other
fuels, could have a material adverse effect on the Company's financial condition
and results of operations. See "Business--Coal Transportation."
RECLAMATION AND CLOSURE LIABILITIES
The federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA") and
similar state statutes require that mine property be restored in accordance with
specified standards and an approved reclamation plan. Reclamation costs include
amounts spent to reclaim the pit and support acreage at surface mines and to
seal portals at deep mines. Other such costs common to both types of mining
include the costs of reclaiming refuse and slurry ponds. The permitting agency
requires that performance bonds be posted in amounts sufficient to guarantee the
performance of such reclamation work. As of April 30, 1998, Lodestar had
approximately $42.4 million of reclamation performance bonds outstanding. The
cost of final reclamation of active mining areas is accrued over the life of the
respective mines based on the units-of-production method. This methodology
requires various estimates and assumptions principally associated with costs and
production levels. As of April 30, 1998, the reclamation liability recorded by
Lodestar was
18
approximately $18.9 million. Lodestar reevaluates its reclamation liability
annually based on its current mining plans and most recent cost and production
estimates. Liability adjustments are recorded to cost of revenues. For the
twelve months ended April 30, 1998, the reclamation provision included in cost
of revenues was $1.4 million. Although management believes it is making adequate
provisions for all reclamation and other costs associated with mine closures,
the Company's financial condition and results of operations could be adversely
affected if such accruals were later determined to be insufficient.
UNIONIZATION OF WORKFORCE
In August 1997, the United Mineworkers of America (the "UMWA") was certified
by the National Labor Relations Board (the "NLRB") as the bargaining
representative for certain employees located in Western Kentucky, constituting
approximately 47% of Lodestar's total employees. Lodestar has entered into a
collective bargaining agreement with the UMWA which either party may terminate
on or after May 13, 2000. Lodestar believes this agreement will not have a
material impact on its financial condition or results of operations. However,
there can be no assurance as to whether future collective bargaining agreements
will be negotiated without production interruptions or the possible impact of
future collective bargaining agreements, or the negotiation thereof, on
Lodestar's financial condition and results of operations. Although the remainder
of Lodestar's workforce remains nonunion, there can be no assurance that they
will not unionize in the future. Furthermore, there can be no assurance that
work stoppages will not occur in the future in connection with labor
negotiations or otherwise.
RELIANCE ON ESTIMATES OF RECOVERABLE RESERVES
There are numerous uncertainties inherent in estimating quantities of
recoverable reserves, including many factors beyond the control of Lodestar. The
reserve data set forth herein represents engineering estimates of Lodestar's
reserves as of January 31, 1998 prepared by Marshall Miller & Associates, an
independent engineering firm. Estimates of economically recoverable coal
reserves and future net cash flows necessarily depend upon a number of variable
factors and assumptions, such as geological and mining conditions (which may not
be fully identified by available exploration data and/or differ from experience
in current operations), 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 attributable to
any particular group of properties, classifications of such reserves based on
risk of recovery and estimates of future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary substantially. Actual coal tonnage recovered from identified reserve areas
or properties, revenues and expenditures with respect to Lodestar's reserves may
vary from estimates, and such variances may be material. No assurance can be
given that these estimates are an accurate reflection of Lodestar's actual
reserves. See "Business--Coal Reserves." Most of Lodestar's mining operations
are conducted on properties owned or leased by Lodestar. The loss of any lease
could adversely affect Lodestar's ability to develop the applicable reserves.
Because title to most of Lodestar's leased properties and mineral rights is not
thoroughly verified until a permit is being obtained to mine the property,
Lodestar's right to mine certain of its reserves may be adversely affected if
defects in title or boundaries exist. In addition, there can be no assurance
that Lodestar can successfully negotiate new leases or mining contracts for
properties containing additional reserves or maintain its leasehold interest in
properties on which mining operations are not commenced during the term of the
lease.
REPLACEMENT OF RESERVES
Lodestar's future success depends upon its ability to find, develop or
acquire additional coal reserves that are recoverable. The recoverable reserves
of Lodestar decline as reserves are depleted. Over 50% of
19
Lodestar's current coal production is from mines that, based on current reserve
estimates and current production levels, will be depleted within seven years.
Lodestar can replace these reserves by successful exploration or development
activities or acquiring properties containing recoverable reserves, or both. In
order to increase reserves and production, Lodestar must continue its
development and exploration or undertake other replacement activities.
Lodestar's current strategy includes increasing its reserve base through
acquisitions of producing properties and by continuing to develop its existing
properties. There can be no assurance, however, that Lodestar's planned
development and exploration projects and acquisition activities will result in
significant additional reserves or that Lodestar will have continuing success
developing additional mines. For a discussion of Lodestar's reserves, see
"Business--Coal Reserves" and "--Development and Exploration."
ENVIRONMENTAL MATTERS; GOVERNMENT REGULATION OF MINING INDUSTRY
Lodestar is subject to numerous federal, state and local environmental laws
and regulations governing, among other things, air emissions, waste water
discharge, solid and hazardous waste storage and treatment and disposal and
remediation of releases of hazardous materials. See "Government
Regulation--Environmental Matters."
The mining operations of Lodestar are subject to inspection and regulation
by the Mine Safety and Health Administration of the Department of Labor ("MSHA")
under provisions of the Federal Mine Safety and Health Act of 1977. All other
operations of Lodestar are subject to inspection and regulation by the
Occupational Safety and Health Administration of the Department of Labor
("OSHA") under the provisions of the Occupational Safety and Health Act of 1970.
It is Lodestar's policy to comply with the directives and regulations of MSHA
and OSHA. In addition, Lodestar takes such necessary actions as, in its
judgment, are required to provide for the safety and health of its employees.
Lodestar believes that it is substantially in compliance with the regulations
promulgated by MSHA and OSHA. However, compliance with new, more stringent MSHA
and/or OSHA directives could have a material adverse effect on results of
operations, financial condition and liquidity of Lodestar. See "Government
Regulation--Health and Safety."
The Department of Labor is considering revised regulations that would alter
the claims process for coal miners and would make claims for black lung benefits
easier to file and establish, which could result in a higher incidence of black
lung claims against Lodestar. See "Government Regulation--Health and Safety."
The federal Clean Air Act, as amended (the "Clean Air Act"), among other
things, places limits on sulfur dioxide emissions from electric power generation
plants and requires major sources of nitrogen oxides to install control
technology. The effect of the Clean Air Act on Lodestar's operations cannot be
completely ascertained at this time. Lodestar believes that compliance with the
sulfur emission limits will likely exert a downward pressure on the price of
high sulfur coal. The extent to which this price decrease will adversely affect
Lodestar will depend on a number of factors, including Lodestar's ability to
secure long-term contracts for its high sulfur coal. In addition, the federal
Environmental Protection Agency (the "EPA") is expected to regulate fine
particulate matter and to implement stricter ozone standards by 2003.
No assurance can be given that the cost of complying with federal, state and
local environmental laws and regulations, as well as the cost of any personal
injury and property or other damage claims, will not have a material adverse
affect on the financial condition and results of operations of Lodestar. See
"Government Regulation--Environmental Matters."
COAL PRICE FLUCTUATIONS
Lodestar's results of operations are highly dependent upon the prices
received for Lodestar's coal. Although 72% of Lodestar's coal sales and related
revenue for the twelve months ended April 30, 1998 were made pursuant to
long-term contracts, the balance of sales were made in the spot market, or
pursuant
20
to contracts based on spot market prices and not pursuant to long-term
contracts. Certain of Lodestar's long-term coal supply contracts are subject to
price adjustment provisions, which provide for increases or decreases in price
determined by specific conditions set forth in the contracts, and price reopener
provisions, which provide for renegotiation of price terms. Accordingly, the
prices received by Lodestar for a portion of its coal production are dependent
upon numerous factors beyond the control of Lodestar. 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,
weather and the overall economic environment. Any significant decline in prices
for coal could have a material adverse effect on the Company's financial
condition and 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, Lodestar may not be able to
generate sufficient cash flow from operations to meet its obligations and make
planned capital expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
COMPETITION
The United States coal industry is highly competitive, with numerous
producers in all coal producing regions. Lodestar competes with other large
producers and hundreds of small producers in the United States and abroad. Many
of Lodestar's customers are also customers of Lodestar's competitors. Continued
demand for Lodestar's coal and the prices that Lodestar will be able to obtain
will depend primarily on coal consumption patterns of the domestic electric
utility industry, which in turn are affected by the demand for electricity, coal
transportation costs, environmental and other governmental regulations and
orders, technological developments and the availability and price of competing
coal and alternative fuel supply sources such as oil, natural gas, nuclear
energy and hydroelectric energy. See "Government Regulation--Environmental
Matters" and "Business--Competition." In addition, during the mid-1970's and
early 1980's, a growing coal market and increased demand attracted new investors
to the coal industry and spurred the development of new mines and added
production capacity throughout the industry. Although demand for coal has grown
over the recent past, the industry has since been faced with overcapacity, which
in turn has increased competition and lowered prevailing coal prices. Moreover,
because of greater competition among electricity producers and increased
pressure from customers and regulators to lower electricity prices, public
utilities are lowering fuel costs by buying higher percentages of spot coal
through a competitive bidding process and by only buying the amount of coal
necessary to meet their requirements. There can be no assurance that
overcapacity or increased competition in the future will not have a material
adverse effect on the Company's financial condition and results of operations.
PREDECESSOR COMPANY RISK
Pursuant to the stock purchase agreement under which the Company acquired
the capital stock of the Predecessor Company, the seller, the Predecessor's
Parent, retained certain assets and liabilities that were excluded from the
Acquisition, including, among others, certain litigation matters and all
liabilities relating to prior operations outside of Kentucky and West Virginia
(including business conducted in Alabama, Colorado, Illinois, Indiana,
Louisiana, Michigan, Ohio and Wisconsin). The Acquisition was structured as a
purchase of capital stock of the Predecessor Company. The Predecessor's Parent
retained responsibility for these matters pursuant to an indemnification
agreement which was guaranteed by the seller's parent, Costain Group PLC. At the
time of the Acquisition, the aggregate indemnification obligations were
estimated to be in excess of $15.0 million payable over a period of years. The
Predecessor's Parent may not itself have assets sufficient to satisfy these
indemnification obligations, and the Company is not able to assess the financial
strength or long-term viability of Costain Group PLC, which has recently
completed a financial restructuring. Accordingly, there can be no assurance that
the Company will be able to obtain the benefit of this indemnification, if
necessary.
21
CONTROL BY RENCO
The Company is a wholly-owned subsidiary of Renco, which is 97.9% owned by
Mr. Ira Leon Rennert, the Chairman and Chief Executive Officer of Renco, and by
trusts established by him for himself and members of his family (but of which he
is not a trustee). As a result of Renco's ownership of all of the capital stock
of the Company, Mr. Rennert is, and will continue to be, able to direct and
control the policies of the Company, including mergers, sales of assets and
similar transactions.
ABSENCE OF A PUBLIC MARKET
The Exchange Notes will be new securities for which there is currently no
public market. The Company does not intend to list the Exchange Notes on any
national securities exchange or quotation system. The Initial Purchasers have
advised the Company that they currently intend to make a market in the Exchange
Notes, but they are not obligated to do so and, if commenced, may discontinue
such market making at any time. Accordingly, there can be no assurance as to the
development of any market or liquidity of any market that may develop for the
Exchange Notes. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the aggregate principal amount of Old Notes outstanding will
decrease, with a resulting decrease in the liquidity of the market therefor.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of the Old Notes set forth in the legend thereon as a consequence of
the issuance of the Old Notes pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act. In general,
Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company currently
does not anticipate that it will register the Old Notes under the Securities
Act.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive in exchange Old Notes of like principal amount, the
terms of which are identical in all material respects to the Exchange Notes. The
Old Notes surrendered in exchange for Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any increase in the indebtedness of the Company. The Company
has agreed to bear the expenses of the Exchange Offer pursuant to the
Registration Rights Agreement. No underwriter is being used in connection with
the Exchange Offer.
For a description of the use of proceeds of the Old Notes Offering, see
"Prospectus Summary--The Company--Old Notes Offering."
22
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company as of April 30, 1998 and as adjusted to give effect to the
Transactions, including the application of the estimated net proceeds from the
Offering. The table below should be read in conjunction with "Unaudited Pro
Forma Consolidated Financial Data," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the related
notes thereto appearing elsewhere herein.
AS OF APRIL 30, 1998
----------------------
ACTUAL AS ADJUSTED
(DOLLARS IN THOUSANDS)
Long-term debt, including current portion:
New Senior Credit Facility(1)........................................................... -- --
Existing Credit Facility................................................................ $ 31,133 --
Term Note............................................................................... 4,500 --
Due to Renco............................................................................ 5,682 --
Old Notes............................................................................... -- $ 150,000
Other................................................................................... 14,452 --
--------- -----------
Total long-term debt, including current portion..................................... 55,767 150,000
--------- -----------
Stockholder's equity (deficit):
Common stock, $1.00 par value. Authorized, issued and outstanding 1,000 shares.......... 1 1
Additional paid-in capital.............................................................. 5,000 5,000
Accumulated deficit..................................................................... (3,858) (29,301)
--------- -----------
Total stockholder's equity (deficit)................................................ 1,143 (24,300)
--------- -----------
Total capitalization...................................................................... $ 56,910 $ 125,700
--------- -----------
--------- -----------
- ------------------------
(1) Represents Lodestar's $90.0 million revolving credit facility which would
have been undrawn, and a $30.0 million letter of credit facility, of which
approximately $21.5 million in letters of credit would have been
outstanding, as of April 30, 1998 on a pro forma basis. The New Senior
Credit Facility will expire in May 2001. See "Description of New Senior
Credit Facility."
23
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data have been
prepared to give effect to the Acquisition and the Transactions. The unaudited
pro forma consolidated balance sheet as of April 30, 1998, gives effect to the
Transactions as if they had occurred on such date. The unaudited pro forma
consolidated statement of operations for the six months ended April 30, 1998,
gives effect to the Transactions as if they had occurred on November 1, 1997 and
the unaudited pro forma consolidated statement of operations for the ten months
ended October 31, 1997 gives effect to the Acquisition and the Transactions as
if they had occurred on January 1, 1997.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable under the circumstances.
Pro forma adjustments are applied to account for the Acquisition under the
purchase method of accounting. Under the purchase method of accounting, the
total purchase price was allocated to the Company's assets and liabilities based
on their relative fair values.
The unaudited pro forma consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the audited consolidated financial statements of the
Company and the Predecessor Company, and the notes thereto, and the other
financial information included elsewhere herein. The unaudited pro forma
consolidated financial data do not purport to be indicative of the results which
would have actually been attained had the Acquisition and the Transactions been
consummated on the dates indicated or of the results which may be expected to
occur in the future.
24
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
(DOLLARS IN THOUSANDS)
ADJUSTMENTS
FOR THE
HISTORICAL TRANSACTIONS PRO FORMA
ASSETS
Current assets:
Cash................................................................. $ 5,404 $ 150,000(1) $ 6,904
(35,633)(2)
(5,682)(3)
(43,240)(4)
(9,064)(5)
(27,818)(6)
(2,782)(7)
(6,300)(8)
(17,981)(9)
Accounts receivable.................................................. 28,831 28,831
Inventories.......................................................... 11,994 11,994
Prepaid expenses and other current assets............................ 5,772 5,772
---------- ------------ -----------
Total current assets............................................... 52,001 1,500 53,501
Property, plant and equipment, net..................................... 77,668 28,788(4) 106,456
Coal and ash disposal contracts in excess of market, net............... 43,307 43,307
14,534 6,300(8) 19,446
Other assets...........................................................
(1,388) 10)
---------- ------------ -----------
Total assets....................................................... $ 187,510 $ 35,200 $ 222,710
---------- ------------ -----------
---------- ------------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt............................... $ 4,000 $ (4,000)(2) $ --
Current installments of capital lease obligations.................... 6,059 (6,059)(4) --
Due to Renco......................................................... 3,682 (3,682)(3) --
Accounts payable..................................................... 39,841 (13,981)(9) 25,860
Accrued expenses..................................................... 30,511 (4,826)(5) 23,269
(4,000)(9)
1,584 (11
---------- ------------ -----------
Total current liabilities.......................................... 84,093 (34,964) 49,129
Capital lease obligations, excluding current installments.............. 8,393 (8,393)(4) --
Long-term debt......................................................... 31,633 150,000(1) 150,000
(31,633)(2)
Due to Renco........................................................... 2,000 (2,000)(3) --
Other non-current liabilities.......................................... 60,248 (12,367)(5) 47,881
---------- ------------ -----------
Total liabilities.................................................. 186,367 60,643 247,010
Stockholder's equity (deficit):
Common stock, $1.00 par value. Authorized, issued and outstanding
1,000 shares....................................................... 1 -- 1
Additional paid-in capital........................................... 5,000 -- 5,000
Accumulated deficit.................................................. (3,858) 8,129(5) (29,301)
(27,818)(6)
(2,782)(7)
(1,388) 10)
(1,584) 11)
---------- ------------ -----------
Total stockholder's equity (deficit)............................... 1,143 (25,443) (24,300)
---------- ------------ -----------
Total liabilities and stockholder's equity (deficit)................... $ 187,510 $ 35,200 $ 222,710
---------- ------------ -----------
---------- ------------ -----------
25
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
(1) Reflects gross proceeds from the Old Notes Offering.
(2) Reflects the repayment in full of the Existing Indebtedness.
(3) Reflects the repayment in full of the indebtedness due to Renco.
(4) Reflects the purchase of certain equipment presently financed pursuant to
leases.
(5) Reflects the buyout of certain long-term royalty agreements at a discount
from book value of approximately $8.1 million. The discount is a
nonrecurring credit which has been excluded from the "Unaudited Pro Forma
Consolidated Statement of Operations."
(6) Reflects the dividend to Renco.
(7) Reflects the effect of contractual payments to certain employees of Lodestar
of approximately $2.8 million. These payments are a nonrecurring charge
which have been excluded from the "Unaudited Pro Forma Consolidated
Statement of Operations."
(8) Reflects payment and capitalization of debt issuance costs associated with
the Old Notes Offering and the New Senior Credit Facility.
(9) Reflects proceeds used to reduce accounts payable and accrued expenses.
(10) Reflects the write-off of certain capitalized costs associated with the
Existing Indebtedness. This write-off is a non-recurring charge which has
been excluded from the "Unaudited Pro Forma Consolidated Statement of
Operations."
(11) Reflects the net tax liability due to the nonrecurring charge and credits
discussed in notes (5), (7) and (10).
26
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998
(DOLLARS IN THOUSANDS)
ADJUSTMENTS
FOR THE
HISTORICAL TRANSACTIONS PRO FORMA(1)
Coal sales and related revenue..................................... $ 136,238 -- $ 136,238
---------- ------------ -------------
Operating costs:
Cost of revenues................................................. 113,635 $ (5,462)(2) 108,173
Depreciation, depletion and amortization......................... 11,829 3,204(3) 15,033
General and administrative....................................... 5,883 -- 5,883
---------- ------------ -------------
131,347 (2,258) 129,089
---------- ------------ -------------
Operating income (loss).......................................... 4,891 2,258 7,149
Interest expense, net.............................................. 4,757 8,625(4) 9,075
450(5)
(4,757)(6)
---------- ------------ -------------
Income (loss) before income taxes and nonrecurring charges and
credits.......................................................... $ 134 $ (2,060) $ (1,926)
---------- ------------ -------------
---------- ------------ -------------
OTHER DATA:
EBITDA(7).......................................................... $ 16,720 $ 5,462 $ 22,182
27
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 1998
(1) The "Unaudited Pro Forma Consolidated Statement of Operations" is presented
before consideration of nonrecurring charges or credits directly
attributable to the Transactions. The total of such net credits has the
effect of decreasing the accumulated deficit as presented on the "Unaudited
Pro Forma Consolidated Balance Sheet" by approximately $2.4 million as
explained in detail in notes (5), (7), (10) and (11) thereto.
(2) Reflects the elimination of lease expenses as a result of repayment in full
of operating lease obligations.
(3) Reflects additional depreciation associated with the purchase of certain
equipment previously financed pursuant to leases.
(4) Reflects interest on the Old Notes.
(5) Reflects amortization of debt issuance costs associated with the Old Notes
Offering and the New Senior Credit Facility.
(6) Reflects the elimination of historical interest expense associated with
indebtedness previously outstanding, including the Existing Indebtedness and
indebtedness due Renco.
(7) EBITDA represents earnings before net interest expense, other income
(expense), income taxes and depreciation, depletion and amortization. The
trends of EBITDA generally follow the trends of operating income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the recent trends of operating income.
Information regarding EBITDA is presented because management believes that
certain investors use EBITDA as one measure of an issuer's ability to
service its debt. EBITDA should not be considered an alternative to, or more
meaningful than, operating income, net income or cash flow as defined by
generally accepted accounting principles or as an indicator of an issuer's
operating performance. Furthermore, caution should be used in comparing
EBITDA to similarly titled measures of other companies as the definitions of
these measures may vary.
28
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TEN MONTHS ENDED OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
HISTORICAL
------------------------
PREDECESSOR THE
COMPANY COMPANY
JANUARY 1, MARCH 15,
1997 TO 1997 TO ADJUSTMENTS ADJUSTMENTS
MARCH 14, OCTOBER 31, FOR THE FOR THE
1997 1997 ACQUISITION TRANSACTIONS PROFORMA(1)
Coal sales and related revenue......... $ 46,486 $ 173,881 -- -- $ 220,367
----------- ----------- ----------- ------------ ------------
Operating costs:
Cost of revenues..................... 44,676 150,716 $ (9,104)(4) 186,288
Depreciation, depletion and
amortization....................... 4,749 14,276 $ (1,370)(2) 5,340(5) 23,750
General and administrative........... 2,190 6,823 755(3) -- 9,013
----------- ----------- ----------- ------------ ------------
51,615 171,815 (615) (3,764) 219,051
----------- ----------- ----------- ------------ ------------
Operating income (loss).............. (5,129) 2,066 615 3,764 1,316
Interest expense, net.................. 809 6,004 14,375(6) 15,125
750(7)
(6,813)(8)
----------- ----------- ----------- ------------ ------------
Income (loss) before income taxes and
nonrecurring charges and credits..... $ (5,938) $ (3,938) $ 615 $ (4,548) $ (13,809)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
OTHER DATA:
EBITDA(9).............................. $ (380) $ 16,342 -- $ 9,104 $ 25,066
29
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TEN MONTHS ENDED OCTOBER 31, 1997
(1) The "Unaudited Pro Forma Consolidated Statement of Operations" is presented
before consideration of nonrecurring charges or credits directly
attributable to the Transactions. The total of such net credits has the
effect of decreasing the accumulated deficit as presented on the "Unaudited
Pro Forma Consolidated Balance Sheet" by approximately $2.4 million as
explained in detail in notes (5), (7), (10) and (11) thereto.
(2) Reflects reduced depreciation due to write-down of fixed assets to fair
value for the period January 1, 1997 to March 14, 1997 related to purchase
accounting for the Acquisition.
(3) Reflects amortization of coal supply contracts and goodwill for the period
January 1, 1997 to March 14, 1997 related to purchase accounting for the
Acquisition.
(4) Reflects the elimination of lease expenses as a result of repayment in full
of operating lease obligations.
(5) Reflects additional depreciation associated with the purchase of certain
equipment previously financed pursuant to leases.
(6) Reflects interest on the Old Notes.
(7) Reflects amortization of debt issuance costs associated with the Old Notes
Offering and the New Senior Credit Facility.
(8) Reflects the elimination of historical interest expense associated with
indebtedness previously outstanding, including the Existing Indebtedness and
indebtedness due Renco.
(9) EBITDA represents earnings before net interest expense, other income
(expense), income taxes and depreciation, depletion and amortization. The
trends of EBITDA generally follow the trends of operating income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the recent trends of operating income.
Information regarding EBITDA is presented because management believes that
certain investors use EBITDA as one measure of an issuer's ability to
service its debt. EBITDA should not be considered an alternative to, or more
meaningful than, operating income, net income or cash flow as defined by
generally accepted accounting principles or as an indicator of an issuer's
operating performance. Furthermore, caution should be used in comparing
EBITDA to similarly titled measures of other companies as the definitions of
these measures may vary.
30
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company and the Predecessor Company at the dates and for the periods
indicated. The selected data presented below under the captions "Statement of
Operations Data" and "Financial Ratios and Other Data" for each of the fiscal
years in the four-year period ended December 31, 1996, for the period January 1,
1997 to March 14, 1997 and for the period March 15, 1997 to October 31, 1997,
and "Balance Sheet Data" as of December 31, 1993, 1994, 1995 and 1996 and
October 31, 1997, are derived from the consolidated financial statements of the
Predecessor Company and the Company, as applicable, which consolidated financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The selected data presented below under the captions
"Statement of Operations Data" and "Financial Ratios and Other Data" for the
period November 1, 1996 to December 31, 1996, for the period March 15, 1997 to
April 30, 1997 and for the six months ended April 30, 1998 and "Balance Sheet
Data" as of April 30, 1997 and 1998 are unaudited but, in the opinion of
management, include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial and operating data for such
periods. Data as of and for the six months ended April 30, 1998 do not purport
to be indicative of results to be expected for the full year. The following
information should be read in conjunction with the audited consolidated
financial statements and the related notes thereto for the fiscal years ended
December 31, 1995 and 1996 and for the period January 1, 1997 to March 14, 1997
for the Predecessor Company and for the period March 15, 1997 to October 31,
1997 for the Company and the unaudited consolidated financial statements for the
period November 1, 1996 to December 31, 1996 for the Predecessor Company and for
the period March 15, 1997 to April 30, 1997 and for the six months ended April
30, 1998 for the Company appearing elsewhere herein and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PREDECESSOR COMPANY(1)
PERIOD PERIOD
NOVEMBER 1, JANUARY 1,
FISCAL YEAR ENDED DECEMBER 31, 1996 TO 1997 TO
--------------------------------------- DECEMBER 31, MARCH 14,
1993 1994(2) 1995(3) 1996(4) 1996 1997
(UNAUDITED)
(DOLLARS AND TONS IN THOUSANDS, EXCEPT PER TON DATA)
STATEMENT OF OPERATIONS DATA:
Coal sales and related revenue..... $418,295 $ 389,996 $308,370 $255,386 $36,910 $ 46,486
Cost of revenues................... 337,012 360,635 255,859 257,269 36,378 44,676
Depreciation, depletion and
amortization..................... 49,267 46,641 30,832 22,714 3,294 4,749
General and administrative......... 18,418 19,601 11,677 14,270 2,307 2,190
-------- --------- -------- -------- ------------ ------------
Operating income (loss)............ 13,598 (36,881) 10,002 (38,867) (5,069) (5,129)
Interest expense, net.............. 2,387 4,428 4,436 2,801 550 809
Other income (expense), net........ (6,171) (204,347) 3,708 -- -- --
-------- --------- -------- -------- ------------ ------------
Income (loss) before income
taxes............................ 5,040 (245,656) 9,274 (41,668) (5,619) (5,938)
Income taxes....................... 1,786 1,414 3,279 -- -- --
-------- --------- -------- -------- ------------ ------------
Net income (loss).................. $ 3,254 $(247,070) $ 5,995 $(41,668) $(5,619) $ (5,938)
-------- --------- -------- -------- ------------ ------------
-------- --------- -------- -------- ------------ ------------
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(5).......................... $ 62,865 $ 9,760 $ 40,834 $(16,153) $(1,775) $ (380)
Capital expenditures............... 37,761 50,162 5,785 10,705 1,820 1,149
Ratio of earnings to fixed
charges(6)....................... 3.1x -- 3.1x -- -- --
OTHER OPERATING DATA:
Tons of coal shipped............... 16,692 15,705 11,811 10,569 1,561 1,910
Tons of coal produced per manhour
(underground) (7)(8)............. 3.5 2.9 4.4 4.4
Cubic yards moved per manhour
(surface)(7)(8).................. 83.7 81.6 92.3 107.9
THE COMPANY
PERIOD PERIOD SIX
MARCH 15, MARCH 15, MONTHS
1997 TO 1997 TO ENDED
OCTOBER 31, APRIL 30, APRIL 30,
1997 1997 1998
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Coal sales and related revenue..... $173,881 $ 31,387 $136,238
Cost of revenues................... 150,716 28,602 113,635
Depreciation, depletion and
amortization..................... 14,276 2,879 11,829
General and administrative......... 6,823 889 5,883
----------- ----------- -----------
Operating income (loss)............ 2,066 (983) 4,891
Interest expense, net.............. 6,004 1,020 4,757
Other income (expense), net........ -- -- --
----------- ----------- -----------
Income (loss) before income
taxes............................ (3,938) (2,003) 134
Income taxes....................... -- -- 54
----------- ----------- -----------
Net income (loss).................. $ (3,938) $ (2,003) $ 80
----------- ----------- -----------
----------- ----------- -----------
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(5).......................... $ 16,342 $ 1,896 $ 16,720
Capital expenditures............... 3,771 833 2,917
Ratio of earnings to fixed
charges(6)....................... -- -- 1.0x
OTHER OPERATING DATA:
Tons of coal shipped............... 6,855 1,285 5,409
Tons of coal produced per manhour
(underground) (7)(8)............. 4.9
Cubic yards moved per manhour
(surface)(7)(8).................. 109.2
31
PREDECESSOR COMPANY(1) THE COMPANY
AS OF DECEMBER 31, AS OF AS OF AS OF
------------------------------------------ APRIL 30, OCTOBER 31, APRIL 30,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash....................................... $ 7,314 $ 17,835 $ 17,806 $ 8,314 $ 7,050 $ 3,055 $ 5,404
Working capital (deficit).................. 7,515 (13,687) (2,115) (33,251) (41,668) (31,424) (32,092)
Property, plant and equipment, net......... 284,710 211,211 131,073 116,094 91,326 84,541 77,668
Total assets............................... 460,253 302,033 233,386 208,358 208,164 200,448 187,510
Total debt (including current portion)..... 26,359 63,119 28,077 22,793 59,035 63,556 55,767
Stockholder's equity....................... 314,224 69,992 75,700 33,666 2,998 1,063 1,143
- ------------------------
(1) Lodestar was acquired by the Company as of March 14, 1997.
(2) Cost of revenues in 1994 was negatively affected by certain events. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Events." In addition, in 1994, $204.3 million in other
expenses were recognized, of which $200.8 million represented a provision to
adjust the valuation of certain assets and liabilities resulting from the
Predecessor Company's reassessment of anticipated business activity in the
coal industry.
(3) Other income (expense) during 1995 represents the net effect of a $44.0
million gain recorded in connection with disposing of the Predecessor
Company's Louisiana operations, a $39.6 million loss to adjust the value of
the Predecessor Company to an expected sales price, and a $.7 million
minority interest in earnings of the Louisiana operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) Results for fiscal 1996 were negatively affected by certain unusual charges
made in connection with an evaluation of the Predecessor Company's accrued
reserves and its legal expenses associated with selling the business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Events."
(5) EBITDA represents earnings before net interest expense, other income
(expense), income taxes and depreciation, depletion and amortization. The
trends of EBITDA generally follow the trends of operating income. See
"Management's Dicussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the recent trends of operating income.
Information regarding EBITDA is presented because management believes that
certain investors use EBITDA as one measure of an issuer's ability to
service its debt. EBITDA should not be considered an alternative to, or more
meaningful than, operating income, net income or cash flow as defined by
generally accepted accounting principles or as an indicator of an issuer's
operating performance. Furthermore, caution should be used in comparing
EBITDA to similarly titled measures of other companies as the definitions of
these measures may vary.
(6) Fixed charges consist of interest expense, capitalized interest,
amortization of deferred financing costs and the portion of rental expense
that is representative of interest expense. Earnings consist of income
before taxes plus fixed charges less capitalized interest. Earnings were
insufficient to cover fixed charges by $245.7 million, $41.7 million, $5.6
million, $5.9 million, $3.9 million and $2.0 million for the fiscal years
ended December 31, 1994 and 1996, the period from November 1, 1996 to
December 31, 1996, the period January 1, 1997 to March 14, 1997, the period
March 15, 1997 to October 31, 1997 and the period March 15, 1997 to April
30, 1997, respectively.
(7) Data regarding manhours is available only on a calendar year basis.
Accordingly, data for shorter periods is not presented, and the data
presented as the period March 15, 1997 to October 31, 1997, represents data
for calendar 1997.
(8) Excludes divested and idled operations.
32
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the sale of Old Notes to the Initial Purchasers pursuant
to the Purchase Agreement, dated May 12, 1998, among the Company, the Guarantors
and the Initial Purchasers, the holders of the Old Notes became entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company became obligated to (a)
file a registration statement in connection with a registered exchange offer
within 60 days after May 15, 1998, the date the Old Notes were issued (the
"Issue Date"), and (b) cause the registration statement relating to such
registered exchange offer to become effective within 180 days after the Issue
Date. The Exchange Offer being made hereby, if consummated within the required
time periods, will satisfy the Company's obligations under the Registration
Rights Agreement. The Company understands that there are approximately
beneficial owners of such Old Notes. This Prospectus, together with the Letter
of Transmittal, is being sent to all such beneficial holders known to the
Company.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding Old
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in the
Morgan Stanley Letter, the Exxon Capital Letter and similar letters, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by any
person who received such Exchange Notes, whether or not such person is the
holder (other than Restricted Holders) without compliance with the registration
and prospectus delivery provisions of the Securities Act, PROVIDED that such
Exchange Notes are acquired in the ordinary course of such holder's or other
person's business, neither such holder nor such other person is engaged in or
intends to engage in any distribution of the Exchange Notes and such holders or
other persons have no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
If any person were to be participating in the Exchange Offer for the
purposes of participating in a distribution of the Exchange Notes in a manner
not permitted by the Commission's interpretation, such person (a) could not rely
upon the Morgan Stanley Letter, the Exxon Capital Letter or similar letters and
(b) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after consummation of the Exchange Offer, it will
make this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
33
The Company will not receive any proceeds from the Exchange Offer. See "Use
of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer
pursuant to the Registration Rights Agreement. No underwriter is being used in
connection with the Exchange Offer.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the Exchange Notes from the Company
and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain conditions set forth herein under
"--Conditions" without waiver by the Company, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes in connection with the Exchange Offer. See
"--Fees and Expenses."
In the event the Exchange Offer is consummated, the Company will not be
required to register the Old Notes. In such event, holders of Old Notes seeking
liquidity in their investment would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act. See "Risk
Factors--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENT
The term "Expiration Date" shall mean the expiration date set forth on the
cover page of this Prospectus, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will issue a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period of time.
The Company reserves the right (a) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
"--Conditions" shall have occurred and shall not have been waived by the Company
(if permitted to be waived by the Company), by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (b) to amend the
terms of the Exchange Offer in any manner deemed by it to be advantageous to the
holders of the Old Notes. Any such delay in acceptance, extension, termination
or amendment will be followed as promptly as practicable by oral or written
notice thereof. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment, and the Company may extend the Exchange Offer for a
period of up to ten business days, depending upon the significance of the
amendment and the manner of disclosure to holders of the Old Notes, if the
Exchange Offer would otherwise expire during such extension period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
34
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from May 15, 1998, payable
semiannually on May 15 and November 15 of each year, commencing November 15,
1998, at the rate of 11 1/2% per annum. Holders of Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued up until the date of the
issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by instruction 3 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents. To be validly tendered, such
documents must reach the Exchange Agent on or before 5:00 p.m., New York City
time, on the Expiration Date.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or other nominees to effect such tender for
such holders.
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, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery to the Exchange Agent on or before 5:00 p.m.
New York City time, on the Expiration Date. No Letter of Transmittal or Old
Notes should be sent to the Company or the Guarantors.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such registered holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm 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 (an "Eligible Institution") unless the Old Notes tendered pursuant
thereto are tendered (a) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (b) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers and a proxy
35
which authorizes such person to tender the Old Notes on behalf of the registered
holder, in each case signed as the name of the registered holder or holders
appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority so to act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes the Company's acceptance of which would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Company's 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 such time as the
Company shall determine. None of the Company, the Guarantors, the Exchange Agent
or any other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived. Any Old Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned without cost to such holder by the Exchange Agent to the
tendering holders of Old Notes, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth under "--Conditions," to terminate the
Exchange Offer in accordance with the terms of the Registration Rights Agreement
and (b) to the extent permitted by applicable law, purchase Old Notes in the
open market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers will differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (a) the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of such holder or other person, (b)
neither such holder nor such other person is engaged in or intends to engage in
a distribution of the Exchange Notes (c) neither such holder or other person has
any arrangement or understanding with any person to participate in the
distribution of such Exchange Notes, and (d) such holder or other person is not
an "affiliate," as defined under Rule 405 of the Securities Act, of the Company
or, if such holder or other person is such an affiliate, will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after consummation of the Exchange Offer, it will
make this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
36
The Company will not receive any proceeds from the Exchange Offer. See "Use
of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer
pursuant to the Registration Rights Agreement. No underwriter is being used in
connection with the Exchange Offer.
The Old Notes were issued on May 15, 1998, and there is no public market for
them at present. To the extent Old Notes are tendered and accepted in the
Exchange Offer, the principal amount of outstanding Old Notes will decrease with
a resulting decrease in the liquidity in the market therefor. Following the
consummation of the Exchange Offer, holders of Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the Old Notes could be adversely affected.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (a) whose Old Notes are not
immediately available or (b) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if: (i) the tender is made through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution 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 of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby, and guaranteeing
that, within three business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s) representing
the Old Notes to be tendered in proper form for transfer and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and (iii) such properly completed and
executed Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing all tendered Old Notes in proper form for transfer
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three business days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (a) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"), (b)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (c) be signed by the Depositor
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the Depositor withdrawing the tender and (d) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
37
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes not theretofore accepted for exchange, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old Notes, if
the Company or the holders of at least a majority in principal amount of Old
Notes reasonably determine in good faith that any of the following conditions
exist: (a) the Exchange Notes to be received by such holders of Old Notes in the
Exchange Offer, upon receipt, will not be tradable by each such holder (other
than a holder which is an affiliate of the Company at any time on or prior to
the consummation of the Exchange Offer) without restriction under the Securities
Act and the Exchange Act and without material restrictions under the blue sky or
securities laws of substantially all of the states of the United States, (b) the
interests of the holders of the Old Notes, taken as a whole, would be materially
adversely affected by the consummation of the Exchange Offer or (c) after
conferring with counsel, the Commission is unlikely to permit the making of the
Exchange Offer on or before November 11, 1998.
Pursuant to the Registration Rights Agreement, if an Exchange Offer shall
not be consummated prior to the Exchange Offer Termination Date, the Company
will be obligated to cause to be filed with the Commission a shelf registration
statement with respect to the Old Notes (the "Shelf Registration Statement") as
promptly as practicable after the Exchange Offer Termination Date and thereafter
use its best efforts to have the Shelf Registration Statement declared
effective.
"Exchange Offer Termination Date" means the date on which the earliest of
any of the following events occurs: (a) applicable interpretations of the staff
of the Commission do not permit the Company to effect the Exchange Offer or (b)
any holder of Notes notifies the Company within 20 business days following the
consummation of the Exchange Offer that (i) such holder is not eligible to
participate in the Exchange Offer, (ii) such holder participated in the Exchange
Offer and did not receive freely transferable Exchange Notes in exchange for
tendered Old Notes or (iii) such holder is a broker-dealer and holds Old Notes
acquired directly from the Company or one of its affiliates.
If any of the conditions described above exist, the Company will refuse to
accept any Old Notes and will return all tendered Old Notes to exchanging
holders of the Old Notes.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal and
deliveries of completed Letters of Transmittal with tendered Old Notes should be
directed to the Exchange Agent addressed as follows:
BY MAIL BY HAND/OVERNIGHT DELIVERY
State Street Bank and Trust Company State Street Bank and Trust Company
Two International Place, 4th Floor 61 Broadway, 15th Floor
Boston, Massachusetts 02110 New York, New York 10006
Attention: Claire Young--Corporate Trust Attention: Corporate Trust Department
Department
The Company will indemnify the Exchange Agent and its agents for any loss,
liability or expense incurred by them, including reasonable costs and expenses
of their defense, except for any such loss, liability or expense caused by
negligence or bad faith.
38
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telephone or facsimile.
The Company will not make any payments to brokers, dealers, or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes, and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and expenses, will be paid by the Company, and are estimated in the
aggregate to be approximately $250,000.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes (or Old Notes for principal amounts not tendered or
accepted for exchange) are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Company will not recognize any gain or loss for accounting purposes upon
the consummation of the Exchange Offer. The expense of the Exchange Offer will
be amortized by the Company over the term of the Exchange Notes under GAAP.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company, through its wholly-owned subsidiary Lodestar, is engaged in the
mining and marketing of bituminous coal used principally for the generation of
electricity, as well as for other industrial applications. Lodestar operates a
diverse portfolio of seven deep and five surface coal mines located in Eastern
and Western Kentucky and is among the largest coal producing companies in
Kentucky, the third largest coal producing state. Lodestar focuses on select
niche coal markets in the Eastern, South Central and Great Lakes regions of the
United States. Lodestar offers flexibility in its coal qualities, as required by
varied and changing customer demands, through its diverse portfolio of mines and
mining methods, its blending capabilities and its transportation alternatives.
Lodestar believes its niche market strategy and flexible operations enable it to
meet customer demand for quality products and services at competitive prices,
resulting in long-term supply contracts. In excess of 90% of Lodestar's fiscal
1998 production is committed under purchase orders and contracts and
approximately 67% of such production is committed under long-term contracts that
had a weighted average term of approximately 8.4 years as of April 30, 1998.
During fiscal 1998, Lodestar will own and/or operate twelve mines, four in
Western Kentucky (three underground and one surface) and eight in Eastern
Kentucky (four underground and four surface). Lodestar also owns and operates an
ash disposal facility in Eastern Kentucky.
Lodestar's Western Kentucky coal product is mid to high sulfur and competes
primarily in the regional utility market. Targeted customers can effectively
burn high sulfur coal by utilizing "scrubbers" that remove sulfur dioxide from
plant emissions or by utilizing the emissions allowance market. Alternatively,
customers can blend such coals with low Btu, low sulfur coals from the Western
United States. Lodestar's Eastern Kentucky coal product, as compared to its
Western Kentucky coal product, is generally higher in Btu content and lower in
sulfur content, which provides for a broader market.
The Company was formed in August 1996 to acquire all of the capital stock of
Costain Coal Inc., the Predecessor Company, from Costain America Inc. The
Acquisition included substantially all of the Predecessor Company's mining
interests in Kentucky and West Virginia. The Acquisition, which was effective
March 14, 1997, has been accounted for using the purchase method of accounting.
After the Acquisition, Costain Coal Inc. was renamed Lodestar Energy, Inc.
CERTAIN EVENTS
Since 1994, the Predecessor's Parent had been divesting its operations and
assets in an attempt to exit the U.S. market. Accordingly, the Predecessor
Company undertook a process of selling operations or liquidating certain assets
based on the geographic location of such assets. In particular, the Predecessor
Company's operations in Ohio, which shipped approximately 325,000 tons of coal,
generating approximately $13.2 million of coal sales and related revenue in
1994, were closed after its coal supply agreement relating to those operations
was sold in December 1994. In March 1995, the Predecessor Company sold its
Louisiana operations, which produced approximately 2.7 million tons of lignite
coal, generating approximately $46.8 million of coal sales and related revenue
in 1994. In December 1995, the Alabama operations, which shipped approximately
820,000 tons of coal, generating approximately $30.8 million of coal sales and
related revenue in 1995, were sold.
In the first quarter of fiscal 1998, Lodestar idled its West Virginia
operations, which shipped approximately 513,000 tons of coal, generating
approximately $13.8 million of coal sales and related revenue for the twelve
months ended April 30, 1998. Lodestar expects reclamation activities to continue
throughout fiscal 1998. The estimated cost of all reclamation and mine closing
activities is included as a liability in the April 30, 1998 balance sheet. With
the idling of the West Virginia operations, all of Lodestar's operating assets
are located in Kentucky.
40
During 1994, the Predecessor Company experienced a series of events which
materially adversely affected its results of operations. Specifically, due to
geologic anomalies and roof problems in its Wheatcroft mine (Western Kentucky),
as well as equipment trouble with the two operating longwall miners, the
Predecessor Company had lower production and yields, which adversely affected
results of operations. At the Baker mine (Western Kentucky), management revised
the long-term mine plan from continuous mining to longwall mining. As a result,
the Predecessor Company experienced development costs and lost production due to
the mine plan modifications necessary to complete the changeover, resulting in
increased cost of revenues. In an effort to generate cash, the Predecessor
Company elected to sell a short-line railroad it owned in Western Kentucky (the
"Short-Line Railroad"), which resulted in an $8.1 million charge to cost of
revenues. In addition, $2.2 million in provisions were made to account for
ongoing employee costs associated with personnel terminations and to increase
outstanding litigation reserves.
During 1996, the Predecessor Company was negatively affected by production
difficulties in Western Kentucky which increased cost of revenues. In addition,
a $7.7 million provision for expected future losses on sales and transportation
contracts, a $6.0 million provision for reclamation, a $4.0 million provision
for workers' compensation benefits and a $3.5 million provision for abandoned
property, all negatively affected cost of revenues. The Predecessor Company also
incurred legal expenses of approximately $2.0 million in connection with the
sales process.
PRODUCTION AND REVENUE SOURCES
As of January 31, 1998, Lodestar had approximately 198.6 million recoverable
tons of demonstrated reserves based upon estimates prepared by Marshall Miller &
Associates. Most of Lodestar's demonstrated reserves are leased from third
parties pursuant to long-term lease and royalty agreements with terms ranging
from five to 30 years. The following table summarizes the tons shipped by region
for the periods presented:
FISCAL YEAR ENDED TEN MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, OCTOBER 31, APRIL 30,
-------------------- -------------------- --------------------
REGION 1995 1996 1996 1997 1997 1998
(TONS IN THOUSANDS)
Eastern Kentucky.................................................. 3,304 4,129 3,463 3,403 1,901 1,978
Western Kentucky.................................................. 6,171 5,479 4,729 4,771 2,480 3,231
West Virginia..................................................... 724 803 690 574 375 200
Brokered.......................................................... 235 158 124 17 -- --
Louisiana......................................................... 533 -- -- -- -- --
Alabama........................................................... 820 -- -- -- -- --
Ohio.............................................................. 24 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total......................................................... 11,811 10,569 9,006 8,765 4,756 5,409
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Lodestar's principal source of revenues are from the sale of coal pursuant
to long-term contracts, or through coal sales on the spot market. In addition,
Lodestar derives additional revenue from ancillary services related to its coal
operations, including ash disposal.
The principal components of Lodestar's expenses are costs relating to the
production and transportation of coal. These costs include labor expenses,
royalty and lease payments, payments for fuel, materials and supplies and
equipment repairs, production taxes and fees, reclamation expenditures, and
trucking costs. Other costs include depreciation, depletion and amortization
expense, general and administrative expense, as well as interest expense.
With respect to royalty and lease payments, Lodestar pays lessors royalties
for the right to mine coal either as a fixed amount per ton or as a percentage
of the sales price. Such royalty payments are reflected
41
in the Company's cost of revenues. In addition, many leases also require the
payment to the lessor of a lease bonus or minimum royalty, payable upon
execution of the lease or in periodic installments. In most cases, the minimum
royalty payments are applied to reduce future production royalties as set forth
in the lease. The Company, in accordance with generally accepted accounting
principles, capitalizes the minimum royalty or lease bonuses and amortizes such
amount on a unit-of-production basis.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the
Predecessor Company and the Company for the periods presented. The combined
operations and other data for the ten months ended October 31, 1997 combine the
results of operations of the Predecessor Company for the period January 1, 1997
to March 14, 1997 and of the Company for the period March 15, 1997 to October
31, 1997. The combined operations and other data for the six months ended April
30, 1997 combine the results of operations of the Predecessor Company for the
periods November 1, 1996 to December 31, 1996 and January 1, 1997 to March 14,
1997 and the Company for the period March 15, 1997 to April 30, 1997. The
combined operations and other data for the ten months ended October 31, 1997 and
for the six months ended April 30, 1997 do not purport to represent what the
Company's consolidated results of operations would have been if the Acquisition
had actually occurred on January 1, 1997 and November 1, 1997, respectively. Due
to the purchase accounting adjustments applied to the Company's accounts as of
March 15, 1997, the results of the Predecessor Company for the ten months ended
October 31, 1996 and the combined results of the Predecessor Company and the
Company for the ten months ended October 31, 1997 are not comparable beyond
EBITDA. Similarly, the combined results of the Predecessor Company and the
Company for the six months ended April 30, 1997 and the results of the Company
for the six months ended April 30, 1998 are not comparable beyond EBITDA.
THE
THE PREDECESSOR COMPANY COMPANY
COMBINED COMBINED
TEN TEN SIX SIX
FISCAL YEAR ENDED MONTHS MONTHS MONTHS MONTHS
DECEMBER 31, ENDED ENDED ENDED ENDED
---------------------- OCTOBER 31, OCTOBER 31, APRIL 30, APRIL 30,
1995 1996 1996 1997 1997 1998
(DOLLARS AND TONS IN THOUSANDS, EXCEPT PER TON DATA)
OPERATIONS AND OTHER DATA:
Coal sales and related revenue............. $ 308,370 $ 255,386 $ 218,476 $ 220,367 $ 114,783 $ 136,238
Cost of revenues........................... 255,859 257,269 220,891 195,392 109,656 113,635
---------- ---------- ----------- ----------- ----------- -----------
Gross profit (loss)........................ 52,511 (1,883) (2,415) 24,975 5,127 22,603
General and administrative................. 11,677 14,270 11,963 9,013 5,386 5,883
---------- ---------- ----------- ----------- ----------- -----------
EBITDA(1).................................. $ 40,834 $ (16,153) $ (14,378) $ 15,962 $ (259) $ 16,720
---------- ---------- ----------- ----------- ----------- -----------
---------- ---------- ----------- ----------- ----------- -----------
OTHER OPERATING DATA:
Tons of coal shipped....................... 11,811 10,569 9,006 8,765 4,756 5,409
---------- ---------- ----------- ----------- ----------- -----------
Coal sales and related revenue per ton
shipped.................................. $ 26.11 $ 24.16 $ 24.26 $ 25.14 $ 24.14 $ 25.19
---------- ---------- ----------- ----------- ----------- -----------
Cost of revenues per ton shipped........... $ 21.66 $ 24.34 $ 24.53 $ 22.29 $ 23.06 $ 21.01
---------- ---------- ----------- ----------- ----------- -----------
---------- ---------- ----------- ----------- ----------- -----------
- ------------------------
(1) EBITDA represents earnings before net interest expense, other income
(expense), income taxes and depreciation, depletion and amortization. The
trends of EBITDA generally follow the trends of operating income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the recent trends of operating income.
Information regarding EBITDA is presented because management believes that
certain investors use EBITDA as one measure of an issuer's ability to
service its debt. EBITDA should not be considered an alternative to,
42
or more meaningful than, operating income, net income or cash flow as
defined by generally accepted accounting principles or as an indicator of an
issuer's operating performance. Furthermore, caution should be used in
comparing EBITDA to similarly titled measures of other companies as the
definitions of these measures may vary.
SIX MONTHS ENDED APRIL 30, 1998 COMPARED TO SIX MONTHS ENDED APRIL 30, 1997
COAL SALES AND RELATED REVENUE for the six months ended April 30, 1998 (the
"1998 Period") were $136.2 million, an increase of $21.5 million or 18.7%
compared to the six months ended April 30, 1997 (the "1997 Period"). This
increase was the result of a 13.8% increase in sales volume combined with a
$1.05 per ton net increase in coal sales and related revenue. The sales volume
increase is attributable to 750,000 tons of increased sales in Western Kentucky.
Additional tons were available for sale in Western Kentucky because of the
increased productivity at the Baker mine and the resumption of mining activities
at the Wheatcroft mine. The net increase in coal sales and related revenue of
$1.05 per ton combines the net effect of a $1.52 per ton increase in coal
related revenue from ancillary services, with a $.47 per ton decrease in coal
revenue per ton. The increase in ancillary services is primarily due to the
revenue generated from contract mining the Shop Branch mine in Eastern Kentucky.
The decrease in coal revenue per ton is primarily attributable to the higher
percentage of Western Kentucky coal sales.
COST OF REVENUES were $113.6 million in the 1998 Period as compared to
$109.7 million in the 1997 Period. The 3.6% increase in cost of revenues was
substantially less than the 13.8% increase in tons shipped. Accordingly, cost of
revenues per ton shipped decreased from $23.06 in the 1997 Period to $21.01 in
the 1998 Period. The primary reason for the cost per ton improvement has been
the improved productivity and resultant lower costs per ton at the Baker mine in
Western Kentucky.
GENERAL AND ADMINISTRATIVE costs increased to $5.9 million in the 1998
Period from $5.4 million in the 1997 Period. The increase of 9.2% in the 1998
Period is due to a combination of factors including: (i) the waiver of the Renco
management fee for the period March 15, 1997 to April 30, 1997; (ii) increased
banking charges, particularly in conjunction with the credit facility which was
not in place for most of the 1997 period; (iii) staffing of permanent personnel
in both the accounting and sales and marketing areas during the 1998 Period. The
variance between the 1997 Period and the 1998 Period would have been greater if
not for charges of $.8 million to write off certain uncollectible receivables
during the 1997 Period.
EBITDA for the 1998 Period was $16.7 million as compared to $(.3) million
for the 1997 Period. The $17.0 million improvement was the result of factors as
previously described in this section.
TEN MONTHS ENDED OCTOBER 31, 1997 COMPARED TO TEN MONTHS ENDED OCTOBER 31,
1996
COAL SALES AND RELATED REVENUE for the ten months ended October 31, 1997
(the "1997 Interim Period") increased to $220.4 million as compared to $218.5
million for the ten months ended October 31, 1996 (the "1996 Interim Period"),
an increase of 0.9%. Coal sales and related revenue per ton shipped increased
from $24.26 to $25.14 on tons shipped that were slightly lower than during the
1996 Interim Period. The increase in coal sales and related revenue was
attributable to minor pricing improvements and significant increases in
coal-related revenue including ash disposal income, revenue from contract coal
stripping and coal processing for third parties. The increased coal sales and
related revenue was achieved despite a decline of $2.9 million in West Virginia
revenues as operations were being idled, and a decline of $3.5 million in
brokered sales.
COST OF REVENUES decreased to $195.4 million for the 1997 Interim Period
from $220.9 million for the 1996 Interim Period, a 11.5% decrease as compared to
a 2.7% decrease in tons shipped. The primary cause of the decrease was certain
unusual adjustments totaling $18.8 million affecting the 1996 Interim Period
including (i) a $5.3 million provision due to the expected failure to meet
minimum shipping obligations over the term of a transportation contract; (ii)
$6.0 million increase in reclamation reserves; (iii) $4.0 million increase in
workers' compensation reserve; and (iv) approximately $3.5 million charge
related to abandoned property. Excluding the aforementioned adjustments, costs
decreased from $22.44 per ton
43
shipped during the 1996 Interim Period to $22.29 per ton shipped in the 1997
Interim Period, a decrease of 0.7%. Costs were lowered in Western Kentucky by a
cost-restructuring program reducing employee benefits, which was implemented
late in 1996. Eastern Kentucky costs remained relatively constant between the
1996 and 1997 Interim Periods.
GENERAL AND ADMINISTRATIVE costs decreased to $9.0 million in the 1997
Interim Period from $12.0 million in the 1996 Interim Period, representing a
decrease of 24.7%. The majority of this decline was attributable to decreased
legal costs of $1.7 million in the 1997 Interim Period. Other factors positively
affecting the 1997 Interim Period were reduced taxes other than income taxes,
services provided by Renco at no charge which were previously provided by
consultants, and reduced administrative expenses at the operating locations. The
aforementioned factors more than offset the greater benefit received in the 1996
Interim Period from the allocation of certain expenses to a company affiliated
with the Predecessor Company.
EBITDA for the 1997 Interim Period was $16.0 million. This was a $30.3
million improvement from EBITDA of $(14.4) million for the 1996 Interim Period
due to the factors discussed above.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
COAL SALES AND RELATED REVENUE for fiscal 1996 were $255.4 million as
compared to $308.4 million for fiscal 1995. This represented a decrease of 17.2%
between the periods. Of this decline, $9.3 million was due to the sale of the
Louisiana operations in March 1995 and $30.8 million was due to the sale of the
Alabama operations in December 1995. Western Kentucky coal sales and related
revenue also decreased by $27.3 million. Western Kentucky production decreased
0.7 million tons primarily attributable to the closure of the Wheatcroft
underground mine, partially offset by increased tons shipped from the Smith
operations which completed the transition from surface to underground
production. In addition, coal sales and related revenue per ton shipped in
Western Kentucky decreased by $1.92 per ton shipped primarily due to the
expiration or liquidation of higher priced contracts. The decline in Western
Kentucky coal sales and related revenue was partially offset by an approximate
$21.1 million increase in Eastern Kentucky coal sales and related revenue. This
was primarily due to a 0.8 million ton increase in shipments as a result of
increased production related to additional leased equipment.
COST OF REVENUES increased to $257.3 million in fiscal 1996 from $255.9
million in fiscal 1995, an increase of 0.6%. Cost of revenues increased from
$21.66 to $24.34 per ton shipped primarily as a result of: (i) $7.7 million
provision for expected future losses on sales and transportation contracts; (ii)
$6.0 million increase in reclamation reserves; (iii) $4.0 million increase in
workers' compensation reserve; and (iv) approximately $3.5 million charge
related to abandoned property. In addition, costs in Western Kentucky were
negatively impacted in fiscal 1996 as compared to fiscal 1995 because of adverse
geologic conditions. Excluding the aforementioned factors, Eastern and Western
Kentucky costs per ton were reasonably consistent between periods.
DEPRECIATION, DEPLETION AND AMORTIZATION decreased to $22.7 million in
fiscal 1996 from $30.8 million in fiscal 1995, a reduction of $8.1 million.
Approximately $3.2 million of this decrease was due to the disposition of the
Louisiana and Alabama operations. The remainder was primarily due to the
reduction in depreciation related to a $31.2 million write-down of impaired
assets on December 31, 1995.
GENERAL AND ADMINISTRATIVE COSTS increased to $14.3 million in fiscal 1996
from $11.7 million in fiscal 1995, an increase of 22.2%. These increased costs
were primarily due to an increase in legal fees of $2.3 million related to the
sales process undertaken by the Predecessor Company.
OPERATING INCOME (LOSS) decreased from $10.0 million in fiscal 1995 to a
loss of $38.9 million in fiscal 1996. The substantial reduction was the
combination of a decrease in coal sales and related revenue and a significant
increase in cost of revenues and an increase in general and administrative
costs.
44
INTEREST EXPENSE, NET decreased from $4.4 million in fiscal 1995 to $2.8
million in fiscal 1996. Of this decrease, $1.1 million was the result of an
improved borrowing position. In addition, interest related to the Louisiana
operations was eliminated, and interest on capitalized leases declined slightly
between periods.
OTHER INCOME (EXPENSE), NET was $3.7 million of income in fiscal 1995. In
fiscal 1995, the Predecessor Company recorded a $44.0 million gain by disposing
of its Louisiana operations. Substantially offsetting this gain, a $39.6 million
loss was incurred, adjusting the value of the Predecessor Company to an expected
sales price. Of the total loss of $39.6 million, $31.2 million related to the
write-down of fixed assets. Also included as $.7 million of expense was the
minority interest in the earnings of the Louisiana operations.
INCOME TAXES of $3.3 million were generated in fiscal 1995 as compared to no
tax liability in fiscal 1996. The fiscal 1995 income taxes were the result of
the gain on the sale of the Louisiana operations.
NET INCOME (LOSS) was $6.0 million in fiscal 1995 as compared to a $41.7
million loss in fiscal 1996. The reduced net income was the result of the
factors as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from working capital
requirements, capital investments and interest payment obligations. The
Company's primary available sources of liquidity are cash provided by operating
activities and existing cash balances. The Company also has available Lodestar's
New Senior Credit Facility that provides for advances by the lender to a maximum
of $90.0 million, based on specific percentages of eligible receivables and
inventories, and for letters of credit of up to $30.0 million. Upon the
consummation of the Transactions, the New Senior Credit Facility was undrawn,
and $22.0 million of letters of credit is outstanding. See "Description of New
Senior Credit Facility."
Cash provided (used) by the Company's operating activities was $(16.7)
million, $11.7 million, $13.0 million and $(6.3) million during the 1997 and
1996 Interim Periods, and fiscal 1996 and 1995, respectively. Cash used by
operating activities in the 1997 Interim Period was negatively affected by the
poor cash position of the Predecessor Company prior to the Acquisition. Between
the date of the Acquisition and October 31, 1997, $27.1 million in cash was used
to finance changes in operating accounts. The fiscal 1996 cash provided by
operating activities resulted from a $21.0 million deterioration of working
capital.
Capital expenditures were $4.9 million, $8.9 million, $10.7 million and $5.8
million during the 1997 and 1996 Interim Periods and fiscal 1996 and 1995,
respectively. Management expects to spend approximately $10.0 million to $15.0
million annually for capital expenditures, of which approximately $8.0 million
is required annually to maintain its current level of operations. In fiscal
1998, capital expenditures are estimated to be approximately $12.0 million. As
of April 30, 1998, the Company had capital expenditure commitments of
approximately $2.5 million.
The Company has significant indebtedness outstanding. See "Risk
Factors--Substantial Indebtedness; Structural Subordination." Management
believes that cash flow from operations at Lodestar, in addition to availability
under the New Senior Credit Facility, will be sufficient to provide for the
Company's liquidity needs for the foreseeable future.
The Indenture and the New Senior Credit Facility contain numerous covenants
and prohibitions that will impose limitations on the liquidity of the Company
and Lodestar, including requirements that the Company and Lodestar satisfy
certain financial ratios and limitations on the incurrence of additional
indebtedness. See "Risk Factors--Restrictions Imposed by Terms of Indebtedness,"
"Description of New Senior Credit Facility" and "Description of the Senior
Notes--Certain Covenants." The ability of the Company and Lodestar to meet their
respective debt service requirements and to comply with such covenants will be
dependent upon future operating performance and financial results which will be
subject to financial, economic, political, competitive and other factors
affecting the Company and Lodestar, many of which are beyond their control.
45
INFLATION AND SEASONALITY
In general, the Company's cost of revenues and general and administrative
costs are affected by inflation, which could affect the Company in future
periods. Management believes, however, that such effects have not been material
to the Company and the Predecessor Company during the past three years. The
Company believes that its business is somewhat seasonal due to seasonal weather
conditions that affect the demand for electricity, as well as the ability to
transport coal.
RECLAMATION AND ENVIRONMENTAL MATTERS
The Company has incurred and will continue to incur capital and operating
expenditures for matters relating to reclamation. Cash expenses associated with
reclamation were approximately $1.2 million and $.9 million for the 1997 and
1996 Interim Periods, respectively. The Company estimates its cash expenditures
for reclamation will be approximately $2.5 million in fiscal 1998. The Company
has minimal expenses related to environmental control and monitoring. See
"Government Regulation--Environmental Matters."
As part of its reclamation activities in the ordinary course of its
business, Lodestar had obtained approximately $42.4 million of performance bonds
as of April 30, 1998. Lodestar's contingent obligations to the surety of these
performance bonds are supported by $17.8 million in outstanding letters of
credit as of April 30, 1998. See "Risk Factors--Reclamation and Closure
Liabilities."
Environmental laws and regulations have changed rapidly in recent years, and
the Company may become subject to more stringent environmental laws and
regulations in the future. Compliance with more stringent environmental laws and
regulations could have a material adverse effect on the Company's consolidated
financial position, results of operations and liquidity. See "Risk
Factors--Environmental Matters; Government Regulation of Mining Industry" and
"Government Regulation--Environmental Matters."
YEAR 2000 BUSINESS MATTERS
The Company has a thorough plan to achieve year 2000 compliance with respect
to its business systems, including systems and user testing scheduled to
commence in the latter part of 1998. The Company does not currently expect year
2000 issues related to its business systems to have any material effect on the
Company's costs or to cause any significant disruption in operations. The
Company has initiated a program to assess its process control environment for
year 2000 compliance, and it intends to make any necessary modifications to
prevent disruption to its operations. The Company relies on systems maintained
by third parties; accordingly, the Company also is developing a contingency plan
designed to minimize the risk of third party noncompliance. The Company believes
that it will incur minimal additional costs, if any, to achieve year 2000
compliance.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 defines comprehensive income
as the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources.
This Statement requires comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement is effective for fiscal years beginning after
December 15, 1997. The Company does not expect the implementation of this
Statement to have a material effect on its consolidated financial statements.
SFAS No. 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their
46
quarterly report to stockholders. This Statement requires that companies
disclose segment data based on how management makes decisions about allocating
resources to segments and measuring their performance. This Statement is
effective for fiscal years beginning after December 15, 1997. The Company does
not expect the implementation of this Statement to have a material effect on its
consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. This Statement is
effective for fiscal years beginning after December 15, 1997. The Company does
not expect the implementation of this Statement to have a material effect on its
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative is
dependent upon the intended use of the derivative. The Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company does not expect implementation of this Statement to have a material
effect on its consolidated financial statements.
47
INDUSTRY
GENERAL
According to data compiled by the United States Department of Energy's
Energy Information Administration (the "EIA"), United States coal production
totaled 1.06 billion tons in 1996, a 2.3% increase from the 1.03 billion tons
produced in 1995 and a record high. The increase in 1996 coal production levels
was driven by a large increase in coal consumption for electricity generation
due to increased natural gas prices, negligible growth in nuclear-powered
generation, abnormally cold weather and strong economic growth. Total United
States coal consumption reached 1.01 billion tons in 1996, a 4.6% increase from
1995, and export sales totaled 90.5 million tons. Approximately 89% of the coal
consumed in the United States is used for the generation of electricity, and
coal continues to be the principal energy source for United States utilities,
with its share of total electricity generation rising from approximately 55% in
1995 to approximately 56% in 1996, compared to approximately 22% from nuclear,
approximately 11% from hydroelectric and approximately 9% from gas-fired
facilities in 1996. In the last three years, coal prices under long-term
contracts have generally remained steady; however, spot market coal prices have
experienced greater fluctuation due to seasonal variations in supply and demand
caused by weather. Despite the increased consumption and the many inefficient
mines that have closed in the last ten years, coal mining companies with
improving productivity have filled the increasing demand without price
increases. Increased competition in the generation of electricity is forcing
utility buyers to 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 has been
experienced in the past.
Productivity gains and environmental legislation have worked together to
exert pressures on the fundamental structure of the coal industry. According to
statistics compiled by the EIA, the number of operating mines has declined by
approximately 54% from 1987 through 1996, even though production during that
same time has increased approximately 16%. During this period, work practice and
technological improvements have allowed overall production per miner per hour to
increase by approximately 73%, whereas industry employment declined by
approximately 42%. These productivity gains and the resulting excess productive
capacity in most segments of the industry have contributed to the stability of
coal prices in recent years at levels lower than in the 1970's and early 1980's.
Clean air concerns and legislation have increased consumption of low-sulfur
products mined in Appalachia and the western United States. Although recently
there has been some consolidation of coal producers in the United States, the
ten largest coal producers in 1996 accounted for in excess of 51% of total
domestic coal production, and no company held a domestic market share of more
than 13% in 1996.
COAL TYPES
In general, steam coal is classified by Btu content and sulfur content. In
ascending order of heat values, the four basic types of coal are lignite,
subbituminous, bituminous and anthracite.
LIGNITE COAL is a brownish-black coal with a Btu content that generally
ranges from 6,500 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 located adjacent to such mines because any
transportation costs, coupled with the mining costs, would exceed the price a
customer would pay for such low-Btu coal.
SUBBITUMINOUS COAL is a black coal with a Btu content that ranges from
approximately 7,900 to 9,500 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.
BITUMINOUS COAL is a "soft" black coal with a Btu content that ranges from
10,500 to 14,000 Btus per pound. This coal is located primarily in Appalachia
(including Kentucky), the Midwest, Colorado and
48
Utah, and is the type most commonly used for electric power generation in the
United States. Bituminous coal is used for utility and industrial steam
purposes, and as a feedstock for coke, which is used in steel production. All of
Lodestar's reserves are bituminous coal.
ANTHRACITE COAL is a "hard" coal with a Btu content that can be as high as
15,000 Btus per pound. Anthracite deposits are located primarily in the
Appalachian region of Pennsylvania, and are used primarily for industrial and
home heating purposes.
COAL QUALITIES
The primary factors considered in determining the value and marketability of
coal are the Btu content, the sulfur content and the percentage of ash (small
particles of inert material) and moisture. 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 utilize the coal efficiently in its operations.
Due to the restrictive environmental regulations regarding sulfur dioxide
emissions, coal is commonly described with reference to its sulfur content. Coal
that emits no more than 1.6 pounds of sulfur dioxide/ MMBtu when burned is
called low-sulfur coal. Coal that emits no more than 1.2 pounds of sulfur
dioxide/ MMBtu is called compliance coal. Compliance coal exceeds the current
requirements of Phase I of the Clean Air Act and meets the prospective
requirements of Phase II of that legislation. Since compliance coal exceeds the
Phase I requirements, consumers using such coal can either earn sulfur emission
credits, which can be sold to other coal consumers, or blend the coal with
higher sulfur coal to lower the overall sulfur emissions without having to
install expensive sulfur-reduction technology (E.G., scrubbers).
The percentage of ash affects the heating value of coal, as well as the
amount of combustion by-products. Specifically, the higher the percentage of
ash, the lower the heating value of the coal and the higher 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.
The percentage of moisture is important because the higher the moisture, the
lower the heating value of the coal. Also, if the percentage of moisture is too
high, customers may experience handling problems with the coal.
COAL REGIONS
The majority of United States coal production is generated from six regions:
Central Appalachia, Southern Appalachia, Northern Appalachia, Illinois Basin,
Rocky Mountain and Powder River Basin. With the exception of the coal from the
Northern Appalachia region, which generally serves only the Northeastern United
States market, coal from each region competes in a national market. The
geographic areas that comprise the six regions and characteristics of the coal
in those regions are as follows:
CENTRAL APPALACHIA consists of Southern West Virginia, Eastern Kentucky and
Virginia. The coal in this region is generally quite low in sulfur (0.7% to 1.5%
sulfur) and high in Btu content (12,000 to 13,500 Btus per pound of coal). The
majority of this coal complies with Phase I of the Clean Air Act. Central
Appalachia sources provide most of the United States' overseas export coal.
According to industry sources, this region has considerable excess production
capacity.
Lodestar has 43.7 million recoverable tons of demonstrated reserves in
Eastern Kentucky, representing 22% of its total demonstrated reserves.
Substantially all of Lodestar's coal in Eastern Kentucky complies with Phase I
of the Clean Air Act. However, Lodestar's coal in this region typically emits
1.5 pounds of sulfur dioxide/MMBtu, which is slightly higher than compliance
coal under Phase II of the Clean Air Act. Notwithstanding the foregoing,
Lodestar believes the sulfur content of its coal in this region will not affect
the marketability thereof.
49
SOUTHERN APPALACHIA consists of Southeastern Kentucky, Tennessee and
Alabama. Coal from this region also has a low sulfur content (0.7% to 1.5%
sulfur), which is generally acceptable for Phase I of the Clean Air Act, and a
high Btu content (12,000 to 13,000 Btus per pound of coal). While productivity
is impaired by the region's thin seams, readily accessible waterways and
proximity to Southern utility plants help to
reduce delivery costs of coal from this region to utility customers.
NORTHERN APPALACHIA consists of Northern West Virginia, Pennsylvania and
Ohio. The Btu content of this coal is generally high (12,000 to 13,000 Btus per
pound of coal), with the exception of coal from Ohio. However, the sulfur
content in this coal (1.5% to 2.5% sulfur) generally does not meet the Phase I
standards of the Clean Air Act.
THE ILLINOIS BASIN consists of Western Kentucky, Illinois and Indiana. Coal
from this region generally has a Btu content of 10,000 to 12,500 Btus per pound
of coal and a sulfur content of 1.8% to 3.5% sulfur. Although there are
exceptions, generally no Illinois Basin coal satisfies the Phase I or Phase II
standards of the Clean Air Act. Therefore, Illinois Basin coal is primarily
blended with low-sulfur coal or burned in plants equipped with scrubbers.
Customers also can bank and trade sulfur dioxide emissions allowances as part of
an overall environmental compliance plan.
Lodestar has 154.9 million recoverable tons of demonstrated reserves in the
Illinois Basin, representing 78% of its total demonstrated reserves. Lodestar's
reserves in this region have relatively high Btu content for the region
(generally 12,500 Btus on a fully washed basis). Although such coal does not
satisfy Phase I or II of the Clean Air Act, Lodestar believes it is well
positioned to market its coal due to its relatively high Btu content, which
makes it attractive for blending with lower sulfur, lower Btu coal. In addition,
the proximity of such reserves to customers that can utilize high sulfur coal
results in lower transportation costs, thereby enhancing such coal's economic
value to the customer.
THE ROCKY MOUNTAIN region consists of Utah and Colorado. The coal in this
region is low in sulfur content (0.4% to 0.5%) and has a moderately high Btu
content (10,500 to 12,000 Btus per pound of coal). This coal complies with Phase
I and Phase II of the Clean Air Act, and, according to industry sources,
production capacity in this region has increased.
THE POWDER RIVER BASIN consists mainly of Wyoming and parts of Montana. This
coal is very low in sulfur content (0.25% to 0.65%), but also is low in Btu
content (8,000 to 8,800 Btus per pound of coal) and very high in moisture
content (20% to 35%). All of this coal complies with Phase I and Phase II of the
Clean Air Act, but most utilities cannot burn it without derating their plants,
unless it is blended with higher Btu coal. According to industry sources, this
region has considerable excess production capacity.
MINING METHODS
Coal is mined using either surface or underground methods. The method
utilized depends upon several factors, including the proximity of the target
coal seam to the earth's surface and the geology of the surrounding area.
Surface techniques generally are employed when a coal seam is within 200 feet of
the earth's surface, and underground techniques are used for deeper seams. In
1996, surface mining accounted for approximately 62% of total U.S. coal
production, and underground mining accounted for the balance. Surface mining
generally is less expensive and has a higher recovery percentage than
underground mining. Surface mining typically results in the recovery of 80% to
90%, and underground mining in the recovery of 50% to 60%, of the total coal
from a particular deposit. The following summarizes various mining methods.
UNDERGROUND (DEEP) MINING
LONGWALL MINING is a deep mining method that uses hydraulic jacks, varying
from five to twelve feet in height, to support the roof of the mine while a
large shearing machine extracts the coal. A chain line then moves the coal to a
deep mine belt system for delivery to the surface. Longwall mining equipment
50
generally cuts blocks of coal, referred to as longwall panels, that have a width
of approximately 650 to 1,000 feet and a length ranging from approximately 7,000
to 18,000 feet. Longwall panels can contain more than 2.0 million tons of coal.
Longwall mining is a low-cost, high-output method of deep mining that results in
the highest coal recovery percentage for underground mining. In addition,
longwall mining is a much faster method of mining coal than room and pillar
mining. After a longwall panel is cut, the longwall mining equipment must be
disassembled and moved to the next panel location, a process which generally
takes one to two weeks. Lodestar presently utilizes a longwall mining system at
its Baker mine in Western Kentucky.
ROOM AND PILLAR MINING is a method of deep mining which uses
remote-controlled continuous miners that cut out a block of coal (the length of
each cut ranging from fifteen to 34 feet), cutting 20-foot wide passages as high
as the coal seam. Roof bolting machines are utilized to secure the immediate
strata above the coal, and pillars (50 to 100 feet squared) are left to provide
overall roof support. In some instances, it is possible to also remove the
pillars of coal, retreating from the back of the mine toward the mouth, allowing
the rock roof to fall in the mined out areas. Room and pillar mining using
continuous mining machines is the most common method of deep mining. Lodestar
and its contractors utilize the room and pillar method at its Smith Underground,
Wheatcroft, Miller Creek and the three Eastern Kentucky contract mines.
SURFACE MINING
MOUNTAINTOP REMOVAL MINING involves the removal of the top of a hill down to
the coal seam, using large earth-moving machines, such as dozers and hydraulic
shovels, leaving a level plateau in place of the hilltop. A more complete
recovery of the coal is accomplished through this method as compared to contour
mining. However, its feasibility depends on the amount of rock and soil
overlying a coal deposit (the "overburden") in relation to the coal to be
removed. The site then is backfilled with the overburden and otherwise restored
to its approximate original contour, and vegetation is replaced. The site is
often returned to higher value uses as the land will now be improved and more
suitable for development and use. The majority of Lodestar's Eastern Kentucky
mining consists of mountaintop removal mining.
CONTOUR MINING is conducted on coal seams where mountaintop removal is not
economical because of the amount of overburden on the coal seam. Mining proceeds
laterally around a hillside, using equipment such as dozers and hydraulic
shovels, at essentially the same elevation following the coal seam. The contour
cut in a coal seam provides a flat surface that can be used to facilitate
highwall mining. Once the coal has been removed, the overburden is replaced,
leaving the mined property with approximately the same contour as before mining.
This is a common surface mining method on the steeper slopes of the Appalachian
bituminous coal fields. Lodestar practices contour mining in Eastern Kentucky
when other mining methods are not economically feasible.
HIGHWALL AND AUGER MINING is a method of mining whereby a system bores into
the face of a coal seam, usually left accessible from contour mining, which has
ceased to be economically viable because of excessive overburden. Highwall
mining can be accomplished by a variety of methods, including relatively simple
auger mining where a corkscrew-like machine, or auger, bores into the side of a
hill and extracts coal by "twisting" it out or by combinations of other mining
equipment, including the use of modified continuous miners. Lodestar is engaged
in some highwall mining in its Eastern Kentucky operations using the continuous
and auger methods.
OPEN PIT MINING is essentially a large-scale earth moving operation, whereby
the overburden is excavated by using equipment, such as dozers, hydraulic
shovels and draglines. The exposed coal is then fractured by blasting and loaded
onto haul trucks or overland conveyors for transportation to processing and
loading facilities. The site then is backfilled with the overburden and
otherwise restored to its approximate original contour, and vegetation is
replaced. One of Lodestar's contractors practices open pit surface mining at the
Smith Surface mine in Western Kentucky.
51
COAL PREPARATION
Depending on coal quality and customer requirements, it is sometimes
possible to ship raw coal directly from the mine to the customer. Generally, raw
coal from surface mines can be shipped in this manner. If raw coal is not
shipped directly to the customer, it is processed in a preparation plant or
blended and shipped to a customer from a loadout facility. Most coal mined by
deep mining methods and some coal mined by surface mining methods must be
processed in a preparation plant. The preparation plant crushes coal, washes it
in a liquid solution, separates it into higher and lower grades and removes
non-coal materials. This process upgrades the quality and heating value of the
coal by removing or reducing sulfur, rock, clay and other ash-producing
materials but entails significant expense and results in some loss of coal. Coal
blending or mixing of various sulfur types is often performed at a preparation
plant or loading facility to meet the specific combustion and environmental
needs of customers. Approximately two-thirds of Lodestar's saleable coal has
been processed through its various preparation facilities, and the vast majority
of the balance is blended and shipped from one of Lodestar's loadout facilities.
CUSTOMERS
Over the last ten years, coal consumption in the United States has generally
experienced steady annual growth, reaching a record level of 1.01 billion tons
in 1996. This steady growth in coal consumption is attributable to similar
growth in the demand for electricity over the same period, as the electric
utility industry accounts for approximately 89% of domestic coal consumption in
1996. In 1996, coal-fired utilities generated approximately 56% of the nation's
electricity, followed by nuclear (approximately 22%), hydroelectric
(approximately 11%) and gas-fired (approximately 9%) utilities. According to
industry sources, over the next several years, electricity usage is expected to
increase at an average annual rate of 1.4%. Since 1980, coal-fired utilities
have generated a majority of all electricity generated in the United States.
Electricity can be generated less expensively using coal rather than gas,
oil or geothermal energy. The delivered cost of coal for utilities averaged
$1.29/MMBtu in 1996 compared to $2.64/MMBtu for gas and $3.16/MMBtu for oil.
Although nuclear and hydro energy are less expensive than coal on an operating
cost basis, no new nuclear plant permits have been issued since 1978, and many
existing plants are near the end of their useful life. In addition, hydro
electricity is limited by the availability of adequate water resources and
environmental considerations. Moreover, an insignificant incremental amount of
geothermally-produced electricity is currently viable in the United States.
Because coal is one of the least expensive and most abundant resources for
the production of electricity, and imports of coal historically have not
exceeded 1% of domestic coal consumption, domestically produced coal is expected
to continue to play a significant role in the production of electricity in the
future. Lodestar believes that it is well positioned to benefit from favorable
trends in the coal and electric utility industries because approximately 56% of
Lodestar's 1997 shipments were to electric utilities.
52
The following table (derived from publications of the EIA) presents
five-year domestic coal production by region, and consumption by sector:
FIVE YEAR COAL PRODUCTION AND CONSUMPTION
-----------------------------------------------------
1992 1993 1994 1995 1996
(TONS IN MILLIONS)
PRODUCTION BY REGION
Appalachia........................................................ 456.6 409.7 445.4 434.9 445.1
Illinois Basin/Midwest............................................ 195.7 167.2 179.9 168.5 172.2
Western........................................................... 345.3 368.5 408.3 429.6 439.5
--------- --------- --------- --------- ---------
Total........................................................... 997.6 945.5 1,033.6 1,033.0 1,056.8
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
CONSUMPTION BY SECTOR
Utilities......................................................... 779.9 813.5 817.3 829.0 873.7
Other Industrial Plants........................................... 74.0 74.9 75.2 72.8 70.6
Coke Plants....................................................... 32.4 31.3 31.7 33.0 31.7
Independent Power Producers....................................... 14.8 17.8 20.9 21.2 24.0
Residential/Commercial Users...................................... 6.2 6.2 6.0 5.8 5.8
--------- --------- --------- --------- ---------
Total........................................................... 907.3 943.7 951.1 961.8 1,005.8
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
UTILITY DEREGULATION
Since 1935, domestic electric utilities have operated in a regulated
environment, with prices and return on investment being determined by state
utility and power commissions. In April 1996, the FERC established rules
providing for open access to electricity transmission systems, thereby
initiating consumer choice in electricity purchasing and encouraging competition
in the generation of electricity. It is anticipated that the FERC rules will
create a national market for the sale of wholesale electricity where competition
will primarily focus on price. Within the electric utility industry, the
low-cost producers of electricity should benefit most due to the increased focus
on price. Competition will likely benefit the coal industry generally because
coal is a relatively low-cost source of electricity generation. Within the coal
industry, companies with customers that are low-cost producers are likely to see
the greatest increase in coal demand. Lodestar's primary customers are low-cost
electricity producers, located in Kentucky, Tennessee, Florida, Michigan and
Ohio.
CLEAN AIR ACT
The Clean Air Act has had, and will continue to have, a significant effect
on the domestic coal industry. Phase I of the Clean Air Act, which became
effective in 1995, regulates the level of sulfur dioxide emissions from power
plants and targets the highest sulfur dioxide emitters. Phase II, which is
scheduled to be implemented in 2000, will extend the restrictions of the Clean
Air Act to most remaining power plants. The Clean Air Act does not define
allowable emission levels on a per plant basis, but instead allocates emission
allowances to the affected plants and allows the emission allowances to be
traded so that market participants can fashion more efficient and flexible
compliance strategies. The emission allowance allocations for Phase I were based
on 2.5 pounds of sulfur dioxide/MMBtu, and Phase II allocations will be based on
1.2 pounds of sulfur dioxide/MMBtu. See "Risk Factors--Environmental Matters;
Government Regulation of Mining Industry" and "Government
Regulation--Environmental Matters."
53
BUSINESS
OVERVIEW
The Company, through its wholly-owned subsidiary Lodestar, is engaged in the
mining and marketing of bituminous coal used principally for the generation of
electricity, as well as for other industrial applications. For the twelve months
ended April 30, 1998, the Company had coal shipments of 10.9 million tons,
resulting in coal sales and related revenue of $278.7 million.
Lodestar focuses on selected niche coal markets in the Eastern, South
Central and Great Lakes regions of the United States. Through its diverse
portfolio of seven deep and five surface coal mines located in Eastern and
Western Kentucky, Lodestar is among the largest coal producers in Kentucky, the
third largest coal producing state. Lodestar believes that it is a low cost
producer offering its customers flexibility in order quantities and
transportation methods, including barge, rail or truck. In addition, Lodestar
processes the vast majority of its coal through its washing and blending
facilities to meet customers' combustion and environmental specifications, such
as energy (as measured by Btus), ash and sulfur content. Lodestar believes that
its niche market strategy, together with its operating flexibility, permits it
to meet customer demand for quality products and services at competitive prices,
resulting in long-term contracts with its customers.
For the twelve months ended April 30, 1998, approximately 72% of Lodestar's
coal sales and related revenue were derived from long-term contracts. As of
April 30, 1998, Lodestar had long-term contracts, including long-term contracts
with the TVA and certain affiliates of U.S. Gen, with a weighted average term of
approximately 8.4 years. Lodestar believes that the facilities to which it
supplies coal generally are well positioned to compete in a deregulated
environment for electricity generation.
Lodestar's niche market strategy targets customers whose needs are
compatible with the particular coal qualities it produces. Lodestar supplies mid
to high sulfur coal (above 1.8% sulfur) from its Western Kentucky operations to
customers, such as electricity generation facilities, that can economically use
such coal by employing sulfur-reduction techniques, including scrubbers and coal
blending, in addition to utilizing emissions allowance credits. Lodestar also
supplies low sulfur coal (less than 1.0% sulfur) from its Eastern Kentucky
operations to customers that require such coal to meet environmental discharge
requirements.
Lodestar believes that the proximity of its reserves and facilities to
customers that can economically use its coal provides it a competitive
advantage. In addition, Lodestar uses its preparation and loadout facilities in
Eastern and Western Kentucky to wash and blend coal to satisfy customer needs
for Btu, ash and sulfur content. Moreover, Lodestar provides its customers
transportation flexibility by offering delivery by barge, rail or truck. For
example, Lodestar's Caseyville Dock is located farther south on the Ohio River
than any comparable facility. As a result, the Caseyville Dock provides Lodestar
a cost advantage in delivering coal to customers in the Southern United States
over competitors that must load and ship from facilities located farther north.
Lodestar believes that its production and transportation flexibility enables it
to satisfy customer requirements, while maintaining efficient and low cost
operations.
Lodestar owns eleven of its mines, which for the twelve months ended April
30, 1998, accounted for more than 90% of its coal production. In addition,
Lodestar operates one mine owned by a third party and purchases most of the coal
produced from such mine. In excess of 90% of the coal produced at Lodestar's
mines is produced by Lodestar employees, and the balance is mined by independent
contractors. Lodestar believes that the selective use of independent contractors
lowers its costs and increases its operating flexibility to vary production in
response to market conditions. In the future, Lodestar will seek to increase its
coal purchases from third parties to maximize the utilization of its washing and
blending facilities and thus improve operating margins.
For the twelve months ended April 30, 1998, electrical power utilities and
IPPs accounted for approximately 56% and 21% of Lodestar's coal sales and
related revenue, respectively. The balance of
54
Lodestar's coal sales and related revenue was attributable to brokers and
industrial customers. Accordingly, Lodestar believes that it is well positioned
to benefit from favorable trends in the electricity generation industry. From
1973 to 1996, coal consumption experienced a CAGR of 2.6%, reaching
approximately 1.01 billion tons of consumption in 1996. This growth in coal
consumption is directly related to the growth in electricity consumption in the
United States. Electricity generation in 1996 accounted for approximately 89% of
the coal consumed in the United States.
In 1996, coal-fired facilities generated approximately 56% of the
electricity consumed in the United States, and the balance was generated by
nuclear, hydroelectric and gas-fired facilities, representing approximately 22%,
11% and 9%, respectively, of electricity consumption. Coal is one of the least
expensive and most abundant domestic resources for the production of
electricity. Accordingly, notwithstanding the alternative fuel sources,
management believes that coal will continue to be a major raw material for
electricity generation in the United States for the foreseeable future.
Lodestar further believes that it will benefit from increasing deregulation
among electricity producers. Since 1935, domestic electricity utilities have
operated in a regulated environment, with prices and return on investment
determined by state utility and power commissions. In April 1996, the FERC
issued orders establishing rules providing for open access to electricity
transmission systems, which are designed to initiate consumer choice in
electricity purchasing and encourage competition in the generation of
electricity. Lodestar believes that this trend toward deregulation will likely
(i) increase the desirability of coal as a raw material for electricity
generation due to its relative low cost and (ii) favor coal producers, such as
Lodestar, that have diverse reserves in addition to cost and transportation
advantages.
COMPETITIVE STRENGTHS
The Company believes its competitive strengths include the following:
PORTFOLIO OF LONG-TERM CONTRACTS
Lodestar has secured long-term coal supply contracts with a weighted average
term of approximately 8.4 years as of April 30, 1998. Lodestar's long-term
contracts have accounted for approximately 80% of its coal sales and related
revenue since 1992. Lodestar believes its strong performance history with major
customers, attributable to, among other things, its low cost structure and
customer service, will strengthen existing relationships, as well as facilitate
the development of new relationships, which will result in additional long-term
contracts.
HIGHLY EFFICIENT OPERATIONS
Lodestar has been successful in increasing productivity at both its Eastern
and Western Kentucky operations. Since 1993, Lodestar's deep mine operations
have improved production from 3.5 tons to 4.9 tons per manhour for the year
ended December 31, 1997. Over the same period, Lodestar's surface mine
operations in Kentucky have improved productivity from 83.7 cubic yards moved to
109.2 cubic yards moved per manhour. Lodestar has achieved such improvements by
developing and instituting more efficient mining techniques, altering its mine
plans and incorporating new mining technologies, such as the high efficiency,
high production longwall mining equipment used in Western Kentucky. Lodestar
also has invested in state-of-the-art surface mining equipment, such as the
Komatsu 575 dozer, the largest dozer in the world, and the DeMag 285S 25-cubic
yard hydraulic shovel, which is used on mountaintop surface mines, to further
improve its operating efficiencies.
FLEXIBLE OPERATIONS
Lodestar's coal reserves, along with its extensive processing infrastructure
and transportation capabilities, enable it to maintain a high degree of
operating flexibility to meet its customers' specific requirements. In
particular, Lodestar's washing and blending capabilities permit Lodestar to
provide coal with a
55
specific Btu, sulfur and ash content. In addition, Lodestar's diverse
transportation capabilities enable it to provide delivery of coal by barge, rail
or truck in a timely manner. In response to varying market conditions, Lodestar
also has the ability, to a certain extent, to revise its mine production. By
maintaining such operating and production flexibility, management believes that
Lodestar is able to respond to changing market conditions, as well as to meet
its customers' needs.
DIVERSE PORTFOLIO OF RESERVES
Lodestar owns or operates twelve mines, four in Western Kentucky (three
underground and one surface) and eight in Eastern Kentucky (four underground and
four surface) with a total demonstrated reserve base of approximately 198.6
million recoverable tons as of January 31, 1998. As of such date, 22%, or
approximately 43.7 million recoverable tons, of its demonstrated reserves was
low sulfur coal and 78%, or 154.9 million recoverable tons, was mid to high
sulfur coal. Lodestar's demonstrated reserve life index (total demonstrated
reserves divided by production for the twelve months ended January 31, 1998) was
approximately eighteen years as of January 31, 1998. All of Lodestar's reserves
are of a quality suitable for use in the generation of electricity throughout
its market area. See "Risk Factors--Reliance on Estimates of Recoverable
Reserves" and "--Replacement of Reserves."
HIGH BARRIERS TO ENTRY
Management believes that the capital costs and environmental requirements
associated with constructing facilities comparable to those of Lodestar result
in high barriers to entry for prospective entrants. Management further believes
that its combination of mining, processing and transportation facilities
provides it significant operating flexibility that would be difficult for a
potential entrant to duplicate. In addition, management believes that the cost
and time commitment required to achieve commercial production for any new mining
or processing operation, including regulatory approvals, would be prohibitively
expensive, further heightening the barriers to entry.
EXPERIENCED MANAGEMENT
Lodestar's senior management team has an average of approximately nineteen
years of experience in coal or related industries. Lodestar believes this
experience enables it to identify and respond to important trends in the coal
industry.
BUSINESS STRATEGY
The Company's business strategy is to improve its operations and financial
performance by focusing on the following principal elements:
MAINTAIN OPERATIONAL FLEXIBILITY
Lodestar strives to maintain a high level of operational flexibility to
respond to customer requirements, as well as other market opportunities. With
its mining facilities in Eastern and Western Kentucky, Lodestar operates in two
distinct coal supply regions. In that regard, Lodestar has flexibility in
developing its mining and production plans in terms of volume and type of coal
to take advantage of prevailing market conditions and enhance its position with
customers. With its multiple mines and coal washing and blending capabilities,
Lodestar also is able to minimize the production costs associated with the
particular quality of coal produced. With respect to transportation, Lodestar
has available multiple options, including facilities and equipment controlled by
Lodestar, designed to provide effective coal transportation and delivery at
competitive costs.
56
IMPROVE OPERATING EFFICIENCIES AND CAPACITY UTILIZATION
Lodestar is committed to continuous improvement through focused capital
investment and the implementation of non-capital cost reduction programs
throughout its operations. Since 1993, Lodestar has completed approximately
$112.2 million of capital investments designed to, among other things, increase
capacity utilization, enhance productivity and lower production costs.
Management expects to spend approximately $10.0 million to $15.0 million
annually for capital expenditures, of which approximately $8.0 million is
required annually to maintain its current level of operations.
EXPAND NICHE MARKETS
By expanding the use of its extensive preparation and transportation
facilities, Lodestar will seek to enter new markets which generate higher
operating margins. Given its proximity to end users of coal, Lodestar seeks to
leverage its infrastructure to expand into niche markets for industrial
corporations, as well as to expand its relationships with IPPs. In addition,
Lodestar intends to expand its coal trading activities and recommence its
brokering operations which will permit Lodestar to optimize the use of its
facilities.
BUILD AND MAINTAIN STRONG RELATIONSHIPS WITH STRATEGIC CUSTOMERS
Through its ongoing customer service initiatives, Lodestar strives to build
and maintain strong relationships with its customers. Lodestar's sales,
transportation and production professionals work closely with customers to be
responsive to their needs, such as small order quantities, specialized sizing,
technical assistance, and flexible and reliable deliveries. As evidence of its
customer commitment, Lodestar has served the TVA for over twenty years and was
the recipient of the TVA's supplier of the year award in 1996.
ACHIEVE OPERATING IMPROVEMENTS FROM THE OLD NOTES OFFERING
Lodestar used a portion of the net proceeds of the Old Notes Offering to:
(i) purchase certain equipment previously financed pursuant to leases, most of
which were entered into by the Predecessor Company; (ii) buy out certain
long-term royalty agreements entered into by the Predecessor Company; and (iii)
make payments to normalize accounts payable which had been extended prior to the
Acquisition. As a result of undertaking the foregoing, Lodestar would have
increased its EBITDA by approximately $5.5 million on a pro forma basis for the
six months ended April 30, 1998, thereby improving its operating cash flow and
financial flexibility.
GROW THROUGH STRATEGIC ACQUISITIONS
To capitalize on the trend toward asset rationalization by coal mining
companies, Lodestar plans to pursue the acquisition of coal companies and
reserves that complement its existing operations or provide strategic expansion
opportunities. Based upon the breadth of Lodestar's operating capabilities in
Eastern and Western Kentucky, Lodestar believes opportunities exist to
consolidate coal reserves within its primary geographic areas. In addition,
Lodestar will consider the acquisition of mines outside its geographic areas
that are compatible with its niche marketing strategy. Although the Company has
discussions from time to time with respect to potential acquisitions of reserves
and/or coal companies, it currently has no commitments or other such
arrangements.
COAL RESERVES
As of January 31, 1998, Lodestar had an estimated demonstrated reserve base
of approximately 198.6 million recoverable tons, with approximately 22% low
sulfur coal and the remaining 78% medium to high sulfur coal. Approximately 92%
of these demonstrated reserves are classified as deep and 8% as surface minable.
57
Reserve estimates were prepared by engineers and geologists at Marshall
Miller & Associates, as of January 31, 1998. Reserve estimates will change from
time to time in reflection of mining activities, analysis of new engineering and
geological data, acquisition or divestment of reserve holdings, modification of
mining plans or mining methods and other factors. The following table summarizes
Lodestar's coal reserves as of January 31, 1998:
DEMONSTRATED RESERVES
------------------------------------
LOCATION MEASURED(1) INDICATED(2) TOTAL
(RECOVERABLE TONS IN THOUSANDS)
WESTERN KENTUCKY
Baker+..................................................................... 22,039 9,754 31,793
Wheatcroft+................................................................ 51,109 57,051 108,160
Smith Underground+......................................................... 9,010 3,883 12,893
Smith Surface++............................................................ 2,089 -- 2,089
------------ ----------- ---------
Total Western Kentucky................................................. 84,247 70,688 154,935
EASTERN KENTUCKY
Ivy Creek++................................................................ 1,519 22 1,541
Spradlin Branch++.......................................................... 1,228 180 1,408
Spurlock Fork++............................................................ 508 10 518
Miller Creek+.............................................................. 8,108 1,308 9,416
Other Underground.......................................................... 16,665 3,850 20,515
Other Surface.............................................................. 8,102 2,162 10,264
------------ ----------- ---------
Total Eastern Kentucky................................................. 36,130 7,532 43,662
Total Underground.......................................................... 106,930 75,846 182,776
Total Surface.............................................................. 13,447 2,374 15,821
------------ ----------- ---------
Total.................................................................. 120,377 78,220 198,597
------------ ----------- ---------
------------ ----------- ---------
- ------------------------
+ Underground
++ Surface
(1) Reserve estimates in this category have the highest degree of geologic
assurance. Measured coal lies within 0.25 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.
(2) 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 0.25 mile, but
less than 0.75 mile, from a point of thickness measurement. Further
exploration is necessary to place indicated coal into the measured category.
Lodestar leases most of its total demonstrated reserves from third parties.
Lodestar's reserve leases generally have terms of between five and 30 years,
although they typically allow Lodestar the right to renew the lease for a stated
period or to maintain the lease in force until the exhaustion of coal reserves.
These leases provide for royalties to be paid to the lessor either as a fixed
amount per ton or as a percentage of the sales prices. Certain leases may also
require payment of a lease bonus or minimum royalties, payable either at the
time of the execution of the lease or in periodic installments. In most cases,
the minimum royalty payments are applied to reduce future production royalties.
58
Consistent with industry practices, Lodestar conducts limited investigation
of title to third party coal properties prior to Lodestar's leasing of such
properties. The title of the lessors or grantors and the boundaries of
Lodestar's leased properties are not fully verified until such time as Lodestar
prepares to mine such reserves.
MINING OPERATIONS
COAL PRODUCTION
Lodestar currently conducts mining operations at seven deep mines and five
surface mines in Kentucky. Approximately 65% of Lodestar's production originates
from its seven deep mines and the remaining production originates from its five
surface mines. For certain of its mines, Lodestar utilized the services of
contract miners, representing less than 10% of Lodestar's production for the
twelve months ended April 30, 1998. Contract miners provide Lodestar the
flexibility to alter mining plans and lower operating costs, particularly at
Lodestar's smaller operations, in response to market conditions. The following
table presents, for each of Lodestar's currently operating mines, the production
volume for the five-year period ended December 31, 1997:
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------------------------
LOCATION 1993 1994 1995 1996 1997
(TONS IN THOUSANDS)
WESTERN KENTUCKY
Baker+................................................................. 3,222 2,722 4,275 3,986 4,142
Wheatcroft+............................................................ 3,867 3,120 1,141 -- 146
Smith Underground+..................................................... -- 76 662 989 987
Smith Surface++........................................................ 1,221 1,052 147 357 594
EASTERN KENTUCKY
Ivy Creek++............................................................ -- -- 94 769 1,037
Spradlin Branch++...................................................... -- 146 618 751 493
Spurlock Fork++........................................................ -- -- 68 565 543
Shop Branch++.......................................................... -- -- -- -- 491
Miller Creek+.......................................................... 398 521 666 694 752
Three Eastern Kentucky Contract Mines+................................. -- -- -- 33 145
--------- --------- --------- --------- ---------
Total.............................................................. 8,708 7,637 7,671 8,144 9,330
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
- ------------------------
+ Underground
++ Surface
The mines in Western Kentucky, which produce mid to high sulfur coal, are
advantageously located near Lodestar's barge loading facility at the Caseyville
Dock, the southernmost dock on the Ohio River. See "--Coal Transportation." The
Eastern Kentucky mines, located within Central Appalachia, produce coal
typically low in sulfur content. Approximately 63% of Lodestar's production
originates from its Western Kentucky mines and the remaining production
originates from its Eastern Kentucky mines.
Lodestar's underground mines in Western Kentucky have substantial
demonstrated reserves, whereas its surface mines in Eastern Kentucky typically
have demonstrated reserves sufficient for two to four years of production.
However, Lodestar continually pursues development of new mines to replace the
production from a completed operation. In this manner, Lodestar's overall
production from its Eastern Kentucky surface mining operations has remained
relatively constant. Summarized below are descriptions of the mines Lodestar
currently operates.
59
BAKER MINE. Lodestar produced approximately 4.1 million tons of coal in
1997 from the Baker mine, the largest coal mine in Kentucky. For the twelve
months ended April 30, 1998, Lodestar sold 65% of the Baker mine production to
the TVA. Lodestar has operated this mine utilizing the longwall method of
underground mining, a highly efficient production technique since February 1995.
The longwall is supported by two continuous miner units. Coal from the Baker
mine averages 2.22% sulfur, 9.35% ash, 12,438 Btus per pound and 7% moisture on
a fully-washed basis. Lodestar controls approximately 31.8 million recoverable
tons of demonstrated reserves associated with the Baker mine.
Lodestar owns and operates a computer-controlled, 1,050-tons per hour,
modern preparation plant (the "Pyro Preparation Plant") located in close
proximity to the Baker mine. Coal from the Baker mine is transported to the Pyro
Preparation Plant by rail. This facility, which is capable of loading or
unloading a 9,000-ton unit train in four hours, has a storage capacity of
200,000 tons for raw coal and 359,000 tons for saleable coal. From this
facility, Lodestar has access to both the Paducah & Louisville Railway, Inc. and
the CSX rail line, as well as to the Caseyville Dock.
Lodestar's modern laboratory located at the Pyro Preparation Plant tests the
quality of coal to facilitate the precise blending of the coals from any
combination of the Baker, Wheatcroft and Smith mines. This facility, which is
operated by a third party, provides Lodestar the flexibility to offer various
coal qualities to meet specific contractual quality requirements.
As of October 31, 1997, the total cost of Lodestar's plant and equipment
associated with the Baker mine, not including the Pyro Preparation Plant, was
approximately $17.2 million, with a net book value of approximately $13.7
million. The total cost of Lodestar's Pyro Preparation Plant was approximately
$3.7 million, with a net book value of $3.4 million as of October 31, 1997.
WHEATCROFT MINE. The Wheatcroft mine produced 146,000 tons in 1997 of which
approximately 42% was sold to a coal brokerage firm for export for the twelve
months ended April 30, 1998. Prior to July 1995, Lodestar operated this mine
utilizing a longwall mining system. In July 1995, Lodestar suspended production
from this mine until July 1997 due to termination of a long-term coal supply
agreement and adverse geologic conditions. Since July 1997, a contract mining
company has provided the labor, equipment, supplies and other materials needed
to mine the Wheatcroft coal. Lodestar pays the contract mining company a fixed
price per ton for its mining services. Lodestar incurred capital costs of $.6
million during the reopening of the mine, with a remaining book value of $.5
million as of October 31, 1997.
The coal from the Wheatcroft mine averages 3.08% sulfur, 9.35% ash, 12,563
Btus per pound and 7% moisture on a fully washed basis. Lodestar controls
approximately 108.2 million recoverable tons of demonstrated reserves associated
with the Wheatcroft mine.
The Pyro Preparation Plant, which is in close proximity to the Wheatcroft
mine, provides Lodestar significant marketing flexibility for coal from the
Wheatcroft mine. The Pyro Preparation Plant's capabilities as discussed above
permit Lodestar to provide coal of specific qualities to meet customer needs.
SMITH UNDERGROUND. Lodestar produced 987,000 tons of coal from its Smith
Underground mine in 1997. For the twelve months ended April 30, 1998, Lodestar
sold approximately 75% of the Smith Underground mine production to Big Rivers.
The Smith Underground mine began production in late 1994, and presently utilizes
two continuous miners. The coal from the Smith Underground mine averages 3.23%
sulfur, 9.99% ash, 11,854 Btus per pound and 9% moisture on a fully washed
basis. Lodestar controls approximately 12.9 million recoverable tons of
demonstrated reserves at the Smith Underground mine.
The raw coal produced from the Smith Underground mine is transported by
overland belt to an on-site, computer controlled, 550-tons per hour, modern
preparation plant (the "Smith Preparation Plant") where the coal is washed,
blended or both. The Smith Preparation Plant has rail and truck loading
capabilities, as well as access to the Caseyville Dock.
60
Beginning in mid-June 1998, production temporarily was suspended at the
Smith Underground mine due to an abnormal build up of coal inventory, primarily
as a result of a reduction in shipments to Big Rivers. See "--Long-Term Coal
Supply Contracts." Lodestar expects to resume production from the mine by the
end of July 1998, regardless of its negotiations with Big Rivers.
The total cost of Lodestar's plant and equipment associated with the Smith
Underground mine, not including the Smith Preparation Plant, was approximately
$2.0 million as of October 31, 1997, and the net book value was approximately
$1.6 million as of such date. The total cost of Lodestar's plant and equipment
associated with the Smith Preparation Plant was approximately $1.7 million as of
October 31, 1997, and its net book value was approximately $1.5 million as of
such date.
SMITH SURFACE. The Smith Surface mine produced approximately 594,000 tons
of coal in 1997. For the twelve months ended April 30, 1998, Lodestar sold
approximately 75% of the Smith Surface mine production to Big Rivers. Since
October 1995, a contract mining company has operated this mine by the open pit
method of surface mining, utilizing a large dragline. As a result, Lodestar does
not maintain any plant and equipment associated with the Smith Surface mine.
The coal from the Smith Surface mine averages 4.04% sulfur, 9.48% ash,
12,135 Btus per pound and 8% moisture on a fully washed basis. This coal is
hauled by truck to the Smith Preparation Plant, where it is processed and loaded
for delivery to the customer. Lodestar controls approximately 2.1 million
recoverable tons of demonstrated reserves associated with the Smith Surface
mine.
The reduction in shipments to Big Rivers has resulted in suspension of
production from the Smith Surface mine as well, beginning in mid-June 1998.
Lodestar believes that it will resume production from the mine only if its
negotiations with Big Rivers are successful. See "--Long-Term Coal Supply
Contracts." Otherwise, it expects the operation to be idled for several months,
possibly indefinitely.
IVY CREEK. Lodestar produced approximately 1.0 million tons of low sulfur
coal in 1997 from the Ivy Creek mine and controls approximately 1.5 million
recoverable tons of demonstrated reserves associated with this mine. The
operation at Ivy Creek utilizes various surface mining techniques and employs
shovel, loader, and dozer spreads, including a Komatsu 575 dozer, the largest
dozer in the world. Coal from the Ivy Creek mine averages 0.9% sulfur, 10.0%
ash, 12,300 Btus per pound and 7% moisture.
Approximately 59% of the coal from this mine is transported by truck to
Lodestar's Transcontinental Loadout near Ivel, Kentucky (the "Transcontinental
Loadout") for shipment to customers. This facility, which is capable of loading
a 10,000-ton unit train in less than four hours, is located on the CSX rail
line, and has throughput capacity of 4.0 million tons per year. The
Transcontinental Loadout has modern crushing, screening and blending equipment,
as well as quality control and automated sampling systems. Coal from Lodestar's
other mines in Eastern Kentucky is also shipped through the Transcontinental
Loadout. Approximately 80% of Lodestar's coal shipped through the
Transcontinental Loadout is sold to affiliates of U.S. Gen. Lodestar generates
additional revenue from the Transcontinental Loadout by loading coal for
non-affiliated enterprises. In addition, Lodestar has the ability to purchase
coal from smaller producers and blend it through the Transcontinental Loadout.
In addition, approximately 13% of the coal from the Ivy Creek mine is
shipped through Lodestar's Stone Coal Loadout located near Pikeville, Kentucky
(the "Stone Coal Loadout"), and the balance is shipped directly to customers via
the Big Sandy River. At the Stone Coal Loadout, Lodestar has the capability of
crushing, sizing, and loading 360,000 tons per year. The Stone Coal Loadout has
capacity for a 9,000-ton unit train with a loading rate of 1,200 tons per hour
and a stockpile capacity of 40,000 tons.
The total cost of Lodestar's plant and equipment associated with the Ivy
Creek mine, not including the Transcontinental and Stone Coal Loadouts, was
approximately $3.6 million as of October 31, 1997, with a net book value of
approximately $3.1 million. The total cost of Lodestar's plant and equipment
associated with the Transcontinental Loadout was approximately $9.0 million as
of October 31, 1997, and its net book value was approximately $8.6 million as of
such date. The total cost of Lodestar's plant and
61
equipment associated with the Stone Coal Loadout was approximately $.6 million
as of October 31, 1997, and its net book value was approximately $.4 million as
of such date.
SPRADLIN BRANCH. Lodestar produced approximately 493,000 tons of low sulfur
coal in 1997 from the Spradlin Branch mine, utilizing the mountaintop and
contour surface mining methods. As of January 31, 1998, Lodestar controls
approximately 1.4 million recoverable tons of demonstrated reserves associated
with this mine. The coal from the Spradlin Branch mine averages 0.7% sulfur, 11%
ash, 12,000 Btus per pound and 7% moisture.
Approximately 36% of the coal from this mine is hauled by truck to several
barge loading facilities located on the Big Sandy River for shipment to various
customers. Lodestar maintains a stockpile near these docks, which allows
Lodestar to blend its product as necessary to meet a particular customer's
needs. The balance of Spradlin Branch mine's production is shipped to the
Transcontinental Loadout for shipment by rail to various customers.
The total cost of Lodestar's plant and equipment associated with the
Spradlin Branch mine was approximately $2.6 million as of October 31, 1997, with
a net book value of approximately $2.3 million.
SPURLOCK FORK. The Spurlock Fork mine produced approximately 543,000 tons
of low sulfur coal in 1997 by the mountaintop removal method of surface mining.
As of January 31, 1998, Lodestar controls approximately 0.5 million recoverable
tons of demonstrated reserves in connection with this mine. The coal from the
Spurlock Fork mine averages 0.9%, sulfur, 11% ash, 12,200 Btus per pound and 7%
moisture.
Approximately 63% of the coal produced from this mine is shipped for
truck-direct or river sales. The balance is hauled by truck to the Stone Coal
Loadout or Transcontinental Loadout. The total cost of Lodestar's plant and
equipment associated with the Spurlock Fork mine was approximately $1.7 million
as of October 31, 1997, with a net book value of approximately $1.5 million.
SHOP BRANCH. Lodestar operates the Shop Branch mine, which began production
in early 1997, as a contractor for the owner of the mine's coal and mining
rights. Lodestar has a contract to mine up to 1.8 million tons of low sulfur
coal of which 491,000 tons were mined in 1997, with approximately 900,000 tons
remaining as of April 30, 1998. Lodestar provides the labor, equipment, supplies
and other materials needed to mine the coal and is paid a fixed price per ton
for its mining services. The mining is accomplished through the mountaintop
removal method of surface mining. The coal averages 0.8% sulfur, 12.0% ash,
12,000 Btus per pound and 7% moisture.
In addition to mining services, Lodestar has agreed to purchase 750,000 tons
per year of coal from the Shop Branch mine through May 1999 and 500,000 tons per
year from June 1999 through May 2001. Pursuant to this contract, Lodestar
purchased approximately 432,000 tons from June 1, 1997 to December 31, 1997,
which were shipped through the Transcontinental Loadout. The total cost of
Lodestar's plant and equipment associated with the Shop Branch mine was
approximately $2.3 million as of October 31, 1997, and its net book value was
approximately $2.1 million as of such date.
MILLER CREEK. Lodestar produced approximately 752,000 tons of low sulfur
coal in 1997 from the Miller Creek mine and as of January 31, 1998 has
approximately 9.4 million recoverable tons of demonstrated reserves associated
with this mine. Lodestar utilizes two continuous miner units at the Miller Creek
mine. This coal averages 0.9% sulfur, 4.0% ash, 13,100 Btus per pound and 5%
moisture on a fully-washed basis.
The coal from the Miller Creek mine is hauled by truck to Lodestar's
Chapperal Preparation Plant in Pikeville, Kentucky (the "Chapperal Preparation
Plant"), a 700-ton per hour modern preparation plant with stockpile capacity of
40,000 tons. The Chapperal Preparation Plant is equipped with train and truck
loadouts and produces a specially sized stoker coal, as well as high quality nut
and slack coal. The coal shipped from the Chapperal Preparation Plant is sold to
a variety of customers.
62
As of October 31, 1997, the total cost of Lodestar's plant and equipment
associated with the Miller Creek mine, not including the Chapperal Preparation
Plant, was approximately $2.6 million, with a net book value of approximately
$2.2 million. The total cost of Lodestar's plant and equipment associated with
the Chapperal Preparation Plant was approximately $1.8 million as of October 31,
1997, and its net book value was approximately $1.6 million as of such date.
THREE EASTERN KENTUCKY CONTRACT MINES. Lodestar controls the coal and
mining rights at three deep mines in Eastern Kentucky, which produced
approximately 145,000 tons in 1997. Lodestar uses contract mining companies at
each of these mines to provide the labor, equipment, supplies and other
materials needed to mine the coal and deliver it to either the Chapperal
Preparation Plant or the Transcontinental Loadout, as instructed by Lodestar.
Lodestar pays each contract mining company a fixed price per ton for its mining
services. These mines produce coal which averages 1.2% sulfur, 8.0% ash, 13,000
Btus per pound and 5% moisture on a fully washed basis. Because Lodestar
utilizes the services of a contract mining company at each of these mines,
Lodestar does not maintain any plant and equipment associated with these mines.
LONG-TERM COAL SUPPLY CONTRACTS
Lodestar supplies a substantial portion of its coal to customers pursuant to
long-term contracts. Customers enter into such long-term contracts principally
to secure a reliable source of coal at predictable prices. Lodestar enters into
such contracts to obtain stable revenue sources required to support the large
expenditures needed to open, expand and maintain the mines servicing such
contracts.
Presently, Lodestar supplies coal to more than 30 customers on an ongoing
basis. For the twelve months ended April 30, 1998, approximately 72% of
Lodestar's coal sales and related revenue were made under long-term contracts.
Five long-term contracts with three customers accounted for approximately 56% of
coal sales and related revenue for the twelve months ended April 30, 1998. As of
April 30, 1998, Lodestar's long-term contracts had a weighted average term of
approximately 8.4 years. The following table sets forth information regarding
Lodestar's long-term supply contracts as of April 30, 1998:
APPROXIMATE
CONTINUOUS EXPIRATION CURRENT CURRENT ANNUAL
SERVICE DATE OF CURRENT CONTRACT TERM(1) CONTRACT TONNAGE
CUSTOMER (NUMBER OF YEARS) CONTRACT (NUMBER OF YEARS) (IN THOUSANDS)
Alabama Power Company................. 2 December 1999 3 400
City of Lansing (2)................... 10 December 1999 3 85
Abbott Laboratories................... 4 March 2000 6 75
Big Rivers(3)......................... 15 June 2001 41/2 1,277
TVA--Colbert/Gallatin(4).............. 21 June 2003 6 2,000
TVA--Johnsonville(4).................. 3 June 2003 6 1,000
Tondu Energy Systems, Inc.(2)......... 9 December 2004 16 200
U.S. Gen--Cedar Bay(2)(5)............. 5 August 2013 20 1,000
U.S. Gen--Indiantown(2)............... 3 December 2025 30 700
- ------------------------
(1) Reflects stated term of contract including any options to extend and does
not assume early termination due to any price reopeners which may exist.
(2) Reflects shipments under total requirements contracts.
(3) The annual tonnage under contract was reduced effective July 1, 1998, to a
maximum of 750,000 tons, with 375,000 tons to each of two separate Big
Rivers plants. Pursuant to the price reopener provision of the contract, Big
Rivers obtained bids for replacement coal to the plants, and Lodestar was
given an opportunity to match the bid prices, with new prices effective July
1, 1998. The process resulted in a higher contract price for 375,000 tons to
one plant. The bid price for replacement tonnage to the other
63
plant was lower than the contract price and was not accepted by Lodestar.
Although Big Rivers has taken the position that the contract has therefore
terminated with respect to that plant as of July 1, 1998, Lodestar has
asserted that the bid received by Big Rivers was not bona fide, as required
by the contract, and that Lodestar was entitled to "match" the next lowest
bid, which was a price acceptable to Lodestar. Although the contract
provides for arbitration, Lodestar continues negotiations with Big Rivers.
Lodestar believes it will reach an agreement with Big Rivers which will
allow it to ship more than 375,000 tons to Big Rivers during this contract
year, at a price acceptable to Lodestar.
(4) Provides for up to a 20% increase or decrease of coal supplied at the
customer's discretion.
(5) This contract accounted for approximately 10% of the Company's coal sales
and related revenue for the twelve months ended April 30, 1998. Cedar Bay
currently is involved in litigation with its principal customer whereby
Cedar Bay is alleging underpayment on the part of this customer pursuant to
their power purchase agreement. Cedar Bay's ability to meet its financial
obligations, including those under this contract with the Company, may be
adversely affected to the extent that Cedar Bay is not successful in its
litigation. If Cedar Bay is unable to fulfill its obligations under its
contract with the Company, including its commitments with respect to ash
disposal, it would have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Other Services."
Lodestar's long-term contracts with the TVA and U.S. Gen accounted for
approximately 27% and 17%, respectively, of Lodestar's coal sales and related
revenue for the twelve months ended October 31, 1997. The TVA contracts and the
U.S. Gen contracts are expected to represent approximately 26% and 18%,
respectively, of coal sales and related revenue in fiscal 1998. No other single
customer accounted for more than 10% of Lodestar's coal sales and related
revenue for the twelve months ended October 31, 1997.
The terms of long-term contracts entered into by Lodestar are the result of
specific bidding procedures set forth by a prospective customer followed by
extensive negotiations between the customer and Lodestar. The terms and
conditions of such contracts vary from customer to customer in many respects. In
particular, long-term contracts specify the characteristics of the coal to be
shipped to a customer, including, without limitation, the Btu, sulfur, ash and
moisture of the coal. Moreover, most of Lodestar's contracts specify the agreed
upon seams and/or locations from which the coal for a customer is to be sourced.
Certain coal supply agreements to which Lodestar is a party are
"requirements" contracts whereby the customer is obligated to purchase only that
quantity of coal required for its operations. Lodestar thus is exposed to
certain risks associated with its customers. In particular, the customer's
limited purchase obligation is directly related to the demand for the customer's
electricity produced from a particular facility with such coal. Demand for
electricity from these facilities, and therefore the demand for Lodestar's coal,
is affected by a number of factors beyond the control of Lodestar. For the
twelve months ended April 30, 1998, 25% of Lodestar's coal sales and related
revenue were derived from such requirements contracts.
In addition to the quantity, quality and source of coal, Lodestar's
contracts contain numerous other terms and conditions, including, without
limitation, the following: (i) price adjustment and/or reopener features; (ii)
extension, assignment and/or termination provisions; and (iii) force majeure
provisions to permit suspension of performance under a contract by Lodestar
and/or a customer due to certain events beyond the control of the affected
party, including labor disputes and changes in government regulation.
Certain of Lodestar's long-term coal supply contracts are subject to price
adjustment provisions which provide for increases or decreases in price, as
determined by specific conditions set forth in the contracts. Price conditions
in a contract might specify an economic index or other market pricing mechanism
on which a contract price is based. Certain contracts contain limitations on the
magnitude of price changes
64
that may result from the reopener provisions of a contract. Price reopener
provisions provide for the renegotiation of the price terms of a long-term
contract.
Although Lodestar currently has no ongoing contract disputes other than the
continuing negotiations with Big Rivers, Lodestar has become involved in such
disputes from time to time relating to, among other things, coal quality,
pricing and quantity. While customer disputes, if unresolved, could result in
the termination or cancellation of the applicable contract, Lodestar works
closely with its customers to resolve any differences. Nonetheless, there can be
no assurance that future disputes, if any, will be resolved in a mutually
satisfactory manner.
Operating profit margins realized by Lodestar under its long-term contracts
vary from contract to contract and depend upon a variety of factors, including
the type of customer (electrical power utility, IPP or industrial), base price
and adjustment provisions, as well as Lodestar's production and transportation
costs. Termination or suspension of deliveries under contracts could have a
material adverse effect on Lodestar's financial condition and results of
operation.
COAL TRANSPORTATION
Customers typically incur the transportation costs from the loadout point
(E.G. where loaded onto truck or barge) to the place of use (E.G. a customers'
power plant). Consequently, the availability and cost of transportation
constitute important factors for the marketability of coal. Transportation costs
are dependent primarily on the proximity of the customer to the coal source.
For the twelve months ended April 30, 1998, approximately 45% of Lodestar's
tonnage was shipped by inland waterway barges, 40% by rail on CSX and 15% by
direct truck deliveries. Although CSX dominates Lodestar's access to rail lines,
Lodestar believes that the freight charges it pays are competitive with the
charges paid by other coal producers served by multiple railroads. The practices
and rates set by the railroad serving a particular mine might affect, either
adversely or favorably, Lodestar's marketing efforts with respect to coal
produced from that mine. In addition, Lodestar believes its use of non-rail
delivery systems is advantageous because it provides both competitive
alternatives and transportation diversification.
WESTERN KENTUCKY OPERATIONS
The Caseyville Dock located on the Ohio River in Western Kentucky plays an
important role in the transportation of Lodestar's Western Kentucky products.
Accessible by truck from Lodestar's Pyro and Smith Preparation Plants, the
Caseyville Dock handled 41% of Lodestar's total coal shipments for the twelve
months ended April 30, 1998. The Caseyville Dock provides Lodestar with a
competitive advantage over other coal producers because it (a) is under the
control of Lodestar and (b) is located farther south on the Ohio River than any
comparable facility, providing a cost advantage in delivering coal to customers
in the Southern United States. In addition, the large number of barge companies
on the Ohio River ensures competitive barging rates. As of October 31, 1997, the
total cost of plant and equipment associated with the Caseyville Dock was
approximately $.7 million, with a net book value of $.7 million.
For the twelve months ended April 30, 1998, 72% of Lodestar's Western
Kentucky coal shipments traveled by truck to the Caseyville Dock to be loaded
onto barges. The current operations depend upon a single trucking company to
transport coal from the Pyro Preparation Plant to the Caseyville Dock. In the
event that this trucking company is unable to continue this service, Lodestar
may experience a disruption in coal deliveries and may incur higher
transportation charges in the future. Subsequent to April 30, 1998, Lodestar has
reached agreement with TVA to ship by rail an increased portion of the coal
supplied to it. This agreement will lessen Lodestar's dependence on this single
trucking company.
65
EASTERN KENTUCKY OPERATIONS
For the twelve months ended April 30, 1998, 76% of Lodestar's Eastern
Kentucky coal shipments traveled by CSX rail. The remaining 24% of coal
shipments traveled by truck directly to the customer or by truck to river docks.
Lodestar's Eastern Kentucky operations utilize numerous independent trucking
companies and thus are not dependent on any single trucking company.
MARKETING AND SALES
Lodestar currently conducts its marketing and sales throughout the Eastern,
South Central and Great Lakes regions of the United States, covering most areas
east of the Mississippi River and, through brokers, internationally. Shipments
of coal for the twelve months ended April 30, 1998 were 10.9 million tons,
including 6.5 million tons under contracts with utilities, 1.9 million tons
under long-term contracts with IPPs, 2.3 million tons to brokers and 0.2 million
tons to industrial customers.
Lodestar has recently increased its marketing staff to expand Lodestar's
industrial sales in the Midwest and its utility and industrial sales in the
Southern United States. New marketing initiatives are expected to increase total
coal sales as well as improve average price realizations. In addition, Lodestar
intends to restart its coal brokering operations to identify smaller producers
that may benefit from Lodestar's marketing resources and experience in certain
niche markets.
OTHER SERVICES
Lodestar operates an ash disposal facility adjacent to the Transcontinental
Loadout, which has approximately twenty years of capacity at current disposal
rates. This facility has the capability of accepting ash from both open-top
hopper railcars and pneumatic railcars. Presently, the ash disposed of at this
facility is received by Lodestar pursuant to its coal supply agreements with
Indiantown Cogeneration, L.P. ("Indiantown") and Cedar Bay Generating, L.P.
("Cedar Bay"), both affiliates of U.S. Gen.
Lodestar is paid a fee for disposal of the ash at this facility. For the
twelve months ended April 30, 1998, Lodestar disposed of approximately 289,000
tons of ash for which it was paid approximately $5.2 million. Cedar Bay
accounted for approximately 70% of the tons and approximately 75% of the revenue
associated with ash disposal for the twelve months ended April 30, 1998. The
total cost, including capitalized development expenditures, of Lodestar's plant
and equipment associated with this facility was $8.7 million as of October 31,
1997, and its net book value was approximately $8.3 million as of such date. See
"--Long-Term Coal Supply Contracts."
DEVELOPMENT AND EXPLORATION
As part of its ongoing mining operations, Lodestar develops certain of its
existing coal reserves. In particular, as part of its mine planning, Lodestar
surveys and drills geographic regions to determine, among other things, the
grade and depth of reserves to be mined. The objective of Lodestar's development
efforts is to identify the specific coal reserves with which to meet customer
requirements cost effectively.
With regard to exploration, Lodestar's business strategy encompasses the
acquisition of coal reserves that complement its existing operations or provide
expansion opportunities. The object of Lodestar's exploration activity is to
maintain and expand its coal reserves, offsetting the annual depletion resulting
from ongoing mining operations. Given the breadth of Lodestar's operating
capabilities in Eastern and Western Kentucky, Lodestar believes that
opportunities exist to consolidate coal reserves within its primary geographic
areas. Historically, the Predecessor Company, due to its strategic objectives,
did not undertake significant exploration activities. Lodestar, however, intends
to pursue exploration activities which are consistent with its business
strategy.
For the twelve months ended April 30, 1998, Lodestar capitalized in
accordance with generally accepted accounting principles $0.7 million associated
with its development and exploration efforts.
66
COMPETITION
The United States coal industry is highly competitive, with numerous
producers in all coal producing regions. Lodestar competes with other large
producers and many small producers in the United States and abroad. Many of
Lodestar's customers are also customers of Lodestar's competitors. The markets
in which Lodestar sells its coal are highly competitive and affected by factors
beyond Lodestar's control. Continued demand for Lodestar's coal and the prices
that Lodestar will be able to obtain will depend primarily on coal consumption
patterns of the domestic electric utility industry, which in turn are affected
by the demand for electricity, coal transportation costs, environmental and
other governmental regulations and orders, technological developments and the
availability and price of competing coal and alternative fuel supply sources
such as oil, natural gas, nuclear energy and hydroelectric energy.
EMPLOYEES
As of April 30, 1998, Lodestar had 949 employees. The following table
presents Lodestar's employees by location:
LOCATION HOURLY SALARY TOTAL
Western Kentucky(1)....................................................................... 471 79 550
Eastern Kentucky(2)....................................................................... 300 51 351
West Virginia(3).......................................................................... 9 2 11
Corporate Office--Lexington, Kentucky..................................................... 10 27 37
--- --- ---
Total................................................................................. 790 159 949
--- --- ---
--- --- ---
- ------------------------
(1) In August 1997, the UMWA was certified by the NLRB following a
representation election to represent 446 employees at Lodestar's Western
Kentucky operations. Lodestar has entered into a collective bargaining
agreement with the UMWA, which either party may terminate on or after May
13, 2000, and that Lodestar believes will contribute to the long-term
success of these operations. Lodestar considers its relationship with these
employees generally to be good and has not experienced significant labor
relations problems as a result of the UMWA representation.
(2) Lodestar's employees at its Eastern Kentucky operations are not represented
by a union, and Lodestar believes its relations with these employees are
good. However, there can be no assurance that Lodestar's workforce in
Eastern Kentucky will not unionize in the future.
(3) Following the idling of production in the first quarter of fiscal 1998, the
employees at Lodestar's West Virginia operations are performing final
reclamation work.
LEGAL PROCEEDINGS
The Company is involved in various claims and lawsuits incidental to the
ordinary course of its business that are not expected to have a material adverse
effect on the financial condition or results of operations of the Company.
Lodestar and Webster County Coal Corporation ("WCCC") are parties to an
agreement relating to Lodestar's mining at its Smith Surface mine. The agreement
resolved various disputes that arose in 1992 when WCCC objected to Lodestar's
renewal of its mining permit, claiming that Lodestar's operations could damage
WCCC's nearby underground mine. The agreement requires Lodestar to maintain a
minimum net worth of $70.0 million or, in the alternative, to procure a payment
and performance bond in the amount of $20.0 million, a requirement Lodestar has
not met since late 1996. In early June 1998, representatives of WCCC notified
Lodestar that it would take legal action to enforce its rights under this
provision of the agreement, if Lodestar did not fully comply with this provision
or propose a resolution acceptable to WCCC on or before June 30, 1998. Lodestar
has proposed an alternative resolution, and
67
although negotiations with WCCC continue, there can be no assurance that WCCC
will not take such legal action. If WCCC were to take such legal action,
Lodestar could be required to stop mining prematurely at the Smith Surface mine,
currently scheduled to be closed in fiscal 1999. Although the Company cannot
predict what actions WCCC will take, the Company does not believe the outcome of
any such action would have a material adverse effect on the financial condition
and results of operations of the Company.
The Predecessor Company initiated a claim on June 16, 1990 against its
insurance carriers in COSTAIN COAL INC. V. NATIONAL UNION FIRE INSURANCE CO., ET
AL., Civil Action No. 90-CI-2075, Fayette Circuit Court, Third Division, for
denial of coverage on claims related to a 1989 accident at a former mine. The
insurance carriers ultimately funded the settlement but are seeking to recoup
from Lodestar a majority of the monies paid. A settlement was reached between
the Predecessor Company and one carrier, resulting in a remaining recoupment
claim of approximately $7.5 million. One of the carriers has been allowed to
file an amended complaint naming the Company as a party. The Predecessor Company
had asserted claims for damages alleging bad faith on the carriers' part in
refusing to fund the claims. In September 1994, the court issued an order
holding that some of the payments by the insurance carriers were made under
policies which did not provide coverage to the actual Predecessor Company entity
involved. The Predecessor Company has asserted that the court's ruling does not
eliminate its bad faith claims or establish the carriers' rights to recoupment.
Pursuant to the Acquisition, the Predecessor's Parent contractually retained
liability and agreed to indemnify Lodestar for the NATIONAL UNION action.
Accordingly, the Predecessor's Parent is defending the NATIONAL UNION action.
Discovery is substantially complete, but no trial date has been set. Although
the Company believes a court would recognize the contractual arrangement between
the Predecessor's Parent and Lodestar regarding the allocation of liability for
this litigation, there can be no assurance that the court will do so. Moreover,
there can be no assurance that the Predecessor's Parent will be able to fulfill
its indemnification obligations. See "Risk Factors--Predecessor Company Risk." A
ruling by the court that the insurance carriers are owed recoupment and that
liability for this matter attaches to Lodestar or the Company despite the
contractual allocation of liability to the Predecessor's Parent, could have a
material adverse effect on the Company's financial condition and results of
operations.
68
GOVERNMENTAL REGULATION
OVERVIEW
The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, permitting and
licensing requirements, air and water pollution, the reclamation and restoration
of mining properties after mining is completed, the discharge of hazardous
materials into the environment, surface subsidence from underground mining and
the effects that mining has on groundwater quality and availability. In
addition, the industry is affected by significant legislation mandating certain
benefits for current and retired coal miners. Various permits (primarily from
state agencies) must be obtained before mining operations are commenced.
Lodestar believes that all permits currently required to conduct its present
mining operations have been obtained. Lodestar may be required to prepare and
present to federal, state or local authorities data pertaining to the effect
that a proposed exploration for or production of coal may have on the
environment. Such requirements could prove costly and time-consuming, and could
delay commencement or continuation of exploration or production operations.
Future legislation and administrative regulations may emphasize the protection
of the environment, and as a consequence, the activities of Lodestar may be more
closely regulated. Such legislation and regulations, as well as future
interpretations and more rigorous enforcement of existing laws, may require
substantial increases in equipment and operating costs to Lodestar and delays,
interruptions or a termination of operations, the extent of which cannot be
predicted.
The remainder of this section provides a brief description of the general
purpose and impact of the principal federal, state and local laws and
regulations that affect the coal mining industry. These descriptions do not
address every material aspect or possible impact of the applicable law or
regulation.
HEALTH AND SAFETY
MINE HEALTH AND SAFETY STANDARDS
The Federal Coal Mine Health and Safety Act of 1969 (the "1969 Act") has
resulted in important health and safety benefits to coal miners while increasing
operating costs and reducing productivity for the coal industry as a whole. The
Federal Mine Safety and Health Act of 1977 (the "1977 Act") significantly
expanded the enforcement of health and safety standards. Regulations are
comprehensive and affect numerous aspects of mining operations, including
training of mine personnel, mining procedures, blasting and the equipment used
in mining operations. In addition to the federal framework, most states
(including Kentucky) impose regulatory and legal parameters for mine safety and
health.
Lodestar seeks to continue to improve its health and safety performance by,
among other measures: training employees in safe work practices; openly
communicating with employees regarding safety procedures; establishing,
following and improving safety standards through Lodestar's loss prevention
system; involving employees in establishing safety standards; and recording,
reporting and investigating all accidents, incidents and losses to avoid
reoccurrence. As evidence of the effectiveness of Lodestar's commitment to
health and safety, Lodestar's Spurlock mine received the Sentinels of Safety
Award in 1996 from MSHA for achieving 80,432 hours without a lost time accident.
BLACK LUNG
The Black Lung Reform Act of 1977 requires each coal mine operator to secure
payment of federal and state black lung claims to its employees through
insurance, bonds, qualified self-insurance or contributions to a
state-controlled fund. This Act also establishes a trust fund for the payment of
benefits and medical expenses to employees who cannot receive these benefits
from their employer. The trust fund is financed by a tax on coal sales. Lodestar
is self-insured for its workers' compensation liability, including obligations
under state and federal black lung claims. Accordingly, as of April 30, 1998,
Lodestar had $19.8
69
million of performance bonds outstanding related to such workers' compensation
liability. These performance bonds and other performance bonds including those
related to reclamation are supported by $17.8 million in letters of credit as of
April 30, 1998 and are secured by a third priority security interest (to become
a second priority security interest upon consummation of the Transactions) in
substantially all the property and other assets of Lodestar.
HEALTH BENEFITS ACT
The Coal Industry Retiree Health Benefit Act of 1992 (the "Health Benefits
Act") provides for the funding of health benefits for UMWA retirees. It requires
"signatory operators" to pay annual premiums to a trust fund benefiting those
retirees. Lodestar has been assigned a small number of beneficiaries based on
its former relationship with signatory operators. Lodestar is indemnified
contractually on this obligation by both the Predecessor's Parent and the
purchaser of its former operations in Alabama. Lodestar currently expects no
material liability in this regard. See "Risk Factors--Predecessor Company Risk."
ENVIRONMENTAL MATTERS
Lodestar is subject to regulation by various environmental laws, including
SMCRA, the Clean Air Act, the Comprehensive Environmental Response Compensation
and Liability Act of 1980 ("CERCLA"), the Federal Water Pollution Control Act
(the "Clean Water Act") and the Resource Conservation and Recovery Act of 1976
("RCRA"), as well as state laws of similar scope. These laws require
governmental approval of many aspects of coal mining operations, and both
federal and state inspectors regularly visit Lodestar's mines and other
facilities in order to assure compliance.
SURFACE MINING CONTROL AND RECLAMATION ACT
SMCRA establishes mining and reclamation standards for all aspects of
surface mining, as well as many aspects of deep mining. SMCRA 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 SMCRA, imposes a tax on
all current mining operations the proceeds of which are used to restore mines
closed before 1977 and not reclaimed. The maximum tax is $.35 per ton on
surface-mined coal and $.15 per ton on underground-mined coal.
SMCRA also requires that comprehensive environmental protection and
reclamation standards be met during the course of and upon completion of mining
activities. For example, SMCRA requires Lodestar to restore a surface mine to
approximate original contour as contemporaneously as practicable with surface
coal mining operations. The mine operator must submit a bond or otherwise secure
the performance of these reclamation obligations. Lodestar accrues the liability
associated with all end of mine reclamation on a ratable basis as the coal
reserve is being mined. The estimated cost of reclamation, and the corresponding
accrual on Lodestar's financial statements, is updated periodically.
As part of its reclamation activities in the ordinary course of its
business, Lodestar had approximately $42.4 million of performance bonds
outstanding as of April 30, 1998. Lodestar's obligations under these performance
bonds and other performance bonds including those related to workers'
compensation are supported by $17.8 million in outstanding letters of credit as
of April 30, 1998 and are secured by a third priority security interest (to
become a second priority security interest upon consummation of the
Transactions) in substantially all the property and other assets of Lodestar.
See "Risk Factors--Reclamation and Closure Liabilities."
CLEAN AIR ACT
The Clean Air Act and corresponding state laws which regulate the emissions
of pollutants 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.
Coal
70
mining and processing may also be impacted by future regulation of fine
particulate matter measuring 2.5 micrometers in diameter or smaller. For
example, new regulations relating to fugitive dust and coal emissions may
restrict Lodestar's ability to develop new mines or require Lodestar to modify
its existing operations.
The Clean Air Act indirectly affects coal mining operations by extensively
regulating the air emissions from coal-fueled electric power generation plants.
Reductions in emissions are occurring in two phases: Phase I began in 1995
(applicable to certain identified facilities) and Phase II will begin in 2000
(applicable to all facilities, including those subject to the 1995
restrictions). The affected utilities may be able to meet these requirements by,
among other things, switching to lower sulfur fuels, installing pollution
control devices such as scrubbers, reducing electricity generating levels, or by
purchasing or trading emissions allowance 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.
Lodestar believes that its presence in two distinct major coal supply
regions will minimize any adverse effects from the transition from Phase I to
Phase II of the Clean Air Act. The Clean Air Act, while limiting sulfur dioxide
(SO(2)) emissions, provides for certain alternatives to allow existing power
plants to continue to operate. In Eastern Kentucky, Lodestar's coal reserve base
consists of low sulfur coal for which a widespread market is expected to
continue to exist. In Lodestar's Western Kentucky operations, while the coal
reserve base consists of mid to high sulfur coals, Lodestar believes that it has
certain strengths with which to manage the effects of stricter emissions limits.
Specifically, higher sulfur coals with higher Btu content, such as Lodestar's
coal, will continue to be economical fuel supplies for plants equipped with
scrubbers. In addition, high sulfur coals can be blended with Western coals
containing low levels of sulfur to take advantage of the superior Btu content of
Lodestar's Western Kentucky coal. The emission allowance trading system also
will permit plants that over-comply with emission limits (including those with
scrubbers) to offset the emissions from higher emitting plants.
The Clean Air Act also requires that existing major sources of nitrogen
oxides in moderate or higher ozone non-attainment areas install Reasonably
Available Control Technology ("RACT") for nitrogen oxides, which are precursors
of ozone. In addition, stricter ozone standards are expected to be implemented
by the EPA by 2003. On October 10, 1997, the EPA unveiled an anti-smog plan
calling for steep reductions in nitrogen oxide emissions in 22 states, and cited
power plants as the preferred way to meet the goal. The states have a year to
respond to the proposal. Any new requirements will make it more costly to
operate coal-fired power plants and could make coal a less attractive fuel
alternative in the planning and building of power plants in the future. The
effect such legislation or other legislation that may be enacted in the future
could have on the coal industry in general and on Lodestar in particular cannot
be predicted with certainty. Such legislation limits the ability of some of
Lodestar's customers to burn higher sulfur coals unless these customers have or
are willing to install scrubbers, to blend coal or to bear the cost of acquiring
emission credits which permit them to burn higher sulfur coal. If the use of
coal as a raw material for power generating were to be reduced, a material
adverse effect on Lodestar's financial condition and results of operations could
result.
In addition, the international community met in Kyoto, Japan in December
1997 and reached an agreement on the Kyoto Protocol establishing binding targets
and timetables for reduction of greenhouse gases. Among other things, the United
States committed to reducing U.S. carbon dioxide (CO(2)) emissions by 7% from
1990 levels by the 2008 to 2012 time frame, which could reduce reliance on
fossil fuels, including coal. Whether the United States will ratify this treaty
is uncertain and will likely be the subject of heavy debate. The Company cannot
predict the outcome of the events or their effects on the Company's operating
performance.
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CERCLA
Lodestar is one of over 150 parties to a consent decree in U.S. V. UNION
ELECTRIC COMPANY, ET AL., 92 CV 00078 (E.D. Mo.), settling claims under CERCLA
of the United States and State of Missouri for cleanup of the Missouri Electric
Works, Inc. Superfund Site located in Cape Girardeau, Missouri. Lodestar's
allocated share of costs is 1.13%, which Lodestar estimates will equal
approximately $113,000. The consent decree has not yet been entered by the Court
because of pending objections by certain non-settling parties.
Except for reclamation costs, amounts spent by Lodestar in 1997 for
environmental matters were not material and are not expected to be material in
1998 or 1999.
COMPLIANCE
Lodestar endeavors 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, Lodestar does not believe such violations can be completely eliminated.
None of the violations to date or the monetary penalties assessed upon Lodestar
have been material.
While it is not possible to quantify the costs of compliance with all
applicable federal and state laws, those costs have been and are expected to
continue to be significant. However, Lodestar believes the cost of compliance
with regulatory standards will not substantially affect its ability to compete
with similarly situated coal companies.
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MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company and the Guarantors:
NAME AGE POSITION
Ira Leon Rennert..................................... 64 Chairman, Chief Executive Officer and Director of the
Company and Chairman and Director of Lodestar,
Eastern Resources and Industrial Fuels
John W. Hughes....................................... 57 President and Chief Operating Officer of the Company
and Lodestar and President of Eastern Resources and
Industrial Fuels
Eugene C. Holdaway................................... 51 Senior Vice President of the Company and Lodestar
R. Eberley Davis..................................... 41 Vice President and General Counsel of Lodestar
Michael E. Donohue................................... 47 Chief Financial Officer of the Company and Vice
President and Chief Financial Officer of Lodestar,
Eastern Resources and Industrial Fuels
Mike Francisco....................................... 42 Vice President--East Kentucky Operations of Lodestar
and Vice President of Industrial Fuels
William M. Potter.................................... 46 Vice President--West Kentucky Operations of Lodestar
IRA LEON RENNERT has been Chairman, Chief Executive Officer, Director and
principal shareholder of Renco (including predecessors) since Renco's first
acquisition in 1975, Chief Executive Officer of the Company since April 1998,
Chairman and Director of the Company since its establishment in August 1996 and
Chairman and Director of Lodestar, Eastern Resources and Industrial Fuels since
March 1997. Renco holds controlling interests in a number of manufacturing and
distribution concerns operating in businesses not competing with Lodestar,
including WCI Steel, Inc., The Doe Run Resources Corporation, Renco Metals, Inc.
and AM General Corporation.
JOHN W. HUGHES has been President and Chief Operating Officer of the Company
since April 1998 and of the Predecessor Company and Lodestar since August 1996.
Mr. Hughes joined the Predecessor Company in July 1995 as Executive Vice
President and Chief Operating Officer. From May 1993 until joining the
Predecessor Company, Mr. Hughes was a consultant and pursued personal interests
outside the coal industry. From November 1992 to May 1993, Mr. Hughes was the
Manager--Operations, Safety and Environmental and the President of Shell Mining
Company. Mr. Hughes has over 30 years of experience in the coal mining and the
oil and gas industries.
EUGENE C. HOLDAWAY has been Senior Vice President of the Company since April
1998 and of the Predecessor Company and Lodestar since September 1995. Mr.
Holdaway joined the Predecessor Company in March 1993 as Vice President--Sales
and Marketing. From June 1987 to March 1993, Mr. Holdaway served as Vice
President--Midwest and Western Sales at Arch Coal Sales Company. Mr. Holdaway
has over 22 years of experience in the coal mining industry.
R. EBERLEY DAVIS has been Vice President and General Counsel of the
Predecessor Company and Lodestar since November 1995. Mr. Davis previously
served as Director of Legal Affairs and Corporate Counsel of the Predecessor
Company from July 1995 to November 1995 and as Director of Legal Affairs
73
for the Western Division of the Predecessor Company from January 1993 to July
1995. Mr. Davis is a member of the Kentucky bar.
MICHAEL E. DONOHUE has been Chief Financial Officer of the Company and Vice
President and Chief Financial Officer of Lodestar, Eastern Resources and
Industrial Fuels since April 1998 and Treasurer of Industrial Fuels since
October 1994. From October 1997 to April 1998, Mr. Donohue was a consultant to
Lodestar. From November 1995 to September 1997, Mr. Donohue served as Vice
President and Treasurer of Lodestar and the Predecessor Company, and from March
1993 to November 1995, Mr. Donohue served as Assistant Treasurer of the
Predecessor Company. Mr. Donohue has held various positions with the Predecessor
Company and its subsidiaries since 1981.
MIKE FRANCISCO has been Vice President--East Kentucky Operations of the
Predecessor Company and Lodestar since July 1995 and Vice President of
Industrial Fuels since August 1995. Since joining the Predecessor Company in
June 1985, Mr. Francisco has held positions as, among others, Chief Engineer--
East Kentucky and Senior Production Engineer. Mr. Francisco has over eighteen
years experience in civil and mining engineering and is a registered
Professional Engineer.
WILLIAM M. POTTER has been Vice President--West Kentucky Operations of the
Predecessor Company and Lodestar since July 1995. Mr. Potter was Mine
Superintendent of Southard Coal from 1987 until it was acquired by the
Predecessor Company in 1989, and Mr. Potter remained in that position at the
Predecessor Company until 1990 when he became Superintendent of the Baker and
Wheatcroft mines. In 1993, Mr. Potter became General Manager of certain
underground operations in Western Kentucky. Mr. Potter has over 22 years of
experience in the mining industry.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the named executive officers by Lodestar and the Predecessor Company for
services rendered in all capacities for the twelve months ended October 31,
1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1)
---------------------- ALL OTHER
NAME AND POSITION SALARY BONUS COMPENSATION(2)
John W. Hughes.......................................................... $ 220,000 $ 330,000 $ 7,176
President and Chief Operating Officer
Eugene C. Holdaway...................................................... 180,250 -- 17,875
Senior Vice President
R. Eberley Davis........................................................ 155,000 35,000 6,511
Vice President and General Counsel
Mike Francisco.......................................................... 115,000 -- 4,543
Vice President--East Kentucky Operations
William M. Potter....................................................... 111,838 189 2,937
Vice President--West Kentucky Operations
- ------------------------
(1) Value of perquisites and other personal benefits did not exceed the lesser
of $50,000 or 10% of total salary and bonus per named executive officer.
(2) The amounts shown as "All Other Compensation" in the table for each named
executive officer represent contributions to Messrs. Hughes, Holdaway,
Davis, Francisco and Potter under Lodestar's 401(k) plan of $6,000, $6,000,
$5,600, $3,807 and $2,280 respectively, and payments of life insurance
premiums of $1,176, $1,060, $911, $676 and $657, respectively. In addition,
Mr. Holdaway received a payment of $10,815 in lieu of a pension. See
"--Benefits."
74
Ira Leon Rennert, the Chairman of the Board of Lodestar, receives no
compensation directly from Lodestar. Mr. Rennert is Chairman of the Board and
the principal stockholder of Renco, which is entitled to receive a management
fee from Lodestar pursuant to the Management Consultant Agreement (as defined).
The management consultant fee was waived for March 15, 1997 through October 31,
1997. See "Certain Relationships and Transactions."
No executive officer of the Company receives any compensation from the
Company except pursuant to his net worth appreciation agreement.
NET WORTH APPRECIATION AGREEMENTS
The named executive officers and Mr. Donohue are each parties to net worth
appreciation agreements with Lodestar, pursuant to which, upon termination of
each person's employment with Lodestar, he is entitled to receive an amount
equal to a fixed percentage of the cumulative net income of the Company, as
defined, from a base date until the end of the fiscal quarter preceding the date
of his termination. Such amount is payable without interest in 40 equal
quarterly installments, commencing three months after later of (i) the
termination of each person's employment or (ii) attaining age 62.
The base date for each of the named executive officers under their
respective net worth appreciation agreement is March 14, 1997, the date of the
Acquisition. Mr. Hughes has a net worth percentage of 2.5% that vests as to 1.5%
on April 30, 2000 and 0.5% on each of April 30, 2001 and 2002, PROVIDED that in
each case Mr. Hughes remains in the employ of Lodestar until the applicable
vesting date. Mr. Holdaway has a net worth percentage of 1.75% that vests as to
1.05% on April 30, 2000 and 0.035% on each of April 30, 2001 and 2002, PROVIDED
that in each case Mr. Holdaway remains in the employ of Lodestar until the
applicable vesting date. Messrs. Davis, Francisco, Potter and Donohue each has a
net worth percentage of 1.25% that vests as to 0.75% on April 30, 2000 and 0.25%
on each of April 30, 2001 and 2002, PROVIDED that in each case Messrs. Davis,
Francisco, Potter and Donohue each remains in the employ of Lodestar until the
applicable vesting date. As of October 31, 1997, none of the named executive
officers had earned any amounts under his respective net worth appreciation
agreement.
The net worth appreciation agreements also provide that, in the event of
payment of a dividend or a sale of Lodestar, the active participants will be
entitled to receive an amount equal to a percentage of the dividend or the net
proceeds of the sale equal to their maximum percentages under the agreements.
Upon consummation of the Old Notes Offering, approximately $2.8 million was paid
to certain employees of Lodestar, including each named executive officer,
pursuant to the net worth appreciation agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company had no compensation committee during fiscal 1997. Ira Leon
Rennert is the sole member of the Board of Directors. The compensation for the
executive officers is fixed by negotiations between such executive officers and
Mr. Rennert on behalf of Renco.
EMPLOYMENT AGREEMENTS
The named executive officers are parties to employment agreements with
Lodestar. Set forth below is a brief description of each such agreement.
JOHN W. HUGHES entered into an Employment Agreement with Lodestar, effective
as of April 1, 1997, with an initial term continuing until April 1, 2002 and
automatically renewable thereafter for additional one-year terms. Pursuant to
the terms of his agreement, Mr. Hughes' compensation is composed of (a) a base
annual salary of $220,000 and (b) an annual bonus of $75,000, provided that (i)
Mr. Hughes achieves certain performance objectives established by Lodestar, (ii)
Mr. Hughes is in active employment of Lodestar at the close of each fiscal year
and (iii) Lodestar's financial statements for such fiscal year, as prepared by
its independent public accountants, show a positive net income.
75
EUGENE C. HOLDAWAY entered into an Employment Agreement with Lodestar,
effective as of April 1, 1997, with an initial term continuing until April 1,
2002 and automatically renewable thereafter for additional one-year terms.
Pursuant to the terms of his agreement, Mr. Holdaway's compensation is composed
of (a) a base annual salary of $180,250 and (b) an annual bonus of $40,000,
provided that (i) Mr. Holdaway achieves certain performance objectives
established by Lodestar, (ii) Mr. Holdaway is in active employment of Lodestar
at the close of each fiscal year and (iii) Lodestar's financial statements for
such fiscal year, as prepared by its independent public accountants, show a
positive net income.
R. EBERLEY DAVIS entered into an Employment Agreement with Lodestar,
effective as of April 1, 1997, with an initial term continuing until April 1,
2002 and automatically renewable thereafter for additional one-year terms.
Pursuant to the terms of his agreement, Mr. Davis' compensation is composed of
(a) a base annual salary of $155,000 and (b) an annual bonus of $25,000,
provided that (i) Mr. Davis achieves certain performance objectives established
by Lodestar, (ii) Mr. Davis is in active employment of Lodestar at the close of
each fiscal year and (iii) Lodestar's financial statements for such fiscal year,
as prepared by its independent public accountants, show a positive net income.
MIKE FRANCISCO entered into an Employment Agreement with Lodestar, effective
as of April 1, 1997, with an initial term continuing until April 1, 2002 and
automatically renewable thereafter for additional one-year terms. Pursuant to
the terms of his agreement, Mr. Francisco's compensation is composed of (a) a
base annual salary of $130,000 and (b) an annual bonus of $25,000, provided that
(i) Mr. Francisco achieves certain performance objectives established by
Lodestar, (ii) Mr. Francisco is in active employment of Lodestar at the close of
each fiscal year and (iii) Lodestar's financial statements for such fiscal year,
as prepared by its independent public accountants, show a positive net income.
WILLIAM M. POTTER entered into an Employment Agreement with Lodestar,
effective as of April 1, 1997, with an initial term continuing until April 1,
2002 and automatically renewable thereafter for additional one-year terms.
Pursuant to the terms of his agreement, Mr. Potter's compensation is composed of
(a) a base annual salary of $111,550 and (b) an annual bonus of $25,000,
provided that (i) Mr. Potter achieves certain performance objectives established
by Lodestar, (ii) Mr. Potter is in active employment of Lodestar at the close of
each fiscal year and (iii) Lodestar's financial statements for such fiscal year,
as prepared by its independent public accountants, show a positive net income.
MICHAEL E. DONOHUE entered into an Employment Agreement with Lodestar,
effective as of July 1, 1998 with an initial term continuing until April 1, 2002
and automatically renewable thereafter for additional one-year terms. Pursuant
to the terms of his agreement, Mr. Donohue's compensation is composed of (a) a
base annual salary of $150,000 and (b) an annual bonus of $35,000, provided that
(i) Mr. Donohue achieves certain performance objectives established by Lodestar,
(ii) Mr. Donohue is in active employment of Lodestar at the close of each fiscal
year and (iii) Lodestar's financial statement for such fiscal year, as prepared
by its independent public accountants, show a positive net income.
Each of the above described employment agreements requires that, until April
1, 2002 or the termination of their employment, whichever is later, each of the
above executive officers not, directly or indirectly, engage in any aspect of
the business of coal mining as an officer, director, partner, proprietor,
investor, associate, employee or consultant. In addition, each of the above
executive officers has agreed to maintain the confidentiality of information
obtained during their employment with Lodestar.
BENEFITS
Lodestar has a 401(k) defined contribution plan that covers all employees.
Employees can defer up to 15% of their income, and Lodestar contributes $1.00
for each $1.00 deferred up to 4% of an employee's salary (except for certain
employees of the Western Kentucky mining operations) and $.50 for each $1.00
deferred up to 4% of an employees' salary for such Western Kentucky employees.
Amounts deferred vest after five years.
76
Lodestar has a defined benefit plan for certain employees of the Western
Kentucky mining operations who do not receive full 401(k) matching from
Lodestar. Eligible employees receive, subject to certain limitations, a monthly
benefit equal to the sum of $17.08875 for each year of service up to ten years,
$17.64 for each year of service in excess of ten years up to twenty years,
$18.19125 for each year of service in excess of twenty years up to 30 years and
$18.7425 for each year of service in excess of 30 years up to 40 years. Benefits
begin on or before the 60th day after the end of the calendar year in which the
latest of the following occur: (i) the eligible employee attains the age of 65,
(ii) the tenth anniversary of the eligible employee's participation in the plan
or (iii) the date the eligible employee ceased to be an employee. William M.
Potter, the only named executive officer who participates in this plan, based on
his service to date, would receive benefits upon retirement at the age of 62
estimated to be $170.89 per month.
Industry legislation mandates certain benefits for current and retired coal
miners. See "Government Regulation--Health and Safety."
STOCK OWNERSHIP
The following table sets forth certain information as of the date hereof
regarding the beneficial ownership of common stock of the Company by each
beneficial owner of 5% or more of the common stock of the Company, each director
and each named executive officer of the Company and Lodestar during the last
fiscal year, and by all directors and executive officers of the Company and
Lodestar as a group. Except as otherwise noted, the persons named in the table
below have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
BENEFICIAL OWNERSHIP
----------------------------
SHARES OF
NAME OF BENEFICIAL OWNERS COMMON STOCK PERCENT
The Renco Group, Inc.(1)................................................................. 1,000 100.0%
Ira Leon Rennert(1)(2)................................................................... 1,000 100.0%
John W. Hughes........................................................................... -- --
Eugene C. Holdaway....................................................................... -- --
R. Eberley Davis......................................................................... -- --
Mike Francisco........................................................................... -- --
William M. Potter........................................................................ -- --
All directors and executive officers as a group (7 persons).............................. 1,000 100.0%
- ------------------------
(1) The address of this beneficial owner is c/o The Renco Group, Inc., 30
Rockefeller Plaza, 42nd Floor, New York, New York 10112.
(2) Mr. Rennert is deemed to beneficially own the Common Stock of the Company
owned by Renco due to the ownership by himself and trusts established by him
(but of which he is not a trustee) for himself and members of his family of
a total of 97.9% of the outstanding Common Stock of Renco.
By virtue of Renco's ownership of all the outstanding shares of Common
Stock, and Mr. Rennert's ownership of a majority of the stock of Renco, Mr.
Rennert is in position to control actions that require the consent of a majority
of the holders of the Company's outstanding shares of Common Stock, including
the election of the Board of Directors.
77
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Under a Management Consultant Agreement, effective March 14, 1997, as
amended (the "Management Consultant Agreement"), between Renco and Lodestar,
Lodestar pays annual fees of $1,200,000 to Renco. The Management Consultant
Agreement provides that Lodestar shall not make any payment thereunder which
would violate any of its agreements with respect to any of its outstanding
indebtedness. The Management Consultant Agreement extends to October 31, 2005,
and thereafter shall continue for additional terms of three years each unless
sooner terminated by either party by giving six months prior written notice. For
the period March 15, 1997 to October 31, 1997, Lodestar's management fees were
waived by Renco. The management fees to Renco for the period from November 1,
1997 to the closing date of the Old Notes Offering were paid with the net
proceeds from the Old Notes Offering. Lodestar believes that the cost of
obtaining the type and quality of services rendered by Renco under the
Management Consultant Agreement was, and continues to be, no less favorable than
that at which Lodestar could obtain such services from unaffiliated entities.
The Company is included in the consolidated federal income tax return of
Renco. Under the terms of the Company's tax sharing agreement with Renco, income
taxes are allocated by Renco to the Company on a separate return basis except
that transactions between the Company and Renco and its other subsidiaries are
accounted for on a cash basis and not on an accrual basis. The Company is not
entitled to the benefit of net tax loss carryforwards, unless such tax losses
were a result of timing differences between its respective accounting for tax
and financial reporting purposes.
To obtain the advantages of volume, Renco purchases certain insurance
coverages for its subsidiaries, including the Company and Lodestar, and the
actual cost of such insurance, without markup, is reimbursed by the covered
subsidiaries. The major areas of Lodestar's insurance coverage obtained under
the Renco programs are property and business interruption. The premiums for
property and business interruption are allocated by Renco substantially as
indicated in the underlying policies. Renco also purchases and administers
certain insurance policies exclusively for Lodestar, including general and
product liability, automobile liability, casualty umbrella, excess workers'
compensation, marine liability, fiduciary and fidelity. Workers' compensation is
self-insured. The cost of such insurance, without markup, is reimbursed by
Lodestar as incurred. The total insurance cost under the Renco insurance
programs incurred in fiscal 1997 by Lodestar was approximately $.9 million. The
policies purchased by Renco were effective for less than a full year during
fiscal 1997; the annual cost of these policies was approximately $2.3 million.
Lodestar believes that its insurance costs under this program were less than it
would have incurred if it had obtained its insurance directly.
In connection with the Acquisition, Renco loaned $2.0 million to the
Company. In addition, Renco loaned $3.0 million to Lodestar in October 1997 to
provide working capital. These loans were repaid in full, including accrued
interest thereon, with the net proceeds of the Old Notes Offering.
Upon consummation of the Old Notes Offering, the Company paid a dividend to
Renco of $27.8 million.
78
DESCRIPTION OF THE SENIOR NOTES
The Senior Notes are issued under the Indenture. The following summary of
the material provisions of the Indenture does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Indenture, including the definitions of certain terms contained therein and
those terms made part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended (the "TIA"), as in effect on the date of the Indenture. A
copy of the Indenture is filed as an exhibit to the Registration Statement. The
definitions of certain capitalized terms used in the following summary are set
forth below under "--Certain Definitions." For purposes of this section,
references to the "Company" include only Lodestar Holdings, Inc. and not its
Subsidiaries.
GENERAL
The Senior Notes are general unsecured obligations of the Company limited to
$235.0 million in aggregate principal amount, of which $150.0 million were
issued in the Old Notes Offering. Additional amounts of Senior Notes in an
aggregate principal amount of $85.0 million may be issued under the Indenture in
one or more series from time to time, subject to the limitations set forth under
"--Certain Covenants--Limitation on Indebtedness."
The Senior Notes will mature on May 15, 2005. Each Note bears interest at
the rate set forth on the cover page hereof from the date of issuance or from
the most recent interest payment date to which interest has been paid, payable
semiannually in arrears on each May 15, and November 15, commencing November 15,
1998, to the person in whose name the Senior Note (or any predecessor Senior
Note) is registered at the close of business on the May 1 or November 1
immediately preceding such interest payment date.
Principal of, premium, if any, and interest on the Senior Notes will be
payable, and the Senior Notes will be exchangeable and transferable, at the
office or agency of the Company in New York City maintained for such purposes
(which initially will be the Trustee or its agent); PROVIDED that payment of
interest may be made at the option of the Company by check mailed to the
registered holders of the Senior Notes ("Holders") at their registered
addresses. The Senior Notes will be issued only in fully registered form without
coupons, in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer, exchange or
redemption of Senior Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
OPTIONAL REDEMPTION
The Senior Notes will be subject to redemption, in whole or in part, at the
option of the Company, at any time on or after May 15, 2002, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued interest to the redemption date, if redeemed during the twelve month
period beginning on May 15 of the years indicated below:
YEAR PERCENTAGE
2002............................................................................. 105.750%
2003............................................................................. 102.875%
2004 and thereafter.............................................................. 100.000%
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS
In addition, at any time prior to May 15, 2001, the Company may redeem up to
35% of the sum of (x) the aggregate principal amount of the Senior Notes issued
in the Offering plus (y) any additional Senior Notes issued after the Issue Date
pursuant to the Indenture, with the proceeds of one or more Equity
79
Offerings at a redemption price (expressed as a percentage of principal amount)
of 111.5% plus accrued interest to the redemption date; PROVIDED that at least
65% of the sum of (x) the aggregate principal amount of Senior Notes issued in
the Old Notes Offering plus (y) any additional Senior Notes issued after the
Issue Date pursuant to the Indenture remains outstanding immediately after any
such redemption. In order to effect the foregoing redemption with the proceeds
of any Equity Offering, the Company shall make such redemption not more than 120
days after the consummation of any such Equity Offering. "Equity Offering" means
an offering of Qualified Capital Stock of the Company (other than to any
Subsidiary of the Company).
SINKING FUND
There will be no mandatory sinking fund payments for the Senior Notes.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Senior Notes are to be redeemed at
any time, selection of such Senior Notes for redemption will be made by the
Trustee in compliance with the requirements of the principal national securities
exchange or quotation system, if any, on which such Senior Notes are listed or,
if such Senior Notes are not then listed on a national securities exchange or
quotation system, on a PRO RATA basis, by lot or by such method as the Trustee
shall deem fair and appropriate; PROVIDED, HOWEVER, that (i) no Senior Notes of
a principal amount of $1,000 or less shall be redeemed in part and (ii) a
redemption with the net cash proceeds of an Equity Offering shall be made on a
PRO RATA basis unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Senior Notes to be redeemed at its
registered address. If any Senior Note is to be redeemed in part only, the
notice of redemption that relates to such Senior Note shall state the portion of
the principal amount thereof to be redeemed. A new Senior Note in a principal
amount equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Senior Note. On and after the
redemption date, interest will cease to accrue on Senior Notes or portions
thereof called for redemption.
GUARANTEES
The Company's obligations under the Senior Notes were guaranteed on the
Issue Date in the manner described below by the Company's existing Subsidiaries,
Lodestar Energy, Inc., Eastern Resources, Inc. and Industrial Fuels Minerals
Company, and, in the future, may be guaranteed by certain of the Company's
Restricted Subsidiaries. See "--Certain Covenants--Future Guarantees."
Each Guarantor unconditionally guarantees, on a senior basis, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Senior Notes, including
the payment of principal of and interest on the Senior Notes. The obligations of
each Guarantor are limited to the maximum amount which, after giving effect to
all other contingent and fixed liabilities of such Guarantor and after giving
effect to any collections from or payments made by or on behalf of any other
Guarantor in respect of the obligations of such other Guarantor under its
Guarantee or pursuant to its contribution obligations under the Indenture, will
result in the obligations of such Guarantor under the Guarantee not constituting
a fraudulent conveyance or fraudulent transfer under federal or state law. Each
Guarantor that makes a payment or distribution under a Guarantee shall be
entitled to a contribution from each other Guarantor in an amount PRO RATA,
based on the net assets of each Guarantor determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or to another Guarantor that is a Restricted Subsidiary without
limitation, or with other persons upon the terms and conditions set forth in the
Indenture. See "--Merger, Consolidation, Etc." In the event that either all of
80
the Capital Stock of a Guarantor is sold by the Company or one of the Restricted
Subsidiaries (whether by merger, stock purchase or otherwise) or all or
substantially all of the assets of a Guarantor are sold by such Guarantor and
such sale complies with the provisions set forth in "--Certain
Covenants--Limitation on Sale of Assets" and "--Certain Covenants--Change of
Control" and any other applicable provisions in the Indenture, the Guarantor's
Guarantee will be released.
RANKING
The indebtedness of the Company and the Guarantors evidenced by the Senior
Notes and the Guarantees rank senior in right of payment to all future senior
subordinated and subordinated indebtedness of the Company and the Guarantors,
respectively, and PARI PASSU with all other existing and future unsubordinated
indebtedness of the Company and the Guarantors, respectively. However, holders
of secured indebtedness and other secured obligations of the Company and the
Guarantors, such as the lenders under the New Senior Credit Facility and the
surety of the Performance Bonds, will have claims that effectively rank prior to
those of the Holders with respect to the assets securing such indebtedness.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee,
become liable, contingently or otherwise, with respect to, or otherwise become
responsible for the payment of (collectively "incur") any Indebtedness
(including Acquired Indebtedness) other than Permitted Indebtedness; PROVIDED
that the Company and the Guarantors may incur Indebtedness (including Acquired
Indebtedness) if: (A) no Default or Event of Default shall have occurred and be
continuing at the time of the proposed incurrence thereof or shall occur as a
result of such proposed incurrence, and (B) after giving pro forma effect to
such proposed incurrence (and the application of the net proceeds therefrom),
the Consolidated Fixed Charge Coverage Ratio of the Company is at least equal to
2.0 to 1.0. Notwithstanding the foregoing, a Restricted Subsidiary that is not a
Guarantor may incur Acquired Indebtedness to the extent such Indebtedness could
have been incurred by the Company and the Guarantors pursuant to the proviso in
the immediately preceding sentence.
(b) The Company and the Guarantors shall not, directly or indirectly, in any
event incur any Indebtedness which by its terms (or by the terms of any
agreement governing such Indebtedness) is subordinated to any other Indebtedness
of the Company or such Guarantor unless such Indebtedness is also by its terms
(or by the terms of any agreement governing such Indebtedness) made expressly
subordinated to the Senior Notes or the Guarantee of such Guarantor, as the case
may be, to the same extent and in the same manner as such Indebtedness is
subordinated to such other Indebtedness of the Company or such Guarantor.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, after the Issue Date (a) declare or pay any dividend
or make any distribution on the Company's Capital Stock or make any payment to
holders of such Capital Stock (other than dividends or distributions payable in
Qualified Capital Stock of the Company or repayment of Indebtedness except as
provided in clause (c)), (b) purchase, redeem or otherwise acquire or retire for
value any Capital Stock of the Company or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock, (c) purchase,
redeem, prepay, defease or otherwise acquire or retire for value, prior to any
scheduled maturity, scheduled repayment or scheduled sinking fund payment,
Indebtedness of the Company or any of the
81
Guarantors that is expressly subordinate in right of payment to the Senior Notes
or the Guarantee of such Guarantor, as the case may be, or (d) make any
Investment (excluding any Permitted Investment) (each of the foregoing actions
set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or (ii) Restricted Payments made subsequent to the Issue Date (the
amount expended for such purposes, if other than in cash, shall be the Fair
Market Value of such property proposed to be transferred by the Company or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment)
shall exceed the sum of:
(w) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the
Company earned subsequent to the Issue Date and prior to the date the
Restricted Payment occurs (treating such period as a single accounting
period);
(x) 100% of the aggregate net proceeds, including the Fair Market Value
of property other than cash, received by the Company from any person (other
than a Subsidiary of the Company) from the issuance and sale subsequent to
the Issue Date of Qualified Capital Stock of the Company (excluding (A)
Qualified Capital Stock paid as a dividend on any Capital Stock or as
interest on any Indebtedness, (B) any net proceeds from issuances and sales
financed directly or indirectly using funds borrowed from the Company or any
Subsidiary of the Company, until and to the extent such borrowing is repaid
and (C) any net proceeds from any Equity Offering which are used to redeem
the Senior Notes pursuant to, and in accordance with, the provisions
described under the caption "--Optional Redemption--Optional Redemption upon
Equity Offerings" above);
(y) 100% of the aggregate net proceeds, including the Fair Market Value
of property other than cash, received by the Company from any person (other
than a Subsidiary of the Company) from the issuance and sale of Disqualified
Capital Stock and/or Indebtedness, in each case that has been converted into
or exchanged for, pursuant to the terms of such Indebtedness, Qualified
Capital Stock of the Company after the Issue Date; and
(z) without duplication, the sum of (1) the aggregate amount returned in
cash on or with respect to Investments (other than Permitted Investments)
made subsequent to the Issue Date whether through interest payments,
principal payments, dividends or other distributions or payments, (2) the
net cash proceeds received by the Company or any Restricted Subsidiary from
the disposition of all or any portion of such Investments (other than to a
Subsidiary of the Company) and (3) upon redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary, the Fair Market Value of such
Subsidiary; PROVIDED, HOWEVER, that the sum of clauses (1), (2) and (3)
above shall not exceed the aggregate amount of all such Investments made
subsequent to the Issue Date.
The foregoing provisions shall not prohibit:
(1) the payment of any dividend within 60 days after the date of its
declaration if the dividend would have been permitted on the date of
declaration;
(2) the acquisition of Capital Stock of the Company or Indebtedness of
the Company or any Guarantor either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of
net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of shares of Qualified Capital Stock of the
Company;
(3) the acquisition of Indebtedness of the Company or any Guarantor that
is expressly subordinate in right of payment to the Senior Notes or such
Guarantor's Guarantee, as the case may be, either (i) solely in exchange for
Indebtedness of the Company or such Guarantor which is expressly subordinate
in right of payment to the Senior Notes or such Guarantor's Guarantee, as
the case may be, at least to the extent that the Indebtedness being acquired
is subordinated to the Senior Notes or such Guarantor's Guarantee, as the
case may be, and has no scheduled principal prepayment
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dates prior to the scheduled final maturity date of the Indebtedness being
exchanged or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of
Indebtedness of the Company or such Guarantor which is expressly subordinate
in right of payment to the Senior Notes or such Guarantor's Guarantee, as
the case may be, at least to the extent that the Indebtedness being acquired
is subordinated to the Senior Notes or such Guarantor's Guarantee, as the
case may be, and has no scheduled principal prepayment dates prior to the
scheduled final maturity date of the Indebtedness being refinanced;
(4) the making of payments by the Company or any of the Restricted
Subsidiaries to Renco (A) no earlier than ten days prior to the date on
which Renco is required to make its payments to the Internal Revenue Service
or the applicable state taxing authority, as the case may be, pursuant to a
tax sharing agreement (which tax sharing agreement provides that the
payments thereunder shall not exceed the amount the Company and its
Subsidiaries would have been required to pay for taxes on a stand-alone
basis, except that the Company and its Subsidiaries will not have the
benefit of any of its tax loss carryforwards unless such tax losses were a
result of timing differences between the Company's and its Subsidiaries'
accounting for tax and financial reporting purposes, and which tax sharing
agreement also provides that transactions between the Company and Renco and
Renco's other Subsidiaries are accounted for on a cash basis and not on an
accrual basis) and (B) to reimburse Renco for out of pocket insurance or
surety bond payments made by Renco on behalf of the Company and its
Subsidiaries;
(5) the payment by the Company or any of the Restricted Subsidiaries of
a management fee to Renco in an amount not to exceed $1.2 million in any
fiscal year; and
(6) the payment by the Company of (i) a dividend to Renco on the Issue
Date in the aggregate amount not to exceed $28.0 million and (ii) accrued
and unpaid management fees to Renco on the Issue Date in an aggregate amount
not to exceed $700,000;
PROVIDED that in the case of clauses (2), (3) and (5), no Default or Event of
Default shall have occurred and be continuing at the time of such payment or as
a result thereof.
In determining the aggregate amount of Restricted Payments permissible under
clause (ii) of the first paragraph of this section, amounts expended, incurred
or outstanding pursuant to clauses (1) and (2) (but not pursuant to clauses (3),
(4), (5) or (6)) of the second paragraph of this section shall be included as
Restricted Payments; PROVIDED that any proceeds received from the issuance of
Qualified Capital Stock pursuant to clause (2) of the second paragraph of this
section shall be included in calculating the amount referred to in clause (x) or
clause (y), as the case may be, of the first paragraph of this section.
LIMITATION ON SALE OF ASSETS
The Company will not, and will not permit any of the Restricted Subsidiaries
to, consummate any Asset Sale unless (i) such Asset Sale is for at least Fair
Market Value, (ii) at least 80% of the consideration therefrom received by the
Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents
and (iii) the Company or such Restricted Subsidiary shall apply the Net Cash
Proceeds of such Asset Sale within 270 days of receipt thereof, as follows:
(a) first, to repay (and, in the case of any revolving credit facility,
to the extent required by such revolving credit facility, effect a permanent
reduction in the commitment thereunder) any Indebtedness secured by the
assets involved in such Asset Sale or otherwise required to be repaid with
the proceeds thereof; and
(b) second, with respect to any Net Cash Proceeds remaining after
application pursuant to the preceding paragraph (a) (the "Available
Amount"), the Company shall make an offer to purchase (the
83
"Asset Sale Offer") from all Holders of Senior Notes, up to a maximum
principal amount (expressed as a multiple of $1,000) of Senior Notes equal
to the Available Amount at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date
of purchase; PROVIDED, HOWEVER, that the Company will not be required to
apply pursuant to this paragraph (b) Net Cash Proceeds received from any
Asset Sale if, and only to the extent that, such Net Cash Proceeds are
applied to a Related Business Investment within 270 days of such Asset Sale;
PROVIDED, FURTHER, that if at any time any non-cash consideration received
by the Company or any Restricted Subsidiary, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash, then such conversion or disposition shall be deemed to
constitute an Asset Sale under the Indenture and the Net Cash Proceeds
thereof shall be applied in accordance with this "Limitation on Sale of
Assets" covenant; and PROVIDED, FURTHER, that the Company may defer the
Asset Sale Offer until there is an aggregate unutilized Available Amount
equal to or in excess of $10.0 million resulting from one or more Asset
Sales (at which time, the entire unutilized Available Amount, and not just
the amount in excess of $10.0 million, shall be applied as required pursuant
to this paragraph). To the extent the Asset Sale Offer is not fully
subscribed to by Holders of the Senior Notes, the Company and the Restricted
Subsidiaries may retain such unutilized portion of the Available Amount and
use it for any purpose not prohibited by the Indenture.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a person in a transaction permitted under "--Merger, Consolidation,
Etc." below, the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the Fair Market Value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notice of an Asset Sale Offer will be mailed to the record Holders as shown
on the register of Holders not less than 30 days nor more than 60 days before
the payment date for the Asset Sale Offer, with a copy to the Trustee, and shall
comply with the procedures set forth in the Indenture. Upon receiving notice of
the Asset Sale Offer, Holders may elect to tender their Senior Notes in whole or
in part in integral multiples of $1,000 principal amount at maturity in exchange
for cash. To the extent Holders properly tender Senior Notes in an amount
exceeding the Available Amount, Senior Notes of tendering Holders will be
repurchased on a PRO RATA basis (based on amounts tendered). An Asset Sale Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
If an offer is made to repurchase the Senior Notes pursuant to an Asset Sale
Offer, the Company will comply with all tender offer rules under state and
Federal securities laws, including, but not limited to, Section 14(e) under the
Exchange Act and Rule 14e-1 thereunder, to the extent applicable to such offer.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company shall be obligated
to make an offer to purchase (a "Change of Control Offer"), and shall, subject
to the provisions described below, purchase, on a business day (the "Change of
Control Purchase Date") not more than 60 nor less than 45 days following the
occurrence of the Change of Control, all of the then outstanding Senior Notes at
a purchase price (the "Change of Control Purchase Price") equal to 101% of the
principal amount of the Senior Notes plus accrued and unpaid interest thereon to
the date of purchase. The Company shall, subject to the provisions described
below, be required to purchase all Senior Notes validly tendered into the Change
of Control Offer and not withdrawn. The Change of Control Offer is required to
remain open for at least 20 business days and until the close of business on the
Change of Control Purchase Date.
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In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, mail to each Holder of
Senior Notes notice of the Change of Control Offer, which notice shall govern
the terms of the Change of Control Offer and shall state, among other things,
the procedures that Holders of Senior Notes must follow to accept the Change of
Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Senior Notes that might be delivered by Holders of
Senior Notes seeking to accept the Change of Control Offer. The Company shall
not be required to make a Change of Control Offer upon a Change of Control if a
third party makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements applicable to a Change of Control
Offer made by the Company and purchases all Senior Notes validly tendered and
not withdrawn under such Change of Control Offer.
In the event that a Change of Control occurs and the Company is required to
purchase the Senior Notes as described above, the Company will comply with all
tender offer rules under state and Federal securities laws, including, but not
limited to, Section 14(e) under the Exchange Act and Rule 14e-1 thereunder, to
the extent applicable to such offer.
LIMITATION ON LIENS
The Company will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Liens
upon any properties or assets of the Company (including, without limitation, any
Capital Stock of a Restricted Subsidiary) or any of the Restricted Subsidiaries
whether owned on the Issue Date or acquired after the Issue Date, or on any
income or profits therefrom, or assign or otherwise convey any right to receive
income or profits thereon other than (i) Liens existing on the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date, (ii) Liens
on properties and assets of the Company and the Restricted Subsidiaries existing
from time to time securing Indebtedness of the Company and the Restricted
Subsidiaries under the New Senior Credit Facility and securing obligations of
the Company and the Restricted Subsidiaries from time to time under performance
bonds, surety bonds or appeal bonds or other obligations of a like nature
incurred in the ordinary course of business and (iii) Permitted Liens.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to: (a) pay dividends or make any other distributions on its Capital
Stock, or any other interest or participation in, or measured by, its profits,
owned by the Company or by any Restricted Subsidiary, or pay any Indebtedness
owed to the Company or any Restricted Subsidiary; (b) make loans or advances to
the Company or any Restricted Subsidiary; or (c) transfer any of its properties
or assets to the Company or to any Restricted Subsidiary, except for such
encumbrances or restrictions existing under or by reason of: (i) applicable law;
(ii) the Indenture; (iii) customary non-assignment provisions of any lease
governing a leasehold interest of the Company or any Restricted Subsidiary; (iv)
any instrument governing Indebtedness of a person acquired by the Company or any
Restricted Subsidiary at the time of such acquisition, which encumbrance or
restriction is not applicable to any person, or the properties or assets of any
person, other than the person or its Subsidiaries so acquired; (v) any written
agreement existing on the Issue Date or amendments or modifications thereto;
PROVIDED that no such agreement shall be modified or amended in such a manner as
to make the encumbrance or restriction more restrictive than as in effect on the
Issue Date; (vi) Indebtedness existing and as in effect on the Issue Date,
including, without limitation, the New Senior Credit Facility or any
refinancing, refunding, replacement or extensions thereof, PROVIDED that any
such encumbrance or restriction contained in any refinancing, refunding,
replacement or extension of the New Senior Credit Facility shall be no more
85
restrictive than such encumbrance or restriction contained in the New Senior
Credit Facility as in effect on the Issue Date; and (vii) Indebtedness incurred
in accordance with the Indenture; PROVIDED that such encumbrance or restriction
shall be no more restrictive than any encumbrance or restriction contained in
the New Senior Credit Facility as in effect on the Issue Date.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
(a) The Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with or for the
benefit of an Affiliate of the Company or any Restricted Subsidiary (other than
transactions between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries) (an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under (b) below and (y) Affiliate Transactions (including
lease transactions) on terms that are no less favorable to the Company or the
relevant Restricted Subsidiary in the aggregate than those that might reasonably
have been obtained in a comparable transaction by the Company or such Restricted
Subsidiary on an arm's-length basis (as determined in good faith by the Board of
Directors of the Company, as evidenced by a Board Resolution) from a person that
is not an Affiliate; PROVIDED that except as otherwise provided under (b) below,
neither the Company nor any of the Restricted Subsidiaries shall enter into an
Affiliate Transaction or series of related Affiliate Transactions involving or
having a value of more than $5.0 million unless the Company or such Restricted
Subsidiary, as the case may be, has received an opinion from an Independent
Financial Advisor, with a copy thereof to the Trustee, to the effect that the
financial terms of such Affiliate Transaction are fair and reasonable to the
Company or such Restricted Subsidiary, as the case may be, and such terms are no
less favorable to the Company or such Restricted Subsidiary, as the case may be,
than those that could be obtained in a comparable transaction on an arm's-length
basis with a person that is not an Affiliate.
(b) The foregoing provisions shall not apply to (i) any Restricted Payment
that is made in compliance with the covenant entitled "Limitation on Restricted
Payments," (ii) payments by the Company or any of the Restricted Subsidiaries to
Renco of the amounts set forth in clauses (4), (5) and (6) of the second
paragraph of the covenant entitled "Limitation on Restricted Payments," (iii)
repayment of Indebtedness, including accrued interest thereon, owing to Renco as
of the Issue Date with the net proceeds of the Old Notes Offering, (iv)
repayment of Indebtedness owing to Renco incurred after the Issue Date in
accordance with its terms, and (v) reasonable and customary regular fees to
directors of the Company and the Restricted Subsidiaries who are not employees
of the Company and the Restricted Subsidiaries.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary to issue any Preferred
Stock (except to the Company or a Restricted Subsidiary), nor will the Company
permit any person (other than the Company or a Restricted Subsidiary) to hold
any Preferred Stock of a Restricted Subsidiary.
FUTURE GUARANTEES
If the Company or any of the Restricted Subsidiaries transfers or causes to
be transferred, in one transaction or a series of related transactions, any
property to any domestic Restricted Subsidiary that is not a Guarantor, or if
the Company or any of the Restricted Subsidiaries shall organize, acquire or
otherwise invest in another Restricted Subsidiary, in each case having total
assets with a book value in excess of $1.0 million, then such transferee or
acquired or other Restricted Subsidiary shall (i) execute and deliver to the
Trustee a supplemental indenture in form reasonably satisfactory to the Trustee
pursuant to which such Restricted Subsidiary shall unconditionally guarantee all
of the Company's obligations under the Senior Notes and the Indenture on the
terms set forth in the Indenture and (ii) deliver to the Trustee an Opinion of
Counsel that such supplemental indenture has been duly authorized, executed and
delivered
86
by such Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary. Thereafter, such
Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture.
CONDUCT OF BUSINESS
The Company and the Restricted Subsidiaries will not engage in any
businesses which are not the same, similar or reasonably related to the
businesses in which the Company and the Restricted Subsidiaries are engaged on
the Issue Date.
REPORTS
So long as any Senior Note is outstanding, the Company will file with the
Commission and, within 15 days after it files them with the Commission, file
with the Trustee and mail or cause the Trustee to mail to the Holders at their
addresses as set forth in the register of the Senior Notes copies of the annual
reports on Form 10-K and of the information, documents and other reports which
the Company is required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act or which the Company would be required to file with
the Commission if the Company then had a class of securities registered under
the Exchange Act. Such financial information shall include annual reports
containing consolidated financial statements and notes thereto, together with an
opinion thereon expressed by an independent public accounting firm, management's
discussion and analysis of financial condition and results of operations as well
as quarterly reports containing unaudited condensed consolidated financial
statements for the first three quarters of every fiscal year.
MERGER, CONSOLIDATION, ETC.
The Company will not, in a single transaction or series of related
transactions, consolidate or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets to,
any person or adopt a Plan of Liquidation unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the person (if other
than the Company) formed by such consolidation or the person into which the
Company is merged or the person which acquires by sale, assignment, transfer,
conveyance or otherwise all or substantially all of the assets of the Company or
in the case of a Plan of Liquidation, the person to which assets of the Company
have been transferred (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the Trustee), executed and delivered to the Trustee,
the due and punctual payment of the principal of, and premium, if any, and
interest on, all of the Senior Notes, and the performance of every covenant of
the Indenture, the Senior Notes and the Registration Rights Agreement on the
part of the Company to be performed or observed; (ii) immediately after giving
effect to such transaction and the assumption contemplated by clause (y) above
(including giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred in connection with or in respect of such
transaction), the Company (in the case of clause (1) of the foregoing clause
(i)) or such person (in the case of clause (2) thereof) shall be able to incur
(assuming a market rate of interest with respect thereto) at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) as if it were the
Company under paragraph (a) of "--Certain Covenants--Limitation on Indebtedness"
above; (iii) immediately before and after giving effect to such transaction and
the assumption contemplated by clause (y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; (iv) the Company or such person
shall have delivered to the Trustee (A) an Officers' Certificate and an Opinion
of Counsel (which counsel shall not be in-house counsel of the Company) each
stating that such consolidation, merger, conveyance, transfer or lease or Plan
of Liquidation and, if a supplemental indenture is
87
required in connection with such transaction, such supplemental indenture,
comply with this provision of the Indenture and that all conditions precedent in
the Indenture relating to such transaction have been satisfied and (B) a
certificate from the Company's independent certified public accountants stating
that the Company has made the calculations required by clause (ii) above in
accordance with the terms of the Indenture; and (v) neither the Company nor any
Restricted Subsidiary nor such person, as the case may be, would thereupon
become obligated with respect to any Indebtedness (including Acquired
Indebtedness), nor any of its property or assets subject to any Lien, unless the
Company or such Restricted Subsidiary or such person, as the case may be, could
incur such Indebtedness (including Acquired Indebtedness) or create such Lien
under the Indenture (giving effect to such person being bound by all the terms
of the Indenture).
Notwithstanding the foregoing, (i) the merger of the Company with an
Affiliate incorporated solely for the purpose of incorporating the Company in
another U.S. jurisdiction shall be permitted and (ii) the merger of the Company
and any Restricted Subsidiary shall be permitted.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "--Certain
Covenants--Limitation on Sale of Assets") will not, and the Company will not
cause or permit any Guarantor to, consolidate with or merge with or into or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets to any person (other than a merger of the
Company with any Guarantor or a merger of Guarantors or a sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the assets of a Guarantor to the Company or to any other Guarantor) unless: (i)
the entity formed by or surviving any such consolidation or merger (if other
than the Guarantor) or to which such sale, lease, conveyance or other
disposition shall have been made is a corporation organized and validly existing
under the laws of the United States or any state thereof or the District of
Columbia; (ii) such entity assumes by supplemental indenture all of the
obligations of such Guarantor under such Guarantee; and (iii) immediately after
giving effect to such transaction, no Default or Event of Default shall have
occurred and be continuing.
Upon any such consolidation, merger, conveyance, lease or transfer in
accordance with the foregoing, the successor person formed by such consolidation
or into which the Company or any Guarantor is merged or to which such
conveyance, lease or transfer is made will succeed to, and be substituted for,
and may exercise every right and power of, the Company or such Guarantor, as the
case may be, under the Indenture with the same effect as if such successor had
been named as the Company or such Guarantor, as the case may be, therein, and
thereafter (except in the case of a sale, assignment, transfer, lease,
conveyance or other disposition) the predecessor corporation will be relieved of
all further obligations and covenants under the Indenture and the Senior Notes,
in the case of the Company, or its Guarantee, in the case of a Guarantor.
88
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(a) the Company defaults in the payment of interest on the Senior Notes
when the same becomes due and payable and the Default continues for a period
of 30 days;
(b) the Company defaults in the payment of the stated principal amount
of the Senior Notes when the same becomes due and payable at maturity, upon
acceleration or redemption pursuant to an offer to purchase required under
the Indenture or otherwise;
(c) the Company or any of the Guarantors fails to comply in all material
respects with any of their other agreements contained in the Senior Notes or
the Indenture (including, without limitation, under the provisions of
"--Certain Covenants--Change of Control," "--Certain Covenants--Limitation
on Sale of Assets" and "--Merger, Consolidation, Etc."), and the Default
continues for the period and after the notice specified below;
(d) there shall be any default or defaults in the payment of principal
or interest under one or more agreements, instruments, mortgages, bonds,
debentures or other evidences of Indebtedness under which the Company or any
Restricted Subsidiary then has outstanding Indebtedness in excess of $7.5
million, individually or in the aggregate;
(e) there shall be any default or defaults under one or more agreements,
instruments, mortgages, bonds, debentures or other evidences of Indebtedness
under which the Company or any Restricted Subsidiary then has outstanding
Indebtedness in excess of $7.5 million, individually or in the aggregate,
and such default or defaults have resulted in the acceleration of the
maturity of such Indebtedness;
(f) the Company or any of the Restricted Subsidiaries fails to perform
(after giving effect to any applicable grace periods) any term, covenant,
condition or provision of one or more agreements, instruments, mortgages,
bonds, debentures or other evidences of Indebtedness under which the Company
or any of the Restricted Subsidiaries then has outstanding Indebtedness in
excess of $7.5 million, individually or in the aggregate, and such failure
to perform results in the commencement of judicial proceedings to foreclose
upon any assets of the Company or any of the Restricted Subsidiaries
securing such Indebtedness or the holders of such Indebtedness shall have
exercised any right under applicable law or applicable security documents to
take ownership of any such assets in lieu of foreclosure;
(g) one or more judgments, orders or decrees for the payment of money
which either individually or in the aggregate at any one time exceed $7.5
million shall be rendered against the Company or any of the Restricted
Subsidiaries by a court of competent jurisdiction and shall remain
undischarged and unbonded for a period (during which execution shall not be
effectively stayed) of 60 consecutive days after such judgment, order or
decree becomes final and nonappealable;
(h) the Company or any Significant Subsidiary (1) admits in writing its
inability to pay its debts generally as they become due, (2) commences a
voluntary case or proceeding under any Bankruptcy Law with respect to
itself, (3) consents to the entry of a judgment, decree or order for relief
against it in an involuntary case or proceeding under any Bankruptcy Law,
(4) consents to the appointment of a Custodian of it or for substantially
all of its property, (5) consents to or acquiesces in the institution of a
bankruptcy or an insolvency proceeding against it, (6) makes a general
assignment for the benefit of its creditors or (7) takes any corporate
action to authorize or effect any of the foregoing;
(i) a court of competent jurisdiction enters a judgment, decree or order
for relief in respect of the Company or any Significant Subsidiary in an
involuntary case or proceeding under any Bankruptcy Law which shall (1)
approve as properly filed a petition seeking reorganization, arrangement,
adjustment or composition in respect of the Company or any Significant
Subsidiary, (2) appoint a
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Custodian of the Company or any Significant Subsidiary or for substantially
all of its property or (3) order the winding-up or liquidation of its
affairs, and such judgment, decree or order shall remain unstayed and in
effect for a period of 60 consecutive days; or
(j) any of the Guarantees of a Significant Subsidiary ceases to be in
full force and effect or any of such Guarantees is declared to be null and
void and unenforceable or any of such Guarantees is found to be invalid, or
any such Guarantor denies its liability under its Guarantee (other than by
reason of release of a Guarantor in accordance with the terms of the
Indenture).
A Default under clause (c) above (other than in the case of any Default
under the provisions of "--Certain Covenants--Limitation on Sale of Assets,"
"--Certain Covenants--Change of Control" or "--Merger, Consolidation, Etc.,"
which Defaults shall be Events of Default without the notice and without the
passage of time specified in this paragraph) is not an Event of Default until
the Trustee notifies the Company, or the Holders of at least 25% in principal
amount of the outstanding Senior Notes notify the Company and the Trustee, of
the Default and the Company does not cure the Default within 30 days after
receipt of the notice. The notice must specify the Default, demand that it be
remedied and state that the notice is a "Notice of Default." Such notice shall
be given by the Trustee if so requested by the Holders of at least 25% in
principal amount of the Senior Notes then outstanding.
If an Event of Default (other than an Event of Default specified in clause
(h) or (i) above) occurs and is continuing, then and in every such case the
Trustee or the Holders of not less than 25% in aggregate principal amount of the
then outstanding Senior Notes may declare the unpaid principal of, premium, if
any, and accrued and unpaid interest on, all the Senior Notes then outstanding
to be due and payable, by a notice in writing to the Company (and to the
Trustee, if given by Holders) and upon such declaration such principal amount,
premium, if any, and accrued and unpaid interest will become immediately due and
payable, notwithstanding anything contained in the Indenture or the Senior Notes
to the contrary. If an Event of Default specified in clause (h) or (i) above
occurs, all unpaid principal of, and premium, if any, and accrued and unpaid
interest on, the Senior Notes then outstanding will ipso facto become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
Holders of the Senior Notes may not enforce the Indenture or the Senior
Notes except as provided in the Indenture. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Senior Notes have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee. The Trustee
may withhold from Holders notice of any continuing Default or Event of Default
(except a Default or Event of Default in the payment of principal of or premium,
if any, or interest on the Senior Notes or that resulted from the failure to
comply with the provisions of "-- Certain Covenants--Change of Control" or
"--Merger, Consolidation, Etc.") if it determines that withholding notice is in
their interest. The Holders of a majority in aggregate principal amount of the
Senior Notes then outstanding by notice to the Trustee may rescind an
acceleration and its consequences if all existing Events of Default (other than
the nonpayment of principal of and premium, if any, and interest on the Senior
Notes which has become due solely by virtue of such acceleration) have been
cured or waived and if the rescission would not conflict with any judgment or
decree. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding may, on behalf of the Holders of all the Senior Notes, waive
any past Default or Event of Default under the Indenture and its consequences,
except a Default in the payment of principal of or premium, if any, or interest
on the Senior Notes or in respect of a covenant or provision of the Indenture
which cannot be modified or amended without the consent of all Holders.
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Under the Indenture, the Company is required to provide an Officers'
Certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (PROVIDED that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof. In addition, for each fiscal year, the
Company's independent certified public accountants are required to certify to
the Trustee that they have reviewed the terms of the Indenture and the Senior
Notes as they relate to accounting matters and whether, during the course of
their audit examination, any Default or Event of Default has come to their
attention, and specifying the nature and period of existence of any such Default
or Event of Default.
AMENDMENT, SUPPLEMENT AND WAIVER
From time to time, the Company, the Guarantors and the Trustee may, without
the consent of the Holders, amend, waive or supplement the Indenture or the
Senior Notes for certain specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies, maintaining the qualification of
the Indenture under the TIA or making any change that does not adversely affect
the rights of any Holder. In addition, the Indenture contains provisions
permitting the Company, the Guarantors and the Trustee, with the consent of the
Holders of not less than a majority in aggregate principal amount of the then
outstanding Senior Notes, to enter into any supplemental indenture for the
purpose of adding, changing or eliminating any of the provisions of the
Indenture or of modifying in any manner the rights of the Holders under the
Indenture; PROVIDED that no such supplemental indenture may without the consent
of the Holder of each outstanding Senior Note affected thereby: (i) reduce the
amount of Senior Notes whose Holders must consent to an amendment or waiver;
(ii) reduce the rate of, or extend the time for payment of, interest, including
defaulted interest, on any Senior Note; (iii) reduce the principal of or premium
on or change the fixed maturity of any Senior Note; (iv) make the principal of,
or interest on, any Senior Note payable in money other than as provided for in
the Indenture and the Senior Notes; (v) make any change in provisions relating
to waivers of defaults, the ability of Holders to enforce their right under the
Indenture or in the matters discussed in these clauses (i) through (ix); (vi)
waive a default in the payment of principal of or interest on, or redemption or
repurchase payment with respect to, any Senior Notes, other than a payment
required under the "Limitation on Sale of Assets" covenant and the "Change of
Control" covenant; (vii) adversely affect the ranking of the Senior Notes or the
Guarantees; (viii) change the Maturity Date or alter the redemption or
repurchase provisions in a manner adverse to Holders other than a redemption or
repurchase pursuant to the "Limitation on Sale of Assets" covenant and the
"Change of Control" covenant; or (ix) release the Guarantee of any Significant
Subsidiary.
DISCHARGE; DEFEASANCE
The Indenture provides that the Company and the Guarantors may terminate
their obligations under the Senior Notes, the Guarantees and the Indenture if:
(i) all Senior Notes previously authenticated and delivered have been delivered
to the Trustee for cancellation or the Company and the Guarantors have paid all
sums payable by them thereunder, or (ii) the Company has irrevocably deposited
or caused to be deposited with the Trustee or the Paying Agent and conveyed all
right, title and interest for the benefit of the Holders of such Senior Notes,
under the terms of an irrevocable trust agreement in form and substance
satisfactory to the Trustee, as trust funds in trust solely for the benefit of
the Holders for that purpose, money or U.S. government obligations maturing as
to principal and interest in such amounts and at such times as are sufficient
without consideration of any reinvestment of such interest to pay principal of,
premium, if any, and interest on such outstanding Senior Notes to maturity;
PROVIDED that, among other things, the Company shall have delivered to the
Trustee (i) either (a) in the case of a legal defeasance, a ruling directed to
the Trustee received from the Internal Revenue Service to the effect that the
Holders of such Senior Notes will not recognize income, gain or loss for Federal
income tax purposes as a result of the Company's exercise of its option under
the defeasance provision of the Indenture and will be subject to Federal income
tax on the same amount and in the same manner and at the same times as would
have
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been the case if such option had not been exercised or (b) an Opinion of Counsel
to the same effect as the ruling described in clause (a) above and, in the case
of a legal defeasance, accompanied by a ruling to that effect published by the
Internal Revenue Service, unless there has been a change in the applicable
Federal income tax since the date of the Indenture such that a ruling from the
Internal Revenue Service is no longer required, and (ii) an Opinion of Counsel
to the effect that, assuming no intervening bankruptcy of the Company between
the date of deposit and the 91st day following the date of deposit and that no
Holder is an insider of the Company, after the passage of 90 days following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally. Certain obligations of the Company and the Guarantors under
the Indenture or the Senior Notes, including the payment of interest and
principal, shall remain in full force and effect until such Senior Notes have
been paid in full. Notwithstanding the foregoing, the ruling of the Internal
Revenue Service and the Opinion of Counsel required by clause (i) above with
respect to a legal defeasance need not be delivered if all Senior Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable on the maturity date within one year or
(z) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company.
GOVERNING LAW
The Indenture provides that it, the Senior Notes and the Guarantees are
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
State Street Bank and Trust Company serves as Trustee under the Indenture.
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent person would exercise
or use under the circumstances in the conduct of such person's own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or the
Guarantors, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the Trustee will be permitted to engage in other
transactions; PROVIDED that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person or any of its
Subsidiaries existing at the time such person becomes a Subsidiary (Restricted
Subsidiary, in the case of the Company) or assumed in connection with the
acquisition of assets from such person, including, without limitation,
Indebtedness incurred by such person in connection with, or in anticipation or
contemplation of, such person becoming a Subsidiary (Restricted Subsidiary, in
the case of the Company) or such acquisition.
"Affiliate" of any specified person means any other person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by
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contract or otherwise; and the terms "affiliated", "controlling" and
"controlled" have meanings correlative of the foregoing. For purposes of
"--Certain Covenants--Limitation on Transactions with Affiliates," the term
"Affiliate" shall include any person who, as a result of any transaction
described therein, would become an Affiliate.
"Asset Acquisition" means (i) an Investment by the Company or any Restricted
Subsidiary in any other person pursuant to which such person shall become a
Restricted Subsidiary or a Subsidiary of a Restricted Subsidiary or shall be
merged with the Company or any Restricted Subsidiary or (ii) the acquisition by
the Company or any Restricted Subsidiary of the assets of any person which
constitute all or substantially all of the assets of such person or any division
or line of business of such person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease, assignment or other transfer for value by the Company or any of
the Restricted Subsidiaries (including, without limitation, any Sale/leaseback)
to any person, in one transaction or a series of related transactions, of (i)
any Capital Stock of any Restricted Subsidiary; (ii) all or substantially all of
the properties and assets of any division or line of business of the Company or
any Restricted Subsidiary; or (iii) other than in the ordinary course of
business, any other properties or assets of the Company or any Restricted
Subsidiary in excess of $1.0 million. For the purposes of this definition, the
term "Asset Sale" shall not include (i) any sale, issuance, conveyance,
transfer, lease or other disposition of properties or assets that is consummated
in accordance with the provisions of "--Merger, Consolidation, Etc." above and
(ii) the sale of inventory in the ordinary course of business.
"Bankruptcy Law" means Title 11 of the U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Capital Expenditures" shall mean payments for any assets, or improvements,
replacements, substitutions or additions thereto, that have a useful life of
more than one year and which, in accordance with GAAP consistently applied, are
required to be capitalized (as opposed to expensed in the period in which the
payment occurred).
"Capital Lease," as applied to any person, means any lease of (or any
agreement conveying the right to use) any property (whether real, personal or
mixed) by such person as lessee which, in conformity with GAAP, is required to
be accounted for as a capital lease on the balance sheet of such person.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participation or other equivalents (however designated) of such
person's capital stock, whether outstanding at the Issue Date or issued after
the Issue Date, and any and all rights, warrants or options exchangeable for or
convertible into such capital stock (but excluding any debt security that is
exchangeable for or convertible into such capital stock).
"Capitalized Lease Obligation" means, as to any person, the obligations of
such person under a Capital Lease and, for purposes of the Indenture, the amount
of such obligations at any date shall be the capitalized amount of such
obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within two years from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within two years from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") or Moody's Investors Service, Inc.
("Moody's"); (iii) commercial paper maturing no more than two years from the
date of creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or
bankers' acceptances maturing within two years from the date of acquisition
thereof issued by any commercial bank organized under the laws of the United
93
States of America or any state thereof or the District of Columbia or any U.S.
branch of a foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $500,000,000; (v) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above. Notwithstanding the foregoing,
for purposes of clause (i) of the definition of "Permitted Investment," 20% of
the Cash Equivalents may include securities having a rating of at least BBB by
S&P and Baa by Moody's.
"Change of Control" means the occurrence of one or more of the following
events: (i) any direct or indirect sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or substantially all
of the assets of the Company or Renco to any person or group of related persons
for purposes of Section 13(d) of the Exchange Act (a "Group") (other than a
Permitted Holder or a Group controlled by a Permitted Holder), together with any
Affiliates thereof (whether or not otherwise in compliance with the provisions
of the Indenture); (ii) the approval by the holders of Capital Stock of the
Company or Renco, as the case may be, of any plan or proposal for the
liquidation or dissolution of the Company, or Renco, as the case may be (whether
or not otherwise in compliance with the provisions of the Indenture); (iii) the
acquisition in one or more transactions of "beneficial ownership" (within the
meaning of Rules 13d-3 and 13d-5 under the Exchange Act, except that a person
shall be deemed to have "beneficial ownership" of all securities that such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time) by any person, entity or Group (other than a
Permitted Holder or a Group controlled by any Permitted Holder) of any Capital
Stock of the Company or Renco such that, as a result of such acquisition, such
person, entity or Group either (A) beneficially owns (within the meaning of
Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, more than
50% of the Company's or Renco's then outstanding voting securities entitled to
vote on a regular basis in an election for a majority of the Board of Directors
of the Company or Renco or (B) otherwise has the ability to elect, directly or
indirectly, a majority of the members of the Company's or Renco's Board of
Directors; or (iv) the shareholders of Renco as of the Issue Date and the
Permitted Holders shall cease to own at least 50% of the equity of Renco owned
by such shareholders on the Issue Date.
"Commission" means the Securities and Exchange Commission.
"Consolidated EBITDA" means, with respect to any person, for any period, the
sum (without duplication) of (i) Consolidated Net Income, (ii) to the extent
Consolidated Net Income has been reduced thereby, all income taxes of such
person and its Subsidiaries (Restricted Subsidiaries, in the case of the
Company) paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or non-recurring gains or
losses), Consolidated Interest Expense, amortization expense (including
amortization of deferred financing costs) and depletion and depreciation expense
and (iii) other non-cash items (other than non-cash interest) reducing
Consolidated Net Income (including, without limitation, any non-cash charges in
respect of post-employment benefits for health care, life insurance and
long-term disability benefits required in accordance with GAAP) less other
non-cash items increasing Consolidated Net Income, all as determined on a
consolidated basis for such person and its Subsidiaries (Restricted
Subsidiaries, in the case of the Company) in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
person, the ratio of Consolidated EBITDA of such person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such person for the Four Quarter Period. For purposes of this definition, if the
Transaction Date occurs prior to the date on which four full fiscal quarters
have elapsed subsequent to the Issue Date and financial statements with respect
thereto are available, "Consolidated EBITDA" and "Consolidated Fixed Charges"
shall be calculated, in the case of the Company, after giving effect on a pro
forma basis to the issuance of the Senior Notes and the application of the net
proceeds therefrom as if the Senior Notes were issued on the
94
first day of the Four Quarter Period. In addition to and without limitation of
the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence of any
Indebtedness (and the application of the net proceeds therefrom) of such person
or any of its Subsidiaries (Restricted Subsidiaries, in the case of the Company)
giving rise to the need to make such calculation and any incurrence of other
Indebtedness at any time on or after the first day of the Four Quarter Period
and on or prior to the Transaction Date (the "Reference Period"), as if such
incurrence occurred on the first day of the Reference Period and (ii) any Asset
Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
person or one of its Subsidiaries (Restricted Subsidiaries, in the case of the
Company) (including any person who becomes a Subsidiary (Restricted Subsidiary,
in the case of the Company) as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness) occurring during
the Reference Period, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Indebtedness or Acquired
Indebtedness) occurred on the first day of the Reference Period. If such person
or any of its Subsidiaries (Restricted Subsidiaries, in the case of the Company)
directly or indirectly guarantees Indebtedness of a third person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if such person or any Subsidiary (Restricted Subsidiary, in the case of the
Company) of such person had directly incurred or otherwise assumed such
guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed
Charges" for purposes of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on Indebtedness determined on a fluctuating basis as of the Transaction
Date and which will continue to be so determined thereafter shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date, and (2) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Rate
Protection Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any person for any
period, the sum of, without duplication, the amounts for such period, taken as a
single accounting period, of (i) Consolidated Interest Expense of such person
(net of any interest income) less non-cash amortization of deferred financing
costs and (ii) the product of (x) the amount of all dividends declared and paid
on Preferred Stock of such person during such period times (y) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current effective consolidated Federal, state, local and foreign tax rate
(expressed as a decimal number between 1 and 0) of such person during such
period (as reflected in the audited consolidated financial statements of such
person for the most recently completed fiscal year).
"Consolidated Interest Expense" means, with respect to any person for any
period, without duplication, the sum of (i) the interest expense of such person
and its Subsidiaries (Restricted Subsidiaries, in the case of the Company) for
such period as determined on a consolidated basis in accordance with GAAP
consistently applied, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation and (d) all accrued interest, and (ii) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by such person and its Subsidiaries (Restricted Subsidiaries, in
the case of the Company) during such period as determined on a consolidated
basis in accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such person and its Subsidiaries (Restricted
Subsidiaries, in the case of the Company), on a consolidated basis for such
period determined in accordance with GAAP; PROVIDED that (i) the net income of
any person in which such person or any Subsidiary (Restricted Subsidiary, in the
case of the Company) of such person has an ownership interest with a third party
(other than a person that meets the definition of a Wholly-Owned Subsidiary
(Wholly-Owned Restricted Subsidiary, in the case of the Company)) shall be
included
95
only to the extent of the amount that has actually been received by such person
or its Wholly-Owned Subsidiaries (Wholly-Owned Restricted Subsidiaries, in the
case of the Company) in the form of dividends or other distributions during such
period (subject to, in the case of any dividend or distribution received by a
Wholly-Owned Subsidiary) (Wholly-Owned Restricted Subsidiary, in the case of the
Company) of such person, the restrictions set forth in clause (ii) below) and
(ii) the net income of any Subsidiary (Restricted Subsidiary, in the case of the
Company) of such person that is subject to any restriction or limitation on the
payment of dividends or the making of other distributions shall be excluded to
the extent of such restriction or limitation; PROVIDED, FURTHER, that there
shall be excluded (a) the net income (or loss) of any person (acquired in a
pooling of interests transaction) accrued prior to the date it becomes a
Subsidiary (Restricted Subsidiary, in the case of the Company) of such person or
is merged into or consolidated with such person or any Subsidiary (Restricted
Subsidiary, in the case of the Company) of such person, (b) any gain (or loss)
(and related tax effects) resulting from an Asset Sale by such person or any of
its Subsidiaries (Restricted Subsidiaries, in the case of the Company), (c) any
extraordinary, unusual or nonrecurring gains or losses (and related tax effects)
in accordance with GAAP and (d) any compensation--related expenses arising as a
result of the application of the net proceeds from the issuance of the Senior
Notes. For purposes of the "Limitation on Restricted Payments" covenant, the
amortization of deferred financing costs relating to the issuance of the Senior
Notes shall be excluded from this definition of "Consolidated Net Income."
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Capital Stock" means any class of Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event (other than a Change of
Control), matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the Maturity Date.
"Event of Default" has the meaning set forth under "--Events of Default"
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under undue pressure or
compulsion to complete the transaction. Fair Market Value of any asset of the
Company or the Restricted Subsidiaries shall be determined by the Board of
Directors of the Company acting in good faith and shall be evidenced by a Board
Resolution thereof delivered to the Trustee; PROVIDED that with respect to any
Asset Sale which involves in excess of $5.0 million, the Fair Market Value of
any such asset or assets shall be determined by an Independent Financial
Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantors" means collectively each of Lodestar Energy, Inc., Eastern
Resources, Inc., Industrial Funds Minerals Company and any Restricted Subsidiary
that in the future executes a supplemental indenture pursuant to the covenant
entitled "Future Guarantees" or otherwise in which any such Restricted
Subsidiary agrees to be bound by the terms of the Indenture; PROVIDED that any
person constituting a Guarantor as described above shall cease to constitute a
Guarantor when its respective Guarantee is released in accordance with the terms
of the Indenture.
"Indebtedness" means with respect to any person, without duplication, (i)
all obligations of such person for borrowed money, (ii) all obligations of such
person evidenced by bonds, debentures, notes or
96
other similar instruments, (iii) all Capitalized Lease Obligations (but not
obligations under Operating Leases) of such person, (iv) all obligations of such
person issued or assumed as the deferred purchase price of property or services,
all conditional sale obligations and all obligations under any title retention
agreement (but excluding trade accounts payable, accrued expenses and deferred
taxes arising in the ordinary course of business), (v) all obligations of such
person for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction entered into in the ordinary course of
business, (vi) all obligations of any other person of the type referred to in
clauses (i) through (v) which are secured by any Lien on any property or asset
of such first person and the amount of such obligation shall be the lesser of
the value of such property or asset or the amount of the obligation so secured,
(vii) all guarantees of Indebtedness by such person, (viii) Disqualified Capital
Stock valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends, (ix) all obligations under
interest rate agreements or hedging agreements of such person and (x) any
amendment, supplement, modification, deferral, renewal, extension or refunding
of any liability of the types referred to in clauses (i) through (ix) above. For
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value to be determined in good faith by the
Board of Directors of the person issuing such Disqualified Capital Stock.
Notwithstanding anything to the contrary contained herein or in the Indenture,
Indebtedness shall not include (i) the purchase of coal reserves requiring the
payment of royalty fees on an installment basis in the ordinary course of
business consistent with past practice, (ii) obligations under performance
bonds, surety bonds or appeal bonds, letters of credit (other than reimbursement
obligations) or similar obligations, in each case incurred in the ordinary
course of business and (iii) any obligation of the Company or any Restricted
Subsidiary in the form of an earn-out arrangement undertaken in connection with
any acquisition of property or assets by the Company or such Restricted
Subsidiary, which obligation shall be based upon increases in coal prices above
price levels existing on the date of such acquisition, shall not constitute
Indebtedness under the Indenture.
"Independent Financial Advisor" means an accounting, appraisal or investment
banking firm of nationally recognized standing that is, in the reasonable and
good faith judgment of the Board of Directors of the Company, qualified to
perform the task for which such firm has been engaged and disinterested and
independent with respect to the Company and its Affiliates.
"Interest Rate Protection Obligations" means the obligations of any person
pursuant to any arrangement with any other person, whereby, directly or
indirectly, such person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Investment" means, with respect to any person, any direct or indirect
advance, loan, guarantee or other extension of credit or capital contribution to
(by means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others or otherwise), or any
purchase or acquisition by such person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued by, any other
person. Investments shall exclude extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices. For the purposes of
the "Limitation on Restricted Payments" covenant, the amount of any Investment
(other than an Investment covered by clause (z) of the first paragraph thereof)
shall be the original cost of such Investment plus the cost of all additional
Investments by the Company or any of the Restricted Subsidiaries, without any
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such
97
Investment, reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment.
"Issue Date" means the date on which the Senior Notes offered hereby are
originally issued under the Indenture.
"Lien" means (x) any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind including, without limitation, any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell and any filing of or agreement to
file a financing statement as debtor under the Uniform Commercial Code or any
similar statute and (y) any agreement to enter into any of the foregoing.
"Maturity Date" means May 15, 2005.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of legal
counsel and investment bankers) related to such Asset Sale, (ii) provisions for
all taxes payable as a direct result of such Asset Sale and (iii) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve required in accordance with GAAP consistently applied
against any liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
reflected in an Officers' Certificate delivered to the Trustee.
"New Senior Credit Facility" means the Amended and Restated Loan and
Security Agreement dated as of the Issue Date among the Company, Lodestar, the
financial institutions named therein, Congress Financial Corporation and The CIT
Group/Business Credit, Inc., as the same may be amended, restated, supplemented
or otherwise modified from time to time, and includes any agreement renewing,
refinancing or replacing all or any portion of the Indebtedness under such
agreement.
"Operating Lease" means, as applied to any person, any lease (including,
without limitation, leases that may be terminated by the lessee at any time) of
any property (whether real, personal or mixed) that is not a Capital Lease other
than any such lease under which that person is the lessor.
"Permitted Holders" means Ira Leon Rennert and his Affiliates, estate, heirs
and legatees, and the legal representatives of any of the foregoing, including,
without limitation, the trustee of any trust of which one or more of the
foregoing are the sole beneficiaries.
"Permitted Indebtedness" means (i) any Indebtedness of the Company and the
Restricted Subsidiaries under the New Senior Credit Facility consisting of (A) a
borrowing facility in an aggregate amount not to exceed $90.0 million in
aggregate principal amount at any time outstanding plus (B) a $30.0 million
letter of credit facility, in each case plus any interest, fees and expenses
from time to time owed thereunder, (ii) the Senior Notes issued in the Old Notes
Offering in an aggregate principal amount not to exceed $150.0 million and the
related Guarantees, (iii) any other Indebtedness of the Company and the
Restricted Subsidiaries outstanding on the Issue Date, (iv) purchase money
Indebtedness and any Indebtedness incurred for Capitalized Lease Obligations of
the Company and the Restricted Subsidiaries not to exceed $20.0 million in the
aggregate at any time outstanding, (v) Interest Rate Protection Obligations to
the extent the notional principal amount of such Interest Rate Protection
Obligations does not exceed the principal amount of the Indebtedness to which
such Interest Rate Protection Obligations relate entered into in the ordinary
course of business, (vi) additional Indebtedness of the Company and the
Restricted Subsidiaries not to exceed $30.0 million in the aggregate at any time
outstanding, (vii) Indebtedness owed by the Company or any of the Restricted
Subsidiaries to the Company or any
98
Restricted Subsidiary; PROVIDED that in the case of Indebtedness owed by the
Company to any Restricted Subsidiary, such Indebtedness is contractually
subordinated in right of payment to the Senior Notes, (viii) any renewals,
extensions, substitutions, refundings, refinancings or replacements of any
Indebtedness described in the preceding clauses (i), (ii) and (iii) above and
this clause (viii), so long as such renewal, extension, substitution, refunding,
refinancing or replacement does not result in an increase in the aggregate
principal amount of the outstanding Indebtedness represented thereby (except if
such Indebtedness refinances Indebtedness under the New Senior Credit Facility
or any other agreement providing for subsequent borrowings, does not result in
an increase in the commitment available under the New Senior Credit Facility or
such other agreement), (ix) any indebtedness of the Company or the Guarantors to
Renco in an aggregate principal amount not to exceed $15.0 million at any time
outstanding; PROVIDED that any such Indebtedness is contractually subordinated
in right of payment to the Company's obligations under the Senior Notes or such
Guarantor's obligations under its Guarantee, as the case may be; PROVIDED,
FURTHER, that if as of any date any person other than Renco or one of its
Wholly-Owned Subsidiaries owns or holds any such Indebtedness or holds a Lien on
the instrument held by Renco or one of its Wholly-Owned Subsidiaries governing
such Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness pursuant to this clause (ix) and (x) any
guarantees of the foregoing.
"Permitted Investment" means (i) cash and Cash Equivalents, (ii) any
Investment by the Company or any of the Restricted Subsidiaries in the Company
or any Restricted Subsidiary, (iii) Related Business Investments by the Company
or any of the Restricted Subsidiaries in joint ventures, partnerships or persons
(including Unrestricted Subsidiaries) that are not Restricted Subsidiaries in an
amount not to exceed $25.0 million in the aggregate at any one time outstanding,
(iv) Investments by the Company or any Restricted Subsidiary in another person,
if as a result of such Investment (a) such other person becomes a Restricted
Subsidiary or (b) such other person is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, the Company or a
Restricted Subsidiary, (v) Investments received in connection with the
bankruptcy or reorganization of suppliers and customers and in settlement of
delinquent obligations of, and other disputes with, customers and suppliers, in
each case arising in the ordinary course of business, (vi) the non-cash proceeds
of any Asset Sale, (vii) Investments under or pursuant to Interest Rate
Protection Obligations in the ordinary course of business and (viii) loans and
advances to employees of the Company and the Restricted Subsidiaries made in the
ordinary course of business.
"Permitted Liens" means (i) pledges or deposits by such person under
worker's compensation laws, unemployment insurance laws or similar legislation,
or good faith deposits in connection with bids, tenders, contracts (other than
for the payment of Indebtedness) or leases to which such person is a party, or
deposits to secure public statutory obligations of such person or deposits to
secure surety or appeal bonds to which such person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, (ii)
Liens imposed by law, such as landlords', carriers', warehousemen's and
mechanics' Liens or bankers' Liens incurred in the ordinary course of business
for sums which are not yet due or are being contested in good faith and for
which adequate provision has been made, (iii) Liens for taxes not yet subject to
penalties for non-payment or which are being contested in good faith and by
appropriate proceedings, if adequate reserve, as may be required by GAAP, shall
have been made therefor, (iv) Liens in favor of issuers of performance bonds,
surety bonds or appeal bonds issued pursuant to the request of and for the
account of such person in the ordinary course of its business, (v) Liens to
support trade letters of credit issued in the ordinary course of business, (vi)
survey exceptions, encumbrances, easements or reservations of, or rights of
others for, rights of way, sewers, electric lines, telegraph and telephone lines
and other similar purposes, or zoning or other restrictions on the use of real
property, (vii) Liens securing Indebtedness permitted under clause (iv) of the
definition of Permitted Indebtedness; PROVIDED that the Fair Market Value of the
asset at the time of the incurrence of the Indebtedness subject to the Lien
shall not exceed the principal amount of the Indebtedness secured, (viii) Liens
with respect to Acquired Indebtedness permitted to be incurred in accordance
with the provisions of "--Certain Covenants-- Limitation on Indebtedness" above;
PROVIDED that such Liens secured such Acquired Indebtedness at the
99
time of the incurrence of such Acquired Indebtedness by the Company or any of
the Restricted Subsidiaries and were not incurred in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the Company or
any of the Restricted Subsidiaries; PROVIDED, FURTHER, that such Liens do not
extend to or cover any property or assets of the Company or any of the
Restricted Subsidiaries other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company or any of the Restricted Subsidiaries and are no
more favorable to the lienholders than those securing the Acquired Indebtedness
prior to the incurrence of such Acquired Indebtedness by the Company or any of
the Restricted Subsidiaries, (ix) Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default, (x) Liens on
assets or property (including any real property upon which such assets or
property are or will be located) securing Indebtedness incurred to purchase or
construct such assets or property, which Indebtedness is permitted to be
incurred under the Indenture, (xi) Liens securing Indebtedness which is incurred
to refinance or replace Indebtedness which has been secured by a Lien permitted
under the Indenture and is permitted to be refinanced or replaced under the
Indenture, PROVIDED that such Liens do not extend to or cover any property or
assets of the Company or any of the Restricted Subsidiaries not securing the
Indebtedness so refinanced or replaced, and (xii) Liens securing reimbursement
obligations under letters of credit but only in or upon the goods the purchase
of which was financed by such letters of credit. "person" means any individual,
corporation, partnership, joint venture, trust, estate, unincorporated
organization or government or any agency or political subdivision thereof or any
similar entities.
"Plan of Liquidation" means, with respect to any person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such person otherwise than as an entirety or
substantially as an entirety and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and all
or substantially all of the remaining assets of such person to holders of
Capital Stock of such person.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participation or other equivalents (however designated) of such
person's preferred or preference stock, whether outstanding on the Issue Date or
issued thereafter, and including, without limitation, all classes and series of
preferred or preference stock of such person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the Exchange Act.
"Qualified Capital Stock" means, with respect to any person, any Capital
Stock of such person that is not Disqualified Capital Stock or convertible into
or exchangeable or exercisable for Disqualified Capital Stock.
"Related Business Investment" means any Investment, Capital Expenditure or
other expenditure by the Company or any Restricted Subsidiary which is related
to the business of the Company and the Restricted Subsidiaries as it is
conducted on the Issue Date or any business which is the same, similar or
reasonably related to such business.
"Renco" means The Renco Group, Inc., a New York corporation, which is the
parent of the Company, or any successor thereto.
"Restricted Subsidiary" means any Subsidiary of the Company which at the
time of determination is not an Unrestricted Subsidiary. The Board of Directors
of the Company may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary only if, immediately after giving effect to such designation, the
Company and the Guarantors could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the "Limitation on Indebtedness"
covenant, on a pro forma basis taking into account such designation.
100
"Sale/leaseback" means any lease whereby the Company or any of the
Restricted Subsidiaries, directly or indirectly, becomes or remains liable as
lessee or as guarantor or other surety, of any property (whether real or
personal or mixed) whether now owned or hereafter acquired, (i) that the Company
or the Restricted Subsidiaries, as the case may be, has sold or transferred or
is to sell or transfer to any other person (other than the Company or any
Restricted Subsidiary), or (ii) that the Company or any of the Restricted
Subsidiaries, as the case may be, intends to use for substantially the same
purpose as any other property that has been or is to be sold or transferred by
the Company or any such Restricted Subsidiary to any person (other than the
Company or any Restricted Subsidiary) in connection with such lease.
"Significant Subsidiary" means any Restricted Subsidiary that satisfies the
criteria for a "significant subsidiary" set forth in Rule 1-02(w) of Regulation
S-X under the Exchange Act.
"Subsidiary" of any person means (i) any corporation of which the
outstanding capital stock having at least a majority of the votes entitled to be
cast in the election of directors under ordinary circumstances shall at the time
be owned, directly or indirectly, by such person or (ii) any other person of
which at least a majority of the voting interest under ordinary circumstances is
at the time owned, directly or indirectly, by such person. For purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Subsidiary.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination is an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company, as provided below) and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary, unless such Subsidiary owns any
Capital Stock of, or owns, or holds any Lien on, any property of, any Restricted
Subsidiary of the Company which is not a Subsidiary of the Subsidiary to be so
designated; PROVIDED that (a) the Company certifies that such designation
complies with the "Limitation on Restricted Payments" covenant and (b) each
Subsidiary to be so designated and each of its Subsidiaries has not at the time
of designation, and does not thereafter, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable with respect to any
Indebtedness pursuant to which the lender has recourse to any of the assets of
the Company or any of the Restricted Subsidiaries. The Board of Directors of the
Company may designate any Unrestricted Subsidiary to be a Restricted Subsidiary
only if, immediately after giving effect to such designation, the Company and
the Guarantors could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the "Limitation on Indebtedness" covenant,
on a pro forma basis taking into account such designation.
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary which
is a Wholly-Owned Subsidiary of the Company.
"Wholly-Owned Subsidiary" means any Subsidiary of such person to the extent
all of the Capital Stock or other ownership interests in such Subsidiary (other
than (x) directors' qualifying shares and (y) an immaterial interest owned by
other persons solely to comply with applicable law) is owned directly or
indirectly by such person or a Wholly-Owned Subsidiary of such person.
101
DESCRIPTION OF NEW SENIOR CREDIT FACILITY
The following description of the New Senior Credit Facility does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the loan and security agreement relating to the New
Senior Credit Facility, a copy of which is filed as an exhibit to the
Registration Statement. Capitalized terms used herein and not otherwise defined
have the meaning ascribed to such terms in the agreement.
GENERAL
As of June 30, 1998, the New Senior Credit Facility was undrawn, and
approximately $22.0 million of letters of credit were outstanding. Under the New
Senior Credit Facility, the revolving credit lenders (the "Revolving Credit
Lenders") will, in their discretion, lend and relend to Lodestar up to not more
than the sum of (i) 90% of the Net Amount of Eligible Accounts plus (ii) 60% of
the Value of Eligible Inventory plus (iii) 25% of the Value of Eligible Stores
Inventory (but not more than a loan value of $5.0 million), (whereby the sum of
(ii) and (iii) shall not exceed $25.0 million) up to a limit of $90.0 million.
Lodestar's collections from accounts are applied to reduce the loan balance,
which may be reborrowed up to the aforesaid limits.
In addition, the Revolving Credit Lenders may extend up to $30.0 million of
letter of credit accommodations The available letter of credit accommodations
will decrease by $4.0 million per year. The annual amortization may be waived at
the lenders' discretion, subject to the results of asset values determined by
appraisal.
INTEREST
Interest on Lodestar's revolving loan balances is payable monthly at the
prime rate plus 0.75% per annum. The interest rate on June 30, 1998 was 9.25%.
In the event of a default by Lodestar under the New Senior Credit Facility, the
interest rate will be 2.75% per annum in excess of the prime rate.
LETTER OF CREDIT FEES
In addition to customary charges, fees and expenses, Lodestar pays the agent
a letter of credit fee equal to 1.5% per annum on the daily outstanding balance
of the letter of credit accommodations for the immediately preceding month,
except that the agent may require Lodestar to pay the agent such letter of
credit fee at a rate equal to 3.5% per annum on such outstanding balance for (i)
the period on and after the date of termination of the New Senior Credit
Facility or (ii) the period from and after the date of the occurrence of an
event of default thereunder.
SECURITY
As security for the indebtedness of the New Senior Credit Facility, Lodestar
has granted the Revolving Credit Lenders a first priority security interest in
substantially all property and assets of Lodestar.
TERM
The New Senior Credit Facility will continue until May 2001 and from year to
year thereafter, provided that either Lodestar or the Revolving Credit Lenders
may terminate the agreement at any expiration date upon 60 days' advance written
notice. Lodestar has paid the Revolving Credit Lenders a customary fee in
connection with the execution of the New Senior Credit Facility.
102
CERTAIN COVENANTS
In addition to customary covenants, the New Senior Credit Facility requires
that Lodestar be subject to certain covenants, including, without limitation: a
restriction on the incurrence of additional indebtedness; a restriction on the
creation of additional liens; compliance with certain financial covenants;
certain restrictions on dividends, loans and investments; and restrictions on
mergers and sales of assets.
EVENTS OF DEFAULT
The New Senior Credit Facility contains certain events of default,
including, without limitation, the following: (i) the failure of Lodestar to pay
any of its obligations under the New Senior Credit Facility within three days
after the due date; (ii) certain defaults by Lodestar under various other
indebtedness after any applicable grace period; (iii) any default by Lodestar in
the performance or observance of the conditions and covenants of the New Senior
Credit Facility or related agreements, beyond any applicable cure period; (iv)
any representation or warranty made by Lodestar to the Revolving Credit Lenders
proving to be false in any material respect; (v) certain judgments against
Lodestar; (vi) certain events of bankruptcy or insolvency of Lodestar; or (vii)
the occurrence of any change in the control or ownership of Lodestar.
103
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary is based on the tax laws of the United States in
effect on the date of this Prospectus, as well as judicial and administrative
interpretations thereof (in final or proposed form) available on or before such
date. The foregoing laws and interpretations thereof are subject to change,
which could apply retroactively.
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not be a taxable event for federal income tax purposes. A holder's holding
period for Exchange Notes will include the holding period for Old Notes. HOLDERS
SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR EXCHANGE NOTES.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Company or any
affiliate of the Company) may exchange such Old Notes for Exchange Notes
pursuant to the Exchange Offer; PROVIDED, that each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that for a period of 180 days
after consummation of the Exchange Offer, it will make this Prospectus, as it
may be amended or supplemented from time to time, available to any broker-dealer
for use in connection with any such resale. In addition, until , 1998,
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other holder of Exchange Notes. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after consummation of the Exchange Offer, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer and to the Company's performance of, or
compliance with, the Registration Rights Agreement (other than commissions or
concessions of any brokers or dealers) and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
104
LEGAL MATTERS
Certain legal matters related to the Exchange Notes being offered hereby are
being passed upon for the Company and the Guarantors by Cadwalader, Wickersham &
Taft, New York, New York.
EXPERTS
The consolidated financial statements of Lodestar Holdings, Inc. and its
subsidiaries as of October 31, 1997 and for the period March 15, 1997 to October
31, 1997 and the consolidated financial statements of the Predecessor Company
and its subsidiaries as of December 31, 1996 and for each of the years in the
two-year period ended December 31, 1996 and the period January 1, 1997 to March
14, 1997, have been included herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein and upon the authority of said firm as experts in accounting and
auditing.
ENGINEERS
The information appearing in this Offering Memorandum concerning estimates
of Lodestar's demonstrated reserves have been audited by Marshall Miller &
Associates, Bluefield, Virginia, as stated in their report with respect thereto
included herein as Annex A upon the authority of that firm as experts.
105
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
COSTAIN COAL INC. AND SUBSIDIARIES
PAGE
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheet as of December 31, 1996......................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995....................... F-4
Consolidated Statements of Stockholder's Equity for the years ended December 31, 1996 and 1995............. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995....................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES AND PREDECESSOR
Independent Auditors' Report............................................................................... F-19
Consolidated Balance Sheet as of October 31, 1997.......................................................... F-20
Consolidated Statements of Operations for the period March 15, 1997 to October 31, 1997 and the period
January 1, 1997 to March 14, 1997........................................................................ F-21
Consolidated Statements of Stockholder's Equity for the period January 1, 1997 to March 14, 1997 and the
period March 15, 1997 to October 31, 1997................................................................ F-22
Consolidated Statements of Cash Flows for the period March 15, 1997 to October 31, 1997 and the period
January 1, 1997 to March 14, 1997........................................................................ F-23
Notes to Consolidated Financial Statements................................................................. F-24
Condensed Consolidated Balance Sheet as of April 30, 1998.................................................. F-33
Condensed Consolidated Statements of Operations for the six months ended April 30, 1998, the period March
15, 1997 to April 30, 1997, the period January 1, 1997 to March 14, 1997 and the period November 1, 1996
to December 31, 1996..................................................................................... F-34
Condensed Consolidated Statements of Cash Flows for the six months ended April 30, 1998, the period March
15, 1997 to April 30, 1997, the period January 1, 1997 to March 14, 1997 and the period November 1, 1996
to December 31, 1996..................................................................................... F-35
Notes to Condensed Consolidated Financial Statements....................................................... F-36
Lodestar Holdings, Inc. is a holding company whose subsidiaries include
Lodestar Energy, Inc., Eastern Resources, Inc. and Industrial Fuels Minerals
Company. These subsidiaries serve as guarantors of the Exchange Notes. The
assets, equity, income and cash flows of other non-guarantor subsidiaries are
inconsequential (I.E. individually and combined less than 3% of the Lodestar
Holdings, Inc. totals). Lodestar Holdings, Inc. has no operations or assets
separate from its investment in its subsidiaries. Accordingly, separate
financial information of the subsidiaries is not considered necessary to
include, as in management's opinion, it would not be material to investors.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Costain Coal Inc.:
We have audited the accompanying consolidated balance sheet of Costain Coal
Inc. and subsidiaries (a wholly-owned subsidiary of Costain America Inc. and the
predecessor to Lodestar Energy, Inc.) as of December 31, 1996, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
the years ended December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Costain Coal
Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
As described further in note 1 to the consolidated financial statements, the
common stock of Costain Coal Inc. and subsidiaries was acquired by Lodestar
Holdings, Inc. (formerly Rencoal, Inc.) on March 14, 1997.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
April 24, 1997
F-2
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
1996
(IN
THOUSANDS,
EXCEPT
SHARE DATA)
ASSETS
Current assets:
Cash............................................................................................. $ 8,314
Accounts receivable.............................................................................. 23,798
Due from affiliates.............................................................................. 10,687
Inventories...................................................................................... 10,980
Prepaid expenses and other current assets........................................................ 5,471
-------------
Total current assets........................................................................... 59,250
Property, plant and equipment, net................................................................. 116,094
Long-term due from Parent.......................................................................... 28,198
Other assets....................................................................................... 4,816
-------------
$ 208,358
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term notes payable......................................................................... $ 116
Current installments of long-term debt........................................................... 102
Current installments of capital lease obligations................................................ 5,755
Accounts payable................................................................................. 45,955
Accrued expenses................................................................................. 40,573
-------------
Total current liabilities...................................................................... 92,501
Long-term obligations, excluding current installments.............................................. 16,820
Other non-current liabilities...................................................................... 65,371
-------------
Total liabilities.............................................................................. 174,692
-------------
Stockholder's equity:
Common stock, $.01 par value. Authorized 1,000 shares, issued and outstanding 100 shares......... 1
Additional paid-in capital....................................................................... 271,011
Accumulated deficit.............................................................................. (236,693)
Pension liability adjustment..................................................................... (653)
-------------
Total stockholder's equity..................................................................... 33,666
Commitments and contingencies......................................................................
-------------
$ 208,358
-------------
-------------
See accompanying notes to consolidated financial statements.
F-3
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
(IN THOUSANDS)
Coal sales and related revenue.......................................................... $ 255,386 $ 308,370
Operating costs:
Cost of revenues...................................................................... 257,269 255,859
Depreciation, depletion and amortization.............................................. 22,714 30,832
General and administrative............................................................ 14,270 11,677
---------- ----------
294,253 298,368
---------- ----------
Operating income (loss)............................................................. (38,867) 10,002
Other income (deductions):
Interest income....................................................................... 2,101 --
Interest expense...................................................................... (4,902) (4,436)
Minority interest in net earnings..................................................... -- (658)
Asset write-downs and provisions...................................................... -- (39,642)
Profit on disposal of Dolet Hills..................................................... -- 44,008
---------- ----------
(2,801) (728)
---------- ----------
Income (loss) before income taxes................................................... (41,668) 9,274
Income taxes............................................................................ -- 3,279
---------- ----------
Net income (loss)................................................................... $ (41,668) $ 5,995
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
F-4
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
ACCUMULATED
ADDITIONAL DEFICIT PENSION TOTAL
COMMON PAID-IN (IN LIABILITY STOCKHOLDER'S
STOCK CAPITAL THOUSANDS) ADJUSTMENT EQUITY
Balances at January 1, 1995..................... $ 1 $ 271,011 $ (201,020) $ -- $ 69,992
Net income...................................... -- -- 5,995 -- 5,995
Pension adjustment.............................. -- -- -- (287) (287)
--- ---------- ------------- ----- ------------
Balances at December 31, 1995................... 1 271,011 (195,025) (287) 75,700
Net loss........................................ -- -- (41,668) -- (41,668)
Pension adjustment.............................. -- -- -- (366) (366)
--- ---------- ------------- ----- ------------
Balances at December 31, 1996................... $ 1 $ 271,011 $ (236,693) $ (653) $ 33,666
--- ---------- ------------- ----- ------------
--- ---------- ------------- ----- ------------
See accompanying notes to consolidated financial statements.
F-5
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
(IN THOUSANDS)
Net cash provided by (used in) operating activities:
Net income (loss)....................................................................... $ (41,668) $ 5,995
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Asset write-downs and provisions...................................................... -- 39,642
Depreciation, depletion and amortization.............................................. 22,714 30,832
(Gain) loss on sale/disposal of property, plant and equipment, net.................... 2,665 (1,290)
Profit on disposal of DHMV............................................................ -- (44,008)
Minority interest in net earnings..................................................... -- 658
Changes in working capital accounts..................................................... 20,965 (25,927)
(Increase) decrease in other assets..................................................... 505 (2,273)
Increase (decrease) in non-current liabilities.......................................... 7,791 (9,920)
----------- ----------
Net cash provided by (used in) operating activities................................. 12,972 (6,291)
----------- ----------
----------- ----------
Cash flows from investing activities:
Capital expenditures.................................................................. (10,705) (5,785)
Proceeds from sale of businesses...................................................... -- 61,176
Proceeds from sales of property, plant and equipment.................................. 305 4,180
----------- ----------
Net cash provided by (used in) investing activities................................. (10,400) 59,571
----------- ----------
Cash flows from financing activities:
Principal payments on long-term obligations........................................... (5,400) (5,415)
Proceeds from short-term notes payable................................................ 116 --
Distributions to minority interest.................................................... -- (640)
Net change in long-term due from Parent............................................... (6,780) (47,254)
----------- ----------
Net cash used in financing activities............................................... (12,064) (53,309)
----------- ----------
Net decrease in cash.................................................................... (9,492) (29)
Cash at beginning of year............................................................... 17,806 17,835
----------- ----------
Cash at end of year..................................................................... $ 8,314 $ 17,806
----------- ----------
----------- ----------
Supplemental cash flow disclosures:
Interest paid......................................................................... $ 4,962 $ 4,450
----------- ----------
----------- ----------
Income taxes paid..................................................................... $ 2,089 $ 2,058
----------- ----------
----------- ----------
Minimum pension liability increase.................................................... $ 366 $ 287
----------- ----------
----------- ----------
Equipment acquired through capital lease.............................................. $ -- $ 14,709
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
F-6
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Costain Coal Inc. and its subsidiaries (the Company) consist of a number of
coal mining operations in Kentucky and West Virginia. Operations in Alabama and
Louisiana were sold in 1995.
(b) OWNERSHIP, PRINCIPLES OF CONSOLIDATION AND VALUATION
At December 31, 1996, the Company was a wholly-owned subsidiary of Costain
America Inc. (CAI). CAI is a wholly-owned subsidiary of Costain USA Inc. (CUSA),
a holding company owned 100% by Costain Group PLC (Group). All significant
intercompany accounts and transactions have been eliminated in consolidation.
All dollar amounts are presented in thousands unless otherwise noted.
In 1994, the Company decided to sell all of its coal mining business.
Following detailed negotiations, the Company reached agreement on January 18,
1995 on the sale of its 80% interest in Dolet Hills Mining Venture (DHMV) to its
joint venture partner for a total consideration of approximately $61.0 million,
subject to certain adjustments. The 1995 consolidated financial statements
include the Company's 80% interest in DHMV through March 24, 1995, the closing
date of its sale.
Apart from DHMV, however, no satisfactory offer was received for the
remainder of the coal mining business at that point in time. Accordingly, CAI
decided that, for the time being, it would be in CAI's best interest to retain
and operate the Company.
In December 1995, the Company sold its Alabama coal operations for $2.0
million with $1 million payable in 24 monthly installments commencing January
31, 1996.
Following a significant improvement in operating performance, the successful
sales of DHMV and the Alabama operations, and in response to inquiries from
potential purchasers, CAI again entered into discussions during 1996 with
potential buyers for the coal mining business. Following extensive negotiations
and due diligence by prospective buyers, further write-downs and provisions of
$39,642 at December 31, 1995 were made to recognize management's estimate of the
ultimate realization from the sale of the Company. These write-downs and
provisions are more fully described in note 9.
Pursuant to the Stock Purchase Agreement between Costain America Inc. and
Lodestar Holdings, Inc. (formerly Rencoal, Inc.) dated November 8, 1996, as
amended by the Supplemental Agreement dated February 13, 1997, the Company's
common stock was acquired by Lodestar Holdings, Inc. on March 14, 1997. Certain
liabilities of the Company were not acquired in the transaction and were
transferred to CAI.
(c) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
an average basis for coal and on the first-in, first-out basis for materials and
supplies.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and, where appropriate,
written down to realizable value. Equipment under capital leases is stated at
the present value of minimum lease payments at the
F-7
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
inception of the lease. In addition, the Company capitalizes expenditures
incurred during the acquisition, exploration, and development phase of mining
operations. As part of the overall asset write-downs at December 31, 1995 (see
note 9), the value of certain property, plant and equipment was reduced.
Depreciation of property, plant and equipment is provided using the
straight-line method over their estimated useful lives. Depletion and
amortization of land and mineral rights and deferred exploration and development
costs are provided using the units-of-production method based on the estimated
recoverable reserves. Equipment held under capital leases is amortized
straight-line over the shorter of the lease term or estimated useful life of the
asset.
The Company adopted the provisions of Statement of Financial Accounting
Standard (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This Statement
required that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the Company's financial position, results of operations, or
liquidity.
(e) INCOME TAXES
Results of operations of the Company have been included in the consolidated
Federal income tax return of CUSA.
The Company's consolidated provision and actual cash payments for U.S.
federal income taxes are allocated between CUSA and all of its subsidiaries in
accordance with the Company's tax allocation policy and have been reflected in
the Company's consolidated financial statements. In general, the consolidated
tax provision and related tax payments or refunds are allocated between the
companies, for financial statement purposes, based principally upon the
financial income, taxable income, credits and other amounts directly related to
the respective company as calculated on a separate return basis.
(f) WORKERS' COMPENSATION AND BLACK LUNG EXPENSE
The cost of workers' compensation and black lung expense is based on
historical claims experience and periodic actuarial studies of workers'
compensation and black lung claims incurred and reported and incurred but not
reported.
(g) RECLAMATION
The cost of final reclamation of active mining areas is accrued over the
life of the mine based on the units-of-production method. Reclamation performed
during mining operations is expensed as incurred.
(h) BENEFIT PLANS
The Company sponsors a defined benefit pension plan covering certain
employees and a defined contribution benefit plan covering substantially all of
its employees (see note 8).
F-8
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
(2) INVENTORIES
Inventories consist of the following at December 31, 1996:
Coal....................................................................... $ 4,782
Materials and supplies..................................................... 6,198
---------
$ 10,980
---------
---------
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at December 31,
1996:
Land and mineral rights................................................... $ 45,772
Buildings and improvements................................................ 45,757
Machinery and equipment................................................... 132,249
Deferred development costs................................................ 10,044
Transportation equipment and other........................................ 3,803
---------
237,625
Less accumulated depreciation, depletion and amortization................. 121,531
---------
Property, plant and equipment, net.................................... $ 116,094
---------
---------
(4) LONG-TERM DEBT
Long-term debt at December 31, 1996 consists of the following:
Miscellaneous notes payable maturing through 2002, at interest rates ranging
from 0% to 10%............................................................. $ 182
Less current installments.................................................... 102
---------
Long-term debt, excluding current installments............................... $ 80
---------
---------
F-9
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1996, and thereafter, are as follows:
YEAR ENDING DECEMBER 31:
1997............................................................................................ $ 102
1998............................................................................................ 25
1999............................................................................................ 15
2000............................................................................................ 15
2001............................................................................................ 15
Thereafter...................................................................................... 10
---------
$ 182
---------
---------
(5) LEASES
The Company is obligated under various capital leases for equipment that
expire at various dates through 2001.
Amortization of assets held under capital leases is included in
depreciation, depletion, and amortization.
The Company also has several noncancelable operating leases, primarily for
mining and transportation equipment, administrative facilities, and office
equipment. These leases expire at various dates through 2011. Rental expense for
operating leases (except those with lease terms of one year or less that were
not renewed) during 1996 and 1995 was $10,791 and $9,120, respectively.
Future minimum lease payments under noncancelable operating leases and the
present value of net minimum capital lease payments as of December 31, 1996 are
as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
1997.............................................................................. $ 7,822 $ 10,791
1998.............................................................................. 7,822 9,982
1999.............................................................................. 7,673 5,824
2000.............................................................................. 3,109 3,173
2001.............................................................................. 822 1,816
Thereafter........................................................................ -- 12,573
--------- -----------
Total minimum lease payments...................................................... 27,248 $ 44,159
-----------
-----------
Less amount representing interest (at rates ranging from 8.4% to 11.8%)........... 4,753
---------
Present value of net minimum capital lease payments............................... 22,495
Less current installments of capital lease obligations............................ 5,755
---------
Capital lease obligations, excluding current installments......................... $ 16,740
---------
---------
F-10
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996 and 1995
consists of:
YEAR ENDED DECEMBER
31,
---------------------
1996 1995
Current........................................................................ $ -- $ 4,916
Deferred....................................................................... -- (1,637)
---------- ---------
$ -- $ 3,279
---------- ---------
---------- ---------
Total income tax expense differs from the amount computed by applying the
Federal income tax rate of 35% to income (loss) before income taxes as a result
of the following:
YEAR ENDED DECEMBER
31,
---------------------
1996 1995
Computed "expected" tax expense (benefit)...................................... $ (14,584) $ 3,246
Increase (reduction) in income taxes resulting from:
Excess of statutory over cost depletion........................................ -- (599)
State income taxes, net of Federal income tax benefit.......................... (295) 3,164
Increase (decrease) in valuation allowance..................................... 22,978 (7,033)
Change in operating loss carryforward.......................................... (4,077) 4,006
Other, net..................................................................... (4,022) 495
---------- ---------
Total income tax expense....................................................... $ -- $ 3,279
---------- ---------
---------- ---------
The significant components of deferred income tax expense (benefit) for the
years ended December 31, 1996 and 1995 are as follows:
YEAR ENDED DECEMBER
31,
---------------------
1996 1995
Deferred tax expense (benefit) (exclusive of the effects of other components
listed below)................................................................ $ (22,978) $ 5,396
Increase (decrease) in beginning-of-the-year balance of the valuation allowance
for deferred tax assets...................................................... 22,978 (7,033)
---------- ---------
$ -- $ (1,637)
---------- ---------
---------- ---------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 are
presented below:
Deferred tax assets:
Net operating loss carryforwards........................................... $ 37,730
Accrued reclamation liabilities............................................ 5,634
Other accrued liabilities.................................................. 31,174
Depreciation and depletion................................................. 20,087
---------
Total gross deferred tax assets............................................ 94,625
Less valuation allowance................................................... (94,625)
---------
Net deferred tax assets.................................................... $ --
---------
---------
F-11
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The valuation allowance for deferred tax assets as of January 1, 1996 was
$71,647. The increase in the total valuation allowance for the year ended
December 31, 1996 was $22,978. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.
Management considers projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of those deductible differences, net
of the existing valuation allowance at December 31, 1996.
At December 31, 1996, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $218,795 as calculated on a
consolidated return basis. The Company has net operating loss carryforwards for
Federal income tax purposes of approximately $107,800 on a separate return
basis. The net operating loss carryforwards expire at various times from
1997-2010.
During 1996 the Company experienced a change of ownership as defined in
Internal Revenue Code section 382. This resulted in significant restrictions on
the Company's ability to use tax attribute carryforwards.
(7) MINORITY INTEREST
The Company's 80% interest in DHMV was sold in March 1995. The minority
interest share of net earnings of DHMV was $658 for the year ended December 31,
1995.
(8) BENEFIT PLAN
The Company maintains a defined benefit pension plan at one of its
operations which covers substantially all the employees at that location. The
plan provides specified pension benefits based on the employees' years of
service. Contributions to the plan are actuarially determined to provide the
plan with sufficient assets to meet future benefit payment requirements. The
plan has approximately 1,100 participants at December 31, 1996.
F-12
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) BENEFIT PLAN (CONTINUED)
The funded status of the plan and the amounts recognized in the Company's
consolidated balance sheet at December 31, 1996 are as follows:
Actuarial present value of benefit obligations:
Vested benefit obligation................................................ $ (9,144)
---------
---------
Accumulated benefit obligation........................................... $ (9,364)
---------
---------
Projected benefit obligation............................................. $ (9,364)
Plan assets at fair value................................................ 7,306
---------
Projected benefit obligation in excess of plan assets.................. (2,058)
Unrecognized net (gain) loss........................................... 653
Prior service cost not yet recognized in net periodic pension cost..... 54
Unrecognized net obligation at July 31, 1989 being recognized over 15
years................................................................ 309
---------
Pension liability included in accrued expenses......................... (1,042)
Adjustment required to recognize minimum liability....................... (1,016)
---------
Total pension liability recognized in consolidated balance sheet......... $ (2,058)
---------
---------
Net pension costs for the plan for 1996 and 1995 consist of the following:
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
Service costs--benefits earned during the period.................................................. $ 463 $ 387
Interest cost on projected benefit obligation..................................................... 505 656
Actual return on plan assets...................................................................... (486) (749)
Net amortization and deferral..................................................................... 15 263
--------- ---------
Net pension plan expense...................................................................... $ 497 $ 557
--------- ---------
--------- ---------
The weighted-average discount rates used to determine the actuarial present
value of the projected benefit obligations were 7.5% for 1996 and 6.0% for 1995.
The expected long-term rate of return on assets was 7.5% for 1996 and 1995.
In 1996 and 1995, as required by SFAS No. 87, the Company recorded
adjustments to the pension liability adjustment to reflect the changes in
accumulated benefits over the fair value of pension assets for the defined
benefit plan. To the extent that the accumulated benefits exceed related
unrecognized prior service cost and the transition obligation, the net change in
the liability is charged directly to stockholder's equity. The maximum
intangible asset to offset the $1,016 and $704 additional liability in 1996 and
1995, respectively, is $363 and $417. The difference of $653 and $287 is charged
to stockholder's equity for 1996 and 1995, respectively.
The Company also maintains a defined contribution plan which covers all
employees meeting certain eligibility requirements. Contributions to plan
expensed in 1996 and 1995 were $1,680 and $1,216 respectively.
F-13
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) ASSET WRITE-DOWNS
In 1994, the Company recorded write-downs of certain assets and
reassessments of certain liabilities resulting from the Company's reassessment
of anticipated business activity in light of the economic environment in the
coal industry (see note 1). The provision in 1995 recognized management's
estimate at July 31, 1996, of the ultimate realization from the sale of the
Company. These amounts consisted of the following:
Property, plant and equipment:
Land and mineral rights............................................................ $ 1,400
Machinery and equipment............................................................ 29,842
---------
31,242
Other noncurrent liabilities....................................................... 8,400
---------
$ 39,642
---------
---------
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996, the carrying amounts of accounts receivable, due from
affiliates, accounts payable, and accrued expenses approximate fair value
because of the short maturity of these instruments.
The fair value of long-term due from Parent approximates its carrying value.
The fair value of long-term obligations, using current rates available to
the Company, approximates their carrying value.
(11) RELATED PARTY TRANSACTIONS
Following the sale of the Company's 80% interest in DHMV in March 1995, the
Company repaid its intercompany loan with CAI and advanced that company
operating funds in the normal course of business. The long-term amount due from
CAI at December 31, 1996 was $28,198. This amount bears interest at 8%. There is
no specified maturity date on the loan to CAI. Due from affiliates consists of
net amounts due from CAI of $3,287, and amounts due from CUSA of $7,400 at
December 31, 1996.
F-14
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have future minimum royalty payments which
represent advance royalty obligations; these are generally recoupable against
royalty payments otherwise due based on production. The future minimum royalty
payments are as follows:
YEAR ENDING DECEMBER 31:
1997......................................................................................... $ 2,946
1998......................................................................................... 2,760
1999......................................................................................... 2,350
2000......................................................................................... 2,067
2001......................................................................................... 1,760
Thereafter................................................................................... 8,805
---------
$ 20,688
---------
---------
The Company and certain subsidiaries are involved in a number of legal
actions, which, if adverse judgments are ultimately awarded, may individually or
in the aggregate have a material adverse effect on the Company's consolidated
financial position and results of operations. With respect to each of these
proceedings, based on the advice of outside counsel and consideration of the
facts at hand, it is the opinion of the Company's management that the ultimate
disposition of the litigation will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
(13) SIGNIFICANT CUSTOMERS
The Company makes a significant portion of its sales to three customers.
Sales to these three customers totaled approximately $74,000, or 29% (11%, 10%
and 8% respectively) of total sales in 1996. Accounts receivable from these
customers totaled $7,955 at December 31, 1996.
The Company made a significant portion of its sales to two customers in
1995. Sales to these two customers totaled approximately $68,000 or 22% (15% and
7% respectively) of total sales in 1995.
F-15
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) ACCRUED EXPENSES AND OTHER NON-CURRENT LIABILITIES
Accrued expenses consist of the following at December 31, 1996:
Accrued royalties........................................................ $ 9,577
Accrued taxes............................................................ 6,006
Workers' compensation and black lung liability........................... 4,741
Other.................................................................... 20,249
---------
$ 40,573
---------
---------
Other non-current liabilities consist of the following at December 31,
1996:
Accrued royalties........................................................ $ 16,268
Accrued reclamation costs................................................ 18,039
Workers' compensation and black lung liability........................... 19,453
Other.................................................................... 11,611
---------
$ 65,371
---------
---------
(15) SUMMARIZED FINANCIAL INFORMATION
The following provides the Company's unaudited condensed financial
information as of and for the ten months ended October 31, 1996:
CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 31,
1996
(IN
THOUSANDS)
(UNAUDITED)
ASSETS
Cash..................................................................................... $ 4,865
Accounts receivable...................................................................... 29,759
Due from related parties................................................................. 39,379
Inventories.............................................................................. 12,155
Other assets............................................................................. 128,298
-------------
Total assets......................................................................... $ 214,456
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable......................................................................... $ 38,891
Accounts expenses........................................................................ 46,355
Long-term obligations.................................................................... 23,806
Other non-current liabilities............................................................ 65,753
Stockholder's equity..................................................................... 39,651
-------------
Total liabilities and stockholder's equity........................................... $ 214,456
-------------
-------------
F-16
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
TEN MONTHS
ENDED
OCTOBER 31,
1996
(IN THOUSANDS)
(UNAUDITED)
Coal sales and related revenue......................................................... $ 218,476
---------------
Operating costs:
Cost of revenues..................................................................... 220,891
Depreciation, depletion and amortization............................................. 19,420
General and administrative........................................................... 11,963
---------------
252,274
---------------
Operating loss..................................................................... (33,798)
Interest expense, net.................................................................. (2,251)
---------------
Net loss............................................................................... $ (36,049)
---------------
---------------
F-17
COSTAIN COAL INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF COSTAIN AMERICA INC.
AND THE PREDECESSOR TO LODESTAR ENERGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
TEN MONTHS
ENDED
OCTOBER 31,
1996
(IN THOUSANDS)
(UNAUDITED)
Net cash provided by operating activities:
Net loss............................................................................... $ (36,049)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization............................................. 19,420
Changes in working capital accounts.................................................... 15,436
Decrease in other assets............................................................... 4,320
Increase in other non-current liabilities.............................................. 8,539
---------------
Net cash provided by operating activities.......................................... 11,666
---------------
Cash flows from investing activities:
Capital expenditures................................................................. (8,885)
---------------
Net cash used in investing activities.............................................. (8,885)
---------------
Cash flows from financing activities:
Principal payments on long-term obligations.......................................... (4,387)
Proceeds from notes payable.......................................................... 116
Net change in due from related parties............................................... (11,451)
---------------
Net cash used in financing activities.............................................. (15,722)
---------------
Net decrease in cash................................................................... (12,941)
Cash at beginning of period............................................................ 17,806
---------------
Cash at end of period.................................................................. $ 4,865
---------------
---------------
F-18
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lodestar Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Lodestar
Holdings, Inc. and subsidiaries (the Company) as of October 31, 1997 and the
related consolidated statements of operations, stockholder's equity, and cash
flows for the period from March 15, 1997 to October 31, 1997 (Successor Period),
and the consolidated statements of operations, stockholder's equity, and cash
flows for the period from January 1, 1997 to March 14, 1997 (Predecessor Period)
of Costain Coal Inc. and subsidiaries (the Predecessor). These consolidated
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
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 aforementioned Company consolidated financial statements
present fairly, in all material respects, the financial position of Lodestar
Holdings, Inc. and subsidiaries as of October 31, 1997 and the results of their
operations and their cash flows for the Successor Period, in conformity with
generally accepted accounting principles. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the results of operations, and cash flows of Costain Coal
Inc. and subsidiaries for the Predecessor Period, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
March 15, 1997, Lodestar Holdings, Inc. (formerly Rencoal, Inc.) acquired all of
the outstanding stock of Costain Coal Inc. in a business combination accounted
for as a purchase. As a result of the acquisition, the consolidated financial
information for the period after the acquisition is presented on a different
cost basis than that for the period before the acquisition and, therefore, is
not comparable.
KPMG PEAT MARWICK LLP
Louisville, Kentucky
January 14, 1998
F-19
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31,
1997
-------------
(IN
THOUSANDS,
EXCEPT SHARE
DATA)
ASSETS
Current assets:
Cash............................................................................................. $ 3,055
Accounts receivable.............................................................................. 37,412
Inventories...................................................................................... 11,604
Prepaid expenses and other current assets........................................................ 4,859
-------------
Total current assets......................................................................... 56,930
Property, plant and equipment, net................................................................. 84,541
Coal and ash disposal contracts in excess of market, net of accumulated amortization of $1,945..... 44,856
Other assets....................................................................................... 14,121
-------------
$ 200,448
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt........................................................... $ 4,000
Current installments of capital lease obligations................................................ 6,603
Due to related party............................................................................. 3,000
Accounts payable................................................................................. 43,062
Accrued expenses................................................................................. 31,689
-------------
Total current liabilities.................................................................... 88,354
Long-term obligations, excluding current installments.............................................. 47,953
Due to related party............................................................................... 2,000
Other non-current liabilities...................................................................... 61,078
-------------
Total liabilities............................................................................ 199,385
-------------
Stockholder's equity:
Common stock, $1.00 par value. Authorized, issued and outstanding 1,000 shares................... 1
Additional paid-in capital....................................................................... 5,000
Accumulated deficit.............................................................................. (3,938)
-------------
Total stockholder's equity................................................................... 1,063
Commitments and contingencies......................................................................
-------------
$ 200,448
-------------
-------------
See accompanying notes to consolidated financial statements.
F-20
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
THE THE
COMPANY PREDECESSOR
MARCH 15, JANUARY 1,
1997 TO 1997 TO
OCTOBER 31, MARCH 14,
1997 1997
(IN THOUSANDS)
Coal sales and related revenue.......................................................... $ 173,881 $ 46,486
Operating costs:
Cost of revenues...................................................................... 150,716 44,676
Depreciation, depletion and amortization.............................................. 14,276 4,749
General and administrative............................................................ 6,823 2,190
----------- -----------
171,815 51,615
----------- -----------
Operating income (loss)............................................................. 2,066 (5,129)
Interest expense, net................................................................. (6,004) (809)
----------- -----------
Loss before income taxes............................................................ (3,938) (5,938)
Income taxes............................................................................ -- --
----------- -----------
Net loss............................................................................ $ (3,938) $ (5,938)
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
F-21
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
ADDITIONAL PENSION TOTAL
COMMON PAID-IN ACCUMULATED LIABILITY STOCKHOLDER'S
STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
(IN THOUSANDS)
THE PREDECESSOR
Balance at January 1, 1997........................ $ 1 $ 271,011 $ (236,693) $ (653) $ 33,666
Net loss.......................................... -- -- (5,938) -- (5,938)
--- ---------- ------------ ----- ------------
Balance at March 14, 1997......................... $ 1 $ 271,011 $ (242,631) $ (653) $ 27,728
--- ---------- ------------ ----- ------------
--- ---------- ------------ ----- ------------
- ----------------------------------------------------------------------------------------------------------------------
THE COMPANY
Balance at March 15, 1997......................... $ -- $ -- $ -- $ -- $ --
Initial Company capitalization.................... 1 5,000 -- -- 5,001
Net loss.......................................... -- -- (3,938) -- (3,938)
--- ---------- ------------ ----- ------------
Balance at October 31, 1997....................... $ 1 $ 5,000 $ (3,938) $ -- $ 1,063
--- ---------- ------------ ----- ------------
--- ---------- ------------ ----- ------------
See accompanying notes to consolidated financial statements.
F-22
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE THE
COMPANY PREDECESSOR
MARCH 15, JANUARY 1,
1997 TO 1997 TO
OCTOBER 31, MARCH 14,
1997 1997
(IN THOUSANDS)
Net cash used in operating activities:
Net loss................................................................................ $ (3,938) $ (5,938)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization.............................................. 14,276 4,749
Amortization of deferred financing fees............................................... 396 --
Inputed interest...................................................................... 1,406 --
Changes in operating assets and liabilities:
Accounts receivable................................................................. (18,865) 5,311
Due from affiliates................................................................. -- 2,679
Inventories......................................................................... 849 (2,979)
Prepaid expenses and other current assets........................................... 753 (655)
Other assets........................................................................ (1,170) (148)
Accounts payable.................................................................... 2,857 (5,212)
Accrued expenses.................................................................... (6,613) 3,225
Other non-current liabilities....................................................... (4,945) (2,770)
----------- -----------
Net cash used in operating activities............................................. (14,994) (1,738)
----------- -----------
Cash flows from investing activities:
Payment for Stock Purchase, net of cash acquired...................................... (22,830) --
Capital expenditures.................................................................. (3,771) (1,149)
Proceeds from sales of property, plant and equipment.................................. 252 --
----------- -----------
Net cash used in investing activities............................................. (26,349) (1,149)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt.......................................................... 41,152 --
Net change in long-term due from Costain America Inc.................................. -- 210
Principal payments on long-term obligations........................................... (4,852) (1,698)
Payments on short-term notes payable.................................................. -- (87)
Proceeds from related party borrowings................................................ 5,000 --
Initial company capitalization........................................................ 5,001 --
Financing fees paid................................................................... (1,903) --
----------- -----------
Net cash provided by (used in) financing activities............................... 44,398 (1,575)
----------- -----------
Net increase (decrease) in cash......................................................... 3,055 (4,462)
Cash at beginning of year............................................................... -- 8,314
----------- -----------
Cash at end of year..................................................................... $ 3,055 $ 3,852
----------- -----------
----------- -----------
Supplemental cash flow disclosures:
Interest paid......................................................................... $ 4,086 $ 587
----------- -----------
----------- -----------
Income taxes paid..................................................................... $ -- $ 1,500
----------- -----------
----------- -----------
Equipment acquired with note payable.................................................. $ -- $ 1,818
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
F-23
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
(a) THE BUSINESS
Lodestar Holdings, Inc. (formerly Rencoal, Inc.) and its subsidiaries (the
Company), a wholly owned subsidiary of The Renco Group, Inc. (Renco), began
operations on March 15, 1997. The Company's principal operations consist of a
number of coal mining operations in Kentucky and West Virginia. Coal shipments
are made to a wide variety of utilities throughout the United States.
(b) STOCK PURCHASE
Pursuant to the Stock Purchase Agreement between Costain America Inc. and
the Company dated November 8, 1996, as amended by the Supplemental Agreement
dated February 13, 1997 (the Stock Purchase), the common stock of Costain Coal
Inc. and its subsidiaries (the Predecessor) was acquired by the Company for a
purchase price of $23,753 on March 14, 1997. Certain liabilities of the
Predecessor were not acquired in the transaction and were transferred to Costain
America Inc. The Company was also indemnified by Costain America Inc. with
regards to the outcome of certain Predecessor litigation. The acquisition of the
Predecessor was accounted for using the purchase method of accounting as
prescribed under Accounting Principles Board Opinion No. 16, "Business
Combinations". All debt and equity and operations acquired have been "pushed
down" to the Company, from the date of acquisition in the consolidated financial
statements.
(c) BASIS OF PRESENTATION
The accompanying consolidated financial statements present the Company's
consolidated financial position as of October 31, 1997 and its consolidated
results of operations and cash flows from the acquisition date of March 15, 1997
through October 31, 1997, and the consolidated operations and cash flows of the
Predecessor for the period January 1, 1997 through March 14, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the period from March 15, 1997
through October 31, 1997 include the accounts of the Company. The consolidated
financial statements for the period from January 1, 1997 through March 14, 1997
include the accounts of Costain Coal Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(b) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
an average basis for coal and on the first-in, first-out basis for materials and
supplies.
F-24
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost or allocated cost for those
assets acquired in the Stock Purchase. Equipment under capital leases is stated
at the present value of minimum lease payments at the inception of the lease. In
addition, the Company capitalizes expenditures incurred during the acquisition,
exploration, and development phase of mining operations.
Depreciation of property, plant and equipment is provided using the
straight-line method over their estimated useful lives. Depletion and
amortization of land and mineral rights and deferred exploration and development
costs are provided using the units-of-production method based on the estimated
recoverable reserves. Equipment held under capital leases is amortized
straight-line over the shorter of the lease term or estimated useful life of the
asset.
(d) INTANGIBLE ASSETS
The Company has certain contracts to sell coal and dispose of coal ash at
prices in excess of current market prices. These contracts, which were acquired
as part of the Stock Purchase, are for varying periods of time, with the last
contract expiring in the year 2025. These contracts were valued at the
acquisition date at the present value of expected profits from sales under these
contracts in excess of those that would be earned if sales were made at the then
prevailing market prices. These contracts are being amortized using the
straight-line method over the lives of the contracts.
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over the expected
period to be benefited of 15 years. Goodwill net of accumulated amortization,
was $7,308 at October 31, 1997 and is included in other assets.
The Company assesses the recoverability of intangible assets by a comparison
of the carrying amounts of such assets to future net cash flows expected to be
generated by the assets. If such assets are considered to be impaired, the
impairment recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. No impairment losses were
recorded in the period from March 15, 1997 through October 31, 1997.
(e) INCOME TAXES
The Company is included in the consolidated federal income tax return of
Renco. Under the terms of the tax sharing agreement among Renco and its
subsidiaries, income taxes are allocated to the Company on a separate return
basis, except that transactions between the Company, Renco and Renco's other
subsidiaries are accounted for on a cash basis and the Company does not receive
the benefit of net operating loss carryforwards, unless such loss carryforwards
were a result of temporary differences between the Company's accounting for tax
and financial reporting purposes.
The results of operations of the Predecessor were included in the
consolidated federal income tax return of Costain USA Inc. (the 100% owner of
Costain America Inc.).
Income taxes are determined under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
F-25
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(f) WORKERS' COMPENSATION AND BLACK LUNG EXPENSE
The cost of workers' compensation and black lung expense is based on
historical claims experience and periodic actuarial studies of workers'
compensation and black lung claims incurred and reported and incurred but not
reported.
(g) RECLAMATION
The cost of final reclamation of active mining areas is accrued over the
life of the respective mines based on the units-of-production method.
Reclamation performed during mining operations is expensed as incurred.
(h) BENEFIT PLANS
The Company retained the Predecessor's defined benefit pension plan covering
certain employees and defined contribution benefit plan covering substantially
all of its employees (see note 8).
(i) USE OF ESTIMATES
Management of the Company and the Predecessor have made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(3) INVENTORIES
Inventories consist of the following at October 31, 1997:
Coal............................................................... $ 8,360
Materials and supplies............................................. 3,244
---------
$ 11,604
---------
---------
F-26
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at October 31:
Land and mineral rights............................................ $ 26,142
Buildings and improvements......................................... 873
Machinery and equipment............................................ 57,241
Deferred development costs......................................... 7,303
Transportation equipment and other................................. 4,890
---------
96,449
Less accumulated depreciation, depletion and amortization.......... 11,908
---------
Property, plant and equipment, net........................... $ 84,541
---------
---------
(5) LONG-TERM DEBT
Long-term debt at October 31, 1997 consists of the following:
Revolving credit agreement, interest payable monthly at 3/4% above
prime (9.25% at October 31, 1997)................................ $ 13,495
Term loan payable in monthly installments of $292 plus interest at
1 3/4% above prime (10.25% at October 31, 1997).................. 22,657
Note payable in quarterly installments of $125 (final payment due
February, 2001) plus interest at the greater of 12.5% or an
indexed rate (12.5% at October 31, 1997)......................... 4,750
---------
Total long-term debt............................................... 40,902
Less current installments.......................................... 4,000
---------
Long-term debt, excluding current installments............... $ 36,902
---------
---------
The aggregate maturities of long-term debt for each of the four years
subsequent to October 31, 1997 are as follows:
YEAR ENDING OCTOBER 31:
1998............................................................................... $ 4,000
1999............................................................................... 4,000
2000............................................................................... 29,652
2001............................................................................... 3,250
---------
$ 40,902
---------
---------
The revolving credit agreement and term loan payable are provided through a
single lending agreement. This lending agreement allows for aggregate borrowings
of up to $60,000 and is available through March 14, 2000. The amount available
under the revolving credit agreement at any one time is determined based upon
inventory and accounts receivable levels, and the balance of the term loan and
letters of credit outstanding. The unborrowed portion available under the
revolving credit agreement as of
F-27
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LONG-TERM DEBT (CONTINUED)
October 31, 1997 was approximately $5,000. A commitment fee of .5% of the
average daily unborrowed portion is due monthly. On December 6, 1997 the Company
amended this credit agreement, increasing the maximum aggregate borrowings
available to $70,000.
The note payable, the revolving credit agreement and the term loan payable
are secured by substantially all assets of the Company.
The debt agreements include covenants as to maintenance of minimum working
capital, minimum net worth, the incurrence of other indebtedness, and
limitations on capital expenditures. The Company is in compliance with all debt
covenants at October 31, 1997.
(6) LEASES
The Company is obligated under various capital leases for equipment that
expire at various dates through 2001.
Amortization of assets held under capital leases is included in
depreciation, depletion, and amortization.
The Company also has several noncancelable operating leases, primarily for
mining and transportation equipment, administrative facilities, and office
equipment. These leases expire at various dates through 2012. Rental expense for
operating leases during the periods March 15, 1997 through October 31, 1997 and
January 1, 1997 through March 14, 1997 was $7,121 and $1,933, respectively.
Future minimum lease payments under noncancelable operating leases and the
present value of net minimum capital lease payments as of October 31, 1997 are
as follows:
CAPITAL OPERATING
YEAR ENDING OCTOBER 31: LEASES LEASES
1998.................................................................... $ 8,165 $ 10,111
1999.................................................................... 7,562 6,657
2000.................................................................... 3,765 3,530
2001.................................................................... 861 2,155
2002.................................................................... -- 1,535
Thereafter.............................................................. -- 11,438
--------- -----------
Total minimum lease payments............................................ 20,353 $ 35,426
-----------
-----------
Less amount representing interest (at rates ranging from 8.4% to
11.8%).................................................................. 2,699
---------
Present value of net minimum capital lease payments..................... 17,654
Less current installments of capital lease obligations 6,603
---------
Capital lease obligations, excluding current installments............... $ 11,051
---------
---------
F-28
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
There was no current or deferred income tax expense (benefit) for the
periods from March 15, 1997 through October 31, 1997 and January 1, 1997 through
March 14, 1997.
Total income tax expense (benefit) differs from the amount computed by
applying the Federal income tax rate of 35% to loss before income taxes as a
result of the following:
THE THE
COMPANY PREDECESSOR
--------------------------------
MARCH 15, JANUARY 1,
1997 TO 1997 TO
OCTOBER 31, MARCH 14,
1997 1997
Computed "expected" tax benefit............................. $ (1,378) $ (2,078)
Increase (reduction) in income taxes resulting from:
State income taxes, net of Federal income tax benefit....... (197) 774
Increase in valuation allowance............................. -- 1,304
Net operating loss for which no benefit is available........ 1,575 --
------- -------
Total income tax expense.................................... $ -- $ --
------- -------
------- -------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at October 31, 1997 are
presented below:
Deferred tax assets:
Accrued reclamation............................................. $ 4,887
Other accrued liabilities....................................... 9,790
Depreciation and depletion...................................... 6,830
---------
Total gross deferred tax assets............................. 21,507
Less valuation allowance.................................... 5,562
---------
Net deferred tax assets..................................... 15,945
---------
Deferred tax liabilities:
Coal and ash disposal contracts................................. (17,945)
---------
Net deferred tax liability (included in other non-current
liabilities).............................................. $ (2,000)
---------
---------
There was no change in the valuation allowance for the periods March 15,
1997 to October 31, 1997 and January 1, 1997 to March 14, 1997. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
Management considers the reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
F-29
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
management believes it is more likely than not the Company will realize the
benefits of those deductible differences, net of the existing valuation
allowance at October 31, 1997.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of October 31, 1997 will be allocated to goodwill.
(8) BENEFIT PLANS
The Company's defined benefit pension plan provides specified pension
benefits based on the employees' years of service. Contributions to the plan are
actuarially determined to provide the plan with sufficient assets to meet future
benefit payment requirements. The plan has approximately 1,100 participants at
October 31, 1997.
The funded status of the plan and the amounts recognized in the Company's
consolidated balance sheet at October 31, 1997 are as follows:
Actuarial present value of benefit obligations:
Vested benefit obligation........................................ $ (9,612)
---------
---------
Accumulated benefit obligation................................... $ (9,613)
---------
---------
Projected benefit obligation..................................... $ (9,613)
Plan assets at fair value........................................ 8,089
---------
Projected benefit obligation in excess of plan assets.......... (1,524)
Unrecognized net gain.......................................... (432)
---------
Pension liability included in accrued expenses................. $ (1,956)
---------
---------
Net pension costs for the plan for the periods March 15, 1997 through
October 31, 1997 and January 1, 1997 through March 14, 1997 consist of the
following:
THE THE
COMPANY PREDECESSOR
----------------------------
MARCH 15, JANUARY 1,
1997 TO 1997 TO
OCTOBER 31, MARCH 14,
1997 1997
Service costs--benefits earned during the period.................... $ 226 $ 71
Interest cost on projected benefit obligation....................... 442 140
Actual return on plan assets........................................ (445) (141)
Net amortization and deferral....................................... 122 39
----- ---
Net pension plan expense............................................ $ 345 $ 109
----- ---
----- ---
The weighted-average discount rate used to determine the actuarial present
value of the projected obligations was 7.5% at October 31, 1997. The expected
long-term rate of return on assets was 7.5% at October 31, 1997.
F-30
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) BENEFIT PLANS (CONTINUED)
The Company also retained a defined contribution plan of the Predecessor
which covers all employees meeting certain eligibility requirements.
Contributions expensed to this plan were $760 for the period March 15, 1997
through October 31, 1997 and $236 for the period January 1, 1997 through March
14, 1997.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
At October 31, 1997, the carrying amounts of accounts receivable, accounts
payable, and accrued expenses approximate fair value because of the short
maturity of these instruments.
The fair value of long-term obligations, using current rates available to
the Company, approximates their carrying value.
(10) RELATED PARTY TRANSACTIONS
The Company has a $3,000 non-interest bearing note payable to Renco for cash
provided during the period from March 15, 1997 through October 31, 1997. This
note is payable upon demand.
The Company also has a note payable in the amount of $2,000 to Renco. This
note is payable in full on March 1, 2001, and bears interest at a rate of
8 1/4%. Interest charges through October 31, 1997 were waived by Renco.
Renco provides certain management services to the Company as provided for
under a management agreement. All charges with respect to this management
agreement were waived during the period from March 15, 1997 through October 31,
1997.
(11) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have future minimum royalty payments which
represent advance royalty obligations; these are generally recoupable against
royalty payments otherwise due based on production. The future minimum royalty
payments are as follows:
YEAR ENDING OCTOBER 31:
1998............................................................................... $ 2,904
1999............................................................................... 2,678
2000............................................................................... 2,399
2001............................................................................... 1,847
2002............................................................................... 1,686
Thereafter......................................................................... 6,669
---------
$ 18,183
---------
---------
The Company and certain subsidiaries are involved in a number of legal
actions, which, if adverse judgments are ultimately awarded, may individually or
in the aggregate have a material adverse effect on the Company's consolidated
financial position and results of operations. With respect to each of these
proceedings, based on the advice of outside counsel and consideration of the
facts at hand, it is the opinion
F-31
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
of the Company's management that the ultimate disposition of the litigation will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is required by certain third parties which have contractual
agreements with the Company, primarily governmental agencies that provide mining
permits, to maintain bonds. The Company has a bonding line of $85,000, of which
$17,000 was available at October 31, 1997. In support of the bonding line,
letters of credit in the amount of $16,000 were outstanding at October 31, 1997.
In addition, the bonding agent has a third priority security interest in
substantially all assets of the Company.
The Company has various other letters of credit outstanding in the amount of
approximately $3,000 at October 31, 1997.
(12) SIGNIFICANT CUSTOMERS
The Company makes a significant portion of its sales to four customers.
Sales to these customers totaled approximately $53,000, or 30% (9%, 8%, 7% and
6% respectively) of total sales, for the period March 15, 1997 through October
31, 1997. Accounts receivable from these customers totaled $8,844 at October 31,
1997.
Likewise, the Predecessor made a significant portion of its sales to these
four customers. Sales to these customers totaled approximately $15,000 or 32%
(10%, 8%, 7% and 7% respectively) of total sales, for the period January 1, 1997
through March 14, 1997.
(13) ACCRUED EXPENSES AND OTHER NON-CURRENT LIABILITIES
Accrued expenses consist of the following at October 31, 1997:
Royalties.......................................................... $ 9,352
Taxes, other than income........................................... 4,444
Payroll and benefits............................................... 4,162
Workers' compensation and black lung............................... 3,717
Reclamation costs.................................................. 1,799
Other.............................................................. 8,215
---------
$ 31,689
---------
---------
Other non-current liabilities consist of the following at October 31, 1997:
Royalties.......................................................... $ 15,991
Reclamation costs.................................................. 18,379
Workers' compensation and black lung............................... 19,929
Other.............................................................. 6,779
---------
$ 61,078
---------
---------
F-32
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 30,
1998
(IN
THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash............................................................................................. $ 5,404
Accounts receivable.............................................................................. 28,831
Inventories...................................................................................... 11,994
Prepaid expenses and other current assets........................................................ 5,772
-------------
Total current assets........................................................................... 52,001
Property, plant and equipment, net................................................................. 77,668
Coal and ash disposal contracts in excess of market, net of accumulated
amortization of $3,494........................................................................... 43,307
Other assets....................................................................................... 14,534
-------------
$ 187,510
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt........................................................... $ 4,000
Current installments of capital lease obligations................................................ 6,059
Due to related party............................................................................. 3,682
Accounts payable................................................................................. 39,841
Accrued expenses................................................................................. 30,511
-------------
Total current liabilities...................................................................... 84,093
Long-term obligations, excluding current installments.............................................. 40,026
Due to related party............................................................................... 2,000
Other non-current liabilities...................................................................... 60,248
-------------
Total liabilities.............................................................................. 186,367
-------------
Stockholder's equity:
Common stock, $1.00 par value. Authorized, issued and outstanding 1,000 shares................... 1
Additional paid-in capital....................................................................... 5,000
Accumulated deficit.............................................................................. (3,858)
-------------
Total stockholder's equity..................................................................... 1,143
-------------
$ 187,510
-------------
-------------
See accompanying notes to consolidated financial statements.
F-33
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THE COMPANY THE PREDECESSOR COMPANY
SIX PERIOD NOVEMBER 1,
MONTHS MARCH 15, JANUARY 1, 1996 TO
ENDED 1997 TO 1997 TO DECEMBER
APRIL 30, APRIL 30, MARCH 14, 31,
1998 1997 1997 1996
--------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Coal sales and related revenue................. $ 136,238 $ 31,387 $ 46,486 $ 36,910
Operating costs:
Cost of revenues............................. 113,635 28,602 44,676 36,378
Depreciation, depletion and amortization..... 11,829 2,879 4,749 3,294
General and administrative................... 5,883 889 2,190 2,307
--------- ----------- ------------- -----------
131,347 32,370 51,615 41,979
--------- ----------- ------------- -----------
Operating income (loss).................... 4,891 (983) (5,129) (5,069)
Interest expense, net........................ 4,757 1,020 809 550
--------- ----------- ------------- -----------
Income (loss) before income taxes.......... 134 (2,003) (5,938) (5,619)
Income taxes................................. 54 -- -- --
--------- ----------- ------------- -----------
Net income (loss).......................... $ 80 $ (2,003) $ (5,938) $ (5,619)
--------- ----------- ------------- -----------
--------- ----------- ------------- -----------
See accompanying notes to consolidated financial statements.
F-34
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THE COMPANY THE PREDECESSOR COMPANY
NOVEMBER 1,
SIX MONTHS MARCH 15, JANUARY 1, 1996 TO
ENDED 1997 TO 1997 TO DECEMBER
APRIL 30, APRIL 30 MARCH 14, 31,
1998 1997 1997 1996
----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Net cash provided by (used in) operating
activities:
Net income (loss)................................. 80 (2,003) (5,938) (5,619)
Adjustment to reconcile net income (loss) to net
cash used in operational activities:
Depreciation, depletion and amortization........ 11,829 2,879 4,749 3,294
(Gain) loss on sale of property, plant and
equipment..................................... (75) 42 2,665
Changes in working capital accounts............. 2,956 (8,155) 2,369 5,529
Increase in other assets........................ (413) (2,093) (148) (3,815)
Decrease in non-current liabilities............. (830) (4,004) (2,770) (748)
----------- --------- ----------- -----------
Net cash provided by (used in) operating
activities:............................... 13,547 (13,334) (1,738) 1,306
----------- --------- ----------- -----------
Cash flows from investing activities
Capital expenditures............................ (2,917) (833) (1,149) (1,820)
Proceeds from sales of property, plant and
equipment..................................... 190 305
----------- --------- ----------- -----------
Net cash provided by (used in) investing
activities:............................... (2,727) (833) (1,149) (1,515)
----------- --------- ----------- -----------
Cash flows from financing activities:
Change in long-term obligations................. (8,471) 17,365 (1,698) (1,013)
Payments on notes payable....................... -- -- (87) --
Net change in due from related parties.......... -- -- 210 4,671
----------- --------- ----------- -----------
Net cash provided by (used in) financing
activities:............................... (8,471) 17,365 (1,575) 3,658
----------- --------- ----------- -----------
Net increase (decrease) in cash................... 2,349 3,198 (4,462) 3,449
Cash at beginning of period....................... 3,055 3,852 8,314 4,865
----------- --------- ----------- -----------
Cash at end of period............................. 5,404 7,050 3,852 8,314
----------- --------- ----------- -----------
----------- --------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-35
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
(IN THOUSANDS)
(1) ACCOUNTING POLICIES
Reference is made elsewhere in the document which includes additional
information about the Company, its operations and its consolidated financial
statements, and contains a summary of major accounting policies followed by the
Company in preparation of its consolidated financial statements. These policies
were also followed in preparing the quarterly condensed consolidated financial
statements included herein.
The management of the Company believes that all adjustment necessary to make
a fair statement of the results in these interim periods have been made. All
adjustments reflected in the financial statements are of a normal recurring
nature except as described in the Notes to Condensed Consolidated Financial
Statements. Net results for the six month periods ended April 30, 1998 and 1997
are not necessarily indicative of the results to be expected for the full year.
(2) INCOME TAX
Income taxes are provided for financial reporting purposes based on
management's best estimate of the effective tax rate expected to be applicable
for the full calendar year.
F-36
GLOSSARY OF SELECTED TERMS
ANTHRACITE COAL. A "hard" coal with a Btu content that can be as high as
15,000 Btus per pound. Anthracite deposits are located primarily in the
Appalachian region of Pennsylvania, and are used primarily for industrial and
home heating purposes.
ASH. Small particles of inert material found in coal. The percentage of ash
affects the heating value of coal, The higher the percentage of ash, the lower
the heating value of the coal.
AUGER. A corkscrew-like machine used in highwall mining to bore into the
side of a hill and extract coal by "twisting" it out. Lodestar is engaged in
some highwall mining in its Eastern Kentucky operations using the auger methods.
BITUMINOUS COAL. A "soft" black coal with a Btu content that ranges from
10,500 to 14,000 Btus per pound. This coal is located primarily in Appalachia
(including Kentucky), the Midwest, Colorado and Utah, and is the type most
commonly used for electric power generation in the United States. Bituminous
coal is used for utility and industrial steam purposes, and as a feedstock for
coke, which is used in steel production. All of Lodestar's reserves are
bituminous coal.
BRITISH THERMAL UNIT (BTU). A measure of the energy required to raise the
temperature of one pound of water one degree Fahrenheit.
COAL SEAM. Coal deposits occur in layers. Each such layer is called a
"seam."
COMPLIANCE COAL. Coal which, when burned, emits less than 1.2 pounds of
sulfur dioxide per million Btu.
CONTINUOUS MINER. Deep mining machines used in room and pillar mining that
cut out a block of coal (the length of each cut ranging from fifteen to 34
feet), cutting 20-foot wide passages as high as the coal seam. Roof bolting
machines are utilized to secure the immediate strata above the coal, and pillars
(50 to 100 feet squared) are left to provide overall roof support. Room and
pillar mining using continuous mining machines is the most common method of deep
mining.
CONTOUR MINING. A type of mining conducted on coal seams where mountaintop
removal is not economical because of the amount of overburden on the coal seam.
Mining proceeds laterally around a hillside, using equipment such as dozers and
hydraulic shovels, at essentially the same elevation following the coal seam.
The contour cut in a coal seam provides a flat surface that can be used to
facilitate highwall mining. Once the coal has been removed, the overburden is
replaced, leaving the mined property with approximately the same contour as
before mining. This is a common surface mining method on the steeper slopes of
the Appalachian bituminous coal fields. Lodestar practices contour mining in
Eastern Kentucky when other mining methods are not economically feasible.
DEEP MINE. An underground coal mine.
DEMONSTRATED RESERVES. The total of measured reserves and indicated
reserves.
DRAGLINE. A type of excavating equipment which casts a cable-hung bucket a
considerable distance, collects the dug material by pulling the bucket toward
itself on the ground with a second cable, elevates the bucket and dumps the
material on a spoil bank, in a hopper or on a pile.
HIGHWALL MINING. A method of deep mining whereby a system bores into the
face of a coal seam, usually left accessible from contour mining, which has
ceased to be economically viable because of excessive overburden. Highwall
mining can be accomplished by a variety of methods, including relatively simple
auger mining where a corkscrew-like machine, or auger, bores into the side of a
hill and extracts coal by "twisting" it out or by combinations of other mining
equipment, including the use of modified
G-1
continuous miners. Lodestar is engaged in some highwall mining in its Eastern
Kentucky operations using the continuous and auger methods
HYDRAULIC SHOVEL. A machine used in mountaintop removal mining to remove
the top of a hill down to the coal seam, leaving a level plateau in place of the
hilltop.
INDICATED RESERVES. 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 0.25 mile, but
less than 0.75 mile, from a point of thickness measurement. Further exploration
is necessary to place indicated coal into the measured category.
LIGNITE COAL. A brownish-black coal with a Btu content that generally
ranges from 6,500 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 located adjacent to such mines because any
transportation costs, coupled with the mining costs, would exceed the price a
customer would pay for such low-Btu coal.
LONGWALL MINING SYSTEM. A deep mining method that uses hydraulic jacks,
varying from five to twelve feet in height, to support the roof of the mine
while a large shearing machine extracts the coal. A chain line then moves the
coal to a deep mine belt system for delivery to the surface. Longwall mining
equipment generally cuts blocks of coal, referred to as longwall panels, that
have a width of approximately 650 to 1,000 feet and a length ranging from
approximately 7,000 to 18,000 feet. Longwall panels can contain more than 2.0
million tons of coal. Longwall mining is a low-cost, high-output method of deep
mining that results in the highest coal recovery percentage for underground
mining. In addition, longwall mining is a much faster method of mining coal than
room and pillar mining. After a longwall panel is cut, the longwall mining
equipment must be disassembled and moved to the next panel location, a process
which generally takes one to two weeks. Lodestar presently utilizes a longwall
mining system at its Baker mine in Western Kentucky.
MEASURED RESERVES. Reserve estimates in this category have the highest
degree of geological assurance. Measured coal lies within 0.25 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.
MOISTURE. One of the primary factors considered in determining the value
and marketability of coal. The percentage of moisture is important because the
higher the moisture, the lower the heating value of the coal. Also, if the
percentage of moisture is too high, customers may experience handling problems
with the coal.
MOUNTAINTOP REMOVAL MINING. A method of mining similar to open pit mining,
except that the top of a hill is removed down to the coal seam, using large
earth-moving machines, such as dozers and hydraulic shovels, leaving a level
plateau in place of the hilltop. A more complete recovery of the coal is
accomplished through this method as compared to contour mining. However, its
feasibility depends on the amount of overburden in relation to the coal to be
removed. The site then is backfilled with the overburden and otherwise restored
to its approximate original contour, and vegetation is replaced. The site is
often returned to higher value uses, as the land will now be improved and more
suitable for development and use. The majority of Lodestar's Eastern Kentucky
mining consists of mountaintop removal mining.
OPEN PIT MINING. A method of mining which is essentially a large-scale
earth moving operation, whereby the rock and soil overlying a coal deposit (the
"overburden") is excavated by equipment, such as dozers, hydraulic shovels and
draglines. The exposed coal is then fractured by blasting and loaded onto haul
trucks or overland conveyors for transportation to processing and loading
facilities. The site then is backfilled with the overburden and otherwise
restored to its approximate original contour, and vegetation
G-2
is replaced. One of Lodestar's contractors practices open pit surface mining at
the Smith Surface mine in Western Kentucky.
OVERBURDEN. Layers of earth and rock covering a coal seam. In surface
mining operations, overburden is removed prior to coal extraction.
PREPARATION PLANT. Usually located on a mine site, although one plant may
serve several mines. A preparation plant is a facility for crushing, sizing and
washing coal to prepare it for use by a particular customer. The washing process
improves the quality of coal by reducing ash and sulfur content and improving
Btu content.
RAW COAL. Coal that has not been washed or treated at a preparation plant.
RECLAMATION. The restoration of land and environmental values to a mining
site after the coal is extracted. Reclamation operations are usually underway
where the coal already has been taken from a mine, even as mining operations are
taking place elsewhere at the site. The process commonly includes "recontouring"
or reshaping the land to its approximate original appearance, restoring topsoil
and planting native grass and ground covers. Reclamation is closely regulated by
both state and federal law.
RECOVERABLE RESERVES. The amount of coal that can be recovered from the
reserve base. The average recovery factor for underground mines is about 57%,
and about 80% from surface mines. Using these percentages, there are about 300.0
billion tons of recoverable reserves in the United States, enough to last more
than 300 years at current consumption levels.
ROOM AND PILLAR MINING. A method of deep mining which uses
remote-controlled continuous miners that cut out a block of coal (the length of
each cut ranging from fifteen to 34 feet), cutting 20-foot wide passages as high
as the coal seam. Roof bolting machines are utilized to secure the immediate
strata above the coal, and pillars (50 to 100 feet squared) are left to provide
overall roof support. In some instances, it is possible to also remove the
pillars of coal, retreating from the back of the mine moving toward the mouth of
the mine, allowing the rock roof to fall in the mined out areas. Room and pillar
mining using continuous mining machines is the most common method of deep
mining. Lodestar and its contractors utilize the room and pillar method of
underground mining at its Smith Underground, Wheatcroft, Miller Creek and the
three Eastern Kentucky contract mines.
SALEABLE COAL. Saleable coal includes any coal that is sold or that is
suitable for sale, including raw coal plus coal which has been washed in a
preparation plant.
SCRUBBER. Any of several forms of chemical/physical devices which operate
to neutralize sulfur compounds formed during coal combustion. These devices
combine the sulfur in gaseous emissions with other chemicals to form inert
compounds, such as gypsum, which must then be removed for disposal.
SPOT MARKET. Sales of coal pursuant to an agreement for shipments over a
period of one year or less. Spot market sales are generally obtained by a
competitive bidding process.
STEAM COAL. Coal used by power plant and industrial steam boilers to
produce electricity or process steam. It generally is lower in Btu content and
higher in volatile matter than metallurgical coal.
STOKER COAL. A specially sized coal of high Btu content specifically for
use in automatic firing equipment.
SUBBITUMINOUS COAL. A black coal with a Btu content that ranges from
approximately 7,900 to 9,500 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.
G-3
SULFUR CONTENT. Coal is commonly described by its sulfur content due to the
importance of sulfur in environmental regulations. Compliance coal, when burned,
emits no more than 1.2 pounds of sulfur dioxide per million Btu. This term
originated as a description of coal as it related to the Clean Air Act. "Low
sulfur" coal has a variety of definitions but typically is used to describe
coals consisting of 1.0% (or usually 1.6 pounds per million Btu) or less sulfur.
Lodestar's reserves in Eastern Kentucky are of low sulfur grades. "Mid to high
sulfur" coal describes coals consisting of 1.8% or more sulfur. Lodestar's
reserves in Western Kentucky are mid to high sulfur grades.
SURFACE MINE. A mine in which coal lies near the surface and can be
extracted by removing the covering layer of overburden. About 60% of total U.S.
coal production comes from surface mines.
TONS. A short ton is equal to 2,000 pounds as compared to a metric ton,
which is approximately 2,205 pounds.
UNDERGROUND MINE. Also known as a "deep" mine. Usually located several
hundred feet below the earth's surface, an underground mine's coal is removed
mechanically and transferred by shuttle car or conveyor to the surface. Most
underground mines are located east of the Mississippi River and account for
about 40% of annual U.S. coal production.
UNIT TRAIN. A long train of usually 90 to 100 cars, carrying only coal. A
typical unit train can carry at least 9,000 to 10,000 tons of coal in a single
shipment and is nearly a mile long.
G-4
ANNEX A
REPORT OF ENGINEERS
March 24, 1998
The Board of Directors
LODESTAR ENERGY, INC.
333 West Vine Street, Suite 1700
Lexington, KY 40507
Ladies and Gentlemen:
As requested and authorized, MARSHALL MILLER & ASSOCIATES (MM&A) has
completed an audit of reserves presently controlled by LODESTAR ENERGY, INC.
(LEI). As you are aware, this audit is primarily based on an update of five
previous, comprehensive reports prepared by MM&A, which include the following:
- "EVALUATION OF RESERVES CONTROLLED BY COSTAIN COAL INC. -- EAST KENTUCKY
OPERATIONS -- CHAPPERAL COAL CORP. - FEBRUARY 1996"
- "EVALUATION OF RESERVES CONTROLLED BY COSTAIN COAL INC. -- EAST KENTUCKY
OPERATIONS -- TRANSCONTINENTAL COAL CORP. - FEBRUARY 1996"
- "EVALUATION OF RESERVES CONTROLLED BY COSTAIN COAL INC. -- EAST KENTUCKY
OPERATIONS -- PRATER CREEK PROCESSING PLANT - FEBRUARY 1996"
- "EVALUATION OF RESERVES CONTROLLED BY COSTAIN COAL INC. -- EAST KENTUCKY
OPERATIONS -- SPRADLIN BRANCH MINE - FEBRUARY 1996"
- "EVALUATION OF RESERVES CONTROLLED BY COSTAIN COAL INC. -- WEST KENTUCKY
OPERATIONS -- SMITH AND BAKER AREAS - FEBRUARY 1996"
The 1996 reserve reports were made current by incorporating updates and
revisions to fully account for additional mining and exploration, revised mine
plans, and modifications in property control. It should be understood that
post-1995 property acquisitions include four reserve areas not previously
evaluated by MM&A in 1996, which are the Carr Creek and Tram Area mountaintop
removal reserves; the Tram Area deep mineable reserves (all three in the East
Kentucky Operations); and the No. 13 seam surface mineable reserves at the Smith
Area (in the West Kentucky Operations). These new areas were thus thoroughly
mapped and evaluated by MM&A using the same methodologies employed in the 1996
reports. This letter/ document, "AUDIT OF DEMONSTRATED RESERVES CONTROLLED BY
LODESTAR ENERGY, INC. - MARCH 1998," provides a summary of the audited and
updated reserve base with reserves classified as either DEMONSTRATED RESERVES or
as RESOURCES.
CONCLUSIONS
This audit of the subject coal properties has confirmed that LEI controls a
total demonstrated reserve base of 198.6 million tons of recoverable coal. Of
this total, 43.7 million recoverable tons are located at LEI's East Kentucky
Operations and 154.9 million recoverable tons are located at the West Kentucky
Operations. TABLE 1, which follows this letter, provides a grand total summary
of the LEI reserve base.
A-1
In addition to the demonstrated reserves, LEI affiliates control an
additional 47.0 million recoverable tons of product coal, which are presently
classified in the resource category. These resources have certain limitations or
hindrances that, under current market conditions, are judged to be subeconomic.
It is emphasized, however, that with favorable results of future exploration,
possible property acquisition, or with more favorable future market conditions,
some of the identified coal resources may ultimately achieve economic reserve
status.
DEFINITIONS
Definitions(1) of key terms and criteria applied in our audit are as
follows:
- RESOURCES -- Resources are defined as naturally occurring concentrations
or deposits of coal in the earth's crust, in such forms and amounts that
economic extraction is currently or potentially feasible. IDENTIFIED
RESOURCES are those resources whose location, rank, quality, and quantity
are known or estimated from specific geologic evidence. Identified coal
resources include economic, marginally economic, and subeconomic
components. To reflect varying distances from points of control or
reliability, these subdivisions can be divided into demonstrated and
inferred, or preferably into measured, indicated, and inferred.
- RESERVE BASE -- The reserve base is defined as those parts of identified
resources that meet specified minimum physical and chemical criteria
related to current mining and production practices, including those for
quality, depth, thickness, rank, and distance from point of measurement.
The RESERVE BASE is the in-place demonstrated (measured plus indicated)
resource from which reserves are estimated.
- 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.
-- 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.
- ------------------------
1 Source: U.S. Geological Survey Circular 891, "COAL RESOURCE CLASSIFICATION
OF THE U.S. GEOLOGICAL SURVEY," 1983.
A-2
METHODOLOGY AND QUALIFICATIONS
This audit of the LEI reserves was planned and performed to obtain
reasonable assurance on the subject coal properties. The audit included
examination by certified professional geologists and professional engineers of
all supplied maps and supporting data using industry-accepted standards.
Although the audit methodology is inherently not as exhaustive as a detailed
reserve evaluation, it is our opinion that the audit was conducted in sufficient
detail and with independent verification on a test basis of the available
information to provide reasonable assurance of the stated reserves and
resources. It should be understood that the reserve audit did not include
independent verification of property ownership and that we have relied on
property information supplied by LEI, which we assumed to be correct.
We appreciate the opportunity to provide you with this audit of reserves. If
we can assist you further or if you have any questions, please do not hesitate
to contact us.
Sincerely,
MARSHALL MILLER & ASSOCIATES
Marshall S. Miller, J. Scott Nelson,
C.P.G. C.P.G.
PRESIDENT VICE PRESIDENT
A-3
LODESTAR ENERGY, INC.
SUMMARY OF RESERVES AND RESOURCES
(RECOVERABLE PRODUCT TONS)
Table 1
MINING METHOD--COAL SEAM DEMONSTRATED RESERVES
(MTR=MOUNTAINTOP REMOVAL, ---------------------------------- GRAND
AREA TSM = THIN SEAM MINER) TOTAL MEASURED INDICATED RESOURCES TOTAL
- ------------------------------- ------------------------------------ ---------- ---------- ---------- ---------- ----------
EAST KENTUCKY OPERATIONS
TRANSCONTINENTAL COAL
PROCESSING
Broadbottom Quadrangle....... Deep--Fireclay Seam 851,387 78,279 773,108 851,387
Broadbottom Quadrangle....... Deep--Upper Elkhorn No. 3 Seam 4,775,957 3,463,613 1,312,344 4,775,957
Broadbottom Quadrangle....... Deep--Upper Elkhorn No. 2 Seam 1,567,005 1,567,005
Broadbottom Quadrangle....... Deep--Upper Elkhorn No. 3
(Subleased) 237,770 237,770 237,770
Broadbottom Quadrangle....... Deep--Upper Elkhorn No. 2
(Subleased) 1,582,122 1,407,016 175,106 1,582,122
Tram Area.................... MTR/Contour--Multi-seam 1,916,351 457,862 1,458,489 1,916,351
Tram Area.................... Deep--Elkhorn No. 2 Seam 447,539 391,660 55,879 447,539
Ivy Creek.................... MTR--Multi-seam 1,540,935 1,519,069 21,866 1,540,935
---------- ---------- ---------- ---------- ----------
Total Transcontinental Coal Processing: 11,352,061 7,555,269 3,796,792 1,567,005 12,919,066
SPRADLIN BRANCH
MTR 610,942 565,859 45,083 610,942
Contour Strip 797,675 662,459 135,216 797,675
---------- ---------- ---------- ---------- ----------
Total Spradlin Branch: 1,408,617 1,228,318 180,299 1,408,617
CHAPPERAL COAL CORP.
Chapperal Coal Corp.......... Deep--Elkhorn No. 3 Seam 488,070 459,106 28,964 406,919 894,989
Chapperal Coal Corp.......... Deep--Elkhorn No. 2 Seam 5,670,304 5,378,184 292,120 5,670,304
Chapperal Coal Corp./ESI..... Deep--Fireclay Seam 2,923,804 2,288,741 635,063 2,923,804
Chapperal Coal Corp./ESI..... Deep--Elkhorn No. 3 Seam 9,415,844 8,107,345 1,308,499 9,415,844
Marion Branch................ MTR--Multi-seam 4,323,355 3,738,416 584,939 4,323,355
Robinson Creek............... Contour/Auger/TSM 703,929 703,929 703,929
Island Creek................. Contour/Auger/TSM 508,662 508,662 508,662
Sugar Camp Creek............. Contour/Auger/TSM 376,630 376,630 376,630
---------- ---------- ---------- ---------- ----------
Total Chapperal Coal Corp.: 24,410,598 21,561,013 2,849,585 406,919 24,817,517
PRATER CREEK
Spurlock..................... MTR/Contour--Multi-seam 518,032 508,154 9,878 518,032
Harold Quadrangle............ Deep--Fireclay Seam 546,940 476,167 70,773 807,715 1,354,655
Harold Quadrangle............ Deep--Upper Elkhorn No. 3 Seam 633,792 633,792
Harold Quadrangle............ Deep--Upper Elkhorn No. 1 Seam 2,991,182 2,484,376 506,806 114,082 3,105,264
---------- ---------- ---------- ---------- ----------
Total Prater Creek: 4,056,154 3,468,697 587,457 1,555,589 5,611,743
CARR CREEK
Hindman & Kite Quadrangles... MTR--Multi-seam 2,435,154 2,316,961 118,193 156,261 2,591,415
---------- ---------- ---------- ---------- ----------
Total East Kentucky Operations: 43,662,584 36,130,258 7,532,326 3,685,774 47,348,358
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
WEST KENTUCKY OPERATIONS
SMITH AREA
Deep, 13 Seam....................... 12,892,876 9,009,918 3,882,958 12,892,876
Surface, 13 Seam.................... 2,088,917 2,088,917 2,088,917
---------- ---------- ---------- ---------- ----------
Total Smith Area: 14,981,793 11,098,835 3,882,958 14,981,793
BAKER AREA
*Deep, 13 Seam...................... 31,793,183 22,038,758 9,754,425 6,748,385 38,541,568
**Deep, 9 Seam--Alcoa Lease 42,667,540 30,057,776 12,609,764 3,893,482 46,561,022
***Deep, 9 Seam--Alcoa Option 65,492,141 21,051,310 44,440,831 32,820,026 98,312,167
---------- ---------- ---------- ---------- ----------
Total Baker Area: 139,952,864 73,147,844 66,805,020 43,461,893 183,414,757
---------- ---------- ---------- ---------- ----------
Total West Kentucky Operations: 154,934,657 84,246,679 70,687,978 43,461,893 198,396,550
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Grand Total, East & West Kentucky Operations: 198,597,241 120,376,937 78,220,304 47,147,667 245,744,908
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
- ------------------------
* Does not include 3.10 million product tons (MPT) of currently uncontrolled
but potentially obtainable demonstrated reserve or 1.12 MPT of uncontrolled
but potentially obtainable reserves.
** Does not include 1.85 MPT of demonstrated reserves on potentially obtainable
but currently uncontrolled tracts and Alcoa partial interest tracts. Also
does not include 0.12 MPT of uncontrolled resources within overall Alcoa
Lease area.
*** LEI has a sole option to lease these reserves; they are therefore considered
as controlled.
A-4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTORS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
Available Information........................... 2
Forward Looking Statements...................... 2
Prospectus Summary.............................. 3
Risk Factors.................................... 15
Use of Proceeds................................. 22
Capitalization.................................. 23
Unaudited Pro Forma Consolidated Financial
Data.......................................... 24
Selected Consolidated Financial Data............ 31
The Exchange Offer.............................. 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 40
Industry........................................ 48
Business........................................ 54
Governmental Regulation......................... 69
Management...................................... 73
Stock Ownership................................. 77
Certain Relationships and Transactions.......... 78
Description of the Senior Notes................. 79
Description of New Senior Credit Facility....... 102
Certain U.S. Federal Income Tax
Considerations................................ 104
Plan of Distribution............................ 104
Legal Matters................................... 105
Experts......................................... 105
Engineers....................................... 105
Index to Consolidated Financial Statements...... F-1
Glossary of Selected Terms...................... G-1
Report of Engineers............................. A-1
UNTIL , 1998 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
LODESTAR
HOLDINGS, INC.
OFFER TO EXCHANGE ITS
11 1/2% SENIOR NOTES
DUE 2005, SERIES B,
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933,
AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
11 1/2% SENIOR NOTES
DUE 2005, SERIES A
--------------
PROSPECTUS
--------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of Delaware
(the "DGCL") empowers the Lodestar Holdings, Inc. (the "Company") and Lodestar
Energy, Inc., both Delaware corporations, to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
complete action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 of the DGCL further provides that to the extent a director,
officer, employee or agent of a corporation has been successful in the defense
of any action, suit or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification or advancement of expenses
provided for by Section 145 shall not be deemed exclusive of any other rights to
which the indemnified party may be entitled; and empowers the corporation to
purchase and maintain insurance on behalf of a director, officer, employee or
agent of the corporation against any liability asserted against him or incurred
by him in any such capacity or arising out of his status as such whether or not
the corporation would have the power to indemnify him against such liabilities
under Section 145.
The Certificate of Incorporation for the Company provides that no director
of the Company shall be personally liable to the Company or its stockholders for
monetary damage for breach of fiduciary duty as a director, except as otherwise
provided by the DGCL.
The Bylaws of the Company provide, in effect, that the Company shall provide
indemnification consistent with Subsections (a) and (b) of Section 145 of the
DGCL to any current or former officer or director of the Company, and that the
Company may provide such indemnification to any current or former employee or
agent of the Company.
The Certificate of Incorporation of Lodestar Energy, Inc., a Delaware
corporation ("Lodestar") provides that a director of Lodestar shall not be
personally liable to Lodestar or its stockholders for monetary damages for
breach of fiduciary duty as a director except for liability (i) for any breach
of the director's duty of loyalty to Lodestar or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL or
II-1
(iv) for any transaction from which the director derives an improper personal
benefit, and provides, in effect, that Lodestar shall provide indemnity
consistent with the Sections of the DGCL referred to above.
The Bylaws of Lodestar provide, in effect, that Lodestar shall indemnify
every person who was or is a party, or is or was threatened to be made a party,
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he or she is or was a director,
officer, employee, or agent of Lodestar, or is or was serving at the request of
Lodestar as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
against expenses (including attorneys' fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit, or proceedings, to the fullest extent permitted by applicable law.
Such indemnifications may, in the discretion of the board of directors, include
advances of the person's expenses in advance of final disposition of such
action, suit, or proceeding, subject to the provisions of any applicable
statute. Lodestar is empowered to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of Lodestar, or
is or was serving at the request of Lodestar as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise, against any liability incurred by such person in such capacity, or
arising out of such person's capacity.
Section 561 of the Michigan Business Corporation Act (the "MBCA") empowers
Industrial Fuels Minerals Company, a Michigan corporation, ("Industrial Fuels")
to indemnify a person who was or is a party or is threatened to be made a party
to a threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative and whether formal or
informal, other than an action by or in the right of the corporation, by reason
of the fact that he or she is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, or other enterprise,
whether for profit or not, against expenses, including attorneys' fees,
judgments, penalties, fines, and amounts paid in settlement actually and
reasonably incurred by him or her in connection with the action, suit, or
proceeding, if the person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders, and with respect to a criminal action or
proceeding, if the person had no reasonable cause to believe his or her conduct
was unlawful.
Section 562 of the MBCA empowers a corporation to indemnify a person who was
or is a party or is threatened to be made a party to a threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, partner, trustee, employee,
or agent of another foreign or domestic corporation, partnership, joint venture,
trust, or other enterprise, whether for profit or not, against expenses,
including attorneys' fees, and amounts paid in settlement actually and
reasonably incurred by the person in connection with the action or suit, if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation or its shareholders,
and except that no indemnification shall be made for a claim, issue, or matter
in which the person has been found liable to the corporation except to the
extent that the court conducting the proceeding or another court of competent
jurisdiction determines that, in view of all the relevant circumstances, the
person is fairly and reasonably entitled to indemnity for reasonable expenses
incurred.
The MBCA further provides that to the extent a director, officer, employee
or agent of a corporation has been successful in the defense of any action, suit
or proceeding referred to in sections 561 and 562 or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against actual
and reasonable expenses, including attorneys' fees, incurred by him or her in
connection therewith; that indemnification or advancement of expenses provided
under sections 561 and 562 is not exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation against any
II-2
liability asserted against him or her and incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under sections 561 and 562.
The Certificate of Incorporation of Industrial Fuels does not address
indemnification of directors and officers.
The By-Laws of Industrial Fuels provide, in effect, that it shall provide
indemnity pursuant to the above described sections of the MBCA.
Section 8 of the Kentucky Business Corporation Act (the "KCBA") empowers
Eastern Resources, Inc., a Kentucky corporation, to indemnify an individual made
a party to a proceeding because he is or was a director, officer, employee, or
agent of the corporation, against the obligation to pay a judgment, settlement,
penalty, fine, or reasonable expenses incurred with respect to the proceeding
(except that indemnity in connection with a proceeding by or in the right of the
corporation shall be limited to reasonable expenses incurred in connection with
the proceeding) if (1) he conducted himself in good faith, (2) he reasonably
believed, in the case of conduct in his official capacity with the corporation,
that his conduct was in its best interest and, in all other cases, that his
conduct was at least not opposed to its best interest, and (3) in the case of
any criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful, except that no indemnification may be made in connection with a
proceeding by or in the right of the corporation in which the person was
adjudged liable to the corporation, or in connection with any other proceeding
charging improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
Section 8 of the KCBA authorizes the court conducting the proceeding or
another court of competent jurisdiction to order indemnification if it shall
determine the director or officer is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances, whether or not he met
the standard of conduct or was adjudged liable as described above, but if he
were adjudged so liable, the indemnification shall be limited to reasonable
expenses incurred.
Section 8 of the KCBA further provides that a corporation shall indemnify a
director or officer who was wholly successful, on the merits or otherwise, in
the defense of any proceeding to which he was a party because he is or was a
director or officer of the corporation against reasonable expenses incurred by
him in connection with the proceeding; that indemnification and advancement of
expenses provided for by Section 8 shall not be deemed exclusive of any other
right to which the indemnified party may be entitled; empowers the corporation
to purchase and maintain insurance on behalf of a director, officer, employee or
agent of the corporation against liability asserted against or incurred by him
in that capacity or arising from his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 8; and empowers the corporation to indemnify and advance expenses to an
officer, employee, or agent who is not a director to the extent, consistent with
public policy, that may be provided by its articles of incorporation, by-laws,
general or specific action of its board of directors, or contract.
The Certificate of Incorporation of Eastern Resources, Inc. ("Eastern
Resources") does not address indemnification of directors and officers.
The By-Laws of Eastern Resources provides that, in effect, it shall provide
indemnity consistent with the provisions of the DGCL set out above, and also
that it shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (i) arising
under the Employee Retirement Income Security Act of 1974 or regulations
promulgated thereunder, or under any other law or regulation of the United
States or any agency or instrumentality thereof or law or regulation of any
state or political subdivision or any agency or instrumentality of either, or
under the common law of any of the foregoing, against expenses (including
attorneys' fees), judgments, fines, penalties, taxes and amounts paid in
II-3
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding by reason of the fact that he is or was a fiduciary,
disqualified person or party in interest with respect to an employee benefit
plan covering employees of Eastern Resources or of a subsidiary corporation, or
is or was serving in any other capacity with respect to such plan, or has or had
any obligations or duties with respect to such plan by reason of such laws or
regulations, provided that any person was or is a director, officer, employee or
agent of Eastern Resources, or (ii) in connection with any matter arising under
federal, state or local revenue or taxation laws or regulations, against
expenses (including attorneys' fees), judgments, fines, penalties, taxes,
amounts paid in settlement and amounts paid as penalties or fines necessary to
contest the imposition of such penalties or fines, actually and reasonably
incurred by him in connection with such action, suit or proceeding by reason of
the fact that he is or was a director, officer, employee or agent of Eastern
Resources, or is a director, officer, employee or agent of Eastern Resources, or
is or was serving at the request of Eastern Resources as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise and had responsibility for or participated in activities
relating to compliance with such revenue or taxation laws and regulations;
provided, however, that such person did not act dishonestly or in willful or
reckless violation of the provisions of the law or regulation under which such
suit or proceeding arises. Unless the Board of Directors determines that under
the circumstances then existing, it is probable that such director, officer,
employee or agent will not be entitled to be indemnified by Eastern Resources
under this section, expenses incurred in defending such suit or proceeding,
including the amount of any penalties or fines necessary to be paid to contest
the imposition of such penalties or fines, shall be paid by Eastern Resources in
advance of the final disposition of such suit or proceeding upon receipt of an
undertaking by or on behalf of the director, officer, employer or agent to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by Eastern Resources under the By-Laws.
II-4
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT
NO. DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------
3.1 -- Certificate of Incorporation of Lodestar Holdings, Inc.
3.2 -- Bylaws of Lodestar Holdings, Inc..
3.3 -- Certificate of Incorporation of Lodestar Energy, Inc.
3.4 -- Bylaws of Lodestar Energy, Inc.
3.5 -- Certificate of Incorporation of Eastern Resources, Inc.
3.6 -- By-laws of Eastern Resources, Inc.
3.7 -- Certificate of Incorporation of Industrial Fuels Minerals Company.
3.8 -- By-laws of Industrial Fuels Minerals Company
4.1 -- Indenture, dated as of May 15, 1998, by and among the Registrants and State Street Bank and Trust
Company, as trustee, relating to the 11 1/2% Senior Notes due 2005, Series A and 11 1/2% Senior
Notes due 2005, Series B and the Guarantees thereof (containing, as exhibits, specimens of the Notes
and the Guarantees).
4.2 -- Purchase Agreement, dated May 12, 1998, among the Registrants and Donaldson, Lufkin and Jenrette
Securities Corporation, relating to the 11 1/2% Senior Notes due 2005.
4.3 -- Registration Rights Agreement, dated as of May 15, 1998, by and among the Registrants and Donaldson,
Lufkin & Jenrette Securities Corporation, relating to the 11 1/2% Senior Notes due 2005.
4.4 -- Form Letter of Transmittal.
5.1 -- Opinion of Cadwalader, Wickersham & Taft.
8.1 -- Opinion of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
10.1.1 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and John W. Hughes.
10.1.2 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and Eugene C. Holdaway.
10.1.3 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and R. Eberley Davis.
10.1.4 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and Mike Francisco.
10.1.5 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and William M. Potter.
10.1.6 -- Employment Agreement, dated as of July 1, 1998, between Costain Coal, Inc. and Michael E. Donohue.
10.2.1 -- Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc. and John
W. Hughes.
10.2.2 -- Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc. and Eugene
C. Holdaway.
10.2.3 -- Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc. and R.
Eberley Davis.
10.2.4 -- Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc. and Mike
Francisco.
10.2.5 -- Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc. and
William M. Potter.
10.2.6 -- Net Worth Appreciation Agreement, dated as of June 1, 1998 between Lodestar Energy, Inc. and Michael
E. Donohue.
II-5
EXHIBIT
NO. DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------------
10.3 -- Amended and Restated Loan and Security Agreement, dated May 15, 1998, by and among Lodestar Energy,
Inc. Lodestar Holdings, Inc., Congress Financial Corporation and The CIT Group/Business Credit, Inc.
10.4.1 -- Contract for Purchase and Sale of Coal, dated September 20, 1996, between Tennessee Valley Authority
and Costain Coal Inc., as amended and supplemented (3.7 lbs of sulfur dioxide per million Btu).
10.4.2 -- Contract for Purchase and Sale of Coal per Purchase Order No. 97PO1-198918, dated September 20,
1996, between Tennessee Valley Authority and Costain Coal Inc., as amended and supplemented.
10.5.1 -- Coal Purchase Agreement, dated as of August 4, 1992, between Costain Coal Inc. and Indiantown
Cogeneration, L.P., as amended and supplemented.
10.5.2 -- Fuel Supply and Waste Disposal Services Agreement, dated as of April 21, 1989, between AES Cedar
Bay, Inc. and Costain Coal Inc., as amended and supplemented.
12 -- Statement regarding computation of ratios.
21 -- List of Subsidiaries of Registrant.
23.1 -- Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Marshall Miller & Associates.
24 -- Power of Attorney (included on the signature page).
25 -- Statement of Eligibility and Qualification on Form T-1 of State Street Bank and Trust Company.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling any
Registrant pursuant to the foregoing provisions, each Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by a Registrant of expenses
incurred or paid by a director, officer or controlling person of a Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, each 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 of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrants hereby undertake:
(1) 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 securities offered (if the total dollar value of
securities offered would not exceed that which was
II-6
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.
(2) 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.
(3) 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.
The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
registrants has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Lexington,
State of Kentucky, on July 14, 1998.
LODESTAR HOLDINGS, INC.
By: /s/ JOHN W. HUGHES
-----------------------------------------
JOHN W. HUGHES
President and Chief Operating Officer
LODESTAR ENERGY, INC
By: /s/ JOHN W. HUGHES
-----------------------------------------
JOHN W. HUGHES
President and Chief Operating Officer
EASTERN RESOURCES, INC.
By: /s/ JOHN W. HUGHES
-----------------------------------------
JOHN W. HUGHES
President
INDUSTRIAL FUELS MINERALS COMPANY
By: /s/ JOHN W. HUGHES
-----------------------------------------
JOHN W. HUGHES
President
II-8
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John W. Hughes and Michael E. Donohue and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform such and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on July 14, 1998
SIGNATURE TITLE
- ------------------------------ ----------------------------------------------
LODESTAR HOLDINGS, INC.
/s/ IRA LEON RENNERT Chairman of the Board, Chief Executive Officer
- ------------------------------ and Director (Principal Executive Officer)
IRA LEON RENNERT
/s/ MICHAEL E. DONOHUE Chief Financial Officer (Principal Financial
- ------------------------------ and Accounting Officer)
MICHAEL E. DONOHUE
LODESTAR ENERGY, INC.
/s/ IRA LEON RENNERT Chairman of the Board and Director
- ------------------------------
IRA LEON RENNERT
/s/ JOHN W. HUGHES President and Chief Operating Officer
- ------------------------------ (Principal Executive Officer)
JOHN W. HUGHES
/s/ MICHAEL E. DONOHUE Vice President and Chief Financial Officer
- ------------------------------ (Principal Financial and Accounting Officer)
MICHAEL E. DONOHUE
EASTERN RESOURCES, INC.
/s/ IRA LEON RENNERT Chairman of the Board and Director
- ------------------------------
IRA LEON RENNERT
/s/ JOHN W. HUGHES President (Principal Executive Officer)
- ------------------------------
JOHN W. HUGHES
/s/ MICHAEL E. DONOHUE Vice President and Chief Financial Officer
- ------------------------------ (Principal Financial and Accounting Officer)
MICHAEL E. DONOHUE
II-9
SIGNATURE TITLE
- ------------------------------ ----------------------------------------------
INDUSTRIAL FUELS MINERALS COMPANY
/s/ IRA LEON RENNERT Chairman of the Board and Director
- ------------------------------
IRA LEON RENNERT
/s/ JOHN W. HUGHES President (Principal Executive Officer)
- ------------------------------
JOHN W. HUGHES
/s/ MICHAEL E. DONOHUE Vice President and Chief Financial
- ------------------------------ Officer(Principal Financial and Accounting
MICHAEL E. DONOHUE Officer)
II-10
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
3.1 -- Certificate of Incorporation of Lodestar Holdings, Inc.
3.2 -- Bylaws of Lodestar Holdings, Inc..
3.3 -- Certificate of Incorporation of Lodestar Energy, Inc.
3.4 -- Bylaws of Lodestar Energy, Inc.
3.5 -- Certificate of Incorporation of Eastern Resources, Inc.
3.6 -- By-Laws of Eastern Resources, Inc.
3.7 -- Certificate of Incorporation of Industrial Fuels Minerals Company.
3.8 -- By-Laws of Industrial Fuels Minerals Company
4.1 -- Indenture, dated as of May 15, 1998, by and among the Registrants and State Street Bank and Trust
Company, as trustee, relating to the 11 1/2% Senior Notes due 2005, Series A and 11 1/2% Senior
Notes due 2005, Series B and the Guarantees thereof (containing, as exhibits, specimens of the
Notes and the Guarantees).
4.2 -- Purchase Agreement, dated May 12, 1998, among the Registrants and Donaldson, Lufkin and Jenrette
Securities Corporation, relating to the 11 1/2% Senior Notes due 2005.
4.3 -- Registration Rights Agreement, dated as of May 15, 1998, by and among the Registrants and
Donaldson, Lufkin & Jenrette Securities Corporation, relating to the 11 1/2% Senior Notes due
2005.
4.4 -- Form Letter of Transmittal.
5.1 -- Opinion of Cadwalader, Wickersham & Taft.
8.1 -- Opinion of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
10.1.1 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and John W. Hughes.
10.1.2 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and Eugene C.
Holdaway.
10.1.3 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and R. Eberley Davis.
10.1.4 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and Mike Francisco.
10.1.5 -- Employment Agreement, dated as of April 1, 1997, between Costain Coal, Inc. and William M. Potter.
10.1.6 -- Employment Agreement, dated as of July 1, 1998, between Lodestar Energy, Inc. and Michael E.
Donohue.
10.2.1 -- Net Worth Appreciation Agreement, dated May 14, 1998, between Lodestar Energy, Inc. and John W.
Hughes.
10.2.2 -- Net Worth Appreciation Agreement, dated May 14, 1998, between Lodestar Energy, Inc. and Eugene C.
Holdaway.
10.2.3 -- Net Worth Appreciation Agreement, dated May 14, 1998, between Lodestar Energy, Inc. and R. Eberley
Davis.
10.2.4 -- Net Worth Appreciation Agreement, dated May 14, 1998, between Lodestar Energy, Inc. and Mike
Francisco.
10.2.5 -- Net Worth Appreciation Agreement, dated May 14, 1998, between Lodestar Energy, Inc. and William M.
Potter.
10.2.6 -- Net Worth Appreciation Agreement, dated June 1, 1998, between Lodestar Energy, Inc. and Michael E.
Donohue.
10.3 -- Amended and Restated Loan and Security Agreement, dated May 15, 1998, by and among Lodestar
Energy, Inc. Lodestar Holdings, Inc., Congress Financial Corporation and The CIT Group/Business
Credit, Inc.
10.4.1 -- Contract for Purchase and Sale of Coal, dated September 20, 1996, between Tennessee Valley
Authority and Costain Coal Inc., as amended and supplemented (3.7 lbs of sulfur dioxide per
million Btu).
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------
10.4.2 -- Contract for Purchase and Sale of Coal, dated September 20, 1996, between Tennessee Valley
Authority and Costain Coal Inc., as amended and supplemented (3.2 lbs. of sulfur dioxide per
million Btu).
10.5.1 -- Coal Purchase Agreement, dated as of August 4, 1992, between Costain Coal Inc. and Indiantown
Cogeneration, L.P., as amended and supplemented.
10.5.2 -- Fuel Supply and Waste Disposal Services Agreement, dated as of April 21, 1989, between AES Cedar
Bay, Inc. and Costain Coal Inc., as amended and supplemented.
12 -- Statement regarding computation of ratios.
21 -- List of Subsidiaries of Registrant.
23.1 -- Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
3.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Marshall Miller & Associates.
24 -- Power of Attorney (included on the signature page).
25 -- Statement of Eligibility and Qualification on Form T-1 of State Street Bank and Trust Company.