<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-39643
ANKER COAL GROUP, INC.
----------------------
(Exact Name Of Registrant As Specified in Its Charter)
Delaware 52-1990183
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2708 Cranberry Square 26505
Morgantown, West Virginia -----
------------------------- (Zip Code)
(Address Of Principal Executive Offices)
Registrant's telephone number, including area code: (304) 594-1616
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares of each of the registrant's classes of
common stock, as of the latest practicable date: Common Stock, $.01 per share
par value, 10,000 shares (August 14, 1998)
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE> 2
ANKER COAL GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
PART I
ITEM 1. Financial Statements:
Consolidated Statement of Operations -
Three and Six Months Ended June 30, 1998 and 1997.......... 1
Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997........................ 2
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1998 and 1997.................... 3
Notes to Consolidated Financial Statements.......................4-6
ITEM 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations..............................7-8
PART II
ITEM 6. Exhibits and Reports on Form 8-K.................................... 9
Signature Page............................................................... 10
This report contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Those statements appear in a number of places herein and include
statements regarding the intent, belief of current expectations of the
performance of the Company or related industry developments. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those described or implied in the forward-looking
statements as a result of various factors, many of which are beyond the control
of the Company. The most important factors include, but are not limited to,
weather, unexpected maintenance problems, variations in coal seam thickness,
variations in rock and soil overlying the coal deposit, variations in rock and
other natural minerals, a disruption in or an increase in the cost of
transportation services, early modification or termination of the Company's
long-term coal supply contracts, competition within the coal production and
electricity generation industries, regulatory uncertainties, price fluctuations
and labor disruptions.
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Coal sales and related revenue $76,320 $ 79,927 $147,894 $149,907
Expenses:
Cost of operations and selling
expenses 72,894 73,257 140,931 134,733
Depreciation, depletion and
amortization 4,439 4,428 8,217 8,668
General and administrative 2,457 2,462 5,088 4,496
Loss on impairment of investment - - 333 -
Restructuring charges 1,496 - 1,496 -
------- -------- -------- --------
Total expenses 81,286 80,147 156,065 147,897
Operating (loss) income (4,966) (220) (8,171) 2,010
Interest, net of $106 capitalized
for the three months ended
June 30, 1998 and net of $386
and $53 capitalized for the
six months ended June 30, 1998
and 1997, respectively (3,253) (2,405) (6,120) (3,847)
Other income, net 317 875 548 1,175
------- -------- -------- --------
Loss before income taxes (7,902) (1,750) (13,743) (662)
Income tax benefit (2,213) (490) (3,848) (185)
------- -------- -------- --------
Net loss (5,689) (1,260) (9,895) (477)
Less mandatorily redeemable preferred
stock dividends 334 319 669 635
Less mandatorily redeemable preferred
stock accretion 150 150 300 300
------- -------- -------- --------
Net loss available to common
stockholders $(6,173) (1,729) $(10,864) $(1,412)
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
1
<PAGE> 4
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
--------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9 -
Accounts receivable:
Trade 33,597 $ 31,029
Affiliates 449 223
Inventories 8,051 10,717
Current portion of long-term notes receivable 600 791
Life insurance proceeds receivable - 10,000
Prepaid expenses and other 3,567 4,659
Deferred income taxes 399 399
--------- --------
Total current assets 46,672 57,818
Properties:
Coal lands and mineral rights 102,343 101,324
Machinery and equipment 88,093 83,370
--------- --------
190,436 184,694
Less allowances for depreciation, depletion and
amortization 24,389 17,333
--------- --------
166,047 167,361
Other assets:
Advance minimum royalties 20,407 19,050
Goodwill, net of accumulated amortization of $1,964 and
$1,408 at June 30, 1998 and December 31, 1997, respectively 42,454 43,010
Other intangible assets, net of accumulated amortization of
$848 and $432 at June 30, 1998 and December 31, 1997,
respectively 6,558 6,553
Notes receivable 4,336 5,056
Other assets 9,880 5,802
--------- --------
Total assets $296,354 $304,650
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 19,110 20,173
Affiliates 656 1,572
Accrued interest 3,142 3,530
Accrued expenses and other 13,473 9,029
Current maturities of long-term debt 821 799
--------- --------
Total current liabilities 37,202 35,103
Long-term debt 133,085 132,800
Other liabilities:
Accrued reclamation expenses 17,976 18,619
Deferred income taxes 12,976 12,976
Other 6,629 6,771
--------- --------
Total liabilities 207,868 206,269
Commitments and contingencies - -
Mandatorily redeemable preferred stock 23,620 22,651
Common stock available for repurchase 15,000 -
Stockholders' equity:
Preferred stock 23,000 23,000
Common stock - -
Paid-in capital 42,900 57,900
Accumulated deficit (16,034) (5,170)
--------- --------
Total stockholders' equity 49,866 75,730
--------- --------
Total liabilities and stockholders' equity $296,354 $304,650
========= ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
2
<PAGE> 5
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
1998 1997
--------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,895) $ (477)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Impairment loss 333 -
Depreciation, depletion and amortization 8,217 8,668
Loss on sale of property, plant and equipment 1,312 -
Deferred taxes - (185)
Changes in operating assets and liabilities:
Accounts receivable (2,794) 4,496
Inventories, prepaid expenses and other (90) (10,391)
Advance minimum royalties (1,357) (3,008)
Accounts payable, accrued expenses and other (1,817) 6,441
Other liabilities (142) (126)
--------- --------
Net cash (used in) provided by operating activities (6,233) 5,418
--------- --------
Cash flows from investing activities:
Acquisitions (including related acquisition cost of
$185, net of cash acquired of $117 and liabilities
and seller note assumed of $8,752) - (9,883)
Purchases of properties (5,390) (26,863)
Proceeds from sales of property, plant and equipment 145 -
Payments received on notes receivable 911 4,459
Other assets (442) (1,388)
Investment in affiliate (333) -
--------- --------
Net cash used in investing activities (5,109) (33,675)
--------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit and long-term
debt 45,565 84,000
Principal payments on revolving line of credit and
long-term debt (43,793) (55,495)
Debt issuance costs (421) -
Proceeds received from life insurance 10,000 -
--------- --------
Net cash provided by financing activities 11,351 28,505
--------- --------
Increase in cash and cash equivalents 9 248
Cash and cash equivalents at beginning of period - 439
--------- --------
Cash and cash equivalents at end of period $ 9 $ 687
========= ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
3
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITIED)
1. Accounting Policies
The unaudited interim consolidated financial statements presented herein
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q and do not include
all of the information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles.
In the opinion of management, these consolidated financial statements contain
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position, results of operations and
cash flows. These unaudited interim consolidated financial statements should be
read in conjunction with the other disclosures contained herein and with the
Company's audited consolidated financial statements and notes thereto contained
in the Company's Special Financial Report on Form 10-K, filed pursuant to Rule
15d-2, for the year ended December 31, 1997. Operating results for interim
periods are not necessarily indicative of results that may be expected for the
entire fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
2. Income Taxes
Income taxes are provided for financial reporting purposes based on
management's best estimate of the effective tax rate expected to be applicable
for the full calendar year.
3. Inventories
Coal inventories are stated at the lower of average cost or market and
amounted to approximately $5,800,000 and $8,822,000 at June 30, 1998 and
December 31, 1997, respectively. Supply inventories are stated at the lower of
cost (first in, first out) and average cost or market and amounted to
approximately $2,251,000 and $1,895,000 at June 30, 1998 and December 31, 1997,
respectively.
4. Restructuring Charges
During the second quarter of 1998, the Company initiated steps to reduce
general and administrative expenses and challenge the mine operating plans. In
connection with this effort, the Company recorded $0.1 million of restructuring
charges relating to management changes and $1.4 million relating to impairment
losses on certain pieces of mining equipment that are not productive in the
current mining plans established. The Company is making an ongoing effort to
restructure and reduce its costs.
5. Oak Mountain Energy, L.L.C.
On April 17, 1997, the Company, an affiliate and unrelated parties
acquired substantially all of the assets and assumed certain liabilities of Oak
Mountain Energy Corporation and its affiliates for approximately $40 million, of
which $10 million was provided by the Company. Subsequent to the initial
capitalization, the Company contributed an additional $255,000.
During 1997, Oak Mountain Energy, L.L.C. ("Oak Mountain") experienced
higher than anticipated capital development costs, which resulted in increased
borrowings under Oak Mountain's credit facilities. By early December 1997, Oak
Mountain had borrowed under its credit facilities the maximum amount available
for the development of its operations and was continuing to incur additional
capital development costs. At that time the Company and the other owners of Oak
Mountain attempted to raise additional capital for the project and also
considered the possible sale of the investment. In addition, on December 13,
1997, Oak Mountain experienced a methane ignition in its mine, which halted all
production for one week and reduced the level of operation at the mine. Rather
than commit the additional funds needed in the project, the Company decided to
terminate its investment.
On February 26, 1998, the Company sold its investment in Oak Mountain to
an affiliate for $1. The Company tried unsuccessfully to sell its investment to
other unrelated parties during December, 1997 and January and February, 1998.
The Company recorded an impairment loss of $8,267,000 to adjust the Company's
investment to its fair market value less cost to sell as of December 31, 1997.
During January, 1998, the Company contributed an additional $333,000 to Oak
Mountain to facilitate its effort to sell its investment. The Company then
recorded an impairment loss of $333,000 to adjust the Company's investment to
its fair market value.
4
<PAGE> 7
5. Oak Mountain Energy, L.L.C., continued
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if Oak Mountain Energy Corporation and its
affiliates had been disposed of as of the beginning of the periods presented,
after including the impact of certain adjustments:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1997 1998 1997
-------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C>
Total coal sales and related revenue $ 77,992 $147,894 $147,972
======== ======== ========
Net loss $ (855) $ (9,562) $ (72)
======== ======== ========
Net loss available to common stockholders $ (1,324) $(10,532) $ (1,007)
======== ======== ========
</TABLE>
5
<PAGE> 8
5. Subsidiary Guarantees
The Company is a holding company with no assets other than its investments
in its subsidiaries. The Company's $125 million Senior Notes due October 2007
(the "Senior Notes") are guaranteed by certain subsidiaries of the Company
(collectively, the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries
is a wholly-owned subsidiary of the Company and has fully and unconditionally
guaranteed the Senior Notes on a joint and several basis. The following tables
summarize the financial position, results of operations and cash flows for the
Company, the Guarantor Subsidiaries and the subsidiaries of the Company which
did not guarantee the Senior Notes (collectively, the "Non-Guarantor
Subsidiaries"). The Company has not presented separate financial statements and
other disclosure regarding the Guarantor Subsidiaries because management has
determined that such information is not material to investors. As of June 30,
1998, there were no restrictions affecting the ability of the Guarantor
Subsidiaries to make distributions to the Company or other Guarantor
Subsidiaries except to the extent provided by law generally (e.g., adequate
capital to pay dividends under corporate law).
<TABLE>
<CAPTION>
As of and for the six months
ended June 30, 1998
-----------------------------------------------------------
(In thousands)
Anker Coal
Anker Coal Guarantor Non-guarantor Cons. Group
Group Subs. Subs. Adjust. Cons.
--------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Total current assets $ 4,247 $ 40,881 $ 8 $ 5,384 $ 50,520
Investment in subsidiaries 55,925 -- -- (55,925) --
Properties, net -- 158,757 7,290 -- 166,047
Other assets -- 79,762 25 -- 79,787
--------- --------- ----------- -------- ---------
Total assets 60,172 279,400 7,323 (50,540) 296,354
========= ========= =========== ======= =========
Total current liabilities -- 31,664 154 5,384 37,202
Long-term debt -- 133,085 -- -- 133,085
Intercompany payable (receivable),
net (59,173) 50,650 8,523 -- --
Other long-term liabilities 11,479 26,102 -- -- 37,581
Mandatorily redeemable preferred stock 23,620 -- -- -- 23,620
Common stock available for repurchase 15,000 -- -- -- 15,000
Total stockholders' equity 69,246 37,899 (1,354) (55,925) 49,866
--------- --------- ----------- -------- ---------
Total liabilities and
stockholders' equity $ 60,172 $ 279,400 $ 7,323 $(50,540) $ 296,354
========= ========= =========== ======== =========
Statement of Operations
Coal sales and related revenues -- $ 147,894 -- -- $ 147,894
Cost of operations and
operating expenses -- 155,612 453 -- 156,065
--------- --------- ----------- ------- ---------
Operating loss -- (7,718) (453) -- (8,171)
Other expense -- 5,572 -- -- 5,572
--------- --------- ----------- ------- ---------
Loss before taxes -- (13,290) (453) -- (13,743)
Income tax benefit $ (3,848) -- -- -- (3,848)
--------- --------- ----------- ------- ---------
Net income (loss) $ 3,848 $ (13,290) $ (453) -- (9,895)
========= ========= =========== ======= =========
Statement of Cash Flows
Net cash (used in) provided
by operating activities -- $ (6,566) $ 333 -- $ (6,233)
========= ========= =========== ======= =========
Net cash used in investing activities -- $ (4,776) $ (333) -- $ (5,109)
========= ========= =========== ======= =========
Net cash provided by financing
activities -- $ 11,351 -- -- $ 11,351
========= ========= =========== ======= =========
</TABLE>
6. Commitments and Contingencies
The Company is a party to various lawsuits and claims incidental to its
business. While it is not possible to predict accurately the outcome of these
matters, management believes that none of these actions will have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
6
<PAGE> 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three and Six Months Ended June 30, 1998 compared to the Three and Six Months
Ended June 30, 1997
Results of Operations
Coal Sales and Related Revenues. Coal sales and related revenues were
$76.3 and $147.9 million for the three and six months ended June 30, 1998
compared to $79.9 and $149.9 million for the same periods of 1997, decreases of
4.5% and 1.3%, respectively. Coal sales volume was 3.2 and 6.2 million tons for
the three and six months ended June 30, 1998 compared to 3.3 and 6.3 million
tons for the same periods a year ago, decreases of 3.0% and 1.3%, respectively.
The decreases are due to the following:
1) Tonnage levels were down in the first and second quarters of 1998 at
the Company's Preston County operations due to the completion of one
contract mining operation in the fourth quarter of 1997 and a
general scaling down of production of the other contract mining
operations. Production is expected to cease at the current contract
mining underground operations in the second half of 1998 due to the
depletion of the reserve base.
2) Tonnage levels were down at the Barbour County operations due to the
implementation of a new mining plan during the fourth quarter of
1997, which as expected resulted in lower production for the first
two quarters of 1998.
3) The Company's Webster County surface mine experienced significant
rainfall in the first quarter of 1998 which reduced its ability to
dispose of preparation plant refuse causing an increase in
inventory. The inventory handling issues eventually prevented the
mine from operating efficiently according to its mine plan. During
March 1998, the Company idled this mine to reduce inventory. The
mine restarted operations in May at reduced levels.
4) Tonnage levels were down in the first quarter of 1998 at the
Monongalia County surface operations due to the move of mining
locations from one finished mining area to a new permitted area.
Production returned to previous levels in the second quarter of
1998.
5) To offset the declines mentioned above, there were increases at
mines acquired or developed during 1997, including the Grant County
and Upshur County operations and additional brokered sales during
the periods.
Cost of Operations and Selling Expenses. The cost of operations and
selling expenses totaled $72.9 and $140.9 million for the three and six months
ended June 30, 1998 compared to $73.3 and $134.7 million for the same periods of
1997, a decrease of 1% and an increase of 4.6%, respectively. The cost of
operations and selling expenses was $23.07 per ton shipped for the three months
ended June 30, 1998 compared to $22.29 per ton for the three months ended June
30, 1997, an increase of 3.5% and for the six months ended June 30, 1998. The
cost of operations and selling expenses was $22.78 per ton shipped compared to
$21.33 for the six months ended June 30, 1997, an increase of 6.8%. The
increases were due to a reduction in production as described above and higher
operating costs at certain underground mines.
Other Operating Expenses. Remaining consistent for the second quarters
ending June 30, 1998 and 1997 were other operating expenses of $6.9 million,
including general and administrative expenses of $2.5 million and depreciation,
depletion and amortization of $4.4 million.
Other operating expenses for the six months ended June 30, 1998 were $13.3
million compared to $13.2 million for the six months ended June 30, 1997.
General and administrative expenses increased 13.3%, to $5.1 million for the six
months ended June 30, 1998 compared to $4.5 million for the six months ended
June 30, 1997. The increase in general and administrative costs primarily
resulted from the increase in the Company's management staff necessary to manage
the additional mines developed or acquired since June 30, 1997. The Company has
initiated steps to reduce general and administrative expenses. Depreciation,
depletion and amortization was $8.2 million for the six months ended June 30,
1998 compared to $8.7 million for the six months ended June 30, 1997, a decrease
of 5.8%. The decrease in depreciation, depletion and amortization primarily
resulted from a decrease in the amortization of non-compete agreements due to
the agreements being fully amortized in subsequent quarters of 1997 and a
decrease in the depletion and amortization resulting from decreased tonnage
production levels described above.
Loss on Impairment of Investment. During the first quarter of 1998, the
Company recorded an additional impairment loss of $0.3 million to adjust the
Company's investment in Oak Mountain to its fair market value. There were no
additional investments in the second quarter of 1998.
Restructuring Charges. During the second quarter of 1998, the Company
initiated steps to reduce general and administrative expenses and restructure
the mine operating plans. In connection with this effort, the Company recorded
$0.1 million of restructuring charges relating to management changes and $1.4
million relating to impairment losses on certain pieces of mining equipment that
are not productive in the current mining plans. The Company is making an
ongoing effort to restructure and reduce its costs.
7
<PAGE> 10
Interest Expense. Interest expense was $3.3 and $6.1 million for the three
and six months June 30, 1998 compared to $2.4 and $3.9 million for the three and
six months ended June 30, 1997, an increase of 37.5% and 56.4%, respectively.
The increases were due to an increase in the average outstanding indebtedness
and average effective interest rate in the respective periods.
Income Taxes. Income tax benefit from operations for the three and six
months ended June 30, 1998 was $2.2 and $3.9 million compared to $0.5 and $0.2
million for the same period a year ago. The income tax benefit for the period is
based on the effective tax rate expected to be applicable for the full year.
Net Income. For the three and six months ended June 30, 1998, the
Company's loss was $5.7 and $9.9 million compared to losses of $1.3 and $0.5
million for the same periods of 1997, a decrease of $4.4 and $9.4 million,
respectively. The decreases in net income are primarily due to increases in year
to date operating expenses and decreases in production levels described above.
Liquidity and Capital Resources
The Company has budgeted approximately $24.0 million for capital
expenditures in 1998. Of the $24 million budgeted for capital expenditures in
1998, approximately $14.0 million relates to the development of recently opened
or acquired properties and to the acquisition of new properties. As of June 30,
1998 the Company incurred $5.4 million of capital expenditures with $2.6 million
relating to the development of recently opened or acquired properties and to the
acquisition of new properties.
On September 25, 1997, the Company issued a $125,000,000 of unsecured 9
3/4% Senior Notes due October 1, 2007. Interest on the Senior Notes is payable
semiannually on April 1 and October 1 of each year commencing April 1, 1998.
On June 30, 1998, the Company's Amended and Restated Revolving Credit
Facility (the "Credit Facility") had approximately $7.6 million of outstanding
indebtedness and additional undrawn availability of approximately $63.4 million.
The Credit Facility contains certain restrictions and limitations, including
financial covenants that require the Company to maintain and achieve certain
levels of financial performance and limitations on the payment of cash dividends
and similar restricted payments. One such covenant that controls the Company's
availability of borrowings is a net leverage ratio based on cashflow for a
rolling twelve month period. Due to the death of John J. Faltis (the Company's
President, Chief Executive Officer and Chairman of the Board of Directors) on
October 12, 1997, the Company recorded $15 million of key man life insurance
proceeds in December 1997, which reduced the Company's net leverage ratio and
created additional availability of borrowings. The rolling twelve month period
for the net leverage ratio covenant will provide the Company with the additional
borrowing availability during the first three quarters of 1998. During the
fourth quarter of 1998 the life insurance proceeds will no longer be included in
the calculation of the net leverage ratio and will decrease borrowing
availability.
In accordance with the Stockholders' Agreement, dated as of August 12,
1996, among the Company, Mr. Faltis, JJF Group Limited Liability Company, a West
Virginia limited liability company formerly controlled by Mr. Faltis and now
controlled by his estate ("JJF Group"), and others (the "Stockholders'
Agreement") the Company maintained key man life insurance on the life of Mr.
Faltis in the amount of $15 million. Under the Stockholders' Agreement the
Company must use the proceeds from the key man policy to repurchase as much of
the Company's Common Stock owned by JJF Group as possible, based on the fair
market value of such Common Stock. The Company has received the $15 million in
key man life insurance proceeds, which it has used to temporarily reduce the
outstanding indebtedness under the Credit Facility. As soon as the fair market
value of the Common Stock owned by JJF Group is determined, such proceeds will
be reborrowed under the Credit Facility and applied to the purchase of such
Common Stock. The Company has estimated the value of the Common Stock to be
approximately $15 million and therefore has recorded this estimate as Common
Stock available for repurchase at June 30, 1998.
The Company's ability to fund its operations and make planned capital
expenditures, to make scheduled debt payments and to remain in compliance with
all of the financial covenants under its debt agreements depends on its future
operating performance and cash flow, which, in turn, are subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond the Company's control. There can be no assurance that the Company's
operating results, cash flow and capital resources will be sufficient to satisfy
these obligations. If the Company cannot generate sufficient cash flow from
operations or call upon other resources, the Company could face liquidity
problems and might be required to take certain actions, including to reduce or
delay planned expansion and capital expenditures, sell assets, obtain additional
equity capital or restructure its debt. There can be no assurance that any of
these actions could be effected on terms satisfactory to the Company, if at all.
Dividend Restrictions Affecting Subsidiaries
As of June 30, 1998 there were no restrictions affecting the ability of
the guarantor subsidiaries of the Senior Notes to make distributions to the
Company or other guarantor subsidiaries except to the extent provided by law
generally (eg, adequate capital to pay dividends under corporate law).
8
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit number 10.14, Amendment No. 1 dated as of December 26, 1997
to the Credit Agreement dated as of September 22, 1997, is filed
herewith on Form 10-Q.
Exhibit number 27, Financial Data Schedule, is filed herewith on Form
10-Q.
(b) No items were filed on Form 8-K during the second quarter 1998.
9
<PAGE> 12
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANKER COAL GROUP, INC.
/s/Bruce Sparks
-----------------------------------------
Bruce Sparks
President and Chief Executive Officer
/s/Michael Matesic
-----------------------------------------
Michael Matesic
Treasurer and Chief Financial Officer
DATE: August 14, 1998
10
<PAGE> 1
Execution Counterpart
AMENDMENT NO. 1
AMENDMENT NO. 1 dated as of December 26, 1997, between ANKER COAL
GROUP, INC., a corporation duly organized and validly existing under the laws of
the State of Delaware (the "Company") each of the Subsidiaries of the Company
identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages
hereto (individually, a "Subsidiary Guarantor" and, collectively, the
"Subsidiary Guarantors" and, together with the Company, the "Obligors"); each of
the lenders that is a signatory hereto (individually, a "Bank" and,
collectively, the "Banks"); and THE CHASE MANHATTAN BANK, as agent for the Banks
(in such capacity, together with its successors in such capacity, the
"Administrative Agent").
The Company, the Subsidiary Guarantors, the Banks and the
Administrative Agent are parties to an Amended and Restated Credit Agreement
dated as of September 22, 1997 (as heretofore modified and supplemented and in
effect on the date hereof, the "Credit Agreement"), providing, subject to the
terms and conditions thereof, for loans to be made by said Banks to the Company
in an aggregate principal amount not exceeding $75,000,000. The Company, the
Subsidiary Guarantors, the Banks and the Administrative Agent wish to amend the
Credit Agreement in certain respects, and accordingly, the parties hereto hereby
agree as follows:
Section 1. Definitions. Except as otherwise defined in this
Amendment No. 1, terms defined in the Credit Agreement (as amended hereby) are
used herein as defined therein.
Section 2. Amendments. Subject to the satisfaction of the conditions
precedent specified in Section 4 below, but effective as of the date hereof; the
Credit Agreement shall be amended as follows:
2.01. References in the Credit Agreement (including references to
the Credit Agreement as amended hereby) to "this Agreement" (and indirect
references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed
to be references to the Credit Agreement as amended hereby.
2.02. Section 1.01 of the Credit Agreement shall be amended by
adding the following new definitions (to the extent not already included in said
Section 1.01) and inserting the same in the appropriate alphabetic locations and
amending the following definitions (to the extent already included in said
Section 1.01), as follows:
Amendment No. 1
<PAGE> 2
-2-
"Anker Capital Developmental Authority Approval" shall mean approval by
the West Virginia Economic Development Authority (the "Authority") of the
application of Anker Capital Corporation to have its capital base increased and
the issuance by the Authority of a certificate of tax credit which entitles
investors in Anker Capital Corporation to West Virginia tax credits upon the
issuance by Anker Capital Corporation of a proper certificate setting forth the
amount of the investors tax credit.
"Anker Capital Disposition" shall mean the purchase of all of the capital
stock of Anker Capital Corporation by the Purchasers (directly, or indirectly
through an entity owned by the Purchasers) from Anker Group, Inc. pursuant to
the Purchase Agreement.
"Applicable Percentage" shall mean: (a) with respect to Base Rate Loans,
2% per annum; (b) with respect to Eurodollar Loans, 3% per annum and (c) with
respect to commitment fees, 1/2 of 1% per annum; provided that (i) during the
period commencing on the Effective Date and ending on December 31, 1997, the
Applicable Percentage for Base Rate Loans, Eurodollar Loans and commitment fees
shall be 3/4 of 1%, 1-3/4% and 3/8 of 1%, respectively, (ii) during the period
commencing on January 1, 1998 and ending on the first Rate Reset Date (as
defined below), the Applicable Percentage for Base Rate Loans, Eurodollar Loans
and commitment fees shall be 1-3/4%, 2-3/4% and 1/2 of 1%, respectively and
(iii) subject to the foregoing clauses (i) and (ii), if the Net Leverage Ratio
as at the last day of any fiscal quarter of the Company shall fall within any of
the ranges set forth below then, upon the delivery 10 the Administrative Agent
of a certificate (a "Leverage Certificate") of a Responsible Officer
substantially in the form of Exhibit C hereto demonstrating such fact prior to
the end of the next succeeding fiscal quarter, the "Applicable Percentage" for
Revolving Credit Loans and commitment fees shall be reduced to the rate for the
respective Type of Loan and commitment fees set forth below opposite such range
during the period commencing on the third Business Day after the date of receipt
of such Leverage Certificate to but not including the first Rate Reset Date
thereafter (except that, notwithstanding the foregoing, the Applicable
Percentage for any such Loan or commitment fee shall not as a consequence of
this proviso be so reduced for any period during which an Event of Default shall
have occurred and be continuing following notice by the Administrative Agent to
the Company upon the instruction of the Majority Banks that such reduction shall
not be made):
Amendment No. 1
<PAGE> 3
-3-
<TABLE>
<CAPTION>
Range Applicable Percentage
of Base Rate Eurodollar Commitment
Net Leverage Ratio Loans Loans Fee
- ------------------ --------- ---------- ----------
<S> <C> <C> <C>
Greater than 6.50 to 1 2% 3% 1/2 of 1%
Greater than or
equal to 6.00 to 1 1-3/4% 2-3/4% 1/2 of 1%
but less than or
equal to 6.50 to 1
Greater than or
equal to 5.50 to 1 1-1/2% 2-1/2% 1/2 of 1%
but less than
6.00 to 1
Greater than or
equal to 5.00 to 1 1-1/4% 2-1/4% 1/2 of 1%
but less than
5.50 to 1
Greater than or
equal to 4.50 to 1 1% 2% 1/2 of 1%
but less than 5.00
to 1
Greater than or
equal to 3.75 to 1 3/4 of 1% 1-3/4% 3/8 of 1%
but less than 4.50
to 1
Greater than or
equal to 3.00 to 1 1/2 of 1% 1-1/2% 3/8 of 1%
but less than 3.75
to 1
</TABLE>
Amendment No. 1
<PAGE> 4
-4-
<TABLE>
<S> <C> <C> <C>
Greater than or
equal to 1.50 to 1 1/4 of 1% 1-1/4% 3/10 of 1%
but less than 3.00
to 1
Less than 1.50 to 1 0% 1% 1/4 of 1%
</TABLE>
For purposes hereof, (a) the first "Rate Reset Date" shall mean the
earlier of (i) the third Business Day after the date on which the Administrative
Agent receives a Leverage Certificate as at December 31, 1997, and (ii) March
31, 1998: and (b) each subsequent Rate Reset Date shall mean the earlier of (i)
the third Business Day after the date on which the Administrative Agent receives
a Leverage Certificate as at the last day of the fiscal quarter of the Company
then most recently ended, and (ii) the date falling 45 days after such last day.
"Available Supplemental Amount" shall mean, at any time, the sum of (i)
$17,750,000 plus (ii) the aggregate amount of cash theretofore received by the
Company in consideration for the issuance by the Company of its capital stock
after the Closing Date (a) to any Person that is a shareholder of the Company on
the Closing Date after giving effect to the Acquisition or (b) to any fund
managed by First Reserve plus (iii) the Net Available Proceeds of any Equity
Issuance in respect of which the Supermajority Banks have agreed not to require
a prepayment or reduction of Commitments under Section 2.10 hereof plus (iv) the
aggregate amount of Net Available Proceeds received in cash by the Company or
any of its Restricted Subsidiaries from the Permitted Joint Venture in
consideration for the sale by the Company or any of its Restricted Subsidiaries
to the Permitted Joint Venture of Eligible Properties in excess of the
respective Stipulated Values for such Eligible Properties plus (v) subject to
consummation of the Anker Capital Disposition, the dollar amount of the tax
credits to which Anker Group, Inc. is entitled (whether or not utilized) in
association with the Anker Capital Developmental Authority Approval, in an
aggregate amount not to exceed $1,800,000 minus (vi) Investments theretofore
made by the Company or any of its Restricted Subsidiaries out of the Available
Supplemental Amount as permitted by Section 9.08(g) hereof.
"Purchase Agreement" shall mean the Stock Purchase Agreement dated as of
December 18, 1997 between P. Rodney Jackson, Donald L. Berg and Anker Group,
Inc., as the same shall be modified and supplemented and in effect from time to
time.
"Purchasers" shall mean P. Rodney Jackson and Donald L. Berg.
Amendment No. 1
<PAGE> 5
-5-
2.03. Section 9.05 of the Credit Agreement is hereby amended by (i)
deleting "and" at the end of clause (c)(iii) thereof, (ii) inserting "and" in
lieu of the period at the end of clause (d) thereof and (iii) inserting a new
clause (e) thereto reading as follows:
"(e) the consummation of the Anker Capital Disposition, provided
that such Disposition is made immediately following, and in connection
with, the Anker Capital Developmental Authority Approval."
2.04. Section 9.08 of the Credit Agreement is hereby amended by (i)
deleting "and" at the end of clause (j) thereof, (ii) inserting "and" in lieu of
the period at the end of clause (k) thereof and (iii) inserting a new clause (1)
thereto reading as follows:
"(I) a contribution to Anker Capital Corporation in an aggregate
amount not exceeding $4,000,000, provided that (i) the contribution is
made immediately following, and in connection with, the Anker Capital
Developmental Authority Approval and (ii) the Anker Capital Disposition
shall be consummated immediately after such contribution."
2.05. Section 9.10(a) of the Credit Agreement is hereby amended to
read as follows:
"(a) Net Leverage Ratio. The Company will not permit the Net
Leverage Ratio on any date to exceed the ratio set forth below opposite
the period during which such date falls:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From October 1, 1997
through December 31, 1997 6.95 to 1
From January 1, 1998
through March 31, 1998 7.25 to 1
From April 1, 1998
through June 30, 1998 7.00 to 1
From July 1, 1998
through September 30, 1998 6.50 to 1
From October 1, 1998
</TABLE>
Amendment No. 1
<PAGE> 6
-6-
<TABLE>
<S> <C>
through December 31, 1998 5.75 to 1
From January 1, 1999
through December 31, 1999 5.50 to 1
From January 1, 2000
through December 31, 2000 4.75 to 1
From January 1, 2001
through December 31, 2001 4.50 to 1
From January 1, 2002
through December 31, 2002 4.25 to 1
Thereafter 4.00 to 1"
</TABLE>
2.06. Section 9.10(b) of the Credit Agreement is hereby amended to
read as follows:
"(b) Net Interest Coverage Ratio. The Company will not permit the
Net Interest Coverage Ratio on any date to be less than the ratio set
forth below opposite the period during which such date falls:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From October 1, 1997
through December 31, 1997 2.00 to 1
From January 1, 1998
through June 30, 1998 1.50 to 1
From July 1, 1998
through September 30, 1998 1.65 to 1
From October 1, 1998
through September 30, 1999 2.00 to 1
From October 1, 1999
through September 30, 2000 2.35 to 1
</TABLE>
Amendment No. 1
<PAGE> 7
-7-
<TABLE>
<S> <C>
From October 1, 2000
through September 30, 2001 2.50 to 1
From October 1, 2001
through December 31, 2001 2.75 to 1
Thereafter 3.00 to 1"
</TABLE>
2.07. Section 9.11 of the Credit Agreement is hereby amended to read
as follows:
"9.11 Capital Expenditures. The Company will not permit the
aggregate amount of Capital Expenditures by the Company and its Restricted
Subsidiaries to exceed $24,000,000 for fiscal year 1998. The Company will
not permit Capital Expenditures for the purchase and development of any
reserves acquired after the Effective Date to exceed in the aggregate for
any single project (other than Big Creek (a "Permitted Capital
Expenditure")) (i) $5,000,000 for fiscal year 1998 and (ii) $10,000,000
for any fiscal year thereafter."
Section 3. Representations and Warranties. The Company represents
and warrants to the Banks that the representations and warranties set forth in
Section 8 of the Credit Agreement are true and complete on the date hereof as if
made on and as of the date hereof (or, if any representation or warranty is
expressly stated to have been made as of a specific date, as of such specific
date) and as if each reference in said Section 8 to "this Agreement" included
reference to this Amendment No. 1.
Section 4. Conditions Precedent. As provided in Section 2 above, the
amendments to the Credit Agreement set forth in said Section 2 shall become
effective, as of the date hereof, upon the satisfaction of the following
conditions precedent:
4.01. Execution by All Parties. This Amendment No. 1 shall have been
executed and delivered by the Company, the Subsidiary Guarantors and the
Majority Banks.
4.02. Documents. The Administrative Agent shall have received the
following documents, each of which shall be satisfactory to the Administrative
Agent in form and substance:
(1) Corporate Documents. Certified copies of the charter and by-laws
(or equivalent documents) of each Obligor (or, in the alternative, a
certification to the effect that none of such documents has been modified
since delivery thereof on the
Amendment No. 1
<PAGE> 8
-8-
Effective Date pursuant to the Credit Agreement) and of all corporate
authority for each Obligor (including, without limitation, board of
director resolutions and evidence of the incumbency of officers for each
Obligor) with respect to the execution, delivery and performance of this
Amendment No. 1 and the Credit Agreement as amended hereby and the loans
under the Credit Agreement as amended hereby and each other document to be
delivered by each Obligor from time to time in connection with the Credit
Agreement as amended hereby (and the Administrative Agent and each Bank
may conclusively rely on such certificate until it receives notice in
writing from each Obligor to the contrary).
(2) Opinions of Counsel to the Obligors. Opinions of counsel to the
Obligors as follows:
(i) Klett Lieber Rooney & Schorling, special Pennsylvania
counsel to the Obligors, as to (x) the due authorization (as to
Delaware Obligors), execution and delivery of this Amendment No. 1,
(y) the enforceability of the Credit Agreement as amended hereby and
(z) the absence of any conflict with other agreements by reason of
this Amendment No. 1 or the transactions contemplated hereby and
(ii) Spilman, Thomas & Battle, special West Virginia counsel
to the Obligors as to (w) the due authorization as to West Virginia
Obligors, (x) the absence of any conflict with other agreements by
reason of this Amendment No. 1 or the transactions contemplated
hereby, (y) the Anker Capital Developmental Authority Approval
having been finalized, and that Anker Group Inc. shall, as a result
thereof, be entitled to tax credits in the amount of 50% of the
Investment permitted under Section 9.08(1) of the Credit Agreement
as amended hereby and (z) the tax credits claimed by Anker Group,
Inc. not being subject to recapture nor the entitlement to such tax
credits being lost, as a result of the Anker Capital Disposition or
the failure of the Purchasers to comply with any requirements of the
West Virginia Capital Company Act, Code ss.5E-1-1, et seq. after the
date of the Anker Capital Disposition,
each of which opinions shall be in form and substance satisfactory to the
Administrative Agent (and each Obligor hereby instructs such counsel to
deliver such opinions to the Administrative Agent).
(3) Officer's Certificate. A Certificate of a Responsible Officer
prepared in good faith and based on reasonable estimates evidencing, as of
the date hereof, the projected utilization of the tax credits received by
Anker Group, Inc. as a result of the
Amendment No. 1
<PAGE> 9
-9-
Anker Capital Developmental Authority Approval, and which shall be
satisfactory in form and substance to the Administrative Agent.
(4) Other Documents. Such other documents as the Administrative
Agent or special New York counsel to Chase may reasonably request.
The effectiveness of the amendments to the Credit Agreement set
forth in Section 2 above is also subject to the payment or delivery by the
Company of the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy,
special New York counsel to Chase, in connection with the negotiation,
preparation, execution and delivery of this Amendment No. 1 and of the Credit
Agreement.
Section 5. Miscellaneous. Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect. This Amendment
No. 1 may be executed in any number of counterparts, all of which taken together
shall constitute one and the same amendatory instrument and any of the parties
hereto may execute this Amendment No. 1 by signing any such counterpart. This
Amendment No. 1 shall be governed by, and construed in accordance with, the law
of the State of New York.
Amendment No. 1
<PAGE> 10
- 10 -
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 1 to be duly executed and delivered as of the day and year first above
written.
ANKER COAL GROUP, INC.
By /s/ Bruce Sparter
--------------------------------------
Title: President
SUBSIDIARY GUARANTORS
ANKER ENERGY CORPORATION
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
ANKER GROUP, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
ANKER POWER SERVICES, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
Amendment No. 1
<PAGE> 11
- 11 -
ANKER WEST VIRGINIA MINING
COMPANY, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
BRONCO MINING COMPANY, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
HAWTHORNE COAL COMPANY, INC.
(formerly known as Anker
Development, Inc.)
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
HEATHER GLEN RESOURCES, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
Amendment No. 1
<PAGE> 12
- l2 -
JULIANA MINING COMPANY, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
KING KNOB COAL CO., INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
MARINE COAL SALES COMPANY
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
PATRIOT MINING COMPANY, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
VANTRANS, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
MELROSE COAL COMPANY, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
Amendment No. 1
<PAGE> 13
- 13 -
NEW ALLEGHENY LAND HOLDING
COMPANY, INC
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
UPSHUR PROPERTY, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
VINDEX ENERGY CORPORATION
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
ANKER VIRGINIA MINING COMPANY, INC.
By /s/ Michael M. Matesic
--------------------------------------
Title: Treasurer
Amendment No. 1
<PAGE> 14
- 14 -
BANKS
THE CHASE MANHATTAN BANK
By /s/ Michael D. Peist
--------------------------------------
Title: Vice President
BANK OF MONTREAL
By
--------------------------------------
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By
--------------------------------------
Title:
MELLON BANK, N.A.
By
--------------------------------------
Title:
THE BANK OF NOVA SCOTIA
By
--------------------------------------
Title:
Amendment No. 1
<PAGE> 15
- 14 -
BANKS
THE CHASE MANHATTAN BANK
By
--------------------------------------
Title: Treasurer
BANK OF MONTREAL
By
--------------------------------------
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ William V. Clifford
--------------------------------------
Title: Vice President
MELLON BANK, N.A.
By
--------------------------------------
Title:
THE BANK OF NOVA SCOTIA
By
--------------------------------------
Title:
Amendment No. 1
<PAGE> 16
- 14 -
BANKS
THE CHASE MANHATTAN BANK
By
--------------------------------------
Title:
BANK OF MONTREAL
By
--------------------------------------
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By
--------------------------------------
Title:
MELLON BANK, N.A.
By /s/ Robert Heuler
--------------------------------------
Title: VP
THE BANK OF NOVA SCOTIA
By
--------------------------------------
Title:
Amendment No. 1
<PAGE> 17
- 14 -
BANKS
THE CHASE MANHATTAN BANK
By
--------------------------------------
Title:
BANK OF MONTREAL
By
--------------------------------------
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By
--------------------------------------
Title:
MELLON BANK, N.A.
By
--------------------------------------
Title:
THE BANK OF NOVA SCOTIA
By /s/ J. Alan Edwards
--------------------------------------
Title: AUTHORIZED SIGNATORY
Amendment No. 1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9
<SECURITIES> 0
<RECEIVABLES> 33,597
<ALLOWANCES> 0
<INVENTORY> 8,051
<CURRENT-ASSETS> 46,672
<PP&E> 190,436
<DEPRECIATION> 24,389
<TOTAL-ASSETS> 296,354
<CURRENT-LIABILITIES> 37,202
<BONDS> 133,085
23,620
23,000
<COMMON> 0
<OTHER-SE> 26,866
<TOTAL-LIABILITY-AND-EQUITY> 296,354
<SALES> 147,894
<TOTAL-REVENUES> 147,894
<CGS> 140,931
<TOTAL-COSTS> 156,065
<OTHER-EXPENSES> (548)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,120
<INCOME-PRETAX> (13,743)
<INCOME-TAX> (3,848)
<INCOME-CONTINUING> (9,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,895)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
