<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 30, 1999
ANKER COAL GROUP, INC.
----------------------
(Exact Name Of Registrant As Specified in Its Charter)
Delaware 333-39643 52-1990183
-------- --------- ----------
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation or organization) Number) Identification No.)
2708 Cranberry Square 26508
Morgantown, West Virginia -----
------------------------- (Zip Code)
(Address Of Principal Executive Offices)
Registrant's telephone number, including area code: (304) 594-1616
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ANKER COAL GROUP, INC.
FORM 8-K
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ITEM 5. OTHER EVENTS .......................... 1
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS ..... 1
SIGNATURE PAGE ................................ 2
EXHIBIT INDEX ................................. 3
</TABLE>
<PAGE> 3
ITEM 5. OTHER EVENTS
Anker Coal Group, Inc. (the "Company") issued the attached press
release on September 30, 1999. In addition, in connection with the
proposed transaction described in the attached press release, the
Company provided projections and related assumptions and risks to
certain noteholders, which are attached to this Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
99.1 Press Release dated September 30, 1999
99.2 Projections and related assumptions and risks
1
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SIGNATURE
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
Date: September 30, 1999
2
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Exhibit 99.1
FOR IMMEDIATE RELEASE
September 30, 1999
Anker Coal Moves Forward with Proposed Restructuring
Morgantown, WV -- Anker Coal Group, Inc. (the "Company") announced today
that it has provided to a limited number of qualified holders a proposal to
restructure its 9-3/4% Senior Notes due 2007 ("old notes") and to raise
additional capital from one of the noteholders, Rothschild Recovery Fund, L.P.
The Company also announced that it does not intend to make the October 1, 1999
interest payment on the old notes until after completion of the private
restructuring and capital raising transactions and currently does not have
sufficient funds to make that payment.
Under the proposal, qualified noteholders would receive $800 principal
amount of 14-1/4% new secured notes for each $1,000 principal amount of old
notes exchanged. In addition, each exchanging noteholder will receive warrants
to purchase its pro rata share of 20% of the Company's fully diluted common
stock at a nominal exercise price. The proposed exchange ratio includes $743
principal amount of new secured notes in exchange for each $1,000 principal
amount of old notes and $57.00 principal amount of new secured notes in lieu of
the $48.75 cash interest payment due October 1, 1999 on the exchanging old
notes. The interest payment due April 1, 2000 on the new secured notes would be
paid in kind by issuing $71.25 principal amount of new secured notes on each
$1,000 principal amount of new secured notes on that date. After April 1, 2000,
interest on the new secured notes would be payable in cash. Holders of old notes
included in the private exchange would be required to consent to amendments to
the indenture governing the old notes that would, among other things, modify or
eliminate certain covenants.
In connection with the proposed private exchange, the Company also is
proposing to issue $6 million principal amount of new secured notes to a
shareholder of the Company controlled by the estate of John J. Faltis, former
Chairman and Chief Executive Officer of the Company, in exchange for
cancellation of that shareholder's stock in the Company and its rights to
require the Company to buy that stock for approximately $10.5 million.
The Company also proposes to issue to Rothschild for approximately $11.2
million in cash in a private placement simultaneously with the private exchange
approximately $13.2 million principal amount of new secured notes and warrants
to purchase 10% of the Company's common stock on a fully diluted basis at a
nominal exercise price. Rothschild has further agreed to provide the Company up
to $6.3 million of additional cash to fund a portion of the October 1, 2000
interest payment on the new secured notes by purchasing on October 1, 2000
additional new secured notes at a price equal to 95% of their then-current
market value. Rothschild's commitment to purchase the additional notes in
October 2000 is subject to conditions, including the absence of a
<PAGE> 2
material adverse change or material liens on the collateral securing the new
secured notes arising after the closing of the private restructuring
transactions.
The proposed restructuring transactions are subject to a number of
conditions, including (1) participation in the private exchange by holders of at
least 90% in aggregate principal amount of the old notes and consent by such
holders to amend the indenture for the old notes, (2) closing of the exchange
with the shareholder as described above, (3) purchase by Rothschild of the new
secured notes and warrants for approximately $11.2 million, (4) completion of an
inter-creditor agreement between the Company's senior secured lenders and the
collateral agent for the new secured notes, which is still under negotiation,
and (5) consent to the transactions and waiver of certain defaults in the
Company's senior secured credit agreement by the Company's senior secured
lenders. Rothschild, which holds approximately 33% of the old notes, has advised
the Company that it intends to exchange its old notes in the private exchange
and to purchase the new secured notes and warrants for approximately $11.2
million in cash as described above. The Company cannot give any assurance that
the proposed restructuring transactions will be completed.
The Company has provided its restructuring proposal to a limited number of
qualified holders previously identified by the Company. No other holders will be
permitted to participate in the private exchange. The Company currently intends
to offer the other holders of old notes the opportunity to exchange their old
notes for new secured notes after completion of the private restructuring
transactions, although the Company is not obligated to do so and can give no
assurance that it will ultimately decide to conduct a subsequent public exchange
offer. In addition, the Company may be prohibited from proceeding with a public
exchange if the collateral securing the new secured notes becomes subject to
material liens arising after the closing date of the private restructuring
transactions that the Company is unable to remove. If the Company proceeds with
a public exchange offer, it would be made pursuant to either a registered
exchange or an exchange that is exempt from the registration requirements of the
Securities Act. The Company currently contemplates that, if it determines to
conduct the public exchange, it will offer $743 principal amount of new secured
notes bearing interest from October 1, 1999 to holders of each $1,000 principal
amount of old notes. Warrants or other equity will not be included in any public
exchange.
The securities to be issued in the private restructuring and capital
raising transactions as described above have not and will not be registered
under the Securities Act of 1933 and may not be offered or sold in the United
States absent registration or an applicable exemption from registration. This
press release is not and shall not be deemed to constitute an offer to sell or
the solicitation of an offer to buy any security.
In connection with the private restructuring proposal, the Company has
provided financial projections to certain holders of old notes eligible to
participate in the private exchange. A copy of these projections and the related
assumptions and risks will be filed with the Securities and Exchange Commission
as an exhibit to a Current Report on Form 8-K.
2
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This press release contains statements that are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, including the Company's ability to implement its
business plan, the availability of liquidity and capital resources, the ability
to achieve anticipated cost savings, securing new mining permits, unforeseen
adverse geologic conditions, successful completion of the planned restructuring
and receipt of additional capital, and other factors identified in the Company's
filings with the SEC. Actual results may differ materially from those described
or implied herein as a result of various factors, many of which are beyond the
control of the Company.
Anker Coal Group, Inc. and its subsidiaries produce and sell coal used
principally for electric generation and steel production in the eastern
United States.
Contact Bruce Sparks, President, Anker Coal Group, Inc. at (304)
594-1616.
3
<PAGE> 1
Exhibit 99.2
ANKER COAL GROUP, INC.
PROJECTED SUMMARY FINANCIAL STATEMENTS
The following pages include financial projections for the years 1999
through 2003 prepared by Anker Coal Group, Inc. (the "Company") in connection
with its proposed private restructuring proposal, the assumptions used in
preparing the projections and risk factors that should be considered.
The projections and assumptions are subject to many risks and
uncertainties, including those described in the risk factors following the
projections. These projections are not guarantees of future performance.
Investors are cautioned not to place undue reliance on the projections since
many factors could cause actual results to vary, in some cases substantially,
from those projected. The projections are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
The Company originally prepared the projections on June 4, 1999 for the
purpose of evaluating the impact of the proposed restructuring then under
discussion. Those projections were based upon actual financial results through
April 30, 1999 and other information available to the Company at the time the
projections were prepared. The projections have been revised to reflect changes
in the terms of the proposed restructuring, but not actual results of operations
since April 30, 1999. The Company is not undertaking to update them at any time.
<PAGE> 2
ANKER COAL GROUP, INC.
ASSUMPTIONS USED FOR PROJECTIONS
1999-2003
- - Coal sales dollars are based on 1999 contract prices and spot market prices
(where applicable) and expected volumes. For 2000 and beyond, coal sales
dollars are based on contractual prices (after giving effect to any
escalation clauses contained in firm contracts) and estimated spot market
prices and expected volume.
- - As of July 1999, the Company had converted its underground mining operations
from company-operated mines to contractor-operated mines. By using contract
miners, the Company has been able to significantly reduce the level of
engineering, accounting and human resource support needed for these
operations. As a result, the Company is projecting a 31% reduction in general
and administrative expenses from 1998 levels. A significant portion of these
savings were achieved prior to September 1999.
- - During 1998 and 1999, the Company reduced the size of its sales force. The
Company was able to reduce its sales force due in part to overstaffing and
the anticipated decrease in coal production. As a result, the Company is
projecting a 35% reduction in selling expenses from 1998 levels, the majority
of which has already been achieved.
- - The Upshur County, West Virginia deep mine has been projected to be operated
by a contract miner at a fixed price per ton for clean coal delivered to the
preparation plant. The contract miner assumed operations on June 1, 1999.
Starting in 2000, the projected cash margin for this mine is $5.50 per ton
versus a 1998 cash margin of $2.91 per ton.
- - The Raleigh County, West Virginia deep mine has been projected to be operated
by a contract miner at a fixed price per ton for clean coal delivered to the
preparation plant. The contract miner assumed operations on July 5, 1999.
Starting in 2000, the projected cash margin for this mine is $7.25 per ton
versus a 1998 cash margin of $4.05 per ton.
- - The Garrett County, Maryland deep mine has been projected to be operated by a
contract miner at a fixed price per ton for clean coal delivered to the
preparation plant. The contract miner assumed operations on or about April
12, 1999. Starting in 2000, the projected cash margin for this mine is $1.00
per ton versus a 1998 cash loss of $4.77 per ton.
- - The Barbour County, West Virginia deep mine has been projected to be
operated by a contract miner at a fixed price per ton for clean coal
delivered to the preparation plant. The contract miner assumed operations
on June 1, 1999. Starting in 2000, the projected cash margin for this
mine is $7.99 per ton versus a 1998 cash margin of
2
<PAGE> 3
$1.46 per ton. A portion of this savings is attributable to the reduction in
travel time which resulted from moving the operating sections of the mine.
The operating sections were moved shortly after the contractor assumed
operations because of a depletion of the mineable reserves in other areas of
the mine. When the new operating sections of the mine are fully developed,
the Company still feels it can achieve the projected results.
- - A new deep mine in Upshur County, West Virginia began operation on September
20, 1999. A contract miner will operate the deep mine at a fixed price per
ton for clean coal delivered to the preparation plant. The projected cash
margin for this mine is $4.40 per ton.
- - The Webster County, West Virginia surface operations are projected to be
reclaimed and all production to cease during 1999.
- - It is projected that the Company will produce/purchase the following tons:
<TABLE>
<CAPTION>
PRODUCED TONS PURCHASED TONS TOTAL TONS
------------- -------------- ----------
<S> <C> <C> <C>
1999 5,162,000 3,631,000 8,793,000
2000 6,672,000 3,622,000 10,294,000
2001 6,732,000 3,622,000 10,354,000
2002 6,432,000 3,622,000 10,054,000
2003 7,452,000 3,622,000 11,074,000
</TABLE>
- - It is projected that a surface mine permit will be granted for operations in
Grant County, West Virginia with this operation to begin in January of 2000.
This permit has not been issued to date.
- - The Projections incorporate the following assumptions in connection with the
capital structure and the Senior Note restructuring:
- The Foothill Revolver under current contractual terms.
- The Foothill Term Loan under current contractual terms.
- The Senior Note restructuring is consummated at the end of September
1999, with 90% of all noteholders exchanging for New 14.25% Notes.
- Borrowing $6.3 million for the October 1, 2000 interest payment and
issuing $7.8 million principal amount of secured notes for such
borrowing.
- Participation by JJF Group in the Senior Note restructuring.
- - The contingency expense included in the projections are to hedge against
potential permit delays and adverse geological conditions that may affect the
operating performance at some of the Company's mines.
3
<PAGE> 4
- - The Preferred Stock Dividends are accrued in accordance with Preferred Stock
terms but are not projected to be paid in cash based upon the terms of the
Company's debt agreements.
- - The Other Operating Cash Expenses in the Cash Flow Statement include advance
mining royalties, reclamation expenditures for closed mining operations, and
changes in the Company's working capital.
- - The Other Investing Cash in the Cash Flow Statement includes cash from asset
sales, the estimated loss on buyouts and sales of leased equipment and
payments to the UMWA Reachback Fund.
- - The Company's projected interest expense for the new secured notes has
been shown to incorporate the projected financial statement impact of the
restructuring. Even though the principal obligations for the new secured
notes have been reduced, the increase in the interest rate does not give
rise to an adjustment in the carrying value of the debt on the Company's
balance sheet. The difference between the actual principal balance of the
new secured notes and the debt shown on the balance sheet will be
amortized through changes in the Company's recorded interest expense.
- - While the Company has accumulated net operating losses that exceed the
maximum amount of cancellation of debt income that could result from the
private exchange, the Company could still be liable for alternative minimum
tax on the cancellation of debt income. Even though the Company feels that
the alternative minimum tax can range from $700,000 to $4.6 million, the
attached projections show a cash affect of $4.0 million paid in alternative
minimum tax.
4
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ANKER COAL GROUP, INC.
PROJECTED SUMMARY FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
TOTAL TOTAL TOTAL TOTAL TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FLASH INCOME STATEMENT
Sales 240,800 274,076 267,642 256,242 282,558
Operating Expenses 232,776 253,340 244,611 232,918 257,571
--------- --------- --------- --------- ---------
Gross Profit 8,024 20,736 23,031 23,324 24,987
General and Administrative Expenses 7,451 6,900 6,900 6,900 6,900
Closed Mine & Reclamation Expenses 1,164 960 960 960 960
Contingency Expense 1,333 6,000 2,924 -- --
--------- --------- --------- --------- ---------
Earnings Before Interest and Taxes (1,924) 6,876 12,247 15,464 17,127
Interest Expense 15,561 18,175 18,485 16,529 16,347
Taxes 4,000 (3,370) (2,088) (1,119) (602)
--------- --------- --------- --------- ---------
Net Income before Preferred Stock Dividends (21,485) (7,929) (4,150) 54 1,382
Preferred Stock Dividends (2,004) (2,004) (2,004) (2,004) (2,004)
Extraordinary Item -- -- -- -- --
--------- --------- --------- --------- ---------
Net Income Available to Common (23,489) (9,933) (6,154) (1,950) (622)
========= ========= ========= ========= =========
Earnings Before Interest, Taxes, $ 16,389 $ 27,674 $ 29,999 $ 29,891 $ 32,227
========= ========= ========= ========= =========
Depreciation and Amortization
</TABLE>
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FLASH CASH FLOW STATEMENT
Earnings Before Interest and Taxes (1,924) 6,876 12,247 15,464 17,127
Net Interest (15,561) (18,175) (18,485) (16,529) (16,347)
Depreciation 18,313 20,798 17,752 14,427 15,100
Other (14,573) (8,010) (4,727) (4,206) (7,947)
--------- --------- --------- --------- ---------
Operating Cash Flow ($ 13,745) $ 1,489 $ 6,787 $ 9,156 $ 7,933
========= ========= ========= ========= =========
Capital Spending (5,981) (1,536) (1,332) (5,592) (1,092)
Other (1,871) (1,223) 18,977 (348) (348)
--------- --------- --------- --------- ---------
Investing Cash Flow ($ 7,852) ($ 2,759) $ 17,645 ($ 5,940) ($ 1,440)
========= ========= ========= ========= =========
Borrowings/Repayments/Restructuring 13,938 12,270 (14,648) (2,149) (1,406)
========= ========= ========= ========= =========
Change in Cash and Cash Equivalents ($ 7,659) $ 11,000 $ 9,784 $ 1,067 $ 5,087
========= ========= ========= ========= =========
SELECTED BALANCE SHEET ITEMS
Total Debt ex Revolver 130,272 143,485 128,837 126,687 125,281
Revolver Balance 10,371 11 - - -
Cash - - 9,773 10,838 15,925
Line of Credit Availability $ 7,132 $ 22,390 $ 21,185 $ 20,339 $ 22,291
EBITDA/Cash Interest 1.83 2.55 1.54 1.71 1.86
EBITDA-Capital Spending/Cash Interest 1.17 2.41 1.47 1.39 1.79
</TABLE>
5
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ANKER COAL GROUP, INC.
RISK FACTORS TO BE CONSIDERED IN CONNECTION WITH THE PROJECTIONS
Investors should consider carefully the risk factors set forth below in
connection with their consideration of the projections provided in this press
release. The risk factors set forth below are generally applicable to the old
notes as well as the new secured notes. References in this Section to "us,"
"we," "our," or the like, refer to the Anker Coal Group, Inc. and its
subsidiaries and predecessors, unless the context indicates otherwise.
THE RESTRUCTURING TRANSACTIONS ARE SUBJECT TO MANY IMPORTANT
CONDITIONS, AND THE COMPANY CANNOT GIVE ANY ASSURANCE THAT THE TRANSACTION
WILL BE COMPLETED.
The projections assume that the private restructuring transactions will be
completed. However, the transactions are subject to many important conditions
including (1) participation in the private exchange by holders of at least 90%
aggregate principal amount of the old notes and consent by such holders to amend
the indenture for the old notes, (2) closing of the exchange with JJF Group in
which the Company would issue $6 million of new secured notes in exchange for
cancellation of JJF Group's stock in the Company and rights to require the
Company buy that stock for approximately $10.5 million (including accrued
interest), (3) purchase by Rothschild of the new secured notes and warrants in
the private placement for approximately $11.2 million, (4) completion of an
inter-creditor agreement between the Company's senior secured lenders under the
Foothill Loan Agreement and the collateral agent for the new secured notes,
which is still under negotiation, and (5) consent to the transactions and waiver
of certain defaults in the Foothill Loan Agreement by the Company's senior
secured lenders. The Company cannot give any assurance that the transactions
will be completed as proposed.
THE RESTRUCTURING OF THE OLD NOTES IN THE PRIVATE EXCHANGE COULD RESULT IN
ADDITIONAL TAX LIABILITY FOR THE COMPANY AND THE GUARANTORS.
The consummation of the private restructuring transactions may cause the
Company to recognize significant cancellation of debt income. In this regard,
the Company may be required to recognize cancellation of debt income in an
amount equal to the difference between the face amount of the old notes and the
issue price of the new secured notes being issued in the private exchange. The
issue price of the new secured notes is likely to be based on the trading price
of the old notes on the date of the private exchange. The Company understands
that, during the past year, the old notes have traded at prices ranging from
$0.55 to $0.35 on the dollar, with more recent trades taking place near the
lower end of that range. Assuming the old notes continue to trade in that range
as of the closing of the private exchange and that 90% of the old notes are
exchanged for new secured notes in the private exchange, the amount of
cancellation of debt income could range from $81.0 million (if market price of
the old notes is at the low end of the range of trading prices for the past
year) to $56.0 million (if market price of the old notes is at the high end of
the range of trading prices for the past year).
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<PAGE> 7
The amount of cancellation of debt income the Company would be required to
recognize would be reduced, however, to the extent that it was determined to be
insolvent before the private exchange. The unrecognized cancellation of debt
would instead reduce certain tax attributes of the Company, such as net
operating losses. The Company expects to have accumulated net operating losses
that would substantially offset the cancellation of debt income that could
result from the private exchange. Nevertheless, the Company could still be
liable for alternative minimum tax on the cancellation of debt income in amounts
(assuming the Company is not insolvent and that old notes are trading in the
range specified above as of the closing of the private exchange) ranging from
$700,000 to $4.6 million, as a result of the limitation on the AMT net operating
losses.
The private restructuring transactions may significantly limit the
Company's ability to utilize its net operating losses in existence before the
closing date of the transactions to offset its post-closing date taxable income.
One or more new secured notes (and the new secured noted to be paid in
kind for the April 1, 2000 interest payment) may be considered applicable high
yield debt obligations. If a new secured note is an applicable high yield debt
obligation, the Company is limited as to the amount of original issue discount
it may deduct on such note.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND CASH FLOW PROBLEMS, AND THE
OPINION OF OUR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS INCLUDED IN OUR
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 CONTAINS A
GOING CONCERN QUALIFICATION.
The Company recorded net losses of approximately $107.0 million and $11.3
million for the year ended December 31, 1998 and the six months ended June 30,
1999, respectively, including a loss on impairments and restructuring charges of
approximately $91.0 million for the year ended December 31, 1998. Our
independent public accountants have issued an opinion that includes a
qualification as to the ability of the Company to continue as a going concern
with respect to our consolidated financial statements for the year ended
December 31, 1998.
As a result of the going concern qualification, we will be required to
provide security in order to obtain reclamation bonds for new mining permits,
including posting cash or cash equivalents for all or a part of the amount of
such bonds. We have been and will continue to meet with our principal customers
and suppliers to explain our financial condition. However, there can be no
assurance that we will be able to avoid adverse impacts caused by changes in the
terms on which we do business with customers and suppliers.
7
<PAGE> 8
WE ARE IN THE PROCESS OF REVALUING OUR NON-OPERATING ASSETS, WHICH COULD
RESULT IN A DOWNWARD ADJUSTMENT OF THE VALUE OF THOSE ASSETS ON OUR BALANCE
SHEET.
In light of the Company's financial condition and the going concern
qualification with respect to the Company's 1998 consolidated financial
statements, in connection with the audit of the Company's financial statements
for the year ended December 31, 1999, during the fourth quarter of 1999 the
Company will be reviewing the carrying values of its non-operating assets. This
review will include an independent appraisal of these assets. Although the
Company cannot predict the outcome of that review, the review could result in
downward adjustments to the amounts recorded for those assets on the Company's
balance sheet.
WE ARE HIGHLY LEVERAGED AND HAVE SIGNIFICANT DEBT SERVICE REQUIREMENTS.
We have substantial indebtedness and significant debt service obligations.
As of June 30, 1999, we had total long-term indebtedness, including the old
notes and current maturities, in the amount of $152.3 million. For the six-month
period ended June 30, 1999, our earnings were insufficient to cover fixed
charges in the amount of approximately $11.5 million. The indenture for the new
secured notes permits, and the old indenture as proposed to be amended would
permit, us and our subsidiaries to incur additional indebtedness, including
secured indebtedness, subject to certain limitations.
Our high degree of leverage could have important consequences, including,
without limitation, that (i) assuming the private placement to Rothschild is
completed, beginning October 1, 2000, a substantial portion of our cash from
operations will be committed to the payment of debt service, (ii) our ability to
obtain additional financing in the future for working capital, capital
expenditures or acquisitions is substantially limited and (iii) our levels of
indebtedness and interest expense limit our flexibility in reacting to changes
in the business environment.
As of September 17, 1999, the total amount of our secured indebtedness and
that of our subsidiaries who have guaranteed our indebtedness which would have
effectively ranked senior to the new secured notes, old notes and subsidiary
guarantees of the new secured notes was approximately $26.9 million. This
includes our obligations and the obligations of the guarantors of the new
secured notes under the Foothill Loan Agreement, which are secured by a first
priority lien on substantially all of our assets and those of the guarantors
(other than real property located in Maryland), as well as other indebtedness
secured by liens that would be permitted under the indenture for the new secured
notes, all of which effectively rank prior to the new secured notes and old
notes, and the subsidiary guarantees. Amounts outstanding under the Foothill
Loan Agreement after the closing date of the private restructuring transactions
can be as much as $55.0 million principal amount in the aggregate, and the
indenture for the new secured notes and the indenture for the old notes as
proposed to be amended would permit the Company to incur up to $10.0 million of
secured purchase money indebtedness with priority over the new secured notes. As
of September 17, 1999, amounts outstanding under the Foothill Loan Agreement
were $26.5 million.
8
<PAGE> 9
Our ability to pay principal and interest on the new secured notes and the
old notes and to satisfy our other debt service obligations, including, without
limitation, the payments under the Foothill Loan Agreement, will depend upon the
future operating performance of our subsidiaries, which could be affected by
many factors. These include prevailing economic conditions in the markets we
serve and financial, business and other factors, certain of which are beyond our
control, as well as the availability of borrowings under the Foothill Loan
Agreement or successor facilities. To satisfy our debt service obligations, we
may be required to refinance all or a portion of our existing indebtedness,
including the new secured notes and the old notes, at or prior to maturity or
sell assets or seek to raise additional equity capital. No assurance can be
given that any such debt or equity financing will be available to us on
acceptable terms, if at all.
Under the indenture for the old notes, the Company was obligated to make a
semi-annual interest payment in the approximate amount of $6.1 million on April
1, 1999. The Company elected to defer making the interest payment at that time.
On April 29, 1999, before the expiration of the grace period under the indenture
for the old notes, the Company made the interest payment due under the old
indenture on the old notes. Funds used to make this interest payment were
borrowed under the Foothill Loan Agreement. The Company does not expect to be
able to make the interest payment due October 1, 1999 on the old notes unless
and until the private restructuring transactions (including the sale of new
secured notes to Rothschild for cash) are consummated. Failure to make the
interest payment on the old notes by October 31, 1999 would be an Event of
Default under the Foothill Loan Agreement and the old notes indenture entitling
Foothill and the old notes trustee, respectively, to take enforcement actions.
In that event, the Company could be forced to seek protection under the United
States Bankruptcy Code or similar state laws.
OUR BORROWING BASE AND LIQUIDITY POSITION HAVE DECLINED.
Our borrowing availability under the revolving credit facility that is
part of the Company's existing credit facility with Foothill, as agent, has
decreased from $15.5 million at December 31, 1998 to $5.3 million at September
17, 1999 (plus $2.0 million of undrawn supplemental availability under an
interim overadvance arrangement that will expire on November 2, 1999). The
decrease is primarily related to the Company's borrowing to make the interest
payment on the old notes on April 29, 1999, performing reclamation in Webster
County, West Virginia and capital expenditures. Revolving credit availability
also has been reduced as a result of lower coal production and coal shipments.
Future revolving credit availability will be impacted by changes in coal
production and the resulting changes in coal inventory and accounts receivable.
The reduced borrowing base materially reduces our liquidity. Although we have
developed and are implementing our business plan to address these issues,
including our proposal to complete the private restructuring transactions, we
continue to experience liquidity problems.
In addition, the Foothill Loan Agreement provides that in order to advance
funds to the Company and other guarantors, the borrowers under the Foothill Loan
Agreement
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must have borrowing availability of at least $5.0 million after giving effect to
such advances and for the thirty days immediately preceding such advances.
During the month of July 1999, the Company's borrowing base declined below $5.0
million on five separate days. The borrowers continued to advance funds to the
Company and the guarantors, which advances constituted a violation of the
intercompany loan covenant under the Foothill Loan Agreement. It is a condition
to closing of the private restructuring transactions that Foothill consent to
those transactions and waive this and any other Events of Default existing as of
the closing date of the transactions.
THE TERMS OF THE NEW SECURED NOTES, THE OLD NOTES AND THE FOOTHILL LOAN
AGREEMENT CONTAIN SIGNIFICANT RESTRICTIONS ON OUR OPERATIONS.
The indenture for the new secured notes and the indenture for the old
notes as proposed to be amended contain certain covenants that, among other
things: (i) limit the incurrence by us and our subsidiaries of additional
indebtedness and the issuance of certain preferred stock; (ii) restrict our
ability and the ability of our subsidiaries to pay dividends and make other
restricted payments (including investments); (iii) limit the ability of our
subsidiaries to incur dividend and other payment restrictions imposed by other
parties; (iv) limit transactions by us and our subsidiaries with affiliates; (v)
limit our ability and that of our subsidiaries to make asset sales; (vi) limit
our ability and that of our subsidiaries to incur certain liens; (vii) limit our
ability to consolidate or merge with or into, or to transfer all or
substantially all of our assets to, another person and (viii) limit our ability
to engage in other lines of business.
The indenture for the new secured notes contains additional covenants and
requirements with respect to the maintenance of the security interests and
collateral securing the payment of the new secured notes, including significant
limitations and restrictions on our ability to dispose of assets or use proceeds
from any such permitted disposition. The indenture for the new secured notes,
however, does allow us to use, to the extent not used to pay down the Foothill
term loan or for certain specified purposes, up to an aggregate of $1.0 million,
plus up to 40% of the excess over $1.0 million, of the proceeds of permitted
dispositions to fund operations.
In addition, the Foothill Loan Agreement contains additional and more
restrictive covenants than the indenture for the new secured notes and requires
us to maintain specified financial ratios and satisfy certain tests relating to
our financial condition. Our ability to comply with the covenants in the
indenture for the new secured notes, the indenture for the old notes as proposed
to be amended and the Foothill Loan Agreement may be affected by events beyond
our control, including prevailing economic, financial, competitive, legislative,
regulatory and other conditions. The breach of any such covenants or
restrictions, if not cured within any applicable cure period, could result in a
default under the indenture for the new secured notes, the indenture for the old
notes as proposed to be amended, or the Foothill Loan Agreement which would
permit the holders of the new secured notes and the old notes, or the lenders
under the Foothill Loan Agreement, as the case may be, to declare all amounts
borrowed thereunder to be due and payable, together with accrued and unpaid
interest, and, in the case of the lenders under
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the Foothill Loan Agreement, to terminate their commitments to make further
extensions of credit under the Foothill Loan Agreement.
As of September 17, 1999, we had approximately $13.2 million of
outstanding indebtedness under the term loan portion and $13.3 million of
outstanding indebtedness under the revolving credit portion of the Foothill Loan
Agreement. Also as of that date, we had an additional $5.3 million of undrawn
availability under the revolving credit portion of the Foothill Loan Agreement,
excluding the additional interim availability of $2.0 million. Total
availability under the revolving credit portion of the Foothill Loan Agreement
may be increased after the closing date of the proposed private restructuring
transactions up to $40 million (less amounts then outstanding and other reserves
in accordance with the Foothill Loan Agreement) depending upon the value of the
collateral that forms the borrowing base for the revolver. All of these amounts
would effectively rank prior to the new secured notes, the old notes and the
subsidiary guarantees.
If we were unable to repay our indebtedness to the lenders under the
Foothill Loan Agreement, including any amounts drawn under a $2.0 million
interim overadvance arrangement that will expire November 2, 1999 (all of which
was available at September 17, 1999), such lenders could proceed against any or
all of the collateral securing the indebtedness under the Foothill Loan
Agreement, which collateral consists of substantially all of our assets and
those of the guarantors (other than real property located in Maryland) and
includes all of the collateral securing the new secured notes. In addition, if
we fail to comply with the financial and operating covenants contained in the
Foothill Loan Agreement, such failure could result in an event of default
thereunder, which could permit the acceleration of the debt incurred thereunder
and, in some cases, cross-acceleration and cross-default of indebtedness
outstanding under other of our debt instruments, including the new secured notes
and the old notes.
WE ARE ORGANIZED AS A HOLDING COMPANY, AND WE DEPEND ON THE SUCCESS OF OUR
OPERATING SUBSIDIARIES, WHICH ALSO HAVE SIGNIFICANT INDEBTEDNESS.
We are a holding company and conduct all of our operations exclusively
through our subsidiaries. Our only significant assets are the capital stock of
our wholly owned subsidiaries. As a holding company, we are dependent on
dividends or other distributions of funds from our subsidiaries to meet our debt
service and other obligations, including our obligations under the new secured
notes and old notes. Substantially all of our subsidiaries are guarantors under
the old notes and will be guarantors under the new secured notes. In addition,
all of our operating subsidiaries are borrowers under, and other of our
subsidiaries guarantee the indebtedness under, the Foothill Loan Agreement,
under which all obligations are secured by a first priority lien on
substantially all of our assets and those of the subsidiary guarantors.
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WE DEPEND ON KEY CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND
THE LOSS OF ONE OR MORE OF THEM COULD ADVERSELY AFFECT US.
A substantial portion of our coal is sold pursuant to long-term coal
supply contracts that are important to the stability and profitability of our
operations. The execution of a satisfactory long-term contract is frequently the
basis on which we undertake the development of coal reserves required to be
supplied under the contract. Between 1994 and 1998, approximately 75% of our
revenues from coal sales were made under long-term contracts, and approximately
80% of our revenues in 1999 are expected to be attributable to coal sales under
long-term contracts. Our long-term contracts had a weighted average term of
approximately 5 years as of December 31, 1998.
Our shipments to Potomac Electric Power Company accounted for 10% of our
revenues in 1998 and are expected to account for approximately 27% of our
revenues in 1999. Our long-term contracts with affiliates of AES Corporation
accounted for more than 18% of our revenues in 1998 and are expected to account
for approximately 18% of revenues in 1999. Our long-term contract with Virginia
Electric Power Company ("VEPCO") accounted for approximately 11% of our revenues
in 1998 and is expected to account for approximately 10% of revenues in 1999.
The loss of these or other long-term contracts could have a material adverse
effect on our financial condition and results of operations.
Virtually all of our long-term coal supply contracts are subject to price
adjustment provisions that permit an increase or decrease in the contract price
at specified times to reflect changes in certain price or other economic
indices, taxes and other charges. One of our 15 long-term coal supply contracts
also contains price reopener provisions that provide for the contract price to
be adjusted upward or downward at specified times on the basis of market
factors. Failure of the parties to agree on a price pursuant to such price
adjustment and reopener provisions can lead to early termination of the
contract. The long-term contracts also typically contain force majeure
provisions allowing suspension of performance by us or the customer to the
extent necessary during the duration of certain events beyond the control of the
affected party, including labor disputes and changes in government regulations.
In August 1999, to resolve disputes under an agreement with VEPCO, the Company
and VEPCO entered into an amendment to their agreement, which, among other
things, gives VEPCO the right, but not the obligation, to terminate its contract
to purchase coal from the Company if the West Virginia Division of Environmental
Protection ("WVDEP") does not issue a permit for the resumption of operations at
its Grant County surface mine by October 15, 1999. If WVDEP fails to issue the
permit by October 15, 1999 and VEPCO exercises its right to cancel the contract,
the Company intends to seek replacement buyers for the subject coal, but no
assurance can be given that any such replacement sales would occur on terms
comparable to those of the VEPCO contract, if at all. The Company has been
advised orally by a WVDEP official that WVDEP has decided to issue a permit
covering a portion of the Grant County surface mine operation. The Company has
not yet received written confirmation that the permit has been granted. See "We
have been unable to obtain a new mining permit for one of our important
properties, which has caused
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reduced levels of coal production. We are uncertain if or when we will be able
to obtain the permit" below.
The margins we realize under our long-term coal supply contracts depend on
a variety of factors. In addition, price adjustment, price reopener and other
provisions may reduce the insulation from short-term coal price volatility that
such contracts provide. If any of our long-term contracts were modified or
terminated, we could be adversely affected to the extent that we were unable to
find alternate customers at the same level of profitability.
TRANSPORTATION COSTS REPRESENT A SIGNIFICANT PORTION OF THE DELIVERED
COST OF COAL, AND INCREASES IN TRANSPORTATION COSTS COULD MAKE OTHER ENERGY
SOURCES MORE COMPETITIVE WITH COAL. TRANSPORTATION DISRUPTIONS COULD IMPAIR
OUR ABILITY TO SELL COAL.
The United States coal industry depends on rail, trucking and barge
transportation to deliver shipments of coal to customers. Disruption of these
transportation services could temporarily impair our ability to supply coal to
our customers and thus adversely affect our business and operating results.
Transportation costs are a significant component of the total cost of supplying
coal to customers and can affect significantly a coal producer's competitive
position and profitability. Increases in our transportation costs, or changes in
such costs relative to transportation costs incurred by providers of competing
coal or of other fuels, could have an adverse effect on our operations and
business.
Coal producers depend upon rail, barge, trucking, overland conveyor and
other systems to provide access to markets. One of our major rail transportation
providers, Conrail, recently was acquired by CSX Transportation, Inc. and
Norfolk Southern Corporation. The integration of Conrail into CSX Transportation
and Norfolk Southern began on June 1, 1999. Although we have not yet experienced
any service disruptions because of the merger, disruptions in service may occur
during the transition period. We do not know how long the transition period will
last. Disruption of transportation services because of problems arising from the
integration process or from weather-related problems, strikes, lock-outs or
other events could impair our ability to supply coal to customers and could have
a material adverse effect on our business, financial condition and results of
operations.
OUR DIVESTITURE STRATEGY HAS BEEN HAMPERED BY OUR CURRENT FINANCIAL
CONDITION. IN ADDITION, OUR EXISTING CREDIT FACILITY LIMITS OUR ABILITY TO USE
ASSET SALE PROCEEDS IN OUR BUSINESS.
Our business plan involves the sale of certain non-operating assets and
selected non-strategic operating properties. The non-operating assets that we
are seeking to sell are those that we believe require substantial development
costs or have significant holding costs. In our opinion, the operating
properties that we plan to sell either complement non-operating assets being
held for sale or are not integral to our long-term operating strategy. We have
been discussing the sale of these properties with third
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parties. We believe that our efforts to market these properties to date have
been hampered by our financial condition. We believe that we will be successful
in selling all or a part of these assets during the next 12 to 24 months.
However, there can be no assurance that asset sales will be completed on terms
acceptable to us, if at all. Further, asset sales involve a number of special
risks, including possible adverse effects on our operating results, diversion of
management's attention, failure to retain key personnel and risks associated
with unanticipated events or liabilities, some or all of which could have a
material adverse effect on our financial condition and results of operations.
Furthermore, the Foothill Loan Agreement requires us to use the first $5.0
million of asset sale proceeds to reduce our $15.0 million term loan from
Foothill. Payments against the term loan cannot be reborrowed and therefore
cannot be used to fund operating costs or other expenses of the Company. As a
result of this provision, we will not be able to use the first $5.0 million of
asset sale proceeds to reinvest in our business, fund operations or service the
indebtedness on the new secured notes or the old notes.
OUR USE OF CONTRACT MINERS POSES BUSINESS RISKS.
Our business plan includes improving cash flow by using contract mining
services for all of our underground mining operations. The Company believes that
by utilizing contract miners it will reduce operating expenses, general and
administrative expenses and month-to-month cost fluctuations. In addition,
because the contract miners are responsible for mine development and
maintenance, the Company will have reduced capital costs. As of July 5, 1999,
contract miners were operating all of our existing underground mines. In
addition, we have finalized the contract mining agreement for operation of our
new underground mine in Upshur County, West Virginia, and the contract miner
began operations on September 20, 1999.
There is a risk, however, that the contractors will not be able to perform
their obligations, including the production requirements, over the life of the
contract mining agreements. While we have taken care in selecting the contract
miners for our underground mines, each of our contract miners is owned by a
single individual. In addition, as a general matter, contract mining companies
are usually not well capitalized. Thus, if the owner of one of our contract
mining companies were to die or if a contract miner began experiencing financial
difficulties for any reason, there is a risk that the contract mining company
would not be able to perform its obligations to the Company. In that event, we
could experience a material decline in coal production if we were unable to
secure a new contract mining company or assume the operations ourselves in a
timely manner.
WE HAVE BEEN UNABLE TO OBTAIN A NEW MINING PERMIT FOR ONE OF OUR IMPORTANT
PROPERTIES, WHICH HAS CAUSED REDUCED LEVELS OF COAL PRODUCTION. WE ARE UNCERTAIN
IF OR WHEN WE WILL BE ABLE TO OBTAIN THE PERMIT.
Coal production tonnage levels were lower in the first quarter of 1999 due
in part to the idling of our Grant County surface mine in December 1998. This
surface mine was
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idled because we had mined all of our then permitted reserves and were not able
to obtain a new mining permit for our adjacent properties, which would have
allowed for the continuation of the surface mining operation. With the idling of
the surface mine, we have been unable to sell the portion of production from our
Grant County deep mine which had previously been blended with coal from the
surface mine. As a result of this and other factors, we idled the deep mine in
February 1999, which further reduced expected tonnage levels. We are working
with the appropriate regulatory agencies to try to get the necessary permits for
the Grant County surface mine. The Company has been advised orally by a WVDEP
official that WVDEP has decided to issue a permit covering a portion of the
Grant County surface mine operation so that the Company can resume mining at
that operation. The Company has not yet received written confirmation that the
permit has been granted. At this point, we are uncertain of when we will
actually receive the necessary permit with respect to the Grant County surface
mine. Also, there is a risk that WVDEP will not issue the permit even though we
have been advised that they will. If the permit is not issued by October 15,
1999, VEPCO will have the right, but not the obligation, to terminate its
long-term coal contract with the Company. See "We depend on key customers for a
significant portion of our revenues, and the loss of one or more of them could
adversely affect us" above.
THE COAL MARKETS ARE HIGHLY COMPETITIVE AND AFFECTED BY FACTORS BEYOND
OUR CONTROL.
The United States coal industry is highly competitive, with numerous
producers in all coal producing regions. We compete with other large producers
and hundreds of small producers in the United States and abroad. Many of our
customers are also customers of our competitors. The markets in which we sell
our coal are highly competitive and affected by factors beyond our control.
Continued demand for our coal and the prices that we will be able to obtain will
depend primarily on coal consumption patterns of the domestic electric utility
industry, which in turn are affected by the demand for electricity, 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. 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, 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 over-capacity, which in turn
has increased competition and lowered prevailing coal prices. Moreover, because
of greater competition to supply electricity 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 buying coal as needed to meet their
requirements rather than stockpiling it.
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WE ARE CONTROLLED BY ONE GROUP OF SHAREHOLDERS THAT HAS SIGNIFICANT
INFLUENCE ON OUR DECISIONS.
Approximately 59% of our outstanding common stock is owned by American Gas
and Oil Investors, L.P., AmGo II, L.P., First Reserve Fund V-2, L.P., First
Reserve Fund V, L.P., First Reserve Fund VI, L.P. and First Reserve Fund VII,
L.P., (collectively, the "First Reserve Funds" ), all of which are under the
common management of First Reserve Corporation. Accordingly, the First Reserve
Funds are able to elect a majority of our directors, determine our corporate and
management policies, and, subject to the terms of a stockholders agreement among
our existing shareholders and with the concurrence of one additional director,
to make decisions relating to fundamental corporate actions, such as any mergers
or acquisitions, sales of all or substantially all of our assets and other
significant corporate transactions. While the issuance of shares upon exercise
of warrants issued in the private restructuring transactions would dilute the
ownership of the First Reserve Funds, the cancellation of shares of JJF Group
pursuant to exchange with JJF Group would offset most of that dilutive effect,
and the First Reserve Funds would continue to own a majority of the common stock
and would be able to control the Company pursuant to the terms of the
stockholders agreement. Specifically, after the private restructuring
transactions assuming (i) 90% aggregate principal amount of old notes are
exchanged, (ii) JJF Group completes its exchange, (iii) all warrants are
exercised and (iv) the Company has not completed an initial public offering of
common stock, the Company's common stock would be held in the following
percentages: First Reserve Funds - 53.25%; Anker Holding B.V. - 6.84%; PPK Group
- - 8.46%; Company management - 1.45%; holders of new secured notes - 30.00%.
Although the First Reserve Funds have, and will continue to have, substantial
control, until the earlier to occur of an initial public offering by the Company
of its common stock or October 30, 2002, an investor agreement to be entered
into in connection with the transactions will require a vote of at least 85% of
the total outstanding shares of common stock (including shares issued on
exercise of warrants) to sell all or a majority of the Company's assets, enter
into a merger with or into another entity or sell a majority of the common stock
of the Company.
COAL MINING IS DEPENDENT UPON MANY FACTORS AND CONDITIONS BEYOND OUR
CONTROL.
Coal mining is subject to conditions beyond our control which can
negatively or positively affect the cost of mining at particular mines for
varying lengths of time. These conditions include weather conditions, unexpected
maintenance problems, variations in coal seam thickness, variations in the
amount of rock and soil overlying the coal deposit, variations in rock and other
natural materials, disruption of transportation services, variations in
geological conditions and other conditions.
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GOVERNMENT REGULATIONS COULD INCREASE OUR COSTS OF DOING BUSINESS AND
MAY DISCOURAGE OUR CUSTOMERS FROM BUYING OUR COAL.
The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, permit and
licensing requirements, air quality standards, water pollution, plant and
wildlife protection, reclamation and restoration of mining properties after
mining is completed, the discharge of materials into the environment, surface
subsidence from underground mining and the effects that mining has on
groundwater quality and availability. In addition, the industry is affected by
legislation mandating certain benefits for current and retired coal miners.
Numerous governmental permits and approvals are required for mining operations.
We may be required to prepare and present to federal, state and local
authorities data pertaining to the effect or impact that any proposed
exploration for or production of coal may have upon the environment.
Requirements imposed by any such authority may be costly and time-consuming and
may delay commencement or continuation of exploration or production operations.
The possibility also exists that new legislation or regulations and orders
may be adopted which may materially adversely affect our mining operations, our
cost structure or our customers' ability to use coal. New legislation and new
regulations under existing laws related to the protection of the environment,
which would further regulate or tax the coal industry, may also require us or
our customers to change operations significantly or incur increased costs. Such
legislation, if enacted, could have a material adverse effect on our business,
financial condition and results of operations.
In particular, we may be required to modify our operations to comply with
permit and emission requirements under the federal Clean Air Act and
corresponding state laws that regulate emissions into the air affecting coal
mining operations. Direct impact on coal mining and processing operations may
occur through the Clean Air Act permit and emissions control requirements
relating to particulate matter, including, without limitation, fugitive dust. In
July 1997, the U.S. Environmental Protection Agency adopted new, more stringent
National Ambient Air Quality Standards for particulate matter and ozone, which
are expected to be implemented by 2003. The impact of the new National Ambient
Air Quality Standards on the coal industry will depend on the policies and
control strategies implemented by states under the Clean Air Act, but it could
have a material adverse effect on our business, financial condition and results
of operations.
In order to comply with limitations on emissions, our customers may buy
low-sulfur coal or switch to other fuels. The Clean Air Act affects coal mining
operations indirectly by extensively regulating the emission into the air of
sulfur dioxide and other compounds, including nitrogen oxides, emitted by
coal-fueled power plants. The Clean Air Act places limits on sulfur dioxide
emissions from electric power generation plants. The initiation of a second
phase of emission reductions beginning in 2000 could affect adversely the demand
for non-compliant coal as additional coal-burning electric power generation
plants become subject to the restrictions of the Clean Air Act. The extent to
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which the switch by utilities to lower sulfur coal or other low-sulfur fuels
would materially adversely affect us would depend upon a number of factors,
including the cost structure of our operations.
The Clean Air Act also affects coal mining operations by requiring
utilities that currently are major sources of nitrogen oxides in moderate or
higher ozone nonattainment areas to install reasonably available control
technology. The Environmental Protection Agency announced a proposal that would
require 22 eastern states to reduce substantially nitrogen oxide emissions by
the year 2003. The effect that such regulations or other requirements that may
be imposed in the future could have on the coal industry in general, and on us
in particular, cannot be predicted with certainty. No assurance can be given
that the implementation of the Clean Air Act, the new National Ambient Air
Quality Standards or any other future regulatory provisions will not materially
adversely affect our business, financial condition and results of operation.
WE DEPEND ON THE SELECTION, ACQUISITION, DEVELOPMENT AND RETENTION OF
COAL RESERVES CONTAINING ECONOMICALLY RECOVERABLE COAL OF QUALITIES THAT WE
CAN SELL TO OUR CUSTOMERS.
Our future success depends primarily upon our ability to develop our
existing coal reserves that are economically recoverable and, to a lesser
extent, on our ability to find and develop new coal reserves. Our recoverable
reserves will generally decline as reserves are depleted, except to the extent
that we prove up existing reserves, conduct successful exploration or
development activities or acquire properties containing recoverable reserves. In
order to increase reserves and production, we must continue our development and
exploration programs or undertake other replacement activities. Our current
strategy is to exploit our existing reserve base and to acquire additional
reserves where needed (and where permitted given our limited capital resources)
to expand or supplement existing operations. There can be no assurance, however,
that our planned development, our existing reserves or our exploration projects
and acquisition activities will result in significant additional reserves or
that we will have continuing success developing additional mines.
A SIGNIFICANT DECLINE IN THE PRICE WE RECEIVE FOR OUR COAL COULD
ADVERSELY AFFECT OUR OPERATING RESULTS AND CASH FLOWS.
Our results of operations are highly dependent upon the prices we receive
for our coal and our ability to improve productivity and reduce costs. The
expiration of long-term contracts with prices above current market prices
requires that we continue to improve productivity and reduce costs in order to
sustain operating margins, which we have attempted to accomplish by employing
contract miners. Prices for export coal have declined. In addition, demand for
coal has decreased because of the warm winters in the northeastern United States
in 1998 and 1999. This has resulted in increased inventories that have caused
pricing pressures in 1999. All of these factors adversely affected our operating
results in the first and second quarters of 1999 and may adversely affect
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operating results for future periods and our ability to generate cash flows
necessary to improve productivity and expand operations.
The price of coal sold under many of our long-term contracts is above
current market prices. Our customers may not extend existing long-term contracts
or enter into new long-term contracts. This could adversely affect the stability
and profitability of our operations.
Between 1994 and 1998, sales under long-term coal supply contracts
generated approximately 75% of our total revenue from coal sales and are
expected to account for approximately 80% of total revenue from coal sales in
1999. These contracts contribute to the stability and profitability of our
operations by providing predictability of production volumes and sales prices.
Changes in regulations governing the electric utility industry may make it more
difficult for us to enter into long-term contracts with our electric utility
customers, as these customers may become more sensitive to long-term price or
quantity commitments in a more competitive environment. A substantial decrease
in the amount of coal we sell pursuant to long-term contracts could subject our
revenue stream to increased volatility and adversely affect our profitability.
THE EXPIRATION OF LONG-TERM CONTRACTS WITH FAVORABLE PRICING OR
CONTRACT PROVISIONS ALLOWING FOR THE RENEGOTIATION OF PRICES COULD REDUCE OUR
PROFITABILITY.
The profitability of our long-term coal supply contracts depends on a
variety of factors, varies from contract to contract and fluctuates during the
contract term, depending on contract provisions, our actual production costs and
other factors. In addition, provisions for adjustment or renegotiation of prices
and other contractual provisions may increase our exposure to short-term coal
price volatility. Virtually all of our long-term contracts include price
adjustment provisions that permit an increase or decrease at specified times in
the contract price to reflect changes in certain price or other economic
indices, taxes and other charges; and one of our 15 long-term coal supply
contracts contains price reopener provisions that provide for the contract price
to be adjusted upward or downward at specified times on the basis of market
factors. If a substantial portion of our long-term contracts were modified or
terminated, we would be affected adversely to the extent that we are unable to
find other customers to purchase coal at the same level of profitability. All of
our long-term contracts are for prices above current spot market prices. The
loss of certain of our long-term contracts could have a material adverse effect
on our business, financial condition and results of operations. The balance of
sales not made pursuant to long-term contracts are made in the spot market, or
pursuant to contracts based on spot market prices and not pursuant to long-term,
fixed-price contracts. Accordingly, the prices we receive for a portion of our
coal production are dependent upon numerous factors beyond our control. These
factors include, but are not limited to, the level of consumer product demand
for electricity, governmental regulations and taxes, the price and availability
of alternative energy sources and the overall economic environment. Any
significant decline in prices for coal could have a material adverse effect on
our financial condition, results of operation and quantities of reserves
recoverable on an economic basis. Should the industry experience
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significant price declines from current levels or other adverse market
conditions, we may not be able to generate sufficient cash flow from operations
to meet our obligations and make planned capital expenditures.
The availability of a ready market for our coal production also depends on
a number of factors beyond our control, including the demand and supply of low
sulfur coal and the availability of pollution credits.
WE RELY ON ESTIMATES OF ECONOMICALLY RECOVERABLE COAL RESERVES, AND WE
CANNOT BE ABSOLUTELY CERTAIN OF THE TRUE EXTENT OF COAL ASSETS WE HAVE AVAILABLE
TO FULFILL OBLIGATIONS UNDER OUR CONTRACTS AND SECURE PAYMENT OF OUR SECURED
INDEBTEDNESS, SUCH AS THE NEW SECURED NOTES AND THE INDEBTEDNESS UNDER THE
FOOTHILL LOAN AGREEMENT.
There are uncertainties inherent in estimating quantities of recoverable
reserves, including many factors beyond our control. The reserve data set forth
in the Annual Report represent engineering estimates of our coal reserves made
by us and audited by the John T. Boyd Company as of June 1, 1997. The President
of the John T. Boyd Company was a member or our Board of Directors from December
1, 1997 until June 8, 1999. The Company has not had the reserve data re-audited
since June 1, 1997, but the Company has updated its reserve estimates as of
December 31, 1998 to take into account production since the date of the reserve
audit, mining activities, new engineering and geological data, acquisitions and
divestitures of reserves and changes in mining plans, mining methods and market
conditions.
Estimates of economically recoverable coal reserves and future net cash
flows 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 or may differ from experience), historical production from the
area compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future coal
prices, future operating costs, severance and excise taxes, development costs
and reclamation costs, all of which may in fact vary considerably from actual
results. For these reasons, estimates of the economically recoverable quantities
of coal attributable to any particular group of properties, classifications of
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 our reserves may vary from estimates, and such variances may be material.
WE DEPEND ON THE LEADERSHIP OF KEY EXECUTIVES, AND IF THEY LEFT THE
COMPANY IT COULD HAVE AN ADVERSE EFFECT UPON US.
On October 12, 1997, John J. Faltis, who was then our President, Chief
Executive Officer and Chairman of the Board of Directors, was killed in a
helicopter accident in West Virginia. With Mr. Faltis' death, the success of
the Company has become increasingly dependent on Bruce Sparks (who succeeded
Mr. Faltis as President) and
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other key personnel. If Mr. Sparks becomes unwilling or unable to serve in his
new role, our business, operations and prospects would likely be further
adversely affected. Mr. Sparks entered into an employment agreement with us and
several of our subsidiaries. We maintain key person life insurance for Mr.
Sparks.
To address the Company's need for increased depth in management, the
Company hired William D. Kilgore, Jr. to be Chairman of the Company's board of
directors and Chief Executive Officer, effective May 1, 1999. Mr. Kilgore has 42
years experience as an executive in the coal business, including as a coal
mining consultant for several central Appalachian companies, as President, Chief
Executive Officer and Director of Agipcoal and as Vice President/General Manager
of Enoxy Coal, Inc.
THE COAL INDUSTRY IS LABOR-INTENSIVE, AND WORK STOPPAGES OR UNIONIZATION
WOULD HAVE AN ADVERSE EFFECT UPON US.
We are not a party to any collective bargaining agreement and consider our
relations with employees to be good. If some or all of our currently non-union
operations were to become unionized, we could incur higher labor costs and an
increased risk of work stoppages. There can be no assurance that our workforce
will not unionize in the future.
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