<PAGE> 1
Securities and Exchange Commission
Washington, D.C.
FORM T-3
FOR APPLICATIONS FOR QUALIFICATION OF INDENTURES
UNDER THE TRUST INDENTURE ACT 1939
Anker Coal Group, Inc.
------------------------------------------------------------------
(Name of Applicant)
2708 Cranberry Square, Morgantown, West Virginia 26508
------------------------------------------------------
(Address of principal executive offices)
SECURITIES TO BE ISSUED UNDER THE INDENTURE TO BE QUALIFIED
TITLE OF CLASS AMOUNT
14.25% Second Priority Senior Secured Notes due 2007
(PIK through April 1, 2000) $13,129,000
Approximate date of proposed public offering: As promptly as possible after the
effective date of this application for qualification
Name and address of agent for service:
B. Judd Hartman, Esq.
Vice President of Legal Affairs
Anker Coal Group, Inc.
2708 Cranberry Square
Morgantown, West Virginia 26058
With a copy to:
Meredith B. Cross, Esq.
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, DC 20037
The Company hereby amends this application for qualification on such date or
dates as may be necessary to delay its effectiveness until (i) the 20th day
after the filing of a further amendment which specifically states that it shall
supersede this amendment or (ii) such date as the Securities and Exchange
Commission, acting pursuant to Section 307(i) of the Act, may determine upon the
written request of the Company.
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GENERAL
1. General Information.
(a) Form of organization: a corporation.
(b) State or other sovereign power under the laws of which
organized: Delaware.
2. Securities Act exemption applicable.
Anker Coal Group, Inc., a Delaware corporation ("Anker"), is
relying upon the exemption provided by Section 3(a)(9) of the Securities Act of
1933, as amended (the "Securities Act"), in connection with its exchange offer
(the "Exchange Offer") as described herein. The Exchange Offer is being made by
Anker pursuant to an Offering Circular, subject to completion, dated December
__, 1999, and the related letter of transmittal and notice of guaranteed
delivery of even date therewith, and consists of an offer to exchange
$12,255,785 of Anker's 14.25% Series B Second Priority Senior Secured Notes due
2007 (PIK through April 1, 2000) (the "New Notes") for the remaining outstanding
$16,495,000 of 9 3/4% Series B Senior Notes due 2007 (the "Old Notes").
On October 28, 1999, Anker consummated a private exchange of New
Notes for Old Notes with a limited number of qualified holders of Old Notes who
were identified in advance. In the private exchange transaction, Anker issued
$86,804,00 principal amount of New Notes and warrants to purchase 2,031 shares
of its common stock in exchange for $108,505,000 principal amount of Old Notes.
At the same time, Anker consummated a private placement of $13,199,000 principal
amount of New Notes and warrants to purchase 1,016 shares of its common stock to
one qualified institutional buyer and a private exchange of $6,000,000 of New
Notes in exchange for cancellation of the shares of Anker common stock owned by
a stockholder and the relinquishment of the stockholder's right to require Anker
to buy the shares over time for approximately $10,500,000, including accrued
interest. There have not been any sales of securities of the same class as the
New Notes by or through an underwriter at or about the same time as the Exchange
Offer.
Anker has retained The Bank of New York as the "Exchange Agent" in
connection with the Exchange Offer. The Exchange Agent will provide to holders
of Old Notes only information otherwise contained in the Offering Circular and
general information regarding the mechanics of the exchange process. The
Exchange Agent will provide the actual acceptance and exchange services with
respect to the exchange of Old Notes and New Notes. The Exchange Agent will not
solicit exchanges in connection with the Exchange Offer and will not make
recommendations as to the acceptance or rejection of the Exchange Offer. The
Exchange Agent will be paid reasonable fees by Anker for its services.
There are no cash payments made to or to be made by any holder of
the outstanding Old Notes in connection with the Exchange Offer.
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AFFILIATIONS
3. Affiliates.
Furnish a list or diagram of all affiliates of the applicant and
indicate the respective percentages of voting securities or other basis of
control.
The following is a list of direct and indirect subsidiaries of
Anker. Indirect subsidiaries are indented and listed under their direct parent
corporations. All direct and indirect subsidiaries are 100% owned unless
otherwise indicated.
Anker Group, Inc.
Anker Energy Corporation
Anker Power Services, Inc.
Anker West Virginia Mining Company, Inc.
The Sycamore Group, LLC -- 50% owned
Summit Energy Group, LLC -- 49% owned
Anker Virginia Mining Company, Inc.
Bronco Mining Company, Inc.
Hawthorne Coal Company, Inc.
Heather Glen Resources, Inc.
Upshur Property, Inc.
Juliana Mining Company, Inc.
Marine Coal Sales Company
Melrose Coal Company, Inc.
Patriot Mining Company, Inc.
Vantrans, Inc.
King Knob Coal Co., Inc.
Vindex Energy Corporation
New Allegheny Land Holding Company, Inc.
Simba Group, Inc.
MANAGEMENT AND CONTROL
4. Directors and Executive Officers.
List the names and complete mailing addresses of all directors and
executive officers of the applicant and all persons chosen to become directors
or executive officers. Indicate all offices with the applicant held or to be
held by each person named.
The names of the directors and executive officers of Anker are set
forth below. The mailing address of each of the directors and executive officers
is 2708 Cranberry Square, Morgantown, West Virginia 26058. The title of each of
the executive officers set forth below refers to such executive officer's
position with Anker, unless otherwise specified below.
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<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
William D. Kilgore, Jr. Chief Executive Officer and Chairman of the Board
P. Bruce Sparks President and Director
John A. H. Shober Director
Thomas R. Denison Director
Willem H. Hartog Director
Michael M. Matesic Treasurer and Chief Financial Officer
Richard B. Bolen Senior Vice President - Sales, Anker Energy Corporation
Gerald Peacock Vice President, Anker Energy Corporation
B. Judd Hartman Secretary
James A. Walls Assistant Secretary
</TABLE>
5. Principal Owners of Voting Securities.
Furnish the following information as to each person owning 10
percent or more of the voting securities of the applicant as of December 15,
1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Name and Complete Title of Class Amount Percentage of Voting
Mailing Address Owned Owned Securities Owned
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Reserve Corporation
475 Steamboat Road
Greenwich, Connecticut 06830 (1) Common Stock 5,407 76.07%
- --------------------------------------------------------------------------------------------------
Rothschild Recovery Fund L.P.
1251 Avenue of the Americas
New York, New York 10020 Common Stock 1,782(2) 20.04(2)
- --------------------------------------------------------------------------------------------------
PPK Group Limited Liability Company(3)
2708 Cranberry Square
Morgantown, West Virginia 26058 Common Stock 859 12.08
- --------------------------------------------------------------------------------------------------
Bruce Sparks(4)
2708 Cranberry Square
Morgantown, West Virginia 26058 Common Stock 859 12.08
- --------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------
(1) Shares of common stock shown as owned by First Reserve are owned of
record by American Oil & Gas Investors, Limited Partnership, AmGO II,
Limited Partnership, First Reserve Fund V, Limited Partnership, First
Reserve Fund V-2, Limited Partnership, First Reserve Fund VI, Limited
Partnership and First Reserve Fund VII, Limited. First Reserve is the
sole general partner of, and possesses sole voting and investment power
for, each of the funds.
(2) Represents shares issuable upon exercise of warrants.
(3) PPK Group Limited Liability Company is a limited liability company
controlled by Mr. Sparks. Mr. Sparks has the sole authority to exercise
all rights and remedies of PPK Group and all voting rights of the shares
owned by PPK Group.
(4) Mr. Sparks may be deemed to share beneficial ownership of the shares
owned of record by PPK Group as a result of his ownership of voting units
of PPK Group.
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UNDERWRITERS
6. Underwriters.
Give the name and complete mailing address of (a) each person who,
within three years prior to the date of the filing the application, acted as an
underwriter of any securities of the obligor which were outstanding on the date
of filing the application, and (b) each proposed principal underwriter of the
securities proposed to be offered. As to each person specified in (a), give the
title of each class of securities underwritten.
There are no principal underwriters of the securities proposed to
be offered in the Exchange Offer. Following are the underwriters identified in
Section (a) hereof:
A. The following were the placement agents in Anker's issuance
of $125 million 9 3/4% Senior Notes due 2007:
Donaldson Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Chase Securities Inc.
270 Park Avenue
New York, New York 10017
CAPITAL SECURITIES
7. Capitalization.
(a) Furnish the following information as to each authorized
class of securities of the applicant.
(i) Debt securities as of December 15, 1999.
<TABLE>
<CAPTION>
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT OUTSTANDING
- -------------- ----------------- ------------------
<S> <C> <C>
9 3/4% Senior Notes due 2007 $16,495,000 $16,495,000
14.25% Second Priority Senior Secured
Notes due 2007 (PIK through
April 1, 2000) $133,993,000* $106,003,000
</TABLE>
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* Includes (a) $119,200,000 principal amount of notes (the "Initial Notes"); (b)
$8,493,000 principal amount of notes to be issued in lieu of the April 1, 2000
cash interest payment on the Initial Notes; and (c) an estimated $6,300,000
principal amount of notes which may be issued at the option of Anker (the
"Optional Notes") in order to pay the October 1, 2000 cash interest payment on
the Initial Notes. The Optional Notes will be issued in a principal amount
sufficientto provide cash proceeds of the lesser of (i) $6,300,000 or (ii) the
amount of the interest due on all outstanding 14.25% notes on October 1, 2000;
provided that the Optional Notes will be issued at a purchase price equal to 95%
of the average of the closing prices of the 14.25% notes for the 20 trading days
ending 5 trading days prior to October 1, 2000.
(ii) Equity Securities as of December 15, 1999.
<TABLE>
<CAPTION>
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT OUTSTANDING
- -------------- ----------------- ------------------
<S> <C> <C>
Common Stock (1) 100,000 7,108
Class A Preferred Stock 10,000 10,000
Class B Preferred Stock 10,000 10,000
Class C Preferred Stock 1,000 0(2)
Class D Preferred Stock 1,000 1,000
</TABLE>
(1) Warrants exercisable for 3,047 shares of common stock are also
outstanding. The warrants are exercisable at a price of $.01 per share
(subject to adjustment) at any time and from time to time until October
28, 2009.
(2) All 1,000 shares of Class C Preferred Stock authorized are owned by
Anker.
(b) Give a brief outline of the voting rights of each class of
voting securities referred to in paragraph (a) above.
Holders of common stock are entitled to one vote per share.
Holders of Class A preferred stock are generally not entitled to
voting rights, but Anker may not take any of the following actions without the
affirmative vote of at least 50% of the Class A preferred stock outstanding: (1)
amend, alter or repeal any provision of its certificate of incorporation or
bylaws, or pass any stockholders' resolution, that would adversely affect the
preferences, special rights, or powers of the Class A preferred stock; (2)
increase or decrease, other than by redemption or conversion, the total number
of authorized shares of Class A preferred stock; or (3) issue any capital stock
that ranks senior to, or on parity with, the Class A
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preferred stock with respect to the payment of dividends or the right to receive
distributions upon liquidation.
Holders of Class B preferred stock are generally not entitled to
voting rights, but Anker may not take any of the following actions without the
affirmative vote of at least 50% of the Class B preferred stock outstanding: (1)
amend, alter or repeal any provision of its certificate of incorporation or
bylaws, or pass any stockholders' resolution, that would adversely affect the
preferences, special rights, or powers of the Class B preferred stock; (2)
increase or decrease, other than by redemption or conversion, the total number
of authorized shares of Class B preferred stock; or (3) issue any capital stock,
other than Class A preferred stock, Class C preferred stock or Class D preferred
stock, that ranks senior to, or on parity with, the Class B preferred stock with
respect to the payment of dividends or the right to receive distributions upon
liquidation.
Holders of Class C preferred stock and Class D preferred stock are
not entitled to voting rights, except as required by applicable law.
INDENTURE SECURITIES
8. Analysis of Indenture Provisions.
Insert at this point the analysis of indenture provisions required
under Section 305(a)(2) of the Act.
The "Indenture" refers to an Indenture dated as of October 1, 1999
between Anker Coal Group, Inc., the Guarantors listed on Schedule A thereto and
The Bank of New York, as Trustee. Definitions of capitalized terms used herein
but not defined herein have the meanings ascribed to them in the Offering
Memorandum.
(A) EVENTS OF DEFAULT
The Indenture provides that each of the following is an "Event of
Default":
- failure to pay interest or Liquidated Damages on the
notes within 30 days after the date due;
- failure to pay principal or premium, if any, on the
notes when due;
- failure to comply with the mandatory redemption
requirements applicable to Asset Sales and Changes
of Control, as described above;
- failure to comply with any other provision of the
notes or the Indenture unless cured within 60 days
after written notice by the Trustee or by the
holders of at least 25% of notes then outstanding;
- failure to comply with any provision of the
documents creating the liens that secure the notes
unless cured within 30 days after written notice by
the Trustee or by the holders of at least 25% of
notes then outstanding;
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- a payment default in connection with Indebtedness of
$5.0 million or more, or any other kind of default
that results in the acceleration of Indebtedness of
$5.0 million or more;
- failure to pay within 60 days final judgments that
exceed applicable insurance coverage by more than
$5.0 million unless those judgments have been
discharged or stayed within that 60-day period;
- if the guarantee of the notes by any significant
subsidiary becomes, or is claimed by the subsidiary
to be, invalid or unenforceable;
- various events of bankruptcy or insolvency with
respect to Anker or any of Anker's significant
subsidiaries; and
- Anker or any of its subsidiaries initiates any suit
or proceeding challenging the legality, validity, or
enforceability of the notes, the Indenture or the
liens that secure the notes.
The holders of a majority in amount of the notes may waive any
existing default or Event of Default and its consequences under the Indenture,
except a continuing payment default. Payment defaults can only be waived by
individual holders; waiver by a majority of the holders is not effective to bind
those who do not consent.
If an Event of Default occurs and is continuing, the Trustee or
the holders of at least 25% in principal amount of the outstanding notes may
declare all of the notes to be due and payable immediately. If the Event of
Default relates to bankruptcy of Anker or a significant subsidiary, the notes
automatically become due and payable immediately without any action by the
Trustee or the holders.
In addition to calling the notes, the Trustee may take the
following enforcement actions as a result of an Event of Default:
- sue Anker and the subsidiaries that have guaranteed
the notes to collect and otherwise enforce the terms
of the notes;
- except as limited by the intercreditor agreement,
foreclose upon the collateral that secures the notes
or seek appointment of a receiver for the collateral
or any other assets of Anker and the subsidiaries
that have guaranteed the notes; or
- pursue any other remedy that is available under the
Indenture or applicable law.
No holder of a note can act to enforce the Indenture unless the
following requirements are met:
- the holder has notified the Trustee of a continuing
Event of Default;
- the holders of at least 25% in amount of the notes
have requested the Trustee to take enforcement
action and offered to indemnify the Trustee in
connection with that action;
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- holders of a majority in amount of the notes have
not instructed the Trustee not to take enforcement
action; and
- the Trustee has failed to take enforcement action
within 60 days.
However, the above limitations do not apply to a suit instituted by a holder of
a note to collect unpaid amounts due under the holder's notes.
Holders of a majority in amount of the notes may direct the
Trustee in its exercise of any trust or power under the Indenture, but the
Trustee can refuse to follow those directions if they would conflict with law or
the Indenture, injure other holders or expose the Trustee to personal liability.
The Trustee may withhold from noteholders notice of any continuing default or
Event of Default, except a default or Event of Default relating to the payment
of principal or interest, if it determines that withholding notice is in their
interest.
(B) AUTHENTICATION AND DELIVERY
The notes shall be executed on behalf of Anker by Anker's Chairman
of the Board, Chief Executive Officer, President, Chief Operating Officer, Chief
Financial Officer, Treasurer, Assistant Treasurer, Secretary, Assistant
Secretary or any Vice-President, which signature shall be attested to by the
Secretary or Assistant Secretary of Anker. Upon a written order of Anker signed
by two of the aforementioned officers, the Trustee shall authenticate and
deliver the notes.
(C) RELEASE OF PROPERTY SUBJECT TO LIEN
RELEASES OF COLLATERAL. Anker may obtain the release of collateral
from the liens of the notes either by substituting cash or other property worth
at least as much as the collateral to be released or by complying with
procedures to demonstrate that Anker is receiving the fair value of the
collateral at issue and the noteholders will not be harmed by the release.
Release by Substitution of Property. In order to substitute
property for collateral to be released from the liens of the notes, Anker must
provide evidence to the Trustee of the fair value of the property to be released
and the fair value of the substitute property. If the fair value of the
collateral being released or substituted is at least equal to the greater of
$25,000 or 1% of the outstanding notes, or if the fair value of all collateral
released through substitution of property during the then current calendar year
is at least 10% of the outstanding notes, the fair values must be certified by
an engineer, appraiser or other expert who is not employed by or affiliated with
Anker or its subsidiaries. Otherwise, the fair values can be established by
Anker's qualified personnel. In addition, Anker must deliver to the Trustee
officers' certificates, corporate resolutions, opinions of counsel and any
documents necessary to create the lien on the substitute collateral.
Release by Substitution of Cash. Anker is not permitted to
substitute cash for collateral unless its senior secured credit facilities have
been paid off and terminated. At that point, Anker can
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- obtain a release of all the collateral, other than
cash, by depositing with the Trustee an amount
sufficient to pay all obligations under the
Indenture;
- obtain a release of particular items of collateral
by depositing with the Trustee an amount at least
equal to the fair value of the collateral to be
released;
- obtain a release of particular items of collateral
being sold for cash equal to their fair value if all
net proceeds of the sale are deposited with the
Trustee to replace the property being sold.
Cash deposited as collateral is to be held by the Trustee in a
segregated account. As long as Anker and its subsidiaries are not in default
under the Indenture, they can select from among permissible investments of cash
deposited as collateral and are entitled to receive interest earned on
investments of that cash. Anker and its subsidiaries can substitute cash or cash
equivalents for other forms of cash collateral.
Release of Collateral Without Substitution. Anker can sell,
exchange or otherwise dispose of collateral, and the Trustee must release its
liens upon the collateral being sold, as long as Anker delivers the following
documents to the Trustee and, if applicable, complies with certain mandatory
redemption requirements.
- If the property to be released has a book value in
excess of the greater of $25,000 and 1% of the
outstanding notes, a board resolution requesting the
release;
- An officers' certificate identifying the property to
be released, specifying its fair value, describing
the terms of the proposed transaction and stating
that the transaction and release comply with the
terms of the Indenture;
- If the total fair value of all the property plus all
other collateral except inventory and accounts
receivable released from the liens of the notes in
the current calendar year is at least 10% of the
amount of the outstanding notes, and the value of
the property to be released is at least equal to the
greater of $25,000 and 1% of the outstanding notes,
Anker must provide a certificate from an engineer,
appraiser or other expert who is not employed by or
affiliated with Anker or its subsidiaries specifying
the fair value of the property and stating that the
proposed release will not impair the liens of the
notes on the remaining collateral;
- If the book value of the collateral that is the
subject of the release is more than the greater of
$25,000 and 1% of the outstanding notes, a legal
opinion that the release complies with the terms of
the Indenture and that the Trustee will have a valid
lien on any substitute collateral.
(D) SATISFACTION AND DISCHARGE
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At any time while the notes are outstanding, Anker may be relieved
of almost all of its obligations under the Indenture or obtain a more limited
release from some covenants by delivering cash to the Trustee and complying with
other procedures.
The broader release, which is referred to in the Indenture as
"Legal Defeasance," would leave Anker with only those obligations relating to
the issuance and replacement of notes, administration of payments and
cooperation with, and payment of the fees and expenses of, the Trustee. The
narrower release, which is referred to as "Covenant Defeasance," would relieve
Anker of its reporting and certification obligations, the financial covenants
and restrictions on operations and transactions, but it would leave Anker
subject to the other provisions of the Indenture.
In order to exercise either Legal Defeasance or Covenant
Defeasance, Anker must comply with all of the following requirements:
(1) Anker must deposit with the Trustee enough cash to pay when
due all amounts required to be paid under notes and the
Indenture;
(2) Depending on whether Anker is seeking Legal Defeasance or
Covenant Defeasance, Anker must deliver to the Trustee one
of the following tax opinions:
- in order to get the narrower release from specified
covenants, Anker must deliver a legal opinion
confirming that the deposit of funds with the
Trustee and the related release of Anker's
obligations will not be a taxable event for the note
holders; or
- in order to get the broader release from the
requirements of the Indenture, Anker must deliver a
legal opinion stating that the lack of tax
consequences for noteholders has been confirmed by
the Internal Revenue Service or is the result of a
change in applicable law since October 1, 1999;
(3) Anker and its subsidiaries that have guaranteed the notes
cannot be in default under the notes or the Indenture when
Anker makes the cash deposit;
(4) The deposit of funds and Anker's release from obligations
under the Indenture cannot be a violation of any of its
material contracts or those of any of its subsidiaries;
(5) In addition to the tax opinion referred to above, Anker
must deliver to the Trustee a legal opinion to the effect
that
- after the 91st day following the deposit, the funds
deposited with the Trustee will not be subject to
recovery in a bankruptcy or similar proceeding of
Anker or any of its subsidiaries that have
guaranteed the notes; and
- all of the requirements for Legal Defeasance or
Covenant Defeasance, whichever is applicable, have
been satisfied;
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(6) Anker must deliver to the Trustee an officers' certificate
stating that
- the deposit of funds was not made with the intent of
preferring the noteholders over the other creditors
or with the intent of defeating, hindering, delaying
or defrauding creditors;
- all of the requirements for Legal Defeasance or the
Covenant Defeasance, whichever is applicable, have
been satisfied.
(E) EVIDENCE OF COMPLIANCE WITH CONDITIONS AND COVENANTS
Anker and the Guarantors will deliver to the Trustee, within 120
days after the end of each fiscal year, an Officers' Certificate stating that a
review of the activities of Anker and its subsidiaries during the preceding
fiscal year has been made under the supervision of the signing Officers with a
view to determining whether Anker or the Guarantor, as the case may be, has
kept, observed, performed and fulfilled its obligations under the Indenture and
the Subsidiary Guarantees, respectively, and further stating, as to each such
Officer signing such certificate, that to the best of his or her knowledge Anker
or such Guarantor, as the case may be, is not in default in the performance or
observance of any of the terms, provisions and conditions of the Indenture (or,
if a Default or Event of Default shall have occurred, describing all such
Defaults or Events of Default of which he or she may have knowledge and what
action Anker or such Guarantor, as the case may be, is taking or proposes to
take with respect thereto) and that to the best of his or her knowledge no event
has occurred and remains in existence by reason of which payment on account of
the principal of or interest, if any, on the notes is prohibited or if such
event has occurred, a description of the event and what action Anker or such
Guarantor, as the case may be, is taking or proposes to take with respect
thereto.
9. Other Obligors.
Give the name and complete mailing address of any person, other
than the applicant, who is an obligor under the Indenture Securities.
<TABLE>
<CAPTION>
ADDRESS INCLUDING ZIP CODE, AND
TELEPHONE NUMBER INCLUDING AREA CODE,
EXACT NAME OF GUARANTOR OF GUARANTOR'S
AS SPECIFIED IN ITS CHARTER PRINCIPAL EXECUTIVE OFFICES
<S> <C>
Anker Energy Corporation 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Anker Group, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
</TABLE>
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<TABLE>
<CAPTION>
ADDRESS INCLUDING ZIP CODE, AND
TELEPHONE NUMBER INCLUDING AREA CODE,
EXACT NAME OF GUARANTOR OF GUARANTOR'S
AS SPECIFIED IN ITS CHARTER PRINCIPAL EXECUTIVE OFFICES
<S> <C>
Anker Power Services, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Anker Virginia Mining Company, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Anker West Virginia Mining Company, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Bronco Mining Company, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Hawthorne Coal Company, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Heather Glen Resources, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Juliana Mining Company, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
King Knob Coal Co., Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Marine Coal Sales Company 645 West Carmel Drive
Carmel, Indiana 46032
(317) 844-6628
Melrose Coal Company, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
</TABLE>
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<TABLE>
<CAPTION>
ADDRESS INCLUDING ZIP CODE, AND
TELEPHONE NUMBER INCLUDING AREA CODE,
EXACT NAME OF GUARANTOR OF GUARANTOR'S
AS SPECIFIED IN ITS CHARTER PRINCIPAL EXECUTIVE OFFICES
<S> <C>
New Allegheny Land Holding Company, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Patriot Mining Company, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Simba Group, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Upshur Property, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Vantrans, Inc. 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
Vindex Energy Corporation 2708 Cranberry Square
Morgantown, West Virginia 26508
(304) 594-1616
</TABLE>
CONTENTS OF APPLICATION FOR QUALIFICATION
(a) Pages numbered one to 16, consecutively.
(b) The statement of eligibility and qualification of the
Trustee under the Indenture to be qualified (on Form T-1 hereby incorporated by
reference to Exhibit 99 hereto).
(c) The following exhibits, in addition to those filed as a
part of the statement of eligibility and qualification of the Trustee:
(i) Exhibit T3A -- Amended and Restated Certificate of
Incorporation of Anker Coal Group, Inc. (incorporated by
reference from Anker Coal Group's Form S-4/A (File No.
333-396457) filed with the Commission on February 10, 1998)
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(ii) Exhibit T3B -- First Restated and Amended Bylaws of Anker
Coal Group, Inc. (incorporated by reference from Anker Coal
Group's Form S-4/A (File No. 333-396457) filed with the
Commission on February 10, 1998)
(iii) Exhibit T3C -- Indenture, dated as of October 1, 1999,
among Anker Coal Group, Inc., the guarantors listed on
Schedule A thereto and The Bank of New York, as Trustee
(incorporated by reference from Anker Coal Group's Form S-4
(File No. 333-92067) filed with the Commission on December
3, 1999).
(iv) Exhibit T3D -- Not applicable.
(v) Exhibit T3E.1 -- Form of Offering Circular, subject to
completion, dated as of December __, 1999.
(vi) Exhibit T3E.2 -- Form of Letter of Transmittal, dated as of
December __, 1999.
(vii) Exhibit T3E.3 -- Form of Notice of Guaranteed delivery,
dated as of December __, 1999.
(viii) Exhibit T3F -- Cross-Reference Sheet
(ix) Exhibit 99 -- Form T-1 Statement of Eligibility of The Bank
of New York under the First Indenture Act of 1939 with
respect to the New Notes (incorporated by reference from
Anker Coal Group's Form S-4 (File No. 333-92067) filed with
the Commission on December 3, 1999).
15
<PAGE> 16
(ix) Exhibit 99 -- Form T-1 Statement of Eligibility of The Bank
of New York under the First Indenture Act of 1939 with
respect to the New Notes (incorporated by reference from
Anker Coal Group's Form S-4 (File No. 333-92067) filed with
the Commission on December 3, 1999).
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939,
the applicant, Anker Coal Group, Inc., a corporation organized and existing
under the laws of the State of Delaware, has duly caused this application to be
signed on its behalf by the undersigned, thereunto duly authorized, and its seal
to be hereunder affixed and attested, all in the City of Morgantown, and State
of West Virginia, on the 22nd day of December, 1999.
(SEAL) ANKER COAL GROUP, INC.
By: /s/ P. Bruce Sparks
---------------------------
P. Bruce Sparks
President
Attest: By: /s/ B. Judd Hartman
---------------------------
B. Judd Hartman
Secretary
16
<PAGE> 1
EXHIBIT T3(e).1
THE INFORMATION IN THIS OFFERING MEMORANDUM IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE OFFERING MEMORANDUM IS DELIVERED IN
FINAL FORM. THIS OFFERING MEMORANDUM IS NOT AN OFFER TO SELL THESE SECURITIES,
AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1999
OFFERING MEMORANDUM
[ANKER LOGO]
ANKER COAL GROUP, INC.
---------------
EXCHANGE OFFER OF
14.25% SERIES B SECOND PRIORITY SENIOR SECURED NOTES DUE 2007 (PIK THROUGH
APRIL 1, 2000) FOR OUTSTANDING 9 3/4% SERIES B SENIOR NOTES DUE 2007
This is an offer to exchange up to $16,495,000 in principal amount of our
outstanding 9 3/4% Series B Senior Notes due 2007 for up to $13,196,000 in
principal amount of our 14.25% Series B Second Priority Senior Secured Notes due
2007 (PIK through April 1, 2000). Exchanging noteholders will receive $743 in
principal amount of new notes for each $1,000 in principal amount of old notes
exchanged. We will also issue, when due, up to $940,215 in principal amount of
additional new notes in payment of the April 1, 2000 interest payment on the new
notes. This offer will expire at 5:00 p.m., New York City time, on , unless we
extend it. The new notes will not trade on any established exchange.
---------------
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF FACTORS YOU
SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
---------------
THE OFFER OF THE SECURITIES CONTEMPLATED IN THIS EXCHANGE OFFER IS MADE UNDER
THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SECTION 5 OF THE SECURITIES
ACT OF 1933, AS AMENDED, PROVIDED BY SECTION 3(a)(9) OF THE SECURITIES ACT.
ACCORDINGLY, THE OFFER OF THE SECURITIES HAS NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES TO BE DISTRIBUTED IN
THIS EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS
OFFERING MEMORANDUM IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................................................................3
Risk Factors...........................................................................................................10
Use of Proceeds........................................................................................................21
Capitalization.........................................................................................................22
Unaudited Pro Forma Consolidated Financial Statements..................................................................24
Selected Financial Data................................................................................................29
Historical and Pro Forma Ratio of Earnings to Fixed Charges............................................................31
Management's Discussion and Analysis of Financial Condition and Results of Operation...................................32
The Coal Industry......................................................................................................43
Business...............................................................................................................47
Management.............................................................................................................62
Security Ownership of Certain Beneficial Owners and Management.........................................................68
Certain Relationships and Related Transactions.........................................................................70
The Exchange Offer.....................................................................................................74
Comparison of the Indentures...........................................................................................81
Description of the New Notes...........................................................................................85
Description of the Old Notes..........................................................................................112
Description of Other Indebtedness.....................................................................................113
Description of the Capital Stock......................................................................................117
Description of the Warrants...........................................................................................120
Material U. S. Federal Income Tax Consequences........................................................................124
Plan of Distribution..................................................................................................131
Where You Can Find More Information...................................................................................131
Validity of New Notes.................................................................................................131
Independent Accountants...............................................................................................131
Experts...............................................................................................................131
Index to Consolidated Financial Statements............................................................................F-1
Report of Marshall Miller & Associates............................................................................Annex A
</TABLE>
<PAGE> 3
SUMMARY
This summary highlights information contained elsewhere in this offering
memorandum. It may not contain all the information that is important to you. We
encourage you to read this entire offering memorandum carefully.
ABOUT ANKER COAL GROUP
We are a producer of coal that is used principally to generate electricity and
to produce coke for use in making steel. We currently own or control substantial
coal reserves in West Virginia, Maryland, Virginia and Kentucky. We currently
operate a portfolio of seven deep mines and one surface mine that are located in
West Virginia and Maryland. We recently changed from operating our deep mines
with our own employees to using contract miners to operate these deep mines for
us. Our coal mines and reserves are located in close proximity to rail and water
transportation services or are within short trucking distances to power plants.
We primarily market and sell our coal to electric utilities located in the
Northeastern and mid-Atlantic states. The utilities that we currently sell our
coal to use modern generating processes that will allow them to continue using
our coal after implementation of Phase II of the Clean Air Act.
In addition to selling coal that we produce from our own mines, we also sell
coal that we purchase from other producers, which is referred to as brokered
coal. In addition, we arrange for coal that others produce to be sold to third
parties, which is referred to as commission coal.
Based on recent data published by the National Mining Association, we are one of
the 30 largest coal producers and one of the 30 largest holders of coal reserves
in the United States.
We believe that we have the following competitive strengths:
-PORTFOLIO OF LONG-TERM CONTRACTS. Our long-term contracts accounted for
an average of approximately 75% of our coal sales revenues from
1994 to 1998. Our portfolio of long-term contracts provides us
with stable sources of revenues to support the large expenditures
needed to open, expand and maintain the mines that service those
contracts.
-DIVERSE PORTFOLIO OF RESERVES. We have increased our reserve base
approximately 246% since 1992. We had approximately 508 million
recoverable tons of coal as of October 1, 1999. The majority of
our coal reserves are medium sulfur, and we also have coal
reserves that comply with the requirements of the Clean Air Act,
known as compliance coal. All of our coal is of a quality suitable
for use in electricity generating facilities.
-EXPERIENCED SENIOR MANAGEMENT TEAM. Our senior management team has many
years of experience in the coal industry. Bruce Sparks, our
president, has 21 years of experience in the coal industry and has
worked with us for the past 14 years. William Kilgore, our chief
executive officer and chairman of our board of directors, has 42
years of experience in the coal industry.
We were organized as a Delaware corporation in August 1996 in order to effect a
recapitalization of Anker Group, Inc., our predecessor. Anker Group, Inc. had
been engaged in coal production since 1975. See "Business--Organization."
---------------
Our common stock is not publicly traded. Our principal executive offices are
located at 2708 Cranberry Square, Morgantown, West Virginia 26508, and our
telephone number is (304) 594-1616.
---------------
3
<PAGE> 4
THE EXCHANGE OFFER
We summarize below the terms of the exchange offer. You should read the detailed
description of the offer under "The Exchange Offer."
<TABLE>
<S> <C>
GENERAL......................... We are offering up to $13,196,000 aggregate principal amount of 14.25% series B second priority
senior secured notes, the interest on which will be paid-in-kind with additional new notes
instead of cash through April 1, 2000, in exchange for up to $16,495,000 aggregate principal
amount of our outstanding 9 3/4% Series B Senior Notes due 2007. The new notes will be issued
under, and entitled to the benefits of, an indenture dated as of October 1, 1999, among us, our
subsidiaries that have guaranteed our obligations under the new notes and The Bank of New York,
as trustee. Exchanging noteholders will receive $743 principal amount of new notes for each
$1,000 principal amount of old notes exchanged. Interest on the new notes will accrue at the
rate of 14.25% per year. We will pay the interest payment on the new notes due on April 1, 2000
by issuing $71.25 principal amount of new notes, instead of cash, for each $1,000 principal
amount of new notes on that date. The new notes will be secured by a security interest, junior
to the liens securing our senior credit facility, in substantially all of our assets. See
"Description of the New Notes." For a discussion of the background and purpose of the exchange
offer, see "The Exchange Offer -- Background and Purpose."
EXPIRATION DATE................. 5:00 p.m., New York City time, on , or any subsequent date to
which the exchange offer is extended.
CONDITIONS TO THE EXCHANGE
OFFER........................... The exchange offer is not subject to any conditions other than that the offer does not violate
applicable law or any applicable interpretation of the staff of the SEC. The offer is not
conditioned upon any minimum principal amount of old notes' being tendered. We reserve the right
- to delay the acceptance of the old notes for exchange,
- to terminate the exchange offer,
- to extend the expiration date of the exchange offer and retain all tendered old notes,
subject to the right of tendering holders to withdraw their tendered old notes or
- to waive any condition or otherwise amend the terms of the exchange offer in any respect.
WITHDRAWAL RIGHTS............... You may withdraw a tender of old notes at any time on or prior to the expiration date by
delivering a written notice of withdrawal to the exchange agent.
PROCEDURES FOR TENDERING OLD
NOTES........................... In order to tender your old notes, you must complete and sign a letter of transmittal in
accordance with the letter's instructions. You must forward the letter of transmittal and any
other required documents to the exchange agent, together with the old notes to be tendered.
Brokers, dealers, commercial banks, trust companies and other nominees may also tender old notes
by book-entry transfer. If your old notes are registered in the name of one of these entities,
you are urged to contact that person promptly if you wish them to tender notes.
Please do not send letters of transmittal and certificates representing notes to us. Send them
only to the exchange agent. The exchange agent can answer your questions regarding how to tender
your notes.
INTEREST........................ We will pay interest accruing from October 1, 1999 on the new notes we issue in the exchange
offer; we will not, however, to pay any interest that has accrued since October 1, 1999 on any
old notes exchanged. We will pay the accrued interest on the new notes to you with the first
interest payments on the new notes. As noted above, we will make this interest payment by
issuing notes.
EXCHANGE AGENT.................. The exchange agent is The Bank of New York. The exchange agent's address and telephone and
facsimile numbers are set forth in "The Exchange Offer -- Exchange Agent" and in the letter of
transmittal.
USE OF PROCEEDS................. We will not receive any cash proceeds from the issuance of the new notes.
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C>
MATERIAL U.S. FEDERAL INCOME
TAX CONSEQUENCES................ We anticipate that the exchange of old notes for new notes in the exchange offer will be
classified as a recapitalization under section 368(a)(1)(E) of the Internal Revenue Code. If
this is the case, the exchange will be nontaxable to holders that exchange their old notes,
because both the old notes and the new notes should constitute "securities" for federal income
tax purposes. If the Internal Revenue Service determines, however, that either the old notes or
the new notes are not securities, the exchange would be a taxable transaction to the
participating holders, who would then generally recognize a capital gain (or loss) as a result
of the exchange. You should review the information set forth in "Material U.S. Federal Income
Tax Consequences" prior to tendering old notes in the exchange offer.
CONSEQUENCES OF FAILURE TO
EXCHANGE........................ Holders of old notes that do not exchange their old notes in the exchange offer will continue to
hold their old notes and will be entitled to all the rights and limitations applicable to the
old notes under the indenture governing the old notes. Unexchanged old notes will be unsecured
and will rank subordinate in right of payment from proceeds of collateral to all current and
future indebtedness secured by liens on that collateral, including the new notes and the
indebtedness under our loan agreement with Foothill Capital Corporation, as agent. In addition,
the trading market for old notes may be further limited if the exchange offer is consummated.
See "The Exchange Offer -- Consequences of Failure to Exchange."
</TABLE>
5
<PAGE> 6
THE NEW NOTES
We summarize below the key terms of the new notes. You should read the detailed
description of the notes under "Description of the New Notes."
<TABLE>
<S> <C>
ISSUER........................ Anker Coal Group, Inc.
TERMS OF NOTES OFFERED........ The terms of the new notes will differ from those of the old notes, including that, as discussed
below,
- exchanging noteholders will receive $743 principal amount of new notes for each $1,000
principal amount of old notes exchanged,
- interest on the new notes will accrue at a rate of 14.25% per year,
- interest on the new notes due April 1, 2000 will be paid in kind by issuing additional new
notes and
- the new notes will be secured by a security interest in substantially all of our assets.
MATURITY...................... September 1, 2007.
INTEREST...................... Payable semi-annually in cash on April 1 and October 1 of each year. We will pay the interest
payment on the new notes due April 1, 2000 in kind by issuing $71.25 principal amount of
additional new notes in lieu of cash interest due on each $1,000 principal amount of new notes
on that date. After that, interest payments will be made in cash.
SECURITY...................... The new notes will have a security interest in substantially all of our assets other than
- mobile equipment;
- cash and cash equivalents, except that there will be a security interest in proceeds of
collateral and cash held by the trustee for the new notes; and
- real property located in Maryland and those real property interests located in West
Virginia that currently cannot be used in our mining operations, as specified in the
indenture that governs the new notes, and related coal reserves, fixtures, equipment,
improvements, structures, buildings and water processing equipment and systems.
If and when we grant a lien on our Maryland real property to secure our senior credit facility,
we will also grant a junior lien on the same property to secure the new notes. The lien
securing payment of the new notes will rank junior to the lien securing our senior credit
facility. While our senior credit facility or any amended or replacement credit facility is
outstanding, holders of new notes will be prohibited from exercising remedies against the
collateral that secures both the new notes and indebtedness under the senior credit facility.
See "Description of the New Notes_Security," "Description of Other Indebtedness_Credit Facility"
and "Description of Other Indebtedness--Intercreditor Agreement."
RANKING....................... The new notes will rank equally in right of payment with any of our existing and future senior
indebtedness and will rank senior to all of our subordinated indebtedness. The lien securing
payment of the new notes will rank junior to the lien securing our senior credit facility.
While our senior credit facility or any amended or replacement credit facility is outstanding,
holders of new notes will be prohibited from exercising remedies against the collateral that
secures both the new notes and indebtedness under the senior credit facility. See "Description
of the New Notes_Security," "Description of Other Indebtedness_Credit Facility" and "Description
of Intercreditor Agreement."
GUARANTEES.................... Our obligations under the new notes will be jointly and severally guaranteed, fully and
unconditionally, by each of our existing and future wholly-owned subsidiaries, other than those
subsidiaries that, both individually and in the aggregate, are inconsequential to our business
and financial condition.
OPTIONAL REDEMPTION........... We may redeem any of the new notes at any time. If we voluntarily redeem any new notes on or
before September 30, 2000, the redemption price will be 104% of the principal amount, plus
accrued interest. The redemption price will decline each year after 2000 and will be 100% of the
principal amount, plus accrued interest, beginning on October 1, 2003.
CHANGE OF CONTROL............. Upon a change of control, as defined later in this offering memorandum, we are required to make
an offer to purchase the new notes. The purchase price will equal 101% of the principal amount
of the new notes on the date of purchase, plus accrued interest. We may not have sufficient
funds available at the time of any change of control to make any
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C>
required debt repayment, including repurchases of the new notes.
COVENANTS..................... The indenture governing the new notes contains covenants with which we must comply, including:
- We may not sell assets unless we receive fair market value and at least 75% of the
consideration is in cash or assets to be used in our coal mining business. We must use
proceeds of permitted assets sales for permitted purposes or to redeem new notes.
- We may not make restricted payments -- such as cash dividends on capital stock,
repurchases or redemptions of stock or investments in or loans to unrestricted entities in
which we have an interest -- unless we meet a series of requirements or an exemption
applies. These requirements include that there be no default under the indenture either
before or after the payment, that we meet a financial test and that all payments in
question not exceed a cap calculated based on our income and cash receipts.
- We may not incur additional indebtedness or issue stock that we can be required to redeem
sooner than 91 days after the new notes mature if, treating the transaction as if it had
occurred at the beginning of the previous four fiscal quarters, our consolidated cash flow
for that four-quarter period would be less than 2.25 times the sum of our consolidated
interest expense and the pretax amount necessary to pay cash dividends on our preferred
stock.
- We may not incur indebtedness that ranks below our senior debt but ahead of the new notes.
- We may not pledge our assets as collateral for any debt for borrowed money that ranks
equally with or below the new notes, unless the new notes also get the benefit of the
pledge. If we grant a lien on real property located in Maryland to secure our senior
credit facility, we must also grant a junior lien on the same property to secure the new
notes.
- We generally may not allow our subsidiaries to be subject to restrictions on their ability
to pay money or transfer assets to us.
- We and our subsidiaries may not enter into transactions with major stockholders or persons
they control, are controlled by or are under common control with, unless the transaction
is fair and we comply with specified procedures.
- Neither we nor our subsidiaries may engage in any business that is not a permitted
business, as defined in the indenture, unless that other business would not be material to
our subsidiaries and us, taken as a whole.
- We may not pay noteholders to waive their rights under, or modify terms of, the indenture
unless we make the same offer to all noteholders.
Each of these covenants is subject to other qualifications and exceptions, which are set forth
in detail in "Description of the New Notes -- Covenants." In addition, our senior credit facility
contains covenants that are more restrictive than these.
BOOK-ENTRY; DELIVERY AND
FORM.......................... New notes exchanged for old notes will be held in book-entry form by The Depository Trust
Company. DTC and its participants will maintain the records of beneficial ownership of the notes
and of transfers of notes.
</TABLE>
RISK FACTORS
You should consider carefully the matters relating to us, our business and an
investment in the new notes described in "Risk Factors."
7
<PAGE> 8
SUMMARY OF HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table is a summary of our historical and unaudited pro forma
consolidated financial data for the three years ended December 31, 1998 and for
the nine months ended September 30, 1999 and 1998. We derived the historical
consolidated financial data for each of the three years in the period ended
December 31, 1998 from our audited consolidated financial statements appearing
elsewhere in this offering memorandum. We derived the historical consolidated
financial data as of September 30, 1999 and for the nine months ended September
30, 1999 and 1998 from our unaudited consolidated financial statements. The
unaudited adjusted combined statements of operations data and other data for the
year ended December 31, 1996 combine the audited results of operations of our
predecessor, Anker Group, Inc., for the period January 1, 1996 to July 31, 1996,
and of us for the period from August 1, 1996 to December 31, 1996.
The pro forma statement of operations data and other data for the year ended
December 31, 1998 and the nine months ended September 30, 1999 give effect to
the following transactions as if each transaction had occurred on January 1,
1998:
- the private placement of our 14.25% Series A notes and the
application of the proceeds from the private placement,
- the private stockholder exchange of our 14.25% Series A notes in
exchange for cancellation of the shares of our common stock owned
by a stockholder and that stockholder's relinquishment of its
right to require us to buy that stock over time;
- the private exchange of our 14.25% Series A notes for old notes;
and
- this exchange offer of new notes for outstanding old notes.
We have based the unaudited pro forma adjustments upon available information and
assumptions that we believe are reasonable. The pro forma consolidated data do
not purport to represent what our consolidated results of operations would have
been had the transactions described above actually occurred at the beginning of
the relevant period. In addition, the unaudited pro forma financial data do not
purport to project our consolidated results of operations for the current year
or any future date or period.
The adjustments set forth in the following table do not reflect a one-time
increase in general and administrative expenses related to the write-off of
approximately $1.2 million of fees and other financing costs incurred in
connection with the private exchange and private placement. The adjustments also
do not include a one-time projected income tax liability of $7.0 million
associated with the private exchange and this exchange offer.
Adjusted EBITDA and Pro Forma Adjusted EBITDA represent our earnings before
interest, taxes, depreciation, depletion, amortization, non-cash stock
compensation and non-recurring related expenses, loss on impairment of
investment and restructuring charges, life insurance proceeds, financial
restructuring charges and extraordinary items. Adjusted EBITDA and Pro Forma
Adjusted EBITDA should not be considered as alternatives to operating earnings
(loss) or net income (loss), as determined in accordance with generally accepted
accounting principles, as a measure of our operating performance. Nor should
they be considered as alternatives to net cash provided by operating, investing
and financial activities, as determined in accordance with generally accepted
accounting principles, as a measure of our ability to meet cash needs. We have
included Adjusted EBITDA and Pro Forma Adjusted EBITDA because we use Adjusted
EBITDA and Pro Forma Adjusted EBITDA to assess our financial performance and
some of the covenants in our loan agreement and indentures are tied to similar
measures. Since all companies and analysts do not necessarily calculate Adjusted
EBITDA and Pro Forma Adjusted EBITDA in the same fashion, Adjusted EBITDA and
Pro Forma Adjusted EBITDA as presented in this offering memorandum may not be
comparable to similarly titled measures other companies report.
You should read the following information together with "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and our
consolidated financial statements and related notes included elsewhere in this
offering memorandum.
8
<PAGE> 9
<TABLE>
<CAPTION>
ANKER COAL GROUP, INC.
-------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------------- -------------------------
1999 1998 1998 1997
----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Coal sales and related revenue $174,293 $226,111 $291,426 $322,979
Operating expenses:
Cost of operations and selling expenses 157,419 214,443 276,469 295,387
Depreciation, depletion and amortization 13,430 13,009 18,150 17,470
General and administrative 6,781 7,767 9,076 9,462
Loss on impairment of investment and
restructuring charges 4,526 7,346 90,717 8,267
Stock compensation and related expenses - - - -
----------- ------------ ----------- -----------
Operating (loss) income (7,863) (16,454) (102,986) (7,607)
Interest expense (10,911) (9,421) (13,066) (10,042)
Other income, net 2,579 821 2,805 2,083
Life insurance proceeds - - - 15,000
----------- ------------ ----------- -----------
(Loss) income before income taxes
and extraordinary item (16,195) (25,054) (113,247) (566)
Income tax (benefit) (200) (7,015) (7,643) (1,242)
----------- ------------ ----------- -----------
(Loss) income before extraordinary item (15,995) (18,039) (105,604) 676
Extraordinary item (1) - - 965 3,849
----------- ------------ ----------- -----------
Net (loss) income (15,995) (18,039) (106,569) (3,173)
Preferred stock dividends and accretion (2) (1,505) (1,454) (1,937) (1,876)
Common stock available for repurchase
accretion (421) - - -
----------- ------------ ----------- -----------
Net (loss) income available to common
stockholders $ (17,921) $ (19,493) $ (108,506) $ (5,049)
=========== ============ =========== ===========
OTHER DATA:
Adjusted EBITDA $ 13,428(3) $ 4,722 $ 8,686 $ 20,213
CASH FLOW DATA:
Net cash provided by (used in) operating
activities $ (1,543) $ (1,446) $ (5,465) $ ( 5,047)
Net cash (used in) provided by investing
activities (2,194) (7,442) (8,134) (47,025)
Net cash (used in) provided by financing
activities 3,743 9,819 13,614 51,516
BALANCE SHEET DATA (AT PERIOD END):
Working (deficit) capital $ (8,283) $ (4,262) $ 21,499
Total assets 187,042 201,720 304,650
Total long-term debt (4) 149,591 142,711 133,599
Mandatorily redeemable preferred stock 26,093 24,588 22,651
Common stock available for repurchase (4) 10,586 10,000 -
Total stockholder's (deficit) equity (65,797) (47,876) 75,730
</TABLE>
<TABLE>
<CAPTION>
ANKER COAL GROUP, INC.
PRO FORMA
--------------------------------------
ADJUSTED COMBINED FOR
THE YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1998 1999
--------------------- ------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Coal sales and related revenue $290,155 $291,426 $174,293
Operating expenses:
Cost of operations and selling expenses 259,579 276,469 157,419
Depreciation, depletion and amortization 14,319 18,150 13,430
General and administrative 7,534 9,076 6,025
Loss on impairment of investment and
restructuring charges - 90,717 4,526
Stock compensation and related expenses 2,969 - -
------------ ---------- ----------
Operating (loss) income 5,754 (102,986) (7,107)
Interest expense (4,886) (16,271) (13,617)
Other income, net 1,480 2,805 2,579
Life insurance proceeds - - -
------------ ---------- ----------
(Loss) income before income taxes
and extraordinary item 2,348 (116,452) (18,145)
Income tax (benefit) 351 (7,643) (200)
------------ ---------- ----------
(Loss) income before extraordinary item 1,997 (108,809) (17,945)
Extraordinary item (1) - 965 -
------------ ---------- ----------
Net (loss) income 1,997 (109,774) (17,945)
Preferred stock dividends and accretion (2) (891) (1,937) (1,505)
Common stock available for repurchase
accretion - - -
------------ ---------- ----------
Net (loss) income available to common
stockholders $ 1,106 $(111,711) $ (19,450)
============ ========== ==========
OTHER DATA:
Adjusted EBITDA $ 24,522 $ 8,686 $ 13,428
CASH FLOW DATA:
Net cash provided by (used in) operating
activities $ (564)
Net cash (used in) provided by investing
activities (84,968)
Net cash (used in) provided by financing
activities 86,088
BALANCE SHEET DATA (AT PERIOD END):
Working (deficit) capital $ 7,410
Total assets 259,683
Total long-term debt (4) 88,029
Mandatorily redeemable preferred stock 20,775
Common stock available for repurchase (4) -
Total stockholder's (deficit) equity 80,779
</TABLE>
- -----------------------------
(1) Represents the write-off of unamortized debt issuance costs related to
our credit facility in 1997 and our amended and restated credit facility
in 1998.
(2) Represents accrued and unpaid dividends and accretion on Class A
mandatorily redeemable preferred stock.
(3) Adjusted for $0.8 million of financial restructuring charges included in
general and administrative expenses.
(4) Includes current portion. See our consolidated financial statements
included elsewhere in this offering memorandum.
RATIO OF EARNINGS TO FIXED CHARGES
Our earnings were insufficient to cover fixed charges for the years ended
December 31, 1998 and 1997, and for the nine months ended September 30, 1999 and
1998. See "Historical and Pro Forma Ratio of Earnings to Fixed Charges."
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RISK FACTORS
You should consider carefully the risks below, as well as other information
included in this offering memorandum, before making a decision to participate in
the exchange offer.
RISKS RELATED TO THE EXCHANGE OFFER
OLD NOTES THAT ARE NOT EXCHANGED FOR NEW NOTES IN THE EXCHANGE OFFER WILL BE
UNSECURED AND WILL EFFECTIVELY RANK SUBORDINATE TO SECURED INDEBTEDNESS,
INCLUDING THE NEW NOTES.
If you fail to exchange your old notes for new notes in the exchange offer, you
will continue to hold your old notes. These unexchanged old notes will remain
subject to the terms of the indenture governing the old notes, as amended
effective as of October 1, 1999. As a result, unexchanged old notes will
continue to be unsecured and will not be entitled to be paid from proceeds of
sales of our assets until all debt secured by liens on those assets has been
paid in full. This means that, except with respect to assets that are not
subject to the liens of secured creditors, the unexchanged old notes will
effectively rank subordinate to all of our current and future secured
indebtedness, including the new notes, the 14.25% Series A notes previously
issued in the private restructuring transactions, the 14.25% Series B notes
issued in the exchange offer registered under the Securities Act to holders of
14.25% Series A notes and indebtedness under our loan agreement with Foothill.
OLD NOTES THAT YOU DO NOT EXCHANGE MIGHT BECOME LESS LIQUID.
In the private restructuring transaction we consummated on October 28, 1999,
holders of 86.8% of our old notes exchanged their old notes for 14.25% Series A
notes. We anticipate that most holders of remaining outstanding old notes will
exchange them for new notes in this exchange offer. Any old notes tendered and
exchanged in the exchange offer will further reduce the aggregate principal
amount of the old notes outstanding. As a result, the liquidity of the market
for any old notes that remain outstanding after the completion of the exchange
offer will likely be substantially limited.
THERE IS CURRENTLY NO PUBLIC TRADING MARKET FOR THE NEW NOTES. IF AN ACTIVE
TRADING MARKET DOES NOT DEVELOP FOR THE NEW NOTES, YOU MAY NOT BE ABLE TO RESELL
THEM.
No active trading market currently exists for the new notes, and none may
develop. The new notes will not be listed on any securities exchange. The
trading price of the new notes may depend upon prevailing interest rates, the
market for similar securities and other factors, including general economic
conditions and our financial condition, performance and prospects. If an active
trading market does not develop, you may not be able to resell your new notes at
their fair market value or at all.
HOLDERS THAT EXCHANGE THEIR OLD NOTES FOR NEW NOTES IN THE EXCHANGE OFFER COULD
BE SUBJECT TO TAXES IF THE INTERNAL REVENUE SERVICE DETERMINES THAT EITHER THE
OLD NOTES OR THE NEW NOTES ARE NOT "SECURITIES" FOR FEDERAL INCOME TAX PURPOSES.
We anticipate that the exchange of old notes for new notes in the exchange offer
will be classified as a recapitalization under section 368(a)(1)(E) of the
Internal Revenue Code. If this is the case, the exchange will be nontaxable to
holders that exchange their old notes, because both the old notes and the new
notes should constitute "securities" for federal income tax purposes. If the
Internal Revenue Service determines, however, that either the old notes or the
new notes are not securities, the exchange would be a taxable transaction to the
participating holders, who would then generally recognize a capital gain (or
loss) as a result of the exchange. For a more detailed discussion of the
potential tax consequences to exchanging noteholders, see "Material U.S. Federal
Income Tax Consequences."
THE SECURITY INTEREST IN OUR ASSETS UNDER THE NEW NOTES WILL BE JUNIOR TO
FOOTHILL'S SECURITY INTEREST AND OTHER PERMITTED LIENS.
The new notes will rank equally in right of payment with any of our existing and
future senior indebtedness and senior to all of our subordinated indebtedness.
The lien securing payment of the new notes, however, will rank junior to the
liens securing up to $55 million of secured credit facilities, including our
loan agreement with Foothill and other specified permitted liens. This means
that holders of these prior liens will be entitled to have their debts paid in
full from proceeds of collateral before any proceeds are paid to holders of new
notes, and neither the trustee under the indenture governing the new notes nor
the holders of new notes will be entitled to foreclose on the collateral while
the secured credit facilities are outstanding. We cannot assure you that our
assets would be sufficient upon liquidation to repay the senior secured lenders
and the holders of new notes. See "Description of the New Notes -- Security."
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WE MAY NOT BE ABLE TO CREATE AN EFFECTIVE SECURITY INTEREST IN FAVOR OF THE NEW
NOTES IN SOME OF OUR COAL PROPERTIES, COAL SALES CONTRACTS OR COAL RESERVES AND
RELATED REAL PROPERTY.
The new notes will have a security interest in substantially all of our assets
other than excluded assets and real property located in Maryland. Excluded
assets include
- cash, other than proceeds of collateral, in which the new notes
will have a security interest;
- mobile equipment, consisting of mining equipment, bulldozers,
underground locomotives and trucks and other vehicles; and
- specified coal reserves and real property interests, including
related fixtures, equipment, improvements, structures, buildings
and water processing equipment and systems, located in West
Virginia that currently cannot be used in our mining operations.
See "Description of the New Notes -- Collateral." We may not be able, however,
to grant an effective security interest in some of our coal properties and coal
sales contracts or in some of our real property. Most of our coal leases and
most, if not all, of our material coal sales contracts prohibit our granting a
security interest in those leases and coal sales contracts. We do not intend to
seek the consent of the other party or parties to those coal leases or coal
sales contracts to grant a security interest to secure the new notes. Thus, the
new notes will not be secured by a security interest in those coal leases or
coal sales contracts that contain these prohibitions.
Furthermore, some coal leases and coal sales contracts do not prohibit our
granting a security interest in them, but they do have restrictions on
assignment. As a result, we may be able to grant a valid lien on those leases
and contracts to secure the new notes; the restrictions on assignment, however,
may prevent the trustee under the indenture governing the new notes from
foreclosing and realizing upon those leases and contracts even after the secured
credit facilities are satisfied.
In addition, in some instances the lien on our real property may be impaired by
inaccurate or inadequate descriptions of real property or the failure to have
properly filed various of our or the guarantor subsidiaries' leasehold
interests.
THE INTERCREDITOR AGREEMENT WITH OUR SENIOR SECURED LENDERS RESTRICTS THE
ABILITY TO ENFORCE THE SECURITY INTEREST UNDER THE NEW NOTES.
In connection with the private restructuring transactions, the trustee under the
indenture governing the 14.25% notes, which includes the new notes, entered into
an intercreditor agreement with Foothill, as agent for the lenders under our
loan agreement with Foothill. The intercreditor agreement specifies the parties'
rights relative to each other in the collateral securing the 14.25% notes. In
particular, the intercreditor agreement provides that the lien securing the
14.25% notes is junior in all respects to the lien securing up to $55 million
principal amount of indebtedness under our loan agreement with Foothill. The
intercreditor agreement also restricts the ability of the trustee for the 14.25%
notes to enforce the security interest securing those notes as long as amounts
remain outstanding under our loan agreement with Foothill. Moreover, if we
replace or refinance our loan agreement with Foothill, the trustee will be
required to enter into a replacement intercreditor agreement with the new senior
secured lenders on terms that, taken as a whole, are not less favorable to the
holders of the 14.25% notes than the terms of the intercreditor agreement with
Foothill. See "Description of Other Indebtedness -- Intercreditor Agreement."
ASSUMING WE COMPLY WITH THE RELEVANT PROCEDURES IN THE INDENTURE GOVERNING THE
NEW NOTES AND APPLICABLE LAW, WE CAN SELL SPECIFIED ASSETS THAT ARE SUBJECT TO
THE NEW NOTES' SECURITY INTERESTS AND USE A PORTION OF THE PROCEEDS IN OUR
DISCRETION WITHOUT THE CONSENT OF THE HOLDERS OF NEW NOTES.
Although the new notes are secured by a junior lien on substantially all of our
assets other than specified excluded assets and real property located in
Maryland, we can sell specified assets in one or more transactions. To the
extent we are not required to use the proceeds of these asset sales to pay down
the term loan with Foothill or for other specified purposes, we can use up to an
aggregate of $1.0 million, plus up to 40% of the excess over $1.0 million, of
these proceeds in our discretion. Moreover, we can sell assets without the
consent of the holders of the new notes as long as we follow the required
procedures under the Trust Indenture Act of 1939, including, in some instances,
obtaining certificates as to the fair value of the assets, to effectuate the
sale. See "Description of the New Notes -- Mandatory Redemption from Excess
Asset Sale Proceeds."
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RISKS RELATED TO ANKER
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND CASH FLOW PROBLEMS, AND THE OPINION
OF OUR INDEPENDENT ACCOUNTANTS CONTAINS A GOING CONCERN EXPLANATORY PARAGRAPH
WITH RESPECT TO OUR 1998 CONSOLIDATED FINANCIAL STATEMENTS.
We recorded net losses of approximately $106.6 million for the year ended
December 31, 1998 and approximately $16.0 million for the nine months ended
September 30, 1999. The net losses include a loss on impairment of investment
and restructuring charges of approximately $90.7 million for the year ended
December 31, 1998, and approximately $4.5 million for the nine months ended
September 30, 1999. Our independent public accountants have issued an opinion on
our consolidated financial statements for the year ended December 31, 1998 that
includes an explanatory paragraph as to our ability to continue as a going
concern.
As a result of the going concern explanatory paragraph, we will be required to
provide security in order to obtain the reclamation bonds required before
regulators will issue new mining permits to us. This could include posting cash
or cash equivalents for all or a part of the amount of the bonds. We have been
and will continue to meet with our principal customers and suppliers to explain
our financial condition. However, we may not be able to avoid adverse impacts
caused by changes in the terms on which we do business with customers and
suppliers.
WE ARE IN THE PROCESS OF REVALUING OUR NON-OPERATING ASSETS AND WE CONTINUE TO
EVALUATE THE CARRYING AMOUNT OF OTHER LONG-LIVED ASSETS, INCLUDING GOODWILL,
WHICH COULD RESULT IN DOWNWARD ADJUSTMENTS OF THE VALUE OF THOSE ASSETS ON OUR
BALANCE SHEET.
In light of our financial condition, we have begun a review of the carrying
values of our non-operating assets. We continue to review the carrying value of
our other long-lived assets including goodwill by analyzing future cash flows
compared to our carrying amounts. Although we cannot predict the outcome of
these reviews, we may make downward adjustments to the amounts recorded for
those assets on our balance sheet.
WE ARE HIGHLY LEVERAGED AND HAVE SIGNIFICANT DEBT SERVICE REQUIREMENTS.
We have substantial indebtedness and significant debt service obligations. As of
November 30, 1999, we had total long-term indebtedness in the amount of $135.9
million including current portion. For the nine-month period ended September 30,
1999, our earnings were insufficient to cover fixed charges in the amount of
approximately $16.2 million. The indentures governing our debt securities permit
us and our subsidiaries to incur additional indebtedness, including secured
indebtedness, subject to limitations.
Our high degree of leverage could have important consequences to the holders of
our notes, including that
- beginning October 1, 2000, a substantial portion of our cash from
operations will be committed to the payment of debt service,
- our ability to obtain additional financing in the future for
working capital, capital expenditures or acquisitions is
substantially limited,
- our levels of indebtedness and interest expense limit our
flexibility in reacting to changes in the business environment and
- on September 1, 2007, the entire unpaid principal of our 14.25%
Second Priority Senior Secured Notes will be due and payable.
As of November 30, 1999, the total amount of our secured indebtedness and that
of our subsidiaries that have guaranteed our indebtedness which would have
effectively ranked senior to the notes was approximately $13.4 million. This
includes our obligations and the subsidiary guarantors' obligations under our
loan agreement with Foothill Capital Corporation, as agent, as well as other
indebtedness secured by permitted liens. The obligations under the loan
agreement with Foothill are secured by a first priority lien on substantially
all of our assets and those of the subsidiary guarantors, other than real
property located in Maryland. Amounts outstanding under the loan agreement with
Foothill may be as much as $55.0 million, and the indentures governing our notes
would permit us to incur up to $10.0 million of secured purchase money
indebtedness with priority over the notes. As of November 30, 1999, the amount
outstanding under the loan agreement with Foothill was $13.0 million, all of
which was outstanding under the term loan portion. As of that date, there was
$17.9 million of undrawn availability under the revolving credit portion of the
loan agreement. Any amounts outstanding under our loan agreement with Foothill
would effectively rank senior to the new notes, all other outstanding 14.25%
notes, the old notes and the guarantees of the subsidiaries guaranteeing the new
notes, all other outstanding 14.25% notes, and the old notes.
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Our ability to pay principal and interest on the new notes, all other
outstanding 14.25% notes, and the old notes and to satisfy our other debt
service obligations, including the payments under the loan agreement with
Foothill, will depend upon the future operating performance of our subsidiaries.
The operating performance of our subsidiaries could be affected by many factors,
including the availability of borrowings under the loan agreement with Foothill
or successor facilities. To satisfy our debt service obligations, we may be
required to refinance all or a portion of our existing indebtedness, including
the new notes and our other 14.25% notes, at or prior to maturity. We may also
satisfy our debt servicing obligations by selling assets or raising equity
capital. Additional financing to satisfy our debt service obligations may not be
available to us on acceptable terms, if at all.
OUR CURRENT FINANCIAL CONDITION HAS HAMPERED OUR DIVESTITURE STRATEGY. IN
ADDITION, OUR EXISTING CREDIT FACILITY AND THE INDENTURE GOVERNING OUR 14.25%
NOTES LIMIT OUR ABILITY TO USE ASSET SALE PROCEEDS IN OUR BUSINESS.
Our business plan involves the sale of some of our non-operating assets and
selected non-strategic operating properties. The non-operating assets that we
are seeking to sell are those that we believe require substantial development
costs or have significant holding costs. In our opinion, the operating
properties that we plan to sell either complement non-operating assets being
held for sale or are not integral to our long-term operating strategy. We have
been discussing the sale of these properties with third parties. We believe that
our financial condition has hampered our efforts to market these properties to
date. Although we believe that we will be successful in selling all or a part of
these assets during the next 12 to 24 months, we may not be able to complete
these asset sales on terms acceptable to us, if at all.
In addition, the loan agreement with Foothill requires us to use the first $5.0
million of asset sale proceeds to reduce our term loan from Foothill. Payments
against the term loan cannot be reborrowed and therefore cannot be used to fund
our operating costs or other expenses. As a result of this provision, we will
not be able to use the first $5.0 million of asset sale proceeds to reinvest in
our business, fund operations or service the indebtedness on our outstanding
notes.
Furthermore, the indenture that governs the new notes and our other 14.25% notes
requires that, twice per year, we offer to redeem the notes using 60% of excess
proceeds, if any, after the first $1.0 million that we receive from asset sales,
unless we use the proceeds within 120 days of our receiving them for specified
purposes under the indenture. See "Description of the New Notes--Mandatory
Redemption From Excess Asset Sale Proceeds." As a result of this provision, we
may not be able to use these excess asset sale proceeds to fund operations or in
our business, other than for capital expenditures made within 120 days of our
receipt of the proceeds.
THE TERMS OF THE AGREEMENTS GOVERNING OUR INDEBTEDNESS CONTAIN SIGNIFICANT
RESTRICTIONS ON OUR OPERATIONS.
The indentures governing our outstanding notes contain covenants that, among
other things:
- limit our ability and our subsidiaries' ability to incur
additional indebtedness and issue preferred stock;
- restrict our ability and the ability of our subsidiaries to pay
dividends and make other restricted payments, including
investments;
- limit the ability of our subsidiaries to incur dividend and other
payment restrictions that other parties impose;
- limit our ability and that of our subsidiaries to conduct
transactions with affiliates;
- limit our ability and that of our subsidiaries to make asset
sales;
- limit our ability and that of our subsidiaries to incur liens;
- limit our ability and that of our subsidiaries to use proceeds
from permitted asset sales;
- limit our ability to consolidate or merge with or into, or to
transfer all or substantially all of our assets to, another
person; and
- limit our ability to engage in other lines of business. See
"Description of the New Notes--Covenants."
In addition, the loan agreement with Foothill contains additional and more
restrictive covenants than the indentures and requires us to maintain specified
financial ratios and satisfy various tests relating to our financial condition.
Our ability to comply with the covenants in the indentures and the loan
agreement may be affected by events beyond our control. The breach of any
covenants or restrictions, if not cured within any applicable cure period, could
result in a default under an indenture or the loan agreement, which would permit
the holders of the notes, or the lenders under the loan agreement, to declare
all amounts borrowed to be due and payable, together with accrued and unpaid
interest. In the case of the lenders under the loan agreement, a default may
allow the lenders to terminate their commitments to make further extensions of
credit under the loan agreement.
If we were unable to repay our indebtedness to the lenders under the loan
agreement with Foothill, the lenders could proceed against any or all of the
collateral securing the indebtedness under the loan agreement. The collateral
consists of substantially all of our assets
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and those of the subsidiaries guaranteeing amounts borrowed under the loan
agreement, other than real property located in Maryland, and includes all of the
collateral securing the new notes. In addition, if we fail to comply with the
financial and operating covenants contained in the loan agreement, we may
trigger an event of default under the loan agreement. An event of default could
permit the acceleration of the debt incurred under the loan agreement and, in
some cases, cross-acceleration and cross-default of indebtedness outstanding
under other of our debt instruments, including the notes. See "Description of
the New Notes--Covenants."
WE ARE ORGANIZED AS A HOLDING COMPANY, AND WE DEPEND ON THE SUCCESS OF OUR
OPERATING SUBSIDIARIES. OUR OPERATING SUBSIDIARIES ALSO HAVE SIGNIFICANT
INDEBTEDNESS.
We are a holding company and conduct all of our operations exclusively through
our subsidiaries. Our only significant assets are the capital stock of our
wholly-owned subsidiaries. As a holding company, we are dependent on dividends
or other distributions of funds from our subsidiaries to meet our debt service
and other obligations, including our obligations under the notes. Substantially
all of our subsidiaries are guarantors under our outstanding notes. In addition,
all of our operating subsidiaries are borrowers under, and other of our
subsidiaries guarantee the indebtedness under, the loan agreement with Foothill.
All obligations under the loan agreement are secured by a first priority lien on
substantially all of our assets and those of our subsidiaries.
WE DEPEND ON KEY CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND THE
LOSS OF ONE OR MORE OF THEM COULD ADVERSELY AFFECT US.
A substantial portion of our coal is sold under long-term coal supply contracts
with a few key customers that are important to the stability and profitability
of our operations. Our shipments to Potomac Electric Power Company accounted for
10% of our revenues in 1998, and we expect shipments to that customer to account
for approximately 27% of our revenues in 1999. Our long-term contracts with
companies related to AES Corporation accounted for more than 18% of our revenues
in 1998, and we expect them to account for approximately 18% of revenues in
1999. Our long-term contract with Virginia Electric Power Company accounted for
approximately 11% of our revenues in 1998, and we expect them to account for
approximately 10% of revenues in 1999. The loss of these or other long-term
contracts could have a material adverse effect on our financial condition and
results of operations. See "Business--Coal Marketing and Sales."
In August 1999, to resolve disputes under one of our agreements with Virginia
Electric Power Company, referred to as VEPCO, we entered into an amendment to
that agreement. The amendment, among other things, gives VEPCO the right, but
not the obligation, to terminate its contract to purchase coal from us since the
West Virginia Division of Environmental Protection did not issue a permit for
the resumption of operations at our Grant County surface mine by October 15,
1999. By letter to us dated October 19, 1999, VEPCO informed us that it was not,
as of that date, exercising its right to terminate its contract and that it
expects not to do so if the permit is approved and issued in the near term. On
December 17, 1999, the West Virginia Division of Environmental Protection issued
the permit, which will enable us to resume our surface mining operation in Grant
County, West Virginia. See "--Our inability to obtain a new mining permit for
one of our important properties has caused reduced levels of coal production."
below.
TRANSPORTATION COSTS REPRESENT A SIGNIFICANT PORTION OF THE DELIVERED COST OF
COAL, AND INCREASES IN TRANSPORTATION COSTS COULD MAKE OTHER ENERGY SOURCES MORE
COMPETITIVE WITH COAL. TRANSPORTATION DISRUPTIONS COULD IMPAIR OUR ABILITY TO
SELL COAL.
We depend on rail, trucking and barge transportation to deliver shipments of
coal to customers. In 1998, we shipped approximately 60% of our coal tonnage by
rail and 40% by truck and barge. Disruption of these transportation services,
particularly rail, could temporarily impair our ability to supply coal to our
customers and adversely affect our business and operating results.
Transportation costs are a significant component of the total cost of supplying
coal to customers and can affect significantly our competitive position and
profitability. Increases in our transportation costs, or changes in our
transportation costs relative to transportation costs that providers of
competing coal or of other fuels incur, could have an adverse effect on our
operations and business.
CSX Transportation, Inc. currently ships all of our coal delivered by rail. CSX
Transportation, Inc. and Norfolk Southern Corporation recently acquired Conrail,
which had been one of our rail transportation providers. The integration of
Conrail into CSX Transportation and Norfolk Southern began on June 1, 1999.
Although we have not yet experienced any service disruptions because of the
merger, disruptions in service may occur during the transition period. We do not
know how long the transition period will last. Disruption of transportation
services because of problems arising from the integration process or from
weather-related problems, strikes, lock-outs or other events could impair our
ability to supply coal to customers and could have a material adverse effect on
our business, financial condition and results of operations. See "Business--Coal
Transportation."
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OUR USE OF CONTRACT MINERS POSES BUSINESS RISKS, INCLUDING THE RISK OF A DECLINE
IN COAL PRODUCTION.
Our business plan includes improving cash flow by using contract mining services
for all of our underground mining operations. We have converted all of our deep
mines to contract mining. There is a risk that the contract miners will not be
able to perform their obligations, including the requirements to produce
specified amounts of coal, over the life of the contract mining agreements.
While we have taken care in selecting the contract miners for our underground
mines, each of our contract miners is owned by a single individual. In addition,
as a general matter, contract mining companies are usually not well capitalized.
If the owner of one of our contract mining companies were to die or if a
contract miner began experiencing financial difficulties for any reason, there
is a risk that the contract mining company would not be able to perform its
obligations to us. In that event, we could experience a material decline in coal
production, which could adversely affect our financial position.
OUR INABILITY TO OBTAIN A NEW MINING PERMIT FOR ONE OF OUR IMPORTANT PROPERTIES
HAS CAUSED REDUCED LEVELS OF COAL PRODUCTION.
Coal production tonnage levels were lower in 1999 due in part to the idling of
our Grant County surface mine in December 1998. We idled this surface mine
because we had mined all of our then permitted coal reserves and were not able
to obtain a new mining permit for our adjacent properties. A new mining permit
for our adjacent properties would have allowed us to continue 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 that we previously had
blended with coal from the surface mine. As a result of this and other factors,
we idled the deep mine in February 1999, which further reduced tonnage levels.
Since the surface mine was idled, we have been working with the appropriate
regulatory agencies to try to get the necessary permits for the Grant County
surface mine. On December 17, 1999, the West Virginia Division of Environmental
Protection issued the permit covering a portion of our Grant County surface mine
operation, which will enable us to resume mining at that operation. Because this
agency did not issue the permit by October 15, 1999, VEPCO has the right, but
not the obligation, to terminate one of its long-term coal contracts with us.
VEPCO indicated by letter to us dated October 19, 1999 that it was not, as of
that date, exercising its right to terminate its contract and that it expected
not to do so if the permit were approved and issued in the near term. See "--We
depend on key customers for a significant portion of our revenues, and the loss
of one or more of them could adversely affect us" above.
WE COULD HAVE INCOME TAX LIABILITY AS A RESULT OF THE RESTRUCTURING OF OUR OLD
NOTES IN THIS EXCHANGE OFFER AND IN THE PRIVATE EXCHANGE.
As a result of this exchange offer and the private exchange of old notes that
was consummated on October 28, 1999, we may recognize significant cancellation
of debt income. As a result of that income, we may incur income tax liabilities.
We will 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 notes issued in exchange for the old notes.
We have accumulated net operating losses that should offset a portion of the
cancellation of debt income that could result from this exchange offer and the
private exchange. Nevertheless, we have estimated that the tax liability
attributable to the cancellation of debt income could be as much as $7.0
million. That estimate is subject to uncertainty, and the actual tax liability
may be less than that amount. We are currently finalizing our determination of
the tax liability that will result from the private restructuring transactions
and this exchange offer. If we are required to pay tax, it will be due and
payable on March 15, 2000. We intend to borrow the funds to pay any tax due from
the revolving credit facility under our loan agreement with Foothill, which will
materially reduce our borrowing availability that would have been available for
our business operations.
THE COAL MARKETS ARE HIGHLY COMPETITIVE AND AFFECTED BY FACTORS BEYOND OUR
CONTROL.
The coal industry is highly competitive, with numerous producers in all coal
producing regions. Historically, we have competed with many other large
producers as well as smaller producers in our region. However, because of
significant consolidation in the coal industry over the past few years and other
factors, we now compete against producers in other regions. In addition, some of
our larger competitors have both the size of reserves and capital resources to
utilize mining technologies we cannot which provide low cost production.
In addition, the coal markets we serve are affected by many variables beyond our
control. The coal markets are presently being affected by:
- environmental and other governmental regulations,
- deregulation of electric utilities,
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- consolidation within the rail transportation industry,
- the increased role of electricity-based futures trading and
- reduced term lengths of long-term sales contracts and a greater
proportion of coal being purchased on a spot basis.
In addition to these recent developments, other long-term factors will affect
the continued demand for our coal and the prices that we will be able to obtain.
These long-term factors include
- the demand for electricity,
- coal transportation costs,
- technological developments and
- the availability and price of alternative fuel supply sources,
such as oil, natural gas, nuclear energy and hydroelectric energy.
WE ARE CONTROLLED BY ONE GROUP OF SHAREHOLDERS THAT HAS SIGNIFICANT INFLUENCE ON
OUR DECISIONS.
Approximately 53.24% of our fully-diluted outstanding common stock is owned by
American Gas and Oil Investors, L.P., AmGo II, L.P., First Reserve Fund V-2,
L.P., First Reserve Fund V, L.P., First Reserve Fund VI, L.P. and First Reserve
Fund VII, L.P., all of which are under the common management of First Reserve
Corporation. Accordingly, these funds are able to
- elect a majority of our directors,
- determine our corporate and management policies and
- subject to the terms of agreements among our existing shareholders
and other investors and with the concurrence of one additional
director, make decisions relating to fundamental corporate
actions, including any mergers or acquisitions and sales of all or
substantially all of our assets.
Although the funds managed by First Reserve Corporation have, and will continue
to have, substantial control, until the earlier to occur of an initial public
offering of our common stock and October 30, 2002, the investor agreement will
require a vote of at least 85% of the total outstanding shares of common stock
to sell all or a majority of our assets, enter into a merger with or into
another entity or sell a majority of our common stock. See "Description of the
Warrants."
COAL MINING IS DEPENDENT UPON MANY FACTORS AND CONDITIONS BEYOND OUR CONTROL.
Coal mining is subject to conditions beyond our control which can affect our
cost of mining at particular mines for varying lengths of time. These conditions
include
- weather conditions,
- unexpected maintenance problems,
- variations in coal seam thickness,
- variations in the amount of rock and soil overlying the coal
deposit,
- disruption, or increase in the cost, of transportation services,
- variations in geological conditions,
- the ability to secure new mining permits,
- regulatory uncertainties,
- price fluctuations and
- labor disruptions.
Over the past 18 months, we have been adversely affected by many of the
conditions. For example, severe rain forced us to close temporarily one of our
surface mining operations, we were unable to obtain a mining permit for our
Grant County surface mine until December 17, 1999, and we have experienced
variations in geological conditions at most of our deep mines and variations in
coal seam thickness and in the amount of rock and soil overlying our coal
deposits.
GOVERNMENT REGULATIONS COULD INCREASE OUR COSTS OF DOING BUSINESS AND MAY
DISCOURAGE OUR CUSTOMERS FROM BUYING OUR COAL.
We are subject to regulation by federal, state and local authorities on matters
including
- employee health and safety,
- permit and licensing requirements,
16
<PAGE> 17
- air quality standards,
- water pollution,
- plant and wildlife protection,
- reclamation and restoration of mining properties after mining is
completed,
- the discharge of materials into the environment,
- surface subsidence, which is the sinking or settling of the
earth's surface from underground mining,
- the effects that mining has on groundwater quality and
availability and
- benefits for current and retired coal miners.
Numerous governmental permits and approvals are required for mining operations.
We may be required to prepare and present to federal, state and local
authorities data pertaining to the effect or impact that any proposed
exploration for, or production of, coal may have on the environment.
Requirements that any governmental authority imposes may be costly and
time-consuming and may delay commencement or continuation of exploration or
production operations.
Furthermore, new legislation or regulations and orders may be adopted that may
materially adversely affect our mining operations, our cost structure or our
customers' ability to use coal. New legislation and new regulations under
existing laws related to the protection of the environment, which would further
regulate or tax the coal industry, may also require us or our customers to
change operations significantly or incur increased costs. New environmental
legislation or regulations could have a material adverse effect on our business,
financial condition and results of operations.
In particular, we may be required to modify our operations to comply with permit
and emission requirements under the federal Clean Air Act and corresponding
state laws that regulate emissions into the air affecting coal mining
operations. Direct impact on coal mining and processing operations may occur
through the Clean Air Act permit and emissions control requirements relating to
particulate matter, including fugitive dust. In July 1997, the U.S.
Environmental Protection Agency adopted new, more stringent National Ambient Air
Quality Standards for particulate matter and ozone, which were initially
expected to be implemented by 2003. The District of Columbia Court of Appeals
partially overturned these standards on appeal. We expect there to be further
appeals, but we cannot predict at this time what the outcome of any further
appeals will be. The impact of any new National Ambient Air Quality Standards on
the coal industry will depend on the policies and control strategies that states
implement under the Clean Air Act, but it could have a material adverse effect
on our business, financial condition and results of operations.
In order to comply with limitations on emissions, our customers may buy
low-sulfur coal or switch to other fuels. The Clean Air Act affects coal mining
operations indirectly by extensively regulating the emission into the air of
sulfur dioxide and other compounds, including nitrogen oxides, emitted by
coal-fired power plants. The Clean Air Act places limits on sulfur dioxide
emissions from electric power generation plants. The initiation of a second
phase of emission reductions beginning in 2000 could affect adversely the demand
for non-compliant coal as additional coal-burning electric power generation
plants become subject to the restrictions of the Clean Air Act. The extent to
which the utilities' switch to lower sulfur coal or other low-sulfur fuels would
materially adversely affect us would depend upon a number of factors, including
the utilities' ability to cost effectively convert non-compliant coal that we
produce to compliance coal.
The Clean Air Act also affects coal mining operations by requiring utilities
that currently are major sources of nitrogen oxides in moderate or higher ozone
nonattainment areas to install reasonably available control technology. The
Environmental Protection Agency announced a proposal that would require 22
eastern states to reduce substantially nitrogen oxide emissions by the year
2003. We cannot predict the effect that these regulations or other requirements
that may be imposed in the future could have on the coal industry in general,
and on us in particular. The implementation of the Clean Air Act, the new
National Ambient Air Quality Standards or any other future regulatory provisions
may materially adversely affect our business, financial condition and results of
operation.
WE DEPEND ON THE SELECTION, ACQUISITION, DEVELOPMENT AND RETENTION OF COAL
RESERVES CONTAINING ECONOMICALLY RECOVERABLE COAL OF QUALITIES THAT WE CAN SELL
TO OUR CUSTOMERS. WE MAY NOT BE SUCCESSFUL IN DEVELOPING OR OBTAINING ACCEPTABLE
COAL RESERVES.
Our future success depends primarily upon our ability to develop our existing
coal reserves that are economically recoverable and, to a lesser extent, on our
ability to find and develop new coal reserves. Our recoverable reserves will
generally decline as reserves are depleted, unless we are able to
- prove up existing reserves,
- conduct successful exploration or development activities, or
- acquire properties containing recoverable reserves.
17
<PAGE> 18
In order to increase reserves and production, we must continue our development
and exploration programs or undertake other replacement activities. Our current
strategy is to exploit our existing reserve base and to acquire additional
reserves where needed to expand or supplement existing operations. Our limited
capital resources hamper our ability to acquire new coal reserves. Our planned
development, our existing reserves or our exploration projects and acquisition
activities may not result in significant additional reserves. In addition, we
may not have success developing additional mines. For a discussion of our
reserves, see "Business--Coal Reserves."
A SIGNIFICANT DECLINE IN THE PRICE WE RECEIVE FOR OUR COAL COULD ADVERSELY
AFFECT OUR OPERATING RESULTS AND CASH FLOWS.
Our results of operations are highly dependent upon the prices we receive for
our coal and our ability to improve productivity and reduce costs. The
expiration of long-term contracts with prices above current market prices
requires that we continue to improve productivity and reduce costs in order to
sustain operating margins. Prices for export coal have declined. In addition,
demand for coal has decreased because of the warm winters in the northeastern
United States in 1998 and 1999. This has resulted in increased inventories that
have caused pricing pressures in 1999. All of these factors adversely affected
our operating results in the first three quarters of 1999 and may adversely
affect operating results for future periods. The declining prices have also
adversely affected our ability to generate cash flows necessary to improve
productivity and expand operations.
The price of coal sold under many of our long-term contracts is above current
market prices. Our customers may not extend existing long-term contracts or
enter into new long-term contracts. This could adversely affect the stability
and profitability of our operations. In addition, changes in regulations
governing the electric utility industry may make it more difficult for us to
enter into long-term contracts with our electric utility customers, as these
customers may become more sensitive to long-term price or quantity commitments
in a more competitive environment. A substantial decrease in the amount of coal
we sell under long-term contracts could subject our revenue stream to increased
volatility and adversely affect our financial position. See "Business--Coal
Contracts."
THE EXPIRATION OF LONG-TERM CONTRACTS WITH FAVORABLE PRICING OR CONTRACT
PROVISIONS ALLOWING FOR THE RENEGOTIATION OF PRICES COULD REDUCE OUR
PROFITABILITY.
The profitability of our long-term coal supply contracts depends on a variety of
factors. Profitability varies from contract to contract and fluctuates during
the contract term, depending on contract provisions, our actual production costs
and other factors. In addition, provisions for adjustment or renegotiation of
prices and other contractual provisions may increase our exposure to short-term
coal price volatility. Virtually all of our long-term contracts include price
adjustment provisions that permit an increase or decrease at specified times in
the contract price to reflect changes in price or other economic indices, taxes
and other charges. In addition, one of our 18 long-term coal supply contracts
contains price reopener provisions that provide for the contract price to be
adjusted upward or downward at specified times on the basis of market factors.
If a substantial portion of our long-term contracts were modified or terminated,
we would be affected adversely to the extent that we are unable to find other
customers to purchase coal at the same level of profitability. All of our
long-term contracts are for prices above current spot market prices. The loss of
some our long-term contracts could have a material adverse effect on our
business, financial condition and results of operations.
Between 1994 and 1998, approximately 75% of our revenues from coal sales were
made under long-term contracts, and we expect approximately 80% of our revenues
in 1999 to be attributable to coal sales under long-term contracts. Our
long-term contracts had a weighted average term of approximately 5.5 years as of
October 1, 1999.
The balance of sales not made under long-term contracts are made in the spot
market, or under contracts based on spot market prices and not under long-term,
fixed-price contracts. Accordingly, the prices we receive for a portion of our
coal production are dependent upon numerous factors beyond our control. These
factors include, but are not limited to,
- the level of consumer demand for electricity,
- governmental regulations and taxes,
- the price and availability of alternative energy sources and
- the overall economic environment.
Any significant decline in prices for coal could have a material adverse effect
on our financial condition, results of operation and quantities of reserves
recoverable on an economic basis. Should the industry experience significant
price declines from current levels or other adverse market conditions, we may
not be able to generate sufficient cash flow from operations to meet our
obligations and to make planned capital expenditures.
18
<PAGE> 19
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
CERTAIN OF THE TRUE EXTENT OF COAL ASSETS WE HAVE AVAILABLE TO FULFILL
OBLIGATIONS UNDER OUR CONTRACTS AND SECURE PAYMENT OF OUR SECURED INDEBTEDNESS.
There are uncertainties inherent in estimating quantities of recoverable
reserves, including many factors beyond our control. Estimates of economically
recoverable coal reserves and future net cash flows depend upon a number of
variables and assumptions, including
- geological and mining conditions, which available exploration data
may not fully identify or may differ from experience;
- historical production from the area compared with production from
other producing areas;
- the assumed effects of governmental agency regulations; 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, (1) estimates of the economically recoverable quantities of
coal attributable to any particular group of properties, (2) classifications of
reserves based on risk of recovery and (3) estimates of future net cash flows
expected from reserves prepared by different engineers or by the same engineers
at different times may vary substantially. Actual coal tonnage recovered from
identified reserve areas or properties, revenues and expenditures with respect
to our reserves may vary materially from estimates. See "Business--Coal
Reserves."
WE DEPEND ON THE LEADERSHIP OF KEY EXECUTIVES, AND IF THEY LEFT US IT COULD HAVE
AN ADVERSE EFFECT UPON US.
On October 12, 1997, John J. Faltis, who was then our President, Chief Executive
Officer and Chairman of our Board of Directors, was killed in a helicopter
accident in West Virginia. With Mr. Faltis' death, our success has become
increasingly dependent on Bruce Sparks, who succeeded Mr. Faltis as President,
and other key personnel. If Mr. Sparks becomes unwilling or unable to serve in
his new role, our business, operations and prospects would likely be further
adversely affected. Mr. Sparks entered into an employment agreement with us and
several of our subsidiaries. See "Management."
To address our need for increased depth in management and operations, we hired
William D. Kilgore, Jr. to be Chairman of our board of directors and Chief
Executive Officer, effective May 1, 1999. Mr. Kilgore has 42 years experience in
the coal business, including as a coal mining consultant for several central
Appalachian companies, as President/Chief Executive Officer and Director of
Agipcoal and as Vice President/General Manager of Enoxy Coal, Inc. Mr. Kilgore
entered into an employment agreement with us and several of our subsidiaries.
See "Management." If we lost Mr. Kilgore's services, our business, operations
and prospects would likely be adversely affected.
THE COAL INDUSTRY IS LABOR-INTENSIVE, AND WORK STOPPAGES OR UNIONIZATION WOULD
HAVE AN ADVERSE EFFECT UPON US.
We are not a party to any collective bargaining agreement and consider our
relations with employees to be good. However, some or all of our workforce may
unionize in the future. If some or all of our currently non-union operations
were to become unionized, we could incur higher labor costs and an increased
risk of work stoppages. We recently changed from operating our deep mines
ourselves to utilizing contract miners to operate these mines. The labor force
for our contract miners is currently not unionized. If some or all of our
contract miners' employees were to become unionized, the contract miners could
incur higher labor costs and have an increased risk of work stoppages, which
could adversely affect our business and costs of operations.
OUR FINANCIAL SITUATION RAISES THE POSSIBILITY THAT THE PREFERENCE PROVISIONS OF
FEDERAL OR STATE INSOLVENCY LAWS COULD BE USED TO CHALLENGE THE VALIDITY OF THE
NEW NOTES .
If we or one of our subsidiaries that guarantees the new notes were to file a
petition, or become a debtor in an involuntary proceeding, under the United
States Bankruptcy Code within 90 days after the consummation of the exchange
offer, then the granting of liens on the assets of the entity that filed the
bankruptcy petition to secure the new notes could be challenged as a voidable
preference under the Bankruptcy Code. In addition, if any of the exchanging
noteholders were determined to be an "insider," as that term is defined in the
Bankruptcy Code, on the date the exchange offer is consummated, then the
applicable period in which the filing of a bankruptcy petition could lead to the
assertion of a preference claim with respect to the exchange offer would be one
year rather than 90 days. "Insider" is defined under the Bankruptcy Code to
include, in the case of a corporation,
19
<PAGE> 20
- officers,
- directors,
- partnerships in which the debtor is a general partner,
- general partners of the debtor,
- relatives of officers, directors or general partners or persons in
control of the debtor,
- persons in control of the corporation and
- an affiliate, or insider of an affiliate, as if the affiliate were
the debtor.
We do not believe that any of the exchanging noteholders would be considered an
"insider" for preference purposes.
The liens that the bankrupt entity had granted could be voided if
- the liens were granted within the applicable reachback period to
secure preexisting debt,
- the liens were granted to or for the benefit of a creditor,
- the bankrupt entity was insolvent at the time it granted the
liens,
- the liens would enable the exchanging noteholders to receive more
in a liquidation of the bankrupt entity than they would have
received in the absence of the transaction and
- no defense applies.
The Bankruptcy Code creates a rebuttable presumption that a bankrupt entity was
insolvent during the 90 days preceding its bankruptcy filing. Applicable
defenses include the exchange of "new value" for the granting of the liens. The
Bankruptcy Code defines "new value" to include the extension of new credit, but
it does not include an obligation substituted for an existing obligation. If a
bankrupt entity's granting of liens were found to be a voidable preference, the
liens that entity granted would be set aside and the obligations of that entity
under the indenture governing the new notes would become unsecured obligations
of that entity. Voiding of the liens the bankrupt entity granted would not
affect the liens that any other entity had granted.
THIS OFFERING MEMORANDUM INCLUDES FORWARD-LOOKING STATEMENTS. IF OUR
EXPECTATIONS REFLECTED IN THESE FORWARD-LOOKING STATEMENTS PROVE TO BE
INCORRECT, OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE EXPECTATIONS.
This offering memorandum includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. The words "anticipates," "believes," "estimates,"
"expects," "plans," "intends" and similar expressions are intended to identify
these forward-looking statements, but are not the exclusive means of identifying
them. These forward-looking statements are subject to risks, uncertainties and
assumptions, including, among other things:
- the success or failure of our efforts to implement our business
plan;
- the availability of liquidity and capital resources;
- our ability to achieve anticipated cost savings;
- whether we are able to obtain new mining permits;
- adverse geologic conditions;
- changes in the industry;
- the weather;
- unexpected maintenance problems;
- reliance on major customers and long-term contracts;
- actions our competitors take and our ability to respond to those
actions;
- risks inherent to mining; and
- the effects of government regulation.
Other matters set forth in this offering memorandum may also cause actual
results in the future to differ materially from those described in the
forward-looking statements. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this offering memorandum might not occur.
20
<PAGE> 21
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes.
21
<PAGE> 22
CAPITALIZATION
This table sets forth our consolidated capitalization (1) as of September 30,
1999, (2) as adjusted to reflect the private exchange, private placement and
private stockholder exchange we consummated on October 28, 1999 and (3) as
adjusted to reflect this exchange offer assuming all outstanding old notes are
exchanged for new notes, as well as the private exchange, private placement and
private stockholder exchange. In the private exchange, 86.8% of the holders of
old notes, that were qualified holders identified in advance, exchanged $108.5
million in aggregate principal amount of their old notes for our 14.25% Series A
notes, and we issued to the exchanging noteholders warrants to purchase 20% of
our fully diluted common stock at an initial exercise price of $0.01 per share.
In the private placement, we sold to Rothschild Recovery Fund L.P., for $11.2
million in cash, $13.2 million in principal amount of our 14.25% Series A notes
and warrants to purchase 10% of our fully diluted common stock at an initial
exercise price of $0.01 per share. We have estimated that the fair value of the
warrants issued in the private exchange and private placement approximates par
value of $0.01 per share. In the private stockholder exchange, we issued $6.0
million in principal amount of our 14.25% Series A notes to JJF Group Limited
Liability Company in exchange for cancellation of shares of our common stock JJF
Group owned, and JJF Group relinquished its right to require us to buy that
stock over time for approximately $10.5 million.
The "as adjusted" columns of the following table do not include (1) the
additional notes we will issue to pay interest in kind on the new notes and
other 14.25% notes due April 1, 2000 or (2) notes that Rothschild Recovery Fund
may purchase, at our option and subject to various conditions, on or before
October 1, 2000 to fund up to $6.3 million of the October 1, 2000 interest
payment on the notes. You should read the information set forth below together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operation," "The Exchange Offer--Accounting Treatment" and our interim condensed
consolidated financial statements and consolidated financial statements and the
related notes included elsewhere in this offering memorandum.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
(UNAUDITED)
---------------------------------------------------
(DOLLARS IN MILLIONS)
AS ADJUSTED
FOR PRIVATE
RESTRUCTURING AS ADJUSTED FOR
ACTUAL TRANSACTIONS EXCHANGE OFFER
------ ------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents........................................... $ -- $ -- $ --
------------ --------- ---------
Accrued Interest.................................................... 6.3 1.0(2) 1.0
Long-term debt (including current portion):
Borrowings under Credit Facility................................ 24.2 13.0(1) 13.0
9 3/4% Series B Senior Notes due 2007........................... 125.0 16.5 --
14.25% Series A Second Priority Senior Secured Notes due
2007 Issued in Private Exchange.............................. -- 113.8(2) 113.8(2)
14.25% Series A Second Priority Senior Secured Notes due
2007 Issued for cash......................................... -- 13.2 13.2
Original Issue Discount......................................... -- (2.0) (2.0)
14.25% Series A Second Priority Senior Secured Notes due
2007 issued to JJF Group..................................... -- 6.0(3) 6.0
14.25% Series B Second Priority Senior Secured Notes due
2007 Issued in this Exchange Offer........................... -- -- 16.5(2)
Other debt...................................................... 0.4 0.4 0.4
----- -------- -------
Total debt.................................................... 149.6 160.9 160.9
Common stock available for repurchase (including current
portion)............................................................ 10.6 -- --
Mandatorily redeemable preferred stock (4).......................... 26.1 26.1 26.1
Total stockholders' equity
Preferred stock.......................................... 23.0 23.0 23.0
Common stock ............................................ -- -- --
Paid-in-capital.......................................... 47.9 52.5(3) 52.5
Paid-in-capital -- stock warrants ....................... -- -- --
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C> <C>
Treasury stock........................................... (5.1) (5.1) (5.1)
Accumulated deficit...................................... (131.6) (139.0)(5) (139.0)
------ -------- -------
Total stockholder's equity.......................................... (65.8) (68.6) (68.6)
------ -------- -------
Total capitalization................................................ $126.8 $ 119.4 $ 119.4
====== ======== =======
</TABLE>
- -----------------------------------------
(1) We used the proceeds of the private placement to reduce outstanding
amounts under the revolving credit facility under our loan agreement with
Foothill.
(2) In connection with the accounting treatment for this exchange offer and
the private exchange, we are required to keep the current carrying
amounts recorded on our balance sheet and include those amounts for
accrued interest not paid as part of this exchange offer and the private
exchange. Our calculation of interest expense in future periods will be
altered for the difference between the carrying amount and the principal
amount of the 14.25% notes issued in this exchange offer and the private
exchange. Our as adjusted principal obligations on the 14.25% notes are
less than the amounts presented.
(3) In connection with the accounting treatment for the private stockholder
exchange, we recorded the notes issued at fair value. The difference
between the notes issued and the common stock available for repurchase,
including current portion, increased paid-in-capital.
(4) Redemption of our Class A preferred stock, which is a class of our
preferred stock that is mandatorily redeemable, is limited by the
restricted payments covenant in the indenture governing the new notes.
See "Description of the New Notes--Covenants."
(5) The as adjusted accumulated deficit includes projected income tax expense
of $7 million associated with this exchange offer and the private
exchange and expected additional costs of $0.4 million relating to the
private exchange. See "Risk Factors--Risks Related to Anker--We could
have income tax liability as a result of the restructuring of our old
notes in this exchange offer and in the private exchange" and "Material
U.S. Federal Income Tax Consequences."
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<PAGE> 24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements are based on
the consolidated financial statements included elsewhere in this offering
memorandum.
The unaudited pro forma consolidated statements of operations for the year ended
December 31, 1998 and the nine months ended September 30, 1999 give effect to
the following transactions as if each transaction had occurred on January 1,
1998:
- the private placement of our 14.25% Series A notes and the
application of the proceeds from the private placement,
- the private stockholder exchange of our 14.25% Series A notes in
exchange for cancellation of the shares of our common stock a
stockholder owned and that stockholder's relinquishment of its
right to require us to buy that stock over time,
- the private exchange of our 14.25% Series A notes for old notes to
a limited number of qualified investors identified in advance and
- this exchange offer of new notes for outstanding old notes.
We have based the unaudited pro forma adjustments upon available information and
assumptions that we believe are reasonable. The pro forma consolidated data do
not purport to represent what our consolidated results of operations would have
been had the transactions described above actually occurred at the beginning of
the relevant period. In addition, the unaudited pro forma financial data do not
purport to project our consolidated results of operations for the current year
or any future date or period.
The adjustments set forth in the following tables do not reflect a one-time
increase in general and administrative expenses related to the write-off of
approximately $1.2 million of fees and other financing costs incurred in
connection with the private exchange and private placement. The adjustments also
do not include a one-time projected income tax liability of $7.0 million
associated with the private exchange and this exchange offer.
Pro Forma Adjusted EBITDA represents our earnings before interest, taxes,
depreciation, depletion, amortization, non-cash stock compensation and
non-recurring related expenses, loss on impairment of investment and
restructuring charges, life insurance proceeds, financial restructuring charges
and extraordinary items. Pro Forma Adjusted EBITDA should not be considered as
an alternative to operating earnings (loss) or net income (loss), as determined
in accordance with generally accepted accounting principles, as a measure of our
operating performance. Nor should it be considered as an alternative to net cash
provided by operating, investing and financial activities, as determined in
accordance with generally accepted accounting principles, as a measure of our
ability to meet cash needs. We have included Pro Forma Adjusted EBITDA because
we use Pro Forma Adjusted EBITDA to assess our financial performance and some of
the covenants in our loan agreement and indentures are tied to similar measures.
Since all companies and analysts do not necessarily calculate Pro Forma Adjusted
EBITDA in the same fashion, Pro Forma Adjusted EBITDA as presented in this
offering memorandum may not be comparable to similarly titled measures other
companies report.
You should read the unaudited pro forma consolidated financial statements
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operation," "The Exchange Offer--Accounting Treatment" and the
consolidated financial statements included elsewhere in this offering
memorandum.
24
<PAGE> 25
ANKER COAL GROUP, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Adjustments
-----------------------------------------------------------
Private Private Stockholder Private
Actual Placement (1) Exchange (2) Exchange (3)
------ ------------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Coal sales and related revenue $ 291,426 - - -
Operating expenses:
Cost of operations and selling
expenses 276,469 - - -
Depreciation, depletion and amortization 18,150 - - -
General and administrative 9,076 - - -
Loss on impairment
of investment and restructuring
charges 90,717 - - -
--------------- -------------- -------------- ---------------
Operating loss (102,986) - - -
Interest expense (13,066) $ (2,201) (a) $ (885) (a) $ 220 (a)
Other income, net 2,805 - - -
--------------- -------------- -------------- ---------------
Loss before income taxes and
extraordinary item (113,247) (2,201) (885) 220
Income tax expense (benefit) (7,643) - (b) - (b) - (b)
---------------- -------------- -------------- ---------------
Net loss before extraordinary item (105,604) (2,201) (885) 220
Extraordinary item 965 - - -
---------------- -------------- -------------- ---------------
Net loss (106,569) (2,201) (885) 220
Preferred stock dividends and accretion (1,937) - - -
Common stock available for repurchase
accretion - - - -
---------------- -------------- -------------- ---------------
Net loss available to common
stockholders $ (108,506) $ (2,201) $ (885) $ 220
================ ============== ============== ===============
Other Data:
Pro Forma Adjusted EBITDA - - - -
</TABLE>
<TABLE>
<CAPTION>
Adjustments
-----------------
Exchange As
Offer(4) Adjusted
-------- -------
(dollars in thousands)
<S> <C> <C>
Coal sales and related revenue - $ 291,426
Operating expenses:
Cost of operations and selling
expenses - 276,469
Depreciation, depletion and amortization - 18,150
General and administrative - 9,076
Loss on impairment
of investment and restructuring
charges - 90,717
--------------- --------------
Operating loss - (102,986)
Interest expense $ (339) (a) (16,271)
Other income, net - 2,805
--------------- --------------
Loss before income taxes and
extraordinary item (339) (116,452)
Income tax expense (benefit) - (b) (7,643)
--------------- --------------
Net loss before extraordinary item 339 (108,809)
Extraordinary item - 965
--------------- --------------
Net loss (339) (109,774)
Preferred stock dividends and accretion - (1,937)
Common stock available for repurchase
accretion - -
--------------- --------------
Net loss available to common
stockholders $ (339) $ (111,711)
=============== ==============
Other Data:
Pro Forma Adjusted EBITDA - 8,686
</TABLE>
25
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(1) Reflects the private placement of our 14.25% Series A notes and the
application of the proceeds from the private placement as if the
transaction occurred on January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the 14.25% notes at an assumed rate of 14.25% with an
increase in principal after six months for the interest that will
be paid in kind by issuing additional notes in lieu of cash at
that time.
(b) Reflects the income tax effects of the pro forma adjustments
assuming that the interest that is paid in kind is non-deductible,
a 39% tax rate and the establishment of a 100% valuation allowance
on all net operating losses.
(2) Reflects the private stockholder exchange of our 14.25% Series A notes to
a stockholder in exchange for the relinquishment of that stockholder's
right as if the transaction occurred on January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the 14.25% notes at an assumed rate of 14.25% with an
increase in principal after six months for the interest that will
be paid in kind by issuing additional notes in lieu of cash at
that time.
(b) Reflects the income tax effects of the pro forma adjustments
assuming that the interest that is paid in kind is non-deductible,
a 39% tax rate and the establishment of a 100% valuation allowance
on all net operating losses.
(3) Reflects the private exchange of our 14.25% Series A notes for old notes
as if the transaction occurred on January 1, 1998.
(a) Reflects the reduction of interest expense resulting from the
exchange of old notes for our 14.25% Series A notes at an assumed
effective interest rate of 8.76% and an increase in principal
after six months for the interest that will be paid in kind by
issuing additional notes in lieu of cash at that time.
(b) Reflects the income tax effects of the pro forma adjustments
assuming that the interest that is paid in kind is non-deductible,
a 39% tax rate and the establishment of a 100% valuation allowance
on all net operating losses.
(4) Reflects the exchange offer, assuming 100% participation, as if the
transaction occurred on January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the 14.25% notes at an assumed rate of $14.25% compared with
the 9 3/4% interest rate on the old notes. The increase in
interest expense also reflects an increase in principal after six
months for the interest that will be paid in kind by issuing
additional notes in lieu of cash at that time.
(b) Reflects the income tax effects of the pro forma adjustments
assuming that the interest that is paid in kind is non-deductible,
a 39% tax rate and the establishment of a 100% valuation allowance
on all net operating losses.
26
<PAGE> 27
ANKER COAL GROUP, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
ADJUSTMENTS
------------------------------------------------------------------
PRIVATE PRIVATE STOCKHOLDER
ACTUAL PLACEMENT (1) EXCHANGE (2) PRIVATE EXCHANGE (3)
---------- ------------------ --------------------- ----------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Coal sales and related revenue $ 174,293 - - -
Operating expenses:
Cost of operations and
selling expenses 157,419 - - -
Depreciation, depletion and
amortization 13,430 - - -
General and administrative 6,781 - - $ (756)(a)
Loss on impairment of
investment and
restructuring charges 4,526 - - -
--------- ------------ ------------ -----------
Operating loss (7,863) - - (756)
Interest expense (10,911) $ (1,701)(a) $ (687)(a) (14)(b)
Other income, net 2,579 - - -
--------- ------------ ------------ -----------
Loss before income taxes and
extraordinary item (16,195) (1,701) (687) (770)
Income tax expense (benefit) (200) - (b) - (b) - (b)
---------- ------------ ------------ -----------
Net loss (15,995) (1,701) (687) (770)
Preferred stock dividends and
accretion (1,505) - - -
Common stock available for
repurchase accretion (421) - (421)(c) -
---------- ------------ ------------ -----------
Net loss available to
common stockholders $ (17,921) $ (1,701) $ (266) $ (770)
========== ============ ============ ===========
Other Data:
Pro Forma Adjusted EBITDA - - - -
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENTS
--------------
EXCHANGE OFFER
(4) AS ADJUSTED
---------------- --------------
(dollars in thousands)
<S> <C> <C>
Coal sales and related revenue - $ 174,293
Operating expenses:
Cost of operations and
selling expenses - 157,419
Depreciation, depletion and
amortization - 13,430
General and administrative - 6,025
Loss on impairment of
investment and
restructuring charges - 4,526
------------- -----------
Operating loss - (7,107)
Interest expense $ (304)(a) (13,617)
Other income, net - 2,579
------------- -----------
Loss before income taxes and
extraordinary item (304) (18,145)
Income tax expense (benefit) - (b) (200)
------------- -----------
Net loss (304) (17,945)
Preferred stock dividends and
accretion - (1,505)
Common stock available for
repurchase accretion - -
------------- -----------
Net loss available to
common stockholders $ (304) $ (19,450)
============= ===========
Other Data:
Pro Forma Adjusted EBITDA - 13,428
</TABLE>
27
<PAGE> 28
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(1) Reflects the private placement of our 14.25% Series A notes and the
application of the proceeds from the private placement as if the
transaction occurred on January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the 14.25% notes at an assumed rate of 14.25%.
(b) Reflects the income tax effects of the pro forma adjustments
assuming a 39% tax rate and the establishment of a 100% valuation
allowance on all net operating losses.
(2) Reflects the private stockholder exchange of our 14.25% Series A notes to
a stockholder in exchange for the relinquishment of that stockholder's
right as if the transaction occurred on January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the 14.25% notes at an assumed rate of 14.25%.
(b) Reflects the income tax effects of the pro forma adjustments
assuming a 39% tax rate and the establishment of a 100% valuation
allowance on all net operating losses.
(c) Reflects a decrease in the common stock available for repurchase
accretion resulting from a stockholder's relinquishment of it
rights before we would have been further obligated to that
stockholder.
(3) Reflects the private exchange of our 14.25% Series A notes for old notes
as if the transaction occurred on January 1, 1998.
(a) Reflects a decrease in general and administrative expenses
resulting from the $0.8 million of financial restructuring
charges.
(b) Reflects an increase of interest expense resulting from the
exchange of old notes for our 14.25% notes at an assumed effective
interest rate of 8.76%.
(c) Reflects the income tax effects of the pro forma adjustments
assuming a 39% tax rate and the establishment of a 100% valuation
allowance on all net operating losses.
(4) Reflects the exchange offer, assuming 100% participation, as if the
transaction occurred on January 1, 1998.
(a) Reflects an increase in interest expense resulting from borrowings
under the 14.25% notes at an assumed rate of $14.25% compared with
the 9 3/4% interest rate on the old notes. The increase in
interest expense also reflects an increase in principal after six
months for the interest that will be paid in kind by issuing
additional notes in lieu of cash at that time.
(b) Reflects the income tax effects of the pro forma adjustments
assuming that the interest that is paid in kind is non-deductible,
a 39% tax rate and the establishment of a 100% valuation allowance
on all net operating losses.
28
<PAGE> 29
SELECTED FINANCIAL DATA
The following table is a summary of our historical consolidated financial data
for the five years ended December 31, 1998 and for the nine months ended
September 30, 1999 and 1998. We derived the historical consolidated financial
data for each of the five years in the period ended December 31, 1998 from our
audited consolidated financial statements, audited by PricewaterhouseCoopers
LLP, independent accountants, appearing elsewhere in this offering memorandum.
We derived the historical consolidated financial data as of September 30, 1999
and for the nine months ended September 30, 1999 and 1998 from our unaudited
consolidated financial statements. The unaudited adjusted combined statements of
operations data and other data for the year ended December 31, 1996 combine the
audited results of operations of our predecessor, Anker Group, Inc., for the
period January 1, 1996 to July 31, 1996, and of us for the period August 1, 1996
to December 31, 1996. You should read the following information together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and our consolidated financial statements and related notes included
elsewhere in this offering memorandum.
<TABLE>
<CAPTION>
Anker Coal Group, Inc.
---------------------- Adjusted
Combined
Nine Months Ended Year Ended for the
September 30, December 31, Year Ended
------------- ------------ December 31,
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Coal sales and related revenue $174,293 $226,111 $ 291,426 $322,979 $290,155
Operating expenses:
expenses 157,419 214,443 276,469 295,387 259,579
Depreciation, depletion and
amortization 13,430 13,009 18,150 17,470 14,319
General and administrative 6,781 7,767 9,076 9,462 7,534
Loss on impairment of investment
and restructuring charges 4,526 7,346 90,717 8,267 -
Stock compensation and related
expenses - - - - 2,969
-------- -------- --------- -------- --------
Operating (loss) income (7,863) (16,454) (102,986) (7,607) 5,754
Interest expense, net (10,911) (9,421) (13,066) (10,042) (4,886)
Other income, net 2,579 821 2,805 2,083 1,480
Life insurance proceeds - - - 15,000 -
-------- -------- --------- -------- --------
(Loss) income before income
taxes and extraordinary item (16,195) (25,054) (113,247) (566) 2,348
Income tax (benefit) (200) (7,015) (7,643) (1,242) 351
-------- -------- --------- -------- --------
(Loss) income before
extraordinary item (15,995) (18,039) (105,604) 676 1,997
Extraordinary item (1) - - 965 3,849 -
-------- -------- --------- -------- --------
Net (loss) income (15,995) (18,039) (106,569) (3,173) 1,997
Preferred stock dividends and
accretion (2) (1,505) (1,454) (1,937) (1,876) (891)
Common stock available for
repurchase accretion (421) - - - -
-------- -------- --------- -------- --------
Net (loss) income available
to common stockholders $(17,921) $(19,493) $(108,506) $ (5,049) $ 1,106
======== ======== ========= ======== ========
OTHER DATA:
Adjusted EBITDA $ 3,428 $ 4,722 $ 8,686 $ 20,213 $ 24,522
CASH FLOW DATA:
Net cash provided by (used in)
operating activities $ (1,543) $ (1,446) $ (5,465) $( 5,047)
Net cash (used in) provided by
investing activities (2,194) (7,442) (8,134) (47,025)
Net cash (used in) provided by
financing activities 3,743 9,819 13,614 51,516
BALANCE SHEET DATA (AT PERIOD END):
Working (deficit) capital $ (8,283) $ (4,262) $ 21,499
Total assets 187,042 201,720 304,650
Total long-term debt (4) 149,591 142,711 133,599
Mandatorily redeemable preferred
stock 26,093 24,588 22,651
Common stock available for
repurchase (4) 10,586 10,000 -
Total stockholder's (deficit)
equity (65,797) (47,876) 75,730
</TABLE>
<TABLE>
<CAPTION>
Anker Coal Anker Group, Inc.
Group, Inc. (Our Predecessor)
----------- -----------------
Year Ended
August 1, 1996 to January 1, 1996 December 31,
December 31, to July 31, ------------
1996 1996 1995 1994
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (dollars in thousands)
<S> <C> <C> <C> <C>
Coal sales and related revenue $123,246 $166,909 $248,897 $227,499
Operating expenses:
expenses 110,215 149,364 221,315 203,174
Depreciation, depletion and
amortization 6,437 7,882 11,732 12,083
General and administrative 3,738 3,796 6,843 5,938
Loss on impairment of investment
and restructuring charges - - - -
Stock compensation and related
expenses - 2,969 - -
-------- -------- -------- --------
Operating (loss) income 2,856 2,898 9,007 6,304
Interest expense, net (2,090) (2,796) (6,612) (3,523)
Other income, net 373 1,107 3,108 1,621
Life insurance proceeds - - - -
-------- -------- -------- --------
(Loss) income before income
taxes and extraordinary item 1,139 1,209 5,503 4,402
Income tax (benefit) 485 (134) 2,270 1,940
-------- -------- -------- --------
(Loss) income before
extraordinary item 654 1,343 3,233 2,462
Extraordinary item (1) - - - -
-------- -------- -------- --------
Net (loss) income 654 1,343 3,233 2,462
Preferred stock dividends and
accretion (2) (775) (116) (215) (215)
Common stock available for
repurchase accretion - - - -
-------- -------- -------- --------
Net (loss) income available
to common stockholders $ (121) $ 1,227 $ 3,018 $ 2,247
======== ======== ======== ========
OTHER DATA:
Adjusted EBITDA $ 9,666 $ 14,856 $ 23,847 $ 20,008
CASH FLOW DATA:
Net cash provided by (used in)
operating activities $ (564) $ 19,022 $ 2,168 $ 13,421
Net cash (used in) provided by
investing activities (84,968) (1,764) 5,021 (32,434)
Net cash (used in) provided by
financing activities 86,088 (29,795) 4,992 17,808
BALANCE SHEET DATA (AT PERIOD END):
Working (deficit) capital $ 7,410 $ 27,599 $ 12,576
Total assets 259,683 187,026 161,372
Total long-term debt (4) 88,029 74,902 69,910
Mandatorily redeemable preferred
stock 20,775 8,600 1,600
Common stock available for
repurchase (4) - - -
Total stockholder's (deficit)
equity 80,779 57,203 41,185
</TABLE>
29
<PAGE> 30
(1) Represents the write-off of unamortized debt issuance costs related to
our credit facility in 1997 and our amended and restated credit facility
in 1998.
(2) Represents accrued and unpaid dividends and accretion on Class A
mandatorily redeemable preferred stock.
(3) Adjusted for $0.8 million of financial restructuring charges included in
general and administrative expenses.
(4) Includes current portion. See our consolidated financial statements
included elsewhere in this offering memorandum.
30
<PAGE> 31
HISTORICAL AND PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
Our consolidated ratios of earnings to fixed charges for each of the periods
indicated are set forth below. For purposes of calculating the ratio of earnings
to fixed charges, "earnings" represents income (loss) from continuing operations
before income taxes and cumulative effects of accounting changes and
extraordinary items plus fixed charges. "Fixed charges" consists of interest
expense, amortization of deferred financing costs and the component of rental
expense that we believe is representative of the interest component of rental
expense.
<TABLE>
<CAPTION> Anker Coal
Anker Group,Inc. Group, Inc. Anker Coal Group, Inc.
----------------------------- ------------------ --------------------- -------------------------------
Years Ended Nine Months Ended
Years Ended January 1, 1996 August 1, 1996 Adjusted Combined December 31, September 30,
December 31, to to for the Year Ended ------------ -----------------
1994 1995 July 31, 1996 December 31, 1996 December 31, 1996(c) 1997 1998 1998 1999
---- ---- ------------- ----------------- -------------------- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Historical
Ratio of earnings to
fixed charges(a).... 1.8x 1.6x 1.3x 1.4x 1.3x -- -- -- -
Pro Forma
Ratio of earnings to
fixed charges(b).... -- --
--
</TABLE>
- -----------------------------
(a) Earnings were insufficient to cover fixed charges for the years ended
December 31, 1997 and 1998, and for the nine months ended September 30,
1998 and 1999. Additional earnings of approximately $0.6 million, $113.2
million, which includes loss on impairment of investment and
restructuring of $90.7 million, $16.2 million and $25.1 million would
have been required to cover fixed charges in the years ended December 31,
1997 and 1998 and the nine months ended September 30, 1998 and 1999,
respectively.
(b) Pro forma earnings were inadequate to cover pro forma fixed charges for
the year ended December 31, 1998 and the nine months ended September 30,
1999 after giving pro forma effect to the private exchange, private
placement and private stockholder exchange of our 14.25% Series A Second
Priority Senior Secured Notes due 2007 (PIK through April 1, 2000) on
October 28, 1999 and the application of the net proceeds from the private
placement, as well as this exchange offer of new notes for outstanding
old notes (assuming 100% participation), as if they had occurred on
January 1, 1998; additional pro forma earnings of $116.4 million, which
includes loss on impairment of investment and restructuring of $90.7
million, and $18.1 million would have been required to cover pro forma
fixed charges for the year ended December 31, 1998 and the nine months
ended September 30, 1999, respectively.
(c) The adjusted combined statements of operations data and other data for
the year ended December 31, 1996 combine the results of operations of our
predecessor, Anker Group, Inc., for the period January 1, 1996 to July
31, 1996, and of us for the period August 1, 1996 to December 31, 1996.
31
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
We have continued to experience liquidity problems during the calendar year
1999. To address these liquidity problems, on October 28, 1999, we completed a
private restructuring of our old notes and a private placement to raise
additional capital. As discussed in more detail below, in the transactions, a
limited number of qualified noteholders identified in advance exchanged $108.5
million of their old notes for $86.8 million of our 14.25% Series A notes, as
well as warrants to purchase our common stock. Exchanging noteholders waived
their right to receive the October 1, 1999 interest payment on their old notes
and also consented to various amendments to the indenture governing the old
notes. In addition, we raised $11.2 million in cash through the sale to
Rothschild Recovery Fund L.P. in a private placement of $13.2 million principal
amount of our 14.25% Series A notes. The funds raised in the private placement
were applied against the revolving credit facility under our loan agreement with
Foothill. As a result, as of November 30, 1999, we had $17.9 million of
availability under our revolving credit facility.
Our loan agreement with Foothill provides us with up to a $55.0 million credit
facility. The credit facility consists of a commitment for a $40.0 million
working capital revolver and a term loan with an original principal amount of
$15.0 million. Commitments under the credit facility will expire in 2002. The
credit facility is secured by substantially all of our present and future
assets.
Borrowings under the revolver are limited to 85% of eligible accounts receivable
and 65% of eligible inventory and bear interest, at our option, at either 1%
above the prime interest rate or at 3 3/4% above the adjusted Eurodollar rate.
For the year ended December 31, 1998, the average interest rate under the
revolver was approximately 8.75%. The term loan bears interest at 2 1/2% above
the prime interest rate and is payable in monthly installments through 2002. The
average interest rate for the term loan for the year ended December 31, 1998 was
approximately 10.25%.
The following table sets forth the amounts outstanding and borrowing
availability under our loan agreement with Foothill as of the dates shown below:
<TABLE>
<CAPTION>
REVOLVING REVOLVING ADDITIONAL
CREDIT CREDIT INTERIM
DATE TERM LOAN BORROWINGS AVAILABILITY AVAILABILITY
---- --------- ---------- ------------ ------------
(in millions)
<S> <C> <C> <C> <C>
12/31/98 $ 15.0 $ 1.9 $ 15.5 --
03/31/99 14.4 1.4 16.5 --
06/30/99 13.9 12.9 6.9 --
09/30/99 13.3 10.9 6.7 2.0
10/31/99 13.2 3.0 14.9 2.0
11/30/99 13.0 -- 17.9 --
</TABLE>
The term loan changes are based on the normal amortization of the loan, except
that
- in July 1999, the term loan was paid down through the application
of approximately $1.25 million of asset sale proceeds, and
- in September 1999, under the terms of an amendment to the loan
agreement, Foothill reversed this payment, which caused the term
loan to increase by the same amount, and reapplied the proceeds to
reduce revolving credit borrowings in order to provide us with
additional liquidity.
The increase in the revolving credit borrowings since March 31, 1999 is
primarily related to
- our borrowing to make the interest payment on the old notes on
April 29, 1999,
- performing reclamation in Webster County, West Virginia and
- capital expenditures.
32
<PAGE> 33
Revolving credit availability also had been reduced as a result of lower coal
production and coal shipments. Changes in coal production and the resulting
changes in coal inventory and accounts receivable will impact future revolving
credit availability.
The loan agreement with Foothill contains covenants that, among other matters,
restrict or limit our ability
- to pay interest and dividends,
- incur indebtedness,
- acquire or sell assets and
- make capital expenditures.
We must also maintain specified cash flow ratios. In particular, the loan
agreement provides that in order to advance funds to the guarantors and us under
the loan agreement, the borrowers under the loan agreement must have borrowing
availability of at least $5.0 million after giving effect to the advances and
for the 30 days immediately preceding the advances. With respect to the term
loan, in addition to regularly scheduled amortizing principal and interest
payments, the loan agreement requires that we apply the first $5.0 million of
proceeds from designated asset sales to the repayment of the term loan. As of
November 30, 1999, no amounts have been applied to the $5.0 million requirement.
Proceeds used to repay the term loan cannot be reborrowed.
Our independent public accountants included a going concern explanatory
paragraph in their accountants' report on our consolidated financial statements
for the year ended December 31, 1998. Specifically, the independent public
accountants stated that because we have, among other things, experienced
recurring losses and negative cash flow from operations and have a retained
deficit, they had substantial doubt about or ability to continue as a going
concern. See the consolidated financial statements for the period ended December
31, 1998 included elsewhere in this offering memorandum for the report of our
independent public accountants. The issuance of the explanatory paragraph by our
independent public accountants in their report on our consolidated financial
statements for the year ended December 31, 1998 caused a default under our
agreement with Foothill. Foothill, however, waived this default.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS AND CONTINGENCIES
We budgeted approximately $9.3 million for capital expenditures for 1999. As of
September 30, 1999, we had incurred approximately $5.2 million of capital
expenditures. With the transition from operating our own deep mines to
contracting with others to run our deep mines, some of the capital expenditures
previously budgeted will no longer be necessary. As a result of this and other
factors, we expect that capital expenditures for 1999 will be less than the $9.3
million budgeted amount.
As a result of the private exchange transaction discussed below and this
exchange offer, we may incur income tax liabilities. As of October 28, 1999, we
estimated that our tax liability could be as much as $7.0 million. That estimate
is subject to uncertainty, and the actual tax liability may be less than that
amount. We are currently finalizing our determination of the tax liability that
will result from the private exchange transaction. If we are required to pay
tax, it will be due and payable on March 15, 2000. We intend to borrow the funds
to pay any tax due from the revolving credit facility under our loan agreement
with Foothill.
BUSINESS PLAN
In late 1998, in response to poor operating and financial performance during
1998, we developed a plan to improve our operating performance and improve short
and long-term liquidity. The plan has four objectives:
- obtain more flexible senior financing;
- improve cash flow from operations;
- raise cash by selling selected assets; and
- reduce our debt and secure additional liquidity.
We achieved the first objective of the plan in November 1998, when we and our
subsidiaries entered into a loan and security agreement with Foothill Capital
Corporation, as agent, and other lenders. The credit facilities issued under the
loan agreement refinanced and replaced the amended and restated credit facility
with The Chase Manhattan Bank and others that had provided for a $71 million
line of credit. Our ability to borrow funds under the prior credit facility with
Chase was limited by financial ratios we were required to meet. Due to our poor
financial performance during 1998, we thus had insufficient borrowing
availability under that credit facility. The new credit facility with Foothill,
on the other hand, provides us with additional flexibility because availability
under the facility is based on the value of our assets. As a result, we have
additional borrowing availability. For a description of the credit facility, see
"Description of Other Indebtedness--Credit Facility."
33
<PAGE> 34
The second objective of our plan is to improve cash flow from operations through
the use of contract mining services for our underground mining operations. We
believe that our use of contract miners will reduce operating expenses, general
and administrative expenses and month-to-month cost fluctuations. In addition,
because the contract miners are responsible for mine development and
maintenance, we will have reduced capital costs. We have completed this
objective of the plan. In early April 1999, we entered into a contract mining
agreement for the operations in Garrett County, Maryland, and the contract miner
began operations on April 12, 1999. In addition, we have entered into contract
mining agreements for our mining operations in Upshur, Barbour and Raleigh
counties in West Virginia. The contract miners for the Upshur and Barbour county
mines began operations on June 1, 1999, and the contractor for the Raleigh
County mine began operations on July 5, 1999. We have also signed a contract
mining agreement for our new deep mine in Upshur County, which began operations
on September 20, 1999.
The third objective of our plan involves the sale of selected non-operating
assets and non-strategic operating properties. The non-operating assets that we
are seeking to sell are those that require substantial development costs and/or
have significant holding costs. The operating properties that we plan to sell
either complement non-operating assets being held for sale or are not integral
to our long-term operating strategy. We have been discussing the sale of these
properties with third parties. In July 1999, we sold selected coal reserves in
Preston and Taylor counties, West Virginia for net proceeds of $1.25 million
plus royalties on future production. The cash proceeds from this asset sale were
applied to reduce the amounts outstanding under the revolving credit facility
under our loan agreement with Foothill.
We believe that our financial condition has hampered our efforts to market other
properties, but we believe that we will be successful in selling all or a part
of these assets during the next 12 to 24 months. However, we cannot assure you
that asset sales will be completed on terms acceptable to us, if at all. We are
also planning to evaluate reasonable offers on other assets as opportunities
develop. For a description of requirements under our loan agreement with
Foothill regarding our use of asset sale proceeds, see "Description of Other
Indebtedness--Credit Facility."
The fourth and final objective of the plan involves reducing our overall debt
level and securing additional liquidity. We believe that this objective of the
plan will be achieved in part through the success of the other objectives of the
plan. This objective has also been furthered, in part, through our consummation,
on October 28, 1999, of a private restructuring of our old notes, a private
placement to raise additional capital and a private stockholder exchange. In the
private restructuring, a limited number of qualified noteholders identified in
advance exchanged $108.5 million in principal amount of old notes they held for
$86.8 million in principal amount of 14.25% Series A Second Priority Senior
Secured Notes due 2007 (PIK through April 1, 2000). Exchanging noteholders
waived their right to receive the October 1, 1999 interest payment on the old
notes they exchanged, and they also received warrants to purchase an aggregate
of 20% of our common stock at an initial exercise price of $0.01 per share. See
"Description of the Warrants." We believe the exercise price represents the fair
value of the warrants at the issue date. In connection with the private
exchange, the exchanging holders of old notes consented to amendments to the
indenture governing the old notes, which, among other things, modify or
eliminate various covenants of that indenture. See "Description of the Old
Notes." In the private placement, we raised $11.2 million in cash through the
sale to Rothschild Recovery Fund L.P., also one of the exchanging noteholders,
of $13.2 million principal amount of our 14.25% Series A notes and warrants to
purchase 10% of our common stock at an initial exercise price of $0.01. This
public exchange offer of new notes for the remaining outstanding old notes is
the final step in the restructuring of our old notes.
The private stockholder exchange consisted of our issuing $6.0 million aggregate
principal amount of our 14.25% Series A notes to JJF Group Limited Liability
Company in exchange for cancellation of the shares of our common stock that JJF
Group owned and JJF Group's relinquishment of its right to require us to buy
that stock over time for approximately $10.5 million, including accrued
interest. JJF Group is an entity controlled by the estate of John J. Faltis, our
former President and Chief Executive Officer who was killed in a helicopter
accident on October 12, 1997 in Upshur County, West Virginia.
As a part of the closing of the private restructuring of the old notes, Foothill
consented to the restructuring transactions and waived existing defaults under
the loan agreement.
The private exchange transaction reduced the stated principal amount of our
long-term debt by $21.7 million, and we eliminated approximately $4.0 million of
additional obligations through the transaction with JJF Group. However, the
additional principal amount of notes issued in the private placement to
Rothschild Recovery Fund and the notes to be issued in lieu of the April 1, 2000
interest payment will partially offset the principal reduction accomplished in
the private exchange. That principal reduction will also be offset if we issue
notes to Rothschild in connection with the October 1, 2000 interest payment as
discussed below.
The need to make interest payments on the old notes had significantly limited
our operating flexibility and substantially reduced our ability to grow or
replenish our production base. By completing the private restructuring, we
believe we have adequate capital resources to meet our short-term liquidity
needs. As we continue to implement our business plan, we intend to increase cash
flow and
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<PAGE> 35
improve profitability to the point that we will be able to service the new notes
and any remaining old notes, without impairing operations, but our strategy may
not be successful. Beginning with the October 1, 2000 interest payment, we will
need to fund payments of interest on the notes from
- operating cash flow,
- borrowings under credit facilities,
- asset sale proceeds or
- other sources.
Rothschild has agreed to purchase, at our option and subject to various
conditions, including the absence of a material adverse change or material liens
on the collateral securing the 14.25% notes arising after the closing of the
private placement, additional 14.25% notes to fund up to $6.3 million of the
October 1, 2000 interest payment on the notes. Our ability to service our
long-term debt on October 1, 2000 and beyond will depend upon a variety of
factors, some of which are beyond our control.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
COAL SALES AND RELATED REVENUES. Coal sales and related revenues decreased 23.3%
from $78.2 million for the three months ended September 30, 1998 to $60.0
million for the three months ended September 30, 1999. For the nine-month
periods ended September 30, the decrease was 22.9% from $226.1 million for 1998
to $174.3 million for 1999. The decreases in coal sales and related revenues
were due in part to lower tonnage levels, as discussed below, and a reduction in
the proportionate share of sales of our higher-priced metallurgical coal to
total sales.
Coal sales volume decreased 12.5% from 3.2 million tons for the three months
ended September 30, 1998 to 2.8 million tons for the three months ended
September 30, 1999. For the nine-month periods ended September 30, the decrease
was 16.0% from 9.4 million tons for 1998 to 7.9 million tons for 1999. These
decreases in coal sales volume were due to the following:
- We idled our Webster County surface mine in December 1998. In
addition, we completed operations at the contract deep mine in
Webster County in the third quarter of 1999, because the mine's
reserve base had been depleted.
- We idled the Grant County surface mine in December 1998. This
surface mine was idled because we had mined all of its then
permitted reserves and were not able to obtain a new mining permit
for the adjacent properties. We would have been able to continue
the surface mining operation with a new mining permit. See "Risk
Factors--Risks Related to Anker--Our inability to obtain a new
mining permit for one of our important properties has caused
reduced levels of coal production. We are uncertain if or when we
will be able to obtain the permit." With the idling of the surface
mine at Grant County, we were unable to sell the portion of
production from the Grant County deep mine that we had previously
blended with coal from the idled surface mine. As a result of this
and other factors, we idled the deep mine in February 1999, which
caused an additional decline in coal production.
- We completed one contract mining operation in Preston County
during the fourth quarter of 1998. We expect production to cease
at the remaining contract deep mine in Preston County at the end
of 1999, because the mine's reserve base will be depleted.
- We implemented a reduced production schedule at our Raleigh County
deep mine. We made this reduction in response to changing geologic
and market conditions and to more effectively mine the remaining
reserves. The Raleigh County deep mine will continue to produce at
a reduced tonnage level throughout 1999.
While we experienced lower production at the mines, as described above, tonnage
levels during 1999 as compared to the same periods for 1998 increased at our
Upshur County, West Virginia deep mine and Garrett County, Maryland deep mine.
These increases partially offset the decreases described above.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and selling
expenses decreased 26.5% from $73.5 million for the three months ended September
30, 1998 to $54.0 million for the three months ended September 30, 1999. During
the nine-month periods ended September 30, the decrease was 26.6% from $214.4
million for 1998 to $157.4 million for 1999. The cost of operations and selling
expenses decreased 13.5% from $22.65 per ton shipped for the three months ended
September 30, 1998 to $19.60 per ton shipped for the three months ended
September 30, 1999. For the nine-month periods ended September 30, the decrease
was 12.9% from $22.73 per ton shipped for 1998 to $19.80 per ton shipped for
1999. The decreases resulted from the implementation of our business plan to
transition from operating our own deep mines to contracting with third parties
to operate our deep mines and from the idling of some of our higher cost mines.
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<PAGE> 36
OTHER OPERATING EXPENSES. Other operating expenses decreased from $7.5 million
for the three months ended September 30, 1998 to $7.4 million for the three
months ended September 30, 1999. For the nine-month periods ended September 30,
other expenses decreased from $20.8 million for 1998 to $20.2 million for 1999.
Other operating expenses includes general and administrative expenses and
depreciation, depletion and amortization.
General and Administrative Expenses. General and administrative expenses
increased 3.7% from $2.7 million for the three months ended September 30, 1998
to $2.8 million for the three months ended September 30, 1999. However, general
and administrative expenses decreased 12.8% from $7.8 million for the nine
months ended September 30, 1998 to $6.8 million for the nine months ended
September 30, 1999. The decrease in general and administrative expenses during
the nine-month period primarily resulted from management changes we made as we
restructured our mining operations. The increase for the three-month period is
primarily related to the costs we incurred in connection with the private
restructuring discussed above and are not expected to continue beyond 1999. We
recorded approximately $0.8 million as of September 30, 1999, for costs in
connection with the private restructuring.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased 4.2% from $4.8 million for the three months ended
September 30, 1998 to $4.6 million for the three months ended September 30,
1999. However, depreciation, depletion and amortization increased 3.1% from
$13.0 million for the nine months ended September 30, 1998 to $13.4 million for
the nine months ended September 30, 1999. As a result of the restructuring of
our deep mining operations that took place in 1998, we reviewed the carrying
value of long-lived assets to determine whether that value was recoverable from
future undiscounted operating cash flows. Based on the results of that review,
we impaired those assets in 1998 and adjusted prospectively the remaining asset
life based on the cash flow analysis. Accordingly, the useful life of goodwill
was reduced from 40 years to a prospective period ranging from 3 to 20 years,
and the useful life of various fixed assets was also reduced. These reductions
in useful life resulted in higher depreciation, depletion and amortization.
LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES. We recorded loss on impairment and
restructuring charges of $1.1 million for the three months ended September 30,
1999, and $4.5 million for the nine months ended September 30, 1999.
The loss on impairment and restructuring recorded in the third quarter consisted
of three items. First, the operating sections of our Barbour County deep mine
were moved from one area of the reserve to another. As a result of the move,
various unamortized assets were no longer useful in the mining operation, and we
recorded a $0.6 million charge. Other unamortized assets associated with this
area of the Barbour County operation totaling $1.7 million were not impaired
because we believe these assets will be used for future mining activities.
Second, in connection with the close down of our operations in Webster County,
we recorded $1.0 million of additional charges for reclamation and other close
down costs to be incurred over the next six months. The third component of the
loss consists of an income offset of $0.5 million relating to the disposition of
coal reserves in Preston and Taylor counties, West Virginia, that were
previously impaired during the fourth quarter of 1998.
During the second quarter of 1999, we reviewed the carrying value of computer
software and determined that, in connection with the use of contract miners at
our deep mines, some software would no longer be utilized. As a result, we
recorded an impairment loss of $1.1 million. In addition, we recorded an
impairment of $2.4 million relating to properties located in Tazewell County,
Virginia.
We recorded loss on impairment and restructuring charges of $5.5 million for the
three months ended September 30, 1998 and $7.3 million for the nine months ended
September 30, 1998. As discussed in more detail below, during the first nine
months of 1998, we
- impaired our remaining investment in Oak Mountain,
- initiated steps to reduce general and administrative expenses,
- recorded an impairment relating to impairment losses on pieces of
mining equipment and
- recorded a reclamation charge relating to a change in the mine
plan for Webster County.
During the third quarter of 1998, we recorded a reclamation charge of $5.1
million relating to a change in the mine plan for our Webster County operation.
INTEREST EXPENSE. Interest expense increased 12.1% from $3.3 million for the
three months ended September 30, 1998 to $3.7 million for the three months ended
September 30, 1999. For the nine-month periods, the increase was 16.0% from $9.4
million for 1998 to $10.9 million for 1999. The increases were due to an
increase in the average outstanding indebtedness and average effective interest
rate from the periods in 1998 to the same periods in 1999.
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<PAGE> 37
OTHER INCOME AND EXPENSE. Other income increased 300% from $0.3 million for the
three months ended September 30, 1998 to $1.2 million for the three months ended
September 30, 1999. For the nine-month periods, the increase was 225% from $0.8
million for 1998 to $2.6 million for 1999. Other income and expense includes
- gain or loss from the sale of assets,
- interest income,
- royalty income,
- production tax credits,
- timber sales and
- miscellaneous income and expense items.
INCOME TAXES. The income tax benefit for the three and nine months ended
September 30, 1999 is based on the effective tax rate expected to be applicable
for the full year. We have established a full valuation allowance on the net
operating loss carryforwards, capital loss carryforwards and contribution
carryforwards because the realization of these assets is uncertain. In addition,
we received a refund of $0.2 million in the first quarter of 1999 related to a
prior year federal tax deposit. We established a valuation allowance for these
items because we were not certain that we would be able to realize these items.
In connection with the expected income tax consequences relating to the
restructuring transactions, we may use the carryforwards, which will result in
the recognition of a tax benefit. See "Risk Factors--Risks Related to Anker--We
could have income tax liability as a result of the restructuring of our old
notes in this exchange offer and in the private exchange."
NET LOSS. Our net loss decreased $3.2 million from $8.1 million for the three
months ended September 30, 1998 to $4.9 million for the three months ended
September 30, 1999. For the nine-month periods, the decrease was $2.0 million
from $18.0 million for 1998 to $16.0 million for 1999. The decreases in net loss
are primarily the result of the reduction of operating and selling expenses
discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
COAL SALES AND RELATED REVENUES. Coal sales and related revenues decreased 9.8%
from $323.0 million for the year ended December 31, 1997 to $291.4 million for
the year ended December 31, 1998. Coal sales volume decreased 8.2% from 13.4
million tons for the year ended December 31, 1997 to 12.3 million tons for the
year ended December 31, 1998. The decreases were due to the following:
- We completed one contract mining operation in Preston County
during the fourth quarter of 1997.
- We implemented a new mining plan at our Barbour County operations
during the fourth quarter of 1997, which, as expected, resulted in
lower production for 1998.
- We experienced significant rainfall at our Webster Country surface
mine during the first quarter of 1998, which reduced our ability
to dispose of preparation plant refuse and caused an increase in
inventory. The inventory handling issues eventually prevented the
mine from operating efficiently according to its mine plan. During
March 1998, we idled this mine to reduce inventory. The mine
restarted operations in May 1998 at reduced levels and continued
to produce at reduced levels through the third quarter of 1998.
During the fourth quarter of 1998, we idled the surface mining
activities in Webster County.
- On February 26, 1998, we sold our interest in Oak Mountain, which
owned and operated an underground mine in Shelby County, Alabama.
Increases in production at mines we previously acquired or developed during
1997, including the Grant County and Upshur County operations, and additional
sales of coal that we purchased from other producers, partially offset the
decline in coal sales described above.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and selling
expenses decreased 6.4% from $295.4 million for the year ended December 31, 1997
to $276.5 million for the year ended December 31, 1998. The cost of operations
and selling expenses increased from $22.00 per ton shipped for the year ended
December 31, 1997 to $22.43 per ton shipped for the year ended December 31,
1998. This increase was due to a reduction in production as described above and
higher operating costs at our Barbour and Raleigh county underground mines.
During 1998, we made significant changes in the management of our operations,
with an emphasis on adding experienced underground mine managers. Once in place,
the new management initiated efforts to
- improve safety,
- tighten capital expenditure requirements,
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<PAGE> 38
- improve operational tracking,
- revamp budgeting and forecasting processes and
- initiate training programs to improve communications and
productivity.
These efforts resulted in cost savings in our underground operations that we
began realizing in late 1998. We did not believe, however, that the realized
savings were large enough or sustainable. As a result, during 1999, we changed
from operating these mines ourselves to using contract miners to operate these
mines.
OTHER OPERATING EXPENSES. Other operating expenses increased from $26.9 million
for the year ended December 31, 1997 to $27.2 million for the year ended
December 31, 1998. Other operating expenses includes general and administrative
expenses and depreciation, depletion and amortization.
General and Administrative Expenses. General and administrative expenses
decreased 4.4% from $9.5 million for the year ended December 31 1997 to $9.1
million for the year ended December 31, 1998. The decrease in general and
administrative costs primarily resulted from changes in our staff necessary to
manage the lower mine production in 1998.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased 4.1% from $17.4 million for the year ended December 31,
1997 to $18.1 million for the year ended December 31, 1998. The increase was due
to depreciation, depletion and amortization starting in 1998 on the mine
developed in Upshur County in 1997 and early 1998. The increase was partially
offset by reductions in production at other locations. As indicated below, we
recorded losses on impairment and restructuring charges that will impact future
depreciation, depletion and amortization. Accordingly, the useful life of
goodwill was reduced from 40 years to a prospective period ranging from three to
20 years, and the useful life of various fixed assets was also reduced.
LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES. The major components of loss on
impairment and restructuring charges were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Impairment of properties and investment $ 44,416 $ 8,267
Exit costs 25,411 -
Assets to be disposed 15,983 -
Equipment leasehold termination costs 3,957 -
Other 950 -
--------- ---------
$ 90,717 $ 8,267
========= =========
</TABLE>
During 1998, we changed the operational managers at each mine, and the new
managers analyzed various operating plans. This reevaluation resulted in a
determination that carrying values exceeded the expected discounted cash flows
from the market and cost assumptions. As a result, in 1998 we recorded losses on
impairments for properties and investments. The properties affected and the
related asset categories are as follows:
<TABLE>
<CAPTION>
PROPERTY, ADVANCED
DESCIRPTION PLANT AND MINIMUM
- ----------- EQUIPMENT ROYALTIES GOODWILL TOTAL
--------- --------- -------- -----
(In thousands)
<S> <C> <C> <C> <C>
Raleigh County, WV - - $ 5,705 $ 5,705
Upshur County, WV $ 6,036 - - 6,036
Grant County, WV and
Garrett County, MD 11,113 $ 7,009 - 18,122
Monongalia County, WV
and Preston County, WV 2,652 2,895 9,006 14,553
-------- --------- -------- --------
$ 19,801 $ 9,904 $ 14,711 $ 44,416
======== ========= ======== ========
</TABLE>
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<PAGE> 39
Also, in conjunction with the reevaluation, we decided to exit our investment in
Webster and Braxton counties in West Virginia. This decision was based on
current market conditions and expected mining costs. The exit charges consist of
the following:
<TABLE>
<CAPTION>
ASSET CATEGORY AMOUNT
- -------------- ------
(In thousands)
<S> <C>
Property, plant and equipment $ 13,569
Reclamation accrual 5,100
Advanced minimum royalties 1,651
Goodwill 4,896
Other 195
---------
$ 25,411
=========
</TABLE>
As part of our liquidity planning, some of our assets have been identified to be
held for sale. These assets have been reclassified to a separate asset account
and were adjusted to their fair market value. We established the fair market
values based on current offers, third party appraisals and other information we
believe is relevant to establish these values. The charges for assets held for
sale consist of the following:
<TABLE>
<CAPTION>
PROPERTY, ADVANCED
PLANT AND MINIMUM ADJUSTMENT
DESCRIPTION EQUIPMENT ROYALTIES TOTAL
- ----------- --------- --------- -----
(In thousands)
<S> <C> <C> <C>
Raleigh County $ 1,353 $ 2,419 $ 3,772
Preston County 7,721 4,026 11,747
Other Property 464 - 464
-------- -------- -------
Total $ 9,538 $ 6,445 $15,983
======== ======== =======
</TABLE>
In conjunction with the mining operational changes described above, we will also
incur losses on equipment currently covered by operating leases. These losses
were estimated by comparing lease buyout costs with the expected fair market
value of the underlying equipment. These differences of approximately $3,957,000
have been recorded as equipment leasehold termination costs.
On April 17, 1997, we entered into a joint venture agreement to acquire
substantially all of the assets and assume specified liabilities of Oak Mountain
Energy Corporation and its affiliates for approximately $40 million, of which we
provided $10 million. Subsequent to the initial capitalization, we contributed
an additional $255,000. Solely for financial accounting purposes, we identified
that we owned an undivided interest in each of the assets and were
proportionately liable for our share of each liability of Oak Mountain up to our
capital investment. In accordance with industry practice and purchase
accounting, we presented our proportionate ownership, amounting to 32.0%, in Oak
Mountain in the consolidated financial statements from the date of acquisition.
In February 1998, we sold our indirect minority ownership interest in Oak
Mountain to a related party for one dollar. We tried unsuccessfully to sell our
investment to other unrelated parties during December 1997 and January and
February 1998. We recorded an impairment loss of $8,267,000 to adjust our
investment to its fair market value less cost to sell as of December 31, 1997.
INTEREST EXPENSE. Interest expense increased 29.8% from $10.0 million for the
year ended December 31, 1997 to $13.0 million for the year ended December 31,
1998. The increase was due to an increase in our average outstanding
indebtedness and average effective interest rate from 1997 to 1998.
INCOME TAXES. Income tax benefit from operations increased from $1.2 million for
the year ended December 31, 1997 to $7.6 million for the year ended December 31,
1998. The change in tax benefit is due to the impairment of the non-deductible
goodwill and the increase in the valuation allowance for our state and federal
net operating loss carryforwards, contribution carryforwards and capital loss
carryforwards. In 1998, we established a valuation allowance for these items
because we were not certain that we would be able to realize these items. In
connection with the expected income tax consequences relating to the
restructuring transactions, we may use the carryforwards, which will result in
the recognition of a tax benefit. See "Risk Factors--Risks Related to Anker--We
could have income tax liability as a result of the restructuring of our old
notes in this exchange offer and in the private exchange."
EXTRAORDINARY ITEM. For the year ended December 31, 1998, we wrote-off the
unamortized portion of debt issuance costs relating to the refinancing of our
amended and restated credit facility with The Chase Manhattan Bank and other
lenders. The amount we wrote off was $965,000, net of income taxes.
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<PAGE> 40
NET LOSS. Our loss increased from $3.2 million for the year ended December 31,
1997 to $106.6 million for the year ended December 31, 1998. The increase in
loss was primarily due to the loss on impairment and restructuring charges,
increases in operating expenses and decreases in production levels described
above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO ADJUSTED COMBINED YEAR ENDED DECEMBER
31, 1996
COAL SALES AND RELATED REVENUES. Coal sales and related revenues increased 11.3%
from $290.2 million for the year ended December 31, 1996 to $323.0 million for
the year ended December 31, 1997. Coal sales volume increased 15.4% from 11.6
million tons for the year ended December 31, 1996 to 13.4 million tons for the
year ended December 31, 1997. The increased volume resulted primarily from
- an increase in the sales of coal we arrange between other
producers and third parties,
- acquisitions of mining operations,
- mine expansion and development and
- our investment in Oak Mountain.
COST OF OPERATIONS AND SELLING EXPENSES. The cost of operations and selling
expenses increased 13.8% from $259.6 million for the year ended December 31,
1996 to $295.4 million for the year ended December 31, 1997. The increase
primarily resulted from an increased volume of shipments and increased costs
related to adverse geological conditions at two of our mines. The cost of
operations and selling expenses decreased 1.4% from $22.40 per ton for the year
ended December 31, 1996 to $22.09 per ton shipped for the year ended December
31, 1997.
OTHER OPERATING EXPENSES. Operating expenses increased 22.8% from $21.9 million
for the year ended December 31, 1996 to $26.9 million for the year ended
December 31, 1997.
General and Administrative Expenses. General and administrative expenses
increased 25.6% from $7.5 million for the year ended December 31, 1996 to $9.5
million for the year ended December 31, 1997. The increase in general and
administrative costs primarily resulted from the increase in our management
staff necessary to manage the additional mines we developed or acquired since
December 31, 1996.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased 22.0% from $14.3 million for the year ended December 31,
1996 to $17.5 million for the year ended December 31, 1997. The increase in
depreciation, depletion and amortization primarily resulted from the
amortization of purchase accounting adjustments and goodwill relating to our
recapitalization and from acquisitions we made in the year ended December 31,
1997.
LOSS ON IMPAIRMENT OF INVESTMENT. On April 17, 1997, we entered into a joint
venture agreement to acquire substantially all of the assets and assume
specified liabilities of Oak Mountain Energy Corporation and its affiliates for
approximately $40 million, of which we provided $10 million. Subsequent to the
initial capitalization, we contributed an additional $255,000. Solely for
financial accounting purposes, we identified that we owned an undivided interest
in each of the assets and were proportionately liable for our share of each
liability of Oak Mountain up to our capital investment. In accordance with
industry practice and purchase accounting, we presented our proportionate
ownership, amounting to 32.0%, in Oak Mountain in the consolidated financial
statements from the date of acquisition.
In February 1998, we sold our indirect minority ownership interest in Oak
Mountain to a related party for one dollar. We tried unsuccessfully to sell our
investment to other unrelated parties during December 1997 and January and
February 1998. We recorded an impairment loss of $8,267,000 to adjust our
investment to its fair market value less cost to sell as of December 31, 1997.
NON-CASH STOCK COMPENSATION AND NON-RECURRING RELATED EXPENSES. During June
1996, we made a non-cash common stock grant to one of our executive officers in
the amount of $1.5 million. This grant was intended to reward the executive
officer for past service and to ensure the continuity of our top management. In
conjunction with that transaction, we awarded a cash bonus and related expenses
in the amount of $1.5 million. These transactions resulted in an expense of $3.0
million in 1996, which did not reoccur in 1997.
INTEREST EXPENSE. Interest expense increased 105.5% from $4.9 million for the
year ended December 31, 1996 to $10.0 million for the year ended December 31,
1997. The increase was due to an increase in our average outstanding
indebtedness and average effective interest rate from 1996 to 1997.
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<PAGE> 41
LIFE INSURANCE PROCEEDS. On October 12, 1997, John J. Faltis, our President,
Chief Executive Officer and Chairman of our Board of Directors, was killed in a
helicopter accident in West Virginia. In accordance with a stockholders'
agreement, dated as of August 12, 1996, among us, Mr. Faltis, JJF Group and
other holders of our capital stock, we maintained key man life insurance on the
life of Mr. Faltis in the amount of $15.0 million. Under the stockholders'
agreement, we were to use the proceeds from the key man policy to repurchase as
much of our common stock that JJF Group owned as possible, based on the fair
market value of the common stock. In December 1997, we received $5.0 million in
life insurance proceeds, which we used to temporarily reduce the outstanding
indebtedness under our amended and restated credit facility with The Chase
Manhattan Bank and others. In connection with our recent private exchange, we
exchanged $6.0 million in principal amount of 14.25% Series A notes with JJF
Group to settle our obligation to repurchase our common stock from JJF Group.
INCOME TAXES. Income taxes decreased from an income tax expense for the year
ended December 31, 1996 of $0.4 million to an income tax benefit from operations
for the year ended December 31, 1997 of $1.2 million. This decrease was
primarily the result of the exclusion of life insurance proceeds and the
deductibility of our taxable loss from income. These decreases were partially
offset by a valuation allowance established for the Oak Mountain capital loss.
EXTRAORDINARY ITEM. For the year ended December 31, 1997, we wrote-off the
unamortized portion of debt issuance costs relating to our credit facility dated
August 12, 1996. We incurred a loss on the refinancing of approximately $3.9
million, net of income taxes of $1.5 million.
NET INCOME. Our net income decreased from $2.0 million of income for the year
ended December 31, 1996 to a loss of $3.2 million for the year ended December
31, 1997. The decrease in net income is primarily due to
- the increase in operating expenses for items, including (1)
adverse geological conditions at two of our mines, (2) general and
administrative costs related to increase in management staff and
(3) depreciation, depletion and amortization;
- the extraordinary loss related to the write-off of unamortized
debt costs; and
- the impairment of the Oak Mountain investment.
- These decreases in net income were partially offset by the
recognition of life insurance proceeds.
YEAR 2000
The Year 2000, or Y2K, issue is the result of computer programs that were
written using two digits, rather than four, to define the applicable year. Any
of our computers, computer programs or mining or administration equipment that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. If any of our systems or equipment has date-sensitive
software using only two digits, system failures or miscalculations may result.
These failures or miscalculations may cause disruptions of operations or
disruptions in normal business activities.
During 1998, we created an internal project team to assess the Y2K issue. The
team identified risks in four general categories:
- internal business software and systems,
- mine operating equipment,
- coal processing facilities and
- other.
INTERNAL BUSINESS SOFTWARE AND SYSTEMS. During July and August of 1998, file
servers, hubs, switches, routers and individual personal computers and
workstations were tested for Y2K compliance. As of September 30, 1999, the
process was complete. A final review of all internal systems as described in the
initial Y2K plan was conducted during the beginning of the fourth quarter of
1999. Our estimated cost for 1999 is $0.2 million and will be funded through
normal operating cash.
COAL PROCESSING FACILITIES. The Y2K project team has identified a person to
serve as coordinator between the mine sites and vendors to assess Y2K compliance
in relation to our coal processing facilities. Coal processing facilities are
composed of various components, including electronic belt scales, analyzers and
controllers. Each plant and its components have been assessed. As of September
30, 1999, the assessment was completed at all coal processing facilities. The
remediation of any Y2K problems at our coal processing facilities was completed
on November 30, 1999.
Although we believe our systems and facilities are Y2K compliant, we have
developed contingency plans. To date, expenditures on Y2K have been minimal and
funded by operating cash. Based on preliminary information, the majority of the
project cost will be
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<PAGE> 42
attributed to the purchase of new software to meet future industry requirements
and will be capitalized. We believe that we are devoting the necessary resources
to identify and resolve significant Y2K issues in a timely manner.
DIVIDEND RESTRICTIONS AFFECTING SUBSIDIARIES
As of September 30, 1999, there were no restrictions affecting the ability of
the subsidiaries guaranteeing our notes to make distributions to us or other
guarantor subsidiaries, except for restrictions in our loan agreement with
Foothill and those restrictions provided by law generally, such as the
requirement of adequate capital to pay dividends under corporate law. Our loan
agreement with Foothill provides that, in order to advance funds to us, the
borrowers under the loan agreement must have borrowing availability of at least
$5.0 million after giving effect to the advances of funds.
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<PAGE> 43
THE COAL INDUSTRY
According to data that the Energy Information Administration of the U.S.
Department of Energy has compiled, U.S. coal production totaled 1.13 billion
tons in 1998, a 3.7% increase from the 1.09 billion tons produced in 1997 and a
record high. Most of the coal consumed in the United States is used to generate
electricity. Factors driving the increase in 1998 coal production include:
- the lower cost of generating electricity with coal compared to
oil, natural gas and nuclear power;
- volatile natural gas prices; and
- strong economic growth.
Total U.S. coal consumption reached 1.09 billion tons in 1998, a nominal
increase from 1997. In 1998, utilities used approximately 83.0% of the coal
consumed in the United States for the generation of electricity. Coal continues
to be the principal energy source for U.S. utilities, with 55.2% of total
electricity generation in 1998, as compared with 21.1% from nuclear, 10.1% from
hydroelectric and 9.8% from gas-fired facilities in 1998.
Despite the increased consumption and the many inefficient mines that have
closed in the last 10 years, coal mining companies with improving productivity
have filled the increasing demand without price increases. As a result of
increased competition among generators of electricity, utility buyers must
purchase coal more selectively. This heightened fiscal responsibility has led to
lower stockpiles, increased spot market activity and shorter contract terms,
which may create greater price volatility than in the past.
According to statistics compiled by the federal government, the number of
operating mines has declined 55% from 1988 through 1998, even though production
during that same time has increased 17.7%. The United States coal industry has
undergone significant consolidation since 1988. The 10 largest coal producers in
1988 accounted for 37.3% of total domestic coal production. The 10 largest coal
companies accounted for 61.9% of total domestic coal production in 1998.
The following table presents five year U.S. coal consumption by sector. We
derived this information from publications of the Energy Information
Administration of the U.S. Department of Energy.
<TABLE>
<CAPTION>
FIVE YEAR COAL CONSUMPTION BY SECTOR
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C>
Utilities.............................. 817.3 829.0 873.7 900.3 910.9
Independent Power Producers............ 20.9 21.2 24.0 21.6 28.1
Coke Plants............................ 31.7 33.0 31.7 30.2 28.2
Other Industrial Plants................ 75.2 72.8 70.6 70.6 69.2
Residential/Commercial Users........... 6.0 5.8 5.8 6.5 6.4
----- ----- ------- ------ -------
Total................... 951.1 968.1 1,005.8 1029.2 1,042.8
===== ===== ======= ====== =======
</TABLE>
COAL TYPES
In general, coal is classified by heat value and sulfur content. In ascending
order of heat values, measured in British Thermal units or "Btus," the four
basic types of coal are lignite, subbituminous, bituminous and anthracite. Coal
of all geological composition may be used as steam coal. Bituminous coals must
have various characteristics to qualify for use as a metallurgical coal, which
is used in coke production.
Lignite Coal. Lignite coal is a brownish-black coal with a heat value
that generally ranges from 3,500 to 8,300 Btus per pound. Major lignite
operations are located in Texas, North Dakota, Montana and Louisiana.
Lignite coal is used almost exclusively in power plants adjacent to the
mine because the addition of any transportation costs to the mining costs
would exceed the price a customer would pay for this low-Btu coal.
Subbituminous Coal. Subbituminous coal is a dull black coal with a heat
value that ranges from approximately 8,300 to 11,500 Btus per pound. Most
subbituminous reserves are located in Montana, Wyoming, Colorado, New
Mexico, Washington and Alaska. Subbituminous coal is used almost
exclusively by electric utilities and some industrial consumers.
Bituminous Coal. Bituminous coal is a "soft" black coal with a heat value
that ranges from 10,500 to 14,000 Btus per pound. This coal is found in
Appalachia, the Midwest, Colorado and Utah, and it is the type most
commonly used for electric power
43
<PAGE> 44
generation in the United States. Bituminous coal is used to generate
steam by utility and industrial customers and is also used as a feedstock
for metallurgical purposes in steel production. Coal used in
metallurgical processes has higher expansion/contraction characteristics
than steam coal.
Anthracite Coal. Anthracite coal is a "hard" coal with a heat value that
can be as high as 15,000 Btus per pound. Anthracite deposits are found
primarily in the Appalachian region of eastern Pennsylvania and are used
primarily for utility, industrial and home heating purposes.
One hundred percent of our reserves are bituminous and are located east of the
Mississippi River.
COAL QUALITIES
The primary factors considered in determining the value and marketability of
coal that utility and industrial customers use to generate steam include the Btu
content, the sulfur content and the percentage of small particles of inert
material known as ash, moisture and volatile matter.
BTU CONTENT. The Btu content provides the basis for satisfying the
heating requirements of boilers. Coal having a lower Btu content
frequently must be blended with coal having a higher Btu content to allow
the consumer to use the coal efficiently in its operations.
SULFUR CONTENT. Due to the restrictive environmental regulations
regarding sulfur dioxide emissions, coal is commonly described with
reference to its sulfur content, measured by pounds of sulfur dioxide
produced per million Btus or lbs.SO2/MMBtu.
Sulfur Content
Classification (lbs.SO2/MMBtus)
-------------- ----------------
Compliance Up to 1.2
Low sulfur Up to 1.6
Medium sulfur Over 1.6 and up to 2.8
High sulfur Over 2.8
Coal that emits no more than 1.2 lbs.SO2/MMBtu of sulfur dioxide when
burned complies with the Clean Air Act Amendment of 1990 and is referred
to as compliance coal. Medium sulfur coal is burned in power plants that
have equipment to limit sulfur emissions in the production of
electricity. These power plants will be able to continue to burn medium
sulfur coal after implementation of Phase II of the Clean Air Act.
ASH CONTENT. The non-combustible nature of ash diminishes the heating
value of the coal. Therefore, coal with a higher percentage of ash will
have a lower heating value. For electric utilities, the percentage of ash
is important not only for its effect on heating value, but also because
it affects the amount of combustion by-products. Electric utilities
typically require coal with an ash content ranging from 6% to 15%,
depending on individual power plant specifications. More stringent ash
standards apply for metallurgical coal, typically requiring less than 8%
ash. Moisture content also diminishes the heating value of coal. A high
percentage of moisture also may cause customers to experience problems
handling the coal. Moisture concerns arise principally with coal from the
Powder River Basin in northeastern Wyoming and southeastern Montana.
Volatile matter, which is combustible matter that vaporizes easily during
combustion, is important for electric utilities because most utility
power plant boilers are designed to burn coal having a medium to high
percentage of volatile matter.
METALLURGICAL COAL
Sulfur content, ash content, volatility, carbon content and other coking
characteristics are especially important for determining the value and
marketability of metallurgical coal. Metallurgical coal is fed into a coke oven
where it is heated in an oxygen deficient environment, producing porous coke
with a high carbon content which is then used to fuel blast furnaces. It is
important in the coking process to create a stable and high strength coke. This
is done by carefully blending low volatile and high volatile metallurgical coals
to create the proper coking characteristics. The lower the volatile
characteristics and percentage of ash in coal, the higher the yield and carbon
content of the coke. However, too much low volatility coal may cause coke to
stick in the coke oven if it is an expanding coal.
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<PAGE> 45
COAL REGIONS
The majority of U.S. coal production comes from six regions: Northern
Appalachia, Central Appalachia, Southern Appalachia, the Illinois Basin, the
Rocky Mountains and the Powder River Basin.
NORTHERN APPALACHIA. Northern Appalachia includes northern West Virginia,
Pennsylvania, Maryland and Ohio. Coal from this region generally has a
sulfur content ranging from low sulfur to high sulfur and has a Btu
content of about 12,000 to 13,000 Btus per pound of coal.
CENTRAL APPALACHIA. Central Appalachia includes southern West Virginia,
eastern Kentucky and Virginia. Coal from this region generally has a low
sulfur content and a high Btu content of about 12,000 to 13,500 Btus per
pound of coal.
SOUTHERN APPALACHIA. Southern Appalachia includes Tennessee and Alabama.
Coal from this region also has a low sulfur content and a high Btu
content of about 12,000 to 13,000 Btus per pound of coal.
THE ILLINOIS BASIN. The Illinois Basin includes western Kentucky,
Illinois and Indiana. Coal from this region varies in Btu content from
10,000 to 12,000 Btus per pound of coal and has a high sulfur content.
THE ROCKY MOUNTAINS. The Rocky Mountain region consists of Utah and
Colorado. The coal from this region has a low sulfur content and varies
in Btu content from about 10,500 to 12,800 Btus per pound of coal.
THE POWDER RIVER BASIN. The Powder River Basin consists mainly of
northeastern Wyoming and southeastern Montana. This coal has a very low
sulfur content and a low Btu content of about 8,000 to 9,200 Btus per
pound of coal.
All of our coal reserves are bituminous and are located east of the Mississippi
River in the Northern and Central Appalachian regions and the Illinois Basin
region of the United States.
MINING METHODS
Coal is mined using either surface or underground methods. The method used
depends upon several factors, including the proximity of the target coal seam to
the earth's surface and the geology of the surrounding area. In general, surface
techniques are usually employed when a coal seam is within 200 feet of the
earth's surface, and underground techniques are used for deeper seams. We
describe the mining methods used at each of our mining operations under
"Business--Mining Operations."
Surface techniques generally require a favorable ratio of the amount of rock and
soil overlying a coal deposit, or overburden, that must be removed to excavate a
given quantity of coal. Underground techniques are used for deeper seams. In
1998, surface mining accounted for approximately 61.0% of total U.S. coal
production, with underground mining accounting for the balance of production. We
estimate that approximately 75.0% of our coal production in 1998 originated from
our deep mines, with the balance originating from our surface mines. Surface
mining generally costs less and has a higher seam recovery percentage than
underground mining. Surface mining typically results in the recovery of 80.0% to
90.0% of the total coal from a particular deposit, while underground mining
typically results in the recovery of 50.0% to 60.0%.
SURFACE MINING METHODS
Surface mining consists essentially of a large-scale earth moving operation in
which the overburden is removed by means of large earth-moving machines. The
coal exposed by removing the overburden is loaded onto haul trucks or overland
conveyers for transportation to processing and loading facilities. The site is
then backfilled with the overburden and otherwise restored to its approximate
original contour and condition, a process known as "reclamation." Federal law
mandates reclamation of all surface mining sites. The most common forms of
surface mining are:
Mountaintop Removal Mining. Mountaintop removal mining involves removing
all material above the coal seam before removal of the coal, leaving a
relative level plateau in place of the hilltop after mining. This method
achieves a more complete recovery of the coal. However, its feasibility
depends on the amount of overlying material in relation to the coal to be
removed.
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<PAGE> 46
Contour Mining. Contour mining is conducted on coal seams where
mountaintop removal is not feasible because of the high overburden
ratios. Mining proceeds laterally around a hillside, at essentially the
same elevation, assuming the seam is fairly flat. The contour cut in a
coal seam provides a flat surface that can be used to facilitate auger
mining. This is a common surface mining method in the steeper slopes of
the Appalachian coalfields.
Auger Mining. In auger mining, the miners remain outside of the mine and
an auger, which is a large, corkscrew-like machine, bores into the side
of a hill and extracts coal by "twisting" it out. Auger mining generally
permits the extraction of coal to depths of only 300 feet or less.
DEEP MINING METHODS
Underground or deep mining operations are used when a coal seam is too deep to
permit surface mining. There are three basic classifications of deep mining
based on the way the coal seam is accessed:
- slope mines, where a coal seam is relatively close to the earth's
surface and is accessed through a sloped tunnel,
- shaft mines, for deeper deposits, which are accessed through a
vertical tunnel, and
- drift mines, which are accessed through a horizontal entry.
Once the coal seam is accessed, there are two types of mining methods to extract
coal from deep mines:
Room and Pillar Mining. Room and pillar mining uses continuous miners or
conventional mining equipment that cut a network of interconnected
passages as high as the coal seam. Roof bolters stabilize the mine roof
and pillars are left to provide overall roof support. As a result of
significant technological advances, this mining method has become the
most common method of deep mining.
Longwall Mining. Longwall mining uses powerful hydraulic jacks to support
the roof of the mine while mobile shearing machines extract the coal.
High capacity chain conveyors then move the coal to a high capacity mine
belt system for delivery to the surface. The longwall machine generally
cuts blocks of coal, referred to as longwall panels, that have a width of
approximately 900 feet and a length ranging from 9,000 to 11,000 feet.
Longwall mining is a low-cost, high-output method of deep mining. After a
longwall panel is cut, the longwall machine must be disassembled and
moved to the next panel location, a process which generally takes one to
two weeks. We do not use the long wall mining method in any of our deep
mines.
COAL PREPARATION AND BLENDING
Depending on coal quality and customer requirements, raw coal may be shipped
directly from the mine to the customer. However, the quality of most raw coal
does not allow it to be shipped directly to the customer without processing it
first in a preparation plant. Preparation plants separate impurities from coal
using a gravity process. This processing upgrades the quality and heating value
of the coal by removing or reducing sulfur and ash-producing materials, but it
entails additional expense and results in some loss of coal. Coals of various
sulfur and ash contents can be mixed or "blended" at a preparation plant or
loading facility to meet the specific combustion and environmental needs of
customers. Coal blending helps increase profitability by reducing the cost of
meeting the quality requirements of specific customer contracts, thereby
optimizing contract revenue.
ENVIRONMENTAL LAWS
Various federal, state and local environmental laws have had, and will continue
to have, a significant effect on the domestic coal industry. These laws govern
matters including employee health and safety, limitations on land use,
permitting and licensing requirements, air quality standards, water pollution,
plant and wildlife protection, reclamation and restoration of mining properties
after mining is completed, discharge of materials into the environment, surface
subsidence, which is the sinking or settling of the earth's surface from
underground mining, and the effects of mining on groundwater quality and
availability. In addition, the electric utility industry is subject to extensive
regulation regarding the environmental impact of electricity generation
activities which could affect demand for coal. New legislation or regulations
could be adopted that may have a significant impact on coal mining operations or
the ability of coal customers to use coal. See "Risk Factors--Risks Related to
Anker--Government regulations could increase our costs of doing business and may
discourage our customers from buying our coal" and "Business--Regulation and
Laws."
46
<PAGE> 47
BUSINESS
OVERVIEW
We are a producer of coal that is used principally to generate electricity and
to produce coke for use in making steel. We currently own or control substantial
coal reserves in West Virginia, Maryland, Virginia and Kentucky. We currently
operate a portfolio of seven deep mines and one surface mine that are located in
West Virginia and Maryland. We recently changed from operating our deep mines
with our own employees to using contract miners to operate these deep mines for
us. Our coal mines and reserves are located in close proximity to rail and water
transportation services or are within short trucking distances to power plants.
We primarily market and sell our coal to electric utilities located in the
Northeastern and mid-Atlantic states. The utilities that we currently sell our
coal to use modern generating processes that will allow them to continue using
our coal after implementation of Phase II of the Clean Air Act. See
"--Regulation and Law--Environmental Laws--Clean Air Act" for a discussion of
Phase II of Title IV of the Clean Air Act.
In addition to selling coal that we produce from our own mines, we also sell
coal that we purchase from other producers, which is referred to as brokered
coal. We also arrange for coal that others produce to be sold to third parties,
which is referred to as commission coal.
Based on the most recent data published by the National Mining Association, we
are one of the 30 largest coal producers and one of the 30 largest holders of
coal reserves in the United States.
ORGANIZATION
We were organized as a corporation in August 1996 under the laws of the State of
Delaware. This was done in order to effect a recapitalization of our
predecessor, Anker Group, Inc. Anker Group, Inc. had been engaged in the
production of coal since 1975. To effect the recapitalization, First Reserve
Corporation purchased approximately 54.1% of our common stock and 10,000 shares
of our Class B preferred stock for $50 million in cash. In addition, senior
management and Anker Holding B.V. exchanged an aggregate of 7.5% of Anker
Group's common stock for shares of Anker Coal Group's common stock. Anker Coal
Group then acquired the remaining 92.5% of Anker Group's common stock from Anker
Holding for approximately $87 million. We partially funded the $87 million by
issuing $25 million of Class A preferred stock to Anker Holding. We paid the
remaining $62 million in cash, $12 million of which we borrowed under our then
existing credit agreement. That credit agreement was subsequently amended and
restated on September 25, 1997 and then replaced with our current credit
facility on November 21, 1998. See "Description of Other Indebtedness." In
addition, we assumed $152 million of Anker Group's outstanding liabilities.
Our principal offices are located at 2708 Cranberry Square, Morgantown, West
Virginia 26508, and our telephone number is (304) 594-1616.
COMPETITIVE STRENGTHS
We believe that we possess the following competitive strengths:
PORTFOLIO OF LONG-TERM CONTRACTS. We have secured long-term coal supply
contracts with a weighted average term of approximately 5.5 years as of October
1, 1999. Our long-term contracts have accounted for an average of approximately
75% of our coal sales revenues from 1994 to 1998. Over the same period,
approximately 2.6 million tons of our annual coal shipments covered by long-term
contracts were up for renewal, and contracts for approximately 2.0 million tons
of this coal were rolled over into new long-term contracts upon their
expiration. In addition, over the same period, we entered into new long-term
contracts for 2.3 million tons of annual coal shipments. We have been successful
in negotiating long-term contracts for our medium and high sulfur coal with
independent power producers and utilities equipped with sulfur-reduction
technologies. As of October 1, 1999, of our 18 long-term contracts, 14 were for
our medium and high sulfur coal. These long-term contracts provide us with
stable sources of revenues to support the large expenditures needed to open,
expand and maintain the mines servicing these contracts.
DIVERSE PORTFOLIO OF RESERVES. We have increased our reserve base approximately
246%, from 147 million recoverable products tons as of December 31, 1992 to
approximately 508 million recoverable product tons as of October 1, 1999,
substantially all of which was due to acquisitions of reserves. As of October 1,
1999, approximately 14% of our coal reserves were compliance coal, and 68% of
our reserves were medium sulfur coal. Many of our current customers that possess
the technology to scrub higher sulfur coal prefer that
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<PAGE> 48
coal due to its lower cost. All of our coal is of a quality suitable for use in
electricity generating facilities. At December 31, 1998, our reserve life index,
defined as total recoverable reserves divided by production for 1998, was
approximately 76.1 years.
EXPERIENCED MANAGEMENT TEAM. Bruce Sparks, our President, has 21 years of
experience in the coal industry, has worked at Anker for the past 14 years and
owns approximately 8.5% of our fully diluted common stock. William Kilgore, our
Chief Executive Officer and the Chairman of our Board of Directors, has 42 years
experience in the coal industry, including as a coal mining consultant for
several Central Appalachian coal companies. See "Management."
COAL RESERVES
As of October 1, 1999, we had an estimated reserve base totaling approximately
508 million recoverable product tons. Approximately 14% of that amount consists
of compliance coal, 18% of that amount consists of low sulfur coal, which
includes the 14% of compliance coal, and 68% of that amount consists of medium
sulfur coal. Approximately 96% of these reserves are classified as deep
mineable, and 4% are classified as surface mineable. Moreover, steam coal
represents approximately 443 million tons, or 87%, of our reserves. Premium
quality metallurgical coal, on the other hand, constitutes approximately 65
million tons, or 13%, of our reserves. Assigned reserves, which consist of coal
that could reasonably be expected to be processed in existing plants, represent
approximately 46% of our reserves. Unassigned reserves, which consist of coal
for which additional expenditures will be required for processing facilities,
represent the remaining 54% of our reserves.
Our engineers and geologists prepare reserve estimates, which are reviewed
periodically to reflect additional data obtained and developments affecting the
reserves. Accordingly, reserve estimates will change from time to time in
response to:
- mining activities,
- analysis of new engineering and geological data,
- acquisition or divestment of reserve holdings,
- modification of mining plans or mining methods,
- market conditions and
- other factors.
We engaged Marshall Miller & Associates, an independent mining and geological
consultant, to audit our estimates of our coal reserves. The audit verified that
we properly estimated our reserve base according to industry-accepted standards.
The audit also verified the accuracy of our reserve estimates. The following
table summarizes our coal reserves as of October 1, 1999. Estimates of measured,
indicated and total recoverable reserves are based on the reserve information
contained in the reserve audit report of Marshall Miller & Associates. See Annex
A -- Report of Marshall Miller & Associates.
<TABLE>
<CAPTION>
ESTIMATES OF MEASURED, INDICATED AND TOTAL RECOVERABLE COAL RESERVES
--------------------------------------------------------------------
Underground Total
(UG) or Measured Indicated Recoverable
Surface (S) (1) (2) Reserves Surface Underground
----------- ---------- ----------- -------- ------- -----------
(in millions of tons)
<S> <C> <C> <C> <C> <C> <C>
County and State
Barbour County, West Virginia UG 23.00 6.98 29.98 29.98
Grant County, West Virginia S/UG 16.21 13.69 29.90 1.30 28.60
Harrison County, West Virginia UG 18.45 38.15 56.60 56.60
Monongalia County, West Virginia S 2.03 0.02 2.05 2.05
Preston County, West Virginia UG 0.68 0.00 0.68 0.68
Raleigh County, West Virginia UG 18.60 12.83 31.43 31.43
Taylor County, West Virginia UG 73.57 144.41 217.98 217.98
Upshur County, West Virginia UG 41.11 24.76 65.87 65.87
Webster County, West Virginia S/UG 2.83 0.11 2.94 2.08 0.86
Allegany County, Maryland S 4.15 0.10 4.25 4.25
Garrett County, Maryland S/UG 19.43 3.26 22.69 9.55 13.14
Muhlenberg County, Kentucky S/UG 7.08 0.83 7.91 0.34 7.57
Tazewell County, Virginia S/UG 25.26 10.44 35.70 0.90 34.80
------ ------ ------ ----- ------
Totals 252.40 255.58 507.98 20.47 487.51
====== ====== ====== ===== ======
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
Avg. Avg.
Avg. Mine Avg. Mine Wash Wash
Recovery Recovery Recovery Recovery
County and State Surface Underground Surface Underground MET STEAM Assigned Unassigned
- ---------------- ------- ----------- ------- ----------- --- ----- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barbour County, West Virginia 54% 73% 29.98 29.98
Grant County, West Virginia 85% 55% 76% 65% 29.90 29.90
Harrison County, West Virginia 57% 100% 56.60 56.60
Monongalia County, West Virginia 85% 100% 2.05 2.05
Preston County, West Virginia 55% 73% 0.68 0.68
Raleigh County, West Virginia 55% 76% 31.43 31.43
Taylor County, West Virginia 60% 70% 217.98 217.98
Upshur County, West Virginia 54% 72% 65.87 65.87
Webster County, West Virginia 85% 55% 61% 66% 2.94 2.94
Allegany County, Maryland 85% 100% 4.25 4.25
Garrett County, Maryland 85% 55% 100% 94% 22.69 11.38 11.31
Muhlenberg County, Kentucky 85% 55% 100% 91% 7.91 0.34 7.57
Tazewell County, Virginia 85% 64% 100% 87% 33.40 2.30 35.70
----- ------ ------ ------
Totals 64.83 443.15 231.17 276.81
===== ====== ====== ======
</TABLE>
(1) "Measured" refers to coal tonnages computed from seam measurements as
observed and recorded in drill holes, mine workings, and/or seam outcrop
prospect openings. The sites for measurement are so closely spaced and
the geologic character so well-defined that the thickness, areal extent,
size, shape and depth of coal are well-established. The maximum
acceptable distance for projection from seam data points varies with the
geologic nature of the coal seam being studied, but generally a radius of
1/4 mile is recognized as the standard. Losses for extraction recovery
and wash recovery have been factored into measured reserves.
(2) "Indicated" refers to coal tonnages computed by projection of data from
available seam measurements for a distance beyond coal classed as
measured. The assurance, although lower than for measured, is high enough
to assume continuity between points of measurement. The maximum
acceptable distance for projection of indicated tonnage is 1/4 to 3/4
mile from points of observation. Further exploration is necessary to
place these reserves in a measured category. Losses for extraction
recovery and wash recovery have been factored into indicated reserves.
We or our subsidiaries own approximately 59% of our total reserves. We lease
approximately 41% of our total reserves from third parties. Our reserve leases
with third parties generally have terms of between 10 to 20 years. We generally
have the right to renew the leases for a stated period or to maintain the lease
in force until the exhaustion of mineable and merchantable coal. These leases
provide that we must pay royalties to the lessor, either as a fixed amount per
ton or as a percentage of the sales price. Many leases also require us to pay a
lease bonus or minimum royalties. These lease bonuses and minimum royalties must
be paid either at the time the lease is executed or in periodic installments. In
most cases, the minimum royalty payments are applied to reduce future production
royalties.
Consistent with industry practices, we conduct limited investigation of title to
third-party coal properties prior to our leasing of these properties. The title
of the lessors or grantors and the boundaries of our leased properties are not
fully verified until we prepare to mine the reserves. If defects in title or
boundaries of undeveloped reserves arise in the future, our control and right to
mine these reserves could be materially affected.
MINING OPERATIONS
COAL PRODUCTION
During 1998, we conducted mining operations at nine deep mines and three surface
mines in eight counties in West Virginia and in Garrett County, Maryland.
Approximately 75% of our production originated from our deep mines, and
approximately 25% of our production originated from our surface mines. The
following table presents the production, including coal purchased from third
parties for blending, from each of the counties in which we produced coal for
the previous five years:
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<PAGE> 50
<TABLE>
<CAPTION>
(in thousands of tons)
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Webster County, West Virginia 2,108 1,889 1,998 2,012 1,271
Barbour County, West Virginia 1,497 1,883 1,787 1,555 1,222
Monongalia County, West Virginia 917 1,288 1,743 1,299 1,134
Raleigh County, West Virginia 123 641 948 1,016 941
Preston County, West Virginia 1,021 893 886 694 512
Garrett County, Maryland 156 293 300 305 286
Harrison County, West Virginia - - - 725 316
Grant County, West Virginia - - - 623 703
Upshur County, West Virginia - - - 204 960
Shelby County, Alabama (1) - - - 182 -
----- ----- ----- ----- -----
Total 5,822 6,887 7,662 8,615 7,345
===== ===== ===== ===== =====
</TABLE>
(1) We indirectly owned a minority interest in Oak Mountain Energy, L.L.C. Oak
Mountain operated a deep mine in Shelby County, Alabama. We sold our
investment in Oak Mountain in the first quarter of 1998 and recorded an
impairment loss of $8,267,000 to adjust our investment to its fair market
value as of December 31, 1997.
The following is a description of our mining operations. In 1998, we recorded
impairment losses and restructuring charges with respect to our operations in
Webster, Monongalia, Raleigh, Preston and Grant counties, West Virginia and
Garrett County, Maryland. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WEBSTER COUNTY, WEST VIRGINIA. In 1998, we operated a mining complex in Webster
County, West Virginia. The complex consisted of a multiple seam surface mine and
a deep mine in the Kittanning Seam operated by a contract miner. Coal from the
surface and deep mines were blended to make two products. The first was a
premium grade steam coal, the contents of which average 1.33 lbs.SO2/MMBtu, 10%
ash, 12,800 Btu per pound, 6.0% moisture and 34 volatility. The second product
was a lesser grade steam coal, the contents of which average 1.67 lbs.
SO2/MMBtu, 15% ash and 12,000 Btu per pound. Production from the surface and
deep mines totaled approximately 1.3 million tons in 1998. We sold approximately
66% of this production to Baltimore Gas & Electric Company, Delmarva Power &
Light Company, Atlantic City Electric Company, AES Corporation and Salt City
Energy Venture, L.P.
As a part of our mining complex, we operated a computer-controlled,
500-tons-per-hour preparation plant located in close proximity to the mines. We
also operated an on- site laboratory that allowed us to precisely blend the coal
from the surface and deep mines. The complex also had a 100,000 ton unprocessed
coal storage capacity and a 100,000 ton processed coal storage capacity.
During the second half of 1998, the coal mined at the surface operation began to
thin, and the quality of the mined coal began to deteriorate. At the same time,
the cost of production began to rise, and the prices at which we could sell the
coal began to decrease. As a result, the surface operation became uneconomical,
and we idled the mine in December 1998. We are currently reclaiming the
properties associated with the idled surface mine and expect to complete the
reclamation in the first quarter of 2000. The deep mine continued to operate
through September 1999, at which time the reserves in the deep mine were
exhausted.
In late 1998 and early 1999, we reevaluated our coal reserves in Webster and
Braxton counties. Our ability to economically mine these reserves had been
adversely affected by the rising cost of production, which is due to the
thinning of the seams and the deteriorating quality of the coal. As a result, we
determined that we could not economically mine these reserves at that time.
Consequently, we impaired the entire carrying value of the properties and have
recorded exit costs associated with these operations.
BARBOUR COUNTY, WEST VIRGINIA. We own a deep mine complex in Barbour County,
West Virginia, known as the Sentinel Mine. The Sentinel Mine produces coal from
the Kittanning Seam. This mine produced approximately 1.1 million tons of coal
in 1998. We sold approximately 85% of the 1998 production to Potomac Electric
Power Company, AES Corporation and Logan Generating Company L.P. Coal from the
Sentinel Mine's Kittanning Seam averages 2.0 lbs.SO2/MMBtu, 9% ash, 13,000 Btu
per pound, 7.0% moisture and 33 volatility on a fully-washed basis. We entered
into a contract mining agreement for the Sentinel Mine, and the contract miner
began operation on June 1, 1999.
The Barbour County operation has approximately 30.0 million tons of recoverable
reserves. All of these recoverable reserves are steam coal, assigned reserves
and are classified as deep mineable.
In addition to the mining operation, we have an on-site, 1,100 tons-per-hour
preparation plant. The plant is fed from a 100,000 ton open stockpile that
facilitates the shipment of coal through an attached 3,000 tons-per-hour train
loading facility. We also have an on-
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site laboratory that provides sampling and blending capabilities. The total cost
of our plant and equipment associated with our Barbour County operations was
approximately $13.0 million at December 31, 1998, and its net book value was
approximately $8.8 million.
We are able to purchase coal from surrounding smaller producers to provide
additional sales at various qualities for our utility and industrial customers.
With our preparation plant capacity, blending ability, on-site laboratory and
large stockpile area, we have the ability to blend the purchased coal with the
production from the Sentinel Mine to serve a variety of customers. In 1998, we
blended approximately 164,000 tons of brokered coal with production from the
Sentinel Mine for shipment to customers.
MONONGALIA COUNTY, WEST VIRGINIA. We operate a surface mine in the Waynesburg
seam in Monongalia County, West Virginia. This surface mine produced
approximately 900,000 tons of coal in 1998. Approximately 10% of this production
was shipped by truck to the Morgantown Energy Associates power plant in
Morgantown, West Virginia, where it was blended with coal refuse. This was done
under a long-term contract with Morgantown Energy Associates. The balance of the
production from the surface mine was shipped to our rail and river terminal
located on the nearby Monongahela River, known as Anker Rail & River Terminal.
The coal was then blended with other brokered coal and shipped by rail and barge
to various utilities. Shipments from Anker Rail & River Terminal averaged 2.5 to
4.3 lbs.SO2/MMBtu, 14 to 16% ash and 11,800 to 12,200 Btu per pound.
We control approximately 2.0 million tons of recoverable reserves in the
Waynesburg seam in Monongalia County with an average quality of 3.7 lbs.
SO2/MMBtu, 16.5% ash and 12,500 Btu per pound. All of these reserves are steam
coal, assigned reserves and are surface mineable.
Anker Rail & River Terminal is designed to enable us to simultaneously load
trains of up to 100 cars, referred to as unit trains, on rail lines jointly
served by CSX Transportation, Inc. and Norfolk Southern Corporation at a rate of
1,500 tons per hour and onto barges on the Monongahela River at a rate of 1,200
tons per hour. The facility is equipped with crushing, screening and blending
equipment, as well as quality control and automated sampling systems. We operate
Anker Rail & River Terminal for coal from our surface mine and for third-party
brokered coal.
We also own the Rosedale and Dippel river facilities. These facilities are
adjacent to the Anker Rail & River Terminal and are used for barge staging and
additional ground storage. The total cost of the plant and equipment associated
with our Monongalia County operations was approximately $3.0 million at December
31, 1998, and its net book value was approximately $2.5 million.
RALEIGH COUNTY, WEST VIRGINIA. We own a deep mine in the Beckley seam in Raleigh
County, West Virginia, known as the Baybeck Mine. In 1998, this mine produced
approximately 941,000 tons of premium quality, low volatility metallurgical
coal, which is used in coke production and is known as met coal. We sold the
1998 production from this mine to Citizens Gas and Coke Utility, Drummond Coal
Sales, Inc., Koppers Industries, Inc., A.K. Steel, U.S. Steel Corporation and
Dofasco Steel Company. Coal from the Baybeck Mine averages 1.0 lbs.SO2/MMBtu,
5.5% ash, 6.0% moisture and 19 volatility. We have entered into a contract
mining agreement for our mining operations in Raleigh County, and the contract
miner began operations on July 5, 1999.
The Baybeck Mine has approximately 1.9 million tons of recoverable reserves. We
previously controlled an additional block of reserves in the Beckley seam
adjacent to our current mine. However, these reserves were separated from our
current mining area by a zone of very thin or no coal. In order to access and
mine these additional reserves, we would have been required to spend additional
capital. As a result of this and other factors, we surrendered these reserves to
the lessor in July 1999.
We also control approximately 29.0 million tons of coal in the Pocahontas #3
Seam. This is a low volatility metallurgical coal reserve and is adjacent to our
Baybeck Mine. This reserve is jointly served by Norfolk Southern and CSX
railroads. We are holding this reserve for sale, and, accordingly, it has been
adjusted to its estimated fair market value.
All of the reserves in Raleigh County are metallurgical coal, assigned reserves
and are classified as deep mineable.
We own and operate a 300-tons-per-hour preparation plant, with an on-site CSX
train loading facility, capable of fast-loading a unit train in four hours. The
loading facility is fed from a 150,000 ton open stockpile area adjacent to the
preparation plant. The total cost of the plant and equipment associated with our
Raleigh County operations was approximately $11.1 million at December 31, 1998,
and its net book value was approximately $7.1 million.
PRESTON COUNTY, WEST VIRGINIA. In 1998, we operated two deep mines through
contract miners in the Upper Freeport seam in Preston County, West Virginia.
These deep mines produced a total of 501,000 tons of coal in 1998. We sold
approximately 82% of the production from these mines to Potomac Electric Power
Company, Allegheny Power Service Corporation and AES Corporation. Coal
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produced from these deep mines averages 2.3 lbs.SO2/MMBtu, 11% ash, 12,800 Btu
per pound, 6.0% moisture and 28 volatility on a fully-washed basis.
We own and operate a 250-tons-per-hour preparation plant in Preston County,
where the coal from our contract mines is processed. The plant has blending
capabilities, a sophisticated sampling system and a 1,200-tons-per-hour CSX unit
train loading facility. The plant has a 60,000 ton storage capacity.
One of the two deep mines ceased production in December 1998 due to the
exhaustion of its reserves. The other deep mine is currently operating. However,
its reserves are expected to be depleted at the end of 1999. We expect to serve
our customers with coal produced from our Barbour and Upshur county mining
operations.
In July 1999, we sold substantially all of the coal reserves we controlled in
Preston County for $1.25 million in cash plus royalties on future production. A
gain of approximately $0.5 million from this sale was recognized in the third
quarter of 1999. As a result of that sale, we now control 0.68 million tons in
Preston County.
The total cost of the plant and equipment associated with our Preston County
operations was approximately $3.2 million at December 31, 1998, and its net book
value was approximately $300,000.
GARRETT COUNTY, MARYLAND. We own a deep mine in the Bakerstown seam in Garrett
County, Maryland, known as the Steyer Mine. The Steyer Mine produced 286,000
tons of coal in 1998. That coal was shipped by truck to Mettiki Coal Corporation
and to our Vindex Mine in Grant County, West Virginia, where it was blended and
shipped to Virginia Electric Power Company's Mount Storm Power Station. Coal
mined from the Bakerstown seam averages 1.76 lbs.SO2/MMBtu, 25% ash, 10,200 Btu
per pound, 5.0% moisture and 15 vol. The Steyer Mine has approximately 10.6
million tons of recoverable reserves. The total cost of the plant and equipment
associated with the Steyer Mine was approximately $2.1 million at December 31,
1998, and its net book value was approximately $700,000.
We control a total of 22.7 million tons of reserves in Garrett County. All of
these reserves are steam coal reserves. Approximately 50% are assigned reserves.
Approximately 13.0 million tons, or 58%, of these reserves are deep mineable.
We entered into a contract mining agreement for our operations in Garrett
County, and the contract miner began operations on April 12, 1999.
HARRISON COUNTY, WEST VIRGINIA. We own 50% of a limited liability company that
operates a deep mine in the Pittsburgh seam in Harrison County, West Virginia,
known as the Sycamore Mine. Production from the Sycamore Mine began in May 1997.
The Sycamore Mine has approximately 5.1 million tons of recoverable reserves
with an average of 5.8 lbs.SO2/MMBtu, 11% ash, 12,500 Btu per pound and 35
volatility.
Coal mined from the Sycamore Mine is sold and delivered by truck to the nearby
Harrison Power Station. Allegheny Power Service Corporation owns the Harrison
Power Station, which burns more than 5.0 million tons of coal per year. The
Harrison Power Station was recently equipped with a scrubber addition, which
allows the Harrison Power Station to burn the high sulfur coal produced at the
Sycamore Mine. In 1998, the Sycamore Mine shipped by truck a total of
approximately 630,000 tons to the Harrison Power Station.
We control a total of 56.6 million tons of reserves in Harrison County. All of
these reserves are steam coal, assigned reserves and are classified as deep
mineable.
GRANT COUNTY, WEST VIRGINIA. We own a surface mine in the Kittanning and
Freeport seams and a deep mine in the Bakerstown seam in Grant County, West
Virginia. The surface mine, known as the Vindex Mine, produced 312,000 tons of
coal in 1998. This coal was sold to Virginia Electric Power Company's Mount
Storm Power Station. The deep mine, known as the Stony River Mine, produced
approximately 333,000 tons of coal in 1998. The coal from the Stony River Mine
was sold to Mettiki Coal Corporation and to the Vindex Mine, where it was
blended and shipped to Virginia Electric Power Company's Mount Storm Power
Station. The blended product averages 3.0 lbs.SO2/MMBtu, 16% ash, 12,000 Btu per
pound, 5.0% moisture and 15 volatility. The reserves for the Vindex Mine and the
Stony River Mine contain approximately 16.2 million tons of recoverable coal,
all of which are located within several miles of the Mount Storm Power Station.
All of these reserves are steam coal, assigned reserves. Approximately 1.0
million tons, or 7.0%, of these reserves are surface mineable.
We operate a 200-tons-per-hour preparation plant located at the Vindex Mine. The
preparation plant processes coal from the Vindex, Steyer and Stony River mines
for shipment to Virginia Electric Power Company, referred to as VEPCO. The total
cost of the plant
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and equipment associated with our Grant County operations was approximately $6.8
million at December 31, 1998, and its net book value was approximately $5.3
million.
In December 1998, we were forced to idle the Vindex Mine because we had mined
all of its then permitted coal reserves, and we were unable to secure a new
mining permit for our adjacent properties. With the closing of the Vindex Mine,
we were unable to sell that portion of the production from the Stony River Mine
which had previously been blended with coal from the Vindex Mine and shipped to
VEPCO's Mount Storm Power Station. As a result of this and other factors, we
idled the Stony River Mine in February 1999. Since the surface mine was idled,
we have been working with the appropriate regulatory agencies to try to get the
necessary permits for the Grant County surface mine. On December 17, 1999, the
West Virginia Division of Environmental Protection issued the mining permit
covering a portion of the Grant County surface mine operation that will enable
us to resume mining at that operation. Because the permit was not issued by
October 15, 1999, VEPCO has the right, but not the obligation, to terminate one
of its long-term coal contracts with us. VEPCO indicated by letter to us dated
October 19, 1999, that, in view of the progress being made in obtaining the
permit, VEPCO anticipated that it would not terminate its contract as long as we
received the permit in the near term.
We control a total of 29.9 million tons of reserves in Grant County. All of
these reserves are steam coal and assigned reserves. Approximately 27.4 million
tons, or 96.4%, of these reserves are deep mineable.
UPSHUR COUNTY, WEST VIRGINIA. In July 1997, we commenced production from a deep
mine in the Upper Freeport seam in Upshur County, West Virginia. As of October
1, 1999, the deep mine, known as the Spruce Fork Mine No. 1, had approximately
6.7 million tons of recoverable reserves in the Upper Freeport seam. In 1998,
the Spruce Fork Mine No. 1 produced 743,000 tons of coal. We sold approximately
81% of the production from this mine to Baltimore Gas & Electric Company, Lehigh
Portland Cement, Logan Generating and Potomac Electric Power Company. The
quality of the reserves at the Spruce Fork Mine No. 1 averages 1.8
lbs.SO2/MMBtu, 9% ash, 13,000 Btu per pound, 6.0% moisture and 33 volatility. We
entered into a contract mining agreement for our Spruce Fork Mine No. 1, and the
contract miner began operations on June 1, 1999.
In September 1999, a contract miner commenced production from a new deep mine in
the Kittanning seam in Upshur Country. This deep mine, known as the Spruce Fork
Mine No. 2, has approximately 16.8 million tons of recoverable reserves. The
quality of these reserves averages 1.90 lbs.SO2/MMBtu, 9% ash, 13,000 Btu per
pound and 33 volatility.
We own and operate a 700-tons-per-hour preparation plant known as the Sawmill
Run Plant. We acquired the plant from a subsidiary of Pittston Coal Company, and
we have upgraded the plant. We also own and operate a train loading facility on
the CSX railroad which is adjacent to the Sawmill Run Plant. The loading
facility is a high-speed unit train loading facility with an automatic sampling
system. The total cost of the plant and equipment associated with our Upshur
County operations was approximately $28.0 million at December 31, 1998, and its
net book value was approximately $26.0 million.
We control approximately 65.9 million tons of recoverable reserves in Upshur
County. All of these reserves are steam coal, assigned reserves and classified
as deep mineable.
OTHER RESERVES. In addition to the reserves discussed above in connection with
our existing mining operations, we own or control substantial additional
reserves, including approximately 218 million tons of reserves in Taylor County,
West Virginia. All of the reserves in Taylor County are steam coal, unassigned
and classified as deep mineable. They have an average quality of 1.92
lbs.SO2/MMBtu, 10% ash, 13,000 Btu and 31 volatility. We are not currently
producing coal from these reserves and are holding them for future production.
CONTRACT MINING
We recently converted from operating our deep mines ourselves to using contract
miners to operate these mines for us. In each case, the contract miner is a
third party that provides coal extraction services at our mines. The contract
miner uses its own employees and its own supplies to mine the coal from our
reserves. The contract miner is responsible for making all capital expenditures
to advance the mine and continue coal production. As a service provider, the
contract miner produces the coal for us, and we own the coal at all times.
COAL TRANSPORTATION
Transportation costs range from 10 to 15% of the cost of a customer's coal for
coal trucked to power plants located in coal fields. For eastern utilities
supplied by rail, on the other hand, transportation costs range from 25 to 40%
of the cost of a customer's coal. Typically, customers receiving coal by truck
purchase the coal on a delivered basis, freight included. Customers receiving
coal by rail
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and generally by barge are responsible for transportation charges. As a result,
the availability and cost of transportation constitute important factors for the
marketability of coal.
In 1998, approximately 60% of our tonnage traveled by rail on CSX and Conrail,
with the remaining 40% traveling by truck and inland waterway barges. Although
all of our mines are currently served only by CSX, we believe that the freight
charges we pay are competitive with the charges that other coal producers served
by multiple railroads pay. The practices of, and rates set by, the railroad
serving a particular mine might affect, either adversely or favorably, our
marketing efforts with respect to coal produced from the relevant mine.
Effective on or about June 1, 1999, Conrail was divided between CSX and Norfolk
Southern. We anticipate that the division of Conrail will give us access to
affected markets without having to incur switching costs between railroads, as
we have in the past. Thus, we may be able to supply coal into various markets
more competitively because of lower rail transportation costs. We also expect
that our competitors will similarly benefit from the division of Conrail since
they will be able to supply coal into markets where we have in the past had a
transportation advantage because there was a single rail line haul into those
markets.
COAL MARKETING AND SALES
We currently conduct our marketing and sales operations primarily in the eastern
and mid-western United States.
Our sales and marketing staff in Morgantown, West Virginia focus on steam coal
sales in the Northeast and mid-Atlantic regions and on metallurgical coal sales
across the entire United States and Canada. Our sales and marketing staff in
Carmel, Indiana focus on sales in the mid-western United States. Sales of coal
in 1998 were 12.3 million tons, including 5.0 million tons shipped under
long-term contracts with utilities, 3.1 million tons under long-term contracts
with independent power producers, 2.4 million tons under spot market contracts
with utilities and 1.8 million tons to metallurgical and industrial customers.
Sales of coal in 1997 were 13.4 million tons, and sales of coal in 1996 were
11.6 million tons.
Anker Holding BV, which currently owns 6.84% of our fully-diluted common stock,
through related parties purchases coal from us for its international trading
operations. These purchases amounted to $131,000 in 1998, $9.7 million in 1997
and $16.2 million in 1996.
LONG-TERM COAL SUPPLY CONTRACTS
During 1999, we have supplied coal to approximately 26 different customers on a
regular basis. We have entered into various long-term coal supply contracts with
our customers, particularly with our regional utilities and independent power
producers. We have secured long-term coal supply contracts with a weighted
average remaining life of approximately 5.5 years as of October 1, 1999. Our
long-term contracts have accounted for approximately 75% of our coal sales
revenues from 1994 to 1998. Over the same period, approximately 2.6 million tons
of annual coal shipments covered by long-term contracts were up for renewal, and
contracts for approximately 2.0 million tons of this coal were rolled over into
new long-term contracts upon their expiration. In addition, over the same
period, we entered into new long-term contracts for 2.3 million tons of annual
coal shipments. We believe that customers enter into these long-term contracts
principally to secure a reliable source of coal at predictable prices. We enter
into these contracts to obtain stable sources of revenues required to support
the large expenditures we need to open, expand and maintain the mines servicing
the contracts. Our long-term contracts with companies related to AES Corporation
accounted for approximately 18% of our revenues in 1998 compared to 17% of our
revenues in 1997 and 16% of our revenues in 1996, and we expect shipments to
these customers to account for approximately 18% of our revenues in 1999. Our
shipments to VEPCO accounted for approximately 11% of our revenues in 1998,
compared to 6% of our revenues in 1997 and 5% of our revenues in 1996, and we
expect shipments to VEPCO to account for approximately 10% of our revenues in
1999. In addition, our shipments to Potomac Electric Power Company accounted for
approximately 10% of our revenues in 1998 and 1997 compared to 11% of our
revenues in 1996, and we expect shipments to that customer to account for
approximately 27% of our revenues in 1999. The loss of these customers and other
of our long-term contracts could have a material adverse effect on our financial
condition and results of operations. See "Risk Factors--Risks Related to
Anker--We depend on key customers for a significant portion of our revenues, and
the loss of one or more of them could adversely affect us."
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The following table sets forth information regarding our long-term coal supply
contracts as of October 1, 1999:
<TABLE>
<CAPTION>
CONTINUOUS APPROXIMATE EXPIRATION CURRENT ANNUAL
YEARS OF TERM OF CURRENT DATE OF CONTRACT
SERVICE WITH CONTRACT CURRENT TONNAGE
CUSTOMER CUSTOMER (NUMBER OF YEARS) CONTRACT (1) (IN THOUSANDS)
- -------- -------- ----------------- ------------ --------------
<S> <C> <C> <C> <C>
Allegheny Energy - Harrison Plant 9 2 12/31/99 720
BG&E - Wagner Plant 10 3 12/31/99 300
BG&E - Crane Plant 5 3 12/31/99 300
Citizens Gas 3 2 12/31/99 144
PEPCO - Chalk Point & Morgantown
Plants 17 2 12/31/00 2150
Lehigh Portland - Union Bridge Plant 1 2 06/30/01 192 (2)
Atlantic Electric - Deepwater Plant 17 6 06/30/01 160 (3)
AK Steel - Ashland & Middletown
Plants 3 2 12/31/01 480 (2)
VEPCO - Mt. Storm Station -Vindex
Contract 8 3 12/31/01 360
PP&L - Brunner Island Plant 1 3 12/31/01 320 (4)
VEPCO Mt. Storm Plant - Mastellar
Contract 8 8 12/31/02 432
Mettiki Coal Corp. 5 7 12/31/02 432
ER&L/AES Thames Plant 11 16 03/03/05 650 (2)
MEA Plant 8 15 09/14/07 120 (2)
AES Shady Point Plant 9 18 12/31/07 600 (2)
Logan Generating Plant 5 21 12/31/14 400 (2)
AES Beaver Valley Plant 14 20 12/31/16 576 (5)
AES Warrior Run Plant (6) 0 20 12/31/19 650 (2)
</TABLE>
- --------------------------------
(1) Reflects existing term of contract and does not assume the customer's
exercise of options to extend.
(2) Reflects shipments under a "total requirements" contract. Amounts are
averages of what the customer has asked for and is expected to ask for in
the future. A "total requirements" contract is a contract in which the
seller agrees to supply all of the specific goods that the purchaser will
need during a specified period at an agreed price, and the purchaser
agrees to purchase all of those goods exclusively from the seller.
(3) Reflects an 85% requirements contract.
(4) Shipments for 2000 at 324,000 tons and 2001 at 162,000 tons.
(5) As of April 1, 1999, this contract changed from a coal supply agreement to
an agency agreement under which the customer pays a fee to us for all tons
delivered to the plant.
(6) Contract term is for 20 years from the commercial operation date, which
has yet to occur. We are currently shipping coal and expect the commercial
operation date to occur before the end of 1999.
The terms of long-term coal supply contracts are based on bidding procedures and
extensive negotiations with customers. Consequently, the terms of these
contracts typically vary significantly from one another in many respects,
including their price adjustment features, price reopener terms, coal quality
requirements, quantity parameters, flexibility and adjustment mechanics,
permitted sources of supply, treatment of environmental constraints, options to
extend and force majeure and termination and assignment provisions.
Virtually all of our long-term coal supply contracts are subject to price
adjustment provisions. These price adjustment provisions permit an increase or
decrease in the contract price at specified times to reflect changes in market
price indices or other economic indices, taxes and other charges. Two of our 18
long-term coal supply contracts also contain price reopener provisions. These
price reopener provisions provide for the contract price to be adjusted upward
or downward at specified times on the basis of market factors. Price reopener
provisions might specify an index or other market pricing mechanism on which a
new contract price is to be based.
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Frequently, customers send bid solicitations to other suppliers to establish a
new price or to establish a right of first refusal. Some price reopener
provisions contain limitations on the magnitude of the price change permitted.
Contract prices under long-term coal supply agreements frequently vary from the
price at which a customer could acquire and take delivery of coal of similar
quality in the spot market.
Our long-term coal supply contracts specify Btu, sulfur, ash, moisture,
volatility and other quality requirements for the coal to be supplied. Most of
our contracts specify the approved seams and/or approved locations from which
the coal is to be mined.
Our long-term coal supply contracts contain "force majeure" provisions that
allow us and/or the customer to suspend performance under the contract to the
extent necessary while events beyond the reasonable control of the affected
party are occurring.
From time to time, we have become involved in contract disputes relating to,
among other things, coal quality, pricing, source of the coal and quantity.
While customer disputes, if unresolved, could result in the termination or
cancellation of the contracts to which they relate, our experience has been that
curative and/or dispute resolution measures decrease the likelihood of
termination or cancellation. In addition, our development of long-term business
relationships with many of our customers has generally permitted us to resolve
business disputes in a mutually acceptable manner. Nonetheless, we have from
time to time been involved in arbitration and other legal proceedings regarding
our long-term contracts, and we cannot assure you that existing and future
disputes can be resolved in a mutually satisfactory manner. In August 1999, to
resolve disputes under an agreement with VEPCO, we entered into an amendment to
that agreement. The amendment, among other things, gives VEPCO the right, but
not the obligation, to terminate that agreement to purchase coal from us if the
West Virginia Division of Environmental Protection does not issue a permit for
the resumption of operations at our Grant County surface mine. See "Risk
Factors--Risks Related to Anker--We depend on key customers for a significant
portion of our revenue, and the loss of one or more of them could adversely
affect us."
The operating profit margins we realize under our long-term coal supply
contracts vary from contract to contract and depend upon a variety of factors,
including price reopener and other price adjustment provisions, as well as our
production costs and the cost of brokered coal. Termination or suspension of
deliveries under a high-price contract could have a material adverse effect on
earnings and operating cash flow disproportionate to the percentage of
production the tonnage delivered under contract represents.
REGULATION AND LAWS
Federal, state and local authorities regulate the coal mining industry on
matters including employee health and safety, permitting and licensing
requirements, air quality standards, water pollution, the reclamation and
restoration of mining properties after mining is completed, the discharge of
materials into the environment, surface subsidence, which is the sinking or
settling of the earth's surface from underground mining, and the effects that
mining has on groundwater quality and availability. In addition, significant
legislation mandating benefits for current and retired coal miners affects the
industry. Mining operations require numerous federal, state and local
governmental permits and approvals.
Our independent operating subsidiaries endeavor to conduct mining operations in
compliance with all applicable federal, state and local laws and regulations.
However, because of extensive and comprehensive regulatory requirements,
violations during mining operations occur from time to time in the industry.
Notwithstanding compliance efforts, we do not believe these violations can be
completely eliminated.
While it is not possible to quantify the costs of compliance with all applicable
laws, those costs have been and continue to be significant.
MINING HEALTH AND SAFETY STANDARDS
Federal legislation has imposed stringent safety and health standards since
1969, when Congress adopted the federal Coal Mine Health and Safety Act of 1969.
The 1969 Coal Mine Health and Safety Act resulted in increased operating costs
and reduced productivity. The Federal Mine Safety and Health Act of 1977
significantly expanded the enforcement of health and safety standards. The 1977
Federal Mine Safety and Health Act imposes safety and health standards on all
mining operations. Regulations are comprehensive and affect numerous aspects of
mining operations, including training of mine personnel, mining procedures,
blasting, the equipment used in mining operations and other matters. The Mine
Safety and Health Administration monitors compliance with these federal laws and
regulations. The Black Lung Benefits Act of 1969 and the Black Lung Benefits
Reform Act of 1977 constitute parts of the 1969 Coal Mine Health and Safety Act
and the 1977 Federal Mine Safety and Health Act, respectively. In addition to
the federal framework, most of the states in which we operate impose regulatory
and legal parameters for mine safety and health.
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One of our long-term goals is to achieve excellent health and safety
performance, as measured by accident frequency rates and other measures. We
believe that our attainment of this goal is inherently tied to our attainment of
productivity and financial goals. We seek to implement this goal by, among other
measures,
- training employees in safe work practices;
- carrying out periodical safety audits at each operation;
- openly communicating with employees;
- establishing, following and improving safety standards;
- involving employees in establishing safety standards; and
- recording, reporting and investigating all accidents, incidents and
losses to avoid recurrences.
As evidence of the effectiveness of our safety program, the West Virginia Office
of Miners' Health, Safety and Training awarded our Osage Mine in Monongalia
County, West Virginia the Bart Lay Award. The Osage Mine was recognized as the
safest coal mine in West Virginia during 1996 and 1997. In addition, the Mine
Safety and Health Administration awarded the Webster County surface mine and the
Steyer Mine the Pacesetter Award for lowest accident frequency for 1998. The
State of West Virginia awarded the preparation plant associated with the
Sentinel Mine the Mountain Guardian Award for lowest accident and violation
frequency for 1998.
BENEFITS UNDER BLACK LUNG LEGISLATION
In order to compensate miners who were last employed as miners prior to 1970,
the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform
Act of 1977, as amended by the Black Lung Benefits Revenue Act of 1981 and the
Black Lung Benefits Amendments of 1981, levy a tax on production of $1.10 per
ton for deep-mined coal and $0.55 per ton for surface-mined coal, neither amount
to exceed 4.4% of the sales price. In addition, the 1981 Acts provide that some
claims for which coal operators had previously been responsible will be
obligations of a government trust funded by the tax. The Revenue Act of 1987
extended the termination date of the tax from January 1, 1996 to the earlier of
January 1, 2014 and the first January on which the government trust becomes
solvent. We maintain a fully-insured program covering all black lung claims
through the West Virginia Workers Compensation and the West Virginia Coal
Workers' Pneumoconiosis Funds. We have not received any notice of claims for
black lung disease which the plans would not cover.
The United States Department of Labor has issued proposed amendments to the
regulations implementing the federal black lung laws which, among other things,
- expand the definition of coal works pneumoconiosis,
- liberalize the standards for entitlement to living miners' and
widows' benefits,
- restrict the number of medical reports a party may use in defending
a claim and
- expand the types of medical conditions for which treatment must be
provided.
If adopted, the amendments could have an adverse impact on us, the extent of
which we cannot accurately predict.
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT OF 1992
Congress enacted the Coal Industry Retiree Health Benefit Act of 1992 in October
1992 to provide for the funding of health benefits for United Mine Workers
Association retirees. The Health Benefits Act was enacted to eliminate the
funding deficits of the 1950 and 1974 United Mine Workers Association Benefit
Trusts by establishing a trust fund to which "signatory operators" are obligated
to pay annual premiums for assigned beneficiaries, together with a pro rata
share for unassigned beneficiaries who never worked for those employers. The
Secretary of Health and Human Services is to determine the amounts of the
premiums to be paid on the basis set forth in the Health Benefits Act.
"Signatory operators" include operators who are signatory to the current or
prior National Bituminous Coal Wage Agreements and "related persons," including
entities that we at one time owned which were signatory operators. For the plan
year from October 1, 1998 through September 30, 1999, we contributed
approximately $386,000 under this legislation, which represented payments that
accrued and were owing with respect to prior years. Based upon independent
actuarial estimates, we believe that the amount of our obligation under the new
plan will be approximately $7.3 million as of December 31, 1998, using a 7%
discount rate. This amount is recorded on our consolidated financial statements
included elsewhere in this offering memorandum. We will fund amounts paid in
connection with this obligation with cash from operations or borrowings under
our credit facility. We have also been involved in a lawsuit concerning a
dispute over a portion of the premiums we allegedly owe. See "--Legal
Proceedings."
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ENVIRONMENTAL LAWS
We are subject to various federal environmental laws, including the Surface
Mining Control and Reclamation Act, the Clean Air Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Clean Water Act and
the Resource Conservation and Recovery Act. We are also subject to state laws of
similar scope in each state in which we operate. These laws require governmental
approval of many aspects of coal mining operations. As a result, both federal
and state inspectors regularly visit our mines and other facilities in order to
assure compliance.
SURFACE MINING CONTROL AND RECLAMATION ACT. The federal Surface Mining Control
and Reclamation Act of 1977, administered by the Office of Surface Mining,
establishes mining and reclamation standards for all aspects of surface mining,
as well as many aspects of deep mining. The Surface Mining Control and
Reclamation Act and similar state statutes require, among other things, that
mined property be restored in accordance with specified standards and an
approved reclamation plan. In addition, the Abandoned Mine Lands Act, which is
part of the Surface Mining Control and Reclamation Act, imposes a tax on all
current mining operations. The proceeds of the tax are used to restore mines
closed before 1977. The maximum tax is $0.35 per ton on surface-mined coal and
$0.15 per ton on underground-mined coal.
The Surface Mining Control and Reclamation Act also requires that we meet
comprehensive environmental protection and reclamation standards during the
course of, and upon completion of, mining activities. For example, the Surface
Mining Control and Reclamation Act requires that we restore a surface mine to
approximate original contour as contemporaneously as practicable. The mine
operator must submit a bond or otherwise secure the performance of these
reclamation obligations. We must obtain permits for surface mining operations
from the federal Office of Surface Mining Reclamation and Enforcement. On the
other hand, where state regulatory agencies have adopted federally approved
state programs under the Surface Mining Control and Reclamation Act, we must
obtain the permits from the appropriate state regulatory authority. We accrue
for the liability associated with all end of mine reclamation on a ratable basis
as the coal reserve is being mined. We periodically update the estimated cost of
reclamation, and the corresponding accrual, on our financial statements. The
earliest a reclamation bond can be released is five years after reclamation to
the approximate original contour has been achieved.
All states in which our active mining operations are located have achieved
primary jurisdiction for Surface Mining Control and Reclamation Act enforcement
through approved state programs. Under the Surface Mining Control and
Reclamation Act, responsibility for any coal operator that is currently in
violation of the Act can be imputed to other companies that are deemed,
according to regulations, to "own or control" the coal operator. Sanctions can
include being blocked from receiving new permits and rescission or suspension of
existing permits. Because of a federal court action invalidating the Surface
Mining Control and Reclamation Act ownership and control regulations, the scope
and potential impact of the "ownership and control" requirements on us are
unclear. The Office of Surface Mining has responded to the court action by
promulgating interim regulations, which more narrowly apply the ownership and
control standards to coal companies. Although the federal action should have a
precedential effect on state regulations dealing with "ownership and control,"
which are in many instances similar to the invalidated federal regulations, we
are not certain what impact the federal court decision will have on these state
regulations.
CLEAN AIR ACT. The Clean Air Act, including the Clean Air Act Amendments, and
corresponding state laws that regulate the emissions of materials into the air,
affect coal mining operations both directly and indirectly. Coal mining and
processing operations may be directly affected by Clean Air Act permitting
requirements and/or emissions control requirements relating to particulate
matter, such as fugitive dust. Coal mining and processing may also be impacted
by future regulation of fine particulate matter measuring 2.5 micrometers in
diameter or smaller. Regulations relating to fugitive dust and coal emissions
may restrict our ability to develop new mines or require us to modify our
existing operations. The Clean Air Act indirectly affects coal mining operations
by extensively regulating the air emissions of coal-fueled electric power
generating plants. Title IV of the Clean Air Act Amendments places limits on
sulfur dioxide emissions from electric power generation plants. The limits set
baseline emission standards for these facilities. Reductions in these sulfur
dioxide emissions will occur in two phases. Phase I began in 1995 and currently
applies to 445 utility units. Phase II will begin in 2000 and will apply to all
facilities, including those subject to the 1995 restrictions. The affected
utilities may be able to meet these requirements by, among other things,
switching to lower sulfur fuels, installing pollution control devices such as
scrubbers, reducing electricity generating levels or by purchasing or trading
pollution credits. Specific emissions sources will receive these credits, which
utilities and industrial concerns can trade or sell to allow other units to emit
higher levels of sulfur dioxide.
We cannot ascertain completely the effect of the Clean Air Act Amendments at
this time. It was generally anticipated that Phase I of Title IV of the Clean
Air Act Amendments would increase prices for low sulfur coal. This price
increase, however, did not materialize. When the Clean Air Act Amendments were
enacted, many plants switched to low sulfur coal supplied from the Powder River
Basin, located predominantly in Wyoming. This compliance strategy generated an
unexpectedly large number of pollution credits, which were then marketed
together with lower cost, higher sulfur coal and sold in competition with
Central Appalachian
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production. We believe these factors reduced or capped the anticipated price
increase for Central Appalachian low sulfur coal in Phase I.
We believe that in Phase II, the price for low sulfur coal is more likely to
increase, and the price for high sulfur coal to decrease, because additional
coal-burning electric power plants will be affected by Phase II. However, this
is not expected to occur until well into Phase II, after the large bank of
pollution credits which has developed in connection with Phase I has been
reduced and before utilities electing to comply with Phase II by installing
scrubber sulfur-reduction technologies are able to implement this compliance
strategy. We do not believe that compliance strategies utilizing scrubbers will
result in significant downward pressure on compliance coal prices during initial
phases of Phase II. However, if the prices of compliance coal and/or pollution
credits rise, scrubber compliance strategies may become more competitive. The
expected reduction of the existing bank of pollution credits during Phase II
should also help to rationalize the market for compliance coal during the long
term to the extent utilities are unable to utilize strategies to create a new
bank of pollution credits. This legislation limits the ability of some of our
customers to burn higher sulfur coals unless these customers have or are willing
to install scrubbers, to blend coal or to bear the cost of acquiring emission
credits that permit them to burn higher sulfur coal. We have endeavored to
mitigate the potential adverse effects of the legislation's limitations on
sulfur dioxide emissions through our acquisition and development of compliance
and low sulfur coal reserves and operations in Appalachia.
The Clean Air Act Amendments also require that existing major sources of
nitrogen oxides in moderate or higher ozone non-attainment areas install
reasonably available control technology for nitrogen oxides, which are
precursors of ozone. In addition, the Environmental Protection Agency is
expected to implement stricter ozone ambient air quality standards by 2003. In
September 1998, the EPA issued its final rule on regional nitrogen oxide
emission reductions directed at 22 eastern states and the District of Columbia.
This rule is intended to further reduce nitrogen oxide emissions by the year
2003. In estimating the impact of this rule on emissions sources, the EPA
assumed reductions of approximately 85% from electric generating units, although
it is up to the individual states to determine how the reductions are to be
imposed on sources within their borders. In addition, in response to petitions
filed under Section 126 of the Clean Air Act Amendments, the EPA has proposed to
apply additional restrictions on nitrogen oxide emissions from specified
individual sources, including electric generating facilities, in various states,
including West Virginia. Because the EPA's actions have been challenged, we do
not know what the ultimate impact of these actions will be. The installation of
reasonably available control technology, and any control measures beyond the
reasonably available control technology that the states and the EPA may require,
will make it more costly to operate coal-fired power plants. In addition,
depending on the requirements of individual state attainment plans and the
development of revised new source performance standards, the installation of
these measures could make coal a less attractive fuel or alternative in the
planning and building of power plants in the future. If coal's share of the
capacity for power generation were to be reduced, a material adverse effect on
our financial condition and results of operations could result. We cannot
predict with certainty the effect this legislation, regulatory action and
pending litigation, as well as other legislation that may be enacted in the
future, could have on the coal industry in general and on us in particular. We
cannot assure you that implementation of the Clean Air Act Amendments, new or
revised ambient air quality standards or any other current or future regulatory
provision will not materially adversely affect us.
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT. The
federal Comprehensive Environmental Response, Compensation and Liability Act and
similar state laws may affect coal mining operations by imposing clean-up
requirements for threatened or actual releases of hazardous substances that may
endanger public health or welfare or the environment. Under the Comprehensive
Environmental Response, Compensation and Liability Act, joint and several
liability may be imposed on waste generators, site owners and operators and
others regardless of fault or the legality of the original disposal activity.
Waste substances generated by coal mining and processing are generally not
regarded as hazardous substances for purposes of the Comprehensive Environmental
Response, Compensation and Liability Act.
CLEAN WATER ACT. Both the federal Clean Water Act and corresponding state
statutes affect coal mining operations by imposing restrictions on discharges,
including acid mine drainage, into surface waters, ground water and wetlands.
The Clean Water Act permitting requirements can impact coal mining operations in
two primary ways. First, under Section 404 of the Clean Water Act, the dredging,
filling or impoundment of waters of the United States requires a permit from the
U.S. Army Corps of Engineers. In addition, under Section 402 of the Clean Water
Act, a permit must be obtained for a discharge from any point source into waters
of the United States. State laws have similar permitting requirements. Regular
monitoring, as well as compliance with reporting requirements and performance
standards, are included under the Clean Water Act and are preconditions for the
renewal of required permits. In addition, to the extent not otherwise regulated
by applicable law, West Virginia's Groundwater Protection Act may affect coal
mining operations by imposing restrictions to protect groundwater quality.
RESOURCE CONSERVATION AND RECOVERY ACT. The federal Resource Conservation and
Recovery Act, and corresponding state statutes, may affect coal mining
operations by imposing requirements for the treatment, storage and disposal of
hazardous wastes. Although many mining wastes are excluded from the regulatory
definition of hazardous waste, and coal mining operations covered by Surface
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Mining Control and Reclamation Act permits are exempted from regulation under
the Resource Conservation Recovery Act by statute, the EPA is studying the
possibility of expanding regulation of mining wastes under the Resource
Conservation Recovery Act.
TOXIC SUBSTANCES CONTROL ACT. The Toxic Substances Control Act regulates, among
other things, the use and disposal of polychlorinated biphenyls, a substance
that, in the past, was commonly found in coolants and hydraulic fluids that the
mining industry utilized. The penalties imposed under the Toxic Substances
Control Act for the improper disposal of polychlorinated biphenyls can be
significant.
COMPETITION
The U.S. coal industry is highly competitive, with numerous producers in all
coal-producing regions. Competition in the coal industry is based on a variety
of factors, including price, location, transportation, quality and stability of
supply. Historically, we have competed with many other larger producers, as well
as small producers in our region. Many of our customers are also customers of
our competitors. In addition, some of our larger competitors have both the size
of reserves and capital resources to utilize mining technologies providing low
cost production, which we cannot. The markets in which we sell our coal are
highly competitive and affected by factors beyond our control. Continued demand
for our coal and the prices that we will be able to obtain will depend primarily
on coal consumption patterns of the domestic electric utility industry, which in
turn are affected by the demand for electricity, deregulation of electric
utilities, coal transportation costs and consolidation within the rail
transportation industry, environmental and other governmental regulations,
technological developments and the availability and price of competing coal and
alternative fuel supply sources such as oil, natural gas, nuclear energy and
hydroelectric energy.
Although demand for coal has grown over the recent past, the industry has since
been faced with over-capacity, which in turn has increased competition and
lowered prevailing coal prices. Moreover, because of greater competition for
electricity and increased pressure from customers and regulators to lower
electricity prices, the term lengths of long-term sales contracts generally have
decreased, and public utilities are lowering fuel costs by buying higher
percentages of spot coal through a competitive bidding process and by buying
only the amount of coal necessary to meet their requirements.
EMPLOYEES AND LABOR RELATIONS
We recently changed from operating our deep mines ourselves to utilizing
contract miners to operate these mines. As a result, our employee base has been
significantly reduced from 668 employees as of December 31, 1998 to 162
employees as of September 30, 1999. We are not a party to any collective
bargaining agreement. We consider our relations with our employees to be good.
If some or all of our currently non-union operations were to become unionized,
we could incur higher labor costs and an increased risk of work stoppages. We
cannot assure you that our workforce will not unionize in the future. The labor
force for our contract miners is currently not unionized. If some or all of our
contract miners' employees were to become unionized, the contract miners could
incur higher labor costs and have an increased risk of work stoppages, which
could adversely affect our business and costs of operations.
LEGAL PROCEEDINGS
In 1998, two of our subsidiaries, Anker Energy Corporation and King Knob Coal
Co., Inc., sued Consolidation Coal Company, known as Consol, the Social Security
Administration, which is the administrator of the Coal Industry Retiree Health
Benefit Act of 1992, and the Trustees of the United Mine Workers of America
Combined Benefit Fund in the U.S. District for the Western District of
Pennsylvania. Our subsidiaries claimed that:
- Consol is responsible for paying approximately one-third of the
subsidiaries' 1992 Coal Act premiums that relate to employees
affected by Consol's breach of several contract mining agreements in
the early 1980's;
- the Social Security Administration should be prohibited from
continuing to invoice Anker Energy and King Knob for these payments,
which Consol should have made; and
- the 1992 Coal Act is unconstitutional.
The trustees filed a counterclaim against Anker Energy and King Knob for the
amount of premiums they have failed to pay as a result of their claim against
Consol. The trial court granted the trustees' motion for summary judgment on
this counterclaim, as well as the motions to dismiss that Consol and the Social
Security Administration filed.
Anker Energy and King Knob appealed to the U.S. Court of Appeals for the Third
Circuit. The appeals court reversed the trial court's ruling with respect to
Consol but affirmed all of the trial court's other rulings. As a result, Anker
Energy and King Knob could pursue their claim for reimbursement against Consol,
but were required to pay the disputed portion of their 1992 Coal Act premiums
while
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the claim was pending. The disputed portion of premiums, including interest and
penalties, is currently approximately $1.3 million. Interest accrues at the
post judgment rate of nine percent per year.
On August 12, 1999, Anker Energy and King Knob filed for a writ of certiorari to
the U.S. Supreme Court. The court of appeals' judgment was stayed pending the
Supreme Court's disposition of the writ. On November 16, 1999, the Supreme Court
denied the writ of certiorari, and we anticipate that Anker Energy and King Knob
will have to pay all or a portion of the disputed premiums within the next six
months. We have fully accrued the entire judgment in prior years. Anker Energy
and King Knob will fund the judgment from borrowings under our revolving credit
facility.
We and our subsidiaries are also involved in various legal proceedings
incidental to our normal business activities. Our management does not believe
that the outcome of any of these proceedings will have a material adverse effect
on our operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William D. Kilgore 63 Chief Executive Officer and Chairman of the Board
P. Bruce Sparks 44 President and Director
John A. H. Shober 66 Director
Thomas R. Denison 39 Director
Willem H. Hartog 37 Director
Michael M. Matesic 34 Treasurer and Chief Financial Officer
Richard B. Bolen 51 Senior Vice President - Sales, Anker Energy Corporation
Gerald Peacock 44 Vice President, Anker Energy Corporation
B. Judd Hartman 36 Secretary
James A. Walls 37 Assistant Secretary
</TABLE>
The term of each of the directors expires annually upon the election and
qualification of a successor at the annual meeting of our stockholders.
MANAGEMENT BIOGRAPHIES
WILLIAM D. KILGORE. Mr. Kilgore was named Chairman of our Board and our Chief
Executive Officer, as well as Chief Executive Officer of Anker Energy
Corporation, our subsidiary, on May 1, 1999. Mr. Kilgore has 42 years experience
in the coal industry. Over the past five years, Mr. Kilgore has served as a
consultant to Kanawha Eagle, LLC, Double Eagle, LLC, New Eagle, LLC and Mossy
Eagle, LLC, all of which are Central Appalachian coal companies. Mr. Kilgore
served as President/Chief Executive Officer and Director of Agipcoal from 1989
to 1994 and as Vice President/General Manager of Enoxy Coal, Inc. from 1985 to
1989.
P. BRUCE SPARKS. Mr. Sparks has been our President since October 28, 1997, and
he has been a stockholder since 1996. From 1988 to October 1997, he was
Executive Vice President of Anker and our predecessor, Anker Group, Inc. Mr.
Sparks was the Vice President of Administration and Chief Financial Officer of
Anker Group from 1985 until 1988. A 1976 business graduate from Concord College,
he spent seven years in various management positions with CoalARBED, Inc., a
coal company, the last of which was as Vice President and Chief Financial
Officer before joining us. Mr. Sparks has been with us for 14 years.
JOHN A. H. SHOBER. Mr. Shober was elected Chairman of the Board on October 28,
1997, and he served as Chairman until June 8, 1999. He has served as one of our
Directors since 1996. Mr. Shober is a private investor and corporate director.
Mr. Shober serves as a director of Penn Virginia Corporation, a natural
resources company; Airgas, Inc., a distributor of industrial gas and industrial
gas supplies; Hercules, Inc., a manufacturer of performance chemicals; C&D
Technologies, Inc., a manufacturer of stored power systems; Ensign-Bickford
Industries, Inc., a manufacturer of detonation devices; and MIBRAG mbH, a German
coal mining and power company. He serves as a member of the Advisory Board of
First Reserve Corporation, which oversees the investment activities and
decisions of First Reserve acting in its capacity as manager for the First
Reserve Funds' investment portfolios.
THOMAS R. DENISON. Mr. Denison became one of our Directors in August 1998. Mr.
Denison is a Managing Director and General Counsel of First Reserve. He joined
the firm in January 1998 and opened its Denver office. Prior to joining First
Reserve, he was a partner in the international law firm of Gibson, Dunn &
Crutcher LLP, which he joined in 1986 as an associate. Mr. Denison received his
Bachelor of Science degree in Business Administration from the University of
Denver and his Juris Doctorate from the University of Virginia. Mr. Denison also
serves as a Director of TransMontaigne, Inc. and Patina Oil & Gas Corporation.
WILLEM H. HARTOG. Mr. Hartog was elected one of our Directors on December 31,
1998. Mr. Hartog has been Senior Vice President Finance and Administration of
Anker Holding, B.V. and various of its subsidiaries since 1998 and has worked
for Anker Holding in various capacities since 1994. Prior to joining Anker
Holding, Mr. Hartog was employed by KPMG as a member of its audit staff.
MICHAEL M. MATESIC. Mr. Matesic is a Certified Public Accountant and has been
our Treasurer and Chief Financial Officer since October 28, 1997 and
Secretary/Treasurer of various of our subsidiaries since 1996. From 1990 to
October 1997, he was Controller of Anker Energy. A 1987 graduate of Duquesne
University with a B.S. in Business Administration, he spent two years on the
audit staff
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of Ernst & Young LLP, certified public accountants. Mr. Matesic's
responsibilities include accounting, tax, financial administration, human
resources and risk management. Mr. Matesic is a member of the American Institute
of Certified Public Accountants, Pennsylvania Institute of Certified Public
Accountants, and the West Virginia Society of Certified Public Accountants. Mr.
Matesic has been with us for 10 years.
RICHARD B. BOLEN. Mr. Bolen has been Senior Vice President - Sales of Anker
Energy since June 8, 1998. Mr. Bolen joined an affiliate of Anker Energy in 1979
and served as its President from 1980 through 1994. In 1994, he became President
of another affiliate, and, in 1995, he assumed the additional duties of Vice
President Operations, Southern Region, for Anker Energy. From October 1996 to
June 1998, Mr. Bolen was Senior Vice President of Operations of Anker Energy.
Mr. Bolen is a 1970 graduate of Virginia Polytechnic Institute with a degree in
Mining Engineering. Prior to joining Anker Energy, he served in various
management capacities with Consolidation Coal Company, Virginia Electric and
Power Company, Jewell Smokeless Coal Corporation and Jno. McCall Coal Company.
GERALD PEACOCK. Mr. Peacock joined Anker Energy in June 1998, as Vice President
of Operations. He graduated from Southern Illinois University with a B.S. in
Mechanical Engineering in 1976. Prior to June, 1998, he was employed by Arch
Mineral Corporation for 20 years, serving in several senior positions, including
President and Vice President of Catenary Coal Holdings, Inc., one of Arch's
operating subsidiaries.
B. JUDD HARTMAN. Mr. Hartman was elected as our Secretary effective November 1,
1997. Prior to joining us, Mr. Hartman was a partner with the law firm of
Spilman, Thomas & Battle in Charleston, West Virginia, a firm that he joined in
1989 as an associate. Mr. Hartman graduated from Washington and Lee University
in 1985 with a Bachelor of Arts degree in Economics and received his Juris
Doctorate degree in 1989 from Wake Forest University School of Law. Mr. Hartman
has been with us for two years.
JAMES A. WALLS. Mr. Walls has been our Assistant Secretary since 1993. He
graduated from West Virginia University with a Bachelor of Science/Bachelor of
Arts and Juris Doctorate degree in 1989. Prior to March of 1993, he was employed
by Spilman, Thomas & Battle in Charleston, West Virginia. Mr. Walls has been
with us for six years.
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EXECUTIVE COMPENSATION
The following table presents summary information of the compensation that we
paid or accrued for services rendered in all capacities for the last three
completed fiscal years for our Chief Executive Officer and each of the four
other most highly compensated executive officers of us or Anker Energy
Corporation, determined as of December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and Other Annual
Principal Position Fiscal Year Salary Bonus Compensation
- ------------------ ----------- ------ ----- ------------
<S> <C> <C> <C> <C>
P. Bruce Sparks 1998 $267,404 $ 15,000 $ 2,391
President, Chief Executive 1997 252,885 90,953 3,625
Officer(1) 1996 210,005 157,757 1,600
Ben H. Daud(3) 1998 181,731 -- 224 (3)
Chief Operating Officer 1997 23,557 20,750 450
(Anker Energy) 1996 -- -- --
Richard B. Bolen(4) 1998 172,115 - 761
Senior Vice President 1997 175,000 18,052 5,126
(Anker Energy) 1996 152,000 20,000 3,036
Kim A. Burke(5) 1998 170,192 -- 5,723
Senior Vice President 1997 175,000 15,166 4,143
(Anker Energy) 1996 136,615 35,000 4,841
Gerald Peacock(6) 1998 93,654 15,000 --
Vice President 1997 -- -- --
(Anker Energy) 1996 -- -- --
</TABLE>
<TABLE>
<CAPTION>
Long-Term Compensation and Awards
---------------------------------
Securities
Restricted Underlying
Name and Stock Options/ LTIP All Other
Principal Position Awards SARs (#) Payments Compensation
- ------------------ ------ -------- -------- ------------
<S> <C> <C> <C> <C>
P. Bruce Sparks -- -- -- --
President, Chief Executive -- -- -- --
Officer(1) -- -- -- $2,885,000(2)
Ben H. Daud(3) 25(4) -- -- --
Chief Operating Officer -- -- -- --
(Anker Energy) -- -- -- --
Richard B. Bolen(4) 25(4) -- -- --
Senior Vice President -- -- -- --
(Anker Energy) -- -- -- --
Kim A. Burke(5) -- -- -- --
Senior Vice President -- -- -- --
(Anker Energy) -- -- -- --
Gerald Peacock(6) 20(4) -- -- --
Vice President -- -- -- --
(Anker Energy) -- -- -- --
</TABLE>
- -------------------------
(1) Mr. Sparks resigned as Chief Executive Officer and Mr. Kilgore was named
Chief Executive Officer and Chairman of our board of directors on May 1,
1999. See "-- Employment Agreements" below for a description of Mr.
Kilgore's compensation arrangements.
(2) In 1996, Mr. Sparks received a one-time bonus. The bonus consists of
$1,385,000 cash and $1,500,000 recognized compensation for stock received
in connection with our recapitalization.
(3) Mr. Daud was hired by Anker Energy Corporation on November 1, 1997. The
listed amounts for 1997 represent only compensation he received from
November 1, 1997 through December 31, 1997. We estimate that his annual
compensation for 1997 would have been: salary, $175,000; bonus, $22,500;
and other annual compensation, $4,841. Mr. Daud resigned from Anker Energy
Corporation on July 2, 1999.
(4) On October 1, 1998, Mr. Daud, Mr. Bolen and Mr. Peacock received
restricted stock awards of common stock under our 1997 Omnibus Stock
Incentive Plan. Awards were valued for purposes of the plan at the par
value of the common stock, which is $0.01 per share.
(5) Mr. Burke's employment with Anker Energy Corporation ended on May 8, 1999.
(6) Anker Energy Corporation hired Mr. Peacock on May 11, 1998. The listed
amounts for 1998 represent only compensation he received from May 11, 1998
through December 31, 1998. We estimate that his annual compensation for
1998 would have been: salary, $150,000; bonus, $15,000; and other annual
compensation, $0.
BOARD COMPENSATION
All directors are reimbursed for their usual and customary expenses incurred in
attending all board and committee meetings. Each director who is not also an
officer receives an aggregate annual fee of $12,000 for serving on our board of
directors. In addition to the annual fee of $12,000, Mr. Shober received an
additional $57,000 for serving as Chairman of the Board in 1998.
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EMPLOYMENT AGREEMENTS
Mr. Sparks has an employment agreement with us and our subsidiaries, Anker
Group, Inc., Anker Energy Corporation and Simba Group, Inc. The agreement with
Anker Energy is dated as of August 1, 1996 and expires on July 31, 2002. The
agreement with Anker Energy provides for Mr. Sparks' employment as an executive
officer of Anker Energy at an annual salary of:
- $250,000 for the period August 1, 1996 through July 31, 1997
- $257,500 for the period August 1, 1997 through July 31, 1998
- $265,200 for the period August 1, 1998 through July 31, 1999
- $273,200 for the period August 1, 1999 through July 31, 2000
- $281,200 for the period August 1, 2000 through July 31, 2001 and
- $289,600 for the period August 1, 2001 through July 31, 2002.
The agreement with Anker Energy also provides for a quarterly bonus of $3,750
for each calendar quarter during its duration, and a yearly bonus based on our
financial performance. Mr. Sparks may terminate his employment upon 30 days'
notice. In the event Anker Energy were to terminate Mr. Sparks other than for
cause at any time prior to August 1, 2000, Mr. Sparks would be entitled to
receive the annual salary, bonuses and benefits that he would have received
under the agreement with Anker Energy through July 31, 2002, had Anker Energy
not terminated his employment. In the event Anker Energy were to terminate Mr.
Sparks other than for cause at any time on or after August 1, 2000, Mr. Sparks
would have the option to receive either
- 250% of his then current annual salary or
- the compensation, bonuses and other benefits he would have been
entitled to receive under the agreement with Anker Energy, had Anker
Energy not terminated him, for a period of two years.
In addition, Mr. Sparks is entitled to participate in any of Anker Energy's
pension plans for which he is eligible. Mr. Spark's agreement with Anker Energy
also requires him not to compete with Anker Energy during the employment term
and for a period of one year following the termination of the agreement. Mr.
Sparks also has employment agreements, each without compensation, with us, Anker
Group and Simba Group, Inc., providing for his seat on the board of directors of
those companies and his employment as an executive officer of those companies.
Mr. Kilgore also has an employment agreement with us and Anker Energy
Corporation, dated as of May 1, 1999. The term of the agreement ends on December
31, 2002. The agreement provides for Mr. Kilgore's employment as Chief Executive
Officer and Chairman of the Board of Directors at an annual salary of $315,000.
Mr. Kilgore is entitled to participate in any of Anker Energy's benefits plans
for which he is eligible and may be reimbursed for costs of relocating his
residence, not to exceed $125,000. Mr. Kilgore also may receive cash bonuses, at
Anker Energy's discretion, and an incentive bonus in the event we undergo a
change of control. The incentive bonus, which would be calculated based on
specified financial tests' being met, can be as much as $2.5 million, and could
include an option for Mr. Kilgore to purchase as much as five percent of our
then-outstanding common stock at an exercise price of $1.00 per share.
In the event that Anker Energy were to terminate Mr. Kilgore's employment other
than for cause on or before May 1, 2001, Mr. Kilgore would be entitled to
receive, in addition to the salary and bonus he had earned to that date, the
amount of his annual salary he would have received for an additional 36 months
less the number of months that have elapsed since Mr. Kilgore's employment. In
the event that Anker Energy were to terminate Mr. Kilgore's employment other
than for cause after May 1, 2001 but before May 1, 2002, Mr. Kilgore would be
entitled to the annual salary he would have received for an additional year had
he not been terminated. In the event that Anker Energy were to terminate Mr.
Kilgore's employment other than for cause after December 31, 2002, Mr. Kilgore
would be entitled to the annual salary he would have received for an additional
year had he not been terminated. Mr. Kilgore's agreement with Anker Energy also
requires him not to compete with Anker Energy during the employment term and for
a period of two years following the termination of the agreement.
None of our other employees has an employment contract with us or any of our
subsidiaries.
1997 OMNIBUS STOCK INCENTIVE PLAN
GENERAL
Our 1997 Omnibus Stock Incentive Plan provides for the issuance of restricted
stock awards or stock options to designated officers and key employees of us or
our affiliates of up to a maximum of 300 shares of authorized but unissued or
reacquired shares of our
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common stock. The plan is intended to motivate, reward and retain participants
in the plan for contributing to our long-term success. It does so by providing
an opportunity for meaningful capital accumulation linked to our future success
and appreciation in shareholder value.
Our president is responsible for administering the plan. Subject to the approval
of our board of directors, the president has the authority to designate who may
participate in the plan and the number of shares of common stock subject to each
restricted stock award or stock option. Awards and options are granted based on
the fair market value of the common stock as of the date of the award or option.
Fair market value is determined by the board of directors.
As long as our common stock is not publicly traded, the plan provides that we
have a call right, which is the right to purchase at fair market value any
vested option and any shares that a participant in the plan owns as a result of
the exercise of an option or the grant of an award. We also have a right of
first refusal with respect to these shares.
The board of directors has the authority to amend the plan, including with
respect to the acceleration of vesting of options and awards. No modification
will become effective, however, without the prior approval of the participants
in the plan if the approval is necessary to comply with any tax or regulatory
requirement or rule of any exchange or system on which the stock may be listed.
In addition, no amendment may, without a participant's consent, adversely affect
any rights that a participant has under any award or grant that is outstanding
at the time the amendment is made.
RESTRICTED STOCK AWARDS
When a participant in the 1997 Omnibus Stock Incentive Plan is granted a
restricted stock award, he or she must sign a restricted stock award agreement.
Under the agreement and the plan, the shares of common stock subject to the
award will be nontransferable, other than by will or the laws of descent and
distribution, and subject to forfeiture until the shares are vested. Unless the
board of directors accelerates the vesting period, the shares subject to an
award will become fully vested on the sixth anniversary of the award if the
participant in the plan has been in our continuous employ during that six-year
period. Vesting will be accelerated upon the termination of the participant's
employment due to
- death, disability or retirement;
- the involuntary termination of the participant's employment during
the 90-day period following our merger with another entity;
- the voluntary termination of the participant's employment at any
time after one year following our merger with another entity; or
- a change of control.
Under the plan, a change of control is deemed to occur if any person or group
that is not a beneficial owner of our voting securities as of the date of the
adoption of the plan becomes the beneficial owner, directly or indirectly, of
our securities that represent in the aggregate 75% or more of the total combined
voting power of all classes of our then-outstanding securities. Once vested, the
shares of common stock are no longer subject to forfeiture and may be
transferred. However, the shares will continue to be subject to our call rights
and right of first refusal.
STOCK OPTIONS
When a participant in the 1997 Omnibus Stock Incentive Plan is granted a stock
option, he or she must sign a stock option grant agreement. Under the agreement
and the plan, the participant's options would become fully vested on the third
anniversary of the date the option is granted if the participant has been in our
or an affiliate's continuous employ during that three-year period. Vesting for
an option will be accelerated on the same basis as vesting is accelerated for
restricted stock awards, as discussed above. Once an option is vested, a
participant may exercise the option as provided in the plan. Options granted
under the plan will expire on the tenth anniversary of the option. After common
stock is purchased pursuant to an option, the shares will continue to be subject
to our call rights and right of first refusal.
OUTSTANDING AWARDS AND OPTIONS
As of October 31, 1999, a total of 147 shares of common stock were outstanding
under the plan. Twelve participants hold these shares, and these shares are
fully vested. We have not granted any options under the plan.
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MANAGEMENT INCENTIVE BONUSES
Designated members of our and our subsidiaries' management, including the
executive officers set forth under "--Executive Officers and Directors" above,
are eligible to receive cash bonuses in addition to their annual salary
compensation. These awards are based on the performance of these individuals, as
determined by their direct supervisors and other senior management, and our
financial performance and that of our subsidiaries. In addition, Mr. Kilgore and
Mr. Sparks are entitled to incentive bonuses as described under "--Employment
Agreements."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At a meeting of our board of directors on May 22, 1997, a compensation committee
was established. Mr. Macaulay, a former director of Anker, and Mr. Shober were
appointed members of the committee. Mr. Shober is currently the only member of
the compensation committee. The compensation committee did not hold any meetings
in 1998 or 1999. Other than Mr. Sparks, no current or former executive officer
or employee of us or any of our subsidiaries participated in deliberations of
the board of directors concerning executive officer compensation. Mr. Sparks'
compensation is established in accordance with his employment agreement. See
"--Employment Agreements" above.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the ownership of our
common stock, as of December 1, 1999, except as otherwise noted, by:
- each person known by us to own beneficially more than 5% of the
outstanding common stock
- each person who is a director or a nominee of Anker
- each person who is identified on the executive compensation table
above and
- all of our directors and executive officers as a group.
The percentage of beneficial ownership of common stock is based on 7,108 shares
outstanding as of December 1, 1999. In addition, we issued warrants to purchase
common stock in connection with the private exchange and private placement
consummated on October 28, 1999. The warrants are exercisable immediately, and
holders of these warrants are included in the following table to the extent
applicable. See "Description of Warrants."
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF SHARES
- ------------------------------------ --------- ---------
<S> <C> <C>
First Reserve Corporation
475 Steamboat Road, Greenwich, Connecticut 06830 (1) 5,407 76.07%
Anker Holding B.V. 695 9.78
P.O. Box 1334
3000 BH
Rotterdam, The Netherlands
Rothschild Recovery Fund L.P.
1251 Avenue of the Americas, New York, New York 10020 1,782(2) 20.04(2)
William D. Kilgore -- --
Thomas R. Denison -- --
John A.H. Shober -- --
Willem H. Hartog -- --
PPK Group Limited Liability Company(3) 859 12.08
P. Bruce Sparks(4) 859 12.08
Richard B. Bolen 25 0.35
Gerald Peacock 20 0.28
All executive officers and directors as 6,311 88.79
a group ((10) persons)(5)
</TABLE>
- -------------------------------------
(1) Shares of common stock shown as owned by First Reserve are owned of record
by American Oil & Gas Investors, Limited Partnership, AmGO II, Limited
Partnership, First Reserve Fund V, Limited Partnership, First Reserve Fund
V-2, Limited Partnership, First Reserve Fund VI, Limited Partnership and
First Reserve Fund VII, Limited Partnership. First Reserve is the sole
general partner of, and possesses sole voting and investment power for,
each of the funds.
(2) Represents shares issuable upon exercise of warrants. See "Description of
the Warrants."
(3) PPK Group Limited Liability Company is a limited liability company
controlled by Mr. Sparks. Mr. Sparks has the sole authority to exercise
all rights and remedies of PPK Group and all voting rights of the shares
owned by PPK Group.
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(4) Mr. Sparks may be deemed to share beneficial ownership of the shares shown
as being owned by PPK Group as a result of his ownership of voting units
of PPK Group.
(5) Includes 5,407 shares beneficially owned by First Reserve.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS' AGREEMENT
On August 12, 1996, we entered into a stockholders' agreement with holders of
our capital stock. The stockholder's agreement was amended on October 26, 1999
as part of the private restructuring of our old notes. The following is a
summary description of the stockholders' agreement, as amended. It does not
restate the entire stockholders' agreement. For a more detailed understanding of
the rights of the stockholders that are parties to the agreement, you should
read the stockholders' agreement. A copy of the stockholders' agreement is
available from us upon request.
NOMINATION OF DIRECTORS
The funds that First Reserve Corporation manages are entitled to nominate
- four of the seven members of our board of directors for as long as
they hold in the aggregate more than 50% of our issued and
outstanding common stock,
- three of the seven members of our board of directors for as long as
they hold in the aggregate more than 10% of our issued and
outstanding common stock or
- one of the seven members of our board of directors for as long as
they hold in the aggregate more than 2% of our issued and
outstanding common stock.
The stockholders' agreement also provides that PPK Group Limited Liability
Company and Anker Holding B.V. may each nominate one director for as long as it
holds at least 2% of our issued and outstanding common stock.
FUNDAMENTAL ISSUES
As long as the funds that First Reserve Corporation manages in the aggregate own
10% or more of our issued and outstanding common stock, or as long as PPK Group
in the aggregate owns 10% or more of our issued and outstanding common stock, we
may not take, and may not permit to be taken, any actions constituting a
fundamental issue without the favorable vote or written consent of at least
five-sevenths of the whole number of our directors. Fundamental issues include,
but are not limited to,
- the sale, lease or exchange of 50% or more of our assets;
- any merger, consolidation, liquidation or dissolution;
- any amendment to our certificate of incorporation;
- the authorization, issuance or sale of shares of our capital
stock, any other type of equity or debt securities or options,
warrants or other rights to acquire equity or debt securities,
except issuances upon conversion of our convertible securities
issued prior to the date of the stockholders' agreement and
issuances to key members of our management under a stock
purchase, stock option or similar plan;
- any redemption, repurchase or other acquisition of our capital
stock or other equity securities, including any option,
warrant or other right to acquire our capital stock or other
equity securities, except purchases or redemptions under the
terms of securities issued prior to the date of the
stockholders' agreement; and
- entering into or engaging in business or entering into any
transactions with any stockholder that is a party to the
stockholders' agreement or any affiliate of those
stockholders, except for our inter-company transactions and
transactions at arm's length and in the ordinary course of
business involving the sale, purchase, exchange or trading of
coal or coal-related products.
In the event the funds that First Reserve manages own in the aggregate 50% or
less of our issued and outstanding common stock and for as long as those funds
in the aggregate own at least 10% of our issued and outstanding common stock,
each of the following additional actions will be fundamental issues:
- any sale, lease, exchange, transfer or disposition by us of (1) any
outstanding capital stock or other equity security of any of our
subsidiaries or (2) assets or other rights for consideration in
excess of $2.0 million, other than dispositions in the ordinary
course of business;
- any purchase, lease, exchange or other acquisition of assets or
other rights, including securities, by us for consideration in
excess of $2.0 million;
- any financing, refinancing or other incurrence of indebtedness by us
with a principal amount in excess of $2.0 million;
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- any capital expenditure by us not provided in an annual budget for
our then-current fiscal year approved by our board of directors in
accordance with specified procedures if the expenditure is either
(1) in excess of $1.0 million or (2) together with the aggregate of
all of our and our subsidiaries other non-budgeted capital
expenditures in the fiscal year, in excess of $2.0 million;
- any amendment to or modification or repeal of any provision of our
by-laws which would materially alter the rights of any of the
stockholders that are parties to the stockholders' agreement;
- any amendment to the employment agreement of Bruce Sparks;
- dissolution of Anker Coal Group, the adoption of a plan of
liquidation with respect to Anker Coal Group, or any action by us to
commence a bankruptcy, receivership or similar proceeding;
- the investment of additional funds in, or extension of additional
credit to, Anker Capital Corporation or any subsidiary of Anker
Capital Corporation or other investment; and
- our entry, other than through Anker Capital Corporation, into any
business other than mining, processing, shipping, purchasing and
selling coal.
Furthermore, if we redeem, repurchase or otherwise acquire our capital stock or
other of our equity securities, or any option, warrant or other right to acquire
capital stock or other equity securities, from any stockholder that is a party
to the stockholder's agreement or its affiliate, except purchases or redemptions
under the terms of securities issued prior to the date of the stockholders'
agreement, the redemption, repurchase or acquisition, and any transactions
relating the redemption, repurchase or acquisition, must be approved by a
majority of our board of directors, excluding for these purposes any director
nominated by a stockholder that is a party to the stockholders' agreement and is
interested in the transaction being approved.
NON-COMPETITION
Each stockholder that is a party to the stockholders' agreement must prevent
entities under its control from engaging in specified activities that are
competitive with our business. In addition, if any of these stockholders becomes
aware of an existing or potential business opportunity in one of these
activities, the stockholder must offer the opportunity to us on an exclusive
basis.
ANTI-DILUTION
If we issue any equity securities of any type, class or series, then we must
offer all stockholders that are parties to the stockholders' agreement the right
to purchase a portion of the securities on the same terms and conditions as we
are offering to the purchaser of the securities. However, this right does not
apply in the case of
- issuances of Class C preferred stock and Class D preferred stock,
- securities offered to the public in an initial public offering,
- issuances upon conversion of our convertible securities issued prior
to the date of the stockholders' agreement,
- issuances to key members of our management under a stock purchase,
stock option or similar plan,
- any issuance of securities as consideration in connection with an
acquisition and
- except with respect to Anker Holding, issuances of common stock in
satisfaction of specified pre-existing contractual obligations.
Each stockholder will be entitled to purchase that percentage of the
newly-issued securities equal to
- if the newly-issued securities are of a type, class or series
previously issued, the stockholder's percentage ownership of the
total outstanding number of the previously-issued securities, or
- in all other events, the stockholder's percentage ownership of the
total outstanding number of shares of common stock.
RESTRICTIONS ON DISPOSITIONS OF STOCK
The stockholders that are parties to the stockholders' agreement may not
transfer any shares of common stock except in accordance with the stockholders'
agreement. Restrictions on dispositions of stock include the following
provisions:
- Lock-Up Period. Prior to August 12, 2001, except for specified
permitted transfers set forth in the stockholders' agreement, no
stockholder may transfer any shares without the prior written
approval of all the other stockholders that are parties to the
stockholders' agreement.
- Right of First Refusal. Beginning on August 12, 2001, if a
stockholder receives a bona fide offer to purchase any or all of its
shares of capital stock and wishes to accept the offer, we and the
remaining stockholders that are parties to the
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stockholders' agreement have the opportunity to purchase the shares
offered at the same price per share and on the same terms and
conditions as the offer the stockholder received.
- Tag Along Rights. Except with respect to specified permitted
transfers and in connection with an initial public offering of our
common stock, each stockholder has the right to participate in the
sale of common stock by another stockholder that is a party to the
stockholders' agreement to any third party at the same price per
share and on the same terms and conditions as the stockholder
initiating the sale to the third party.
SALES OF SHARES
In the event of the death, total disability, retirement after age 60 or
termination of employment of Bruce Sparks, we have obligations and rights to
purchase shares of capital stock that PPK Group owns. If Mr. Sparks dies, we are
required to use all proceeds from the "key man" life insurance policy we
maintain with respect to Mr. Sparks to purchase shares of capital stock that PPK
Group owns at fair market value. The indentures governing our notes would permit
this repurchase as an exception to the limitation on restricted payments. See
"Description of the New Notes--Covenants--Limitation on Restricted Payments."
During the eight months following the death of Mr. Sparks, we would have the
option to purchase all, but not some, of the shares PPK Group owns at fair
market value and, during the 120-day period following expiration of the
eight-month period, PPK Group would have the right to require us to purchase
shares PPK Group owns at fair market value. In the event of the total
disability, retirement after age 60 or termination of employment other than for
cause, prior to August 12, 2001, of Mr. Sparks, we have the option, for a period
of time ranging from three months to nine months depending upon the
circumstances, to purchase all, but not some, of the shares of capital stock PPK
Group holds at fair market value. In the event of termination of Mr. Sparks'
employment for cause prior to August 12, 2001, we have the option, for a period
of one year, to purchase the shares of common stock PPK Group holds for the
lower of book value and fair market value.
In the event of a change of control of any stockholder that is a party to the
stockholders' agreement, we have the right but not the obligation, for a period
of 60 days after we become aware of the change of control, to purchase all of
the stockholder's shares of capital stock at fair market value.
SALE OF ALL OF OUR COMMON STOCK
After August 12, 2001, under specified circumstances, the funds that First
Reserve Corporation manages may compel all stockholders that are parties to the
stockholders' agreement to participate in the sale of all of our outstanding
common stock to a buyer or buyers that are not our affiliates or affiliates of
any of the stockholders that are parties to the stockholders' agreement. Until
the earlier to occur of an initial public offering of our common stock and
October 30, 2002, however, any sale of a majority of our common stock must be
approved by holders of at least 85% of our outstanding common stock. All shares
of common stock will be sold at an identical price and on identical terms. In
addition, a sale may only be consummated if the buyer or buyers either redeem or
purchase the Class A preferred stock and Class B preferred stock.
REGISTRATION RIGHTS
At any time following an initial public offering of our common stock, upon the
written request of PPK Group, Anker Holding B.V. or the funds that First Reserve
Corporation manages, we are required, as expeditiously as possible, to use our
best efforts to effect the registration, under the Securities Act, of the shares
of common stock outstanding as of August 12, 1996 or the common stock that any
of PPK Group, Anker Holding or the funds that First Reserve Corporation manages
acquired after that date.
INVESTOR AGREEMENT
In connection with the private restructuring of our old notes, we entered into
an investor agreement with the stockholders that are parties to the
stockholders' agreement and the initial holders of our warrants. Some of the
parties to the investor agreement, including the funds that First Reserve
Corporation manages, PPK Group, Anker Holding B.V. and Rothschild Recovery Fund,
L.P., are each beneficial owners of more than 5% of our fully-diluted common
stock. The investor agreement contains provisions regarding tag along rights,
restrictions on dispositions of shares of common stock issued upon exercise of
warrants and restrictions on mergers and sales of assets and stock. For a more
complete summary of the investor agreement, please see "Description of Warrants
- -- Investor Agreement."
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TRANSACTIONS WITH RELATED PARTIES
Anker Holding B.V., through parties related to it, purchases coal from us for
its trading operations. These purchases are at prices that we believe are no
less favorable to us then those that we would have obtained in a comparable
transaction with an unrelated person. These purchases amounted to $100,000 in
1998, $9.7 million in 1997 and $16.2 million in 1996.
In February 1998, one of our subsidiaries sold its ownership interest in
Anker-Alabama, L.L.C., which indirectly owned an interest in Oak Mountain, to a
party related to Anker Holding B.V. for one dollar. We had tried but were
unsuccessful in selling our investment to unrelated parties during December 1997
and January and February 1998. We recorded an impairment loss of $8,267,000 to
adjust our investment to its fair market value less cost to sell as of December
31, 1997.
On October 28, 1999, we issued $6.0 million principal amount of notes to JJF
Group in exchange for cancellation of all of our shares of common stock that JJF
Group owned and JJF Group's relinquishment of its rights under a put agreement
entered into in August 1998. The put agreement required us to purchase the
shares of our common stock that JJF Group owned in installments over time for a
total of approximately $10.5 million. As part of the October 28, 1999 private
restructuring transaction, JJF Group ceased to be a party to the stockholders'
agreement.
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THE EXCHANGE OFFER
BACKGROUND AND PURPOSE OF THE EXCHANGE OFFER
On September 25, 1997, we issued in a private placement $125 million of
unsecured 9 3/4% Series A Senior Notes due 2007. In February 1998, we registered
the old notes under the Securities Act and exchanged the old notes for our
outstanding 9 3/4% Series A Senior Notes due 2007. The old notes are currently
freely transferable.
We recorded a net loss of approximately $106.6 million for the year ended
December 31, 1998 and approximately $16.0 million for the nine months ended
September 30, 1999. The net losses include a loss on impairment of investment
and restructuring charges of approximately $90.7 million for the year ended
December 31, 1998, and approximately $4.5 million for the nine months ended
September 30, 1999. The opinion of our independent public accountants with
respect to our consolidated financial statements for the period ended December
31, 1998 includes an explanatory paragraph about our ability to continue as a
going concern.
We were obligated to make a semi-annual interest payment on the old notes in the
approximate amount of $6.1 million on April 1, 1999. We elected to defer making
the interest payment at that time. On April 29, 1999, before the expiration of
the grace period under the indenture governing the old notes, we made the
interest payment due on the old notes.
In late 1998, we developed a plan to improve our operating performance and
improve our short and long-term liquidity. The plan has four objectives:
- obtain more flexible senior financing;
- improve cash flow from operations;
- raise cash by selling selected assets; and
- reduce our debt and secure additional liquidity.
For a discussion of our efforts in achieving the first three objectives of the
business plan, see "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Liquidity and Capital Resources -- Business Plan."
The fourth and final objective of the plan involves reducing our overall debt
level and securing additional liquidity. We believe that this objective of the
plan will be achieved in part through the success of the other objectives of the
plan. This objective has also been furthered, in part, through our consummation,
on October 28, 1999, of a private restructuring of our old notes, a private
placement to raise additional capital and a private stockholder exchange. These
transactions originated in discussions that we began in January 1999 with
Rothschild Recovery Fund L.P., which advised us that it was the beneficial owner
of approximately 33% of the outstanding principal amount of the old notes,
regarding a possible restructuring of the old notes. These discussions
contemplated a possible private sale of additional secured notes in order to
fund interest payments on the restructured notes. In addition, we discussed
issuing equity securities to Rothschild as a part of the new financing. On March
1, 1999, we hired Gordian Group, L.P. as our financial advisor to assist us in
evaluating alternatives for restructuring the old notes.
The transaction we initially discussed with Rothschild was aimed primarily at
reducing our outstanding debt by offering a limited number of qualified holders
of old notes an incentive, in the form of collateral and advance funding of two
semi-annual interest payments, to exchange their old notes for a smaller
principal amount of new notes. In the course of those discussions, however, we
determined to seek funding of a third semi-annual interest payment and
additional liquidity to implement our business plan and meet working capital
needs. We were able to address our short-term liquidity needs on an interim
basis, until the private exchange, the private stockholder exchange and the
private placement were consummated, by entering into an amendment to our loan
agreement with Foothill on August 27, 1999. Under the amendment, Foothill and
the other lenders agreed to provide us with up to $3.25 million of additional
liquidity, $2.0 million of which we would have had to repay, if drawn, on or
before November 2, 1999. See "Description of Other Indebtedness -- Credit
Facility."
In addition, under an agreement we entered into with JJF Group Limited Liability
Company in August 1998, we were obligated to repurchase in installments over a
three-year period up to 2,026 shares of our common stock for an aggregate
purchase price of approximately $10.5 million, including accrued interest, from
JJF Group. JJF Group is an entity controlled by the estate of John J. Faltis,
our former President and Chief Executive Officer who was killed in a helicopter
accident in October 1997. We had previously purchased a portion of these shares
but remained obligated to buy back the following additional amounts of our
common stock for the prices and on the dates specified:
- 305 shares for $1.505 million plus accrued interest from August 1,
1998 at the rate of 5.63% per year on August 1, 1999, for which JJF
Group exercised its put right on July 20, 1999;
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- 325 shares for $1.604 million plus accrued interest from August 1,
1999 at a per year rate equal to the "blended annual rate" published
by the Internal Revenue Service on August 1, 2000; and
- 1,396 shares for $6.891 million plus accrued interest from August 1,
2000 at a per year rate equal to the "blended annual rate" published
by the Internal Revenue Service on August 1, 2001.
On July 20, 1999, JJF Group exercised its right to require us to purchase 305
shares of our common stock it held for an aggregate price of approximately $2.1
million including interest. Closing of the purchase with respect to the put
right exercised on July 20, 1999 was initially scheduled to occur on August 15,
1999 and was subsequently extended to September 30, 1999 and then to October 29,
1999. We and JJF Group entered into negotiations regarding a possible
restructuring of JJF Group's rights under the put agreement, and that
restructuring took the form of JJF Group's participation in the private
stockholder exchange.
After further negotiations with Rothschild, the transaction originally discussed
with Rothschild and previously described in our SEC filings was modified to
provide for our issuance of a series of new notes, the majority of which we
would issue in exchange for old notes and a portion of which we would sell to
(1) Rothschild in a private placement for cash to provide working capital for
our use and (2) JJF Group in exchange for the cancellation of our common stock
that JJF Group held and JJF Group's relinquishment of its right to require us to
buy that stock over time for approximately $10.5 million, including accrued
interest.
Thus, in the private restructuring that was consummated on October 28, 1999, a
limited number of qualified noteholders identified in advance exchanged $108.5
million in principal amount of old notes they held for $86.8 million in
principal amount of our 14.25% Series A Second Priority Senior Secured Notes due
2007 (PIK through April 1, 2000), which represents $800 in aggregate principal
amount of our 14.25% Series A notes for each $1,000 aggregate principal amount
of old notes exchanged. Exchanging noteholders waived their right to receive the
October 1, 1999 interest payment on the old notes, and they also received
warrants to purchase an aggregate of 20% of our fully diluted common stock at an
initial exercise price of $0.01 per share. See "Description of the Warrants." We
believe the exercise price represents the fair value of the warrants at the
issue date. In connection with the private exchange, the exchanging holders
consented to amendments to the indenture governing the old notes, which, among
other things, modify or eliminate various covenants of that indenture. See
"Description of the Old Notes." In the private placement, we raised $11.2
million in cash through the sale to Rothschild Recovery Fund, also one of the
exchanging noteholders, of $13.2 million principal amount of our 14.25% Series A
notes and warrants to purchase 10% of our fully diluted common stock at an
initial exercise price of $0.01. In the private stockholder exchange, we issued
$6.0 million in aggregate principal amount of our 14.25% Series A notes to JJF
Group in exchange for cancellation of the shares of our common stock that JJF
Group owned and JJF Group's relinquishment of its right to require us to buy
that stock over time for approximately $10.5 million, including accrued
interest. On December 3, 1999, we filed a registration statement with the SEC on
Form S-4 in order to exchange the 14.25% Series A Notes we issued in the private
restructuring for registered notes of the same class as the new notes.
In addition, Rothschild has agreed to purchase, at our option and subject to
various conditions, including the absence of a material adverse change or
material liens on the collateral securing the 14.25% notes arising after the
closing of the private placement, additional new notes to fund up to $6.3
million of the October 1, 2000 interest payment on the notes. Our ability to
service our long-term debt on October 1, 2000 and beyond will depend upon a
variety of factors, some of which are beyond our control.
The private restructuring transactions reduced the stated principal amount of
our long-term debt by $21.7 million, and we eliminated approximately $4.0
million of additional obligations through the transaction with JJF Group.
However, the additional principal amount of notes issued in the private
placement to Rothschild and the notes to be issued in lieu of the April 1, 2000
interest payment will partially offset the principal reduction accomplished in
the private restructuring transactions. That principal reduction will also be
offset if we issue notes to Rothschild in connection with the October 1, 2000
interest payment as discussed above.
We determined to conduct the private exchange, the private stockholder exchange
and the private placement as private transactions with a limited group of
qualified investors identified in advance in order to complete the transactions
as promptly as possible. We are making this exchange offer to holders of old
notes not included in the private exchange on the terms discussed below in order
to give you the opportunity to exchange your old notes for new notes in a public
exchange.
TERMS OF THE EXCHANGE
We offer, upon the terms and subject to the conditions set forth in this
offering memorandum and in the accompanying letter of transmittal, to exchange
up to $13,196,000 in aggregate principal amount of 14.25% Series B Second
Priority Senior Secured Notes due 2007 (PIK through April 1, 2000) for up to
$16,495,000 in aggregate principal amount of our outstanding 9 3/4% Series B
Senior Notes due 2007. The new notes will be issued under, and entitled to the
benefits of, an indenture dated as of October 1, 1999, among us, our
subsidiaries that have guaranteed our obligations under the new notes and The
Bank of New York, as trustee. Exchanging
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<PAGE> 76
noteholders will receive $743 principal amount of new notes for each $1,000
principal amount of old notes exchanged. Interest on the new notes will accrue
at the rate of 14.25% per year. We will pay the interest payment on the new
notes due on April 1, 2000 by issuing $71.25 principal amount of new notes,
instead of cash, for each $1,000 principal amount of new notes on that date.
Holders exchanging old notes for new notes in the exchange offer will be
entitled to receive interest on the new notes accruing from October 1, 1999, but
we will have no obligation to pay any interest that has accrued since October 1,
1999 on the old notes exchanged. The new notes will be secured by a security
interest, junior to the liens securing our senior credit facility, in
substantially all of our assets. See "Description of the New Notes" for a
detailed description of the terms of the new notes and "Comparison of the
Indentures" for a table comparing various provisions of the indentures governing
the old notes and the new notes.
We will exchange new notes for old notes properly tendered on or prior to the
expiration date and not properly withdrawn in accordance with the procedures
described below. We will issue the new notes promptly after the expiration date,
and the additional new notes in payment of the April 1, 2000 interest payment on
the new notes will be issued when due. The exchange offer is not conditioned
upon any minimum principal amount of old notes' being tendered.
The exchange offer is not being made to, and we will not accept tenders for
exchange from, holders of old notes in any jurisdiction in which the exchange
offer or the acceptance of the offer would not be in compliance with the
securities or blue sky laws of that jurisdiction.
Old notes that are not tendered for, or are tendered but not accepted, will
remain outstanding and be entitled to the benefits of the indenture governing
the old notes, as amended effective October 1, 1999.
We will be considered to have accepted validly tendered old notes if and when we
give oral or written notice to the exchange agent. The exchange agent will act
as the tendering holders' agent for purposes of receiving the new notes from us.
If we do not accept any tendered old notes for exchange because of an invalid
tender or the occurrence of other events, the exchange agent will return the
certificates for unaccepted old notes, without expense, to the tendering holder
promptly after the expiration date, or, if unaccepted old notes are
uncertificated, those securities will be returned, without expense to the
tendering holder, promptly after the expiration date via book entry transfer.
Our board of directors does not make any recommendation to holders of old notes
as to whether or not to tender all or any portion of their old notes. In
addition, no one has been authorized to make any recommendation. Holders of old
notes must make their own decision whether to tender their old notes and, if so,
the amount of old notes to tender.
EXPIRATION DATE
The expiration date for the offer is 5:00 p.m., New York City time, on ,
unless we extend the exchange offer. In that case, the expiration date
will be the latest date and time to which the exchange offer is extended.
CONDITIONS; EXTENSIONS; AMENDMENTS
The exchange offer is not subject to any conditions other than that the offer
does not violate applicable law or any applicable interpretations of the SEC
staff. The offer is not conditioned upon any minimum principal amount of old
notes' being tendered.
We reserve the right in our sole discretion:
- to delay the acceptance of the old notes for exchange,
- to terminate the exchange offer,
- to extend the expiration date and retain all old notes that have
been tendered, subject, however, to the right of holders of old
notes to withdraw their tendered notes, and
- to waive any condition or otherwise amend the terms of the exchange
offer in any respect.
If we amend the exchange offer in a manner we consider material, or if we waive
a material condition of the exchange offer, we will promptly disclose the
amendment by means of a supplement to the offering memorandum, and we will
extend the exchange offer for a period of five to ten business days.
Following any delay in acceptance, extension, termination or amendment, we will
notify the exchange agent and make a public announcement. In the case of an
extension, we will make the announcement no later than 9:00 a.m., New York City
time, on the next
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<PAGE> 77
business day after the previously scheduled expiration date. We will communicate
any public announcement by issuing a release to an appropriate news agency.
PROCEDURES FOR TENDERING OLD NOTES
To tender in the exchange offer, a holder must, unless the tender is being made
in book-entry form,
- complete, sign and date the letter of transmittal, or a facsimile of
it,
- have the signatures guaranteed if required by the letter of
transmittal and
- mail or otherwise deliver the letter of transmittal or the
facsimile, the old notes and any other required documents to The
Bank of New York, which is the exchange agent, prior to 5:00 p.m.,
New York City time, on the expiration date.
Any financial institution that is a participant in The Depository Trust
Company's Book-Entry Transfer Facility system may make book-entry delivery of
the old notes by causing DTC to transfer the old notes into the exchange agent's
account. Although delivery of old notes may be effected in this way, the letter
of transmittal, or facsimile, with any required signature guarantees and any
other required documents must be transmitted to and received or confirmed by the
exchange agent at its addresses set forth under "--Exchange Agent," below, prior
to 5:00 p.m., New York City time, on the expiration date. Delivery of documents
to DTC in accordance with its procedures does not constitute delivery to the
exchange agent.
A holder's tender of old notes will constitute an agreement between us and the
holder to the terms and subject to the conditions set forth in this offering
memorandum and in the letter of transmittal.
The method of delivery of old notes and the letter of transmittal and all other
required documents to the exchange agent is at the election and risk of the
holders. Instead of delivery by mail, we recommend that holders use an overnight
or hand delivery service. In all cases, holders should allow sufficient time to
assure delivery to the exchange agent before the expiration date. No letter of
transmittal of old notes should be sent to us.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the tenders for them. Any beneficial owner whose
old notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should contact the registered
holder promptly and instruct the registered holder to tender on behalf of the
beneficial owner. If the beneficial owner wishes to tender on that owner's own
behalf, the owner must, prior to completing and executing the letter of
transmittal and delivery of the owner's old notes, either make appropriate
arrangements to register ownership of the old notes in the owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signature on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution within the meaning of Rule
17Ad-15 under the Securities Exchange Act, unless the old notes are tendered
- by a registered holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on
the letter of transmittal, or
- for the account of an eligible guarantor institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, the guarantee must be by
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.,
- a commercial bank or trust company having an office or correspondent
in the United States or
- an eligible guarantor institution.
If the letter of transmittal for any old notes is signed by a person other than
the registered holder, the old notes must be endorsed by the registered holder
or accompanied by a properly completed bond power, in each case signed or
endorsed in blank by the registered holder. If the letter of transmittal or any
old notes or bond powers are signed or endorsed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, they should so indicate when
signing. In addition, these persons must submit evidence satisfactory to us of
their authority to act in that capacity with the letter of transmittal. We can
waive this requirement.
We will determine in our sole discretion all questions as to the validity, form,
eligibility, including time of receipt, and acceptance and withdrawal of
tendered old notes. We reserve the absolute right to reject any and all old
notes not properly tendered or any old notes whose acceptance by us would, in
the opinion of our counsel, be unlawful. We also reserve the right to waive any
defects,
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<PAGE> 78
irregularities or conditions of tender as to any particular old notes either
before or after the expiration date. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of old notes must be cured
within a time period we will determine. Although we intend to request the
exchange agent to notify holders of defects or irregularities relating to
tenders of old notes, neither we, the exchange agent nor any other person will
have any duty or incur any liability for failure to give that notification.
Tenders of old notes will not be considered to have been made until any defects
or irregularities have been cured or waived. Any old notes that the exchange
agent receives which are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
GUARANTEED DELIVERY PROCEDURES
Holders that wish to tender their old notes and:
- whose old notes are not immediately available;
- that cannot deliver their old notes, the letter of transmittal or
any other required documents, to The Bank of New York, which is the
exchange agent; or
- that cannot complete the procedures for book-entry transfer, prior
to the expiration date,
may effect a tender if:
(1) the tender is made through a firm that is a member of a registered
national securities exchange or of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company
having an office or correspondent in the United States;
(2) prior to the expiration date, the exchange agent receives from an
institution listed in clause (1) above a properly completed and duly
executed notice of guaranteed delivery, by facsimile transmission,
mail or hand delivery, setting forth the name and address of the
holder, the certificate number(s) of the old notes and the principal
amount of old notes tendered, stating that the tender is being made
this way and guaranteeing that, within three New York Stock Exchange
trading days after the expiration date, the letter of transmittal,
or a facsimile of it, together with the certificate(s) representing
the old notes, or a confirmation of book-entry transfer of the old
notes into the exchange agent's account at the book-entry transfer
facility, and any other documents required by the letter of
transmittal, will be deposited by the institution with the exchange
agent; and
(3) the exchange agent receives, no later than three New York Stock
Exchange trading days after the expiration date, the certificate(s)
representing all tendered old notes in proper form for transfer, or
a confirmation of book-entry transfer of the old notes into the
exchange agent's account at the book-entry transfer facility,
together with a letter of transmittal, or a facsimile of it,
properly completed and duly executed, with any required signature
guarantees, and all other documents required by the letter of
transmittal.
Holders that wish to tender their old notes according to the guaranteed delivery
procedures set forth above may request that the exchange agent send them a
notice of guaranteed delivery.
WITHDRAWAL RIGHTS
Except as otherwise provided in this offering memorandum, tenders of old notes
may be withdrawn at any time on or prior to 5:00 p.m., New York City time, on
the expiration date.
For a holder to withdraw a tender of old notes, the exchange agent must receive
a written or facsimile transmission notice of withdrawal at its address below
before 5:00 p.m., New York City time, on the expiration date. Any notice of
withdrawal must
- specify the name of the person who deposited the old notes to be
withdrawn;
- identify the old notes to be withdrawn, including the certificate
number or numbers and principal amount of the old notes;
- be signed by the depositor in the same manner as the original
signature on the letter of transmittal by which the old notes were
tendered, including any required signature guarantees, or be
accompanied by documents of transfer sufficient to have the trustee
register the transfer of the old notes into the name of the person
withdrawing the tender; and
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<PAGE> 79
- specify the name of which any withdrawn old notes are to be
registered, if different from that of the depositor.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of withdrawal notices. Any old notes so withdrawn
will be considered not to have been validly tendered for purposes of the
exchange offer, and no new notes will be issued unless the old notes withdrawn
are validly re-tendered. Any old notes that have been tendered but that are not
accepted for exchange or that are withdrawn will be returned to the holder
without cost to the holder as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn old notes may be
re-tendered by following one of the procedures described above under the caption
"Procedures for Tendering" at any time prior to the expiration date.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. Delivery of the letter of transmittal and any other required documents,
questions, requests for assistance, requests for additional copies of this
offering memorandum or of the letter of transmittal and requests for notice of
guaranteed delivery should be directed to the exchange agent as follows:
<TABLE>
<CAPTION>
BY OVERNIGHT COURIER OR BY FACSIMILE TO CONFIRM BY TELEPHONE
BY HAND DELIVERY: REGISTERED/CERTIFIED MAIL: TRANSMISSION: OR FOR INFORMATION:
<S> <C> <C> <C>
The Bank of New York The Bank of New York (212) 815-6339 (212) 815-6331
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
Ground Level Attn: Reorganization Unit -- 7E
Corporate Trust Services Window
Attn: Reorganization Unit -- 7E
</TABLE>
Delivery other than to the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay other expenses to be incurred in
the exchange offer, including the fees and expenses of the exchange agent,
accounting fees and legal fees. Holders who tender their old notes for exchange
will not be obligated to pay any transfer taxes. If, however, new notes are to
be delivered to, or issued in the name of, any person other than the registered
holder of the old notes tendered, tendered old notes are registered in the name
of any person other than the person signing the letter of transmittal or a
transfer tax is imposed for any reason other than the exchange of old notes in
connection with the exchange offer, then the amount of any transfer taxes,
whether imposed on the registered holder or any other persons, will be payable
by the tendering holder. If satisfactory evidence of payment of these taxes or
exemption from them is not submitted with the letter of transmittal, the amount
of these transfer taxes will be billed directly to the tendering holder.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as that of the old
notes as reflected in our accounting records on the date of the exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes upon
completion of the exchange offer.
We recorded the private placement, the private exchange and the private
stockholder exchange in accordance with FAS-15 "Accounting By Debtors and
Creditors For Troubled Debt Restructurings." We also expect to record this
exchange offer in accordance with FAS-15. In the private exchange and this
exchange offer, the carrying amount of $125.0 million principal amount of old
notes and the accrued and unpaid interest of approximately $6.1 million will be
compared to the principal and interest payments on the new notes over time. To
the extent the carrying amount is less than the interest and principal on the
old notes, we will adjust the carrying amount. We do not expect to change our
carrying amount in connection with the private exchange and this exchange offer.
These transactions have tax ramifications that we expect to result in the
recording of income tax expense on our financial statements. See "Risk
Factors--Risks Related to Anker--We could have income tax liability as a result
of the restructuring of our old notes in this exchange offer and in the private
exchange."
The issuance of 14.25% notes for cash in the private placement is expected to
result in financial statement recognition of original issue discount. This
discount will be accreted over the term of the notes. We recorded the private
stockholder exchange in a manner similar to the private exchange described
above. All of these transactions will have an effect on our recorded annual
interest expense.
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<PAGE> 80
In connection with the accounting treatment for the private stockholder
exchange, we recorded the notes we issued at their face value. The difference
between the notes and the common stock available for repurchase, including
current portion, increased paid-in capital.
CONSEQUENCES OF FAILURE TO EXCHANGE
Old notes not exchanged in this exchange offer will continue to remain
outstanding in accordance with their terms. Participation in the exchange offer
is voluntary, and eligible holders of old notes should carefully consider
whether to participate. We urge holders of old notes to consult their financial
and tax advisors in making their own decision on what action to take.
Unexchanged old notes will continue to be unsecured. Except with respect to
property, if any, of us or the subsidiaries guaranteeing our obligations under
the old notes which is not subject to the liens of secured creditors, in a
default situation unexchanged old notes will be effectively subordinate in right
of payment to all of our current and future secured senior indebtedness,
including the new notes, all of our other 14.25% notes and our loan agreement
with Foothill.
Because 86.6% of the old notes were exchanged in the private exchange offer, and
to the extent that old notes are exchanged in this exchange offer, the trading
market for unexchanged old notes could be adversely affected.
Whether or not the exchange offer is effected, we may in the future seek to
acquire unexchanged old notes in open market or privately negotiated
transactions, through subsequent private exchanges or otherwise.
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<PAGE> 81
COMPARISON OF THE INDENTURES
The following table contains a summary comparison of the material provisions of
the indenture governing the old notes, as amended effective as of October 1,
1999, and the indenture governing the new notes. This section contains a summary
of the material terms of these indentures. It does not restate the indentures in
their entirety. We urge you to read the indentures because they, and not this
description, define the rights of noteholders under each indenture. You may
obtain copies of the indentures from us.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SECTION OLD NOTES INDENTURE NEW NOTES INDENTURE
------- ------------------- -------------------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OBLIGOR Anker Coal Group, Inc. Same as old notes indenture
- ------------------------------------------------------------------------------------------------------------------------------
TRUSTEE HSBC Bank USA The Bank of New York
- ------------------------------------------------------------------------------------------------------------------------------
MATURITY October 1, 2007 September 1, 2007
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE 9 3/4% 14.25%
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST PAYMENT DATES April 1 and October 1 Same as old notes indenture
- ------------------------------------------------------------------------------------------------------------------------------
GUARANTORS All wholly-owned subsidiaries Same as old notes indenture
- ------------------------------------------------------------------------------------------------------------------------------
RANKING The old notes are unsecured The new notes are secured by a lien, junior to the
obligations and rank pari passu liens securing our credit facilities, on
with all of our existing and substantially all of our assets and those of the
future unsecured and subsidiaries guaranteeing the new notes, other
unsubordinated indebtedness. than excluded assets and real property located in
Maryland. Excluded assets refers to (1) mobile
equipment, (2) cash and cash equivalents, other
than cash that comes into possession of the
trustee for the new notes in which there will be a
security interest, and (3) other coal reserves and
those interests in real property and related
improvements and fixtures located in West Virginia
that currently cannot be used in our mining
operations. If and when we grant liens on the
Maryland real property to secure our loan
agreement with Foothill, we will grant junior
liens on the same property to secure the new
notes.
As secured obligations, the new notes have priority
in right of payment from proceeds of collateral over
all unsecured obligations. Because the lien securing
the new notes is a junior lien, the new note holders'
right of payment from proceeds of collateral is
junior to the rights of holders of all prior liens,
including liens securing our loan agreement and all
other senior secured indebtedness.
- ------------------------------------------------------------------------------------------------------------------------------
OPTIONAL - Prior to October 1, 2000, we can - On or before September 30, 2000,
REDEMPTION redeem up to 35% of the old we can redeem new notes at 104%
notes from proceeds of an of par;
initial public - offering at
109.75% of par; - from October 1, 2000 through
September 30, 2001, we can
redeem new notes at 103% of
</TABLE>
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<PAGE> 82
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SECTION OLD NOTES INDENTURE NEW NOTES INDENTURE
------- ------------------- -------------------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
par;
- from October 1, 2002 through
September 30, 2003, we can - from October 1, 2001 through
redeem old notes at 104.875% of September 30, 2002, we can
par; redeem new notes at 102% of par;
- from October 1, 2003 through - from October 1, 2002 through
September 30, 2004, we can September 30, 2003, we can
redeem old notes at 103.250% of redeem new notes at 101% of par;
par; and
- from October 1, 2004 through - from and after October 1, 2003,
September 30, 2005, we can we can redeem new notes at 100%
redeem old notes at 101.625% of of par.
par; and
- from and after October 1, 2005,
we can redeem old notes at par.
- ------------------------------------------------------------------------------------------------------------------------------
MANDATORY None - From 60% of proceeds of permitted asset
REDEMPTION sales in excess of $1.0 million that are not
used within 120 days (1) to reduce senior
secured indebtedness permanently, (2) at a
time when all senior secured indebtedness
has been repaid in full, to purchase 14.25%
notes in the market, (3) to fund capital
expenditures in connection with our coal
mining business and that of the subsidiaries
guaranteeing the new notes in the ordinary
course of business or to reimburse these
capital expenditures made in the 120 days
immediately preceding our receipt of these
proceeds at par; or
- upon the occurrence of a change of control,
at 101% of par.
- ------------------------------------------------------------------------------------------------------------------------------
SECURITY None Secured by a lien, junior to the liens
securing our credit facilities and other
specified permitted liens, on substantially
all of our and the assets of our
subsidiaries guaranteeing the new notes,
subject to no-assignment provisions, other
than excluded assets and real property
located in Maryland. If and when we grant
liens on our Maryland real property to
secure the loan agreement with Foothill, we
will grant junior liens on the same property
to secure the new notes.
- ------------------------------------------------------------------------------------------------------------------------------
SINKING FUND None None
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 83
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE OF We will not be required to offer to redeem old We are required to offer to redeem new notes at 101% of
CONTROL notes upon a change of control. par upon a change of control. However, changes in our
board of directors and acquisition of less than 80% of our
stock by a person other than a permitted holder will not
constitute a change of control.
- ------------------------------------------------------------------------------------------------------------------------------------
COVENANTS The indenture governing the old notes restricts our Same as old notes indenture, plus covenants (1)
ability and that of most of our subsidiaries to (1) restricting the use of asset sale proceeds, (2) requiring
pay dividends, repurchase stock and make other prepayment upon the occurrence of a change of control and
restricted payments unless specified conditions are (3) pertaining to the secured status of the new notes.
met; (2) incur specified kinds of indebtedness, (3)
engage in various transactions with affiliates; or
(4) incur liens other than permitted liens. The
holders of a majority of the outstanding old notes
are able to waive or amend most of these
restrictions.
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATIONS We can consolidate, merge or sell substantially all We can consolidate, merge or sell substantially all of
MERGERS AND of our assets without the consent of the holders of our assets without the consent of the holders of the new
ASSET SALES the old notes if we meet specified conditions. We notes if we meet specified conditions. Consolidation,
will not be required to offer to repurchase old merger or sale of substantially all our and our
notes in connection with any merger, consolidation subsidiaries' assets constitutes a change of control,
or sale of substantially all our assets. which requires that we offer to redeem the new notes at
101% of par.
- ------------------------------------------------------------------------------------------------------------------------------------
EVENTS OF - Failure to pay interest for 30 days; Same as old notes indenture, plus cross-default with
DEFAULT documents creating the liens securing the new notes.
- failure to pay principal when due;
- consolidation, merger or sale of our assets
in violation of the indenture;
- breach of any other provision of the
indenture that continues uncured for 60 days
after notice;
- a payment default under any other indebtedness
for borrowed money or a non-monetary default
that results in the acceleration of any other
indebtedness for borrowed money of at least
$5 million;
- invalidity of a subsidiary guarantee; or
- specified bankruptcy or insolvency defaults.
- ------------------------------------------------------------------------------------------------------------------------------------
ACCELERATION Automatic in the case of bankruptcy defaults; Same as old notes indenture
otherwise, upon the trustee's
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 84
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
declaration or the declaration of holders of at
least 25% in principal amount of the old notes
following an event of default.
- ----------------------------------------------------------------------------------------------------------------------------------
DEFEASANCE Subject to defeasance under specified circumstances Same as old notes indenture
- ----------------------------------------------------------------------------------------------------------------------------------
LISTING None None
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 85
DESCRIPTION OF THE NEW NOTES
The new notes will be issued under the Indenture between us and The Bank of New
York, as Trustee. The terms of the new notes include those terms stated in the
Indenture and those terms made part of the Indenture by reference to the Trust
Indenture Act of 1939. You can find the definitions of capitalized terms used in
this description below under "-- Definitions." This section contains a summary
and a more detailed description of the material provisions of the Indenture. It
does not restate the Indenture in its entirety. We urge you to read the
Indenture because it, and not this description, defines your rights as holders
of the new notes. You may obtain a copy of the Indenture from us.
GENERAL
We are a holding company that owns stock of subsidiary corporations. All of our
wholly owned subsidiaries have guaranteed payment of the new notes and
performance of our other obligations under the Indenture and related security
documents. The have also granted liens on their assets to secure those
obligations. These liens do not apply to all of their assets and are junior to
the liens that Foothill holds. The scope and terms of these liens are described
in more detail below under the heading "Security."
The notes under the Indenture are being issued in two series: Series A, which
are the notes we issued in the private restructuring transactions, and Series B,
which are the new notes and the notes to be issued in the registered exchange
offer to holders of Series A notes. The terms and conditions of the two series
of notes are identical. The difference between the two series is that the Series
A notes have not been registered under the Securities Act of 1933 and are not
freely tradable, while the Series B notes will be either registered or issued
under an exemption from registration that will permit them to be freely
tradable. The Series A notes were issued on October 28, 1999 to holders of our
old notes in exchange for cancellation of those notes; to Rothschild Recovery
Fund L.P. in return for approximately $13.2 million in cash; and to JJF Group
Limited Liability Company in return for cancellation of its shares of our common
stock and its right to require us to purchase those shares in installments over
time for approximately $10.5 million, including accrued interest. The Series B
notes will be issued
- in this exchange offer,
- in a registered exchange offer to holders of Series A notes; and
- at our option, to Rothschild Recovery Fund in return for an additional
cash payment of up to $6.3 million on or about October 1, 2000.
For purposes of the discussion under this section only, the term "new notes"
includes the Series A notes and the Series B notes unless otherwise specified.
The interest payment due April 1, 2000 on the new notes will be paid in kind in
the form of additional new notes. The amount of additional new notes issued as
payment of interest will be $71.25 for each $1,000 principal amount of new notes
outstanding. The new notes issued as payment of interest will be of the same
series as the notes on which the interest is being paid.
PRINCIPAL, MATURITY AND INTEREST
The new notes
- have a maximum aggregate principal amount of $118.3 million plus the
amount of new notes issued to pay interest on April 1, 2000 and the
amount of new notes to be sold to Rothschild Recovery Fund L.P. on
October 1, 2000;
- will mature on September 1, 2007; and
- accrue interest at a rate of 14.25% per year, payable semi-annually on
April 1 and October 1.
We can issue up to $118,258,800 million of notes under the Indenture. This
amount does not include the additional notes that we will issue to pay interest
due April 1, 2000 or the additional new notes that we may sell to Rothschild
Recovery Fund L.P. on October 1, 2000. The amount of these additional new notes
cannot be calculated in advance. The amount of the April 1, 2000 interest
payment will depend on the total amount of new notes outstanding on that date.
The amount of new notes to be sold to Rothschild Recovery Fund will depend upon
the price at which the new notes trade during a period of approximately 30 days
before October 1, 2000. The sale to Rothschild Recovery Fund is intended to
raise a fixed amount of cash, and the new notes will be sold at 95% of the
average trading price, so we will need to issue more new notes if the average
trading price is lower than we will if the price is higher.
The new notes mature on September 1, 2007. Interest on the new notes accrues at
the rate of 14.25% per annum and is payable twice each year -- on April 1 to
persons who held new notes on March 15 of that year, and on October 1 to persons
who held new notes on
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September 15 of that year. The first interest payment is due April 1, 2000 and
will be made in the form of additional new notes with a face amount of $71.25
for each $1,000 of new notes on which interest is being paid. All other interest
payments will be made in cash. Except for the new notes that are issued in
payment of interest due April 1, 2000 and the new notes that are to be sold to
Rothschild Recovery Fund on October 1, 2000, interest on the new notes accrues
from October 1, 1999. Interest on the new notes to be issued in payment of the
interest due April 1, 2000 will accrue from that date. Interest on the new notes
to be sold to Rothschild Recovery Fund L.P. on October 1, 2000 will accrue from
the date those notes are issued. Interest is computed on the basis of a 360-day
year comprised of twelve 30-day months.
Principal, premium, if any, and interest and liquidated damages, if any, on the
new notes is payable, and the new notes may be presented for transfer or
exchange, at our office or agency maintained for that purpose within the city
and state of New York. At our option, payment of interest may be made by check
mailed to registered holders of the new notes at the addresses set forth on the
registry books maintained by the Trustee, who will initially act as registrar
for the new notes. However, payments to holders that have provided wire transfer
instructions will be made according to those instructions. No service charge
will be made for any exchange or registration of transfer of new notes, but we
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection with the exchange or registration. Unless we
otherwise designate, our office or agency will be the corporate trust office of
the Trustee.
Except for the new notes issued in payment of interest due April 1, 2000, the
new notes will be issued in denominations of $1,000, $800 or $743 or integral
multiples of those amounts. New notes issued in payment of interest will be
issued in integral multiples of $1.
NO MANDATORY SINKING FUND
We are not required to make sinking fund payments for the new notes.
SECURITY
- The new notes are secured by liens in favor of the Trustee on almost
all of our assets and those of our subsidiaries that have guaranteed
the new notes.
- These liens do not apply to (1) mobile equipment, (2) coal leases and
other contracts and permits that prohibit these liens or assignments,
(3) real property located in Maryland and (4) some specific parcels of
real property and related improvements located in other states.
- Although we have provided the best descriptions of real property
collateral available to us, some of those descriptions may be
inaccurate or insufficient to create valid liens on the property.
- The liens that secure the new notes are junior to the liens that
secure our commercial loan facility and to all other liens that
existed on October 28, 1999. This means that holders of these senior
liens are entitled, if we default, to be paid in full from proceeds of
collateral before any payments are made on the new notes.
- We have the right to obtain the release of collateral without
replacing it as long as we comply with the restrictions and procedural
requirements of the Indenture.
- The Trustee's ability to enforce the liens and to retain proceeds of
any enforcement action it takes is limited by an intercreditor
agreement with our lenders that hold senior secured debt.
- The Trustee's willingness to enforce the liens against individual
parcels of real property may also be limited by concerns about
becoming liable for dealing with environmental problems at the
property.
COLLATERAL
The collateral for the new notes includes all of our and the guarantor
subsidiaries' right, title and interest in and to each of the following:
- Accounts
- books and records
- equipment, not including mobile equipment
- General Intangibles
- Inventory
- Negotiable Collateral
- cash collateral
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- Investment Property, including, all capital stock in subsidiaries
- Real Property Collateral, not including real estate located in
Maryland and specified parcels of real property and related
improvements located elsewhere
- any money or other of our assets and those of the guarantor
subsidiaries which come into the possession, custody or control of the
Collateral Agent
- the proceeds and products, whether tangible or intangible, of any of
the items above, including proceeds of insurance covering any or all
of the collateral, and any and all Accounts, books, Equipment, General
Intangibles, Inventory, Negotiable Collateral, Real Property, money,
deposit accounts, or other tangible or intangible property resulting
from the sale, exchange, collection or other disposition of any of the
items above or any portion of or interest in those items and the
proceeds of those items.
In the case, however, of any coal supply agreement, coal brokerage agreement,
other agreement or leasehold interest or permit the terms of which prohibit or
would give the other party the right to terminate if the contract or permit were
assigned or subjected to a lien, then unless the other party's consent has been
obtained or the restriction is found to be unenforceable, the liens securing the
new notes apply solely to the proceeds of the contract or permit.
Furthermore, the liens securing the new notes may not be effective against some
parcels of real property because (1) we do not have accurate or adequate legal
descriptions of those parcels and (2) some of our leasehold interests or those
of the guarantor subsidiaries may not be properly recorded in the land records.
It should be noted, however, that the property descriptions that we used to
create the liens securing the new notes are essentially the same as the ones we
used to create the liens securing the loan from our commercial lender, so any
problems caused by those descriptions would apply to both kinds of debt.
The collateral release provisions of the Indenture permit the release of
collateral without substitution of collateral of equal value under specified
circumstances. See "--Possession, Use and Release of Collateral--Release of
Collateral." As described under "--Repurchase at the Option of Holders--Asset
Sales," we may utilize the net cash proceeds of specified asset sales for
various purposes, including for the purpose of making an offer to purchase
notes. To the extent that cash proceeds remain after we have purchased all new
notes that are tendered in response to a purchase offer, the unutilized net cash
proceeds may be released to us, free of the lien securing the new notes.
If an event of default occurs under the Indenture, the Collateral Agent may take
action to protect and enforce its rights in the collateral, including the
institution of foreclosure proceedings, except to the extent it is prohibited
from doing so by the terms of the intercreditor agreement between Foothill and
the Trustee. See "--Intercreditor Agreement." As long as the intercreditor
agreement remains in effect, proceeds of foreclosure on collateral must be
applied in accordance with that agreement, which generally means net proceeds
must be paid to our lenders that hold senior secured debt until their loans have
been paid in full before the Collateral Agent can apply any proceeds under the
Indenture. Collateral proceeds that are available to the Collateral Agent are to
be used first to pay the expenses of the foreclosure and fees and other amounts
then payable to the Trustee under the Indenture and, after that, to pay the
principal of and interest on, and other amounts due with respect to, the new
notes.
Real property pledged as security for debt may be subject to known and
unforeseen environmental risks. Under federal environmental laws, a secured
lender may be held liable, in limited circumstances, for the costs of cleaning
up or preventing releases or threatened releases of hazardous substances at or
from a mortgaged property. There may be similar risks under various state laws
and common law theories. Lender liability may be imposed where the lender
actually participates in the management or operation of the mortgaged property,
with some exceptions.
Under the Indenture, the Trustee may, before taking specified actions, request
that holders of notes provide an indemnification against its costs, expenses and
liabilities. It is possible that environmental cleanup costs could become a
liability of the Trustee and cause a loss to any holders of notes that provided
indemnification. In addition, the holders may act directly rather than through
the Trustee, in specified circumstances, in order to pursue a remedy under the
Indenture. If holders of new notes exercised that right, they could, under some
circumstances, be subject to the risks of environmental liability discussed
above.
LIEN SUBORDINATION
The liens securing our Senior Secured Indebtedness have priority over the liens
securing the new notes with respect to all collateral. The Senior Secured
Indebtedness currently consists of a term loan and a revolving credit facility
extended by Foothill and other lenders. The principal amount outstanding under
this credit facility may be as much as $55 million. The agent for our lenders
that hold senior secured debt and the Trustee have entered into an intercreditor
agreement relating to the administration, preservation and disposition of the
collateral. See "--Intercreditor Agreement" below. The Trustee and each holder
of new notes acknowledge that, as
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more fully set forth in the intercreditor agreement, regardless of the order or
manner of attachment or perfection, the liens of the Trustee on the collateral
are subject to and subordinate in all respects to the liens of the lenders that
hold senior secured debt. Until the Senior Secured Indebtedness has been paid in
full and the credit facilities have been terminated, the Collateral Agent will
be prohibited from taking any action to enforce the liens securing the new
notes.
The liens on the collateral that secure senior secured debt have priority over
the liens securing the new notes. In the event we default on the new notes, or
enter into bankruptcy, liquidation or reorganization, our assets would be used
to pay the Senior Secured Indebtedness before any payment from those assets
could be made on the new notes. The relative priorities of the lenders that hold
senior debt and the noteholders with respect to the collateral are set forth in
the intercreditor agreement. As of November 30, 1999, we and our subsidiaries
had outstanding Senior Secured Indebtedness, including amounts outstanding under
the loan agreement with Foothill and other Indebtedness secured by prior liens,
of approximately $13.0 million. The Indenture permits us and our Restricted
Subsidiaries to incur additional Indebtedness, including secured Indebtedness,
subject to limitations. Specifically, Indebtedness under the loan agreement with
Foothill may be as much as $55 million.
Under some circumstances, we can designate current or future subsidiaries as
unrestricted subsidiaries. Unrestricted subsidiaries are not subject to the
restrictive covenants set forth in the Indenture. All of our subsidiaries
currently are restricted subsidiaries.
INTERCREDITOR AGREEMENT
The intercreditor agreement between Foothill and the Trustee provides
- the relative priorities of the parties to the agreement in and to
the collateral,
- the conditions under which the parties to the agreement will
consent to the release of or granting of any Lien in any of the
collateral and
- the conditions under which the parties to the agreement will
enforce their rights with respect to the collateral and the
Indebtedness secured by the collateral.
The intercreditor agreement imposes significant limitations on the ability of
the Collateral Agent to enforce the liens securing the new notes while amounts
remain outstanding under our credit facilities. See "Description of Other
Indebtedness--Intercreditor Agreement."
BANKRUPTCY LIMITATIONS
The rights of the Collateral Agent to repossess and dispose of the collateral
upon the occurrence of an event of default would be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were commenced by or
against us before the Collateral Agent has repossessed and disposed of the
collateral. Under the U.S. Bankruptcy Code, a secured creditor such as the
Collateral Agent is prohibited from repossessing its security from a debtor in a
bankruptcy case, or from disposing of security repossessed from the debtor,
without the bankruptcy court's approval. Moreover, the U.S. Bankruptcy Code
permits the debtor to continue to retain and to use collateral even though the
debtor is in default under the applicable debt instruments, as long as the
secured creditor is given "adequate protection." The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended in
general to protect the value of the secured creditor's interest in the
collateral and may include cash payments or the granting of additional security
to replace the value of existing collateral that is lost as a result of the stay
of repossession or disposition or any use of the collateral by the debtor during
the pendency of the bankruptcy case. In view of the lack of a precise definition
of the term "adequate protection" and the broad discretionary powers of a
bankruptcy court, it is impossible to predict how long payments under the new
notes could be delayed following commencement of a bankruptcy case, whether or
when the Collateral Agent could repossess or dispose of the collateral or
whether or to what extent holders of new notes would be compensated for any
delay in payment or loss of value of the collateral through the requirement of
"adequate protection."
SUBSIDIARY GUARANTEES
Our payment obligations under the new notes are jointly and severally
guaranteed, fully and unconditionally, on a secured basis, by our wholly owned
subsidiaries. Each of the subsidiaries that have guaranteed the new notes is a
borrower under the loan agreement with Foothill and is liable for amounts due
under the loan agreement on a senior secured basis. As a result, the
subsidiaries' guarantees of the new notes are effectively subordinated to the
prior payment in full of all Senior Secured Indebtedness. The obligations of
each subsidiary guarantor are limited in order not to constitute a fraudulent
conveyance under applicable law.
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The Indenture prohibits the guarantor subsidiaries from merging with other
entities that are not guarantors unless specified tests are met and the
surviving entity becomes a guarantor of the new notes. The Indenture also
provides that, in the event of a sale or other disposition of all of the stock
or assets of any guarantor subsidiary, the stock or assets will be released from
the liens securing the new notes as long as the proceeds of the sale are to be
applied in accordance with the applicable provisions of the Indenture. See
"--Security" and "--Repurchase at the Option of Holders--Asset Sales."
OPTIONAL REDEMPTION
We may redeem any of the new notes at our option. The initial redemption price
is 104% of the principal amount, plus accrued interest and liquidated damages,
if any. The redemption price will decline each year after 2000 and will be 100%
of the principal amount, plus accrued interest and liquidated damages, if any,
beginning on October 1, 2003.
We may redeem all or part of the new notes upon our giving not fewer than 30 nor
more than 60 days' notice at the redemption prices, expressed as percentages of
principal amount, set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
Until October 1, 2000...........................................................................104%
Beginning October 1, 2000.......................................................................103%
Beginning October 1, 2001.......................................................................102%
Beginning October 1, 2002.......................................................................101%
Beginning October 1, 2003 and thereafter........................................................100%
</TABLE>
MANDATORY REDEMPTION
We must redeem, or offer to redeem, new notes from excess asset sale proceeds or
upon a change of control.
MANDATORY REDEMPTION FROM EXCESS ASSET SALE PROCEEDS
- During the first 15 days of January and July of each year, we may
be required to offer to redeem new notes out of excess proceeds
of asset sales we received by the end of the immediately
preceding month that have not been previously used to make an
offer to redeem.
- Asset sale proceeds do not have to be used for this purpose if
they are used within 120 days of receipt (1) to make a permanent
paydown of senior secured debt, (2) to buy back new notes in the
market at a time when no senior secured debt is outstanding or
(3) to pay for capital expenditures relating to our coal mining
activities or that of any of the guarantor subsidiaries.
- In addition, we can use the first $1 million plus 40% of the
excess over $1 million of what would otherwise be excess asset
sale proceeds for general corporate purposes rather than to
redeem new notes.
- We must pay 100% of outstanding principal plus accrued interest
and any liquidated damages on new notes that we redeem out of
excess asset sale proceeds.
- If the total redemption price of new notes tendered in response
to an offer to redeem is less than the amount of excess proceeds,
we can use the remaining excess proceeds for general corporate
purposes.
Within 120 days after the receipt of any proceeds from an asset sale, we or a
guarantor subsidiary may apply the proceeds, at our option, (1) to repay Senior
Secured Indebtedness, and to correspondingly permanently reduce commitments with
respect to that Senior Secured Indebtedness in the case of term borrowings, (2)
at any time when no Senior Secured Indebtedness is outstanding and no default or
event of default has occurred or is continuing, to offer to purchase new notes
in the market in accordance with the terms of the Indenture at a price and in an
amount we determine, or (3) to the making of a capital expenditure in a
Permitted Business relating to our coal mining activities and that of the
guarantor subsidiaries if deemed necessary and appropriate for use in the
ordinary course of our business and that of our subsidiaries by our board of
directors or to reimburse the cost of a capital expenditure made during the 120
days before the proceeds were received. The property and assets that are the
subject of that capital expenditure and any other non-cash consideration
received as a result of the asset sale, however, must be made subject to the
liens securing the new notes. Pending the final application of any asset sale
proceeds, we may temporarily reduce Indebtedness under our credit facilities or
invest the proceeds in any manner that is not prohibited by the Indenture.
We must use 60% of the excess over $1.0 million of net proceeds from asset sales
that are not applied or invested as provided in the preceding paragraph to make
offers to redeem new notes. The amount of proceeds required to be used for this
purpose is calculated twice each year, as of June 30 and December 31. If the
amount of excess proceeds exceeds $1 million on either date, we must make
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an offer to all holders of notes within 15 days after that date to purchase the
maximum principal amount of new notes that may be purchased out of the excess
proceeds, at an offer price in cash in an amount equal to 100% of principal plus
accrued and unpaid interest and liquidated damages on those notes, if any, to
the date of purchase, in accordance with the applicable procedures set forth in
the Indenture. To the extent that the aggregate amount of notes tendered in
response to the offer is less than the amount of excess proceeds available to
purchase those notes, we may use any remaining excess proceeds for general
corporate purposes. If the aggregate principal amount of notes tendered by
holders in response to the offer exceeds the amount of excess proceeds available
to purchase notes, the Trustee will select the notes to be purchased on a pro
rata basis. Upon completion of the offer to purchase, the amount of excess
proceeds will be reset at zero.
MANDATORY REDEMPTION UPON A CHANGE OF CONTROL
- Upon a change of control, holders have the right to require us to
redeem their new notes at 101% of principal plus accrued interest
and any liquidated damages.
Upon the occurrence of a Change of Control, each holder of new notes will have
the right to require us to repurchase all or any part of that holder's new notes
at an offer price in cash equal to 101% of the aggregate principal amount of the
new notes, plus accrued and unpaid interest and liquidated damages, if any, on
the new notes to the date of purchase. Within 30 days following any Change of
Control, we will mail a notice to each noteholder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
new notes on the date specified in the notice, which date will be no earlier
than 30 days and no later than 60 days from the date the notice is mailed, in
accordance with the procedures required by the Indenture and described in the
notice. We will comply with the requirements of Rule 14e-1 under the Securities
Exchange Act of 1934 and any other securities laws and regulations to the extent
those laws and regulations are applicable in connection with the repurchase of
the new notes as a result of a Change of Control.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of our assets and those of our subsidiaries taken as a whole. Although there is
a developing body of case law interpreting the phrase "substantially all," there
is no precise established definition of the phrase under applicable law. As a
result, the ability of a holder to require us to repurchase its new notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of our assets and those of our subsidiaries taken as a whole to another
person or entity or group may be uncertain.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the noteholders to require that we
repurchase or redeem their new notes in the event of a takeover,
recapitalization or similar transaction.
- Our commercial loan agreement prohibits us from redeeming new
notes unless there is no existing default and specified financial
tests are met.
The loan agreement with Foothill prohibits us from purchasing any new notes
unless specified conditions are satisfied. The loan agreement also provides that
Change of Control events with respect to us would constitute a default under the
loan agreement. Among other things, we are not permitted to purchase new notes
unless there is no existing event of default and, after taking account of the
use of funds for the purchase, the subsidiaries would have the ability to borrow
at least $5.0 million, in the case of purchases funded by asset sale proceeds,
or $10.0 million, in all other cases, under the revolving credit facility of the
loan agreement. Any future credit agreements or other agreements to which we
become a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when we are prohibited from purchasing new
notes, we could seek the consent of our lenders to the purchase of new notes, or
we could attempt to refinance the borrowings that contain the prohibition. If we
do not obtain a consent or repay the borrowings, we will remain prohibited from
purchasing new notes. In that case, our failure to purchase tendered new notes
would constitute an event of default under the Indenture, which would, in turn,
constitute a default under the loan agreement with Foothill.
PROCEDURES FOR REDEEMING NEW NOTES
If fewer than all of the new notes are to be redeemed or repurchased in an offer
to purchase at any time, the Trustee will make the selection of new notes for
redemption or repurchase in compliance with the requirements of the principal
national securities exchange, if any, on which the new notes are listed. If the
new notes are not so listed, the selection will be made on a pro rata basis. No
new notes that have been previously reissued at less than their original
principal amount, however, will be redeemed except as part of the redemption of
all new notes held by the same holder. Notices of redemption or repurchase will
be mailed by first class mail at least 30, but not more than 60, days before the
redemption date or repurchase date to each holder of new notes to be redeemed or
repurchased at its registered address. If any new note is to be redeemed or
repurchased in part only, the notice of redemption or repurchase that relates to
that new note will state the portion of the principal amount of the new note to
be redeemed or repurchased. A new note in principal amount equal to the
unredeemed or unrepurchased portion will be issued in the name of the noteholder
upon
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cancellation of the original new note. On and after the redemption or
repurchase date, interest ceases to accrue on notes or portions of new notes
called for redemption or repurchase.
DEFINITIONS
Set forth below is a summary of some terms used in this description of the new
notes. We refer you to the Indenture for the full definition of these terms.
"ACCOUNTS" means all accounts, contract rights and all other forms of
obligations owing to us and the subsidiaries that have guaranteed the new notes
arising out of the sale or lease of goods or the rendition of services by us and
those subsidiaries, irrespective of whether earned by performance, and any and
all related credit insurance, guaranties or security.
"APPRAISER" means an engineer, appraiser or other expert who, except as
otherwise expressly provided in the Indenture, we may employ.
"ASSET SALE" means
(1) the sale, lease, conveyance or other disposition of any assets or
rights, including a sale and leaseback or a contract settlement,
other than in the ordinary course of business; however, the sale,
lease, conveyance or other disposition of all or substantially
all of our assets will be treated either as a Change of Control
or as a merger or consolidation rather than as an Asset Sale; and
(2) the issue or sale by us or any of our Restricted Subsidiaries of
equity interests of any of our Restricted Subsidiaries, in the
case of either clause (1) or (2), whether in a single transaction
or a series of related transactions that have a fair market
value, as determined in good faith by our board of directors, in
excess of $1.0 million or for net cash proceeds in excess of
$100,000.
The following kinds of transactions are not treated as Asset Sales even if they
meet the tests described in the first sentence of this definition:
- our transfer of assets to a subsidiary that has guaranteed the
new notes or a transfer by that subsidiary to us or to another
guarantor subsidiary;
- a guarantor subsidiary's issuance of equity interest to us or to
another guarantor subsidiary;
- a Restricted Payment that is permitted by the covenant described
under "--Covenants--Limitation on Restricted Payments;"
- a disposition of cash equivalents;
- a disposition in the ordinary course of business of either
obsolete equipment or equipment otherwise no longer useful in the
business;
- a disposition in the ordinary course of business of mineral
rights or real property no longer useful in the business for net
proceeds not to exceed $50,000 in the aggregate in any calendar
year;
- any sale of equity interests in, or Indebtedness or other
securities of, an Unrestricted Subsidiary;
- any sale and leaseback of an asset within 90 days after the
completion of construction or acquisition of the asset;
- contribution of excluded assets to an entity engaged in a
Permitted Business in exchange for an equity interest in that
entity which is subjected to the liens securing the new notes;
and
- any disposition of Inventory or Accounts in the ordinary course
of our or the guarantor subsidiaries' business.
"CAPITAL LEASE OBLIGATION" means, as of any measurement date, the amount of the
liability under a capital lease that would be required to be capitalized on a
balance sheet in accordance with generally accepted accounting principles.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, other
than by merger or consolidation, in one or a series of related
transactions, of all or substantially all of our assets and those
of our Restricted Subsidiaries taken as a whole to any "person,"
as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, other than to the Permitted Holders;
(2) the adoption of a plan relating to our liquidation or
dissolution;
(3) the consummation of any transaction, including any merger or
consolidation, the result of which is that any person or entity,
other than the Permitted Holders, becomes the "beneficial owner,"
as that term is defined in
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Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934,
directly or indirectly, of more than 80% of our voting stock, as
measured by voting power rather than number of shares; or
(4) we consolidate with, or merge with or into, any person or entity,
other than the Permitted Holders, or any person or entity, other
than the Permitted Holders, consolidates with, or merges with or
into, us in connection with a transaction in which our
outstanding voting stock is converted into or exchanged for cash,
securities or other property. This does not include, however, any
transaction in which our voting stock outstanding immediately
before the transaction is converted into or exchanged for voting
stock of the surviving or transferee entity constituting a
majority of the outstanding shares of the voting stock of the
surviving or transferee entity, immediately after giving effect
to the issuance.
"COAL ACQUISITION PREFERRED STOCK" means preferred stock that (1) is issued to a
seller of coal properties or assets as part of the consideration or financing of
the acquisition of the properties or assets and (2) provides for the payment of
dividends calculated by reference to the revenues from coal production of those
properties or assets, as long as the aggregate purchase price is fair to us. Our
Class C preferred stock, par value $13,000 per share, and Class D preferred
stock, par value $7,000 per share, each as in effect on October 1, 1999, are
each Coal Acquisition Preferred Stock.
"COLLATERAL AGENT" means the Trustee, as Collateral Agent for the holders of new
notes, or any successor Collateral Agent.
"CONSOLIDATED CASH FLOW" means, for any particular period, the result of the
following calculation: Start with our Consolidated Net Income for the period in
question and
(1) add back extraordinary losses and net losses in connection with
Asset Sales which were deducted in computing Consolidated Net
Income for the period;
(2) add back accrued taxes based on income or profits that were
deducted in computing Consolidated Net Income for the period;
(3) add back consolidated interest expense, including amortization of
debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred with respect to letter of credit or
bankers' acceptance financings and net payments, if any, under
Hedging Obligations, that were deducted in computing Consolidated
Net Income for the period;
(4) add back depreciation, depletion and amortization, including
amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior
period, and other non-cash expenses, excluding any non-cash
expense to the extent that it represents an accrual of or reserve
for cash expenses in any future period or amortization of a
prepaid cash expense that was paid in a prior period, that were
deducted in computing Consolidated Net Income for the period; and
(5) subtract non-cash revenues, other than non-cash income that
represents an accrual of cash revenues in any future period, that
was included in Consolidated Net Income for the period.
Notwithstanding the calculation above, taxes based on the income or profits of,
and the depreciation and amortization and other non-cash charges of, our
subsidiaries will be added to Consolidated Net Income to compute Consolidated
Cash Flow only to the extent, and in the same proportion, that the Net Income of
each subsidiary was included in calculating the Consolidated Net Income and only
if the subsidiary would not be prohibited from paying that amount to us as a
dividend.
"CONSOLIDATED NET INCOME" means, for any period, our Net Income and that of our
Restricted Subsidiaries, on a consolidated basis, determined in accordance with
generally accepted accounting principles, adjusted as follows:
(1) the Net Income of any subsidiary that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of
dividends or distributions paid in cash, or to the extent
converted into cash, to us or our wholly owned subsidiary;
(2) the Net Income of any Restricted Subsidiary will be excluded to
the extent that the Restricted Subsidiary's declaration or
payment of dividends or similar distributions of its Net Income
is prohibited;
(3) the Net Income of any person or entity acquired in a pooling of
interests transaction for any period before the date of the
acquisition will be excluded;
(4) the cumulative effect of a change in accounting principles will
be excluded; and
(5) any net after-tax extraordinary gains or losses will be excluded.
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"EQUIPMENT" means all of our and the guarantor subsidiaries' machinery, machine
tools, motors, equipment, furniture, furnishings, loading facilities, tipples,
processing plants and similar structures, fixtures, tools, parts, goods, other
than consumer goods, farm products or Inventory, wherever located. Equipment
does not include, however, Mobile Equipment.
"FIXED CHARGES" means, for any period, the sum, without duplication, of the
following charges or expenses:
(1) our consolidated interest expense and that of our Restricted
Subsidiaries, whether paid or accrued, including amortization of
debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions, discounts and other
fees and charges in connection with letter of credit or banker's
acceptance financings and net payments, if any, under Hedging
Obligations;
(2) our consolidated interest expense and that of our Restricted
Subsidiaries which was capitalized during that period;
(3) any interest expense on Indebtedness of another person or entity
which we or one of our Restricted Subsidiaries guarantees or
which is secured by a lien on our assets or that of one of our
Restricted Subsidiaries, whether or not the guarantee or lien is
called upon;
(4) the product of (a) all cash dividend payments, on any series of
our preferred stock or that of any of our Restricted
Subsidiaries, other than dividend payments on equity interests
payable solely in our equity interests, multiplied by (b) a
fraction, the numerator of which is one and the denominator of
which is one minus our then current combined federal, state and
local effective tax rate, expressed as a decimal.
"FIXED CHARGE COVERAGE RATIO" means, for any period, the ratio of our
Consolidated Cash Flow and that of our Restricted Subsidiaries to their Fixed
Charges. In the event that we or any of our Restricted Subsidiaries incurs,
assumes, guarantees or redeems any Indebtedness, other than revolving credit
borrowings, or issues or redeems preferred stock after the start of the period
for which the Fixed Charge Coverage Ratio is being calculated but before the
date as of which the Fixed Charge Coverage Ratio is being calculated, then the
Fixed Charge Coverage Ratio will be calculated as if that incurrence,
assumption, guarantee or redemption of Indebtedness, or the issuance or
redemption of preferred stock had occurred at the beginning of the applicable
four-quarter reference period. In addition, for purposes of making the
computation referred to above,
(1) acquisitions and Investments that we or any of our Restricted
Subsidiaries has made, including through mergers or
consolidations and including any related financing transactions,
during the four-quarter reference period or between the reference
period and the calculation date, will be treated as if they had
occurred on the first day of the four-quarter reference period,
and Consolidated Cash Flow for the reference period will be
calculated without giving effect to clause (3) of the proviso set
forth in the definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with generally accepted
accounting principles, and operations or businesses disposed of
before the calculation date, will be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with generally accepted accounting
principles, and operations or businesses disposed of before the
calculation date, will be excluded, but only to the extent that
the obligations giving rise to the Fixed Charges will not be
obligations of any of our Restricted Subsidiaries or us following
the calculation date.
"GENERAL INTANGIBLES" means all of our and the guarantor subsidiaries' present
and future general intangibles and other personal property, including rights
under coal supply contracts, coal brokerage agreements and other contract
rights, rights arising under common law, statutes or regulations, choses or
things in action, goodwill, permits, patents, trade names, trademarks,
servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists,
monies due or recoverable from pension funds, route lists, rights to payment and
other rights under any royalty or licensing agreements, infringement claims,
computer programs, information contained on computer disks or tapes, literature,
reports, catalogs, deposit accounts, insurance premium rebates, tax refunds and
tax refund claims, other than goods, Accounts and Negotiable Collateral.
"HEDGING OBLIGATIONS" means the obligations of a person or entity under (1)
interest rate swap agreements, interest rate cap agreements and interest rate
collar agreements with respect to Indebtedness that is permitted by the terms of
the Indenture and (2) other agreements or arrangements designed to protect
against fluctuation in interest rates or the value of foreign currencies
purchased or received in the ordinary course of business.
"INDEBTEDNESS" means, for any person or entity, as of any date,
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- any indebtedness, whether or not contingent, for borrowed money
or evidenced by bonds, notes, debentures or similar instruments,
letters of credit or reimbursement agreements for letters of
credit, other than standby letters of credit issued in the
ordinary course of business that either have not been drawn upon
or, if drawn upon, were reimbursed no later than the tenth
business day after the issuer of the letter of credit demanded
reimbursement, bankers' acceptances, Capital Lease Obligations,
the deferred and unpaid portion of the purchase price of
property, other than trade payables, and Hedging Obligations, if
and to the extent any of these forms of indebtedness, other than
letters of credit and Hedging Obligations, would appear as a
liability upon a balance sheet of the person or entity prepared
in accordance with generally accepted accounting principles; and
- all indebtedness of others secured by a lien on any asset of that
person or entity, whether or not that person or entity assumes
the indebtedness, and, to the extent not otherwise included, the
person or entity's guarantee of any indebtedness of any other
person or entity.
The amount of any Indebtedness outstanding as of any date will be (1) the
accredited value of the Indebtedness, in the case of any Indebtedness that does
not require current payment of interest, and (2) the principal amount of the
Indebtedness, together with any interest on the Indebtedness that is more than
30 days past due, in the case of any other Indebtedness.
"INDENTURE" means the indenture, dated as of October 1, 1999, by and among us,
the Trustee and the subsidiaries guaranteeing the new notes.
"INDEPENDENT" means a person or entity that
- is in fact independent,
- does not have any direct financial interest or any material
indirect financial interest in us or in any subsidiary that has
guaranteed the notes or in any affiliate of us or a guarantor
subsidiary, and
- is not connected with us or any guarantor subsidiary as an
officer, employee, promoter, underwriter, trustee, partner,
director or person performing similar functions.
Whenever an opinion or certificate of an Independent person or entity is
required under the Indenture, that person or entity must be appointed by an
order signed by two of our officers and approved by the Trustee in the exercise
of reasonable care. The opinion or certificate must state that the signer has
read this definition and that the signer is independent as that term is defined
in the Indenture.
"INTERCREDITOR AGREEMENT" means the intercreditor agreement dated as of October
1, 1999, between the Collateral Agent and Foothill Credit Corporation, as
collateral agent for the senior commercial lenders, substantially in the form
attached as an exhibit to the Indenture, as it may be amended, waived or
otherwise modified from time to time in accordance with the provisions of the
agreement, or any similar agreement with lenders under any replacement credit
facility on terms which, taken as a whole, are not materially less favorable to
the noteholders in any material respect than the form attached as an exhibit to
the Indenture.
"INVENTORY" means all of our and the guarantor subsidiaries' present and future
inventory, whether in the form of raw materials, work-in-process or finished and
semi-finished inventory of any kind, nature or description, wherever located,
including the following:
- all minerals in whatever form, including coal, fly ash, bottom
ash or other ash, methane, sulfur, sulfur dioxide and other
by-products resulting from the processing of the coal we and the
subsidiaries that have guaranteed the new notes mine and other
minerals and chemicals resulting from the mining or processing of
coal;
- cast iron fittings, paint, belts and hoses, bolts and nuts, wire
and wire products, welding supplies, tools, steel, rope, timber,
railroad, spikes, railroad car parts and railroad crane parts,
baghouse parts, pump parts, compressor parts, electrical parts,
bearings, drills, bits and accessories and other parts and
supplies;
- all wrapping, packaging, advertising and shipping materials; and
- any other personal property held for sale, exchange or lease or
furnished or to be furnished or used or consumed in the business
or in connection with the manufacturing, packaging, shipping,
advertising, selling or finishing of goods, inventory,
merchandise and other personal property, and all names or marks
affixed to or to be affixed to these items for purposes of our
and the guarantor subsidiaries' selling these items and all
right, title and interest to them.
Inventory also includes all coal (1) in which we and the subsidiaries that have
guaranteed the new notes have any interest which has been mined, (2) that is in
a coal stockpile and (3) that is held for sale in the ordinary course of
business, together with all other present and future goods we and the guarantor
subsidiaries hold for sale in the ordinary course of business, wherever located.
"INVESTMENT PROPERTY" means "investment property" as that term is defined in
Section 9-115 of the New York Uniform Commercial Code.
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"INVESTMENTS" means all investments a person or entity makes in other persons or
entities, including affiliates, in the form of direct or indirect loans,
including guarantees of Indebtedness or other obligations, advances or capital
contributions -- excluding commission, travel and similar advances to officers
and employees made in the ordinary course of business -- purchases or other
acquisitions for consideration of Indebtedness and equity interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with generally accepted
accounting principles. If we or any of our Restricted Subsidiaries sells or
otherwise disposes of any equity interests of any of our direct or indirect
Restricted Subsidiaries so that, after giving effect to the sale or disposition,
the person or entity is no longer a Restricted Subsidiary, we will be deemed to
have made an Investment on the date of the sale or disposition equal to the fair
market value of the equity interests of the Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described below under "--Covenants --Limitation on Restricted
Payments."
"LIQUIDATED DAMAGES" means additional amounts we must pay to holders of Series A
notes as a result of delays in the registration of the Series A notes or the
consummation of the exchange of registered Series B notes for unregistered
Series A notes.
"MOBILE EQUIPMENT" means all equipment that is (1) mobile and (2) used or useful
in connection with our coal mining, extraction, development, construction or
environmental remediation activities or that of any Restricted Subsidiary.
Mobile Equipment includes any of the following, whether the equipment is on
wheels, is track mounted or is skid mounted: bulldozers, drills, pans, augers,
high wall miners, continuous miners, shuttle cars, roof bolters, mobile roof
supporters, rock dusters, man trips, scoops, backhoes, shovels, front end
loaders, continuous haulage units, underground locomotives, loaders, trailers,
trucks, other motor vehicles and other mining, construction, earthmoving or
excavating equipment of a similar nature.
"NEGOTIABLE COLLATERAL" means letters of credit, notes, drafts, instruments,
Investment Property, documents and chattel paper issued to us or any of our
subsidiaries that have guaranteed the new notes; personal property leases under
which we or our subsidiary is the lessor; and the books relating to any of these
items.
"NET INCOME" means, for any person or entity and any period, the net income
(loss) of the person or entity, determined in accordance with generally accepted
accounting principles and before deducting preferred stock dividends, excluding,
however, the following items:
(1) any extraordinary gain, but not loss, together with any related
provision for taxes on that gain, but not loss, realized in
connection with any Asset Sale or disposition of any securities
or the extinguishment of any Indebtedness; and
(2) any extraordinary gain, but not loss, together with any related
provision for taxes on the extraordinary gain, but not loss.
In determining Consolidated Net Income for the purpose of the covenant described
under "--Covenants --Limitation on Restricted Payments" only, however, items (1)
and (2) will not be so excluded.
"PERMITTED BUSINESS" means coal producing, coal mining, coal brokering or mine
development or any business that is reasonably similar or is a reasonable
extension, development or expansion or is ancillary to these activities,
including ash disposal and/or environmental remediation, and participation in
the ownership and operation of coal-fired electric power generating facilities
that purchase coal or other inventory from us or any Restricted Subsidiary.
"PERMITTED HOLDERS" means the Estate of John J. Faltis, JJF Group Limited
Liability Company, P. Bruce Sparks, PPK Group Limited Liability Company, Anker
Holding B.V., First Reserve Corporation, American Oil & Gas Investors, Limited
Partnership, Amgo II, Limited Partnership, First Reserve Fund V, Limited
Partnership, First Reserve Fund V-2, Limited Partnership, First Reserve Fund VI,
Limited Partnership and First Reserve Fund VII, Limited Partnership, any of the
entities that received warrants on October 28, 1999 to purchase our common stock
and any of their affiliates and their successors and assigns.
"PERMITTED INVESTMENTS" means
(1) any Investment in Anker Coal Group or in a subsidiary that is a
guarantor of the new notes;
(2) any Investment in cash equivalents;
(3) any Investment by us or any guarantor subsidiary in a person or
entity, if as a result of the Investment (a) the person or entity
becomes a subsidiary that guarantees the new notes or (b) the
person or entity is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to,
or is liquidated into, us or a subsidiary that is a guarantor of
the new notes;
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(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made in compliance with
the covenant described under "--Mandatory Redemption--Asset
Sales;"
(5) any acquisition of assets solely in exchange for the issuance of
our equity interests;
(6) any Investment existing on October 1, 1999;
(7) any Investment acquired by us or any of our Restricted
Subsidiaries (a) in exchange for any other Investment or accounts
receivable held by us or any Restricted Subsidiary in connection
with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of the other Investment or
accounts receivable or (b) as a result of the transfer of title
with respect to any secured investment in default as a result of
a foreclosure by us or any of our Restricted Subsidiaries with
respect to the secured Investment;
(8) Hedging Obligations permitted under the covenant described under
"--Covenants--Limitation on Incurrence of Indebtedness and
Issuance of Mandatorily Redeemable Stock;"
(9) loans and advances to officers, directors and employees for
business-related travel expenses, moving expenses and other
similar expenses, in each case, incurred in the ordinary course
of business;
(10) any guarantees permitted to be made pursuant to the covenant
described under "--Covenants--Limitation on Incurrence of
Indebtedness and Issuance of Mandatorily Redeemable Stock;"
(11) any Investment of excluded assets, other than Mobile Equipment,
in any person or entity engaged in the ownership and operation of
a coal-fired power generation facility that purchases coal or
other inventory from us or any Restricted Subsidiary; however,
any ownership interest in that person or entity we or a
subsidiary guarantor making the Investment receives will be
subjected to the liens securing the new notes; and
(12) other Investments in any person or entity, including Investments
in Unrestricted Subsidiaries, primarily engaged in a Permitted
Business having an aggregate fair market value, measured on the
date each Investment was made and without giving effect to
subsequent changes in value, when taken together with all other
Investments made pursuant to this clause (12) that are at the
time outstanding, do not exceed $10.0 million.
"PERMITTED LIENS" means
(1) liens securing senior Indebtedness that is permitted by clauses
(1), (2), (7) and (9) under "--Covenants--Permitted Debt" and the
liens securing the new notes;
(2) liens in favor of us;
(3) liens on property of an entity existing at the time it is merged
into or consolidated with us or any of our subsidiaries, as long
as the liens were in existence before the contemplation of the
merger or consolidation and do not extend to any assets other
than those of the person or entity merged into or consolidated
with us;
(4) liens on property existing at the time it was acquired by us or
any of our subsidiaries, as long as the liens were in existence
before the contemplation of the acquisition;
(5) liens to secure the performance of statutory or regulatory
obligations, leases, surety or appeal bonds, performance bonds or
other obligations of a similar nature incurred in the ordinary
course of business;
(6) liens to secure Indebtedness, including Capital Lease
Obligations, permitted by clause (4) under
"--Covenants--Permitted Debt" covering only the assets acquired
with that Indebtedness;
(7) liens existing on October 1, 1999;
(8) liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good
faith by appropriate proceedings promptly instituted and
diligently concluded, as long as any reserve or other appropriate
provision required in conformity with generally accepted
accounting principles has been made;
(9) liens incurred in the ordinary course of our business or that of
any of our subsidiaries with respect to obligations that do not
exceed $5 million at any one time outstanding and that (a) are
not incurred in connection with the borrowing of money or the
obtaining of advances or credit, other than trade credit in the
ordinary course of business, and (b) do not in the aggregate
materially detract from the value of the property or materially
impair the use of the property in our or the subsidiary's
operation of business;
(10) liens on assets of Unrestricted Subsidiaries which secure
non-recourse debt of Unrestricted Subsidiaries;
(11) liens on assets of subsidiaries that have guaranteed the new
notes which would be Permitted Liens if they were liens or assets
of us to secure senior Indebtedness that was permitted to be
incurred by clauses (1), (2), (7) and (9) under
"--Covenants--Permitted Debt;" and
(12) liens securing Permitted Refinancing Indebtedness to the same
extent, as long as the lien is not secured by any additional
assets, and with the same or lower priority as liens securing the
Indebtedness that was exchanged or extended, refinanced, renewed,
replaced, defeased or refunded with the net proceeds of the
Permitted Refinancing Indebtedness.
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"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of us or any of our
Restricted Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness of us
or any of our Restricted Subsidiaries, as long as
(1) the principal amount, or accreted value, if applicable, of the
Permitted Refinancing Indebtedness does not exceed the principal
amount of, or accreted value, if applicable, plus accrued
interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded, plus the amount of reasonable
expenses incurred, including premiums paid, if any, to the
holders of the Indebtedness;
(2) the Permitted Refinancing Indebtedness has a final maturity date
at or later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of
payment to the new notes, the Permitted Refinancing Indebtedness
has a final maturity date later than 91 days after the final
maturity date of, and is subordinated in right of payment to, the
new notes on terms at least as favorable to the holders of the
new notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
(4) the Indebtedness is incurred either by us or by the Restricted
Subsidiary that is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"REAL PROPERTY COLLATERAL" means the parcel or parcels of real property and
related improvements described in the mortgages securing the new notes and any
real property we and the subsidiaries that have guaranteed the new notes acquire
in the future, including leasehold interests, together with all buildings,
structures, fixtures and other improvements relating to the property, and all
metals and minerals that are in, under, upon, or to be produced from the real
property to the extent of our rights and those of the subsidiaries that have
guaranteed the new notes to the same, including all coal, but only to the extent
the metals and minerals have not been extracted from the real property, wherever
located, including our real property and related assets and that of the
subsidiaries that have guaranteed the new notes, as more particularly described
in the mortgages securing the new notes. Real Property Collateral will not
include, however, the specified interests in real property listed in Schedule B
to the Indenture or any non-assignable property. The Real Property Collateral
also will not include any real property located in the State of Maryland which
is not subject to the liens securing the Senior Secured Indebtedness.
"RESTRICTED SUBSIDIARY" of a person or entity means any Subsidiary of us or of
our subsidiary that is not an Unrestricted Subsidiary.
"SENIOR SECURED INDEBTEDNESS" means all amounts we and the subsidiaries that
have guaranteed the new notes owe under debt or commercial paper facilities
providing for term loans, revolving credit loans or letters of credit, including
amounts arising after the filing of a bankruptcy or similar case, whether or not
allowable as a claim in the case, not to exceed an aggregate principal amount of
$55 million at any one time outstanding.
"TRUSTEE" means The Bank of New York or any successor Trustee under the
Indenture.
"UNRESTRICTED SUBSIDIARY" means any of our subsidiaries that our board of
directors designates as an Unrestricted Subsidiary through a board resolution,
but only to the extent that the subsidiary:
- has no Indebtedness other than non-recourse debt;
- is not party to any agreement, contract, arrangement or
understanding with us or any of our Restricted Subsidiaries,
unless the terms of the agreement, contract, arrangement or
understanding are no less favorable to us or the Restricted
Subsidiary than those that might be obtained at the time from
persons or entities that are not affiliates;
- is a person or entity with respect to which neither we nor any of
our Restricted Subsidiaries has any direct or indirect obligation
(1) to subscribe for additional equity interests or (2) to
maintain or preserve the person or entity's financial condition
or to cause the person or entity to achieve any specified levels
of operating results; and
- has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of us or any of our
Restricted Subsidiaries.
If, at any time, any Unrestricted Subsidiary would fail to meet the conditions
referred to above as an Unrestricted Subsidiary, it will then cease to be an
Unrestricted Subsidiary for purposes of the Indenture, and any Indebtedness of
the subsidiary will be deemed to be incurred by our Restricted Subsidiary as of
that date. If the Indebtedness is not permitted to be incurred as of that date
under the covenant described under "--Covenants--Limitation on Incurrence of
Indebtedness and Issuance of Mandatorily Redeemable Stock," we will be in
default of that covenant.
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Our board of directors may at any time designate any Unrestricted Subsidiary to
be a Restricted Subsidiary. In that case, the designation will be deemed to be
an incurrence of Indebtedness by our Restricted Subsidiary of any outstanding
Indebtedness of the Unrestricted Subsidiary, and the designation will only be
permitted if (1) the Indebtedness is permitted under the covenant described
under "--Covenants--Limitation on Incurrence of Indebtedness and Issuance of
Mandatorily Redeemable Stock," calculated on a pro forma basis as if the
designation had occurred at the beginning of the four-quarter reference period,
and (2) no default or Event of Default under the Indenture would exist following
the designation.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at
any date, the number of years obtained by dividing
- the sum of the products obtained by multiplying (1) the amount of
each then-remaining installment, sinking fund, serial maturity or
other required payments of principal, including payment at final
maturity, by (2) the number of years, calculated to the nearest
one-twelfth, that will elapse between that date and the making of
the payment, by
- the then-outstanding principal amount of the Indebtedness.
COVENANTS
The Indenture contains covenants with which we must comply. Here are summaries
and more detailed descriptions of the principal covenants.
LIMITATION ON ASSET SALES. We may not sell assets unless we receive fair market
value and at least 75% of the consideration is in cash or assets to be used for
our coal mining business. Proceeds of permitted Asset Sales must be used for
permitted purposes or to redeem new notes, as described above under "-Mandatory
Redemption - Asset Sales."
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, consummate an Asset Sale unless
- we or the Restricted Subsidiary, as the case may be, receives
consideration at the time of the Asset Sale at least equal to the
fair market value, as determined in good faith by our board of
directors, of the assets or equity interests issued or sold or
otherwise disposed of, and
- at least 75% of the consideration we or the Restricted Subsidiary
receives is in the form of (1) cash or cash equivalents or (2)
property or assets to be used in the ordinary course of our or
the subsidiary's coal mining business.
For purposes of determining compliance with this covenant, the following types
of consideration are treated as cash or cash equivalents:
- any liabilities of the seller, other than contingent liabilities
and liabilities that are by their terms subordinated to the new
notes or any guarantee of the new notes, which the transferee
assumes under an agreement that releases the seller from further
liability; and
- any securities, notes or other obligations the seller receives
from the transferee which are converted into cash within 90 days
after the Asset Sale.
Proceeds of permitted Asset Sales must be used for permitted purposes or to
redeem new notes, as described above under a "--Mandatory Redemption--Asset
Sales."
LIMITATION ON RESTRICTED PAYMENTS. We may not make restricted payments - such as
cash dividends on capital stock, repurchases or redemptions of stock or
investments in or loans to unrestricted entities in which we have an interest,
unless a series of requirements are met or a specific exemption applies. The
requirements are as follows:
- There can be no default under the Indenture either before or
after the payment;
- We must be able to meet the financial test to incur additional
debt, even if the payment is treated as having been made at the
beginning of the previous four quarters; and
- The payment in question, together with all other restricted
payments, would not exceed a cap that is calculated by reference
to our income and cash receipts.
Even if these general requirements are not met, we can make some kinds of
payments that would otherwise be restricted as long as they qualify under one of
the specific exemptions in the covenant. Most of the exemptions apply only if
there is no existing Event of Default under the Indenture. The exemptions
include:
- Payments of dividends on stock that were permissible under the
Indenture when declared;
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- Payments to retire debt or preferred stock which are made out of
proceeds of the sale of our common stock;
- Refinancing of our old notes or of subordinated debt;
- Redemption of stock our officers, directors and employees own
under specified circumstances;
- Redemption of our Series A and Series B preferred stock following
a Change of Control and redemption of all new notes that are
tendered for redemption as a result of the Change of Control; and
- Payment of dividends on our Coal Acquisition Preferred Stock.
The restrictions of the covenants in the Indenture apply only to us and
subsidiaries that our board of directors has designated as Restricted
Subsidiaries. Our board can change the designation of any subsidiary and make
these restrictions inapplicable, but only if our investment in, and other
transactions with, the subsidiary would be permissible under the terms of the
Indenture.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, take any of the following
actions unless the tests set forth below are satisfied:
(1) declare or pay any dividend or make any other payment or
distribution to direct or indirect shareholders on account of
their equity interests, other than dividends or distributions
payable in our stock that is not mandatorily redeemable until at
least 91 days after the new notes mature;
(2) purchase, redeem or otherwise acquire or retire for value any of
our equity interests or that of any direct or indirect parent of
us;
(3) make any principal payment on, or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any of
the old notes or Indebtedness that is subordinated to the new
notes, except a scheduled repayment of principal or a payment of
principal at stated maturity; or
(4) make any Investment other than a Permitted Investment.
All of the following tests must be satisfied in order for us or our Restricted
Subsidiaries to be permitted to make any of the payments specified above:
- No default or Event of Default under the Indenture can be
continuing or would result from the payment;
- At the time of making the payment and after giving effect to the
payment as if it had been made at the beginning of the applicable
four-quarter period, we would be permitted to incur at least
$1.00 of additional Indebtedness under the Fixed Charge Coverage
Ratio test, as set forth below under "--Limitation on Incurrence
of Indebtedness and Issuance of Mandatorily Redeemable Stock;"
and
- The payment, together with the aggregate amount of all other
restricted payments we and our Restricted Subsidiaries make after
October 1, 1999, excluding restricted payments permitted by
clauses (2), (3), (4) and (6) of the next succeeding paragraph,
is less than the sum, without duplication, of the following:
(1) 50% of our Consolidated Net Income for the period, taken as
one accounting period, from the beginning of the first
fiscal quarter commencing after October 1, 1999 to the end
of our most recently ended fiscal quarter for which internal
financial statements are available at the time of the
restricted payment, or, if the Consolidated Net Income for
the period is a deficit, less 100% of that deficit, plus
(2) 100% of the aggregate net cash proceeds and the fair market
value of marketable securities, as we determine in good
faith, we receive from the issue or sale to a person or
entity other than a Restricted Subsidiary since October 1,
1999 of our stock, other than stock that we can be required
to redeem, or of our debt securities that have been
converted into stock; however, proceeds used to acquire or
redeem old notes or subordinated debt or equity interests
under the exemption provided below are to be excluded from
this calculation; plus
(3) 100% of the aggregate net cash proceeds and the fair market
value of marketable securities, as we determine in good
faith, we receive as an equity contribution from a holder or
holders of our equity interests, other than a contribution
with respect to stock that we can be required to redeem;
plus
(4) to the extent that any Restricted Investment that was made
after October 1, 1999 is sold or otherwise liquidated or
repaid, the aggregate amount of cash and the fair market
value of marketable securities, as we determine in good
faith, we receive as the return of capital with respect to
the Restricted Investment, less the cost of disposition, if
any; plus
(5) the amount resulting from redesignations of Unrestricted
Subsidiaries, as long as the amount does not exceed the
amount of Investments we or any Restricted Subsidiary made
in the Unrestricted Subsidiary since October 1, 1999 which
was treated as a Restricted Payment under the Indenture,
plus
(6) the amount of the net reduction in Investments in
Unrestricted Subsidiaries resulting from the payment of cash
dividends we or any of our Restricted Subsidiaries received
from the Unrestricted Subsidiaries.
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The following kinds of payments are exempt from the restrictions of this
covenant even if they would otherwise be prohibited:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration
the payment would have complied with the provisions of the
Indenture;
(2) as long as no event of default is continuing, the
redemption, repurchase, retirement, defeasance or other
acquisition of any of the old notes, subordinated
indebtedness or equity interests in exchange for, or out of
the net cash proceeds of, the substantially concurrent sale,
other than to any of our Restricted Subsidiaries, of our
other equity interests, other than stock that we can be
required to redeem; however, the amount of any net cash
proceeds that are utilized under this exemption to make any
redemption, repurchase, retirement, defeasance or other
acquisition will be excluded in calculating the maximum
amount of restricted payments permitted by the restricted
payments covenant;
(3) as long as no event of default is continuing, the
defeasance, redemption, repurchase or other acquisition of
the old notes or subordinated indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing
Indebtedness;
(4) the payment of any dividend by any of our subsidiaries to
the holders of our or its common equity interests on a pro
rata basis;
(5) as long as no event of default is continuing, the
repurchase, retirement or other acquisition or retirement
for value of our common equity interests held by any of our
future, present or former employees or directors or any of
our Restricted Subsidiaries or the estate, heirs or legatees
of, or any entity controlled by, any of these employees or
directors, under any management equity plan or stock option
plan or any other management or employee benefit plan or
agreement in connection with the termination of that
person's employment for any reason, including by reason of
death or disability. The aggregate Restricted Payments made
under this clause to any person other than PPK Group Limited
Liability Company may not exceed $100,000 in any calendar
year. The aggregate Restricted Payments made under this
clause to PPK Group may not exceed the cash proceeds of key
man life insurance policies which we receive after October
1, 1999, less the amount of any Restricted Payments
previously made to PPK Group Limited Liability Company
pursuant to this clause;
(6) as long as no Event of Default is continuing, in the event
of a Change of Control under the Indenture, the making of
mandatory redemptions on our Class A preferred stock and our
Class B preferred stock, par value $1,000 per share, in each
case in accordance with the terms of the change of control
provisions of the preferred stock as in effect on October 1,
1999. No redemption may be made until after we have redeemed
all new notes tendered under the Change of Control
provisions of the Indenture;
(7) as long as no Event of Default is continuing, the
declaration and payment of dividends on, and the making of
scheduled mandatory redemptions of, our Coal Acquisition
Preferred Stock in accordance with the terms of that stock;
and
(8) repurchases of equity interests deemed to occur upon
exercise of stock options if those equity interests
represent a portion of the exercise price of the options.
The payment restrictions in this covenant apply only to us and to our Restricted
Subsidiaries. They do not apply to Unrestricted Subsidiaries. Our board of
directors may redesignate any Restricted Subsidiary as an Unrestricted
Subsidiary if the designation is permitted by this covenant and otherwise would
not cause a default under the Indenture. For purposes of determining whether
redesignation is permissible, all outstanding Investments we and our Restricted
Subsidiaries make, except to the extent repaid in cash, in the subsidiary to be
redesignated will be deemed to be Restricted Payments at the time of the
redesignation and will reduce the amount available for Restricted Payments under
the first paragraph of the covenant. The amount of the Investments will be equal
to the fair market value of the Investments at the time of the redesignation.
The redesignation will only be permitted if a Restricted Payment to an
Unrestricted Subsidiary in that amount would be permitted at that time and if
the subsidiary to be redesignated otherwise meets the definition of an
Unrestricted Subsidiary.
The amount of all Restricted Payments, other than cash, will be the fair market
value on the date of the Restricted Payment of the asset(s) or securities we or
a Restricted Subsidiary, as the case may be, proposes to be transferred or
issued under the Restricted Payment. The fair market value of any non-cash
Restricted Payment will be based on the good faith determination of our board of
directors. Not later than the date of making any Restricted Payment, we must
deliver to the Trustee an officers' certificate stating that the Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this covenant were computed.
LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF MANDATORILY REDEEMABLE
STOCK. We may not incur additional Indebtedness or issue stock that we can be
required to redeem sooner than 91 days after the new notes mature if, treating
the transaction as if it had occurred at the beginning of the previous four
fiscal quarters, our consolidated cash flow for that four-quarter
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period would be less than 2.25 times the sum of our consolidated interest
expense plus the pretax amount necessary to pay cash dividends on our preferred
stock. These restrictions do not apply to Indebtedness that falls within the
definition of Permitted Debt.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to any Indebtedness, including Acquired
Debt, and that we will not, and will not permit any of our Restricted
Subsidiaries to issue any shares of stock that the issuer can be required to
redeem before the 91st day after the new notes mature. We or any of the
subsidiaries that have guaranteed the new notes, may incur Indebtedness,
including Acquired Debt, or issue shares of stock if the Fixed Charge Coverage
Ratio for our most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which the
additional Indebtedness is incurred or the stock is issued would have been at
least 2.25 to 1, determined as if the additional Indebtedness had been incurred
or the stock had been issued and the proceeds had been received and applied at
the beginning of the four-quarter period.
LIMITATION ON LAYERING. We cannot create Indebtedness that ranks below the
Senior Secured Debt but ahead of the new notes.
The Indenture also provides that neither we nor any subsidiary that has
guaranteed the new notes may incur any Indebtedness that is contractually
subordinated to any other Indebtedness of us or the subsidiary, unless the
Indebtedness is also contractually subordinated to the new notes or the
guarantee of the subsidiary on substantially identical terms. No Indebtedness of
us or any guarantor subsidiary, however, will be deemed to be contractually
subordinated to any other Indebtedness of us or the guarantor subsidiary solely
by virtue of its being unsecured.
PERMITTED DEBT. We and our Restricted Subsidiaries can incur some kinds of
Indebtedness even if we or they do not meet the consolidated cash flow test
described above.
The restrictions on incurrence of Indebtedness described above under
"--Limitation on Incurrence of Indebtedness and Issuance of Mandatorily
Redeemable Stock" do not apply to any of the following items of Indebtedness:
(1) Indebtedness under debt or commercial paper facilities
providing for term loans, revolving credit loans or letters
of credit in a principal amount of up to $55 million;
(2) Indebtedness that existed on October 1, 1999;
(3) Indebtedness under the Indenture and related documents;
(4) Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each
case incurred for the purpose of financing all or any part
of the purchase price, lease or cost of construction or
improvement of property, plant or equipment used in our
business or that of a subsidiary that has guaranteed the new
notes, in an aggregate principal amount not to exceed $10.0
million at any time outstanding;
(5) Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or
replace Indebtedness, other than intercompany Indebtedness,
that the Indenture permits to be incurred;
(6) intercompany Indebtedness between or among us and any of our
subsidiaries that have guaranteed the new notes; however,
(a) if we are the obligor on the Indebtedness, the
Indebtedness must be expressly subordinated to the prior
payment in full in cash of all obligations with respect to
the new notes, and (b)(i) any subsequent issuance or
transfer of equity interests that results in any
Indebtedness' being held by a person or entity other than us
or a subsidiary that has guaranteed the new notes and (ii)
any sale or other transfer of any Indebtedness to a person
or entity that is not either a guarantor subsidiary or us
will be deemed, in each case, to constitute an incurrence of
Indebtedness by us or the guarantor subsidiary, as the case
may be;
(7) Hedging Obligations;
(8) Indebtedness incurred in connection with performance, surety
and similar bonds and completion guarantees we or any
Restricted Subsidiary provides in the ordinary course of
business;
(9) the issuance by our Unrestricted Subsidiaries of
non-recourse debt; however, if any of this Indebtedness
ceases to be non-recourse debt of an Unrestricted
Subsidiary, that event will be deemed to constitute an
incurrence of Indebtedness by our Restricted Subsidiary; and
(10) Guarantees of Indebtedness that another provision of this
covenant permits to be incurred.
For purposes of determining compliance with this covenant, in the event that an
item of Indebtedness meets the criteria of more than one of the categories of
permitted debt described in clauses (1) through (10) above or is entitled to be
incurred pursuant to the first paragraph of the covenant described under this
section, we can choose which provision will apply to the item of Indebtedness.
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Accrual of interest, the accretion of accredited value and the payment of
interest in the form of additional Indebtedness will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
LIMITATION ON LIENS. We may not pledge our assets as collateral for any debt for
borrowed money that ranks equally with or below the new notes, unless the new
notes also get the benefit of the pledge. If we grant a lien on real property in
Maryland to secure our senior credit facility, we must also grant a junior lien
on the same property to secure the new notes.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any lien securing Indebtedness or trade payables on any asset
now owned or acquired in the future, or any income or profits from that asset or
assign or convey any right to receive income from that asset, except Permitted
Liens, unless the new notes are secured equally and ratably with, or before in
the case of subordinated indebtedness, the obligation or liability secured by
the lien. In the event that we or any subsidiary that has guaranteed the new
notes grants a lien on any real property located in the state of Maryland to
secure the Senior Secured Indebtedness, that grantor must immediately grant a
junior lien in favor of the Collateral Agent to secure the obligations under the
Indenture.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. We
generally cannot allow our subsidiaries to be subject to restrictions on their
ability to pay money or transfer assets to us.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, directly or indirectly, be subject to any agreement
or other consensual arrangement that restricts our or their ability to do any of
the following:
- (1) pay dividends or make any other distributions to us or any of our
Restricted Subsidiaries based upon stock ownership or its profits or
(2) pay any indebtedness owed to us or any of our Restricted
Subsidiaries,
- make loans or advances to us or any of our Restricted Subsidiaries or
- transfer any of our or their properties or assets to us or any of our
Restricted Subsidiaries.
The following kinds of restrictions are permissible under this covenant even if
they would otherwise fall within one of the three categories set forth above:
- restrictions imposed by the terms of Indebtedness as in effect on
October 1, 1999;
- restrictions imposed by the terms of our senior credit facility;
- restrictions imposed by the Indenture and the new notes;
- restrictions imposed by applicable law, rules or regulations or any
order or ruling by a governmental authority;
- restrictions imposed by agreements to which a Restricted Subsidiary
was already subject at the time it was acquired and that do not apply
to us or any other Restricted Subsidiary;
- customary non-assignment provisions in leases, licenses, encumbrances,
contracts or similar agreements entered into or acquired in the
ordinary course of business;
- purchase money obligations for property acquired in the ordinary
course of business which impose transfer restrictions on the acquired
property;
- customary restrictions included in contracts for the sale of assets by
us or a Restricted Subsidiary;
- restrictions on cash or other deposits imposed by customers under
contracts entered into in the ordinary course of business;
- customary provisions in joint venture agreements at the time of
creation of the joint venture and other similar agreements entered
into in the ordinary course of business; and
- renewals or replacements of agreements that impose restrictions that
are otherwise permissible under this covenant.
LIMITATION ON MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. We may not merge or
consolidate with other companies unless (1) we are not in default under the new
notes, (2) the surviving corporation assumes our obligations under the Indenture
and (3) we could incur additional Indebtedness under the debt covenant described
under "-- Limitation on Incurrence of Indebtedness and Issuance of Mandatorily
Redeemable Stock."
The Indenture provides that we may not consolidate or merge with or into,
whether or not we are the surviving corporation, or sell or otherwise dispose of
all or substantially all of our properties or assets in one or more related
transactions, to another corporation, person or entity or entity unless all of
the following tests are met:
- we must be the surviving corporation or the surviving corporation or
other party to the transaction must be organized under U.S. law;
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- the surviving corporation or other party to the transaction must
assume all our obligations under the new notes and the Indenture;
- immediately after closing of the transaction there would be no default
under the Indenture; and
- we or the surviving corporation or other party to the transaction
would be able to incur additional Indebtedness under the covenant
described above under "-- Limitation on Incurrence of Indebtedness and
Issuance of Mandatorily Redeemable Stock" with the financial ratio
specified in that covenant calculated as if the transaction had been
completed at the start of the four-quarter measurement period.
This covenant does not prohibit (1) a Restricted Subsidiary from merging with or
transferring property to us or (2) us from merging with an affiliate that was
incorporated solely for the purpose of reincorporating us in another state of
the United States, as long as the amount of our Indebtedness and that of our
Restricted Subsidiaries is not increased.
LIMITATION ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS. We and our
subsidiaries may not enter into transactions with major stockholders or persons
we or they control, are controlled by or are under common control with, unless
the transaction is fair and we comply with specified procedures.
The Indenture provides that we will not, and will not permit any of our
Restricted Subsidiaries to, make any payment to or Investment in, or sell,
lease, transfer or otherwise dispose of any of our or its properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any person or entity that directly or indirectly
controls, is controlled by, or is under common control with us or the Restricted
Subsidiary unless
- the transaction is on terms that are no less favorable to us or the
relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction with an unrelated person or
entity;
- if the total consideration involved in the transaction exceeds $5
million, the transaction must be approved by a majority of the members
of our board of directors or that of the Restricted Subsidiary who do
not have an interest in the transaction, and one of our officers must
certify that fact in writing to the Trustee; and
- if the total consideration involved in the transaction exceeds $10
million, we must deliver to the Trustee an opinion from an engineer,
appraiser or other expert who has no interest in, or connection with,
us or our subsidiaries to the effect that the transaction is fair from
a financial point of view.
The following kinds of transactions are not subject to the restrictions of this
covenant:
- any employment agreement we or any of our Restricted Subsidiaries
enters into in the ordinary course of business;
- transactions between or among us and/or our Restricted Subsidiaries;
- Restricted Payments that are permitted by the provisions of the
Indenture described above under "--Limitation on Restricted Payments;"
- any payments made in connection with the new notes, warrants to
purchase our common stock issued October 28, 1999, or any related
agreements;
- the payment of reasonable and customary fees paid to, and indemnity
provided on behalf of, our officers, directors or employees or those
of any Restricted Subsidiary;
- transactions in which we or any of our Restricted Subsidiaries
delivers to the Trustee a letter from an engineer, appraiser or other
expert who has no interest in, or connection with, us or our
subsidiaries to the effect that the terms of the transaction are no
less favorable to us or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction with an
unrelated person or entity;
- loans to employees (1) under our employee relocation policy as in
effect on October 1, 1999 or (2) for any other purpose, as long as the
loans are not in excess of $100,000 in the aggregate at any one time
outstanding and are approved by a majority of our or the Restricted
Subsidiary's board of directors, as applicable, in good faith;
- any agreement as in effect as of October 1, 1999 or any amendment to
that agreement, as long as the amendment is no less favorable to the
holders of the new notes in any material respect than the original
agreement as in effect on October 1, 1999, or any transaction
contemplated by that agreement;
- the existence of, or the performance by us or any of our Restricted
Subsidiaries of our or its obligations under the terms of, the
stockholders' agreement, dated as of August 12, 1996, as in effect on
October 1, 1999, and any amendments or similar agreements that are no
less favorable to the holders of new notes and that are entered into
after October 1, 1999; and
- coal supply agreements with Anker Holding B.V. and its affiliates in
the ordinary course of business and otherwise in compliance with the
terms of the Indenture on arms-length terms.
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LIMITATION OF BUSINESS ACTIVITIES
Neither we nor any of our subsidiaries can engage in any business that does not
fall within the definition of "Permitted Business" unless that other business
would not be material to us and our subsidiaries taken as a whole.
LIMITATION ON PAYMENTS FOR CONSENT. We cannot pay holders of new notes to waive
rights under, or modify the terms of, the Indenture unless we make the same
offer to all holders of new notes.
The Indenture provides that neither we nor any of our subsidiaries may, directly
or indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any new notes for, or as an
inducement to, any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the new notes unless the consideration is offered
to be paid or is paid to all holders of the new notes that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to the consent, waiver or agreement.
ADDITIONAL SUBSIDIARY GUARANTEE
The Indenture provides that if we or any of our Restricted Subsidiaries acquires
or creates another Restricted Subsidiary after October 1, 1999, then the newly
acquired or created Restricted Subsidiary must guarantee the new notes.
REPORTS
As long as any of the new notes is outstanding, we are required to file with the
SEC the annual reports, quarterly reports and other documents that we would have
been required to file with the SEC under Section 13(a) or 15(d) of the Exchange
Act if we were subject to these sections. We must also provide to all holders of
new notes and file with the Trustee copies of these reports. In addition, until
the effectiveness of a registration statement that permits holders of Series A
notes to exchange them for Series B notes or to sell their Series A notes
without restriction, we must furnish to the holders of the new notes and to
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
We will be in default under the new notes if specified events occur. These
events include(1) failure to pay principal on the new notes when due, (2)
failure to pay interest within 30 days after it is due, (3) breaches of
covenants, (4) defaults under other indebtedness, (5) failure to pay judgments
and (6) bankruptcy. Bankruptcy causes automatic acceleration of the new notes.
Any other event of default will give the Trustee or 25% of the holders the right
to call the new notes and take other enforcement action, including foreclosing
on the collateral.
The Indenture provides that each of the following is an "Event of Default:"
- failure to pay interest on the new notes or Liquidated Damages on the
Series A notes within 30 days after the date due;
- failure to pay principal or premium, if any, on the new notes when due;
- failure to comply with the mandatory redemption requirements applicable to
Asset Sales and Changes of Control, as described above;
- failure to comply with any other provision of the new notes or the
Indenture unless cured within 60 days after written notice by the Trustee
or by the holders of at least 25% of the new notes then outstanding;
- failure to comply with any provision of the documents creating the liens
that secure the new notes unless cured within 30 days after written notice
by the Trustee or by the holders of at least 25% of the new notes then
outstanding;
- a payment default in connection with Indebtedness of $5.0 million or more,
or any other kind of default that results in the acceleration of
Indebtedness of $5.0 million or more;
- failure to pay within 60 days final judgments that exceed applicable
insurance coverage by more than $5.0 million unless those judgments have
been discharged or stayed within that 60-day period;
- if the guarantee of the new notes by any significant subsidiary becomes, or
is claimed by the subsidiary to be, invalid or unenforceable;
- various events of bankruptcy or insolvency with respect to us or any of our
significant subsidiaries; and
- we or any of our subsidiaries initiates any suit or proceeding challenging
the legality, validity, or enforceability of the new notes, the Indenture
or the liens that secure the new notes.
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The holders of a majority in amount of the new notes may waive any existing
default or Event of Default and its consequences under the Indenture, except a
continuing payment default. Payment defaults can only be waived by individual
holders; waiver by a majority of the holders is not effective to bind those who
do not consent.
If an Event of Default occurs and is continuing, the Trustee or the holders of
at least 25% in principal amount of the outstanding new notes may declare all of
the new notes to be due and payable immediately. If the Event of Default relates
to bankruptcy of us or a significant subsidiary, the new notes automatically
become due and payable immediately without any action by the Trustee or the
holders.
In addition to calling the new notes, the Trustee may take the following
enforcement actions as a result of an Event of Default:
- sue us and the subsidiaries that have guaranteed the new notes to collect
and otherwise enforce the terms of the new notes;
- except as limited by the intercreditor agreement, foreclose upon the
collateral that secures the new notes or seek appointment of a receiver for
the collateral or any other assets of us and the subsidiaries that have
guaranteed the new notes; or
- pursue any other remedy that is available under the Indenture or applicable
law.
No holder of a new note can act to enforce the Indenture unless the following
requirements are met:
- the holder has notified the Trustee of a continuing Event of Default;
- the holders of at least 25% in amount of the new notes have requested the
Trustee to take enforcement action and offered to indemnify the Trustee in
connection with that action;
- holders of a majority in amount of the new notes have not instructed the
Trustee not to take enforcement action; and
- the Trustee has failed to take enforcement action within 60 days.
However, the above limitations do not apply to a suit instituted by a holder of
a new note to collect unpaid amounts due under the holder's new notes.
Holders of a majority in amount of the new notes may direct the Trustee in its
exercise of any trust or power under the Indenture, but the Trustee can refuse
to follow those directions if they would conflict with law or the Indenture,
injure other holders or expose the Trustee to personal liability. The Trustee
may withhold from holders of new notes notice of any continuing default or Event
of Default, except a default or Event of Default relating to the payment of
principal or interest, if the Trustee determines that withholding notice is in
the noteholders' interest.
We are required to certify to the Trustee annually that we are in compliance
with the Indenture and to notify the Trustee whenever we become aware of any
default or Event of Default.
NO RECOURSE AGAINST OTHERS
Holders of new notes have no legal recourse against our directors, officers,
employees or stockholders.
The Indenture provides that none of our directors, officers, employees or
stockholders, in those capacities, will have any liability for any of our
obligations under the new notes or the Indenture or for any claim based on, in
respect of or by reason of those obligations or their creation. Each holder, by
accepting the new notes, waives and releases all of this liability.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE.
We can be relieved of our obligations under the Indenture if we deposit with the
Trustee sufficient money or government securities to pay the principal of and
interest on the new notes as they become due.
At any time while the new notes are outstanding, we may be relieved of almost
all of our obligations under the Indenture or obtain a more limited release from
some covenants by delivering cash to the Trustee and complying with other
procedures.
The broader release, which is referred to in the Indenture as "Legal
Defeasance," would leave us with only those obligations relating to the issuance
and replacement of new notes, administration of payments and cooperation with,
and payment of the fees and expenses of, the Trustee. The narrower release,
which is referred to as "Covenant Defeasance," would relieve us of our reporting
and
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certification obligations, the financial covenants and restrictions on
operations and transactions, but it would leave us subject to the other
provisions of the Indenture.
In order to exercise either Legal Defeasance or Covenant Defeasance, we must
comply with all of the following requirements:
(1) We must deposit with the Trustee enough cash to pay when due all amounts
required to be paid under the new notes and the Indenture;
(2) Depending on whether we are seeking Legal Defeasance or Covenant
Defeasance, we must deliver to the Trustee one of the following tax
opinions:
- in order to get the narrower release from specified covenants, we must
deliver a legal opinion confirming that the deposit of funds with the
Trustee and the related release of our obligations will not be a
taxable event for the holders of new notes; or
- in order to get the broader release from the requirements of the
Indenture, we must deliver a legal opinion stating that the lack of tax
consequences for holders of new notes has been confirmed by the
Internal Revenue Service or is the result of a change in applicable law
since October 1, 1999;
(3) We and the subsidiaries that have guaranteed the new notes cannot be in
default under the new notes or the Indenture when we make the cash deposit;
(4) The deposit of funds and our release from obligations under the Indenture
cannot be a violation of any of our material contracts or those of any of
our subsidiaries;
(5) In addition to the tax opinion referred to above, we must deliver to the
Trustee a legal opinion to the effect that
- after the 91st day following the deposit, the funds deposited with the
Trustee will not be subject to recovery in a bankruptcy or similar
proceeding of us or any of the subsidiaries that have guaranteed the
new notes; and
- all of the requirements for Legal Defeasance or Covenant Defeasance,
whichever is applicable, have been satisfied; and
(6) We must deliver to the Trustee an officers' certificate stating that
- the deposit of funds was not made with the intent of preferring the
holders of new notes over the other creditors or with the intent of
defeating, hindering, delaying or defrauding creditors;
- all of the requirements for Legal Defeasance or the Covenant
Defeasance, whichever is applicable, have been satisfied.
POSSESSION AND USE OF COLLATERAL
Unless the new notes have been accelerated, we and our subsidiaries can keep and
use the collateral as long as the use does not violate the restrictions and
covenants in the Indenture. In addition, we and they can transfer collateral
from one Restricted Subsidiary to another without the Trustee's consent.
Collateral that we or our subsidiaries use or that is transferred from one
subsidiary to another remains subject to the liens securing the new notes.
DISPOSITION AND RELEASE OF COLLATERAL
We and our subsidiaries can sell or transfer collateral free and clear of the
liens securing the new notes if we and they comply with the requirements
described below. The applicable requirements depend upon the kind of collateral
and its value. In general, we must receive fair value in exchange for collateral
and, except in the case of collateral that we sell in the ordinary course of our
business, we must deliver to the Trustee evidence that the price was fair and
that the release of the collateral will not impair the liens securing the new
notes. If we comply with the applicable requirements, the Trustee must release
the lien on the particular item of collateral.
DISPOSITION OF COLLATERAL WITHOUT RELEASE
As long as the new notes have not been accelerated, we and our subsidiaries can
take the following actions or sell or transfer the following kinds of collateral
free and clear of the liens securing the new notes without obtaining the
Trustee's consent or a formal release of liens:
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(1) dispose of worn-out or obsolete machinery, equipment, furniture,
apparatus, tools or implements, materials, supplies or other similar
property or nonproductive real property, as long as the value does not
exceed the greater of $25,000 or 1% of the outstanding new notes in any
given year;
(2) sell or dispose of inventory and collect or write off accounts
receivable in the ordinary course of business, as long as we certify to
the Trustee every six months that our inventory and receivables
transactions during the preceding six-month period were in the ordinary
course of business and that we used the proceeds from those
transactions for purposes that are permitted under the Indenture;
(3) grant rights-of-way, restrictions on use, subleases, easements or other
encumbrances on real estate that do not impair the usefulness of the
property or prejudice the interests of the holders of new notes;
(4) give up, amend or exchange contractual rights or rights in real
property, as long as any net proceeds or substitute property received
in the transaction in excess of the greater of $25,000 or 1% of the
outstanding new notes becomes subject to the liens securing the new
notes;
(5) give up or modify any franchise, license or permit, the loss of which
will not affect our continuing business operations, as long as any net
proceeds received in the transaction in excess of the greater of
$25,000 or 1% of the outstanding new notes becomes subject to the liens
securing the new notes;
(6) alter, repair, replace, change the location or position of and add to
our plants, structures, machinery, systems, equipment, fixtures and
related property, as long as the property in question continues to be
subject to the liens securing the new notes; or
(7) demolish, dismantle, tear down, scrap or abandon any worthless
collateral, including mineral rights, leases and other real property
interests.
RELEASES OF COLLATERAL. We may obtain the release of collateral from the liens
securing the new notes either by substituting cash or other property worth at
least as much as the collateral to be released or by complying with procedures
to demonstrate that we are receiving the fair value of the collateral at issue
and the holders of the new notes will not be harmed by the release.
Release by Substitution of Property. In order to substitute property for
collateral to be released from the liens securing the new notes, we must
provide evidence to the Trustee of the fair value of the property to be
released and the fair value of the substitute property. If the fair value
of the collateral being released or substituted is at least equal to the
greater of $25,000 or 1% of the outstanding new notes, or if the fair value
of all collateral released through substitution of property is at least 10%
of the outstanding new notes, the fair values must be certified by an
engineer, appraiser or other expert who is not employed by or affiliated
with us or our subsidiaries. Otherwise, the fair values can be established
by our qualified personnel. In addition, we must deliver to the Trustee
officers' certificates, corporate resolutions, opinions of counsel and any
documents necessary to create the lien on the substitute collateral.
Release by Substitution of Cash. We are not permitted to substitute cash
for collateral unless our senior secured credit facilities have been paid
off and terminated. At that point, we can
- obtain a release of all the collateral, other than cash, by depositing
with the Trustee an amount sufficient to pay all obligations under the
Indenture;
- obtain a release of particular items of collateral by depositing with
the Trustee an amount at least equal to the fair value of the
collateral to be released;
- obtain a release of particular items of collateral being sold for cash
equal to their fair value if all net proceeds of the sale are deposited
with the Trustee to replace the property being sold.
Cash deposited as collateral is to be held by the Trustee in a segregated
account. As long as we and our subsidiaries are not in default under the
Indenture, we and they can select from among permissible investments of cash
deposited as collateral and are entitled to receive interest earned on
investments of that cash. We and our subsidiaries can substitute cash or cash
equivalents for other forms of cash collateral.
Release of Collateral Without Substitution. We can sell, exchange or
otherwise dispose of collateral, and the Trustee must release its liens
upon the collateral being sold, as long as we deliver the following
documents to the Trustee and, if applicable, comply with the mandatory
redemption requirements described above under "Mandatory Redemption from
Excess Asset Sale Proceeds."
- If the property to be released has a book value in excess of the
greater of $25,000 and 1% of the outstanding new notes, a board
resolution requesting the release;
- An officers' certificate identifying the property to be released,
specifying its fair value, describing the terms of the proposed
transaction and stating that the transaction and release comply with
the terms of the Indenture;
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- If the total fair value of all the property plus all other collateral
except inventory and accounts receivable released from the liens
securing the new notes in the current calendar year is at least 10% of
the amount of the outstanding new notes, and the value of the property
to be released is at least equal to the greater of $25,000 and 1% of
the outstanding new notes, we must provide a certificate from an
engineer, appraiser or other expert who is not employed by or
affiliated with us or our subsidiaries specifying the fair value of the
property and stating that the proposed release will not impair the
liens securing the new notes on the remaining collateral;
- If the book value of the collateral that is the subject of the release
is more than the greater of $25,000 and 1% of the outstanding new
notes, a legal opinion that the release complies with the terms of the
Indenture and that the Trustee will have a valid lien on any substitute
collateral.
CASH HELD BY THE TRUSTEE
Cash or cash equivalents deposited with or received by the Trustee will be held
in a collateral account for the benefit of the holders of the new notes and,
where applicable, the lenders that hold senior secured debt, as part of the
collateral. As long as we and our subsidiaries are not in default under the
Indenture, we and they can obtain the release of cash from the Trustee if
release is permitted under the provisions of the Indenture described above under
"-- Mandatory Redemption from Excess Asset Sale Proceeds" and "-- Disposition
and Release of Collateral." We can also obtain the release of insurance or
condemnation proceeds in order to replace the property that was destroyed or
taken.
If we or any of our subsidiaries fails to perform any of the covenants in the
Indenture, the Trustee may use cash it holds as collateral to correct the
omission, and, if that cash is insufficient, the Trustee may advance funds and
charge interest at 14.25% on the advance.
TRANSFER AND EXCHANGE
A holder may transfer or exchange new notes in accordance with the Indenture. As
described under "-- Book-Entry; Delivery and Form," as long as new notes are in
book-entry form, registration of transfers and exchanges of new notes will be
made through direct participants and indirect participants in The Depository
Trust Company. For new notes in definitive form, the Registrar and the Trustee
may require a noteholder to furnish appropriate endorsements and transfer
documents. In addition, we may require a noteholder to pay any taxes and fees
required by law or permitted by the Indenture. We are not required to register
the transfer of or exchange any new note selected for redemption. Also, we are
not required to issue, register the transfer of or exchange any new note for a
period of 15 days before a selection of new notes to be redeemed.
The registered holder of a new note will be treated as the owner of the new note
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except for payment provisions, most provisions of the Indenture and related
documents can be amended or waived by holders of a majority in amount of the
outstanding new notes. Provisions relating to payments and similar matters
cannot be amended or waived without the consent of all holders. The Trustee can
unilaterally amend the Indenture and related documents in order to perform its
duties under the Indenture.
AMENDMENTS AND WAIVERS BY THE MAJORITY OF HOLDERS. Except as described below,
the holders of a majority in amount of the outstanding new notes can permit the
Indenture, the subsidiary guarantees, the new notes, the intercreditor agreement
or any of the security documents to be amended or supplemented and can waive any
existing default or Event of Default under those documents other than a payment
default.
AMENDMENTS AND WAIVERS THAT REQUIRE THE CONSENT OF ALL AFFECTED HOLDERS.
Amendments and waivers cannot do any of the following things without the consent
of each holder of new notes affected by the amendment or waiver:
- reduce the principal amount of new notes whose holders must consent to
an amendment, supplement or waiver;
- reduce the principal of or change the fixed maturity of any new note or
alter the provisions for redemption of the new notes other than
mandatory redemptions out of excess asset sale proceeds or upon a
Change of Control;
- reduce the rate of, or change the time for payment of, interest on any
new note;
- waive a payment default, except a rescission of acceleration of the new
notes by the holders of at least a majority in principal amount of the
outstanding new notes and a waiver of the payment default that resulted
from the acceleration;
- make any new note payable in money other than U.S. dollars;
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- make any change in the provisions of the Indenture relating to waivers
of the rights of holders of new notes to receive payments of principal
of or premium, if any, or interest on the new notes;
- waive a redemption payment with respect to any new note, other than
mandatory redemption out of excess asset sale proceeds or upon a Change
of Control;
- release any subsidiary from any of its obligations under its guarantee
of the new notes, or amend the provisions of the Indenture relating to
the release of subsidiaries that have guaranteed the new notes;
- permit the release or termination of all or substantially all of the
liens for the benefit of the holders of new notes, other than as
expressly provided in the Indenture; or
- make any change in these amendment and waiver provisions, except to
increase the percentage of outstanding new notes required for these
actions or to provide that other provisions of the Indenture cannot be
modified or waived without the consent of the holder of each
outstanding new note.
AMENDMENTS BY THE TRUSTEE WITHOUT CONSENT
The Trustee can amend the Indenture, the subsidiary guarantees or the new notes
without anyone's consent in order to do any of the following:
- cure any ambiguity, defect or inconsistency;
- provide for uncertificated new notes in addition to, or in place of,
certificated new notes;
- provide for the assumption of our or a guarantor subsidiary's
obligations to holders of new notes in the case of a merger or
consolidation;
- make any change that would provide any additional rights or benefits to
the holders of new notes or that does not adversely affect the legal
rights under the Indenture of any holder of new notes;
- comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act of 1939;
- further secure the new notes or to add guarantees with respect to the
new notes;
- establish or maintain the liens securing the new notes, correct or
amplify the description of the collateral, or subject additional
property to the liens; or
- add to our covenants for the benefit of the parties to the
intercreditor agreement.
In addition, the Trustee can amend or supplement any of the security documents
without anyone's consent in order to do any of the following:
- cure any ambiguity, defect or inconsistency;
- provide for the assumption of our or a guarantor subsidiary's
obligations in case of a merger or consolidation;
- make any change that would provide any additional rights or benefits to
holders of new notes or that does not adversely affect the legal rights
and liens of the new notes;
- add holders of permitted senior secured Indebtedness as parties to the
intercreditor agreement;
- further secure or add guarantees of the new notes;
- establish or maintain the liens securing the new notes, correct or
amplify the description of the collateral, or subject additional
property to the liens; or
- establish or provide for an amended, restated, modified, renewed or
replaced credit facility permitted to be incurred by the Indenture;
- give holders of Permitted Refinancing Indebtedness liens with the same
or lower priority as the liens securing the indebtedness so refinanced;
and
- add to our covenants for the benefit of the parties to the
intercreditor agreement.
THE TRUSTEE
The duties, rights, powers and limitations of the Trustee are governed by the
Indenture.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only the duties specifically set forth in the
Indenture. The holders of a majority of the new notes have the right to direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the Trustee, subject to specified exceptions. The Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of new notes unless the holder has agreed
to indemnify the Trustee against any loss, liability or expense. During the
continuance of an Event of Default, the
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Trustee must exercise its rights under the Indenture with the same degree of
care and skill as a prudent person would exercise under the circumstances in the
conduct of the person's own affairs.
The Indenture contains limitations on the rights of the Trustee, should it
become a creditor of ours, to obtain payment of claims in specified cases or to
realize on specified property it receives in connection with any claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with us or any of our subsidiaries or affiliates. If the Trustee acquires any
conflicting interest, as defined in the Indenture or in the Trust Indenture Act,
however, the Trustee must eliminate the conflict within 90 days or resign.
BOOK-ENTRY; DELIVERY AND FORM
New notes exchanged for old notes will be held in book-entry form by The
Depository Trust Company. DTC and its participants will maintain the records of
beneficial ownership of the notes and of transfers of the notes.
New notes exchanged for old notes will be represented by one or more permanent
global notes in definitive, fully registered form, deposited with a custodian
for, and registered in the name of a nominee of, The Depository Trust Company.
Beneficial interests in permanent global notes will be shown on, and transfers
will be effected through, records maintained by DTC and its participants.
The certificates representing the new notes will be issued in fully registered
form without interest coupons and will be deposited with the Trustee as
custodian for, and registered in the name of a nominee of, DTC.
Ownership of beneficial interests in a global note will be limited to persons
who have accounts with DTC or persons who hold interests through DTC
participants. Ownership of beneficial interests in a global note will be shown
on, and the transfer of that ownership will be effected only through, records
DTC or its nominee maintains with respect to interests of participants and the
records of participants with respect to interests of persons other than
participants. Qualified institutional buyers may hold their interests in a
global note directly through DTC if they are participants in that system or
indirectly through organizations that are participants in that system.
As long as DTC, or its nominee, is the registered owner or holder of a global
note, DTC or its nominee, as the case may be, will be considered the sole owner
or holder of the new notes represented by the global note for all purposes under
the Indenture and the new notes. No beneficial owner of an interest in a global
note will be able to transfer that interest except in accordance with DTC's
applicable procedures, in addition to those provided for under the Indenture
and, if applicable, those of Euroclear and Cedel Bank.
Payments of the principal of, and interest on, a global note will be made to DTC
or its nominee, as the case may be, as the registered owner of the global note.
Neither we, the Trustee nor any paying agent will have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in a global note or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
We expect that DTC or its nominee, upon receipt of any payment of principal or
interest in respect of a global note, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the global note as shown on the records of DTC or its
nominee. We also expect that payments participants make to owners of beneficial
interests in the global note held through those participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for those customers. These payments will be the responsibility of those
participants.
Transfers between participants in DTC will be effected in the ordinary way in
accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
We expect that DTC will take any action permitted to be taken by a holder of new
notes, including the presentation of notes for exchange as described below, only
at the direction of one or more participants to whose account the DTC interests
in a global note is credited and only in respect of that portion of the
aggregate principal amount of new notes as to which the participant or
participants has or have given that direction. However, if there is an Event of
Default under the notes, DTC will exchange the applicable global note for
certificated new notes, which it will distribute to its participants and which
may bear legends restricting their transfer.
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DEPOSITORY TRUST COMPANY
DTC will facilitate the exchange of new notes for old notes in the exchange
offer using its standard procedures. Neither we nor the Trustee is responsible
for DTC's performance of its obligations.
We understand that DTC is a limited purpose trust company organized under the
laws of the State of New York, a "banking organization" within the meaning of
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "Clearing
Agency" registered under the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participants and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, eliminating the
need for physical movement of certificates and some other organizations.
Indirect access to the DTC system is available to others, such as banks,
brokers, dealers and trust companies that clear through, or maintain a custodial
relationship with, a participant, either directly or indirectly.
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a global note among
participants of DTC, Euroclear and Cedel Bank, they are under no obligation to
perform or continue to perform those procedures, and those procedures may be
discontinued at any time. Neither we nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel Bank or their
participants or indirect participants of their obligations under the rules and
procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for the
global notes and we do not appoint a successor depositary within 90 days, we
will issue certificated notes, which may bear legends restricting their
transfer, in exchange for the global notes. Holders of an interest in a global
note may receive certificated notes, which may bear legends restricting their
transfer, in accordance with the DTC's rules and procedures in addition to those
provided for under the Indenture.
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DESCRIPTION OF THE OLD NOTES
On September 25, 1997, we issued $125.0 million of unsecured 9 3/4% Series A
Senior Notes due October 1, 2007. We used the proceeds from the issuance of
these notes to repay all outstanding indebtedness, together with accrued
interest and fees associated with the repayment, under our then-existing amended
and restated credit facility. We incurred a loss on the refinancing of
approximately $3.9 million, net of income taxes of $1.5 million. We classified
the loss as an extraordinary item on our consolidated financial statements in
1997.
On March 11, 1998, we consummated an exchange offer registered under the
Securities Act in which we exchanged $125.0 million of old notes for the $125.0
million of unsecured 9 3/4% Series A Senior Notes due 2007 we had previously
issued. In addition, on October 28, 1999, we consummated a private exchange of
$86.8 million in aggregate principal amount of our 14.25% Series A notes for
$108.5 million in aggregate principal amount of old notes with a limited number
of qualified holders of old notes identified in advance. Currently, $16.5
million in aggregate principal amount of old notes remain outstanding. In
connection with the private exchange, exchanging holders of old notes,
constituting a majority of the principal amount of old notes then outstanding,
consented to amendments to the indenture governing the old notes. The
amendments, effective as of October 1, 1999, among other things, modify or
eliminate various covenants of the indenture governing the old notes.
Interest on the old notes is payable semiannually on April 1 and October 1 of
each year, commencing April 1, 1998. We may redeem the old notes, in whole or in
part, at any time on or after October 1, 2002 at the redemption price as
specified in the indenture governing the old notes plus accrued and unpaid
interest and other charges. At any time on or prior to October 1, 2000, we may
redeem, with proceeds of an initial public offering, up to 35% of the aggregate
principal amount of the old notes at a redemption price equal to 109.75% of the
principal amount plus accrued and unpaid interest and other charges. The old
notes mature on October 1, 2007.
The old notes contain cross-default provisions related to our outstanding credit
facility.
Our obligations under the old notes are jointly and severally guaranteed, fully
and unconditionally on a senior unsecured basis, by each of our wholly-owned
subsidiaries.
For a summary of various terms of the indenture governing the old notes compared
to the indenture governing the new notes, see "Comparison of the Indentures." In
addition, you may obtain a copy of indenture governing the old notes from us.
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DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
On November 21, 1998, we and Foothill Capital Corporation, as agent, entered
into a loan and security agreement whereby the lenders under the agreement have
provided to us up to a $55.0 million credit facility. The credit facility
consists of a commitment for a $40.0 million working capital revolver and a term
loan with an original principal amount of $15.0 million. Commitments under the
credit facility will expire in 2002. The credit facility is secured by
collateral that consists of substantially all of our present and future assets.
Borrowings under the revolver are limited to 85% of eligible accounts receivable
and 65% of eligible inventory. Borrowings bear interest, at our option, at
either 1% above the prime interest rate or at 3 3/4% above the adjusted
Eurodollar rate. For the year ended December 31, 1998, the average interest rate
under the revolver was approximately 8.75%. As of November 30, 1999, there was
no outstanding indebtedness under the revolver.
The term loan bears interest at 2 1/2% above the prime interest rate and is
payable in monthly installments through 2002. The average interest rate for the
term loan for the year ended December 31, 1998 was approximately 10.25%. As of
November 30, 1999, the outstanding indebtedness under the term loan was
approximately $13.0 million.
The following table sets forth the amounts outstanding and borrowing
availability under the credit facility as of the dates specified:
<TABLE>
<CAPTION>
Revolving Revolving Additional
Credit Credit Interim
Date Term Loan Borrowings Availability Availability
---- --------- ---------- ------------ ------------
(in millions)
<S> <C> <C> <C> <C>
12/31/98 $ 15.0 $ 1.9 $ 15.5 __
03/31/99 14.4 1.4 16.5 __
06/30/99 13.9 12.9 6.9 __
09/30/99 13.3 10.9 6.7 2.0
10/31/99 13.2 3.0 14.9 2.0
11/30/99 13.0 __ 17.9 __
</TABLE>
The term loan changes are based on the normal amortization of the loan, except
that
- in July 1999 the term loan was paid down through the application of
approximately $1.25 million of asset sale proceeds; and
- in September 1999, under the terms of the August 27, 1999 amendment to
the loan agreement with Foothill described below, Foothill reversed
this $1.25 million payment, which caused the term loan to increase by
the same amount, and Foothill reapplied the proceeds to reduce
revolving credit borrowings in order to provide us with additional
liquidity.
The increase in the revolving credit borrowings since March 31, 1999 is
primarily related to
- our borrowing to make the interest payment on April 29, 1999 on the old
notes,
- performing reclamation in Webster County, West Virginia and
- capital expenditures.
Lower coal production and coal shipments have also reduced revolving credit
availability. Future revolving credit availability will be impacted by changes
in coal production and the resulting changes in coal inventory and accounts
receivable.
The loan agreement with Foothill contains covenants that, among other matters,
restrict or limit our ability to
- pay interest and dividends,
- incur indebtedness,
- acquire or sell assets and
- make capital expenditures.
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We must also maintain cash flow ratios specified in the loan agreement. In
particular, the loan agreement provides that, in order to advance funds to us
and the other guarantors under the loan agreement, the borrowers under the loan
agreement must have borrowing availability of at least $5.0 million after giving
effect to the advances and for the 30 days immediately preceding the advances.
With respect to the term loan, in addition to regularly scheduled amortizing
principal and interest payments, the loan agreement requires that we apply the
first $5.0 million of proceeds from designated asset sales to the repayment of
the term loan. As of November 30, 1999, no amounts have been applied to the $5.0
million requirement. Proceeds used to repay the term loan cannot be reborrowed.
On August 27, 1999, we entered into an amendment to the loan agreement with
Foothill. Under the amendment, Foothill and the other lenders agreed to provide
us with up to $3.25 million of additional liquidity, $2.0 million of which, if
drawn, we would have been required to repay on or before November 2, 1999. We
also entered into a consent and amendment to the loan agreement with Foothill as
of October 1, 1999. Under that consent and amendment, Foothill and the other
lenders consented to our issuance of the 14.25% Series A notes in the private
exchange and the private placement, provisions of the loan agreement were
amended to take into account the issuance of the 14.25% notes, and Foothill and
the other lenders waived various defaults under the loan agreement existing as
of that date.
The former amended and restated credit facility, which was repaid with funds
from our existing credit facility with Foothill, provided for a line of credit
up to $71.0 million. The average interest rate on borrowings under the amended
and restated credit facility was 8.1% in 1998 and 8.89% in 1997. We incurred a
loss on the refinancing of approximately $965,000, net of income taxes of
$375,000. The loss was classified as an extraordinary item in our consolidated
financial statements in 1998.
NOTE PAYABLE TO SELLER
In conjunction with an acquisition we made, we assumed an outstanding note
payable with an original principal amount of $2.8 million, which bears interest
at 7.47% and is payable in monthly installments through April 1, 2000. The
principal amount outstanding as of September 30, 1999 was approximately $0.4
million. The note is secured by a first lien on the coal reserve acquired in the
transaction.
INTERCREDITOR AGREEMENT
At the closing of the private placement and the private exchange of old notes,
Foothill Capital Corporation, as agent for the lenders under the loan agreement,
and The Bank of New York, as collateral agent under the indenture governing the
14.25% notes, entered into an intercreditor agreement dated as of October 1,
1999. The intercreditor agreement defines the rights of the lenders under the
loan agreement in relation to the rights of the noteholders with respect to the
collateral that secures our and our guarantor subsidiaries' obligations under
both the loan agreement and the indenture governing the 14.25% notes. The
following description summarizes the material terms of the intercreditor
agreement. It does not restate the intercreditor agreement in its entirety. We
urge you to read the intercreditor agreement because it, and not this
description, defines the rights of noteholders, in relation to the senior
lenders, to the collateral. You may obtain a copy of the intercreditor agreement
from us.
Under the intercreditor agreement, Foothill acknowledges the lien that the
collateral agent holds on the collateral to secure the 14.25% notes and the
obligations under the indenture and related security documents. The collateral
agent and each noteholder, by accepting a 14.25% note,
- acknowledge the lien that Foothill holds on the collateral to secure
the obligations under the loan agreement and related security
documents,
- agree to all of the terms of the intercreditor agreement, as it may be
amended from time to time, and
- acknowledge that the collateral agent has not been granted a lien on
some of our property and that of the subsidiary guarantors which is
subject to Foothill's lien.
Under the intercreditor agreement, Foothill and the collateral agent agree that
Foothill's lien on the collateral has priority over the collateral agent's lien
on the collateral to secure the senior debt under the loan agreement up to an
aggregate principal amount of $55.0 million, plus interest, fees, expenses and
related costs. Foothill's priority is not affected by
- the order, time or manner of attachment, perfection or recording of
Foothill or the collateral agent's lien;
- any amendments to the terms of the loan agreement or the indenture
governing the 14.25% notes or any other documents governing our
obligations or those of the guarantor subsidiaries to either the
lenders or the noteholders; or
- any action or inaction of either Foothill or the collateral agent with
respect to the collateral.
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The intercreditor agreement also provides that each of Foothill and the
collateral agent is solely responsible for perfecting and maintaining the
perfection of its lien on the collateral. In addition, neither Foothill nor the
collateral agent may contest the validity, perfection, priority or
enforceability of the liens of the other or the obligations that the liens
secure.
The intercreditor agreement provides that, until the debt under the loan
agreement has been paid in full and the commitments under the loan agreement
have been terminated,
- Foothill has the exclusive right to control, manage and liquidate the
collateral;
- the collateral agent and the holders of the 14.25% notes may not seek
to foreclose or realize upon the collateral or assert any interest in
the collateral or exercise any rights to setoff, recoupment or
counterclaim or deduction against the collateral or the proceeds of the
collateral, other than to preserve the collateral agent's lien on the
collateral; and
- prior to the occurrence of a payment default under the indenture
governing the 14.25% notes, the collateral agent and the holders of
14.25% notes may not commence any action or proceeding under the U.S.
Bankruptcy Code or state insolvency laws against us, the guarantor
subsidiaries or any of the collateral.
The intercreditor agreement provides that proceeds of collateral are to be
applied to pay the senior debt under the loan agreement in full. Moreover, until
the loan agreement and the related documents evidencing the senior debt have
been terminated, proceeds of collateral are to be used to provide for payment of
our and the guarantor subsidiaries' contingent liabilities under those
agreements before payment of any amounts owed under the indenture governing the
14.25% notes and related documents. If the collateral agent receives any
proceeds of collateral while the senior debt under the loan agreement remains
outstanding, the collateral agent must turn those proceeds over to Foothill.
Despite this requirement, to the extent a court equitably subordinates any of
the senior debt under the loan agreement to our obligations under the indenture
governing the 14.25% notes, the collateral agent may retain and apply proceeds
of collateral in payment of our obligations under the 14.25% notes before the
subordinated portion of the senior debt is paid.
If we and the guarantors become debtors in a bankruptcy case and Foothill or
other lenders under the loan agreement are willing to permit the use of cash
collateral or provide bankruptcy financing on terms that contemplate the
continuation of the collateral agent's lien on the collateral during the
bankruptcy case, then, until the senior debt has been paid in full and the
commitments under the loan agreement have been terminated, the collateral agent
waives any right to object to that financing on the ground that its interest in
the collateral is not adequately protected as long as the total outstanding
principal of that financing, including amounts already outstanding under the
loan agreement, does not exceed $55.0 million.
If either Foothill or the collateral agent gives notice to us or the guarantors
of a default, event of default, acceleration of indebtedness or its intention to
exercise its enforcement rights, it must give concurrent notice to the other.
The failure to give notice to the other, however, will not affect the validity
of the notice as against us and the guarantors or the relative priorities of the
liens of Foothill and the collateral agent in the collateral.
OPTION AGREEMENT
Simultaneously with the execution of the intercreditor agreement, Foothill
entered into an option Agreement with Rothschild Recovery Fund L.P., a
participant in the private exchange and private placement. The following
description summarizes the material terms of the option agreement. It does not
restate the option agreement in its entirety. You may obtain a copy of the
option agreement from us.
The option agreement grants Rothschild or its designee an option to purchase
all, but not less than all, of the senior debt under our loan agreement with
Foothill on the following terms:
- The option to purchase the senior debt must be exercised in writing
within 10 days after the collateral agent under the indenture governing
the 14.25% notes receives a written notice from Foothill of Foothill's
intention to exercise its remedies under the loan agreement and related
documents.
- Unless the notice of exercise of the option is previously revoked,
closing of the purchase of the senior debt must occur within 30 days
after Rothschild gives notice of its exercise of the option.
- During the 30-day period, Foothill must forbear from exercising its
remedies with respect to the shared collateral, other than accounts and
inventory, under the loan agreement and related documents.
At closing, Rothschild must:
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- pay to Foothill the outstanding balance of the senior debt, including
early termination fees, attorneys fees of Foothill and other amounts
payable under the loan documents,
- furnish substitute letters of credit or cash collateral to replace or
secure all letters of credit outstanding under the loan documents and
- agree to reimburse Foothill and the lenders for any other fees,
expenses, or losses for which we and the guarantors would be liable
under the loan documents which Foothill or the lenders incur after
closing of the purchase.
Upon closing of the purchase, Rothschild will become the holder of the senior
debt and Foothill's liens upon, and other interests in, the collateral.
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DESCRIPTION OF THE CAPITAL STOCK
The following description of our capital stock contains a summary of the
material provisions of our certificate of incorporation and the certificates of
designations, preferences and rights of each class of our preferred stock. It
does not restate these documents in their entirety. You should read these
documents, copies of which you may obtain from us, in their entirety to
understand all of the rights that holders of our capital stock are entitled to.
In addition, the following summary is subject to applicable provisions of
Delaware law.
Our authorized capital stock consists of
- 100,000 shares of common stock with a par value of $0.01 per share,
- 10,000 shares of Class A preferred stock with a par value of $2,500 per
share,
- 10,000 shares of Class B preferred stock with a par value of $1,000 per
share,
- 1,000 shares of Class C preferred Stock with a par value of $13,000 per
share and
- 1,000 shares of Class D preferred Stock with a par value of $7,000 per
share.
As of November 30, 1999,
- 7,108 shares of common stock were issued and outstanding,
- all of the authorized shares of Class A, B and D preferred stock were
issued and outstanding and
- we owned all of the authorized shares of Class C preferred stock.
COMMON STOCK
Each share of common stock has equal voting, dividend, distribution and
liquidation rights. Each share of common stock is not redeemable and has no
preemptive, conversion or cumulative voting rights, except as described under
"Certain Relationships and Related Transactions-Stockholders' Agreement."
Covenants in the indentures governing the old notes and the new notes and our
loan agreement with Foothill prohibit the declaration and payment of dividends.
In the event of our liquidation, dissolution or winding up, the holders of the
common stock are entitled to share equally and ratably in our assets, if any,
that remain after the payment of all of our debts and liabilities and the
liquidation preference of any outstanding preferred stock.
PREFERRED STOCK
CLASS A PREFERRED STOCK
Holders of Class A preferred stock are generally not entitled to voting rights.
However, we may not take any of the following actions without the affirmative
vote of at least 50% of the Class A preferred stock outstanding:
- amend, alter or repeal any provision of our certificate of
incorporation or bylaws, or pass any stockholders' resolution, that
would adversely affect the preferences, special rights or powers of the
Class A preferred stock;
- increase or decrease, other than by redemption or conversion, the total
number of authorized shares of Class A preferred stock; or
- issue any capital stock that ranks senior to, or on parity with, the
Class A preferred stock with respect to the payment of dividends or the
right to receive distributions upon liquidation.
Holders of Class A preferred stock are entitled to annual cash dividends. These
dividends are payable on December 31 and accrue whether or not they have been
declared. The dividend per share is calculated by multiplying the total of the
sum of $2,500 plus all accrued and unpaid dividends by five percent. As of
September 30, 1999, there were approximately $4.2 million of accrued and unpaid
dividends on the Class A preferred stock. Dividends cannot be paid on any of our
equity securities, other than our Class C preferred stock and Class D preferred
stock, if accrued dividends on the Class A preferred stock have not been
declared and paid.
Each share of Class A preferred stock is entitled to a liquidation preference
over the Class B preferred stock and common stock, and junior to the Class C
preferred stock and Class D preferred stock, equal to $2,500 plus accrued and
unpaid dividends. Furthermore, we must redeem all shares of Class A preferred
stock in the event of bankruptcy or if all common stock is transferred to a
single person. The amount paid per share will be $2,500 plus any accrued and
unpaid dividends. However, Class A preferred stock may not be redeemed until we
have paid all accrued and unpaid dividends on Class C preferred stock and Class
D preferred stock.
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On May 31, 2006, we must redeem 10% of all outstanding Class A preferred stock.
After that, on every May 31, we must redeem the same number of shares of Class A
preferred stock until all outstanding shares have been redeemed. The price per
share for redemption will be $2,500 plus any accrued and unpaid dividends. The
indenture governing the 14.25% notes prohibits us from making any dividend or
redemption payments on the Class A preferred stock unless we meet a coverage
test described under "Description of the New Notes--Covenants--Limitation on
Restricted Payments." We are also prohibited from making any dividend or
redemption payments on the Class A preferred stock upon the occurrence, and
during the continuance, of any default or event of default under the indenture
governing the 14.25% notes.
In the event we conduct a public offering of our common stock, holders of Class
A preferred stock will have the right to convert their shares into shares of
common stock. The number of shares of common stock offered for each share of
Class A preferred stock will be determined by the following formula:
1.5(2,500)/offering price of the common stock. However, the number of shares of
common stock issued upon conversion of the Class A preferred stock may not
exceed 20% of the total number of shares of common stock that we offer for sale
in the public offering.
CLASS B PREFERRED STOCK
The Class B preferred stock is generally non-voting and is entitled to no
dividends. However, we may not take any of the following actions without the
affirmative vote of at least 50% of the Class B preferred stock outstanding:
- amend, alter or repeal any provision of our certificate of
incorporation or bylaws, or pass any stockholders' resolution, that
would adversely affect the preferences, special rights or powers of the
Class B preferred stock;
- increase or decrease, other than by redemption, the total number of
authorized shares of Class B preferred stock;
- issue any capital stock, other than Class A preferred stock, Class C
preferred stock or Class D preferred stock, that ranks senior to, or on
a parity with, the Class B preferred stock with respect to the right to
receive distributions upon liquidation; or
- enter into, authorize or permit any sale of Anker Coal Group.
A sale of Anker Coal Group is deemed to have occurred at any time that
- both any third party that is not an affiliate of the First Reserve
Corporation or the First Reserve Funds acquires beneficial ownership of
a majority of our outstanding common stock and PPK Group Limited
Liability Company and Anker Holdings B.V. and their permitted
transferees beneficially own in the aggregate less than 20% of our
common stock;
- we are merged with or into any other entity and, following the
consummation of the merger, any third party that is not an affiliate of
First Reserve or the First Reserve Funds owns a majority of the
outstanding common stock, partnership interests or other comparable
securities of the resulting or surviving entity and PPK Group and Anker
Holdings B.V. and their permitted transferees beneficially own in the
aggregate less than 20% of the outstanding common stock, partnership
interests or other comparable securities of the resulting or surviving
entity; or
- there is a sale, transfer or other disposition to one or more third
parties not affiliated with First Reserve or the First Reserve Funds in
a transaction or series of transactions of more than 75% of the assets,
valued on a consolidated basis prior to the transaction or series of
transactions, of us and our direct or indirect subsidiaries.
Each share of Class B preferred stock is entitled to a liquidation preference of
$1,000 over shares of common stock and any preferred stock junior to the Class B
preferred stock. Furthermore, the Class B preferred stock is mandatorily
redeemable for cash at a price per share of $1,375 in the event we enter into
bankruptcy or there is a sale of Anker Coal Group. The Class B preferred stock
is not redeemable upon a sale, however, as long as the First Reserve Funds are
entitled to designate a majority of our board of directors, unless a majority of
the directors not designated by the First Reserve Funds approves the sale.
Moreover, the Class B preferred stock is not redeemable to the extent that
- we have not effected all of the required redemptions of our Class A
preferred stock and Class D preferred stock prior to or simultaneously
with the redemption of the Class B preferred stock,
- there are any accrued but unpaid dividends on the Class A preferred
stock, Class C preferred stock or Class D preferred stock or
- we do not have funds legally available to redeem the Class B preferred
stock.
The Class B preferred stock is also redeemable, in whole but not in part, at our
option for cash at a price of $1,375 per share; however, we may not elect to
redeem the Class B preferred stock for so long as the First Reserve Funds are
entitled to designate a majority of our board of directors, unless a majority of
the directors not designated by the First Reserve Funds approves the redemption.
In addition, in the event of a public offering of our common stock, the Class B
preferred stock is redeemable for common stock at our
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option or the option of the holders of the Class B preferred stock; however, we
may not elect to redeem the Class B preferred stock for so long as the First
Reserve Funds are entitled to designate a majority of our board of directors,
unless a majority of the directors not designated by the First Reserve Funds
approves the redemption. Moreover, the holders of the Class B preferred stock
may not elect to have us redeem the Class B preferred stock for so long as the
First Reserve Funds are entitled to designate a majority of our board of
directors, unless a majority of the directors not designated by the First
Reserve Funds approves the public offering. The indenture governing the 14.25%
notes prohibits the making of any dividend or redemption payments on the Class B
preferred stock unless we meet a coverage test described under "Description of
the New Notes--Covenants--Limitation on Restricted Payments." We are also
prohibited from making any dividend or redemption payments on the Class Be
preferred stock upon the occurrence, and during the continuance, of any default
or event of default under the indenture governing the 14.25% notes.
CLASS D PREFERRED STOCK
In connection with our purchase of assets from Phillips Resources, Inc., we
issued 1,000 shares of Class D preferred stock to Glenn Springs Holdings, Inc.,
which owns Phillips. The Class D preferred stock is non-voting, except as
required by applicable law. The Class D preferred stock is entitled to receive:
- for a period of 15 years from and after January 1, 1996, quarterly
cumulative cash dividends in an amount equal to 2 1/2% of the gross
realization from coal sales from properties in Upshur and Randolph
counties for the immediately preceding calendar quarter and
- after that, quarterly cumulative cash dividends equal to 1 1/2% of the
gross realization from coal sales from properties in Upshur and
Randolph counties for the immediately preceding calendar quarter.
Each share of Class D preferred stock is entitled to a liquidation preference
over all other classes of our capital stock equal to the redemption price
described below.
If aggregate dividends of $5.0 million or more on the Class D preferred stock
are not paid on or before December 31, 2005, then we must, if a holder of Class
D preferred stock requests, redeem that holder's shares over the five year
period beginning December 31, 2006 by redeeming 20% of that holder's shares on
that date and on December 31 of the succeeding four years, at a price per share
equal to $7,000 plus all accrued and unpaid dividends. If aggregate dividends of
$5.0 million or more on the Class D preferred stock are paid on or before
December 31, 2005, then we must redeem the Class D preferred stock over the five
year period beginning December 31, 2011 by redeeming 20% of the issued and
outstanding shares of Class D preferred stock on that date and on December 31 of
each succeeding year, at the same redemption price described in the previous
sentence. Furthermore, the Class D preferred stock is redeemable at any time at
our option at a price per share equal to this same redemption price.
No dividends have been paid on the Class D preferred stock as of the date of
this offering memorandum. The indenture governing the 14.25% notes prohibits the
payment of dividends on the Class D preferred stock after the occurrence, and
during the continuance, of any default or event of default under that indenture.
STOCK PURCHASE WARRANT
On August 12, 1996, we issued a stock purchase warrant to the First Reserve
Funds. The stock purchase warrant is exercisable for that number of shares of
our common stock equal to 8.333% of the total number of shares of common stock
issued to the holders of Class A preferred stock upon their conversion of Class
A preferred stock into shares of our common stock. The exercise price is $0.01
per share of common stock. The First Reserve funds may exercise the stock
purchase warrant concurrently with each conversion of shares of Class A
preferred stock into shares of common stock. The stock purchase warrant expires
on the date that all of our Class A preferred stock ceases to be outstanding.
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DESCRIPTION OF THE WARRANTS
The following is summary description of the material provisions of the warrants
and the material rights of holder of warrants and shares of common stock issued
upon exercise of the warrants. It does not restate the terms of the warrants and
the rights of the holders in their entirety. For more details regarding the
rights of holders of warrants and shares of common stock issued upon exercise of
warrants, please read the warrant, the warrant agreement, the common stock
registration rights agreement, the investor agreement and the stockholders'
agreement. You may obtain copies of these agreements from us.
GENERAL
In connection with the private exchange and private placement of our 14.25%
Series A notes, we issued warrants to purchase 3,047 shares of our common stock,
which is equivalent to 30% of our fully diluted common stock. The initial
exercise price of the warrants is $0.01 per share, payable in cash. The warrants
are exercisable at any time or from time to time before October 28, 2009. We
will not issue fractional shares upon exercise of the warrants, but we will pay
a cash adjustment for any fractional share that would otherwise be issuable. The
cash amount will be equal to the same fraction of the per share exercise price.
ANTI-DILUTION
The exercise price and the number of shares of common stock for which the
warrants are exercisable are subject to adjustment upon the occurrence of any of
the following events:
- our issuance of any shares of common stock for no consideration or for
a consideration per share less than the market price, as defined below,
including
(1) our issuance of any warrants, rights or options to subscribe for
or to purchase common stock or other securities exercisable,
convertible into or exchangeable for common stock at an exercise
price per share of common stock less than the market price, but
not including grants or exercises of employee stock options; and
(2) our issuance of any securities exercisable, convertible into or
exchangeable for common stock at an exercise, conversion or
exchange price per share of common stock less than the market
price;
- the subdivision or combination of the common stock; and
- the payment in shares of common stock of a dividend or distribution.
Market price, as of any date, means
(1) the average of the closing bid prices for the shares of common
stock as reported to The Nasdaq National Market for the ten
trading days immediately preceding the relevant date;
(2) if The Nasdaq National Market is not the principal trading market
for the common stock, the average of the last reported bid prices
on the principal trading market for the common stock during the
same period, or, if there is no bid price for the period, the
average of the last reported sales price on each trading day for
the period; or
(3) if market value cannot be calculated as of the relevant date on
any of the bases above, the market price means the average fair
market value as reasonably determined by an investment banking
firm we select and reasonably acceptable to the holders of a
majority in interest of the warrants.
In the case of any transaction, including a merger, consolidation, sale of all
or substantially all of our assets, liquidation or recapitalization of the
common stock, in which the common stock is changed into or, under the operation
of law or the terms of the transaction, exchanged for other of our securities or
common stock or other securities of any other company or interests in a
non-corporate entity or other property, then each holder of warrants will be
entitled, upon exercise of warrants, to receive the aggregate amount of stock,
securities, cash and/or any other property that the holder would have received
in the transaction if it had exercised the warrants immediately prior to
consummation of the transaction. Similarly, if we declare or make any
distribution of our assets to holders of common stock, then each holder of
warrants is entitled, upon exercise of warrants, to receive the amount of assets
that would have been payable to the holder had the holder owned the shares of
common stock received upon exercise of the warrants on the record date for
determination of stockholders entitled to the distribution.
If our Class A preferred stock is converted into common stock, each warrant will
be exercisable for additional shares of common stock in an amount equal to each
warrant's pro rata share, based on the number of warrants originally issued, of
30% of the aggregate number of shares of common stock into which the Class A
preferred stock is converted. The exercise price will be the implied
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conversion price per share of common stock at which the Class A preferred stock
is converted. This exercise price will be payable in cash or by delivery by the
holder of notes.
If we redeem our Class B preferred stock at a redemption price payable in shares
of common stock, each warrant will be exercisable for additional shares of
common stock in an amount equal to each warrant's pro rata share, based on the
number of warrants originally issued, of 30% of the aggregate number of shares
for which the Class B preferred stock is redeemed. The exercise price will be
the redemption price per share of common stock at which the Class B preferred
stock is redeemed. This exercise price will be payable in cash or by delivery by
the holder of notes.
If the stock purchase warrant issued to the funds that First Reserve Corporation
manages becomes exercisable upon a conversion of Class A preferred stock, the
warrants will be exercisable for additional shares of common stock in an amount
equal to each warrant's pro rata share, based on the number of warrants
originally issued, of 30% of the aggregate number of shares for which the First
Reserve funds' warrant is exercised. The exercise price will be $.01 per share
of common stock. This exercise price will be payable in cash or by the holder's
delivery of notes.
If we issue any equity securities of any type, class or series, we must offer
each holder of warrants or of shares of common stock issued upon exercise of
warrants, along with some other stockholders, the right to purchase a portion of
the newly-issued securities on the same terms and conditions as we offer to the
purchasers of the newly-issued securities. Each holder of warrants or of shares
of common stock issued upon exercise of warrants would be entitled to purchase
that portion of the newly-issued securities equal to
- if the newly-issued securities are of a type, class or series
previously issued, the holder's percentage ownership of the total
outstanding number of the previously-issued securities or,
- in all other events, the holder's percentage of ownership of our total
outstanding common stock.
For the purposes of this calculation, all warrants will be deemed to have been
exercised for shares of common stock, and each holder of warrants will be deemed
to hold the number of shares of common stock issuable upon exercise of the
holder's warrants and any other shares of common stock held by the holder.
The exercise price for the warrants will not, however, be adjusted
- upon the grant or exercise of any employee stock options, as long as a
majority of the non-employee members of our board of directors or a
majority of the members of a committee of non-employee directors
established for that purpose approves of the grant of exercise;
- upon the exercise of the options to purchase common stock under Mr.
Kilgore's employment agreement;
- upon the issuance of common stock or warrants in accordance with the
terms of the agreement under which the initial warrant holders received
their warrants; or
- upon exercise of the warrants.
RESTRICTIONS ON TRANSFER
We have not registered the warrants or the shares of common stock issuable upon
exercise of the warrants under the Securities Act. Each holder of warrants or
shares of common stock issuable upon exercise of the warrants agrees that it
will offer to sell the warrants or the shares of common stock only to, and will
solicit offers to buy the warrants or shares of common stock only from,
qualified institutional buyers, institutional accredited investors or purchasers
under Regulation S. Furthermore, all initial holders of warrants have entered
into an investor agreement, and any holder of shares of common stock issuable
upon exercise of a warrant which transfers any of those shares of common stock
must require the transferee to agree in writing to be bound by all the
provisions of the investor agreement and the common stock registration rights
agreement described below.
In addition, each holder of warrants has agreed not to transfer warrants or
shares of common stock issuable upon exercise of warrants to any person or
entity that, to the knowledge of the holder, is engaged in any business in the
states of West Virginia, Maryland, Pennsylvania, Virginia or Kentucky involving
- the purchase for resale, sale, operation or maintenance for resale of
coal, coal reserves, coal inventories, coal mines, coal mining
operations, coal processing operations or processing or disposing of
ash produced from the consumption of coal;
- the conduct or performance of coal mining, coal loading, coal
processing or contract coal mining or processing;
- the employment of independent contractors in connection with any of the
activities above;
- the conduct of coal trading; or
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- the holding of any equity investment constituting a controlling equity
interest in any entity or business that, at the time the transfer is
proposed to be made, is engaged in any of the above activities.
INVESTOR AGREEMENT
The initial holders of the warrants entered into an investor agreement. Upon
exercise of the warrants and purchase of shares of common stock issued upon
exercise, the holder of the common stock must also enter into the investor
agreement. The investor agreement contains the following provisions:
RESTRICTIONS ON MERGER AND SALE OF ASSETS AND STOCK
Until the earlier to occur of an initial public offering of our common stock and
October 30, 2002, the investor agreement prohibits
- us from consolidating or merging with or into, or selling, assigning,
transferring, leasing, conveying or otherwise disposing of all or a
majority of our properties or assets in one or more related
transactions, to another corporation, person or entity, except (1) in
accordance with the terms of the indenture governing the 14.25% notes
and (2) upon the affirmative written vote or consent of the holders of
at least 85% of our outstanding common stock as of the record date, as
defined below, and
- us or any of our shareholders, in one transaction or a series of
related transactions, from selling, transferring or otherwise disposing
of more than 50% of our outstanding common stock, except upon the
affirmative written vote or consent of at least 85% of the holders of
the outstanding common stock as of the record date. We or the
shareholders are required to give written notice to all holders of
warrants at least 30 days prior to the record date.
For these purposes, the record date means the date fixed for a stockholder vote
in accordance with the terms of our certificate of incorporation and bylaws.
TAG ALONG RIGHTS
In accordance with the terms of the investor agreement, other than in connection
with permitted transfers and with an initial public offering of our common
stock, each holder of shares of common stock issuable upon exercise of warrants
has the right to participate in a sale of common stock by another holder of
common stock to any third party at the same price per share and on the same
terms and conditions as the stockholder initiating the sale to the third party.
Each stockholder is entitled to sell that number of shares of common stock so
that the ratio of the number of shares sold by the stockholder to the aggregate
number of shares sold to the third party is equal to the ratio of the number of
shares owned by the stockholder to the total number of shares of common stock
outstanding.
REGISTRATION RIGHTS
The initial holders of the warrants entered into a common stock registration
rights agreement with us. Upon exercise of the warrants and purchase of common
stock issued upon exercise, the holder of the common stock must also enter into
the common stock registration rights agreement. The agreement grants them demand
and incidental registration rights with respect to the shares of common stock
issuable upon exercise of the warrants and any other shares of common stock held
by the holders of those shares. These shares of common stock are referred to as
registrable securities.
DEMAND REGISTRATION
At any time following the earlier of October 28, 2002 or an initial public
offering of our common stock, the holders of at least 25% of the registrable
securities may demand that we register their shares of common stock under the
Securities Act. Holders of registrable securities collectively may only demand
registration of their shares twice, and we are not obligated file a registration
statement relating to a request, other than on Form S-3 or a similar short-form
registration statement, within a period of six months after the effective date
of any other registration statement that was not effected on Form S-3 or a
similar short-form registration statement. We are obligated to register all
shares of registrable securities requested to be included by the holders
initially demanding registration and any other holder of registrable securities
that has properly notified us that its securities should also be included. In
the event of an underwritten offering, however, we may register fewer than all
shares requested to be included if the managing underwriter advises us that the
number of securities requested to be included in the registration exceeds the
maximum number that can be offered without having an adverse effect on the
offering of shares, including the price at which the shares can be sold.
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INCIDENTAL REGISTRATION
If we at any time register any of our securities under the Securities Act, other
than a registration on Form S-4 or S-8 or any successor or similar form and
other than a request for registration described in the preceding paragraph, we
are required to include in the registration statement any registrable securities
owned by holders that have properly notified us that their securities should be
included. If the registration is an underwritten registration, holders of
registrable securities will sell their shares to the underwriters on the same
terms and conditions as apply to us. We are obligated to register all shares of
registrable securities that the holders request to be included. In the event of
an underwritten offering, however, we may register fewer than all shares
requested to be included if the managing underwriter advises us that the number
of securities requested to be included in the registration exceeds the maximum
number that can be offered without having an adverse effect on the offering of
shares, including the price at which the shares can be sold.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the anticipated material U.S. federal income
tax consequences of the exchange of the old notes for new notes, as well as the
ownership and disposition of the new notes. The discussion constitutes the
opinion of Wilmer, Cutler & Pickering regarding these material tax consequences.
This discussion is based on laws, regulations, rulings and decisions now in
effect, all of which are subject to change, possibly with retroactive effect. We
cannot assure you that the Internal Revenue Service will not challenge one or
more of the tax consequences described below, and we have not obtained, nor do
we intend to obtain, a ruling from the Internal Revenue Service as to any U.S.
federal income tax consequences relating to the notes.
This discussion may not apply to all holders of new notes because:
- this discussion does not address the tax consequences to subsequent
purchasers of the new notes and is limited to investors who will hold
the new notes as capital assets, as defined in Section 1221 of the
Internal Revenue Code;
- this discussion does not discuss the tax consequences to holders that
may be subject to special tax rules, such as financial institutions,
insurance companies, tax exempt entities, dealers in securities or
foreign currencies or persons who hold the notes as a position in a
straddle or as part of a "conversion transaction" or that have hedged
the interest rate on the notes;
- this discussion does not address all aspects of U.S. federal income
taxation that may be relevant to holders of the notes in light of their
particular circumstances; and
- this discussion does not address any tax consequences arising under the
laws of any state, local or foreign taxing jurisdiction.
Because this discussion may not apply to all new note holders, prospective
holders should consult their own tax advisors as to the particular tax
consequences to them of acquiring, holding or disposing of the new notes.
DEFINITIONS
A "United States Holder" of a note means:
- a citizen or resident of the United States, including, in some cases,
former citizens and former long-time residents,
- a corporation, partnership or other entity created or organized under
the laws of the United States or any political subdivision,
- an estate, if its income is subject to U.S. federal income taxation, or
- a trust if (1) a U.S. court is able to exercise primary supervision
over the administration of the trust and (2) one or more U.S. persons
have the authority to control all substantial decisions of the trust.
A "Foreign Holder" is a holder that is not a United States Holder.
The term "note(s)" by itself refers to both new notes and exchanged old notes.
CONSEQUENCES OF THE EXCHANGE OFFER FOR HOLDERS
QUALIFICATION AS A RECAPITALIZATION
The federal income tax consequences of the exchange of old notes for new notes
in this exchange offer depends on whether the exchange offer will qualify as a
recapitalization under section 368(a)(1)(E) of the Internal Revenue Code. The
exchange offer should qualify as a recapitalization if both the old notes and
the new notes are "securities" for federal income tax purposes. The term
"security" is not defined in the Internal Revenue Code or the applicable
Treasury regulations and has not been clearly defined by judicial decisions.
Whether a debt instrument qualifies as a "security" for purposes of section
368(a)(1)(E) depends upon an overall evaluation of the nature of the debt
instrument, with one of the most significant factors being the term of that
instrument. In general, the longer the term of a debt instrument, the greater
the likelihood that it will be considered a security. Instruments with a term of
more than ten years are likely to be treated as securities, and instruments with
a term of less than five years are unlikely to be treated as securities.
We intend to report the exchange offer as a recapitalization based upon our
belief that both the old notes and the new notes should be treated as securities
for federal income tax purposes. Assuming that the exchange offer does qualify
as a recapitalization, a holder that
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exchanges old notes for new notes will not recognize gain or loss as a result of
the exchange, except as discussed below under "--Accrued but Unpaid Interest." A
holder's tax basis in the new notes will equal the holder's tax basis in the old
notes exchanged, and the holder's holding period for the new notes will include
the holding period of the old notes.
If the exchange offer fails to qualify as a recapitalization because either the
new notes or the old notes are not securities for federal income tax purposes,
an exchanging noteholder would recognize a capital gain or loss equal to the
fair market value of the new notes received less the holder's tax basis in its
old notes, subject to the market discount rules discussed below.
The remaining discussion assumes that the exchange offer will qualify as a
recapitalization for federal income tax purposes.
ACCRUED BUT UNPAID INTEREST
We intend to allocate the new notes issued in the exchange offer entirely to
principal of the old notes for purposes of our own tax return and the backup
withholding and information reporting rules. We cannot assure you, however, that
the Internal Revenue Service will respect that allocation for federal income tax
purposes. If new notes were treated as received by an exchanging holder of old
notes in part in satisfaction of accrued but unpaid interest on the old notes,
then that amount would be taxable to the holder as interest income if it has not
been previously included in the holder's gross income. Conversely, a holder
generally recognizes a deductible loss to the extent that it does not receive a
payment of interest that has previously been included in its income. You should
consult your tax advisor regarding the allocation of consideration and the
deductibility of unpaid interest for tax purposes.
CONSEQUENCES TO HOLDERS OF OWNING AND DISPOSING OF NOTES
QUALIFIED STATED INTEREST
United States Holders will generally be taxed on any "qualified stated interest"
as ordinary income from domestic sources at the time it is paid or accrued in
accordance with the United States Holder's method of accounting for tax
purposes. Qualified stated interest is stated interest that is unconditionally
payable at least annually at a single fixed rate that appropriately takes into
account the length of the interval between payments.
The new notes will pay interest semiannually at a stated rate of 14.25 percent
per annum, with the exception of the first interest payment due on April 1,
2000. We expect to satisfy the April 1, 2000 interest payment on the new notes
by issuing additional new notes. Because of the ability to make this initial
payment in kind, the annual amount of qualified stated interest on the new notes
will generally equal the combined semiannual October 1 interest payment on the
notes. The remaining interest payments will be taken into account under the
original issue discount rules, discussed below.
ORIGINAL ISSUE DISCOUNT
New notes issued in exchange for old notes will be issued with original issue
discount. Except as described below under "--Acquisition Premium on Notes,"
"--Amortizable Bond Premium" and "--High Yield Discount Obligation Rules," each
United States Holder of a new note must include in gross income a portion of the
original issue discount that accrues on the new note during each taxable year,
determined by using a constant yield to maturity method, regardless of whether
the holder receives cash payments attributable to this original issue discount.
The original issue discount included in income for each year will be calculated
under a compounding formula that will result in the allocation of less original
issue discount to the earlier years of the term of the new note and more
original issue discount to later years. Any amount included in income as
original issue discount will increase a United States Holder's tax basis in the
note.
Original issue discount on a note is the excess of the note's stated redemption
price at maturity over its issue price. For purposes of determining the amount
of original issue discount of the new notes and otherwise under the original
issue discount rules, each new note and the additional new note to be issued
with respect to that new note in satisfaction of the April 1, 2000 interest
payment will be aggregated and treated as part of the same debt obligation.
The stated redemption price at maturity of a debt obligation is the sum of all
payments, whether denominated as interest or principal, required to be made on
the debt obligation, other than payments of qualified stated interest. The issue
price of a debt obligation is determined based on whether the debt obligation is
issued in exchange for cash or other property and whether such debt obligation
or the property for which it is exchanged is "publicly traded" as that term is
used in the applicable Treasury regulations. If a new debt obligation is part of
an issue a substantial amount of which is issued for cash, the issue price of
each new debt obligation in the issue is the first price at which a substantial
amount of the debt obligations in the issue is sold for money. If a new debt
obligation is issued in
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exchange for an existing debt obligation and is part of an issue a substantial
amount of which is publicly traded, then the issue price of the new debt
obligation is the fair market value of the new debt obligation. If a substantial
amount of the new debt obligation is not publicly traded but is issued in
exchange for a debt obligation that is publicly traded, then the issue price of
the new debt obligation is the fair market value of the publicly traded debt
obligation for which it is exchanged.
MARKET DISCOUNT
If a United States Holder purchases a note subsequent to its original issuance
and the note's issue price, increased by the amount of any accrued original
issue discount, exceeds the holder's purchase price, the note will be considered
to have market discount equal to that excess. Any gain recognized by the holder
on the disposition of a note having market discount generally will be treated as
ordinary income to the extent of the market discount that accrued on the note
while held by the holder. Alternatively, the holder may elect to include market
discount in income currently over the life of the note. This election will apply
to all market discount notes the holder acquires on or after the first day of
the first taxable year to which the election applies and is revocable only with
the consent of the Internal Revenue Service. Market discount will accrue on a
straight-line basis unless the holder elects to accrue the market discount on a
constant yield method. A constant yield election will apply only to notes to
which it is made and is irrevocable. Unless a holder elects to include market
discount, if any, in income on a current basis, as described above, the holder
could be required to defer the deduction of a portion of the interest paid on
any indebtedness incurred or maintained to purchase or carry notes.
Some holders of old notes may have acquired their old notes at a market
discount. Market discount that is not recognized in connection with the exchange
of old notes for new notes because the exchange offer qualifies as a
recapitalization will carry over to, and be treated as, market discount on the
new notes. You should consult your own tax advisor regarding the amount of any
market discount accrued with respect to your old notes.
ACQUISITION PREMIUM ON NOTES
A United States Holder of a new note will be entitled to a reduction in the
amount of original issue discount required to be included in its income if the
United States Holder is considered to acquire the new note with acquisition
premium. A new note received in the exchange offer will have acquisition premium
if the United States Holder's adjusted tax basis in the new note immediately
after the exchange is less than or equal to the stated redemption price at
maturity and exceeds the issue price of the new note. The amount of original
issue discount the holder must include in its gross income with respect to that
new note for any taxable year is generally reduced by the portion of the
acquisition premium properly allocable to that year. Alternatively, a holder may
elect to amortize and deduct the acquisition premium over the remaining term of
the note on a constant yield method. Holders of new notes should consult their
own tax advisors regarding the amount of any acquisition premium and reduction
in original issue discount with respect to the new notes.
AMORTIZABLE BOND PREMIUM
In the event that an exchanging United States Holder's tax basis in its old
notes is greater than or equal to the stated redemption price at maturity of the
new notes that the United States Holder receives in the exchange offer, the
United States Holder will not have to include original issue discount in income,
and the excess will be treated as "premium." A United States Holder generally
may elect to amortize the premium over the term of the new note on a constant
yield method. However, if the new note may be optionally redeemed for more than
its stated redemption price at maturity at the time it is acquired, the
amortization of the premium might, depending on the timing and pricing of the
acquisition relative to the redemption provisions of the new notes, have to be
deferred. The amount amortized for a year will be treated as a reduction of
interest income from the new note. If the United States Holder does not elect
amortization, the premium will decrease the gain or increase the loss otherwise
recognized upon the disposition of the new note. The election to amortize
premium on a constant yield method, once made, applies to all debt obligations
that the electing United States Holder holds or acquires on or after the first
day of the first taxable year to which the election applies, and the election
may not be revoked without the consent of the Internal Revenue Service.
SALE, EXCHANGE AND RETIREMENT OF NOTES
When a United States Holder disposes of a new note, that holder generally will
recognize capital gain or loss equal to the difference between:
(A) the amount of cash and the fair market value of any property received,
except to the extent that amount is attributable to accrued and unpaid
interest which is taxable as ordinary income, and
(B) the holder's adjusted tax basis in the new note.
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A United States Holder's adjusted tax basis in a new note received in the
exchange offer will, in general, be the basis of the old note exchanged for that
new note increased by
- any amounts included in income as original issue discount and
- any market discount previously included in the holder's income
and decreased by
- any principal and non-qualified stated interest the holder receives and
- any amortized premium previously deducted from income by that holder.
The capital gain or loss generally will be long-term capital gain or loss if the
holding period of the new note exceeds one year at the time of the disposition.
Some noncorporate taxpayers, including individuals, are eligible for
preferential rates of taxation of the long-term capital gain. The deductibility
of capital losses is subject to limitations.
FOREIGN HOLDERS
Any gain or income realized on a Foreign Holder's disposition of a note
generally will not be subject to U.S. federal income tax provided
- the gain is not effectively connected with the holder's conduct of a
trade or business in the United States and
- in the case of gains realized by an individual, the individual is not
present in the United States for 183 days or more in the taxable year
of the disposition.
Under present U.S. federal income and estate tax law, and subject to the
discussion below concerning backup withholding,
(1) no U.S. federal withholding tax will be imposed with respect to payment
of principal, premium, if any, or interest, including original issue
discount, on a note owned by a Foreign Holder, provided that
- the Foreign Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of our
stock entitled to vote, within the meaning of section 871(h)(3) of
the Internal Revenue Code and the related regulations,
- the Foreign Holder is not a controlled foreign corporation that is
related, directly or indirectly, to us through stock ownership,
- the Foreign Holder is not a bank whose receipt of interest on a
note is described in section 881(c)(3)(A) of the Internal Revenue
Code and
- the Foreign Holder satisfies the statement requirement, described
generally below, set forth in sections 871(h) and 881(c) of the
Internal Revenue Code and the related regulations;
(2) no U.S. federal withholding tax will be imposed generally with respect
to any gain or income realized by a Foreign Holder upon the disposition
of a note; and
(3) a note beneficially owned by an individual who at the time of death is
a Foreign Holder will not be subject to U.S. federal estate tax as a
result of the individual's death, provided that:
- the individual does not actually or constructively own 10% or more
of the total combined voting power of all classes of our stock
entitled to vote, within the meaning of section 871(h)(3) of the
Internal Revenue Code, and
- the interest payments with respect to the note would not have
been, if received at the time of the individual's death,
effectively connected with the conduct of a U.S. trade or business
by the individual.
To satisfy the statement requirement referred to in (1) above, the beneficial
owner of the note, or a financial institution holding the note on behalf of the
beneficial owner, must provide, in accordance with specified procedures, our
paying agent with a statement to the effect that the beneficial owner is a
Foreign Holder. Under current Treasury regulations, this statement will satisfy
the certification requirements if (1) the beneficial owner provides its name and
address, and certifies, under penalties of perjury, that it is a Foreign Holder,
which certification may be made on an Internal Revenue Service Form W-8 or Form
W-8BEN, or (2) a financial institution holding the note on behalf of the
beneficial owner certifies, under penalties of perjury, that it has received the
statement and furnishes a paying agent with a copy.
With respect to notes held by a foreign partnership, under current law, the
foreign partnership may provide the Form W-8 or a Form W-8IMY. However, for
interest and disposition proceeds paid with respect to a note after December 31,
2000, unless the foreign partnership has entered into a withholding agreement
with the Internal Revenue Service, a foreign partnership will be required, in
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addition to providing an intermediary Form W-8 or Form W-8IMY, to attach an
appropriate certifications by each partner. Prospective investors, including
foreign partnerships and their partners, should consult their tax advisors
regarding possible additional reporting requirements.
If a Foreign Holder cannot satisfy the requirements of the portfolio interest
exception described in (1) above, payments on a note, including payments of
original issue discount, made to that holder will be subject to a 30%
withholding tax unless the beneficial owner of the note provides us or the
paying agent, as the case may be, with a properly executed
- IRS Form 1001 or Form W-8BEN claiming an exemption from, or reduction
of, withholding under the benefit of a tax treaty or
- IRS Form 4224 or Form W-8ECI stating that interest paid on the note is
not subject to withholding tax because it is effectively connected with
the beneficial owner's conduct of a trade or business in the United
States.
Treasury regulations that will become generally effective for payments made
beginning January 1, 2001, modify various certification requirements described
above. In general, these new regulations do not significantly alter the
substantive withholding and information reporting requirements, but rather they
unify current certification procedures and forms and clarify reliance standards.
In addition, the new regulations impose different conditions on the ability of
financial intermediaries acting for a Foreign Holder to provide certifications
on behalf of the Foreign Holder, which may include entering into an agreement
with the Internal Revenue Service to audit selected documentation with respect
to these certifications. It is possible that we and other withholding agents may
request new withholding exemption forms from holders in order to qualify for
continued exemption from withholding under the Treasury regulations when they
become effective. Foreign Holders should consult their own tax advisors to
determine the effects of the application of the new regulations to their
particular circumstances.
If a Foreign Holder is engaged in a trade or business in the United States, and
payment on a note, including payments of original issue discount, is effectively
connected with the conduct of that trade or business, the Foreign Holder,
although exempt from U.S. federal withholding tax as discussed above, generally
will be subject to U.S. federal income tax on that payment on a net income basis
in the same manner as if it were a United States Holder. In addition, if the
Foreign Holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% or applicable lower tax treaty rate on its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, the payment on a note will be included in the foreign
corporation's earnings and profits.
INFORMATION REPORTING AND BACKUP WITHHOLDING
UNITED STATES HOLDER
In general, information reporting requirements will apply to payments on a note,
to accrued original issue discount and to the proceeds of the sale of a note to
some noncorporate United States Holders. A 31% backup withholding tax may apply
to the payments if the United States Holder:
- fails to furnish or certify its correct taxpayer identification number
to the payer in the manner required,
- is notified by the Internal Revenue Service that it has failed to
report payments of interest and dividends properly or
- under some circumstances, fails to certify that it has not been
notified by the Internal Revenue Service that it is subject to backup
withholding for failure to report interest and dividend payments.
Any amounts withheld under the backup withholding rules will be allowed as a
credit against the holder's U.S. federal income tax. If the holder has filed a
return and the required information is furnished to the Internal Revenue
Service, the holder may be entitled to a refund of the excess of the amount
withheld over the holder's federal income tax liability.
FOREIGN HOLDER
Under current regulations, no information reporting or backup withholding will
apply to payments to Foreign Holders if a statement described in the previous
section regarding Foreign Holders has been received and the payor does not have
actual knowledge that the beneficial owner is a U.S. person. If these conditions
are not satisfied, information reporting and backup withholding will apply.
These rules also apply to payments on a note paid to the beneficial owner by a
U.S. office of an agent or broker.
In addition, backup withholding and information reporting will not apply if
payments on a note are paid or collected by a foreign agent on behalf of the
beneficial owner of the note, or if a foreign office of a broker, as defined in
applicable U.S. Treasury regulations, pays
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the proceeds of the sale of a note to the owner of the note. Information
reporting, however, may be required in some circumstances. If the agent or
broker is, for U.S. federal income tax purposes:
- a United States person,
- a controlled foreign corporation,
- a foreign person that derives 50% or more of its gross income for
specified periods from the conduct of a trade or business in the United
States, or
- with respect to payments made beginning January 1, 2000, a foreign
partnership if, at any time during its tax year, one or more of its
partners are "U.S. persons," as defined in U.S. Treasury regulations,
who in the aggregate hold more than 50% of the income or capital
interest in the partnership if, at any time during the tax year, the
partnership is engaged in a U.S. trade or business,
the payments will be subject to information reporting, but not backup
withholding, unless (1) the agent or broker has documentary evidence in its
records that the beneficial owner is not a U.S. person and other conditions are
met or (2) the beneficial owner otherwise establishes an exemption.
The Treasury regulations that will become generally effective for payments made
beginning January 1, 2000 modify some of the certification requirements for
backup withholding. It is possible that we and other withholding agents may
request a new withholding exemption form from holders in order to qualify for
continued exemption from backup withholding under Treasury regulations when they
become effective.
CONSEQUENCES OF THE EXCHANGE FOR ANKER
CANCELLATION OF DEBT INCOME
Our exchange of old notes in the exchange offer at less than their face amount
will give rise to cancellation of debt income which, absent an applicable
exception, must be included in our gross income for federal income tax purposes.
To the extent that we are considered to be insolvent for federal income tax
purposes, which would mean that our liabilities exceed the fair market value of
our assets, immediately prior to the exchange offer, we would not have to
include the cancellation of debt as income; however, various of our other tax
attributes, such as net operating loss carryovers, research and development
credits, alternative minimum tax credits and capital loss carryovers, would be
reduced.
To the extent the insolvency exception is not applicable, we will be required to
recognize and report 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 notes exchanged. We nevertheless expect that we will be able to offset a
substantial part of any cancellation of debt income we are required to recognize
as a result of the exchange offer with our net operating losses, subject to the
alternative minimum tax consequences discussed below.
ALTERNATIVE MINIMUM TAX
Alternative minimum tax is imposed at a rate of 20% on a corporation's
alternative minimum taxable income. Alternative minimum taxable income is
calculated by adding back specified deductions, or portions of those deductions,
that are permitted in calculating a corporation's regular taxable income. In
particular, in calculating our alternative minimum taxable income, our net
operating losses, as computed for alternative minimum tax purposes, may only
offset 90% of our alternative minimum taxable income.
To the extent the insolvency exception is not available, we must include
cancellation of debt income when calculating alternative minimum taxable income,
and our net operating losses can only be used to offset 90% of that alternative
minimum taxable income. Accordingly, if the cancellation of debt income
resulting from the exchange of old notes for new notes were significant, we
could have a substantial alternative minimum tax liability.
HIGH YIELD DISCOUNT OBLIGATION RULES
The new notes are likely to constitute high yield discount obligations.
Accordingly, we may not be entitled to deduct a portion of the original issue
discount and may further be required to defer deductions on another portion
until amounts attributable to the original issue discount are paid in cash.
Subject to otherwise applicable limitations, a corporate holder will be entitled
to a dividend received deduction with respect to the disqualified portion of the
accrued original issue discount if we have sufficient current or accumulated
earnings and profits. To the
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extent that our earnings and profits are insufficient, any portion of the
original issue discount that otherwise would have been recharacterized as a
dividend for purposes of the dividend received deduction will continue to be
treated as ordinary original issue discount income in accordance with the rules
described above under "--Original Issue Discount."
NET OPERATING LOSS DEDUCTION LIMITATIONS
Our net operating loss carryforwards, if any, may be limited by section 382 of
the Internal Revenue Code as a result of the restructuring transactions. If we
were to undergo an ownership change as defined in section 382 of the Internal
Revenue Code, that section would limit the amount of pre-change net operating
losses, including accrued but unrecognized "built-in" losses, that we may use to
offset post-change taxable income. An ownership change occurs if the percentage
of the value of the stock of a company owned by one or more "5% Stockholders"
increases by more than 50 percentage points during any three year period.
We do not believe that the restructuring transactions will result in an
ownership change. We cannot assure you, however, that the Internal Revenue
Service would not assert that we have experienced or would experience, as a
result of the restructuring transactions, an ownership change. Furthermore, we
cannot assure you that an ownership change would not occur as a result of future
transactions involving our stock that are beyond our control.
THIS DISCUSSION MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. PROSPECTIVE UNITED STATES HOLDERS AND FOREIGN HOLDERS OF THE NOTES
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES
TO THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING
THE TAX CONSEQUENCES UNDER U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS AND THE EFFECTS OF CHANGES IN THOSE LAWS.
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PLAN OF DISTRIBUTION
We will exchange new notes for old notes. We will not receive any proceeds from
the exchange of new notes for old notes.
Based on an interpretation by the staff of the Division of Corporation Finance
of the SEC, we believe that the new notes we issue in connection with the
exchange offer, like the old notes, may be offered for resale, resold and
otherwise transferred by any holder of the new notes without compliance with the
registration requirements of the Securities Act.
We have not entered into any arrangement or understanding with any person to
distribute the new notes received in the exchange offer. In addition, to the
best of our information and belief, each person participating in the exchange
offer is acquiring the new notes in the ordinary course of business and has no
arrangement or understanding with any person to participate in the distribution
of the new notes.
We have agreed to pay all expenses incident to the exchange offer, other than
commissions or concessions of any brokers or dealers.
We shall not be liable for any delay by DTC or any participant or indirect
participant in identifying the beneficial owners of the old notes, and we and
these participants may conclusively rely on, and shall be protected in relying
on, instructions from DTC for all purposes, including with respect to the
registration and delivery, and the principal amounts, of the new notes to be
issued.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information with the SEC
under the Securities Exchange Act of 1934. The file number for our SEC filings
is 333-39643. You can inspect and copy all of this information at the Public
Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site
that contains reports, proxy statements and information statements and other
information regarding issuers, like us, that file electronically with the SEC.
The address of this web site is http://www.sec.gov.
VALIDITY OF NEW NOTES
Wilmer, Cutler & Pickering, Washington, D.C., will pass upon the validity of the
new notes for us.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of Anker Coal Group, Inc. as of December
31, 1998 and 1997 and for the period from August 1, 1996 to December 31, 1996
and the consolidated financial statements of Anker Group, Inc. for the period
from January 1, 1996 to July 31, 1996 included in this offering memorandum have
been so included in reliance on the reports, which contain an explanatory
paragraph relating to our ability to continue as a going concern, as described
in Note 14 to the financial statements, of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
EXPERTS
The reserve reports and estimates of our coal reserves included in this offering
memorandum have, to the extent described in the offering memorandum, been
prepared by us and audited by Marshall Miller & Associates. Summaries of these
estimates contained in Marshall Miller & Associates' audit report have been
included in this offering memorandum as Annex A. We have relied on Marshall
Miller & Associates as an expert with respect to the matters contained in the
audit report.
131
<PAGE> 132
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------
<TABLE>
<S> <C>
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants............................................................ F-2
Report of Independent Accountants............................................................ F-3
Consolidated Balance Sheets at December 31, 1998 and 1997.................................... F-4
Consolidated Statements of Operations for the years ended December
31, 1998 and 1997 and for the period August 1, 1996 (date of
acquisition) through December 31, 1996 and for the period
January 1, 1996 through July 31, 1996.................................................. F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998 and 1997 and
for the period August 1, 1996 (date of acquisition)
through December 31, 1996.............................................................. F-6
Consolidated Statements of Stockholders' Equity for the period
January 1, 1996 through July 31, 1996.................................................. F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 and for the period from August 1,
1996 (date of acquisition) through December 31,
1996 and for the period January 1, 1996 through July 31, 1996.......................... F-8
Notes to Consolidated Financial Statements................................................... F-9
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet at September 30, 1999................................... F-27
Condensed Consolidated Statements of Operations for the nine
and three months ended September 30, 1999 and 1998..................................... F-28
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998............................................... F-29
Notes to Condensed Consolidated Financial Statements......................................... F-30
FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required in the
schedules is not applicable or is shown in the financial
statements or the notes to the financial statements.
</TABLE>
F-1
<PAGE> 133
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Anker Coal Group, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Anker Coal
Group, Inc. and its subsidiaries (the Company) at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1998 and the five month period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, and
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has experienced recurring losses from
operations, negative cash flows from operations and has a retained deficit that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 14. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 29, 1999
F-2
<PAGE> 134
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Anker Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated statement of
operations, stockholders' equity, and cash flows of Anker Group, Inc. and
Subsidiaries (Predecessor) for the period January 1, 1996 through July 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated results of
their operations and their cash flows of Anker Group, Inc. and Subsidiaries
(Predecessor) for the period January 1, 1996 through July 31, 1996 in conformity
with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 28, 1997
F-3
<PAGE> 135
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15 -
Accounts receivable:
Trade 27,845 $ 31,029
Affiliates 42 223
Inventories 5,876 10,717
Current portion of long-term notes receivable 986 791
Life insurance proceeds receivable - 10,000
Prepaid expenses and other 1,989 3,443
Deferred income taxes 3,683 399
--------- ---------
Total current assets 40,436 56,602
Properties:
Coal lands and mineral rights 62,398 101,324
Machinery and equipment 72,355 83,370
--------- ---------
134,753 184,694
Less allowances for depreciation, depletion and amortization 26,161 17,333
--------- ---------
108,592 167,361
Other assets:
Assets held for sale 10,000 -
Advance minimum royalties 4,453 19,050
Goodwill, net of accumulated amortization of $2,517 and
$1,408 in 1998 and 1997, respectively 21,572 43,010
Other intangible assets, net of accumulated amortization of
$694 and $432 in 1998 and 1997, respectively 6,268 6,553
Notes receivable 3,735 5,056
Other assets 6,664 7,018
--------- ---------
Total assets $ 201,720 $ 304,650
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 10,982 16,254
Affiliates 480 1,572
Cash overdraft 5,111 3,919
Accrued interest 3,365 3,530
Accrued expenses and other 11,287 8,674
Accrued leasehold termination 3,957 -
Accrued reclamation expenses 5,234 355
Current maturities of long-term debt 2,777 799
Common stock available for repurchase 1,505 -
--------- ---------
Total current liabilities 44,698 35,103
Long-term debt 139,934 132,800
Other liabilities:
Accrued reclamation expenses 17,367 18,619
Deferred income taxes 8,242 12,976
Other 6,272 6,771
--------- ---------
Total liabilities 216,513 206,269
Commitments and contingencies - -
Mandatorily redeemable preferred stock 24,588 22,651
Common stock available for repurchase 8,495 -
Stockholders' equity:
Preferred stock 23,000 23,000
Common stock - -
Paid-in capital 47,900 57,900
Treasury stock (5,100) -
Accumulated deficit (113,676) (5,170)
--------- ---------
Total stockholders' equity (47,876) 75,730
--------- ---------
Total liabilities and stockholders' equity $ 201,720 $ 304,650
========= =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-4
<PAGE> 136
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Coal sales and related revenue $291,426 $322,979 $123,246 $166,909
Expenses:
Cost of operations and selling expenses 276,469 295,387 110,215 149,364
Depreciation, depletion and amortization 18,150 17,470 6,437 7,882
General and administrative 9,076 9,462 3,738 3,796
Stock compensation and related expenses - - - 2,969
Loss on impairment and restructuring charges 90,717 8,267 - -
---------- ---------- --------- ---------
Total expenses 394,412 330,586 120,390 164,011
Operating (loss) income (102,986) (7,607) 2,856 2,898
Interest, net of $386 and $760 capitalized in 1998
and 1997, respectively (13,066) (10,042) (2,090) (2,796)
Life insurance proceeds - 15,000 - -
Other income, net 2,805 2,083 373 1,107
---------- ---------- --------- ---------
(Loss) income before income taxes and
extraordinary item (113,247) (566) 1,139 1,209
Income tax (benefit) expense (7,643) (1,242) 485 (134)
---------- ---------- --------- ---------
Net (loss) income before extraordinary item (105,604) 676 654 1,343
Extraordinary loss, net of taxes of $375 and $1,497
in 1998 and 1997, respectively 965 3,849 - -
---------- ---------- --------- ---------
Net (loss) income (106,569) (3,173) 654 1,343
Less mandatorily redeemable preferred stock dividends 1,337 1,276 512 116
Less mandatorily redeemable preferred stock accretion 600 600 263 -
---------- ---------- --------- ---------
Net (loss) income available to common
Stockholders $ (108,506) $ (5,049) $ (121) $ 1,227
========== ========== ========= =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-5
<PAGE> 137
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND
FOR THE PERIOD AUGUST 1, 1996 THROUGH DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN TREASURY ACCUMULATED
STOCK STOCK CAPITAL STOCK DEFICIT TOTAL
------------ ------------ ----------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1996 - - - - - -
Initial Company capitalization $23,000 - $57,900 - - $80,900
Net income - - - - $ 654 654
Mandatorily redeemable preferred stock
dividends - - - - (512) (512)
Mandatorily redeemable preferred stock
accretion - - - - (263) (263)
------------ ------------ ----------- ------------- -------------- ----------
Balance at December 31, 1996 23,000 - 57,900 - (121) 80,779
Net loss - - - - (3,173) (3,173)
Mandatorily redeemable preferred stock
dividends - - - - (1,276) (1,276)
Mandatorily redeemable preferred stock
accretion - - - - (600) (600)
------------ ------------ ----------- ------------- -------------- ----------
Balance at December 31, 1997 23,000 - 57,900 - (5,170) 75,730
Net loss - - - - (106,569) (106,569)
Mandatorily redeemable preferred stock
dividends - - - - (1,337) (1,337)
Mandatorily redeemable preferred stock
accretion - - - - (600) (600)
Issuance of Class A common stock awards - - - - - -
Reclassification of Class A common stock to
common stock available for
repurchase - - (15,000) - - (15,000)
Repurchase of Class A common stock - - 5,000 (5,000) - -
Repurchase of Class C preferred stock - - - (100) - (100)
------------ ------------ ----------- ------------- -------------- ----------
Balance at December 31, 1998 $23,000 - $47,900 $ (5,100) $(113,676) $(47,876)
============ ============ =========== ============= ============== ==========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-6
<PAGE> 138
PREDECESSOR
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 THROUGH JULY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
------- ----------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $14,122 $ 50 $40,007 $ 3,024 $57,203
Stock compensation - - 1,500 - 1,500
Net income - - - 1,343 1,343
Mandatorily redeemable preferred stock
dividends - - - (116) (116)
------- ----------- ------- ------- --------
Balance at July 31, 1996 $14,122 $ 50 $41,507 $ 4,251 $59,930
======= =========== ======= ======= ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-7
<PAGE> 139
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
YEAR YEAR PERIOD PERIOD
ENDED ENDED AUGUST 1 THROUGH JANUARY 1
DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH JULY 31,
1998 1997 1996 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (106,569) $ (3,173) $ 654 $ 1,343
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Extraordinary item, net of taxes 965 3,849 - -
Loss on impairment and restructuring charges 90,717 8,267 - -
Depreciation, depletion and amortization 18,150 17,470 6,437 7,882
Minority interest - - 31 (5)
Life insurance proceeds - (15,000) - -
Deferred taxes (8,018) (2,739) 485 (257)
Gain on sale of property, plant and equipment (302) (352) (203) (806)
Loss on sale of investment - 1,069 - -
Stock compensation - - - 2,969
Tax refund received 722 - - -
Changes in operating assets and liabilities (net of
assets and liabilities acquired and disposed of):
Accounts receivable 3,365 (5,536) (434) 2,153
Inventories, prepaid expenses and other 5,105 (7,511) 5,515 (1,258)
Advance minimum royalties (2,915) (3,777) (2,095) (706)
Accounts payable, accrued expenses and other (6,186) 2,513 (10,087) 8,095
Other liabilities (499) (127) (867) (388)
----------- ---------- ----------- ------------
Net cash (used in) provided by operating activities (5,465) (5,047) (564) 19,022
----------- ---------- ----------- ------------
Cash flows from investing activities:
Purchase of Anker Group, Inc., including related
acquisition cost of $7,534, net of cash acquired of
$6,980 and liabilities assumed of $151,873 - - (66,554) -
Acquisitions - (9,883) (4,262) -
Purchases of properties (11,795) (45,203) (6,769) (3,046)
Proceeds from sales of property, plant and equipment 2,535 2,549 213 1,560
Proceeds from sale of investment - 3,551 - -
Issuances of notes receivable (38) (2,156) (4,991) (671)
Payments received on notes receivable 1,164 5,134 518 889
Intangible assets - (927) (277) -
Other assets - (90) (2,846) (496)
----------- ---------- ----------- ------------
Net cash used in investing activities (8,134) (47,025) (84,968) (1,764)
----------- ---------- ----------- ------------
Cash flows from financing activities:
Proceeds from revolving line of credit and long-term debt 155,698 174,259 81,460 49,389
Principal payments on revolving line of credit and
long-term debt (146,586) (249,199) (45,372) (79,184)
Proceeds from issuance of Senior Notes - 125,000 - -
Cash overdraft 1,192 2,135 - -
Debt issuance costs (1,590) (5,679) - -
Purchase of treasury stock (5,100) - - -
Proceeds from issuance of preferred and common stock - - 50,000 -
Proceeds received from life insurance 10,000 5,000 - -
----------- ---------- ----------- ------------
Net cash provided by (used in) financing activities 13,614 51,516 86,088 (29,795)
----------- ---------- ----------- ------------
Increase (decrease) in cash and cash equivalents 15 (556) 556 (12,537)
Cash and cash equivalents at beginning of period - 556 - 13,526
----------- ---------- ----------- ------------
Cash and cash equivalents at end of period $ 15 - $ 556 $ 989
=========== ========== =========== ============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-8
<PAGE> 140
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Anker Coal Group, Inc. and Subsidiaries (the "Company") was formed in August
1996. The Company was capitalized with approximately $50 million in cash and
$14.1 million of preferred and common stock exchanged for similar stock in Anker
Group, Inc. and Subsidiaries (the "Predecessor"). Subsequently, the Company
acquired the remaining 92.5% of the common stock of the Predecessor for
approximately $87 million, which was funded by the issuance of $25 million of
Class A mandatorily redeemable preferred stock and the payment of $62 million in
cash, $12 million of which was borrowed under the Company's credit facilities.
The acquisition was effective on August 12, 1996 but for accounting purposes,
the Company has designated August 1, 1996 as the effective date of the
acquisition. The acquisition of the Predecessor was accounted for using the
purchase method of accounting as prescribed under Accounting Principles Bulletin
No. 16, "Accounting for Business Combinations."
The operating results of this acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The following
unaudited adjusted results have been prepared to illustrate results of
operations had the acquisition been made on January 1, 1996 and do not purport
to be indicative of what would have occurred had the acquisition been made as of
those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
UNAUDITED
<S> <C>
Coal sales and related revenue $ 290,155
==========
Operating income $ 5,754
==========
Net income $ 1,997
==========
</TABLE>
The Company's operations, which are principally located in West Virginia and
Maryland, consist of mining and selling coal from mineral rights which it owns
and/or leases, as well as brokering coal from other producers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements as of December 31, 1998, 1997 and for the
period August 1, 1996 (date of acquisition) through December 31, 1996 include
the accounts of Anker Coal Group, Inc. and its wholly and majority-owned
subsidiaries. The consolidated financial statements for the period January 1,
1996 through July 31, 1996 include the accounts of the Predecessor. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. The Company must maintain a lockbox
account and direct all cash receipts to this account. Control of this account
has been transferred to the Foothill Capital Corporation, as agent, under the
Company's Credit Facility.
INVENTORIES:
Coal inventories are stated at the lower of average cost or market and amounted
to approximately $4,415,000 and $8,822,000 at December 31, 1998 and 1997,
respectively. Supply inventories are stated at the lower of average cost or
market and amounted to approximately $1,461,000 and $1,895,000 at December 31,
1998 and 1997, respectively.
F-9
<PAGE> 141
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTIES:
Properties are recorded at cost, which includes the allocated purchase price for
the acquisition described in Note 1.
Coal lands represent the investment in land and related mineral and/or surface
rights, including capitalized mine development costs, which are being mined or
will be mined. Mine development costs of $24.9 million and $40.7 million at
December 31, 1998 and 1997, respectively, represent expenditures incurred, net
of revenue received and amortization, in the development of coal mines until the
principal operating activity becomes coal production. Depletion and amortization
of coal lands is computed on a tonnage basis calculated to amortize its costs
fully over the estimated recoverable reserves.
Provisions for machinery and equipment depreciation are based upon the estimated
useful lives of the respective assets and are computed by the straight-line
method.
Upon sale or retirement of properties, the cost and related accumulated
depreciation or depletion are removed from the respective accounts, and any gain
or loss is included in other non-operating income.
GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired related to the acquisition described in Note 1. Due to the
restructuring of the Company's mining operations, goodwill will be prospectively
amortized over 3 to 20 years in conjunction with the expected useful lives of
existing mineral rights and sales contracts.
Other intangible assets consist of debt issuance costs which are being amortized
using the straight line method over the life of the associated debt, which
approximates the effective interest method.
During the period January 1 through July 31, 1997, adjustments were made to
increase goodwill due to changes in assumptions or underestimates relating to
certain preacquisition, contingent assets and liabilities. Accordingly, goodwill
was increased by approximately $4,789,000, net of income taxes.
ACCRUED RECLAMATION EXPENSES:
Provisions to reclaim disturbed acreage remaining after production has been
completed and related mine closing costs are accrued during the life of the
mining operation or recorded in conjunction with the acquisition of related
properties. The annual provision included in cost of operations is made at a
rate per ton equivalent to the estimated end-of-mine-life reclamation cost
divided by the estimated tonnage to be mined. The estimated liability of the
Company is not discounted or reduced for possible recoveries from insurance
carriers.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on temporary
differences between the consolidated financial statements and the tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Estimates also affect the amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
F-10
<PAGE> 142
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents approximates fair value. The
fair value of current and long term debt is less than the carrying value by
approximately $56.3 million at December 31, 1998. The fair value of current and
long term debt exceeded the carrying value by approximately $1.3 million at
December 31, 1997. The fair value of the Company's borrowings under its senior
notes, credit agreement and other notes payable is estimated using the current
market rate and discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
ADVANCE MINIMUM ROYALTIES:
Advance minimum royalties represent payments, ranging from 2% to 10% of coal
yield, made by the Company to landowners for the right to mine on the
landowners' property. These payments are initially capitalized then expensed
over future production or are expensed as incurred when mine properties are held
for sale.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company periodically reviews the carrying value of long-lived assets, based
on whether they are recoverable from expected future undiscounted operating cash
flows and will recognize impairments when the expected future operating cash
flow derived from such long-lived assets is less than their carrying value. See
Note 13 for the results of the current year evaluation.
EARNINGS PER SHARE:
The presentation of earnings per share is not required as the Company's stock is
not publicly traded.
NEW ACCOUNTING PRONOUNCEMENTS:
In 1998, the Financial Accounting Standards Boards (FASB) issued its Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. As the Company has no items of other
comprehensive income, the requirements of SFAS No. 130 are not applicable.
In 1998, FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This pronouncements establishes standards
for reporting information about operating segments and related disclosures about
products and services, geographic areas, and major customers. The Company
operates within one industry segment only and, as such, the requirements of SFAS
No. 131 are not applicable.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 enhances the
disclosure requirements for pensions and postretirement benefits. The adoption
of SFAS No. 132 has no impact on the measurement or recognition of benefits.
In 1998, the American Institute of Certified Public Accountants issued its
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on expensing
and capitalizing the costs associated with developing or obtaining internal-use
software. This pronouncement will be effective for the year ended December 31,
1999. Management is currently assessing the impact that the adoption of this
pronouncement will have on the consolidated financial statements.
RECLASSIFICATION:
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
F-11
<PAGE> 143
3. COAL SALES AND RELATED REVENUE
Coal sales and related revenue consists of the following:
<TABLE>
<CAPTION>
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Coal mining revenue $207,102 $234,091 $ 85,175 $126,500
Brokered coal revenue 81,220 85,411 36,521 37,697
Ash disposal and waste fuel revenue 3,104 3,477 1,550 2,712
-------- -------- -------- --------
$291,426 $322,979 $123,246 $166,909
======== ======== ======== ========
</TABLE>
Included in revenue are sales to unconsolidated affiliated companies aggregating
approximately $0.1 million for the year ended December 31, 1998, $9.7 million
for the year ended December 31, 1997, $9.2 million for the period August 1, 1996
through December 31, 1996, and $7 million for the period January 1, 1996 through
July 31, 1996.
The Company recognizes revenue either upon shipment or customer receipt of coal,
based on contractual terms. The Company's coal mining revenue is substantially
generated from long-term coal supply contracts with domestic utilities and
Independent Power Producers throughout the northeastern United States. These
contracts range from one to twenty years with fixed based prices which change
based on certain industry and government indices. Receivables generally are due
within 30 to 45 days. Sales to three customers represented 39.7%, 32.4% and
29.7% of total revenue for years ended December 31, 1998 and 1997, and for the
two periods ended December 31, 1996 combined, respectively. The Company performs
credit evaluations on all new customers, and credit losses have historically
been minimal.
4. FEDERAL EXCISE TAXES
Federal excise taxes, included in cost of operations and selling expenses,
amounted to $5,786,000 in 1998, $5,896,000 in 1997, $2,188,000 for the period
August 1, 1996 through December 31, 1996, and $3,378,000 for the period January
1, 1996 through July 31, 1996.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Senior notes $125,000 $125,000
Foothill Credit Facility 16,911 -
Amended and Restated Credit Facility - 7,000
Notes payable to seller 800 1,388
Other notes payable to affiliates - 211
-------- --------
142,711 133,599
Less current maturities of long-term debt 2,777 799
-------- --------
$139,934 $132,800
======== ========
</TABLE>
F-12
<PAGE> 144
5. LONG-TERM DEBT, CONTINUED
SENIOR NOTES:
On September 25, 1997, the Company issued $125,000,000 of unsecured 9 3/4%
Senior Notes due October 1, 2007. In connection therewith, the Company repaid
all outstanding indebtedness together with accrued interest and fees associated
with such repayment under the Company's existing credit agreement. The Company
incurred a loss on the refinancing of approximately $3.9 million, net of income
taxes of $1.5 million. The loss has been classified as an extraordinary item in
the consolidated financial statements in 1997. Interest on the Senior Notes is
payable semiannually on April 1 and October 1 of each year, commencing April 1,
1998. The Senior Notes are redeemable by the Company, in whole or in part, at
any time on or after October 1, 2002 at the redemption price as specified in the
agreement plus accrued and unpaid charges. At any time on or prior to October 1,
2000, the Company may redeem up to 35%, through an initial public offering, of
the aggregated principal amount of the Senior Notes originally issued at a
redemption price equal to 109.75% of the principal amount plus accrued and
unpaid charges.
The Senior Notes contain certain cross-default provisions related to the
Company's outstanding Credit Facility.
The Company's obligations under the Senior Notes are jointly and severally
guaranteed fully and unconditionally on a senior unsecured basis, by the
wholly-owned subsidiaries of the Company that have executed a subsidiary
guarantee. See Note 11 for the financial statements of the Company and its
guarantor and nonguarantor subsidiaries.
CREDIT FACILITY:
On November 21, 1998, the Company and Foothill Capital Corporation, as agent,
entered into a loan and security agreement whereby the lenders will provide to
the Company a $55 million credit facility (the "Credit Facility"). The Credit
Facility consists of a $40 million working capital revolver and a $15 million
term loan. Commitments under the Credit Facility will expire in 2002. The Credit
Facility is collateralized by substantially all of the Company's present and
future assets.
Borrowings under the revolver are based on 85% of eligible accounts receivable
and 65% of eligible inventory and bear interest at the Company's option at
either 1% above the prime interest or at 3 3/4% above the adjusted Eurodollar
rate. For the year ended December 31, 1998, the average interest rate was
approximately 8.75%. As of December 31, 1998, the outstanding indebtedness under
the revolver was approximately $1.9 million.
The term loan bears interest at 2 1/2% above the prime interest rate and is
payable in monthly installments through 2002. The average interest rate for the
term loan for the year ended December 31, 1998 was approximately 10.25%. As of
December 31, 1998, the outstanding indebtedness under the term loan was
approximately $15 million.
The Credit Facility contains covenants which, among other matters, restrict or
limit the ability of the Company to pay interest, dividends, incur indebtedness,
or acquire or sell assets and make capital expenditures. The Company must also
maintain certain cash flow ratios.
The Credit Facility also contains covenants that require the Company to receive
an unqualified audit opinion on its annual financial statements. The issuance of
the going-concern opinion by the Company's independent accountants for the year
ended December 31, 1998 is a violation of this covenant. However, Foothill has
agreed to accept the going concern opinion and the Company has obtained a waiver
for this violation from Foothill.
AMENDED AND RESTATED CREDIT FACILITY:
The Amended and Restated Credit Facility, which was repaid by the Credit
Facility, provided for a line of credit up to $71 million. The average interest
rate on borrowings under the Amended and Restated Credit Facility was 8.1% in
1998 and 8.89% in 1997. The Company incurred a loss on the refinancing of
approximately $965,000, net of income taxes of $375,000. The loss has been
classified as an extraordinary item in the consolidated financial statements in
1998.
NOTE PAYABLE TO SELLER:
In conjunction with an acquisition, the Company assumed an outstanding note
payable, which bears interest at 7.47% and is payable in monthly installments
through April 1, 2000.
F-13
<PAGE> 145
5. LONG-TERM DEBT, CONTINUED
OTHER MATTERS:
Future minimum required principal payments on long-term debt are: $2,777,000 in
1999; $2,309,000 in 2000; $2,142,900 in 2001; $10,482,000 in 2002 and
$125,000,000 thereafter.
6. MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND TREASURY STOCK
Mandatorily redeemable preferred stock, common stock and treasury stock as of
December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
DESCRIPTION 1998 1997 PAR VALUE 1998 1997
- ------------------------------------------------ -------- ------- ----------- -------- --------
NUMBER OF SHARES (IN THOUSANDS)
AUTHORIZED,
ISSUED AND
OUTSTANDING
<S> <C> <C> <C> <C> <C>
Common Stock:
Class A 10,199 10,000 $ 0.01 - -
======= ======= ======== ========
Preferred Stock:
Class B 10,000 10,000 1,000 $10,000 $10,000
Class C - 1,000 13,000 13,000 13,000
------- ------- -------- --------
10,000 11,000 $23,000 $23,000
======= ======= ======== ========
Mandatorily Redeemable Preferred Stock:
Class A 10,000 10,000 2,500 $28,125 $26,788
Class D 1,000 1,000 7,000 7,000 7,000
Less preferred stock discount - - 10,537 11,137
------- ------- -------- --------
11,000 11,000 $24,588 $22,651
======= ======= ======== ========
Treasury Stock:
Common Stock Class A (1,013) - 4,936 $(5,000) -
Preferred Stock Class C (1,000) - 100 (100) -
------- ------- -------- --------
(2,013) - $(5,100) -
======= ======= ======== ========
</TABLE>
PREFERRED STOCK:
Class B preferred stock is nonvoting, with no dividends, redeemable at $1,375
per share upon the event of liquidation or other action described in the
preferred stock agreement. Class B stockholders shall be entitled to receive
liquidation distributions senior to common stockholders.
Class C preferred stock is nonvoting with 4% cumulative dividends, calculated on
the gross realization from certain coal sales, redeemable at par value upon the
event of liquidation or other action described in the preferred stock agreement.
During 1998, the Company repurchased all of the outstanding Class C preferred
stock for $100 per share.
MANDATORILY REDEEMABLE PREFERRED STOCK:
Class A preferred stock is nonvoting with 5% cumulative dividends, mandatorily
redeemable at par value over ten years beginning May 31, 2006. Dividends are
predicated on meeting certain established debt covenants. Dividends in arrears
as of December 31, 1998 and 1997 amounted to $3,125,000 and $1,788,000,
respectively, in the aggregate and $313 and $179, respectively, per share. With
regards to rights to receive distributions upon liquidation of the Company,
Class A shares rank junior to Class D preferred stockholders and senior to Class
B preferred and common stockholders. Upon public offering by the Company of its
common stock, each holder of Class A preferred stock shall have the right to
convert each Class A share to common shares based on a specified formula.
F-14
<PAGE> 146
6. MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND TREASURY STOCK,
CONTINUED
Class D preferred stock is nonvoting with 2 1/2% cumulative dividends through
2011, reducing to 1 1/2% cumulative dividends thereafter, calculated on the
gross realization from certain coal sales, redeemable at par value over five
years beginning December 31, 2006, if aggregate dividends paid on or before
December 31, 2005 are less than $5,000,000; otherwise mandatorily redeemable at
par value over five years beginning December 31, 2011. With regards to rights to
receive distributions upon liquidation of the Company, Class D stockholders rank
senior to Class B and common stockholders.
The mandatorily redeemable preferred stock was recorded at estimated fair market
value, which is less than redemption value. This difference of $12 million is
being accreted over the remaining life of the preferred stock.
7. COMMON STOCK AVAILABLE FOR REPURCHASE AND LIFE INSURANCE PROCEEDS
On October 12, 1997, John Faltis, the Company's President, Chief Executive
Officer and Chairman of the Board of Directors, was killed in a helicopter
accident in West Virginia. In accordance with the Stockholders' Agreement, dated
as of August 12, 1996, among the Company, Mr. Faltis ("Faltis"), JJF Group
Limited Company, a West Virginia limited liability company formerly controlled
by Mr. Faltis and now controlled by his estate ("JJF Group"), and others (the
"Stockholders' Agreement") the Company maintained key man life insurance on the
life of Mr. Faltis in the amount of $15 million. For the year ended December 31,
1997 $15 million was included within the consolidated statement of operations.
In accordance with the Stockholders' Agreement, the Company was to use proceeds
received from the insurance policy to repurchase common stock owned by JJF
Group.
In lieu of the certain provisions in the Stockholders' Agreement regarding the
purchase and sale of the Company's common stock owned by JJF Group upon the
death of Faltis, the Company and JJF Group entered into a Put Agreement dated as
of August 25, 1998 (the "Put Agreement") pursuant to which the Company granted
to JJF Group the right to require the Company to purchase such common stock. On
September 15, 1998, pursuant to the Put Agreement, the Company acquired 1,013
shares of the Company's common stock from JJF Group. The schedule for the
remaining payments under the Put Agreement is as follows:
<TABLE>
<CAPTION>
MAXIMUM NUMBER OF
SHARES SUBJECT TO PER SHARE
PUT OPTION DATE PUT OPTION NOTICE PUT OPTION PRICE TOTAL PURCHASE PRICE
--------------- ----------------- ---------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
August 1, 1999 305 $ 4,936 $ 1,505
August 1, 2000 325 4,936 1,604
August 1, 2001 1,396 4,936 6,891
----- -------
2,026 $10,000
===== =======
</TABLE>
Under the Put Agreement, if JJF Group fails or elects not to put any of its
common stock to the Company on or before the applicable date, JJF Group shall
not have the right to put those shares to the Company after that date. The Put
Agreement also requires the Company to pay interest on the outstanding balance
of the total purchase price at the "blended annual rate" established by the
Internal Revenue Service. The interest rate will be adjusted on July 25 of each
year during the term of the Put Agreement based on the blended annual rate in
effect as of that time. For the year ended December 31, 1998, the interest rate
for the Put Agreement was 5.63%.
F-15
<PAGE> 147
8. INCOME TAXES:
The (benefit) provision for taxes is comprised of the following:
<TABLE>
<CAPTION>
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal - - - $ 123
Deferred:
Federal and state $ (15,597) $ 2,557 $ 1,253 (45)
Tax benefit from recognition of net
operating losses (18,193) (7,146) (768) (212)
Valuation allowance 26,147 3,347 - -
---------- --------- --------- ---------
Provision for income taxes before
extraordinary item (7,643) (1,242) 485 (134)
Tax benefit of extraordinary charge (375) (1,497) - -
---------- --------- --------- ---------
$ (8,018) $ (2,739) $ 485 $ (134)
========== ========= ========= =========
</TABLE>
In the period January 1 through July 31, 1996, the Predecessor was subject to
alternative minimum taxes; accordingly, the $123,000 represents amounts payable
under the alternative tax structure, which is a creditable tax that can be used
to reduce any future regular income taxes.
The reconciliation of the federal statutory tax rate to the consolidated
effective tax rate is as follows:
<TABLE>
<CAPTION>
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
----------- ----------- ----------- -----------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1,
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Federal statutory tax rate $ (38,992) $ (192) $ 387 $ 411
Goodwill 377 348 122 -
Impairment of goodwill 6,667 - - 8
Business meals exclusion 42 55 50 (604)
Use of percentage depletion 85 (313) (95) -
Loss disallowance - 416 - -
Life insurance proceeds - (5,100) - -
Valuation allowance 26,147 3,347 - -
Mine development amortization - 132 - -
Other 223 644 - -
State taxes (2,567) (579) 21 51
----------- ---------- ---------- ---------
$ (8,018) $ (1,242) $ 485 $ (134)
=========== ========== ========== =========
</TABLE>
F-16
<PAGE> 148
8. INCOME TAXES, CONTINUED
The components of net deferred tax assets and liabilities as of December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Inventory $ 57 $ 77
Other current liabilities 532 322
Accrued reclamation 2,050 -
Leasehold termination 1,044 -
----------- -----------
$ 3,683 $ 399
=========== ===========
Depreciation, depletion and amortization (16,089) (14,436)
Advance minimum royalties - (611)
Accrued reclamation 884 1,071
Other long-term assets (939) 953
Fair market value (6,921) (8,663)
Capital loss 1,214 2,871
Contribution carryforwards 301 228
Other long-term liabilities (453) (453)
Impairment of assets 14,325 -
Restructuring charges 951 -
Net operating loss 27,979 9,411
----------- -----------
21,252 (9,629)
Valuation allowance (29,494) (3,347)
----------- -----------
$ (8,242) $ (12,976)
=========== ===========
</TABLE>
The Company has a federal and state net operating loss carryforwards of
approximately $27,726,000 that is available to off set future taxable income
beginning in 1999 and will begin to expire in 2006. In addition, the Company has
alternative minimum tax credit carryforwards of approximately $253,000 as of
December 31, 1998.
The Company received a federal tax refund of $722,000 in 1998 through the
utilization of previously unrecognized net operating loss carryforwards. This
refund was allocated directly to goodwill.
The Company has established a full valuation allowance on the net operating loss
carryforwards, capital loss carryforwards and contribution carryforwards because
the future realization of these assets is uncertain.
9. BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company has a contributory defined contribution retirement plan covering all
employees who meet eligibility requirements. The plan provides for employer
contributions representing 5% of compensation. The Company's contributions
amounted to $1,452,000 for the year ended December 31, 1998, $1,218,000 for the
year ended December 31, 1997, $577,000 for the period August 1, 1996 through
December 31, 1996, and $547,000 for the period January 1, 1996 through July 31,
1996.
The Company also has a 401(k) savings plan for all employees who meet
eligibility requirements. The plan provides for mandatory employer contributions
to match 50% of employee contributions up to a maximum of 2% of each
participant's compensation. In addition, the Company may make discretionary
contributions up to 5% of employee compensation. The Company's contributions
amounted to $473,000 for the year ended December 31, 1998, $418,000 for the year
ended December 31, 1997, $185,000 for the period August 1, 1996 through December
31, 1996, and $182,000 for the period January 1, 1996 through July 31, 1996.
F-17
<PAGE> 149
9. BENEFIT PLANS, CONTINUED
In addition, the Company has a 401(h) savings plan for the purpose of providing
retiree health care benefits. The plan is a defined contribution plan for all
employees who meet eligibility requirements and provides for mandatory employer
contributions between .237% and 1.66% of each participant's compensation, based
on years of service. The Company's contributions amounted to $309,000 for the
year ended December 31, 1998, $302,000 for the year ended December 31, 1997,
$143,000 for the period August 1, 1996 through December 31, 1996, and $150,000
for the period January 1, 1996 through July 31, 1996.
STOCK BENEFIT PLAN
In May 1997, the Company's Board of Directors approved a Stock Incentive Plan
(the Plan) which provides for grants of restricted stock and nonqualified,
compensatory stock options to key employees of the Company and affiliates.
During 1998, 199 shares of restricted stock were granted at par value, which
approximated fair value.
10. COMMITMENTS AND CONTINGENCIES
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT:
Current and projected operating deficits in the United Mine Workers of America
Benefit Trust Funds (the Funds) resulted in the Coal Industry Retiree Health
Benefit Act of 1992 (the Act). The Act created a multiemployer benefit plan
called the United Mine Workers of America Combined Benefit Fund (the Combined
Fund). The Combined Fund provides medical and death benefits for all
beneficiaries of the earlier trusts who were actually receiving benefits as of
July 20, 1992. The Act provides for the assignment of beneficiaries to former
employers and the allocation of any unassigned beneficiaries (referred to as
orphans) to companies using a formula included in the legislation. The Act
requires that responsibility for funding those payments be assigned to companies
that had been signatories to the National Bituminous Coal Wage Agreement
(Agreement). Although the Company does not currently have any operations which
are signatory to the Agreement, it is subject to certain liabilities as a result
of being signatory to a prior agreement.
A company's annual cost of benefits is based on the number of beneficiaries
assigned to the company plus a percentage of the cost of unassigned
beneficiaries, which is a function of the number of orphans times the
per-beneficiary premium. As part of the acquisition described in Note 1, the
Company recorded a liability of approximately $7.3 million to recognize the
anticipated unfunded obligations under this Act. The Company paid $352,000 for
the year ended December 31, 1998, $352,000 for the year ended December 31, 1997,
$725,000 for the period August 1, 1996 through December 31, 1996, and $470,000
for the period January 1, 1996 through July 31, 1996.
In 1997, the Company brought suit against the Combined Fund for continuing to
charge the Company for premiums which, the Company contends, should be paid by
the former employer of assigned and unassigned beneficiaries. The Combined Fund
filed a counterclaim for the amount of the premiums that the Company has refused
to pay as well as penalties and interest. As noted above, the Company has
previously recorded all anticipated unfunded obligations under this Act,
including the premiums, interest and penalties under dispute. Penalties and
interest will accrue until final resolution.
ADVANCE MINIMUM ROYALTIES:
The Company made royalty payments of approximately $12,254,000 during 1998,
$13,233,000 during 1997, $5,307,000 for the period August 1, 1996 through
December 31, 1996, and $4,687,000 for the period January 1, 1996 through July
31, 1996. Required minimum royalty payments, over the next five years, on the
leases are: $5,258,000 in 1999; $4,933,000 in 2000; $4,056,000 in 2001;
$3,066,000 in 2002; and $3,082,000 in 2003.
OPERATING LEASES:
The Company has office and mining equipment operating lease agreements. Total
rent expense approximated $12,467,000 for the year ended December 31, 1998,
$9,189,000 for the year ended December 31, 1997, $3,277,998 for the period
August 1, 1996 through December 31, 1996, and $5,002,472 for the period January
1, 1996 through July 31, 1996. Minimum annual rentals for office and mining
equipment leases for the next five years, including payments for leases for in
Accrued Leasehold Termination (See note 13), are approximately $9,722,000 in
1999; $6,987,000 in 2000; $3,194,000 in 2001; $1,472,000 in 2002; and $259,000
in 2003.
F-18
<PAGE> 150
10. COMMITMENTS AND CONTINGENCIES, CONTINUED
CONTINGENCIES:
The Company is a party to various lawsuits and claims incidental to its
business. While it is not possible to predict accurately the outcome of these
matters, management believes that none of these actions will have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
11. SUBSIDIARY GUARANTEES
The Company is a holding company with no assets other than its investments in
its subsidiaries. The Company's $125 million Senior Notes due October 2007 (the
"Senior Notes") are guaranteed by certain subsidiaries of the Company
(collectively, the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries
is a wholly-owned subsidiary of the Company and has fully and unconditionally
guaranteed the Senior Notes on a joint and several basis. The following tables
summarize the financial position, results of operations and cash flows for the
Company, the Guarantor Subsidiaries and the subsidiaries of the Company which
did not guarantee the Senior Notes (collectively, "Non-Guarantor Subsidiaries").
The Company has not presented separate financial statements and other disclosure
regarding the Guarantor Subsidiaries because management has determined that such
information is not material to investors. As of December 31, 1998, there were no
restrictions affecting the ability of the Guarantor Subsidiaries to make
distributions to the Company or other Guarantor Subsidiaries except to the
extent provided by law generally (e.g., adequate capital to pay dividends under
corporate law).
F-19
<PAGE> 151
11. SUBSIDIARY GUARANTEES, CONTINUED
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1998
-------------------------------------------------
(IN THOUSANDS)
ANKER ANKER COAL
COAL GUARANTOR NON-GUARANTOR CONS. GROUP
GROUP SUBS. SUBS. ADJUST. CONS.
----------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Total current assets $ 3,683 $ 31,642 - $ 5,111 $ 40,436
Investment in subsidiaries 55,925 - - (55,925) -
Properties, net - 101,302 $ 7,290 - 108,592
Other assets - 52,692 - - 52,692
---------- ---------- ---------- ---------- ----------
Total assets $ 59,608 $ 185,636 $ 7,290 $ (50,814) $ 201,720
========== ========== ========== ========== ==========
Total current liabilities 4,719 34,544 324 5,111 44,698
Long-term debt - 139,934 - - 139,934
Intercompany payable, net (54,985) 47,324 7,661 - -
Other long-term liabilities 6,745 25,136 - - 31,881
Mandatorily redeemable preferred
stock 24,588 - - - 24,588
Common stock available for repurchase 8,495 - - - 8,495
Total stockholders' equity 70,046 (61,302) (695) (55,925) (47,876)
---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity $ 59,608 $ 185,636 $ 7,290 $ (50,814) $ 201,720
========== ========== ========== ========== ==========
STATEMENT OF OPERATIONS
Coal sales and related revenues - 291,426 - - 291,426
Cost of operations and operating expenses - 393,637 775 - 394,412
---------- ---------- ---------- ---------- ----------
Operating income (loss) - (102,211) (775) - (102,986)
Other (income) expense 2,302 8,675 (716) - 10,261
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes and
extraordinary item (2,302) (110,886) (59) - (113,247)
Income tax (benefit) expense (7,643) - - - (7,643)
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item $ 5,341 (110,886) (59) - (105,604)
Extraordinary item, net of tax of $1,497 - 965 - - 965
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 5,341 $(111,851) $ (59) $ - $(106,569)
========== ========== ========== ========== ==========
STATEMENT OF CASH FLOWS
Net cash (used in) provided by operating
activities $ 5,255 $ (10,565) $ (155) - $ (5,465)
========== ========== ========== ========== ==========
Net cash used in investing activities - $ (8,134) - - $ (8,134)
========== ========== ========== ========== ==========
Net cash provided by financing activities $ (5,255) $ 18,714 $ 155 - $ 13,614
========== ========== ========== ========== ==========
</TABLE>
F-20
<PAGE> 152
11. SUBSIDIARY GUARANTEES, CONTINUED
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1997
------------------------------------------------
(IN THOUSANDS)
ANKER NON- ANKER COAL
COAL GUARANTOR GUARANTOR CONS. GROUP
GROUP SUBS. SUBS. ADJUST. CONS.
----- --------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Total current assets $ 399 $ 56,194 $ 9 $ - $ 56,602
Investment in subsidiaries 55,925 - - (55,925) -
Properties, net - 160,071 7,290 - 167,361
Other assets - 80,687 - - 80,687
------------ ----------- -------------- ---------- -----------
Total assets $ 56,324 $ 296,952 $ 7,299 $ (55,925) $ 304,650
============ =========== ============== ========== ===========
Total current liabilities - 34,962 141 - 35,103
Long-term debt - 132,800 - - 132,800
Intercompany payable, net (62,167) 54,108 8,059 - -
Other long-term liabilities 14,473 23,893 - - 38,366
Mandatorily redeemable preferred stock 22,651 - - - 22,651
Total stockholders' equity 81,367 51,189 (901) (55,925) 75,730
------------ ----------- -------------- ---------- -----------
Total liabilities and
stockholders' equity $ 56,324 $ 296,952 $ 7,299 $ (55,925) $ 304,650
============ =========== ============== ========== ===========
STATEMENT OF OPERATIONS
Coal sales and related revenues - 313,781 9,198 - 322,979
Cost of operations and operating expenses - 310,869 19,717 - 330,586
------------ ----------- -------------- ---------- -----------
Operating income (loss) - 2,912 (10,519) - (7,607)
Other (income) expense - (7,403) 362 - (7,041)
------------ ----------- -------------- ---------- -----------
Income (loss) before taxes and
extraordinary item - 10,315 (10,881) - (566)
Income tax (benefit) expense (1,242) - - - (1,242)
------------ ----------- -------------- ---------- -----------
Income (loss) before
extraordinary item 1,242 10,315 (10,881) - 676
Extraordinary item, net of tax of $1,497 - 3,849 - 3,849
------------ ----------- -------------- ---------- -----------
Net income (loss) $ 1,242 $ 6,466 $ (10,881) - $ (3,173)
============ =========== ============== ========== ===========
STATEMENT OF CASH FLOWS
Net cash (used in) provided by operating
activities $ 10,000 $ (16,992) $ 1,945 - $ (5,047)
============ =========== ============== ========== ===========
Net cash used in investing activities $ (10,000) $ (31,384) $ (15,641) $ 10,000 $ (47,025)
============ =========== ============== ========== ===========
Net cash provided by financing activities - $ 38,400 $ 13,116 - 51,516
============ =========== ============== ========== ===========
</TABLE>
F-21
<PAGE> 153
11. SUBSIDIARY GUARANTEES, CONTINUED
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 1, 1996 THROUGH DECEMBER 31, 1996
----------------------------------------------
(IN THOUSANDS)
ANKER NON- ANKER COAL
COAL GUARANTOR GUARANTOR CONS. GROUP
GROUP SUBS. SUBS. ADJUST. CONS.
------------ ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Coal sales and related revenues - $ 118,997 $ 4,249 - $ 123,246
Cost of operations and operating expenses - 115,886 4,504 - 120,390
------------ ------------ ------------ -------- -----------
Operating income - 3,111 (255) - 2,856
Other (income) expense - 1,870 (153) - 1,717
------------ ------------ ------------ -------- -----------
Income (loss) before taxes - 1,241 (102) - 1,139
Income tax expense (benefit) $ 485 - - - 485
------------ ------------ ------------ -------- -----------
Net (loss) income $ (485) $ 1,241 $ (102) - $ 654
============ ============ ============ ======== ===========
STATEMENT OF CASH FLOWS
Net cash (used in) provided by operating
activities - $ (5,709) $ 5,145 - $ (564)
============ ============ ============ ======== ===========
Net cash used in investing activities - $ (80,379) $ (4,589) - $ (84,968)
============ ============ ============ ======== ===========
Net cash provided by financing activities - $ 86,088 - - $ 86,088
============ ============ ============ ======== ===========
</TABLE>
12. RELATED PARTIES
In July 1997, mineral reserve estimates were audited by John T. Boyd Company.
On December 1, 1997, James W. Boyd, President of John T. Boyd Company, and
executor of John Faltis' estate, was elected to the Company's Board of
Directors.
In February 1998, the Company sold its investment in Oak Mountain, LLC to an
affiliate for $1. See Note 13 for further information.
F-22
<PAGE> 154
13. LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES
The major components of loss on impairment and restructuring charges were as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Impairment of properties and investment $ 44,416 $ 8,267
Exit costs 25,411 -
Assets to be disposed 15,983 -
Equipment leasehold termination costs 3,957 -
Other 950 -
--------- ---------
$ 90,717 $ 8,267
========= =========
</TABLE>
IMPAIRMENT OF PROPERTIES AND INVESTMENT:
The impairments on properties and investments became necessary when the Company
reevaluated its business plans as a result of operational and management
changes. This reevaluation has resulted in excess carrying values as compared
to the expected discounted cash flows. The properties affected and the related
asset categories are as follows:
<TABLE>
<CAPTION>
PROPERTY, ADVANCED
PLANT AND MINIMUM
DESCRIPTION EQUIPMENT ROYALTIES GOODWILL TOTAL
------------------------- --------- --------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Raleigh County, WV - - $ 5,705 $ 5,705
Upshur County, WV $ 6,036 - - 6,036
Grant County, WV
and Garrett County, MD 11,113 $ 7,009 - 18,122
Monongalia County, WV
and Preston County, WV 2,652 2,895 9,006 14,553
-------- --------- -------- --------
$ 19,801 $ 9,904 $ 14,711 $ 44,416
======== ========= ======== ========
</TABLE>
EXIT COSTS:
Also, in conjunction with the reevaluation, the Company, based on current market
conditions and expected mining costs, decided to exit its investment in Webster
and Braxton Counties, West Virginia. The exit charges consist of the following:
<TABLE>
<CAPTION>
Asset Category AMOUNT
------
(IN THOUSANDS)
<S> <C>
Property, plant and equipment $ 13,569
Reclamation accrual 5,100
Advanced minimum royalties 1,651
Goodwill 4,896
Other 195
---------
$ 25,411
=========
</TABLE>
F-23
<PAGE> 155
13. LOSS ON IMPAIRMENT AND RESTRUCTURING CHARGES, CONTINUED
ASSETS TO BE DISPOSED:
As part of the Company's liquidity planning, certain assets have
been identified to be held for sale. These assets have been reclassified to a
separate asset account and were adjusted to their fair market value. The fair
market values were established by management based on current offers, third
party appraisals and other information management believes relevant to establish
these values. The asset held for sale charges consist of the following:
<TABLE>
<CAPTION>
PROPERTY, ADVANCED
PLANT AND MINIMUM
DESCRIPTION EQUIPMENT ROYALTIES TOTAL
------------------------ --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Raleigh County, WV $ 1,353 $ 2,419 $ 3,772
Preston County, WV 7,721 4,026 11,747
Other Property 464 - 464
-------- -------- --------
$ 9,538 $ 6,445 $15,983
======== ======== ========
</TABLE>
EQUIPMENT LEASEHOLD TERMINATION COSTS:
In conjunction with the mining changes described, the Company will
also incur losses on equipment currently covered by operating leases. These
losses were estimated by comparing lease buyout costs with the expected fair
market value of the underlying equipment. These differences totaling $3,957 have
been recorded as equipment leasehold termination costs.
OAK MOUNTAIN ENERGY, L.L.C.
On April 17, 1997, the Company, an affiliate and unrelated parties
entered into a joint venture agreement to acquire substantially all of the
assets and assume certain liabilities of Oak Mountain Energy Corporation and its
affiliates for approximately $40 million, of which $10 million was provided by
the Company. Subsequent to the initial capitalization, the Company contributed
an additional $255,000. The Company owns an undivided interest in each of the
assets and is proportionately liable for its share of each liability of Oak
Mountain Energy, L.L.C. ("Oak Mountain") up to its capital investment. In
accordance with industry practice and purchase accounting, the Company has
presented their proportionate ownership, amounting to 32.0%, in Oak Mountain in
the consolidated financial statements from the date of acquisition.
In February 1998, the Company sold its investment in Oak Mountain to
an affiliate for $1. The Company tried unsuccessfully to sell its investment to
other unrelated parties during December 1997 and January and February 1998. The
Company has recorded an impairment loss of $8,267,000 to adjust the Company's
investment to its fair market value less cost to sell as of December 31, 1997.
F-24
<PAGE> 156
14. GOING CONCERN
Beginning in late 1997 and early 1998, the Company's financial position began to
deteriorate due primarily to poor operating performance and excessive capital
expenditures. In response to its financial problems, the Company developed a
plan to improve operations. This plan consisted of reducing general and
administrative expenses and making significant changes in the management of the
Company's operations, with an emphasis on adding experienced underground mine
managers. Once in place, the new management initiated efforts to improve safety,
tighten capital expenditure requirements, improve operational tracking, revamp
budgeting and forecasting processes, and initiate training programs to improve
communications and productivity.
While these efforts improved the Company's operations, the results were not as
significant as needed and were not realized in the timeframes projected. In
light of that and its continued financial difficulties, the Company revised the
plan to insure that it would have adequate long-term liquidity. The revised plan
consists of four components: (1) obtain more flexible senior financing; (2)
improve cash flow from operations; (3) raise cash by selling certain assets; and
(4) reduce the Company's debt.
The first component was achieved in November 1998 with the closing of the
Credit Facility. The new Credit Facility helps provide the needed flexibility
by enabling the Company to borrow against its asset base.
The second component of the Company's plan is to utilize contract mining
services for its underground operations. By utilizing contractors, the Company
expects to reduce both operating and general and administrative expenses, reduce
month-to-month cost fluctuations, and minimize future capital expenditures thus
improving cash flow from operations. The Company believes it will complete this
analysis and engage contractors for certain of its underground operations during
the second quarter of 1999.
The third component of the Company's plan is to sell certain non-operating
assets and select non-strategic operating properties. The non-operating assets
which the Company is seeking to sell are those that require substantial
development costs and/or have significant holding costs. The operating
properties which the Company plans to sell either complement the non-operating
assets being held for sale or are not integral to the Company's long-term
operating strategy. The Company believes that its efforts to date to market
these properties have been hampered by the Company's deteriorated financial
position. The Company believes it will be successful in selling all or a part of
these assets during the next twelve to eighteen months. The Company will also
evaluate reasonable offers on other assets as opportunities develop.
The final component of the plan involves reducing the Company's overall debt
level. This will be achieved in part through the success of the other components
of the plan. Based upon the expected results in the next two years, the Company
is also exploring the possibility of restructuring its Senior Notes in order to
reduce its long-term debt. The significant annual interest charges from the
Senior Notes severely limit the Company's operating flexibility and
substantially reduce the Company's ability to grow or replenish its production
base. The Company believes that a restructuring of its Senior Notes would
improve liquidity. However, there can be no assurance that the Company will be
able to restructure its Senior Notes on terms acceptable to it, if at all.
The Company and its Board of Directors are committed to this plan and believe
the results will provide the foundation for an improved financial position.
F-25
<PAGE> 157
15. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
THE COMPANY THE COMPANY THE COMPANY PREDECESSOR
------------ ------------ ------------ -----------
PERIOD PERIOD
YEAR YEAR AUGUST 1 JANUARY 1
ENDED ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1998 1997 1996 1996
------------ ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash paid for interest $13,617 $ 7,641 $ 2,747 $ 2,983
Cash paid for taxes - 17 202 8
Details of acquisitions:
Fair value of assets - 14,354 8,476 -
Liabilities - 4,354 4,214 -
------- -------- ---------- -----------
Cash paid - 10,000 4,262 -
Less cash acquired - 117 - -
------- -------- ---------- -----------
- $ 9,883 $ 4,262 -
======= ======== ========== ===========
Non cash activities:
Stock exchange in purchase of Anker
Group, Inc. - - $ 50,900 -
Redeemable preferred stock dividends
and accretion $1,937 $ 1,876 $ 775 $ 116
Assets written off to goodwill - $ 4,789 - -
</TABLE>
16. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
1998 and 1997:
<TABLE>
<CAPTION>
1998 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -------------------------------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Coal sales and related revenue $ 71,574 $ 76,320 $ 78,217 $ 65,315
Loss before extraordinary items (4,206) (5,689) (8,144) (87,565)
Net loss (4,206) (5,689) (8,144) (88,530)
Net loss available to common stockholders (4,691) (6,173) (8,628) (89,014)
1997
- --------------------------------------
Coal sales and related revenue $ 69,980 $ 79,927 $ 90,911 $ 82,161
Income (loss) before extraordinary items 783 (1,260) (948) 2,101
Net income (loss) 783 (1,260) (4,797) 2,101
Net income (loss) available to common
stockholders 314 (1,729) (5,269) 1,635
</TABLE>
F-26
<PAGE> 158
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $ 21
Accounts receivable 25,431
Inventories 3,279
Current portion of long-term notes receivable 682
Prepaid expenses and other 3,271
Deferred income taxes 3,683
--------------
Total current assets 36,367
Properties:
Coal lands and mineral rights 62,535
Machinery and equipment 71,893
--------------
134,428
Less allowances for depreciation, depletion and amortization 34,023
--------------
100,405
Other assets:
Assets held for sale 9,000
Advance minimum royalties 5,963
Goodwill, net of accumulated amortization of $3,700 at
September 30, 1999 20,389
Other intangible assets, net of accumulated amortization of $1,419 at
September 30, 1999 5,493
Notes receivable 3,495
Other assets 5,930
----------------
Total assets $ 187,042
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 10,319
Affiliate 547
Cash overdraft 2,928
Accrued interest 6,310
Accrued expenses and other 10,150
Accrued leasehold termination 3,214
Accrued reclamation expenses 5,015
Current maturities of long-term debt 2,472
Common stock available for repurchase 3,695
--------------
Total current liabilities 44,650
Long-term debt 147,119
Other liabilities:
Accrued reclamation expenses 15,396
Deferred income taxes 8,242
Other 4,448
--------------
Total liabilities 219,855
Commitments and contingencies -
Mandatorily redeemable preferred stock 26,093
Common stock available for repurchase 6,891
Stockholders' equity:
Preferred stock 23,000
Common stock -
Paid-in capital 47,900
Treasury stock (5,100)
Accumulated deficit (131,597)
--------------
Total stockholders' equity (65,797)
--------------
Total liabilities and stockholders' equity $ 187,042
==============
</TABLE>
The accompanying notes are an integral
Part of the consolidated financial statements.
F-27
<PAGE> 159
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Coal sales and related revenue $ 60,070 $ 78,217 $ 174,293 $ 226,111
Expenses:
Cost of operations and selling expenses 53,971 73,512 157,419 214,443
Depreciation, depletion and amortization 4,591 4,792 13,430 13,009
General and administrative 2,836 2,679 6,781 7,767
Loss on impairment and restructuring 1,065 5,517 4,526 7,346
-------------- -------------- ------------- --------------
Total expenses 62,463 86,500 182,156 242,565
-------------- -------------- ------------- --------------
Operating loss (2,393) (8,283) (7,863) (16,454)
Interest, net of $386 capitalized for the nine months
September 30,1998 (3,711) (3,301) (10,911) (9,421)
Other income, net 1,158 273 2,579 821
-------------- -------------- ------------- --------------
Loss before income taxes (4,946) (11,311) (16,195) (25,054)
Income tax benefit - (3,167) (200) (7,015)
-------------- -------------- ------------- --------------
Net loss (4,946) (8,144) (15,995) (18,039)
Mandatorily redeemable preferred stock dividends (352) (334) (1,055) (1,004)
Mandatorily redeemable preferred stock accretion (150) (150) (450) (450)
Common stock available for repurchase accretion (142) - (421) -
-------------- -------------- ------------- --------------
Net loss available to common stockholders $ (5,590) $ (8,628) $ (17,921) $ (19,493)
============== ============== ============= ==============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-28
<PAGE> 160
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (15,995) $ (18,039)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on impairment and restructuring 4,526 7,346
Depreciation, depletion and amortization 13,430 13,009
Gain on sale of property, plant and equipment (77) (101)
Debt issuance costs 756 -
Deferred taxes - (7,015)
Changes in operating assets and liabilities:
Accounts receivable 2,456 (670)
Inventories, prepaid expenses and other 1,315 4,298
Advance minimum royalties (1,893) (1,875)
Accounts payable, accrued expenses and other (1,116) 2,711
Accrued reclamation (3,121) (968)
Other liabilities (1,824) (142)
---------------- ----------------
Net cash used in operating activities (1,543) (1,446)
Cash flows from investing activities:
Purchases of properties (5,222) (8,134)
Proceeds from sales of property, plant and equipment 1,690 345
Issuance of notes receivable - (20)
Payments received on notes receivable 544 1,010
Other assets 794 (310)
Investment in affiliate - (333)
---------------- ----------------
Net cash used in investing activities (2,194) (7,442)
Cash flows from financing activities:
Proceeds from revolving line of credit and long-term debt 187,538 84,600
Principal payments on revolving line of credit and long-term debt (180,658) (75,341)
Cash overdraft (2,183) (3,919)
Payment of debt issuance costs (954) (421)
Treasury stock purchase - (5,100)
Proceeds received from life insurance proceeds - 10,000
---------------- ----------------
Net cash provided by financing activities 3,743 9,819
Increase in cash and cash equivalents 6 931
Cash and cash equivalents at beginning of period 15 -
---------------- ----------------
Cash and cash equivalents at end of period $ 21 $ 931
================ ================
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
F-29
<PAGE> 161
ANKER COAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The unaudited interim consolidated financial statements presented herein have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q and do not include all of the
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. In the
opinion of management, these consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position, results of operations and
cash flows. These unaudited interim consolidated financial statements should be
read in conjunction with the other disclosures contained herein and with the
Company's audited consolidated financial statements and notes thereto contained
in the Company's Annual Form 10-K for the year ended December 31, 1998.
Operating results for interim periods are not necessarily indicative of results
that may be expected for the entire fiscal year.
The preparation of financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform with the 1999 presentation.
2. INCOME TAXES
Income taxes are provided for financial reporting purposes based on management's
best estimate of the effective tax rate expected to be applicable for the full
calendar year. The Company has established a full valuation allowance on the net
operating loss carryforwards, capital loss carryforwards and contribution
carryforwards because the realization of these assets are uncertain.
3. INVENTORIES
Coal inventories are stated at the lower of average cost or market and amounted
to approximately $2.9 million and $4.4 million at September 30, 1999 and
December 31, 1998, respectively. Supply inventories are stated at the lower of
average cost or market and amounted to approximately $0.4 million and $1.5
million at September 30, 1999 and December 31, 1998, respectively.
4. LOSS ON IMPAIRMENT AND RESTRUCTURING
The Company recorded loss on impairment and restructuring charges of $1.1
million and $4.5 million for the three and nine months ended September 30, 1999.
The loss on impairment and restructuring recorded in the third quarter consisted
of three items. First, the operating sections of the Company's Barbour County
deep mine were moved from one area of the reserve to another. As a result of the
move, certain unamortized assets were no longer useful in the mining operation,
and the Company recorded a $0.6 million charge. Other unamortized assets
associated with this area of the Barbour County operation totaling $1.7 million
were not impaired because the Company believes these assets will be used for
future mining activities. Second, in connection with the close down of the
Company's operations in Webster County, the Company recorded $1.0 million of
additional charges for reclamation and other close down costs to be incurred
over the next seven months. The third component of the loss consists of an
income offset of $0.5 million relating to the disposition of certain coal
reserves in Preston and Taylor Counties, West Virginia, that were previously
impaired during the fourth quarter of 1998.
During the second quarter of 1999, the Company reviewed the carrying value of
computer software and determined that, in connection with the use of contract
miners at the Company's deep mines, certain software would no longer be
utilized. As a result, the Company recorded an impairment loss of $1.1 million.
In addition, the Company recorded an impairment of $2.4 million relating to
properties located in Tazewell County, Virginia.
F-30
<PAGE> 162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
The Company recorded loss on impairment and restructuring charges of $5.5
million and $7.3 million for the three and nine months ended September 30, 1998.
During 1998, the Company impaired its remaining investment in Oak Mountain of
$0.3 million and initiated steps to reduce general and administrative expenses
by making management changes resulting in $0.2 million of restructuring charges.
In addition, the Company recorded an impairment of $2.4 million in the second
quarter of 1998 relating to impairment losses on certain pieces of mining
equipment.
During the third quarter of 1998, a reclamation charge of $5.1 million was
recorded relating to the Company's operations in Webster County. This
reclamation charge was a result of a change in the mine plan for the Webster
County surface mine.
5. SUBSIDIARY GUARANTEES
The Company is a holding company with no assets other than its investments in
its subsidiaries. The Company's $125 million principal amount of 9.75% Senior
Notes due October 2007 (the "Old Notes") are guaranteed by certain subsidiaries
of the Company (collectively, the "Guarantor Subsidiaries"). Each of the
Guarantor Subsidiaries is a wholly-owned subsidiary of the Company and has fully
and unconditionally guaranteed the Old Notes on a joint and several basis. The
following tables summarize the financial position, results of operations and
cash flows for the Company, the Guarantor Subsidiaries and the subsidiaries of
the Company which did not guarantee the Old Notes (collectively, "Non-Guarantor
Subsidiaries"). The Company has not presented separate financial statements and
other disclosure regarding the Guarantor Subsidiaries because management has
determined that such information is not material to investors. The restrictions
affecting the ability of the Guarantor Subsidiaries to make distributions to the
Company or other Guarantor Subsidiaries are set forth in the Loan and Security
Agreement dated November 21, 1998, among the Company, Foothill Capital
Corporation ("Foothill") and the lenders named therein (the "Foothill Loan
Agreement"). The ability of the Guarantor Subsidiaries to make distributions is
also affected by law generally (e.g., adequate capital to pay dividends under
corporate law). See Note 7 for information on the recent private exchange of
$108.5 million of Old Notes for New Secured Notes.
AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
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 $ 3,683 $ 29,755 - $ 2,929 $ 36,367
Investment in subsidiaries 55,925 - - (55,925) -
Properties, net - 93,115 $ 7,290 - 100,405
Other assets - 50,270 - - 50,270
---------- ----------- -------- ----------- -----------
Total assets $ 59,608 $ 173,140 $ 7,290 $ (52,996) $ 187,042
========== =========== ======== =========== ===========
Total current liabilities 3,696 37,965 60 2,929 44,650
Long-term debt - 147,119 - - 147,119
Intercompany payable (receivable), net (54,169) 45,954 8,215 - -
Other long-term liabilities 6,745 21,341 - - 28,086
Mandatorily redeemable preferred stock 26,093 - - - 26,093
Common stock available for repurchase 6,891 - - - 6,891
Total stockholders' equity 70,352 (79,239) (985) (55,925) (65,797)
---------- ----------- -------- ----------- -----------
Total liabilities and stockholders' equity $ 59,608 $ 173,140 $ 7,290 $ (52,996) $ 187,042
========== =========== ======== =========== ===========
STATEMENT OF OPERATIONS
Coal sales and related revenues - $ 174,293 - - $ 174,293
Cost of operations and operating expenses - 181,976 $ 180 - 182,156
---------- ----------- -------- ----------- -----------
Operating loss - (7,683) (180) - ( 7,863)
Other expense $ - (8,332) - - (8,332)
---------- ----------- -------- ----------- -----------
Loss before taxes - (16,015) (180) - (16,195)
Income tax benefit 200 - - - 200
---------- ----------- -------- ----------- -----------
Net income (loss) $ 200 $ (16,015) $ (180) - $ (15,995)
========== =========== ======== =========== ===========
STATEMENT OF CASH FLOWS
Net cash provided by (used in) operating activities 200 $ (1,743) - - $ (1,543)
========== =========== ======== =========== ===========
Net cash used in investing activities - $ ( 2,194) - - $ ( 2,194)
========== =========== ======== =========== ===========
Net cash provided by financing activities - $ 3,743 - - $ 3,743
========== =========== ======== =========== ===========
</TABLE>
F-31
<PAGE> 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
6. COMMITMENTS AND CONTINGENCIES
In 1998, certain subsidiaries of the Company (the "Plaintiffs") sued
Consolidation Coal Company ("Consol"), the Social Security Administration (the
administrator of the Coal Industry Retiree Health Benefits Act of 1992 (the
"1992 Coal Act")), and the Trustees of the United Mine Workers of America
Combined Benefit Fund (the "Trustees") in the United States District for the
Western District of Pennsylvania claiming that (i) Consol is responsible for
paying certain of the Plaintiffs' 1992 Coal Act premiums relating to employees
that were affected by Consol's breach of several contract mining agreements in
the early 1980s (approximately 1/3 of the Plaintiffs' entire premium); (ii) the
Social Security Administration should be enjoined from continuing to invoice the
Plaintiff for these payments that should be made by Consol; and (iii) the 1992
Coal Act is unconstitutional. The Trustees filed a counterclaim against the
Plaintiffs for the amount of premiums they have failed to pay as a result of
their claim against Consol. The court granted the Trustee's motion for summary
judgment on their counterclaim, and the court granted the motions to dismiss
filed by Consol and the Social Security Administration.
The Plaintiffs appealed to the United States Third Circuit Court of Appeals. The
appeals court reversed the trial court ruling with respect to Consol. However,
the appeals court affirmed all other trial court rulings. Thus, the appeals
court ruled that the Plaintiffs can pursue their reimbursement claim against
Consol, but while that claim is proceeding they must pay the disputed portion of
their 1992 Coal Act premiums. At this time, the disputed portion of premiums,
including interest and penalties, is approximately $1.3 million. Interest
accrues at the post judgment rate of 9% per year.
The Plaintiffs filed a petition for appeal with the United States Supreme Court
on August 12, 1999. The Third Circuit's judgment has be stayed pending the
Supreme Court denial of the writ or otherwise ruling against the Plaintiffs. The
entire judgment has been fully accrued by the Company in prior years. In the
event the Plaintiffs are required to pay this judgment, the Plaintiffs will fund
the judgment from borrowings under the revolving credit facility under the
Foothill Loan Agreement.
The Company and its subsidiaries are party to various other lawsuits and claims
incidental to the conduct of their business. While it is not possible to predict
accurately the outcome of these matters, the Company's management does not
believe that these matters will have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
7. SUBSEQUENT EVENTS
On October 28, 1999, the Company completed a private restructuring of the Old
Notes and a private placement to raise additional capital. In the transactions,
a limited number of qualified noteholders exchanged $108.5 million of their Old
Notes for $86.8 million of 14.25% Series A Second Priority Senior Secured Notes
due 2007 (paid in kind ("PIK") through April 1, 2000) ("New Secured Notes"). The
New Secured Notes are guaranteed by all of the subsidiaries of the Company.
Exchanging noteholders waived their right to receive the October 1, 1999
interest payment on the Old Notes. Exchanging noteholders also received warrants
to purchase 20% of the common stock of the Company at a nominal exercise price.
The Company believes that the nominal exercise price represents the fair value
of the warrants at the time of issuance. In connection with the private
exchange, exchanging noteholders consented to amendments to the indenture for
the Old Notes that, among other things, modified or eliminated various
covenants. Following the private exchange, approximately $16.5 million of the
Old Notes remain outstanding. The Company also paid the October 1, 1999 cash
interest payment on the remaining Old Notes on October 28, 1999, prior to the
expiration of the grace period for that interest payment.
The Company expects to record the private exchange transaction described above
in accordance with FAS-15 "Accounting By Debtors and Creditors For Troubled Debt
Restructurings." In the private exchange, the carrying amount of the Old Notes
($125.0 million) and the accrued and unpaid interest of approximately $6.1
million is compared with the New Secured Notes principal and interest payments
over time. To the extent the carrying amount is less than the New Secured Notes
interest and principal, the Company can adjust its carrying amount. The Company
does not expect to change its carrying amount in connection with the private
exchange.
In conjunction with the private exchange, the Company raised $11.2 million in
cash through the sale to Rothschild Recovery Fund L.P. ("RRF") in a private
placement of $13.2 million principal amount of New Secured Notes and warrants to
purchase 10% of the common stock of the Company at a nominal exercise price. The
funds raised in the private placement were applied against the revolving credit
facility under the Foothill Loan Agreement. The issuance of the New Secured
Notes for cash in the private placement is expected to result in the financial
statement recognition of original issue discount. This discount will be accreted
over the term of the New Secured Notes.
F-32
<PAGE> 164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
The Company also issued $6.0 million of New Secured Notes to JJF Group Limited
Liability Company ("JJF Group"), a shareholder of the Company controlled by the
estate of John J. Faltis, the former Chairman and Chief Executive Officer of the
Company. The New Secured Notes were issued to JJF Group in exchange for
cancellation of JJF Group's common stock in the Company and its rights to
require the Company to buy that stock for approximately $10.5 million under a
Put Agreement dated as of August 25, 1998 (the "Put Agreement"). In connection
with the expected accounting treatment for the private exchange with JJF Group,
the Company will record the New Secured Notes issued at their face value, and
the difference between the New Secured Notes and the common stock available for
repurchase (including current portion) will increase paid-in-capital
F-33
<PAGE> 165
ANNEX A
AUDIT OF DEMONSTRATED RESERVES
CONTROLLED BY ANKER COAL GROUP, INC.
December 1, 1999
Prepared for
ANKER COAL GROUP, INC.
2708 Cranberry Square
Morgantown, West Virginia 26505
Prepared by
MARSHALL MILLER & ASSOCIATES
P.O. Box 848
Bluefield, Virginia 24605
<PAGE> 166
MARSHALL MILLER & ASSOCIATES LOGO
December 1, 1999
Mr. Bruce Sparks, President
ANKER COAL GROUP, INC.
2708 Cranberry Square
Morgantown, West Virginia 26505
Dear Mr. Sparks:
MARSHALL MILLER & ASSOCIATES (MM&A) has completed an audit of
reserves controlled by ANKER COAL GROUP, INC. (ANKER). A reserve audit verifies
that the audited reserve base has been properly estimated according to
industry-accepted standards and that the reserves, as presented, may be used
with reasonable geologic assurance for mine planning and/or economic
forecasting.
This audit was based on a thorough review of an extensive amount of
geologic data documenting the Anker reserves as well as Anker's in-house reserve
estimations, which were provided by Anker to facilitate the audit. The audit
demonstrated that Anker's geologic modeling and reserve estimation methodologies
are performed within industry-accepted standards. Moreover, MM&A's independent
checks verified the Anker reserve estimates, since differences between the MM&A
and Anker estimates were typically less than the generally-accepted margin of
error for the estimation of measured reserves. This letter provides a summary of
those portions of the audited reserve base that qualify as DEMONSTRATED
reserves.
CONCLUSIONS
Our audit of the subject coal properties has confirmed that Anker
controls a total demonstrated reserve base of 507.98 million tons of potentially
recoverable coal. The demonstrated reserves are reasonably well established by
exploration with 50 percent having measured status and 50 percent having
indicated status.
The table below presents MM&A's estimates of the Anker demonstrated
reserve base, which were prepared during the course of this audit. The reserve
estimate accounts for mine depletion through September 1999 and is therefore
based on Anker's reserves as of October 1, 1999.
<PAGE> 167
Mr. Bruce Sparks, President
ANKER COAL GROUP, INC.
December 1, 1999
Page 1
SUMMARY OF DEMONSTRATED RESERVES
(MILLIONS OF TONS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
UNDERGROUND TOTAL
(UG) OR RECOVERABLE
COUNTY AND STATE SURFACE (S) MEASURED INDICATED RESERVES SURFACE UNDERGROUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Barbour County, West Virginia UG 23.00 6.98 29.98 29.98
Grant County, West Virginia S/UG 16.21 13.69 29.90 1.30 28.60
Harrison County, West Virginia UG 18.45 38.15 56.60 56.60
Monongalia County, West Virginia S 2.03 0.02 2.05 2.05
Preston County, West Virginia UG 0.68 0.00 0.68 0.68
Raleigh County, West Virginia UG 18.60 12.83 31.43 31.43
Taylor County, West Virginia UG 73.57 144.41 217.98 217.98
Upshur County, West Virginia UG 41.11 24.76 65.87 65.87
Webster County, West Virginia S/UG 2.83 0.11 2.94 2.08 0.86
Allegheny County, Maryland S 4.15 0.10 4.25 4.25
Garrett County, Maryland S/UG 19.43 3.26 22.69 9.55 13.14
Muhlenberg County, Kentucky S/UG 7.08 0.83 7.91 0.34 7.57
Tazewell County, Virginia S/UG 25.26 10.44 35.70 0.90 34.80
- --------------------------------------------------------------------------------------------------------------------------------
TOTALS 252.40 255.58 507.98 20.47 487.51
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
===============================================================================
DEFINITIONS
===============================================================================
Definitions(1) of key terms and criteria applied in this audit are as follows:
- RESERVE - Reserve is defined as virgin and/or accessed parts
of a coal reserve base that could be economically extracted
or produced at the time of determination considering
environmental, legal, and technological constraints.
DEMONSTRATED RESERVES are the sum of coal reserves
classified as measured and indicated as explained below.
- RESERVE RELIABILITY CATEGORIES - The reliability categories
are related to the level of geologic assurance for the
existence of a quantity of resources. Assurance is based on
the distance from points where coal is measured or sampled
and on the abundance and quality of geologic data as related
to thickness of overburden, rank, quality, thickness of
coal, areal extent, geologic history, structure, and
correlation of coal beds and enclosing rocks. The degree of
assurance increases as the proximity to points of control,
abundance, and quality of geologic data increase. The
reserve reliability categories include:
- MEASURED COAL - Reserve estimates in this category
have the highest degree of geologic assurance.
Measured coal lies within 1/4 mile of a valid point
of measurement or point of observation (such as
previously mined areas) supporting such
measurements. The sites for thickness measurement
are so closely spaced, and the geologic character
is so well defined, that the average thickness,
areal extent, size, shape, and depth of coal beds
are well established.
(1) Source: U.S. Geological Survey Circular 891, "Coal Resource Classification
of the U.S. Geological Survey," 1983.
1
<PAGE> 168
Mr. Bruce Sparks, President
ANKER COAL GROUP, INC.
December 1, 1999
Page 2
- INDICATED COAL - Reserve estimates in this category
have a moderate degree of geologic assurance. There
are no sample and measurement sites in areas of
indicated coal. However, a single measurement can
be used to classify coal lying beyond measured as
INDICATED. Indicated coal lies more than 1/4 mile,
but less than 3/4 mile, from a point of thickness
measurement. Further exploration is necessary to
place indicated coal into the measured category.
================================================================================
METHODOLOGY AND QUALIFICATIONS
================================================================================
The reserve estimates presented herein are based on a thorough
review and checking of an extensive amount of geologic data provided by Anker to
document its reserve estimations. For each reserve area, seam correlations,
thickness, and mineable limits were cross-checked by MM&A to the geologic
database and maps provided by Anker. Reserve acreage by measured and indicated
status, average seam thickness, average seam density, and average mine and wash
recovery percentage were verified by MM&A to prepare a check calculation of each
reserve.
MM&A has previously prepared a number of proprietary reserve reports
covering some of the subject reserve areas. A comparison of the geologic data,
coal mapping, and reserve estimations from these reports to Anker's in-house
reserve mapping and estimations demonstrated that Anker's estimates have been
performed within industry-accepted methodologies. Checking of those reserve
areas not previously evaluated by MM&A also supported this conclusion.
Our audit of the Anker's reserves was planned and performed to
obtain reasonable geologic assurance on the subject coal properties. The audit
included examination by certified professional geologists of all supplied
reserve maps and supporting data using industry-accepted standards. Although the
audit methodology is inherently not as exhaustive as a detailed reserve
evaluation, in our opinion the audit was conducted in sufficient detail and with
independent verification on a test basis of the underlying supporting evidence
to provide reasonable assurance for the subject reserves. The reserve audit did
not include independent verification of property ownership; we have relied on
property information supplied by Anker and considered this information to be
accurate.
Sincerely,
MARSHALL MILLER & ASSOCIATES
ENERGY & MINERAL RESOURCES GROUP
/s/ J. Scott Nelson /s/ Peter B. Taylor
J. Scott Nelson, C.P.G. Peter B. Taylor, K.P.G.
Vice President Supervisory Geologist
2
<PAGE> 1
LETTER OF TRANSMITTAL
ANKER COAL GROUP, INC.
Offer To Exchange Anker's
14.25% Series B Second Priority Senior Secured Notes due 2007
(PIK through April 1, 2000)
For Any and All of Anker's
9 3/4% Series B Senior Notes due 2007
Pursuant to the Offering Memorandum Dated , 1999
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON , UNLESS THE EXCHANGE OFFER IS EXTENDED.
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C> <C>
BY HAND BY OVERNIGHT COURIER BY FACSIMILE TO CONFIRM BY
DELIVERY: OR REGISTERED/CERTIFIED TRANSMISSION: TELEPHONE OR FOR
The Bank of New York MAIL: (212) 815-6339 INFORMATION:
101 Barclay Street The Bank of New York (212) 815-6331
New York, New York 10286 101 Barclay Street
Ground Level New York, New York 10286
Corporate Trust Services Window Attn: Reorganization Unit -- 7E
Attn: Reorganization Unit -- 7E
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE
INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be completed by holders of Old Notes (as
defined below) either if Old Notes are to be forwarded herewith or if tenders of
Old Notes are to be made by book-entry transfer to an account maintained by The
Bank of New York (the "Exchange Agent") at The Depository Trust Company ("DTC")
pursuant to the procedures set forth in "The Exchange Offer -- Procedures for
Tendering Old Notes" in the Offering Memorandum.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
--------------------------------------------------
<PAGE> 2
Please list below the Old Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, please list the certificate
numbers and aggregate principal amounts on a separately executed schedule and
affix the schedule to this Letter of Transmittal.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF NOTES TENDERED
- -----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S), EXACTLY AS NAME CERTIFICATE AGGREGATE PRINCIPAL AMOUNT OF OLD
APPEAR(S) ON CERTIFICATE(S) (PLEASE FILL IN, IF BLANK) NUMBER(S)* AMOUNT OF OLD NOTES NOTES TENDERED FOR
DELIVERED EXCHANGE**
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders. Such holders should check the appropriate box below and provide the requested
information.
** Need not be completed if tendering for exchange all Old Notes delivered to the Exchange Agent. All Old Notes delivered shall
be deemed tendered unless a lesser number is specified in this column. The minimum permitted tender is $1,000 in principal
amount of Old Notes. All other tenders must be in integral multiples of $1,000 of principal amount.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 3
- --------------------------------------------------------------------------------
TENDER OF OLD NOTES
- --------------------------------------------------------------------------------
[ ] Check here if tendered Old Notes are enclosed herewith.
[ ] Check here if tendered Old Notes are being delivered by book-entry
transfer made to the account maintained by the Exchange Agent at DTC and
complete the following:
Name of Tendering Institution:____________________________________________
DTC Account Number:_______________________________________________________
Transaction Code Number:__________________________________________________
[ ] Check here if tendered Old Notes are being delivered pursuant to a Notice
of Guaranteed Delivery previously delivered to the Exchange Agent. In such
case, please enclose a photocopy of the Notice of Guaranteed Delivery and
complete the following:
Name of Registered Holder(s):_____________________________________________
Window Ticket Number (if any):____________________________________________
Date of Execution of Notice of Guaranteed Delivery:_______________________
Name of Eligible Institution that Guaranteed Delivery:____________________
[ ] Check here if you are a broker-dealer that acquired the Old Notes for its
own account as a result of market making or other trading activities (a
"Participating Broker-Dealer") and wish to receive 10 additional copies of
the Offering Memorandum and 10 copies of any amendments or supplements
thereto. In such case, please complete the following:
Name:_____________________________________________________________________
Address:__________________________________________________________________
Area Code and Telephone Number:___________________________________________
Contact Person:___________________________________________________________
- --------------------------------------------------------------------------------
2
<PAGE> 4
LADIES AND GENTLEMEN:
The undersigned hereby tenders to Anker Coal Group, Inc., a Delaware corporation
(the "Company") the above described aggregate principal value of the Company's 9
3/4% Series B Senior Notes due 2007 (the "Old Notes") in exchange for the
Company's 14.25% Series B Second Priority Senior Secured Notes due 2007 (PIK
through April 1, 2000) (the "New Notes") in a principal amount equal to $743 for
every $1,000 principal amount of Old Notes tendered, upon the terms and subject
to the conditions set forth in the Offering Memorandum dated ,
1999 (as the same may be amended or supplemented from time to time, the
"Offering Memorandum"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Offering Memorandum, constitute the
"Exchange Offer").
Subject to and effective upon the acceptance for exchange of all or any portion
of the Old Notes tendered herewith in accordance with the terms and conditions
of the Exchange Offer (including, if the Exchange Offer is extended or amended,
the terms and conditions of any such extension or amendment), the undersigned
hereby sells, assigns and transfers to or upon the order of the Company all
right, title and interest in and to such Old Notes as are being tendered
herewith. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent as its agent and attorney-in-fact (with full knowledge that the
Exchange Agent is also acting as agent of the Company in connection with the
Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), subject only to the right of withdrawal described in
the Offering Memorandum, to (i) deliver certificates for Old Notes to the
Company together with all accompanying evidences of transfer and authenticity
to, or upon the order of, the Company, upon receipt by the Exchange Agent, as
the undersigned's agent, of the New Notes to be issued in exchange for such Old
Notes, (ii) present certificates for such Old Notes for transfer, and to
transfer the Old Notes on the books of the Company, and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Old Notes, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENT(S) AND WARRANT(S) THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD NOTES
TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE COMPANY
WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND CLEAR OF
ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE OLD NOTES
TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE
UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE OLD NOTES TENDERED HEREBY.
THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed on page 2, if they are not already set forth
there, as they appear on the certificates (or, in the case of book-entry
securities, on the relevant security position listing) representing such Old
Notes. The certificate number(s) and the principal amount of Old Notes that the
undersigned wishes to tender should be indicated in the appropriate boxes on
page 2.
If any tendered Old Notes are not exchanged pursuant to the Exchange Offer for
any reasons, or if certificates are submitted for more Old Notes than are
tendered or accepted for exchange, certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered by
book-entry transfer, such Old Notes will be credited to the appropriate account
maintained at DTC), without expense to the tendering holder, promptly following
the expiration or termination of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to any one of the
procedures described in "The Exchange Offer -- Procedures for Tendering Old
Notes" in the Offering Memorandum and in the instructions hereto will, upon the
Company's acceptance for exchange of such tendered Old Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Offering Memorandum, the
Company may not be required to accept for exchange any of the Old Notes tendered
hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the New Notes be issued
in the name(s) of the undersigned or, in the case of a book-entry transfer of
Old Notes, that such New Notes be credited to the account indicated above
maintained at DTC. If applicable, substitute
3
<PAGE> 5
certificates representing Old Notes not tendered or not accepted for exchange
will be issued to the undersigned or, in the case of a book-entry transfer of
Old Notes, will be credited to the account indicated above maintained at DTC.
Similarly, unless otherwise indicated under "Special Delivery Instructions," the
undersigned hereby directs that New Notes be delivered to the undersigned at the
address shown below the undersigned's signature.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any accrued interest thereon from October 1, 1999 but will be entitled to
receive interest on the New Notes from October 1, 1999. Such interest will be
paid with the first interest payment on the New Notes, which interest payment
will be made by issuing additional New Notes, instead of cash, as set forth in
the Offering Memorandum. Interest on the New Notes is payable semi-annually on
each April 1 and October 1 of each year.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned, and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned.
4
<PAGE> 6
<TABLE>
<S> <C>
- ------------------------------------------------------------ ------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, AND 6) (SEE INSTRUCTIONS 1, 5, AND 6)
To be completed ONLY if the New Notes or any Old Notes To be completed ONLY if the New Notes or any Old Notes
delivered but not tendered for exchange are to be sent to delivered but not tendered for exchange are to be issued in
someone other than the registered holder of the Old Notes the name of someone other than the registered holder of the
whose name(s) appear(s) above, or such registered holder(s) Old Notes whose name(s) appear(s) above.
at an address other than that shown above.
Issue: [ ] New Notes and/or Issue: [ ] New Notes and/or
[ ] Old Notes delivered but not tendered for exchange [ ] Old Notes delivered but not tendered for exchange
Name(s):____________________________________________________ Name(s):____________________________________________________
(Please Print) (Please Print)
Address:____________________________________________________ Address:____________________________________________________
(Please Print) (Please Print)
____________________________________________________________ ____________________________________________________________
____________________________________________________________ ____________________________________________________________
(Please include ZIP code) (Please include ZIP code)
____________________________________________________________ ____________________________________________________________
Telephone Number with Area Code Telephone Number with Area Code
____________________________________________________________ ____________________________________________________________
Tax ID Number Tax ID Number
- ------------------------------------------------------------ ------------------------------------------------------------
</TABLE>
5
<PAGE> 7
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(Please Complete Substitute Form W-9 Contained Herein)
(Note: Signatures Must be Guaranteed if Required by Instruction 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificates for the Old Notes tendered (or, in the case of book-entry
securities, on the relevant security position listing), or by any person(s)
authorized to become the registered holder(s) by endorsements and documents
transmitted herewith (including such opinions of counsel, certifications and
other information as may be required by the Company to comply with the
restrictions on transfer applicable to the Old Notes). If signature is by an
attorney-in-fact, executor, administrator, trustee, guardian, officer or a
corporation or another acting in a fiduciary capacity or representative
capacity, please set forth the signer's full title. See Instruction 5.
X_______________________________________________________________________________
X_______________________________________________________________________________
(SIGNATURE(S) OF HOLDER(S) OR AUTHORIZED SIGNATORY)
Date:______________________________, 1999
Name:___________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT)
Capacity:_______________________________________________________________________
Address:________________________________________________________________________
________________________________________________________________________________
(PLEASE INCLUDE ZIP CODE)
Telephone No. (with area code):_________________________________________________
Tax ID No:______________________________________________________________________
GUARANTEE OF SIGNATURES
(See Instructions 2 and 5 below)
Certain Signatures Must be Guaranteed by an Eligible Institution
________________________________________________________________________________
(AUTHORIZED SIGNATURE)
________________________________________________________________________________
(CAPACITY (FULL TITLE))
________________________________________________________________________________
(NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURE)
________________________________________________________________________________
(ADDRESS OF FIRM -- PLEASE INCLUDE ZIP CODE)
________________________________________________________________________________
(TELEPHONE NO. (WITH AREA CODE) OF FIRM)
Date:______________________________, 1999
6
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed either if (a)
certificates are to be forwarded herewith or (b) tenders are to be made pursuant
to the procedures for tender by book-entry transfer set forth in "The Exchange
Offer -- Procedures for Tendering Old Notes" in the Offering Memorandum.
Certificates, or timely confirmation of a book-entry transfer of such Old Notes
into the Exchange Agent's account at DTC, as well as this Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to the expiration date set forth in the Offering Memorandum
(the "Expiration Date").
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal and all other required documents to the Exchange Agent on or prior
to the Expiration Date or (iii) who cannot complete the procedures for delivery
by book-entry transfer on a timely basis, may tender their Old Notes by properly
completing and duly executing a Notice of Guaranteed Delivery pursuant to the
guaranteed delivery procedures set forth in "The Exchange Offer -- Procedures
for Tendering Old Notes" in the Offering Memorandum. Pursuant to such
procedures: (x) such tender must be made by or through an Eligible Institution
(as defined below); (y) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form made available by the Company,
must be received by the Exchange Agent on or prior to the Expiration Date; and
(z) the certificates (or a book-entry confirmation (as defined in the Offering
Memorandum)) representing all tendered Old Notes, in proper form for transfer,
together with a Letter of Transmittal (or facsimile thereof), properly completed
and duly executed, with any required signature guarantees and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such Notice of Guaranteed Delivery, all as provided in "The
Exchange Offer -- Procedures for Tendering Old Notes" in the Offering
Memorandum.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Old Notes to be
properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein and in the Offering Memorandum, "Eligible Institution"
means a firm or other entity identified in Rule 17Ad-15 under the Exchange Act
as "an eligible guarantor institution," including (as such terms are defined
therein) (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (iii) a credit union; (iv) a
national securities exchange, registered securities association or clearing
agency; or (v) a savings association that is a participant in a Securities
Transfer Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER, AND
THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
The Company will not accept any alternative, conditional or contingent tenders.
Each tendering holder, by executing a Letter of Transmittal (or facsimile
thereof), waives any right to receive any notice of the acceptance of such
tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of Transmittal
is required if:
(i) this Letter of Transmittal is signed by the registered holder
(which term, for purposes of this document, shall include any
participant in DTC whose name appears on the relevant security
position listing as the owner of the Old Notes) of Old Notes
tendered herewith, unless such holder(s) has completed either the
box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" above, or
(ii) such Old Notes are tendered for the account of a firm that is an
Eligible Institution.
7
<PAGE> 9
In all other cases, an Eligible Institution must guarantee the signature(s) on
this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned "Description of
Old Notes" is inadequate, the certificate number(s) and/or the aggregate
principal amount of Old Notes and any other required information should be
listed on a separate signed schedule that is attached to this Letter of
Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. If less than all the Old Notes
evidenced by any certificate submitted are to be tendered, fill in the aggregate
principal amount of Old Notes that are to be tendered in the box entitled
"Aggregate Principal Amount of Old Notes Tendered for Exchange." In such case,
new certificates(s) for the remainder of the Old Notes that were evidenced by
your old certificate(s) will be sent to the holder of the Old Notes (or such
other party as you identify in the box captioned "Special Delivery
Instructions") promptly after the Expiration Date. All Old Notes represented by
certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn at
any time on or prior to the Expiration Date. In order for a withdrawal to be
effective, a written or facsimile transmission of such notice of withdrawal must
be timely received by the Exchange Agent at its address set forth above on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn and (if certificates for Old Notes
have been tendered) the name of the registered holder of the Old Notes as set
forth on the certificate for the Old Notes, if different from that of the person
that tendered such Old Notes. If certificates for the Old Notes have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such certificates for the Old Notes, the tendering holder
must submit the serial numbers shown on the particular certificates for the Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "The Exchange
Offer -- Procedures for Tendering Old Notes" in the Offering Memorandum, the
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawal of Old Notes, in which case a notice of
withdrawal will be effective if delivered to the Exchange Agent by written or
facsimile transmission. Withdrawals of tenders of Old Notes may not be
rescinded. Old Notes properly withdrawn will not be deemed validly tendered for
purposes of the Exchange Offer but may be retendered at any subsequent time on
or prior to the Expiration Date by following any of the procedures described in
the Offering Memorandum under "The Exchange Offer -- Procedures for Tendering
Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
The Company, any affiliates or assigns of the Company, the Exchange Agent or any
other person shall not be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification. Any Old Notes that have been tendered but that are
withdrawn will be returned to the holder thereof without cost to such holder
promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If this
Letter of Transmittal is signed by the registered holder(s) of the Old Notes
tendered hereby, the signatures(s) must correspond exactly with the name(s) as
written on the face of the certificate(s) (or, in the case of book-entry
securities, on the relevant security position listing) without alteration,
enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different name(s) on several
certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal (or facsimiles thereof) as there are different
registrations of certificates.
If this Letter of Transmittal or any certificates or bond powers is signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
8
<PAGE> 10
persons should so indicate when signing and must submit proper evidence
satisfactory to the Company, in its sole discretion, of such persons' authority
to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the Old
Notes listed and transmitted hereby, no endorsement(s) of certificate(s) or
separate bond power(s) are required unless New Notes are to be issued in the
name of a person other than the registered holder(s). Signature(s) on such
certificate(s) or bond power(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the registered
owner(s) of the Old Notes listed, the certificates must be endorsed or
accompanied by appropriate bond powers, signed exactly as the name or names of
the registered owner(s) appear(s) on the certificates. Signatures on such
certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTION. If New Notes are to be issued in
the name of a person other than the signer of this Letter of Transmittal, or if
New Notes are to be sent to someone other than the signer of this Letter of
Transmittal or to an address other than that shown above, the appropriate boxes
on this Letter of Transmittal should be completed. Certificates for Old Notes
not exchanged will be returned by mail or, if tendered by book-entry transfer,
by crediting the account indicated above maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for, may, in the view of
counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to applicable law, to waive any of the conditions of the Exchange
Offer set forth in the Offering Memorandum under "The Exchange Offer --
Conditions; Extension; Amendments" or any conditions or irregularity in any
tender of Old Notes of any particular holder whether or not similar conditions
or irregularities are waived in the case of other holders. The Company's
interpretation of the terms and conditions of the Exchange Offer (including this
Letter of Transmittal and the instructions hereto) will be final and binding. No
tender of Old Notes will be deemed to have been validly made until all
irregularities with respect to such tender have been cured or waived. The
Company, any affiliates or assigns of the Company, the Exchange Agent or any
other person shall not be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. QUESTIONS, REQUEST FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to the Exchange Agent at its address and
telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Offering Memorandum, the Notice of Guaranteed Delivery
and the Letter of Transmittal may be obtained from the Exchange Agent or from
your broker, dealer, commercial bank, trust company or other nominee.
9. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate(s) representing
Old Notes has been lost, destroyed or stolen, the holder should promptly notify
the Exchange Agent. The holder will then be instructed as to the steps that must
be taken in order to replace the certificate(s). This Letter of Transmittal and
related documents cannot be processed until the procedures for replacing lost,
destroyed or stolen certificate(s) have been followed.
10. SECURITY TRANSFER TAXES. Holders that tender their Old Notes for exchange
will not be obligated to pay any transfer taxes in connection therewith. If,
however, New Notes are to be delivered to, or are to be issued in the name of,
any person other than the registered holder of the Old Notes tendered, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
9
<PAGE> 11
IMPORTANT TAX INFORMATION
Under federal income tax law, a holder whose tendered Old Notes are accepted for
exchange is required by law to provide the Exchange Agent with such holder's
correct taxpayer identification number ("TIN") on Substitute Form W-9 included
herein or otherwise establish a basis for exemption from backup withholding. If
such holder is an individual, the TIN is his or her social security number. If
the Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service may subject the holder or transferee to a $50.00 penalty. In addition,
delivery of such holder's New Notes may be subject to backup withholding.
Failure to comply truthfully with the backup withholding requirements also may
result in the imposition of severe criminal and/or civil fines and penalties.
Certain holders (including, among others, all corporations and certain foreign
persons) are not subject to these backup withholding and reporting requirements.
Exempt holders should furnish their TIN, write "Exempt" on the face of the
Substitute Form W-9, and sign, date and return the Substitute Form W-9 to the
Exchange Agent. A foreign person, including entities, may qualify as an exempt
recipient by submitting to the Exchange Agent a properly completed Internal
Revenue Service Form W-8, signed under penalties of perjury, attesting to that
holder's foreign status. A Form W-8 can be obtained from the Exchange Agent. See
the enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional instruction.
If backup withholding applies, the Exchange Agent is required to withhold 31% of
any payments made to the holder or other transferee. Backup withholding is not
an additional federal income tax. Rather, the federal income tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to Old Notes
exchanged in the Exchange Offer, the holder is required to provide the Exchange
Agent with either: (i) the holder's correct TIN by completing the form included
herein, certifying that the TIN provided on Substitute Form W-9 is correct (or
that such holder is awaiting a TIN) and that (A) the holder has not been
notified by the Internal Revenue Service that the holder is subject to backup
withholding as a result of failure to report all interest or dividends or (B)
the Internal Revenue Service has notified the holder that the holder is no
longer subject to backup withholding; or (ii) an adequate basis for exemption.
NUMBER TO GIVE THE EXCHANGE AGENT
The holder is required to give the Exchange Agent the TIN (e.g., social security
number or employer identification number) of the registered holder of the Old
Notes. If the Old Notes are held in more than one name or are held not in the
name of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which number to report.
10
<PAGE> 12
<TABLE>
<CAPTION>
PAYER'S NAME:
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
SUBSTITUTE Social Security Number or
FORM W-9 Part I: PLEASE PROVIDE Employer Identification Number:
YOUR TIN IN THE BOX
AT RIGHT AND CERTIFY _____________________________________
BY SIGNING AND
DATING BELOW
---------------------------------------------------------------------------------
Part II: CERTIFICATION. Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me)
and
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN) (2) I am not subject to backup withholding because (i) I have not been notified
by the Internal Revenue Service IRS") that I am subject to backup withholding
as a result of failure to report all interest or dividends, or (ii) the IRS
has notified me that I am no longer subject to backup withholding.
---------------------------------------------------------------------------------
Part III: Awaiting TIN: [ ]
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
CERTIFICATE INSTRUCTIONS -- You must cross out item (2) in Part II above if you have been notified by the IRS
that you are subject to backup withholding because of underreporting interest or dividends on your tax return.
However, if after being notified by the IRS that you are subject to backup withholding you received another
notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2).
<S> <C>
Signature:_________________________________________________________ Date:__________________________, 1999
Name:________________________________________________
(please print)
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART III OF THIS SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31%
of all payments made to me on account of the New Notes shall be retained until I
provide a taxpayer identification number to the Exchange Agent and that, if I do
not provide my taxpayer identification number with 60 days, such retained
amounts shall be remitted to the Internal Revenue Service as backup withholding
and 31% of all reportable payments made to me thereafter will be withheld and
remitted to the Internal Revenue Service until I provide a taxpayer
identification number.
Signature:________________________________ Date:_______________________, 1999
Name:___________________________________
(please print)
- --------------------------------------------------------------------------------
11
<PAGE> 1
FORM OF
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
9 3/4 % SERIES B SENIOR NOTES DUE 2007
OF
ANKER COAL GROUP, INC.
This Notice of Guaranteed Delivery, or one substantially
equivalent to this form, must be used to accept the Exchange Offer (as defined
below) if (i) certificates for the Company's (as defined below) 9 3/4% Series B
Senior Notes due 2007 (the "Old Notes") are not immediately available, (ii) Old
Notes, the Letter of Transmittal and all other required documents cannot be
delivered to The Bank of New York (the "Exchange Agent") on or prior to the
expiration date (as defined in the Offering Memorandum referred to below) or
(iii) the procedures for delivery by book-entry transfer cannot be completed on
a timely basis. This Notice of Guaranteed Delivery may be delivered by hand,
overnight courier or mail, or transmitted by facsimile transmission, to the
Exchange Agent. See "The Exchange Offer--Procedures for Tendering Old Notes" and
"The Exchange Offer--Guaranteed Delivery Procedures" in the Offering Memorandum.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C>
BY HAND DELIVERY: BY FACSIMILE TRANSMISSION:
The Bank of New York 212-815-6339
101 Barclay Street
New York, NY 10286
Ground Level
Corporate Trust Services Window
Attn: Reorganization Unit -- 7E
BY OVERNIGHT COURIER OR TO CONFIRM BY TELEPHONE
REGISTERED/CERTIFIED MAIL: OR FOR INFORMATION:
The Bank of New York 212-815-6331
101 Barclay Street
New York, NY 10286
Attn: Reorganization Unit -- 7E
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER
THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF DELIVERY VIA FACSIMILE
TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to Anker Coal Group, Inc., a
Delaware corporation (the "Company"), upon the terms and subject to the
conditions set forth in the Offering Memorandum dated , 1999 (as
the same may be amended or supplemented from time to time, the "Offering
Memorandum"), and the related Letter of Transmittal (which, together with the
Offering Memorandum, constitute the "Exchange Offer"), receipt of which is
hereby acknowledged, the aggregate principal amount of Old Notes set forth below
pursuant to the guaranteed delivery procedures set forth in the Offering
Memorandum under the caption "The Exchange Offer--Guaranteed Delivery
Procedures."
<TABLE>
<S> <C>
Aggregate Principal Amount Tendered: Name(s) of Registered Holders(s):
______________________________________________________ _____________________________________________
Certificate No(s). (if available): __________________ Address(es):_________________________________
_____________________________________________
If Old Notes will be tendered by
book-entry transfer, provide the _____________________________________________
following information:
Area Code and Telephone Number(s):___________
DTC Account Number:___________________________________
Signatures(s):_______________________________
Date:_________________________________________________ _____________________________________________
</TABLE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (i) a bank; (ii) a
broker, dealer, municipal securities broker, municipal securities dealer,
government securities broker or government securities dealer; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings association (each, an "Eligible Institution"),
hereby guarantees to deliver to the Exchange Agent, at one of its addresses set
forth above, either the Old Notes tendered hereby in proper form for transfer,
or confirmation of the book-entry transfer of such Old Notes to the Exchange
Agent's account at The Depository Trust Company ("DTC"), pursuant to the
procedures for book-entry transfer set forth in the Offering Memorandum, in
either case together with one or more properly completed and duly executed
Letter(s) of Transmittal (or facsimile thereof) and any other required documents
within three New York Stock Exchange trading days after the date of execution of
this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Notes tendered hereby to the Exchange Agent within the
time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
<TABLE>
<S> <C>
Name of Firm:_________________________________ _______________________________
(Authorized Signature)
Address:______________________________________ Title:_________________________
______________________________________________ Name:__________________________
______________________________________________ (Please type or print)
(ZIP Code)
Area Code and Telephone Number:_______________ Date:__________________________
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. ACTUAL
SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY,
A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY
OTHER REQUIRED DOCUMENTS.
<PAGE> 1
EXHIBIT T3F
TABLE SHOWING REFLECTION IN INDENTURE OF CERTAIN PROVISIONS
OF THE TRUST INDENTURE ACT OF 1939 ("TIA")
<TABLE>
<CAPTION>
TIA Section Indenture Section
- ----------- -----------------
<S> <C> <C>
310 (a)(1).............................................8.10
(a)(2).............................................8.10
(a)(3).............................................Not Applicable
(a)(4).............................................Not Applicable
(a)(5).............................................8.10
(b)................................................8.10
(c)................................................Not Applicable
311 (a)................................................8.11
(b)................................................8.11
312 (a)................................................2.5
(b)................................................13.3
(c)................................................13.3
313 (a)................................................8.6(a)
(b)................................................8.6(b)
(c)................................................8.6(a)
(d)................................................8.6(c)
314 (a)(1).............................................4.3
(a)(2).............................................4.3
(a)(3).............................................4.3
(a)(4).............................................4.4
(b)................................................5.3(b), (c)
(c)(1).............................................13.4(a), 5.7(b)(vii)
(c)(2).............................................13.4(b)
(c)(3).............................................Not Applicable
(d)(1).............................................5.6, 5.7(b)(v), 5.7(c)
(d)(2).............................................5.8(c)(iii)
(d)(3).............................................5.8(c)(iii), (iv)
(e)................................................13.5
315 (a)................................................8.1(b)
(b)................................................8.5(a)
(c)................................................8.1(a)
(d)................................................8.1(d)
316 (a)(1).............................................7.4, 7.5
(a)(2).............................................Not Applicable
(b)................................................7.7
317 (a)(1).............................................7.8
(a)(2).............................................7.9
(b)................................................2.4
318 ...................................................13.1
</TABLE>
