<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 333-39643
ANKER COAL GROUP, INC.
----------------------
(Exact Name Of Registrant As Specified in Its Charter)
Delaware 52-1990183
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2708 Cranberry Square
Morgantown, West Virginia 26508
-------------------------------
(Address Of Principal Executive Offices)
(304) 594-1616
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of outstanding shares of each of the registrant's
classes of common stock, as of the latest practicable date: Common Stock, $.01
per share par value, 9,186 shares (May 14, 1999)
<PAGE> 2
ANKER COAL GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PART I
ITEM 1. Financial Statements.
Consolidated Statements of Operations - Three Months
Ended March 31, 1999 and 1998 .......................1
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 ................2
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 .......................3
Notes to Consolidated Financial Statements ..................4-5
ITEM 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations .........................6-10
PART II
ITEM 5. Other Information ..................................................11
ITEM 6. Exhibits and Reports on Form 8-K ...................................11
Signature Page .............................................................12
FORWARD-LOOKING DISCLAIMER
This report contains statements which constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements include statements regarding the intent, belief of current
expectations of the performance of the Company, the ability of the Company to
implement its business plan or related industry developments. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Readers are further cautioned
that actual results, levels of activity, performance or achievements of the
Company, or industry results, may differ materially from those described or
implied in the forward-looking statements as a result of various factors, many
of which are beyond the control of the Company. These factors include, but are
not limited to: general economic and business conditions; the ability of the
Company to implement its business plan; the availability of liquidity and
capital resources; the ability of the Company to achieve anticipated cost
savings; the ability of the Company to secure new mining permits; changes in the
industry; weather; unexpected maintenance problems; variations in coal seam
thickness; variations in rock and soil overlying the coal deposit; variations in
rock and other natural minerals; a disruption in or an increase in the cost of
transportation services; early modification or termination of the Company's
long-term coal supply contracts; competition within the coal production and
electricity generation industries; regulatory uncertainties; price fluctuations
and labor disruptions.
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Coal sales and related revenue $ 56,952 $ 71,574
Expenses:
Cost of operations and selling expenses 50,334 68,037
Depreciation, depletion and amortization 4,392 3,778
General and administrative 1,935 2,631
Loss on impairment and restructuring charges -- 333
-------- --------
Total expenses 56,661 74,779
Operating income (loss) 291 (3,205)
Interest, net of $280 capitalized in 1998 (3,625) (2,867)
Other income, net 590 231
-------- --------
Loss before income taxes (2,744) (5,841)
Income tax benefit 200 1,635
-------- --------
Net loss (2,544) (4,206)
Less mandatorily redeemable preferred stock dividends (352) (335)
Less mandatorily redeemable preferred stock accretion (150) (150)
-------- --------
Net loss available to common stockholders $ (3,046) $ (4,691)
======== ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
1
<PAGE> 4
ANKER COAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 8 $ 15
Accounts receivable:
Trade 22,558 27,845
Affiliates 114 42
Inventories 9,345 5,876
Current portion of long-term notes receivable 692 986
Prepaid expenses and other 1,782 1,989
Deferred income taxes 3,683 3,683
--------- ---------
Total current assets 38,182 40,436
Properties:
Coal lands and mineral rights 62,742 62,398
Machinery and equipment 72,735 72,355
--------- ---------
135,477 134,753
Less allowances for depreciation, depletion and amortization 27,933 26,161
--------- ---------
107,544 108,592
Other assets:
Assets held for sale 10,000 10,000
Advance minimum royalties 5,420 4,453
Goodwill, net of accumulated amortization of $2,905 and $2,517 in
1999 and 1998, respectively 21,184 21,572
Other intangible assets, net of accumulated amortization of $899 and $694
in 1999 and 1998, respectively 6,063 6,268
Notes receivable 3,618 3,735
Other assets 6,785 6,664
--------- ---------
Total assets $ 198,796 $ 201,720
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 9,776 10,982
Affiliates 607 480
Cash overdraft 5,204 5,111
Accrued interest 6,545 3,365
Accrued expenses and other 11,105 11,287
Accrued leasehold termination 3,957 3,957
Accrued reclamation expenses 5,687 5,234
Current maturities of long-term debt 2,788 2,777
Common stock available for repurchase 1,505 1,505
--------- ---------
Total current liabilities 47,174 44,698
Long-term debt 138,673 139,934
Other liabilities:
Accrued reclamation expenses 15,963 17,367
Deferred income taxes 8,242 8,242
Other 6,081 6,272
--------- ---------
Total liabilities 216,133 216,513
Commitments and contingencies -- --
Mandatorily redeemable preferred stock 25,090 24,588
Common stock available for repurchase 8,495 8,495
Stockholders' equity:
Preferred stock 23,000 23,000
Common stock -- --
Paid-in capital 47,900 47,900
Treasury stock (5,100) (5,100)
Accumulated deficit (116,722) (113,676)
--------- ---------
Total stockholders' equity (50,922) (47,876)
--------- ---------
Total liabilities and stockholders' equity $ 198,796 $ 201,720
========= =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
2
<PAGE> 5
ANKER COAL GROUP, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,544) $ (4,206)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Impairment loss -- 333
Depreciation, depletion and amortization 4,392 3,778
Gain on sale of property, plant and equipment (33) (9)
Changes in operating assets and liabilities:
Accounts receivable 5,215 (1,291)
Inventories, prepaid expenses and other (3,262) (1,672)
Advance minimum royalties (967) (927)
Accounts payable, accrued expenses and other 1,028 292
-------- --------
Net cash provided by (used in) operating
activities 3,829 (3,702)
-------- --------
Cash flows from investing activities:
Purchases of properties (2,858) (3,522)
Proceeds from sales of property, plant and equipment 144 52
Payments received on notes receivable 411 799
Other assets (126) (309)
Investment in affiliate -- (333)
-------- --------
Net cash used in investing activities (2,429) (3,313)
-------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit and
long-term debt 64,055 7,000
Principal payments on revolving line of credit and
long-term debt (65,305) (11,243)
Cash overdraft 93 1,548
Debt issuance costs (250) (275)
Proceeds received from life insurance -- 10,000
-------- --------
Net cash (used in) provided by financing
activities (1,407) 7,030
-------- --------
(Decrease) increase in cash and cash equivalents (7) 15
Cash and cash equivalents at beginning of period 15 --
-------- --------
Cash and cash equivalents at end of period $ 8 $ 15
======== ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
3
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITIED)
1. Accounting Policies
The unaudited interim consolidated financial statements presented herein
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q and do not include
all of the information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles.
In the opinion of management, these consolidated financial statements contain
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position, results of operations and
cash flows. These unaudited interim consolidated financial statements should be
read in conjunction with the other disclosures contained herein and with the
Company's audited consolidated financial statements and notes thereto contained
in the Company's 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.
2. Income Taxes
Income taxes are provided for financial reporting purposes based on
management's best estimate of the effective tax rate expected to be applicable
for the full calendar year.
3. Inventories
Coal inventories are stated at the lower of average cost or market and
amounted to approximately $8,014,000 and $4,415,000 at March 31, 1999 and
December 31, 1998, respectively. Supply inventories are stated at the lower of
cost (first in, first out) or market and amounted to approximately $1,331,000
and $1,461,000 at March 31, 1999 and December 31, 1998, respectively.
4. Subsequent Events
Under the indenture governing the Senior Notes, the Company was obligated
to make a semi-annual interest payment in the approximate amount of $6.1 million
on April 1, 1999. The Company elected to defer making the interest payment at
that time. However, on April 29, 1999, prior to the expiration of the grace
period under the indenture, the Company made the interest payment due under the
Senior Notes.
In mid-April, 1999, the Company reached an agreement in principle with
Rothschild Recovery Fund, L.P. ("Rothschild") regarding a restructuring of its
Senior Notes. The Company is negotiating with Rothschild and is preparing
documentation to effect the proposed restructuring. The proposed transaction
contemplates the exchange of Senior Notes for newly issued 12.50% senior secured
notes due 2007 (the "New Notes") with a principal amount equal to 75% of the
principal amount of the Senior Notes being exchanged. The New Notes would be
secured by a lien on certain assets of the Company and its subsidiaries junior
to the lien currently held by the Company's senior secured lenders. Exchanging
holders will be asked to consent to certain modifications of the covenants
contained in the indenture for the Senior Notes. The Company expects to offer
the opportunity to exchange Senior Notes for New Notes initially to certain
qualified buyers in a private transaction and subsequently to all remaining
holders of Senior Notes in accordance with applicable securities laws under
which the New Notes issued in the subsequent exchange would be freely tradable.
Contemporaneously with closing of the proposed private exchange of Senior
Notes for New Notes, the Company intends to sell at par for cash approximately
$22 million of New Notes ("New Interest Notes") in a private transaction to a
limited number of holders of Senior Notes. The proceeds of sale of the New
Interest Notes would be escrowed with the indenture trustee for the New Notes to
cover the first three interest payments on the New Notes and New Interest Notes.
Rothschild has advised the Company that it is willing to purchase all New
Interest Notes that are not purchased by other potential purchasers in the
proposed private sale. Purchasers of the New Interest Notes will also receive
warrants to purchase a minority equity stake in the Company.
4
<PAGE> 7
It should be noted that consummation of the proposed exchanges, indenture
amendments and private sale will be subject to a number of conditions,
including, without limitation, approval of the modifications to the indenture
for the Senior Notes by holders of a majority of the outstanding Senior Notes,
negotiation of definitive documentation satisfactory to the Company and
participation in the private exchange offer of a satisfactory level of holders
of Senior Notes. There can be no assurance that the Company will complete the
restructuring of the Senior Notes or the sale of the New Interest Notes as
described above.
5. Subsidiary Guarantees
The Company is a holding company with no assets other than its investments
in its subsidiaries. The Company's $125 million Senior Notes due October 2007
(the "Senior Notes") are guaranteed by certain subsidiaries of the Company
(collectively, the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries
is a wholly-owned subsidiary of the Company and has fully and unconditionally
guaranteed the Senior Notes on a joint and several basis. The following tables
summarize the financial position, results of operations and cash flows for the
Company, the Guarantor Subsidiaries and the subsidiaries of the Company which
did not guarantee the Senior Notes (collectively, "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 March 31, 1999, there were no
restrictions affecting the ability of the Guarantor Subsidiaries to make
distributions to the Company or other Guarantor Subsidiaries except for
restrictions in the Loan and Security Agreement dated November 21, 1998, among
the Company, Foothill Capital Corporation and others (the "Foothill Loan
Agreement") and to the extent provided by law generally (e.g., adequate capital
to pay dividends under corporate law). The Foothill Loan Agreement provides that
in order to advance funds to the Company, the borrowers under such Agreement
must have borrowing availability of at least $5 million after giving effect to
such advances. As of March 31, 1999 and April 30, 1999, the borrowing
availability under the Foothill Loan Agreement was $16.5 million and $6.3
million, respectively. Thus, the maximum amount which the borrowers could
advance to the Company on each of those dates was $11.5 million and $1.3
million, respectively.
<TABLE>
<CAPTION>
As of and for the three months
ended March 31, 1999
----------------------------------------------------------------------
(unaudited)
(In thousands)
Anker Coal
Anker Coal Guarantor Non-guarantor Cons. Group
Group Subs. Subs. Adjust. Cons.
---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheets
Total current assets $ 3,683 $ 29,295 -- $ 5,204 $ 38,182
Investment in subsidiaries 55,925 -- -- (55,925) --
Properties, net -- 100,254 $ 7,290 -- 107,544
Other assets -- 53,070 -- -- 53,070
---------- ---------- ---------- ---------- ----------
Total assets $ 59,608 $ 182,619 $ 7,290 $ (50,721) $ 198,796
========== ========== ========== ========== ==========
Total current liabilities 1,809 39,895 266 5,204 47,174
Long-term debt -- 138,673 -- -- 138,673
Intercompany payable (receivable), net (53,969) 46,190 7,779 -- --
Other long-term liabilities 6,745 23,541 -- -- 30,286
Mandatorily redeemable preferred stock 25,090 -- -- -- 25,090
Common stock available for repurchase 8,495 -- -- -- 8,495
Total stockholders' equity 71,438 (65,680) (755) (55,925) (50,922)
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 59,608 $ 182,619 $ 7,290 $ (50,721) $ 198,796
========== ========== ========== ========== ==========
Statement of Operations
Coal sales and related revenues -- 56,952 -- -- 56,952
Cost of operations and operating expenses -- 56,601 60 -- 56,661
---------- ---------- ---------- ---------- ----------
Operating income (loss) -- 351 (60) -- 291
Other expense (139) (2,896) -- -- (3,035)
---------- ---------- ---------- ---------- ----------
Loss before taxes (139) (2,545) (60) -- (2,744)
Income tax benefit 200 -- -- -- 200
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 61 $ (2,545) $ (60) -- $ (2,544)
========== ========== ========== ========== ==========
Statement of Cash Flows
Net cash provided by operating activities -- $ 3,829 -- -- $ 3,829
========== ========== ========== ========== ==========
Net cash used in investing activities -- $ (2,429) -- -- $ (2,429)
========== ========== ========== ========== ==========
Net cash used in financing activities -- $ (1,407) -- -- $ (1,407)
========== ========== ========== ========== ==========
</TABLE>
5
<PAGE> 8
6. Commitments and Contingencies
The Company is a party to various lawsuits and claims incidental to its
business. While it is not possible to predict accurately the outcome of these
matters, management believes that none of these actions will have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources; Going Concern Opinion
The Company's independent public accountants issued a going concern
opinion with respect to the Company's Consolidated Financial Statements for the
year ended December 31, 1998. Specifically, the independent public accountants
stated that because the Company has, among other things, experienced recurring
losses and negative cash flow from operations and has a retained deficit, they
had substantial doubt about its ability to continue as a going concern. See Item
8, Consolidated Financial Statements, of the Company's Form 10-K for the period
ended December 31, 1998, for the opinion of the Company's independent public
accountants.
The Foothill Loan Agreement contains a covenant that requires the Company
to deliver an unqualified audit opinion on its annual financial statements. The
issuance of the going concern opinion by the Company's independent public
accountants for the year ended December 31, 1998 constituted a default of that
covenant. Foothill has waived that default. It should be noted that the failure
of the Company to obtain an unqualified audit opinion does not constitute a
default under the indenture governing the Senior Notes.
Under the indenture governing the Senior Notes, the Company was obligated
to make a semi-annual interest payment in the approximate amount of $6.1 million
on April 1, 1999. The Company elected to defer making the interest payment at
that time. However, on April 29, 1999, prior to the expiration of the grace
period under the indenture, the Company made the interest payment due under the
Senior Notes.
The following table sets forth the amounts outstanding and borrowing
availability under the Foothill Loan Agreement as of certain dates:
<TABLE>
<CAPTION>
Revolving Revolving
Credit Credit
Date Term Loan Borrowings Availability
-------- --------- ---------- ------------
(in millions)
<S> <C> <C> <C>
12/31/98 $ 15.0 $ 1.9 $ 15.5
01/31/99 14.8 4.5 14.3
02/28/99 14.6 1.9 14.3
03/31/99 14.4 1.4 16.5
04/30/99 14.2 12.9 6.3
</TABLE>
The term loan changes are based on the normal amortization of the loan.
The increase in the revolving credit borrowings is primarily related to the
Company's borrowing to make the interest payment under the Senior Notes on April
29, 1999, and to an increase in coal inventory. Revolving credit availability
has been reduced as a result of lower coal shipments, the liquidation of
accounts receivable of approximately $5.2 million during the first quarter of
1999 and the borrowings to make the interest payment under the Senior Notes.
Although the increase in coal inventory increases revolving credit availability,
availability only increases by 65% of inventory value. Future revolving credit
availability will be impacted by changes in coal production and the resulting
changes in coal inventory and accounts receivable. In accordance with the
Company's business plan, the Company expects to implement contract mining
services at its underground operations. The transition from company mines to
contract mines could result in decreased coal production. The Company believes
it can manage this transition to avoid any material decline in production.
However, no assurance can be made that coal production will not decrease during
this transition. In the event there is a decline in coal production, revolving
credit availability will also decline.
6
<PAGE> 9
The Company has budgeted approximately $9.3 million for capital
expenditures for 1999. Of this amount, approximately $1.4 million relates to the
development of new mining operations in Upshur County, West Virginia. As of
March 31, 1999, the Company has incurred approximately $2.9 million of capital
expenditures.
In addition to capital expenditures, operating expenses and debt service
requirements, the Company expects to incur exit costs with respect to its
Webster County operations, equipment leasehold termination costs, potential cash
security requirements to obtain reclamation bonds for new mining permits and
payments required under the Put Agreement dated August 25, 1998, between the
Company and JJF Group Limited Liability Company ("JJF Group"). Under the Put
Agreement, JJF Group has the right to require the Company to purchase shares of
its common stock at a specified price per share on August 1, 1999, 2000 and
2001. If exercised, the total purchase price to be paid by the Company to JJF
Group on each of those dates is approximately $1,505,000, $1,604,000 and
$6,891,000, respectively.
In late 1998, the Company developed a plan to improve its financial
performance and provide adequate short and long-term liquidity. The Company's
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 and secure additional liquidity.
The first component of the plan was completed in November, 1998, upon the
closing of the Foothill Loan Agreement. As more fully described in the Form 10-K
for the period ended December 31, 1998, the Foothill Loan Agreement provides for
up to a $40 million working capital revolver and a $15 million term loan.
Commitments under the Foothill Loan Agreement will expire in 2002. Borrowings
are secured by a lien on substantially all of the assets of the Company. The
working capital revolver is an "asset based" facility, meaning that borrowings
are based on 85% of eligible accounts receivable and 65% of eligible inventory,
subject to certain limitations and qualifications. In addition to regularly
scheduled amortizing principal and interest payments, the Foothill Loan
Agreement requires that the Company apply the first $5 million of asset sale
proceeds to the repayment of the $15 million term loan facility.
The second component of the Company's plan is to improve cash flow by
using contract mining services for its underground mining operations. The
Company believes that by utilizing contract miners it will reduce operating
expenses, general and administrative expenses and month-to-month cost
fluctuations. In addition, the Company will have reduced capital costs because
the contract miners will be responsible for mine development and maintenance
capital expenditures. The Company has made progress on this component of the
plan. In early April, the Company 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, the Company recently entered into
contract mining agreements for its mining operations in Upshur County and
Barbour County, West Virginia. The contract miner is expected to begin
operations on or about June 1, 1999. The Company is also in negotiations with
another contract miner for the operations in Raleigh County, West Virginia.
The third component of the Company's plan involves the sale of certain
non-operating assets and 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 non-operating
assets being held for sale or are not integral to the Company's long-term
operating strategy. The Company has been discussing the sale of these properties
with third parties. The Company believes that its efforts to market these
properties to date have been hampered by its financial condition. The Company
plans to continue its efforts to dispose of these assets and believes that it
will be successful in selling all or a part of these assets during the next
twelve to eighteen months. However, there can be no assurance that asset sales
will be completed on terms acceptable to the Company, if at all.
The fourth and final component of the plan involves reducing the Company's
overall debt level and securing additional liquidity. To that end, in mid-April,
1999, the Company reached an agreement in principle with Rothschild Recovery
Fund, L.P. ("Rothschild") regarding a restructuring of its Senior Notes. The
Company is negotiating with Rothschild and is preparing documentation to effect
the proposed restructuring. The proposed transaction contemplates the exchange
of Senior Notes for newly issued 12.50% senior secured notes due 2007 (the "New
Notes") with a principal amount equal to 75% of the principal amount of the
Senior Notes being exchanged. The New Notes would be secured by a lien on
certain assets of the Company and its subsidiaries junior to the lien currently
held by the Company's senior secured lenders. Exchanging holders will be asked
to consent to certain modifications of the covenants contained in the indenture
for the Senior Notes. The Company expects to offer the opportunity to exchange
Senior Notes for New Notes initially to certain qualified buyers in a private
transaction and subsequently to all remaining holders of Senior Notes in
accordance with applicable securities laws under which the New Notes issued in
the subsequent exchange would be freely tradable.
7
<PAGE> 10
Contemporaneously with closing of the proposed private exchange of Senior
Notes for New Notes, the Company intends to sell at par for cash approximately
$20 million of New Notes ("New Interest Notes") assuming a 100% exchange, in a
private transaction to a limited number of holders of Senior Notes. The
proceeds of sale of the New Interest Notes would be escrowed with the indenture
trustee for the New Notes to cover the first three interest payments on the New
Notes and New Interest Notes. Rothschild has advised the Company that it is
willing to purchase all New Interest Notes that are not purchased by other
potential purchasers in the proposed private sale. Purchasers of the New
Interest Notes will also receive warrants to purchase a minority equity stake
in the Company.
It should be noted that consummation of the proposed exchanges, indenture
amendments and private sale will be subject to a number of conditions,
including, without limitation, approval of the modifications to the indenture
for the Senior Notes by holders of a majority of the outstanding Senior Notes,
negotiation of definitive documentation satisfactory to the Company and
participation in the private exchange offer of a satisfactory level of holders
of Senior Notes. There can be no assurance that the Company will complete the
restructuring of the Senior Notes or the sale of the New Interest Notes as
described above. The Company is currently evaluating the accounting and tax
implications of this restructuring.
The Company structured and is currently implementing the plan as described
above to address its liquidity needs. During the implementation of this plan,
the Company will be monitoring the borrowing availability under the Foothill
Loan Agreement and the Company's liquidity position, and evaluating financial
and operating alternatives to stabilize the decline in the borrowing base and
manage the Company's liquidity needs. The Company's ability to generate
sufficient liquidity for 1999 and comply with financial covenants under its debt
arrangements will depend on the successful implementation of all aspects of the
Company's plan as outlined above, the improvement of future operating
performance, the consummation of asset sales, and the waiver of conditions under
the Foothill Loan Agreement, as well prevailing economic conditions and
financial, business and other factors, some of which are beyond the Company's
control. There can be no assurance that the Company can accomplish these
objectives or that it will not be adversely effected by matters beyond its
control. It should also be noted that the Foothill Loan Agreement requires that
the first $5 million of proceeds of asset sales be applied to reduce the term
loan facility. The Company has requested Foothill to waive this requirement, but
Foothill has declined to do so in advance of any asset sale. If the Company
cannot generate sufficient cash flow or call upon other resources, the Company
could face liquidity problems and might be required to take certain actions,
including to reduce or delay planned expansion and capital expenditures or
obtain additional equity capital. There can be no assurance that any of these
actions could be effected on terms satisfactory to the Company, if at all.
The description of the proposed restructuring of the Senior Notes and the
issuance of New Interest Notes is not and shall not be deemed to constitute an
offer to sell or the solicitation of an offer to buy any security or the
solicitation of any consent. The New Notes, including the New Interest Notes,
have not been registered under the Securities Act of 1933 and will not be
offered or sold in the United States absent registration or an applicable
exemption from registration, nor shall there be any sale of such securities in
any state in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
Three Months Ended March 31, 1999 compared to the Three Months Ended March 31,
1998
Results of Operations
Coal Sales and Related Revenues. Coal sales and related revenues were
$57.0 million for the first quarter ended March 31, 1999 compared to $71.6
million for the first quarter ended March 31, 1998, a decrease of 20.4%. Coal
sales volume declined to approximately 2.6 million tons for the quarter ended
March 31, 1999 compared to 3.0 million tons for the quarter ended March 31,
1998, a decrease of 13.3%. The decline in coal sales volume was attributable to
lower production levels at certain mines during the first quarter of 1999 as
described below:
1) Tonnage levels were lower in the first quarter of 1999 due to idling
the Company's Webster County surface mine in December 1998. The
Company is currently reclaiming the properties associated with the
idled surface mine. The contract deep mine in Webster County
continues to operate; however, production from the deep mine is
expected to cease in mid-1999 as the reserves are depleted.
8
<PAGE> 11
2) Tonnage levels were lower in the first quarter of 1999 due to idling
the Grant County surface mine in December 1998. This surface mine
was idled because the Company had mined all of its then permitted
reserves and was not able to obtain a new mining permit for its
adjacent properties which would have allowed for the continuation of
the surface mining operation. Moreover, with the idling of the
surface mine, the Company was unable to sell the portion of
production from its Grant County deep mine which had previously been
blended with coal from the surface mine. As a result of this and
other factors, the Company idled the deep mine in February 1999,
which also caused an additional decline in coal production. The
Company is currently working with the appropriate regulatory
agencies to secure the new mining permit for the surface operation.
The issuance of this permit will depend on numerous factors, many of
which are beyond the control of the Company. There can be no
assurance that this will occur or that the operations in Grant
County will resume.
3) Tonnage levels were lower in the first quarter of 1999 due to the
completion of one contract mining operation in Preston County during
the fourth quarter of 1998. Production is expected to cease at the
remaining contract deep mine in Preston County at the end of 1999
due to the depletion of the reserve base.
4) Tonnage levels were lower in the first quarter of 1999 due to the
implementation of a new mining plan at the Company's Raleigh County
deep mine. The Raleigh County deep mine will continue to produce at
a reduced tonnage level throughout 1999.
While the Company experienced lower production at certain mines as
described above, tonnage levels during the first quarter of 1999 as compared to
the same period for 1998 increased at the Company's Upshur County, West Virginia
deep mine and Garrett County, Maryland deep mine.
Cost of Operations and Selling Expenses. The cost of operations and
selling expenses totaled $50.3 million for the first quarter ended March 31,
1999 compared to $68.0 million for the first quarter ended March 31, 1998, a
decrease of 26.0%. The cost of operations and selling expenses for the Company
was $19.71 per ton shipped for the first quarter ended March 31, 1999 compared
to $22.51 per ton for the first quarter ended March 31, 1998, a decrease of
12.5%. The decrease in the cost of operations and selling expenses are the
result of restructuring and operational changes made in late 1998 and
operational improvements made during the first quarter of 1999.
Other Operating Expenses. Other operating expenses for the first quarter
ended March 31, 1999 were $6.3 million compared to $6.4 million for the first
quarter ended March 31, 1998, a decrease of 1.6%. Included in other operating
expenses are general and administrative expenses and depreciation, depletion and
amortization.
General and administrative expenses decreased 26.9%, to $1.9 million for
the first quarter ended March 31, 1999 compared to $2.6 million for the first
quarter ended March 31, 1998. The decrease in general and administrative costs
primarily resulted from the restructuring charges and operational management
changes made in 1998.
Depreciation, depletion and amortization was $4.4 million for the first
quarter ended March 31, 1999 compared to $3.8 million for the first quarter
ended March 31, 1998, an increase of 15.8%. The increase in depreciation,
depletion and amortization primarily resulted from a reduction in the expected
useful life of goodwill and other certain long-lived assets. Due to the
restructuring of the Company's mining operations that took place in 1998, the
Company reviewed the carrying value of long-lived assets, based on whether they
are recoverable from future undiscounted operating cash flows and appropriately
impaired the necessary 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 certain fixed assets had a reduction in the useful life resulting in a
higher depreciation, amortization or depletion rate.
Loss on Impairment and Restructuring Charges. The Company recorded an
impairment loss of $0.3 million to adjust the Company's investment in Oak
Mountain to its fair market value in the first quarter of 1998. There were no
adjustments in the first quarter of 1999.
Interest Expense. Interest expense was $3.6 million for the first quarter
ended March 31, 1999 compared to $2.9 million for the first quarter ended March
31, 1998, an increase of 24.1%. The increase was due to an increase in the
average outstanding indebtedness and average effective interest rate in the
first quarter of 1999 as compared to the first quarter of 1998.
Income Taxes. Income tax benefit from operations for the first quarter
ended March 31, 1999 was $0.2 compared to $1.6 million in income tax benefit for
the first quarter ended March 31, 1998, a decrease of $1.4 million. The income
tax benefit for the period is based on the effective tax rate expected to be
applicable for the full 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. In addition, the Company received a refund of $0.2 million related
to a prior year federal tax deposit.
Net Loss. For the first quarter ended March 31, 1999, the Company's net
loss was $2.5 million compared to a net loss of $4.2 million for the first
quarter ended March 31, 1998, a decrease of $1.7 million. The decrease in net
loss is primarily due to the reduction of operating and selling expenses as
mentioned above.
9
<PAGE> 12
Year 2000
The Year 2000 ("Y2K") issue is the result of computer programs that were
written using two digits, rather than four, to define the applicable year. Any
of the Company's computers, computer programs, mining or administration
equipment that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. If any of the Company's systems or
equipment have date-sensitive software using only two digits, system failures or
miscalculations may result causing disruptions of operations or disruptions in
normal business activities.
During 1998, the Company created an internal project team to access the
Y2K issue and 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 PCs and workstations, were
tested for Y2K compliance. As of March 31, 1999, the process was substantially
complete. The Company's estimated cost for 1999 is $0.2 million and will be
funded through normal operating cash.
Mine Operating Equipment. The Y2K project team is currently evaluating
each piece of mining equipment to ensure operating compliance for the Y2K issue.
In this process, a person from the project team is serving as the coordinator
between the mining operations and vendors to assess compliance. At the mining
locations, a person familiar with the equipment has been chosen to assess any
computer embedded chips within each piece of equipment. The coordinator is
compiling a list from each location and identifying the same pieces of equipment
from other locations and requesting confirmation of Y2K compliance from vendors.
The Company's estimated cost has not been determined because all necessary
information is still being collected from the mine sites and vendors. The
assessment and remediation on mine operating equipment should be complete by
mid-1999.
Coal Processing Facilities. The Y2K project team has also identified a
person to serve as coordinator between the mine sites and vendors to assess Y2K
compliance in relation to the Company's coal processing facilities. Coal
processing facilities are composed of various components such as electronic belt
scales, analyzers and controllers. Each plant and its components are currently
being assessed and vendors will be contacted when a complete list is assembled.
The Company's estimated cost has not been determined because all necessary
information is still being collected from the mine sites and vendors. The
assessment and remediation on coal processing facilities should be complete by
mid-1999.
Other. In addition to the three major categories above, the Company is in
the process of identifying and contacting its critical suppliers, customers and
service providers to ensure their readiness for the year 2000. As of March 31,
1999, the Company had completed its identification process and is in the process
of contacting these critical parties with respect to their Y2K compliance. This
is expected to be completed by mid-1999.
Currently, the Company has no contingency plan for the Y2K issue, but
expects to develop one by the end of the second quarter of 1999. To date,
expenditures on Y2K have been minimal and funded by operating cash. Based on
preliminary information, the majority of the project cost will be attributed to
the purchase of new software to meet future industry requirements and will be
capitalized. The total remaining project cost will be expended as incurred over
the next eight months. Management believes that the Company is devoting the
necessary resources to identify and resolve significant Y2K issues in a timely
manner.
Dividend Restrictions Affecting Subsidiaries
As of March 31, 1999, there were no restrictions affecting the ability of
the guarantor subsidiaries of the Senior Notes to make distributions to the
Company or other guarantor subsidiaries except for restrictions in the Foothill
Loan Agreement and to the extent provided by law generally (e.g., adequate
capital to pay dividends under corporate law). The Foothill Loan Agreement
provides that in order to advance funds to the Company, the borrowers under such
Agreement must have borrowing availability of at least $5 million after giving
effect to such advances. As of March 31, 1999 and May 12, 1999, the borrowing
availability under the Foothill Loan Agreement was $16.5 million and $6.4
million, respectively. Thus, the maximum amount which the borrowers could
advance to the Company on each of those dates was $11.5 million and $1.4
million, respectively.
10
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 5. Other Information.
As previously announced, effective May 1, 1999, William D. Kilgore was
named Chairman and Chief Executive Officer of the Company. Mr. Kilgore will also
serve as Chairman and Chief Executive Officer of Anker Energy Corporation
("Anker Energy"), a subsidiary of the Company.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit number 27, Financial Data Schedule, is filed herewith.
(b) No reports were filed on Form 8-K during the first quarter of 1999.
11
<PAGE> 14
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANKER COAL GROUP, INC.
/s/ P. Bruce Sparks
-------------------------------------
P. Bruce Sparks
President
/s/ Michael Matesic
-------------------------------------
Michael Matesic
Treasurer and Chief Financial Officer
DATE: May 14, 1999
12
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