<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1998*
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
-------------------- ------------------
COMMISSION FILE NUMBER 333-59037
LODESTAR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3903875
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
30 ROCKEFELLER PLAZA, SUITE 4225
NEW YORK, NEW YORK 10112
(Address of principal executive offices) (Zip Code)
(606) 255-4006
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. / / YES /X/ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant is $0. The number of shares outstanding of each
of the registrant's classes of common stock, as of February 8, 1999:
COMMON STOCK, $1.00 PAR VALUE 1000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE: None
*SPECIAL FINANCIAL REPORT: This filing contains only financial statements and
related financial information for the fiscal year ended October 31, 1998. See
"Explanatory Note."
<PAGE>
EXPLANATORY NOTE
Lodestar Holdings, Inc. filed a Registration Statement on Form S-4 (Registration
No. 333-59037), as amended, originally filed July 14, 1998 (Registration
Statement) with the Securities and Exchange Commission (SEC) to register an
exchange offer of its 11 1/2 % Senior Notes due 2005. The Registration Statement
became effective November 12, 1998.
Pursuant to Rule 15d-2, under the Securities Exchange Act of 1934, as amended,
if a registration statement did not contain certified financial statements for
the registrant's last full fiscal year preceding the fiscal year in which the
registration statement became effective, a special report furnishing certified
financial statements for such last full fiscal year shall be filed with the SEC.
Accordingly, included herein are Lodestar Holdings, Inc.'s consolidated
financial statements for its fiscal year ended October 31, 1998 together with
the related financial statement schedules. The accompanying financial
information should be read in conjunction with the Registration Statement.
Lodestar Holdings, Inc. is a holding company whose wholly-owned direct and
indirect subsidiaries include Lodestar Energy, Inc., Eastern Resources, Inc. and
Industrial Fuels Minerals Company. These subsidiaries guarantee the Senior
Notes. The assets, equity, income and cash flows of other non-guarantor
subsidiaries are inconsequential (I.E. individually and combined less than 3% of
the Lodestar Holdings, Inc. totals). Lodestar Holdings, Inc. has no operations
or assets separate from its investment in its subsidiaries. Accordingly,
in management's opinion, it is not considered necessary to include separate
financial information of the subsidiaries as it would not provide additional
material information.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements," which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
industry capacity; demand; industry trends, including coal pricing; competition;
the loss of any significant customers or long-term contracts; availability of
qualified personnel; outcome of litigation; and other factors referenced in this
report. For a detailed discussion of these factors, please refer to the
information under the caption "Risk Factors" in the Registration Statement. The
Company expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
EXPLANATORY NOTE, FORWARD-LOOKING STATEMENTS 1
TABLE OF CONTENTS 2
PART II
ITEM 8. Financial Statements and Supplementary Data 3
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 28
SIGNATURES 31
</TABLE>
2
<PAGE>
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lodestar Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Lodestar
Holdings, Inc. and subsidiaries (the Company) as of October 31, 1998 and 1997
and the related consolidated statements of operations and comprehensive loss,
stockholder's equity (deficit), and cash flows for the year ended October 31,
1998 and for the period from March 15, 1997 to October 31, 1997 (Successor
Periods), and the consolidated statements of operations and comprehensive loss,
stockholder's equity, and cash flows for the period from January 1, 1997 to
March 14, 1997 and for the year ended December 31, 1996 (Predecessor Periods) of
Costain Coal Inc. and subsidiaries (the Predecessor). These consolidated
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Company consolidated financial statements
present fairly, in all material respects, the financial position of Lodestar
Holdings, Inc. and subsidiaries as of October 31, 1998 and 1997 and the results
of their operations and their cash flows for the Successor Periods in conformity
with generally accepted accounting principles. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the results of operations, and cash flows of Costain Coal
Inc. and subsidiaries for the Predecessor Periods, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective March
15, 1997, Lodestar Holdings, Inc. (formerly Rencoal, Inc.) acquired all of the
outstanding stock of Costain Coal Inc. in a business combination accounted for
as a purchase. As a result of the acquisition, the consolidated financial
information for the period after the acquisition is presented on a different
cost basis than that for the period before the acquisition and, therefore, is
not comparable.
Louisville, Kentucky
December 10, 1998
3
<PAGE>
LODESTAR HOLDINGS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
(in thousands,
ASSETS except share data)
------
<S> <C> <C>
Current assets:
Cash 14,949 3,055
Accounts receivable 29,874 37,412
Inventories 9,550 11,604
Prepaid expenses and other current assets 4,092 3,259
---------- ----------
Total current assets 58,465 55,330
Property, plant and equipment, net 95,498 84,541
Coal and ash disposal contracts in excess of market, net of
accumulated amortization of $5,051 and $1,945,
respectively 41,750 44,856
Other assets 18,065 15,721
---------- ----------
$ 213,778 200,448
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current installments of long-term debt $ - 4,000
Current installments of capital lease obligations - 6,603
Due to related party - 3,000
Accounts payable 25,161 43,062
Accrued expenses 32,411 31,689
---------- ----------
Total current liabilities 57,572 88,354
Long-term obligations, excluding current installments 150,000 47,953
Due to related party - 2,000
Other non-current liabilities 40,789 61,078
---------- ----------
Total liabilities 248,361 199,385
---------- ----------
Stockholder's equity (deficit):
Common stock, $1.00 par value. Authorized, issued and
outstanding 1,000 shares 1 1
Additional paid-in capital 5,000 5,000
Accumulated deficit (38,428) (3,938)
Accumulated other comprehensive loss - minimum
pension liability adjustment (1,156) -
---------- ----------
Total stockholder's equity (deficit) (34,583) 1,063
Commitments and contingencies ---------- ----------
$ 213,778 200,448
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Statements of Operations and Comprehensive Loss
<TABLE>
<CAPTION>
The The
Company Predecessor
------- -----------
Year ended March 15, 1997 to January 1, 1997 to Year ended
October 31, 1998 October 31, 1997 March 14, 1997 December 31, 1996
---------------- ----------------- ------------------ -----------------
(in thousands)
<S> <C> <C> <C> <C>
Coal sales and related revenue $ 263,716 173,881 46,486 255,386
Operating costs:
Cost of revenues 221,813 150,716 44,676 257,269
Depreciation, depletion
and amortization 27,349 14,276 4,749 22,714
General and administrative 14,658 6,823 2,190 14,270
----------- ----------- ----------- -----------
263,820 171,815 51,615 294,253
----------- ----------- ----------- -----------
Operating income (loss) (104) 2,066 (5,129) (38,867)
Interest expense, net (13,140) (6,004) (809) (2,801)
----------- ----------- ----------- -----------
Loss before income taxes
and extraordinary items (13,244) (3,938) (5,938) (41,668)
Income taxes - - - -
----------- ----------- ----------- -----------
Loss before extraordinary
items (13,244) (3,938) (5,938) (41,668)
Extraordinary items 6,572 - - -
----------- ----------- ----------- -----------
Net loss (6,672) (3,938) (5,938) (41,668)
Other comprehensive loss -
Minimum pension liability
adjustment (1,156) - - (366)
----------- ----------- ----------- -----------
Comprehensive loss $ (7,828) (3,938) (5,938) (42,034)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Statements of Stockholder's Equity (Deficit)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Accumulated comprehensive stockholder's
Stock Capital Deficit Loss Equity (Deficit)
------ ---------- ----------- ------------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C>
THE PREDECESSOR
Balance at January 1, 1996 $ 1 $ 271,011 $ (195,025) $ (287) $ 75,700
Net loss - - (41,668) - (41,668)
Minimum pension liability
adjustment - - - (366) (366)
----- ----------- ----------- -------- -----------
Balance at December 31, 1996 1 271,011 (236,693) (653) 33,666
Net loss - - (5,938) - (5,938)
----- ----------- ----------- -------- -----------
Balance at March 14, 1997 $ 1 $ 271,011 $ (242,631) $ (653) $ 27,728
----- ----------- ----------- -------- -----------
----- ----------- ----------- -------- -----------
THE COMPANY
Balance at March 15, 1997 $ - $ - $ - $ - $ -
Initial Company capitalization 1 5,000 - - 5,001
Net loss - - (3,938) - (3,938)
----- ----------- ----------- -------- -----------
Balance at October 31, 1997 1 5,000 (3,938) - 1,063
Net loss - - (6,672) - (6,672)
Dividends paid - - (27,818) - (27,818)
Minimum pension liability
adjustment - - - (1,156) (1,156)
----- ----------- ----------- -------- -----------
Balance at October 31, 1998 $ 1 $ 5,000 $ (38,428) $ (1,156) $ (34,583)
----- ----------- ----------- -------- -----------
----- ----------- ----------- -------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
The The
Company Predecessor
------- -----------
Year ended March 15, 1997 to January 1, 1997 to Year ended
October 31, 1998 October 31, 1997 March 14, 1997 December 31, 1996
---------------- ------------------ ------------------ -----------------
(in thousands)
<S> <C> <C> <C> <C>
Net cash used in operating activities:
Net loss $ (6,672) (3,938) (5,938) (41,668)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 27,349 14,276 4,749 22,714
Loss on sale/disposal of property plant
and equipment 94 - - 2,665
Amortization of deferred financing fees 822 396 - -
Inputed interest 1,204 1,406 - -
Gain from buyout of deferred payment
obligations (7,960) - - -
Financing fees written off 1,388 - - -
Changes in operating assets and liabilities:
Accounts receivable 7,538 (18,865) 5,311 6,231
Due from affiliates - - 2,679 (4,177)
Inventories 2,054 849 (2,979) 3,490
Prepaid expenses and other current assets (1,444) (847) (655) 1,288
Other assets 687 430 (148) 505
Accounts payable (17,937) 2,857 (5,212) 9,302
Accrued expenses 2,787 (6,613) 3,225 4,831
Other non-current liabilities (16,118) (4,945) (2,770) 7,791
---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities (6,208) (14,994) (1,738) 12,972
----------- ---------- ---------- ----------
Cash flows from investing activities:
Payment for Stock Purchase, net of cash acquired - (22,830) - -
Capital expenditures (34,360) (3,771) (1,149) (10,705)
Proceeds from sales of property, plant and
equipment 328 252 - 305
---------- ---------- ---------- ----------
Net cash used in investing activities (34,032) (26,349) (1,149) (10,400)
Cash flows from financing activities: ---------- ---------- ---------- ----------
Proceeds from long-term debt 150,000 41,152 - -
Net change in long-term due from
Costain American Inc. - - 210 (6,780)
Principal payments on long-term obligations (58,556) (4,852) (1,698) (5,400)
Proceeds from (payments on) short-term notes
payable - - (87) 116
Proceeds from (payments on) related party
borrowings (5,000) 5,000 - -
Initial company capitalization - 5,001 - -
Financing fees paid (6,492) (1,903) - -
Dividends paid (27,818) - - -
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities 52,134 44,398 (1,575) (12,064)
---------- ---------- ---------- ----------
Net increase (decrease) in cash 11,894 3,055 (4,462) (9,492)
Cash at beginning of year 3,055 - 8,314 17,806
---------- ---------- ---------- ----------
Cash at end of year $ 14,949 3,055 3,852 8,314
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental cash flow disclosures:
Interest paid $ 3,590 4,086 587 4,962
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income taxes paid $ 347 - 1,500 2,089
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Equipment acquired with note payable $ - - 1,818 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Minimum pension liability increase $ 1,156 - - 366
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1998
(In thousands)
(1) OVERVIEW AND BASIS OF PRESENTATION
(a) THE BUSINESS
Lodestar Holdings, Inc. (formerly Rencoal, Inc.) and its
subsidiaries, Lodestar Energy, Inc., Eastern Resources, Inc.
and Industrial Fuels Minerals Company, (the Company), a wholly
owned subsidiary of The Renco Group, Inc. (Renco), began
operations on March 15, 1997. The Company's principal
operations consist of a number of coal mining operations in
Kentucky. Coal shipments are made to a wide variety of
utilities throughout the United States.
(b) STOCK PURCHASE
Pursuant to the Stock Purchase Agreement between Costain America
Inc. and the Company dated November 8, 1996, as amended by the
Supplemental Agreement dated February 13, 1997 (the Stock
Purchase), the common stock of Costain Coal Inc. and its
subsidiaries (the Predecessor) was acquired by Lodestar
Holdings, Inc. for a purchase price of $23,753 on March 14,
1997. Certain liabilities of the Predecessor were not acquired
in the transaction and were transferred to Costain America
Inc. Lodestar Holdings, Inc. was also indemnified by Costain
America Inc. with regard to the outcome of certain Predecessor
litigation. The acquisition of the Predecessor was accounted
for using the purchase method of accounting as prescribed
under Accounting Principles Board Opinion No. 16, "Business
Combinations".
(Continued)
8
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(1) OVERVIEW AND BASIS OF PRESENTATION - CONTINUED
(c) SENIOR NOTES
On May 15, 1998, Lodestar Holdings, Inc. sold and issued $150,000
in 11.5% Senior Notes due May 15, 2005 (the Senior Notes). The
proceeds from the Senior Notes were used to repay existing
indebtedness; purchase certain equipment financed pursuant to
both operating and capital leases; buyout certain deferred
payment obligations; pay a dividend to Renco; make contractual
payments to certain executives; pay related fees and expenses;
and reduce accounts payable and accrued expenses and for other
general corporate purposes.
(d) BASIS OF PRESENTATION
The accompanying consolidated financial statements present the
Company's consolidated financial position as of October 31,
1998 and 1997 and its consolidated results of operations and
cash flows for the year ended October 31, 1998 and from the
acquisition date of March 15, 1997 through October 31, 1997,
and the consolidated operations and cash flows of the
Predecessor for the period January 1, 1997 through March 14,
1997 and for the year ended December 31, 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the year ended October
31, 1998 and for the period from March 15, 1997 through
October 31, 1997 include the accounts of the Company. The
consolidated financial statements for the period from January
1, 1997 through March 14, 1997 and for the year ended December
31, 1996 include the accounts of the Predecessor. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(Continued)
9
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(b) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on an average basis for coal and on the first-in,
first-out basis for materials and supplies.
(c) REVENUE RECOGNITION
Revenues are recognized upon shipments of coal and upon receipt of
coal ash. Revenues are primarily generated from shipments to
customers throughout the United States.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost or allocated cost
for those assets acquired in the Stock Purchase. Equipment
under capital leases is stated at the present value of minimum
lease payments at the inception of the lease. In addition, the
Company capitalizes expenditures incurred during the
acquisition and development phase of mining operations.
Depreciation of property, plant and equipment is provided using
the straight-line method over their estimated useful lives as
follows: buildings and improvements, 6-15 years; mining
equipment, 3-5 years; preparation plant and machinery, 3-7
years; and transportation equipment and other, 7-15 years.
Depletion and amortization of land and mineral rights and
deferred development costs are provided using the
units-of-production method based on the estimated recoverable
reserves. Equipment held under capital leases was amortized
straight-line over the shorter of the lease term or estimated
useful life of the asset.
(Continued)
10
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(d) PROPERTY, PLANT AND EQUIPMENT - CONTINUED
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the
recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. No impairment
losses were recorded in the financial statements presented.
(e) INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over the
fair value of net assets acquired, is amortized on a
straight-line basis over the expected period to be benefited of
15 years. Goodwill net of accumulated amortization, was $6,201
and $7,308 at October 31, 1998 and 1997, respectively, and is
included in other assets. As discussed further in note 7,
goodwill was reduced in 1998 by $600 for subsequently
recognized tax benefits relating to the valuation allowance for
deferred tax assets.
The Company has certain contracts to sell coal and dispose of coal
ash at prices in excess of current market prices. These
contracts, which were acquired as part of the Stock Purchase,
are for varying periods of time, with the last contract
expiring in the year 2025. These contracts were valued at the
acquisition date at the present value of expected profits from
sales under these contracts in excess of those that would be
earned if sales were made at the then prevailing market prices.
These contracts are being amortized using the straight-line
method over the lives of the contracts.
(Continued)
11
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(e) INTANGIBLE ASSETS - CONTINUED
The Company assesses the recoverability of intangible assets by a
comparison of the carrying amounts of such assets to future net
cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment recognized
is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. No impairment
losses were recorded in the financial statements presented.
(f) INCOME TAXES
The Company is included in the consolidated federal income tax
return of Renco. Under the terms of the tax sharing agreement
among Renco and its subsidiaries, income taxes are allocated to
the Company on a separate return basis, except that
transactions between the Company, Renco and Renco's other
subsidiaries are accounted for on a cash basis and the Company
does not receive the benefit of net operating loss
carryforwards, unless such loss carryforwards were a result of
temporary differences between the Company's accounting for tax
and financial reporting purposes (see note 16).
Income taxes are determined under the asset and liability method.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
The results of operations of the Predecessor were included in the
consolidated federal income tax return of Costain USA Inc. (the
100% owner of Costain America Inc.).
(Continued)
12
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(g) WORKERS' COMPENSATION AND BLACK LUNG EXPENSE
The cost of workers' compensation and black lung expense is based
on historical claims experience and actuarial studies of
workers' compensation and black lung claims incurred and
reported and incurred but not reported. The black lung
valuation methods project the ultimate expected numbers of
state and federal black lung claims from the mine employee
population, and based on the combined projected cost of such
claims, estimates an annual cost with the goal of fully funding
all future claims within the expected period of mining
operations.
(h) RECLAMATION
The cost of final reclamation of active mining areas is accrued
over the life of the respective mines based on the
units-of-production method. Reclamation performed during mining
operations is expensed as incurred.
(i) COMPREHENSIVE INCOME
On November 1, 1997, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive
income consists of a minimum pension liability adjustment and
is presented in the consolidated statements of operations and
comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does
not affect the Company's financial position or results of
operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
(Continued)
13
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(j) USE OF ESTIMATES
The respective managements of the Company and the Predecessor have
made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(k) RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to
the current year presentation.
(3) INVENTORIES
Inventories consist of the following at October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Coal $ 6,067 8,360
Materials and supplies 3,483 3,244
---------- ----------
$ 9,550 11,604
---------- ----------
---------- ----------
</TABLE>
(Continued)
14
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at October 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and mineral rights $ 27,206 26,142
Buildings and improvements 1,169 873
Machinery and equipment 92,560 57,241
Deferred development costs 10,291 7,303
Construction in progress 482 4,890
---------- ----------
131,708 96,449
Less accumulated depreciation, depletion
and amortization 36,210 11,908
---------- ----------
Property, plant and equipment, net $ 95,498 84,541
---------- ----------
---------- ----------
</TABLE>
(5) LONG-TERM DEBT
Long-term debt at October 31, 1998 consists of the Senior Notes. The
Senior Notes are general unsecured obligations of Lodestar Holdings,
Inc. and are guaranteed by Lodestar Energy, Inc., Eastern Resources,
Inc. and Industrial Fuels Minerals Company. Interest on the Senior
Notes is payable semiannually on May 15 and November 15.
In addition, the Company has borrowing and letter of credit capacity
under a credit facility which expires May 15, 2001. The limits on
aggregate borrowings and letters of credit are $90,000 and $30,000,
respectively. Availability under this facility at any one time is
based upon inventory and accounts receivable levels with respect to
borrowings, and the appraised value of property, plant and equipment
with respect to letters of credit. The interest rate applicable to
outstanding borrowings is the prime rate plus 0.75% per annum (8.75%
as of October 31, 1998). As of October 31, 1998, there were no
outstanding borrowings under this facility. As of October 31, 1998,
letters of credit outstanding under this facility were $15,206. The
credit facility is secured by substantially all of the assets of
Lodestar Energy, Inc.
(Continued)
15
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(5) LONG-TERM DEBT - CONTINUED
Long-term debt at October 31, 1997 consisted of the following (see note 1
regarding repayment of existing indebtedness on May 15, 1998 with the
proceeds from the Senior Notes):
<TABLE>
<CAPTION>
<S> <C>
Revolving credit agreement, interest payable monthly at 0.75% above
prime (9.25% at October 31, 1997) $ 13,495
Term loan payable in monthly installments of $292 plus
interest at 1.75% above prime (10.25% at October 31, 1997) 22,657
Note payable in quarterly installments of $125 (final payment
due February, 2001) plus interest at the greater of 12.5%
or an indexed rate (12.5% at October 31, 1997) 4,750
----------
----------
Total long-term debt 40,902
Less current installments 4,000
----------
Long-term debt, excluding current installments
$ 36,902
----------
----------
</TABLE>
The Senior Notes and credit facility include covenants, among others, as
to maintenance of minimum net worth, limitations on other indebtedness
and limitations on capital expenditures. The Company is in compliance
with all debt covenants at October 31, 1998.
(6) LEASES
The Company was obligated at October 31, 1997 in the amount of $17,654
under various capital leases for equipment. During 1998, the Company
purchased all equipment financed pursuant to capital leases using the
proceeds from the Senior Notes.
(Continued)
16
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(6) LEASES - CONTINUED
During 1998, the Company purchased a significant amount of equipment
previously financed pursuant to operating leases using the proceeds
from the Senior Notes. As of October 31, 1998, the Company has
noncancelable operating leases for transportation equipment and
administrative facilities. The remaining leases expire at various
dates through 2012. Rental expense for operating leases during the
year ended October 31, 1998, the period March 15, 1997 through October
31, 1997, the period January 1, 1997 through March 14, 1997 and the
year ended December 31, 1996 was $5,090, $7,121, $1,933 and $10,791,
respectively.
Future minimum lease payments under noncancelable operating leases as of
October 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending
October 31:
-----------
<S> <C>
1999 $ 1,535
2000 1,535
2001 1,535
2002 1,535
2003 1,535
Thereafter 8,938
----------
Total minimum lease payments $ 16,613
----------
----------
</TABLE>
(7) INCOME TAXES
There was no income tax expense (benefit) for the year ended October 31,
1998, the period from March 15, 1997 through October 31, 1997, the
period January 1, 1997 through March 14, 1997 or the year ended
December 31, 1996.
(Continued)
17
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(7) INCOME TAXES - CONTINUED
Total income tax expense (benefit) differs from the amount computed by
applying the Federal income tax rate of 35% to loss before income
taxes as a result of the following:
<TABLE>
<CAPTION>
The The
Company Predecessor
------- -----------
Year ended March 15, 1997 to January 1, 1997 to Year ended
October 31, 1998 October 31, 1997 March 14, 1997 December 31, 1996
---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Computed "expected" tax
benefit $ (2,335) (1,378) (2,078) (14,584)
Increase (reduction) in income
taxes resulting from:
State income taxes, net of
Federal income tax
benefit (297) (197) 774 (295)
Increase (decrease) in
valuation allowance (209) - 1,304 22,978
Change in operating loss
carryforward - - - (4,077)
Other, net 258 - - (4,022)
Net operating loss for
which no benefit is
available 2,583 1,575 - -
---------- ---------- ---------- ----------
Total income tax
expense $ - - - -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(Continued)
18
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(7) INCOME TAXES - CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at October 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued reclamation $ 4,644 4,887
Other accrued liabilities 7,200 9,790
Depreciation and depletion 6,534 6,830
---------- ----------
Total gross deferred tax assets 18,378 21,507
Less valuation allowance 4,753 5,562
---------- ----------
Net deferred tax assets 13,625 15,945
---------- ----------
Deferred tax liabilities:
Coal and ash disposal contracts (15,025) (17,945)
---------- ----------
Net deferred tax liability (included in other
non-current liabilities) $ (1,400) (2,000)
---------- ----------
---------- ----------
</TABLE>
The valuation allowance decreased $809 for the year ended October 31,
1998. Subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of October 31, 1998 will be
allocated to goodwill. Such benefits of $600 were used to reduce
goodwill during 1998. There was no change in the valuation allowance
for the periods March 15, 1997 to October 31, 1997. The valuation
allowance increased $1,304 in the period January 1, 1997 to March 14,
1997. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible.
(Continued)
19
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(7) INCOME TAXES - CONTINUED
Management considers the reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of those
deductible differences, net of the existing valuation allowance at
October 31, 1998 (see note 16).
(8) BENEFIT PLANS
The Company's defined benefit pension plan provides specified pension
benefits based on the employees' years of service. Contributions to
the plan are actuarially determined to provide the plan with
sufficient assets to meet future benefit payment requirements. The
plan's assets consist primarily of investments in intermediate term
fixed income loans and private placement bonds and mortgages. The plan
has approximately 1,000 participants at October 31, 1998.
The funded status of the plan and the amounts recognized in the Company's
consolidated balance sheets at October 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (11,820) (9,612)
---------- ----------
---------- ----------
Accumulated benefit obligation $ (11,822) (9,613)
---------- ----------
---------- ----------
Projected benefit obligation $ (11,822) (9,613)
Plan assets at fair value 9,030 8,089
---------- ----------
Projected benefit obligation in excess of plan assets (2,792) (1,524)
Unrecognized net (gain) loss 1,156 (432)
---------- ----------
Pension liability prior to adjustment to recognize
minimum liability (1,636) (1,956)
Minimum pension liability adjustment (1,156) -
---------- ----------
Total pension liability recognized in consolidated
balance sheet $ (2,792) (1,956)
---------- ----------
---------- ----------
</TABLE>
(Continued)
20
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(8) BENEFIT PLANS - CONTINUED
Net pension costs for the plan consist of the following:
<TABLE>
<CAPTION>
The The
Company Predecessor
------- -----------
Year ended March 15, 1997 to January 1, 1997 to Year ended
October 31, 1998 October 31, 1997 March 14, 1997 December 31, 1996
---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Service costs - benefits earned
during the period $ 285 226 71 463
Interest cost on projected benefit
obligation 715 442 140 505
Actual return on plan assets (715) (445) (141) (486)
Net amortization and deferral 100 122 39 15
------ ------ ------- -------
Net pension plan expense $ 385 345 109 497
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
The weighted-average discount rate used to determine the actuarial
present value of the projected obligations was 6.75% and 7.5% at
October 31, 1998 and 1997, respectively. The expected long-term rate
of return on assets was 7.0% and 7.5% at October 31, 1998 and 1997,
respectively.
The Company also retained a defined contribution plan of the Predecessor
which covers all employees meeting certain eligibility requirements.
Contributions expensed to this plan were $1,117 for the year ended
October 31, 1998, $760 for the period March 15, 1997 through October
31, 1997, $236 for the period January 1, 1997 through March 14, 1997
and $1,680 for the year ended December 31, 1996.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
At October 31, 1998 and 1997, the carrying amounts of accounts
receivable, accounts payable, and accrued expenses approximate fair
value because of the short maturity of these instruments.
The fair value of the Senior Notes is subject to periodic fluctuations
due to prevailing market conditions which are impacted by interest
rates and other factors beyond the control of the Company. Management
of the Company believes that the carrying value of the Senior Notes is
a reasonable approximation of the fair value at October 31, 1998.
(Continued)
21
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(10) RELATED PARTY TRANSACTIONS
Renco provides certain management services to the Company under a
management agreement. Payments of $1,200 were made during 1998 in
accordance with this agreement. Charges of $750, which would have been
incurred in accordance with this agreement were waived during the
period from March 15, 1997 through October 31, 1997. Management
believes that such costs approximate the cost of comparable services
which could be obtained from unaffiliated entities.
At October 31, 1997 the Company had a $3,000 non-interest bearing note
payable to Renco for cash provided during the period from March 15,
1997 to October 31, 1997. This note payable was repaid during 1998
with the proceeds from the Senior Notes.
The Company also had a note payable in the amount of $2,000 to Renco at
October 31, 1997. This note bore interest at a rate of 8.25% and was
repaid during 1998 with the proceeds from the Senior Notes.
Interest charges through October 31, 1997 were waived by Renco.
(11) COMMITMENTS AND CONTINGENCIES
The Company has future minimum royalty payments which represent advance
royalty obligations; these are generally recoupable against royalty
payments otherwise due based on production. The future minimum royalty
payments are as follows:
<TABLE>
<CAPTION>
Year ending
October 31:
-----------
<S> <C>
1999 $ 3,343
2000 2,491
2001 1,988
2002 1,879
2003 789
Thereafter 2,496
----------
$ 12,986
----------
----------
</TABLE>
(Continued)
22
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(11) COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company is involved in a number of legal actions, which, if adverse
judgments are ultimately awarded, may individually or in the aggregate
have a material adverse effect on the Company's consolidated financial
position and results of operations. With respect to each of these
proceedings, based on the advice of outside counsel and consideration
of the facts at hand, it is the opinion of the Company's management
that the ultimate disposition of the litigation will not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is required by certain third parties which have contractual
agreements with the Company, primarily governmental agencies that
provide mining permits, to maintain land reclamation bonds. The
Company has land reclamation bonds of $43,605 outstanding as of
October 31, 1998. The Company has other bonds, primarily for
performance and workers' compensation obligations, of $26,195
outstanding as of October 31, 1998. In support of outstanding bonds,
letters of credit in the amount of $9,489 were outstanding at October
31, 1998.
The Company has various other letters of credit outstanding in the amount
of $5,717 at October 31, 1998.
A significant customer (the Customer) of the Company is involved in
litigation with the utility for which the Customer generates power.
The Customer is alleging underpayment by the utility pursuant to the
contract in place. The Customer's ability to meet its financial
obligations, including those under its contract with the Company, may
be adversely affected to the extent the Customer is not successful in
its litigation. As of October 31, 1998, the Company has receivables
from the Customer totaling $9,668 ($5,015 of which is classified as
current and $4,653 of which is classified as long term). The Company
also has contracts with the Customer to sell coal and dispose of coal
ash. These contracts were part of the intangible asset recorded in
connection with the Stock Purchase. As of October 31, 1998, the net
amount recorded for these contracts with the Customer is approximately
$16,000. Management of the Company does not consider any loss with
regard to these assets probable or estimable at this time.
(Continued)
23
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(12) SIGNIFICANT CUSTOMERS
The Company derives a significant portion of its coal sales and related
revenue from two customers. Coal sales and related revenue from these
customers totaled approximately $118,000 or 45% (27% and 18%,
respectively) of total coal sales and related revenue for the year
ended October 31, 1998. Coal sales and related revenue from these
customers totaled approximately $76,000, or 44% (27% and 17%,
respectively) of total coal sales and related revenue, for the period
March 15, 1997 through October 31, 1997. Accounts receivable from
these customers totaled $13,745 and $17,375 at October 31, 1998 and
1997, respectively.
Likewise, the Predecessor derived a significant portion of its coal sales
and related revenue from these two customers. Coal sales and related
revenue from these customers totaled approximately $19,000 or 41% (22%
and 19%, respectively) of total coal sales and related revenue for the
period January 1, 1997 through March 14, 1997, and approximately
$114,000 or 45% (25% and 20%, respectively) of total coal sales and
related revenue for the year ended December 31, 1996.
(13) EXTRAORDINARY ITEMS
The extraordinary items are composed of a credit associated with the
buyout of certain deferred payment obligations and a charge associated
with the write-off of capitalized costs. The deferred payment
obligations were bought out at a discount from book value of $7,960.
The charge of $1,388 represented the write-off of all unamortized
costs attributable to the indebtedness which was paid in full with the
proceeds from the Senior Notes.
(Continued)
24
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(14) ACCRUED EXPENSES AND OTHER NON-CURRENT LIABILITIES
Accrued expenses consist of the following at October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Royalties $ 3,299 4,526
Deferred payment obligations - 4,826
Taxes, other than income 3,120 4,444
Payroll and benefits 3,928 4,162
Workers' compensation and black lung 4,838 3,717
Reclamation costs 2,186 1,799
Interest 7,906 74
Other 7,134 8,141
--------- ----------
$ 32,411 31,689
--------- ----------
--------- ----------
</TABLE>
Other non-current liabilities consist of the following at October 31,
1998 and 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred payment obligations $ - 12,190
Reclamation costs 16,225 18,379
Workers' compensation and black lung 12,201 19,929
Other 12,363 10,580
--------- ----------
$ 40,789 61,078
--------- ----------
--------- ----------
</TABLE>
(15) YEAR 2000 - UNAUDITED
---------------------
The Company established an internal committee in 1998 responsible for
monitoring year 2000 (Y2K) compliance with respect to its business
systems. The committee, in conjunction with an independent consulting
firm, has developed a detailed work schedule, which was finalized in
January 1999. Since the majority of the Company's information systems
have been recently developed, work to be performed in that area will
be minimal. The primary risk areas which are currently being evaluated
are the embedded systems affecting mining equipment, prep plant
systems, scale system interfaces, laboratory equipment, and other
facility-specific equipment.
(Continued)
25
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(15) YEAR 2000 - UNAUDITED - CONTINUED
Testing will be prioritized based on evaluated risk. Testing of the most
critical areas is scheduled to be completed in April of 1999 with all
testing completed by July 1, 1999. Remediation efforts, which are not
expected to be of a material nature, will begin in the second quarter
of 1999. Additionally, the Company is in the process of a
comprehensive review of third party Y2K compliance efforts of its most
critical vendors and customers. Although management believes that it
is unlikely that its operations will be disrupted, contingency plans
are currently being developed to address the areas in which potential
disruptions could be most serious. All contingency plans will be
finalized during the third quarter of fiscal 1999.
To accelerate the completion of its Y2K efforts, the Company has recently
revised the scheduled work plan to increase reliance on third party
consultants. This has increased projected expenditures to achieve Y2K
compliance to between $400 and $600, dependent on the magnitude of
required remediation efforts, and without consideration of the
internal labor costs, which are not expected to be significant. As of
October 31, 1998, approximately $100 has been spent in Y2K compliance
efforts.
(Continued)
26
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements (Continued)
(16) SUBSEQUENT EVENT - UNAUDITED
Effective with the beginning of fiscal 1999, Renco, formerly a C
corporation, elected to be treated as an S corporation for federal
income tax purposes, pursuant to a change in the federal income tax
laws allowing corporations with subsidiaries to elect such status. In
connection with that election, Renco is permitted to designate its
wholly-owned subsidiaries as qualified Subchapter S subsidiaries, and
the Company has been so designated. Because of this designation,
substantially all of the Company's taxable income will be included in
Renco's shareholders' income tax returns. Generally, no provision for
income taxes will be included in the Company's statements of income
for periods beginning after October 31, 1998. The Company will
continue to provide for state and local income taxes for those taxing
jurisdictions which do not recognize qualified Subchapter S subsidiary
status, although management believes such state and local taxes will
not be material to the Company. However, under the "built in gains"
provisions of the tax law, federal and state taxes may become payable
and would be charged to the Company's statement of income. Such taxes
are measured by the excess of the fair market value of assets over
their tax bases on the effective date of the Subchapter S subsidiary
designation if the associated assets are disposed of within the
ten-year postdesignation period. The Company's net deferred tax
liability as of October 31, 1998 will be classified in the first
quarter of fiscal 1999 as a non-current liability for any potential
tax that could be incurred resulting from the built in gains
provisions referred to above.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Financial Statements. The consolidated financial statements
listed below, together with the Independent Auditors' Report,
are included in this report as Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of October 31, 1997
and 1998
Consolidated Statements of Operations and
Comprehensive Loss for the year ended October 31,
1998, the period from March 15, 1997 through October
31, 1997, the period from January 1, 1997 through
March 14, 1997, and the year ended December 31, 1996
Consolidated Statements of Stockholder's Equity
(Deficit) for the year ended October 31, 1998, the
period from March 15, 1997 through October 31, 1997,
the period from January 1, 1997 through March 14,
1997, and the year ended December 31, 1996
Consolidated Statements of Cash Flows for the year
ended October 31, 1998, the period from March 15,
1997 through October 31, 1997, the period from
January 1, 1997 through March 14, 1997, and the year
ended December 31, 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule. The consolidated financial
statement schedule listed below, together with the Independent
Auditors' Report, are included in this report below:
Independent Auditors' Report on Financial Statement
Schedule
Schedule II - Valuation and Qualifying Accounts
3. Exhibits. The information called for by this paragraph is
contained in the Exhibit Index of this report and incorporated
herein by reference.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lodestar Holdings, Inc.:
Under date of December 10, 1998, we reported on the consolidated balance sheets
of Lodestar Holdings, Inc. and subsidiaries as of October 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive loss,
stockholder's equity (deficit), and cash flows for the year ended October 31,
1998 and for the period from March 15, 1997 to October 31, 1997, and the
consolidated statements of operations and comprehensive loss, stockholder's
equity, and cash flows for the period from January 1, 1997 to March 14, 1997 and
for the year ended December 31, 1996 of Costain Coal Inc. and subsidiaries. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the accompanying consolidated financial statement
schedules. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Louisville, Kentucky
December 10, 1998
29
<PAGE>
SCHEDULE II
LODESTAR ENERGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions Additions Deductions
Balance charged to charged to write-offs Balance
at beginning costs and other against at end of
of year expenses accounts (1) allowance year
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Twelve Months ended October 31, 1998:
Applied against asset accounts:
Allowance for inventory obsolescence $ 2,710 395 1,443 $ 1,662
Allowance for unrecoupable advance royalties 2,750 684 1,011 2,423
Ten Months ended October 31, 1997:
Applied against asset accounts:
Allowance for inventory obsolescence $ 1,464 382 1,590 726 $ 2,710
Allowance for unrecoupable advance royalties 2,656 94 - 2,750
Twelve Months ended December 31, 1996:
Applied against asset accounts:
Allowance for inventory obsolescence $ 1,055 413 4 $ 1,464
Allowance for unrecoupable advance royalties 1,598 1,189 131 2,656
</TABLE>
(1) Purchase accounting adjustment.
30
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the under signed thereunto duly authorized.
LODESTAR HOLDINGS, INC.
(Registrant)
By: /S/ JOHN W. HUGHES
-------------------------------------------.
President
Date: FEBRUARY 5, 1999
-----------------------------------------.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
February 5, 1999 /s/ Ira Leon Rennert
- --------------------------------------------------------------------------------
IRA LEON RENNERT
Chairman of the Board and Director
February 5, 1999 /s/ John W. Hughes
- --------------------------------------------------------------------------------
JOHN W. HUGHES
President
(principal executive officer)
February 5, 1999 /s/ Michael E. Donohue
- -------------------------------------------------------------------------------
MICHAEL E. DONOHUE
Vice President and Chief Financial Officer
(principal financial and accounting officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report to security holders covering the registrant's last fiscal year,
proxy statement, form of proxy or other proxy soliciting material has been sent
to security holders.
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------------------------------------
<S> <C>
27 Financial Data Schedule.
</TABLE>
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 14,949
<SECURITIES> 0
<RECEIVABLES> 29,874
<ALLOWANCES> 0
<INVENTORY> 9,550
<CURRENT-ASSETS> 58,465
<PP&E> 131,708
<DEPRECIATION> 36,210
<TOTAL-ASSETS> 213,778
<CURRENT-LIABILITIES> 57,572
<BONDS> 150,000
0
0
<COMMON> 1
<OTHER-SE> (34,584)
<TOTAL-LIABILITY-AND-EQUITY> 213,778
<SALES> 263,716
<TOTAL-REVENUES> 263,716
<CGS> 221,813
<TOTAL-COSTS> 263,820
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,140
<INCOME-PRETAX> (13,244)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,244)
<DISCONTINUED> 0
<EXTRAORDINARY> 6,572
<CHANGES> 0
<NET-INCOME> (6,672)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
