<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999
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)
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.
[ X ] YES [ ] NO
Number of shares outstanding of each of the registrant's classes of common
stock, as of September 14, 1999:
COMMON STOCK, $1.00 PAR VALUE 1000 SHARES
<PAGE>
TABLE OF CONTENTS
Page No.
--------
TABLE OF CONTENTS 1
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets
July 31, 1999 and October 31, 1998 2
Consolidated Statements of Operations
Three Months Ended July 31, 1999 and 1998 3
Consolidated Statements of Operations
Nine Months Ended July 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
Nine Months Ended July 31, 1999 and 1998 5
Notes To Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
<PAGE>
Part I. - Item 1 Financial Statements
Lodestar Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 31, 1999 October 31, 1998
------------- ----------------
<S> <C> <C>
Assets (in thousands, except share data)
Current assets:
Cash $ 2,916 $ 14,949
Accounts receivable 36,371 29,874
Inventories 16,895 9,550
Prepaid expenses and other current assets 4,931 4,092
--------- ---------
Total current assets 61,113 58,465
Property, plant and equipment, net 114,876 95,498
Coal and ash disposal contracts in excess of market, net of
accumulated amortization of $7,028 and $5,058, respectively 39,780 41,750
Other assets 18,016 18,065
--------- ---------
$ 233,785 $ 213,778
========= =========
Liabilities and Stockholder's Deficit
Current liabilities:
Current installments of long-term debt $ 1,025 $ --
Accounts payable 28,013 25,161
Accrued expenses 23,855 32,411
--------- ---------
Total current liabilities 52,893 57,572
Long-term obligations, excluding current installments 181,480 150,000
Other non-current liabilities 50,830 40,789
--------- ---------
Total liabilities 285,203 248,361
--------- ---------
Stockholder's 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 (55,263) (38,428)
Accumulated other comprehensive loss - minimum
pension liability adjustment (1,156) (1,156)
--------- ---------
Total stockholder's deficit (51,418) (34,583)
--------- ---------
$ 233,785 $ 213,778
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Lodestar Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
July 31, 1999 July 31, 1998
------------- -------------
(in thousands)
<S> <C> <C>
Coal sales and related revenue $ 67,719 $ 63,419
-------- --------
Operating costs:
Cost of revenues 55,286 54,883
Depreciation, depletion
and amortization 7,740 8,168
Selling, general and administrative 5,230 5,283
-------- --------
68,256 68,334
-------- --------
Operating loss (537) (4,915)
Interest expense, net (5,152) (3,876)
-------- --------
Loss before income taxes (5,689) (8,791)
and extraordinary items
Income tax benefit -- 54
-------- --------
Loss before extraordinary
items (5,689) (8,737)
Extraordinary items -- 6,572
-------- --------
Net loss $ (5,689) $ (2,165)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Lodestar Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31, 1999 July 31, 1998
------------- -------------
(in thousands)
<S> <C> <C>
Coal sales and related revenue $ 172,463 $ 199,657
--------- ---------
Operating costs:
Cost of revenues 142,661 169,527
Depreciation, depletion
and amortization 21,892 19,997
Selling, general and administrative 10,092 10,158
--------- ---------
174,645 199,682
--------- ---------
Operating loss (2,182) (25)
Interest expense, net (14,653) (8,633)
--------- ---------
Loss before income taxes and
extraordinary items (16,835) (8,658)
Income tax provision -- --
--------- ---------
Loss before extraordinary
items (16,835) (8,658)
Extraordinary items -- 6,572
--------- ---------
Net loss $ (16,835) $ (2,086)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Lodestar Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31, 1999 July 31, 1998
------------- -------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (16,835) $ (2,086)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation, depletion and amortization 21,892 19,997
Loss (gain) on sale/disposal of property plant
and equipment 37 (2)
Amortization of deferred financing fees 833 539
Imputed interest 469 1,164
Financing fees written off -- 1,388
Changes in operating assets and liabilities:
Accounts receivable (6,497) 4,890
Inventories (6,996) (829)
Prepaid expenses and other current assets (948) (3,372)
Other assets (1,113) 1,979
Accounts payable 2,852 (13,524)
Accrued expenses (9,418) (5,426)
Other non-current liabilities (350) (14,855)
--------- ---------
Net cash used in operating activities (16,074) (10,137)
--------- ---------
Cash flows from investing activities:
Cost of acquisitions, net of liabilities incurred (10,384) --
Capital expenditures (10,686) (31,313)
Proceeds from sales of property, plant and
equipment 98 282
--------- ---------
Net cash used in investing activities (20,972) (31,031)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 25,258 150,000
Principal payments on long-term obligations (245) (58,557)
Payments on related party borrowings -- (5,000)
Financing fees paid -- (6,300)
Dividends paid -- (27,818)
--------- ---------
Net cash provided by financing activities 25,013 52,325
--------- ---------
Net increase (decrease) in cash (12,033) 11,157
Cash at beginning of period 14,949 3,056
--------- ---------
Cash at end of period $ 2,916 $ 14,213
========= =========
Supplemental cash flow disclosures:
Interest paid $ 17,679 $ 3,589
========= =========
Property, plant and equipment and inventory
acquired through debt incurred and liabilities
assumed $ 18,275 $ --
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Lodestar Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
Nine Months ended July 31, 1999 and 1998
(Unaudited - in thousands)
(1) Basis of Presentation
The accompanying consolidated financial statements have been prepared from
the accounting records of Lodestar Holdings, Inc. and its subsidiaries (the
Company), without audit. Lodestar Holdings, Inc. is a wholly owned
subsidiary of The Renco Group, Inc. (Renco). The consolidated financial
statements reflect all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. The results of
operations presented for the three and nine month periods ended July 31,
1999 are not necessarily indicative of the results to be expected for the
full year.
(2) Inventories
Inventories consist of the following at July 31,1999 and October 31,1998:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Coal $ 13,924 $ 6,067
Materials and supplies 2,971 3,483
---------------- ----------------
$ 16,895 $ 9,550
================ ================
</TABLE>
(3) Acquisition of Assets of Colonial Coal Company, Inc.
On January 15, 1999, Lodestar acquired coal inventory, mining rights,
leases of real property, and equipment from Colonial Coal Company, Inc.
(Colonial), a mining company in Eastern Kentucky. The consideration to
Colonial was $5,384 in cash paid at the closing, periodic deferred payment
obligations of $5,806, and the assumption of $5,440 in reclamation and
other liabilities.
(4) Acquisition of Assets of White Oak Mining and Construction Company, Inc.,
Horizon Mining LLC, and Grand Valley Coal Company.
On July 16, 1999, Lodestar acquired mining rights, leases of real property,
and equipment from White Oak Mining and Construction Company, Inc., Horizon
Mining LLC, and Grand Valley Coal Company (Sellers), mining companies in
Utah and Colorado. The consideration to the Sellers was $5,000 in cash paid
at the closing and the assumption of $7,029 in reclamation and other
liabilities.
6
<PAGE>
Lodestar Holdings, Inc.
and Subsidiaries
(5) Subchapter S Corporation Election
On January 15, 1999, Renco filed an election with the consent of its
shareholders with the Internal Revenue Service to change its taxable status
from that of a subchapter C corporation to that of a subchapter S
corporation, effective November 1, 1998. At the same time, Renco elected
for the Company to be treated as a qualified subchapter S subsidiary
(QSSS). Most states in which the Company operates will follow similar tax
treatment. QSSS status requires the ultimate shareholders to include their
pro rata share of the Company's income or loss in their individual tax
returns. The Company will continue to provide for state and local income
taxes for the taxing jurisdictions which do not recognize QSSS status;
however, management believes this is not material to the Company.
(6) Contingencies
On August 12, 1999, a Florida state court ruled in favor of a significant
customer (the Customer) of the Company in its litigation against the
utility for which the Customer generates power (the Utility). The Customer
was awarded $18.1 million representing underpayment by the Utility pursuant
to the contract in place. It is expected that the Utility will appeal this
judgment. 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 collecting this
judgment. As of July 31, 1999, the Company has receivables from the
Customer totaling $11,990 ($6,439 of which is classified as current and
$5,551 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 March 14,
1997, purchase of the capital stock of Costain Coal Inc. and its
subsidiaries (subsequently renamed Lodestar Energy, Inc.) by the Company.
As of July 31, 1999, the net amount capitalized for these contracts with
the Customer is $15,225. The management of the Company does not expect the
resolution of this legal proceeding to have a material adverse impact on
the results of operations or the financial condition of the Company.
7
<PAGE>
Part I. - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Lodestar Holdings, Inc. (the Company) was formed in August 1996 to acquire all
of the capital stock of Costain Coal Inc. from Costain America Inc. (the
Acquisition). The Acquisition, which was effective March 14, 1997, was accounted
for using the purchase method of accounting. After the Acquisition, Costain Coal
Inc. was renamed Lodestar Energy, Inc. (Lodestar). On May 15, 1998, the Company
sold and issued (the Notes Offering) $150.0 million of 11.5% Senior Notes due
2005 (the Notes).
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 have guaranteed the 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, separate
financial information of the subsidiaries is not considered necessary to
include, as in management's opinion, it would not be material to investors.
The Company, through its wholly-owned subsidiary, Lodestar, is engaged in the
mining and marketing of bituminous coal used principally for the generation of
electricity, as well as for other industrial applications. Lodestar's Western
Kentucky coal product is mid to high sulfur and competes primarily in the
regional utility market. Lodestar's Eastern Kentucky coal product, as compared
to its Western Kentucky coal product, is generally higher in energy (as measured
in British thermal units (Btu's)) content and lower in sulfur content and is
marketed in the Eastern, South Central and Great Lakes regions of the United
States. Lodestar also owns and operates an ash disposal facility in Eastern
Kentucky.
On July 16, 1999, Lodestar acquired certain assets of White Oak Mining and
Construction Company, Inc., Horizon Mining LLC, and Grand Valley Coal Company
(Sellers), including the White Oak and Horizon Mines in Utah and certain
undeveloped reserves in Colorado. All of the aforementioned mines had been idled
by Sellers. The acquisition of the Utah and Colorado properties provides the
Company access to coal reserves which are lower in sulfur content than its
Kentucky reserves, and which will allow market expansion. The Company began
production at the White Oak Mine in mid-August.
As of July 31, 1999, Lodestar controlled the mineral rights through lease or
ownership at fifteen active mines. Two of the active mines are in Western
Kentucky (both underground) and thirteen in Eastern Kentucky (8 underground and
5 surface). All operations temporarily idled by Lodestar during the second
quarter of fiscal year 1999, have been reactivated.
During Lodestar's third quarter of fiscal year 1999, Lodestar idled the Smith
underground mining operation, which generated 720,000 sold tons in fiscal year
1998 and 189,000 sold tons year-to-date in fiscal year 1999. Equipment
previously employed at the Smith underground operation has been relocated to the
newly acquired Utah properties or to the Eastern Kentucky underground
operations. The Smith underground mine was the primary source of tonnage sold on
a long-term contract with West Kentucky Energy, an electrical utility in Western
Kentucky formerly known as Big Rivers. This contract was surrendered by Lodestar
as one component of successful negotiations between Lodestar and Webster County
Coal Corporation (WCCC), which resolved various disputes relating to Lodestar's
past mining at the Smith surface mine. Another component of this settlement was
a long-term coal waste disposal agreement between Lodestar and WCCC. The
efficient utilization of the waste material from WCCC reduces Lodestar's Western
Kentucky reclamation liability.
8
<PAGE>
Results of Operations
Three months ended July 31, 1999 compared with three months ended July 31, 1998.
The following table summarizes the tons shipped by region and other operating
data for the Company for the periods presented.
<TABLE>
<CAPTION>
Three Months Ended
July 31, 1999 July 31, 1998
------------- -------------
( tons in thousands )
<S> <C> <C>
Region:
Brokered 113 -
Eastern Kentucky 1,019 1,167
Western Kentucky 1,510 1,331
------- -------
Total 2,642 2,498
======= =======
Other Operating Data:
Coal sales and related revenue per
ton shipped $ 25.63 $ 25.39
Cost of coal sales and related
revenues per ton shipped $ 20.93 $ 21.98
Coal sales revenue per ton shipped $ 25.10 $ 23.46
Cost of coal sales revenues per
ton shipped $ 20.77 $ 20.35
</TABLE>
Coal sales and related revenue for the three months ended July 31, 1999 (the
1999 Quarter) were $67.7 million, an increase of $4.3 million, or 6.8%, compared
to the three months ended July 31, 1998 (the 1998 Quarter). The 1998 Quarter
included $3.2 million of revenue related to contract mining operations that were
completed in the first quarter of fiscal year 1999, representing a decreasing
component of the total net $4.3 million increase. Coal sales revenue increased
by $7.7 million, which partially was the result of a 5.8% increase in the volume
of tons shipped, as well as an increase in realization of $1.64 per sold ton, or
7.0%. The sold tonnage volume increase is the result of an aggressive marketing
effort implemented in the 1999 Quarter to relieve inventory build ups resulting
from mild winter weather during the 1998-1999 season.
The $1.64 increase in realization per sold ton during the 1999 Quarter is
primarily the result of higher prices on the Western Kentucky shipments due to
overall higher coal quality, subsequent to the elimination of the production
from the Smith underground and surface mines, and to a lesser extent, to the
higher quality of coal production from the Eastern Kentucky mines.
9
<PAGE>
Cost of revenues for the 1999 Quarter was $55.3 million, an increase of $.4
million, or .1%, compared to the 1998 Quarter. The 1998 Quarter included $3.6
million of costs related to contract mining operations that were completed in
the first quarter of fiscal year 1999. Adjusted for such benefit, cost of
revenues increased $4.0 million primarily as a result of the 144,000 additional
tons shipped during the 1999 Quarter and the $.42 increase in the cost of coal
sales revenue per ton shipped as compared to the 1998 Quarter. Cost of revenues
at the Western Kentucky operations were relatively unchanged overall from the
1998 Quarter to the 1999 Quarter with favorable productivity and operating
factors offsetting lower salable yield recoveries. The cost of revenues at the
Eastern Kentucky operations increased due to higher mining ratios (cubic yards
of overburden removed to salable tons of coal produced) encountered at certain
surface operations and lower salable yield recoveries at certain underground
operations.
Depreciation, depletion, and amortization for the 1999 Quarter decreased from
the 1998 Quarter by $.4 million. This decrease is primarily the result of the
timing of capital expenditures during the 1999 fiscal year period as compared to
the 1998 fiscal year period.
Selling, general and administrative expenses during the 1999 Quarter were $5.2
million compared to $5.3 million in the 1998 Quarter. The 1999 Quarter selling,
general, and administrative expenses included a nonrecurring charge of $3.0
million, which represents costs charged to operations in conjunction with due
diligence on a potential acquisition which is not expected to provide a future
benefit to the Company. The selling, general, and administrative expenses for
the 1998 Quarter include a nonrecurring payment of $2.8 million to certain
employees in connection with the Notes Offering. Notwithstanding these
nonrecurring charges, selling, general and administrative expenses for the 1999
Quarter have decreased by $.3 million compared to the 1998 Quarter with
favorable variances in other administrative expenses offsetting costs associated
with Year 2000 compliance efforts.
Operating loss decreased from $4.9 million during the 1998 Quarter to $.5
million during the 1999 Quarter, primarily as a result of the improved sales
pricing during the 1999 Quarter.
Interest expense, net was $5.2 million for the 1999 Quarter, an increase of $1.3
million over the 1998 Quarter, which reflects the impact of increased debt.
Income taxes for the 1999 Quarter were $0 as compared to a $54,000 tax benefit
recorded during the 1998 Quarter. Due to the Company's change in tax status (See
Note 5 of Notes to Consolidated Financial Statements), the Company is no longer
subject to income taxes, and accordingly, no provision or credit for income
taxes has been recorded during the 1999 Quarter.
Extraordinary items for the 1999 Quarter were $0 as compared to $6.6 million of
income recorded during the 1998 Quarter. The 1998 Quarter extraordinary income
was attributable to the buyout of certain deferred payment obligations with the
proceeds of the Notes Offering.
Net loss increased from $2.2 million during the 1998 Quarter to $5.7 million
during the 1999 Quarter as a result of the factors described above.
10
<PAGE>
Nine months ended July 31, 1999 compared with nine months ended July 31, 1998.
The following table summarizes the tons shipped by region and other operating
data for the Company for the periods presented.
<TABLE>
<CAPTION>
Nine Months Ended
July 31, 1999 July 31, 1998
------------- -------------
( tons in thousands )
<S> <C> <C>
Region:
Brokered 230 -
Eastern Kentucky 2,838 3,146
Western Kentucky 3,717 4,562
West Virginia - 200
------- -------
Total 6,785 7,908
======= =======
Other Operating Data:
Coal sales and related revenue per
ton shipped $ 25.42 $ 25.25
Cost of coal sales and related
revenues per ton shipped $ 21.03 $ 21.44
Coal sales revenue per ton shipped $ 24.18 $ 23.23
Cost of coal sales revenues per
ton shipped $ 20.45 $ 19.75
</TABLE>
Coal sales and related revenue for the nine months ended July 31, 1999 (the 1999
Period) were $172.5 million, a decrease of $27.2 million, or 13.6%, compared to
the nine months ended July 31, 1998 (the 1998 Period). The related revenue
component was $8.4 million in the 1999 Period and $16.0 million in the 1998
Period, representing $7.6 million of the total $27.2 million decrease. Of this
decrease, $6.9 million is primarily attributable to the completion of the
contract mining operation in Eastern Kentucky.
Coal sales revenue decreased by $19.6 million, which primarily was the result of
a 14.2% decrease in the volume of tons shipped. Coal sales revenue per ton
shipped was $24.18 in the 1999 Period compared to $23.23 in the 1998 Period,
increasing as a result of a higher ratio of contract shipments to spot market
orders, improved overall coal quality, as well as a greater ratio of higher
priced Eastern Kentucky coal sales to Western Kentucky coal sales. The 1.1
million ton decline in coal shipped for the 1999 Period versus the 1998 Period
is the result of Lodestar's decision to reduce spot shipments during a weak coal
market, the temporarily reduced production levels at certain mine sites in both
the Western and Eastern Kentucky operations during the second quarter of 1999,
the closure of mines during fiscal year 1998, and the deferral of certain
contracted customer shipments.
Cost of revenues for the 1999 Period was $142.7 million, a decrease of $26.9
million, or 15.9%, compared to the 1998 Period. The $26.9 million reduction in
cost of revenues is primarily the result of fewer sold tons during the 1999
Period. Additionally, a $9.3 million reduction in cost of revenues due to the
completion of the contract mining operation in Eastern Kentucky benefited the
1999 Period. Cost of coal sales revenue increased $.70 per ton shipped primarily
due to lower salable yield from the Western Kentucky Baker underground mine and
higher surface mining ratios at certain Eastern Kentucky surface mines, net of
the benefit of a $5.6 million reduction in equipment lease expense associated
with the buyout of those obligations with the proceeds of the Notes.
11
<PAGE>
Depreciation, depletion, and amortization for the 1999 Period increased from the
1998 Period by $1.9 million. The primary reason for this increase was
depreciation as a result of capital equipment additions during the interim
twelve months including $27.5 million, which was capitalized in conjunction with
the buyout of leases with the proceeds of the Notes.
Selling, general and administrative expenses during the 1999 Period were $10.1
million compared to $10.2 million in the 1998 Period. The 1999 Period selling,
general, and administrative expenses included a nonrecurring charge of $3.0
million, which represents costs charged to operations in conjunction with due
diligence on a potential acquisition which is not expected to provide a future
benefit to the Company. The selling, general, and administrative expenses for
the 1998 Period include a nonrecurring payment of $2.8 million to certain
employees in connection with the Notes Offering. Notwithstanding, these
nonrecurring charges, selling, general and administrative expenses for the 1999
Period have decreased by $.3 million compared to the 1998 Period with favorable
variances in other administrative expenses offsetting costs associated with Year
2000 compliance efforts.
Operating loss increased from $25,000 during the 1998 Period to $2.2 million
during the 1999 Period primarily as a result of the impact of reduced shipments
during the 1999 Period.
Interest expense, net was $14.7 million for the 1999 Period, an increase of $6.0
million over the 1998 Period, which reflects the impact of interest on the
Notes.
Income taxes for the 1999 Period are $0. Due to the Company's change in tax
status (See Note 5 of Notes to Consolidated Financial Statements), the Company
is no longer subject to income taxes, and accordingly, no provision or credit
for income taxes has been recorded during the 1999 Period.
Extraordinary items for the 1999 Period were $0 as compared to $6.6 million of
income recorded during the 1998 Period. The 1998 Period extraordinary income was
attributable to the buyout of certain deferred payment obligations with the
proceeds of the Notes Offering.
Net loss increased from $2.1 million during the 1998 Period to a loss of $16.8
million during the 1999 Period as a result of the factors described above.
Liquidity and Capital Resources
The Company's liquidity requirements arise from working capital requirements,
capital investments, interest payment obligations and costs of implementing its
business strategy to grow through strategic acquisitions. The Company's primary
source of liquidity is cash provided by operating activities. The Company also
has available a $120 million senior credit facility (the Senior Credit Facility)
that provides for advances by the lender to a maximum of $90.0 million, based on
specific percentages of eligible receivables and inventories, and for letters of
credit of up to $30.0 million, based on a percentage of appraised value of
equipment and mineral reserves. As of July 31, 1999, the Senior Credit Facility
debt was $25.3 million, and $21.2 million of letters of credit were outstanding.
Based upon eligible collateral as of July 31, 1999, the net unused borrowing and
letter of credit availability thereunder was $8.8 million and $3.5 million,
respectively.
12
<PAGE>
Cash used in the Company's operating activities for the 1999 Period was $16.1
million, compared to $10.1 million used in the 1998 Period operating activities.
The $16.1 million of cash used in operating activities during the 1999 Period
reflects the negative impact on cash resulting from reduced sales volume and the
build up of receivables and inventory experienced during the nine months ended
July 31, 1999. The $10.1 million of cash used in the operating activities during
the 1998 Period reflects the activity resulting from the pay down of liabilities
subsequent to the Notes Offering.
For the nine months ended July 31, 1999, capital expenditures and the cost of
acquisitions funded with cash were $21.1 million, including $5.0 million and
$5.4 million cash payments made in conjunction with the Utah and Tug River
acquisitions, respectively. As of July 31, 1999, the Company had capital
expenditure commitments of approximately $9.1 million of which $2.8 are expected
to be paid prior to October 31, 1999.
The Company's liquidity has decreased substantially during the three month
period ending July 31, 1999. Outstanding borrowings under the Senior Credit
Facility have increased from $3.8 million to $25.3 million. The primary factors
that negatively impacted cash flow during the 1999 Quarter were: (i.) increased
receivables of $13.1 million due to higher sales volume, (ii.) $10.3 million in
capital expenditures, including the $5.0 million spent on the Utah and Colorado
properties, and (iii.) the $8.6 million semi-annual interest payment on the
Notes.
Management believes that borrowings and liquidity will stabilize during the
fourth quarter of fiscal 1999 as capital expenditures return to more normal
levels, and the Company's borrowing base increases in conjunction with the Utah
acquisition, As of August 31, 1999, the Company's availability under its
borrowing and letter of credit facilities were $12.0 million and $8.4 million,
respectively. Accordingly, management believes that cash flow from operations
and availability under the Senior Credit Facility, will be sufficient to provide
for its working capital requirements, capital investments, and interest payment
obligations for the foreseeable future.
The indenture governing the Notes and the Senior Credit Facility contains
numerous covenants and prohibitions that impose limitations on the liquidity of
the Company, including requirements that the Company satisfy certain financial
ratios and limitations on the incurrence of additional indebtedness. The ability
of the Company to meet its debt service requirements and to comply with such
covenants will be dependent upon future operating performance and financial
results which will be subject to financial, economic, political, competitive and
other factors affecting the Company, many of which are beyond its control.
Year 2000
The Company established an internal committee in 1998 responsible for monitoring
year 2000 (Y2K) compliance. During the 1999 Period, the committee, in
conjunction with an independent consulting firm, has been diligently
administering a detailed work schedule designed to minimize the Company's risk
to business interruptions related to Y2K issues.
The Company's information systems (IS) have been evaluated, and Y2K remediation
work to be performed in that area is minimal and is projected to be completed
before the end of the calendar year. The primary non-IS risk areas are the
embedded systems affecting mining equipment, preparation plant systems, scale
system interfaces, laboratory equipment, and other facility-specific equipment.
Testing and evaluation of all critical areas have been completed. Remediation
efforts, which are not expected to be of a material nature, began in the second
quarter of 1999 on selected noncompliance items. Projections at this time
indicate that all remediation work that is required will be accomplished before
the end of the calendar year.
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Additionally, the Company has completed a comprehensive review of the 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. Contingency planning will be
completed during the fourth quarter of calendar year 1999 and monitoring of the
compliance status of critical third party vendors and customers will continue
through the rollover of the millennium.
Without consideration of internal labor costs (which are not expected to be
significant), the expenditures to achieve Y2K compliance are projected to be
less than $1.0 million of which, approximately $740,000 has been incurred
through the 1999 Period.
While every effort is being made to ensure Y2K compliance within the
controllable scope of the Lodestar operations, there can be no assurance that
business interruptions resulting from Y2K issues initiated from external systems
can be prevented.
Effect of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly report to stockholders. This Statement requires that companies
disclose segment data based on how management makes decisions about allocating
resources to segments and measuring their performance. This Statement is
effective for the Company in its 1999 fiscal year. The implementation of this
Statement does not have a material effect on its consolidated financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits." SFAS No. 132 revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or recognition of those plans. This Statement is
effective for the Company in its 1999 fiscal year. The Company does not expect
the implementation of this Statement to have a material effect on its
consolidated financial statements.
Forward - Looking Statements
This report includes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995, 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; major equipment failures; changes in, or failure or
inability to comply with, government regulation, including, without limitation,
environmental regulations; 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 Company's Registration
Statement No. 333-59037 (effective November 12, 1998). These forward-looking
statements speak only as of the date of this report. 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.
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Part I. - Item 3
No quantitative or qualitative disclosures about market risks have been included
as in management's opinion, it would not be material to investors.
Part II. - Item 1 Legal Proceedings
(a) In 1997, Cedar Bay Generating Company Limited Partnership (Cedar Bay),
one of Lodestar's five largest customers, brought a lawsuit in the
Circuit Court for Duval County, Florida, against Florida Power & Light
Company (FP&L), the utility for which Cedar Bay generates power. Cedar
Bay alleged, among other things, that FP&L was in breach of its
contract with Cedar Bay for underpaying invoices from Cedar Bay by
amounts which FP&L disputes were properly due under the contract. While
the lawsuit has been pending, FP&L has withheld payment to Cedar Bay of
the portion of the invoices disputed by FP&L and Cedar Bay has, in
turn, withheld a portion of the amounts invoiced by Lodestar to Cedar
Bay for coal used by Cedar Bay to generate power for FP&L. In order to
protect its financial interest in this matter, Lodestar sought approval
from the court to intervene in the litigation between Cedar Bay and
FP&L generally in support of Cedar Bay's position. In April 1999, the
court granted Lodestar's application. On August 12, 1999, following a
three-week trial, judgment in excess of $18.1 million was entered on
the jury's verdict in favor of Cedar Bay. Slightly in excess of $5.1
million of the judgment relates to the portion of Cedar Bay's claim in
which Lodestar has a financial interest. Lodestar now expects to
recover from Cedar Bay this $5.1 million, plus an additional amount,
estimated to be approximately $900,000, due to Cedar Bay's similar
underpayment on coal burned to produce power for customers other than
FP&L. Cedar Bay has consistently represented to Lodestar that its
current financial condition prohibits it from paying Lodestar until it
actually receives payment from FP&L. Management believes it is unlikely
that Lodestar will receive the amount due from Cedar Bay until all
appeals of the judgment by FP&L are exhausted, or until further actions
are taken by Lodestar against either Cedar Bay or FP&L, or both. The
management of the Company does not expect the resolution of this legal
proceeding to have a material adverse impact on the results of
operations or the financial condition of the Company.
(b) See Management's Discussion and Analysis of Financial Condition and
Results of Operations contained herein for information as to the
settlement of litigation between the Company and Webster County Coal
Corporation described under "Business - Legal Proceedings" in the
Company's prospectus dated November 12, 1998.
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Part II. - Item 6 Exhibits and reports on Form 8-K
Exhibits:
A list of exhibits required to be filed as part of this Report Form
10-Q is set forth in the "Exhibit Index", which immediately precedes
such exhibits, and is incorporated herein by reference.
Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
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SIGNATURE
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 under
signed thereunto duly authorized.
Lodestar Holdings, Inc.
(Registrant)
By: /s/ Michael E. Donohue
------------------------------------------
Michael E. Donohue
Vice President and Chief Financial Officer
(duly authorized officer and principal
financial and accounting officer)
Date: September 14, 1999
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EXHIBIT INDEX
Exhibit No. Description
- --------------------------------------------------------------------------------
10 Material Contracts
10.1 Amendment No. 5, dated July 16, 1999, to Amended and Restated
Loan and Security Agreement, dated May 15, 1998, by and among
Lodestar Energy, Inc., as Borrower, Lodestar Holdings, Inc.,
as Guarantor, the financial institutions named therein as
lenders, Congress Financial Corporation, as Agent, and The
CIT/Business Credit, Inc., as Co-Agent.
27 Financial Data Schedule
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Exhibit 10.1
AMENDMENT NO. 5 TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
AMENDMENT dated as of July 16, 1999 by and among Lodestar Energy, Inc., a
Delaware corporation ("Borrower"), Lodestar Holdings, Inc., a Delaware
corporation ("Guarantor"), the financial institutions from time to time parties
to the Loan Agreement (as hereinafter defined) as lenders (individually, a
"Lender" and collectively, the "Lenders"), Congress Financial Corporation, a
Delaware corporation, in its capacity as administrative agent and collateral
agent for the Lenders (in such capacity, the "Agent") and The CIT Group/Business
Credit, Inc., a New York corporation, in its capacity as co-agent for Lenders
(in such capacity, the "Co-Agent").
W I T N E S S E T H
WHEREAS, Agent, Co-Agent, Lenders, Borrower and Guarantor have entered
into financing arrangements pursuant to which Lenders, or Agent on behalf of
Lenders, have made and may make loans and advances and provide other financial
accommodations to Borrower as set forth in the Amended and Restated Loan and
Security Agreement, dated May 15, 1998, by and among Agent, Co-Agent, Lenders,
Borrower and Guarantor as amended pursuant to Amendment No. 1 to Amended and
Restated Loan and Security Agreement, dated October 22, 1998, Amendment No. 2 to
Amended and Restated Loan and Security Agreement, dated December 21, 1998,
Amendment No. 3 to Amended and Restated Loan and Security Agreement, dated
January 13, 1999 and Amendment No. 4 to Amended and Restated Loan and Security
Agreement, dated April 30, 1999 (as amended by this Amendment and as the same
may hereafter be further amended, modified, supplemented, extended, renewed,
restated or replaced, the "Loan Agreement") and the agreements, documents and
instruments at any time executed and/or delivered in connection therewith or
related thereto (collectively, together with the Loan Agreement, the "Financing
Agreements");
WHEREAS, Grand Valley (as hereinafter defined) is the owner of certain
assets located at and used in connection with mining operations formally
conducted by Grand Valley at the Munger Canyon Mine (a sealed mine) and McClane
Canyon Mine (a mine in active idle status) which mines are located in Garfield
and Mesa Counties in Colorado and Borrower has entered into agreements to
purchase the Grand Valley Assets (as hereinafter defined) from Grand Valley, as
set forth in the Grand Valley Purchase Agreements (as hereinafter defined);
<PAGE>
WHEREAS, Horizon (as hereinafter defined) is the owner of certain assets
located at and used in connection with mining operations formally conducted by
Horizon at the Horizon Mine (a mine in active idle status) which mine is located
in Carbon County, Utah and Borrower has entered into agreements to purchase the
Horizon Assets (as hereinafter defined) from Horizon, as set forth in the
Horizon Purchase Agreements (as hereinafter defined);
WHEREAS, White Oak (as hereinafter defined) is the owner of certain assets
located at and used in connection with mining operations formally conducted by
White Oak at the White Oak Mine (a mine in active idle status) which mine is
located in Carbon and Emery Counties, Utah and Borrower has entered into
agreements to purchase the White Oak Assets (as hereinafter defined) from White
Oak, as set forth in the White Oak Purchase Agreements (as hereinafter defined);
WHEREAS, on or about July 2, 1999, Borrower made a loan in the amount of
$1,000,000 to Renco Coal (as hereinafter defined) and Borrower has requested the
consent of Agent and Lenders to such loan;
WHEREAS, in connection with such transactions, Borrower has requested that
Agent and Lenders agree to certain amendments to the Loan Agreement and Agent
and Lenders are willing to agree to such amendments, subject to the terms and
conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
and covenants set forth herein, and for other good and valuable consideration,
the adequacy and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. DEFINITIONS.
1.1 ADDITIONAL DEFINITIONS. As used herein, the following terms shall have
the respective meanings given to them below and the Loan Agreement shall be
deemed and is hereby amended to include, in addition and not in limitation of,
each of the following definitions:
(a) "AMENDMENT NO. 5" shall mean this Amendment No. 5 to the Amended
and Restated Loan and Security Agreement by and among Borrower, Guarantor,
Agent, Co-Agent and Lenders.
(b) "COAL INVENTORY" shall mean all coal inventory located on or
about the Grand Valley Real Property, Horizon Real Property and White Oak Real
Property.
(c) "EARTHFAX" shall mean EarthFax Engineering, Inc. and its
successors and assigns.
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(d) "EQUIPMENT LESSOR" shall mean The CIT Group/Equipment Financing,
Inc., and its successors and assigns.
(e) "FIRST AMERICAN" shall mean First American Title Insurance
Company and its successors and assigns, as escrowee pursuant to the Closing
Escrow Agreement, dated of even date herewith, by and among First American,
Borrower and the Kiscaden Sellers.
(f) "GRAND VALLEY" shall mean Grand Valley Coal Company, a Colorado
corporation, and its successors and assigns.
(g) "GRAND VALLEY ASSETS" shall mean all of the assets and
properties acquired by Borrower from Grand Valley pursuant to the Grand Valley
Purchase Agreements, including, but not limited to, Coal Inventory, Coal Leases,
Contracts, Files and Records, Inventory, Fee Property, Mines, Permits, Personal
Property, Property Rights, Water Rights, all non-extracted minerals (including
but not limited to coal, coal reserves, oil, gas and other minerals) located in,
on or under the Grand Valley Real Property, all buildings, fixtures and
improvements on the Grand Valley Real Property and any other Purchased Assets,
as each such term is defined in Amendment No. 5 or in the Grand Valley Asset
Purchase Agreement (as in effect on the date of Amendment No. 5).
(h) "GRAND VALLEY ASSET PURCHASE AGREEMENT" shall mean the Grand
Valley Asset Purchase Agreement, dated of even date herewith, by and between the
Grand Valley and Borrower, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(i) "GRAND VALLEY MORTGAGES" shall mean, individually and
collectively, the deeds of trust, mortgages and other security agreements to be
entered into by Borrower, as grantor and Agent, as grantee, with respect to the
Grand Valley Real Property.
(j) "GRAND VALLEY PURCHASE AGREEMENTS" shall mean, individually and
collectively, the Grand Valley Asset Purchase Agreement, together with any bills
of sale, deed and assignments, assignment and assumption agreements, leases,
subleases and such other instruments of transfer or lease as are referred to
therein and all side letters with respect thereto, and all agreements, documents
and instruments executed and/or delivered in connection therewith, as all of the
foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced; PROVIDED, THAT, the term "Grand Valley
Purchase Agreements" as such term is defined herein shall not include any of the
"Financing Agreements" as such term is defined herein.
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<PAGE>
(k) "GRAND VALLEY REAL PROPERTY" shall mean the Real Property of
Borrower purchased from Grand Valley and located in Garfield County and Mesa
County, Colorado as more particularly described on Exhibit A hereto.
(l) "GVP" shall mean the Grand Valley Rural Power Lines, Inc., a
Colorado cooperative association, and its successors and assigns.
(m) "GVP AGREEMENT" shall mean the Agreement, dated August 25, 1992,
between GVP and Grand Valley.
(n) "GVP COLLATERAL" shall mean the equipment and real property as
described on Exhibit B hereto, PROVIDED, THAT, the term "GVP Collateral" shall
not include any Coal Inventory or other Inventory or any Accounts or any
proceeds of any of the foregoing.
(o) "HORIZON" shall mean Horizon Mining, LLC, a Utah limited
liability company, and its successors and assigns.
(p) "HORIZON ASSETS" shall mean all of the assets and properties
acquired by Borrower from Horizon pursuant to the Horizon Purchase Agreements,
including, but not limited to, Coal Inventory, Coal Leases, Contracts, Files and
Records, Inventory, Fee Property, Permits, Personal Property, Property Rights,
Water Rights, all non-extracted minerals (including but not limited to coal,
coal reserves, oil, gas and other minerals) located in, on or under the Horizon
Real Property, all buildings, fixtures and improvements on the Horizon Real
Property and any other Purchased Assets, as each such term is defined in
Amendment No. 5 or the Horizon Asset Purchase Agreement (as in effect on the
date of Amendment No. 5).
(q) "HORIZON ASSET PURCHASE AGREEMENT" shall mean the Horizon Mine
Asset Purchase Agreement, dated of even date herewith, by and between the
Horizon and Borrower, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(r) "HORIZON LEASED EQUIPMENT" shall mean one (1) continuous miner
and three (3) shuttle cars leased by Borrower from CIT pursuant to the Horizon
Equipment Lease.
(s) "HORIZON MORTGAGES" shall mean, individually and collectively,
the deeds of trust, mortgages and other security agreements to be entered into
by Borrower, as grantor and Agent, as grantee, and with respect to the Horizon
Real Property.
(t) "HORIZON PURCHASE AGREEMENTS" shall mean individually and
collectively, the Horizon Asset Purchase Agreement, the Horizon Equipment Lease,
together with any bills of sale, deed and assignments, royalty agreements,
assignment and assumption agreements, leases,
4
<PAGE>
subleases and such other instruments of transfer or lease as are referred to
therein and all side letters with respect thereto, and all agreements, documents
and instruments executed and/or delivered in connection therewith, as all of the
foregoing now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced; PROVIDED, THAT, the term "Horizon
Purchase Agreements" as such term is defined herein shall not include any of the
"Financing Agreements" as such term is defined herein.
(u) "HORIZON REAL PROPERTY" shall mean the Real Property of Borrower
purchased from Horizon and located in Carbon County, Utah as more particularly
described on Exhibit C hereto.
(v) "HORIZON EQUIPMENT LEASE" shall mean the Master Lease Agreement,
dated December 2, 1998, by and between Equipment Lessor and Horizon as assigned
by Horizon to Borrower and as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed restated or replaced.
(w) "KISCADEN MORTGAGES" shall mean the Grand Valley Mortgages, the
Horizon Mortgages and the White Oak Mortgages.
(x) "KISCADEN PURCHASE AGREEMENTS" shall mean, collectively, the
Grand Valley Purchase Agreements, the Horizon Purchase Agreements and the White
Oak Purchase Agreements.
(y) "KISCADEN SELLERS" shall mean, collectively, each of the
following (and their respective successors and assigns): (i) White Oak, (ii)
Horizon and (iii) Grand Valley.
(z) "RENCO COAL" shall mean Renco Coal, Inc., a Delaware corporation
and a direct or indirect subsidiary of Renco Group, and its successors and
assigns.
(aa) "TBL" shall mean Tokyo Boeki, Ltd., a company organized under
the laws of Japan, and its successors and assigns.
(ab) "TERMINATION CHARGE" shall have the meaning for such term as
set forth in Schedule 14 to the Grand Valley Asset Purchase Agreement as it
exists on the date of Amendment No. 5.
(ac) "WHITE OAK ASSETS" shall mean all of the assets and properties
acquired by Borrower from White Oak pursuant to the White Oak Purchase
Agreements, including, but not limited to, Coal Inventory, Coal Leases,
Contracts, Fee Property (except as listed on Schedule 3.2 to the White Oak Asset
Purchase Agreement), Files and Records, Inventory, Permits, Personal Property,
Property Rights, Water Rights, all non-extracted minerals (including but not
5
<PAGE>
limited to coal, coal reserves, oil, gas and other minerals) located in, on or
under the White Oak Real Property, all buildings, fixtures and improvements on
the White Oak Real Property and any other Purchased Assets, as each such term is
defined in the White Oak Asset Purchase Agreement (as in effect on the date of
Amendment No.5).
(ad) "WHITE OAK ASSET PURCHASE AGREEMENT" shall mean the White Oak
Mine Asset Purchase Agreement, dated of even date herewith, by and between the
White Oak and Borrower, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(ae) "WHITE OAK MORTGAGES" shall mean, individually and
collectively, the deeds of trust, mortgages and other security agreements to be
entered into by Borrower, as grantor and Agent, grantee, with respect to the
White Oak Real Property.
(af) "WHITE OAK PURCHASE AGREEMENTS" shall mean, individually and
collectively, the White Oak Asset Purchase Agreement, together with any bills of
sale, deed and assignments, royalty agreements, assignment and assumption
agreements, leases, subleases and such other instruments of transfer or lease as
are referred to therein and all side letters with respect thereto, and all
agreements, documents and instruments executed and/or delivered in connection
therewith, as all of the foregoing now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced; PROVIDED, THAT,
the term "White Oak Purchase Agreements" as such term is defined herein shall
not include any of the "Financing Agreements" as such term is defined herein.
(ag) "WHITE OAK REAL PROPERTY" shall mean the Real Property of
Borrower purchased from White Oak and located in Carbon County and Emery County,
Utah as more particularly described on Exhibit D hereto.
(ah) "WHITE OAK" shall mean White Oak Mining & Construction Co.,
Inc., a Nevada corporation, and its successors and assigns.
1.2 INTERPRETATION. For purposes of this Amendment, all terms used herein,
including but not limited to, those terms used and/or defined in the recitals
hereto shall have the respective meanings assigned thereto in the Loan
Agreement.
2. CONSENTS. Subject to the terms and conditions contained herein, Agent
and Lenders hereby consent to the following:
(a) the purchase by Borrower of the Grand Valley Assets pursuant to
the Grand Valley Purchase Agreements (as in effect on the date hereof);
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(b) the purchase by Borrower of the Horizon Assets pursuant to the
Horizon Purchase Agreements (as in effect on the date hereof);
(c) the purchase by Borrower of the White Oak Assets pursuant to the
White Oak Purchase Agreements (as in effect on the date hereof);
(d) the Indebtedness of Borrower to GVP not to exceed $600,000 of
the Termination Charge arising pursuant to the GVP Agreement (as in effect on
the date hereof) as assigned to Borrower pursuant to the Grand Valley Purchase
Agreements;
(e) the continuation of the security interests in and liens upon the
GVP Collateral in favor of GVP to secure up to $600,000 of the Termination
Charge;
(f) the Indebtedness of Borrower to the Equipment Lessor pursuant to
the Horizon Equipment Lease in an amount not to exceed $1,700,000;
(g) the amendment to the Schedules to the Loan Agreement as set
forth in Section 4 of this Amendment; and
(h) the loan in the amount of $1,000,000 from Borrower to Renco Coal
made on or about July 2, 1999;
PROVIDED, THAT, (1) each of the foregoing shall have occurred by no later than
July 30, 1999; and (2) notwithstanding anything to the contrary in the Loan
Agreement, none of the Grand Valley Assets, Horizon Assets and White Oak Assets
or other Collateral located at, on or under the Grand Valley Real Estate, the
Horizon Real Estate or the White Oak Real Estate, shall constitute Eligible
Accounts, Eligible Inventory or Eligible Equipment, as each such term is defined
in the Loan Agreement, EXCEPT, THAT, such Accounts, Inventory or Equipment will,
after the date hereof, be considered Eligible Accounts, Eligible Inventory or
Eligible Equipment, on and after each of the following conditions shall have
been satisfied as determined by Agent: (A) Agent shall have completed a field
examination of the businesses, operations and assets acquired by Borrower
pursuant to the Kiscaden Purchase Agreements in accordance with Agent's
customary procedures and practices and as otherwise required by the nature and
circumstances of such businesses, operations and assets, the results of which
shall be satisfactory to Agent; (B) Agent shall have established such advance
rates and additional criteria for eligibility and such other terms and
conditions with respect to such Accounts, Inventory and Equipment as Agent may
determine (if any) based on the results of such field examination; and (C) such
Accounts, Inventory and Equipment shall satisfy all of the criteria for
eligibility so as to constitute Eligible Accounts, Eligible Inventory or
Eligible Equipment (including criteria set forth in the Loan Agreement as in
effect on the date hereof and such additional criteria as determined by Agent as
provided above).
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<PAGE>
3. AMENDMENTS.
3.1 INDEBTEDNESS. Section 7.3 of the Loan Agreement is hereby amended by
adding new Sections 7.3(s) and (t) as follows:
"(s) Indebtedness of Borrower to Horizon arising pursuant to the
Horizon Equipment Lease as in effect on the date of Amendment No. 5;
PROVIDED, THAT, (i) such Indebtedness is and shall only be secured by the
security interests and liens upon the Horizon Lease Equipment as permitted
under Section 7.4(d) hereof, (ii) the terms and conditions of such
Indebtedness shall be acceptable in all respects to Agent, (iii) such
Indebtedness shall not exceed $1,700,000 (less the aggregate amount of all
repayments in respect thereof), (iv) Borrower shall not, directly or
indirectly, make any payments with respect to such Indebtedness,
including, but not limited to any prepayments or any non-mandatory
payments, EXCEPT THAT Borrower may make regularly scheduled monthly
payments in respect of the Horizon Equipment Lease as in effect on the
date of Amendment No. 5 so long as the aggregate amount of all such
payments shall not exceed $1,700,000 and as of the date of each such
payment and after giving effect thereto, no Event of Default or act,
condition or event which with notice or passage of time or both would
constitute an Event of Default shall exist or have occurred and be
continuing, (v) Borrower shall not, directly or indirectly, (A) amend,
modify, alter or change any terms of such Indebtedness or any other
provisions of any agreement, document or instruments to the extent such
provision governs or affects the Indebtedness as in effect on the date of
Amendment No. 5, or (B) redeem, retire, defease, purchase or otherwise
acquire such Indebtedness, or set aside or otherwise deposit or invest any
sums for such purpose, and (vi) Borrower shall furnish to Agent all
notices or demands in connection with such Indebtedness either received by
Borrower or on its behalf, promptly after the receipt thereof or sent by
Borrower or on its behalf concurrently with the sending thereof, as the
case may be; and
(t) Indebtedness of Borrower to GVP arising pursuant to the GVP
Agreement (as in effect on the date of Amendment No. 5), as assigned to
Borrower pursuant to the Grand Valley Purchase Agreements (as in effect on
the date of Amendment No. 5); PROVIDED, THAT, (i) such Indebtedness is and
shall only be secured by the security interests and liens upon the GVP
Collateral as permitted under Section 7.4(i) hereof, (ii) the terms and
conditions of such Indebtedness shall be acceptable in all respects to
Agent, (iii) such Indebtedness shall not exceed $600,000 (less the
aggregate amount of all repayments in respect thereof), (iv) Borrower
shall not, directly or indirectly, make any payments with
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<PAGE>
respect to such Indebtedness, including, but not limited to any
prepayments or any non-mandatory payments, EXCEPT THAT Borrower may make
regularly scheduled monthly payments in respect of the Termination Charge
so long as the aggregate amount of all such payments shall not exceed
$600,000 and as of the date of each such payment and after giving effect
thereto, no Event of Default or act, condition or event which with notice
or passage of time or both would constitute an Event of Default shall
exist or have occurred and be continuing, (v) Borrower shall not, directly
or indirectly, (A) amend, modify, alter or change any terms of such
Indebtedness or any other provisions of any agreement, document or
instruments related thereto as in effect on the date of Amendment No. 5,
or (B) redeem, retire, defease, purchase or otherwise acquire such
Indebtedness, or set aside or otherwise deposit or invest any sums for
such purpose, PROVIDED, THAT, the foregoing shall not be construed to
limit the right of Borrower to provide a Bond payable to GVP in respect of
such Indebtedness to the extent Borrower is permitted to incur
Indebtedness in connection with such Bond under Section 7.3 hereof, and
(vi) Borrower shall furnish to Agent all notices or demands in connection
with such Indebtedness either received by Borrower or on its behalf,
promptly after the receipt thereof or sent by Borrower or on its behalf
concurrently with the sending thereof, as the case may be."
3.2 LIMITATION ON LIENS. Section 7.4 of the Loan Agreement is hereby
amended to add an new Section 7.4(i) as follows:
"(i) the security interests in and liens upon the GVP Collateral in
favor of GVP to secure the obligations of Borrower to GVP arising pursuant
to the GVP Agreement (as in effect on the date of Amendment No 5), as
assigned to Borrower and permitted in Section 7.3(t) hereof; PROVIDED,
THAT, in no event shall the GVP Collateral include the Coal Inventory, any
other Inventory, any Accounts or any Equipment other than such Equipment
listed on Exhibit B to Amendment No. 5 or any proceeds of any of the
foregoing."
3.3 LOANS, INVESTMENTS, GUARANTEES. Section 7.7 of the Loan Agreement is
hereby amended to add an new Section 7.5(p) as follows:
"(p) the loan in the amount of $1,000,000 made on or about July 2,
1999 by Borrower to Renco Coal to be used for a deposit paid to a third
party in connection with the purchase of certain assets or stock by Renco
Coal from such third party."
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4. SCHEDULES. Schedules 1.68, 6.1(a), 6.5(c), 6.7, 6.22 and 6.23 of the
Loan Agreement are hereby supplemented by adding the material set forth on the
Supplement to Schedules 1.68, 6.1(a), 6.5(c), 6.7, 6.22 and 6.23 as set forth in
Exhibit E to this Amendment.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS. In addition to the
continuing representations, warranties and covenants heretofore or hereafter
made by Borrower to Lenders and Agent pursuant to the other Financing
Agreements, Borrower hereby represents, warrants and covenants with and to
Lenders and Agent as follows (which representations, warranties and covenants
are continuing and shall survive the execution and delivery of Amendment No.5
and shall be incorporated into and made a part of the Financing Agreements):
5.1 ACQUISITION OF CERTAIN ASSETS OF THE KISCADEN SELLERS.
(a) The Grand Valley Purchase Agreements, the Horizon Purchase
Agreements and the White Oak Purchase Agreements and the transactions
contemplated under each have been duly executed, delivered and performed in
accordance with their terms by the respective parties thereto in all respects,
including the fulfillment (not merely the waiver, except as have been disclosed
to Agent and consented to in writing by Agent) of all conditions precedent set
forth therein. After giving effect to the Grand Valley Purchase Agreements, the
Horizon Purchase Agreements and the White Oak Purchase Agreements, except as set
forth on Exhibit F, Borrower has acquired good and marketable title or a valid
leasehold interest to the Grand Valley Assets, the Horizon Assets and the White
Oak Assets. All amounts paid by Borrower pursuant to the Grand Valley Asset
Purchase Agreement, the Horizon Asset Purchase Agreement and the White Oak Asset
Purchase Agreement have been paid with the proceeds of the Loans.
(b) All of the Grand Valley Assets, the Horizon Assets and the White
Oak Assets (other than intangible property) to be acquired, leased or subleased
by Borrower pursuant to the Grand Valley Purchase Agreements, the Horizon
Purchase Agreements and the White Oak Purchase Agreements are on premises being
acquired, leased or subleased by Borrower from the Kiscaden Sellers, and, except
as set forth on Exhibit G, the Grand Valley Assets, the Horizon Assets and the
White Oak Assets are free and clear of all liens, claims, encumbrances and
security interests other than any tax, mechanics, materialmen and landlord
statutory liens otherwise permitted under the Loan Agreement.
(c) Except as set forth on Exhibit H, all actions and proceedings
required by the Grand Valley Purchase Agreements, the Horizon Purchase
Agreements and the White Oak Purchase Agreements, applicable law or regulation
have been taken and the transactions contemplated thereunder have been duly and
validly consummated. Except as listed on Exhibit H hereto, Borrower has received
all necessary consents and approvals of third parties to the transactions
contemplated by the Grand Valley Purchase Agreements, the Horizon Purchase
Agreements and the White Oak Purchase Agreements.
10
<PAGE>
(d) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Grand Valley Purchase Agreements, the Horizon
Purchase Agreements and the White Oak Purchase Agreements and no governmental or
other action or proceeding has been threatened or commenced, seeking any
injunction, restraining order or other order which seeks to void or otherwise
modify the transactions described in the Grand Valley Purchase Agreements, the
Horizon Purchase Agreements and the White Oak Purchase Agreements .
(e) Borrower has delivered, or caused to be delivered, to Agent
true, correct and complete copies of the Grand Valley Purchase Agreements, the
Horizon Purchase Agreements and the White Oak Purchase Agreements.
5.2 NO DEFAULT. No Event of Default exists on the date of Amendment No. 5
(after giving effect to the amendment to the Loan Agreement made by the
provisions of Amendment No. 5).
5.3 CORPORATE POWER AND AUTHORITY. This Amendment has been duly executed
and delivered by Borrower and Guarantor and is in full force and effect as of
the date of Amendment No. 5 and the agreements and obligations of Borrower and
Guarantor contained herein constitute legal, valid and binding obligations of
Borrower and Guarantor enforceable against Borrower and Guarantor in accordance
with their respective terms.
5.4 ADDITIONAL ITEMS TO BE DELIVERED. Borrower hereby agrees that, in
addition to all other terms, conditions and provisions set forth in the other
Financing Agreements, Borrower shall deliver or cause to be delivered to Agent,
the following items, each in form and substance satisfactory to Agent, as soon
as possible, but in any event, by the date referred to below with respect to
each such item:
(a) on or before August 31, 1999, agreements in writing, from each
consignee, processor or other third party in possession of any Coal Inventory,
Inventory or other Collateral at the locations acquired pursuant to the Kiscaden
Purchase Agreements and pursuant to which such consignee, processor or other
third party acknowledges the first priority lien of Agent on Coal Inventory and
Inventory of Borrower in the possession of such consignee, processor or other
third person, agrees to waive any and all claims such person may at any time
have against such Inventory, and agrees to permit Agent access to, and the right
to remain on, the premises of the customer so as to exercise Agent's rights and
remedies and otherwise deal with the Collateral, in each case as duly
authorized, executed and delivered by each of such persons and Borrower;
11
<PAGE>
(b) on or before August, 31, 1999, UCC-1 financing statements
between Borrower, as secured party/consignor and each person who has possession
of any Inventory or other assets of Borrower, as debtor/consignee, indicating
Agent, as assignee, for filing in the appropriate government recording offices,
as determined by Agent, in each case as duly authorized, executed and delivered
by Borrower and each of such persons;
(c) on or before August 31, 1999, Agent shall receive, all other
consents, waiver, acknowledgments, releases, terminations and other agreements,
documents from third parties which Agent may deem necessary or desirable in
order to permit, protect and perfect security interests in and liens upon the
Collateral or to effect the provisions or purposes of this Amendment No. 5 or
the other Financing Agreements; PROVIDED, THAT, the foregoing shall not include
the consents of lessors of the Grand Valley Real Property, Horizon Real Property
and White Oak Real Property to the Kiscaden Mortgages;
(d) on or before July 20, 1999, Agent shall have received evidence
that the Agent has a valid perfected first priority security interest in all of
the Collateral;
(e) on or before August 6, 1999, Agent shall have received written
reports or appraisals of any or all of the Collateral located on or under the
Grand Valley Real Property, the Horizon Real Property or the White Oak Real
Property by an appraiser acceptable to Agent;
(f) on or before August 6, 1999, Agent shall have received the
Kiscaden Mortgages, in each case as duly authorized, executed and delivered by
Borrower;
(g) on or before August 6, 1999, Agent shall have received UCC-1
financing statements between Agent, as secured party and Borrower, as debtor
with respect to fixtures and minerals for filing in the appropriate government
recording offices, as determined by Lender, in each case as duly authorized,
executed and delivered by Borrower;
(h) on or before August 6, 1999, Agent shall have received a letter
addressed to Agent from EarthFax permitting Agent and Lenders to rely on the
environmental audits dated June 1999 with respect to the Grand Valley Real
Property, the Horizon Real Property and the White Oak Real Property;
(i) on or before July16, 1999, Agent shall have received copies of
the title insurance policy, dated of even date herewith, issued by South Eastern
Utah Title Company to Borrower with respect to the White Oak Real Property,
together with a Report, dated July 9, 1999, prepared by Parsons, Behle & Latimer
for Borrower with respect to the Grand Valley Real Property based in part on the
Title Opinion dated June 30, 1995 issued by Pruitt, Gushee & Bachtell to Horizon
with respect to the Horizon Real Property, and a Report, dated July 9, 1999,
prepared by Parsons, Behle & Latimer for Borrower with respect to the Grand
Valley Real
12
<PAGE>
Property based in part on the Title Commitment dated June 8, 1999, issued by
Abstract & Title Co. of Mesa County, Inc. to Borrower and a Title Memorandum
prepared for Borrower by Mineral Land Services, Inc. with respect to the Grand
Valley Real Property;
(j) on or before August 6, 1999, Agent shall have received
Collateral Access Agreements with respect to any of the premises of Borrower
acquired, leased or subleased pursuant to the Kiscaden Purchase Agreements by
Borrower from any owner or lessor (other than the Kiscaden Sellers), in each
case, duly executed and delivered by such owner and lessor of such premises;
(k) on or before July 16, 1999, Agent shall have received UCC,
Federal and State tax lien searches against the Kiscaden Sellers in the
following jurisdictions: Garfield and Mesa Counties in Colorado, Carbon and
Emery Counties in Utah, Secretary of State and Pike County, Kentucky; and
(l) on or before July 16, 1999, Agent shall have received the Due
Diligence Report dated July 9, 1999, prepared by Parsons, Behle & Latimer for
Borrower in connection with the acquisition of certain assets from the Kiscaden
Sellers.
6. CONDITIONS PRECEDENT. The effectiveness of the consents, waivers and
other terms and conditions contained herein shall be subject to the receipt by
Agent of each of the following, in form and substance satisfactory to Agent:
6.1 evidence that the Kiscaden Purchase Agreements have been duly executed
and delivered by and to the appropriate parties thereto and the transactions
contemplated under the terms of the Kiscaden Purchase Agreements have been
consummated prior to or contemporaneously with the execution of this Amendment;
6.2 Collateral Access Agreements with respect to any of the premises of
Borrower acquired, leased or subleased pursuant to the Kiscaden Purchase
Agreements, by Borrower from any of the Kiscaden Sellers, in each case, duly
executed and delivered by the Kiscaden Sellers as the owner and lessor of such
premises;
6.3 UCC, Federal and State tax lien and judgment lien searches against
Kiscaden Sellers in the jurisdictions in which any of the Grand Valley Assets,
Horizon Assets and White Oak Assets are located (except as those jurisdictions
listed in Section 5.4(k) hereof);
6.4 UCC-1 financing statements between Agent, as secured party and
Borrower, as debtor with respect to the Collateral for filing in the appropriate
government recording offices, as determined by Lender, in each case as duly
authorized, executed and delivered by Borrower;
13
<PAGE>
6.5 a pay proceeds authorization letter, duly authorized, executed and
delivered by Borrower providing for the authorization of Agent to remit certain
proceeds of the Loans to First American;
6.6 UCC-3 termination statements for each of the UCC-1 financing
statements, filed of record, by and between each of the parties set forth on
Exhibit I hereof, as secured party and any of the Kiscaden Sellers, as the case
may be, as debtor, duly authorized, executed and delivered by such secured
parties;
6.7 all releases, terminations and such other documents as Agent may
request to evidence the termination and release by TBL of any interest in and to
any of the Grand Valley Assets, duly authorized, executed and delivered by TBL,
including but not limited to, (i) UCC terminations statements for all UCC
financing statements previously filed by TBL, as secured party and Grand Valley,
as debtor and (ii) satisfactions and discharges of any mortgages, deeds of trust
or deeds to secured debt by Grand Valley in favor of TBL, in form acceptable for
recording in the appropriate government office;
6.8 certificates issued by each of the Colorado Secretary of State and
Utah Secretary of State indicating that Borrower is a foreign corporation duly
qualified to conduct business in such State and is in good standing in each such
State;
6.9 environmental audits of the Grand Valley Real Property, Horizon Real
Property and the White Oak Real Property, each dated June 1999 and conducted by
EarthFax;
6.10 the opinion letters of Borrower and opinion letters of counsel to the
Kiscaden Sellers, each with respect to the Kiscaden Purchase Agreements, upon
which Agent and Lenders are permitted to rely, and such other matters as Agent
and/or Lenders may request; and
6.11 an original of this Amendment, duly authorized, executed and
delivered by Borrower.
7. ADDITIONAL EVENTS OF DEFAULT. The parties hereto acknowledge, confirm
and agree that the failure of Borrower to comply with the covenants, conditions
and agreements contained herein shall constitute an Event of Default under the
Financing Agreements (subject to the applicable cure period, if any, with
respect thereto provided for in the Loan Agreement as in effect on the date
hereof).
14
<PAGE>
8. EFFECT OF THIS AMENDMENT. Except as modified pursuant hereto, no other
waivers, changes or modifications to the Financing Agreements are intended or
implied, and in all other respects, the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of
effective date hereof. Any acknowledgment or consent contained herein shall not
be construed to constitute a consent to any other or further action by Borrower
or to entitle Borrower to any other consent. The Loan Agreement and this
Amendment shall be read and construed as one agreement. To the extent of
conflict between the terms of this Amendment and the other Financing Agreements,
the terms of this Amendment shall control.
9. FURTHER ASSURANCES. The parties hereto shall execute and deliver such
additional documents and take such additional actions as may be necessary to
effectuate the provisions and purposes of this Amendment.
10. GOVERNING LAW. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the laws of the State of New York.
11. BINDING EFFECT. This Amendment shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors and
assigns.
12. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their authorized officers as of the date and year
first above written.
Very truly yours,
LODESTAR ENERGY, INC.
By: /s/ MICHAEL DONOHUE
Title: CHIEF FINANCIAL OFFICER
15
<PAGE>
LODESTAR HOLDINGS, INC.
By: /s/ MICHAEL DONOHUE
Title: CHIEF FINANCIAL OFFICER
AGENT:
CONGRESS FINANCIAL CORPORATION, for
itself and as Agent
By: /s/ THOMAS A. MARTIN
Title: ASSISTANT VICE PRESIDENT
CO-AGENT:
THE CIT GROUP/BUSINESS CREDIT, INC., for
itself and as Co-Agent
By: /s/ CHRISTOPHER HILL
Title: ASSISTANT VICE PRESIDENT
16
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<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
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0
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