<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 April 30, 2000
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.
/ / YES /X/ NO
Number of shares outstanding of each of the registrant's classes of common
stock, as of June 14, 2000:
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 2
Consolidated Balance Sheets as of
April 30, 2000 and October 31, 1999 2
Consolidated Statements of Operations for the Three Months Ended
April 30, 2000 and April 30, 1999 3
Consolidated Statements of Operations for the Six Months Ended
April 30, 2000 and April 30, 1999 4
Consolidated Statements of Cash Flows for the
Six Months Ended April 30, 2000 and April 30, 1999 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 17
PART II. OTHER INFORMATION 18
ITEM 1 - LEGAL PROCEEDINGS 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE 20
1
<PAGE>
PART I. - ITEM 1 FINANCIAL STATEMENTS
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
April 30, 2000 October 31, 1999
---------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 2,554 $ 3,454
Accounts receivable 32,072 39,828
Inventories 15,518 15,780
Prepaid expenses and other 3,370 4,121
--------- ---------
Total current assets 53,514 63,183
Property, plant and equipment, net 111,301 109,244
Coal and ash disposal contracts in excess of market, net of accumulated
amortization of $13,950 and $7,685, respectively 32,858 39,123
Other assets 11,446 17,655
--------- ---------
$ 209,119 $ 229,205
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current installments of long-term obligations (Note 4) $ 36,236 $ 1,033
Accounts payable 36,755 32,052
Accrued expenses 29,037 28,681
--------- ---------
Total current liabilities 102,028 61,766
Long-term obligations, excluding current installments (Note 4) 155,699 180,259
Other non-current liabilities 52,694 47,816
--------- ---------
Total liabilities 310,421 289,841
--------- ---------
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 (106,066) (65,400)
Accumulated other comprehensive loss - minimum pension liability adjustment (237) (237)
--------- ---------
Total stockholder's deficit (101,302) (60,636)
--------- ---------
$ 209,119 $ 229,205
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
April 30, 2000 April 30, 1999
-------------- --------------
<S> <C> <C>
Coal sales and related revenue $ 55,391 $ 47,314
Operating costs:
Cost of revenues 51,201 38,707
Depreciation, depletion and amortization 7,351 7,183
General and administrative 2,747 2,318
Asset write-downs and provisions 20,502 --
-------- --------
81,801 48,208
-------- --------
Operating loss (26,410) (894)
Interest expense, net (5,665) (4,811)
-------- --------
Net loss $(32,075) $ (5,705)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------
April 30, 2000 April 30, 1999
---------------- ----------------
<S> <C> <C>
Coal sales and related revenue $ 115,744 $ 104,744
Operating costs:
Cost of revenues 104,756 87,375
Depreciation, depletion and amortization 14,631 14,152
General and administrative 5,279 4,862
Asset write-downs and provisions 20,502 --
--------- ---------
145,168 106,389
--------- ---------
Operating loss (29,424) (1,645)
Interest expense, net (11,242) (9,501)
--------- ---------
Net loss $ (40,666) $ (11,146)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
April 30, 2000 April 30, 1999
-------------- --------------
<S> <C> <C>
Net cash provided by (used in) operating activities:
Net loss $(40,666) $(11,146)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion, and amortization 14,631 14,152
Loss on sale/disposal of property plant and equipment 22 13
Amortization of deferred financing fees 597 549
Imputed interest 357 284
Asset write-downs and provisions 20,502 --
Changes in operating assets and liabilities:
Accounts receivable 7,252 6,483
Inventories 28 (10,203)
Prepaid expenses and other current assets (1,487) 341
Other assets (124) (884)
Accounts payable 4,787 1,375
Accrued expenses (275) (5,198)
Other non-current liabilities (1,167) (1,198)
-------- --------
Net cash provided by (used in) operating activities 4,457 (5,432)
-------- --------
Cash flows from investing activities:
Payment for acquisitions (4,900) (5,384)
Capital expenditures (10,523) (5,417)
Proceeds from sales of property, plant and equipment 309 73
-------- --------
Net cash used in investing activities (15,114) (10,728)
-------- --------
Cash flows from financing activities:
Net borrowings from revolving credit facility 10,319 3,757
Principal payments on long-term obligations (562) (79)
-------- --------
Net cash provided by financing activities 9,757 3,678
-------- --------
Net decrease in cash (900) (12,482)
Cash at beginning of year 3,454 14,949
-------- --------
Cash at end of year $ 2,554 $ 2,467
======== ========
Supplemental cash flow disclosures:
Interest paid $ 10,287 $ 8,674
======== ========
Debt incurred through acquisition of property, plant and equipment $ 600 $ 5,806
======== ========
Other liabilities assumed through acquisition of property, plant and equipment $ 3,100 $ 5,440
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months ended April 30, 2000 and 1999
(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). For tax purposes, Renco is a
Subchapter S Corporation and the Company has been designated a qualified
Subchapter S subsidiary. The consolidated financial statements reflect all
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 six month periods ended April 30,
2000 are not necessarily indicative of the results to be expected for the
full year.
(2) INVENTORIES
Inventories consist of the following:
April 30, 2000 October 31, 1999
-------------- ----------------
Coal $12,395 $12,366
Materials and supplies 3,123 3,414
------- -------
$15,518 $15,780
======= =======
(3) ACQUISITION OF ASSETS IN NOVEMBER 1999
On November 12, 1999, Lodestar Energy, Inc. ("Lodestar"), a wholly-owned
subsidiary of the Company, acquired certain mining rights, leases of real
property and equipment in Eastern Kentucky (collectively, "Bent Mountain")
from Quaker Coal Company, Inc. and affiliates ("Quaker"). The
consideration paid to Quaker was $4.9 million in cash, a deferred payment
obligation of $0.6 million due one year from the date of the acquisition,
and the assumption of certain other liabilities. This transaction was
funded through a supplemental loan under the Company's $120.0 million
senior credit facility (the "Senior Credit Facility"). (See Note 4). This
acquisition provides Lodestar with a surface mining operation with
approximately 15.4 million tons of demonstrated reserves. Lodestar began
production on Bent Mountain in December 1999 and expects to generate
annual production of approximately 1.5 million tons.
(4) AMENDMENT TO SENIOR CREDIT FACILITY
In order to secure the necessary funds to consummate the Bent Mountain
transaction (See Note 3), in November 1999 Lodestar entered into an
amendment to its Senior Credit Facility providing for a supplemental loan
of $6.7 million. This supplemental loan bears interest at the prime rate
plus 0.75% and is payable in four equal quarterly installments beginning
February 1, 2000. In conjunction with such amendment, the Company is now
subject, among other things, to minimum monthly earnings tests during the
remaining life of its credit facility. At April 30, 2000, $5,025 remains
outstanding under the supplemental loan with equal payments due on May
1st, August 1st, and November 1st.
The Company has failed to meet the minimum monthly earnings tests for each
month since January 31, 2000. The lenders waived the Company's
non-compliance with the monthly earnings test requirements for the periods
ended January 31, 2000 and February 29, 2000. As of March 31, 2000 and
continuing through the date of submission of this document, unremedied
events of default exist under the covenants of the Company's Senior Credit
Facility. Although Lodestar's lenders could pursue various remedies in
accordance with their contractual rights, as of June 14, 2000, they have
continued to fund and have taken no action to restrict Lodestar from
operating in the normal course of business. Management is pursuing various
alternatives in an effort to resolve the Company's current default
situation. However, since there can be no assurance that this situation
will be resolved, amounts outstanding under the Senior Credit Facility
have been classified as current liabilities as of April 30, 2000.
6
<PAGE>
Simultaneous with the amendment, Renco entered into an agreement (the
"Subordinated Loan Letter") with the Company's lenders to provide, in
certain circumstances, subordinated loans of up to $6.0 million to the
Company should the Company fail to maintain certain financial covenants
required by the terms of the Senior Credit Facility or should the Company
not meet minimum daily loan availability requirements of $6.0 million. The
proceeds of the subordinated loan can only be used to reduce the
outstanding borrowings under the Senior Credit Facility thereby reducing
the minimum daily loan availability shortfall, if any, and in certain
cases creating additional availability under the Senior Credit Facility.
The Senior Credit Facility was further amended in March 2000. In
conjunction with such amendment, Renco and the lenders under the Senior
Credit Facility agreed that Renco may at its election provide $5.0 million
of cash collateral to the lenders, in $1.0 million installments from March
to July 2000. The lenders, in turn, will provide additional availability
to the Company equal to the amount of cash collateral provided. As of June
1, 2000, $4.0 million of additional availability had been provided in
accordance with such amendment. The cash collateral provided reduces the
liability of Renco to make advances under the Subordinated Loan Letter.
(5) BUSINESS
The Company has incurred significant net losses and negative cash flows
during fiscal 2000, 1999 and 1998. The Company projects ongoing losses in
fiscal 2000 with positive cash flow in the second half of the year
partially as a result of reduced capital expenditures. The amount of the
Company's losses has been impacted by generally unfavorable factors
affecting the coal industry in the Eastern United States, as well as the
Company's own specific operational problems, which are in large part due
to the Company's shortage of economically mineable low-sulfur reserves.
During the fiscal year ended October 31, 1999 and including the Bent
Mountain acquisition in November of 1999, the Company expended $16,084 in
cash, has committed $7,851 in debt payments and has assumed short and
long-term obligations of $15,734 in an effort to improve its low-sulfur
reserve base. Approximately 40% of the Company's production in fiscal 2000
is expected to be from mining activities on properties which have been
acquired since January 1, 1999.
The Company's continued financial viability is dependent upon the
Company's ability to successfully integrate these newly acquired
properties with the Company's existing operations in a manner which
improves operational results. Additionally, the Company must remedy the
defaults under the Senior Credit Facility and/or access new sources of
financing to enable the Company to maintain appropriate levels of
liquidity until the necessary operational improvements can be attained.
(6) ASSET WRITE-DOWNS AND PROVISIONS
During the three months ended April 30, 2000, Lodestar recorded a pre-tax
non-cash charge of approximately $20.5 million.
In response to current market conditions, Lodestar implemented new mining
strategies primarily in its Eastern Kentucky operations that result in
significant changes in the timing and extent to which certain Central
Appalachia coal assets are expected to be deployed.
Based upon the centralization of mining activity at certain primary sites,
the idling or closure of certain high operating cost mines, and the
re-evaluation of the economics of future mining on certain other
properties controlled by Lodestar, the Company recorded approximately
$15.0 million of pre-tax non-cash charges to write-off or establish
appropriate provisions for the impairment of certain long-term
contracts, adjust reclamation liability reserves, accelerate
amortization of deferred development, write-off potentially unrecoupable
advance royalties and to adjust reserves for collectability, litigation
and coal inventory valuations.
Additionally, as a result of the performance of the company, a $5.5
million charge was recorded to write-off goodwill.
No impact on the Company's cash flow has occurred as a result of this
$20.5 million charge for asset write-downs and provisions.
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 are Lodestar Energy, Inc., Eastern Resources, Inc. and
Industrial Fuels Minerals Company. These subsidiaries have guaranteed the Notes.
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)) content and lower in sulfur content and is
marketed in the Eastern, South Central and Great Lakes regions of the United
States. Lodestar's Mountain reserves located in Utah and Colorado are
super-compliance coal (sulfur dioxide content less than 0.5%) marketed to
regional utilities, as well as in the Midwest and Midsouth utility markets.
Lodestar also owns and operates an ash disposal facility in Eastern Kentucky.
Lodestar's principal source of revenues is from the sale of coal pursuant to
long-term contracts, or through coal sales on the spot market. In addition,
Lodestar derives additional revenue from ancillary services related to its coal
operations, including ash disposal, contract mining, and processing of
third-party coal.
CERTAIN EVENTS AND FACTORS AFFECTING PROFITABILITY
The primary variable factors which affect Lodestar's profitability are: (i)
market conditions; (ii) productivity; (iii) for underground operations, the
ratio of coal available for sale to material extracted (the "salable yield");
(iv) for surface mining operations, the ratio of yards of overburden moved to
tons of coal produced (the "mining ratio"); and (v) the heat and sulfur content
of the coal produced (the "coal quality").
During the second quarter of fiscal year 2000, Lodestar implemented new
mining strategies in its Eastern Kentucky operations that resulted in the
centralization of mining activity at certain primary sites, and the
elimination or deferral of future plans to mine at other locations. The
primary sources of future surface production are from the Tug River,
Gooseneck mine, acquired in January of 1999, and the Bent Mountain mine,
acquired in November of 1999. Underground production from the Millers Creek
mine is expected to continue through third quarter of fiscal 2000, with
potential for the mine to be idled during the fourth quarter. The Company has
currently idled mining operations at its Marion Branch and Island Creek
surface mines and has re-evaluated the economics of future mining on certain
other properties the Company controls. As a result of the current plans for
the deployment of these Central Appalachian coal assets, the Company has
recorded approximately $14.5 million of pre-tax non-cash charges to establish
appropriate provisions for the impairment of certain long-term contracts,
adjust reclamation liability reserves, accelerate amortization of deferred
development, write-off potentially unrecoupable advance royalties and to
adjust reserves for collectability, litigation and coal inventory valuations.
Additionally, a $5.5 million charge was recorded to write-off goodwill and
$0.5 million of asset revaluation adjustments was recorded for the Western
Kentucky operation. (See Note 6 to the Consolidated Financial Statements).
8
<PAGE>
During the six months ended April 30, 2000 (the "2000 Period"), and extending to
date into the third quarter of fiscal 2000, Lodestar, as well as the coal
industry operating as a whole, has encountered extremely soft market demand for
coal produced in the Illinois and Appalachian coal basins, partially as a result
of unseasonably mild weather patterns, increased competition from Western United
States coal sources, and increased competition in both import and export arenas.
These market conditions negatively affected Lodestar's results, primarily in the
Western Kentucky operations, where further price decreases are expected as a
result of negotiated price reopener provisions dropping realization by
approximately $1.00 per sold ton, which will go into effect on July 1, 2000 on
certain contracts. Notwithstanding the foregoing, due to expected increases in
volume of contract shipments, improvements in realization related to certain of
its other contracts, and reduced exposure to the spot market during the
remainder of 2000, the Company does not expect its realization per ton to
decline significantly during the second half of the year.
Lodestar began an underground mining operation in Utah at its White Oak mine in
August of 1999. The White Oak mine represents approximately 13.3% of the
reserves comprising the Mountain operation. The White Oak operation has incurred
significant losses resulting in negative EBITDA, as defined in Note 2, page 10,
of $2.4 million during the first six months of fiscal year 2000 and operating
losses are continuing during the third quarter. The ongoing losses are
attributable to geologic, equipment, and personnel problems. As of June 1, 2000,
management believes that many of the operational problems at its White Oak mine
have been resolved; however unless material improvement in operating results are
achieved in the immediate future, the White Oak mining operation may be idled
for a significant period of time, perhaps permanently. The permanent idling of
the White Oak mine may have a material adverse affect on the Company's financial
condition.
Lodestar's collective bargaining agreement with the United Mine Workers of
America, (the "UMWA"), which represents approximately 400 employees at
Lodestar's Western Kentucky operations, expired May 13, 2000. As of the date of
this filing, attempts to negotiate a mutually acceptable contract have been
unsuccessful. Although the unionized workforce has continued to work without a
contract to date and negotiation efforts are ongoing, there is no certainty that
a work stoppage can be avoided. An extended work stoppage would have a material
adverse effect on Lodestar's results of operations.
Frontier Insurance Company ("Frontier") is the surety on performance bonds in
the total amount of approximately $83.0 million, posted by Lodestar with various
governmental agencies and third parties. Frontier's credit rating was downgraded
by A.M. Best to B in March, 2000 and further downgraded to C++ in April, 2000.
Also, effective June 1, 2000, Frontier is no longer included in the U. S.
Department of Treasury Circular 570 listing of acceptable surety on bonds posted
with federal agencies. On March 31, 2000, Lodestar received notice from the
Kentucky Department of Workers Claims (the "DWC") that Lodestar was required to
replace the surety on the bonds outstanding in favor of the DWC relating to
Lodestar's self-insured, workers' compensation liability in Kentucky, with an
approved bonding company. As of April 30, 2000, $16.8 million of such bonds were
outstanding. Lodestar management is actively pursuing various alternatives for
providing the required collateral for its liabilities to DWC, and believes it
may be able to do so without a significant impact on the financial condition of
the Company. It is probable, however, that Lodestar will not be able to continue
its self-insured status after June 30, 2000. This is likely to have a negative
impact on future operating results, the amount of which is not determinable at
this date. On May 8, 2000, Lodestar received notice from the Kentucky Natural
Resources and Environmental Protection Cabinet ("DNR") that it was not accepting
bonds prospectively with Frontier as surety. As part of its reclamation
activities, Lodestar had approximately $43.8 million of performance bonds
outstanding in favor of the DNR, as of April 30, 2000. Although the DNR has not
required replacement of existing reclamation bonds, Kentucky Administrative
Regulations provide that DNR would do so in the event of bankruptcy or
insolvency of the surety, and that coal extraction and processing operations
would be suspended if such replacement was not accomplished within ninety days.
Alternatives for replacing these bonds, if required, as well as for providing
reclamation bonds to DNR prospectively, include posting (i) performance bonds
with adequate surety or (ii) collateral bonds with cash deposits, certificates
of deposit, or letters of credit. If replacement of reclamation bonds was
required and could not be accomplished, Lodestar could be required to suspend
coal extraction and processing activities on the affected mining permits.
Lodestar management is actively seeking an alternative surety for its
reclamation liabilities, but there is no assurance it will be successful. On
June 8, 2000, Lodestar received notice from the Utah Department of Natural
Resources, Division of Oil, Gas and Mining ("DOGM"), that Frontier is no longer
an acceptable surety on bonds posted with federal agencies. As of April 30,
2000, Lodestar had approximately $5.0 million of performance bonds outstanding
in favor of the federal Bureau of Land Management relating to mining leases in
Utah. DOGM is requiring replacement of these bonds by July 15, 2000. If Lodestar
is unable to do so, it could be required to suspend mining operations in Utah.
As of April 30, 2000, Lodestar had $3.0 million of performance bonds outstanding
in favor of the federal Department of Labor, supporting various workers
compensation obligations. To date, Lodestar has not received notice to replace
these bonds.
9
<PAGE>
RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
April 30, 2000 April 30, 1999
--------------- --------------
<S> <C> <C>
OPERATIONS AND OTHER DATA:
Coal sales and related revenue $ 55,391 $ 47,314
Cost of revenues 51,201 38,707
Depreciation, depletion and amortization 7,351 7,183
General and administrative 2,747 2,318
Asset write-downs and provisions (1) 20,502 --
Operating loss (26,410) (894)
Interest expense, net 5,665 4,811
-------- --------
Net loss $(32,075) $ (5,705)
======== ========
EBITDA (2) $ 1,443 $ 6,289
======== ========
OTHER FINANCIAL DATA:
Net cash provided by (used in) operating activities $ (1,584) $ 1,743
Net cash used in investing activities $ (2,758) $ (4,277)
Net cash provided by financing activities $ 3,915 $ 3,678
Capital expenditures $ 3,067 $ 3,667
OTHER OPERATING DATA:
Tons of coal shipped 2,427 1,921
Coal sales and related revenue per ton shipped $ 22.82 $ 24.63
Cost of coal sales and related revenues per ton shipped $ 21.10 $ 20.15
Coal sales revenue per ton shipped $ 22.45 $ 23.85
Cost of coal sales revenues per ton shipped $ 20.96 $ 19.95
</TABLE>
(1) See Note 6 to the Consolidated Financial Statements.
(2) EBITDA represents earnings before net interest expense, other income
(expense), extraordinary items, income taxes, depreciation, depletion and
amortization and asset write-downs and provisions. The trends of EBITDA
generally follow the trends of operating income. Information regarding
EBITDA is presented because management believes that certain investors use
EBITDA as one measure of an issuer's ability to service its debt. EBITDA
should not be considered an alternative to, or more meaningful than,
operating income, net income or cash flow as defined by generally accepted
accounting principles or as an indicator of an issuer's operating
performance. Furthermore, caution should be used in comparing EBITDA to
similarly titled measures of other companies as the definitions of these
measures may vary.
PRODUCTION AND REVENUE SOURCES:
The following table summarizes the tons shipped by region for the periods
presented:
THREE MONTHS ENDED APRIL 30,
REGION 2000 1999
---------- ------------
(TONS IN THOUSANDS)
Eastern Kentucky 971 917
Western Kentucky 1,187 903
Mountain 211 --
Brokered 58 101
----- -----
Total 2,427 1,921
===== =====
10
<PAGE>
THREE MONTHS ENDED APRIL 30, 2000 COMPARED TO THREE MONTHS ENDED APRIL 30, 1999
COAL SALES AND RELATED REVENUE for the three months ended April 30, 2000 (the
"2000 Quarter") were $55.4 million, an increase of $8.1 million or 17.1%
compared to the three months ended April 30, 1999 (the "1999 Quarter"). The $8.1
million increase in coal sales and related revenue is the result of $10.0
million of additional coal sales revenue driven by shipment volume, offset by a
decline in coal sales pricing of $1.3 million and a decrease of $0.6 million in
revenue from other related ancillary services. The $10.0 million of additional
coal sales revenue reflects an increase of 26.3% or 506,000 tons of coal
shipments during the 2000 Quarter as compared to the 1999 Quarter, which was
primarily generated from the Western Kentucky operation, which supplied 56.1% of
the increase, and from the Mountain operation which supplied 41.7% of the 2000
Quarter increase. The Western Kentucky increase in coal shipments during the
2000 Quarter indicates improvement from the 1999 Quarter which experienced lower
than normal shipment volumes, partially due to a significant customer's request
to defer shipment of 168,000 tons as well as to generally soft coal market
conditions resulting from mild weather. In the 2000 Quarter, the Company
participated in the poor Western Kentucky spot market primarily because of its
liquidity needs. The Mountain operation, which was acquired in July 1999,
contributed 211,000 sold tons or $3.2 million in coal sales revenue during the
2000 Quarter. Shipments from the Eastern Kentucky operations, which have been
supplemented by brokered coal replacing certain higher cost Lodestar coal
production, were stable, representing 2.2% of the increased shipment volume
during the 2000 Quarter as compared to the 1999 Quarter.
Coal sales prices dropped 5.9% or $1.40 per sold ton from $23.85 per sold ton
during the 1999 Quarter to $22.45 per sold ton during the 2000 Quarter. Half, or
$0.70, of the $1.40 per sold ton drop in realization is attributable to the
introduction of the Mountain operations coal production which earned an average
realization per sold ton of $15.09 during the 2000 Quarter and which represented
8.7% of sold tonnage volume and 5.8% of coal sales revenue. Lower average
realizations for coal produced in the Rocky Mountain coal basin reflect a
competitive advantage in operating costs as compared to the Illinois and
Appalachian basin production due, among other factors, to the ability to sell
raw coal, thereby, avoiding yield loss and processing costs. Primarily, the
remaining $0.70 decrease in realization per sold ton reflects continuing
downward pressure on market pricing for coal produced in the Illinois and
Appalachian Coal Basins. (See also Certain Events and Factors Affecting
Profitability).
COST OF REVENUES were $51.2 million in the 2000 Quarter, as compared to $38.7
million in the 1999 Quarter, an increase of $12.5 million, or 32.3%.
Approximately $10.3 million of this increase results from the 26.3% increase in
the volume of coal shipments during the 2000 Quarter as previously described,
including $4.1 million of cost of revenues on the Mountain coal production.
Additionally, $2.2 million reflects cost increases in the Kentucky mines as cost
of coal sales revenues per ton shipped for those operations for the 2000 and
1999 Quarters were $21.10 and $19.95, respectively, for an increase of $1.15 or
5.8% in operating costs. The increased mining costs were primarily driven by a
decrease in salable yield from 63.7% in the 1999 Quarter to 60.1% in the 2000
Quarter at the Western Kentucky operations. This decline in salable yield was
caused by geological conditions existing during the startup of a new block of
longwall panels which resulted in higher ash content in coal produced during
February and March of 2000. As mining continued further into the block, ash
decreased and the Western Kentucky operations experienced improved salable
yield. The Eastern Kentucky operations experienced an improved average surface
mining ratio of 14.5 as compared to the 1999 Quarter ratio of 18.2 and improved
salable yield at the underground mine which increased from 39.8% in the 1999
Quarter to 47.6% in the 2000 Quarter. However, cost of revenues in the Eastern
Kentucky operations increased by approximately 3.3% during the 2000 Quarter as
compared to the 1999 Quarter, primarily due to increased diesel fuel prices,
higher hauling costs and the mining of property with higher mineral royalty
rates. The Mountain operation continued to experience adverse geologic
conditions during the 2000 Quarter, which delayed attainment of full production
capacity and increased operating costs. During the 2000 Quarter, cost of
revenues exceeded coal sales and related revenues by $0.9 million for the
Mountain operation, which was unchanged from the results for the three months
ended January 31, 2000.
DEPRECIATION, DEPLETION, AND AMORTIZATION of $7.4 million for the 2000 Quarter
increased from the 1999 Quarter by $0.2 million, or 2.8%. This increase is
primarily the result of depreciation, depletion and amortization of assets
associated with the Mountain operation.
GENERAL AND ADMINISTRATIVE costs were $2.7 million in the 2000 Quarter, an
increase of $0.4 million or 17.4% from the 1999 Quarter, primarily due to costs
associated with development of administrative support functions in the Mountain
operations, as offset by cost reductions for Year 2000 expenditures that
negatively impacted the 1999 Quarter.
11
<PAGE>
ASSET WRITE-DOWNS AND PROVISIONS recorded during the 2000 Quarter were $20.5
million. As a result of revised plans for the deployment of certain coal
properties, $10.0 million of pre-tax non-cash charges to revalue associated
assets and liabilities were recorded. Additionally, $5.5 million of goodwill
was written off based on the performance of the Company, and approximately
$5.0 million was written off, reflecting the impairment of certain coal
contracts based on their current pricing. (See Note 6 to the Consolidated
Financial Statements and Certain Events and Factors Affecting Profitability.)
OPERATING LOSS for the 2000 Quarter was $26.4 million as compared to $0.9
million for the 1999 Quarter. The $25.5 million increase is the result of $20.5
million of charges to asset write-downs and provisions and $5.0 million of
further reductions in operating margin as previously described.
INTEREST EXPENSE, NET was $5.7 million for the 2000 Quarter, an increase of $0.9
million as compared to $4.8 million for the 1999 Quarter. This is the result of
interest expense associated with increased borrowing on the Company's Senior
Credit Facility and other increased indebtedness relative to acquisitions
occurring since the 1999 Quarter.
NET LOSS increased from $5.7 million during the 1999 Quarter to $32.1 million
during the 2000 Quarter as a result of the factors described above.
12
<PAGE>
RESULTS OF OPERATIONS:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------
April 30, 2000 April 30, 1999
---------------- --------------
<S> <C> <C>
OPERATIONS AND OTHER DATA:
Coal sales and related revenue $ 115,744 $ 104,744
Cost of revenues 104,756 87,375
Depreciation, depletion and amortization 14,631 14,152
General and administrative 5,279 4,862
Asset write-downs and provisions (2) 20,502 --
--------- ---------
Operating loss (29,424) (1,645)
Interest expense, net 11,242 9,501
--------- ---------
Net loss $ (40,666) $ (11,146)
========= =========
EBITDA $ 5,709 $ 12,507
========= =========
OTHER FINANCIAL DATA:
Net cash provided by (used in) operating activities $ 4,457 $ (5,432)
Net cash used in investing activities $ (15,114) $ (10,728)
Net cash provided by financing activities $ 9,757 $ 3,678
Capital expenditures (1) $ 15,423 $ 10,801
OTHER OPERATING DATA:
Tons of coal shipped 4,899 4,143
Coal sales and related revenue per ton shipped $ 23.63 $ 25.28
Cost of coal sales and related revenues per ton shipped $ 21.38 $ 21.09
Coal sales revenue per ton shipped $ 23.16 $ 23.60
Cost of coal sales revenues per ton shipped $ 21.23 $ 20.25
</TABLE>
(1) Capital expenditures for the six months ended April 30, 2000 and 1999
include $4.9 million and $5.4 million, respectively, in cash payments for
acquisitions.
(2) See Note 6 to the Consolidated Financial Statements.
PRODUCTION AND REVENUE SOURCES:
The following table summarizes the tons shipped by region for the periods
presented:
SIX MONTHS ENDED APRIL 30,
---------------------------
REGION 2000 1999
---------- ------------
(TONS IN THOUSANDS)
Eastern Kentucky 1,988 1,819
Western Kentucky 2,327 2,207
Mountain 394 --
Brokered 190 117
----- -----
Total 4,899 4,143
===== =====
13
<PAGE>
SIX MONTHS ENDED APRIL 30, 2000 COMPARED TO SIX MONTHS ENDED APRIL 30, 1999
COAL SALES AND RELATED REVENUE for the six months ended April 30, 2000 (the
"2000 Period") were $115.7 million, an increase of $11.0 million or 10.5%
compared to the six months ended April 30, 1999 (the "1999 Period"). The
increase resulted from $14.7 million of increased shipments of 756,000 tons or
18.2%, of which 394,000 tons or 9.5% was sourced from the Mountain operation,
and $1.0 million of pricing improvement in the Eastern Kentucky operation during
the 2000 Period, offset by a $4.7 million decrease in revenue associated with
other related ancillary services primarily due to the completion of contract
mining activity in Eastern Kentucky during the 1999 Period.
Overall, coal sales revenue per ton shipped decreased $0.44 or 1.9% from $23.60
in the 1999 Period to $23.16 in the 2000 Period, primarily, as a result of the
introduction of 394,000 tons of coal from the Mountain operation with an average
realization of $15.30 per ton shipped. Lower average realizations for coal
produced in the Rocky Mountain coal basin reflect a competitive advantage in
operating costs as compared to the Illinois and Appalachian basin production
due, among other factors, to the ability to sell raw coal, thereby, avoiding
yield loss and processing costs. Exclusive of the impact of Mountain coal, the
average realization per sold ton for the Eastern and Western operations for the
2000 and 1999 Periods were $23.85 and $23.60, respectively, an increase of 1.1%.
COST OF REVENUES were $104.8 million in the 2000 Period, as compared to $87.4
million in the 1999 Period. Components of this $17.4 million or 19.9% increase
include $15.6 million cost of revenue on 756,000 additional shipped tons, $7.8
million of which is attributable to the Mountain operation, $4.6 million of
increased operating costs in the Western Kentucky and Eastern Kentucky
operations, offset by $2.8 million of reduced cost of revenues primarily
associated with the completion of contract mining activity during the 1999
Period. As noted, operating costs in the Western Kentucky and Eastern Kentucky
operations increased by $4.6 million, or 5.5% on a per sold ton basis, primarily
as a result of decreased salable yield in Western Kentucky and higher diesel
fuel, transportation costs, and royalty expense in Eastern Kentucky. The
productivity levels at the Mountain operation have continued to be impacted by
adverse geological conditions during the 2000 Period which have resulted in cost
of revenues in excess of coal sales and related revenue of $1.8 million.
DEPRECIATION, DEPLETION, AND AMORTIZATION of $14.6 million for the 2000 Period
increased from the 1999 Period by $0.4 million, or 2.8%. This increase is
primarily the result of depreciation, depletion and amortization of assets
associated with the Mountain operation.
GENERAL AND ADMINISTRATIVE costs were $5.3 million in the 2000 Period, an
increase of $0.4 million as compared to $4.9 million in the 1999 Period. This
increase is primarily associated with the development of administrative support
functions in the Mountain operation, with various other increases in general and
administrative costs offset by reduced expenses for Year 2000 expenditures
during the 2000 Period.
ASSET WRITE-DOWNS AND PROVISIONS recorded during the 2000 Quarter were $20.5
million. As a result of revised plans for the deployment of certain coal
properties, $10.0 million of pre-tax non-cash charges to revalue associated
assets and liabilities were recorded. Additionally, $5.5 million of goodwill
was written off based on the performance of the Company, and
approximately $5.0 million was written off, reflecting the impairment of
certain coal contracts based on their current pricing. (See Note 6 to the
Consolidated Financial Statements and Certain Events and Factors Affecting
Profitability.)
OPERATING LOSS for the 2000 Period was $29.4 million as compared to $1.6 million
for the 1999 Period. This $27.8 million increase includes $20.5 million of
charges to asset write-downs and provisions, and $7.3 million of further
reductions in operating margins as previously described.
INTEREST EXPENSE, NET was $11.2 million for the 2000 Period, an increase of $1.7
million as compared to $9.5 million for the 1999 Period. This is the result of
interest expense associated with increased borrowings on the Company's Senior
Credit Facility and other increased indebtedness relative to acquisitions
occurring since the 1999 Period.
NET LOSS increased from $11.1 million during the 1999 Period to $40.7 million
during the 2000 Period as a result of the factors described above.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash provided by operating
activities. The Company also has available a $120.0 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. Due
to the Company's operating performance in fiscal 2000, Lodestar is in violation
of certain covenants of the Senior Credit Facility. Although Lodestar's lenders
could pursue various remedies in accordance with their contractual rights, as of
June 14, 2000, they have continued to fund and have taken no actions to restrict
Lodestar from operating in the normal course of business.
The Company's liquidity requirements arise from working capital requirements,
capital investments, interest payment obligations, and debt service of
supplemental loans outstanding under the Senior Credit Facility. As of April 30,
2000, the Senior Credit Facility debt was $34.6 million, and $24.9 million of
letters of credit were outstanding. Based upon eligible collateral as of April
30, 2000, the net unused borrowing and letter of credit availability thereunder
was $4.0 million and $2.1 million, respectively. Through management of its
working capital, Lodestar was able to increase its borrowing availability
between April 30, 2000 and May 15, 2000 to allow funding of its $8.6 million
semi-annual coupon payment on May 15th.
Cash provided from the Company's operating activities for the 2000 Period was
$4.5 million, compared to $5.4 million of cash used in the 1999 Period. The $4.5
million of cash provided by operating activities was primarily a result of
working capital changes. The primary components of the working capital changes
were a reduction in accounts receivable of $7.3 million which includes the
benefit of collecting $4.8 million from the resolution of the Cedar Bay
litigation (See "Legal Proceedings"), and an increased level of accounts payable
of $4.8 million as the result of a general increased aging of accounts payable.
Increasing by $4.4 million, total net cash used in investing activities was
$15.1 million and $10.7 million for the 2000 Period and 1999 Period,
respectively. For the six months ended April 30, 2000, capital expenditures were
$10.5 million as compared to $5.4 million during the 1999 Period. Capital
expenditures in the 2000 Period were abnormally high due to the capitalization
of equipment and development activity occurring both at the Mountain operation,
in conjunction with the ramp-up of the White Oak and McClane Canyon mines, as
well as in the Eastern Kentucky operation, in conjunction with the ramp-up of
the Bent Mountain mine. Additionally, expenditures of $2.5 million for the
second of two new longwall face conveyor systems and $1.5 million for
construction of mainline belting systems occurred at the Western Kentucky Baker
mine. The Company had capital expenditure commitments of approximately $1.0
million at April 30, 2000 and projects total capital expenditures for fiscal
year 2000 will approximate $12.0 million. Other cash used in investing
activities during the 2000 and 1999 Periods include cash payments of $4.9
million made to the respective sellers in conjunction with the Bent Mountain
acquisition and $5.4 million in conjunction with the Tug River acquisition.
During the 2000 Period, borrowings under the Company's Senior Facility increased
from $24.3 million to $34.6 million and the availability under its borrowing
line decreased from $9.8 million to $4.0 million. Cash provided by operating
activities was not enough to offset the cost of the Bent Mountain acquisition of
$4.9 million, the interest coupon payment of $8.6 million paid on November 15,
1999 and the significant capital expenditures of $10.5 million during the 2000
Period. Borrowing availability was temporarily benefited in November by the
supplemental loan as described in Note 3 of the Consolidated Financial
Statements, however, such loan will result in four $1.675 million quarterly
outflows, the second of which was paid on May 1, 2000.
As of June 7, 2000, the Company's availability under its Senior Credit Facility
borrowing line was approximately $2.1 million. Outstanding borrowings and
letters of credit under the Senior Credit Facility are $37.9 million and $26.7
million, respectively. Lodestar's day-to-day operations are being hampered by a
significant liquidity shortage. Although, the Company expects to have minimal
($1.0 million to $2.0 million) capital expenditure requirements during the
remainder of fiscal year 2000, it is obligated, as previously described, to make
$1.675 million supplemental loan repayments on August 1st and November 1st, as
well as a semi-annual coupon payment of $8.625 million on November 15th.
15
<PAGE>
To meet the aforementioned obligations, the Company will have cash provided
by its operating activities and availability provided by cash collateral to
be provided by Renco of $1.0 million under its Senior Credit Facility, as
described in Note 4 of the accompanying financial statements. There can be no
assurance that these sources will provide sufficient liquidity to meet the
Company's needs.
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.
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; ability to meet its liquidity
needs; satisfactory completion of negotiations with U.M.W.A. and other factors
referenced in this report. 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.
16
<PAGE>
PART I. - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of business, is exposed to inherent market
risks relative to coal prices, which the Company attempts to mitigate through
its portfolio of long-term contracts, which provide stability in pricing for
much of its production.
The Company is exposed to interest rate change market risk with respect to its
borrowings under the Senior Credit Facility (under which the line of credit is
at the prime rate plus 75 basis points), as well as certain other debt and
long-term liabilities, that are recorded at discounted values. Without extreme
interest rate volatility, which has been absent from the current business
environment, fluctuations in interest rates are not expected to have a
significant impact on the Company's operating results.
The Company currently holds no market sensitive instruments, derivatives or
other financial instruments the disclosure of which would be required by Item
305 Regulation S-K, nor does the Company participate in any business activity
for speculative purposes.
17
<PAGE>
PART II. - ITEM 1 LEGAL PROCEEDINGS
In October 1999, Lodestar initiated arbitration proceedings against Cedar Bay to
collect approximately $6.0 million in underpayments for coal delivered to Cedar
Bay by Lodestar. Previously, Cedar Bay had been awarded a judgment for
approximately $5.1 million of this amount in its litigation against its customer
Florida Power & Light Company. (The $5.1 million awarded to Cedar Bay was part
of a larger judgment. See Part 1 - Item 3 Legal Proceedings of the Form 10K for
the fiscal year ended October 31, 1999.) Such matter was resolved on April 19,
2000 with the payment by Cedar Bay to Lodestar of slightly more than $4.8
million.
On November 15, 1996, Lodestar and Shipyard River Coal Terminal Co.
("Shipyard"), an affiliate of AEI Resources, Inc., entered into various
agreements relating to a mining project in Pike County, Kentucky, including a
Coal Purchase Agreement (the "CPA") and a Contract Mining Agreement (the
"CMA"). Lodestar purchased coal from Shipyard pursuant to the CPA and
conducted mining for Shipyard pursuant to the CMA. On December 1, 1997,
Lodestar and East Kentucky Energy Corporation ("EKE"), also an affiliate of
AEI Resources, Inc., entered a Lease and Sublease Agreement (the "Lease"),
pursuant to which Lodestar leased certain coal properties in Knott County,
Kentucky. Lodestar has not mined on the property subject to the Lease and
presently has no plans to do so. In December 1999, Lodestar management and
representatives of Shipyard and EKE began negotiations aimed at resolving
several outstanding issues between the companies, including issues under the
CPA, the CMA, and the Lease. However, on May 16, 2000, EKE filed suit against
Lodestar in the Boyd County, Kentucky, Circuit Court, seeking damages for
alleged breach of the Lease. EKE alleges that Lodestar failed to timely make
a minimum royalty payment due under the Lease, resulting in forfeiture of the
Lease. EKE claims that, despite its forfeiture of the Lease, Lodestar is
liable for (i) minimum royalties that would have been due under the lease had
it not been terminated ($25,000 per month from February 2000 through November
2002), and (ii) royalty income lost because Lodestar did not mine the
property subject to the Lease, in the amount of $7.5 million. Lodestar
believes that EKE's claims are without merit, and has filed a counterclaim
seeking damages of $9.7 million for wrongful termination of the Lease. On May
24, 2000, Shipyard filed a separate suit against Lodestar in the Pike County
Circuit Court, seeking damages under the CPA. Shipyard claims that Lodestar
has failed to make payment for coal due under the CPA in the amount of $1.5
million. Lodestar will file a counterclaim seeking damages of approximately
$1 million from Shipyard for failure to make all payments due under the CMA.
Management of the Company does not expect the resolution of these legal
proceedings to have a material adverse impact on the results of operations or
the financial condition of the Company.
Lodestar is involved in various other claims and lawsuits incidental to the
ordinary course of its business that are not expected to have a material adverse
effect on the financial condition or results of operations of the Company.
18
<PAGE>
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.
19
<PAGE>
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, principal
financial and accounting officer)
Date: June 14, 2000
-------------
20
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
--------------------------------------------------------------------------------
27 FINANCIAL DATA SCHEDULE
21
