<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 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 (606) 255-4006
(Address of principal executive (Zip Code) (Registrant's telephone
offices) number, including area code)
(Securities registered pursuant to Section 12(b) or 12(g) of the Act): None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
[ ] YES [ X ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant at January 31, 2000 was $-0-.
Number of shares outstanding of each of the registrant's classes of common
stock, as of January 31, 2000.
COMMON STOCK, $1.00 PAR VALUE 1000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
TABLE OF CONTENTS 1
PART I.
ITEM 1 - BUSINESS 2
ITEM 2 - PROPERTIES 7
ITEM 3 - LEGAL PROCEEDINGS 10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II.
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 12
ITEM 6 - SELECTED FINANCIAL DATA 13
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 15
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 48
PART III.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 49
ITEM 11 - EXECUTIVE COMPENSATION 50
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 53
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 54
PART IV.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K 55
SIGNATURES 58
</TABLE>
1
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PART 1. - ITEM 1 BUSINESS
OVERVIEW
Lodestar Holdings, Inc. and its subsidiaries (the "Company") is a holding
company whose wholly-owned direct and indirect subsidiaries are Lodestar
Energy, Inc. ("Lodestar"), Eastern Resources, Inc. and Industrial Fuels
Minerals Company each of which is a guarantor of the Company's 11.5% Senior
Notes due 2005 (the "Notes"). The Company has no operations or assets
separate from its investment in its subsidiaries. Accordingly, inclusion of
separate financial information of the subsidiaries is not considered
necessary, because in management's opinion, it would not be material to
investors. The Renco Group, Inc. ("Renco") owns 100% of the outstanding stock
of the Company.
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. During the year
ended October 31, 1999, in excess of 95% of Lodestar's total revenue was
derived from coal sales. Lodestar also owns and operates an ash disposal
facility and processes a low volume of third-party coal through its
preparation plants and loadout facilities. These ancillary services accounted
for less than 5% of total revenue. After application of the quantitative
thresholds for aggregation of reportable business segments, which in
Lodestar's situation was determined based primarily upon the nature of the
products and services provided, the financial reporting throughout this
document has been made on a fully aggregated basis as is appropriate for a
company operating in a single, dominant industry segment.
In excess of 80% of the coal produced at Lodestar's mines is mined by
Lodestar employees, and the balance is mined by independent contractors.
Lodestar believes that the selective use of independent contractors lowers
its costs and increases its operating flexibility to vary production in
response to market conditions.
SHIPMENTS
For the twelve months ended October 31, 1999, the Company had coal shipments
of 9.5 million tons, which was the primary source of coal sales and related
revenue of $240.1 million. Lodestar's Western Kentucky coal product, which
represented 52.3% of sold tons for the year ended October 31, 1999, is mid to
high sulfur and competes primarily in the regional utility market. Lodestar's
Eastern Kentucky coal product (42.9% of sold tons), as compared to its
Western Kentucky coal product, is generally higher in energy content (as
measured in British thermal units (Btu's)) and lower in sulfur content and is
marketed in the Eastern, South Central, and Great Lakes regions of the United
States. Lodestar's Mountain coal production, mined from reserves located in
Utah and Colorado (0.9% of sold tons), is super-compliance coal (sulfur
content of 0.5% or less) and is marketed to regional utilities, as well as in
the Midwest and Midsouth utility markets. Lodestar purchases coal for
blending and for resale, which accounted for 3.9% of tons sold.
During the year ended October 31, 1999, approximately 63% of Lodestar's
production originated from underground mines, and the remainder from surface
mines. The following table presents the volume of tonnage shipped by region
for each of the three years ended October 31, 1999.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
OCTOBER 31,
REGION: 1997 1998 1999
- ------------------------------------ ------------ ------------- ------------
<S> <C> <C> <C>
(TONS IN THOUSANDS)
Eastern Kentucky 4,055 4,122 4,054
Western Kentucky 5,522 5,972 4,952
West Virginia (1) 687 200 -
Utah (2) - - 89
Brokered 46 116 365
------------ ------------- ------------
TOTAL 10,310 10,410 9,460
============ ============= ============
</TABLE>
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(1) Discontinued in fiscal 1998
2
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(2) Acquired in fiscal 1999
MARKETS AND LONG-TERM CONTRACTS
Lodestar's marketing strategy focuses on selected niche coal markets in the
Eastern, South Central, Midwest, Midsouth, and Great Lakes regions of the
United States, targeting customers whose needs are compatible with the
particular qualities of coal which Lodestar produces. Lodestar's customers
include electricity generation facilities that can economically use mid to
high sulfur coal by employing sulfur-reduction techniques and coal blending,
as well as utilization of emissions allowance credits. Lodestar also supplies
low sulfur coal to customers that require such coal to meet environmental
discharge requirements.
Lodestar offers its customers flexibility in order quantities and
transportation methods, including barge, rail, or truck. In addition,
Lodestar processes the majority of its coal through its washing and blending
facilities to meet customers' quality specifications, such as Btu, ash, and
sulfur content. Lodestar believes that its niche marketing strategy, together
with its operating flexibility, permits it to meet customer demand for
quality products and services at competitive prices, resulting in long-term
contracts with its customers. During the year ended October 31, 1999, 77% of
Lodestar's sales were under long-term contracts.
As of October 31, 1999, Lodestar's long-term contracts (remaining terms
exceeding one year) had a weighted-average remaining term of approximately
7.6 years, and included long-term contracts with the Tennessee Valley
Authority (the "TVA") and certain affiliates of Pacific Gas & Electric
("PG&E"). Lodestar believes that the facilities to which it supplies coal
generally are well positioned to compete in a deregulated environment for
electricity generation.
For the twelve months ended October 31, 1999, electrical power utilities and
independent power producers ("IPPs") accounted for approximately 76% of
Lodestar's coal sales. The balance was attributable to industrial customers
and brokers. Lodestar has no direct overseas customers, but participates in
the export market through sales to coal brokers.
The coal business is somewhat seasonal due to varying weather conditions that
affect the demand for electricity, as well as the ability to transport coal.
Generally, Lodestar produces and sells more coal during the summer and fall
months because of more favorable weather conditions and the ability to ship
to its customers on the Great Lakes, which may not be possible during the
winter and early spring months. These trends, however, are subject to
fluctuation depending on weather and market conditions. With mild winter
weather conditions continuing in most parts of the country, along with the
additional stockpiling that occurred in anticipation of the year 2000,
Lodestar expects that short-term market demand will be weak. Conversely, the
recent increase in fuel oil prices is expected to have a favorable impact on
Lodestar's coal sales volume under certain of its contracts where its
customers' plants compete against plants with higher-cost energy sources.
The following table sets forth information regarding Lodestar's long-term
supply contracts as of October 31, 1999:
<TABLE>
<CAPTION>
APPROXIMATE ANNUAL
EXPIRATION DATE CONTRACT TERM (1) CONTRACT TONNAGE
CUSTOMER OF CURRENT CONTRACT (NUMBER OF YEARS) (IN THOUSANDS)
- --------------------------------------- ----------------------- -------------------- --------------------
<S> <C> <C> <C>
Potomac Electric Power Company May 2002 3 300
City of Lansing (2) December 2000 4 85
TVA:
Colbert/Cumberland (3) June 2003 6 2,000
Johnsonville (3) June 2003 6 1,000
Allen February 2005 10 500
Tondu Energy Systems, Inc. (2) December 2004 15 150
Pacific Gas & Electric:
Cedar Bay (2)(4) August 2013 20 1,000
Indiantown (2) December 2025 30 700
Nevada Power December 2003 4 200
Illinois Power December 2001 2 600
</TABLE>
- --------------
(1) Reflects original stated term of contract including any options to
extend and does not assume early termination due to any price
reopeners, which may exist.
3
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(2) Reflects shipments under total requirements contracts.
(3) Provides for up to a 20% increase or decrease in coal supplied at the
customer's discretion. Lodestar is in the process of renegotiating
price reopener provisions, which will go into effect on July 1, 2000
and be in effect for the remaining three years of the contract. It is
management's best estimate that the pricing under these contracts will
decrease between $1.00/ton and $1.25/ton effective July 1, 2000.
(4) This contract accounted for approximately 12% of Lodestar's coal sales
and related revenue for the twelve months ended October 31, 1999. Cedar
Bay currently is involved in litigation with its principal customer as
more fully described in "Legal Proceedings."
Lodestar's long-term contracts with the TVA and PG&E accounted for approximately
28% and 18%, respectively, of Lodestar's coal sales and related revenue for the
twelve months ended October 31, 1999, and are expected to represent
approximately 30% and 17%, respectively, of coal sales and related revenue in
fiscal 2000. Shipments under a contract with Alabama Power Company, which
expired in January 2000, accounted for 15% of coal sales and related revenue
during the fiscal year ended October 31, 1999.
TRANSPORTATION AND ANCILLARY SERVICES
Customers typically incur the transportation costs from the loadout point (E.G.
where the coal is loaded onto rail, truck or barge) to the place of use (E.G. a
customers' power plant). Consequently, the availability and cost of
transportation constitute important factors for the marketability of coal.
Transportation costs are dependent primarily on the proximity of the customer to
the coal source. For the twelve months ended October 31, 1999, approximately 62%
of Lodestar's tonnage was shipped by rail, 31% by inland waterway barges, and 7%
by truck.
For the twelve months ended October 31, 1999, 56% of Lodestar's Western Kentucky
coal shipments traveled by truck to Lodestar's Caseyville Dock on the Ohio River
to be loaded onto barges. Substantially all of the balance was shipped by rail.
For the twelve months ended October 31, 1999, 66% of Lodestar's Eastern Kentucky
coal shipments traveled by CSX Transportation, Inc. ("CSX") rail and 16% by
Norfolk Southern Corporation ("NS") rail. The remaining 18% of coal shipments
from Eastern Kentucky traveled by truck directly to the customer or by truck to
river docks. Of the coal shipped from Utah, 94% was shipped by rail via Union
Pacific Railroad ("UP") and the remaining 6% by truck.
Lodestar operates an ash disposal facility adjacent to its Transcontinental
Loadout in Eastern Kentucky, which has approximately twenty years of capacity at
current disposal rates. This facility has the capability of accepting ash from
both open-top hopper railcars and pneumatic railcars. Presently, the ash
disposed of at this facility is received by Lodestar pursuant to its coal supply
agreements with Indiantown Cogeneration, L.P. ("Indiantown") and Cedar Bay
Generating, L.P. ("Cedar Bay"), both affiliates of PG&E. Lodestar is paid a fee
for disposal of the ash at this facility. For the twelve months ended October
31, 1999, Lodestar disposed of approximately 184,000 tons of ash for which it
was paid approximately $3.9 million.
INDUSTRY FACTORS
The U.S. coal industry is highly competitive, with numerous producers in all
coal producing regions. Lodestar competes with other large producers and many
small producers in the United States and abroad. Many of Lodestar's customers
are also customers of Lodestar's competitors. The markets in which Lodestar
sells its coal are highly competitive and affected by factors beyond Lodestar's
control. Continued demand for Lodestar's coal and the prices that Lodestar will
be able to obtain will depend primarily on coal consumption patterns of the
domestic electric utility industry, which in turn are affected by the demand for
electricity, coal transportation costs, environmental and other governmental
regulations and orders, technological developments and the availability and
price of competing coal and alternative fuel supply sources, such as oil,
natural gas, nuclear energy and hydroelectric energy.
On October 20, 1999, a decision was rendered in an action styled BRAGG V.
ROBERTSON, a citizens' suit, pending in the United States District Court for the
Southern District of West Virginia, that addressed an issue concerning
mountaintop removal mining and associated valley fills in West Virginia. In this
decision, the Court permanently enjoined the director of the West Virginia
mining regulatory authority from issuing surface mining permits that would
authorize placement of excess spoil in intermittent and perennial streams for
the primary purpose of waste disposal. Enforcement of the decision has been
4
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stayed pending the outcome of the appeal of the decision being pursued by the
permitting agency. The laws in Kentucky relating to surface mining permits, like
those in West Virginia at issue in this case, are based on and similar to the
Federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA"). Thus, if
the BRAGG decision stands, it is likely that enforcement of the decision would
eventually affect Lodestar's ability to obtain new permits for mountaintop
removal mining in the form presently utilized at certain of Lodestar's
operations in Eastern Kentucky, thereby hindering Lodestar's ability to develop
certain reserves.
Lodestar's ability to acquire additional coal reserves that are recoverable
depends upon successful exploration and development activities. For the twelve
months ended October 31, 1999, Lodestar capitalized in accordance with generally
accepted accounting principles $3.8 million associated with its development
efforts, which among other costs include permitting, site preparation and
equipment moving costs.
REGULATORY AND ENVIRONMENTAL MATTERS
The coal mining industry is subject to regulation by federal, state and local
authorities on matters such as employee health and safety, permitting and
licensing requirements, air and water pollution, the reclamation and restoration
of mining properties after mining is completed, the discharge of hazardous
materials into the environment, surface subsidence from underground mining and
the effects that mining has on groundwater quality and availability.
The mining operations of Lodestar are subject to inspection and regulation by
the Mine Safety and Health Administration of the Department of Labor ("MSHA")
under provisions of the Federal Mine Safety and Health Act of 1977. All other
operations of Lodestar are subject to inspection and regulation by the
Occupational Safety and Health Administration of the Department of Labor
("OSHA") under the provisions of the Occupational Safety and Health Act of 1970.
The U.S. Department of Labor is considering revised regulations that would alter
the claims process for coal miners and could make claims for black lung benefits
easier to file and establish, which could result in a higher incidence of black
lung claims against Lodestar. Although the ultimate impact of these proposed
regulations can not be determined at this time, regulations which cause even a
slight increase in the approval of black lung claims could have a material
adverse effect on the Company's financial position.
SMCRA establishes mining and reclamation standards for all aspects of surface
mining, as well as many aspects of deep mining. SMCRA also requires that
comprehensive environmental protection and reclamation standards be met during
the course of and upon completion of mining activities. As part of its
reclamation activities in the ordinary course of its business, Lodestar had
approximately $53.0 million of performance bonds outstanding as of October 31,
1999. Lodestar's obligations under these performance bonds, other performance
bonds, including those related to workers' compensation, and certain other
obligations are supported by $25.2 million in outstanding letters of credit as
of October 31, 1999.
The Clean Air Act and corresponding state laws which regulate the emissions of
pollutants into the air affect coal mining operations both directly and
indirectly. Coal mining and processing operations may be directly affected by
Clean Air Act permitting requirements and/or emissions control requirements
restricting Lodestar's ability to develop new mines or requiring Lodestar to
modify its existing operations. The Clean Air Act indirectly affects coal mining
operations by extensively regulating the air emissions from coal-fueled electric
power generation plants. Reductions in emissions from power generation plants
are occurring in two phases: Phase I began in 1995 (applicable to certain
identified facilities) and Phase II began in 2000 (applicable to all facilities,
including those subject to the 1995 restrictions). The effect of the Clean Air
Act on Lodestar's operations is uncertain at this time. We believe that
compliance with the sulfur emission limits for power generation plants will
likely exert a downward pressure on the price of high sulfur coal.
Lodestar endeavors to conduct mining operations in compliance with all
applicable federal, state and local laws and regulations. However, because of
extensive and comprehensive regulatory requirements, violations during mining
operations occur from time to time in the industry. Notwithstanding compliance
efforts, Lodestar does not believe such violations can be completely eliminated.
None of the violations to date or the monetary penalties assessed upon Lodestar
have been material.
5
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While it is not possible to quantify the costs of compliance with all applicable
federal and state laws, those costs have been and are expected to continue to be
significant. However, Lodestar believes the cost of compliance with regulatory
standards will not substantially affect its ability to compete with similarly
situated coal companies.
EMPLOYEES
As of October 31, 1999, Lodestar had 994 employees. Lodestar has entered into a
collective bargaining agreement with the United Mine Workers of America,
("UMWA"), which represents 420 employees at Lodestar's Western Kentucky
operations. Renegotiation of the UMWA contract, which expires May 13, 2000, is
currently in progress. The remaining 574 employees are not represented by a
union.
6
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PART L. - ITEM 2 PROPERTIES
The following table summarizes Lodestar's coal reserves as of April 30, 1999
(1):
<TABLE>
<CAPTION>
DEMONSTRATED RESERVES (4)
------------------------------- PERCENTAGE
(RECOVERABLE TONS IN THOUSANDS) OF
LOCATION MEASURED (2) INDICATED (3) TOTAL GRAND TOTAL
- ---------------------------------------------------- ------------------ ---------------- ------------ --------------
<S> <C> <C> <C> <C>
KENTUCKY
Western Kentucky 91,356 62,464 153,820 54.8%
Eastern Kentucky 47,065 7,202 54,267 19.3%
------------------ ---------------- ------------ --------------
Kentucky Total 138,421 69,666 208,087 74.1%
UTAH
Mountain Operation - July 1999, Acquisition 8,517 6,101 14,618 5.2%
COLORADO
Mountain Operation - July 1999, Acquisition 25,647 17,171 42,818 15.2%
BENT MOUNTAIN
EKY Operation - November 1999, Acquisition 14,587 838 15,425 5.5%
------------------ ---------------- ------------ --------------
GRAND TOTAL 187,172 93,776 280,948 100.0%
================== ================ ============ ==============
DEEP MINEABLE 147,253 90,708 237,961 84.7%
================== ================ ============ ==============
SURFACE MINEABLE 39,919 3,068 42,987 15.3%
================== ================ ============ ==============
</TABLE>
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(1) Reserve estimates reflecting the status as of April 30, 1999 were
prepared by engineers and geologists at Marshall Miller & Associates.
Reserve estimates will change from time to time in reflection of mining
activities, analysis of new engineering and geological data,
acquisition or divestment of reserve holdings, modification of mining
plans or mining methods and other factors.
(2) Reserve estimates in this category have the highest degree of geologic
assurance. Measured coal lies within 0.25 mile of a valid point of
measurement or point of observation (such as previously mined areas)
supporting such measurements. The sites for thickness measurement are
so closely spaced, and the geologic character is so well defined, that
the average thickness, areal extent, size, shape, and depth of coal
beds are well established.
(3) Reserve estimates in this category have a moderate degree of geologic
assurance. There are no sample and measurement sites in areas of
indicated coal. However, a single measurement can be used to classify
coal lying beyond measured as indicated. Indicated coal lies more than
0.25 mile, but less than 0.75 mile, from a point of thickness
measurement. Further exploration is necessary to place indicated coal
into the measured category.
(4) Lodestar leases most of its total demonstrated reserves from third
parties. Lodestar's reserve leases generally have terms of between five
and thirty years, although they typically allow Lodestar the right to
renew the lease for a stated period or to maintain the lease in force
until the exhaustion of coal reserves. These leases provide for
royalties to be paid to the lessor either as a fixed amount per ton or
as a percentage of the sales prices. Certain leases may also require
payment of lease bonus or minimum royalties, payable either at the time
of the execution of the lease or in periodic installments. In most
cases, the minimum royalty payments are applied to reduce future
production royalties.
7
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The geographic areas where Lodestar currently operates are as follows:
THE ILLINOIS BASIN consists of Western Kentucky, Illinois, and Indiana. Coal
from this region generally has an energy content of 10,000 to 12,500 Btus per
pound of coal and a sulfur content of 1.8% to 3.5% sulfur. Although there are
exceptions, generally no Illinois Basin coal satisfies the Phase I or Phase
II standards of the Clean Air Act. Therefore, Illinois Basin coal is
primarily blended with low-sulfur coal or burned in plants equipped with
scrubbers. Customers also can bank and trade sulfur dioxide emissions
allowances as part of an overall environmental compliance plan.
Lodestar has approximately 153.8 million recoverable tons of demonstrated
reserves in the Illinois Basin, representing 54.8% of its total demonstrated
reserves. Lodestar's reserves in this region have relatively high Btu content
for the region (generally 12,500 Btus on a fully washed basis). Although such
coal does not satisfy Phase I or II of the Clean Air Act, Lodestar believes
it is well positioned to market its coal due to its relatively high Btu
content, which makes it attractive for blending with lower sulfur, lower Btu
coal. In addition, the proximity of such reserves to customers that can
utilize high sulfur coal results in lower transportation costs, thereby
enhancing such coal's economic value to the customer.
Lodestar produced and sold approximately 5.0 million tons of coal from the
Western Kentucky operations during the twelve months ended October 31, 1999,
of which 58% was sold to the TVA. The Western Kentucky operations currently
consist of two active mines and two inactive mines. The active mines include
the Baker mine, which is an underground longwall and continuous miner
operation, and the Smith surface mine, which is an open pit dragline
operation staffed and capitalized by a contract mining company. The Western
Kentucky Wheatcroft and Smith underground mines are currently inactive due to
market conditions. The Western Kentucky infrastructure includes two centrally
located coal preparation plants, office, warehouse, and bathhouse structures,
truck and rail loading facilities, and a barge loading facility located on
the Ohio River. The rail facilities provide access to both the Paducah &
Louisville Railway, Inc. and the CSX rail line.
As of October 31, 1999, the total cost of Lodestar's plant and equipment
associated with the Western Kentucky operations was approximately $42.5
million, with a net book value of approximately $21.0 million.
CENTRAL APPALACHIA consists of Southern West Virginia, Eastern Kentucky, and
Virginia. The coal in this region is generally low in sulfur (0.7% to 1.5%
sulfur) and high in energy content (12,000 to 13,500 Btus per pound of coal).
The majority of this coal complies with Phase I of the Clean Air Act.
According to industry sources, this region has considerable excess production
capacity.
Lodestar has approximately 69.7 million recoverable tons of demonstrated
reserves in Eastern Kentucky (including the November 1999 Bent Mountain
acquisition), representing 24.8% of its total demonstrated reserves.
Substantially all of Lodestar's coal in Eastern Kentucky complies with Phase
I of the Clean Air Act. However, Lodestar's coal in this region typically
emits 1.5 pounds of sulfur dioxide/mmBtu, which is slightly higher than
compliance coal under Phase II of the Clean Air Act. Notwithstanding the
foregoing, Lodestar believes the sulfur content of its coal in this region
will not affect the marketability thereof.
Lodestar produced and sold approximately 4.1 million tons of coal from the
Eastern Kentucky operations during the twelve months ended October 31, 1999,
of which 38% was sold to affiliates of PG&E. The Eastern Kentucky operations
consist of one continuous miner, underground mine, and multiple surface
mining sites that progress through a normal sequence of activity that
includes development, active production, and reclamation stages.
Infrastructure in Eastern Kentucky includes an ash disposal system, two
preparation plants, five processing and load-out facilities accessing both
the CSX rail line and the NS rail line, as well as, office, warehouse, and
other structures.
As of October 31, 1999, the total cost of Lodestar's plant and equipment
associated with the Eastern Kentucky operations was approximately $55.5
million, with a net book value of approximately $33.3 million.
THE ROCKY MOUNTAIN region consists of Utah and Colorado. The coal in this
region is low in sulfur content (0.4% to 0.5%) and has a moderately high
energy content (10,500 to 12,000 Btus per pound of coal). This coal complies
with Phase I and Phase II of the Clean Air Act.
Lodestar acquired approximately 57.4 million recoverable tons of demonstrated
reserves in the Rocky Mountain region, in July 1999, representing 20.4% of its
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total demonstrated reserves. Lodestar began mining its Mountain operations in
Utah in August 1999 and sold approximately 89,000 tons of coal during the twelve
months ended October 31, 1999, of which 49% was sold to the TVA. This operation
currently consists of one active, continuous miner, underground mine, and one
inactive underground mine. Infrastructure in Utah includes a processing and
load-out facility, which accesses the UP rail line and various office,
bathhouse, and warehouse structures.
As of October 31, 1999, the total cost of Lodestar's plant and equipment
associated with the Utah operations was approximately $8.7 million, with a net
book value of approximately $7.4 million.
Lodestar is in the process of developing an underground mine in Colorado on
reserves that Lodestar acquired in July 1999, with coal production projected to
begin in the first half of fiscal 2000. As of October 31, 1999, the total cost
of Lodestar's plant and equipment associated with the Colorado operations was
approximately $214,000, with a net book value of approximately $75,000.
Lodestar believes that its facilities are well maintained and are considered
satisfactory for their purposes.
See note 5 to the Consolidated Financial Statements, Part II, Item 8, for a
description of liens related to the Company's property, plant, and equipment.
9
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PART I. - ITEM 3 LEGAL PROCEEDINGS
In 1997, Cedar Bay, one of Lodestar's five largest customers, brought a
lawsuit in the Circuit Court, Fourth Judicial Circuit, 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 and others. In order to
protect its financial interest in this matter, Lodestar obtained court
approval, in April 1999, to intervene in the litigation between Cedar Bay and
FP&L generally in support of Cedar Bay's position. 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. Approximately $5.1 million of
the judgment relates to the portion of Cedar Bay's claim in which Lodestar
has a financial interest. Lodestar has asserted a claim against Cedar Bay for
this $5.1 million, plus an additional amount, calculated at approximately
$900,000, due to Cedar Bay's similar underpayment on coal burned to produce
energy 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. In October 1999,
Lodestar initiated arbitration proceedings against Cedar Bay in an effort to
collect these sums. Cedar Bay responded by filing a lawsuit in the Circuit
Court for Duval County seeking an injunction to stop the arbitration
proceedings. On December 30, 1999, the court entered an order enjoining any
further arbitration proceedings until Cedar Bay's litigation with FP&L is
final. Lodestar management is considering whether to appeal this order.
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.
Costain Coal Inc. (the "Predecessor Company") initiated a claim on June 16,
1990 against its insurance carriers in COSTAIN COAL INC. V. NATIONAL UNION
FIRE INSURANCE CO., ET AL., Fayette Circuit Court, Third Division, Kentucky,
for denial of coverage on claims related to a 1989 accident at a former mine.
The insurance carriers ultimately funded the settlement but are seeking to
recoup a majority of the monies paid from the Predecessor Company. One of the
carriers filed an amended complaint naming the Company as a party. A
settlement was reached between the Predecessor Company and one carrier,
resulting in a remaining recoupment claim of approximately $7.5 million plus
interest and court costs. In December 1999, the Predecessor Company reported
to the Company that settlement agreements have been reached with the
remaining carriers, which would eliminate any potential liability to the
Company. Based upon the Company's knowledge to date, management does not
expect this matter to have a material effect on the Company's financial
condition or results of operations.
Lodestar and Webster County Coal Corporation ("WCCC") are parties to an
agreement (the "Agreement") relating to Lodestar's mining at its Smith
surface mine. The agreement resolved various disputes that arose in 1992 when
WCCC objected to Lodestar's renewal of its mining permit, claiming that
Lodestar's operations could damage WCCC's nearby underground mine. The
agreement required Lodestar to maintain a minimum net worth of $70.0 million
or, in the alternative, to procure a payment and performance bond in the
amount of $20.0 million. On August 10, 1998, WCCC filed suit against Lodestar
in the Webster County (Kentucky) Circuit Court (Case No. 98-CI-001633)
seeking a judgment requiring specific performance of this minimum net worth
or bond requirement of the agreement. This dispute was resolved by an
amendment to the Agreement, made June 30, 1999, pursuant to which Lodestar
has posted a payment and performance bond in the amount of $2.0 million in
favor of WCCC. The litigation was dismissed by order entered July 15, 1999.
The outcome of this action did not have a material adverse effect on the
financial condition or results of operations 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.
10
<PAGE>
PART I. - ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended October 31, 1999.
By virtue of Renco's ownership of all the outstanding shares of Common Stock,
and Ira Leon Rennert's ownership, through trusts established for himself and
his family, of all of the stock of Renco, Mr. Rennert is in position to
control actions that require the consent of a majority of the holders of the
Company's outstanding shares of Common Stock.
On January 5, 2000, Renco, by consent of sole shareholder in lieu of meeting,
re-elected Mr. Rennert as Chairman and sole director of the Company.
11
<PAGE>
PART II. - ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company is a direct wholly-owned subsidiary of Renco. There is no
established public trading market for the Company's common stock. Since March
1997, the Company has had one shareholder. The Company paid a cash dividend
once during fiscal 1998 aggregating $27,818,000.
12
<PAGE>
PART II. - ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of Lodestar Holdings, Inc. and its subsidiaries and its predecessor
company at the dates and for the periods indicated. The selected data
presented below under the captions "Statement of Operations Data" and
"Financial Ratios and Other Data" for each of the fiscal years in the
two-year period ended December 31, 1996, for the period January 1, 1997 to
March 14, 1997 and for the period March 15, 1997 to October 31, 1997, and for
each of the fiscal years in the two-year period ended October 31, 1999, are
derived from the consolidated financial statements of our predecessor company
and us, as applicable, and which consolidated financial statements have been
audited by KPMG LLP, independent certified public accountants. The selected
data presented below under the captions "Statement of Operations Data" and
"Financial Ratios and Other Data" for the period November 1, 1996 to December
31, 1996 is unaudited but, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the financial and operating data for such periods. The
"Balance Sheet Data" as of December 31, 1995, and 1996 and October 31, 1997,
1998 and 1999 are derived from the consolidated financial statements of our
predecessor company and us, as applicable, and which consolidated financial
statements have been audited by KPMG LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (1) LODESTAR HOLDINGS, INC.
-------------------------------------------------------- --------------------------------------
FISCAL FISCAL PERIOD PERIOD PERIOD FISCAL FISCAL
YEAR ENDED YEAR ENDED 11/01/96 TO 1/1/97 3/15/97 YEAR ENDED YEAR ENDED
12/31/95 12/31/96 12/31/96 TO TO 10/31/98 10/31/99
(2) (3) (UNAUDITED) 3/14/97 10/31/97 (5) (6) (6)
- --------------------------------------------------------------------------------------------------------------------------------
(DOLLARS AND TONS IN THOUSANDS, EXCEPT PER TON DATA)
<C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Coal sales and related revenue $ 308,370 $ 255,386 $ 36,910 $ 46,486 $ 173,881 $ 263,716 $ 240,050
Cost of revenues (7) 257,875 259,285 36,714 45,096 151,976 223,829 202,025
Depreciation, depletion and
amortization 30,832 22,714 3,294 4,749 14,276 27,349 32,169
General and administrative (7) 9,661 12,254 1,971 1,770 5,563 12,642 12,810
--------- --------- -------- -------- --------- ------- ---------
Operating income (loss) 10,002 (38,867) (5,069) (5,129) 2,066 (104) (6,954)
Interest expense, net 4,436 2,801 550 809 6,004 13,140 20,018
Other income (expense), net 3,708 - - - - - -
--------- --------- -------- -------- --------- ------- ---------
Income (loss) before income
taxes and extraordinary
items 9,274 (41,668) (5,619) (5,938) (3,938) (13,244) (26,972)
Income taxes 3,279 - - - - - -
Extraordinary items - - - - - 6,572 -
--------- --------- -------- -------- --------- ------- ---------
Net income (loss) $ 5,995 $ (41,668) $ (5,619) $ (5,938) $ (3,938) $ (6,672) $ (26,972)
========= ========= ======== ======== ========= ========= =========
FINANCIAL RATIOS AND OTHER DATA:
Net cash provided by (used in)
operating activities (6,291) 12,972 1,306 (1,738) (14,994) (6,208) (12,040)
Net cash provided by (used in)
investing activities 59,571 (10,400) (1,515) (1,149) (26,349) (34,032) (23,138)
Net cash provided by (used in)
financing activities (53,309) (12,064) 3,658 (1,575) 44,398 52,134 23,683
Capital expenditures 5,785 10,705 1,820 1,149 3,771 34,360 23,282
Ratio of earnings to fixed
charges (4) 3.1x - - - - - -
OTHER OPERATING DATA:
Tons of coal shipped 11,811 10,569 1,561 1,910 6,839 10,410 9,460
</TABLE>
- -----------------
(1) Lodestar Energy, Inc. was acquired by Lodestar Holdings, Inc. as of
March 14, 1997, (the "Acquisition").
(2) Other income (expense) during 1995 represents the net effect of a
$44.0 million gain recorded in connection with disposing of the
Predecessor's Louisiana operations, a $39.6 million loss to adjust
the value of the predecessor company to an expected sales price,
and a $0.7 million minority interest in earnings of the Louisiana
operations.
(3) Results for fiscal 1996 were negatively affected by certain non-cash
charges made in connection with an evaluation
13
<PAGE>
of the Predecessor's accrued reserves and its legal expenses
associated with selling the business.
(4) Fixed charges consist of interest expense, capitalized interest, and
amortization of deferred financing costs and the portion of rental
expense that is representative of interest expense. Earnings consist of
income before taxes and extraordinary items plus fixed charges less
capitalized interest. Earnings were insufficient to cover fixed charges
by $41.7 million, $5.6 million, $5.9 million, $3.9 million, $6.7
million and $27.0 million for the fiscal year ended December 31, 1996,
the period from November 1, 1996 to December 31, 1996, the period
January 1, 1997 to March 14, 1997, the period March 15, 1997 to October
31, 1997, and the fiscal years ended October 31, 1998 and 1999,
respectively.
(5) Fiscal year ended October 31, 1998 includes a benefit of $6.6 million
from extraordinary items. See note 13 of "Notes to Consolidated
Financial Statements" included in Part II. - Item 8 of this filing.
(6) Capital expenditures during fiscal year ended October 31, 1998 include
$27.5 million, which was capitalized in conjunction with the buyout of
leases. Capital expenditures for the 1999 fiscal year include $11.2
million in cash payments for acquisitions.
(7) Costs previously reported as selling, general and administrative costs
have been reclassified to cost of revenue to more accurately correlate
historical cost data with the current cost reporting basis.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (1) LODESTAR HOLDINGS, INC.
----------------------------------- ---------------------------------------------------
AS OF 12/31/95 AS OF 12/31/96 AS OF 10/31/97 AS OF 10/31/98 AS OF 10/31/99
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash $ 17,806 $ 8,314 $ 3,055 $ 14,949 $ 3,454
Working capital (deficit) (2,115) (33,251) (33,024) 893 1,417
Property, plant and equipment, net 131,073 116,094 84,541 95,498 109,244
Total assets 233,386 208,358 200,448 213,778 229,205
Total debt (including current portion) 28,077 22,793 63,556 150,000 181,292
Stockholder's equity (deficit) 75,700 33,666 1,063 (34,583) (60,636)
</TABLE>
- ---------------
(1) Lodestar Energy, Inc. was acquired by Lodestar Holdings, Inc.
as of March 14, 1997.
14
<PAGE>
PART II. - ITEM 7 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").
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. In July 1999, Lodestar acquired reserves located in
Utah and Colorado, the Mountain operations, which 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.
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").
In the first quarter of fiscal 1998, Lodestar closed its West Virginia
operations, which shipped approximately 687,000 tons of coal, generating
approximately $19.4 million of coal sales and related revenue for the twelve
months ended October 31, 1997, and approximately 200,000 tons of coal,
generating approximately $5.2 million of coal sales and related revenue for
the twelve months ended October 31, 1998. The cost of all remaining
reclamation and mine closing activities associated with the West Virginia
operations, estimated at $1.5 million, is included as a liability in the
October 31, 1999 consolidated balance sheet.
On May 15, 1998, the Company sold and issued (the "Notes Offering") $150.0
million of its 11.5% Senior Notes due 2005 (the "Notes"). The Company's
subsidiaries have guaranteed the Notes. The proceeds from the Notes were used
to repay existing indebtedness; purchase certain equipment financed pursuant
to both operating and capital leases; buy out certain deferred payment
obligations; pay a dividend to The Renco Group, Inc., the Company's parent
company ("Renco"); make certain contractual payments to executives; pay
related fees and expenses; and reduce accounts payable, accrued expenses, and
for other general corporate purposes.
On January 15, 1999, Lodestar acquired 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 $5.4
million in cash paid at the closing, periodic deferred payments and the
assumption of certain reclamation liabilities from Colonial's prior mining
activities. The Company immediately began mining operations on properties
acquired from Colonial, hereafter referred to as the Tug River operations.
The Tug River operations utilize certain mining equipment, which was formerly
deployed in West Virginia.
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, hereafter
referred to as the Mountain operations, had been idled by Sellers. The
acquisition of the Mountain operations provided 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. The consideration to Sellers was $5.0 million in cash
paid at the closing, assumption of capitalized lease obligations, and the
assumption of certain reclamation and other liabilities associated with
Sellers' prior mining activities.
On November 12, 1999, Lodestar acquired certain mining rights, leases of real
property and equipment in Eastern
15
<PAGE>
Kentucky from Quaker Coal Company, Inc. and affiliates ("Quaker"). The
consideration to Quaker was $4.9 million in cash and a deferred payment of
$0.6 million, due one year from the date of the acquisition. This acquisition
provides Lodestar a surface mining operation with approximately 15.4 million
tons of demonstrated reserves. Lodestar began production on this property in
December of 1999.
Primarily as a result of market conditions, the Smith surface mine in Western
Kentucky, which produced 588,000 tons and 376,000 tons during the twelve
month periods ended October 31, 1997 (the "1997 Period") and 1998 (the "1998
Period"), respectively, was idled during the Third Quarter of fiscal 1998.
Primarily to efficiently perform its reclamation obligation, mining activity
resumed at this site during the First Quarter of fiscal 2000.
During the second half of fiscal 1998, the Smith underground mine experienced
adverse mining conditions, which negatively affected operating costs and
productivity. As a result, the mine plan was revised resulting in work force
reductions and lower production capacity. Total production from the Smith
underground mine was 709,000 tons for the 1998 Period and 190,000 for the
twelve months ended October 31, 1999 (the "1999 Period"). During the 1998
Period, the Company recorded a $3.4 million provision to cost of sales. This
provision reflected mine closing costs, incremental costs of alternative
reclamation plans, and projected losses to be incurred during the remaining
life of the Big Rivers Electric Corporation ("Big Rivers") contract, due to
operational modifications at the Smith underground mine. Subsequent to
completion of the Big Rivers contract commitments, Lodestar elected to idle
the Smith underground mine, and currently has no plans to resume mining
activities at this site. During the twelve months ending October 31, 1999,
$2.1 million was charged against the accrual established during the 1998
Period. The remaining balance of $1.3 million is included as accrued
reclamation at October 31, 1999.
The cost of workers' compensation and black lung expense is based on
historical claims experience and actuarial studies of workers' compensation
and black lung claims incurred and reported and incurred but not reported.
The Company recorded a credit for workers' compensation and black lung
expense for the 1998 Period of $0.9 million as compared to the provision of
$4.5 million which was recorded for the 1997 Period and the provision of $3.0
million, which was recorded during the 1999 Period. The credit recorded
during the 1998 Period took into consideration the results of an independent
actuarial study, which considered data through the end of fiscal 1998. The
October 31, 1998 actuarial study projected a significant reduction in both
the volume and magnitude of future claims from the current working population
in comparison to projections that were made in the previous actuarial study.
The primary reason for the projected reductions in future claims was the
significantly improved claims experience, which the Company incurred in the
1998 Period and which has continued during the 1999 Period. Management
believes that the improved claims experience is the result of improved
operational controls and the impact of legislative changes in the State of
Kentucky. Currently, the U.S. Department of Labor is considering revised
regulations that could alter the claims process for black lung benefit
recipients, potentially resulting in a higher incidence of approval of black
lung claims. As the impact of these proposed regulations, if any, on the
Company's financial position cannot be determined at this time, no additional
adjustment to the reserve has been recorded as of October 31, 1999.
Due to revisions to the Company's Eastern Kentucky mine plan, and in
conjunction with the Company's ongoing evaluation of its coal reserves, it
was decided in the 1999 Period that the Company would potentially not be able
to realize the full recorded value of certain of its mineral holdings in
Eastern Kentucky. Accordingly, during the 1999 Period, a reserve of $2.4
million was established to write-down certain deferred development and
advance royalties to their estimated realizable value. Additionally, in
conjunction with the Company's analysis of its asset values under Statement
of Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," a $1.0
million reduction in the carrying value of property was recorded to recognize
the impairment of certain Eastern Kentucky properties.
16
<PAGE>
RESULTS OF OPERATIONS: (1)
<TABLE>
<CAPTION>
THE COMPANY
AND THE
THE PREDECESSOR COMPANY
COMBINED -----------------------------------
TWELVE TWELVE TWELVE
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1998 1999
--------------------- ---------------- -----------------
<S> <C> <C> <C>
(DOLLARS AND TONS IN THOUSANDS, EXCEPT PER TON DATA)
OPERATIONS AND OTHER DATA:
Coal sales and related revenue $ 257,277 $ 263,716 $ 240,050
Cost of revenues (3) 233,786 223,829 202,025
Depreciation, depletion -
and amortization (4) 22,319 27,349 32,169
Selling, general and admin. (3) 9,304 12,642 12,810
--------------------- ---------------- -----------------
Operating loss (4) (8,132) (104) (6,954)
Interest expense, net (4) 7,363 13,140 20,018
Income taxes (4) - - -
Extraordinary items - (6,572) -
--------------------- ---------------- -----------------
Net loss (4) $ (15,495) $ (6,672) $ (26,972)
===================== ================ =================
OTHER FINANCIAL DATA:
Net cash used in operating
activities $ (15,426) $ (6,208) $ (12,040)
Net cash used in investing
activities $ (29,013) $ (34,032) $ (23,138)
Net cash provided by financing
activities $ 46,481 $ 52,134 $ 23,683
Capital expenditures (2) $ 6,740 $ 34,360 $ 23,282
OTHER OPERATING DATA:
Tons of coal shipped 10,310 10,410 9,460
Coal sales and related revenue per
ton shipped $ 24.95 $ 25.33 $ 25.38
Cost of revenues per ton shipped 22.68 21.50 21.36
</TABLE>
(1) The table above sets forth the results of operations data for the
Predecessor Company and the Company for the periods presented. The
combined operations and other data, other financial data and other
operating data for the twelve months ended October 31, 1997 combine the
results of operations of the Predecessor Company for the periods
November 1, 1996 to December 31, 1996 (unaudited) and January 1, 1997
to March 14, 1997 and the Company's results of operations for the
period March 15, 1997 to October 31, 1997. The combined operations and
other data for the twelve months ended October 31, 1997 do not purport
to represent what the Company's consolidated results of operations
would have been if the Acquisition had actually occurred on November 1,
1996.
(2) Capital expenditures for the 1998 fiscal year include $27.5 million
capitalized in conjunction with the buyout of leases. Capital
expenditures for the 1999 fiscal year include $11.2 million in cash
payments for acquisitions.
(3) Costs previously reported as selling, general and administrative costs
have been reclassified to cost of revenue to more accurately correlate
historical cost data with the current cost reporting basis.
(4) Due to the purchase accounting adjustments applied to the Company's
accounts as of March 15, 1997, the consolidated financial information
for the period after the acquisition is presented on a different cost
basis than for the period before the acquisition. Therefore, for the
twelve months ended October 31, 1998 compared to the twelve months
ended October 31, 1997 no analysis of the change has been included for
these items in the narrative section of this discussion.
17
<PAGE>
PRODUCTION AND REVENUE SOURCES
The following table summarizes the tons shipped by region for the periods
presented:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED OCTOBER 31,
REGION 1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Eastern Kentucky 4,055 4,122 4,054
Western Kentucky 5,522 5,972 4,952
West Virginia 687 200 -
Mountain - - 89
Brokered 46 116 365
------------ ------------ ------------
Total 10,310 10,410 9,460
============ ============ ============
</TABLE>
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.
TWELVE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED OCTOBER
31, 1998
COAL SALES AND RELATED REVENUE for the 1999 Period were $240.1 million, a
decrease of $23.7 million or 9.0% compared to the 1998 Period. This decrease
was the result of a 9.1% decrease in tons shipped, net of a $0.05 per ton net
increase in coal sales and related revenue. The sales volume decrease is
primarily attributable to reduced coal production in the Western Kentucky
operation as a result of the closure of the Smith underground mine and idling
of the Smith surface mine, which collectively contributed 0.2 million shipped
tons and $3.7 million in coal sales and related revenue during the 1999
Period compared to 1.2 million shipped tons and $22.3 million in coal sales
and related revenue during the 1998 Period. These mines were idled partially
in response to a decline in marketability for the specific coal quality
produced at these operations as well as in an effort to eliminate higher
production cost coal products. In addition, $10.4 million of the decline in
coal sales and related revenue is the result of the completion of a contract
mining operation in Eastern Kentucky during the First Quarter of the 1999
Period which contributed $3.8 million and $14.2 million of revenue to the
1999 Period and 1998 Period, respectively. The decrease in coal sales and
related revenue associated with volume was offset by an increase of $1.05 per
ton in the average sales price of coal, from $23.29 in the 1998 Period to
$24.34 in the 1999 Period. This price increase is primarily the result of
eliminating approximately 1.0 million tons of Western Kentucky lower quality
coal, with lower realizations, from the total sold production.
COST OF REVENUES were $202.0 million in the 1999 Period, or $21.36 per sold
ton, as compared to $223.8 million in the 1998 Period, or $21.50 per sold
ton, a decrease of $21.8 million or 9.7%. Of this decrease, $18.8 million is
associated with the 9.1%, or approximately 1.0 million ton decline in sales
volume discussed above. Additionally, due to the completion of the contract
mining operation in Eastern Kentucky, cost of revenues decreased by $13.9
million in the 1999 Period. Before consideration of the volume changes and
the reduction in contract mining costs, cost of revenue per sold ton
increased to $20.98 from $19.83 per sold ton in the 1998 Period, or 5.8%.
This cost increase is primarily due to higher mining ratios encountered at
certain surface mines in the Eastern Kentucky operation and lower salable
yields encountered at underground mines in both Eastern and Western Kentucky.
The average mining ratio at the Company's Eastern Kentucky surface mines was
16.95 in the 1999 Period as compared to 13.86 in the 1998 Period. The average
salable yield for the Company's underground operations was 59.5% in the 1999
Period as compared to 60.5% in the 1998 Period.
In addition, costs in the 1999 Period were negatively impacted by increases
in workers' compensation costs of $3.9 million and charges of $2.4 million in
the 1999 Period due to non-cash adjustments of deferred development and
advance royalty valuations associated with Eastern Kentucky coal reserves
which were evaluated as being not economically mineable under current market
conditions.
18
<PAGE>
The 1999 Period benefited by $6.5 million as compared to the 1998 Period due
to the elimination of equipment lease expenses that occurred prior to the
buyout of those obligations during the 1998 Period. Additionally, the 1998
Period was negatively affected by a $3.4 million provision to account for
certain costs associated with the Smith underground mine in Western Kentucky.
DEPRECIATION, DEPLETION, AND AMORTIZATION of $32.2 million for the 1999
Period increased from the 1998 Period by $4.8 million, or 17.6%. The primary
reason for this increase was depreciation as a result of capital equipment
additions during the previous twelve months, including $27.5 million which
was capitalized in conjunction with the buyout of leases with the proceeds of
the Notes. Additional depletion and amortization charges of $1.0 million were
recorded during the 1999 Period to adjust the net book value of certain
Eastern Kentucky properties in compliance with FAS 121, "Accounting for the
Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of."
SELLING, GENERAL AND ADMINISTRATIVE costs increased by $0.2 million to $12.8
million in the 1999 Period from $12.6 million in the 1998 Period. The 1999
Period costs include a $3.3 million charge incurred in conjunction with the
due diligence of a failed acquisition. 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.
Excluding these nonrecurring charges, selling, general and administrative
expenses for the 1999 Period have decreased by $0.3 million compared to the
1998 Period with favorable variances in other administrative expenses
offsetting costs of approximately $0.7 million associated with Year 2000
compliance efforts.
OPERATING LOSS for the 1999 Period was $7.0 million as compared to $0.1
million for the 1998 Period. The $6.9 million increase is the result of a
$1.9 million decrease in gross margin, a $4.8 million increase in
depreciation, depletion and amortization and a $0.2 million increase in
selling, general and administrative costs.
INTEREST EXPENSE, NET was $20.0 million for the 1999 Period, an increase of
$6.9 million as compared to $13.1 million for the 1998 Period. This increase
is the result of interest on the Notes of $17.3 million compared to $7.9
million in the 1999 Period and 1998 Period, respectively, partially offset by
decreased interest expense associated with borrowings on the Company's Senior
Credit Facility and other debt from $5.2 million in the 1998 Period to $2.7
million in the 1999 Period.
INCOME TAXES were $0 during the 1999 Period and the 1998 Period. Due to the
Company's conversion to a Subchapter S status as described in note 1 of the
Consolidated Financial Statements, effective in the 1999 Period the Company
is generally no longer subject to income taxation.
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 from the Notes, offset by the write-off of all unamortized
costs attributed to the indebtedness which was also paid in full with the
proceeds of the Notes.
NET LOSS increased from $6.7 million during the 1998 Period to $27.0
million during the 1999 Period as a result of the factors described above.
TWELVE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED OCTOBER
31, 1997
COAL SALES AND RELATED REVENUE for the twelve months ended October 31, 1998
were $263.7 million, an increase of $6.4 million or 2.5% compared to the
twelve months ended October 31, 1997. This increase was the result of a 1.0%
increase in tons shipped combined with a $0.38 per ton net increase in coal
sales and related revenue. The sales volume increase is attributable to
450,000 tons of increased sales in Western Kentucky and slight Eastern
Kentucky increases net of a 487,000 ton reduction in West Virginia.
Additional tons were available for sale in Western Kentucky because of the
increased productivity at the Baker mine and the resumption of mining
activities at the Wheatcroft mine, as offset by decreases in tons produced at
the Smith mines. The net increase in coal sales and related revenue of $0.38
per ton combines the net effect of a $1.26 per ton increase in coal related
revenue from ancillary services, with an $0.88 per ton decrease in coal
revenue per ton. The increase in ancillary services, which represented 8.1%
and 3.1% of coal sales and related revenue for the 1998 and 1997 Periods,
respectively, is primarily due to the revenue generated from contract mining
at the Shop Branch mine in Eastern Kentucky. The decrease in coal revenue per
ton is primarily attributable to the lower overall average coal quality.
19
<PAGE>
COST OF REVENUES were $223.8 million in the 1998 Period as compared to $233.8
million in the 1997 Period. The 4.3% decrease in cost of revenues together
with the 1.0% increase in tons shipped resulted in cost of revenues per ton
shipped decreasing from $22.68 in the 1997 Period to $21.50 in the 1998
Period. The primary reason for the cost per ton decrease was the improved
productivity and resultant lower costs per ton at the Baker mine in Western
Kentucky. In addition, a significant reduction in cost of revenues resulted
from the elimination of $2.7 million of equipment lease expense subsequent to
the buyout of those obligations in the 1998 Period, as well as from the $5.4
million decrease in workers compensation expense. See "- Certain Events and
Factors Affecting Profitability". These reductions were partially offset by
the additional costs associated with the significant increase in coal related
revenue during the 1998 Period, higher mining costs in the 1998 Period
compared to the 1997 Period for the Smith underground mine which resulted
from the adverse mining conditions and reduced production levels, as well as
the negative impact of recording the $3.4 million Smith provision in the 1998
Period (see "-Certain Events and Factors Affecting Profitability").
SELLING, GENERAL AND ADMINISTRATIVE costs increased to $12.6 million in the
1998 Period from $9.3 million in the 1997 Period. The increase of $3.3
million in the 1998 Period is due to a combination of factors including: (i)
the one-time payment of $2.8 million to certain executives in connection with
the Notes Offering in the 1998 Period; (ii) staffing of permanent personnel
in both the accounting and sales and marketing areas during the 1998 Period;
and (iii) the waiver of the $0.75 million Renco management fee for the period
March 15, 1997 to October 31, 1997. The variance between the 1997 Period and
the 1998 Period is partially offset by bad debt charges of $0.8 million
during the 1997 Period.
Due to the purchase accounting adjustments applied to the Company's accounts
as of March 15, 1997, variances in the remaining line items in the results of
operations are not comparable between the 1998 Period and the 1997 Period.
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
October 31, 1999, the Senior Credit Facility debt was $24.3 million, and
$25.2 million of letters of credit were outstanding. Based upon eligible
collateral as of October 31, 1999, the net unused borrowing and letter of
credit availability thereunder was $9.8 million and $3.4 million,
respectively.
Cash used in the Company's operating activities for the 1999 Period was $12.0
million, compared to $6.2 million and $15.0 million used in the 1998 Period
and 1997 Period, respectively. The $12.0 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 twelve months ended October 31, 1999. The
$6.2 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 twelve months ended October 31, 1999, capital expenditures and the
cost of acquisitions funded with cash were $23.3 million, including $5.0
million and $5.4 million of cash payments made to the respective sellers in
conjunction with the Mountain and Tug River acquisitions, respectively. As of
October 31, 1999, the Company had capital expenditure commitments of
approximately $8.5 million (excluding the mineral acquisition costs incurred
in November 1999 as described below) of which approximately $3.5 million has
been incurred and paid through January 18, 2000.
The Company's liquidity decreased substantially during the 1999 Period.
Outstanding borrowings under the Senior Credit Facility increased from no
borrowings at October 31, 1998 to $24.3 million at October 31, 1999. The
primary factors that negatively impacted cash flow during the 1999 Period
were: (i.) $23.3 million in capital expenditures, including the $10.4 million
spent on the acquisition of the Mountain and Tug River properties, (ii.) the
$17.25 million annual interest payment on the Notes, (iii.) increased
receivables of $10.0 million partially due to the Cedar Bay receivable, (iv.)
the $6.2 million increase in inventories, and (v.) approximately $3.0 million
spent in conjunction with due diligence relative to a failed acquisition
attempt.
In November 1999, the Company completed a transaction to acquire certain
mining rights and mining equipment in Eastern Kentucky from Quaker. In order
to secure the necessary funds required to consummate this transaction,
20
<PAGE>
Lodestar entered into an amendment to the Senior Credit Facility which
allowed the Company to access $6.7 million in advances, which were previously
restricted to letters of credit (the "Supplemental Borrowings"). The
Supplemental Borrowings bear interest at the prime rate plus 0.75% and are
payable in four equal quarterly installments beginning January 31, 2000. In
conjunction with the amendment to the Senior Credit Facility, which was
required to secure this financing, the Company is now subject to minimum
monthly earnings tests during the remaining life of the Senior Credit
Facility. As of January 18, 2000, the Company's net unused borrowing and
letter of credit availability is $9.2 million reflecting outstanding
borrowings of $32.5 million, including the Supplemental Borrowings. In
addition to the availability, which its operations provide, other potential
sources of funds to the Company during 2000 include the pending resolution of
the Cedar Bay litigation (See Part I - Item 3 Legal Proceedings), and in
certain circumstances subordinated loans from Renco of up to $6.0 million
should the Company fail to maintain certain financial covenants during the
remaining term of the Senior Credit Facility. Accordingly, management
believes that operating cash flow and availability under the Senior Credit
Facility will be sufficient to provide for its working capital requirements,
capital investments, and interest and principal payment obligations for the
foreseeable future. The indenture governing the Notes and the Senior Credit
Facility contain 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
No operational, financial, or other problems have been encountered in
conjunction with the year 2000 ("Y2K") transition, nor is business
interruption from compliance issues within the controllable scope of Lodestar
expected in the future. Without consideration of internal labor costs, total
expenditures related to Y2K projects were approximately $0.88 million,
including expense charges of approximately $0.68 million that were incurred
during the year ended October 31, 1999, as well as capital charges of
approximately $0.18 million and $0.02 million incurred during the 1999 Period
and 1998 Period, respectively. The Company is continuing to monitor the
potential impact of Y2K issues initiated from external third party systems.
Expenditures in the fiscal year ending October 31, 2000 are expected to be
less than $0.15 million.
IMPACT 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. The Company adopted SFAS No. 131 effective
November 1, 1998. After application of the quantitative thresholds for
aggregation of reportable business segments, which in Lodestar's situation
was determined based primarily upon the nature of the products and services
provided, the Company's financial information has been presented on a fully
aggregated basis as is appropriate for a Company operating in a single,
dominant industry segment.
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. The Company adopted
SFAS No. 132 effective November 1, 1998. The implementation of this Statement
did not have a material impact on the Company's results of operations for the
year ended October 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition of all
derivatives as either assets or liabilities at fair value. The Company does
not believe adoption of the standard will have a material effect on either
financial position or results of operations. The Company plans to adopt the
standard effective November 1, 2000, as required.
21
<PAGE>
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. 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.
22
<PAGE>
PART II. - ITEM 7a. 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 provides 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 most volatile component in the Company's cost structure is the cost of
diesel fuel on which the Company spent $4.3 million during the year ending
October 31, 1999. The Company's cost of such fuel has increased approximately
63% between October 31, 1998 and 1999, resulting in a high probability that
the Company will incur significantly greater fuel costs in the upcoming
fiscal year as compared to the 1999 Period.
The Company currently possesses no market sensitive instruments, derivatives
or other financial instruments as defined in S-K Regulation Par. 229.305, nor
participates in any business activity for speculative purposes.
23
<PAGE>
PART II. - ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report 25
Consolidated Balance Sheets as of October 31, 1999 and 1998 26
Consolidated Statements of Operations and Comprehensive Loss for the years ended
October 31, 1999 and 1998, the period from March 15, 1997 to October 31, 1997,
and the period from January 1, 1997 to March 14, 1997 27
Consolidated Statements of Stockholder's Equity (Deficit) for the years ended October 31, 1999
and 1998, the period from March 15, 1997 to October 31, 1997, and the period from
January 1, 1997 to March 14, 1997 29
Consolidated Statements of Cash Flows for the years ended October 31, 1999 and 1998, the
period from March 15, 1997 to October 31, 1997, and the period from
January 1, 1997 to March 14, 1997 30
Notes to Consolidated Financial Statements 32
</TABLE>
24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Lodestar Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Lodestar
Holdings, Inc. and subsidiaries (the Company) as of October 31, 1999 and
1998, and the related consolidated statements of operations and comprehensive
loss, stockholder's equity (deficit), and cash flows for the years then ended
and for the period from March 15, 1997 to October 31, 1997 (Successor
Periods), and the consolidated statements of operations and comprehensive
loss, stockholder's equity, and cash flows for the period from January 1,
1997 to March 14, 1997 (Predecessor Period) of Costain Coal Inc. and
subsidiaries (the Predecessor). These consolidated financial statements are
the responsibility of the companies' managements. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned Company consolidated financial statements
present fairly, in all material respects, the financial position of Lodestar
Holdings, Inc. and subsidiaries as of October 31, 1999 and 1998, and the
results of their operations and their cash flows for the Successor Periods in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the results of operations and cash
flows of Costain Coal Inc. and subsidiaries for the Predecessor Period, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
March 15, 1997, Lodestar Holdings, Inc. acquired all of the outstanding stock
of Costain Coal Inc. in a business combination accounted for as a purchase.
As a result of the acquisition, the consolidated financial information for
the period after the acquisition is presented on a different cost basis than
that for the period before the acquisition and, therefore, is not comparable.
Louisville, Kentucky
January 21, 2000
25
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Balance Sheets
October 31, 1999 and 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 3,454 $ 14,949
Accounts receivable 39,828 29,874
Inventories 15,780 9,550
Prepaid expenses and other 4,121 4,092
------------- -------------
Total current assets 63,183 58,465
Property, plant and equipment, net 109,244 95,498
Coal and ash disposal contracts in excess of market, net of accumulated
amortization of $7,685 and $5,058, respectively 39,123 41,750
Other assets 17,655 18,065
------------- -------------
$229,205 $213,778
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current installments of long-term obligations $ 1,033 $ --
Accounts payable 32,052 25,161
Accrued expenses 28,681 32,411
------------- -------------
Total current liabilities 61,766 57,572
Long-term obligations, excluding current installments 180,259 150,000
Other non-current liabilities 47,816 40,789
------------- -------------
Total liabilities 289,841 248,361
------------- -------------
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 (65,400) (38,428)
Accumulated other comprehensive loss - minimum pension liability adjustment (237) (1,156)
------------- -------------
Total stockholder's deficit (60,636) (34,583)
Commitments and contingencies
------------- -------------
$229,205 $213,778
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Statements of Operations and Comprehensive Loss
(in thousands)
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------------------
YEAR ENDED YEAR ENDED MARCH 15, 1997 TO
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Coal sales and related revenue $ 240,050 $ 263,716 $ 173,881
Operating costs:
Cost of revenues 202,025 223,829 151,976
Depreciation, depletion and amortization 32,169 27,349 14,276
General and administrative 12,810 12,642 5,563
-------------------- -------------------- --------------------
247,004 263,820 171,815
-------------------- -------------------- --------------------
Operating income (loss) (6,954) (104) 2,066
Interest expense, net (20,018) (13,140) (6,004)
-------------------- -------------------- --------------------
Loss before income taxes and extraordinary items (26,972) (13,244) (3,938)
Income taxes -- -- --
-------------------- -------------------- --------------------
Loss before extraordinary items (26,972) (13,244) (3,938)
Extraordinary items -- 6,572 --
-------------------- -------------------- --------------------
Net loss (26,972) (6,672) (3,938)
Other comprehensive gain (loss) -
Minimum pension liability adjustment 919 (1,156) --
-------------------- -------------------- --------------------
Comprehensive loss $ (26,053) $ (7,828) $ (3,938)
==================== ==================== ====================
See accompanying notes to consolidated financial statements.
(Continued)
</TABLE>
27
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Statements of Operations and Comprehensive Loss, Continued
(in thousands)
<TABLE>
<CAPTION>
THE PREDECESSOR
---------------------
JANUARY 1, 1997 TO
MARCH 14, 1997
---------------------
<S> <C>
Coal sales and related revenue $ 46,486
Operating costs:
Cost of revenues 45,096
Depreciation, depletion and amortization 4,749
General and administrative 1,770
---------------------
51,615
---------------------
Operating loss (5,129)
Interest expense, net (809)
---------------------
Loss before income taxes and extraordinary items (5,938)
Income taxes --
---------------------
Loss before extraordinary items (5,938)
Extraordinary items --
---------------------
Net loss (5,938)
Other comprehensive gain (loss) - Minimum pension liability adjustment --
---------------------
Comprehensive loss $ (5,938)
---------------------
---------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Statements of Stockholder's Equity (Deficit)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL DEFICIT LOSS EQUITY (DEFICIT)
------------ -------------- --------------- ------------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C>
THE PREDECESSOR
Balance at January 1, 1997 $ 1 $ 271,011 $ (236,693) $ (653) $ 33,666
Net loss -- -- (5,938) -- (5,938)
------------ -------------- --------------- ------------- --------------
Balance at March 14, 1997 $ 1 $ 271,011 $ (242,631) $ (653) $ 27,728
------------ -------------- --------------- ------------- --------------
------------ -------------- --------------- ------------- --------------
THE COMPANY
Balance at March 15, 1997 $ -- $ -- $ -- $ -- $ --
Initial Company capitalization 1 5,000 -- -- 5,001
Net loss -- -- (3,938) -- (3,938)
------------ -------------- --------------- ------------- --------------
Balance at October 31, 1997 1 5,000 (3,938) -- 1,063
Net loss -- -- (6,672) -- (6,672)
Dividends paid -- -- (27,818) -- (27,818)
Minimum pension liability adjustment -- -- -- (1,156) (1,156)
------------ -------------- --------------- ------------- --------------
Balance at October 31, 1998 1 5,000 (38,428) (1,156) (34,583)
Net loss -- -- (26,972) -- (26,972)
Minimum pension liability adjustment -- -- -- 919 919
------------ -------------- --------------- ------------- --------------
Balance at October 31, 1999 $ 1 $ 5,000 $ (65,400) $ (237) $ (60,636)
------------ -------------- --------------- ------------- --------------
------------ -------------- --------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------------------------------------
YEAR ENDED YEAR ENDED MARCH 15, 1997 TO
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1999
------------------- ------------------- --------------------
<S> <C> <C> <C>
Net cash used in operating activities:
Net loss $ (26,972) $ (6,672) $ (3,938)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion, and amortization 32,169 27,349 14,276
Loss on sale/disposal of property plant and equipment 19 94 -
Amortization of deferred financing fees 1,058 822 396
Imputed interest 639 1,204 1,406
Gain from buyout of deferred payment obligations - (7,960) -
Financing fees written off - 1,388 -
Changes in operating assets and liabilities:
Accounts receivable (9,954) 7,538 (18,865)
Inventories (5,881) 2,054 849
Prepaid expenses and other current assets (398) (1,444) (847)
Other assets (1,113) 687 430
Accounts payable 6,891 (17,937) 2,857
Accrued expenses (6,140) 2,787 (6,613)
Other non-current liabilities (2,358) (16,118) (4,945)
------------ ------------ ------------
Net cash used in operating activities (12,040) (6,208) (14,994)
------------ ------------ ------------
Cash flows from investing activities:
Payment for Stock Purchase - - (22,830)
Payment for acquisitions (11,184) - -
Capital expenditures (12,098) (34,360) (3,771)
Proceeds from sales of property, plant and equipment 144 328 252
------------ ------------ ------------
Net cash used in investing activities (23,138) (34,032) (26,349)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 24,282 150,000 41,152
Principal payments on long-term obligations (599) (58,556) (4,852)
Proceeds from (payments on) related party borrowings - (5,000) 5,000
Initial company capitalization - - 5,001
Financing fees paid - (6,492) (1,903)
Dividends paid - (27,818) -
------------ ------------ ------------
Net cash provided by financing activities 23,683 52,134 44,398
------------ ------------ ------------
Net increase (decrease) in cash (11,495) 11,894 3,055
Cash at beginning of year 14,949 3,055 -
------------ ------------ ------------
Cash at end of year $ 3,454 $ 14,949 $ 3,055
------------ ------------ ------------
------------ ------------ ------------
Supplemental cash flow disclosures:
Interest paid $ 18,373 $ 3,590 $ 4,086
------------ ------------ ------------
------------ ------------ ------------
Income taxes paid $ - $ 347 $ -
------------ ------------ ------------
------------ ------------ ------------
Minimum pension liability (decrease) increase $ (919) $ 1,156 $ -
------------ ------------ ------------
------------ ------------ ------------
Debt incurred through acquisition of property,
plant and equipment $ 7,251 $ - $ -
------------ ------------ ------------
------------ ------------ ------------
Other liabilities assumed through acquisition of
property, plant and equipment $ 12,434 $ - $ -
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
(Continued)
</TABLE>
30
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
THE PREDECESSOR
---------------------
JANUARY 1, 1997 TO
March 14, 1997
---------------------
<S> <C>
Net cash used in operating activities:
Net loss $ (5,938)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion, and amortization 4,749
Changes in operating assets and liabilities:
Accounts receivable 5,311
Due from affiliates 2,679
Inventories (2,979)
Prepaid expenses and other current assets (655)
Other assets (148)
Accounts payable (5,212)
Accrued expenses 3,225
Other non-current liabilities (2,770)
------------
Net cash used in operating activities (1,738)
------------
Cash flows used in investing activities:
Capital expenditures (1,149)
------------
Net cash used in investing activities (1,149)
------------
------------
Cash flows used in financing activities:
Net change in long-term due from Costain America Inc. 210
Principal payments on long-term obligations (1,698)
Payments on short-term notes payable (87)
------------
Net cash used in financing activities (1,575)
------------
Net decrease in cash (4,462)
Cash at beginning of year 8,314
------------
Cash at end of year $ 3,852
------------
------------
Supplemental cash flow disclosures:
Interest paid $ 587
------------
------------
Income taxes paid $ 1,500
------------
------------
Equipment acquired with note payable $ 1,818
------------
------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(1) OVERVIEW AND BASIS OF PRESENTATION
(a) THE BUSINESS
Lodestar Holdings, Inc. and its subsidiaries, Lodestar
Energy, Inc., Eastern Resources, Inc. and Industrial Fuels
Minerals Company, (the Company), a wholly owned subsidiary
of The Renco Group, Inc. (Renco), began operations on March 15,
1997. The Company's principal operations consist of a number
of coal mining operations in Kentucky and an underground mine
in Utah, which began production in 1999. Coal shipments are
made to a wide variety of utilities throughout the United
States. The Company operates in a single, dominant industry
segment.
(b) STOCK PURCHASE
Pursuant to the Stock Purchase Agreement between Costain
America Inc. and the Company dated November 8, 1996, as
amended by the Supplemental Agreement dated February 13,
1997 (the Stock Purchase), the common stock of Costain
Coal Inc. and its subsidiaries (the Predecessor) was
acquired by Lodestar Holdings, Inc. for a purchase price
of $22,830 on March 14, 1997. Certain liabilities of the
Predecessor were not acquired in the transaction and were
transferred to Costain America Inc. Lodestar Holdings,
Inc. was also indemnified by Costain America Inc. with regard
to the outcome of certain Predecessor litigation. The
acquisition of the Predecessor was accounted for using the
purchase method of accounting as prescribed under Accounting
Principles Board Opinion No. 16, "Business Combinations."
(c) SENIOR NOTES
On May 15, 1998, Lodestar Holdings, Inc. sold and issued
$150,000 in 11.5% Senior Notes due May 15, 2005 (the "Senior
Notes"). The Senior Notes are guaranteed by the subsidiaries.
The proceeds from the Senior Notes were used to repay existing
indebtedness; purchase certain equipment financed pursuant to
both operating and capital leases; buyout certain deferred
payment obligations; pay a dividend to Renco; make contractual
payments to certain executives; pay related fees and expenses;
and reduce accounts payable and accrued expenses and for other
general corporate purposes.
(d) BASIS OF PRESENTATION
The accompanying consolidated financial statements present the
Company's consolidated financial position as of October 31,
1999 and 1998 and its consolidated results of operations and
cash flows for the years ended October 31, 1999 and 1998, and
from the acquisition date of March 15, 1997 to October 31,
1997, and the consolidated operations and cash flows of the
Predecessor for the period January 1, 1997 to March 14, 1997.
(Continued)
32
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the years ended
October 31, 1999 and 1998 and for the period from March 15,
1997 to October 31, 1997 include the accounts of the Company.
The consolidated financial statements for the period from
January 1, 1997 to March 14, 1997 include the accounts of the
Predecessor. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on an average cost basis for coal, materials, and
supplies.
(c) REVENUE RECOGNITION
Revenues are recognized upon passage of title of coal and coal
ash. Revenues are primarily generated from coal shipments to
customers throughout the United States.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost or allocated
cost for those assets acquired in the Stock Purchase.
Equipment under capital leases is stated at the present value
of minimum lease payments at the inception of the lease. In
addition, the Company capitalizes expenditures incurred during
the acquisition and development phase of mining operations.
Depreciation of property, plant and equipment is provided
using the straight-line method over their estimated useful
lives as follows: buildings and improvements, 6-15 years;
mining equipment, 3-5 years; preparation plant and machinery,
3-7 years; and transportation equipment and other, 7-15 years.
Depletion and amortization of land and mineral rights and
deferred development costs are provided using the
units-of-production method based on the estimated recoverable
reserves. Equipment held under capital leases was amortized
straight-line over the shorter of the lease term or estimated
useful life of the asset.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the
recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Additional
depletion expense of $1,000 was recorded in the year ended
October 31, 1999 to recognize impairment in the Company's
investment in minerals in Eastern Kentucky. No impairment
provision was required during the other periods presented.
(Continued)
33
<PAGE>
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(e) INTANGIBLE ASSETS
Goodwill, which represents the excess of purchase price over
the fair value of net assets acquired, is amortized on a
straight-line basis over the expected period to be benefited
of 15 years. Goodwill net of accumulated amortization, was
$5,737 and $6,201 at October 31, 1999 and 1998, respectively,
and is included in other assets. Goodwill was reduced in 1998
by $600 for subsequently recognized tax benefits relating to
the valuation allowance for deferred tax assets.
The Company has certain contracts to sell coal and dispose of
coal ash at prices in excess of market prices. These
contracts, which were acquired as part of the Stock Purchase,
are for varying periods of time, with the last contract
expiring in the year 2025. These contracts were valued at the
acquisition date at the present value of expected profits from
sales under these contracts in excess of those that would be
earned if sales were made at the then prevailing market
prices. These contracts are being amortized using the
straight-line method over the lives of the contracts.
The Company assesses the recoverability of intangible assets
by a comparison of the carrying amounts of such assets to
future net cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. No
impairment losses related to intangible assets were recorded
in the consolidated financial statements presented.
(f) INCOME TAXES
Effective with the beginning of fiscal 1999, Renco, formerly a
C Corporation, elected to be treated as an S Corporation for
federal income tax purposes, pursuant to a change in the
federal income tax laws allowing corporations with
subsidiaries to elect such status. In connection with that
election, Renco was permitted to designate its wholly-owned
subsidiaries as qualified Subchapter S subsidiaries, and the
Company has been so designated. Because of this designation,
substantially all of the Company's taxable transactions are
included in Renco's shareholders' income tax returns.
Accordingly, no provision for income taxes has been included
in the Company's consolidated statement of operations for
fiscal 1999.
From March 15, 1997 to October 31, 1998, the Company was
included in the consolidated federal income tax return of
Renco. Under the terms of the tax sharing agreement among
Renco and its subsidiaries, income taxes were allocated to the
Company on a separate return basis, except that transactions
between the Company, Renco, and Renco's other subsidiaries
were accounted for on a cash basis and the Company did not
receive the benefit of net operating loss carry-forwards,
unless such carry-forwards were a result of temporary
differences between the Company's accounting for tax and
financial reporting purposes.
Prior to fiscal 1999, income taxes were determined under the
asset and liability method. Deferred tax assets and
liabilities were recognized for the future tax consequences
attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities were
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences were
expected to be recovered or settled.
34
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(g) WORKERS' COMPENSATION AND BLACK LUNG EXPENSE
The cost of workers' compensation and black lung expense is
based on historical claims experience and actuarial studies of
workers' compensation and black lung claims incurred and
reported and incurred but not reported. The black lung
valuation methods project the ultimate expected number of
state and federal black lung claims from the mine employee
population, and based on the combined projected cost of such
claims, estimates an annual cost with the goal of fully
accruing for all future claims within the expected period of
mining operations.
(h) RECLAMATION
The estimated cost of final reclamation of active mining areas
generally is accrued over the life of the respective mines
based on the units-of-production method. Reclamation performed
during mining operations is expensed as incurred.
(i) COMPREHENSIVE INCOME
On November 1, 1997, the Company adopted SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes
standards for reporting and presentation of comprehensive
income and its components in a full set of financial
statements. Comprehensive income includes a minimum pension
liability adjustment and is presented in the consolidated
statements of operations and comprehensive income. The
Statement requires only additional disclosures in the
consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior
year financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
(j) USE OF ESTIMATES
The respective managements of the Company and the Predecessor
have made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(k) RECLASSIFICATION
Certain prior period amounts have been reclassified to conform
to the current year presentation.
35
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(3) INVENTORIES
Inventories consist of the following at October 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Coal $ 12,366 $ 6,067
Materials and supplies 3,414 3,483
------------ -------------
$ 15,780 $ 9,550
------------ -------------
------------ -------------
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows at
October 31,1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Land and mineral rights $ 50,299 $ 27,206
Buildings and improvements 1,169 1,169
Machinery and equipment 106,590 92,560
Deferred development costs 14,055 10,291
Construction in progress 1,619 482
------------ -------------
173,732 131,708
Less accumulated
depreciation, depletion,
and amortization (64,488) (36,210)
------------ -------------
Property, plant and
equipment, net $ 109,244 $ 95,498
------------ -------------
------------ -------------
</TABLE>
36
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(5) LONG-TERM DEBT
Long-term debt, excluding capital lease obligations, as
of October 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
11 1/2 % Senior Notes, due May 15, 2005 $ 150,000 $ 150,000
Revolving credit facility, interest
payable monthly at 3/4% above prime
(9.0% as of October 31, 1999), due
May 15, 2001 ("Senior Credit Facility") 24,282 -
Note payable with imputed interest at
8.2%, payable in semi-annual installments
of $375, through February 2012
secured by $3.0 million in letters of credit 5,686 -
------------ -------------
Total long-term debt 179,968 150,000
Less current installments 750 -
------------ -------------
Long-term debt, excluding capital lease
obligations and current installments $ 179,218 $ 150,000
------------ -------------
------------ -------------
</TABLE>
The aggregate maturities of long-term debt, excluding capital lease
obligations, as of October 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31, AMOUNT
-----------------------------------------------------
<S> <C>
2000 $ 750
2001 25,032
2002 750
2003 750
2004 750
Thereafter 155,375
--------------
183,407
Less amount representing imputed
interest at a rate of 8.2% 3,439
--------------
Present value of long-term debt
payments 179,968
Less current installments of
long-term debt 750
--------------
Long-term debt, excluding current
installments $ 179,218
--------------
--------------
</TABLE>
The Senior Notes are general unsecured obligations of Lodestar
Holdings, Inc. and are guaranteed by Lodestar Energy, Inc.,
Eastern Resources, Inc. and Industrial Fuels Minerals Company.
Interest on the Senior Notes is payable semi-annually on May 15 and
November 15.
37
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
The Company's Senior Credit Facility expires May 15, 2001. The limits
on aggregate borrowings and letters of credit are $90,000 and $30,000,
respectively. Availability under the facility is based upon inventory
and accounts receivable levels with respect to borrowings, and the
appraised value of property, plant, and equipment with respect to
letters of credit. As of October 31, 1999 and 1998, letters of credit
outstanding under this facility were $25,242 and $15,206, respectively.
The Senior Credit Facility is secured by substantially all of the
assets of Lodestar Energy, Inc.
See note 17 for discussion of subsequent events, which affected the
terms of the Senior Credit Facility.
(6) LEASES
The Company is obligated under a capital lease for equipment that
expires in 2003. As of October 31, 1999, the gross amount of equipment
and related accumulated depreciation recorded under the capital lease
was $1,445 and $69, respectively.
As of October 31, 1999, the Company has non-cancelable operating leases
for mining and transportation equipment and administrative facilities.
The leases expire at various dates through 2012. Rental expense for
operating leases during the years ended October 31, 1999 and 1998, the
period March 15, 1997 to October 31, 1997, and the Predecessor's period
January 1, 1997 to March 14, 1997 was $1,721, $5,090, $7,121, and
$1,933, respectively.
Future minimum lease payments under non-cancelable operating leases and
capital lease payments as of October 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING OCTOBER 31, LEASES LEASES
----------------------- ------- ----------
<S> <C> <C>
2000 $ 385 $ 2,650
2001 385 2,650
2002 385 2,464
2003 385 1,535
2004 32 1,535
Thereafter - 7,404
----- --------
Total minimum lease payments 1,572 $ 18,238
========
Less amount representing imputed
interest at a rate of 8.5% 248
-----
Present value of net minimum capital
lease payments 1,324
Less current installments of capital
lease obligations 283
-----
Capital lease obligations, excluding
current installments $ 1,041
=======
</TABLE>
38
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(7) INCOME TAXES
Due to the Company's Subchapter S status, no income tax expense or
benefit was applicable during 1999. The income tax expense for the year
ended October 31, 1998, the period from March 15, 1997 to October 31,
1997 and the period from January 1, 1997 to March 14, 1997 was $ -0-.
Total income tax expense (benefit) differs from the amount computed by
applying the federal income tax rate of 35% to loss before income taxes
as a result of the following:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
--------------------------------------- ------------------
YEAR ENDED MARCH 15, 1997 TO JANUARY 1, 1997 TO
OCTOBER 31, 1998 OCTOBER 31, 1997 MARCH 14, 1997
---------------- ----------------- -------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (2,335) $ (1,378) $ (2,078)
Increase (reduction) in income taxes
resulting from State income taxes,
net of Federal income tax benefit (297) (197) 774
Increase (decrease) in valuation allowance (209) - 1,304
Other, net 258 - -
Net operating loss for which no
benefit is available 2,583 1,575 -
----------- ------------- -------------
Total income tax expense $ - $ - $ -
=========== ============= ==============
</TABLE>
39
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at October 31, 1998
are presented below:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Deferred tax assets:
Accrued reclamation $ 4,644
Other accrued liabilities 7,200
Depreciation and depletion 6,534
--------
Total gross deferred tax assets 18,378
Less valuation allowance (4,753)
--------
Net deferred tax assets 13,625
Deferred tax liabilities:
Coal and ash disposal contracts (15,025)
--------
Net deferred tax liability $ (1,400)
========
</TABLE>
The valuation allowance decreased $809 for the year ended October 31,
1998. There was no change in the valuation allowance for the period
March 15, 1997 to October 31, 1997. The valuation allowance increased
$1,304 in the period January 1, 1997 to March 14, 1997. In assessing
the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
The net deferred tax liability of $1,400 at October 31, 1998 was
reclassified to other non-current liabilities on the accompanying 1999
consolidated balance sheet.
(8) BENEFIT PLANS
The Company's defined benefit pension plan provides specified pension
benefits to certain eligible participants based on the employees' years
of service. Contributions to the plan are actuarially determined to
provide the plan with sufficient assets to meet future benefit payment
requirements. The plan's assets consist primarily of investments in
intermediate term fixed income loans and private placement bonds and
mortgages. The plan had 1,056 and 1,093 participants at October 31,
1999 and October 31, 1998, respectively.
40
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
The plan's benefit obligations, fair value of plan assets, and funded
status of the plan at October 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 11,823 $ 9,613
Service cost 307 285
Interest cost 794 715
Actuarial (gain) loss (1,598) 1,689
Benefits paid (406) (479)
-------- ---------
Benefit obligation at end of year 10,920 11,823
-------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 9,030 8,089
Actual return on plan assets (36) 715
Employer contribution 750 705
Benefits paid (406) (479)
-------- ---------
Fair value of plan assets at end of year 9,338 9,030
-------- ---------
Funded status (1,582) (2,793)
Unrecognized net actuarial loss 237 1,156
-------- ---------
Net amount recognized $ (1,345) $ (1,637)
======== =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF:
Accrued benefit liability $ (1,582) $ (2,793)
Accumulated other comprehensive loss 237 1,156
-------- ---------
Net amount recognized $ (1,345) $ (1,637)
======== =========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF OCTOBER 31:
Discount rate 7.50% 6.75%
Expected return on plan assets 7.00% 7.00%
</TABLE>
41
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
Components of net periodic benefit cost:
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
------------------------------------------------------------- ------------------
YEAR ENDED YEAR ENDED MARCH 15, 1997 TO JANUARY 1, 1997 TO
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1997 MARCH 14, 1997
---------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Service cost $ 307 $ 285 $ 226 $ 71
Interest cost 794 715 442 140
Expected return on plan assets (642) (615) (445) (141)
Amortization of prior service cost - - 122 39
------- ------ ------ -------
Net periodic benefit cost $ 459 $ 385 $ 345 $ 109
======= ====== ====== =======
</TABLE>
The Company's defined contribution plan covers all employees meeting
certain eligibility requirements. Contributions expensed to this plan
were $927 for the year ended October 31, 1999, $1,117 for the year
ended October 31, 1998, $760 for the period March 15, 1997 to October
31, 1997, and $236 for the Predecessor period January 1, 1997 to March
14, 1997.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
At October 31, 1999 and 1998, the carrying amounts of accounts
receivable, accounts payable, and accrued expenses approximate fair
value because of the short maturity of these instruments.
The fair value of the Senior Notes is subject to periodic fluctuations
due to prevailing market conditions which are impacted by interest
rates and other factors beyond the control of the Company. As of
October 31, 1999 and 1998, the fair value of the 11.5% Senior Notes was
approximately $75,000 and $120,000, respectively, based on quoted
market prices. The carrying values of the Senior Credit Facility and
other debt are not materially different from the estimated fair value.
(10) RELATED PARTY TRANSACTIONS
Renco provides certain management services to the Company under a
management agreement. Payments of $1,200 were made annually during 1999
and 1998 in accordance with this agreement. Charges of $750, which
would have been incurred in accordance with this agreement, were waived
for the period from March 15, 1997 to October 31, 1997. Management
believes that such costs approximate the cost of comparable services,
which could be obtained from unaffiliated entities.
At October 31, 1997, the Company had a $3,000 non-interest-bearing note
payable to Renco for cash provided during the period from March 15,
1997 to October 31, 1997. This note payable was repaid during 1998 with
the proceeds from the Senior Notes.
42
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
The Company also had a note payable in the amount of $2,000 to Renco at
October 31, 1997. This note bore interest at a rate of 8.25% and was
repaid during 1998 with the proceeds from the Senior Notes. Interest
charges through October 31, 1997 were waived by Renco.
As an inducement for the Company's lenders to enter into an amendment
to the credit facility in November 1999, Renco entered into an
agreement, to provide in certain circumstances, up to $6,000 of
subordinated loans to Lodestar should certain financial covenants not
be achieved. See note 17.
(11) COMMITMENTS AND CONTINGENCIES
The Company has future minimum royalty payments including obligations
which were incurred in conjunction with the acquisition of certain
mining rights as more fully described in note 17, which represent
advance royalty obligations; these are generally recoupable against
royalty payments otherwise due based on production. The expected future
royalty payments in conjunction with these commitments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
OCTOBER 31, AMOUNT
------------ ------
<S> <C>
2000 $ 4,908
2001 4,348
2002 4,264
2003 3,285
2004 2,439
Thereafter 7,987
--------
$ 27,231
========
</TABLE>
The Company is involved in a number of legal actions, which, if adverse
judgments are ultimately awarded, may individually or in the aggregate
have a material adverse effect on the Company's consolidated financial
position and results of operations. With respect to each of these
proceedings, based on the advice of outside counsel and consideration
of the facts at hand, it is the opinion of the Company's management
that the ultimate disposition of the litigation will not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
As of October 31, 1999 and 1998, the Company has outstanding
performance bonds of $81,465 and $69,800, respectively. Of the total
outstanding bonds, $53,011 and $43,605, respectively, have been
provided to government agencies that provide mining permits to maintain
land reclamation bonds. The remainder of outstanding bonds provide
surety for various obligations, including contractual performance and
workers' compensation payments. As support for the issuers of the
outstanding bonds and in conjunction with other commitments, the
Company has outstanding letters of credit totaling $25,242 and $15,206
as of October 31, 1999 and 1998, respectively.
43
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
A significant customer (the "Customer") of the Company is involved in
litigation with the utility for which the Customer generates power. The
Customer alleged, among other things, that the utility was in breach of
its contract for underpaying disputed amounts. While the lawsuit was
pending, the utility withheld a portion of the amounts invoiced by the
Customer and the Customer in turn withheld a portion of the amounts
invoiced by the Company. On August 12, 1999, following a three week
trial, a judgment in excess of $18.1 million was entered in favor of
the Customer. Slightly in excess of $5.1 million of the judgment
related to the portion of the Customer's claim in which the Company has
a financial interest. The judgment has been appealed by the utility. No
monies have changed hands between the parties relating to the judgment.
Due to a declaratory order prepared by the court no "underpayments"
have occurred since the judgment date. Should the judgment in favor of
the Customer be reversed during the appeal process, it would have an
adverse effect on the Company as $4,313 has been recorded as a current
receivable relative to this matter on the Company's October 31, 1999
consolidated balance sheet. Additionally, there is further potential
that the Customer's ability to meet its other financial obligations may
be adversely affected to the extent the Customer is not successful in
its litigation. As of October 31, 1999, the Company has undisputed
receivables totaling $9,280 from the Customer ($3,445 of which is
classified as current and $5,835 of which is classified as long-term).
The Company also has contracts with the Customer to sell coal and
dispose of coal ash. These contracts were part of the intangible asset
recorded in connection with the Stock Purchase. As of October 31, 1999,
the net amount recorded for these contracts with the Customer is
$14,957. Management of the Company does not consider any loss with
regard to these assets probable or estimable at this time.
(12) SIGNIFICANT CUSTOMERS
The Company derives a significant portion of its coal sales and related
revenue from three customers each of whom contribute in excess of 10%
of the total. Coal sales and related revenue from these customers
totaled approximately $147,000 or 61% (28%, 18% and 15%, respectively)
of total coal sales and related revenue for the year ended October 31,
1999. Trade accounts receivable from these customers totaled $18,554 at
October 31, 1999.
For the year ended October 31, 1998, two customers contributed in
excess of 10% of the total coal sales and related revenue totaling
approximately $118,000 or 45% (27% and 18%, respectively). Coal sales
and related revenue from these two customers totaled approximately
$76,000, or 44% (27% and 17%, respectively) of total coal sales and
related revenue, for the period March 15, 1997 to October 31, 1997.
Trade accounts receivable from these customers totaled $13,745 at
October 31, 1998.
Likewise, the Predecessor derived a significant portion of its coal
sales and related revenue from these two customers. Coal sales and
related revenue from these customers totaled approximately $19,000 or
41% (22% and 19%, respectively) of total coal sales and related revenue
for the period January 1, 1997 to March 14, 1997.
(13) EXTRAORDINARY ITEMS
The extraordinary items recorded in 1998 result from a credit
associated with the buyout of certain deferred payment obligations and
a charge associated with the write-off of capitalized costs. The
deferred payment obligations were bought out at a discount from book
value of $7,960. The charge of $1,388 represented the write-off of all
unamortized costs attributable to certain indebtedness which was paid
in full with the proceeds from the Senior Notes.
44
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(14) ACCRUED EXPENSES AND OTHER NON-CURRENT LIABILITIES
Accrued expenses consist of the following at October 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Royalties $ 2,120 $ 3,299
Taxes, other than income 2,675 3,120
Payroll and benefits 3,515 3,928
Workers' compensation and black lung 3,920 4,838
Reclamation costs 3,187 2,186
Interest 7,906 7,906
Other 5,358 7,134
-------- --------
$ 28,681 $ 32,411
======== ========
</TABLE>
Other non-current liabilities consist of the following at
October 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Reclamation costs $ 24,574 $ 16,225
Workers' compensation and black lung 12,319 12,201
Other 10,923 12,363
-------- --------
$ 47,816 $ 40,789
======== ========
</TABLE>
(15) YEAR 2000 (UNAUDITED)
No operational, financial, or other problems were encountered in
conjunction with the Y2K transition, nor is business interruption from
compliance issues within the controllable scope of Lodestar expected in
the future. The Company engaged an independent consultant to assist in
the Y2K project. Total incremental expenditures related to Y2K projects
were $864 and $16 in the years ended October 31, 1999 and 1998,
respectively.
45
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
(16) SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly results for the years
ended October 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1999
------------------------------------------------------------
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 57,430 $ 47,314 $ 67,719 $ 67,587
Gross margin 8,762 8,607 12,433 8,223
Net loss (5,441) (5,705) (5,689) (10,137)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1998
------------------------------------------------------------
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 71,588 $ 64,650 $ 63,419 $ 64,059
Gross margin 13,802 7,792 8,536 9,757
Income (loss) before extraordinary items 1,711 (1,632) (8,737) (4,586)
Net income (loss) 1,711 (1,632) (2,165) (4,586)
</TABLE>
During the three months ended July 31, 1998, the Company recorded
$6,572 of extraordinary items. See note 13.
(17) SUBSEQUENT EVENT (UNAUDITED)
In November of 1999, the Company completed a transaction to acquire
certain mining rights and mining equipment in Eastern Kentucky. In
order to secure the necessary funds required to consummate this
transaction, Lodestar entered into an amendment to its Senior Credit
Facility providing for a supplemental loan of $6,700. This supplemental
loan bears interest at the prime rate plus 0.75% and is payable in four
equal quarterly installments beginning January 31, 2000. In conjunction
with this amendment to its existing facility the Company, among other
things, is now subject to minimum monthly earnings tests during the
remaining life of its Senior Credit Facility.
Simultaneous with the amendment as previously described, Renco entered
into an agreement with the Company's lenders to provide in certain
circumstances subordinated loans of up to $6 million to the Company
should the Company fail to maintain certain financial covenants
required by the current terms of the Senior Credit Facility or should
the Company not meet minimum daily loan availability requirements.
46
<PAGE>
(Continued)
LODESTAR HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(in thousands)
As shown in the accompanying consolidated financial statements, the
Company has incurred significant net losses and negative cash flows
during fiscal 1999 and 1998. The Company projects ongoing losses in
fiscal 2000 with positive cash flow primarily as a result of reduced
capital expenditures and positive working capital changes. 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, its own specific operational problems, which are in large part
due to its shortage of economically mineable low-sulfur reserves.
During the fiscal year ended October 31, 1999 and including its
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 38.5% of the Company's production in fiscal
2000 is expected to be from mining rights which have been acquired
since January 1, 1999.
The Company's continued financial viability is dependent upon its
ability to successfully integrate these newly acquired properties with
its existing operations in a manner which improves operational results
and to maintain adequate levels of liquidity under its Senior Credit
Facility until the necessary operational improvements can be attained.
In the event the Company is unable to improve its operational
performance, it will need to obtain additional financing.
47
<PAGE>
PART II. - ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
48
<PAGE>
PART III. - ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth-certain information regarding the directors and
executive officers of the Company and the Guarantors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ira Leon Rennert 65 Chairman and Director of the Company, Lodestar, Eastern
Resources and Industrial Fuels.
John W. Hughes 58 President and Chief Executive Officer of the Company and
Lodestar and President of Eastern Resources and Industrial
Fuels.
R. Eberley Davis 42 Vice President, General Counsel and Assistant Secretary of
Lodestar and Assistant Secretary of the Company, Eastern
Resources and Industrial Fuels.
Michael E. Donohue 48 Vice President and Chief Financial Officer of the Company,
Lodestar, Eastern Resources and Industrial Fuels.
T. LeMichael Francisco 43 Vice President of Marketing and Business Development of
Lodestar and Vice President of Industrial Fuels.
William M. Potter 47 Vice President of Operations of Lodestar
</TABLE>
IRA LEON RENNERT has been Chairman, Chief Executive Officer, Director and
principal shareholder of Renco (including predecessors) since Renco's first
acquisition in 1975, Chairman and Director of the Company since its
establishment in August 1996 and Chairman and Director of Lodestar, Eastern
Resources and Industrial Fuels since March 1997. Mr. Rennert was Chief Executive
Officer of the Company from April 1998 until January 2000. Renco holds
controlling interests in a number of manufacturing and distribution concerns
operating in businesses not competing with Lodestar, including WCI Steel, Inc.,
The Doe Run Resources Corporation, Renco Metals, Inc. and AM General
Corporation.
JOHN W. HUGHES has been President of the Company since April 1998 and of the
Predecessor Company and Lodestar since August 1996. Mr. Hughes has been Chief
Executive Officer of the Company and Lodestar since January 2000. Mr. Hughes was
Chief Operating Officer of the Company from April 1998 until January 2000, and
of the Predecessor Company and Lodestar from July 1995 until January 2000. Mr.
Hughes joined the Predecessor Company in July 1995 as Executive Vice President
and Chief Operating Officer. From May 1993 until joining the Predecessor
Company, Mr. Hughes was a consultant and pursued personal interests outside the
coal industry. From November 1992 to May 1993, Mr. Hughes was the Manager of
Operations, Safety and Environmental and the President of Shell Mining Company.
Mr. Hughes has over 30 years of experience in the coal mining and the oil and
gas industries.
R. EBERLEY DAVIS has been Vice President and General Counsel of the Predecessor
Company and Lodestar since November 1995. Mr. Davis previously served as
Director of Legal Affairs and Corporate Counsel of the Predecessor Company from
July 1995 to November 1995 and as Director of Legal Affairs for the Western
Division of the Predecessor Company from January 1993 to July 1995. Mr. Davis is
a member of the Kentucky bar.
MICHAEL E. DONOHUE has been Chief Financial Officer of the Company and Vice
President and Chief Financial Officer of Lodestar, Eastern Resources, and
Industrial Fuels since April 1998 and Treasurer of Industrial Fuels since
October 1994. From October 1997 to April 1998, Mr. Donohue was a consultant to
Lodestar. From November 1995 to September 1997, Mr. Donohue served as Vice
President and Treasurer of Lodestar and the Predecessor Company, and from March
1993 to November 1995, Mr. Donohue served as Assistant Treasurer of the
Predecessor Company. Mr. Donohue has held various positions with the Predecessor
Company and its subsidiaries since 1981.
T. LEMICHAEL FRANCISCO has been Vice President of Marketing and Business
Development of Lodestar since August 1999. Mr. Francisco was Vice President -
East Kentucky Operations of the Predecessor Company and Lodestar from July 1995
until August 1999 and has been Vice President of Industrial Fuels since August
1995. Since joining the Predecessor Company in June 1985, Mr. Francisco has held
positions as, among others, Chief Engineer - East Kentucky and Senior Production
Engineer. Mr. Francisco has over eighteen years experience in civil and mining
engineering and is a registered Professional Engineer.
WILLIAM M. POTTER has been Vice President - Operations of Lodestar since
October 1999. Mr. Potter was Vice President - West Kentucky Operations of the
Predecessor Company and Lodestar from July 1995 until October 1999. Mr.
Potter was Mine Superintendent of Southard Coal from 1987 until it was
acquired by the Predecessor Company in 1989, and Mr. Potter remained in that
position at the Predecessor Company until 1990 when he became Superintendent
of the Baker and Wheatcroft mines. In 1993, Mr. Potter became General Manager
of certain underground operations in Western Kentucky. Mr. Potter has over 22
years of experience in the mining industry.
49
<PAGE>
PART III. - ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation of
the named executive officers by Lodestar and the Predecessor Company for
services rendered in all capacities for the twelve months ended October 31,
1997, 1998, and 1999:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
LTIP PAYOUTS (2)
FISCAL SALARY BONUS & PAYOUTS LONG- ALL OTHER
NAME AND POSITION YEAR (ANNUAL COMPENSATION (1)) TERM COMPENSATION COMPENSATION(3)
- ----------------- ------ ------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Ira Leon Rennert (4) 1999 - - - $1,200,000
Chairman and Director 1998 - - - 1,200,000
1997 - - - -
- ---------------------------------------------------------------------------------------------------------------
John W. Hughes 1999 $220,000 - - 11,811
President and Chief 1998 220,000 - $695,455 7,816
Executive Officer 1997 220,000 $330,000 - 7,176
- ---------------------------------------------------------------------------------------------------------------
Michael E. Donohue 1999 150,000 - - 8,855
Vice President and CFO 1998 95,250 - 150,000 5,428
1997 109,648 - - 6,934
- ---------------------------------------------------------------------------------------------------------------
R. Eberley Davis 1999 155,000 - - 9,758
Vice President and General 1998 155,000 - 347,727 7,297
Counsel 1997 155,000 35,000 - 6,511
- ---------------------------------------------------------------------------------------------------------------
T. LeMichael Francisco 1999 148,750 - - 9,331
Vice President 1998 130,000 - 347,727 6,120
1997 115,000 - - 4,543
- ---------------------------------------------------------------------------------------------------------------
William M. Potter 1999 127,675 - - 10,732
Vice President 1998 111,500 - 347,727 3,038
1997 111,838 189 - 2,937
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------
(1) Value of perquisites and other personal benefits did not exceed the
lesser of $50,000 or 10% of total salary and bonus per named executive
officer.
(2) The amounts shown as "LTIP Payouts" in the table for each named
executive officer represent contractual payments under such officer's
Net Worth Appreciation Agreement. See "Net Worth Appreciation
Agreements."
(3) The amounts shown as "All Other Compensation" in the table for each
named executive officer, except Mr. Rennert, represent contributions to
Messrs. Hughes, Donohue, Davis, Francisco and Potter under Lodestar's
401(k) plan of $8,800, $8,125, $9,300, $8,925, and $10,144,
respectively in fiscal 1999, $6,400, $4,798, $6,200, $5,200 and $2,248,
respectively, in fiscal 1998, and $6,000, $6,321, $5,600, $3,867 and
$2,280 respectively, in fiscal 1997 and payments of life insurance
premiums of $3,011, $730, $458, $406, and $588, respectively in fiscal
1999, $1,416, $630, $1,097, $920 and $790, respectively, in fiscal
1998, and $1,176, $613, $911, $676 and $657, respectively, in fiscal
1997.
(4) Mr. Rennert receives no compensation directly from Lodestar. He is
Chairman of the Board and, through trusts established for himself and
his family, is the sole stockholder of Renco, which receives a
management fee from Lodestar pursuant to the Management Consulting
Agreement. The amount shown as all other compensation to Mr. Rennert
are the management fees paid by Lodestar to Renco for fiscal 1999 and
1998. The management consultant fee was waived for March 15, 1997 to
October 31, 1997.
The executive officers who receive salaries are employees of Lodestar and
receive their compensation from Lodestar. No compensation is paid to the
executive officers by Lodestar Holdings, Inc.
50
<PAGE>
NET WORTH APPRECIATION AGREEMENTS
The named executive officers, except Mr. Rennert, are each parties to net worth
appreciation agreements with Lodestar, pursuant to which, upon termination of
each person's employment with Lodestar, he is entitled to receive an amount
equal to a fixed percentage of the cumulative net income of the Company, as
defined, from a base date until the end of the fiscal quarter preceding the date
of his termination. Such amount is payable without interest in 40 equal
quarterly installments, commencing three months after later of (i) the
termination of each person's employment or (ii) attaining age 62.
The base date for each of the named executive officers under their respective
net worth appreciation agreement is March 14, 1997, the date of the Acquisition.
Mr. Hughes has a net worth percentage of 2.5% that vests as to 1.5% on April 30,
2000 and 0.5% on each of April 30, 2001 and 2002, PROVIDED that in each case Mr.
Hughes remains in the employ of Lodestar until the applicable vesting date.
Messrs. Davis, Francisco, Potter and Donohue each has a net worth percentage of
1.25% that vests as to 0.75% on April 30, 2000 and 0.25% on each of April 30,
2001 and 2002, PROVIDED that in each case Messrs. Davis, Francisco, Potter and
Donohue each remains in the employ of Lodestar until the applicable vesting
date. As of October 31, 1999, the cumulative vested value of the net worth
appreciation agreements for each of the named executive officers was zero.
The net worth appreciation agreements also provide that, in the event of payment
of a dividend or a sale of Lodestar, the active participants will be entitled to
receive an amount equal to a percentage of the dividend or the net proceeds of
the sale equal to their maximum percentages under the agreements. Upon
consummation of the offering of the Senior Notes, approximately $2.8 million was
paid to certain employees of Lodestar, including each named executive officer,
pursuant to the net worth appreciation agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company had no compensation committee during fiscal 1997, 1998 or 1999. Mr.
Rennert is the sole member of the Board of Directors. The compensation for the
executive officers is fixed by negotiations between such executive officers and
Mr. Rennert on behalf of Renco.
EMPLOYMENT AGREEMENTS
The named executive officers are parties to employment agreements with Lodestar,
expiring April 1, 2002, automatically renewable thereafter for additional one
year terms. These employment agreements provide for the following:
<TABLE>
<CAPTION>
BASE
NAME ANNUAL SALARY ANNUAL BONUS
- -------------------------------------------------------------------
<S> <C> <C>
John W. Hughes $ 220,000 $ 75,000
R. Eberley Davis 155,000 25,000
T. LeMichael Francisco 130,000 25,000
William M. Potter 111,500 25,000
Michael E. Donohue 150,000 35,000
</TABLE>
- -------------
Each employee's receipt of his annual bonus is subject to (a) his achieving
performance objectives established by Lodestar, (b) being in the active employ
of Lodestar at the close of the fiscal year, and (c) Lodestar's financial
statement for such fiscal year, as prepared by its independent public
accountants, showing a positive net income. No bonuses are payable for fiscal
1999.
Each of the above described employment agreements requires that, until April 1,
2002 or the termination of
51
<PAGE>
employment, whichever is later, the executive officer not, directly or
indirectly, engage in any aspect of the business of coal mining as an
officer, director, partner, proprietor, investor, associate, employee or
consultant in a capacity competitive to the Company. In addition, each of the
above executive officers has agreed to maintain the confidentiality of
information obtained during his employment with Lodestar.
BENEFITS
Lodestar has a 401(k) defined contribution plan that covers all employees.
Employees can defer up to 15% of their income, and Lodestar contributes $1.00
for each $1.00 deferred up to 4% of an employee's salary (except for certain
employees of the Western Kentucky mining operations) and $0.50 for each $1.00
deferred up to 4% of an employees' salary for such Western Kentucky employees.
Amounts deferred vest after five years.
Lodestar has a defined benefit plan for certain employees of the Western
Kentucky mining operations who do not receive full 401(k) matching from
Lodestar. Eligible employees receive, subject to certain limitations, a monthly
benefit equal to the sum of $17.08875 for each year of service up to ten years,
$17.64 for each year of service in excess of ten years up to twenty years,
$18.19125 for each year of service in excess of twenty years up to 30 years and
$18.7425 for each year of service in excess of 30 years up to 40 years. Benefits
begin on or before the 60th day after the end of the calendar year in which the
latest of the following occur: (i) the eligible employee attains the age of 65,
(ii) the tenth anniversary of the eligible employee's participation in the plan
or (iii) the date the eligible employee ceased to be an employee. William M.
Potter, the only named executive officer who participates in this plan, based on
his service to date, would receive benefits upon retirement at the age of 62
estimated to be $170.89 per month.
Industry legislation, including the Federal Coal Mine Health and Safety Act of
1969, the Federal Mine Safety and Health Act of 1977, and the Black Lung Reform
Act of 1977 mandate certain benefits for current and retired coal miners for
which directors and executive officers of the Company may be eligible.
52
<PAGE>
PART III. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of the date hereof
regarding the beneficial ownership of common stock of the Company by each
beneficial owner of 5% or more of the common stock of the Company, each director
and each named executive officer of the Company and Lodestar during the last
fiscal year, and by all directors and executive officers of the Company and
Lodestar as a group. Except as otherwise noted, the persons named in the table
below have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
NAME OF BENEFICIAL OWNERS SHARES OF COMMON STOCK PERCENT
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Renco Group, Inc.(1) 1,000 100.0%
Ira Leon Rennert(1)(2) 1,000 100.0%
John W. Hughes - -
Michael E. Donohue - -
R. Eberley Davis - -
T. LeMichael Francisco - -
William M. Potter - -
All directors and executive officers as a group (16 persons) 1,000 100.0%
</TABLE>
- -----------
(1) The address of this beneficial owner is c/o The Renco Group, Inc.,
30 Rockefeller Plaza, 42nd Floor, New York, New York 10112.
(2) Mr. Rennert is deemed to beneficially own the Common Stock of the
Company owned by Renco due to the ownership by trusts established by
him for himself and members of his family all the outstanding Common
Stock of Renco.
By virtue of Renco's ownership of all the outstanding shares of Common Stock,
and Mr. Rennert's ownership of all of the stock of Renco, Mr. Rennert is in a
position to control actions that require the consent of a majority of the
holders of the Company's outstanding shares of Common Stock, including the
election of the Board of Directors.
53
<PAGE>
PART III. - ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under a Management Consulting Agreement, effective March 14, 1997, as amended
(the "Management Consultant Agreement"), between Renco and Lodestar, Lodestar
pays annual fees of $1.2 million to Renco. The Management Consultant Agreement
provides that Lodestar shall not make any payment thereunder which would violate
any of its agreements with respect to any of its outstanding indebtedness. The
Management Consultant Agreement extends to October 31, 2005, and thereafter
shall continue for additional terms of three years each unless sooner terminated
by either party by giving six months prior written notice. For the period March
15, 1997 to October 31, 1997, Lodestar's management fees were waived by Renco.
Lodestar believes that the cost of obtaining the type and quality of services
rendered by Renco under the Management Consultant Agreement was, and continues
to be, no less favorable than that at which Lodestar could obtain such services
from unaffiliated entities.
Effective with the beginning of fiscal 1999, Renco, formerly a C corporation,
elected to be treated as an S corporation for federal income tax purposes,
pursuant to a change in the federal income tax laws allowing corporation with
subsidiaries to elect such status. In connection with that election, Renco is
permitted to designate its wholly-owned subsidiaries as qualified Subchapter S
subsidiaries, and the Company has been so designated. Because of this
designation, substantially all of the Company's taxable income will be included
in Renco's shareholders' income tax returns. Generally, no provision for income
taxes will be included in the Company's statements of income for periods
beginning after October 31, 1998. The Company will continue to provide for state
and local income taxes for those taxing jurisdictions which do not recognize
qualified Subchapter S subsidiary status, although management believes such
state and local taxes will not be material to the Company. However, under the
"built in gains" provision of the tax law, certain federal and state taxes may
become payable and would be charged to the Company's statement of income. Such
taxes are measured by the excess of the fair market value of assets over their
tax bases on the effective date of the Subchapter S subsidiary designation if
the associated assets are disposed of within the ten-year post-designation
period.
To obtain the advantages of volume, Renco purchases certain insurance coverage
for its subsidiaries, including the Company and Lodestar, and the actual cost of
such insurance, without markup, is reimbursed by the covered subsidiaries. The
major areas of Lodestar's insurance coverage obtained under the Renco programs
are property and business interruption. The premiums for property and business
interruption are allocated by Renco substantially as indicated in the underlying
policies. Renco also purchases and administers certain insurance policies
exclusively for Lodestar, including general and product liability, automobile
liability, casualty umbrella, workers' compensation (excluding the Kentucky
self-insured program), marine liability, fiduciary and fidelity. The cost of
such insurance, without markup, is reimbursed by Lodestar as incurred. The total
insurance cost under the Renco insurance programs incurred in fiscal 1999 by
Lodestar was approximately $2.1 million. Lodestar believes that its insurance
costs under this program were less than it would have incurred if it had
obtained its insurance directly.
In connection with the Acquisition, Renco loaned $2.0 million to the Company. In
addition, Renco loaned $3.0 million to Lodestar in October 1997 to provide
working capital. These loans were repaid in full, including accrued interest
thereon, with the net proceeds of the offering of the Notes.
Upon consummation of the offering of the Notes, the Company paid a dividend to
Renco of $27.8 million.
As an inducement for the Company's lenders to enter into an amendment to the
credit facility in November 1999, Renco entered into an agreement, 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 as discussed in note 17 of the consolidated financial
statements.
54
<PAGE>
PART IV. - ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents Filed as a Part of This Report.
1. Consolidated Financial Statements
The consolidated financial statements listed below together with the
report thereon of the independent auditors dated January 21, 2000, are
included in this report for Item 8. And is incorporated by reference
herein.
Consolidated Balance Sheets as of October 31, 1999 and 1998
Consolidated Statements of Operations and Comprehensive Gain (Loss) for
the years ended October 31, 1999 and 1998, the period from March 15,
1997 to October 31, 1997, and the Predecessor's period from January 1,
1997 to March 14, 1997
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended October 31, 1999 and 1998, the period from March 15, 1997 to
October 31, 1997, and the Predecessor's period January 1, 1997 to March
14, 1997
Consolidated Statements of Cash Flows for the years ended October 31,
1999 and 1998, the period from March 15, 1997 to October 31, 1997, and
the Predecessor's period from January 1, 1997 to March 14, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Independent Auditors' Report on Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K.
The information called for by this paragraph is contained in the
Exhibit Index of this report which is incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
55
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Lodestar Holdings, Inc.:
Under date of January 21, 2000, we reported on the consolidated balance sheets
of Lodestar Holdings, Inc. and subsidiaries as of October 31, 1999 and 1998, and
the related consolidated statements of operations and comprehensive loss,
stockholder's equity (deficit), and cash flows for the years then ended and for
the period from March 15, 1997 to October 31, 1997. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the accompanying consolidated financial statement schedule. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
Louisville, Kentucky
January 21, 2000
56
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LODESTAR HOLDINGS, INC.
Valuation and Qualifying Accounts
Periods ended October 31, 1999, 1998 and 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS ADDITIONS DEDUCTIONS BALANCE
AT CHARGED TO CHARGED TO WRITE-OFFS AT
BEGINNING COSTS AND OTHER AGAINST END
OF YEAR EXPENSES ACCOUNTS (1) ALLOWANCE OF PERIOD
------------ ------------ -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
TWELVE MONTHS ENDED OCTOBER 31, 1999:
Applied against asset accounts:
Allowance for inventory
obsolescence $1,662 $ 120 $ -- $ 378 $1,404
Allowance for unrecoupable advance
royalties 2,423 1,598 -- 374 3,647
TWELVE MONTHS ENDED OCTOBER 31, 1998:
Applied against asset accounts:
Allowance for inventory
obsolescence $2,710 $ 395 $ -- $1,443 $1,662
Allowance for unrecoupable advance
royalties 2,750 684 -- 1,011 2,423
TWELVE MONTHS ENDED OCTOBER 31, 1997:
Applied against asset accounts:
Allowance for inventory
obsolescence $1,464 $ 382 $1,590 $ 726 $2,710
Allowance for unrecoupable advance
royalties 2,656 94 -- -- 2,750
</TABLE>
(1) Purchase accounting adjustment.
(2) Represents combined amounts for Lodestar Holdings, Inc. for the period
March 15, 1997 to October 31, 1997 and the Predecessor for the period
January 1, 1997 to March 14, 1997.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 31st day of January
2000.
LODESTAR ENERGY, INC.
By: /s/ John W. Hughes
------------------------------
John W. Hughes
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 31st day of January 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Ira Leon Rennert
-----------------------
Ira Leon Rennert Chairman of the Board and Director
/s/ John W. Hughes
-----------------------
John W. Hughes President and Chief Executive Officer
(principal executive officer)
/s/ Michael E. Donohue
-----------------------
Michael E. Donohue Vice President and Chief Financial Officer
(principal financial and accounting officer)
</TABLE>
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act of Registrants, Which Have Not Registered Securities.
Pursuant to Section 12 of the Act.
No annual report to security holders covering the registrant's last fiscal year
and no proxy statement, form of proxy, or other proxy soliciting material with
respect to any annual or other meeting of security holders has been or will be
sent to security holders.
58
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation of Lodestar Holdings, Inc. (1)
3.2 Bylaws of Lodestar Holdings, Inc. (1)
3.3 Certificate of Incorporation of Lodestar Energy, Inc. (1)
3.4 Bylaws of Lodestar Energy, Inc. (1)
3.5 Certificate of Incorporation of Eastern Resources, Inc. (1)
3.6 Bylaws of Eastern Resources, Inc. (1)
3.7 Certificate of Incorporation of Industrial Fuels Minerals Company. (1)
3.8 Bylaws of Industrial Fuels Minerals Company. (1)
4.1 Indenture, dated as of May 15, 1998, by and among the Registrants and
State Street Bank and Trust Company, as trustee, relating to the 11
1/2% Senior Notes due 2005, Series A and 11 1/2% Senior Notes due 2005,
Series B and the Guarantees thereof (containing, as exhibits, specimens
of the Notes and the Guarantees). (1)
4.2 Purchase Agreement, dated May 12, 1998, among the Registrants, Donaldson,
Lufkin & Jenrette Securities Corporation and BT Alex. Brown Incorporated,
relating to the 11 1/2% Senior Notes due 2005. (1)
4.3 Registration Rights Agreement, dated as of May 15, 1998, by and among
the Registrants and Donaldson, Lufkin & Jenrette Securities
Corporation, relating to the 11 1/2% Senior Notes due 2005. (1)
4.4 Form Letter o f Transmittal. (1)
10.1.1 Employment Agreement, dated as of April 1, 1997, between Costain Coal Inc.
and John W. Hughes. (1)
10.1.2 Employment Agreement, dated as of April 1, 1997, between Costain Coal Inc.
and Eugene C. Holdaway. (1)
10.1.3 Employment Agreement, dated as of April 1, 1997, between Costain Coal Inc.
and R. Eberley Davis. (1)
10.1.4 Employment Agreement, dated as of April 1, 1997, between Costain Coal Inc.
and Mike Francisco. (1)
10.1.5 Employment Agreement, dated as of April 1, 1997, between Costain Coal Inc.
and William M. Potter. (1)
10.1.6 Employment Agreement, dated as of April 1, 1997, between Costain Coal Inc.
and Michael E. Donohue. (1)
10.2.1 Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar
Energy, Inc. and John W. Hughes. (1)
10.2.2 Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc.
and Eugene C. Holdaway. (1)
10.2.3 Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc.
and R. Eberley Davis. (1)
10.2.4 Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc.
and Mike Francisco. (1)
10.2.5 Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc.
and William M. Potter. (1)
10.2.6 Net Worth Appreciation Agreement, dated as of May 14, 1998, between Lodestar Energy, Inc.
and Michael E. Donohue. (1)
10.2.7 Form of Amended and Restated Net Worth Appreciation Agreement, dated January 15, 1999.
10.3 Amended and Restated Loan and Security Agreement, dated May 15, 1998, by and among
Lodestar Energy, Inc. Lodestar Holdings, Inc., Congress Financial Corporation and
the CIT Group/Business Credit, Inc. (1)
10.4.1 Contract for Purchase and Sale of Coal, dated September 20, 1996, between Tennessee Valley Authority
and Costain Coal Inc., as amended and supplemented (3.7 lbs. of sulfur dioxide per million Btu). (1)
10.4.2 Contract for Purchase and Sale of Coal per Purchase Order No. 97PO1-198918, dated September 20, 1996,
between Tennessee Valley Authority and Costain Coal Inc., as amended and supplemented. (1)
10.5.1 Coal Purchase Agreement, dated as of August 4, 1992, between Costain Coal Inc.
and Indiantown Cogeneration, L.P., as amended and supplemented. (1)
10.5.2 Fuel Supply and Waste Disposal Services Agreement, dated as of April 21, 1989, between AES Cedar Bay, Inc.
and Costain Coal Inc., as amended and supplemented. (1)
10.6 Management Consulting Agreement dated March 14, 1997, between Costain Coal Inc. and The Renco Group, Inc. (1)
</TABLE>
59
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.7 Amendment No. 1, dated as of October 22, 1998, 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 names therein as lenders, Congress Financial
Corporation, as Agent, and the CIT/Business Credit, Inc., as Co-Agent.(2)
10.8 Amendment No. 2, dated as of December 4, 1998, 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.(2)
10.9 Amendment No. 3, dated as of January 15, 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.(2)
10.10 Amendment No. 4, dated as of April 30, 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.(2)
10.11 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. (3)
10.12 Amendment No. 6, dated November 15, 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.
21 List of Subsidiaries of Registrant. (1)
27 Financial Data Schedule
</TABLE>
- -----------
(1) Incorporated by reference to the same numbered exhibits filed with the
Company's Registration Statement on Form S-4, as amended (File No.
333-59037) originally filed with the Commission on July 14, 1998.
(2) Incorporated by reference to the Company's Form 10-Q for its quarterly
period ended April 30, 1999. (3) Incorporated by reference to the
Company's Form 10-Q for the quarterly period ended July 31, 1999.
<PAGE>
EXHIBIT 10.2.7
LODESTAR ENERGY, INC.
333 West Vine Street
Suite 1700
Lexington, KY 40507
As of January 15, 1999
AMENDMENT TO NET WORTH APPRECIATION PARTICIPATION AGREEMENT
This will confirm the understanding of this Corporation (the
"Company") with you with respect to our agreed amendments to your Net Worth
Appreciation Participation Agreement dated May 14, 1998 (the "Agreement").
As you know, our parent company, The Renco Group, Inc. ("Renco"),
has elected to become, for Federal Internal Revenue Code purposes, a
subchapter S corporation (instead of a subchapter C corporation), effective
with its fiscal year beginning November 1, 1998, and has designated Lodestar
Holdings, Inc. ("Holdings"), this Company and their subsidiaries as qualified
subchapter S subsidiaries (the "S election"). This designation is also
applicable for those states which recognize such election. This letter is
intended to set forth our understanding as to the changes in the Agreement
intended to accommodate such election.
It is the intent of the parties to the Agreement that the S election
not alter the benefits payable under the Agreement; therefore we agree as
follows:
A. For purposes of calculating the benefits payable under the
Agreement, Holdings will continue to calculate Federal corporate income taxes
and the corporate income taxes for those jurisdictions in which Holdings and
its subsidiaries do business, for fiscal periods beginning on or after
November 1, 1998, as if Holdings and its subsidiaries had continued to have C
corporation status, under the Federal Internal Revenue Code and under state
and local tax laws, in accordance with the provisions of generally accepted
accounting principles and the Internal Revenue Code and regulations
thereunder and under state and local tax laws thereunder applicable to C
corporations as from time to time in effect ("C Status"). Such tax
calculations will include calculations of current and deferred tax expense or
benefit and current and non-current tax assets and liabilities ("C Taxes")
and the differences ("Tax Differences") between the C Taxes and the taxes as
recorded by Holdings and its subsidiaries while being designated a qualified
subchapter S subsidiary ("S Taxes").
1
<PAGE>
EXHIBIT 10.2.7
Cumulative Income Statement Tax Difference shall be the cumulative
difference in income tax expense or benefit between the calculation of the C
Taxes and S Taxes, in each case calculated for the tax periods beginning on
or after November 1, 1998 and through the end of the calculation period.
Cumulative Cash Flow Tax Difference shall be the cumulative difference in
income tax payments, net of refunds, between the calculation of the C Taxes
and S Taxes in each case made after November 1, 1998 or, which would be in
the case of C Taxes, or are in the case of S Taxes, immediately due and
payable contemporaneously with the payment of any Distributions, as defined
below. Payment by Holdings and its subsidiaries of a management fee to The
Renco Group, Inc. in excess of $1,200,000 per fiscal year or cash dividends
paid by Holdings shall be called a "Distribution."
In connection with the annual audit of the financial statements of
the Company, the Company's Board of Directors will require that the
independent public accountants issue a special report indicating their
agreement with the Tax Differences.
B. Any payment due to you under Paragraph 2 of the Agreement (the
"Termination Benefit") shall be (A) the total percentage credit to you under
Paragraph 1 ("Vested Credit") of the cumulative net income, as defined, less
(B) the Vested Credit of the Cumulative Income Statement Tax Difference (the
calculation period shall end at the end of Holdings fiscal quarter (at
Holdings option) (X) immediately preceding your date of termination or (Y)
during which your termination occurs) and excluding such Cumulative Income
Statement Tax Difference to the extent equal to Cumulative Cash Flow Tax
Difference utilized in calculating and Additional Compensation Benefit under
Paragraph 3.
C. Any payment due to you under Paragraph 3 of the Agreement in
regard to Distributions paid by Holdings (the "Additional Compensation
Benefit"), shall be (A) the excess of Maximum Credit of the cumulative
Distributions paid by Holdings subsequent to November 1, 1998 over the
Maximum Credit of any positive Cumulative Cash Flow Tax Difference less (B)
the amount of Additional Compensation Benefit previously paid to you under
Paragraph 3 subsequent to November 1, 19989.
D. Any payment due to you under Paragraph 6 of the Agreement (the
"Sale Proceeds Benefit"), shall be (A) the Maximum Credit of any net
proceeds, as defined, plus (B) the Maximum Credit of the cumulative
Distributions paid by Holdings subsequent to November 1, 1998, less (C) the
Maximum Credit of the Cumulative Income Statement Tax Difference through the
date of sale, and less (D) the amount of any Additional Compensation Benefits
previously paid to you under Paragraph 3 subsequent to November 1, 1998.
2
<PAGE>
EXHIBIT 10.2.7
E. As amended hereby, the Agreement shall continue in full force
and effect.
Please confirm that the foregoing correctly sets forth our
understanding by signing and returning the enclosed duplicate of this letter.
Very truly yours,
LODESTAR ENERGY, INC.
\s\ IRA LEON RENNERT
- --------------------
Ira Leon Rennert
Chairman of the Board
Accepted and Agreed to:
\s\ JOHN W. HUGHES
- ------------------
John W. Hughes
President and Chief Executive Officer
\s\ R. EBERLEY DAVIS
- --------------------
R. Eberley Davis
Vice President, General Counsel
\s\ MICHAEL E. DONOHUE
- ----------------------
Michael E. Donohue
Vice President, Finance and Chief Financial Officer
\s\ T. LEMICHAEL FRANCISCO
- --------------------------
T. LeMichael Francisco
Vice President, Marketing & Business Development
\s\ WILLIAM M. POTTER
- ---------------------
William M. Potter
Vice President, Operations
3
<PAGE>
EXHIBIT 10.12
AMENDMENT NO. 6 TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
AMENDMENT dated as of November 15, 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 ("Congress"), 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, Amendment No. 4 to Amended and
Restated Loan and Security Agreement, dated April 30, 1999 and Amendment No.
5 to Amended and Restated Loan and Security Agreement, dated July 16, 1999
(as amended by these Amendments 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, the Ridge Top Sellers (as hereinafter defined) are the
owners of certain assets located at and used in connection with mining
operations conducted by the Ridge Top Sellers in Pike County, Kentucky and
Borrower has entered into agreements to purchase the Ridge Top Assets (as
hereinafter defined) from the Ridge Top Sellers, as set forth in the Ridge
Top Purchase Agreements (as hereinafter defined);
WHEREAS, Guarantor has agreed to guarantee the Obligations of
Borrower to each of Alma (as hereinafter defined), Big Sandy (as hereinafter
defined), Citation (as hereinafter defined) and Provident (as hereinafter
defined) pursuant to the Alma Surface Agreement (as hereinafter defined), Big
Sandy Assignment (as hereinafter defined), the Citation Sublease (as
hereinafter defined) and the Provident Assignment (as hereinafter defined),
respectively;
WHEREAS, Borrower has requested that Agent and Lenders make certain
supplemental loans to Borrower;
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) "ALMA" shall mean Alma Land Company, a Kentucky
corporation, and its successors and assigns.
1
<PAGE>
(b) "ALMA SURFACE AGREEMENT" shall mean the Surface
Agreement, dated of even date with Amendment No. 6, by and among Alma,
Borrower and Guarantor, as the same now exists and may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(c) "AMENDMENT NO. 6" shall mean this Amendment No. 6 to
the Amended and Restated Loan and Security Agreement by and among Borrower,
Guarantor, Agent, Co-Agent and Lenders.
(d) "B&B" shall mean Branham & Baker Coal Company, Inc., a
Kentucky corporation, and its successors and assigns.
(e) "BIG SANDY" shall mean Big Sandy Company, L.P., a
Delaware limited partnership, and its successors and assigns.
(f) "BIG SANDY ASSIGNMENT" shall mean the Assignment,
Assumption and Guaranty Agreement, dated of even date with Amendment No. 6,
by and among B&B, Quaker, Big Sandy, Borrower and Guarantor, as the same now
exists and may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
(g) "SUBORDINATED LOAN LETTER AGREEMENT" shall mean the
letter agreement, dated of even date with Amendment No. 6, by and among Renco
Group, Borrower, Guarantor, Co-Agent and Agent with respect to terms for
subordinated loans by Renco Group to Borrower, as the same now exists and may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
(h) "CITATION" shall mean Citation Coal Corporation, a
Kentucky corporation, and its successors and assigns.
(i) "CITATION SUBLEASE" shall mean the Sublease Agreement,
dated of even date with Amendment No. 6, by and among Citation, Borrower and
Guarantor, as the same now exists and may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
(j) "DEFERRED PAYMENT" shall mean a payment to be made by
Borrower in the amount of $600,000 to the Ridge Top Sellers on the first
anniversary of the Closing (as such term is defined in the Ridge Top Asset
Purchase Agreement).
(k) "EBITDA" shall mean, as to any Person, with respect to
any period, an amount equal to: (i) the Consolidated Net Income of such
Person and its Subsidiaries for such period determined in accordance with
GAAP, PLUS, (ii) depreciation, amortization, depletion of coal reserves and
other non-cash charges for such period (to the extent deducted in the
computation of Consolidated Net Income of such Person), all in accordance
with GAAP, PLUS, (iii) Interest Expense for such period (to the extent
deducted in the computation of Consolidated Net Income of such Person), PLUS,
(iv) charges for Federal, State, local and foreign income taxes for such
period (to the extent deducted in the computation of Consolidated Net Income
of such Person), plus (v) the then outstanding principal amount of
Indebtedness of Borrower to Renco Group arising pursuant to the subordinated
loans made by Renco Group to Borrower pursuant to a request by Agent under
the Subordinated Loan Letter Agreement, if any, MINUS (vi) all income (plus
all charges, up to the amount of such income) attributable to any Subsidiary
of such Person, which is not wholly owned by Guarantor or its subsidiaries,
if and to the extent such income was not distributed to such Person in cash.
(l) "HIGHWALL MINER" shall mean the Equipment constituting
the Metec Highwall Miner and all associated components, including push beams,
generators and spare parts.
(m) "INTEREST EXPENSE" shall mean, for any period, as to
any Person and its Subsidiaries, all of the following as determined in
accordance with GAAP, total interest expense, whether paid or accrued
(including the interest component of Capitalized Lease Obligations for such
period), but excluding (i) interest paid in property other than cash, and
(ii) any other interest expense not payable in cash.
2
<PAGE>
(n) "LETTER OF CREDIT FACILITY LIMIT" shall mean
$33,000,000 from the date of Amendment No. 6 through the later of the
repayment of $3,350,000 in respect of the Obligations arising pursuant to the
Supplemental Loans (including without, limitation, principal, interest, fees,
costs, expenses and other charges in respect thereof payable by Borrower to
Lenders) or May 1, 2000, and shall mean $30,000,000, thereafter; PROVIDED,
THAT, in no event shall the aggregate face amount of the letters of credit
outstanding pursuant to the Letter of Credit Facility exceed $30,000,000 in
the aggregate.
(o) "MAXIMUM CREDIT" shall mean $120,000,000, PROVIDED,
THAT, in the event that Lenders do not (i) enter into participation
arrangements with a new Participant after the date of Amendment No. 6 on
terms and conditions and for amounts acceptable to each Lender AND (ii)
repurchase the participation interest of any existing Participant that has
not consented to the amendments provided for herein, on terms and conditions
acceptable to Lenders, Agent may, at its option, effective upon the date of
written notice by Agent to Borrower with respect to such subject, reduce the
Maximum Credit to an amount between $120,000,000 and $89,999,999.
(p) "PROVIDENT" shall mean Provident Commercial Group,
Inc., an Ohio corporation, and its successors and assigns.
(q) "PROVIDENT ASSIGNMENT" shall mean the Partial
Assignment and Assumption Agreement, dated of even date with Amendment No.6,
by and among B&B, Borrower, Guarantor and Provident.
(r) "QUAKER" shall mean Quaker Coal Company, Inc., a
Kentucky corporation, and its successors and assigns.
(s) "RENCO SUBORDINATION AGREEMENT" shall mean the
Subordination Agreement, dated of even date with Amendment No. 6, by and
among Agent, Borrower, Guarantor and Renco Group and acknowledged by
Borrower, as the same now exists and may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
(t) "REVOLVING CREDIT FACILITY LIMIT" shall mean
$87,000,000 from the date of Amendment No. 6 through the later of the
repayment of $3,350,000 in respect of the Obligations arising pursuant to the
Supplemental Loans (including without, limitation, principal, interest, fees,
costs, expenses and other charges in respect thereof payable by Borrower to
Lenders) or May 1, 2000, and shall mean $90,000,000, thereafter, EXCEPT,
THAT, such limit may be further reduced at any time by an amount equal to the
amount of any reduction in the Maximum Credit in accordance with Section
1.1(o) of Amendment No. 6.
(u) "RIDGE TOP" shall mean the Ridge Top Coal Corporation,
a Kentucky corporation, and its successors and assigns.
(v) "RIDGE TOP ASSETS" shall mean all of the assets and
properties acquired by Borrower from the Ridge Top Sellers pursuant to the
Ridge Top Purchase Agreements, including, but not limited to, certain
contracts, coal leases, equipment, permits, records and surface leases as
described on EXHIBIT A hereto, including certain non-extracted minerals
(consisting of coal and coal reserves) located in, on or under the Ridge Top
Real Property, all buildings, fixtures and improvements on the Ridge Top Real
Property.
(w) "RIDGE TOP ASSET PURCHASE AGREEMENT" shall mean the
Asset Purchase Agreement, dated September 30, 1999, by and between the Ridge
Top Sellers and Borrower, as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(x) "RIDGE TOP PURCHASE AGREEMENTS" shall mean,
individually and collectively, the Ridge Top Asset Purchase Agreement, the
Alma Surface Agreement, the Big Sandy Assignment, the Citation Sublease and
the Provident Assignment, 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
3
<PAGE>
replaced; PROVIDED, THAT, the term "Ridge Top Purchase Agreements" as such
term is defined herein shall not include any of the "Financing Agreements" as
such term is defined herein.
(y) "RIDGE TOP 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 Ridge Top Real Property, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
(z) "RIDGE TOP REAL PROPERTY" shall mean the Real Property
of Borrower purchased from the Ridge Top Sellers or leased or subleased from
Alma or Citation and located in Pike County, Kentucky as more particularly
described on EXHIBIT B hereto.
(aa) "RIDGE TOP SELLERS" shall mean, collectively, each
of the following (and their respective successors and assigns): (1) B&B,
(2) Quaker and (3) Ridge Top.
(bb) "SUPPLEMENTAL LOANS" shall mean the loans hereafter
made by Agent and Lenders to or for the benefit of Borrower on a revolving
basis (involving advances, repayments and readvances) as set forth in Section
4.1 of Amendment No. 6.
(cc) "SUPPLEMENTAL LOAN LIMIT" shall mean $6,700,000, and
shall be reduced by $1,675,000 each quarter commencing February 1, 2000 until
the Supplemental Loan Termination Date, and shall mean zero at all times
after the Supplemental Loan Termination Date.
(dd) "SUPPLEMENTAL LOAN TERMINATION DATE" shall mean
October 31, 2000.
1.2 AMENDMENT TO DEFINITIONS.
(a) The term "Consolidated Net Worth" in the Loan Agreement
shall be amended to add to the end of clause (a) thereof, immediately before the
word "and":
"plus the then outstanding principal amount of Indebtedness of
Borrower to Renco Group arising pursuant to the subordinated loans made
by Renco Group to Borrower pursuant to a request by Agent under the
Subordinated Loan Letter Agreement, if any."
(b) All references to the term "Loans" herein and in the
Loan Agreement shall be deemed and each such reference is hereby amended to
include, in addition and not in limitation, the Supplemental Loans.
(c) All references to the term "Obligations" herein and in
the Loan Agreement shall be deemed and each such reference is hereby amended
to include, in addition and not in limitation, the Supplemental Loans as
defined herein.
1.3 INTERPRETATION. For purposes of this Amendment, all terms used
herein, including but not limited to, those terms used and/or defined herein
or in the recitals hereto shall have the respective meanings assigned thereto
in the Loan Agreement.
2. CONSENTS.
2.1 Subject to the terms and conditions contained herein, Agent and
Lenders hereby consent to the following:
(a) the purchase by Borrower of the Ridge Top Assets pursuant
to the Ridge Top Purchase Agreements (as in effect on the date hereof);
(b) the Indebtedness of Borrower to the Ridge Top Sellers in
respect of the Deferred Payment in an amount not to exceed $600,000;
4
<PAGE>
(c) the release of Agent's lien and security interests for
the benefit of Lenders with respect to the Highwall Miner; and
(d) the guarantee by Guarantor of the obligations of
Borrower to each of Alma, Big Sandy, Citation and Provident pursuant to the
Alma Surface Agreement (as in effect on the date hereof), the Big Sandy
Assignment (as in effect on the date hereof), the Citation Sublease (as in
effect on the date hereof) and the Provident Assignment (as in effect on the
date hereof), respectively.
2.2 The consents of Agent and Lenders set forth in
Section 2.1 above are subject to the satisfaction of each of the following
(in addition to those conditions set forth in Section 7 below):
(a) each of the foregoing shall have occurred by no later than
November 15, 1999; and
(b) notwithstanding anything to the contrary in the Loan
Agreement, none of the Ridge Top
Assets at, on or under the Ridge Top Real Property, 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: (i)
Agent shall have completed a field examination of the businesses, operations
and assets acquired by Borrower pursuant to the Ridge Top Purchase Agreement
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;
(ii) Agent shall have received written reports or appraisals of any or all of
the Collateral located on or under the Ridge Top Real Property, in form,
scope and methodology acceptable to Agent, by an appraiser acceptable to
Agent, addressed to Agent and on which Agent is expressly permitted to rely;
(iii) 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 (iv) 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).
3. AMENDMENTS TO NOTES. For the period from the date hereof through
and including the later of, the repayment of $3,350,000 in respect of the
Obligations arising pursuant to the Supplemental Loans (including without
limitation, principal, interest, fees, costs, expenses and other charges in
respect thereof payable by Borrower to Lenders) or May 1, 2000:
3.1 the Revolving Credit Notes shall be amended to reduce the
maximum amount of the Indebtedness arising pursuant to the Loans and
evidenced thereby from $90,000,000 to $87,000,000 and the Letter of Credit
Notes shall be amended to increase the maximum amount of the Indebtedness
arising pursuant to the Tranche B Letter of Credit Accommodations and the
Supplemental Loans and evidenced thereby from $30,000,000 to $33,000,000 and,
at all times thereafter, and until all of the Obligations are indefeasibly
paid in full, the Revolving Credit Notes shall be amended to increase the
maximum amount of the Indebtedness arising pursuant to the Loans and
evidenced thereby from $87,000,000 to $90,000,000 and the Letter of Credit
Notes shall be amended to reduce the maximum amount of the Indebtedness
arising pursuant to the Tranche B Letter of Credit Accommodations and the
Supplemental Loans and evidenced thereby from $33,000,000 to $30,000,000,
EXCEPT, THAT, the amount of the Revolving Credit Notes may be reduced at any
time in connection with a reduction in the amount of the Maximum Credit in
accordance with Section 1.1(o) of Amendment No. 6 and the resulting reduction
in the Revolving Credit Facility Limit in accordance with Section 1.1(s) of
Amendment No. 6; and
3.2 The Letter of Credit Notes shall be amended to add the words "and
the Supplemental Loans (as such term is defined in Amendment No. 6)" in each of
the following places:
(a) following the parenthetical in subsection (ii) of the
first paragraph of page 1;
(b) following the words the Loan Agreement in the fourth
line of the second paragraph of page 1; and
5
<PAGE>
(c) following the words "Tranche B Letter of Credit
Accommodations" each time such words appear in the first full paragraph and
the third paragraph on page 2.
.
4. AMENDMENTS TO LOAN AGREEMENT.
4.1 SUPPLEMENTAL LOANS.
(a) In addition to the Loans which may be made by Lenders
to Borrower pursuant to Sections 3.1 and 3.2 of the Loan Agreement on or
after the date hereof, upon the request of Borrower made at any time after
the date hereof and prior to the Supplemental Loan Termination Date, and
subject to and upon the terms and conditions contained herein and in the Loan
Agreement and the other Financing Agreements, Lenders agree to make the
Supplemental Loans to Borrower from time to time prior to the Supplemental
Loan Termination Date, in an amount requested by Borrower, up to the amount
equal to the Supplemental Loan Limit as then in effect.
(b) Except in Agent and Lenders' discretion, Borrower shall
not have any right to request, and Lenders shall not make any Supplemental
Loans in excess of the Supplemental Loan Limit or at any time on or after the
Supplemental Loan Termination Date.
6
<PAGE>
(c) The Supplemental Loans shall be secured by all
Collateral and evidenced by the Letter of Credit Notes. Notwithstanding
anything to the contrary contained herein or in the Loan Agreement or the
other Financing Agreements, (i) on each date when any reduction in the
Supplemental Loan Limit becomes effective, Borrower agrees absolutely and
unconditionally to automatically and without notice or demand to make a
payment in respect of the Supplemental Loans in an amount equal to the
excess, if any, of the aggregate unpaid principal amount of the Supplemental
Loans over the Supplemental Loan Limit as so reduced in immediately available
funds and (ii) unless sooner demanded by Lender in accordance with terms of
the Loan Agreement or the other Financing Agreements, Borrower further agrees
that all outstanding and unpaid Obligations arising pursuant to the
Supplemental Loans (including without limitation, principal, interest, fees,
costs, expenses and other charges in respect thereof payable by Borrowers to
Lenders) shall automatically, without notice or demand, be absolutely and
unconditionally due and payable and Borrower shall pay to Agent in
immediately available funds all such Obligations on the Supplemental Loan
Termination Date. Interest shall accrue and be due, until and including the
next business day, if amount paid by Borrowers to the bank account designated
by Agent for such purpose is received in such bank account later than 11:00
a.m., New York City time.
(d) Section 3.1(d) of the Loan Agreement is hereby amended
to add a new Section 3.1(d) (iv) thereto as follows:
", and (iv) the aggregate outstanding principal amount of the
Tranche B Letter of Credit Accommodations and the Supplemental Loans
shall not exceed the Letter of Credit Availability."
(e) Borrower and Guarantor each acknowledge and agree that,
notwithstanding anything to the contrary contained in the Loan Agreement or
the Financing Agreements, the failure of Borrower to pay such Obligations
arising pursuant to the Supplemental Loans on the effective date of any
reduction in the Supplemental Loan Limit to the extent set forth in Section
4.1(c) above or all of such Obligations arising pursuant to the Supplemental
Loans on or before the Supplemental Loan Termination Date, shall constitute
an Event of Default.
4.2 LETTER OF CREDIT ACCOMMODATIONS. Section 3.2 of the Loan
Agreement is hereby amended to add a new Section 3.2(k) thereto as follows:
"(k) Borrower shall cause an updated appraisal with respect to
the Eligible Equipment, in form scope and methodology acceptable to
Agent, and addressed to Agent and Lenders, and on which Agent and
Lenders are expressly permitted to rely, and prepared by MB Valuation
Services, Inc. (or other appraiser acceptable to Agent), to be
delivered to Agent on or before February 1, 2000 and a minimum of every
six (6) months thereafter."
4.3 INDEBTEDNESS. Section 7.3 of the Loan Agreement is hereby
amended by adding a new Section 7.3(u) thereto as follows:
"(u) Indebtedness of Borrower to Renco Group arising pursuant to
or in connection with the loans to be made by Renco Group to Borrower
pursuant to a request by Agent for such loans under the Subordinated
Loan Letter Agreement; PROVIDED, THAT, (i) such Indebtedness is and
shall only be unsecured, (ii) the terms and conditions of such
Indebtedness shall be acceptable in all respects to Agent, (iii) such
Indebtedness shall not exceed $6,000,000 at any time outstanding, (iv)
Borrower shall not, directly or indirectly, make any payments with
respect to such Indebtedness, EXCEPT THAT Borrower may make payments in
respect of such Indebtedness so long as the following conditions are
satisfied (or as permitted in accordance with Section 3(b) of the
Subordinated Loan Letter Agreement), as determined by Agent: (A) as of
the date of any such payment and after giving effect thereto, the
Excess Revolving Credit Availability shall not be less than
$12,000,000, and for each of the thirty (30) consecutive days
immediately prior to any such payment, Excess Revolving Credit
Availability shall not have been less than $12,000,000 and (B) as of
the date of any 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, without the prior written consent of Agent: (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 without the prior written
consent of Agent, 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
7
<PAGE>
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."
4.4 CONSOLIDATED NET WORTH. Section 7.10(b) of the Loan Agreement is
hereby deleted in its entirety and the following substituted therefor:
"(b) On or after October 30, 1998 ($71,500,000)
and all times thereafter"
4.5 CAPITAL EXPENDITURES. Section 7.11 of the Loan Agreement is
hereby amended to add a new Section 7.11(d) thereto as follows:
" and (d) such limitation shall not apply to the Capital Expenditures
by Borrower of up to $6,700,000, paid pursuant to the Ridge Top
Purchase Agreements as in effect on the date of Amendment No. 6."
4.6 EBITDA. Section 7 of the Loan Agreement is hereby amended to add a
new section 7.25 thereto as follows:
"7.25 EBITDA. Borrower shall, for each month listed below, have
cumulative EBITDA of not less than the amount listed below opposite
each such month (and such covenant shall be reset each year thereafter
based upon projections delivered by Borrower to Agent and in a manner
reasonably acceptable to Borrower and Agent):
<TABLE>
<CAPTION>
MONTH ENDING MINIMUM EBITDA
------------ --------------
<S> <C>
November 30, 1999 $ 2,237,000
December 31, 1999 $ 4,313,000
January 31, 2000 $ 6,069,000
February 29, 2000 $ 8,933,000
March 31, 2000 $ 12,403,000
April 30, 2000 $ 15,241,000
May 31, 2000 $ 18,191,000
June 30, 2000 $ 21,011,000
July 31, 2000 $ 23,542,000
August 31, 2000 $ 27,592,000
September 30, 2000 $ 31,388,000
October 31, 2000 $ 35,204,000"
</TABLE>
50 AMENDMENTS TO AMENDMENT NO. 5.
5.1 Section 2 (2) of Amendment No. 5 is hereby deleted in its entirety
and replaced with the following sentence:
"Notwithstanding anything to the contrary in the Loan Agreement,
(A) none of the Grand Valley Assets, Horizon Assets and White Oak
Assets, constituting Equipment, and located on the Grand Valley Real
Property shall constitute Eligible Equipment EXCEPT THAT such Equipment
will be considered Eligible Equipment, within ten (10) days after Agent
shall have received, an appraisal in form and substance satisfactory to
Agent, addressed to Agent and Lenders, on which Agent and Lenders are
expressly permitted to rely, and prepared by MB Valuation Services,
Inc. (or other appraiser acceptable to Agent) and to the extent that
such Equipment shall satisfy all of the criteria for eligibility so as
to constitute Eligible Equipment, AND (B) none of the Grand Valley
Assets, Horizon Assets and White Oak Assets which constitute Coal
Reserves shall be included in the calculation of Letter of Credit
Availability for purposes of Section 3.2(g) of the Loan Agreement
EXCEPT THAT such Coal Reserves shall be included in such calculation
within ten (10) days after Agent shall have received, an appraisal
setting forth the distressed sale value of such Coal Reserves, in form
and substance satisfactory to Agent, addressed to Agent and Lenders, on
which Agent and Lenders are expressly permitted to rely, and prepared
by Marshall Miller & Associates (or other appraiser acceptable to
Agent)."
5.2 The term "Coal Inventory" as defined in Amendment No. 5 shall have
such meaning only with respect to the agreements and amendments to the Loan
Agreement set forth in Amendment No. 5.
8
<PAGE>
60 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.6
and shall be incorporated into and made a part of the Financing Agreements):
6.1 ACQUISITION OF RIDGE TOP ASSETS.
(a) The Ridge Top 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 Ridge Top
Purchase Agreements, Borrower has acquired good and marketable title or a
valid leasehold interest to the Ridge Top Assets. All amounts paid by
Borrower pursuant to the Ridge Top Purchase Agreements have been paid with
the proceeds of the Loans.
(b) All of the Ridge Top Assets to be acquired, leased or
subleased by Borrower pursuant to the Ridge Top Purchase Agreements are
located in Pike County, Kentucky on premises being acquired, leased or
subleased by Borrower from the Ridge Top Sellers and/or Alma, Citation, Big
Sandy and Provident. No consignees, processors or other third party is in
possession of any Coal Inventory, Inventory or other Collateral acquired
pursuant to the Ridge Top Purchase Agreements. Except as set forth on EXHIBIT
C hereto, the Ridge Top 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) All actions and proceedings required by the Ridge Top
Purchase Agreements, applicable law or regulation have been taken and the
transactions contemplated thereunder have been duly and validly consummated.
Except as set forth on Exhibit D hereto, Borrower has received all necessary
consents and approvals of third parties to the transactions contemplated by
the Ridge Top Purchase Agreements.
(d) No court of competent jurisdiction has issued any
injunction, restraining order or other order which prohibits consummation of
the transactions described in the Ridge Top 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 Ridge Top Purchase
Agreements.
(e) Borrower has delivered, or caused to be delivered, to
Agent true, correct and complete copies of the Ridge Top Purchase Agreements.
6.2 NO DEFAULT. No Event of Default exists on the date of
Amendment No. 6 (after giving effect to the amendment to the Loan
Agreement made by the provisions of Amendment No. 6).
6.3 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. 6 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.
6.4 ADDITIONAL ITEMS TO BE DELIVERED.
(a) 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 no later than November 30, 1999:
(i) 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 consisting of the Ridge Top Assets or to effect the
provisions or purposes of this consent or the other Financing Agreements;
PROVIDED, THAT, the foregoing shall not include the consents of lessors of
the Ridge Top Real Property to the Ridge Top Mortgages;
(ii) Agent shall have received evidence that the
Agent has a valid perfected first priority security interest in all of the
Collateral consisting of the Ridge Top Assets;
9
<PAGE>
(iii) Agent shall have received written reports or
appraisals of any or all of the Ridge Top Assets constituting Equipment, in
form, scope and methodology acceptable to Agent, by an appraiser acceptable
to Agent, addressed to Agent and on which Agent is expressly permitted to
rely including, the Caterpillar Model 5230 Hydraulic Shovel, S/N 77LL00022
and the 3516 Diesel Engine S/N 2PK00503;
(iv) Agent shall have received the Ridge Top
Mortgages, in each case as duly authorized, executed and delivered by
Borrower; and
(v) Agent shall have received UCC-1 financing
statements or UCC-3 amendments with respect to UCC-1 financing statements by
and between Agent, as secured party and Borrower, as debtor with respect to
the Ridge Top Assets consisting of fixtures and minerals for filing in the
appropriate government recording offices, as determined by Agent, in each
case as duly authorized, executed and delivered by Borrower.
(b) 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, written reports or
appraisals of any or all of the Ridge Top Assets constituting Collateral
(other than Equipment) located on or under the Ridge Top Real Property in
form, scope and methodology acceptable to Agent, by an appraiser acceptable
to Agent, addressed to Agent and on which Agent is expressly permitted to
rely, as soon as possible, but in any event, by no later than January 15,
1999.
(c) Borrower hereby agrees that, in addition to all other
terms, conditions and provisions set forth in the Financing Agreements,
Borrower shall use its best efforts (without the payment of money) to deliver
Collateral Access Agreements with respect to any of the premises of Borrower
acquired, leased or subleased pursuant to the Ridge Top Agreements, in each
case, duly executed and delivered by the owner, lessor or sublessor of such
premises (other than Alma, Big Sandy or Citation).
70 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:
7.1 the Subordinated Loan Letter Agreement and the Renco
Subordination Agreement, each duly authorized, executed and delivered by
Borrower;
7.2 evidence that the Ridge Top Purchase Agreements have been duly
executed and delivered by and to the appropriate parties thereto and the
transactions contemplated under the terms of the Ridge Top Purchase
Agreements have been consummated prior to or contemporaneously with the
execution of this consent;
7.3 Collateral Access Agreements with respect to any of the premises
of Borrower acquired, leased or subleased pursuant to the Ridge Top Purchase
Agreements, from Citation, Alma and Big Sandy, in each case, duly executed
and delivered by Citation, Alma and Big Sandy as the owner and lessor of such
premises;
7.4 UCC, Federal and State tax lien and judgment lien searches
against the Ridge Top Sellers in the jurisdictions in which any of the Ridge
Top Assets are located;
7.5 an environmental audit of the Ridge Top Property, dated
September 7, 1999, and conducted by Summit Engineering, Inc. and a letter,
dated November 2, 1999, addressed to Agent from such environmental engineer
permitting Agent and Lenders to rely on such environmental audit;
7.6 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 the Ridge Top Sellers; and
7.7 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 E hereto, as secured party and any of the Ridge Top Sellers, as the
case may be, as debtor, duly authorized, executed and delivered by such
secured parties and a release agreement executed by the judgment creditor
with respect the Notice of Judgment Lien, KENNETH ROWE, ET AL. V. S&L COAL
SALES, INC., Pike County Circuit Court, Division No. I, Civil Action No.
96-CI-00429.
10
<PAGE>
80 FEE. In consideration of Amendment No. 6, Borrower shall on the
date hereof, pay to Agent, for the ratable benefit of Lenders, and Agent may
at its option charge to the account of Borrower maintained by Agent, a fee in
the amount of $200,000, which fee is fully earned and payable as of the date
hereof and shall constitute part of the Obligations.
90 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).
100 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.
110 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.
120 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.
130 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.
140 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.
11
<PAGE>
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/ ROGER FAY
--------------
Title: VICE PRESIDENT
-----------------
LODESTAR HOLDINGS, INC.
By: /s/ ROGER FAY
--------------
Title: VICE PRESIDENT
-----------------
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
--------------------------
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 3,454
<SECURITIES> 0
<RECEIVABLES> 39,828
<ALLOWANCES> 0
<INVENTORY> 15,780
<CURRENT-ASSETS> 63,183
<PP&E> 173,732
<DEPRECIATION> 64,488
<TOTAL-ASSETS> 229,205
<CURRENT-LIABILITIES> 61,766
<BONDS> 180,259
0
0
<COMMON> 1
<OTHER-SE> (60,637)
<TOTAL-LIABILITY-AND-EQUITY> 229,205
<SALES> 240,050
<TOTAL-REVENUES> 240,050
<CGS> 202,025
<TOTAL-COSTS> 247,004
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,018
<INCOME-PRETAX> (26,972)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,972)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
