<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 31, 1999
AEI RESOURCES, INC.
(Exact name of registrant as specified in charter)
333-72327
Delaware 333-72355 61-13155723
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
1500 Big Run Road
Ashland, Kentucky 41102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606) 928-3433
N/A
(Former name or former address
if changed since last report.)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events
AEI Resources, Inc. is filing this report in connection with its
obligations to file certain information with the Securities and Exchange
Commission pursuant to Section 4.03 of both the Indenture for its 10-1/2% Senior
Notes Due 2005 and the Indenture for its 11-1/2% Senior Subordinated Notes Due
2006. Currently, AEI Resources, Inc. is not subject to the periodic reporting
requirements pursuant to Section 12 or Section 15(d) of the Securities Exchange
Act of 1934.
The annual financial information for the 1998 fiscal year that AEI
Resources, Inc. would be required to file with the Commission on Form 10-K is
attached as Exhibits 99.1-99.3 to this amendment.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(a) Financial statements of business acquired.
Not applicable.
(b) Pro Forma Financial Information.
Not applicable.
(c) Exhibits.
Exhibit 99.1 Selected Financial Information
Exhibit 99.2 Management's Discussion and Analysis of
Financial Conditions and Results of Operations
Exhibit 99.3 Financial Statements
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
AEI RESOURCES, INC.
/s/ Vic Grubb
By: Vic Grubb
Treasurer
Date: April 15, 1999
<PAGE>
EXHIBIT 99.1
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below as of and for the years ended
December 31, 1997 and 1998, have been derived from the Consolidated Annual
Financial Statements of AEI Resources Holding, Inc., which have been audited by
Arthur Andersen LLP, independent public accountants and are included as an
exhibit to the report to which these financial statements are an exhibit. The
selected consolidated financial data below as of and for the years ended
December 31, 1995 and 1996 have been derived from the Consolidated Annual
Financial Statements of AEI Holding Company Inc., the predecessor entity to AEI
Resources Holding, Inc., which have been audited by Arthur Andersen LLP,
independent public accountants, and are not included elsewhere herein or in the
report to which these financial statements are an exhibit. The selected
Consolidated Financial data as of and for the years ended December 31, 1994 and
1994 has been derived from the unaudited Consolidated Financial Statements of
the Company's predecessor business and are not included elsewhere herein or in
the report to which these financial statements are an exhibit. The information
presented below is qualified in its entirety by, and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and related notes included as exhibits to the report to which these
financial statements are an exhibit.
AEI Resources Holding, Inc. (including its predecessors)
(Dollars in millions, except per ton data)
<TABLE>
<CAPTION>
For the Fiscal Year Ended December 31,
==========================================================
1994 1995(1) 1996 1997 1998
======= ========== ======== ======= =======
<S> <C> <C> <C> <C> <C>
Operating Revenues and Expenses:
Revenues $ 103.1 $ 112.3 $ 123.2 $ 175.3 $ 733.4
Cost of operations 91.5 94.5 97.1 145.2 590.9
Depreciation, depletion and
amortization 4.4 6.0 6.9 10.8 76.8
Selling, general and administrative 7.0 8.6 9.1 13.9 32.5
Writedowns and special items -- -- -- -- 16.5
======= ========== ======== =======
Income from operations 0.2 3.2 10.1 5.4 16.7
Interest expense (0.3) (2.0) (5.5) (9.2) (65.2)
Other income (expense),net (2) 0.3 (0.5) 0.5 0.4 4.7
======= ========== ======== ======= =======
Income (loss) before income tax provision and
extraordinary item 0.2 0.7 5.1 (3.4) (43.8)
Income tax provision (benefit)(3) - (0.4) - 17.5 (20.4)
======= ========== ======== ======= =======
Net income (loss) before extraordinary item(4) 0.2 1.1 5.1 (20.9) (23.4)
Extraordinary loss from extinguishment of debt - - - (1.3) (10.2)
======= ========== ======== ======= =======
Net Income (loss) $ 0.2 $ 1.1 $ 5.1 $ (22.2) $ (33.6)
======= ========== ======== ======= =======
Other Data:
Adjusted EBITDA(S) $ 4.9 $ 8.7 $ 17.5 $ 16.6 $ 113.5
Cash flows from operating activities NA 11.1 4.8 (10.2) (49.4)
Cash flows from investing activities NA (11.0) (12.5) (38.3) (655.7)
Cash flows from financing activities NA 0.9 7.3 131.6 664.0
Capital expenditures 11.5 12.6 14.1 32.2 40.9
Ratio of Adjusted EBITDA to interest expense(s) 16.3x 4.4X 3.2x 1.8X 1.7X
Ratio of total debt to Adjusted EBITDA(S) 1.1x 6.0x 3.7x 13.1x 10.7X
Ratio of earnings to fixed charges(6) 1.0x 1.1x 1.6x * *
Operating Data:
Proven and probable reserves (at period end,
in million of tons) NA NA NA 166 2,436
Coal sales (millions of tons) 3.5 3.3 4.2 6.5 25.2
Average sales price per ton $ 26.61 $ 26.27 $ 24.84 $ 25.19 $ 27.40
Average cost per ton sold(7) 25.22 24.20 21.32 22.08 75.50
Balances Sheet Data (end of period):
Working capital (2.6) $ (5.6 $ (11.6) $ 85.1 $ (72.9)
Total assets 69.7 92.3 106.9 265.4 2,409.1
Total debt (including current portion) 5.6 52.4 64.1 217.0 1,215.6
Stockholders' equity deficit) 31.1 (4.7) 0.3 (18.1) (92.7)
NA-Not available.
</TABLE>
<PAGE>
- --------
(1) The operations data for the year ended December 31, 1995 combine the
audited results of operations for AEI Holding Company, Inc. (AEI Resources
Holding, Inc., predecessor) for the period from January 1, 1995, through
December 31, 1995, and the results of Addington Coal Operations (the
predecessor to AEI Holding Company, Inc.) for the period from January 1,
1995, through November 1, 1995. The operations data for the year ended
December 31, 1995 do not purport to represent what the combined results of
operations of AEI Resources Holding, Inc. would have been if the
predecessor businesses had actually been acquired as of January 1, 1995.
(2) Other income (expense), net reflects the inclusion of gain or loss on asset
sales and minority interest.
(3) In April 1997, Bowied Resources Limited ("Bowie") changed its tax reporting
status from an S-corporation to a C-corporation, resulting in an initial
deferred tax liability of $1.6 million. In November 1997, the other
subsidiaries of AEI Holding Company, Inc. likewise changed from S-
corporations to C-Corporations, resulting in an initial deferred tax
liability of $18.0 million .
(4) Net income (loss) from continuing operations is prior to any extraordinary
items.
(5) Adjusted EBITDA as presented above and as used herein consists of earnings
before interest, taxes, depletion, depreciation, amortization and other
non-cash charges as adjusted to exclude certain unusual or nonrecurring
charges, all in accordance with the term "Consolidated Cash Flow" as
that term is used in the term "Fixed Charge Coverage Ratio" in the
indenture governing the Senior Notes and Senior Subordinated Notes of AEI
Resources, Inc. Adjusted EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service indebtedness
and because it is a widely accepted financial indicator of a company's
ability to service indebtedness and because it is used in the Indenture
to determine compliance with certain covenants. However, Adjusted EBITDA
should not be considered as an alternative to income from operations or to
cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as an
indication of a company's operating performance or as a measure of
liquidity.
(6) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income tax provision plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest incurred (which
includes amortization of deferred financing costs) whether expensed or
capitalized and one-third of rental expenses, deemed representative of that
portion of rental expense estimated to be attributable to interest.
Earnings were inadequate to cover fixed charges for 1997 and 1998 by
$3.8 million and $57.9 million, respectively.
(7) Average cost per ton sold is calculated based on total coal operating
cost included in cost of operations, plus depreciation costs related to
mining, divided by coal sold.
<PAGE>
EXHIBIT 99.2
*Note: Inserts A, B & C and D (referenced herein) are
to the end of this document.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data," "Financial Statements" and the notes thereto. To the
extent the Company makes forward-looking statements, actual results may vary
materially therefrom. All of the information set forth in this report,
including, without limitation, the "Cautionary Safe Harbor Statement" included
in this report should be considered and evaluated.
GENERAL
The Company derives its revenues primarily from the sale of coal to electric
utilities and other industrial users under long-term sales contracts. The
Company sells a substantial portion of its coal under long-term sales contracts
and sells the remainder under short-term contracts and on the spot market.
Sales pursuant to long-term sales contracts accounted for 72% of the Company's
pro forma coal sales revenues during 1998, with the remainder being accounted
for by sales pursuant to short-term contracts and on the spot market.
The principal components of the Company's expenses are costs relating to the
production and transportation of its coal, including labor expenses, royalty and
lease payments, reclamation expenditures and rail, barge and trucking costs.
Other expenses include depletion, depreciation, amortization, selling, general
and administrative and interest expenses.
CERTAIN FACTORS AFFECTING CURRENT AND FUTURE OPERATING RESULTS
The Company's current and future operating results will likely be affected by
the following events and factors:
Certain Contract Revenues. Under certain long-term sales contracts, in relation
to contract revenues from coal sales, the Company has been receiving additional
periodic payments with such payments included in revenues as coal shipments
occur pursuant to contract terms. Such proceeds amounted to $9.7 million in
1998. The contracts call for $46.4 million of additional payments to be paid to
the Company in 1999. The contracts call for $91.0 million of additional
payments over the following four years.
Recent Acquisitions. In connection with its recent acquisitions, the Company
expects to incur certain one-time acquisition charges aggregating approximately
$22.1 million, approximately $3.8 million of which has been paid as of December
31, 1998. The costs relate primarily to severance plan obligations and change of
control provisions contained in employment agreements assumed by the Company in
connection with its acquisition of Zeigler Coal Holding Company on September 2,
1998. The Company also wrote off $16.3 million of deferred financing costs
related to the bridge financing for the acquisitions of the Cyprus Subsidiaries
and Zeigler. Other integration costs are expected to include closing redundant
facilities and relocating certain business processes of the businesses acquired
in the recent acquisitions.
Increased Interest Costs. As a result of increased indebtedness incurred by the
Company in connection with its recent acquisitions, the Company's interest
expense increased substantially from 1997 to 1998 and is expected to further
increase in 1999. Interest costs will increase further if the Company acquires
additional coal companies or coal reserves financed through debt.
Reclamation and Mine Accruals. Annually, the Company reviews its entire
reclamation liability and makes necessary adjustments, including mine plan and
permit changes and revisions to production levels to optimize mining reclamation
and efficiency. The financial impact of any such adjustment is recorded to cost
of coal sales. Although the Company's management believes it is making adequate
provisions for all expected reclamation and other costs associated with mine
closures, future operating results would be adversely affected if such accruals
were later determined to be insufficient.
<PAGE>
RESULTS OF OPERATIONS
AEI RESOURCES HOLDING, INC. (INCLUDING THE COMPANY'S PREDECESSOR)
The following table sets forth, for the periods indicated, certain operating and
other data of AEI Resources Holding, Inc., including the Company's predecessor
(AEI Holding Company, Inc.) presented as a percent of revenues.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
1995 1996 1997 1998
---- ---- ---- ----
Operating Data:
<S> <C> <C> <C> <C>
Revenues.................................................. 100.0% 100.0% 100.0% 100%
Cost of operations........................................ (84.1) (78.8) (82.8) (80.6)
Depreciation, depletion and amortization.................. ( 5.3) ( 5.6) ( 6.2) (10.5)
Selling, general and administrative....................... ( 7.7) ( 7.4) ( 7.9) ( 4.4)
Writedowns and special items.............................. -- -- -- ( 2.2)
----- ----- ----- -----
Income from operations.................................... 2.9 8.2 3.1 2.3
Interest expense.......................................... ( 1.8) ( 4.5) ( 5.2) ( 8.9)
Other income (expense), net............................... ( 0.4) 0.4 0.2 0.6
----- ----- ----- -----
Income (loss) before income tax provision (benefit)....... 0.7 4.1 ( 1.9) ( 6.0)
----- ----- ----- -----
</TABLE>
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997
Due to the completion of the Company's recent acquisitions, the changes in
results of operations discussed below may not be illustrative of operations if
the Company had operated the businesses acquired in the recent acquisitions from
January 1, 1998.
Revenues. Revenues were $733.4 million for the year ended December 31, 1998,
compared to $175.3 million for the year ended December 31, 1997, an increase of
$558.1 million or 318%. The increase in revenues is attributable to mining
revenues from recently acquired businesses included in the results of operations
in the year ended December 31, 1998, and not in the results of operations in the
year ended December 31, 1997, which primarily consisted of $20.8 million from
Ikerd-Bandy; $94.2 million from Leslie Resources; $177.5 million from the
Company's subsidiaries it acquired from Cyprus Amax Coal Company; and $199.4
million from Zeigler. Revenues exclusive of the acquirees increased from $169.0
million to $193.4 million ($24.4 million or 14%). The increase is due to
increased tonnage delivery (6.2 million tons to 7.3 million tons or 18%) offset
by a decrease in revenue per ton ($27.07 to $26.15 or 3%).
Cost of Operations. The cost of operations totaled $590.9 million for the year
ended December 31, 1998, compared to $145.2 million for the year ended December
31, 1997, an increase of $445.7 million or 307%. The increase is primarily
attributable to acquirees included in 1998 and not in 1997, including Ikerd-
Bandy ($28.6 million), Leslie Resources ($95.6 million), the Cyprus Subsidiaries
($162.2 million), and Zeigler ($148.2 million). Cost of operations exclusive of
the acquirees increased from $139.2 million to $160.8 million ($21.6 million or
16%). This increase is due primarily to the increased production volumes brought
about by increased sales opportunities.
<PAGE>
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1998, totaled $76.8 million
compared to $10.8 million for the year ended December 31, 1997, an increase of
$66.0 million or 611%. The increase in depreciation, depletion and amortization
resulted primarily from: (i) increased depreciation from the property and
equipment acquired in the Company's recent acquisitions, and (ii) additional
depreciation and amortization from 1997 and 1998 capital expenditures, and (iii)
increased depletion of mineral reserves.
Writedowns and Special Items. In connection with integrating acquired
operations, the Company closed certain of its non-acquiree mines during the year
ended December 31, 1998. As a result, estimated non-recoverable assets of $2.0
million were written off and additional estimated reclamation and mine closure
costs of $14.4 million were recorded. There were no such charges for the year
ended December 31, 1997.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses for the year ended December 31, 1998, were $32.5 million
compared to $13.9 million for the year ended December 31, 1997, an increase of
$18.6 million or 134%. The increase in such expenses primarily resulted from
acquirees included in 1998 and not in 1997 and the expansion of management and
administrative functions to support the recent growth.
Interest Expense. Interest expense for the year ended December 31, 1998, was
$65.2 million compared to $9.2 million for the year ended December 31, 1997, an
increase of $56.0 million or 609%. The increase resulted primarily from interest
associated with: (i) the increase in debt levels from $217.0 million as of
December 31, 1997, to $1.2 billion as of December 31, 1998, brought about by the
recent acquisitions, (ii) the related amortization of debt financing costs.
Other Income (Expense), Net. Other income (expense) increased $4.3 million in
1998, primarily due to a $1.0 million gain on the sale of an aircraft and an
increase in interest income resulting from the investment of excess debt
proceeds from the 1997 Notes.
Provision for Income taxes. There was a $20.4 million income tax benefit for
the year ended December 31, 1998, as compared to a $17.5 million provision for
the year ended December 31, 1997. During the year ended December 31, 1997, the
Company operated primarily under S Corporation tax status. During April of 1997,
Bowie Resources, Limited, experienced a change in the tax status from an S
corporation to a C corporation, which resulted in the recording of a $1.6
million provision and deferred tax liability. In addition, during November of
1997, the mining businesses transferred from Addington Enterprises (as an S
Corporation) to the Company (as a C corporation) initially recorded a net
deferred tax liability of $18.0 million, with an increase to the income tax
provision for the differences in book and tax bases in assets and liabilities.
Prior to 1998, a deferred tax benefit was not recorded, due to uncertainties in
realization, until after the acquisitions of Zeigler and Kindill and the
establishment of a deferred tax liability in September 1998. This will allow the
utilization of certain tax benefits, including NOL's and AMT credits, which
resulted in a deferred tax benefit for 1998.
Extraordinary Loss From Debt Refinancing. For the year ended December 31, 1998,
the Company incurred an extraordinary loss of $10.2 million (net of $6.8 million
tax benefit) compared to $1.3 million (net of a $0.9 million tax benefit) for
the year ended December 31, 1997. During the year ended December 31, 1998, the
Company retired a $25 million credit facility early and extinguished the Cyprus
and Zeigler Bridge Facilities. All unamortized debt issuance costs associated
with the retired facilities were written off.
Net Loss (Income). For the year ended December 31, 1998, the Company had a net
loss of $33.6 million compared to a net loss of $22.2 million for the year ended
December 31, 1997, an increase of $11.4 million. The increase primarily was due
to increased depreciation associated with the Company's recent acquisitions,
increased interest expense associated with financing those acquisitions and the
extraordinary loss related to the write-off of unamortized debt issuance costs.
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Revenues. Revenues were $175.3 million for the year ended December 31, 1997,
compared to $123.2 million for the year ended December 31, 1996, an increase of
$52.1 million or 42%. The increase in revenues is attributable to a 56% increase
in coal mining revenues (up $59.2 million from $104.8 million to $164.0
million), partially offset by a 49% decrease in equipment sales, rental and
repair (down $7.9 million from $16.0 million to $8.1 million). Coal sales
tonnage increased 55% from 4.2 million tons for the year ended December 31,
1996, to 6.5 million tons for the year ended December 31, 1997. This increased
volume resulted primarily from increased sales from the eastern Kentucky
operations. Revenue per ton also increased $0.35 or 1% (from $24.84 for the year
ended December 31, 1996, to $25.19 for the year ended December 31, 1997). This
increase in revenues per ton is attributable to the expiration of lower priced
contracts and the inclusion of new higher priced contracts.
<PAGE>
Equipment sales, rental and repair declined in 1997 from 1996 due to (i)
revenues from highwall miner equipment repair and sales to Mining Technologies
Australia, Pty. Ltd. ("MTA") (an Australian entity formerly majority owned by
Larry Addington) in 1996 exceeding 1997 revenues by $3.2 million due to
decreased operations in Australia in 1997, and (ii) rental of four Addcar/TM/
highwall mining systems by Mining Technologies, Inc. and Bowie (totaling $5.4
million in revenue) during 1996 which were instead deployed to internal jobs in
1997.
Cost of Operations. The cost of operations totaled $145.2 million for the year
ended December 31, 1997, compared to $97.1 million for the year ended December
31, 1996, an increase of $48.1 million or 50%. The increase was primarily due to
the increase in tons produced from 4.2 million in 1996 to 6.3 million in 1997
which correspond with the increased sales volume in 1997. The average cost per
ton sold for the Company was $22.08 per ton for the year ended December 31,
1997, compared to $21.32 per ton for the year ended December 31, 1996, an
increase of $0.76 per ton or 4%. This increase was attributable primarily to an
increase in adverse mining conditions, primarily increased stripping ratios.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for the year ended December 31, 1997, totaled $10.8 million
compared to $6.9 million for the year ended December 31, 1996, an increase of
$3.9 million or 57%, which is consistent with the increase in cost of
operations. The increase in depreciation, depletion and amortization primarily
resulted from the use of an Addcar/TM/ highwall mining system and the
amortization of mine development costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1997, were $13.9 million
compared to $9.1 million for the year ended December 31, 1996, an increase of
$4.8 million or 53%. The increase in such expenses primarily resulted from
increased costs associated with organizational growth, a 1997 employee bonus and
other sales-related costs.
Interest Expense. Interest expense for the year ended December 31, 1997, was
$9.2 million compared to $5.5 million for the year ended December 31, 1996, an
increase of $3.7 million or 67%. This increase resulted primarily from interest
associated with the 1997 Notes and increased stockholder loans used to fund the
development of the Company's operations.
Provision for Income Taxes. The provision for income taxes for the year ended
December 31, 1997, was $17.5 million compared to no provision for the year ended
December 31, 1996. The increase in the provision for income taxes is due
primarily to the provision for deferred income taxes resulting from the change
in tax status from an S corporation to a C corporation.
Net Income (Loss). For the year ended December 31, 1997, the Company had a net
loss of $22.2 million compared to net income of $5.1 million for the year ended
December 31, 1996, a decrease of $27.3 million or 535%. The decrease primarily
resulted from increased tax expenses caused by the change in tax status from an
S corporation to a C corporation in 1997 and the increase in selling, general
and administrative and interest expense.
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Revenues. Revenues were $123.2 million for 1996 compared to $112.3 million for
1995, an increase of $10.9 million or 10%. The increase in revenues is
attributable to a 150% increase in equipment sales, rental and repair (up $9.6
million from $6.4 million to $16.0 million) and a 335% increase in coal mining
revenues (up $80.7 million from $24.1 million to $104.8 million). Equipment
sales, rental and repairs increased in 1996 due to (i) revenues from highwall
miner equipment repair and sales to MTA in 1996 exceeding 1995 revenues by $9.7
million as operations in Australia accelerated in 1996, (ii) equipment rental
income in 1996 exceeded 1995 revenues by $3.6 million due to equipment deployed
to internal jobs in 1995 being leased to third parties in 1996 offset by a $6.0
million sale of an Addcar/TM/ highwall mining system in 1995 for which there was
no comparable sale in 1996. The coal mining revenue increase is due to a 27%
increase in tonnage sold (up 0.9 million tons from 3.3 million tons to 4.2
million tons) offset by a 5% decrease in revenue per ton (down $1.43 from $26.27
to
<PAGE>
$24.84). Tonnage increased due to opening new mines while the revenue per ton
decrease is due to the expiration of higher than average contracts and the
addition of lower priced contracts.
Cost of Operations. The cost of operations totaled $97.1 million for 1996
compared to $94.5 million for 1995, an increase of $2.6 million or 3%. The
increase primarily resulted from an increase in total production from 3.3
million tons in 1995 to 4.2 million tons in 1996 partially offset by a decrease
in average cost per ton sold of $2.88 or 12% (from $24.20 in 1995 to $21.32 in
1996). The cost per ton decrease is due to the use of Addcar/TM/ highwall mining
systems. The cost of operations also declined in 1996 as a result of decreased
contract mining and increased equipment leasing.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization for 1996 totaled $6.9 million compared to $6.0 million for 1995, an
increase of $0.9 million or 15%. The increase in depreciation, depletion and
amortization primarily resulted from an increase in amortization associated with
additional equipment purchased for the Company's Colorado mining operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 were $9.1 million compared to $8.6 million for
1995, an increase of $0.5 million or 6%. The increase in selling, general and
administrative expenses was attributable to expanded operations.
Interest Expense. Interest expense for 1996 was $5.5 million compared to $2.0
million for 1995, an increase of $3.5 million or 175%. The primary reason for
the increase was the incurrence of a $30.0 million term loan by Addington
Enterprises, Inc. in connection with the purchase of certain coal mining
subsidiaries from Addington Resources, Inc.
Provision for Income Taxes. There was no income tax provision for 1996 compared
to a benefit of $0.4 million for 1995, a decrease in the benefit of $0.4 million
due to a change in the corporate tax status.
Net Income. For 1996, the Company had net income of $5.1 million compared to
net income of $1.1 million for 1995, an increase of $4.0 million or 364%. The
increase primarily resulted from a higher margin on coal sales, increased
equipment sales and increased equipment rental, which was partially offset by
higher depreciation and interest expense in 1996.
LIQUIDITY
Cash flow from operations was ($49.4 million), ($10.2 million) and $4.8 million
for the years ended December 31, 1998, 1997 and 1996, respectively. During the
year ended December 31, 1998, the Company had a net loss of $33.6 million,
compared to a net loss of $22.2 million for the year ended December 31, 1997,
and net income of $5.1 million for the year ended December 31, 1996. During the
year ended December 31, 1998, cash flow from operations was decreased by the
increase in the net loss of $11.3 million, a decrease in non-current liabilities
of $65.7 million primarily due to increased reclamation activities resulting
from the closure of higher-cost operations. Partially offsetting were decreases
in accounts receivable of $13.3 million and an increase in accounts payable of
$5.1 million. During the year ended December 31, 1997, cash flow from
operations was decreased due to an increase in accounts receivable of $8.0
million, an increase in inventories of $6.2 million, an increase in other non-
current assets of $2.2 million and a decrease in other non-current liabilities
of $2.7 million which was more than offset by a provision for deferred income
tax of $16.6 million, prepayment penalties on debt refinancing of $1.6 million,
depreciation of $10.8 million and an increase in accounts payable of $4.2
million. During the year ended December 31, 1996, cash flow from operations was
decreased by an increase in accounts receivable of $6.1 million, an increase in
inventories of $3.1 million, a decrease in other non-current liabilities of $5.7
million which was partially offset by an increase in accounts payable of $9.5
million and depreciation of $6.9 million.
<PAGE>
At various times during the first nine months of 1998, events of default existed
under the prior $25 million credit facility of the Company as a result of non-
compliance with certain financial covenants contained therein and under the
indenture governing the 1997 Notes (the "Old Indenture") as a result of cross
default provisions. In addition, a default existed under the Old Credit Facility
and the Old Indenture because the Company failed to timely provide certain
required notices, reports and certificates. The Company remedied its non-
compliance by obtaining a waiver and amendment to the Old Credit Facility (which
has subsequently been retired) providing the required information and curing the
other defaults under the Old Indenture.
The Company has substantial indebtedness and significant debt service
obligations. As of December 31, 1998, the Company had total long-term
indebtedness, including current maturities, aggregating $1.2 billion. The loan
agreement and the guaranty related to Zeigler's industrial revenue bonds and the
indentures governing the Company's Senior Notes and its Senior Subordinated
Notes will permit the Company to incur substantial additional indebtedness in
the future, including secured indebtedness, subject to certain limitations. Such
limitations will include certain covenants that, among other things: (i) limit
the incurrence by the Company of additional indebtedness and the issuance of
certain preferred stock; (ii) restrict the ability of the Company to make
dividends and other restricted payments (including investments); (iii) limit
transactions by the Company with affiliates; (iv) limit the ability of the
Company to make asset sales; (v) limit the ability of the Company to incur
certain liens; (vi) limit the ability of the Company to consolidate or merge
with or into, or to transfer all or substantially all of its assets to, another
person and (vii) limit the ability of the Company to engage in other lines of
business. The Senior Credit Facility will contain additional and more
restrictive covenants as compared to the guaranty and the loan agreement related
to Zeigler's industrial revenue bonds and will require the Company to maintain
specified financial ratios and satisfy certain tests relating to its financial
condition.
The Company may continue to engage in evaluating potential strategic
acquisitions. The Company expects that funding for any such future acquisitions
may come from a variety of sources, depending on the size and nature of such
acquisition. Potential sources of capital include cash generated from
operations, borrowings under the Senior Credit Facility, or other external debt
or equity financings. There can be no assurance that such additional capital
sources will be available to the Company on commercially reasonable terms or at
all.
On December 14, 1998, the Company amended and restated the Senior Credit
Facility, which currently provides for aggregate borrowings of up to $875.0
million. As of December 31, 1998, the Company had approximately $47.0 million of
borrowings available under the Senior Credit Facility (after giving effect to
approximately $178.0 million of outstanding letters of credit). On April 1,
1999, Zeigler converted its industrial revenue bonds, in the aggregate
principal amount of $145.8 million, from a daily interest rate to a fixed
interest rate for the term of the bonds. In connection with the conversion,
the Company and its majority-owned subsidiaries, other than Yankeetown Dock
Corporation, guaranteed the bonds and created a mechanism whereby, upon the
satisfaction of certain conditions, the letters of credit issued by the
Company's lender in support of the bonds will be released. If all of the
letters of credit supporting the bonds are released, the Company will have
approximately $168.9 million of borrowings available under the Senior Credit
Facility (after giving effect to approximately $26.1 million of outstanding
letters of credit). Interest rates on the revolving loans under the Senior
Credit Facility will be based, at the Company's option, on the Base Rate (as
defined therein) or LIBOR (as defined therein). The revolving loan portion ($300
million) of the Senior Credit Facility will mature on the last business day of
December 2003, and the repayment of the term loan portion ($575 million) of the
Senior Credit Facility will occur in unequal installment payments between
September 1999 and December 2004. The Senior Credit Facility will contain
certain restrictions and limitations, including financial covenants that will
require the Company to maintain and achieve certain levels of financial
performance and limit the payment of cash dividends and similar restricted
payments.
The Company made capital expenditures of $14.1 million, $32.2 million and $40.9
million for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company currently anticipates a total of $108.0 million of capital
expenditures in the year ending December 31, 1999, $38.0 million for replacement
of and improvements to equipment and facilities, $22.0 million for expansion at
Mid-vol, $38.0 million for expansion at Bowie,
<PAGE>
$6.0 million for the manufacture of an additional Addcar/TM/ highwall mining
system and $4.0 million for expansion of Zeigler's operations.
Since September 30, 1998, the Company's principal liquidity requirements have
been for debt service requirements under the industrial revenue bonds, the
Senior Notes, the Senior Subordinated Notes, the Senior Credit Facility, other
outstanding indebtedness, and for working capital needs and capital
expenditures, including future acquisitions. The Company's ability to make
scheduled payments of principal of, or to pay the interest or Liquidated
Damages, if any, on, or to refinance, its indebtedness (including each issue of
the industrial revenue bonds, the Senior Notes and the Senior Subordinated
Notes), or to fund planned capital expenditures will depend on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. Based upon the current level of operations and anticipated
cost savings and operating improvements, the Company believes that cash flow
from operations and available cash, together with available borrowings under the
Senior Credit Facility, will be adequate to meet the Company's liquidity needs
for the reasonably foreseeable future. The Company will likely need to
refinance the Senior Credit Facility, the Senior Notes and the Senior
Subordinated Notes upon or prior to their respective maturities. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations, that anticipated cost savings and operating improvements will be
realized or that future borrowings will be available under the Senior Credit
Facility in an amount sufficient to enable the Company to service its
indebtedness, including the industrial revenue bonds, the Senior Notes and the
Senior Subordinated Notes, or to fund its other liquidity needs. In addition,
there can be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms or at all.
HEDGING POLICY
The Company has not historically purchased or sold coal future contracts or
engaged in financial hedging transactions to any material extent, although it
may do so in the future. A subsidiary of Zeigler was actively engaged in
financial hedging transactions through June 2, 1998, however, that subsidiary
will wind down its operations during the fourth quarter of 1999 and the first
quarter of 2000. The Company may from time to time enter into contracts to
supply coal to utilities or other customers prior to acquiring the coal reserves
necessary to meet all of its obligations under these contracts but it does not
expect this practice to impact its results of operations materially in the near
term.
INFLATION
Due to the capital-intensive nature of the Company's activities, inflation may
have an impact on the development or acquisition of mining operations, or the
future costs of final mine reclamation and the satisfaction of other long-term
liabilities, such as health care or pneumoconiosis (black lung) benefits.
However, inflation in the United States has not had a significant effect on the
Company's operations in recent years.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued which
establishes new rules for the reporting and display of comprehensive income and
its components in the financial statements. Comprehensive income generally
represents all changes in shareholder's equity except those resulting from
investments by or distributions to shareholders. The Company adopted this
statement in 1998 with no impact on the Company as the Company currently has no
transactions which give rise to differences between Net Income and Comprehensive
Income.
Also in June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131") was issued which establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard was adopted for the
<PAGE>
Company's 1998 fiscal year-end, comparative information from earlier years were
restated to conform to requirements of this standard.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued which improves and standardizes disclosures
by eliminating certain existing reporting requirements and adding new
disclosures. The statement addresses disclosure issues only and does not change
the measurement of recognition provisions specified in previous statements. The
statement supersedes SFAS No. 87, "Employers' Accounting for Pensions," SFAS No.
88, "Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Company adopted this
statement for its 1998 fiscal year-end.
Effective January 1, 1999, the Company will adopt Statement of Position (SOP)
98-5 "Reporting on the Costs of Start-Up Activities." The new statement
requires that the costs of start-up activities be expensed as incurred. The
Company has not yet evaluated the impact of this statement on the results of
operations or financial position.
IMPACT OF YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations and the ability to
engage in normal business activities. Based on the Company's ongoing assessment
of its business systems, the Company determined that its key business systems
are substantially compliant with year 2000 requirements. The Company has
deployed portions of a new Company-wide management and accounting system with
remaining portions to be deployed by the end of the third quarter. These
systems are year 2000 compliant and are being installed due to additional
functionality needed as a result of the growth of the Company. Non-information
technology components could have an impact on the Company's operations.
Management has substantially completed a review of all non-information
technology components, including embedded technology, equipment-related hardware
and software, as well as communication systems. Remediation efforts have begun
and are expected to be completed by mid-summer. A third-party review is being
scheduled to take place during the month of August to ensure that all required
remediation has been performed. The Company is not materially reliant on third-
party systems (e.g., electronic data interchange) to conduct business.
The Company presently believes that the year 2000 issue will not pose
significant operational problems for its business systems. However, if any
needed modifications and conversions were not made, or were not completed
timely, the year 2000 issue would likely have a material impact on the
operations of the Company. The Company's total year 2000 project cost is not
expected to be material, based on presently available information.
<PAGE>
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems. The Company has determined it has no
exposure to contingencies related to the year 2000 issue for the majority of the
products it has sold. If any of the Company's suppliers or customers do not, or
if the Company itself does not, successfully deal with the year 2000 issue, the
Company could experience delays in receiving or shipping coal and equipment that
would increase its costs and that could cause the Company to lose revenues and
even customers and could subject the Company to claims for damages. Customer
problems with the year 2000 issue could also result in delays in the Company
invoicing its customers or in the Company receiving payments from them that
would affect the Company's liquidity. Problems with the year 2000 issue could
affect the activities of the Company's customers to the point that their demand
for the Company's products is reduced. The severity of these possible problems
would depend on the nature of the problem and how quickly it could be corrected
or an alternative implemented, which is unknown at this time. In the extreme,
such problems could bring the Company to a standstill.
The Company, based on its normal interaction with its customers and suppliers
and the wide attention the year 2000 issue has received, believes that its
suppliers and customers will be prepared for the year 2000 issue. There can,
however, be no assurance that this will be so. The Company has not yet seen any
need for contingency plans for the year 2000 issue, but this need will be
continuously monitored as the Company acquires more information about the
preparations of its suppliers and customers. Some risks of the year 2000 issue
are beyond the control of the Company and its suppliers and customers. For
example, the Company does not believe that it can develop a contingency plan
which will protect the Company from a downturn in economic activity caused by
the possible ripple effect throughout the entire economy that could be caused by
problems of others with the year 2000 issue.
The Company will utilize both internal and external resources to test its
business systems for year 2000 compliance. The Company anticipates completing
its year 2000 testing this year, which is prior to any anticipated impact on its
operating systems. The time spent by employees of the Company on the year 2000
issue will be expensed as incurred, and is not expected to be material to the
Company. The Company does not expect there to be any other significant costs as
a result of the year 2000 issue.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the ability to locate and
correct all relevant computer codes, the ability to successfully integrate the
business systems of newly acquired entities and similar uncertainties.
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from projected results. In addition,
other written or oral statements which constitute forward-looking statements
have been made and may in the future be made by or on behalf of the Company.
Such forward-looking statements include statements regarding expected
commencement dates of mining operations, projected quantities of future coal
production, estimated reserves and recovery rates, anticipated production rates,
costs and expenditures as well as projected demand or supply for the products
the Company produces, which will affect both sales levels and prices realized by
the Company. Factors that could cause actual results to differ materially
include, among others: risks and uncertainties relating to general domestic and
international economic and political conditions; the cyclical and volatile
prices of coal; the risks associated with having or not having price protection
programs; unanticipated ground and water conditions; unanticipated grade and
geological problems; processing problems; availability of materials and
equipment; the timing of receipt of necessary governmental permits; the ability
to retain and obtain favorable coal contracts; the occurrence of unusual weather
or operating conditions; force majeure events; the
<PAGE>
failure of equipment or processes to operate in accordance with specifications
or expectations; labor relations; accidents; delays in anticipated start-up
dates; environmental risks; and the results of financing efforts and financial
market conditions. Many of such factors are beyond the Company's ability to
control or predict. Readers are cautioned not to put undue reliance on forward-
looking statements. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
<PAGE>
EXHIBIT 99.3
AEI RESOURCES HOLDING, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1998
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
AEI Resources Holding, Inc.:
We have audited the accompanying consolidated balance sheets of AEI
Resources Holding, Inc. and subsidiaries (see Note 1), as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AEI
Resources Holding, Inc. and subsidiaries (see Note 1) as of December 31, 1997
and 1998 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Louisville, Kentucky
April 9, 1999
<PAGE>
AEI RESOURCES HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- ------------
(DOLLAR AMOUNT IN THOUSANDS)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................................................ $ 83,616 $ 42,614
Short-term investments........................................................................... 401 -
Accounts receivable (including amounts due from related parties of $7,951 and $1,757,
respectively, net of allowance for doubtful accounts of $2,489 in 1998)......................... 29,939 141,095
Inventories...................................................................................... 22,658 117,552
Prepaid expenses and other....................................................................... 6,562 18,800
---------- -----------
Total current assets......................................................................... 143,176 320,061
---------- -----------
Property, Plant and Equipment, at cost, including mineral reserves and mine development and
contract costs................................................................................... 129,685 2,151,503
Less-accumulated depreciation, depletion and amortization........................................ (23,027) (80,416)
---------- -----------
106,658 2,071,087
---------- -----------
Debt issuance costs, net.......................................................................... 12,713 70,090
Advance royalties................................................................................. 2,179 16,332
Other non-current assets, net..................................................................... 667 12,494
---------- -----------
Total assets................................................................................. $ 265,393 $ 2,490,064
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable (including amounts due to related parties of $3,301 and $3,110, respectively)... $ 30,410 $ 124,502
Current portion of long-term debt and capital leases............................................. 7,608 61,533
Current portion of reclamation and mine closure costs............................................ 2,100 45,617
Current portion of employee benefits............................................................. 484 33,776
Income taxes payable............................................................................. - 7,816
Deferred income taxes............................................................................ 5,199 -
Accrued expenses and other....................................................................... 12,318 119,758
---------- -----------
Total current liabilities.................................................................... 58,119 393,002
---------- -----------
Non-Current Liabilities, less current portion:
Long-term debt and capital leases................................................................ 209,361 1,154,049
Employee benefits................................................................................ 46 528,081
Reclamation and mine closure costs............................................................... 9,431 331,249
Deferred income taxes............................................................................ 5,933 108,932
Other non-current liabilities.................................................................... 577 67,401
---------- -----------
Total non-current liabilities................................................................ 225,348 2,189,712
---------- -----------
Total liabilities............................................................................ 283,467 2,582,714
---------- -----------
Commitments and Contingencies (see notes)
Stockholders' Equity (Deficit):
Common stock ($.01 par value, 100,000 and 150,000 shares authorized, respectively, 52,800 and
52,802 shares issued and outstanding, respectively)............................................. 1 1
Additional capital............................................................................... 7,193 -
Retained deficit................................................................................. (25,268) (92,651)
---------- -----------
Total stockholders' deficit.................................................................. (18,074) (92,650)
---------- -----------
Total liabilities and stockholders' equity (deficit)......................................... $ 265,393 $2,490,064
========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
-2-
<PAGE>
AEI RESOURCES HOLDING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Coal mining..................................................................... $ 104,804 $ 163,980 $ 704,832
Equipment sales, rental and repair (including amounts from related parties of
$14,333, $6,764 and $-, respectively).......................................... 16,033 8,086 9,532
Other (including amounts from related parties of $607, $2,381 and $509,
respectively).................................................................. 2,363 3,188 19,050
---------- ---------- ----------
Total revenues.............................................................. 123,200 175,254 733,414
---------- ---------- ----------
Costs and expenses:
Cost of operations (including amounts to related parties of $19,866, $25,575
and $29,880, respectively)..................................................... 97,101 145,203 590,869
Depreciation, depletion and amortization........................................ 6,945 10,755 76,846
Selling, general and administrative............................................. 9,025 13,870 32,476
Writedowns and special items.................................................... - - 16,466
---------- ---------- ----------
Total costs and expenses.................................................... 113,071 169,828 716,657
---------- ---------- ----------
Income from operations...................................................... 10,129 5,426 16,757
Interest and other income (expense):
Interest expense (including amounts to related parties of $427, $1,382 and $-,
respectively).................................................................. (5,527) (9,192) (65,247)
Gain on sale of assets.......................................................... 305 338 1,004
Other, net...................................................................... 97 59 3,697
---------- ---------- ----------
(5,125) (8,795) (60,546)
---------- ---------- ----------
Income (loss) before minority interest, income taxes and extraordinary item. 5,004 (3,369) (43,789)
Less - Minority interest......................................................... (59) - -
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item.................... 5,063 (3,369) (43,789)
Income tax provision (benefit)................................................... - 17,516 (20,409)
---------- ---------- ----------
Income (loss) before extraordinary item..................................... 5,063 (20,885) (23,380)
Extraordinary loss from extinguishment of debt (net of $-, $869 and $6,801 tax
benefit, respectively).......................................................... - (1,303) (10,196)
---------- ---------- ----------
Net income (loss)........................................................... $ 5,063 $ (22,188) $ (33,576)
========== ========== ==========
Unaudited pro forma information (Note 21):
Income (loss) before income taxes and extraordinary item........................ $ 5,063 $ (3,369)
Unaudited pro forma income tax expense (benefit)................................ 1,924 (1,280)
Extraordinary item, net of tax benefit.......................................... - (1,303)
---------- ----------
Unaudited pro forma net income (loss)........................................... $ 3,139 $ (3,392)
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-3-
<PAGE>
AEI RESOURCES HOLDING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS ADDITIONAL
-----------------------
SHARES AMOUNT (DEFICIT) CAPITAL TOTAL
------------ --------- ------------- ------------ ---------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996............................. - $ - $ 528 $ (5,259) $ (4,731)
1996 net income (loss)............................... - - (2,621) 7,684 5,063
Owners' distribution, net............................ - - - (7) (7)
-------- ------ ----------- ---------- ----------
Balance at December 31, 1996........................... - - (2,093) 2,418 325
Issued 2 shares of $.01 par value common stock on
October 20, 1997.................................... 2 - - - -
Issued 98 shares of $.01 par value common stock on
November 12, 1997................................... 98 - - - -
Deferred tax benefit................................. - - - 5,515 5,515
Stock split of 528 to 1 on December 9, 1997.......... 52,700 1 - (1) -
1997 net income (loss)............................... - - (23,175) 987 (22,188)
Owners' distribution, net............................ - - - (1,726) (1,726)
-------- ------ ----------- ---------- ----------
Balance at December 31, 1997........................... 52,800 1 (25,268) 7,193 (18,074)
Charge to equity for MTI purchase.................... - - (43,807) (7,193) (51,000)
Deferred tax benefit................................. - - 10,000 - 10,000
Issued 2 shares of $.01 par value common stock on May
28, 1998............................................ 2 - - - -
1998 net income (loss)............................... - - (33,576) - (33,576)
-------- ------ ----------- ---------- ----------
Balance at December 31, 1998........................... 52,802 $ 1 $ (92,651) $ - $ (92,650)
======== ====== =========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-4-
<PAGE>
AEI RESOURCES HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)....................................................... $ 5,063 $ (22,188) $ (33,576)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities
Depreciation, depletion and amortization.............................. 6,945 10,755 76,846
Amortization of finance costs included in interest expense............ 65 198 7,349
Loan cost write-offs from debt refinancing............................ - 572 16,997
Provision for deferred income taxes................................... - 16,647 (64,121)
Provision for writedowns and special items............................ - - 16,466
Gain on sale of assets................................................ (305) (338) (1,004)
Changes in assets and liabilities:
(Increase) decrease in:
Receivables........................................................... (6,079) (7,951) 13,348
Inventories........................................................... (3,050) (6,173) 1,235
Prepaid expenses and other............................................ (1,408) (835) (8,640)
Other non-current assets.............................................. (372) (2,177) (1,804)
Increase (decrease) in:
Accounts payable...................................................... 9,518 4,191 5,123
Accrued expenses and other............................................ 66 (1,354) (11,929)
Other non-current liabilities......................................... (5,669) (2,726) (65,662)
-------------- ------------ --------------
Total adjustments................................................... (289) 10,809 (15,796)
-------------- ------------ --------------
Net cash provided by (used in) operating activities................. 4,774 (11,379) (49,372)
-------------- ------------ --------------
Cash Flows From Investing Activities:
Net proceeds from sale of assets........................................ 1,589 549 14,400
Disposition of assets held for sale..................................... - - 310,000
Additions to property, plant and equipment and mine development and
contract costs......................................................... (14,092) (32,214) (40,862)
Acquisition of coal-mining companies including debt retirement, net of
cash received.......................................................... - (6,625) (939,615)
Short-term investments.................................................. - (401) 401
-------------- ------------ --------------
Net cash used in investing activities............................... (12,503) (38,691) (655,676)
-------------- ------------ --------------
Cash Flows From Financing Activities:
Borrowings on long-term debt............................................ 3,629 265,327 1,760,000
Repayments on long-term debt............................................ (4,150) (98,243) (957,056)
Net borrowings (payments) on revolving line of credit................... 4,258 (8,584) -
Net borrowings from (repayments to) stockholders........................ 7,315 (8,715) -
Repayments on capital leases............................................ (3,617) (3,782) (6,175)
Payments for debt issuance costs........................................ - (12,673) (81,723)
Charge to equity for MTI purchase....................................... - - (51,000)
Other changes in owners' equity (deficit), net.......................... (87) (97) -
-------------- ------------ --------------
Net cash provided by financing activities........................... 7,348 133,233 664,046
-------------- ------------ --------------
Net increase (decrease) in cash and cash equivalents................ (381) 83,163 (41,002)
-------------- ------------ --------------
Cash and Cash Equivalents, beginning of period........................... 834 453 83,616
-------------- ------------ --------------
Cash and Cash Equivalents, end of period................................. $ 453 $ 83,616 $ 42,614
============== ============ ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-5-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
1. ORGANIZATIONAL TRANSACTIONS AND BASIS OF PRESENTATION
a. Organizational Transactions
During November 1997, pursuant an exchange agreement, the mining
assets of Addington Enterprises, Inc. (Enterprises) and 69.8% of the
common stock of Bowie Resources, Ltd. (Bowie) were transferred to a
newly formed entity, AEI Holding Company, Inc. (AEI HoldCo. - a
Delaware company) in exchange for the issuance of AEI HoldCo.'s shares
to Enterprises (50%) and Larry Addington (50%). Additionally, AEI
HoldCo. purchased Harold Sergent's 7.7% ownership interest in Bowie
for $2,000. Enterprises is owned by Larry Addington (80%), Robert
Addington (10%) and Bruce Addington (10%), who are brothers.
Enterprises retained, in November 1997, certain non-coal mining
properties as well as technology related assets which were
subsequently disposed in the MTI agreement (see below).
The MTI Agreement was between Mining Technologies, Inc., a newly
formed subsidiary of AEI HoldCo. (as purchaser) and Enterprises (as
seller) for Enterprises' ownership interest in its North American
(N.A.) mining technologies division. The purchase price of $51,000
(cash) was delivered at closing on January 2, 1998. The net assets
acquired include mining equipment (primarily Highwall Mining Systems),
contract mining agreements, real property and the intellectual
property for the N.A. Highwall Mining Systems (patents, trademarks,
etc.). Enterprises retained ownership of the non-N.A. intellectual
property.
The November 1997 Exchange and MTI transactions described above were
treated for accounting purposes as a transfer of entities and net
assets under common control with accounting similar to that of a
pooling of interests. Accordingly, the historical cost basis of the
underlying assets and liabilities transferred (from Enterprises and
Bowie) were carried over from the transferring entity to AEI HoldCo.
Due to common control, the MTI cash purchase price of $51,000 paid by
AEI HoldCo. to Enterprises was recorded as a charge to equity when
paid in January 1998.
During May 1998, the owners of AEI HoldCo. (Larry Addington and
Enterprises) established a new company, Coal Ventures, Inc. (CVI - a
Delaware company) and in June 1998 transferred their shares of AEI
HoldCo. to CVI in exchange for similar proportionate CVI shares,
thereby making CVI the owner of AEI HoldCo.
During August 1998, CVI changed its name to AEI Resources, Inc.
(Resources). In addition, during July 1998, the owners of Resources
established a new company, AEI Resources Holding, Inc. (ARHI - a
Delaware company - collectively, the Company) and transferred their
shares of Resources to ARHI in exchange for similar proportionate ARHI
shares, thereby making ARHI the owner of Resources. ARHI has no other
assets or activities other than the ownership of Resources.
b. Basis of Presentation
The accompanying financial statements include the historical accounts
of ARHI as well as its predecessors: Resources, AEI HoldCo. and
Enterprises and subsidiaries, all under the common control of Larry
Addington. The accompanying financial statements also include the
purchase accounting and post-acquisition operations of the following
significant acquisitions since their date of acquisition: Ikerd-Bandy
(October 1997), Leslie Resources (January 1998), Cyprus Subsidiaries
(June 1998), Mid-Vol (July 1998), Zeigler (September 1998), Kindill
(September 1998) and Martiki (November 1998). See Note 3 for
discussion of acquisitions. Significant intercompany transactions and
balances have been eliminated in consolidation. Minority interests
have not been recorded due to insignificance.
-6-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Various allocations and carve-out adjustments have been made in the
preparation of the accompanying consolidated financial statements.
Such allocations have been recorded to segregate the historical
accounts to reflect the businesses transferred. Management believes
that the method used for allocations and carve-out adjustments is
reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL
a. Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
b. Company Environment and Risk Factors
The Company's principal business activities consist of surface and
deep mining and marketing of bituminous coal, performance of contract
mining for third parties, construction and licensing of mining
equipment, as well as leasing and repairing mining equipment. These
operations are primarily located in Kentucky, Indiana, Illinois, West
Virginia, Tennessee and Colorado.
The Company, in the course of its business activities, is exposed to a
number of risks including: the possibility of the termination or
alteration of coal sales contracts, fluctuating market conditions of
coal and transportation costs, competitive industry and overcapacity,
changing government regulations, unexpected maintenance and equipment
failure, employee benefits cost control, misestimates of proven and
probable coal reserves, satisfactory labor relations, loss of key
employees, satisfactory resolution of the year 2000 issue and the
ability of the Company to obtain financing, necessary mining permits
and control of adequate recoverable mineral reserves. In addition,
adverse uncontrollable (wet) weather and geological conditions tend to
increase mining costs, sometimes substantially. Precipitation is
generally highest at most of the Company's mining operations in early
spring and late fall.
The Company is exposed to risks associated with a highly leveraged
organization. Such risks include: increased vulnerability to adverse
economic and industry conditions, limited ability to fund future
working capital, capital expenditures, business acquisitions or other
corporate requirements, possible liquidity problems as well as
financing and credit constraints. Management believes it has adequate
financing resources (including cash equivalents, cash generated from
operations and additional borrowings) to meet its needs in 1999.
The Company's current business plans include on-going growth in its
coal mining operations, primarily through acquisitions. The Company
faces numerous risks in the successful identification, consummation
and post-acquisition integration of such acquisitions.
c. Inventories
Inventories are stated at average cost, which approximates first-in,
first-out (FIFO) cost and does not exceed market. Components of
inventories consist of coal, deferred overburden and parts and
supplies (Note 4). Coal inventories represent coal contained in
stockpiles and exposed in the pit. Deferred overburden represents the
costs to remove the earthen matter (i.e., overburden) covering the
coal seam in surface mining. Costs to remove overburden are
accumulated and deferred on a pro-rata basis as
-7-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
overburden is removed and eventually charged to cost of operations when
the coal is sold. The calculation of deferred overburden requires
significant estimates and assumptions, principally involving engineering
estimates of overburden removal and coal seam characteristics.
d. Advance Royalty Payments (current portion included in Prepaid Expenses and
Other)
The Company is required, under certain royalty lease agreements, to make
minimum royalty payments whether or not mining activity is being performed
on the leased property. These minimum payments are recoupable once mining
begins on the leased property. The Company capitalizes these minimum
royalty payments and amortizes the deferred costs once mining activities
begin or expenses the deferred costs when the Company has ceased mining or
has made a decision not to mine on such property. Included in prepaid
expenses and other is $3,491 and $8,669 for 1997 and 1998, respectively,
relating to advanced royalties.
e. Net Assets Held for Sale
At the time of the Zeigler acquisition, the Company identified various
Zeigler items which it would resell including the Wyoming coal mines
(within Triton Coal Company) and non-coal mining activities. Net assets
held for sale as of December 31, 1998 in the accompanying financial
statements includes net assets related to Zeigler's power marketing and
fuel technology.
On December 14, 1998, the Company sold all issued and outstanding stock of
its subsidiary, Triton Coal Company for $275,000 (the Triton Disposition).
Prior to the closing of the Triton Disposition, all assets and liabilities
of Triton which were not related to the Wyoming Mines were transferred to
another subsidiary of the Company. The Company has agreed to provide
certain transition services as well as temporary credit support via
letters of credit (Note 7b) to the purchaser of Triton following the
closing. Net proceeds from the Triton Disposition were used to partially
retire the remaining amount due on the bridge financing facility for the
Zeigler acquisition (Note 7).
On December 18, 1998, the Company sold the Pier IX and Shipyard River
Terminals and related assets (the Pier Disposition) for an aggregate
purchase price of $35,000.
Through an energy-trading subsidiary, Zeigler began entering into power
and gas forward contracts and options for trading purposes in 1997. These
forward contracts and options were recorded at their estimated fair market
values by the Company at the date of purchase. At December 31, 1998, open
net contract and option positions were not material and did not represent
significant credit related exposure. The net assets held for sale balance
is $3,038 at December 31, 1998 and is included in prepaid expenses and
other current assets. The Company assigned amounts to assets held for sale
based on expected sale proceeds as well as earnings, advances and
allocated interest during the holding period prior to disposal. The
Company expects the remaining assets held for sale to be disposed during
1999. No gain or loss was recorded on the Triton Disposition and Pier
Disposition. A recap of net assets held for sale for 1998 follows:
<TABLE>
<S> <C>
Initial assigned value $ 292,576
1998 holding period cash advances (10,812)
1998 allocated interest 9,650
1998 net proceeds from disposal (310,000)
----------
Balance at December 31, 1998 3,038
1999 expected holding period cash advances 954
1999 expected allocated interest 1,008
----------
1999 expected net proceeds from disposal $ 5,000
==========
</TABLE>
-8-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
f. Depreciation, Depletion and Amortization
Property, plant and equipment are recorded at cost, including construction
overhead and interest, where applicable. Expenditures for major renewals
and betterments are capitalized while expenditures for maintenance and
repairs are expensed as incurred. Depreciation, depletion and amortization
are provided using either the straight-line or units of production method
with estimated useful lives under the straight-line method comprising
substantially the following ranges:
<TABLE>
<CAPTION>
YEARS
------------
<S> <C>
Buildings.................................................................... 10 to 45
Mining and other equipment and related facilities............................ 2 to 20
Transportation equipment..................................................... 2 to 7
Furniture and fixtures....................................................... 3 to 10
</TABLE>
Mineral reserves and mine development costs (included in property, plant
and equipment) are amortized using the units-of-production method, based
on estimated recoverable reserves. Coal sales contract related costs are
amortized as tons are delivered, based on contracted tonnage requirements.
Debt insurance costs $71,927 for 1997 and 1998, respectively) are being
amortized using the effective interest method, over the life of the
related debt, or using the straight-line method, over the life of the
related debt, if the result approximates the effective interest method.
g. Restricted Cash (Included in Other Non-Current Assets)
The Company pays amounts as required by various royalty agreements.
Certain of these agreements have been disputed by third parties, requiring
that cash be paid into an escrow account until the rightful recipient is
determined. Included in other non-current assets is $93 and $843 for 1997
and 1998, respectively, relating to restricted cash.
h. Coal Mine Reclamation and Mine Closure Costs
The Company estimates its future cost requirements for reclamation of land
where it has conducted surface and deep mining operations, based on its
interpretation of the technical standards of regulations enacted by the
U.S. Office of Surface Mining, as well as state regulations.
The Company accrues for the cost of final mine closure and related exit
costs over the estimated useful mining life of the developed property or,
if purchased, at the date of acquisition. These costs relate to reclaiming
the pit and support acreage at surface mines and sealing portals at deep
mines. Other costs common to both types of mining are related to
reclaiming refuse and slurry ponds as well as holding period and related
termination/exit costs. The Company expenses the reclamation of current
mine disturbance which is performed prior to final mine closure. The
establishment of the final mine closure reclamation liability and the
current disturbance is based upon permit requirements and requires various
significant estimates and assumptions, principally associated with cost
and production levels. Annually, the Company reviews its end of mine
reclamation and closure liability and makes necessary adjustments,
including mine plan and permit changes and
-9-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
revisions to cost and production levels to optimize mining and reclamation
efficiency. The economic impact of such adjustments is generally recorded
to cost of coal sales prospectively as remaining tons are mined. Also, as
described in Note 1. when a mine life is shortened due to change in mine
plan, mine closing obligations are accelerated and the related accrual is
increased accordingly. Although the Company's management believes it is
making adequate provisions for all expected reclamation and other costs
associated with mine closures, future operating results would be adversely
affected if such accruals were later determined to be insufficient. End of
mine reclamation and closure expense for 1996, 1997 and 1998 was $596,
$2,196 and $18,188, respectively.
i. Income Taxes
For 1996 and part of 1997 (see below), Enterprises and Bowie were S
corporations under the Internal Revenue Code and similar state statutes.
As a result, Enterprises and Bowie were not subject to income taxes and
their taxable income or loss was reported in the stockholders' individual
tax returns. Accordingly, the historical net income (loss) presented in
the accompanying financial statements during the S corporation periods is
exclusive of an income tax provision (See Notes 8 and 21).
The provision for income taxes includes the change in tax status matters
as described above plus federal, state and local income taxes currently
payable and those deferred because of temporary differences between the
financial statement and tax basis of assets and liabilities. The Company
records income taxes under the liability method. Under this method,
deferred income taxes are recognized for the estimated future tax effects
of differences between the tax basis of assets and liabilities and their
financial reporting amounts as well as net operating loss carryforwards
and tax credits based on enacted tax laws. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
j. Revenue Recognition
Most of the Company's revenues have been generated under long-term coal
sales contracts with electric utilities, industrial companies or other
coal-related organizations, primarily in the eastern United States.
Revenues are recognized on coal sales in accordance with the sales
agreement, which is usually when the coal is shipped to the customer and
title is passed. Advance payments are received deferred and recognized in
revenue as coal is shipped. The Company also rents and sells equipment
and provides repair and contract mining services, and the revenue from
such rental, sale and service is recognized when earned. Revenue from the
construction of mining equipment is recognized on a percentage of
completion basis. The Company grants credit to its customers based on
their creditworthiness and generally does not secure collateral for its
receivables. The allowance for doubtful accounts for 1997 and 1998 is $0
and $2,489, respectively. Historically, accounts receivable write-offs
have been insignificant.
k. Stockholders' Equity (Deficit)
The 1996 and 1997 historical owners' equity accounts (retained earnings
(deficit) and additional capital) for legal entities (Bowie) which have
been carried over from the transferor under the exchange agreement (Note
1) have remained unchanged as presented within the accompanying
consolidated statements of stockholders' equity (deficit).
-10-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The businesses transferred from Enterprises have operated as divisions
and, accordingly, the 1996 and 1997 historical equity account changes
(earnings and losses and owners' contributions and distributions) have
been presented within additional capital in the accompanying consolidated
statements of stockholders' equity (deficit) for the pre-transfer period.
Prior to the formation of Resources in May 1998, the common stock activity
presented in the accompanying consolidated statement of stockholders'
equity (deficit) represents that of the predecessor company AEI HoldCo.
As described in Note 8, in connection with the consummation of the
November 1997 exchange agreement, the mining businesses transferred from
Enterprises required that deferred taxes be recorded by AEI HoldCo.
Because a portion of the mining assets transferred from Enterprises were
stepped up for tax purposes, but not book (similar to a taxable pooling),
the resulting deferred tax benefit of approximately $5,500 was recorded in
November 1997 with a corresponding increase in additional capital.
As described in Note 1a, on January 2, 1998, AEI HoldCo. made a payment of
$51,000 for the purchase of MTI which was recorded as a charge to equity
in January 1998. In addition, because the tax basis of the MTI net assets
transferred were stepped up for tax purposes, but not book (similar to a
taxable pooling), the resulting deferred tax benefit of $10,000 was
recorded in January 1998 with a corresponding increase in equity.
l. Asset Impairments and Accelerated Mine Closing Accruals
In certain situations, expected mine lives are shortened because of
changes to planned operations. When that occurs and it is determined that
the mine's underlying costs are not recoverable in the future, reclamation
and mine closing obligations are accelerated and the mine closing accrual
is increased accordingly. Also, to the extent that it is determined that
asset carrying values will not be recoverable during a shorter mine life,
a provision for such impairment is recognized. The Company adopted SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, in prior years. SFAS No. 121 expanded the
Company's criteria for loss recognition, and provides methods for both
determining when an impairment has occurred and for measuring the amount
of the impairment. SFAS No. 121 requires that projected future cash flows
from use and disposition of all the Company's assets be compared with the
carrying amounts of those assets. When the sum of projected cash flows is
less than the carrying amount, impairment losses are recognized.
m. Employee Benefits
Postretirement Benefits Other Than Pensions - As prescribed by SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pension,
the Company accrues, based on annual independent actuarial valuations, for
the expected costs of providing postretirement benefits other than
pensions, which are primarily medical benefits, during an employee's
actual working career until vested.
Workers Compensation and Black Lung Benefits - Certain of the Company's
subsidiaries are liable under federal and state laws to pay workers
compensation and pneumoconiosis (black lung) benefits to eligible
employees, former employees and their dependents. The Company is self-
insured for significant federal and state workers compensation and black
lung benefits. The remaining portion of workers compensation and black
lung claims are covered by state insurance funds into which the Company
pays premiums.
-11-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The accrual for self-insured workers compensation and black lung is
adjusted to equal the present value of future claim payments, determined
based on outside actuarial valuations performed annually.
Postemployment Benefits - The Company provides certain postemployment
benefits, primarily long-term disability and medical benefits, to former
and inactive employees and their dependents during the time period
following employment but before retirement. The Company accrues the
discounted present value of expected future benefits, based on annual
outside actuarial valuations.
n. Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS No. 123, Accounting
for Stock-Based Compensation, which the Company has adopted. This standard
defines a fair value method of accounting for stock options and similar
equity instruments. Pursuant to this standard, companies are encouraged,
but not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are also permitted to
continue to account for such transactions under Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, but
are required to disclose in a note to the financial statements pro forma
net income as if the Company had applied SFAS No. 123. The accounting
requirements of SFAS No. 123 are effective for all employee awards granted
after the beginning of the fiscal year of adoption. The Company has
elected to account for such transactions under APB No. 25.
o. Reclassifications
Certain reclassifications of prior year amounts were made to conform with
the current year presentation with no effect on previously reported net
income (loss) or stockholders' equity (deficit).
p. Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers
investments having maturities of three months or less at the time of the
purchase to be cash equivalents.
Supplemental disclosure:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid for interest, net of capitalized interest of $246, $467 and
$14,060, respectively................................................ $ 5,357 $ 7,193 $ 53,667
Income taxes paid....................................................... - - 880
</TABLE>
The 1997 Statement of Cash Flows is exclusive of non-cash deferred tax
asset and equity increase of $5,515, non-cash property additions of
$2,253, non-cash capitalized loan fees of $238, non-cash transfers of
inventory items to development costs of $1,062 and settlement of a note
(included in other assets) for property and mine development work valued
at $1,220.
The 1998 statement of cash flows is exclusive of non-cash deferred tax
asset and equity increase of $10,000.
-12-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ACQUISITIONS
The following significant acquisitions in Notes 3a through 3g have each been
accounted for as a purchase, and their results of operations have been
included with that of the Company since the date of acquisition.
a. Ikerd-Bandy Co., Inc.
In October 1997, Enterprises acquired all of the capital stock of
Ikerd-Bandy Co., Inc., a coal mining business with operations in
eastern Kentucky, for the purchase price of approximately $7,600
(including $300 in related fees and expenses) plus the assumption of
approximately $4,700 in debt.
b. Leslie Resources
In January 1998, AEI HoldCo. acquired all the capital stock of Leslie
Resources, Inc. and Leslie Resources Management, Inc., (collectively,
Leslie Resources) a coal mining business with operations in eastern
Kentucky, for the purchase price of $11,900 (including $300 in related
fees and expenses) plus the assumption of approximately $11,000 in
debt.
c. Cyprus Subsidiaries
On June 29, 1998, pursuant to a May 28, 1998 stock purchase and sale
agreement with Cyprus Amax Coal Company (Cyprus), CVI acquired various
Cyprus Subsidiaries, a coal mining business with operations in
Kentucky, West Virginia, Indiana and Tennessee. The purchase price was
$98,000 plus a working capital adjustment as well as payments for
purchased and leased equipment and a royalty owed to Cyprus for future
production.
d. Mid-Vol
On July 10, 1998, CVI acquired the capital stock of Mid-Vol Leasing,
Inc., Mega Minerals, Inc. and Premium Processing, Inc. (collectively,
Mid-Vol), a coal mining business with operations in West Virginia for
the purchase price of $35,000 plus a working capital adjustment as
well as production royalty payments.
e. Zeigler
On August 5, 1998, Resources (via a subsidiary) submitted a cash
tender offer to acquire all of the common stock of Zeigler Coal
Holding Company (Zeigler), a diversified publicly held coal mining and
energy business with operations primarily in Kentucky, West Virginia,
Ohio, Illinois and Wyoming. The cash purchase price for the stock was
approximately $600,000, and Resources assumed approximately $255,000
of Zeigler's debt. This acquisition closed on September 2, 1998.
Certain acquired assets were held for resale as discussed in Note 2e.
f. Kindill
On September 2, 1998, the Company acquired the capital stock of
Kindill Holding, Inc. and Hayman Holdings, Inc. (collectively Kindill)
(a related party) for the purchase price of $11,000 plus assumption of
approximately $50,000 of Kindill's debt. Kindill is a coal mining
business with operations in Indiana.
-13-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
g. Martiki
On November 6, 1998, the Company acquired the capital stock of Martiki Coal
Corporation (Martiki), a subsidiary of MAPCO Coal, Inc. for $32,000.
Martiki is a coal mining business with operations in eastern Kentucky.
The following unaudited pro forma information for the periods shown below
gives effect to the aforementioned acquisitions as if they had occurred at the
beginning of each period:
<TABLE>
<CAPTION>
1997 1998
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................................. $ 1,395,200 $ 1,383,400
Income (loss) before extraordinary items............................. (135,100) (43,700)
Net income (loss).................................................... (136,400) (53,900)
</TABLE>
The unaudited pro forma information assumes that the Company owned the
aforementioned acquisitions at the beginning of the periods presented and
includes adjustments for depreciation, depletion and amortization, interest
expense and an inventory adjustment to conform to the Company's accounting
policies. The unaudited pro forma financial data is presented for information
purposes only and is not necessarily indicative of the results of operations
that actually would have been achieved had such acquisitions been consummated
at the beginning of these periods, and is not intended to be a projection of
future results.
The purchase accounting entries recorded from the acquisitions noted in 3c
through 3g above are preliminary and are expected to be finalized in 1999.
Upon acquisition of Zeigler, the Company assumed a transition and severance
plan covering up to approximately 500 former Zeigler employees. Subject to
certain conditions, employees will receive severance payments if terminated up
to one year after acquisition (through September 1, 1999). Included in other
current accruals at December 31, 1998 are $18,216 of future payments
anticipated under this plan. In 1998, the Company incurred costs of $3,846
which reduced the accrual.
4. INVENTORIES
As of December 31, 1997 and 1998, inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------------- ------------------
<S> <C> <C>
Coal................................................................. $ 3,995 $ 44,813
Deferred overburden.................................................. 10,768 40,201
Parts and supplies................................................... 7,895 32,538
----------------- ------------------
$ 22,658 $ 117,552
================= ==================
</TABLE>
-14-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including mineral reserves and mine
development and contract costs, at December 31, 1997 and 1998 are summarized
by major classification as follows:
<TABLE>
<CAPTION>
1997 1998
----------------- ------------------
<S> <C> <C>
Land................................................................. $ 1,670 $ 88,250
Mining and other equipment and related facilities.................... 63,125 406,592
Mine development and contract costs.................................. 24,177 52,725
Mineral reserves..................................................... 15,992 1,579,478
Mine development in process.......................................... 22,150 658
Construction work in process......................................... 2,571 23,800
----------------- ------------------
129,685 2,151,503
Less-accumulated depreciation, depletion and amortization............ (23,027) (80,416)
----------------- ------------------
Net property, plant and equipment.................................... $ 106,658 $ 2,071,087
================= ==================
</TABLE>
Included in property, plant and equipment is $24,721 for 1997 and $24,458
for 1998 related to development and construction projects for which
depreciation, depletion and amortization have not yet commenced. During the
development phase, any anticipated mining revenues would be recorded as a
reduction in development costs. The Company reviews the realization of these
projects on a periodic basis.
6. ACCRUED EXPENSES AND OTHER
Accrued expenses and other as of December 31, 1997 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1997 1998
--------------- -----------------
<S> <C> <C>
Payroll, Bonus and Vacation........................................ $ 5,385 $ 34,250
Non-income Taxes................................................... 2,568 27,571
Severance.......................................................... - 18,216
Deferred revenues.................................................. - 16,799
Royalties.......................................................... 1,081 12,667
Interest........................................................... 2,701 3,715
Other.............................................................. 583 6,540
--------------- -----------------
$ 12,318 $ 119,758
=============== =================
</TABLE>
-15-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT
a. Long-term Debt and Capital Leases
Long-term debt and capital leases as of December 31, 1997 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1997 1998
---------------- ------------------
<S> <C> <C>
Senior Credit Facility (Note 7b):
Term Loan A................................................................... $ - $ 325,000
Term Loan B................................................................... - 250,000
Revolving Credit Facility..................................................... - 75,000
10.5% Senior Notes (Note 7c).................................................... 200,000 200,000
11.5% Senior Subordinated Notes (Note 7c)....................................... - 150,000
Zeigler Industrial Revenue Bonds (Note 7e)...................................... - 145,800
Notes payable to sellers of Cyprus Subsidiaries ($25,033), Mid-Vol ($15,000),
Leslie Resources ($8,988) and Ikerd-Bandy ($4,543) (Note 7d)................... 4,647 53,564
Zeigler acquisition bridge facility (Note 7d)................................... - 10,000
Capital leases (Note 10b)....................................................... 10,527 4,352
Other........................................................................... 1,795 1,866
---------------- ------------------
Total...................................................................... 216,969 1,215,582
Less - current portion..................................................... 7,608 (61,533)
---------------- ------------------
Long-term debt............................................................. $ 209,361 $ 1,154,049
================ ==================
</TABLE>
Principal maturities of long-term debt and capital leases as of December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31:
<S> <C>
1999......................................................... $ 61,533
2000......................................................... 97,753
2001......................................................... 97,397
2002......................................................... 92,883
2003......................................................... 218,969
Thereafter................................................... 647,047
------------
$ 1,215,582
============
</TABLE>
Upon early extinguishment in 1997 of the Company's previously outstanding
credit facility and bridge financing, the Company expensed as an
extraordinary item in November 1997 approximately $1,600 of prepayment
penalties and bridge financing costs and $571 of deferred debt issuance
costs. In connection with arranging the November 1997 financing
transactions, the Company paid a fee of $4,375 to a related party.
b. Senior Credit Facility
The Senior Credit Facility term loan and revolver (collectively the "Credit
Facility") are with UBS AG (an affiliate of Warburg Dillon Read LLC), as
administrative agent and a syndicate of other lending institutions
(lenders). The Credit Facility consists of a Term Loan A Facility of
$325,000 (maturing through 2003), a Term Loan B Facility of $250,000
(maturing through 2004) (the "term loan facilities") and a $300,000
-16-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
senior secured revolving credit facility (Revolver), maturing through 2003.
The revolver includes a $225,000 sublimit for the issuance of letters of
credit. Interest is calculated at the option of the Company based on LIBOR
or ABR (alternative base rate) plus the applicable "spread", as defined.
The applicable "spread" shall be determined pursuant to a formula based on
the Company's financial performance. The ABR is the higher of the Federal
Funds effective rate plus 0.5% and the Prime Rate. As of December 31,
1998, the average interest rates were as follows: Term loan A (9.65%),
Term Loan B (9.91%) and Revolver (9.49%). The Credit Facility is
collateralized primarily by capital stock of the Company and its
subsidiaries, along with all accounts receivable; inventory; property,
plant and equipment; intangibles; contact rights and other personal and
real property of the Company. The Company and most of its subsidiaries
have guaranteed the Credit Facility.
The Credit Facility also contains various financial covenants which, among
other things, limits additional indebtedness, dividend and other restricted
payments, affiliate transactions, mergers and capital expenditures as well
as meeting certain financial ratios including, but not limited to interest
coverage, minimum net worth and maximum leverage ratio, all as defined. In
addition, the credit facilities are required to be prepaid with either 75%
of annual Excess Cash Flow (or 50%, depending on leverage ratio), as
defined, 100% of proceeds from the incurrence of additional debt, 100% of
proceeds from asset sales or dispositions above certain defined thresholds
or 50% of the net proceeds from the issuance of equity securities. There
was no such required pre-payment during 1998.
As of December 31, 1998, the Company has $75,000 in outstanding borrowings
under the Revolver. In addition, the Company has letters of credit in the
amount of $178,047 issued under the Revolver. These letters of credit
cover the following:
<TABLE>
<S> <C>
Insurance/Workers compensation/Reclamation Bonds....................... $ 14,514
Zeigler IRBs........................................................... 148,947
Mineral leases/Royalties............................................... 1,900
Seller financing/Taxes................................................. 2,686
Vulcan acquisition of Triton (Note 2e)................................. 10,000
--------------
$178,047
==============
</TABLE>
The amount available for borrowing under the revolver at December 31, 1998
was $46,953.
On June 29, 1998, the Company replaced a former credit facility and,
consequently, expensed as an extraordinary item in June 1998 approximately
$424 of related deferred debt issuance costs, net of a tax benefit of $283.
At December 31, 1998, there were no borrowings under the former credit
facility.
c. 10.5% Senior Notes and 11.5% Senior Subordinated Notes
On December 14, 1998, Resources and AEI HoldCo. co-issued $200,000 of 10.5%
Senior Notes due 2005 (Senior Notes). These 10.5% Senior Notes were
exchanged for previously issued $200,000 10% Senior Notes of AEI HoldCo.
due 2007. As part of the $200,000 Senior Notes exchange, the old indenture
was modified to eliminate substantially all of the covenants and certain
related definitions and events of default. Warburg Dillon Read LLC was the
dealer manager of the Senior Notes exchange.
Also on December 14, 1998, Resources issued $150,000 of 11.5% Senior
Subordinated Notes due 2006 (Subordinated Notes). Warburg Dillon Read LLC
was the initial purchaser of the Subordinated Notes.
-17-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Senior Notes mature in their entirety on December 15, 2005 and the
Subordinated Notes mature in their entirety on December 15, 2006. The
Senior Notes and Subordinated Notes are general, unsecured obligations of
the issuers. Interest is payable on June 15 and December 15 of each year.
The Company has the option to redeem the Senior Notes and Subordinated
Notes on or after December 15, 2002, at redemption prices ranging from
105.75% in 2002 to 100% in 2005. Before December 15, 2002, the Company may
redeem the Senior Notes and Subordinated Notes at the face amount plus
accrued and unpaid interest, liquidated damages, if any, and an applicable
"make whole premium" of up to $35,446 and $32,109, respectively.
Upon a change in control (as defined), the Company will be required to make
an offer to purchase all outstanding Senior Notes and Subordinated Notes at
101% of the principal amount. The Senior Notes and Subordinated Notes are
jointly and severally guaranteed on a senior unsecured basis by ARHI and
each of the Company's current and future domestic majority-owned
subsidiaries, other than Yankeetown Dock Corporation. In addition to
containing various restrictive financial covenants, the Senior Notes and
subordinated Note Indentures will restrict, among other things, additional
indebtedness, issuance of preferred stock, dividend payments, mergers, sale
of subsidiaries and assets and affiliate transactions.
The Company has agreed to file a registration statement under the U.S.
Securities Act for the Senior Notes and Subordinated Notes which would
provide for their resale. If such registration statement is not filed or
declared effective within the time periods allotted in the Indentures (such
effective date being March 14, 1999 for the Subordinated Notes), the
Company will be required to pay liquidated damages to Senior Notes and
Subordinated Notes holders. For the Senior Notes, the Company has agreed
to pay each noteholder liquidated damages of 20c per one thousand dollars
principal amount (aggregating to $40 per week) per week commencing December
8, 1998 for 90 days. If the registration statement is not declared
effective by March 8, 1999, then the amount of liquidated damages payable
weekly will increase by an additional 5c per one thousand dollars principal
amount for each 90-day period up to a maximum of 50c payable weekly per one
thousand dollars principal amount. For Subordinated Notes, the Company
will be required to pay liquidated damages commencing March 14, 1999 at a
weekly rate of 5c per one thousand dollars principal amount (aggregating to
$7.5 per week) for the first 90 days and increasing 5c each 90 days
thereafter until up to a maximum of 50c payable weekly per one thousand
dollars principal amount. The Company has filed an initial registration
statement with the Securities and Exchange Commission on February 12, 1998;
however, it is uncertain when or if this filing will become effective.
d. Bridge Facilities
The Company has funded the acquisitions of Cyprus Subsidiaries, Mid-Vol,
Kindill and Zeigler (see Note 3) with short-term (bridge) financing
arranged by UBS AG, an affiliate of Warburg Dillon Read LLC. The bridge
financing facility for the Cyprus Subsidiaries and Mid-Vol acquisitions was
for $200,000. The bridge financing facility for the Zeigler and Kindill
acquisitions was for $600,000.
As of December 31, 1998, the Cyprus/Mid-Vol bridge was retired and only
$10,000 of the Zeigler bridge facility remained outstanding, which the
Company plans to repay in 1999. In connection with the extinguishment of
the bridge facilities, the Company recorded in 1998 an extraordinary loss
on extinguishment of $9,772, net of a tax benefit of $6,518.
-18-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has also committed to issue common equity shares to UBS AG
(aggregating from 2.5% to 10% of the total outstanding common equity),
under certain circumstances, in the event all outstanding loans under the
bridge loan agreements are not repaid prior to April 15, 1999. The
Company does not believe these agreements will result in UBS AG acquiring
any equity interest in the Company. Nothing has been recorded in the
December 31, 1998 financial statements related to this matter as the
Company believes no significant amount of consideration was provided to
UBS AG under these agreements.
e. Industrial Revenue Bonds
The Company has industrial revenue bonds which are floating rate
obligations issued by the Peninsula Ports Authority of Virginia
($115,000) and Charleston County, South Carolina ($30,800) (collectively,
Zeigler IRBs). Both obligations are backed by letters of credit issued
under the Company's revolver (Note 7b). The principal of the obligation
by the Peninsula Ports Authority of Virginia is due in one lump-sum
payment on May 1, 2022, and the principal of the obligation by Charleston
County, South Carolina is due in one lump-sum payment on August 1, 2028.
The Zeigler IRBs are not secured by any assets of the Company. Interest
on these obligations is variable and payable monthly. The weighted-
average interest rate for these borrowings was 3.61% as of December 31,
1998. Refer to Note 18c for subsequent refinancing of the Zeigler IRBs.
f. Seller Notes Payable
In connection with the acquisitions of Ikerd-Bandy, Leslie Resources,
Cyprus Subsidiaries and Mid-Vol (Note 3), the Company entered into notes
payable to the sellers of these businesses (Seller Notes). The Cyprus
subsidiaries Sellers Notes are secured and the other Seller Notes are
unsecured and bear interest (or have been discounted) at rates ranging
from 5% to 10%. These Seller Notes also mature from 2002 to 2004.
8. INCOME TAXES
As discussed in Note 21, during April 1997 Bowie's S corporation status was
terminated. Upon such termination, Bowie initially recorded a net deferred
tax liability of $1,600 with an increase to income tax provision for the
differences in book and tax bases in assets and liabilities. In addition,
during November 1997, the mining businesses transferred from Enterprises
(see Note 1, as an S corporation) to the Company (as a C corporation)
initially recorded a net deferred tax liability of $17,963 with an increase
to income tax provision for the differences in book and tax bases in assets
and liabilities. Presented below are income tax disclosures as of and for
the years ended December 31, 1997 and 1998. Prior to 1997, the Company
operated as an S corporation, and no corporate income taxes were recorded.
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1997 1998
----------------- -------------------
<S> <C> <C>
Tax provisions:
Current $ - $ 36,911
Deferred 17,516 (57,320)
----------------- -------------------
$ 17,516 $ (20,409)
================= ===================
</TABLE>
-19-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table presents the difference between the actual tax provision
and the amounts obtained by applying the statutory U.S. federal income tax
rate of 35% to the 1997 and 1998 net loss before income taxes.
<TABLE>
<CAPTION>
1997 1998
----------------- -----------------
<S> <C> <C>
Federal provision computed at statutory rate........................... $ (1,145) $ (15,326)
State income tax (net of federal tax benefits and apportionment
factors) computed at statutory rate................................... (135) (2,189)
Change in tax status................................................... 19,563 -
Percentage depletion in-excess of cost................................. - (3,928)
Premium amortization................................................... - 1,034
Federal and state tax effect on S corporation period earnings.......... (679) -
Other.................................................................. (88) -
----------------- -----------------
$ 17,516 $ (20,409)
================= =================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
--------------- -----------------
<S> <C> <C>
Deferred Tax Assets:
Accrued employee benefits............................................. $ - $ 209,341
Accrued reclamation and closure....................................... 4,560 135,966
AMT credits........................................................... - 28,547
Net operating loss carryovers......................................... 9,353 8,015
Patents and technology................................................ - 12,574
Other................................................................. 681 38,742
--------------- -----------------
Valuation allowance.................................................... 14,594 433,185
- (8,015)
--------------- -----------------
14,594 425,170
--------------- -----------------
Deferred Tax Liabilities:
Property, plant and equipment......................................... 1,903 215,784
Mineral reserves and mine development costs........................... 17,343 286,313
Other................................................................. 6,480 32,005
--------------- -----------------
25,726 534,102
--------------- -----------------
Net Deferred Tax Liability........................................ $ 11,132 $ 108,932
=============== =================
</TABLE>
Certain subsidiaries have carryforwards for net operating losses (NOL) of
approximately $20,000 which may only be used by these subsidiaries, and if not
used will expire between 2011 and 2018. NOL carryforwards may also be limited
under certain ownership changes. The valuation allowance was recorded in
purchase accounting using the more likely than not methodology.
-20-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. EMPLOYEE BENEFITS
Employee benefits at December 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
NON-
CURRENT CURRENT TOTAL
----------------- ------------------- -------------------
<S> <C> <C> <C>
Postretirement benefits $ 16,882 $ 375,045 $ 391,927
Coal Act benefits 5,582 63,774 69,356
Workers compensation and black lung benefits 9,978 83,555 93,533
Pension benefits 101 2,488 2,589
Postemployment benefits 1,233 3,219 4,452
----------------- ------------------- -------------------
Total $ 33,776 $ 528,081 $ 561,857
================= =================== ===================
</TABLE>
a. Postretirement Benefits Other than Pensions
Prior to the Cyprus Subsidiaries acquisition on June 29, 1998, the Company
did not have any defined benefit pension plans, postretirement benefits or
UMWA Combined Benefit Fund obligations. In conjunction with certain of the
acquisitions described in Note 3, the Company acquired, or agreed to put in
place, benefit plans providing defined benefits to certain non-union
employees and post-retirement healthcare and life insurance to eligible
union employees.
The Company's non-contributory pension plans cover certain of its non-union
employees and union employees at one of the Company's acquired mines.
Benefits are generally based on the employee's years of service and
compensation during each year of employment. The Company's funding policy
is to make the minimum payment required by the Employee Retirement Income
Security Act of 1974. There were no minimum contributions required in 1998.
Summaries of the changes in the benefit obligations, plan assets
(consisting principally of common stocks and U.S. government and corporate
obligations) and funded status of the plans are as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------
OTHER
PENSION POST-RETIREMENT
BENEFITS BENEFITS
------------------- -------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1 $ - $ -
Acquisition of Cyprus Subsidiaries and Zeigler.......... 102,027 385,861
Service cost............................................ 1,472 326
Interest cost........................................... 2,363 9,679
Benefits paid........................................... (3,487) (3,939)
------------------- -------------------
Benefit obligation at December 31....................... $ 102,375 $ 391,927
=================== ===================
CHANGE IN PLAN ASSETS
Value of plan assets at January 1....................... $ - $ -
Acquisition of Cyprus Subsidiaries and Zeigler.......... 100,261 -
Actual return on plan assets............................ 8,607 -
Benefits paid........................................... (3,487) -
------------------- -------------------
Fair value of plan assets at end of year................ $ 105,381 $ -
=================== ===================
</TABLE>
-21-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1998
--------------------------------------------
OTHER
PENSION POST-RETIREMENT
BENEFITS BENEFITS
------------------- -------------------
<S> <C> <C>
FUNDED STATUS OF THE PLANS
Accumulated obligations less plan assets................. $ 3,006 $ 391,927
Unrecognized actuarial gain.............................. (5,595) -
------------------- -------------------
Net liability recognized................................. $ 2,589 $ 391,927
=================== ===================
NET PERIODIC BENEFIT COST
Service cost............................................. $ 1,472 $ 326
Interest cost............................................ 2,363 9,679
Expected return on plan assets........................... (3,013) -
------------------- -------------------
$ 822 $ 10,005
=================== ===================
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate............................................ 7.25% 7.25%
Expected return on plan assets........................... 9.50% 9.50%
Rate of compensation increase............................ 4.00% 4.00%
Health care cost trend on covered charges................ - 8.00% in 1998
Decline to
5.00% over 20
years
</TABLE>
The expense and liability estimates can fluctuate by significant amounts
based upon the assumptions used by the actuaries. If the healthcare cost
trend rates were increased by one percent in each year, the accumulated
postretirement benefit obligation would increase by $60,200 or 15.4% as of
December 31, 1998. The effect of this change on the 1998 expense accrual
would be an increase of $4,500 or 45%.
b. Multi-Employer Pension and Benefits Plans
UMWA Pension Plan - Certain of the Company's recently acquired subsidiaries
are required under their respective contracts with the 1974 UMWA to pay
amounts based on hours worked to the UMWA Pension Plan and Trust, a multi-
employer pension plan covering all employees who are members of the UMWA.
The accompanying consolidated statements of operations include $348 of
expense in 1998, applicable to the plan. The Employee Retirement Income
Security Act of 1974 (ERISA) as amended in 1980, imposes certain
liabilities on contributors to multi-employer pension plans in the event of
a contributor's complete or partial withdrawal from the plan. The
withdrawal liability would be calculated based on the contributor's
proportionate share of the plan's unfunded vested liabilities.
-22-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
c. UMWA Combined Benefit Fund
The Company provides healthcare benefits to eligible retirees and their
dependents. Retirees who were members of the United Mine Workers of
America (UMWA) and who retired on or before December 31, 1975 received
these benefits from multi-employer benefit plans. The Company contributed
to these funds based on the number of its retirees in one of the funds and
based on hours worked by current UMWA members for the other fund. Current
and projected operating deficits of these trusts led to the passage of the
Coal Industry Retiree Health Benefit Act of 1992 (the Coal Act). The
Coal Act established a new multi-employer benefit trust that will provide
healthcare and life insurance benefits to all beneficiaries of the earlier
trusts who were receiving benefits as of July 20, 1992. The Coal Act
provides for the assignment of beneficiaries to their former employers and
any unassigned beneficiaries to employers based on a formula. Based upon
an independent actuarial valuation, the Company estimates the amount of its
obligation (discounted at 7.25%) under the Coal Act to be approximately
$69,356 as of December 31, 1998.
The Company recorded expenses related to the Coal Act of $0, $0 and $1,919
for 1996, 1997 and 1998, respectively.
d. Workers Compensation and Black Lung
The operations of the Company are subject to the federal and state workers'
compensation laws. These laws provide for the payment of benefits to
disabled workers and their dependents, including lifetime benefits for
black lung. The Company's subsidiary operations are either fully insured or
self-insured for their workers compensation and black lung obligations.
The actuarially determined liability for self-insured workers compensation
and black lung benefits is based on a 7.25% discount rate and various other
assumptions including incidence of claims, benefit escalation, terminations
and life expectancy. The annual black lung expense consists of actuarially
determined amounts for self-insured obligations plus the premiums paid to
the state insurance funds. The estimated amount of discounted obligations
for self-insured workers compensation and black lung claims plus an
estimate for incurred but not reported claims is $93,533 as of December 31,
1998.
The Company recorded self-insured expenses related to workers compensation
and black lung claims of $0, $0 and $2,470, respectively.
e. Post-Employment Benefits Other than Pensions
The Company, has a long-term disability plan which provides for three years
of disability benefits and for three years of continuation in the medical
plan. Claimants on disability at January 1, 1999 will receive three
additional years of indemnity and medical benefits, at which point further
eligibility will end. The actuarially determined liability for long-term
disability benefits is based on a 7.25% discount rate and various other
assumptions including life expectancy. The present value of the long-term
disability claimants is $4,452 at December 31, 1998. The Company recorded
expenses related to long-term disability benefits of $0, $0 and $334 for
1996, 1997 and 1998, respectively.
-23-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
f. 401(k) Plans
The Company and certain subsidiaries sponsor savings and long-term
investment plans for substantially all employees other than employees
covered by the contract with the UMWA. Some of the plans matched 50% the
voluntary contributions of participants up to a maximum contribution based
upon a percentage of a participant's salary with an additional matching
contribution possible at the Company's discretion. The expense for 1998
under these plans was $401.
10.COMMITMENTS AND CONTINGENCIES
a.Coal Sales Contracts and Contingency
As of December 31, 1998, the Company had commitments under 55 long-term
sales contracts to deliver scheduled base quantities of coal annually to 34
customers. The contracts expire from 2002 through 2010, with the Company
contracted to supply a minimum of approximately 226 million tons of coal
over the remaining lives of the contracts at prices which are at or above
market. Certain of the contracts have sales price adjustment provisions,
subject to certain limitations and adjustments, based on changes in
specified production costs. Larry Addington has guaranteed the Company's
obligations under one of the coal sales contracts.
Under a ten-year contract dated July 1, 1998, the Company is required to
sell coal from its Bowie mine to TVA. The Company cannot satisfy the
delivery requirements in full from its Bowie mine if it is unable to lease
certain additional reserves located on federal land in Colorado. The
failure to do so could materially adversely impact the profitability of the
Bowie mine. The Company is in process of procuring the necessary leases
and permits, however, it may encounter resistance in its efforts.
b. Leases
The Company has various operating and capital leases for mining,
transportation and other equipment. Lease expense for the years ended
December 31, 1996, 1997 and 1998 was approximately $6,000, $9,600 and
$30,128 (net of amount capitalized in mine development cost of $1,800 and
$463,460 in 1997 and 1998), respectively. Property under capital leases
included in property, plant and equipment in the accompanying balance
sheets at December 31, 1997 and 1998 was approximately $21,400 less
accumulated depreciation of approximately $5,810 and $7,400, respectively.
Depreciation of assets under capital leases is included in depreciation
expense.
The Company also leases coal reserves under agreements that call for
royalties to be paid as the coal is mined. Total royalty expense for the
years ended December 31, 1996, 1997 and 1998 was approximately $11,200,
$13,600 and $61,700, respectively. Certain agreements require minimum
annual royalties to be paid regardless of the amount of coal mined during
the year. However, such agreements are generally cancelable at the
Company's discretion. The assets of the Bowie #2 mine are held as
collateral for one of these agreements.
-24-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Approximate future minimum lease and royalty payments are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
ROYALTIES LEASES LEASES
--------- --------- -------
Year ended December 31,
<S> <C> <C> <C>
1999.............................. $ 17,712 $ 44,447 $ 4,885
2000.............................. 22,081 37,809 202
2001.............................. 22,624 33,255 -
2002.............................. 22,992 23,239 -
2003.............................. 24,025 11,400 -
Thereafter.......................... 28,747 2,598 -
-------
Total minimum lease payments........ 5,087
Less-amount representing interest... 735
-------
Present value of minimum lease
payments (Note 7a).................. 4,352
Less-current portion................ 4,161
-------
$ 191
=======
</TABLE>
Included in the above operating lease commitments are $47,034 to a related
party.
c.Legal Matters
The Company is named as defendant in various actions in the ordinary course of
its business. These actions generally involve disputes related to contract
performance, property boundaries, mining rights, blasting damages, personal
injuries and royalty payments, as well as other civil actions that could
result in additional litigation or other adversary proceedings. Certain
actions are described as follows:
In connection with the acquisition of the Cyprus Subsidiaries (Note 1), the
Company became potentially liable under a suit filed in the Circuit Court of
Perry County, Kentucky in 1996 by Joseph D. Weddington and Kentucky Land &
Exploration Company ("Kentucky Land"). Kentucky Land has asserted claims to
approximately 1,425 acres of property upon which the Company mines coal and is
claiming substantial damages. Based on a prior federal appellate court
decision related to a similar claim by different plaintiffs, the Company
believes that it is likely to prevail. The Company does not believe the
ultimate outcome of this matter will result in a material adverse effect on
the financial position or results of operations of the Company, taken as a
whole.
A subsidiary of Pittston Minerals Group, Inc. has made claims for
indemnification from the Company under the terms of a sale agreement between a
predecessor of the Company (as seller) and the Pittston subsidiary. The
claimed indemnification covers a number of items, including allegedly assumed
liabilities, alleged failure to transfer specific licenses, assets and permits
and alleged non-compliance with certain agreements, applicable laws and
permits. The Company is in process of investigating and negotiating the claims
with the Pittston subsidiary. Many of the claims have been resolved without
any payment by or liability to the Company. To the Company's knowledge, no
lawsuit has been filed or otherwise threatened by the Pittston subsidiary
against the Company. The Company intends to defend these claims vigorously,
and at this time it is not possible to predict the outcome of the claims.
However, the Company believes that the liability arising from such claims
would not have a material adverse effect on the financial position or results
of operations of the Company.
-25-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In October 1998, Cyprus Amax Coal Company filed a complaint against the
Company alleging that under the terms of the purchase agreement, the Company
is responsible for certain long-term disability coverage to current and former
employees of the acquired Cyprus subsidiaries. The Company contends that the
obligations in question were retained by Cyprus and intends to defend the
claims vigorously. At this time, it is not possible to determine the likely
outcome of the claim, but the Company does not believe the ultimate outcome of
this matter will result in a material adverse effect on the financial position
or results of operations of the Company taken as a whole.
Through December 31, 1998, the Company is in arrears in delivering coal under
a certain coal supply contract with TVA. The Company intends to prospectively
ship all tons for which it is currently in arrears. The Company does not
believe the ultimate outcome of this matter will result in a material adverse
impact upon the financial position or results of operations of the Company.
In August 1998, the Company settled a claim by Robert C. Billips, d/b/a
Peter Fork Mining Company for an initial cash payment of $150 and payments
over the next 49 years estimated at a present value of $250. The Company
has a litigation accrual to cover the settlement.
While the final resolution of any matter may have an impact on the
Company's financial results for a particular reporting period, management
believes that the ultimate disposition of these matters will not have a
materially adverse effect upon the financial position or results of operations
of the Company.
d.Commissions
The Company has various Sales and Agency Agreements with third parties,
whereby the Company pays a $.10 - $2.00 per ton commission on various coal
sales agreements. The costs are expensed as the coal is delivered, and in 1998
the Company paid approximately $3,900 in commissions.
e.Addcar/TM/ Highwall Mining System Lease Agreement
Effective May 1998, the Company entered into an agreement with Independence
Coal Company, Inc. (Independence) whereby the Company (as lessor) shall lease
an Addcar/TM/ Highwall Mining System to Independence (as lessee) for a term of
24 months from initial set up or until all mineable coal from the lessee's
Twilight mine is recovered, for $220 per month subject to various terms and
conditions.
Additionally, effective September 1998 the Company leased to Independence a
second Addcar/TM/ Highwall Mining System and agreed to lease a third System in
January, 1999. Each lease is for two years and requires a $4,125 prepaid
rental payment upon delivery, and at the lessee's option each may be extended
for a third year with a rental prepayment of $1,547. Additionally, a monthly
rental payment of $37 for each system is payable by the lessee. Payment terms
are subject to various terms and conditions.
f.Environmental Matters
Based upon current knowledge, the Company believes that it is in material
compliance with environmental laws and regulations as currently promulgated
(also, see Note 2h). However, the exact nature of environmental control
problems, if any, which the Company may encounter in the future cannot be
predicted, primarily because of the increasing number, complexity and changing
character of environmental requirements that may be enacted by federal and
state authorities.
-26-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
g. Performance Bonds
The Company has outstanding performance bonds of approximately $751,000 as
of December 31, 1998, to secure reclamation, workers compensation and other
performance commitments.
h. Employment Agreements
The Company has entered into employment agreements with individuals for
various officer positions. These agreements expire through February 2003 and
contain termination benefits and other matters.
i. Collective Bargaining Agreements
Approximately 32% of the Company's coal employees are affiliated with
unions. The Company has several collective bargaining agreements with the
United Mine Workers of America (UMWA). These agreements expire from 1999
through 2002.
j. Indemnifications
Pursuant to various stock and asset purchase agreements with sellers, the
Company has granted indemnification for performance guarantees made by
certain sellers relating to mineral lease obligations and employee benefits.
The Company believes no significant obligation will result relating to such
indemnifications.
11.STOCK OPTION PLAN
During 1998, the Company's Board of Directors adopted a Stock Option Plan
(the Option Plan). A total of 75,000 shares of Common Stock are reserved for
issuance upon exercise of options granted under the Option Plan. The Option
Plan is administered by the Benefits Committee of the Board of Directors which
determines the terms of the options granted including the exercise price,
number of shares subject to the option and exercisability.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plan. The
Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting
for Stock-Based Compensation. Accordingly, no compensation cost has been
recognized for the Option Plan.
-27-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following summarizes the stock option transactions under the Option Plan
for the year ended December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at January 1, 1998 - $ -
Granted................................... 66,371 147.00
Exercised................................. - -
Canceled.................................. 1,760 64.40
------ -------
Options outstanding at December 31, 1998..... 64,611 $149.25
====== =======
Options exercisable at December 31, 1998..... 39,114 $137.50
====== =======
</TABLE>
Stock options are granted with exercise prices which are equal to the market
value of the stock on the date of grant, have a maximum term of ten years and
vest over periods ranging from three months to five years. In February 1999,
an option holder exercised options to purchase 3,100 shares of the Company.
The weighted average fair value at date of grant for options granted during
1998 was $34.46 per option. The fair value of options at date of grant was
estimated using the Black-Scholes model with the following weighted-averaged
assumptions:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Expected life (years)............................... 6.2
Risk-free interest rate............................. 5.57%
Volatility.......................................... 0%
Dividend yield...................................... 0%
</TABLE>
A summary of stock options outstanding at December 31, 1998 follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------------- -----------------------------------
WEIGHTED AVERAGE
EXERCISE PRICE PER NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARE SHARES PER SHARE CONTRACTUAL LIFE SHARES EXERCISE PRICE
------------------ --------- --------------- ---------------- --------- ------------------
<S> <C> <C> <C> <C> <C>
$ 64.40 52,025 $ 64.40 9.1 years 32,550 $ 64.40
$ 500.00 12,586 $500.00 9.6 years 6,564 $500.00
</TABLE>
As previously discussed, the Company accounts for the Option Plan in accordance
with APB No. 25 under which no compensation expense has been recognized for
stock option awards. Had compensation cost for the Company's stock option plan
been determined on the fair vale at the grant date for awards for the year ended
December 31, 1998 consistent with the provisions of SFAS No. 123, the Company's
net income (loss) would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998
------
<S> <C>
Net income (loss) - as reported................................. (33,576)
Net income (loss) - pro forma................................... (35,803)
</TABLE>
-28-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. OTHER SUBSIDIARY MATTERS
a. Bowie Resources, Ltd.
In April 1997, Bowie's shareholders (Larry Addington (90%) and Harold
Sergent (10%)) collectively sold 22.5% of their shares of Bowie common
stock to Mitsui Matasushima (Mitsui).
In November 1997, in connection with the shareholder exchange
agreement described in Note 1, the Company purchased a 7.7% ownership
interest in Bowie from Harold Sergent for $2,000, bringing the
Company's total interest in Bowie to 77.5%.
On September 2, 1998, the Company reacquired the 22.5% minority
interest in Bowie for the purchase price of $11,500. This acquisition
was accounted for as a purchase.
b. Employee Benefits Management, Inc.
Employee Benefits Management, Inc. (EBMI), a renamed subsidiary of the
Company, was recapitalized on December 11, 1998 in the State of
Delaware whereby it authorized 1,000 shares of Class A stock and 176
shares of Class B stock. The Class A stock was issued on December 11,
1998 to Enterprises (1 share) and to Zeigler (999 shares).
The Class B shares were initially issued on December 18, 1998 to
several subsidiaries of the Company. On December 29, 1998, these
subsidiaries holding Class B shares of EBMI aggregately sold their
shares to Employers Risk Services, Inc. (ERSI) (an unrelated party)
for $300.
All voting rights of EBMI are vested solely in the holders of the
Class A Common Stock, except that the holders of the Class B Common
Stock shall be entitled as a class to elect one of the six directors
of EBMI. The Class B Shares can be put to EBMI after July 1, 2007 for
the lesser of 15% of EBMI's net worth or $7,000. EBMI has the right to
call the Class B Shares after January 1, 2008 for the lesser of 15.75%
of EBMI's net worth or $7,350.
c. R&F Coal Company
In December 1998, R&F Coal Company (R&F), a subsidiary of the Company,
sold coal mining assets including inventories, property, equipment and
a coal supply contract for approximately $7,600. No gain or loss on
sale was recorded.
-29-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. MAJOR CUSTOMERS
The Company had coal mining sales to the following major customers that
in any period exceeded 10% of revenues:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ------------------------------------ ----------------------------------
PERCENTAGE PERCENTAGE YEAR-END PERCENTAGE YEAR-END
OF TOTAL OF TOTAL RECEIVABLE OF TOTAL RECEIVABLE
REVENUES REVENUES REVENUES REVENUES BALANCE REVENUES REVENUES BALANCE
---------- ------------- --------- ----------- ------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Customer A................. $21,577 18% $60,457 34% $7,687 $110,261 15% $10,048
Customer B................. NA NA 19,593 11% 2,425 88,724 12% 8,185
Customer C................. 22,547 18% 23,464 13% 4,055 42,470 6% 4,485
Customer D................. 27,019 22% 20,776 12% 1,411 18,752 3% 966
</TABLE>
14. WRITEDOWN AND SPECIAL ITEMS
In connection with integrating acquired operations, the Company closed
certain of its (non-acquiree) mines. Accordingly, estimated non-recoverable
assets of $2,000 were written off and estimated reclamation and closure
costs of $14,400 were recorded.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, accounts receivable and
accounts payable are considered to be representative of their respective
fair values because of the immediate short-term maturity of these financial
instruments. The book value of the Company's debt instruments approximate
fair value given the refinancing in December 1998.
16. RELATED PARTY TRANSACTIONS AND BALANCES
The Company has dealt with certain companies or individuals which are
related parties either by having stockholders in common or because they are
controlled by stockholders/officers of the Company or by relatives of
stockholders/officers of the Company. In addition to related party
transactions and balances described elsewhere, the following related party
transactions and balances are summarized and approximated as follows below:
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- -------------
<S> <C> <C> <C>
Revenues, costs and expenses:
Equipment Sales....................................... $ 7,010 $ 5,502 $ -
Repair and Maintenance Income......................... 2,954 781 -
Property sales........................................ - 145 -
Equipment Rental Income............................... 4,369 336 -
Management Fee Income................................. 165 199 115
Flight fee income..................................... 442 590 394
Cancellation fee income............................... - 1,592 -
Trucking expense...................................... 13,521 18,308 19,613
Repair and maintenance expense........................ 4,916 4,791 13,700
Equipment rental expense.............................. 1,429 2,016 5,897
Consultant fees....................................... 180 135 -
Interest expense...................................... 427 1,382 -
Commission expense.................................... 91 31 -
Administrative and miscellaneous expense.............. 58 294 123
</TABLE>
-30-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ----------------- -----------------
<S> <C> <C> <C>
Assets:
Accounts receivable................................... $ 4,814 $ 7,951 $ 1,757
Liabilities:
Accounts payable...................................... 6,094 3,301 3,110
Interest payable...................................... 393 - -
Commission payable.................................... 19 - -
</TABLE>
The Company leases mining equipment and aircraft as well as constructs,
repairs and sells equipment to related parties. The Company has employed
related parties for trucking, consulting, equipment rental and repair and
other administrative services. Equipment sales (listed above) are primarily
to a related party in Australia (formerly majority-owned by Larry
Addington) that performs contract mining using the Highwall Miner.
For 1997, the Company earned $1,592 in fees when a related party cancelled
a mining arrangement with the Company.
17. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, (SFAS No. 130) became effective during 1998. SFAS No.
130 establishes standards for the reporting and display of comprehensive
income and its components in financial statements. Comprehensive income
generally represents all changes in shareholders' equity except those
resulting from investments by or distributions to shareholders.
Implementation of SFAS No. 130 had no impact on the Company as the Company
does not currently have any transactions which give rise to differences
between net income and comprehensive income.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, (SFAS No. 131) will be
implemented in the financial statements for the year ended December 31,
1998. SFAS No. 131 requires publicly-held companies to report financial and
descriptive information about operating segments in financial statements
issued to shareholders for interim and annual periods. SFAS No. 131 also
requires additional disclosures with respect to products and services,
geographic areas of operation and major customers. See Note 13 for segment
information.
In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits was issued which improves and standardizes
disclosures by eliminating certain existing reporting requirements and
adding new disclosures. The statement addresses disclosure issues only and
does not change the measurement of recognition provisions specified in
previous statements. See Note 9 for SFAS No. 132 disclosures.
Effective January 1, 1999, the Company will adopt Statement of Position
(SOP) 98-5 Reporting on the Costs of Start-Up Activities. The new statement
requires that the costs of start-up activities be expensed as incurred. The
Company does not believe the impact of this statement will be material to
its results of operations or financial position.
-31-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
18. EVENTS SUBSEQUENT TO DECEMBER 31, 1998
a. Energy Resources, LLC
In January 1999, the Company acquired 95% of Energy Resources, LLC from
the Harold Sergent family for $3,000. The acquisition was accounted for
as a purchase.
b. Princess Beverly
In February 1999, the Company acquired all the capital stock of
Princess Beverly Coal Company, a coal mining business with operations
in West Virginia, for the purchase price of approximately $11,500. This
acquisition will be accounted for as a purchase. The Company also
acquired approximately a 1% interest in Hanna Land Company LLC, a
limited liability company established to develop a coal mining property
in West Virginia owned by the Company. The Company also has an option
to purchase (and the owner has the right to put) the remaining 99% in
Hanna Land Company LLC for $12,000 upon the successful permitting of
the mining property.
c. Industrial Revenue Bonds
On April 1, 1999, the Company refinanced their Zeigler IRBs (Note 7e).
The old IRBs were retired and new IRBs were issued under the following
terms: $145,800 principal amount, secured by letters of credit, 6.91%
average interest, maturing in 2022 and 2028 with the ability to release
letters of credit as security upon the satisfaction of certain
conditions.
d. Sunny Ridge
On April 9, 1999, the Company entered into a stock purchase agreement
to acquire all the common stock of Sunny Ridge Enterprises, Inc., a
coal mining business with operations in Kentucky for the purchase price
of $50,000.
19. SEGMENT DATA
The Company's principal industry segments are as follows: coal mining,
equipment sales, rental and repair and other. Included in the segment
"other" is the Company's railcar earnings, non-coal royalty fee and
management fee income. The Company's segments are managed separately
because each requires different operating and marketing strategies.
Products and services are generally sold between segments on a cost basis.
Operating earnings for each segment includes all costs and expenses
directly related to the segment before financing charges and corporate
allocations. Corporate items principally represent general and
-32-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
administrative costs. Identifiable assets are those used in the operations of
each business segment. Corporate assets consist primarily of cash and
unamortized financing costs. Information about the Company's operations for
each segment is as follows:
FINANCIAL DATA BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------------------------
1996 1997 1998
------------------ ---------------- ------------------
<S> <C> <C> <C>
Revenues:
Coal mining.................................................. $ 104,804 $ 163,980 $ 704,832
Equipment sales, rental and repair........................... 16,033 8,086 9,532
Other........................................................ 2,363 3,188 19,050
------------------ ---------------- ------------------
$ 123,200 $ 175,254 $ 733,414
------------------ ---------------- ------------------
Income (loss) before income taxes and extraordinary item:
Coal mining.................................................. $ 9,193 $ 15,761 $ 19,240
Equipment sales, rental and repair........................... 6,670 794 1,491
------------------ ---------------- ------------------
Other........................................................ $ 4,057 $ (370) $ 6,255
------------------ ---------------- ------------------
Operating earnings....................................... 19,920 16,185 26,986
Corporate expenses........................................... (10,273) (10,090) (10,229)
Interest expenses............................................ (5,527) (9,192) (65,247)
Unallocated.................................................. 884 (272) 4,701
------------------ ---------------- ------------------
$ 5,004 $ (3,369) $ (43,789)
------------------ ---------------- ------------------
Identifiable assets:
Coal mining.................................................. $ 147,216 $ 2,331,948
Equipment sales, rental and repair........................... 14,031 32,186
Other........................................................ 611 575
Corporate assets............................................. 103,535 125,355
---------------- ------------------
$ 265,393 $ 2,490,064
---------------- ------------------
Capital expenditures:
Coal mining.................................................. $ 11,103 $ 28,969 $ 30,373
Equipment sales, rental and repair........................... 2,642 3,196 4,216
Other........................................................ 347 49 6,273
------------------ ---------------- ------------------
$ 14,092 $ 32,214 $ 40,862
------------------ ---------------- ------------------
Depreciation, depletion and amortization:
Coal mining.................................................. $ 6,217 $ 9,858 $ 74,726
Equipment sales, rental and repair........................... 578 640 2,120
Other........................................................ 150 257 -
------------------ ---------------- ------------------
$ 6,945 $ 10,755 $ 76,846
------------------ ---------------- ------------------
</TABLE>
-33-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
20. PARENT AND SUBSIDIARY GUARANTEES
The following tables summarize the financial position, operating results
and cash flows for ARHI, Resources and its guarantor and non-guarantor
subsidiaries regarding the Senior Notes and Subordinated Notes (Note 7c) as
of December 31, 1997 and 1998 and for the three years in the period ended
December 31, 1998. Each of the guarantor subsidiaries (except EBMI - Note
12b) is a wholly-owned subsidiary of Resources and each has fully and
unconditionally guaranteed the Senior Notes and Subordinated Notes on a
joint and several basis. Separate financial statements and other
disclosures concerning ARHI and the Guarantor subsidiaries are not
presented because the Company has determined that they are not material to
investors. Yankeetown Dock Corporation (60% owned by the Company) is the
only non-guarantor subsidiary. Resources was organized in May 1998 and
commenced operations in June 1998. ARHI was organized in July, 1998.
<TABLE>
<CAPTION>
AEI
RESOURCES AEI GUARANTOR NON-GUARANTOR
HOLDING RESOURCES SUBSIDIARIES SUBSIDIARIES
------------ --------- ------------ -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996:
OPERATING RESULTS (1996):
Revenues........................................................ $ - $ - $ 109,165 $ 15,357
Costs and expenses.............................................. - - 96,981 17,412
------------ --------- ------------ -------------
Income (loss) from operations.................................. - - 12,184 (2,055)
Interest and other income (expense)............................. - - (4,500) (625)
------------ --------- ------------ -------------
Income (loss) before minority interest......................... - - 7,684 (2,680)
Less-Minority interest.......................................... - - - -
------------ --------- ------------ -------------
Net income (loss).............................................. $ - $ - $ 7,684 $ (2,680)
============ ========= ============ =============
CASH FLOWS (1996):
Cash flows from operating activities:
Net income (loss)............................................... $ - $ - $ 7,684 $ (2,680)
Total adjustments to reconcile net income (loss) to net cash
used in operating activities................................... - - 84 (314)
------------ --------- ------------ -------------
Net cash provided by (used in) operating activities............. - - 7,768 (2,994)
Net cash used in investing activities........................... - - (10,577) (1,926)
Net cash provided by financing activities....................... - - 2,801 4,547
------------ --------- ------------ -------------
Net decrease in cash and cash equivalents....................... - - (8) (373)
Cash and cash equivalents, beginning of year.................... - - 411 423
------------ --------- ------------ -------------
Cash and cash equivalents, end of year.......................... $ - $ - $ 403 $ 50
============ ========= ============ =============
DECEMBER 31, 1997:
BALANCE SHEET:
Total current assets............................................ $ - $ - $ 55,900 $ 4,063
Properties, net................................................. - - 75,682 28,512
Other assets.................................................... - - 7,115 5,952
------------ --------- ------------ -------------
Total assets................................................... $ - $ - $ 138,697 $ 38,527
============ ========= ============ =============
Total current liabilities including current portion of
long-term debt and capital leases.............................. $ - $ - $ 47,980 $ 6,423
Long-Term debt and capital leases, less current Portion......... - - 7,047 27,170
Other liabilities............................................... - - 22,770 10,530
------------ --------- ------------ -------------
Total liabilities.............................................. - - 77,797 44,123
------------ --------- ------------ -------------
Total Stockholders' equity (deficit)............................ - - 60,900 (5,596)
------------ --------- ------------ -------------
Total liabilities and owners' equity (deficit).................. $ - $ - $ 138,697 $ 38,527
============ ========= ============ =============
OPERATING RESULTS (1997):
Revenues........................................................ - $ - $ 158,160 $ 17,563
Costs and expenses.............................................. - - 147,389 18,677
------------ --------- ------------ -------------
Income (loss) from operations.................................. - - 10,771 (1,114)
Interest and other income (expense)............................. - - (7,291) (922)
------------ --------- ------------ -------------
Income (loss) before income taxes and extraordinary item....... - - 3,480 (2,036)
Income tax provision (benefit).................................. - - 17,845 470
------------ --------- ------------ -------------
Income (loss) before extraordinary item........................ - - (14,365) (2,506)
Extraordinary loss from extinguishment of debt (net of tax
benefit)....................................................... - - - (263)
------------ --------- ------------ -------------
Net income (loss).............................................. $ - $ - $ (14,365) $ (2,769)
============ ========= ============ =============
<CAPTION>
COMBINING
ADJUSTMENTS TOTAL
-------------- ----------
<S> <C> <C>
DECEMBER 31, 1996:
OPERATING RESULTS (1996):
Revenues........................................................ $ (1,322) $ 123,200
Costs and expenses.............................................. (1,322) 113,071
-------------- ----------
Income (loss) from operations.................................. - 10,129
Interest and other income (expense)............................. - (5,125)
-------------- ----------
Income (loss) before minority interest......................... - 5,004
Less-Minority interest.......................................... (59) (59)
-------------- ----------
Net income (loss).............................................. $ 59 $ 5,063
============== ==========
CASH FLOWS (1996):
Cash flows from operating activities:
Net income (loss)............................................... $ 59 $ 5,063
Total adjustments to reconcile net income (loss) to net cash
used in operating activities................................... (59) (289)
-------------- ----------
Net cash provided by (used in) operating activities............. - 4,774
Net cash used in investing activities........................... - (12,503)
Net cash provided by financing activities....................... - 7,348
-------------- ----------
Net decrease in cash and cash equivalents....................... - (381)
Cash and cash equivalents, beginning of year.................... - 834
-------------- ----------
Cash and cash equivalents, end of year.......................... $ - $ 453
============== ==========
DECEMBER 31, 1997:
BALANCE SHEET:
Total current assets............................................ $ (9,809) $ 143,176
Properties, net................................................. - 106,658
Other assets.................................................... (68,798) 15,559
-------------- ----------
Total assets................................................... $ (78,607) $ 265,393
============== ==========
Total current liabilities including current portion of
long-term debt and capital leases.............................. $ (9,809) $ 58,119
Long-Term debt and capital leases, less current Portion......... (27,170) 209,361
Other liabilities............................................... (17,917) 15,987
-------------- ----------
Total liabilities.............................................. (54,896) 283,467
-------------- ----------
Total Stockholders' equity (deficit)............................ (23,711) (18,074)
-------------- ----------
Total liabilities and owners' equity (deficit).................. $ (78,607) $ 265,393
============== ==========
OPERATING RESULTS (1997):
Revenues........................................................ $ (552) $ 175,254
Costs and expenses.............................................. (552) 169,828
-------------- ----------
Income (loss) from operations.................................. - 5,426
Interest and other income (expense)............................. - (8,795)
-------------- ----------
Income (loss) before income taxes and extraordinary item....... - (3,369)
Income tax provision (benefit).................................. - 17,516
-------------- ----------
Income (loss) before extraordinary item........................ - (20,885)
Extraordinary loss from extinguishment of debt (net of tax
benefit)....................................................... - (1,303)
-------------- ----------
Net income (loss).............................................. $ - $ (22,188)
============== ==========
</TABLE>
-34-
<PAGE>
AEI RESOURCES HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
AEI
RESOURCES AEI GUARANTOR NON-GUARANTOR
HOLDING RESOURCES SUBSIDIARIES SUBSIDIARIES
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS (1997):
Cash flows from operating activities:
Net income (loss).............................................. $ - $ - $ (14,365) $ (2,769)
Total adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities.................... - - 12,411 601
----------- ------------ ------------- -------------
Net cash used in operating activities.......................... - - (1,954) (2,168)
Net cash used in investing activities.......................... - - (22,039) (16,028)
Net cash provided by financing activities...................... - - 25,449 18,607
----------- ------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents........... - - 1,456 411
Cash and cash equivalents, beginning of period................. - - 403 50
----------- ------------ ------------- -------------
Cash and cash equivalents, end of period....................... $ - $ - $ 1,859 $ 461
=========== ============ ============= =============
DECEMBER 31, 1998:
BALANCE SHEET:
Total current assets........................................... $ - $ (88,724) $ 405,402 $ 3,383
Properties, net................................................ - 5,376 2,065,630 81
Other assets................................................... (92,650) 1,028,991 50,749 256
----------- ------------ ------------- -------------
Total assets.............................................. $ (92,650) $ 945,643 $ 2,521,781 $ 3,720
=========== ============ ============= =============
Total current liabilities, including current portion of
long-term debt and capital leases............................. $ - $ 57,923 $ 335,647 $ 265
Long-term debt and capital leases, less current portion........ - 987,309 366,740 -
Other liabilities.............................................. - 34,606 998,136 2,921
----------- ------------ ------------- -------------
Total liabilities......................................... - 1,079,838 1,700,523 3,186
Total shareholders' equity (deficit)........................... (92,650) (134,195) 821,258 534
----------- ------------ ------------- -------------
Total liabilities and shareholders' equity (deficit)........... $ (92,650) $ 945,643 $ 2,521,781 $ 3,720
=========== ============ ============= =============
OPERATING RESULTS (1998):
Revenues....................................................... $ - $ - $ 732,430 $ 984
Costs and expenses............................................. - 10,905 704,846 906
----------- ------------ ------------- -------------
Income (loss) from operations.................................. - (10,905) 27,584 78
Interest and other income (expense)............................ - (49,567) (11,812) -
----------- ------------ ------------- -------------
Income (loss) before income taxes......................... - (60,472) 15,772 78
Income tax provision (benefit)................................. - (26,238) 5,793 36
----------- ------------ ------------- -------------
Income (loss) before extraordinary item................... - (34,234) 9,979 42
Extraordinary loss from debt extinguishment.................... - (9,772) (424) -
----------- ------------ ------------- -------------
Net Income (loss)......................................... $ - $ (44,006) $ 9,555 $ 42
=========== ============ ============= =============
CASH FLOWS (1998):
Cash Flows from Operating Activities:
Net income (loss).............................................. $ - $ (44,006) $ 10,338 $ 42
Total adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities.................... - 2,547 (18,422) 79
----------- ------------ ------------- -------------
Net cash provided by (used in) operating activities............ -
Net cash used in investing activities..........................
Net cash provided by financing activities.
----------- ------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents...........
Cash and Cash Equivalents, beginning of period.................
----------- ------------ ------------- -------------
Cash and Cash Equivalents, end of period....................... $ $ $ $
=========== ============ ============= =============
<CAPTION>
COMBINING
ADJUSTMENTS TOTAL
----------- ------------
<S> <C> <C>
CASH FLOWS (1997):
Cash flows from operating activities:
Net income (loss).............................................. $ - $ (22,188)
Total adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities.................... - 12,008
----------- ------------
Net cash used in operating activities.......................... - (10,180)
Net cash used in investing activities.......................... - (38,290)
Net cash provided by financing activities...................... - 131,633
----------- ------------
Net increase (decrease) in cash and cash equivalents........... - 83,163
Cash and cash equivalents, beginning of period................. - 453
----------- ------------
Cash and cash equivalents, end of period....................... $ - $ 83,616
=========== ============
DECEMBER 31, 1998:
BALANCE SHEET:
Total current assets........................................... $ - $ 320,061
Properties, net................................................ - 2,071,087
Other assets................................................... (888,430) 98,916
----------- ------------
Total assets.................................................. $(888,430) $2,190,064
=========== ============
Total current liabilities, including current portion of
long-term debt and capital leases............................. $ (833) $ 393,002
Long-term debt and capital leases, less current portion........ (200,000) 1,154,049
Other liabilities.............................................. - 1,035,663
----------- ------------
Total liabilities......................................... $(200,833) $2,582,714
Total shareholders' equity (deficit)........................... (687,597) (92,650)
----------- ------------
Total liabilities and shareholders' equity (deficit)........... $(888,430) $2,490,064
=========== ============
OPERATING RESULTS (1998):
Revenues....................................................... $ - $ 733,414
Costs and expenses............................................. - 716,657
----------- ------------
Income (loss) from operations.................................. - 16,757
Interest and other income (expense)............................ 833 (60,546)
----------- ------------
Income (loss) before income taxes............................. 833 (43,789)
Income tax provision (benefit)................................. - (20,409)
----------- ------------
Income(loss) before extraordinary item........................ 833 (23,380)
- (10,196)
Extraordinary loss from debt extinguishment.................... ----------- ------------
Net Income (loss)............................................. $ 833 $ (33,576)
=========== ============
CASH FLOWS (1998):
Cash Flows from Operating Activities:
Net income (loss).............................................. $ $
Total adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities...................
----------- ------------
Net cash provided by (used in) operating activities............
Net cash used in investing activities..........................
----------- ------------
Net cash provided by financing activities.
Net increase (decrease) in cash and cash equivalents...........
Cash and Cash Equivalents, beginning of period.................
----------- ------------
Cash and Cash Equivalents, end of period....................... $ $
=========== ============
</TABLE>
21. UNAUDITED PRO FORMA INFORMATION
A pro forma adjustment has been made to historical net income (loss) to
reflect a provision for federal, state and local income taxes during the
respective S corporation periods (see Note 21) using a combined effective
rate of 38%
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