<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 0-16498
ADDINGTON RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1125039
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 North Big Run Road
Ashland, Kentucky 41102
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number
including area code: (606) 928-3433
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - par value of $1.00 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 25, 1994
Common stock, par value of $1.00 per share -- $140,031,342.
The number of shares of the registrant's common stock outstanding as of
March 25, 1994 - 15,704,178 shares.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
Item 1. Business.
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Addington Resources, Inc. and its subsidiaries (the "Company") are
primarily engaged in the development and operation of integrated solid waste
disposal systems. The Company is also engaged in the surface mining and
marketing of bituminous coal. For certain financial information concerning the
Company's mining and environmental industry segments, see Note 19 to the audited
Consolidated Financial Statements. Addington Resources, Inc. was incorporated
on September 29, 1986, under the laws of Delaware.
Disposition of Certain Coal Assets in the First Quarter of 1994.
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Pursuant to the Stock Purchase Agreement dated September 24, 1993 (the
"Agreement") between Addington Holding Company, Inc., a wholly owned subsidiary
of the Company, and Pittston Acquisition Company, an indirect wholly owned
subsidiary of The Pittston Company ("Pittston"), the Company sold to Pittston
(the "Pittston Transaction") all of the Company's stock in five of its indirect
wholly owned coal subsidiaries, Addington, Inc., Appalachian Mining, Inc.,
Appalachian Land Company, Vandalia Resources, Inc. and Kanawha Development
Corporation (collectively the "Subsidiaries"). The Pittston Transaction was
consummated on January 14, 1994 (the "Closing Date").
In the Pittston Transaction, the Company transferred to Pittston all its
long-term coal sales contracts with electric utilities except as set forth below
under Coal Mining Operations-Major Sales Contracts. The Company also
transferred to Pittston all of its coal reserves in Ohio, Virginia and West
Virginia and, of its Kentucky coal reserves, only those reserves located in the
Breathitt County Area of Kentucky. See Item 2. Properties. In addition, the
Company transferred all of its tipples and barge loading facilities, and all of
its assets (including property, plant and equipment) used in connection with
mining the specific coal reserves transferred. The Subsidiaries transferred
certain property, plant and equipment to the Company before the Closing Date.
Pursuant to the terms of the Agreement, the Company sold to Pittston all of
the Company's common stock in the Subsidiaries for $157,000,000 in cash. The
Agreement also contemplated that certain property, plant and equipment and
mineral reserves would be transferred from the Subsidiaries to the Company
before the Closing Date. In addition, the Agreement contemplated that the
Subsidiaries would distribute to the Company before the Closing Date, their
excess working capital. The Agreement also required that within 60 days after
the Closing Date, the Company would deliver to Pittston a statement of working
capital for the Subsidiaries showing the Subsidiaries' Combined Net Working
Capital, as defined in the Agreement, as of the close of business
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on the Closing Date. If the Combined Net Working Capital exceeds zero, Pittston
is to pay the Company an appropriate adjustment. If the Combined Net Working
Capital is less than zero, the Company is to pay Pittston an appropriate
adjustment. By letter dated March 15, 1994, the Company asserted that Pittston
should make a payment in the amount of $2,286,000 to the Company in light of the
Subsidiaries' Combined Net Working Capital as of the Closing Date. In
accordance with the terms of the Agreement, the Company and Pittston are
currently seeking to resolve their differences with respect to the Subsidiaries'
Combined Net Working Capital as of the Closing Date. Because the parties are
not in agreement with respect to the appropriate adjustment, the Company cannot
predict at this time the amount which will be owed by one party to the other
with respect to such an adjustment.
In connection with the Pittston Transaction, the Company transferred to
Pittston certain properties in Fayette County, West Virginia. The Company and
Pittston entered into a royalty agreement (the "Royalty Agreement") pursuant to
which Pittston will pay to the Company a royalty of $1.00 per ton of coal mined
from these properties. The term of the Royalty Agreement will be from the
Closing Date until the date Pittston has paid $3.75 million in royalties. The
Royalty Agreement provides for a minimum royalty of $100,000 per month, with a
maximum royalty in any one-year period of $1.5 million. The Company also
entered into a long-term coal sales contract to supply approximately 4,920,000
tons of coal to a Pittston subsidiary. See "Business-Major Coal Sales
Contracts." The Agreement also provides that the Company will pay Pittston a
royalty of $0.50 per ton of coal produced by two highwall mining machines for
three and one-half years.
To facilitate a smooth transition of operations of the Subsidiaries
following the Closing, the Company entered into an agreement with Pittston to
assist Pittston with regard to employee related matters involving the
Subsidiaries and to promote the interests of Pittston and the Subsidiaries in
the financial community. The Company further agreed that neither the Company
nor its affiliates would (a) compete with Pittston on any coal sales contract of
the Subsidiaries acquired pursuant to the Agreement by contacting any customer
of any acquired coal sales contract regarding any renewal, extension or price
reopener of the contract for a period ending upon the final termination of any
acquired coal sales contract, (b) lease, purchase, contract, license or
otherwise acquire an interest in the Robinson Forest area of Kentucky for so
long as Pittston or the Subsidiaries have an interest in such area, (c) disclose
information about the Subsidiaries to third parties for a period of two years,
or (d) participate in any activities regarding rail access to any property of
the Subsidiaries for a period of two years.
Addington Resources, Inc. has guaranteed the prompt payment and performance
by each of its subsidiaries of all obligations under the Agreement and certain
related contracts; provided, however, that the guarantor's liability will not
exceed
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$157,000,000 in the aggregate. Pittston Minerals Group, Inc., a direct wholly
owned subsidiary of Pittston, has guaranteed the prompt payment and performance
by each of its subsidiaries of all obligations under the Agreement and certain
related contracts; provided, however, that the guarantor's liability will not
exceed $157,000,000 in the aggregate.
For more information on the Pittston Transaction, see the Company's Current
Report on Form 8-K dated January 14, 1994, and the proxy statement dated
December 22, 1993, as filed with the Securities and Exchange Commission. See
also Note 2 to the audited Consolidated Financial Statements.
Integrated Solid Waste Disposal Operations
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LANDFILL OPERATIONS. To increase utilization of the Company's experience
in moving materials and reclaiming land, the Company entered the sanitary
landfill business.
As of December 31, 1993, the Company was operating or had under
construction seven landfills in Kentucky, North Carolina and Georgia.
In June 1992, the Kentucky Department of Natural Resources and
Environmental Protection (the "Cabinet") issued a 10-year operating permit for a
newly constructed contained landfill in Ohio County, Kentucky. The Cabinet has
issued the county a construction permit for approximately 20 million cubic yards
of airspace. The Company has a 40-year agreement with Ohio County to operate
this county landfill.
In July 1992, the Cabinet issued a 10-year operating permit for the
Company's Epperson contained landfill, located midway between Lexington,
Kentucky and Cincinnati, Ohio. The Cabinet issued a construction permit for
more than 12 million cubic yards of landfill space.
In July 1992, the Company purchased a landfill located in Lincoln County,
Kentucky. The Cabinet has issued the Company a permit which allows operation of
the landfill until 1995. The Company has applied for a new contained landfill
construction permit.
On November 25, 1992, the Cabinet issued a 10-year operating permit for a
25-acre contained landfill in Greenup County, Kentucky. The operating permit is
for the first segment of this contained landfill. On September 22, 1992, the
Company's subsidiary, Green Valley Environmental Corp. ("Green Valley") and
Kentuckians for the Commonwealth ("KFTC") entered into a Settlement Agreement
concerning a four-year dispute over Green Valley's landfill in Greenup County,
Kentucky. The Settlement Agreement resolves all disputes between Green Valley
and KFTC with respect to administrative and judicial actions filed by KFTC and
others, including a citizens group known as GROWL. The two co-chairpersons
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of GROWL also executed the Agreement, although other individual members did not.
Under the Settlement Agreement, Green Valley installed an additional liner to
the bottom of the landfill and drilled nine new monitoring wells. The new
construction is consistent with Kentucky's stringent landfill regulations for
landfills intending to operate beyond July 1, 1995. The Settlement Agreement
limits the landfill's service area to a 38-county region in Kentucky, Ohio and
West Virginia and provides for a full-time inspector. The size of the landfill
will be capped at 138 acres. The Settlement Agreement also provides that Green
Valley will not operate other landfills in Greenup County or the 22,000-acre
area contiguous to the landfill. Green Valley will donate three percent of its
net profits from operation of the landfill to community cleanup efforts,
recycling programs and community environmental education. The Settlement
Agreement also contains certain restrictions that are not expected to adversely
affect Green Valley's planned development of its environmental operations in
eastern Kentucky. Two other citizens and a nonprofit corporation also filed
suit in the Greenup Circuit Court claiming that the Company improperly rendered
an alleged county road running through the site impassable; the plaintiff sought
to have the alleged county road reopened. On February 26, 1992, the Greenup
Circuit Court dismissed the suit. The plaintiffs have appealed the dismissal.
All of the Company's contained landfills which received operating permits
from the Cabinet in 1992 are designed and permitted in accordance with
Kentucky's new landfill regulations.
In July 1992, the Company assumed operation of the county's landfill in
Montgomery County, North Carolina pursuant to an exclusive 20-year agreement.
The agreement also provides for construction of a recycling facility and a new
contained landfill adjacent to the current operations. The Company has received
a permit for the recycling facility and construction of the facility commenced
in December 1993. The Company has applied for a new contained landfill permit,
which application is under review by the North Carolina Department of
Environmental Health and Natural Resources ("DEHNR").
In May 1992, the Company entered into a 20-year agreement to permit,
construct and operate a new regional landfill in Bertie County, North Carolina.
In August 1993, DEHNR issued a construction permit for the new landfill, and the
Company commenced operations at the new landfill on October 8, 1993 pursuant to
an operating permit issued that day. The construction permit contains 504
acres, with a fill area of 103 acres containing approximately 10 million cubic
yards of airspace. In 1992 and 1993, the Company signed long-term waste
disposal contracts with 14 counties in northeastern North Carolina. Counties in
the region deliver waste to the new facility via five transfer stations.
In August 1992, the Company signed agreements with Wayne County, Georgia
and the Wayne County Solid Waste Management Authority (the "Authority") to
permit, construct and operate a new
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regional landfill in Wayne County. Under the agreements, the facility would be
owned by the Authority and operated under a 20-year agreement by the Company.
In December 1993, a construction permit for the new landfill was issued by the
Georgia Department of Natural Resources. The construction permit contains 381
acres, with a fill area of 80 acres containing approximately 9,500,000 cubic
yards of airspace. The Company commenced construction in January 1994.
Other Solid Waste Operations. The Company also owns and operates a
collection company which operates in northern and central Kentucky and central
Florida with approximately 40,000 residential accounts and commercial accounts.
Anticipated capital expenditures for the Company's existing landfill
facilities for 1994 are projected to be $17,000,000, although the amounts
expended may differ substantially from this amount. The Company is constantly
pursuing additional landfill facilities through acquisitions, privatization of
municipally owned facilities, as well as start-up facilities. In addition to
planned expenditures for existing facilities, the Company anticipates
opportunities for such additional facilities during 1994 in the approximate
amount of $20,000,000, but there can be no assurance that such opportunities
will be available to the Company nor that the amounts actually expended will not
differ substantially from this amount.
Coal Mining Operations
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The Company has historically sold coal primarily to electric utilities
under long-term sales contracts. The Company also makes sales on the spot
market. The Company's coal is suitable for use as steam coal by utilities for
power generation and as industrial coal for heating and other purposes.
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Set forth below is information concerning the Company's coal sales for the
years 1989 through 1993.
<TABLE>
<CAPTION>
Spot Contract Average
Market Sales Sales (1) Total Sales Net Price
Year (in tons) (in tons) (in tons) per Ton
- -------------- ------------ -------------- ------------- ----------
<S> <C> <C> <C> <C>
1989 569,000 5,928,000(2) 6,497,000(2) $32.76
1990 579,000 7,586,000 8,165,000 32.51
1991 372,000 7,848,000 8,220,000 32.83
1992 865,000 7,950,000 8,815,000 30.04
1993 842,000(3) 10,688,000 11,530,000(3) 29.29(3)
</TABLE>
_______________
(1) Contract sales are sales under contracts with a term of more than one year.
See "Business--Major Coal Sales Contracts."
(2) The amounts shown do not include approximately 161,000 tons sold during
1989 under a long-term contract, which tonnage the Company sold without
profit for the assignor of the contract.
(3) Based on tons of coal sold in spot market sales through the Closing Date of
the Pittston Transaction.
The Company's expansion to date is a result of factors which the Company
believes provide it with advantages over many of its competitors. The Company
believes these factors include its relatively low mining costs, which are
primarily the result of the cost, efficiency and productivity of its equipment,
non-union labor force and mining methods as well as its ability to supply coal
on a timely basis in the quality and quantity required by its customers. To the
extent practicable, the Company has located mine sites near suitable loading and
transportation facilities in order to minimize transportation costs. In
addition, the Company has been able to acquire reserves at prices which the
Company believes to be favorable.
In its eastern Kentucky operations, the Company's mining methods are
primarily mountaintop removal/1/ and contour mining./2/
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/1/ Mountaintop removal mining is a surface mining method in which all
material above the coal seam is removed before removal of the coal, leaving a
level plateau in place of the hilltop after mining. A more complete recovery of
the coal is accomplished through this method; however, its feasibility depends
on the amount of overlying material in relation to the coal to be removed.
/2/ Contour mining is a surface mining method conducted on coal seams
where mountaintop removal is not feasible because the coal seam is too low on a
hill to mine economically. Mining proceeds laterally around a hillside, at
essentially the same elevation, assuming the seam is fairly flat. This is a
common
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On the West Virginia properties the Company previously owned, the Company's
mining method was primarily mountaintop removal, but the Company also engaged an
independent contractor to deep mine some of its West Virginia coal reserves.
The Company has previously engaged in limited auger mining/3/ but does not
expect to use this method to any significant extent in its operations. The
Company seeks to use mountaintop removal mining projects where possible because
mountaintop removal (i) results in higher tonnage recovered per acre, thereby
reducing the permit-bonding requirements because fewer acres must be reclaimed
and (ii) facilitates the permitting of large projects, allowing for mining
activities over a longer period of time at each location than would be available
under other mining methods. Although the Company has permits for underground
mining, it currently is not mining coal by this method.
The Company is currently developing and constructing highwall mining
machines. Highwall mining machines mine coal by boring into the face of a coal
seam using a continuous miner. The coal is then transported back to the mine
opening via conveyor belts on a series of cars connected to the continuous
miner. The miner is remote controlled by employees working at the mine opening.
The Company anticipates using the highwall mining machines after surface mining
is no longer feasible because of the volume of material overlying the coal seam
in relation to the amount of coal in the seam. The Company expects that
highwall mining machines will enable it to mine coal more efficiently because
the machines are significantly less capital intensive and labor dependent than
alternative mining methods. After the Pittston Transaction, the Company is
operating two machines in its contract mining operations. If the Company is
able to successfully develop its highwall mining machines, it anticipates that
highwall mining machines will contribute significantly to its coal extraction
operations and that the Company will engage in contract mining operations for
third parties using the machines. See also "Mining Technologies Licensing
Agreement" below.
Before commencing mining on a property, the Company is required to prepare
and have approved by state regulatory authorities a reclamation plan for
restoring the mined property to a productive use upon completion of mining.
Thereafter, as a part of its mining of the property, the Company reclaims and
restores the mined areas by grading, shaping and preparing the soil for seeding.
Upon completion of mining, a property is then usually seeded with grasses for
use as pasture or trees for use as timberland as
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surface mining method in the steeper slopes of Appalachian bituminous
coalfields.
/3/ Auger mining is conducted by boring into the face of a coal seam and
pulling the coal out with a screw-like drill. Auger mining is frequently
conducted after contour mining is no longer feasible because of the volume of
material overlying the coal seam in relation to the amount of coal in the seam.
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specified in the approved reclamation plan. The Company believes that it is in
compliance in all material respects with applicable regulations relating to
reclamation.
Major Coal Sales Contracts
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As of December 31, 1993, the Company had ten major customers for most of
its sales. On that date it had eleven sales contracts with a remaining term of
approximately one year or more, including two contracts with Cincinnati Gas &
Electric Company ("CG&E"), and one contract each with American Electric Power
Company, Inc. ("AEP"), the Tennessee Valley Authority ("TVA"), East Kentucky
Power Cooperative, Inc. ("East Kentucky"), Consumers Power Company ("Consumers
Power"), South Mississippi Electric Power Association ("SMEPA"), Duke Power
Company ("Duke Power"), Alabama Power Company ("Alabama Power"), Duquesne Light
Company ("Duquesne Light"), and American Eagle Coal Company ("American Eagle").
Of these contracts, all but the contract with the AEP subsidiary, Indiana-
Kentucky Electric Corporation, were transferred in the Pittston Transaction.
See "Disposition of Certain Coal Assets in the First Quarter of 1994" above.
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For each of the three years in the period ended December 31, 1993, or such
shorter period as is applicable, the following table provides information
regarding tonnage sold, gross revenues and the average price per ton for sales
to the Company's major customers.
<TABLE>
<CAPTION>
Average
Tonnage Gross Price
Customer Year Sold Revenues Per Ton
- -------- ---- ------- -------- -------
<S> <C> <C> <C> <C>
1. TVA(1) 1991 1,006,000 $29,197,000 $29.02
1992 679,000 20,072,000 29.56
1993 1,391,000 41,394,000 29.77
2. East Kentucky(1) 1991 234,000 5,769,000 24.65
1992 214,000 5,196,000 24.28
1993 319,000 7,878,000 24.69
3. Consumers Power 1991 243,000 8,364,000 34.42
1992 243,000 8,384,000 34.50
1993 260,000 9,102,000 34.94
4. CG&E(1) 1991 2,885,000 94,095,000 32.62
1992 2,553,000 81,842,000 32.06
1993 2,614,000 93,231,000 35.67
5. AEP(1)(2) 1991 1,706,000 59,019,000 34.60
1992 1,436,000 36,411,000 25.35
1993 953,000 22,300,000 23.40
6. SMEPA(1) 1991 806,000 40,094,000 49.74
1992 757,000 37,775,000 49.90
1993 748,000 37,496,000 50.15
7. Duke Power(1)(4) 1991 255,000 8,600,000 33.73
1992 274,000 8,378,000 30.58
1993 337,000 8,665,000 25.73
8. Alabama 1991 623,000 15,953,000 25.61
Power(1)(3) 1992 953,000 25,409,000 26.66
1993 841,000 21,405,000 25.45
9. Duquesne Light (5) 1992 147,000 4,977,000 33.86
1993 320,000 10,652,000 33.28
10. American Eagle 1992 738,000 20,052,000 27.18
1993 910,000 23,503,000 25.83
</TABLE>
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(1) Also includes sales on the spot market and under other short-term
contracts.
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(2) The 1991 figures include sales under contracts with the Indiana-Kentucky
Electric Corporation and the Kentucky Power Company.
(3) Figures for 1991 are for the period March 1 through December 31, 1991.
(4) The average price per ton shown includes payment by buyer of seller's
reclamation tax liability and federal black lung tax through September 30,
1992.
(5) Figures for 1992 are for the period March 1 through December 31, 1992.
During 1993, approximately 27.6% of the Company's total revenues were
attributable to coal sales to CG&E, 12.1% were attributable to coal sales to
TVA, and 11.1% were attributable to SMEPA.
CG&E Coal Sales Contract. Pursuant to a coal sales agreement, the Company
will supply CG&E 5,400,000 tons of coal over six years beginning January 1,
1994. The monthly tonnages to be delivered will be between 63,750 tons and
86,250 tons, with annual tonnages between 765,000 tons and 1,035,000 tons.
Indiana-Kentucky Coal Sales Contract. The Company will continue to supply
coal to Indiana-Kentucky Electric Corporation pursuant to its contract to
provide 70,000 tons of coal per month through September 1994. Indiana-Kentucky
Electric Corporation may vary the actual monthly tonnage by a maximum increase
of 15,000 tons per month. This coal is currently being mined by a third-party
contract miner from the Company's Knottsville Area reserves in western Kentucky
and reserves controlled by the contract miner on property adjacent to the
Knottsville Area. Approximately 40% of the coal currently being shipped comes
from the Knottsville Area reserves. Additional coal may be mined from the
Company's South Hill Area, Aberdeen Area and Hopkins County Area reserves to
supply the Indiana-Kentucky Electric Corporation contract. The Company has
engaged a third-party contract miner following the Company's decision to close
its own western Kentucky operations in 1991.
American Eagle Coal Sales Contract. Pursuant to a coal sales agreement
(the "Coal Sales Agreement") entered into in connection with the Pittston
Transaction, the Company will sell to the Pittston subsidiary, American Eagle
Coal Company ("American Eagle"), 1,440,000 tons of coal per year for three years
beginning December 1, 1993, and then 100,000 tons per month thereafter until
American Eagle has purchased a total of 4,920,000 tons of coal. During the
initial 3-year period, the coal will be shipped at the rate of 120,000 tons per
month. The monthly tonnages can be decreased or increased by 5% in any month at
American Eagle's option, although the total tonnage to be delivered under the
contract will not be affected by such variations.
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American Eagle will pay the Company a base price of $26.00 per ton of coal
purchased through December 31, 1994. The price per ton of coal delivered during
each calendar year thereafter will be the base price of $26.00 per ton, plus the
most conservative escalation, as determined by the percentage of sales price,
that would be applied to purchases of coal pursuant to the terms of any of the
coal supply contracts containing indexed escalation formulas which were held by
the Subsidiaries at the Closing Date. The price per ton of coal throughout the
term of the contract is also subject to adjustment, either positively or
negatively, for any deviations from ash content and average caloric value
specifications set forth in the contract.
TVA Contract. Pursuant to Contract T-1, as amended on May 11, 1989, TVA
agreed to purchase approximately 13,500 tons of coal per week over a three year
period to be delivered to TVA's Allen plant near Memphis, Tennessee or its
Cumberland plant near Cumberland City, Tennessee. By amendment dated October
30, 1991, the term of Contract T-1 was extended through the delivery of the
approximately 2,575,000 tons of coal remaining to be shipped, with an expiration
date of April 23, 1995.
On January 6, 1992, the Company agreed to allow Marion Mining Corporation
("Marion") to perform as an independent contractor to deep mine the Company's
reserves in southern Illinois to supply such coal to TVA under Contract T-1, for
which the Company would receive a royalty fee of $3.00 per ton from Marion. The
Company also granted Marion an option to purchase Southern Illinois Mining
Company, Inc. ("SIMC"), the Company's subsidiary which was the supplier under
Contract T-1 and controlled the Company's coal reserves in southern Illinois.
The Company also agreed to hold 1,400,000 tons under Contract T-4 for
availability under Contract T-1, assuming TVA's consent to this arrangement.
During April 1992, the Company sold all of the outstanding stock of SIMC to
Marion for $1 million in cash and an approximately $10.4 million promissory note
(the "SIMC Note") bearing interest at six percent. The SIMC Note is secured by:
(i) a pledge of the capital stock of SIMC; (ii) a Mortgage, Security Agreement,
Assignment of Rents and Profits, and Fixture Financing Statements, which
encumbers coal reserves and related real estate located in Williamson County,
Illinois; and (iii) a Security Agreement covering certain of the SIMC assets,
excluding accounts receivable arising out of the sale of coal to TVA under
Contract T-1. At the time of the sale, the assets of SIMC consisted primarily
of Contract T-1, a deep mine, certain coal reserves and a coal operation
facility. The Company has guaranteed SIMC's performance of Contract T-1.
On September 15, 1992, the Company filed suit against Marion and SIMC in
Boyd County Circuit Court, Boyd County, Kentucky for, among other claims, breach
of contract and misrepresentations. The Company claimed that SIMC had ceased
its mining operations and was not shipping coal under Contract T-1. On
September 21, 1992, the Company obtained a temporary restraining order requiring
Marion and
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SIMC to protect and preserve the assets of SIMC for the Company's benefit. By
letter dated November 4, 1992, TVA gave SIMC a deadline of February 2, 1993, to
resume delivery of coal under Contract T-1 or the contract would be terminated.
By letter dated January 29, 1993, TVA informed SIMC of its intent to terminate
SIMC's right to make further deliveries effective at the close of business on
February 2, 1993. On February 1, 1993, both Marion and SIMC filed bankruptcy.
On November 5, 1993, the Company filed a foreclosure action in state court
in Illinois (the "Illinois Foreclosure Action") to foreclose the security
interest in the real property and personal property of SIMC. SIMC subsequently
filed an adversary proceeding against the Company in United States Bankruptcy
Court for the Eastern District of Kentucky on January 19, 1994. The Complaint
alleges, among other things, that the sale of the stock of SIMC to Marion and
the pledge of all assets of SIMC to the Company to secure the loan of $10.4
million to SIMC and Marion was a preferential transfer and fraudulent
conveyance under the Bankruptcy Code and applicable state law, and that such
transfer should be declared void and all assets of SIMC returned to SIMC. The
Complaint also seeks the return of $1,000,000 paid by Marion to the Company as
partial consideration for its purchase of the SIMC stock, the return of $378,200
in royalties paid to the Company subsequent to the sale and $500,000 in punitive
damages. The Company has filed an answer in which it denied the substantive
allegations of the Complaint and asserted various affirmative defenses to the
claims.
Because of the pendency of the adversary proceeding in U.S. Bankruptcy
Court, the Company has advised SIMC that it has decided to (i) cease the
Illinois Foreclosure Action, (ii) litigate the issues raised by SIMC in the
adversary proceeding and (iii) allow the SIMC assets to be sold through the U.S.
Bankruptcy Court, with the proceeds of such sale, if any, to be held by the U.S.
Bankruptcy Court until it has issued a final order in the adversary proceeding.
The Company established a $5,767,000 reserve against the SIMC Note at December
31, 1993. This reserve was based on management's estimate of the ultimate
realizable value of the mineral reserves. See Note 5 to the audited
Consolidated Financial Statements.
On August 11, 1992, the Company filed an action for declaration of rights
against the Ohio River Company ("ORCO") and SIMC in the U.S. District Court for
the Eastern District of Kentucky at Ashland. The action arose from a dispute
between the Company and ORCO concerning a transportation agreement for barge
transportation of coal being delivered to TVA pursuant to Contract T-1. In
connection with Marion's acquisition of SIMC, the Company assigned its rights
and obligations under the transportation agreement to SIMC. SIMC's performance
was guaranteed by the Company and SIMC apparently defaulted. The Company asked
the court to declare the rights of the parties in regard to the transportation
agreement. ORCO asserted counterclaims against both SIMC and the Company in
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<PAGE>
the action. These counterclaims sought unspecified damages for lost future
profits and damages from the Company for damages allegedly suffered by ORCO to
date. The Company estimates that SIMC may have been indebted to ORCO in the
amount of approximately $450,000 under the assigned transportation agreement,
the performance of which the Company guaranteed as noted above. ORCO and the
Company settled the dispute with a payment by the Company of $600,000 to ORCO in
the first quarter of 1994.
General. The Company believes that, generally speaking, utilities enter
long-term agreements in order to assure themselves of a supply of coal at a
predetermined price, thereby obtaining some protection from market price
fluctuation and establishing a dependable supply source. Typical contracts
between the Company and its customers give the customer various options to
increase or decrease quantities of coal to be delivered under the contract
within stated limitations, to advance or delay the delivery schedules to a
specified extent, and to modify or cancel contracts under certain circumstances.
Presumably, the Company's customers would exercise these options when it is
advantageous for them to do so, and the Company accepts the corresponding risk
that it may have to deliver coal to its customers at prices which are not then
advantageous to the Company. The benefits of these arrangements to the
customer and the risks to the Company are somewhat mitigated by provisions,
described below, that call for adjustments in the purchase price of coal based
in most cases upon industry-wide or macro-economic factors (although changes in
these may not reflect actual changes in the Company's costs), and in some cases
upon specific costs incurred by the Company.
Generally, all of the Company's sales contracts with utilities have
included price adjustment provisions, subject to certain limitations, for
changes in certain production costs, as measured by specified indices or actual
costs, which generally include wage rates, costs of supplies, employee benefits,
general and administrative costs, taxes, environmental and safety legislation
and royalties to lessors. The contracts have provided that the customers have a
right to terminate their purchase obligations if applicable environmental
standards would prohibit the burning of the coal to be purchased. In addition,
the contracts have provided for suspension of deliveries upon the occurrence of
certain force majeure events (i.e., events outside the control of the parties)
as defined in the agreements. Moreover, certain of the contracts have required
that the coal to be delivered be mined and shipped from only approved sites,
which approval has been secured with respect to areas mined to date. In
addition, if the coal supplied is not timely delivered or fails to meet the
contract's specifications, the customer may suspend its acceptance of deliveries
until the Company furnishes reasonable assurances that the deficiency will be
corrected. If corrections are not made within a specified period, the customer
may terminate its contract. Moreover, certain of the contracts have permitted
the customers to demand that coal with a lower sulfur content be shipped under
the contract. The Company
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<PAGE>
has been able to meet its contractual obligations under its coal sales contracts
in all material respects.
Mining Technology Licensing Agreement
- -------------------------------------
In June 1992, the Company entered into a 14-year exclusive licensing
agreement that permits Joy Technologies, Inc. ("Joy Technologies") to
manufacture and market a highwall mining system that the Company developed and
currently uses in its own mining operations. In accordance with the terms of
the agreement, Joy Technologies plans to market the system to mining companies
on the basis of a cost per ton of material mined by the system. If Joy
successfully markets the system, the Company will receive approximately $130,000
in origination fees for each of the first eight machines leased and
approximately $255,000 in origination fees for each machine leased thereafter,
and a royalty based on tons of material mined by these other mining companies.
The agreement provides that Joy will charge a lessee a minimum royalty per ton
of material mined of $3.77, subject to adjustment for inflation and safety-
related changes. The Company will receive 30% of the minimum royalty of $3.77
(as adjusted for inflation) and generally 50% of any part of such royalty
payments in excess of $3.77 (as adjusted for inflation). During 1993, Joy
manufactured and leased two highwall mining systems to third party coal
companies. While Joy has not met the Company's anticipated results for leases
under the June 1992 agreement, Joy has indicated to the Company that Joy's
leases of highwall mining machines will increase significantly during 1994.
Except for certain preexisting obligations by the Company to sell up to five
machines to third parties, the Company will not manufacture highwall mining
machines for transfer to third parties in the future. In addition, the Company
is permitted to manufacture up to 20 highwall mining machines for its own use or
for its use for contract mining purposes on properties owned or controlled by
third parties (provided that no more than ten such machines may be in use at any
one time for such contract mining purposes).
Acquisitions of West Virginia Coal Assets During 1993
- -----------------------------------------------------
On February 4, 1993, in accordance with the terms of an Acquisition
Agreement dated as of January 29, 1993, among the Company and NERCO Coal Corp.,
(collectively with its subsidiaries, "NERCO") and its wholly owned indirect
subsidiaries Prospect Land and Development Company, Inc., the Company acquired
substantially all of NERCO's West Virginia mining operations including
approximately 80 million tons of coal reserves.
As partial consideration for the acquisition, the Company issued to NERCO a
promissory note (the "Note") for payment on April 1, 1993, of $3 million plus
interest at the Prime Rate, as defined, plus 1% per annum from the date of
closing. Terms of the acquisition also provided that the Company also pay NERCO
an overriding royalty payment of $0.75 per ton of coal mined until a total of
$9.5 million has been paid, with a minimum annual
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overriding royalty payment of $750,000. The Company also assumed existing
royalty obligations to previous owners with respect to the coal reserves
acquired, including both production royalties and a minimum annual royalty
payment of $1,625,000 for the next 17 years. In the event of certain defaults,
all minimum annual royalty payments to NERCO and the previous owners would be
accelerated. The assets acquired by the Company secured payment of the Note and
the mining royalties, in an amount secured not to exceed the unpaid principal
and interest on the Note and $5.5 million.
On August 13, 1993, Kanawha Development Corporation ("Kanawha
Development"), a newly established coal-related subsidiary of the Company,
entered into various agreements to acquire, among other items, a sublease
interest in approximately 30 million tons of coal reserves in southern West
Virginia. The consideration for this acquisition included the following: (a)
Kanawha Development paid $2.5 million in recoupable advance royalties to the
sublessor; (b) Kanawha Development paid $900,000 for related engineering data,
permits and mine development; (c) a royalty of 4% of sales value on tonnage
mined and sold to be paid to the sublessor with a minimum annual royalty of $1.0
million per year due for ten years; (d) Kanawha Development would pay to the
former owner of the sublease an overriding royalty of $0.50 per ton for all tons
mined and sold; and (e) Kanawha Development will assume certain obligations
under the sublease agreement.
As part of the Pittston Transaction described above, all of the Company's
West Virginia operations were transferred to Pittston.
Other Operations.
- ----------------
Sulfur Mining Operations. The Company has determined to terminate its
efforts to mine sulfur in west Texas. During 1993, the Company wrote off its
investment of approximately $9,384,000 in connection with this termination.
Citrus Operations. In 1990, the Company purchased a Belizian corporation
owning approximately 4,616 acres of citrus farm property in Belize for
$1,250,000. The Company plans to continue the citrus operations on the Belizian
property. As of December 31, 1993, the Company has invested $10,508,000 in its
citrus operations.
Limestone Mining Operations. To increase utilization of the Company's
experience in moving materials and reclaiming land, the Company is evaluating
its opportunities to expand into the mining of limestone in western Kentucky.
Limestone is used in the production of flue gas desulfurization systems for
electric utilities. As of December 31, 1993, the Company has invested
$3,011,000 in its limestone mining operations.
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Gold and Industrial Metals Operations. The Company is currently exploring
the opportunity to develop a previously-operated gold mine in Mohave County,
Arizona. The Arizona Department of Environmental Quality has issued the Company
an air quality permit and is currently reviewing the Company's application for
an aquifer permit. If the Company determines to pursue this project, production
of gold could occur by the end of 1994. The Company is also considering the
development of other industrial metal mining projects. As of December 31, 1993,
the Company has invested approximately $1,093,000 in these gold and other
industrial metal mining ventures.
Construction Projects. In the latter half of 1987 the Company began
bidding on several highway construction contracts in Kentucky. During July
1991, the Company sold the wholly owned subsidiary through which it conducted
its highway construction operations. The Company recorded a pre-tax gain of
$500,000 on the sale. In connection with the sale, Larry Addington and the
Company agreed not to compete with the following operations of the purchaser
until July 19, 1996, subject to certain geographical limitations: highway
construction, grading, excavating and earth-moving (other than in connection
with coal mining and sanitary waste disposal), asphalt production or the laying
of asphalt, or limestone quarry operations. Except with respect to the
limestone quarry operations, the covenant not to compete generally applies to
operations in central and eastern Kentucky. The covenant not to compete with
respect to limestone quarry operations applies to Buchanan County, Virginia,
Mingo and Logan Counties, West Virginia and five counties in far eastern
Kentucky.
Expansion Policy
- ----------------
The Company continuously evaluates the acquisition of additional sales
contracts and reserves, and may consider acquiring other coal related companies.
There are no assurances that should such opportunities arise, the Company will
be successful in making an acquisition or of profitably operating the
acquisition.
Administrative Offices and Equipment
- ------------------------------------
The Company maintains administrative offices in Ashland, Lexington and
Owensboro, Kentucky. The Company also maintains small operations offices in
Colorado, West Virginia and Belize. In addition, the Company currently leases
most of the equipment used in its mining operations, such as bulldozers,
scrapers, graders, loaders, drills, continuous miners and trucks. In the
opinion of management, the Company's offices and equipment are adequate and
suitable for its current operations.
Employees
- ---------
At March 15, 1994, the Company employed approximately 652 people. None of
the Company's employees are represented by a labor union, and management
believes that its relations with its employ-
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<PAGE>
ees are good. The Company has been subject to limited union organizing efforts
in the past, but such efforts were not successful. The Company cannot predict
whether there will be any such activities in the future. Unionization could
adversely affect the Company's costs.
Competition
- -----------
The coal industry is highly competitive, and the Company competes
(principally in price and quality of coal) with many other coal producers, many
of whom are substantially larger and have greater financial resources than the
Company. Most long-term supply agreements and even spot market orders are the
result of competitive bidding. In recent years, moreover, the coal industry has
been characterized by stable or declining prices and minimal growth, which has
increased competitive pressures in the industry, and prices for coal sold on the
spot market by the Company have generally declined. The Company believes it can
compete effectively in the coal industry for many reasons, including its
efficient labor force, the location and price of its coal reserves and its
mining methods.
A continued demand for the Company's coal will depend on market and other
factors beyond the Company's control, including the overall demand for coal of
the types and qualities produced by the Company, the Company's ability to
maintain control of sufficient reserves of the type and quality required by the
market, the availability and price of, and regulations regarding, competing coal
and alternative fuels, such as oil, natural gas or nuclear power and the cost of
transporting the Company's coal. In this regard, production of electricity
through additional nuclear power facilities by a customer of the Company may
reduce such customer's demand for the Company's coal.
Solid waste management is a very competitive business which requires
substantial investment in labor and capital resources. The sources of
competition vary by locality and by the type of services provided, and originate
from national, regional and local companies. Several national waste management
companies are much larger and have far greater resources than the Company. The
Company also competes with municipalities and industrial facilities which
provide their own waste hauling and disposal services. Disposal operations
compete primarily on the basis of proximity to collection and hauling operations
and on the basis of price. The Company anticipates that competition in the
disposal business will increasingly include an emphasis on safeguards with
respect to the environment, and intends to continue its policy of constructing
and operating landfills with high levels of environmental protection and
monitoring. Incineration and other waste reduction processes are also sources
of competition. However, the Company believes that its contained landfill
operations can complement certain of these processes, in that landfills serve as
receptacles for incinerating trash and nonprocessable material.
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<PAGE>
Government Regulation of Coal Operations
- ----------------------------------------
Mining-Related Permits. Various permits must be obtained before mining
operations are commenced. The Company believes it has obtained all permits
necessary to conduct its present mining operations. The Company believes that,
upon filing of the required information with the appropriate regulatory
agencies, it will not encounter substantial difficulty obtaining or renewing
necessary permits in the future.
Regulations Affecting Coal Mining Operations-Environmental, Health and
Safety Matters. Coal mining is subject to regulation by various federal, state
and local authorities with respect to its effect upon the environment. Areas
regulated include air and water quality control, limitations on land use, solid
waste disposal, noise levels, aesthetic considerations and other matters. The
federal Surface Mining Control and Reclamation Act of 1977 (the "Reclamation
Act") was enacted to regulate the surface mining of coal and the surface effects
of underground mining. The Reclamation Act, among other things, requires that
mined property be restored to its original condition in accordance with
specified standards and an approved reclamation plan. Kentucky has enacted
legislation regulating surface and deep mining that establish reclamation and
environmental standards for coal mining operations which correspond to those
found in the Reclamation Act. Kentucky is charged with enforcing these state
laws and with enforcing, subject to federal oversight, the provisions of the
Reclamation Act in Kentucky.
Federal and state legislation controlling air pollution indirectly affects
the demand for certain kinds of coal by limiting the amount of sulfur dioxide
(believed to be the cause of "acid rain") which may be emitted as a result of
fuel combustion, thereby creating a greater demand for low sulfur coal. In
addition, mining operations are directly affected by regulation of emissions at
the mine sites. The federal Clean Air Act was amended in 1990 with a goal of
reducing the adverse effects of acid deposition through reductions in annual
emissions of sulfur dioxide by 10,000,000 tons from 1980 emission levels and
reductions in annual emissions of nitrogen oxides by 2,000,000 tons from 1980
emission levels. The amendments establish a system in which the U.S.
Environmental Protection Agency issues allowances to fossil fuel-fired
utilities. The allowances will limit sulfur dioxide emissions from utilities to
8,900,000 tons annually by 2000. The amendments also establish civil penalties
for excess emissions from utilities. The Company is unable to predict what
effect passage of the legislation will have on its operating results. Certain
of the Company's contracts in the past have provided cancellation rights to the
purchaser if any governmental standards or regulations are enacted which
prohibit the purchase of coal under such contracts or make the purchase of coal
under such contracts commercially unfeasible.
The Federal Water Pollution Control Act (the "Clean Water Act") affects
coal mining operations by: imposing effluent dis-
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<PAGE>
charge restrictions on pollutants discharged into waters; imposing regular
monitoring and reporting requirements; requiring the issuance and renewal of
permits for the discharge of pollutants into waters; and imposing performance
standards as a requirement for the issuance of permits. In addition, Kentucky
has enacted state legislation regulating the water pollution effects of coal
mining operations. Kentucky is charged with enforcing these state laws and with
enforcing, subject to federal oversight, the Clean Water Act in Kentucky.
The Federal Mine Safety and Health Act of 1977 imposes strict health and
safety standards on all mining operations. Regulations are comprehensive and
affect numerous aspects of mining operations, including the proper training of
mine personnel, mining procedures, blasting, the equipment used in mining
operations and other matters. The Black Lung Benefits Reform Act of 1977
requires each coal mine operator to secure payment of federal and state black
lung benefits to its employees through insurance, bonds or contributions to a
state controlled fund. The act also establishes a trust fund for payment of
benefits and medical expenses to employees for whom benefits have not been
obtained by their employer. This trust fund is financed by a tax on coal.
Kentucky also regulates mining safety issues on a state level.
Under certain circumstances, substantial fines and penalties, including
revocation of mining permits, may be imposed under the laws described above.
Monetary and, in severe circumstances, criminal sanctions may be imposed for
failure to comply with these laws. Regulations also provide that a mining
permit can be refused or revoked if an officer, director or a shareholder with a
10% or greater interest in the entity is affiliated with another entity which
has outstanding permit violations. Although the Company has been cited for
isolated violations, the Company and its subsidiaries have never had a permit
suspended or revoked because of any violation by the Company, its subsidiaries
or any affiliates of the Company.
Compliance with Regulatory Requirements. The Company endeavors to conduct
its mining operations in compliance with all applicable federal, state and local
laws and regulations. However, because of the extensive and comprehensive
regulatory requirements, minor, inadvertent violations during mining operations
are not unusual, and although the Company has no intention to commit and seeks
to prevent the incurrence of any infractions, the Company might have violations
in the future. The Company believes its compliance record compares favorably
with that of other coal mining companies.
The Company believes that its continued compliance with regulatory
standards will not substantially affect its ability to compete with similarly
situated coal mining companies. The cost of compliance, however, does increase
the cost of mining coal and to this extent makes coal less competitive with
alternative fuels. While the Company is not aware of any pending or proposed
legisla-
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<PAGE>
tion or regulatory action, except as discussed above with respect to acid rain,
the possibility exists that new legislation may be enacted or new regulations
adopted which will have the effect of increasing the cost of mining coal.
Government Regulation of Environmental Operations
- -------------------------------------------------
General Regulatory Process. The Company and the waste services industry in
general are subject to extensive, expansive and evolving regulation by federal,
state and local authorities. In particular, the regulatory process requires
firms in the industry to retain and obtain numerous governmental permits to
conduct various aspects of their operations, any of which may be subject to
revocation, modification or denial. The continually shifting policies and
attitudes of the regulatory agencies relating to the industry may impact the
Company's ability to obtain applicable permits from governmental authorities on
a timely basis and to retain such permits. The Company is not in a position to
assess the extent of any such impact, but it could be significant.
State and local governments have also from time to time proposed or adopted
other type of laws, regulations or initiatives with respect to the environmental
services industry. Included among these are laws, regulations and initiatives
to ban or restrict the interstate or inter-county shipment of wastes, impose
higher taxes on out-of-state waste shipments than in-state shipments, and
regulate disposal facilities as public utilities.
The Company makes a continuing effort to anticipate regulatory, political
and legal developments that might affect operations, but cannot predict the
extent to which any legislation or regulation that may be enacted or enforced in
the future may affect its operations.
Operating permits are generally required at the state level for a landfill.
Operating permits need to be renewed periodically and may be subject to
revocation, modification, denial or non-renewal for various reasons, including
failure of the Company to satisfy regulatory concerns. In the solid waste
collection phase, regulation takes such forms as licensing of collection
vehicles, truck safety requirements, vehicular weight limitations and, in
certain localities, limitations on rates, area and time and frequency of
collection. In the solid waste disposal phase, regulation covers various
matters, including gas emission, liquid runoff and rodent, pest, litter and
traffic control. Zoning and land use requirements and limitations are
encountered in the solid waste collection and disposal phases of the Company's
business. In addition, the Company's operations may be subject to water
pollution laws and regulations; air and noise pollution laws and regulations;
and safety standards under the Occupational Safety and Health Act ("OSHA").
Governmental authorities have the power to enforce compliance with these various
laws and regulations and violators are subject to injunctions, fines and
revocation of
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<PAGE>
permits. Private individuals may also have the right to sue to enforce
compliance.
Regulatory or technological developments relating to the environment may
require the Company (as well as others in the solid waste management business)
to modify, supplement or replace equipment and facilities at costs which may be
substantial.
Although the Company intends to conduct its operations in compliance with
applicable laws and regulations, the Company believes that heightened political
and citizen sensitivity causes companies in the solid waste management industry
to be faced, in the normal course of operating their businesses, with the
possibility of expending funds for fines, penalties and environmental
compliance. The Company believes its compliance record compares favorably with
that of other solid waste companies.
Permitting and Construction Process. The Company is required to obtain
construction and operating permits when it designs and constructs new landfills.
When appropriate, the Company intends to pursue obtaining permits for expansion
and/or modification of its existing landfills or landfills which may be acquired
in the future. Permit expansions and modifications generally take the form of
vertical expansions of existing disposal capacity, lateral expansions of
permitted disposal acreage, or modifications of operating restrictions to allow
increased disposal volume or additional waste streams.
Although the permitting process varies from state to state, the following
summary (which is based on Kentucky law) sets forth the typical steps in the
permitting process.
Local Approval. In most instances, some form of local zoning or
planning approval, commonly referred to as siting approval, is required to
permit a site and may be required to expand or modify a landfill. Particularly
in urban areas, this process often requires complying with city or county zoning
regulations through a separate application process to a zoning or planning
board. An applicant generally files various reports and drawings which describe
the project and public hearings are held. Frequently, community opposition will
be present and many local zoning or planning authorities may consider community
opposition in deciding whether to grant siting approval. Following hearings, a
decision is made. Generally, both the applicant and any opposition have the
right to appeal such decision. Although not always required, the local approval
process is usually completed prior to applying for a state permit.
State Approval. Upon receipt of local approval, an applicant must
then submit detailed construction and operating plans for state approval. Most
states require an applicant to evidence that a new, modified or expanded
facility will meet or exceed state regulations regarding disposal facility
siting and design specifications. States generally consider the technical
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<PAGE>
merits of an application, particularly such matters as geology, hydrogeology,
ecology, archaeology, soil characteristics, surface drainage, the presence of,
or location relative to, airports, wetlands and local water supply systems and
the adequacy of local road systems.
Engineering consultants design the project to meet state regulations and
standards. This design is reviewed by state officials, comments are issued and,
possibly after negotiations between the applicant and the state officials,
revisions are made by the applicant. Once the design is approved, public notice
is given and frequently a hearing held. Both the applicant and any opposition
generally have the right to appeal the decision.
Resource Conservation and Recovery Act ("RCRA"). RCRA regulates the
generation, treatment, storage, handling, transportation and disposal of
hazardous and solid waste and requires states to develop programs to insure the
safe disposal of solid waste in sanitary landfills. RCRA divides solid waste
into two groups, hazardous and nonhazardous. Wastes are generally classified as
hazardous wastes if they: (i) either (a) are specifically included on a list of
hazardous wastes or (b) exhibit certain characteristics; and (ii) are not
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous. Among the wastes that are specifically designated as nonhazardous
waste are household waste and various types of special waste. These wastes,
which will be accepted at the Company's landfills, may contain incidental
hazardous substances.
On October 9, 1991, the EPA promulgated new regulations pursuant to
Subtitle D of RCRA. These new regulations include location standards, facility
design standards, operating criteria, closure and post-closure requirements,
financial assurance standards and groundwater monitoring requirements as well as
corrective action standards, all of which have not previously been uniformly
applied at landfills within the fifty states. In addition, the new regulations
require landfills constructed or expanded after October 9, 1993, to have one or
more liners (typically high-density polyethylene liners) to keep leachate out of
groundwater and have extensive systems to collect leachate for handling and
treatment. In addition, by October 9, 1996, groundwater wells must also be
installed at virtually all landfills to monitor groundwater quality and the
leachate collection system operation. The regulations also require (where
threshold test levels are met) that methane gas generated at landfills be
controlled in a manner that will protect human health and the environment.
Because some states have already adopted regulations at least as stringent as
the new federal regulations, the new Subtitle D regulations will cause greater
changes in the landfill regulation of certain states than of others.
The Federal Water Pollution Control Act ("Clean Water Act"). The Clean
Water Act established rules regulating the discharge of
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<PAGE>
pollutants from a variety of sources, including solid waste disposal sites, into
waters of the United States. For any discharge, the Clean Water Act would
require the Company to apply for and obtain a discharge permit, conduct sampling
and monitoring and, under certain circumstances, reduce the quantity of
pollutants in those discharges. Also, virtually all landfills are required to
comply with the new federal storm water regulations, which are designed to
prevent possibly contaminated storm water from flowing into surface waters.
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). CERCLA addresses problems created by the release of any hazardous
substance into the environment. CERCLA's primary mechanism for remedying such
problems is to impose strict joint and several liability for cleanup of
facilities among all past owners and operators of the site at the time of
disposal and current owners and operators of the site as well as the generators
and the transporters who arranged for disposal and transportation of hazardous
substances. The costs of CERCLA cleanup can be very substantial. Liability
under CERCLA does not depend upon the existence or disposal of "hazardous waste"
but can also be founded upon the existence of even very small amounts of the
more than 1,000 "hazardous substances" listed by the EPA.
The Clean Air Act ("Clean Air Act"). The Clean Air Act provides for
federal, state and local regulation of the emission of air pollutants and is
applicable to landfills. The EPA has proposed new source performance standards
regulating overall air emissions from solid waste landfills. The EPA may also
issue regulations controlling the emissions of particular air pollutants from
solid waste landfills. Moreover, landfills located in areas with air pollution
problems may be subject to even more extensive air pollution controls.
State and Local Regulations. All states in which the Company currently
operates, as well as each state in which the Company may operate in the future,
have laws and regulations governing the generation, handling, transfer,
transportation and disposal of solid waste, water and air pollution and the
design, operation, maintenance, closure and post-closure maintenance of
landfills.
Most states have already tightened, or are in the process of tightening,
the regulatory requirements on the permitting of new and expanded solid waste
facilities and on the continued operation of existing facilities. As Subtitle D
takes effect, state regulations are expected to become both more stringent and
more uniform nationwide. The increased stringency of state regulations may be
expected to benefit the Company, as older landfills are forced to close.
However, the increasing state and local scrutiny of landfills also makes it more
difficult for the Company to comply with the continually evolving and expensive
regulations applicable to the disposal of solid waste.
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<PAGE>
Environmental Liability Insurance. The Company has obtained and currently
maintains environmental impairment liability insurance coverage in the amount of
$5,000,000 aggregate for certain environmental risks arising from the operation
of landfill facilities and waste collection and hauling operations. The
environmental impairment liability insurance coverage is specific in
qualification and premium cost to each landfill facility through pre-issuance
inspections. Currently, it is management's opinion that the premium charge for
its coverage from commercial insurance underwriters is reasonable and
appropriate. Assuming the Company's environmental operations expand, certain
economies of scale may be available to the Company to pursue alternative risk
management policies or programs apart from the general commercial insurance
underwriters.
Item 2. Properties.
----------
Coal Resources
--------------
On January 14, 1994, the Company sold a substantial portion of its coal-
related assets to an indirect wholly owned subsidiary of The Pittston Company.
See Item 1. Business-Disposition of Certain Coal Assets in the First Quarter of
1994. The information set forth in this Item relates only to the Company's
properties retained following the Pittston Transaction.
The Company currently operates four active mines, all of which are in the
Pike County Area (located in Pike County, Kentucky). The Job 17 mine, which
began production in 1986, produced an average of 89,000 tons of coal per month
during 1993. The Job 17A mine, which began production in September 1993,
produced an average of 44,000 tons of coal per month during 1993 since it
opened. The Ivy Creek mine, which began production in 1986, produced an average
of 89,000 tons of coal per month in 1993. The Ivy-H mine, which began
production in June 1993, produced an average of 30,000 tons of coal per month
during 1993 since it opened. Each of these four mines has a production
capability of up to approximately 100,000 tons of coal per month and produces
high quality low-sulfur coal.
As of December 31, 1993, as adjusted for the Pittston Transaction, the
Company owned in fee approximately 22,329 acres and controlled, primarily
through short-term leases and contract mining agreements, an additional 26,156
acres of reserves in eastern Kentucky. In western Kentucky, the Company leased
as of December 31, 1993, approximately 7,503 acres of reserves, and owned in
fee approximately 354 acres. Approximately 44% of the Company's coal reserves
are low-sulfur compliance reserves.
As adjusted for the disposition in The Pittston Transaction, the table
below sets forth (in thousands of tons) estimated minimum surface minable coal
reserves, recoverable and marketable, as of December 31, 1993. Since the
completion of the reserve studies
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<PAGE>
upon which the estimates are based, some leases have expired, and the Company
has acquired control of additional properties. Mining has also occurred in most
of the areas, and the information has been adjusted to reflect estimated
production in each area since the dates of the respective studies. The Company
believes that despite its mining activity and the expiration of some leases in
the areas covered by reserve studies, the estimates of aggregate minimum surface
minable remain accurate in all material respects.
Reserve studies are estimates based on an evaluation of available data, and
actual reserves may vary substantially from the estimates. Estimated minimum
surface minable reserves are comprised of coal that is considered to be
merchantable and economically recoverable by using surface mining practices and
techniques prevalent in the coal industry at the time of the reserve study.
While the Company has historically used surface mining in almost all of its
operations, deep mining may be considered where it would be more profitable than
surface mining in the Company's judgment. The Company believes that it can
recover a greater proportion of the coal reserves in certain areas through
surface mining than is shown in the table below. The Company believes its
current reserves exceed its current contractual requirements even if limited to
recovery only by current surface mining recovery methods. In this regard, the
reserves shown in the table below include a variety of qualities of coal. Where
appropriate, the Company has blended coal of different qualities to meet
contract specifications.
A substantial part of the reserves currently available to the Company are
represented by leases which expire after a stated number of years. Most of the
leases give the Company renewal options, which are usually subject to the
condition that mining has commenced on or near the leased property. Most of the
leases require various payments in order to maintain the lease if mining has not
begun on the property. The Company believes that it has conducted mining
activities and made payments to obtain renewal rights with regard to lease
properties covering reserves which, when added to reserves owned in fee by the
Company, are sufficient to satisfy its current requirements under long-term
contracts. However, the availability of reserves on other leased property at
the present time does not assure the Company that the reserves will be available
at a time that the Company may wish to mine such reserves. Moreover, the
availability of reserves on leased property is often subject to uncertainties
relating to such matters as the title of the lessor to the coal and precise
boundaries. See Item 2. Properties-Controlled Reserves.
- 27 -
<PAGE>
<TABLE>
<CAPTION>
Minimum Surface
Demonstrated Mining
Recoverable Permitted
Reserves(1) Measured(2) Indicated(2) Type(3) Reserves(2)
------------ ----------- ------------ ------- -----------
(in thousands of tons)
Kentucky Mining
Property(4)
- ---------------
<S> <C> <C> <C> <C> <C>
Princess Area 5,742 2,343 3,399 Steam 1,800
Pike County Area 36,244 10,651 25,593 Steam 11,500
Licking River Area 4,630 1,104 3,526 Steam 500
South Hill Area 840 840 -0- Steam 500
Knottsville Area 1,020 1,020 -0- Steam -0-
West Louisville Area 12,180 12,180 -0- Steam 500
Hopkins Co. Area 6,236 6,236 -0- Steam -0-
Aberdeen Area 760 760 -0- Steam -0-
------ ------ ------ ------
Total 67,652 35,134 32,518 14,800
====== ====== ====== ======
</TABLE>
(1) All minable reserves are categorized as "Demonstrated Recoverable."
Minimum Demonstrated Recoverable Reserves is the sum of Measured and
Indicated Reserves.
(2) "Measured" reserves represent the portion of total reserve estimates which,
in the opinion of the Company, is substantiated by adequate information,
including that derived from exploration, current and previous mining
operations, outcrop data and knowledge of mining conditions. "Indicated"
reserves are computed from information of a more preliminary or limited
extent. The divisions into these two categories are based upon the general
guidelines of the U.S. Geological Survey and judgments related to a
combination of factors. The Company believes that the division is a
reasonably close estimate of the general order of relative tonnages
involved. The figures listed above reflect a 90% recovery factor that has
been applied to in-place surface minable reserves. Recovery factors for
deep-minable reserves are 65% of the in-place tonnage, except for two coal
seams which use 55% of in-place tonnage. "Surface Mining Permitted
Reserves" are reserves which are approved for surface mining by having met
conditions of the local, state and federal regulatory agencies for active
disturbance of the reserves and the extraction of the mineral. Such
approval under the Surface Coal Mining and Reclamation Act of 1977 is a
prerequisite to production and marketing of the coal. This permit process
varies from state to state; however, a 12 to 18 month time period is normal
for the process in states in which the Company holds reserves.
(3) All reserves controlled by the Company are listed as "Steam" because of the
quality characteristics and because current contracts are with electric
utilities.
- 28 -
<PAGE>
(4) The Princess Area properties are located in Boyd, Carter and Greenup
Counties, Kentucky. The Pike County Area properties are located in Floyd,
Martin and Pike Counties, Kentucky. The Licking River Area is located in
Elliott and Lawrence Counties, Kentucky. The South Hill Area and the
Aberdeen Area are located in Butler County, Kentucky. The Knottsville Area
and the West Louisville Area are located in Daviess County, Kentucky. The
Hopkins County Area is located in Hopkins County, Kentucky.
The extent to which the Company's coal resources will be mined will depend
upon factors over which it has no control, such as future economic conditions,
the price and demand for coal of the quality and type controlled by the Company,
the price and supply of alternative fuels and future mining practices and
regulation. The ability of the Company to mine in areas covered by the reserve
studies depends upon the ability of the Company to maintain control of the
reserves (other than the properties owned in fee) through extensions or renewals
of the leases or other agreements or the ability of the Company to obtain new
leases or agreements for other reserves.
Controlled Reserves
- -------------------
The Company has and plans to continue an active leasing and acquisition
program to augment the reserves it controls, particularly in areas where it is
currently operating. To date, the Company has not experienced any material
difficulty in acquiring leases or the right to mine in areas where it has
operations or in which it plans to commence mining in the future.
Generally, the Company's leases for its coal reserves are for an initial
term, usually of five years. Most of the leases contain an option to renew on
the part of the Company, with exercise of the option usually subject to the
condition that mining shall have commenced on (or, as specified in some leases,
near) the leased property. Most of the leases require the payment of some
amount of advance royalties or delay rentals (payments to keep the lease in
force if mining has not commenced) on a periodic basis during each year if
mining has not begun on the property. After mining commences, the leases
generally require the payment of a royalty based on the tonnage mined and sold.
The Company's average royalty expense for the year ended December 31, 1993 on
reserves retained following the Pittston Transaction was $3.36 per ton.
Notwithstanding the probable loss of some of its mining rights under its
current and future leases due to their expiration, the Company believes that it
can maintain or acquire sufficient reserves to enable it to fulfill all of its
obligations under its sales contracts and, if it so chooses, sell additional
amounts of coal on the spot market.
- 29 -
<PAGE>
Some of the Company's reserves are owned in fee or are on land owned in fee
by the Company, and the balance of its reserves are on land leased or otherwise
controlled by the Company. Most of the Company's leases describe the leased
property in general terms, and these descriptions are usually not based on
actual surveys or boundaries which are otherwise precisely identified.
Moreover, because of the short-term nature of its leases and because of the
expense involved, the Company does not have title to the leases reviewed by
attorneys or other qualified title examiners. As to title to properties
acquired by the Company, the Company has relied on the assurances of the parties
from whom the properties were acquired, rather than on current title
examinations. As to properties the Company leases, a limited title
investigation and, to the extent possible, a determination of the precise
boundaries of a property is made in most cases only as a part of the process of
securing a mining permit shortly before commencement of mining operations. The
Company believes that its practices in investigating title and determining
boundaries to the properties it owns, leases or otherwise controls are
consistent with customary industry practices in Kentucky and that such
practices are adequate to enable it to acquire the right to mine such
properties.
Landfill Operations
- -------------------
The table below sets forth certain information as of December 31, 1993 with
respect to the Company's six operating landfills. Permitted Capacity refers to
the remaining capacity for which the Company has received construction permits
from the appropriate state authorities. The Company constructs its landfills in
a series of landfill cells as additional airspace is needed to accommodate
customer demand.
<TABLE>
<CAPTION>
Estimated Average
Permitted Permitted Current
Capacity Capacity Volume Accepted
Landfill (cubic yards) (estimated tonnage) (tons per day)
-------- --------------- --------------------- ------------------
<S> <C> <C> <C>
Ohio County, KY 20,079,000 12,047,000 600-800
Greenup County, KY 3,258,000 1,955,000 700-1,100
Grant County, KY 11,745,000 7,047,000 250-500
Lincoln County, KY 588,000(1) 353,000(1) 250-500
Bertie County, NC 9,970,000 5,982,000 600-800
Montgomery County, NC 1,490,000(2) 894,000(2) 250-500
</TABLE>
(1) The Company has applied for a permit modification to increase the permitted
size of the landfill to an aggregate airspace of 9,243,000 cubic yards or
5,544,000 tons.
(2) The Company has applied for a permit modification to increase the permitted
size of the landfill to an aggregate airspace of 6,896,000 cubic yards or
4,138,000 tons.
- 30 -
<PAGE>
Item 3. Legal Proceedings.
-----------------
The Company is named as defendant in various actions in the ordinary course
of its business. These actions generally involve such matters as property
boundaries, mining rights, blasting damage, personal injuries, and royalty
payments. The Company believes these proceedings are incidental to its business
and are not likely to result in adverse judgments which are material to the
Company's results of operations and financial condition.
The Company previously sold coal to Consumers Power under a contract
acquired by Pittston in January 1994. See Item 1. Business. Although the
contract was transferred, the Company retains all obligations with respect to
the litigation described below. The contract contains a provision that states
that if Consumers Power is able to demonstrate an ability to purchase coal
meeting certain requirements for a contract term of ten years or more from
another producer located in the U.S. Department of Energy's District No. 8 at a
price that is more than $.15 per million BTU below the average FOB mine price of
coal purchased and sold under the contract for the previous three-month period,
Consumers Power can terminate the contract if the parties negotiate but fail to
agree upon the price of future coal shipments. On November 4, 1988, the Company
was notified that Consumers Power was prepared to demonstrate its ability to
purchase coal from another producer within the parameters of this termination
provision. In response to this notice, the Company filed a complaint in Boyd
Circuit Court on January 18, 1989, in Boyd County, Kentucky, against Consumers
Power. The complaint, as subsequently amended, alleges, among other things, that
the conditions necessary to trigger the termination provision have not occurred,
that the termination provision is unconscionable and that the competitor's bid
tortiously interferes with the Company's contractual relations with Consumers
Power. On February 2, 1989, the Company obtained a restraining order preventing
Consumers Power from terminating the contract pursuant to the termination
provision. On March 21, 1989, Consumer Power filed an answer denying the
complaint's allegations and asserting a counterclaim that the Company had
breached the contract by not entering into negotiations to reduce the contract
price. Consumers Power also alleged the breach of a guaranty by the Company. On
May 4, 1989, the Boyd Circuit Court directed the parties to maintain the status
quo in their contractual relationship, directed the Company to post a $750,000
bond, and directed the parties to provide for expedited discovery in the case.
On November 9, 1990, the Boyd Circuit Court directed the Company to increase the
amount of the bond to be posted from $750,000 to $3,000,000 in light of the
additional amounts of coal shipped under the contract from the date of the
court's previous order.
On April 30, 1993, the Boyd Circuit Court entered summary judgment in favor
of the Company against Consumers Power that the termination provisions of the
Company's coal supply contract with Consumers Power had not been appropriately
triggered by Consumers Power. Consumers Power has appealed the grant of summary
judgment to the Kentucky Court of Appeals. On June 3, 1993, Consumers Power
also filed a motion in Boyd Circuit Court to dissolve the May 4,
- 31 -
<PAGE>
1989 temporary restraining order that prevents Consumers Power from seeking to
terminate the contract pursuant to the contract provision. Although on
September 1, 1993, the court subsequently dissolved the temporary restraining
order and ordered that the Company's $3,000,000 bond could be released,
Consumers Power has not terminated the contract in light of the April 30, 1993
summary judgment decision that the termination provision had not been
appropriately triggered. By letter dated October 5, 1993, Consumers Power has
notified the Company that it is currently prepared to demonstrate its ability to
purchase coal from another producer within the parameters of the termination
provision. Consumers Power states that it can obtain coal for approximately
$24.90 per ton instead of the $34.16 per ton charged during the three months
ended September 30, 1993.
On February 15, 1991, Bill Robinson, Sr. filed suit against Addwest Gold,
Inc. ("Addwest Gold") and Addwest Mining, Inc. ("Addwest Mining") in the Montana
Second Judicial District Court, Butte-Silver Bow County, Montana. The complaint
alleged breach of contract, fraud and bad faith in relation to Robinson's
employment with Addwest Gold. Robinson alleged that agents of Addwest Gold
induced him to go to work for Addwest Gold by promising him a large bonus on the
happening of certain contingencies, and then failed to pay him a bonus in the
amount he expected. The Company sold Addwest Gold in January, 1990. On March
29, 1991, the action was removed to the U.S. District Court for the District of
Montana, Butte Division. On March 25, 1992, Robinson amended his complaint to
add, among others, as defendants Larry Addington and Larry Harrington,
individually, and Addington Resources, Inc. and Addington Holding, Inc.
Robinson did not claim a specific amount of damages in these pleadings.
At the time of the trial in October, 1992, Robinson made a claim for a
total of approximately $19 million in damages. On November 5, 1992, the jury
returned a verdict against the defendants for approximately $850,000 in
compensatory damages, $1,000 in punitive damages against Larry Harrington,
$6,000,000 in punitive damages against Larry Addington, and $4,500,000 in
punitive damages against Addwest Gold.
On February 23, 1993, the judge entered a judgment stating that the
defendants Larry Harrington, Addwest Gold, Addington Resources, Addington
Holding Company and Addwest Mining are jointly and severally liable to Mr.
Robinson for compensatory damages in the amount of $850,000 and that Mr.
Robinson is entitled to punitive damages in the amount of $1,000 from Larry
Harrington, $6,000,000 from Larry Addington, and $4,500,000 jointly and
severally from defendants Addwest Gold, Addington Resources, Addington Holding
Company and Addwest Mining.
With respect to claims against Larry Addington, although the jury
specifically rejected a claim by Mr. Robinson that Mr. Addington had committed
fraud upon him, the court found that there was sufficient evidence to sustain
the finding of liability upon
- 32 -
<PAGE>
the plaintiff's claim for negligent misrepresentation and the imposition of
punitive damages against Larry Addington. The court stated that there was
sufficient evidence to support a finding that the alleged negligent
misrepresentations made by Larry Addington to the plaintiff were accomplished
with actual malicious intent within the meaning of the Montana statute relating
to claims for punitive damages.
Following the court's denial on October 6, 1993, of post-judgment motions,
the defendants filed a notice of appeal on November 1, 1993, to the U.S. Court
of Appeals for the Ninth Circuit. After extensive settlement discussions
conducted under the supervision of a mediator for the U.S. Court of Appeals for
the Ninth Circuit, a settlement has been reached in which Mr. Robinson will
release all parties from all claims. As a result of the settlement, the Company
expects to pay Mr. Robinson $3,450,000 by April 15, 1994. The parties are
currently in the process of drafting appropriate settlement documentation.
The Company is obligated for the full amount of this settlement pursuant to
certain indemnification agreements. In accordance with Section 145 of the
General Corporation Law of the State of Delaware and the Indemnity Agreement of
August 1988 between the Company and Larry Addington, the Company agreed to
indemnify Larry Addington with respect to this litigation. The Board of
Directors (Larry Addington abstaining) found that Mr. Addington did at all times
relevant to this litigation act in good faith and in a manner which he
reasonably believed to in or not opposed to the best interests of the Company
and, therefore, has agreed to indemnify him from and against the amount of any
final judgment or settlement entered in the litigation and to pay (and/or
advance) any and all expenses incurred by him in connection with the defense of
the litigation or its appeal.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
- 33 -
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters.
----------------------------------------
The Company's Common Stock trades on the NASDAQ National Market System
(symbol-ADDR). The table below sets forth the high and low sales prices as
reported on NASDAQ for the periods indicated.
<TABLE>
<CAPTION>
High Low
<S> ------- -------
<C> <C>
1992
First Quarter $11 1/4 $ 8 1/4
Second Quarter 9 3/8 7 3/8
Third Quarter 15 1/8 9 1/4
Fourth Quarter 16 12 3/4
1993
First Quarter $16 3/4 $12 1/4
Second Quarter 16 3/4 12 1/4
Third Quarter 18 1/4 14
Fourth Quarter 20 15 3/4
1994
First Quarter (through March 25,
1994) $19 3/4 $16 1/4
</TABLE>
On March 25, 1994, the closing price of the Company's Common Stock on the
NASDAQ National Market System was $16.50 per share. At March 17, 1994, the
Company had 258 stockholders of record (including depositaries which hold stock
in street name on behalf of other beneficial owners).
Holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. The Company has not paid any dividends since its initial public
offering but expects to reconsider that policy during 1994; no prediction can be
made regarding the results of that reconsideration or whether dividends will be
paid in the future.
The Company currently has a line of credit with a bank with a total
commitment of $15 million. In connection with the line of credit, the Company
has agreed to certain restrictive covenants which, among others, limit the
amount of dividends that the Company can pay, limit its ability to incur
additional indebtedness, require an as-defined minimum tangible net worth, and
require a minimum current ratio.
- 34 -
<PAGE>
Item 6. Selected Financial Information
------------------------------
The following selected financial information of the Company for each of the
five years in the period ended December 31, 1993 are derived from the audited
Consolidated Financial Statements of the Company. The selected financial
information should be read in conjunction with the audited Consolidated
Financial Statements and the notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
Income Statement Data: 1989 1990 1991 1992 1993
- --------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Revenues:
Mining $228,229 $265,582 $271,808 $292,225 $358,957
Environmental - 298 1,868 7,779 24,929
Other 18,766 3,581 1,579 1,470 261
-------- -------- -------- -------- --------
Total revenues 246,995 269,461 275,255 301,474 384,147
-------- -------- -------- -------- --------
Costs and expenses:
Costs of operations 177,736 205,981 222,726 236,854 328,457
Depreciation and amortization 25,395 25,658 29,740 25,111 29,939
Selling, general and
administrative 20,278 22,736 23,409 21,274 22,303
-------- -------- -------- -------- --------
Total costs and expenses 223,409 254,375 275,875 283,239 380,699
-------- -------- -------- -------- --------
Income (loss) from operations 23,586 15,086 (620) 18,235 3,448
-------- -------- -------- -------- --------
Interest and other income
(expense):
Interest expense (20,844) (16,160) (14,446) (13,483) (16,577)
Interest income 5,994 4,943 2,365 791 649
Gain on sale of assets 122 107 1,840 4,285 630
Gain on sale of subsidiaries - 15,887 500 10,544 -
Minority interest (868) - - - -
Gain on trading gold futures 2,242 - - - -
Litigation Settlement - - - (5,100) (4,050)
Other, net 1,187 136 36 1,052 (5,706)
-------- -------- -------- -------- --------
Total interest and other income
(expense) (12,167) 4,913 (9,705) (1,911) (25,054)
-------- -------- -------- -------- --------
Income (loss) before income tax
provisions (benefits) and
cumulative effect of a change
in accounting principle 11,419 19,999 (10,325) 16,324 (21,606)
Income tax provision (benefit) 2,900 5,900 (4,139) 5,288 (5,417)
-------- -------- -------- -------- --------
Income (loss) before cumulative
effect of a change in
accounting principle 8,519 14,099 (6,186) 11,036 (16,189)
Cumulative effect of a change
in accounting for income
taxes - - (3,500) - -
-------- -------- -------- -------- --------
Net income (loss) $ 8,519 $ 14,099 $ (9,686) $ 11,036 $(16,189)
======== ======== ======== ======== ========
Primary net income (loss) per
share before cumulative
effect of a change in
accounting principle $ .67 $ .93 $ (.41) $ .72 $(1.04)
Cumulative effect of a change
in accounting for income
taxes - - (.23) - -
-------- -------- -------- -------- --------
Primary net income (loss) per
share $ .67 $ .93 $ (.64) $ .72 $(1.04)
======== ======== ======== ======== ========
Fully diluted net income per
share (1) (1) (1) (1) (1)
Tons of coal sold 6,658 8,165 8,220 8,815 11,530
-------- -------- -------- -------- --------
</TABLE>
- 35 -
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------
Balance Sheet Data 1989 1990 1991 1992 1993
- ------------------ -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 61,441 $ 42,591 $ 10,640 $ 36,575 $ 11,417
Total assets 322,124 337,408 332,416 339,024 315,658
Short-term obligations 22,820 21,209 30,816 26,371 149,670
Long-term debt net of current
portion 142,632 143,998 135,153 128,232 11,954
Stockholders' equity 120,624 135,274 125,685 136,811 124,933
</TABLE>
_________________________
(1) The fully diluted net income per share calculation for 1989 has not been
presented because the effect would be anti-dilutive. The fully diluted net
income per share for 1990, 1991, 1992 and 1993 has not been presented due
to the conversion of the Convertible Subordinated Debentures in November
1989.
- 36 -
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations.
-------------
General
- -------
Adverse weather conditions and particularly precipitation can affect the
Company's ability to conduct its mining operations. Since heavier
precipitation generally occurs in the areas in which the Company conducts its
mining operations during late fall and early winter, the Company believes that
its revenues and profitability may be adversely affected during those periods.
Results of Operations
- ---------------------
1993 Compared with 1992
- -----------------------
Net loss during 1993 was $16,189,000 or $1.04 per share, compared to net
income of $11,036,000 or $.72 per share for 1992. Net loss during 1993 was
affected by the following:
(1) Pursuant to the Stock Purchase Agreement dated September 24, 1993, (the
"Agreement"), the Company entered into an agreement to sell the stock of
five of its coal subsidiaries to an indirect wholly owned subsidiary of The
Pittston Company ("Pittston") for $157 million cash. The Agreement also
contemplated that, before closing, certain property, plant and equipment
(the net book value of which was approximately $43,000,000 as of December
31, 1993) would be transferred to other subsidiaries of the Company from
the subsidiaries to be sold. In addition, the Company will retain all of
the net working capital (the net book value of which was approximately
$30,000,000 as of December 31, 1993) of the sold subsidiaries as of the
date of closing (the "Closing Date"). The Agreement also required that
within 60 days after the Closing Date, the Company would deliver to
Pittston a statement of working capital for the Subsidiaries showing the
Subsidiaries' Combined Net Working Capital, as defined in the Agreement, as
of the close of business on the Closing Date. If the Combined Net Working
Capital exceeds zero, Pittston is to pay the Company an appropriate
adjustment. If the Combined Net Working Capital is less than zero, the
Company is to pay Pittston an appropriate adjustment. By letter dated March
15, 1994, the Company asserted that Pittston should make a payment in the
amount of $2,286,000 to the Company in light of the Subsidiaries' Combined
Net Working Capital as of the Closing Date. In accordance with the terms of
the Agreement, the Company and Pittston are currently seeking to resolve
their differences with respect to the Subsidiaries' Combined Net Working
Capital as of the Closing Date. Because the parties are not in agreement
with respect to the appropriate adjustment, the
- 37 -
<PAGE>
Company cannot predict at this time the amount which will be owed by one
party to the other with respect to such an adjustment. In connection with
the sale, the Company has provided certain guarantees to Pittston.
This transaction was completed on January 14, 1994.
As a result of this transaction, the net assets related to the sale
appear as a current asset at December 31, 1993 in the Company's audited
Consolidated Financial Statements. Additionally, since the Company's
$125,000,000 Senior Secured Notes were redeemed in connection with the
transaction, they have been classified as a current liability at December
31, 1993 in the audited Consolidated Financial Statements.
The Company does not expect to record a loss on this transaction. The
Company will record the actual economic impact of the disposal in its 1994
financial statements. However, principally due to the Company's de-
emphasis on mining operations, the Company recorded approximately
$14,506,000 of pre-tax asset write-offs during 1993. See Note 3 to the
audited Consolidated Financial Statements. These write-offs consist
principally of $9,384,000 related to the Company's decision to abandon its
sulfur mine development project in the western United States.
Additionally, the Company has written off approximately $5,122,000 of
assets that it has abandoned associated with its environmental projects.
These asset write-offs are reflected in income from operations and will be
available to offset current and future federal and state income tax
liabilities.
Other terms of the transaction include the Company entering into a
coal supply contract with Pittston (the "Pittston Coal Supply Contract")
for the sale of 4,920,000 tons over 3-1/2 years at a base price of $26.00
per ton, subject to adjustments. Additionally, the Company will receive a
$1.00 per ton production royalty for coal produced from certain West
Virginia properties being sold to Pittston with a minimum royalty of
$100,000 per month, a maximum aggregate royalty in any one year of $1.5
million, and a maximum aggregate royalty under the agreement of $3.75
million. The Company will also pay Pittston a royalty of $0.50 per ton of
coal produced by two highwall mining machines for 3-1/2 years.
After the transaction discussed above, the Company continues to own
and operate four eastern Kentucky mines with estimated annual production
capacity of 3,000,000 tons per year. During 1993, these mines produced
2,373,000 tons with an average cost of operations of $25.84 per ton. The
average sales price received by the
- 38 -
<PAGE>
Company from coal produced by these eastern Kentucky mines during 1993 was
$28.59 per ton.
Future production from these retained coal mines will be placed on the
Pittston Coal Supply Contract and a new coal supply contract entered into
with The Cincinnati Gas & Electric Company (the "CG&E Coal Supply
Contract"). The CG&E Coal Supply Contract calls for the sale of 5,400,000
tons of coal over six years beginning January 1, 1994.
(2) During 1993, the Company reserved for certain litigation settlements which
reduced pre-tax income by $4,050,000. (See Note 13 to the audited
Consolidated Financial Statements.)
(3) During 1993, the Company established a $5,767,000 pre-tax reserve against
the note receivable arising out of the 1992 sale of one of its
subsidiaries; this write-off is reflected in other income and expense.
(See Note 5 to the audited Consolidated Financial Statements.)
(4) Adverse wet weather conditions during the first four months of 1993 and
the month of December 1993 caused major inefficiencies at the Company's
mining operations and, as a result, a major increase in production costs.
Net income during 1992 was $11,036,000 or $.72 per share, compared to net
loss of $9,686,000 or $.64 per share for 1991. Net income during 1992 was
affected by the following:
(1) The Company recognized a $10,544,000 pre-tax gain on the sale of certain
coal subsidiaries. (See Note 5 to the audited Consolidated Financial
Statements.)
(2) During 1992, the Company recognized $4,285,000 in pre-tax gains on the sale
of assets. The majority of this gain was recognized from the sale of
certain West Virginia coal reserves.
(3) During 1992, the Company reached a litigation settlement which reduced pre-
tax income by $5,100,000. (See Note 13 to the audited Consolidated
Financial Statements.)
(4) During 1992, the Company recognized an approximately $5,000,000 pre-tax
gain on the sale of highwall mining machines.
The Company's mining revenues increased from $292,225,000 in 1992 to
$358,957,000 in 1993. Contributing to this 23% increase was revenue of
$4,827,000 recognized on a fourth highwall mining machine sold to Pittston
during 1993. Also contributing was a 31% increase in tons sold from 8,815,000
- 39 -
<PAGE>
tons sold during 1992 compared to 11,530,000 tons sold during 1993.
Additionally,included in mining revenues was $4,255,000 realized from the
Company's highwall miner contract mining activities during 1993 compared to
$1,480,000 realized from the Company's highwall miner contract mining activities
during 1992. This increase in tons sold is primarily a result of the
acquisition described in Note 18 to the audited Consolidated Financial
Statements.
Total environmental revenues and environmental income from operations
increased to $24,929,000 and $3,722,000, respectively, during 1993 compared to
total environmental revenues of $7,779,000 and environmental income from
operations of $1,620,000 during 1992. Included in environmental revenues and
environmental income from operations is revenue and income from operations
generated by the Company's landfill operations and waste collection services.
During 1993, the Company's landfill operations generated $17,264,000 of revenue
and $5,818,000 of income from operations. During 1993, the Company's waste
collection services generated $7,665,000 of revenues and $2,096,000 of losses
from operations. During 1992, the Company's landfill operations generated
$4,689,000 of revenues and $1,984,000 of income from operations. During 1992,
the Company's waste collection services generated $3,090,000 of revenues and
$364,000 of losses from operations. The primary reasons for the substantial
increases in total environmental revenues and income from operations is the
receipt of operating permits for certain contained landfills during 1992 and the
commencement of operations at these landfills. The Company received
approximately 753,000 tons of waste at Company-owned landfills during 1993
compared to 196,000 tons of waste received during 1992.
In June 1992, the Company entered into a 14-year exclusive licensing
agreement that permits Joy Technologies, Inc. ("Joy") to manufacture and market
a highwall mining system that the Company developed and currently uses in its
own mining operations. In accordance with the terms of the June 1992 agreement,
Joy plans to market the system to mining companies on the basis of a cost per
ton of material mined by the system. If Joy successfully markets the system,
the Company will receive approximately $130,000 in origination fees for each of
the first eight machines leased and approximately $255,000 in origination fees
for each machine leased thereafter, and a royalty based on tons of material
mined by these other mining companies. The agreement provides that Joy will
charge a lessee a minimum royalty per ton of material mined of $3.77, subject to
adjustment for inflation and safety-related changes. The Company will receive
30% of the minimum royalty of $3.77 (as adjusted for inflation) and generally
50% of any part of such royalty payments in excess of $3.77 (as adjusted for
inflation). While Joy has not met the Company's anticipated results for leases
under the June
- 40 -
<PAGE>
1992 agreement, Joy has indicated to the Company that Joy's leases of highwall
mining machines will increase significantly during 1994.
Included in the Company's other revenues and income from operations in 1993
was $260,000 in origination fees received from Joy. These fees relate to the
two highwall miners leased by Joy to third parties during 1993. During 1993,
Joy paid no per ton royalty fees related to these two machines.
As a percentage of total revenues, cost of operations increased from 79%
for 1992 to 86% for 1993. This increase is primarily a result of higher costs
being incurred at the Company's mining operations due to adverse weather
conditions during the first part of the year and due to the asset write-offs
discussed above.
Depreciation and amortization increased from $25,111,000 in 1992 to
$29,939,000 in 1993. This 19% increase is primarily attributable to an increase
in depreciation and amortization of landfill property and equipment.
Selling, general and administrative expenses during 1993 totalled
$22,303,000 and remained relatively unchanged compared to $21,274,000 for 1992.
Interest expense increased from $13,483,000 during 1992 to $16,577,000
during 1993. The 23% increase is primarily due to the decline in the amount of
interest capitalized in 1993. The amount of interest capitalized for 1993 was
$2,111,000 compared to interest capitalized of $4,806,000 for 1992. The
capitalized interest is related primarily to the Company's environmental
operations. The decrease in capitalized interest occurred because the Company
ceases to capitalize interest after a landfill becomes operational.
Interest income decreased from $791,000 during 1992 compared to $649,000
during 1993. This 18% decrease is due to a decrease in the average amount of
short-term investments outstanding coupled with a decrease in the interest rate
yields on short-term investments.
Gain on the sale of assets decreased from $4,285,000 for 1992 to $630,000
for 1993. This decrease is primarily due to a $4,626,000 pre-tax gain
recognized from the sale of certain West Virginia coal reserves and land in 1992
which were not included in the Company's current mining plans.
The Company's effective tax rate decreased from a 32% provision in 1992 to
a 25% benefit in 1993. This decrease in the effective tax rate is primarily a
result of several factors, including percentage depletion, state income taxes
and the allowance on utilization of minimum tax credits.
- 41 -
<PAGE>
The Company's cash and cash equivalents totalled $13,744,000 at
December 31, 1993, compared to $32,955,000 at December 31, 1992. This 58%
decrease is primarily due to the timing of the receipt of payments on
receivables, as well as funding capital additions.
Accounts receivable at December 31, 1993 totalled $8,946,000, compared to
the balance of $33,523,000 at December 31, 1992. This decrease is primarily due
to including the accounts receivable related to the coal subsidiaries sold to
Pittston in the net assets held for disposal as of December 31, 1993.
Inventories decreased from $28,060,000 at December 31, 1992, compared to
$11,803,000 at December 31, 1993 primarily due to including the inventory
related to the coal subsidiaries sold in the net assets held for disposal as of
December 31, 1993.
Prepaid expenses and other at December 31, 1993 totalled $7,718,000
compared to the balance of $6,538,000 at December 31, 1992. This increase is
primarily due to deferred selling costs of approximately $1,100,000 related to
the sale of coal subsidiaries to Pittston on January 14, 1994.
Property, plant and equipment decreased to $139,055,000 at December 31,
1993 compared to $212,585,000 at December 31, 1992. This 35% decrease is
primarily due to including property, plant and equipment related to the
subsidiaries sold to Pittston in the net assets held for disposal to Pittston as
of December 31, 1993. However, the Company had property additions during 1993
of approximately $49 million. These additions are primarily: 1) coal related
acquisitions as described in Note 18 to the audited Consolidated Financial
Statements and 2) landfill and other environmental related development costs.
The net balance of coal sales contracts and contract mining agreements
decreased from $33,041,000 at December 31, 1992 compared to zero at December 31,
1993. This decrease is due to including the coal sales contracts related to the
coal subsidiaries sold to Pittston in the net assets held for disposal as of
December 31, 1993.
Accounts payable at December 31, 1993 decreased to $5,609,000 as compared
to the December 31, 1992 balance of $21,865,000, primarily due to including the
payables related to the coal subsidiaries sold to Pittston in the net assets
held for disposal as of December 31, 1993.
Accrued expenses and other liabilities increased to $13,714,000 at December
31, 1993 as compared to $12,833,000 at December 31, 1992, primarily due to the
litigation reserve
- 42 -
<PAGE>
established at year end, as discussed above, offset by a decrease in reclamation
and closure costs.
The Company's line of credit balance at December 31, 1993 totalled
$23,442,000 compared to the December 31, 1992 balance of $22,535,000. This
increase is primarily due to the acquisition of certain coal reserves in West
Virginia. (See Note 18 to the audited Consolidated Financial Statements.) The
acquisition of these additional coal reserves was financed by drawing on this
line of credit.
The Company's long-term debt outstanding increased from $3,232,000 at
December 31, 1992 to $11,954,000 at December 31, 1993. This increase is
primarily due to the $10,000,000 borrowed against the environmental company's
line of credit during 1993.
The Company's other long-term liabilities increased from $1,331,000 at
December 31, 1992 to $2,705,000 at December 31, 1993. This increase is
primarily due to the normal increase in landfill closure and post-closure costs
accrued, as well as an increase in the accrual for workers' compensation,
including black lung benefits.
1992 Compared with 1991
- -----------------------
Net income during 1992 was $11,036,000 or $.72 per share, compared to net
loss of $9,686,000 or $.64 per share for 1991. Net income during 1992 was
affected by the following:
(1) The Company recognized a $10,544,000 pre-tax gain on the sale of coal
subsidiaries. (See Note 5 to the audited Consolidated Financial
Statements.)
(2) During 1992, the Company recognized $4,285,000 in pre-tax gains on the sale
of assets. The majority of this gain was recognized from the sale of
certain West Virginia coal reserves.
(3) During 1992, the Company reached a litigation settlement which reduced pre-
tax income by $5,100,000. (See Note 13 to the audited Consolidated
Financial Statements.)
(4) During 1992, the Company recognized an approximately $5,000,000 pre-tax
gain on the sale of highwall mining machines.
Net loss during 1991 was affected by the following:
(1) During 1991, the Company elected to adopt SFAS No. 109 "Accounting for
Income Taxes". The effect of adopting this new standard for accounting for
income taxes as of January 1, 1991 was to increase the Company's net loss
by
- 43 -
<PAGE>
$3,500,000. (See Note 1 to the audited Consolidated Financial Statements.)
(2) A significant increase in the cost of diesel fuel due to the Persian Gulf
crisis caused a major increase in the cost of operations at the Company's
mining operation during 1991.
(3) The high operating costs of three of the Company's mines located in western
Kentucky resulted in the Company's decision to close these three mines in
1991. The Company incurred a net loss of approximately $10,681,000 at its
western Kentucky operations during 1991, which includes a pre-tax charge to
expense of approximately $9,000,000 to write off its investment in its
western Kentucky mines and to reserve for future reclamation. See Note 7
to the audited Consolidated Financial Statements.
The Company's net mining revenues increased from $271,808,000 during 1991
to $292,225,000 during 1992. The Company's mining revenues increased primarily
due to the sales of five of its highwall mining machines. Three of these
highwall mining machines were sold to Pittston for aggregate revenues of
$12,427,000, while two were sold and leased back from a financing company for
aggregate revenues of $6,400,000. Under its licensing agreement with Joy
discussed above, the Company is generally prohibited from selling the highwall
mining machines to third parties in the future. Although the Company
experienced an increase in tons sold from 8,220,000 tons sold during 1991
compared to 8,815,000 tons sold during 1992, the average sales price per ton
decreased from $32.83 per ton for 1991 to $30.04 per ton for 1992. This 8.5%
decrease in the average sales price is primarily attributable to the March 1992
sale of a coal subsidiary, the assets of which consisted primarily of two long-
term coal sales contracts pursuant to which the Company sold during 1991 a total
of 957,703 tons of coal at an average per ton sales price of $41.69. (See Note
5 to the audited Consolidated Financial Statements.) In addition, while
approximately 90.2 percent of the Company's total coal sales in tons during 1992
were pursuant to contracts with a term of more than one year, see Item 1.
"Business -- Coal Mining Operations," the Company is also subject to general
conditions in the coal industry, currently including high coal inventories of
electric utilities, generally weak demand, and low exports. During 1992,
adverse conditions in the coal industry drove down spot coal prices, thus
decreasing revenues from the Company's spot market sales which accounted for
approximately 9.8 percent of the Company's total coal sales in tons in 1992.
General conditions in the coal industry also affect the Company's efforts to
negotiate new long-term contracts with utilities. For example, high inventory
levels at utilities and low spot coal prices decrease the incentive for an
electric utility to enter into a long-term coal sales contract.
- 44 -
<PAGE>
Environmental revenues and net income increased to $7,779,000 and $351,000,
respectively, during 1992 compared to environmental revenues of $1,868,000 and
net loss of $563,000 during 1993. The primary reasons for these substantial
increases are the Company's receipt of operating permits for certain contained
landfills in 1992 and the commencement of operations at these landfills; the
Company also increased its waste collection services in 1992 through
acquisitions of other waste hauling businesses.
Other revenue decreased to $1,470,000 during 1992 compared to $1,579,000
during 1991. This decrease is due to the Company's sale of its road
construction subsidiary during July 1991. During 1992, the Company recorded
licensing revenue from Joy of $1,470,000 resulting from the agreement between
the Company and Joy that provides Joy the right to manufacture and sell the
Company's highwall mining machines. (See Note 12 to the audited Consolidated
Financial Statements.)
As a percentage of total revenues, cost of operations decreased from 81%
during 1991 to 79% during 1992. This decrease is primarily due to the Company's
pre-tax charge to expense in 1991 of approximately $9,000,000 to write off its
investment in its western Kentucky mines and to reserve for future reclamation.
Depreciation and amortization decreased from $29,740,000 during 1991 to
$25,111,000 during 1992. This 16% decrease is primarily attributable to the
amortization of coal contracts no longer being included in depreciation and
amortization since the contracts were sold during March 1992. (See Note 5 to the
audited Consolidated Financial Statements.)
Selling, general and administrative expenses decreased from $23,410,000
during 1991 to $21,274,000 during 1992. This 9% decrease is primarily
attributable to certain selling expenses associated with Kanawha Land Company,
Inc. no longer being incurred since this subsidiary was sold during March 1992.
(See Note 5 to the audited Consolidated Financial Statements.)
Interest expense decreased from $14,446,000 during 1991 to $13,483,000
during 1992. The 7% decrease is primarily due to an overall decrease in
interest rates on bank debt tied to the prime interest rate and an overall
reduction in outstanding indebtedness. In addition, the Company continued to
capitalize interest associated with its investment in those projects still in
the development phase. The amount of interest capitalized for 1992 was
$4,806,000 compared to interest capitalized of $4,874,000 for 1991.
Interest income decreased from $2,365,000 during 1991 compared to $791,000
during 1992. This 67% decrease is due to a decrease in the interest rate yields
on short-term investments.
Gain on the sale of assets increased from $1,840,000 for 1991 to $4,285,000
for 1992. This increase is primarily due to a $4,626,000 pre-tax gain
recognized from the sale of certain West
- 45 -
<PAGE>
Virginia coal reserves and land which were not included in the Company's current
mining plans.
The Company's effective income tax rate decreased from a 40% benefit in
1991 to a 32% provision in 1992. This decrease in the effective tax rate is
primarily a result of several factors, including percentage depletion and state
income taxes.
Liquidity and Capital Resources
- -------------------------------
The working capital needs of the Company have been met primarily through a
combination of funds provided by banks and other institutions and cash generated
through operations.
As of December 31, 1993, the Company had approximately $16,558,000
remaining available under its lines of credit secured by certain accounts
receivable and coal inventory and substantially all of its environmental assets
bearing interest at rates ranging from prime to prime plus 1/2%.
There are certain environmental contingencies related to the Company's coal
operations and integrated solid waste disposal system operations, primarily land
reclamation obligations and landfill closure obligations, respectively. Under
current federal and state surface mining laws, the Company is required to
reclaim land where surface mining operations are conducted. Accruals for the
estimated cost of restoring the land are provided as mining takes place, based
upon engineering estimates of costs. The Company also estimates and records its
costs associated with closure and post-closure monitoring and maintenance for
operating landfills based upon relevant government regulations. Accruals for
these closure and post-closure costs are provided as permitted airspace of the
landfill is consumed. The Company revises its estimates on a periodic basis.
As of December 31, 1993, the Company had accrued expenses for reclamation and
closure costs of approximately $2,524,000. There is a possibility that such
obligations, when ultimately paid, may differ substantially from the recorded
accrued expenses thus affecting the Company's liquidity. See Note 1 and Note 11
to the audited Consolidated Financial Statements.
In 1990, the Company implemented a self-insurance program to cover most of
its employees for workers' compensation, including black lung benefits. Black
lung expense is being provided, based upon a recent actuarial study, over the
estimated remaining working lives of the miners using accounting methods similar
to that of a defined benefit pension plan. Benefits provided are subject to
federal and state law and, thus, are not under the control of the Company.
Workers' compensation (including black lung) expense for the year ended December
31, 1993 was approximately $3,755,000. There is a possibility that workers'
compensation (including black lung) obligations, when ultimately settled and
paid, may differ substantially from the recorded balance and thus affect the
- 46 -
<PAGE>
Company's liquidity. See Note 16 to the audited Consolidated Financial
Statements.
The Company believes that its present financial condition, considering the
funds available under the existing line of credit, the proceeds received from
the sale of certain coal subsidiaries (see Note 2 of the audited Consolidated
Financial Statements), and internal financial resources, provide adequate
capital reserves and liquidity.
The overall net increase (decrease) in cash and cash equivalents was
$(19,211,000), $30,650,000 and $(6,995,000) for 1993, 1992 and 1991,
respectively. Such net increase (decrease) reflects net cash provided by (used
in) operating, investing and financing activities.
Net cash provided by operating activities was $22,756,000, $17,147,000 and
$30,699,000 for 1993, 1992 and 1991, respectively. These fluctuations among
years primarily reflect changes in working capital terms whereby increases in
net working capital would cause a decline in net cash provided by operating
activities.
During 1993, the Company's working capital increased by $10,093,000, which
primarily consists of a $11,899,000 increase in accounts receivable, a
$6,358,000 increase in inventories and a $4,510,000 decrease in deferred income
taxes, net of a $10,706,000 increase in accrued expenses and other current
liabilities. During 1992, the Company's working capital increased by
$5,112,000, primarily due to a $6,584,000 increase in inventories. During 1991,
the Company's working capital decreased by $5,833,000, primarily due a
$5,087,000 decrease in inventories.
Net cash provided by (used in) investing activities was $(47,399,000),
$26,275,000 and $(37,172,000) for 1993, 1992 and 1991, respectively. The 1993
amount consists of property, plant and equipment purchases of $44,752,000,
mineral reserve additions of $6,493,000, and net of proceeds of $3,846,000
received from sale of property, plant and equipment. The major components of
the 1992 amount consist of net proceeds from sale of $39,355,000 primarily
received from the sale of Kanawha Land Company, Inc. (see Note 5 to the audited
Consolidated Financial Statements); net of property, plant and equipment
purchases of $38,182,000; the liquidation of $15,000,000 of short-term
investments; and net proceeds of $11,831,000 received from the sale of property,
plant and equipment. The major components of the 1991 amount consist of
property, plant and equipment purchases of $52,209,000, net of the liquidation
of $10,382,000 of short-term investments.
Net cash provided by (used in) financing activities was $5,432,000,
$(12,772,000) and $(522,000) for 1993, 1992 and 1991, respectively. The 1993
amount primarily represents proceeds of $4,312,000 from the issuance of common
stock and net borrowings of $1,648,000 on long-term debt and the revolving line
of credit. The
- 47 -
<PAGE>
1992 and 1991 amounts primarily represent net repayments of long-term debt and
the revolving line of credit.
Inflation has not had a significant effect on the Company's business
primarily because the United States economy has been experiencing a period of
relatively low inflation.
The Company's capital needs, earnings and cash flow are somewhat dependent
on events beyond the Company's control, such as weather patterns, the state of
the economy, and changes in existing governmental and environmental regulations.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
See accompanying Table of Contents to Consolidated Financial Statements and
Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and
----------------------------------------------------------------
Financial Disclosure.
--------------------
None.
- 48 -
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
The following information is furnished as of March 15, 1994, with respect
to the executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Larry Addington 58 President, Chief Executive Officer,
Director
Robert Addington 54 Vice President - Operations and
Engineering, Director
Bruce Addington 40 Vice President - Operations, Director
William R. Nelson 46 Vice President
R. Douglas Striebel 36 Vice President, Treasurer and Chief
Financial Officer
Jack C. Fisher 65 Director
Carl R. Whitehouse 71 Director
</TABLE>
All directors hold office until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the discretion of the Board of Directors. All officers spend
substantially full time working for the Company or its subsidiaries.
Larry Addington, Robert Addington and Bruce Addington have been
directors since the organization of the Company. Jack C. Fisher and Carl R.
Whitehouse were elected to the Board of Directors on October 21, 1987. Larry
Addington, Robert Addington and Bruce Addington are brothers.
Messrs. Addington have substantial experience in the operation of coal
mining ventures. Their first mining company, Addington Brothers Mining Company,
began mining coal in eastern Kentucky in 1972 and was sold to Ashland Oil, Inc.
in 1976. In 1978, Larry Addington formed Pyramid Mining, Inc. ("Pyramid"),
which mined coal in western Kentucky and was sold to First Mississippi
Corporation, a diversified energy company in 1981.
Larry Addington has been President of the Company since its
organization and was the founder of each of the corporate entities acquired by
the Company pursuant to the Company's 1987 reorganization.
Robert Addington has been Vice President of Operations and Engineering
of the Company since its organization. He served in a
- 49 -
<PAGE>
similar capacity for each of the corporate entities acquired by the Company
pursuant to the Company's 1987 reorganization.
Bruce Addington has functioned as Vice President of Operations of the
Company since its organization.
William R. Nelson has been Vice President of the Company directing its
environmental operations since August 1992. From November 1981 to July 1992, he
worked with the Chambers Development Company, Inc., most recently as its
Treasurer.
R. Douglas Striebel has served as Vice President and Chief Financial
Officer of the Company since 1988. From 1984 until joining the Company, Mr.
Striebel was an Audit Manager with Arthur Andersen & Co.
Jack C. Fisher served as Mayor of Owensboro, Kentucky from 1984 to
1987. He is currently retired. Before 1984, he served as Manager of Mail
Processing with the U.S. Postal Service in Owensboro. Mr. Fisher is a member
of the Company's Audit Committee.
Carl R. Whitehouse retired in December 1988 as the Chairman of the
Board of Citizens State Bank in Owensboro, Kentucky, where he had served as
President and Chief Executive Officer for over five years. Mr. Whitehouse is a
member of the Company's Audit Committee.
Compliance with Section 16(a) of The Exchange Act
- -------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
the Company's common stock, to file reports (including a year-end report) of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Company with copies of all reports filed.
Based solely on a review of the forms furnished to the Company, or
written representations from certain reporting persons, the Company believes
that all persons who were subject to Section 16(a) in 1993 complied with the
filing requirements.
Limitation on Liability of Directors
- ------------------------------------
Pursuant to the Company's Certificate of Incorporation, no director
shall be personally liable to the Company or its stockholders for monetary
damages for breach of his fiduciary duty as a director, except for a breach of
the director's duty of loyalty, for acts and omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, for
transactions from which a director derived an improper personal benefit or for
unlawful payment of dividends or stock purchases or redemptions pursuant to
Section 174 of the Delaware General Corporation Law. This provision offers
persons who serve on the Board of Directors of the Company protection against
awards of monetary damages for
- 50 -
<PAGE>
negligence in the performance of their duties. It does not affect the
availability of equitable remedies such as an injunction or rescission based
upon a director's breach of the duty of care.
In addition, the Company has entered into Indemnity Agreements with
its executive officers and directors which establish contractual rights for the
executive officers and directors to be indemnified by the Company to the
fullest extent permitted by law. See Item 13. Certain Relationships and Related
Transactions.
Item 11. Executive Compensation.
----------------------
The following table sets forth the aggregate cash compensation paid by
the Company for 1993, 1992 and 1991 to the five most highly compensated
executive officers of the Company whose salary and bonus compensation exceeded
$100,000 in 1993.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- -------------
Name and Principal All Other
Position Year Salary Bonus Compensation Options (#)
- ------------------ ---- --------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Larry Addington 1993 $274,134 $ - 0 - $-0- - 0 -
President, Chief Executive 1992 259,615 39,468 -0- - 0 -
Officer and Director 1991 250,000 - 0 - -0- - 0 -
Robert Addington 1993 $224,134 $ - 0 - $-0- - 0 -
Vice President - 1992 207,692 39,468 -0- - 0 -
Operations and 1991 200,000 - 0 - -0- - 0 -
Engineering, Director
Bruce Addington 1993 $173,442 $ - 0 - $-0- - 0 -
Vice President - 1992 135,000 39,468 -0- - 0 -
Operations, Director 1991 130,000 - 0 - -0- - 0 -
William R. Nelson/(1)/ 1993 $201,000 $ - 0 - $995(2) - 0 -
Vice President 1992 $ 77,123 $ - 0 - 735(2) - 0 -
1991 - 0 - - 0 - -0- - 0 -
Michael J. Quillen/(3)/ 1993 $201,000 $100,000 $-0- - 0 -
Vice President 1992 95,406 - 0 - -0- 40,000
1991 - 0 - - 0 - -0- - 0 -
- ---------------
</TABLE>
/(1)/ Employment began August 1, 1982.
/(2)/ Represents the premium on term life insurance with a $500,000 death
benefit.
/(3)/ Employment began July 1, 1992; Mr. Quillen resigned effective
January 14, 1994.
The Company has entered into an employment agreement with William R.
Nelson. Pursuant to the employment agreement, the Company will employ Mr.
Nelson as the President and Chief Executive Officer of its subsidiary, Addington
Environmental, Inc. ("Addington Environmental"). Mr. Nelson will be paid an
annual
- 51 -
<PAGE>
salary of $200,000, with a possible bonus pursuant to a plan to be agreed upon
by the parties. The employment agreement provides a three-year term ending on
July 31, 1995. If Mr. Nelson becomes disabled during the term of the employment
agreement, he will be entitled to his full salary during the 12 months following
the onset of such disability. Mr. Nelson's employment pursuant to the agreement
will terminate upon the occurrence of certain events, including death, mutual
agreement, termination for Cause, as defined, a material breach by Mr. Nelson of
his obligations, or the expiration of the three-year term. If a Change of
Control (as defined) occurs, Mr. Nelson will be entitled to certain severance
benefits upon a termination of his employment within three years after the
Change of Control, unless his termination is due to death or retirement, for
Cause, as defined, or by Mr. Nelson other than for Good Reason, as defined. If
Mr. Nelson is entitled to receive severance benefits, the Company will pay him
on the 30th day following his termination an amount equal to any accrued but
unpaid balance of his salary and prorated bonus, plus an amount equal to his
salary at the rate then in effect for a period of three years minus a period
equal to the time elapsed between the date upon which a Change of Control occurs
and his date of termination. Upon the termination of his employment under the
agreement for any reason, Mr. Nelson is subject to certain restrictive covenants
set forth in the agreement for a period of three years from the termination.
The Company will provide Mr. Nelson the use of an automobile, limited country
club dues, and a term life insurance policy with a death benefit of $500,000.
The agreement also provided that the Company would incur certain costs in
connection with Mr. Nelson's move to Kentucky, including the purchase of his
Pennsylvania home. The employment agreement also provides that upon the
satisfaction of certain conditions, the Company will grant Mr. Nelson either
options to purchase shares of common stock in the entity holding the material
portion of the waste management businesses owned by the Company, or options to
acquire shares of the Company. No such options have yet been granted.
Each of Messrs. Addington and the Company's Chief Financial Officer are
entitled to receive bonuses if the Company achieves certain target performance
levels in sales, operating profits and mining productivity as established
annually by the Audit Committee. For the twelve months ended December 31, 1993,
the target for annual sales was between 5,000,000 tons and 6,500,000 tons and
the target for pre-tax net profit was between $10,000,000 and $22,000,000.
Bonuses are paid if the return on stockholders' equity for the twelve months
ended December 31, 1993 is at least 12.5%, with the amount of the bonus to be
based upon the target performance levels and the return on stockholders' equity
achieved. Pursuant to the incentive provision, if the return on stockholders'
equity were 12.5%, the minimum bonus to be paid would be $3,432 to each
participant; if the maximum target performance levels were achieved and the
return on stockholders' equity were 20% or more, the maximum bonus of $120,120
would be paid to each participant. Pursuant to this management incentive
program, no bonuses were paid for 1993.
- 52 -
<PAGE>
Compensation of Directors
- -------------------------
Directors of the Company who are also officers of the Company receive no
compensation for their services as directors. During 1993, the Company's
standard directors fees for non-management directors were a base salary of
$10,000 per year for services as directors, with an additional $1,000 per Board
meeting actually attended, and $500 for each committee meeting actually attended
which was not held in conjunction with a meeting of the Board of Directors.
Stock Option Plan
- -----------------
During 1988, the Company adopted, with stockholder approval, the Restated
Stock Option Plan (the "Option Plan"). The purposes of the Option Plan are to
encourage certain officers, employees, and independent contractors to use their
best efforts for the Company's success and to provide a valuable means of
retaining key personnel as well as attracting new personnel when needed for
future operations and growth.
Pursuant to the Option Plan, the Company has reserved for issuance
1,500,000 shares of Common Stock for which options may be granted by the Option
Committee of the Board of Directors (currently consisting of Messrs. Addington)
to officers, employees and independent contractors of the Company and its
subsidiaries in amounts and upon terms and conditions to be determined from time
to time by the Option Committee. Messrs. Addington are not eligible to receive
options pursuant to the Option Plan. During 1993, no options were granted to,
or exercised by, any of the executive officers named in the Summary Compensation
Table above.
- 53 -
<PAGE>
Aggregated 1993
Year-End Option Value
---------------------
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-Money
Options at Year End (#) Options at Year End ($)(1)
----------------------- ---------------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
----- ------------- -------------
<S> <C> <C>
Larry Addington N/A N/A
Robert Addington N/A N/A
Bruce Addington N/A N/A
William R. Nelson - 0 -/- 0 - $0.00/$0.00
Michael J. Quillen - 0 -/40,000 $0.00/$375,000
- -------------------
</TABLE>
(1) Based on December 31, 1993 price per share of $19.00.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
Except as otherwise noted in the footnote following the table, the
following table sets forth certain information concerning ownership of the
Common Stock as of March 15, 1994, by each director, each executive officer
named in Item 11, each person or entity who is known to the Company to be the
beneficial owner of more than 5% of the Common Stock and all directors and
executive officers of the Company as a group. Except as otherwise noted in the
footnote following the table, each beneficial owner listed below has sole voting
and dispositive power with respect to the shares listed next to his name.
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Percentage
of Beneficial Owner Owned of Class
- ------------------- ------------ ----------
<S> <C> <C>
Howard P. Berkowitz
HPB Associates, L.P.
888 Seventh Avenue
New York, New York 10106 1,103,785(1) 7.0%
Larry Addington
1500 North Big Run Road
Ashland, KY 41102 4,113,324 26.2%
Robert Addington
1500 North Big Run Road
Ashland, KY 41102 1,520,000 9.7%
Bruce Addington
1500 North Big Run Road
Ashland, KY 41102 1,578,006 10.0%
</TABLE>
- 54 -
<PAGE>
<TABLE>
<S> <C> <C>
William R. Nelson 500 *
Michael J. Quillen - 0 - *
Jack C. Fisher 2,500 *
Carl R. Whitehouse 3,100(2) *
All directors and executive
officers as a group
(9 persons) 7,217,430 46.0%
</TABLE>
_______________
*Represents less than 1% of outstanding shares.
(1) Mr. Berkowitz, as managing partner of HPB Associates, L.P., has sole
voting and dispositive powers with respect to the shares owned by the
partnership. Information on the partnership's beneficial ownership is
according to a Schedule 13D dated January 20, 1992.
(2) Includes 1,100 shares owned by Mr. Whitehouse's wife; Mr. Whitehouse
has no voting or dispositive powers with respect to these 1,100
shares.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
In situations where there will be an ongoing relationship with related
parties for the purchase of services or products, it is the Company's policy
that a majority of the independent and disinterested directors will be required
to approve continuation or initiation of the relationship and will periodically
review such transactions to assure that they meet the aforementioned standard.
TASK Trucking Company ("TASK") provides trucking services to the Company
and is owned by a brother-in-law of Messrs. Addington. During 1993, the
Company's expense was $19,186,000 for trucking services provided through TASK.
The Company believes that the price charged for such trucking services was not
greater than the prices generally charged by non-affiliated entities in the
area.
Larry Addington owns a 50% interest in an office building in Owensboro,
Kentucky in which the Company leases approximately 7,300 square feet of office
space for a rent of $110,015 during 1993 plus utilities. The lease is for a
term of five years, expiring in 1996. The annual rental beginning in 1994 will
be $117,350 plus utilities. The Company believes that the rental paid is not
greater than that charged by non-affiliated entities in the area for similar
facilities and is comparable to the rate charged to other tenants in the
building, none of whom are related to the Company or Messrs. Addington.
On February 23, 1993, the U.S. District Court for the District of Montana
entered a judgment in a suit by Bill Robinson, Sr.
- 55 -
<PAGE>
stating that the defendants Larry Addington, Larry Harrington, Addwest Gold,
Inc., Addington Resources, Inc., Addington Holding Company, and Addwest Mining,
Inc. are jointly and severally liable to Mr. Robinson for compensatory damages
in the amount of $850,000 and that Mr. Robinson is entitled to punitive damages
in the amount of $1,000 from Larry Harrington, $6,000,000 from Larry Addington,
and $4,500,000 jointly and severally from defendants Addwest Gold, Inc.,
Addington Resources, Inc., Addington Holding Company, and Addwest Mining, Inc.
A settlement has been reached in which Mr. Robinson will release all parties
from all claims. As a result of the settlement, the Company expects to pay Mr.
Robinson $3,450,000 by April 15, 1994. The parties are currently in the process
of drafting appropriate settlement documentation. Pursuant to indemnification
agreements, including an agreement with Larry Addington discussed below, the
Company is obligated for the full amount of the settlement, none of which will
be covered by insurance. See Item 3. Legal Proceedings and Note 13 to the
audited Consolidated Financial Statements.
With respect to claims against Larry Addington, although the jury
specifically rejected a claim by Mr. Robinson that Mr. Addington had committed
fraud upon him, the court found that there was sufficient evidence to sustain
the finding of liability upon the plaintiff's claim for negligent
misrepresentation and the imposition of punitive damages against Larry
Addington. The court stated that there was sufficient evidence to support a
finding that the alleged negligent misrepresentations made by Larry Addington to
the plaintiff were accomplished with actual malicious intent within the meaning
of the Montana statute relating to claims for punitive damages.
Upon a determination by the Board of Directors (Larry Addington abstaining)
that Larry Addington did at all times relevant to the litigation act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company, the Company would be obligated to indemnify
Mr. Addington against the amount of any final judgment entered against him and
any and all expenses incurred by him in connection with the litigation. Because
the interests of all the defendants were coincident, no marginal expenses were
incurred by Mr. Addington during the trial phase of the litigation. However,
Mr. Addington did engage separate counsel on appeal. This indemnification is
pursuant to an indemnity agreement entered into with Mr. Addington in August
1988, the form of which was previously approved by the Company's stockholders.
The indemnification is also in accordance to Section 145 of the General
Corporation Law of the State of Delaware and the Company's Certificate of
Incorporation and Bylaws. The Board of Directors, in meetings held on December
18, 1992 and March 29, 1993, at which times it received reports from counsel on
the litigation, determined to indemnify Mr. Addington for past and future
expenses as well as the trial court judgment.
- 56 -
<PAGE>
Larry Addington had guaranteed the Company's obligations in connection with
the assignment of a coal sales contract subsequently transferred in the Pittston
Transaction.
On September 4, 1992, in accordance with the terms of an employment
agreement, the Company purchased the Pennsylvania home of William R. Nelson, a
Vice President of the Company, for a purchase price of $325,000. The Company
sold the home on September 16, 1993. The Company incurred aggregate expenses on
the purchase and disposition of Mr. Nelson's home, including a loss on the sale
of the home and carrying and disposition costs, of approximately $135,000.
- 57 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
-----------------------------------------------------------------
(a) (1) List of Financial Statements Filed. See accompanying Index to
Consolidated Financial Statements and Schedules.
(a) (2) List of Financial Statement Schedules Filed. See accompanying
Index to Consolidated Financial Statements and Schedules.
(a) (3) List of Exhibits Filed.
(3) (A)/1/ Restated Certificate of Incorporation of Registrant
(B)/1/ Bylaws of Registrant
(10)(A)/2/ Deed dated June 18, 1985 by and between Martiki Coal Corporation
and ARMM Coal, Inc.
(B)/2/ Deed of Conveyance dated June 7, 1984 by and between Franklin
Real Estate Company and ARMM Land Co., Inc.
(C)/2/ Contract Mining Agreement and Related Agreements dated June 10,
1986 among Addington, Inc., CJC Leasing, Inc., N.O.R. Mining,
Inc., Adams Resources & Energy, Inc., and Third National Bank
(D)/3/ Form of Lease Agreement among Larry Addington and Larry K.
Harrington and Addwest Mining, Inc.
(E)/4/ Employment Agreement between R. Douglas Striebel and the
Registrant, as amended
(F)/5/ Agreement dated as of April 18, 1990, between Indiana-Kentucky
Electric Corporation and Addwest Mining Company, Inc.
(G) Addington Resources, Inc. Restated Stock Option Plan, as amended.
(H) Form of Indemnity Agreement between the Registrant and its
directors and officers
(I) Employment Agreement dated as of July 14, 1992, between Addington
Environmental, Inc. and William R. Nelson.
(11) Statement re computation of per share earnings. See page F-33
of the audited Consolidated Financial
- 58 -
<PAGE>
Statements and Schedules filed as part of this report.
(21) List of subsidiaries of Registrant
(23) Consent of Arthur Andersen & Co.
(99)(A)/2/ Coal Purchase and Sales Agreement dated September 1, 1984 by and
between Fossil Fuels, Inc., Delta Energy Corporation and
Consumers Power Company
(99)(B)/2/ Amended and Restated Contract for Purchase and Sale of Coal dated
June 27, 1986 by and between Tennessee Valley Authority and
Addington, Inc. [Contract No. 86P-65-T4] (See Exhibit (99)(D)
and Exhibit (99)(G) pertaining to amendments to Contract No.
86P-65-T4)
(99)(C)/2/ Contract for Purchase and Sale of Coal dated September 12, 1986
by and between Tennessee Valley Authority and Addwest Mining,
Inc. [Contract No. 86P-16-T1] (See Exhibit (99)(E) and Exhibit
99(H) pertaining to amendments to Contract No. 86P-16-T1)
(99)(D)/6/ Supplemental Agreement to Contract 86P-65-T4 for Purchase and
Sale of Coal dated May 1989, by and between Tennessee Valley
Authority and Addington, Inc.
(99)(E)/6/ Supplemental Agreement to Contract 86P-16-T1 for Purchase and
Sale of Coal dated February 1, 1989 by and between Tennessee
Valley Authority and Addwest Mining, Inc.
(99)(F)/6/ Transfer Agreement dated as of April 3, 1989, by and among
Addwest Mining, Inc. and Addington, Inc. and the Tennessee
Valley Authority
(99)(G)/7/ Supplemental Agreement dated October 23, 1990, to Contract
86P-16-T4 by and between Addington, Inc. and Tennessee Valley
Authority.
(99)(H)/3/ Supplemental Agreements to Contract 86P-16-T1 for Purchase and
Sale of Coal dated May 11, 1989 and October 30, 1991 by and
between Tennessee Valley Authority and Addwest Mining, Inc.
____________________
/1/ Incorporated by reference to the Registration Statement on
Form S-1 [File No. 33-22164]
- 59 -
<PAGE>
/2/ Incorporated by reference to the Registration Statement on
Form S-1 [File No. 33-11918]
/3/ Incorporated by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991
[File No. 0-16498].
/4/ Incorporated by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989
[File No. 0-16498].
/5/ Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1990 [File No. 0-16498].
/6/ Incorporated by reference to the Registration Statement on
Form S-1 [File No. 33-29848]
/7/ Incorporated by reference to the Registrant's Annual Report
Form 10-K for the fiscal year ended December 31, 1990 [File
No. 0-16498].
(b) Reports on Form 8-K.
-------------------
During the quarter ended December 31, 1993, the Company filed no Current
Reports on Form 8-K.
(c) Exhibits.
--------
The exhibits listed in response to Item 14(a)(3) are filed as a part of
this report.
(d) Financial Statement Schedules.
-----------------------------
The financial statement schedules listed in response to Item 14(a)(2) are
filed as part of this report.
- 60 -
<PAGE>
ADDINGTON RESOURCES, INC.
TABLE OF CONTENTS TO
CONSOLIDATED FINANCIAL STATEMENTS & SCHEDULES
<TABLE>
<CAPTION>
Page(s)
---------------
<S> <C>
Report of Independent Public Accountants F-2, F-34
Consolidated Balance Sheets as of December 31, 1992
and 1993 F-3 to F-4
Consolidated Statements of Operations for the years
ended December 31, 1991, 1992 and 1993 F-5 to F-6
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1991,
1992 and 1993 F-7
Consolidated Statements of Cash Flows for the years
ended December 31, 1991, 1992 and 1993 F-8 to F-9
Notes to Consolidated Financial Statements F-10 to F-32
Exhibit 11 - Calculation of Net Income (Loss) Per Share F-33
Schedules to Consolidated Financial Statements F-35 to F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Addington Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Addington
Resources, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1992 and 1993, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Addington Resources, Inc. and
subsidiaries as of December 31, 1992 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
As explained in Note 1(g) to the financial statements, effective January 1,
1991, the Company changed its method of accounting for income taxes.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
March 23, 1994
Louisville, Kentucky
F-2
<PAGE>
ADDINGTON RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
As of December 31,
------------------------------
1992 1993
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 32,955,151 $ 13,744,002
Net assets held for disposal - 141,865,803
Accounts receivable 33,522,592 8,945,515
Inventories 28,059,543 11,803,046
Prepaid expenses and other 6,537,615 7,717,738
------------ ------------
Total current assets 101,074,901 184,076,104
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost 212,584,934 139,054,751
Less - Accumulated depreciation (47,941,208) (22,664,255)
------------ ------------
164,643,726 116,390,496
------------ ------------
MINERAL RESERVES, at cost 18,263,285 1,703,623
Less - Accumulated amortization (1,441,651) (18,489)
------------ ------------
16,821,634 1,685,134
------------ ------------
COAL SALES CONTRACTS AND CONTRACT MINING AGREEMENT
(net of accumulated amortization of $64,255,888 at
December 31, 1992) 33,041,146 -
OTHER 23,442,308 13,506,692
------------ ------------
Total assets $339,023,715 $315,658,426
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
ADDINGTON RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1992 1993
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 21,864,804 $ 5,609,230
Revolving line of credit 22,534,929 23,441,737
Current portion of long-term debt 3,836,223 126,228,033
Accrued expenses and other 12,833,032 13,714,495
Current portion of deferred income taxes 3,431,000 3,666,000
------------ ------------
Total current liabilities 64,499,988 172,659,495
------------ ------------
NON-CURRENT LIABILITIES:
Long-term debt, less current portion 128,231,537 11,954,354
Other long-term liabilities 1,330,595 2,705,213
Deferred income taxes 8,150,765 3,406,184
------------ ------------
Total non-current liabilities 137,712,897 18,065,751
------------ ------------
COMMITMENTS AND CONTINGENCIES - See Note
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 30,000,000 shares authorized,
15,241,378 shares and 15,675,378 shares outstanding at
December 31, 1992 and 1993, respectively 15,241,378 15,675,378
Paid-in capital 77,667,148 81,544,648
Retained earnings 43,902,304 27,713,154
------------ ------------
Total stockholders' equity 136,810,830 124,933,180
------------ ------------
Total liabilities and stockholders' equity $339,023,715 $315,658,426
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
<PAGE>
ADDINGTON RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Mining $271,808,300 $292,225,151 $358,956,872
Environmental 1,867,457 7,779,298 24,928,807
Other 1,579,095 1,470,000 260,847
------------ ------------ ------------
275,254,852 301,474,449 384,146,526
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of operations (including trucking services and
office rent to related parties of approximately
$11,762,000, $17,618,000 and $19,296,000 for 1991,
1992 and 1993, respectively) 222,725,658 236,854,459 328,457,377
Depreciation and amortization 29,739,663 25,110,814 29,938,714
Selling, general and administrative 23,409,515 21,274,158 22,302,763
------------ ------------ ------------
275,874,836 283,239,431 380,698,854
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (619,984) 18,235,018 3,447,672
------------ ------------ ------------
INTEREST AND OTHER INCOME (EXPENSE):
Interest expense (14,446,072) (13,483,321) (16,577,434)
Interest income 2,365,495 791,306 648,643
Gain on sale of assets 1,839,908 4,284,831 630,121
Gain on sale of subsidiaries 500,000 10,544,202 -
Litigation settlement - (5,100,000) (4,050,000)
Other, net 35,157 1,052,392 (5,705,152)
------------ ------------ ------------
(9,705,512) (1,910,590) (25,053,822)
------------ ------------ ------------
Income (loss) before income tax provisions
(benefits) and cumulative effect of a change
in accounting principle (10,325,496) 16,324,428 (21,606,150)
------------ ------------ ------------
INCOME TAX PROVISIONS (BENEFITS) (4,139,000) 5,288,000 (5,417,000)
------------ ------------ ------------
Income (loss) before cumulative effect of a change
in accounting principle (6,186,496) 11,036,428 (16,189,150)
Cumulative effect of a change in accounting for
income taxes (3,500,000) - -
------------ ------------ ------------
Net income (loss) $ (9,686,496) $ 11,036,428 $(16,189,150)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
ADDINGTON RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME (LOSS) PER SHARE:
Income (loss) per share before cumulative effect
of a change in accounting principle $ (.41) $ .72 $ (1.04)
Cumulative effect per share of a change in accounting
for income taxes (.23) - -
----------- ----------- -----------
Net income (loss) per share $ (.64) $ .72 $ (1.04)
=========== =========== ===========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,232,068 15,240,382 15,562,907
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
ADDINGTON RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-----------------------------------
Shares
---------------------- Paid-In Retained
Authorized Issued Amount Capital Earnings Total
---------- ---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 30,000,000 15,222,178 $15,222,178 $77,499,148 $ 42,552,372 $135,273,698
Issuance of common stock upon exercise of
stock options - 10,000 10,000 87,500 - 97,500
Net loss - - - - (9,686,496) (9,686,496)
---------- ---------- ----------- ----------- ------------ ------------
Balance, December 31, 1991 30,000,000 15,232,178 15,232,178 77,586,648 32,865,876 125,684,702
Issuance of common stock upon exercise of
stock options - 9,200 9,200 80,500 - 89,700
Net income - - - - 11,036,428 11,036,428
---------- ---------- ----------- ----------- ------------ ------------
Balance, December 31, 1992 30,000,000 15,241,378 $15,241,378 $77,667,148 $ 43,902,304 $136,810,830
Issuance of common stock upon exercise of
stock options - 434,000 434,000 3,877,500 - 4,311,500
Net loss - - - - (16,189,150) (16,189,150)
---------- ---------- ----------- ----------- ------------ ------------
Balance, December 31, 1993 30,000,000 15,675,378 $15,675,378 $81,544,648 $ 27,713,154 $124,933,180
========== ========== =========== =========== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE>
ADDINGTON RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 1)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,686,496) $ 11,036,428 $(16,189,150)
------------ ------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization, including
amortization of financing costs 29,739,663 26,051,833 30,557,962
Gain on sale of assets (1,839,908) (4,284,831) (630,121)
Asset writedowns 7,152,936 - 19,110,686
Gain on sale of subsidiaries (500,000) (10,544,202) -
Change in assets and liabilities, net of effects
from acquisitions and disposals-
(Increase) decrease in-
Cash held for disposal - - (103,126)
Accounts receivable (2,739,388) 744,983 (11,898,541)
Inventories 5,087,480 (6,583,512) (6,357,956)
Prepaid expenses and other (151,255) (1,393,054) (5,271,392)
Other assets (60,102) (2,635,707) 560,594
Increase (decrease) in-
Accounts payable (44,712) 1,089,965 5,405,737
Accrued expenses and other 2,025,716 (737,645) 10,706,388
Deferred income taxes 1,715,297 3,072,069 (4,509,581)
Other liabilities - 1,330,595 1,374,618
------------ ------------ ------------
Total adjustments 40,385,727 6,110,494 38,945,268
------------ ------------ ------------
Net cash provided by operating activities 30,699,231 17,146,922 22,756,118
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net of disposition costs 2,914,040 11,830,975 3,845,503
Proceeds from sale of subsidiaries, net of disposition costs 1,445,703 39,354,551 -
(Increase) decrease in-
Other assets 2,160,429 137,191 -
Short-term investments 10,381,683 15,000,000 -
Mineral reserves (977,423) (707,243) (6,493,441)
Additions to property, plant and equipment (52,209,427) (38,182,017) (44,751,505)
Acquisition of coal sales contracts (67,828) - -
Acquisition of environmental companies, net of cash acquired (818,879) (1,158,051) -
------------ ------------ ------------
Net cash provided by (used in) investing activities $(37,171,702) $ 26,275,406 $(47,399,443)
------------ ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-8
<PAGE>
ADDINGTON RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 1)
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt $ 343,150 $ 2,896,276 $ 10,388,384
Issuance of common stock 97,500 89,700 4,311,500
Repayments of long-term debt (12,535,880) (17,227,914) (7,146,860)
Financing costs incurred (515,247) (15,150) (527,656)
Borrowings (repayments) on revolving line of credit 12,088,381 1,484,608 (1,593,192)
------------ ------------ ------------
Net cash provided by (used in) financing activities (522,096) (12,772,480) 5,432,176
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (6,994,567) 30,649,848 (19,211,149)
CASH AND CASH EQUIVALENTS, beginning of year 9,299,870 2,305,303 32,955,151
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,305,303 $ 32,955,151 $ 13,744,002
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-9
<PAGE>
ADDINGTON RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
a. Financial Statement Presentation and Organization-
-------------------------------------------------
The accompanying consolidated financial statements as of December 31, 1991,
1992 and 1993 include the accounts of Addington Resources, Inc. (the
Company) and its wholly-owned subsidiary, Addington Holding Company, Inc.
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Certain 1991 and 1992 amounts have
been reclassified to conform to 1993 presentation with no effect on net
income (loss).
b. Company Environment-
-------------------
The mining and environmental industries expose the Company to a number of
issues including: the possibility of the termination of sales contracts,
fluctuating market conditions, changing governmental regulations,
unfavorable mining conditions, loss of key employees and the ability of the
Company to control adequate recoverable mineral reserves and obtain the
necessary permits for its landfills.
Most of the Company's revenues have been generated under long-term coal
sales contracts with electric utilities located 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.
Revenues are recognized on environmental sales as services are provided or
waste is received in the landfill. The Company grants credit to its
customers based on their creditworthiness and generally does not secure
collateral for its receivables.
c. Inventories-
-----------
Inventories are stated at average cost, which approximates first-in, first-
out (FIFO) cost, and does not exceed market.
d. Depreciation and Amortization-
-----------------------------
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided using either the straight-line or units produced
or consumed methods. The following estimated useful lives are used under
the straight-line method:
F-10
<PAGE>
Years
-----
Mining and other equipment and
related facilities 5 to 40
Environmental equipment and
related facilities 5 to 40
Transportation equipment 3 to 10
Barge loading facilities 5 to 25
Mine development costs 3 to 15
Furniture and fixtures 3 to 10
Capitalized environmental development costs include landfill related
expenditures for land, permitting and preparation costs. Such
landfill costs represent costs related to starting up the operation,
developing the entire site and constructing the individual cells.
Landfill costs are amortized as the relevant permitted airspace is
consumed.
Mineral reserves are amortized using the units-of-production method,
based on estimated recoverable reserves.
Financing costs (included in Other Assets) are being amortized using
the straight-line method, over the life of the related debt, which
approximates the interest method.
Intangible assets primarily consist of customer lists and covenants
not to compete. These assets are amortized over their estimated
useful lives, usually no longer than five years, using the straight-
line method.
The amounts assigned to coal sales contracts are amortized to expense
based on tons shipped to the customer.
e. Advance Royalty Payments (included in Other Assets)-
---------------------------------------------------
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 them once
mining activities begin or expenses them when the Company has ceased
mining or has made a decision not to mine on such property.
f. Restricted Cash (included in Other Assets)-
------------------------------------------
The Company is mining reserves whose ownership is currently being
disputed. Royalty payments related to these reserves are being
deposited by the Company into an escrow account and will be paid as
the disputes are settled.
The Company also pays amounts into escrow as required under state
regulations related to closure and post-closure costs of its
landfills.
F-11
<PAGE>
As of December 31, 1992 and 1993, total restricted cash was $2,221,000 and
$2,348,000, respectively.
g. Accounting Change-
-----------------
Effective January 1, 1991, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, the standard for accounting for income
taxes issued by the Financial Accounting Standards Board. The cumulative
effect of this accounting change at December 31, 1990 was recorded
effective January 1, 1991 and increased net loss by $3,500,000 ($.23 per
share).
h. Net Income (Loss) Per Share-
---------------------------
Net income (loss) per share is based on the weighted average number of
common shares and common equivalent shares outstanding, as applicable,
during the periods.
i. 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
purchase to be cash equivalents.
The cash amounts of interest and income taxes paid by the Company in 1991,
1992 and 1993 are as follows:
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest, net of amounts
capitalized of $4,874,000,
$4,806,000 and
$2,111,000 $14,713,000 $13,556,000 $16,434,000
Income taxes 446,000 3,274,000 2,281,000
</TABLE>
For 1993, the statement of cash flows excludes the impact of the
reclassification of net assets held for disposal, as such reclassification
is non-cash in nature.
During 1991, 1992 and 1993, the Company acquired certain assets, primarily
property, plant and equipment and mineral reserves, by assuming
liabilities, primarily notes and other payables, and making cash payments.
The non-cash portions of approximately $1,005,000, $1,131,000 and
$14,788,000 for the years ended December 31, 1991, 1992 and 1993,
respectively, have been excluded from the statements of cash flows.
During 1992, the Company also disposed of certain assets, primarily
property, plant and equipment and mineral reserves, by accepting a note
receivable. The non-cash portion of $10,399,000 has been excluded from the
1992 statement of cash flows.
F-12
<PAGE>
j. Reclamation and Closure Cost-
----------------------------
Under current Federal and state surface mine laws, the Company is
required to reclaim land where surface mining operations are conducted.
Accruals for the estimated cost of restoring the land are provided as
mining takes place, based upon engineering estimates of costs.
The Company also estimates and records its costs associated with
closure and post-closure monitoring and maintenance for operating
landfills based upon relevant government regulations. Accruals for
these closure and post-closure costs are provided as permitted
airspace of the landfill is consumed. The Company revises its
estimates on a periodic basis.
k. Income Taxes-
------------
The provision (benefit) for income taxes is based on income for
financial statement purposes. Deferred income taxes, which arise from
temporary differences between the period in which certain income and
expenses are recognized for financial reporting purposes and the period
in which they affect taxable income, are included in the amounts
provided for income taxes.
2. Sale of Certain Coal Subsidiaries
---------------------------------
During September, 1993, the Company entered into an agreement to sell the
stock of five of its coal subsidiaries to Pittston Minerals Group, Inc.
("Pittston") for $157 million cash. Before closing, certain property, plant
and equipment (the net book value of which was approximately $43 million as
of December 31, 1993) was transferred to other subsidiaries of the Company
from the subsidiaries to be sold. In addition, the Company retained all of
the net working capital (the net value of which was approximately $30
million as of December 31, 1993) of the sold subsidiaries as of the date of
closing. In connection with the sale, the Company has provided certain
guarantees to Pittston.
This transaction was completed on January 14, 1994.
The subsidiaries sold to Pittston include: Addington, Inc. and its
wholly-owned subsidiary, Ironton Coal Company; Appalachian Mining, Inc.;
Appalachian Land Company; Vandalia Resources, Inc.; and Kanawha Development
Corporation. The operations of these subsidiaries are located in Ohio, West
Virginia and Kentucky.
Other terms of the transaction include the Company entering into a coal
supply contract with Pittston for the sale of 4,920,000 tons over 3-1/2
years at a base price of $26 per ton. Additionally, the Company will
receive a $1 per ton production royalty for coal produced from certain West
Virginia properties being sold to Pittston with a minimum royalty of
$100,000 per month, a maximum aggregate royalty in any one year of $1.5
million, and a maximum aggregate royalty under the agreement of $3.75
million. The Company will also pay Pittston a royalty of $0.50 per ton of
coal produced by two retained highwall mining machines for 3-1/2 years.
F-13
<PAGE>
With respect to the $157,000,000 sale price and the net working capital
retained by the Company, approximately $2,500,000 was used to pay the
Company's closing costs for the transaction, including a $1,000,000 payment
to a consultant for the Company and $500,000 to the financial advisors for
their services. The Company used approximately $131,725,000 of the proceeds
to provide for the early redemption of its 12% Senior Secured Notes due July
1, 1995, including the payment of $4,288,000 as a redemption premium and
approximately $2,437,000 in net interest through March 15, 1994 (the
redemption date). In addition, the Company used certain of the proceeds to
retire all indebtedness outstanding under the Company's revolving line of
credit agreement related to its coal operations. The oustanding balance on
the line of credit as of January 14, 1994 was $23,442,000. The Company also
used approximately $3,800,000 to compensate its employees for extraordinary
efforts expended in connection with the consummation of the transaction,
including approximately $416,500 in connection with the termination of stock
options held by employees who will become employees of Pittston as a result
of the transaction.
As a result of this transaction, the net assets relating to the sales
transaction appear as net assets held for disposal in the accompanying
December 31, 1993 balance sheet. Additionally, since the $125,000,000
Senior Secured Notes were redeemed in connection with the transaction, they
have been classified as a current liability in the accompanying December 31,
1993 balance sheet.
The Company does not expect to record a loss on this transaction.
Accordingly, the Company will record the actual economic impact of the
disposal in its 1994 financial statements. However, principally due to the
Company's de-emphasis on mining operations, the Company recorded
approximately $14,506,000 of asset write-offs in its 1993 financial
statements. These write-offs principally relate to its sulfur mine
development project ($9,384,000) which has been abandoned. Additionally,
the Company has written off approximately $5,122,000 of assets that it has
abandoned associated with its environmental projects. These asset write-offs
are included in cost of operations in the accompanying 1993 consolidated
statement of operations.
The Company will continue to own and operate four eastern Kentucky mines
with estimated annual production capacity of 3,000,000 tons per year.
3. Stock Option and Stock Grant Plans
----------------------------------
The Company has a non-qualified stock option plan pursuant to which
1,500,000 shares of common stock were reserved for issuance and may be
granted to officers, directors, and key employees of the Company and to key
independent contractors of the Company in amounts and upon terms and
conditions to be determined from time to time by the Company. Stock options
generally are exercisable either three years or five years from the date of
issuance. The following stock options have been issued, exercised or
cancelled as of December 31, 1993:
F-14
<PAGE>
<TABLE>
<CAPTION>
OPTIONS ISSUED OPTIONS EXERCISED OPTIONS CANCELLED
---------------------- -------------------- --------------------
EXERCISE EXERCISE EXERCISE
YEAR NUMBER PRICE NUMBER PRICE NUMBER PRICE
- ---- --------- ----------- ------- ----------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
1987 661,000 $ 9.75 - $ - - $ -
1988 70,000 11.00 - - - -
1989 77,000 14.75 - - - -
1990 9,000 12.38 56,500 9.75 - -
1991 27,000 7.50 10,000 9.75 23,000 12.38-14.75
1992 185,000 7.50-9.625 9,200 9.75 6,000 9.75
1993 - - 434,000 9.75-14.75 - -
--------- ------- ------
TOTAL 1,029,000 509,700 29,000
========= ======= ======
</TABLE>
As of December 31, 1993, 278,000 shares were exercisable and 500,000 options
were available for issue.
In connection with the transaction discussed in Note 2, the Company has
determined to terminate all stock options previously granted under its stock
option plan to employees who will become employees of Pittston as a result of
the transaction. Options for a total of 59,000 shares of the Company's common
stock previously granted to 11 employees will be terminated. The Company will
compensate each of these employees in the amount of the number of options held
by each employee multiplied by the difference between the per share option
exercise price and $16. The Company estimates that the total cost for such
terminations will be approximately $416,500.
On December 6, 1989, the Company adopted a non-qualified stock grant plan
pursuant to which 500,000 shares of common stock were reserved for issuance to
employees of the Company, except that officers, directors and owners of more
than 10% of the Company's common stock are not eligible to receive stock grants.
All stock grants issued to date specify that the recipient of the stock grant
must remain employed by the Company for 5 years from the date of grant in order
to exercise the grant. As of December 31, 1993, no grants were exercisable and
the following stock grants were issued or cancelled:
<TABLE>
<CAPTION>
GRANTS GRANTS
YEAR ISSUED CANCELLED
---- ------- ---------
<S> <C> <C>
1989 163,100 -
1990 217,400 28,500
1991 - 126,350
1992 - 32,450
1993 - 19,300
------- -------
380,500 206,600
======= =======
</TABLE>
As of December 31, 1993, stock grants for 173,900 shares of common stock were
outstanding, with 326,100 available for issue.
F-15
<PAGE>
In connection with the transaction discussed in Note 2, the Company has
amended the stock grant plan to provide, among other things, that service by
an employee with Pittston or an affiliate as a result of the transaction
will be counted toward the time of service required under the stock grants
and any termination of the employee without cause by Pittston within 120
days of the closing of the transaction shall not result in a cancellation of
his stock grant but shall automatically vest his rights in the stock grant.
Approximately 256 employees holding stock grants for a total of 92,400
shares of common stock will become employees of Pittston as a result of the
transaction.
4. Environmental Commitments
-------------------------
a. Municipal Agreements-
--------------------
In July, 1990, a wholly-owned subsidiary, Ohio County Balefill
("Balefill"), entered into an exclusive 40-year agreement with Ohio
County (Kentucky) Fiscal Court to operate the County's landfill.
Balefill has been operating the County's landfill since that date.
In March, 1992, the Company entered into an agreement with Montgomery
County, North Carolina concerning the operation of the County's
landfill. During July, 1992, the Company began operating the County's
landfill under a 20-year contract. Under the terms of the agreement, the
Company has agreed to construct a recycling facility and a new contained
landfill adjacent to the current operations.
b. Green Valley Environmental Corp.-
--------------------------------
On September 22, 1992, the Company's subsidiary, Green Valley
Environmental Corp. ("Green Valley") and Kentuckians for the
Commonwealth ("KFTC") entered into a Settlement Agreement concerning a
four-year dispute over Green Valley's landfill in Greenup County,
Kentucky. The Settlement Agreement resolves all disputes between Green
Valley and KFTC with respect to administrative and judicial actions
filed by KFTC and others, including a citizens group known as GROWL. The
two co-chairpersons of GROWL also executed the Settlement Agreement,
although other individual members did not. Under the Settlement
Agreement, Green Valley will install an additional liner to the bottom
of the landfill and drill nine new monitoring wells. The new
construction is consistent with Kentucky's stringent landfill
regulations for landfills intending to operate beyond July 1, 1995. The
Settlement Agreement limits the landfill's service area to a 38-county
region in Kentucky, Ohio and West Virginia and provides for a full-time
inspector. The size of the landfill will be capped at 138 acres or
approximately 23 million cubic yards of airspace. The Settlement
Agreement also provides that Green Valley will not operate other
landfills in Greenup County or the 22,000-acre area contiguous to the
landfill. Green Valley will donate three percent of its net profits from
operation of the landfill to community cleanup efforts, recycling
programs and community environmental education.
F-16
<PAGE>
5. Sale of Subsidiaries
--------------------
a. Kanawha Land Company, Inc.-
--------------------------
During March, 1992, the Company entered into an agreement with Pittston
Coal Sales Corp. ("Pittston") whereby Pittston acquired all of the
outstanding stock of one of the Company's subsidiaries, Kanawha Land
Company, Inc. ("Kanawha"), for $42.5 million in cash and agreed to
purchase certain mining equipment for $17.2 million in cash. The Kanawha
assets acquired by Pittston primarily include two long-term coal sales
contracts with the Appalachian Power Company and four highwall mining
machines. At the date of disposal, the two contracts called for a total
of approximately 21 million tons of coal to be delivered over the next
14 years.
Other terms of the agreement call for Pittston's subsidiaries to
purchase up to 1,790,000 tons of coal from one of Addington's mines in
West Virginia for a purchase price of $27 per ton through 1994. During
October, 1992, the Company modified this agreement, whereby the Company
agreed to supply 900,000 tons per year for 1993 and 1994 at prices
ranging from $25.50 to $26.00 per ton during 1993. The sales price per
ton will escalate during 1994 based on certain producer price indices.
The Company also agreed to purchase approximately 2,300,000 tons of low-
sulfur compliance coal from one of Pittston's mines in eastern Kentucky
through February, 1996 for a purchase price of $25 per ton, with a 3%
price escalation per year. The subsidiaries which hold the coal
contracts described in this paragraph were included in the sale to
Pittston discussed in Note 2. Therefore, after January 14, 1994, the
Company has no further committments under the two coal contracts
discussed in this paragraph.
In connection with the sale of Kanawha, the Company increased its
reclamation accrual by $5,000,000 for certain West Virginia operations.
This increase in the reclamation accrual is a result of the sale of
these two long-term contracts which were being supplied by the West
Virginia operations that are currently being phased down. This
$5,000,000 reclamation provision has been netted against the gain on
sale of coal subsidiary in the accompanying 1992 consolidated statement
of operations.
b. Southern Illinois Mining Company, Inc.-
--------------------------------------
During April, 1992, the Company sold all of the outstanding stock of one
of its subsidiaries, Southern Illinois Mining Company, Inc. ("SIMC"), to
Marion Mining Corporation ("Marion") for $1 million in cash and an
approximately $10.4 million promissory note (the "SIMC Note") bearing
interest at six percent. The SIMC Note is secured by: (i) a pledge of
the capital stock of SIMC; (ii) a Mortgage, a Security Agreement,
Assignment of Rents and Profits, and Fixture Financing Statements, all
of which encumber coal reserves and related real estate located in
Williamson County, Illinois; and (iii) a Security
F-17
<PAGE>
Agreement covering certain of the SIMC assets, excluding accounts
receivable arising out of the sale of coal to TVA under Contract T-1.
At the time of the sale, the assets of SIMC consisted primarily of
Contract T-1 with the Tennessee Valley Authority, a deep mine, certain
coal reserves and a coal preparation facility. The Company has
guaranteed SIMC's performance of Contract T-1.
On September 15, 1992, the Company filed suit against Marion and SIMC
in Boyd County Circuit Court, Boyd County, Kentucky for, among other
claims, breach of contract and misrepresentations. The Company claims
that SIMC has ceased its mining operations and is not shipping coal
under Contract T-1. On September 21, 1992, the Company obtained a
temporary restraining order requiring Marion and SIMC to protect and
preserve the assets of SIMC for the Company's benefit. On February 1,
1993, both Marion and SIMC filed bankruptcy.
On November 5, 1993, the Company filed a foreclosure action in state
court in Illinois to foreclose the security interest in the real
property and personal property of SIMC. SIMC subsequently filed an
adversary proceeding against the Company in United States Bankruptcy
Court for the Eastern District of Kentucky on January 19, 1994. The
Complaint seeks the return of $1,000,000 paid by Marion to the Company
as partial consideration for its purchase of the SIMC stock, the return
of $378,200 in royalties paid to the Company subsequent to the sale and
$500,000 in punitive damages. The Company has filed an answer in which
it denied the substantive allegations of the Complaint and asserted
various affirmative defenses to the claims.
Because of the pendency of the adversary proceeding in U.S. Bankruptcy
Court, the Company has advised SIMC that it has decided to (i) cease
the Illinois Foreclosure Action, (ii) litigate the issues raised by
SIMC in the adversary proceeding and (iii) allow the SIMC assets to be
sold through the U.S. Bankruptcy Court, with the proceeds of such sale,
if any, to be held by the U.S. Bankruptcy Court until it has issued a
final order in the adversary proceeding.
Upon considering the current status of the SIMC proceedings, the
Company has determined to record a reserve to the SIMC Note at December
31, 1993 in the amount of $5.8 million (included in other, net in the
accompanying 1993 consolidated statement of operations). Such valuation
was determined considering the estimated ultimate realizable value from
the mineral reserves.
6. Closure of Western Kentucky Coal Operations
-------------------------------------------
During 1991, the Company encountered substantial operating difficulties at
its mines in Western Kentucky and, as a result, decided to close its Western
Kentucky coal mines. Accordingly, as of December 31, 1991, the Company
recorded a pre-tax charge to expense of approximately $9,000,000 to write-
off its investment in its remaining Western Kentucky mines and to reserve
for future reclamation of these mines.
F-18
<PAGE>
7. Debt
As of December 31, 1992 and 1993 the Company's debt consisted of the following:
a. Revolving Lines of Credit-
The Company's coal subsidiaries had a revolving line of credit agreement
with their bank which provided the coal subsidiaries with short-term
borrowings up to a maximum line of credit of $30,000,000, bearing interest
at the prime interest rate plus 1/2%. The outstanding balance of this line
of credit as of December 31, 1992 and 1993 was approximately $22,535,000
and $23,442,000, respectively. This line of credit was paid off in 1994 in
connection with the transaction described in Note 2.
Subsequent to yearend, the Company's remaining coal subsidiaries entered
into a new revolving line of credit agreement with their bank. This new
line of credit provides the coal subsidiaries with short-term borrowings,
generally equal to 90% of certain accounts receivable plus 50% of certain
coal inventory, up to a maximum line of credit of $15,000,000, bearing
interest at the prime interest rate. This new $15,000,000 line of credit
replaces the Company's former $30,000,000 line of credit. The prime
interest rate as of December 31, 1993 was 6.0%.
During May, 1993, the Company's environmental subsidiaries entered into a
new $20 million revolving credit agreement with a bank secured by virtually
all of the assets and common stock of all environmental subsidiaries. This
line of credit bears interest at 1-1/2% over the bank's base rate or 3-1/2%
over the Eurodollar rate. Since principal payments are not required to be
made on this line of credit until it expires in June, 1996, the outstanding
balance of this line of credit as of December 31, 1993 of $10,000,000 has
been classified as long-term debt.
In connection with these lines of credit, the Company has agreed to certain
restrictive covenants which, among others, limit the amount of dividends
that the Company can pay, limit its ability to incur additional
indebtedness, and require the Company to maintain certain as defined
financial ratios.
F-19
<PAGE>
b. Long-term Debt-
As of December 31, 1992 and 1993, long-term debt consisted of the
following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1992 1993
------------ ------------
<S> <C> <C>
Senior Secured Notes, see note 7c $125,000,000 $125,000,000
Note payable, revolving line of credit, environmental subsidiaries, see note 7a - 10,000,000
Note payable, unsecured, with annual principal payments of $1,553,409, bearing
interest at the prime interest rate 1,553,409 -
Note payable, secured by aircraft, with monthly principal and interest payments
of $33,012, bearing interest at 1/4% below the prime interest rate 1,426,478 1,170,735
Note payable, unsecured, with quarterly payments of $62,500, bearing interest at 7% 721,103 -
Industrial revenue bonds, secured by building and equipment, with quarterly principal
payments ranging from $5,000 to $38,000, bearing interest at 70% of the prime
interest rate 595,000 493,000
Note payable, unsecured, with annual payments of $180,000, non-interest bearing,
discounted at 7% 768,171 634,594
Various other notes payable, certain of which are secured by equipment, bearing
interest from 5% to 12% 2,003,599 884,058
------------ ------------
$132,067,760 $138,182,387
Less - current portion 3,836,223 126,228,033
------------ ------------
$128,231,537 $ 11,954,354
============ ============
</TABLE>
c. Senior Secured Notes-
On July 11, 1988, the Company issued $125,000,000 of 12% Senior Secured
Notes (the Notes) that mature on July 1, 1995 and received net proceeds
of $120,625,000, which is net of underwriting discounts of $4,375,000. The
Notes are secured by a first priority mortgage and security interest in
certain real and personal property of the Company with a minimum fair
market value of 150% of the outstanding principal amount of the Notes. In
connection with the Notes, the Company has agreed to certain restrictive
covenants which, among others, limit the amount of dividends that the
Company can pay, limit its ability to incur additional indebtedness,
require a minimum net equity, limit certain transactions with affiliates,
restrict liens on the assets that secure the Notes and place certain
restrictions on the Company's ability to receive funds from certain of its
subsidiaries. In connection with the transaction dicussed in Note 2, these
notes were called for redemption on March 15, 1994. Therefore, the entire
$125,000,000 balance of these Senior Secured Notes has been classified as a
current liability as of December 31, 1993.
F-20
<PAGE>
Principal payments required for long-term debt and senior secured notes
after December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Year Amount
---------- ------------
<S> <C>
1994 $126,228,033
1995 770,088
1996 10,810,365
1997 333,105
1998 12,314
Thereafter 28,482
------------
Total $138,182,387
============
</TABLE>
8. Property, Plant and Equipment
-----------------------------
Property, plant and equipment are recorded at cost. Expenditures for major
renewals and betterments are capitalized while expenditures for maintenance
and repairs are expensed as incurred.
Property, plant and equipment are summarized by major classification as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1992 1993
------------ ------------
<S> <C> <C>
Land $ 9,216,691 $ 8,987,432
Mining and other equipment and
related facilities 108,391,179 44,428,489
Environmental equipment and related facilities 9,751,658 8,376,132
Transportation equipment 8,304,283 7,758,410
Barge loading facilities 7,887,933 2,960,043
Mine development costs 25,427,222 13,365,872
Environmental development costs 38,902,474 51,990,631
Furniture and fixtures 991,343 1,187,742
Construction in process 3,712,151 -
------------ ------------
$212,584,934 $139,054,751
============ ============
</TABLE>
Included in property, plant and equipment as of December 31, 1992 and 1993
are approximately $33,134,000 and $24,062,000, respectively, related to
start-up development projects for which depreciation and amortization have
not yet commenced. The Company reviews the realization of these projects on
a periodic basis.
F-21
<PAGE>
9. Inventories
-----------
As of December 31, 1992 and 1993, inventories consisted of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1992 1993
----------- -----------
<S> <C> <C>
Coal $25,753,783 $10,222,372
Supplies and parts 2,305,760 1,580,674
----------- -----------
$28,059,543 $11,803,046
=========== ===========
</TABLE>
10. Accrued Expenses and Other
--------------------------
As of December 31, 1992 and 1993, accrued expenses and other
consisted of:
<TABLE>
<CAPTION>
December 31,
---------------------------
1992 1993
----------- -------------
<S> <C> <C>
Payroll and employee benefits $ 3,026,752 $ 2,919,406
Workers' compensation costs 1,473,697 2,046,749
Production related taxes 1,316,266 1,679,548
Reclamation & closure costs 3,971,793 1,217,377
Deferred gain 1,766,329 -
Litigation - 3,450,000
Other 1,278,195 2,401,415
----------- -----------
$12,833,032 $13,714,495
=========== ===========
</TABLE>
11. Income Taxes
------------
SFAS No. 109--"Accounting for Income Taxes" was issued by the Financial
Accounting Standards Board in February, 1992. In conformity with SFAS No.
109 transition rules, the Company elected to adopt the new income tax
accounting standard effective January 1, 1991. The cumulative effect at
January 1, 1991 (Note 1) of this accounting change was to increase
deferred income taxes by $3,500,000. This increase is primarily due to the
elimination of the ability to record the benefits of future projected
percentage depletion deductions as a reduction to deferred income taxes,
as previously allowed by SFAS No. 96. A requirement of SFAS No. 109 is
that deferred income tax liabilities or assets at the end of each period
will be determined using the tax rate expected to be in effect when taxes
are actually paid or recovered. Accordingly, under the new standard,
income tax provisions will increase or decrease in the same period in
which a change in tax rates is enacted.
The income tax provision (benefit) for the years ended December 31, 1991,
1992, and 1993 consists of the following:
F-22
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1991 1992 1993
----------- ---------- -----------
<S> <C> <C> <C>
Federal:
Currently payable $(1,113,000) $3,439,000 $(1,200,000)
Deferred (3,891,000) 790,000 (4,594,000)
----------- ---------- -----------
(5,004,000) 4,229,000 (5,794,000)
----------- ---------- -----------
State:
Currently payable 670,000 915,000 847,000
Deferred 195,000 144,000 (470,000)
----------- ---------- -----------
865,000 1,059,000 377,000
----------- ---------- -----------
$(4,139,000) $5,288,000 $(5,417,000)
=========== ========== ===========
</TABLE>
The following is a reconciliation of the income tax provision (benefit) at the
statutory tax rate of 34% to the Company's effective rate for the years ended
December 31, 1991, 1992, and 1993.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1991 1992 1993
---------------------- ------------------ ---------------------
Amount Percent Amount Percent Amount Percent
----------- ------- --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal taxes at
statutory rate $(3,511,000) (34.0)% $5,550,000 34.0% $(7,346,000) (34.0%)
Statutory depletion in
excess of cost depletion (1,280,000) (12.4) (1,881,000) (11.5) (2,138,000) (9.9)
Valuation allowance on utilization
of minimum tax credits - - - - 3,788,000 17.5
Additional taxes provided - - 825,000 5.0 - -
Other 81,000 .5 95,000 .6 30,000 .1
State taxes, net of
Federal tax benefit 571,000 5.6 699,000 4.3 249,000 1.2
----------- ------- ---------- ----- ----------- ------
$(4,139,000) (40.3)% $5,288,000 32.4% $(5,417,000) (25.1%)
=========== ======= ========== ===== =========== ======
</TABLE>
Deferred income taxes arise from recognizing revenue and expense in different
years for tax and financial statement purposes. The provision (benefit) for
deferred income taxes resulted from the following:
F-23
<PAGE>
<TABLE>
<CAPTION>
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Depreciation and asset writedowns $ 1,443,000 $ 1,966,000 $ (890,000)
Deferred overburden 219,000 1,185,000 468,000
Mine development costs 1,080,000 (452,000) 54,000
Start-up costs (1,055,000) (579,000) (52,000)
Minimum tax credits (806,000) (3,503,000) 3,788,000
Mine closing accrual 340,000 - -
Self-insurance reserves (296,000) (230,000) (150,000)
Net operating loss carryforwards (3,704,000) 1,978,000 (5,293,000)
Deferred revenues - (659,000) 148,000
Bad debt reserves - - (1,588,000)
Litigation reserves - - (1,013,000)
Other, net (917,000) 1,228,000 (536,000)
----------- ----------- -----------
$(3,696,000) $ 934,000 $(5,064,000)
=========== =========== ===========
</TABLE>
At December 31, 1993, the Company had approximately $24,525,000 of deferred
tax assets (net of a valuation allowance of $3,788,000) and $31,597,000 of
deferred tax liabilities, resulting in a net deferred tax liability of
$7,072,000. At December 31, 1992, the Company had approximately $16,235,000
of deferred tax assets and $27,817,000 of deferred tax liabilities,
resulting in a net deferred tax liability of $11,582,000. Included in the
Company's 1993 deferred tax assets are regular tax net operating loss
carryforwards of approximately $25,800,000 which, if not utilized, will
expire in the years 2007 and 2008 and alternative minimum tax credit
carryforwards of approximately $8,200,000, which have an unlimited
carryforward period. In 1993, the Company recorded a valuation allowance of
$3,788,000 against these credits due to realizability concerns.
12. Commitments and Contingencies
-----------------------------
a. Coal Sales Contracts-
--------------------
Subsequent to the transaction discussed in Note 2, the Company has
commitments to deliver scheduled base quantities of coal annually to
three customers under three coal sales contracts. One contract expires
in 1994, one expires in 1997 and one expires in 2000. The contracts
call for the Company to supply a minimum of 10.8 million tons over the
remaining lives of the contracts at prices which are at or above
market. The contracts have sales price adjustment provisions, subject
to certain limitations and adjustments, based on changes in specified
production costs.
For additional information concerning coal sales contracts, see Item 1
"Business - Major Coal Sales Contracts" of Form 10-K included herein.
b. Leases-
------
The Company has various operating leases for mining and other
equipment. Lease expense for the years ending December 31, 1991, 1992
and 1993 was approximately $18,182,000, $22,125,000 and $27,500,000,
respectively.
F-24
<PAGE>
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 ending December 31, 1991, 1992 and 1993 was approximately
$17,006,000, $15,399,000 and $21,225,000, respectively. Certain agreements
require minimum annual royalties to be paid regardless of the amount of
coal mined during the year.
Approximate future minimum payments after the transaction discussed in Note
2 are as follows:
<TABLE>
<CAPTION>
Operating
Year Leases Royalties
---- ----------- ----------
<S> <C> <C>
1994 $6,906,000 $2,552,000
1995 5,149,000 3,000,000
1996 2,584,000 2,925,000
1997 1,082,000 1,675,000
1998 260,000 500,000
Thereafter 69,000 1,200,000
</TABLE>
c. Legal Matters-
-------------
The Company is named as defendant in various actions in the ordinary course
of its business. These actions generally involve such matters as property
boundaries, mining rights, blasting damage, personal injuries, and royalty
payments. The Company believes these proceedings are incidental to its
business and are not likely to result in materially adverse judgments.
The Company is presently involved in a legal dispute with a customer
(Consumers Power) regarding the sales price of coal shipped under a coal
sales contract and the potential termination of the contract. On May 4,
1989, the Boyd Circuit Court directed the parties to maintain the status
quo in their contractual relationship, directed the Company to post a
$750,000 bond and directed the parties to provide expedited discovery in
the case. On November 9, 1990, the Boyd Circuit Court directed the Company
to increase the amount of the bond to be posted from $750,000 to $3,000,000
in light of the additional amounts of coal shipped under the contract from
the date of the court's previous order.
On April 30, 1993, the Boyd Circuit Court entered summary judgment in favor
of the Company against Consumers Power that the termination provision of
the Company's coal supply contract with Consumers Power had not been
appropriately triggered by Consumers Power. Consumers Power has appealed
the grant of summary judgment to the Kentucky Court of Appeals. On June 3,
1993, Consumers Power also filed a motion in Boyd Circuit Court to dissolve
the May 4, 1989 temporary restraining order that prevents Consumers Power
from seeking to terminate the contract pursuant to the contract provision.
Although on
F-25
<PAGE>
September 1, 1993, the court subsequently dissolved the temporary
restraining order and ordered that the Company's $3,000,000 bond could
be released, Consumers Power has not terminated the contract in light
of the April 30, 1993 summary judgment decision that the termination
provision had not been appropriately triggered. By letter dated October
5, 1993, Consumers Power has notified the Company that it is currently
prepared to demonstrate its ability to purchase coal from another
producer within the parameters of the termination provision. Consumers
Power states that it can obtain coal for approximately $24.90 per ton
instead of the $34.16 per ton charged during the three months ended
September 30, 1993.
The Company will transfer the contract with Consumers Power to Pittston
in the transaction discussed in Note 2. The Company, however, will
retain all obligations with respect to any liabilities arising out of
the above litigation. While the Company cannot predict the ultimate
outcome of the above dispute, it is not anticipated that the outcome
will have a materially adverse impact upon the Company's financial
position and results of operations.
d. Licensing Agreement-
-------------------
In June, 1992, the Company entered into a 14-year licensing agreement
that permits Joy Technologies, Inc. to manufacture and market a
highwall mining system that the Company developed and currently uses in
its own mining operations. Under the terms of the agreement, Joy
Technologies plans to market the system to mining companies on the
basis of a cost per ton of material mined by the system. The Company
and Joy Technologies will share revenues from origination fees and from
usage fees based on tons of material mined by these other mining
companies. During 1993, Joy Technologies, a world-wide manufacturer of
mining equipment, manufactured and leased two highwall mining systems
to third party coal companies. Such revenues from this agreement during
1993 were approximately $261,000.
13. Litigation Settlements
----------------------
a. Addwest Gold-
------------
On November 5, 1992, a U.S. District Court jury returned a verdict
against Addington Resources, Inc. and others for approximately $850,000
in compensatory damages and $10,501,000 in punitive damages.
Subsequently, the verdict was entered by a judgment of the court. The
suit arose out of an alleged bonus payment due to a former employee of
Addwest Gold in connection with the January, 1990 sale of Addwest Gold
by the Company.
Subsequent to December 31, 1993, the Company reached a settlement with
their former employee whereby all claims were dismissed. As a result of
the settlement, the Company expects to pay the former employee
$3,450,000 by April 15, 1994. The parties are currently in the process
of drafting the appropriate settlement documents. This settlement
amount is recorded in the December 31, 1993 financial statements.
F-26
<PAGE>
b. Ohio River Company-
------------------
On August 11, 1992, the Company filed an action for a declaration of
rights against the Ohio River Company ("ORCO") and SIMC (Note 5) in the
U.S. District Court for the Eastern District of Kentucky at Ashland.
The action arises from a dispute between the Company and ORCO
concerning a transportation agreement for barge transportation of coal
being delivered to TVA pursuant to Contract T-1. In connection with
Marion's acquisition of SIMC, the Company assigned its rights and
obligations under the transportation agreement to SIMC. SIMC's
performance was guaranteed by the Company, and SIMC has apparently
defaulted. The Company has asked the court to declare the rights of the
parties in regard to the transportation agreement. ORCO has asserted
counterclaims against both SIMC and the Company in the action. These
counterclaims seek unspecified damages for lost future profits and at
least $700,000 in damages from the Company for damages allegedly
suffered by ORCO to date.
During 1993, the Company reached a settlement with ORCO whereby both
parties dismissed their claims against each other and agreed to
terminate the Company's obligation under the SIMC transportation
agreement. As a result, the Company agreed to pay ORCO $600,000 which
relates primarily to SIMC's unpaid transportation fees previously
guaranteed by the Company. This settlement amount is recorded in the
December 31, 1993 financial statements.
c. Pyramid Mining-
--------------
On October 10, 1990, Pyramid Mining, Inc. and Pyramid Equipment, Inc.
("Pyramid"), subsidiaries of First Mississippi Corporation, filed a
complaint alleging a number of charges against the Company and its
wholly-owned subsidiary, Addwest Mining, Inc. ("Addington Companies"),
among others. Pyramid's complaint sought compensatory and trebled
damages against the Addington Companies in an undetermined amount
believed to be in excess of $8.9 million. The complaint also sought $20
million in punitive damages and an order for an equitable accounting
and constructive trust to recover, among other things, all profits made
by Addwest Mining, Inc. through the operation of the Nickle mine and
the Jetson mine.
During April, 1992, the Company reached a settlement with Pyramid
whereby both parties dismissed their claims against each other. As a
result of the settlement, the Company paid Pyramid $5,100,000.
14. Major Customers
---------------
Major customers accounted for 35%, 22%, 15% and 11% of total revenues for
the year ended December 31, 1991; for 27%, 13% and 12% of total revenues
for the year ended December 31, 1992; and for 28%, 12% and 11% of total
revenues for the year ended December 31, 1993.
F-27
<PAGE>
15. Workers' Compensation and Black Lung
------------------------------------
The operations of the Company are subject to the Federal Coal Mine Health
and Safety Act of 1969, as amended, and the related state workers'
compensation laws. These laws provide for the payment of benefits to
disabled workers and their dependents, including lifetime benefits for
pneumoconiosis (black lung).
The Company has implemented a self-insurance program to cover most of its
employees for workers' compensation, including black lung benefits. Certain
other employees are covered under state-administered workers' compensation
programs.
Black lung expense is being provided, based upon a recent actuarial study,
over the estimated remaining working lives of the miners using accounting
methods similar to that of a defined benefit pension plan. Black lung
expense consists of normal costs for the current period, amortization (over
a ten year period) of the $1,750,000 prior service cost at the date the
Company became self-insured, plus interest at 8%. Benefits provided are
subject to federal and state laws and, thus, are not under the control of
the Company.
Workers' compensation (including black lung) expense for the years ended
December 31, 1991, 1992 and 1993 was approximately $3,379,000, $3,035,000
and $3,755,000, respectively.
16. Related Party Transactions
--------------------------
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 or by relatives of stockholders/
officers of the Company. The Company recorded various expenses to
related parties consisting of approximately $11,627,000, $17,506,000 and
$19,186,000 for trucking services for the years ended December 31, 1991,
1992 and 1993, respectively, approximately $110,000, $112,000 and $110,000
for office rent expense for the years ended December 31, 1991, 1992 and
1993, respectively, and approximately $25,000 for certain deep mining
consulting services for the year ended December 31, 1991. The Company has
also recorded flight fee income from related parties of approximately
$3,000, $5,000 and zero for the years ended December 31, 1991, 1992 and
1993, respectively.
The Company had amounts payable to related parties of approximately
$632,000 and $391,000 as of December 31, 1992 and 1993, respectively.
17. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires the Company to disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth
below for the Company's financial instruments.
F-28
<PAGE>
The carrying amount of cash equivalents approximates fair value because of
the short maturity of cash equivalents. The long-term investment represents
a less than 10% interest in a non-public company and fair value is
estimated based on recent issue prices. The fair value of long-term debt is
estimated based on the quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the same
remaining maturities. The 12% Notes ($125 million carrying amount) are
valued at a premium due to the relatively high interest rate.
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 13,744,000 $ 13,744,000
Long-term investment 1,020,000 1,020,000
Long-term debt 13,182,000 13,182,000
Senior secured notes 125,000,000 129,288,000
</TABLE>
The fair value estimates are made at discrete points in time based on
relevant market information and information about the financial
instruments. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision.
18. Acquisitions
------------
a. NERCO Properties-
----------------
On February 4, 1993, in accordance with the terms of an Acquisition
Agreement dated January 29, 1993 between coal subsidiaries of the
Company and NERCO Coal Corp. ("NERCO"), the Company acquired the
majority of NERCO's West Virginia mining operations, primarily
consisting of inventories, property, plant, equipment, coal sales
contracts and the assumption of certain reclamation liabilities, as
well as the rights to approximately 80 million tons of coal reserves.
The majority of these reserves are considered low sulfur coal.
As partial consideration for the acquisition, the Company issued to
NERCO a promissory note (the "Note") for payment on April 1, 1993 of $3
million plus interest at the prime rate, as defined, plus 1% per annum
from the date of closing. The Company will also pay NERCO an overriding
royalty payment of $0.75 per ton of coal mined until a total of $9.5
million has been paid, with a minimum annual overriding royalty payment
of $750,000. The Company also is assuming certain existing royalty
obligations to previous owners with respect to the coal reserves
acquired, including both production royalties and a minimum annual
royalty payment of $1,625,000 for the next 17 years. In the event of
certain defaults, all minimum annual royalty payments to NERCO and the
previous owners may be accelerated. The assets acquired by the Company
secure payment of the Note and the mining royalties in an amount not to
exceed the unpaid principal and interest on the Note plus $5.5 million.
F-29
<PAGE>
Unaudited pro forma information for the year ended December 31, 1992
and 1993 has been provided below to reflect the impact on the Company's
historical operations as if the acquisition had occurred on January 1,
1992. The unaudited pro forma financial information is not necessarily
indicative of the results of operations that would have occurred had
the acquisition occurred during the periods presented or of the future
results of operations.
<TABLE>
<CAPTION>
Pro Forma
(in thousands, except per share data)
Year Ending December 31,
1992 1993
-------- --------
<S> <C> <C>
Revenue $381,276 $387,977
Income from operations 18,396 3,745
Net income (loss) 11,145 (15,989)
Net income (loss) per share .73 (1.03)
Weighted average shares
outstanding 15,240 15,563
</TABLE>
b. West Virginia Coal Reserves-
---------------------------
On August 13, 1993, Kanawha Development Corporation (KDC), a newly
established coal-related subsidiary of Addington, entered into various
agreements, the purpose being to acquire, among other items, a sublease
interest in approximately 30 million tons of coal reserves in southern
West Virginia.
Consideration for this acquisition includes the following: (a) KDC paid
$2.5 million in recoupable advance royalties to the sublessor; (b) KDC
paid $900,000 for related engineering data, permits and mine
development; (c) a royalty of 4% of sales value on tonnage mined and
sold will be paid to the sublessor with a minimum annual royalty of
$1.0 million per year due for ten years; (d) KDC will pay to the former
owner of the sublease an overriding royalty of $0.50 per ton for all
tons mined and sold; and (3) KDC will assume certain obligations under
the sublease agreement.
The Company has guaranteed the performance of KDC under the sublease
terms. In the event KDC is sold by the Company, the new owner of KDC
becomes the guarantor of performance under the sublease terms.
Both of the acquisitions discussed in this note were included in the
transaction discussed in Note 2.
19. Segment Information
-------------------
The Company considers its major business segments to be mining (including
coal, gold, silver, sulfur and limestone) and environmental (including
sanitary landfills and waste collection, recycling and disposal). Included
in the segment "Other" for 1992 and 1993 is the Company's technology
licensing activities (Note 12d) as well as citrus operations currently in
the development stage. In prior years, "other" included highway
construction activities.
F-30
<PAGE>
Information about the Company's operations for each segment are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Year Ended December 31: 1991 1992 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Mining $271,808 $292,225 $358,957
Environmental 1,868 7,779 24,929
Other 1,579 1,470 261
-------- -------- --------
$275,255 $301,474 $384,147
======== ======== ========
Income (loss) from operations:
Mining $ 1,278 $ 18,300 $ 7,346 (1)
Environmental (496) 1,620 (1,400)(2)
Other 601 1,410 261
-------- -------- --------
1,383 21,330 6,207
General corporate expenses (2,003) (3,095) (2,759)
-------- -------- --------
$ (620) $ 18,235 $ 3,448
======== ======== ========
Depreciation and amortization:
Mining $ 28,555 $ 23,893 $ 26,726
Environmental 329 832 2,728
Other - - -
-------- -------- --------
28,884 24,725 29,454
General corporate depreciation
and amortization 856 386 485
-------- -------- --------
$ 29,740 $ 25,111 $ 29,939
======== ======== ========
Capital expenditures:
Mining $ 44,696 $ 17,584 $ 28,511
Environmental 9,644 18,942 18,271
Other 1,314 1,412 2,595
-------- -------- --------
$ 55,654 $ 37,938 $ 49,377
======== ======== ========
As of December 31:
Identifiable assets:
Mining $270,141 $235,430 $225,138
Environmental 34,952 58,938 65,887
Other 6,374 8,983 10,508
-------- -------- --------
311,467 303,351 301,533
General corporate assets 20,949 35,673 14,125
-------- -------- --------
Total assets $332,416 $339,024 $315,658
======== ======== ========
</TABLE>
(1) Includes asset writedown related to sulfur project ($9,384,000 - See
Note 2).
(2) Includes asset writedown related to certain abandoned assets
($5,122,000 - see Note 2).
F-31
<PAGE>
Revenues by industry segment are comprised of sales to unaffiliated
customers; there are no intersegment sales.
Identifiable assets by industry segment are those assets that are used in
the Company's operations in each industry. General corporate assets consist
of cash and cash equivalents, short-term investments and deferred financing
costs.
<TABLE>
<CAPTION>
20. Quarterly Financial Data (unaudited - in thousands of dollars except per
share amounts)
First Second Third Fourth
1992 Quarter Quarter Quarter Quarter Year
- ---- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $66,922 $74,620 $ 77,787 $ 82,145 $301,474
------- ------- -------- -------- --------
Income from operations 2,160 5,670 5,247 5,158 18,235
------- ------- -------- -------- --------
Net income $ 3,608 $ 2,000 $ 3,556 $ 1,872 $ 11,036
======= ======= ======== ======== ========
Net income per share (1) $.24 $.13 $.23 $.12 $.72
==== ==== ==== ==== ====
1993
- ----
Net revenues $82,592 $92,098 $101,549 $107,908 $384,147
------- ------- -------- -------- --------
Income (loss) from
operations 1,228 3,401 7,631 (8,812)(2) 3,448(2)
------- ------- -------- -------- --------
Net income (loss) $(1,707) $ (8) $ 2,491 $(16,965) $(16,189)
======= ======= ======== ======== ========
Net income (loss)
per share (1) $(.11) $ - $.16 $(1.09) $(1.04)
===== ==== ==== ====== ======
</TABLE>
(1) Quarters may not add to annual net income per share due to changes in
shares outstanding.
(2) Includes asset writedowns related to abandoned sulfur project
($9,384,000) and environmental projects ($5,122,000), as described in
Note 2.
F-32
<PAGE>
Exhibit 11
ADDINGTON RESOURCES, INC.
CALCULATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1991 1992 1993
----------- ----------- ------------
<S> <C> <C> <C>
Income (loss) before cumulative effect of a change
in accounting principle $(6,186,496) $11,036,428 $(16,189,150)
Cumulative effect of a change in accounting for income taxes (3,500,000) - -
----------- ----------- ------------
Primary net income (loss) $(9,686,496) $11,036,428 $(16,189,150)
=========== =========== ============
Average shares of stock outstanding 15,232,068 15,240,382 15,562,907
=========== =========== ============
Primary net income (loss) per share before cumulative effect
of a change in accounting principle $(.41) $.72 $(1.04)
Cumulative effect of a change in accounting for income taxes (.23) - -
----------- ----------- ------------
Primary net income (loss) per share $(.64) $.72 $(1.04)
=========== =========== ============
</TABLE>
NOTE: The dilutive effect of the Company's common stock equivalents (grants
and shares under option) for the primary net income per share
calculation was insignificant for 1991, 1992 and 1993.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Addington Resources, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Addington Resources, Inc. and subsidiaries
included in this Form 10-K and have issued our report thereon dated March 23,
1994. Our report on the consolidated financial statements includes an
explanatory paragraph with respect to the change in the method of accounting for
income taxes effective January 1, 1991, as discussed in Note 1(g) to the
consolidated financial statements. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedules listed
in the table of contents (page F-1) are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
March 23, 1994
Louisville, Kentucky
F-34
<PAGE>
ADDINGTON RESOURCES, INC.
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Balance at Balance
Beginning Additions at End
of Year at Cost Retirements Other of Year
------------ ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Classification
- --------------
YEAR ENDED DECEMBER 31, 1991
Land $ 8,258,078 $ 1,369,014 $ (150,150) $ - $ 9,476,942
Mining and other equipment and
related facilities 81,216,717 26,280,077 (3,632,738) - 103,864,056
Environmental equipment and related
facilities 5,366,741 2,391,265 (4,321) - 7,753,685
Transportation equipment 7,967,338 166,093 (790,247) - 7,343,184
Barge loading facilities 5,767,082 3,333,067 (1,242,347) - 7,857,802
Mine development costs 17,850,082 15,171,284 (6,424,295) - 26,597,071
Environmental development costs 16,948,526 6,875,950 (55,849) - 23,768,627
Furniture and fixtures 745,240 67,099 (20,348) - 791,991
Construction in process 5,714,962 - (1,061,633) - 4,653,329
------------ ----------- ------------ ------------ ------------
$149,834,766 $55,653,849 $(13,381,928) $ - $192,106,687
============ =========== ============ ============ ============
YEAR ENDED DECEMBER 31, 1992
Land $ 9,476,942 $ 544,922 $ (805,173) $ - $ 9,216,691
Mining and other equipment and
related facilities 103,864,056 12,066,214 (7,539,091) - 108,391,179
Environmental equipment and related
facilities 7,753,685 1,997,973 - - 9,751,658
Transportation equipment 7,343,184 1,096,319 (135,220) - 8,304,283
Barge loading facilities 7,857,802 32,494 (2,363) - 7,887,933
Mine development costs 26,597,071 6,843,184 (8,013,033) - 25,427,222
Environmental development costs 23,768,627 15,133,847 - - 38,902,474
Furniture and fixtures 791,991 222,768 (23,416) - 991,343
Construction in process 4,653,329 - (941,178) - 3,712,151
------------ ----------- ------------ ------------ ------------
$192,106,687 $37,937,721 $(17,459,474) $ - $212,584,934
============ =========== ============ ============ ============
YEAR ENDED DECEMBER 31, 1993
Land $ 9,216,691 $ 1,473,823 $ - $ (1,703,082) $ 8,987,432
Mining and other equipment and
related facilities 108,391,179 19,369,805 (12,165,484) (71,167,011) 44,428,489
Environmental equipment and related
facilities 9,751,658 2,627,108 (4,002,634) - 8,376,132
Transportation equipment 8,304,283 777,891 (33,049) (1,290,715) 7,758,410
Barge loading facilities 7,887,933 1,716,120 (53,538) (6,590,472) 2,960,043
Mine development costs 25,427,222 7,104,735 (7,901,375) (11,264,710) 13,365,872
Environmental development costs 38,902,474 16,053,226 (2,965,069) - 51,990,631
Furniture and fixtures 991,343 253,914 (19,216) (38,299) 1,187,742
Construction in process 3,712,151 - (3,712,151) - -
------------ ----------- ------------ ------------ ------------
$212,584,934 $49,376,622 $(30,852,516) $(92,054,289)(1) $139,054,751
============ =========== ============ ============ ============
</TABLE>
(1) Represents reclassification of property, plant and equipment to net assets
held for disposal.
F-35
<PAGE>
ADDINGTON RESOURCES, INC.
SCHEDULE VI
ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Cost and at End
of Year Expenses Retirements Other of Year
----------- ----------- ------------ ------------ -----------
Classification
- --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1991
Mining and other equipment and
related facilities $24,443,558 $ 9,975,227 $ (3,100,765) $ - $31,318,020
Environmental equipment and related
facilities 90,245 166,443 (272) 151,018(1) 407,434
Transportation equipment 2,561,643 749,686 (301,190) - 3,010,139
Barge loading facilities 1,997,997 531,063 (817,188) - 1,711,872
Mine development costs 463,731 365,045 - - 828,776
Furniture and fixtures 286,912 95,762 (7,238) - 375,436
----------- ----------- ------------ ------------ -----------
$29,844,086 $11,883,226 $ (4,226,653) $ 151,018 $37,651,677
=========== =========== ============ ============ ===========
YEAR ENDED DECEMBER 31, 1992
Mining and other equipment and
related facilities $31,318,020 $10,023,050 $ (2,103,911) $ - $39,237,159
Environmental equipment and related
facilities 407,434 428,014 - 219,994(1) 1,055,442
Transportation equipment 3,010,139 988,089 (103,706) - 3,894,522
Barge loading facilities 1,711,872 515,373 (1,214) - 2,226,031
Mine development costs 828,776 361,330 (198,635) - 991,471
Environmental development costs - 73,395 - - 73,395
Furniture and fixtures 375,436 92,799 (5,047) - 463,188
----------- ----------- ------------ ------------ -----------
$37,651,677 $12,482,050 $ (2,412,513) $ 219,994 $47,941,208
=========== =========== ============ ============ ===========
YEAR ENDED DECEMBER 31, 1993
Mining and other equipment and
related facilities $39,237,159 $10,396,676 $ (9,835,290) $(26,108,371) $13,690,174
Environmental equipment and related
facilities 1,055,442 1,141,876 (364,966) - 1,832,352
Transportation equipment 3,894,522 1,083,815 (70,830) (664,955) 4,242,552
Barge loading facilities 2,226,031 865,794 (32,560) (2,182,229) 877,036
Mine development costs 991,471 403,377 - (1,394,848) -
Environmental development costs 73,395 1,400,970 - - 1,474,365
Furniture and fixtures 463,188 114,703 (11,735) (18,380) 547,776
----------- ----------- ------------ ------------ -----------
$47,941,208 $15,407,211 $(10,315,381) $(30,368,783)(2) $22,664,255
=========== =========== ============ ============ ===========
</TABLE>
(1) Additions to accumulated depreciation that have been capitalized as
environmental development costs
(2) Represents reclassification of accumulated depreciation to net assets
held for disposal.
F-36
<PAGE>
ADDINGTON RESOURCES, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------------------
Balance at Charged to Charged to Balance at
Description Beginning of Year Costs & Expenses Other Accounts Deductions End of Year
----------- ----------------- ---------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1991-
None - -
YEAR ENDED DECEMBER 31, 1992-
None - -
YEAR ENDED DECEMBER 31, 1993-
Reserve for assets in bankruptcy
proceedings (see Note 5 to the
consolidated financial statements) $ - $5,767,000 $ - $ - $5,767,000
</TABLE>
F-37
<PAGE>
ADDINGTON RESOURCES, INC.
SCHEDULE IX
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Weighted
Average
Weighted Maximum Average Interest
Balance Average Outstanding Outstanding Rate
at End of Interest During the During the During the
Period Rate Period Period (1) Period (2)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Notes Payable to Banks:
Year ended December 31, 1991 $21,050,321 7.50% $21,050,321 $16,530,800 8.67%
Year ended December 31, 1992 $22,534,929 6.50% $22,534,929 $21,972,472 6.72%
Year ended December 31, 1993 $23,441,737 6.50% $24,534,351 $23,072,775 6.29%
</TABLE>
(1) The average amount outstanding during the period was computed by dividing
the total of the quarter-end outstanding principal balances by five.
(2) The weighted average interest rate during the period was computed by
dividing the interest expense by the average principal amount
outstanding during the period.
F-38
<PAGE>
ADDINGTON RESOURCES, INC.
SCHEDULE X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Charged to Costs and Expenses
Years Ended December 31,
---------------------------------------------
Item 1991 1992 1993
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Repair and maintenance $23,810,000 $32,227,000 $38,541,000
Depreciation and amortization 29,740,000 25,111,000 29,939,000
Royalties 17,006,000 15,399,000 21,225,000
Severance taxes 6,197,000 5,378,000 7,704,000
Reclamation taxes 6,398,000 6,211,000 8,670,000
</TABLE>
Note: Amounts for advertising costs are not presented, as such amounts are less
than 1% of total sales and revenues.
F-39
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADDINGTON RESOURCES, INC.
Date: March 29, 1994 By /s/ Larry Addington
---------------------
Larry Addington, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Larry Addington President and Chairman March 29, 1994
- ------------------------ of the Board of Directors
Larry Addington (Chief Executive Officer)
/s/ R. Douglas Striebel Vice President and Chief March 29, 1994
- ------------------------ Financial Officer (Chief
R. Douglas Striebel Financial Officer) (Chief
Accounting Officer)
/s/ Robert Addington Director March 29, 1994
- ------------------------
Robert Addington
/s/ Bruce Addington Director March 29, 1994
- -----------------------
Bruce Addington
/s/ Carl R. Whitehouse Director March 29, 1994
- ------------------------
Carl R. Whitehouse
/s/ Jack C. Fisher Director March 29, 1994
- ------------------------
Jack C. Fisher
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- -------
(3)(A)/1/ Restated Certificate of Incorporation of Registrant
(B)/1/ Bylaws of Registrant
(10)(A)/2/ Deed dated June 18, 1985 by and between Martiki Coal
Corporation and ARMM Coal, Inc.
(B)/2/ Deed of Conveyance dated June 7, 1984 by and between Franklin
Real Estate Company and ARMM Land Co., Inc.
(C)/2/ Contract Mining Agreement and Related Agreements dated June
10, 1986 among Addington, Inc., CJC Leasing, Inc., N.O.R.
Mining, Inc., Adams Resources & Energy, Inc., and Third
National Bank
(D)/3/ Form of Lease Agreement among Larry Addington and Larry K.
Harrington and Addwest Mining, Inc.
(E)/4/ Employment Agreement between R. Douglas Striebel and the
Registrant, as amended
(F)/5/ Agreement dated as of April 18, 1990, between Indiana-
Kentucky Electric Corporation and Addwest Mining Company,
Inc.
(G) Addington Resources, Inc. Restated Stock Option Plan, as
amended.
(H) Form of Indemnity Agreement between the Registrant and its
directors and officers
(I) Employment Agreement dated as of July 14, 1992, between
Addington Environmental, Inc. and William R. Nelson
(11) Statement re computation of per share earnings.
See page F-33 of
<PAGE>
the audited Consolidated Financial Statements and Schedules
filed as part of this report.
(21) List of subsidiaries of Registrant
(23) Consent of Arthur Andersen & Co.
(99)(A)/2/ Coal Purchase and Sales Agreement dated September 1, 1984 by
and between Fossil Fuels, Inc., Delta Energy Corporation and
Consumers Power Company
(99)(B)/2/ Amended and Restated Contract for Purchase and Sale of Coal
dated June 27, 1986 by and between Tennessee Valley
Authority and Addington, Inc. [Contract No. 86P-65-T4] (See
Exhibit (99)(D) and Exhibit 99(G) pertaining to amendments to
Contract No. 86P-65-T4)
(99)(C)/2/ Contract for Purchase and Sale of Coal dated September 12,
1986 by and between Tennessee Valley Authority and Addwest
Mining, Inc. [Contract No. 86P-16-T1] (See Exhibit 99(E) and
Exhibit 99(H) pertaining to amendments to Contract No.
86P-16=T1)
(99)(D)/6/ Supplemental Agreement to Contract 86P-65-T4 for Purchase and
Sale of Coal dated May 1989, by and between Tennessee Valley
Authority and Addington, Inc.
(99)(E)/6/ Supplemental Agreement to Contract 86P-16-T1 for Purchase and
Sale of Coal dated February 1, 1989 by and between Tennessee
Valley Authority and Addwest Mining, Inc.
(99)(F)/6/ Transfer Agreement dated as of April 3, 1989, by and among
Addwest Mining, Inc. and Addington, Inc. and the Tennessee
Valley Authority
(99)(G)/7/ Supplemental Agreement dated October 23, 1990, to Contract
86P-16-T4 by and between Addington, Inc. and Tennessee Valley
Authority.
<PAGE>
(99)(H)/3/ Supplemental Agreements to Contract 86P-16-T1 for Purchase
and Sale of Coal dated May 11, 1989 and October 30, 1991 by
and between Tennessee Valley Authority and Addwest Mining,
Inc.
____________________
/1/Incorporated by reference to the Registration Statement on Form S-1 [File
No. 33-22164]
/2/Incorporated by reference to the Registration Statement on Form S-1 [File
No. 33-11918]
/3/Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 [File No. 0-16498].
/4/Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 [File No. 0-16498].
/5/Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1990 [File No. 0-16498].
/6/Incorporated by reference to the Registration Statement on Form S-1 [File
No. 33-29848]
/7/Incorporated by reference to the Registrant's Annual Report Form 10-K for
the fiscal year ended December 31, 1990 [File No. 0-16498].
<PAGE>
Exhibit (10)(G)
---------------
ADDINGTON RESOURCES, INC.
RESTATED STOCK OPTION PLAN
1. Purpose. The purpose of the Addington Resources, Inc. Restated
Stock Option Plan (the "Plan") is to promote the interests of Addington
Resources, Inc., a Delaware corporation (the "Corporation"), by affording an
incentive to certain employees and independent contractors to remain in the
employ of the Corporation or its subsidiaries and to use their best efforts on
its behalf; and further to aid the Corporation in attracting, maintaining, and
developing capable personnel of a caliber required to ensure the Corporation's
continued success by means of an offer to such persons of an opportunity to
acquire or increase their proprietary interest in the Corporation through the
granting of options to purchase the Corporation's stock pursuant to the terms of
this Plan. It is anticipated and intended that options granted under this Plan
will either be nonqualified stock options ("NQSO's") governed by Section 83 of
the Code or incentive stock options ("ISO's"), as contemplated by and defined in
Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). The
Board of Directors of the Corporation shall appoint an Option Committee (the
"Committee") which shall have the discretion to designate options as "incentive
stock options" or "nonqualified stock options" at the time of grant.
2. Shares Subject to Plan.
----------------------
(a) Subject to the provisions of Section 9, the shares to be delivered
upon exercise of options granted under the Plan shall be made available, at the
discretion of the Board of Directors, from the authorized unissued shares of the
Corporation's Common Stock or from shares reacquired by the Corporation,
including shares purchased in the open market. Unless the context indicates
otherwise, as used herein, Common Stock shall refer to shares of the common
stock of the Corporation, or the common stock or securities of a successor of
the Corporation which have been substituted therefor under Section 9 of the
Plan.
(b) Subject to adjustments and substitutions made pursuant to the
provisions of Section 9, the aggregate number of shares which may be issued upon
exercise of all options and which may be granted under the Plan shall not exceed
1,500,000 shares of Common Stock.
(c) If any option granted under the Plan expires or terminates for
any reason whatsoever without having been exercised in full, the shares subject
to, but not delivered under, such option shall become available for other
options to the same employee/contractor or other employees/contractors without
decreasing the aggregate number of shares which may be granted under the Plan;
or shall be available for any lawful corporate purpose.
- 1 -
<PAGE>
(d) More than one option may be granted to an optionee pursuant to this
Plan.
3. Option Agreements.
-----------------
(a) Each option under the Plan shall be evidenced by an option agreement,
which shall be signed by the Committee and by the employee/contractor and which
shall contain such provisions as may be approved by the Committee.
(b) The option agreements shall constitute binding contracts between the
Corporation and the optionee and every optionee, upon acceptance of such option
agreement, shall be bound by the terms and restrictions of this Plan and of the
option agreement.
(c) The terms of the option agreement shall be in accordance with this
Plan, but may include additional provisions and restrictions, provided that the
same are not inconsistent with the Plan.
4. Administration. The Board of Directors of the Corporation shall
appoint an Option Committee (the "Committee") to administer the Plan, which
Committee shall consist of not less than three nor more than five members who
are not and have not at any time for one year prior to appointment to the
Committee been eligible to receive an option under the Plan or stock or options
or stock appreciation rights under another Corporation or subsidiary plan. The
Committee shall have full power and authority to construe, interpret, and
administer the Plan and may from time to time adopt such rules and regulations
for carrying out this Plan as it may deem proper and in the best interests of
the Corporation. Subject to the terms, provisions and conditions of the Plan,
the Committee shall have exclusive jurisdiction: [i] to select the employees or
contractors to whom options shall be granted and the type to be granted, [ii] to
determine the number of shares subject to each option, [iii] to determine the
time or times when options will be granted, [iv] to determine the option price
of the shares subject to each option, [v] to determine the time or times when
each option may be exercised, [vi] to fix such other provisions of the option
agreement as the Committee may deem necessary or desirable consistent with the
terms of this Plan, and [vii] to determine all other questions relating to the
administration of the Plan. The interpretation of any provisions of this Plan
by the Committee shall be final, conclusive, and binding upon all persons and
the Board of Directors shall place into effect, and shall cause the Corporation
to perform its obligations under the Plan in accordance with, the determinations
of the Committee.
A majority of the Committee shall constitute a quorum, and a majority vote
at any meeting shall constitute committee action. Written action of the
Committee may be taken by a majority of the members, and action so taken shall
be effective as if it had been taken by a vote of the majority of the members
duly called and held. No member of the Board of Directors or the Committee
shall
- 2 -
<PAGE>
be liable for any action or determination made in good faith with respect to the
Plan or any option issued hereunder.
5. Eligibility.
-----------
(a) Employees and independent contractors of the Corporation and of its
subsidiaries, including officers, who are not stockholders as of the date the
Plan is adopted by the Board of Directors shall be eligible to receive options.
No director of the Corporation shall be eligible to receive options. The fact
that an employee or independent contractor has been granted an option under this
Plan shall not in any way affect or qualify the right of the employer to
terminate his service at any time, subject to the terms and conditions of any
service agreement which may then be in effect. Nothing contained in this Plan
shall be construed to limit the right of the Corporation to grant options
otherwise than under the Plan for any proper and lawful corporate purpose,
including but not limited to options granted to employees and contractors.
Employees or contractors to whom options may be granted under the Plan will be
those selected by the Committee from time to time who, in the sole discretion of
the Committee, have contributed in the past or who may be expected to contribute
materially in the future to the successful performance of the Corporation.
(b) ISO's may be granted only to otherwise eligible recipients (under
Section 5.A above) who are also [i] employees of the Corporation or a subsidiary
and [ii] do not own Common Stock possessing more than 10 percent of the combined
voting power of all classes of stock of the Corporation at the time the option
is granted. The aggregate fair market value of the stock with respect to which
ISO's are exercisable for the first time by an employee during any calendar year
(under this Plan and any other stock option plan of the Corporation and its
subsidiaries) shall not exceed $100,000.
6. Option Price. The price at which shares of stock may be purchased
under an option granted pursuant to this Plan shall be determined by, and in
accordance with procedures to be established by the Committee, but shall in no
instance be less than the fair market value of such shares on the date that the
option is granted, based on the value of the stock as determined by the average
of the bid and asked prices of such shares on the date of grant as supplied by
the National Association of Securities Dealers, Inc. through NASDAQ, or the last
sales price if the stock is then included in the NASDAQ National Market System
(or, if none on that date, on the most recent date for which such information is
available), and published in The Wall Street Journal, or, such successor or
other quotation system pursuant to which trading prices of shares of Common
Stock are quoted or recorded and made available, on the date of grant. The
option price will be subject to adjustments in accordance with the provisions
of Section 9 herein.
- 3 -
<PAGE>
7. Exercise of Options.
-------------------
(a) Subject to the provisions of the Plan with respect to termination of
service under Section 8 herein, the period during which each option may be
exercised, whether in full or by installment, shall be fixed by the Committee
at the time such option is granted, but such period shall expire not later than
ten years from the date granted. The closing of the purchase of shares pursuant
to an option shall occur within 30 days of the exercise of the option.
(b) No shares shall be delivered pursuant to any exercise of an option
until the requirements of such laws and regulations as may be deemed by the
Committee to be applicable to them are satisfied. No optionee, or the legal
representative, legatee, or distributee of an optionee, shall be deemed to be a
holder of any shares subject to any option unless and until the certificate or
certificates for them have been issued.
(c) The exercise price for options shall be payable (i) in cash, or (ii) by
tender to the Corporation of shares of the Corporation's Common Stock
(including "Restricted Stock," as defined in Rule 144 under the Securities Act
of 1933, which shall be valued as if it were not subject to restrictions on
transfer or possibilities of forfeiture) owned by the optionee, or (iii) by any
combination thereof. If shares of Restricted Stock are tendered for
consideration for the exercise of such option, the number of shares issued on
the exercise of such option equal to the number of shares of Restricted Stock
tendered in consideration thereof shall be subject to the same restrictions as
the Restricted Stock so tendered and any additional restrictions that may be
imposed by the Committee. The exercise price, when tendered, shall be tendered
together with an amount equal to any withholding tax due as a result of the
exercise, provided, however, that the Committee may in its discretion allow an
optionee to elect to have a number of shares equal in fair market value to the
withholding tax obligation withheld from those otherwise issuable upon exercise
in satisfaction of the withholding tax due.
8. Termination of Service.
----------------------
(a) If services of an optionee to the Corporation or its subsidiaries are
terminated for any reason other than cause, death, retirement or disability, an
option shall be exercisable by the optionee at any time prior to the expiration
date of the option or within three months and one day (three months for an ISO)
after the date of such termination, whichever is earlier, but only to the extent
the optionee had the right to exercise such option at the date of the
termination of services. If an optionee is an independent contractor and not
an employee, the date of such termination of service shall be the date services
of the contractor shall cease as provided under any applicable agreement between
the contractor and the Corporation or its subsidiaries; provided, however, if no
applicable agreement exists between such parties, the date of
- 4 -
<PAGE>
termination of service shall be the date the Corporation or its subsidiaries
notifies the contractor in writing that the contractor's services are
terminated.
(b) In the event of the death of an optionee while in the employ of the
Corporation, his option shall be exercisable by the person or persons to whom
such optionee's rights pass by will or by the laws of descent and distribution
at any time prior to the expiration date of the option or within twelve months
after the date of such death, whichever is earlier, but only to the extent the
optionee had the right to exercise such option on the date of his death.
(c) If an optionee is an employee and optionee's service with the
Corporation or its subsidiaries terminates due to retirement or disability, the
option period will continue under the same terms and conditions as if the
optionee were still employed. ISO's shall expire three months after retirement
and 12 months after disability (within the meaning of Section 22(e)(3) of the
Code with respect to ISO's).
(d) In the event that termination of the services of an optionee, including
an independent contractor, by the Corporation or its subsidiaries is the result
of dismissal for cause, then effective as of the day prior to the date of such
dismissal, all options granted the optionee shall terminate and all rights under
such options, to the extent not previously exercised, shall become null and
void.
9. Capital Adjustments Affecting Stock.
-----------------------------------
(a) In the event of a capital adjustment in the Common Stock resulting from
a stock dividend, stock split, reorganization, merger, consolidation, or a
combination or exchange of shares or other transaction in which shares are
issued other than for consideration, the number of shares of Common Stock
subject to this Plan and the number of shares under option shall be
automatically adjusted to take into account such capital adjustment. By virtue
of such a capital adjustment, the price of any share under option shall be
adjusted so that there will be no change in the aggregate purchase price payable
upon exercise of any such option.
(b) In the event the Corporation merges or consolidates with another person
or entity, or all or a substantial portion of the Corporation's assets or
outstanding capital stock are acquired (whether by merger, purchase or
otherwise) by another person or entity (the "Successor"), the kind of shares of
Common Stock which shall be subject to the Plan and to each outstanding option
shall, automatically by virtue of such merger, consolidation or acquisition, be
converted into and replaced by shares of common stock, or such other class of
securities having rights and preferences no less favorable than common stock, of
the Successor, and the number of shares subject to the Plan and each option and
the purchase price per share upon exercise of an option shall be correspondingly
- 5 -
<PAGE>
adjusted, so that, by virtue of such merger, consolidation or acquisition, each
optionee shall have the right to purchase [a] that number of shares of common
stock of the Successor which have a fair market value equal, as of the date of
such merger, conversion or acquisition, to the fair market value, as of the date
of such merger, conversion or acquisition, of the shares of Common Stock of the
Corporation theretofore subject to his option, [b] for a purchase price per
share which, when multiplied by the number of shares of common stock of the
Successor subject to the option, shall equal the aggregate exercise price at
which the optionee could have acquired all of the shares of Common Stock of the
Corporation theretofore optioned to the optionee.
Example of Adjustment and Substitution under Section 9.B.:
Assume an optionee has the option to purchase 10,000 shares at an option
price of $27 per share and the fair market value of the shares at time of
exercise, as set by merger or otherwise, is $45 per share and assume further
that the market value of the Successor corporation's common stock is $30 per
share. The calculation of the adjusted optioned shares and price in the
Successor corporation's common stock is as follows:
BEFORE ADJUSTMENT
-----------------
<TABLE>
<CAPTION>
<S> <C>
Fair market value of optioned shares (10,000 x $45)..................... $450,000
Exercise Price of optioned shares (10,000 x $27)........................ $270,000
AFTER ADJUSTMENT
----------------
Shares of common stock of Successor subject to Option ($450,000 / $30).. 15,000
Adjusted option price in Successor common stock ($270,000 / 15,000)..... $ 18
</TABLE>
(c) The granting of an option pursuant to this Plan shall not affect in any
way the right and power of the Corporation to make adjustments, reorganizations,
reclassifications, or changes of its capital or business structure or to merge,
consolidate, dissolve, liquidate, sell or transfer all or any part of its
business or assets.
10. Amendments, Suspension, or Termination. The Board of Directors of the
Corporation shall have the right, at any time, to amend, suspend or terminate
the Plan in any respect which it may deem to be in the best interests of the
Corporation, provided, however, no amendments shall be made in the Plan without
stockholder approval which:
(a) Increase the total number of shares for which options may be granted
under this Plan or pursuant to outstanding options except as provided in Section
9, or materially increase the benefits accruing to participants under the Plan,
or materially modify the requirements as to eligibility for participation in the
Plan.
(b) Change the minimum purchase price for the optioned shares, except as
provided in Section 9;
- 6 -
<PAGE>
(c) Adversely affect outstanding options or any unexercised rights
thereunder, except as provided in and required by Section 9, without the option
holder's consent;
(d) Extend the termination date of the Plan or the maximum term for options
granted hereunder.
11. Obligation of the Corporation. So long as options granted under the
Plan are outstanding, the Corporation (or its Successor, as defined in Section
9.B.) shall on a regular basis release for publication quarterly and annual
summary statements of sales and earnings, and such financial information shall
appear on a wire service, in a financial news service, in a newspaper of general
circulation or otherwise be made publicly available.
12. Effective Date, Term and Approval. This Stock Option Plan shall
become effective upon adoption by the Board of Directors of the Corporation,
subject to approval or ratification by the stockholders of the Corporation
within one year of the effective date of the Plan. This Plan shall terminate on
May 15, 1997, and no options may be granted under the Plan after that date,
unless an earlier termination date after which no options may be granted under
the Plan is fixed by action of the Board of Directors, but any option granted
prior thereto may be exercised in accordance with its terms. The Plan and all
options granted pursuant to it are subject to all laws, approvals, requirements
and regulations of any governmental authority which may be applicable thereto
and, notwithstanding any provisions of the Plan or option agreement, the holder
of an option shall not be entitled to exercise his option nor shall the
Corporation be obligated to issue any shares to the holder if such exercise or
issuance shall constitute a violation by the holder or the Corporation of any
provisions of any approval requirements, applicable law or regulations.
13. Certain Definitions.
i. Cause. With respect to termination of an optionee's employment or
service for cause, as used herein or in the stock option agreement, the term
"cause" shall mean:
(a) A willful and intentional act of optionee intended to injure or having
the effect of injuring the reputation, business or business relationships of
Corporation or any of its subsidiaries.
(b) Any breach of any covenant contained in this Plan or the option
agreement by optionee.
(c) Repeated or continuous failure, neglect or refusal to perform by
optionee of his normal duties and responsibilities.
(d) Commission by optionee of any act or any failure by optionee to act
involving serious criminal conduct or moral turpitude which reflects materially
and adversely on the Corporation or its subsidiaries.
- 7 -
<PAGE>
(b) Retirement. With respect to termination of an optionee's employment or
service due to retirement as used herein or in a stock option agreement the term
"retirement" shall mean, service terminated voluntarily after the age of 55.
(c) Disability. Except as provided in Section 8.C. with respect to ISO's,
with respect to termination of an optionee's employment or service for
disability as used herein or in a stock option agreement, the term "disability"
shall mean inability or incapacity of the optionee to continue performing
services for the Corporation in the same capacity for the same amount of time
provided shortly before occurrence of the event, in the sole and exclusive
judgment of the Committee.
14. Transferability of Options. An option granted under the Plan may not
be transferred except by will or the laws of descent and distribution, and
during the lifetime of the employee to whom granted may be exercised only by
such employee.
15. Governing Law; Severability. This Stock Option Plan shall be
governed by the laws of the Commonwealth of Kentucky and shall be construed as a
stock option plan within the meaning of the Internal Revenue Code of 1986, as
amended from time to time. The invalidity or unenforceability of any provision
of this Plan or any option granted pursuant to this Plan shall not affect the
validity and enforceability of the remaining provisions of this Plan and the
options granted hereunder, and such invalid or unenforceable provision shall be
stricken to the extent necessary to preserve the validity and enforceability of
this Plan and the options granted hereunder.
- 8 -
<PAGE>
Exhibit (10)(H)
---------------
FORM OF INDEMNITY AGREEMENT
This Agreement is made as of the _____ day of _____________, 19___, between
Addington Resources, Inc., a Delaware corporation (the "Corporation"), and
_________________ (the "Indemnitee"), a director and/or officer of the
Corporation.
RECITALS
A. The Indemnitee is currently serving as a director and/or officer of
the Corporation and the Corporation wishes the Indemnitee to continue in such
capacity. The Indemnitee is willing, under certain circumstances, to continue
in such capacity.
B. The Corporation's By-laws (the "By-laws") provide that the Corporation
shall indemnify each of its directors and officers (among others) to the fullest
extent permitted by law. The General Corporation Law of the State of Delaware
(the "Statute"), by its terms, recognizes that such indemnification is not
exclusive of other rights that may arise by agreement, vote of shareholders or
as otherwise therein provided.
C. The Corporation may decide to purchase policies of directors' and
officers' liability insurance ("D&0 Insurance"). However, D&0 Insurance
coverage has been severely limited, the premium costs have increased
severalfold, and the availability of such insurance at a reasonable price is
uncertain. Accordingly, any policy which the Corporation may be able to obtain
for its directors and officers may apply only to the extent that the Corporation
is not permitted by law to indemnify its directors and officers or if the
Corporation is financially unable to pay the indemnification permitted by law.
D. The indemnities available under the Corporation's By-laws and the D&0
Insurance may not be adequate to protect the Indemnitee against the risks
associated with service to the Corporation.
AGREEMENT
NOW, THEREFORE, in order to induce the Indemnitee to continue to serve as a
director and/or officer of the Corporation and in consideration for his or her
continued services, and in order to do everything possible to procure and
maintain adequate D&O Insurance coverage, the Corporation hereby agrees to
indemnify the Indemnitee as follows:
1. Indemnity. The Corporation shall pay on behalf of the Indemnitee, and
his executors, administrators or assigns, any amount which the Indemnitee is or
becomes legally obligated to pay because of any claim or claims made against
the Indemnitee because of any act or omission or neglect or breach of duty,
including any
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actual or alleged error or misstatement or misleading statement, which the
Indemnitee commits or suffers while acting in the capacity as a director or
officer of the Corporation or, at the request of the Corporation, as an officer,
director or trustee of a partnership, joint venture, trust or other enterprise
(including service with respect to employee benefit plans) and solely because of
being a director, officer or trustee. The payments which the Corporation shall
be obligated to make hereunder shall include, among other things, damages,
judgments, settlements and costs, costs of investigation and costs of defense of
legal actions, claims or proceedings, and appeals therefrom, and costs of
attachments or similar bonds; provided however, that the Corporation shall not
be obligated to make any payments hereunder, including fines, fees or other
obligations imposed by law which it is prohibited by applicable law from paying
by way of indemnity (or any other reason) to the Indemnitee.
2. Enforcement. If a claim under this Agreement is not paid by the
Corporation, or on its behalf, within sixty (60) days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim, and if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim.
3. Subrogation. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Corporation effectively to
bring suit to enforce such rights.
4. Exclusions. The Corporation shall not be liable under this Agreement
to make any payment in connection with any claim made against the Indemnitee:
(a) for which payment is actually made to the Indemnitee under a valid and
collectible insurance policy, except in respect of any excess beyond the
amount of payment under such insurance;
(b) for which the Indemnitee is indemnified by the Corporation otherwise than
pursuant to this Agreement;
(c) if it is proved by final judgement in a court of law or other adjudication
to have been based upon or attributable to the Indemnitee gaining in fact
any personal profit or advantage to which the Indemnitee was not legally
entitled;
(d) for an accounting of profits made from the purchase or sale by the
Indemnitee of securities of the
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Corporation within the meaning of Section 16(b) of the Securities Exchange
Act of 1934 and amendments thereto or similar provisions of any state
statutory law or common law;
(e) brought about or contributed to by the dishonesty of the Indemnitee seeking
payment hereunder; however, notwithstanding the foregoing, the Indemnitee
shall be protected under this Agreement as to any claims upon which suit
may be brought against the Indemnitee by reason of any alleged dishonesty
of such Indemnitee, unless a judgment or other final adjudication thereof
adverse to the Indemnitee shall establish that the Indemnitee committed (i)
acts of active and deliberate dishonesty (ii) with actual dishonest purpose
and intent and, which acts were material to the cause of action so
adjudicated; or
(f) if a proper court holds that payment is prohibited by applicable law or is
against public policy.
5. Partial Indemnity. If the Indemnitee is entitled under any provision
of this Agreement to indemnification by the Corporation for a portion of any
costs, charges, or expenses, but not, however, to indemnification for all of the
total amount thereof, the Corporation shall nevertheless indemnify the
Indemnitee for the portion of such costs, charges, or expenses to which the
Indemnitee is entitled.
6. Consent. No costs, charges or expenses for which indemnity shall be
sought thereunder shall be incurred without the Corporation's consent, which
consent shall not be unreasonably withheld.
7. Notice of Claim. The Indemnitee, as a condition precedent to the
Indemnitee's right to be indemnified under this Agreement, shall give to the
Corporation notice in writing as soon as practicable of any claim made against
the Indemnitee for which indemnity will or could be sought under this Agreement.
Notice to the Corporation shall be directed to the attention of the Corporate
Secretary, Addington Resources, Inc., 9431 Route 60, Ashland, Kentucky 41101 (or
such other address as the Corporation shall designate in writing to the
Indemnitee); notice shall be deemed received if sent by prepaid mail properly
addressed, the date of such notice being the date postmarked. In addition, the
Indemnitee shall give the Corporation such information and cooperation as it
may reasonably require and as shall be within the Indemnitee's power.
8. Advancement of Expenses. Costs and expenses (including attorneys'
fees) incurred by the Indemnitee in defending or investigating any action, suit,
proceeding or investigation shall be paid by the Corporation in advance of the
final disposition of such
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matter, if the Indemnitee shall undertake in writing to repay any such advances
in the event that it is ultimately determined that the Indemnitee is not
entitled to indemnification under the terms of this Agreement. The advances to
be made hereunder shall be paid by the Corporation to the Indemnitee within
twenty (20) days following delivery of a written request therefore, together
with the required written undertaking, by the Indemnitee to the Corporation.
Notwithstanding the foregoing or any other provision of this Agreement, no
advance shall be made by the Corporation if a determination is reasonably and
promptly made by the Board of Directors, by a majority vote of a quorum of
disinterested directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs) by independent legal
counsel, that, based upon the facts known to the Board or counsel at the time
such determination is made,
(a) the Indemnitee acted in bad faith or deliberately breached the Indemnitee's
duty to the Corporation or its stockholders, and
(b) as a result of such actions by the Indemnitee, it is more likely than not
that it will ultimately be determined that the Indemnitee is not entitled
to indemnification under the terms of this Agreement.
9. Employee Benefit Plans. For purposes of this Agreement, the
Indemnitee's capacity as a director of the Corporation shall include any service
by the Indemnitee, on behalf or at the request of the Corporation, as a
fiduciary with respect to any employee benefit plan, its participants, or
beneficiaries; references to "fines" shall include any excise taxes asserted on
a person with respect to any employee benefit plan.
10. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one instrument.
11. Non-Exclusivity. Nothing herein shall be deemed to diminish or
otherwise restrict the Indemnitee's right to indemnification under any provision
of the Restated Certificate of Incorporation or Bylaws of the Corporation or
under Delaware law.
12. Governing Law. This Agreement shall be governed by and construed in
accordance with Delaware law.
13. Successors and Assigns. This Agreement shall be binding upon all
successors and assigns of the Corporation (including any transferee of all or
substantially all of its assets and any successor by merger or operation of law)
and shall inure to the benefit of the heirs, personal representatives and estate
of the Indemnitee.
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14. Separability; Interpretation of Agreement. If any provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever (i) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, all portions of any
paragraphs of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that are not by themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby, and (ii) to
the fullest extent possible, the provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing
any such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent of the parties that the Corporation provides
indemnification to the Indemnitee to the fullest extent permissible.
15. Savings Clause. Whenever there is a conflict between any provision of
this Agreement and any applicable present or future statute, law or regulation
contrary to which the Corporation and the Indemnitee have no legal right to
contract, the latter shall prevail, but in such event the affected provisions of
this Agreement shall be curtailed and restricted only to the extent necessary
to bring them within applicable legal requirements.
16. Coverage. The provisions of this Agreement shall apply with respect to
the Indemnitee's service as an officer and/or director of the Corporation prior
to the date of this Agreement and with respect to all periods of such service
after the date of this Agreement, even though the director and/or officer may
have ceased to be a director and/or officer of the Corporation.
17. Modification and Waiver. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and signed as of the day and year first above written.
ADDINGTON RESOURCES, INC.,
a Delaware corporation
By ___________________________
Name: _______________________
Title: ______________________
INDEMNITEE
By ___________________________
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Exhibit (10(I)
EMPLOYMENT AGREEMENT
This is an Employment Agreement dated as of July 14, 1992, between
Addington Environmental, Inc., a Kentucky corporation (the "Company") and
William R. Nelson (the "Employee").
Recitals
A. The Company operates waste, hauling, recycling and disposal
businesses and seeks development and acquisition opportunities throughout the
southeastern United States. The Company desires to employ the Employee in order
that it may take advantage of the Employee's expertise in the waste business;
and the Employee desires to be employed by the Company, all upon the terms and
conditions of this Agreement.
B. The Company considers the establishment and maintenance of sound
and vital senior management to be essential to protecting and enhancing the best
interests of the Company and its shareholders.
C. The Company desires to employ the Employee and the Employee
desires to be employed by the Company, each upon the terms and conditions set
forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties to this Agreement,
the parties agree as follows:
1. Employment Services. The Company hereby employs the Employee and
the Employee hereby accepts such employment, upon the terms and conditions of
this Agreement.
2. Term. The term of the Employee's employment pursuant to this
Agreement and the obligations of the Company with respect to such employment
(the "Term") shall be a three-year period which shall commence on August 1,
1992, and will end on July 31, 1995.
3. Duties. During the Term, the Employee shall be the Company's
President and Chief Executive Officer. In those offices, the Employee shall
perform the duties customary for those positions and such other duties as the
Board may from time to time assign to him. The parties contemplate that the
Employee will serve on the Company's Board of Directors. The Employee agrees,
at the discretion of the Company's shareholders, to serve on the Board without
any additional compensation.
4. Salary. The Company shall pay the Employee an annual salary of
$200,000, payable in 26 equal biweekly installments.
5. Bonus Compensation. The Company and the Employee agree that
within 60 days of the date of this Agreement, an incentive bonus plan,
applicable to the Employee, will be established by the
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Company. The parties intend to consolidate the financial condition of the
Company with its subsidiaries and affiliates in the environmental business to
establish a starting point upon which to base the Employee's future entitlement,
if any, to a bonus. The bonus plan shall be performance based and will include
such factors as the Company's Board of Directors in its reasonable discretion
elects to include, including, but not limited to some or all of the following:
gross revenues, free operating cash flow, shareholder value and net profits.
The bonus plan shall provide for payment of the bonus, when applicable, based
upon a percentage of the Company's performance over a baseline, in cash and/or
stock on an annual basis. The bonus plan shall provide that the amount of any
annual cash bonus shall not exceed the Employee's annual salary.
6. Representations of the Employee. The Employee hereby makes the
following representations and warranties to the Company as of the date of this
Agreement and throughout the Term:
(a) The Employee is subject to no contractual restrictions which
would materially interfere with or prevent the Employee from performing his
services to the Company pursuant to this Agreement;
(b) Except as disclosed by the Employee to the Company in writing
prior to the execution and delivery of this Agreement, the Employee is not a
party to, nor is he aware of, any pending or threatened civil or criminal
litigation, or governmental or regulatory investigation or inquiry, which might
implicate the Employee in any wrongdoing, the nature of which, if such events
took place while employed by the Company, would form the basis for termination
for Cause;
(c) Except as disclosed by the Employee to the Company in writing
prior to the execution and delivery of this Agreement, the Employee has no
knowledge of any facts or events which, if publicly known, would serve as the
basis for civil or criminal litigation or governmental or regulatory
investigation or inquiry of the nature referred to in paragraph 6(b) above;
(d) The Employee has had the opportunity to ask questions and receive
answers concerning the financial condition and operating results of the Company
and Addington Resources, Inc. and to obtain any additional information (to the
extent that such information could be acquired without unreasonable effort or
expense) that the Employee desired; and
(e) The Employee has the education, qualifications and experience
necessary to satisfactorily perform his duties as set forth in this Agreement.
The Employee shall perform his duties as set forth in this Agreement to the best
of his abilities and with the diligence and the level of performance which might
be reasonably expected of executive officers in similar positions.
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7. Expenses. In accordance with the Company's expense reimbursement
policies and procedures in effect from time to time, the Employee shall be
reimbursed within 30 days for reasonable out-of-pocket expenses incurred while
performing his services, as long as the Employee provides satisfactory written
documentation of such expenses.
8. Extent of Services; Business Opportunities.
(a) The Employee shall serve the Company faithfully and to the best
of his ability and shall devote his full time, attention and energies to the
business of the Company.
(b) All waste management opportunities (including development and
acquisition opportunities) developed or located by the Employee during the term
of this Agreement or which the Employee becomes aware of during the term of this
Agreement shall belong to the Company. The Employee shall not be entitled to
any finder's or broker's fees in connection with any waste management or
acquisition opportunities or in connection with the raising of capital for the
Company.
9. Vacation. The Employee shall be entitled to three weeks of
vacation per year, to be taken at a time mutually satisfactory to the Employee
and the Company, during which time his salary shall be paid in full. Unused
vacation for any year during the Term may not be accumulated for use in
subsequent years unless the failure to use such vacation was at the direction of
the Company's Board.
10. Automobile. During the Term, the Company shall provide the
Employee, at the Company's expense, with an automobile, comparable to
automobiles provided to other executive officers of the Company, for use in
connection with the Employee's performance of his duties under this Agreement,
so long as the Company may recover the cost of that selected make and model over
a three-year period in accordance with Section 168 of the Internal Revenue Code
of 1986, and the regulations thereunder.
11. Insurance. Throughout the Term, subject to the Employee's
insurability, the Company shall maintain with a reputable issuer a term policy
insuring the Employee's life and guaranteeing the Employee's designated
beneficiary or beneficiaries a benefit payable upon the Employee's death of
$500,000. Throughout the Term, the Company shall provide the Employee with
health insurance coverage for the Employee, his wife, and children comparable to
the coverage provided by the Company to its other employees. The Company shall
bear the full cost of all such insurance provided.
12. Club Memberships. During the Term, the Company shall pay all
initiation fees, dues and assessments associated with the Employee's membership
in any one country club located in the Fayette County area in which the Employee
becomes a member. The Company may assign to the Employee, in satisfaction of
its obligations under this paragraph 12, a corporate membership in the
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country club of the Employee's selection, if such membership may be obtained by
the Company.
13. Moving Expenses. The Company shall pay the following expenses
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upon receipt of satisfactory written documentation associated with the
Employee's relocation to Lexington, Kentucky:
(a) The Company shall acquire the Employee's residence in Indiana,
Pennsylvania within 60 days after the date of this Agreement, for a purchase
price of $325,000 in cash. The sale shall be on terms and conditions customary
for the transfer of residential property, including without limitation, transfer
to the Company by general warranty deed of good and marketable fee simple title
to the residence, free and clear of any liens or encumbrances. The Company's
covenants in this paragraph 13(a) are based on the Employee's representations
and warranties that the Employee's residence was appraised at $302,500 in 1990
by First Federal Savings and Loan Association of Indiana, Pennsylvania and that
the Employee's investment in the property is approximately $325,000. The
Employee and his family shall have the right to possession of his Indiana,
Pennsylvania residence, without the payment of any rent or other consideration
to the Company, for a period of 90 days after the date of this Agreement;
(b) In connection with the sale of the Employee's Pennsylvania
residence, the Company shall pay reasonable (i) broker's fees, and (ii) legal
expenses;
(c) In connection with the acquisition of a residence in Kentucky,
the Company shall pay reasonable (i) legal expenses, (ii) appraisal fees, (iii)
survey fees, (iv) title insurance fees, (v) loan placement fees charged by a
mortgage lender, and (vi) miscellaneous fees charged by a mortgage lender;
(d) The Company shall pay reasonable (i) packing, and (ii) moving
expenses; and
(e) The Company shall pay reasonable expenses of the Employee in
locating a residence in Kentucky, including traveling expenses and overnight
lodging.
14. Termination Following Change of Control. If any of the events
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constituting a Change of Control (as defined in paragraph 17(b) below) shall
have occurred, the Employee shall be entitled to the termination benefits
provided in paragraph 15 below upon the concurrent or subsequent termination of
the Employee's employment within three years after the Change of Control, unless
such termination is (a) because of the Employee's death or Retirement; (b) by
the Company for Cause; or (c) by the Employee other than for Good Reason.
15. Compensation Upon Termination. If the Employee is entitled to
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receive termination benefits pursuant to paragraph 14 above, the Company shall
pay to the Employee on the 30th day
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following the Date of Termination as severance compensation in a lump sum an
amount equal to:
(a) any accrued but unpaid balance of the Employee's (i) salary
through the Date of Termination at the rate in effect at the Date of
Termination, (ii) bonus, prorated through the Date of Termination; plus
(b) an amount equal to the Employee's full salary at the rate in
effect as of the Date of Termination, for a period of three years minus a period
equal to the number of days which elapse between the date upon which a Change of
Control occurs and the Date of Termination (discounted to present value using
the rate published in the Wall Street Journal as of the Date of Termination (or
the next available business day) for Treasury Bills or other comparable
government obligations issued at par with the closest maturity date to the date
one year from the Date of Termination plus 1.
16. Disability.
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(a) If during the Term the Employee becomes unable to perform his
duties hereunder because of disability, the Employee shall be entitled to his
full salary during the twelve months next following the onset of such
disability. If that disability continues throughout that six-month period, the
Company may terminate the Employee's employment hereunder. Upon any such
termination, the Term shall be deemed to have ended and all obligations of the
Company under this Agreement shall cease, but the Employee's covenants regarding
confidentiality and noncompetition shall be enforceable by the Company. Solely
as used in this paragraph 16 "disability" shall mean the Employee's inability
(as determined by a independent physician) due to accident or physical or mental
illness, to adequately and fully perform the duties that the Employee was
performing for the Company when the disability began. If at any time during the
Term the independent physician makes a determination with respect to the
Employee's disability, that determination shall be final, conclusive, and
binding upon the Company, the Employee, and their successors in interest.
(b) The Company may obtain disability insurance coverage in favor of
the Employee. In the event that such coverage is obtained, the six-month period
referred to in paragraph 16(a) above shall be reduced, with respect to
compensation to be paid to the Employee, to the extent that the payment of such
compensation is covered by such disability policy.
17. Definitions. For purposes of this Agreement, the following words and
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terms shall have the following meanings:
(a) Cause. Termination by the Company of the Employee's employment
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for "Cause" shall mean termination upon (i) the failure by the Employee
substantially to perform his duties in any material respect on behalf of the
Company after written demand for
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substantial performance has been delivered to the Employee by the Board, which
demand specifically identifies the duties in which the Board believes that the
Employee has not substantially performed, (ii) the engaging by the Employee in
gross misconduct materially and demonstrably injurious to the Company, (iii) the
material breach by the Employee of his fiduciary duty to the Company or its
shareholders, (iv) the material breach of any representation and warranty set
forth in this Agreement, (v) the violation by the Employee of any law, rule or
regulation, if such violation might, in the reasonable opinion of the Company's
Board of Directors, have a material adverse impact on the Company's business or
reputation, or (vi) the issuance with respect to the Employee of any cease-and-
desist order or similar order or ruling by the Securities and Exchange
Commission or any securities exchange, if the issuance of such cease-and-desist
order or similar order or ruling by the Securities and Exchange Commission
might, in the reasonable opinion of the Company's Board of Directors, have a
material adverse impact on the Company's business or reputation.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for Cause until there shall have been delivered to the Employee a
copy of a resolution duly adopted by the affirmative vote of not less than two-
thirds of the entire membership of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to the Employee and an
opportunity for the Employee, together with his counsel, to be heard before the
Board), finding that in the good faith opinion of the Board, the Employee was
guilty of conduct set forth above in this paragraph 17(a) and specifying the
particulars thereof in detail;
(b) Change of Control. A "change of control" of the Company shall
mean (i) the transfer of more than 50% of the beneficial interest in the stock
of the Company other than to an affiliate of the Company or the shareholders of
Addington Resources, Inc., or (ii) the aggregate ownership interest, directly or
indirectly, legally or beneficially, of Larry Addington, Kathy Addington, Bruce
Addington, Robert Addington and Steve Addington in the stock of Addington
Resources, Inc. declines below 25%;
(c) Date of Termination. "Date of Termination" shall mean the date
specified in the Notice of Termination as defined in paragraph 17(e);
(d) Good Reason. "Good Reason" shall mean:
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(i) Without the Employee's express written consent, the assignment to
the Employee of any duties inconsistent with the Employee's positions, duties,
responsibilities and status as an officer of the Company immediately prior to a
Change of Control of the Company; a change in the Employee's reporting
responsibilities, titles or offices as in effect immediately prior to a Change
of Control of the Company; or any removal of the Employee from or any failure to
re-elect the Employee to any of such positions, except in connection with the
termination of the Employee's employment for
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Cause, or as the result of the Employee's death or Retirement, or by the
Employee other than for Good Reason;
(ii) A material breach by the Company of its obligations under this
Agreement;
(iii) The relocation of the Company's principal executive offices to
a location outside the Lexington area; or the Company's requiring the Employee
to be based anywhere other than the Company's principal executive offices,
except for required travel on the Company's business to an extent substantially
consistent with the Employee's present business travel obligations;
(iv) The Company's failure to continue in effect any presently
existing benefit or compensation plan, pension plan, life insurance plan, health
and accident plan or disability plan; or the taking of any action by the Company
which would adversely affect his participation in or materially reduce his
benefits under any of the plans described above or deprive him of any material
fringe benefits; or
(v) The Company's failure to obtain the assumption of all obligations
under this Agreement by any successor as contemplated by this Agreement.
(e) Notice of Termination. Any termination by the Company or by the
Employee, pursuant to this Agreement, shall be communicated by written notice of
such termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice, from the Company or the Employee,
which shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment under
the provision so indicated.
(f) Retirement. Termination of the Employee's employment based on
"Retirement" shall mean voluntary termination in accordance with the Company's
retirement policies, generally applicable to its salaried employees or in
accordance with any retirement arrangement established with the Employee's
consent with respect to the Employee.
18. Termination. The Employee's employment pursuant to this Agreement shall
be terminated upon the occurrence of the earliest of the following events:
(a) On the death of the Employee;
(b) Whenever the Company and the Employee shall agree in writing to
terminate this Agreement;
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(c) Upon the occurrence of an event which would serve as the basis
for the termination of the Employee's employment for Cause;
(d) The material breach by the Employee of his obligations under this
Agreement; or
(d) Upon expiration of the Term of this Agreement.
Upon any such termination, the Employee shall be entitled to receive only the
salary payable as of the end of the next pay period in which the event of
termination occurs or becomes effective and any accrued but unpaid bonus, and
he shall not be entitled to additional compensation or benefits.
19. Restrictive Covenant.
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(a) As an essential ingredient in consideration of this Agreement,
the Employee agrees that he shall not, during the term of this Agreement, and
for a period of three years from the effective date of the termination for any
reason whatsoever of his employment under this Agreement, whether such
termination is voluntary or involuntary, either directly or indirectly, for or
on behalf of himself or any person, persons, partnership, corporation or other
entity, other than the Company:
(i) Engage in the waste hauling, treatment, disposal or recycling
businesses within a 75 mile radius of any of the Company's waste disposal
facilities;
(ii) Solicit or accept the business of any current or former
customers of the Company or its affiliates (other than through the obtaining of
national accounts where the solicitation of such business is not made to or
through contacts developed with such customer while in the employ of the
Company);
(iii) Except in the course of his employment hereunder and for the
benefit of the Company, take, use, appropriate or divulge to anyone any
Proprietary Information or other confidential information of the Company; or
(iv) Enter into agreement with or solicit the employment of, employees
of the Company for the purpose of causing them to leave the Company or to do any
of the acts described in paragraphs 19(a)(i) through (iii) above.
(b) In connection with the Employee's employment, he will be exposed
to Proprietary Information of the Company and its affiliates. For purposes of
this Agreement, "Proprietary Information" means any trade secret of or private
information concerning the Company and its affiliates, including, without
limitation, the Company's or its affiliates' design, use, purchase or sale of
its landfills and other waste disposal products and facilities; information
concerning product designs, manufacturing methods,
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processes, treatment or composition of materials, plant layout, marketing plans
or proposals, contracts, agreements, customer lists and customer needs,
requirements and preferences; and information concerning existing and potential
waste sources and landfill or waste disposal development and acquisition
opportunities. The Company has expressly or impliedly protected such
information from unrestricted use by persons not associated with the Company.
Information that is generally known to the Company's competitors without prior
disclosure by the Employee shall be excluded from the scope of "Proprietary
Information" for purposes of this Agreement.
20. Specific Enforcement. In the event of a breach of the Employee's
covenants in this Agreement, it is agreed that damages will be difficult to
ascertain and that the Company may petition a court of law or equity for, and be
granted, injunctive relief in addition to any other relief which the Company may
have under the law, including reasonable attorneys' fees. The Employee
represents and acknowledges that the enforcement of any remedy under this
Agreement, including specific enforcement, will not prevent him from earning a
livelihood because his abilities are such that he reasonably can expect to find
work. In any litigation between the parties to this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees to the extent permitted by
law.
21. Benefit.
-------
(a) This Agreement shall inure to the benefit of and shall be binding
upon the Company, its successors and assigns. Neither the benefit nor burden of
this Agreement is assignable by the Employee. Any attempted assignment by the
Employee shall be null and void and shall terminate this Agreement, except for
provisions regarding confidentiality and noncompetition which shall be
enforceable by the Company against the Employee.
(b) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets, or both of the Company by agreement
in form and substance satisfactory to the Employee, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform if such succession had not taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Employee to compensation from the Company in the same amount and on the same
terms as he would have been entitled hereunder if he had terminated his
employment for Good Reason, provided that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, the "Company" shall
mean the Company as defined in this Agreement and any successor to its business
or assets or both as aforesaid or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
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<PAGE>
22. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky. The parties hereto
irrevocably submit to the nonexclusive jurisdiction of any State or Federal
court sitting in Boyd County, Kentucky in any action or proceeding arising out
of or relating to this Agreement, and hereby irrevocably agree that all claims
in respect of such action or proceeding may be heard and determined in such
court. The parties hereby irrevocably waive, to the fullest extent that they
may effectively do so, the defense of an inconvenient forum to the maintenance
of such action or proceeding.
23. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all prior
and other understandings with respect to the subject matter hereof. No change,
modification, addition or amendment of this Agreement shall be enforceable
unless in writing and signed by the party against whom enforcement is sought.
24. Headings. The headings contained in this Agreement are included for
ease of reference only and shall not be considered in the interpretation or
enforcement of this Agreement.
25. Provisions Severable. To the extent that any one or more of the
provisions of this Agreement shall be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired.
26. Notices. All notices required to be given under this Agreement shall be
in writing and may be given in person or by United States mail, by delivery
service or by electronic transmission. Any notice directed to a party to this
Agreement shall become effective upon the earliest of the following: (i) actual
receipt by that party; (ii) delivery to the designated address of that party,
addressed to that party; or (iii) if given by certified or registered United
States mail, five business days after deposit with the United States Postal
Service, postage prepaid, addressed to that party at its designated address.
The designated address of a party shall be as follows unless a party specifies
another address to the other party by means of a notice given in accordance with
the provisions of this paragraph 26:
If to the Company:
Addington Environmental, Inc.
771 Corporate Drive, Suite 900
Lexington, Kentucky 40503
Fax: (606) 223-4178
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<PAGE>
With a copy to:
Scott W. Dolson
Brown, Todd & Heyburn
2700 Lexington Financial Center
Lexington, Kentucky 40507
Fax: (606) 231-0011
If to the Employee:
William R. Nelson
120 Gary Lane
Indiana, Pennsylvania 15701
27. Stock Options.
-------------
(a) Upon the terms and conditions set forth below, the Company shall
grant to the Employee either (i) options ("Options") to purchase shares of
common stock in the corporation holding a material portion of the waste
management businesses held directly or indirectly by Addington Resources, Inc.
("ARI") (the "Waste Business"), or (ii) options to acquire shares of ARI.
(b) The Company shall grant to the Employee Options within 30 days
after the satisfaction of each of the following conditions: (i) within three
years after the date of this Agreement, the Waste Business is separated from
the non-waste management businesses held directly or indirectly by ARI, through
a distribution of shares to the shareholders of ARI of a corporation holding
directly or indirectly the Waste Business (the "Distribution"); and (ii) the
Employee is employed by the Company as of the date of the Distribution; and
(iii) at the time of the Distribution, there exists no material default by the
Employee in connection with the performance of the Employee's obligations under
this Agreement.
(c) The Options shall give the Employee the non-transferable right
to acquire shares in the corporation holding the Waste Business. The number of
shares subject to the Options shall be agreed-upon by the Company and Employee
in connection with the establishment of the Company's stock option plan. The
Company will be under no obligation to register the shares to be issued upon
exercise of the Options under the Securities Act of 1933, as amended, or any
state securities laws. The Employee shall be entitled to request piggyback
registration of his shares of the Waste Business in the first underwritten
offering to the general public to occur following the exercise of all or a
portion of the Options. These piggyback registration rights shall be on terms
customary to such agreements, including those regarding the pro rata payment of
underwriting discounts and commissions by the Employee as a selling
shareholder.
(d) The exercise price for each share acquired through exercise of
the Options shall be an amount equal to the fair
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<PAGE>
market value of such share at the close of business on the date of the
Distribution, based on the value of the stock as determined by the average of
the bid and asked prices of such shares on the date of the Distribution as
supplied by the National Association of Securities Dealers, Inc. through
NASDAQ, or the last sales price if the stock is included in the NASDAQ National
Market System, or such successor or other quotation system pursuant to which
trading prices of the shares of common stock are quoted on the date of grant.
(e) The Options shall be issued to the Employee pursuant to an option
agreement which shall be no less favorable than the terms of options issued
under the ARI Restated Stock Option Plan, including without limitation the term
during which such Options may be exercised, unless otherwise required by law.
(f) If (i) the Distribution does not occur within three years after
the date of this Agreement, or the Distribution occurs and for valid business or
legal reasons, the Company does not issue Options to the Employee, and (ii) the
Employee remains employed by the Company during such entire three year period,
and (iii) there exists no material default by the Employee in connection with
the performance of his obligations under this Agreement, then, in lieu of the
grant of Options, the Employee shall be granted, as of the date three years from
the date of this Agreement, options to purchase shares of ARI's common stock,
pursuant to the terms of ARI Restated Stock Option Plan or any option plan
subsequently adopted by ARI substantially similar to the Restated Stock Option
Plan. The number of options to be granted to the Employee pursuant to this
paragraph 27(g) shall be agreed to by the Employee and the Company in connection
with the development of the Company's stock option plan.
(h) The provisions of this paragraph 27 will not be effective until
30 days following the notification of the director of the Kentucky Division of
Securities of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the date first set forth above, but actually on the dates set
forth below.
ADDINGTON ENVIRONMENTAL, INC.
By /s/ Jack Baker
------------------------------
Title: President
-------------------------
Date: 7-9-92
---------------------------
/s/ William R. Nelson
----------------------------------
William R. Nelson
Date: July 14, 1992
---------------------------
Guaranty by Addington Resources, Inc.
-------------------------------------
The performance of Addington Environmental, Inc.'s obligations under the
Agreement set forth above are hereby guaranteed by Addington Resources, Inc.
ADDINGTON RESOURCES, INC.
By /s/ Larry Addington
-------------------------------
Title: President
----------------------------
Date: 7-9-92
-----------------------------
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<PAGE>
Exhibit 21. List of Subsidiaries at March 15, 1994
--------------------------------------
Name of Subsidiary (1) Place of Incorporation
---------------------- ----------------------
Addington Holding Company, Inc. (2) Delaware
Green Valley Environmental Corp. Kentucky
Mining Technologies, Inc. Kentucky
Addington Mining, Inc. Kentucky
Addwest Mining, Inc. Kentucky
Addwest Minerals, Inc. Kentucky
New River Lime, Inc. Kentucky
Addington Environmental, Inc. Kentucky
Collection Services, Inc. (3) Kentucky
Ohio County Balefill, Inc. (3) Kentucky
East Carolina Environmental, Inc. (3) Kentucky
Epperson Waste Disposal, Inc. (3) Kentucky
Tri-K Landfill, Inc. (3) Kentucky
Uwharrie Environmental, Inc. (3) Kentucky
Belize River Fruit Co. Kentucky
Barton Creek Farm Limited (4) Belize
Addwest Transport, Inc. Kentucky
- -------------------
(1) All of the Company's subsidiaries do business under the listed name.
(2) Except as otherwise indicated, all of the subsidiaries listed below are
wholly owned by Addington Holding Company, Inc. which is a wholly owned
subsidiary of Addington Resources, Inc.
(3) A wholly owned subsidiary of Addington Environmental, Inc.
(4) A jointly owned subsidiary of Belize River Fruit Co. and Addington Holding
Company, Inc.
<PAGE>
EXHIBIT 23
----------
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation
by reference of our reports included in the Form 10-K into the Company's
previously filed Registration Statement File No. 33-34559.
/s/ Arthur Andersen & Co.
Arthur Andersen & Co.
Louisville, Kentucky
March 23, 1994
