SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Rochester & Pittsburgh Coal Company
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, no par value
2) Aggregate number of securities to which transaction applies:
3,440,984 shares outstanding
3) Per unit price or other underlying value of transaction computed
pursuant to Ex change Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$43.50 for each share outstanding
4) Proposed maximum aggregate value of transaction:
approximately $149,682,800
5) Total fee paid: $29,937
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by the Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
ROCHESTER & PITTSBURGH COAL COMPANY
655 Church Street
Indiana, Pennsylvania 15701
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Rochester & Pittsburgh Coal Company (the "Company") to be
held at 10:00 a.m., local time, on September 22, 1998 at the offices of Duane,
Morris & Heckscher LLP, 42nd Floor, One Liberty Place, 1650 Market Street,
Philadelphia, Pennsylvania 19103.
At the Special Meeting, you will be asked to consider and vote upon the
approval and adoption of an Agreement and Plan of Merger (the "Merger
Agreement") dated as of May 28, 1998 among the Company, CONSOL Inc. ("CONSOL")
and CONSOL Commonwealth Inc. ("Merger Sub"). A copy of the Merger Agreement is
attached as Appendix A to the Proxy Statement accompanying this letter. Pursuant
to the Merger Agreement, Merger Sub will be merged with and into the Company
(the "Merger") and the Company will become an indirect subsidiary of CONSOL.
In summary, the Merger Agreement provides that upon the Merger each share
of Common Stock, no par value per share, of the Company (the "Common Stock")
that is issued and outstanding at the time the Merger is consummated (the
"Effective Time"), other than shares held by shareholders who perfect their
statutory dissenters rights and shares held by the Company as treasury stock,
will be cancelled and extinguished and converted automatically into the right
to receive an amount in cash, without interest, equal to $43.50 per share of
Common Stock (the "Merger Price"), an aggregate of $149,682,800. On May 27,
1998, the day prior to the public announcement of the Merger Agreement, the
Company's Common Stock closed at $46.25 per share on the OTC Bulletin Board. The
book value per share of the Company's Common Stock as of June 30, 1998 was
$59.37 compared to the Merger Price of $43.50.
Complete information concerning the Merger, a description of the business
of the Company and certain financial information relating to the Company is set
forth in the accompanying Proxy Statement and the complete text of the Merger
Agreement is contained in Appendix A thereto.
The Company's Board of Directors has received the opinion, dated as of
May 28, 1998, of J.P. Morgan Securities Inc. ("J.P. Morgan"), the Company's
financial advisor, to the effect that, based upon and subject to the various
considerations set forth therein, as of the date of such opinion, the
consideration to be paid to the Company's shareholders in connection with the
Merger was fair from a financial point of view to the Company's shareholders.
The full text of such opinion is set forth as Appendix C to the accompanying
Proxy Statement. The Company's Board of Directors has unanimously approved the
proposed Merger after considering various factors described in the accompanying
Proxy Statement, including the fairness opinion of J.P. Morgan, competitive
conditions prevailing in the coal industry, the losses encountered to date at
the Mine No. 84 project and the Company's Helvetia subsidiary, analyses of the
value of the Company's Common Stock and reductions in the annual dividend rate
on the Company's Common Stock and believes that the Merger is fair to and in the
best interests of the Company and its shareholders.
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The Company has had a proud history since its inception more than 100 years
ago. It was, therefore, only after lengthy negotiations and deliberations that
the Board of Directors concluded that the shareholders' best interests would be
served by the Merger with CONSOL. Given the intense competition in the coal
industry among fewer and ever larger companies with increasingly greater
financial resources and the Company's recent results of operations, the Board of
Directors believes its decision is the best alternative for shareholders.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the votes cast in person or by proxy at the Special Meeting by
the holders of the Common Stock. It is important that your shares be represented
at the Special Meeting, regardless of the number of shares you hold. Therefore,
please complete, sign and date the enclosed proxy card and return it in the
enclosed envelope as soon as possible, whether or not you plan to attend the
Special Meeting. Returning the proxy card will not affect your right to revoke
your proxy as described in the accompanying Proxy Statement or to attend the
Special Meeting.
Sincerely,
---------------------
Thomas W. Garges, Jr.
President and Chief Executive Officer
September 4, 1998
<PAGE>
ROCHESTER & PITTSBURGH COAL COMPANY
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 22, 1998
To the Shareholders of Rochester & Pittsburgh Coal Company:
A Special Meeting of Shareholders (the "Special Meeting") of Rochester &
Pittsburgh Coal Company (the "Company") will be held at 10:00 a.m., local time,
on Tuesday, September 22, 1998, at the offices of Duane, Morris & Heckscher LLP,
42nd Floor, One Liberty Place, 1650 Market Street, Philadelphia, Pennsylvania
19103, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger dated as of May 28, 1998 (the "Merger Agreement") among the
Company, CONSOL Inc. ("CONSOL") and CONSOL Commonwealth Inc. ("Merger Sub"), a
copy of which is attached as Appendix A to the Proxy Statement accompanying this
Notice. Pursuant to the Merger Agreement, Merger Sub will be merged with and
into the Company (the "Merger") and the Company will become an indirect
subsidiary of CONSOL. As a result of the Merger, each share of Common Stock, no
par value per share, of the Company (the "Common Stock") that is issued and
outstanding at the time the Merger is consummated (the "Effective Time"), other
than shares held by shareholders who perfect their statutory dissenters rights
and shares held by the Company as treasury stock, will be cancelled and
extinguished and converted automatically into the right to receive an amount in
cash, without interest, equal to $43.50 per share of Common Stock (the "Merger
Price"); and
2. To transact such other business as may properly come before the Special
Meeting and any adjournment, postponement or continuation thereof.
The Company's Board of Directors has fixed the close of business on
June 26, 1998 as the record date for the determination of shareholders entitled
to notice of and to vote at the Special Meeting. Approval and adoption of the
Merger Agreement will require the affirmative vote of a majority of the votes
cast in person or by proxy by the holders of Common Stock at the Special
Meeting, provided a quorum is present.
Holders of Common Stock have the right to dissent from the Merger and to
obtain payment for their shares by following the procedures prescribed in
Subchapter 15D of the Pennsylvania Business Corporation Law of 1988, as amended,
the text of which is attached as Appendix D to, and summarized under "The Merger
and the Merger Agreement - Dissenters Appraisal Rights" in, the accompanying
Proxy Statement.
THE BOARD OF DIRECTORS OF THE COMPANY HAS CAREFULLY CONSIDERED THE TERMS OF
THE MERGER AGREEMENT AND HAS UNANIMOUSLY APPROVED THE PROPOSED MERGER AND HAS
DETERMINED THAT THE PROPOSED MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE
COMPANY AND ITS SHAREHOLDERS.
<PAGE>
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
COMMON STOCK VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT.
By Order of the Board of Directors,
-------------------------------------
Thomas W. Garges, Jr.
President and Chief Executive Officer
September 4, 1998
IMPORTANT
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING
REGARDLESS OF THE NUMBER OF SHARES THAT YOU HOLD. THEREFORE, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE AS
SOON AS POSSIBLE. IF YOU ARE UNABLE TO ATTEND THE SPECIAL MEETING, YOUR SHARES
WILL BE VOTED AS SPECIFIED IN ANY COMPLETED PROXY CARD RETURNED BY YOU.
RETURNING THE ENCLOSED PROXY CARD WILL NOT AFFECT YOUR RIGHT TO REVOKE YOUR
PROXY AS DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT OR TO ATTEND THE SPECIAL
MEETING IN PERSON.
<PAGE>
ROCHESTER & PITTSBURGH COAL COMPANY
655 Church Street
Indiana, Pennsylvania 15701
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PROXY STATEMENT
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SPECIAL MEETING OF SHAREHOLDERS TO BE HELD TUESDAY, SEPTEMBER 22, 1998
This Proxy Statement is being furnished to shareholders of Rochester &
Pittsburgh Coal Company, a Pennsylvania corporation (the "Company"), in
connection with the solicitation of proxies by the Company's Board of Directors
(the "Board of Directors") for use at a special meeting of the Company's
shareholders and any adjournment, postponement or continuation thereof (the
"Special Meeting") to be held on Tuesday, September 22, 1998 at 10:00 a.m.,
local time, at the offices of Duane, Morris & Heckscher LLP, 42nd Floor, One
Liberty Place, 1650 Market Street, Philadelphia, Pennsylvania 19103. This Proxy
Statement, the accompanying letter to shareholders, the Notice of Special
Meeting and the proxy card enclosed herewith are first being mailed to the
Company's shareholders on or about September 4, 1998.
This Proxy Statement relates to the proposed merger (the "Merger") of
CONSOL Commonwealth Inc., a Pennsylvania corporation ("Merger Sub") and an
indirect subsidiary of CONSOL Inc., a Delaware corporation ("CONSOL"), with and
into the Company with the Company being the surviving entity pursuant to an
Agreement and Plan of Merger dated as of May 28, 1998 (the "Merger Agreement")
among the Company, CONSOL and Merger Sub. See "The Merger and the Merger
Agreement."
At the Special Meeting, the Company's shareholders will consider and vote
upon a proposal to approve and adopt the Merger Agreement. Pursuant to the
Merger Agreement, each share of Common Stock, no par value per share, of the
Company (the "Common Stock") that is issued and outstanding at the time the
Merger is consummated (the "Effective Time"), other than shares held by
shareholders who perfect their statutory dissenters rights ("Dissenting Shares")
and shares held by the Company as treasury stock ("Treasury Shares"), will be
cancelled and extinguished and converted automatically into the right to receive
an amount in cash, without interest, equal to $43.50 per share of Common Stock
(the "Merger Price"). See "The Merger and the Merger Agreement - Payment for
Common Stock."
Shares of Common Stock represented by proxies in the accompanying form, if
duly executed and received by the Board of Directors before the Special Meeting,
will be voted at the Special Meeting in accordance with the specifications made
thereon by the shareholders. Any proxy not specifying to the contrary will be
voted in favor of the approval and adoption of the proposal referred to in the
Notice of Special Meeting. A shareholder who signs and
<PAGE>
returns a proxy in the accompanying form may revoke it at any time before it is
voted by giving written notice of revocation or a duly executed proxy bearing a
later date to the Secretary of the Company or by attending the Special Meeting
and voting in person.
The cost of solicitation of proxies in the accompanying form will be borne
by the Company, including expenses in connection with preparing and mailing this
Proxy Statement. Such solicitation will be made by mail and may also be made on
behalf of the Company in person or by telephone or telegram by the Company's
regular officers and employees, none of whom will receive special compensation
for such services. The Company, upon request therefor, will also reimburse
brokers or persons holding shares in their names or in the names of nominees for
their reasonable expenses in sending proxies and proxy material to beneficial
owners.
Only holders of Common Stock of record at the close of business on June 26,
1998 will be entitled to notice of and to vote at the Special Meeting. Each
share of Common Stock is entitled to one vote on all matters to come before the
Special Meeting.
As of the close of business on June 26, 1998, the Company had outstanding
3,440,984 shares of Common Stock. The presence in person or by proxy of the
holders of a majority of the outstanding shares will constitute a quorum at the
Special Meeting.
Holders of Common Stock have the right to dissent from the Merger and to
obtain payment for their shares by following the procedures prescribed in
Subchapter 15D of the Pennsylvania Business Corporation Law of 1988, as amended
(the "PBCL"), which is attached as Appendix D to, and summarized under "The
Merger and the Merger Agreement - Dissenters Appraisal Rights" in, this Proxy
Statement. See "The Merger and the Merger Agreement - Dissenters Appraisal
Rights."
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
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<S> <C>
SUMMARY.................................................................................................... 1
Parties to the Merger............................................................................ 1
The Special Meeting.............................................................................. 2
Vote Required; Record Date....................................................................... 2
The Merger and the Merger Agreement.............................................................. 3
The Stockholders Agreement....................................................................... 7
Market Prices and Dividends...................................................................... 7
Selected Consolidated Financial Data............................................................. 9
INTRODUCTION............................................................................................... 10
VOTING AND PROXIES......................................................................................... 10
Record Date; Solicitation of Proxies............................................................. 10
Vote Required.................................................................................... 11
Stock Ownership of Management and Certain Beneficial Owners...................................... 12
THE MERGER AND THE MERGER AGREEMENT........................................................................ 15
General.......................................................................................... 15
Background of the Merger......................................................................... 15
Opinion of Financial Advisor; Reasons for the Merger;
Recommendation of the Board of Directors....................................................... 17
Interests of Certain Persons in the Merger....................................................... 23
Effective Time of the Merger..................................................................... 23
Payment for Common Stock......................................................................... 24
Certain Other Effects of the Merger.............................................................. 24
Antitrust Matters................................................................................ 24
Accounting Treatment............................................................................. 25
Terms of the Merger; Amendments.................................................................. 25
Conditions to Consummation of the Merger; Representations
and Warranties; Certain Covenants.............................................................. 26
Certain Other Agreements of the Parties.......................................................... 30
Management of the Company after the Merger....................................................... 31
Termination; Fees and Expenses; Plans of the Company If the
Merger Is Not Consummated...................................................................... 31
Source and Amount of Funds....................................................................... 32
Federal Income Tax Consequences of the Merger.................................................... 32
Dissenters Appraisal Rights...................................................................... 33
THE STOCKHOLDERS AGREEMENT................................................................................. 36
INFORMATION CONCERNING THE COMPANY......................................................................... 38
Business......................................................................................... 38
Properties....................................................................................... 49
Legal Proceedings................................................................................ 54
Selected Consolidated Financial Data............................................................. 55
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................... 56
(i)
<PAGE>
ADDITIONAL INFORMATION..................................................................................... 66
Independent Public Auditors...................................................................... 66
Available Information............................................................................ 66
OTHER PROPOSALS............................................................................................ 67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. 68
APPENDICES:
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Agreement and Plan of Merger, dated as of May 28, 1998, among CONSOL
Inc., CONSOL Commonwealth Inc.
and Rochester & Pittsburgh Coal Company........................................................ A-1
Stockholders Agreement dated as of May 28, 1998 among
CONSOL Inc., CONSOL Commonwealth Inc., Emilie I. Wiggin,
Co-Trustee, Urling I. Searle, Co-Trustee, Peter Iselin, Emilie I.
Wiggin, O'Donnell Iselin II, Columbus O'D. Iselin and
Gordon B. Whelpley, Jr......................................................................... B-1
Opinion of J.P. Morgan Securities Inc............................................................ C-1
Subchapter 15D and Section 1930 of the Pennsylvania
Business Corporation Law, as amended........................................................... D-1
</TABLE>
(ii)
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. This Summary does not purport to be complete and should be
read in conjunction with, and is qualified in its entirety by reference to, the
more detailed information appearing elsewhere in this Proxy Statement and the
Appendices hereto.
Parties to the Merger
Rochester & Pittsburgh Coal Company
The Company and its predecessors have been engaged in the mining of coal in
central and western Pennsylvania since 1881. From the mid-1960's, the Company
has been principally engaged in the deep mining of bituminous coal for sale
pursuant to long-term coal supply agreements to electric generating plants
located adjacent to or near the Company's mines. The Company's coal production
totaled 8.6 million tons in 1997.
In 1992, the Company acquired coal properties and Mine No. 84 in
southwestern Pennsylvania. Development and rehabilitation work at Mine No. 84
was completed in 1997, and the Company is now engaged, as a material portion of
its planned operations, in the eastern and midwestern utility coal markets in
addition to the continuing sale of coal pursuant to long-term coal supply
agreements.
The mailing address of the Company's principal executive offices is 655
Church Street, Indiana, Pennsylvania 15701, and its telephone number is (724)
349-5800.
CONSOL Inc.
CONSOL, through its predecessors, has been engaged in coal mining since
1864. CONSOL operating companies conduct mining at 24 complexes in six eastern
states and the Canadian province of Alberta. Production from these complexes
totaled 72.8 million tons in 1997. CONSOL is the leading U.S. producer of coal
from underground mines.
CONSOL maintains a fleet of towboats and barges to transport coal to
customers located on the Monongahela, Ohio and Mississippi River systems.
CONSOL has more than 7,700 employees and had sales of $2.3 billion in 1997.
Three- quarters of CONSOL's sales are to electric utilities in the U.S. and
overseas.
The mailing address of CONSOL's principal executive offices is Consol
Plaza, 1800 Washington Road, Pittsburgh, Pennsylvania 15241, and its telephone
number is (412) 831-4000.
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<PAGE>
CONSOL Commonwealth Inc.
Merger Sub, a Pennsylvania corporation, is an indirect subsidiary of CONSOL
that was formed by CONSOL solely for the purpose of effecting the Merger. The
mailing address of Merger Sub's principal executive offices is Consol Plaza,
1800 Washington Road, Pittsburgh, Pennsylvania 15241, and its telephone number
is (412) 831-4000.
The Special Meeting
Purposes of the Meeting; Date, Time and Place
The Special Meeting will be held on Tuesday, September 22, 1998 at 10:00
a.m., local time, at the offices of Duane, Morris & Heckscher LLP, 42nd Floor,
One Liberty Place, 1650 Market Street, Philadelphia, Pennsylvania 19103 for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt the Merger
Agreement among the Company, CONSOL and Merger Sub, a copy of which is attached
as Appendix A to this Proxy Statement, pursuant to which, among other things,
each share of Common Stock that is issued and outstanding at the Effective Time,
other than Dissenting Shares and Treasury Shares, will be cancelled and
extinguished and converted automatically into the right to receive the Merger
Price; and
2. To transact such other business as may properly come before the Special
Meeting and any adjournment, postponement or continuation thereof.
Vote Required; Record Date
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the votes cast in person or by proxy at the Special Meeting by
the holders of the Common Stock, assuming a quorum is present. The Board of
Directors has fixed the close of business on June 26, 1998 as the record date
(the "Record Date") for the determination of shareholders entitled to notice of
and to vote at the Special Meeting. As of the Record Date, 3,440,984 shares of
Common Stock were outstanding, each of which is entitled to one vote on each
matter to be acted upon at the Special Meeting.
In connection with the execution of the Merger Agreement, on May 28, 1998,
Emilie I. Wiggin and Urling I. Searle as Co-Trustees of certain trusts, Peter
Iselin, Emilie I. Wiggin, O'Donnell Iselin II, Columbus O'D. Iselin and Gordon
B. Whelpley, Jr. (collectively, the "Majority Shareholders") entered into a
Stockholders Agreement with CONSOL and Merger Sub whereby the Majority
Shareholders, who collectively own beneficially 1,741,705 shares of Common Stock
(the "Majority Shares"), or approximately 50.6% of the outstanding Common Stock,
agreed, among other things, to grant CONSOL an irrevocable proxy to vote the
Majority Shares in favor of the approval and adoption of the Merger Agreement
and an option, exercisable under certain circumstances, to purchase all of the
Common Stock held by such shareholders at a price of $43.50 per share in cash.
Since either the Majority Shareholders or CONSOL's nominees voting by proxy
will vote the Majority Shares in favor of the approval and adoption of the
Merger Agreement at the Special Meeting, the Merger
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<PAGE>
Agreement will be approved and adopted at the Special Meeting regardless of the
votes of the Company's shareholders other than the Majority Shareholders. A copy
of the Stockholders Agreement is attached as Appendix B to this Proxy Statement.
See "The Stockholders Agreement."
The Merger and the Merger Agreement
General
At the Effective Time, (i) the separate existence of Merger Sub will cease
and Merger Sub will be merged with and into the Company, and the Company will be
the surviving corporation (the "Surviving Corporation"), (ii) the Company will
become an indirect subsidiary of CONSOL and (iii) each issued and outstanding
share of Common Stock of the Company, other than Dissenting Shares and Treasury
Shares, will be cancelled and extinguished and be converted into the right to
receive $43.50 in cash payable to the holder thereof, without interest.
Background of the Merger
For information relating to the background and chronology of the Merger and
the Merger Agreement, see "The Merger and the Merger Agreement - Background of
the Merger" in this Proxy Statement.
Recommendation of the Board of Directors of the Company; Reasons for the Merger
The Board of Directors, at a regular meeting held on May 28, 1998,
unanimously approved and adopted the Merger Agreement and directed that the
Merger Agreement be submitted to the Company's shareholders for their approval
and adoption. The Board of Directors has determined that the Merger Agreement is
fair to and in the best interests of the Company and its shareholders and
recommends that shareholders vote FOR approval and adoption of the Merger
Agreement. Among the factors considered by the Board of Directors were (i) the
prospects of the Company in view of competitive conditions prevailing in the
coal industry, (ii) the losses encountered at Mine No. 84 since it became
operational as well as losses at the Company's Helvetia subsidiary, (iii) the
opinion of the Board of Directors that the trading price of the Company's Common
Stock on the OTC Bulletin Board was not properly reflective of the value of the
Company's Common Stock, (iv) the opinion of the Board of Directors that the book
value of the Company's Common Stock may not be a fair indicator of the value of
the Company's Common Stock, (v) the decrease in the annual dividend rate on the
Company's Common Stock from $1.50 per share in 1992, 1993 and 1994 to $.75 in
1995 and to $.60 per share in 1996, 1997 and 1998 and (vi) the opinion of J. P.
Morgan Securities Inc. ("J.P. Morgan") to the Board of Directors that, based
upon and subject to the various considerations set forth therein, as of May 28,
1998, the consideration to be paid to the shareholders of the Company in
connection with the Merger was fair to the shareholders of the Company from a
financial point of view. See "The Merger and the Merger Agreement - Opinion of
Financial Advisor; Reasons for the Merger; Recommendation of the Board of
Directors."
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<PAGE>
Opinion of Financial Advisor
J.P. Morgan has acted as the Company's financial advisor in connection with
the Merger. J.P. Morgan has delivered its written opinion dated as of May 28,
1998 to the Board of Directors to the effect that, based upon and subject to the
various considerations set forth therein, as of the date of such opinion, the
consideration to be paid to the shareholders of the Company in connection with
the Merger was fair to the shareholders of the Company from a financial point of
view. The full text of J.P. Morgan's opinion, which sets forth a description of
the assumptions made, matters considered and limitations on the review
undertaken by J.P. Morgan, is included in this Proxy Statement as Appendix C.
Shareholders are urged to read the opinion in its entirety. J.P. Morgan's
opinion is directed only to the fairness of the consideration to be paid to the
Company's shareholders in connection with the Merger from a financial point of
view. J.P. Morgan's opinion does not address any other aspect of the Merger or
related transactions and does not constitute a recommendation to any shareholder
of the Company as to how such shareholder should vote such shareholder's Common
Stock at the Special Meeting. See "The Merger and the Merger Agreement - Opinion
of Financial Advisor; Reasons for the Merger; Recommendation of the Board of
Directors."
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors with respect to
the Merger, shareholders should be aware that members of the Company's
management and the Board of Directors have certain interests in connection with
the Merger. See "The Merger and the Merger Agreement - Interests of Certain
Persons in the Merger."
In connection with the consummation of the Merger and the resultant change
in control of the Company, 21 officers and senior employees of the Company with
long-term service to the Company will be entitled to receive severance payments
and deferred compensation from the Company at the Effective Time, whether or not
their employment with the Company is terminated, in cash, without interest,
aggregating approximately $6.5 million. See "The Merger and the Merger Agreement
- - Terms of the Merger; Amendments."
CONSOL, Merger Sub and the Company have agreed that neither CONSOL nor the
Company as the Surviving Corporation in the Merger shall have any claim or right
to damages or indemnification from any current or former officer, director or
shareholder of the Company or any of its subsidiaries acting in their capacities
as such based upon a breach of the representations and warranties of the Company
contained in the Merger Agreement with respect to any information (whether
written or oral), documents or material furnished to CONSOL by the Company or
any of its subsidiaries or any of their respective officers, directors,
employees, agents, counsel, accountants or advisors with respect to the
transactions contemplated by the Merger Agreement. In addition, the Merger
Agreement does not affect the rights of the Company's directors, officers or
employees to indemnification under the Company's Articles of Incorporation and
By-laws. See "The Merger and the Merger Agreement - Interests of Certain Persons
in the Merger."
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<PAGE>
Effective Time of the Merger; Payment for Common Stock
The Merger will become effective upon the filing of Articles of Merger with
the Department of State of the Commonwealth of Pennsylvania in accordance with
the PBCL. The Articles of Merger will be presented for filing as soon as
practicable after the satisfaction or waiver of all conditions to consummation
of the Merger set forth in Article VII of the Merger Agreement. See "The Merger
and the Merger Agreement - Conditions to Consummation of the Merger;
Representations and Warranties; Certain Covenants." Detailed instructions with
regard to the surrender of certificates, together with a letter of transmittal,
will be forwarded to holders of certificates formerly evidencing Common Stock as
promptly as practicable following the Effective Time by a bank or trust company
designated by CONSOL and acceptable to the Company (the "Exchange Agent").
Payment will be made to such former holders of Common Stock as promptly as
practicable following receipt by the Exchange Agent of certificates for their
Common Stock and other required documents. No interest will be paid or accrued
on the cash payable upon the surrender of certificates. See "The Merger and the
Merger Agreement - Payment for Common Stock."
Certain Other Effects of the Merger
If the Merger is consummated, the Company's shareholders will not have the
opportunity to continue their equity interest in the Company as an independent
entity and therefore will not share in any future earnings and growth of the
Company. Moreover, if the Merger is consummated, the Common Stock will cease to
be traded in the over-the-counter market and the registration of the Common
Stock under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), will be terminated. See "Additional Information - Available Information."
Antitrust Matters
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations thereunder (the "HSR Act") provides that certain
acquisition transactions may not be consummated unless certain information has
been furnished to the Antitrust Division of the Department of Justice (the
"Department of Justice") and the Federal Trade Commission (the "FTC"). The
expiration or termination of any applicable HSR Act waiting period or extension
thereof is a condition precedent to the obligations of CONSOL, Merger Sub and
the Company to consummate the Merger. See "The Merger and the Merger Agreement -
Antitrust Matters."
Conditions to Consummation of the Merger
The obligations of CONSOL and Merger Sub to consummate the Merger are
subject to the satisfaction, at or before the closing of the Merger (the
"Closing Date"), of certain conditions, including approval of the Merger
Agreement by the Company's shareholders at the Special Meeting. See "The Merger
and the Merger Agreement - Conditions to Consummation of the Merger;
Representations and Warranties; Certain Covenants."
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<PAGE>
The Merger Agreement may be amended at any time before or after shareholder
approval by written agreement of CONSOL, Merger Sub and the Company except that
after approval and adoption of the Merger Agreement by the shareholders of the
Company, no amendment may be made, without the further approval of the
shareholders of the Company, which either decreases the amount of cash to which
the shareholders of the Company are entitled pursuant to the Merger Agreement or
otherwise materially adversely affects the shareholders of the Company.
Termination; Fees and Expenses
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, before or after the approval and adoption thereof
by the shareholders of the Company: (i) by mutual written consent of the Boards
of Directors of the Company and CONSOL; (ii) by either the Company or CONSOL if
the Closing (as defined in the Merger Agreement) of the Merger shall not have
occurred by September 30, 1998; (iii) by either the Company or CONSOL if a court
of competent jurisdiction or a governmental, regulatory or administrative agency
or other governmental entity (a "Governmental Entity") shall have issued an
order, decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the Merger
Agreement provided that the party seeking to terminate the Merger Agreement
shall have used commercially reasonable efforts to remove such injunction, order
or decree; (iv) by CONSOL in the event of a breach by the Company of any
representation, warranty, covenant or other agreement in the Merger Agreement
which (a) would give rise to the failure of a condition precedent to the
obligations of CONSOL and Merger Sub under the Merger Agreement and (b) has not
been cured or cannot be cured within 20 days after the giving by CONSOL of
written notice to the Company; (v) by the Company in the event of a breach by
CONSOL of any representation, warranty, covenant or other agreement in the
Merger Agreement, which (a) would give rise to the failure of a condition
precedent to the obligations of the Company under the Merger Agreement and (b)
has not been cured or cannot be cured within 20 days after the giving by the
Company of written notice to CONSOL or (vi) by CONSOL or the Company if the
Merger Agreement shall not have been approved and adopted by the requisite vote
of the Company's shareholders at the Special Meeting.
Whether or not the Merger is consummated, all fees and expenses incurred in
connection with the Merger and the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such expenses.
Federal Income Tax Consequences of the Merger
The receipt of cash for Common Stock pursuant to the Merger or pursuant to
the exercise of dissenters appraisal rights under Pennsylvania law will be a
taxable transaction to the Company's shareholders for United States federal
income tax purposes and may also be a taxable transaction for state, local,
foreign and other tax purposes. See "The Merger and the Merger Agreement -
Federal Income Tax Consequences of the Merger." Shareholders are urged to
consult their own tax advisors as to the particular tax consequences to them of
the Merger, including the applicability and effect of state, local, foreign and
other taxes.
-6-
<PAGE>
Dissenters Appraisal Rights
Under the PBCL, shareholders of the Company who file a written objection
prior to the vote on the Merger Agreement and do not vote in favor of approval
and adoption of the Merger Agreement have the right to demand an appraisal of
the "fair value" of their Common Stock if the required procedures under
Subchapter 15D of the PBCL are followed. Appraisal rights will be forfeited if
the requirements of Subchapter 15D are not fully and precisely satisfied. See
"The Merger and the Merger Agreement - Dissenters Appraisal Rights" and a copy
of the text of Subchapter 15D and Section 1930 of the PBCL included in this
Proxy Statement as Appendix D.
The Stockholders Agreement
In connection with the execution of the Merger Agreement, on May 28, 1998,
the Majority Shareholders, who in the aggregate own beneficially 1,741,705
shares of Common Stock, or approximately 50.6% of the Common Stock outstanding
on the Record Date, entered into the Stockholders Agreement with CONSOL and
Merger Sub. Under the Stockholders Agreement, the Majority Shareholders (i)
agree, until the termination of the Merger Agreement in accordance with its
terms, that they will not, directly or indirectly, initiate, solicit or
knowingly encourage or take any action knowingly to facilitate any Competitive
Proposal (as defined in the Merger Agreement), (ii) appoint nominees of CONSOL
as proxies for the Majority Shareholders to attend any meetings of shareholders
of the Company and to vote the Majority Shares, which appointment is irrevocable
until September 30, 1998 and (iii) grant CONSOL an irrevocable option,
exercisable in whole but not in part until September 30, 1998, to purchase the
Majority Shares at a price per share, payable in cash, of $43.50. CONSOL has
agreed that, if it exercises the option, CONSOL shall vote the Majority Shares
in favor of the approval and adoption of the Merger Agreement. For a more
complete description of the Stockholders Agreement, see "The Stockholders
Agreement."
Market Prices and Dividends
The shares of Common Stock are traded in the over-the-counter market on the
OTC Bulletin Board under the symbol "RPTC." The following table sets forth, for
each of the quarters indicated, the quarterly cash dividends declared and the
high and low bid prices per share of Common Stock. The quotations, taken from
daily newspapers, represent prices between dealers and do not include retail
mark up, mark down or commission and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
High Low Cash Dividends Declared(1)
---- --- --------------------------
<S> <C> <C> <C>
1998:
First Quarter.......................... $45.50 $41.00 $.15
Second Quarter......................... 47.00 40.88 .15
Third Quarter (through
September 2, 1998)................... 42.50 41.00 --
-7-
<PAGE>
1997:
First Quarter.......................... $28.50 $25.25 $.15
Second Quarter......................... 43.00 28.25 .15
Third Quarter.......................... 43.50 35.00 .15
Fourth Quarter......................... 43.00 35.00 .15
1996:
First Quarter.......................... $33.00 $28.00 $.15
Second Quarter......................... 33.00 31.50 .15
Third Quarter.......................... 31.50 30.50 .15
Fourth Quarter......................... 32.25 25.00 .15
</TABLE>
- ----------
(1) All dividends were declared and paid in the same period shown with the
exception of the dividends declared in the fourth quarters of 1997 and 1996
which were paid in January 1998 and January 1997, respectively.
On May 27, 1998, the last trading day prior to the first public
announcement of the Merger, the last reported bid price for the Common Stock on
the OTC Bulletin Board was $46.25 per share. Shareholders are urged to obtain
current market quotations for the Common Stock. On June 26, 1998, there were
approximately 530 holders of record of the Common Stock. On September 2, 1998,
the last reported bid price for the Common Stock on the OTC Bulletin Board was
$41.00 per share.
-8-
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Six Months
Ended June 30,(3) Year Ended December 31,(3)
------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(unaudited) (audited)
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations
Tons of coal produced 4,905 2,906 4,985 4,290 4,492 4,976 3,218
Sales $162,232 $101,784 $210,345 $202,265 $216,686 $191,991 $153,628
Depreciation, depletion
and amortization 18,373 6,711 17,765 11,795 13,285 12,215 10,406
Provision (credit) for
income taxes (2,850) (8) 1,493 3,969 (337) 1,838 1,502
Net income (loss) (1)(2) (150) (5,914) (3,724) 11,261 (3,535) 2,466 7,083
Financial Position
Working capital $ 28,295 $ 32,742 $ 30,838 $ 36,547 $ 41,969 $ 50,145 $ 31,025
Property, plant and
equipment - net 348,618 362,847 355,446 356,625 322,363 230,169 183,009
Net capital expenditures 11,221 27,390 32,452 46,878 88,090 58,848 48,213
Total assets 526,807 506,275 518,134 531,398 491,407 410,994 356,884
Long-term debt 75,744 98,565 84,535 100,501 120,784 75,693 29,455
Shareholders' equity 204,303 204,069 205,515 211,185 203,114 207,450 210,794
Per Share Data
Average shares outstanding 3,441 3,4441 3,441 3,441 3,439 3,439 3,441
Net income (loss) (1)(2) $(.04) $(1.72) $(1.08) $3.27 $(1.03) $.72 $2.06
Cash dividends declared .30 .30 .60 .60 .75 1.50 1.50
Book value at period end 59.37 59.31 59.73 61.37 59.06 60.33 61.31
</TABLE>
- ------------------
(1) Net income (loss) and net income (loss) per share for 1997 was impacted by
a $17,000,000 write-down of the property, plant and equipment related to
Helvetia, which was substantially offset by pretax gains on the sales of
nonstrategic coal reserves and land of $14,000,000.
(2) Net income (loss) and net income (loss) per share for 1993 include a credit
of $4,709,000 and $1.37, respectively, for the cumulative effect to January
1, 1993 of a change in accounting for income taxes.
(3) The Company's subsidiary, Eighty-Four, completed development of its Mine
No. 84 in October 1997. Prior to the completion of development,
Eighty-Four's provision for income taxes, certain real estate tax expenses
and certain general and administration expenses, which were not considered
costs of mine development, were included in operating results.
-9-
<PAGE>
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of the Company
in connection with the solicitation of proxies by the Board of Directors for use
at a Special Meeting of the Company's shareholders to be held on Tuesday,
September 22, 1998 at 10:00 a.m., local time, at the offices of Duane, Morris &
Heckscher LLP, 42nd Floor, One Liberty Place, 1650 Market Street, Philadelphia,
Pennsylvania 19103 and at any adjournment, postponement or continuation thereof.
This Proxy Statement, the attached Notice of Special Meeting and the enclosed
form of proxy are first being mailed to shareholders of the Company entitled to
notice of and to vote at the Special Meeting on or about September 4, 1998.
The purpose of the Special Meeting is to consider and vote upon the
approval and adoption of the Merger Agreement as more fully described in this
Proxy Statement.
As a result of the Merger, all shareholders of the Company will cease to
have an equity interest in, or possess any rights as shareholders of, the
Company. See "The Merger and the Merger Agreement - General." A copy of the
Merger Agreement is included in this Proxy Statement as Appendix A. The summary
of the portions of the Merger Agreement set forth in this Proxy Statement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the text of the Merger Agreement.
The Board of Directors has unanimously approved the Merger Agreement and
recommends that you vote FOR approval and adoption of the Merger Agreement and
has directed that the Merger Agreement be submitted for consideration and vote
to the shareholders of the Company.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the votes cast in person or by proxy at the Special Meeting by
the holders of the outstanding Common Stock providing a quorum is present at the
Special Meeting.
VOTING AND PROXIES
Record Date; Solicitation of Proxies
The Board of Directors has fixed the close of business on June 26, 1998 as
the Record Date for the determination of shareholders entitled to notice of and
to vote at the Special Meeting. Accordingly, only holders of Common Stock of
record on the books of the Company at the close of business on the Record Date
will be entitled to vote at the Special Meeting. At the close of business on the
Record Date, 3,440,984 shares of Common Stock were issued and outstanding and
entitled to vote at the Special Meeting held by approximately 530 holders of
record.
In addition to soliciting proxies by mail, officers and employees of the
Company, without receiving additional compensation therefor, may solicit proxies
on behalf of the Company personally or by telephone, telegram or other forms of
wire or facsimile
-10-
<PAGE>
communication. The Company will bear the cost of the Special Meeting and of
soliciting proxies therefor, including the cost of printing and mailing of this
Proxy Statement and related materials, and the reasonable expenses incurred by
brokerage houses, custodians, nominees and fiduciaries in forwarding proxy
materials to the beneficial owners of Common Stock.
Vote Required
The holders of a majority of the outstanding shares of Common Stock
entitled to vote, represented in person or by proxy, will constitute a quorum at
the Special Meeting. However, those holders of Common Stock entitled to vote who
attend, in person or by proxy, any adjournment or adjournments of the Special
Meeting that have been previously adjourned for one or more periods aggregating
at least 15 days because of an absence of a quorum shall constitute a quorum for
the purposes of approving and adopting the Merger Agreement although they
constitute less than a quorum as fixed by law or in the Articles of
Incorporation or By-laws of the Company for the originally scheduled date of the
Special Meeting.
Providing that a quorum is present at the Special Meeting, under the PBCL
the affirmative vote of a majority of the votes cast in person or by proxy at
the Special Meeting by the holders of the outstanding shares of Common Stock
entitled to vote is required for approval and adoption of the Merger Agreement.
Common Stock that is represented by properly executed proxies, unless such
proxies shall have previously been properly revoked, will be voted in accordance
with the instructions indicated in such proxies. If no contrary instructions are
indicated, such shares will be voted FOR approval and adoption of the Merger
Agreement and in the discretion of the proxy holder as to any other matter that
may properly come before the Special Meeting. Brokers may not give a proxy to
vote without instructions from beneficial owners when the matter to be voted
upon involves a merger or consolidation. Under the PBCL, if a shareholder,
including a nominee or other record owner, either records the fact of abstention
or otherwise withholds authority to vote or fails to vote in person or by proxy,
such action would not be considered a "vote cast" and would have no effect on
the approval and adoption of the Merger Agreement, other than to reduce the
number of affirmative votes needed for approval. Any other matter which may
properly come before the Special Meeting at which a quorum is present for such
purpose requires the affirmative vote of the majority of the votes cast on the
matter by the holders of shares of Common Stock, unless a greater vote is
required by law or the Articles of Incorporation or By-laws of the Company. A
shareholder who has given a proxy may revoke it at any time prior to its
exercise at the Special Meeting by delivering a written notice of revocation of
the proxy or by submission of a properly executed proxy bearing a later date to
the Secretary of the Company at 655 Church Street, Indiana, Pennsylvania 15701,
or by voting the Common Stock covered thereby in person at the Special Meeting.
Shareholders have the right to dissent from the Merger and, subject to
certain conditions provided under the PBCL, to receive payment for the fair
value of their Common Stock. See "The Merger and the Merger Agreement -
Dissenters Appraisal Rights" and Appendix D hereto.
-11-
<PAGE>
In connection with the execution of the Merger Agreement, on May 28, 1998,
the Majority Shareholders, who in the aggregate own beneficially 1,741,705
shares of Common Stock, or approximately 50.6% of the Common Stock outstanding
on the Record Date, entered into the Stockholders Agreement with CONSOL and
Merger Sub. Under the Stockholders Agreement, the Majority Shareholders (i)
agree, until the termination of the Merger Agreement in accordance with its
terms, that they will not, directly or indirectly, initiate, solicit or
knowingly encourage or take any action knowingly to facilitate any Competitive
Proposal (as defined in the Merger Agreement), (ii) appoint nominees of CONSOL
as proxies for the Majority Shareholders to attend any meetings of shareholders
of the Company and to vote the Majority Shares, which appointment is irrevocable
until September 30, 1998 and (iii) grant CONSOL an irrevocable option,
exercisable in whole but not in part until September 30, 1998, to purchase the
Majority Shares at a price per share, payable in cash, of $43.50, subject to
certain conditions, including the condition that CONSOL, if it exercises the
option, shall vote the Majority Shares in favor of the approval and adoption of
the Merger Agreement. For a more complete description of the Stockholders
Agreement, a copy of which is included as Appendix B to this Proxy Statement,
see "The Stockholders Agreement."
Since either the Majority Shareholders or CONSOL's nominees voting by proxy
will vote the Majority Shares in favor of the approval and adoption of the
Merger Agreement at the Special Meeting, the Merger Agreement will be approved
and adopted at the Special Meeting regardless of the votes of the Company's
shareholders other than the Majority Shareholders. A copy of the Stockholders
Agreement is attached as Appendix B to this Proxy Statement. See "The
Stockholders Agreement."
The transactions to be considered at the Special Meeting involve matters of
great importance to the shareholders of the Company. Accordingly, shareholders
are urged to read and carefully consider the information presented in this Proxy
Statement, and to complete, date, sign and promptly return the enclosed proxy
card in the enclosed prepaid envelope. Stock certificates should not be sent
with the enclosed proxy card. If the Merger is consummated, shareholders will be
furnished instructions for surrendering their Common Stock for cash.
Stock Ownership of Management and Certain Beneficial Owners
The following table sets forth as of the Record Date the amount and
percentage of the Company's outstanding Common Stock beneficially owned by (i)
each person who is known by the Company to own beneficially more than 5% of its
Common Stock, (ii) each director, (iii) each of the five highest paid executive
officers of the Company whose compensation exceeded $100,000 during 1997 and
(iv) all executive officers and directors of the Company as a group.
-12-
<PAGE>
<TABLE>
<CAPTION>
Shares Percent of
Name of Individual Beneficially Outstanding
or Identity of Group Owned(1) Common Stock(2)
- -------------------- ----------- ---------------
<S> <C> <C>
5% or Greater Holders:
- ----------------------
Urling I. Searle.......................... 1,646,932(3) 47.9%
655 Church Street
Indiana, Pennsylvania 15701
Emilie I. Wiggin.......................... 1,634,161(4) 47.5
655 Church Street
Indiana, Pennsylvania 15701
Trust Under Will of
O'Donnell Iselin, Urling I. Searle
and Emilie I. Wiggin, Co-Trustees....... 820,427(5) 23.8
655 Church Street
Indiana, Pennsylvania 15701
Trust dated July 6, 1964 of
O'Donnell Iselin, Urling I. Searle
and Emilie I. Wiggin, Co-Trustees....... 667,178(5) 19.4
655 Church Street
Indiana, Pennsylvania 15701
CONSOL Inc................................ 1,741,705(6) 50.6
Consol Plaza
1800 Washington Road
Pittsburgh, Pennsylvania 15241
Franklin Resources, Inc................... 180,900(7) 5.3
777 Mariners Island Boulevard, 6th Floor
San Mateo, California 94404
Directors:
David H. Davis............................ 2,663 ---
Thomas W. Garges, Jr...................... 5,940 ---
L. Blaine Grube........................... 7,258 ---
Thomas M. Hyndman, Jr..................... 1,260 ---
Columbus O'D. Iselin, Jr.................. 14,908 ---
O'Donnell Iselin II....................... 20,552 ---
Peter Iselin.............................. 82,470(8) ---
William G. Kegel.......................... 3,482 ---
John L. Schroder, Jr...................... 1,497 ---
Gordon B. Whelpley, Jr.................... 21,796 ---
-13-
<PAGE>
Executive Officers: (9)
- -----------------------
W. Joseph Engler, Jr...................... 3,200 ---
George M. Evans........................... 812 ---
Thomas M. Majcher......................... 250 ---
A. W. Petzold............................. 250 ---
All Directors and executive
officers as a group (14 persons)........ 166,338 ---
</TABLE>
- --------------
(1) Information furnished by each individual named. The securities
"beneficially owned" are determined in accordance with the definitions of
"beneficial ownership" as set forth in the releases of the Securities and
Exchange Commission (the "Commission") applicable as of the date hereof
and, accordingly, may include securities owned by or for, among others,
spouses and/or minor children of the individual and other relatives who
have the same home as such individual as well as other securities as to
which the individual has or shares voting or investment power. Beneficial
ownership may be disclaimed as to certain of the securities.
(2) Less than 1% unless otherwise indicated.
(3) Under the rules of the Commission, the maximum beneficial ownership of the
Company's Common Stock which Urling I. Searle could be deemed to have is
47.9%. Of this total, Urling I. Searle has sole voting and dispositive
power with respect to 16,240 shares and shared voting and dispositive power
with respect to 820,427 shares held by the Trust Under the Will of
O'Donnell Iselin, 667,178 shares held by the Trust Under Deed dated July 6,
1964 and 118,141 shares held by the Trusts Under the Will of Urling S.
Iselin, all of which shares are subject to the Stockholders Agreement. This
total also includes 4,148 shares held by the E.I. Wiggin Trust No. 1, 8,325
shares held by the E.I. Wiggin Trust No. 2, 4,148 shares held by the Peter
Iselin Trust No. 1 and 8,325 shares held by the Peter Iselin Trust No. 2,
with regard to which Urling I. Searle has shared voting and dispositive
power.
(4) Under the rules of the Commission, the maximum beneficial ownership of the
Company's Common Stock which Emilie I. Wiggin could be deemed to have is
47.5%. Of this total, Emilie I. Wiggin has sole voting and dispositive
power with respect to 15,942 shares and shared voting and dispositive power
with respect to 820,427 shares held by the Trust Under the Will of
O'Donnell Iselin, 667,178 shares held by the Trust Under Deed dated July 6,
1964 and 118,141 shares held by the Trusts Under the Will of Urling S.
Iselin, all of which shares are subject to the Stockholders Agreement. This
total also includes 4,148 shares held by the Peter Iselin Trust No. 1 and
8,325 shares held by the Peter Iselin Trust No. 2, with respect to which
Emilie I. Wiggin has shared voting and dispositive power.
(5) The Co-Trustee of these Trusts are Urling I. Searle and Emilie I. Wiggin.
-14-
<PAGE>
(6) This total represents the Majority Shares subject to the Stockholders
Agreement. See "The Stockholders Agreement."
(7) Based on information as of December 31, 1997 contained in a filing made
with the Commission by Franklin Resources, Inc.
(8) Of these shares, 19,719 shares are held by Mr. Iselin's wife.
(9) Excludes executive officers listed under Directors.
PROPOSAL NO. 1
THE MERGER AND THE MERGER AGREEMENT
General
The following information with respect to the Merger is qualified in its
entirety by reference to the full text of the Merger Agreement, a copy of which
is included in this Proxy Statement as Appendix A. The Merger Agreement sets
forth the terms and conditions upon which the Merger is to be effected. If the
Merger Agreement is approved and adopted at the Special Meeting by the requisite
vote of the holders of Common Stock and all other conditions to the obligations
of the parties thereto are satisfied or waived, the Merger will be consummated.
At the Effective Time, Merger Sub will be merged with and into the Company. The
Company will be the Surviving Corporation in the Merger and will thereby become
an indirect subsidiary of CONSOL. Pursuant to the Merger, each share of Common
Stock that is issued and outstanding at the Effective Time, other than
Dissenting Shares and Treasury Shares, will be cancelled and extinguished and
converted automatically into the right to receive the Merger Price in cash. Upon
consummation of the Merger, holders of Common Stock will possess no further
interest in, or rights as shareholders of, the Company.
Background of the Merger
Following an inquiry from CONSOL in the fall of 1995, the Company and
CONSOL held discussions regarding CONSOL's interest in a potential acquisition
of the Company, commencing in the spring of 1996 and continuing through March
1997. These discussions encompassed the principal terms of a possible business
combination transaction, including possible acquisition prices. Although the
Company and CONSOL initially discussed a possible price of $60.00 per share for
the Company's Common Stock in the summer of 1996 before the conduct of due
diligence by CONSOL, by the winter of 1996 after the conduct of extensive due
diligence by CONSOL, the Company and CONSOL were discussing a transaction in
which one share of the Company's Common Stock would be converted, at the
election of the Company's shareholders, into either .45 of a share of preferred
stock, par value $100 per share, of CONSOL's parent or $45.00 per share in cash,
subject to potential increase based upon the net proceeds from the sale of
certain Company assets. The discussions terminated in March 1997 because the
Company and CONSOL were unable to reach agreement on a number of terms of the
proposed acquisition.
-15-
<PAGE>
On September 29, 1997, the Company retained J.P. Morgan as its financial
advisor to evaluate the strategic alternatives available to the Company to
maximize shareholder value, including a possible sale or merger of the Company.
During late December 1997 and early January 1998, J.P. Morgan contacted a number
of parties (10 coal companies, five financial buyers, two utility companies and
two land management companies) whom J.P. Morgan believed might have an interest
in the acquisition of the Company, and distributed a confidential information
memorandum to 13 parties (eight coal companies, three financial buyers and two
land management companies) who expressed an interest in receiving the
information memorandum. On February 13, 1998, upon analysis of the information
memorandum, five of the parties (all coal companies) who had theretofore
submitted preliminary, non-binding indications of interest to J.P. Morgan were
invited by the Company and J.P. Morgan to conduct further due diligence on the
Company. On April 20, 1998, the date established by J.P. Morgan for the receipt
of final, binding bids to acquire the Company, J.P. Morgan had received one
final, binding proposal (from CONSOL) for the acquisition of the Company that
was in accordance with the specifications established by J.P. Morgan. J.P.
Morgan received an indication of interest and a request for additional time from
one other interested party (Coal Resources) that was not in accordance with the
specifications established by J.P. Morgan, and whose indication of interest was
at a price significantly lower than the binding CONSOL proposal and was further
subject to financing contingencies. The Board of Directors thereupon determined
that the Company should enter into negotiations with CONSOL regarding its
proposal notwithstanding the prior negotiations that had been terminated in
March 1997.
Between April 29, 1998 and May 28, 1998, representatives of the Company
(Thomas W. Garges, Jr., President, Chief Executive Officer and a director of the
Company, Columbus O'D. Iselin, Jr., a director of the Company, and Thomas M.
Hyndman, Jr., a director of the Company), J.P. Morgan and CONSOL and the
Company's and CONSOL's respective legal counsel conducted negotiations with
respect to the terms and conditions of the Merger Agreement and the Stockholders
Agreement.
CONSOL's April 20, 1998 proposal (i) indicated a merger consideration of
$43.50 per share, an aggregate of approximately $150 million, (ii) included a
marked-up merger agreement indicating CONSOL's proposed changes to a draft
merger agreement previously distributed by the Company to the five parties
invited to conduct due diligence, (iii) stated that CONSOL's proposal was not
subject to further approval by CONSOL's Board of Directors or of its parent
entity, (iv) noted that CONSOL had no partners or joint venturers in its
proposal, (v) indicated that CONSOL would not require specific financing to
complete the transaction described in its proposal and (vi) stated CONSOL's
anticipation that a definitive merger agreement and any necessary governmental
filings could be completed within 30 days.
The principal terms and conditions covered by the negotiations between the
Company, CONSOL and their respective representatives were: (i) the amount of the
merger consideration, (ii) the representations and warranties to be made by the
Company in the Merger Agreement, (iii) the payment of dividends to the Company's
stockholders pending the Merger, (iv) whether the costs of the Company's
severance arrangements with certain of its officers and long-time employees
would be included in the limitation on increases in the Company's current
liabilities and long-term indebtedness, (v) the effect of changes in the
Company's
-16-
<PAGE>
working capital and long-term indebtedness pending the Merger, (vi) the conduct
of the Company's business pending the Merger, (vii) the conditions precedent to
CONSOL's obligations under the Merger Agreement and (viii) the willingness of
the Majority Shareholders to enter into an agreement with CONSOL such as the
Stockholders Agreement. As a result of the negotiations between the Company,
CONSOL and their respective representatives, the Merger Agreement, compared to
CONSOL's April 20, 1998 proposal, reflects: (i) the same merger consideration
per share as originally proposed by CONSOL, (ii) a number of exceptions to the
representations and warranties made by the Company in the Merger Agreement,
(iii) permission for the Company to pay its regular quarterly cash dividend to
its shareholders on June 1, 1998, (iv) CONSOL's consent to increases in the sum
of the Company's long-term indebtedness and current liabilities from the amounts
thereof at February 28, 1998 by up to $12 million at the date of consummation of
the Merger, (v) the exclusion of the Company's severance obligations from
limitations on increases in the Company's current liabilities, (vi) a number of
exceptions to restrictions originally proposed by CONSOL on the conduct of the
Company's business pending the Merger, (vii) revisions to the conditions
precedent to CONSOL's obligations under the Merger Agreement and (viii) the
execution of the Stockholders Agreement by the Majority Shareholders. On May 28,
1998, the Company and CONSOL concluded their negotiations with respect to the
terms and conditions of the Merger Agreement and the Stockholders Agreement and
both agreements were executed.
On May 28, 1998, J.P. Morgan delivered its oral and written opinion to the
Board of Directors to the effect that, based upon and subject to the various
considerations set forth therein, as of the date of such opinion, the
consideration to be paid to the Company's shareholders in connection with the
Merger was fair to the shareholders of the Company from a financial point of
view. On May 28, 1998, the Board of Directors met and unanimously approved the
Merger Agreement. Immediately thereafter, the Company, CONSOL and Merger Sub
executed the Merger Agreement and the Majority Shareholders, CONSOL and Merger
Sub executed the Stockholders Agreement and jointly issued a press release
regarding the execution of the Merger Agreement and the Stockholders Agreement.
Opinion of Financial Advisor; Reasons for the Merger; Recommendation of the
Board of Directors
Opinion of Financial Advisor
Pursuant to an engagement letter dated September 29, 1997, the Company
retained J.P. Morgan as its financial advisor in connection with an examination
of the strategic alternatives available to the Company in an effort to maximize
shareholder value and to deliver a fairness opinion in connection with any
acquisition transaction resulting therefrom.
At a meeting of the Board of Directors on May 28, 1998, J.P. Morgan
rendered its oral and written opinion to the Board of Directors that, as of such
date, the consideration proposed to be paid to the Company's shareholders in the
proposed Merger was fair, from a financial point of view, to such shareholders.
No limitations were imposed by the Board of Directors upon J.P. Morgan with
respect to the investigations made or procedures followed by J.P. Morgan in
rendering its opinion.
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The full text of the written opinion of J.P. Morgan dated May 28, 1998,
which sets forth the assumptions made, matters considered and limits on the
review undertaken by J.P. Morgan, is attached as Appendix C to this Proxy
Statement and is incorporated herein by reference. The Company's shareholders
are urged to read the opinion in its entirety. J.P. Morgan's written opinion is
addressed to the Board of Directors, is directed only to the consideration to be
paid in the Merger and does not constitute a recommendation to any shareholder
of the Company as to how such shareholder should vote at the Special Meeting.
The summary of the opinion of J.P. Morgan set forth in this Proxy Statement is
qualified in its entirety by reference to the full text of such opinion, but
such summary sets forth all of the material parts of J.P. Morgan's analysis.
In arriving at its opinion, J.P. Morgan reviewed, among other things, the
Merger Agreement; the audited financial statements of the Company for the fiscal
year ended December 31, 1997 and the unaudited financial statements of the
Company for the period ended March 31, 1998; current and historical market
prices of the Common Stock; certain publicly available information concerning
the business of the Company and of certain other companies engaged in businesses
comparable to those of the Company and the reported market prices for certain
other companies' securities deemed comparable; publicly available terms of
certain transactions involving companies comparable to the Company and the
consideration received for such companies; the terms of other business
combinations deemed relevant by J.P. Morgan; certain internal financial analyses
and forecasts prepared by the Company and its management and certain agreements
with respect to outstanding indebtedness or obligations of the Company. J.P.
Morgan also held discussions with certain members of the management of the
Company with respect to certain aspects of the Merger, the past and current
business operations of the Company, the financial condition and future prospects
and operations of the Company, the effects of the Merger on the financial
condition and future prospects of the Company and certain other matters believed
necessary or appropriate to J.P. Morgan's inquiry. In addition, J.P. Morgan
visited certain representative facilities of the Company, and reviewed such
other financial studies and analyses and considered such other information as it
deemed appropriate for the purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or that
was furnished to it by the Company or was otherwise reviewed by J.P. Morgan, and
J.P. Morgan has not assumed any responsibility or liability therefor. J.P.
Morgan has not conducted any valuation or appraisal of any assets or
liabilities, nor have any valuations or appraisals been provided to J.P. Morgan.
In relying on financial analyses and forecasts provided to J.P. Morgan, J.P.
Morgan has assumed that they have been reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management of
the Company as to the expected future results of operations and financial
condition of the Company to which such analyses or forecasts relate. J.P. Morgan
has also assumed that the Merger will have the tax consequences described in
this Proxy Statement, and in discussions with, and materials furnished to J.P.
Morgan by, representatives of the Company, and that the other transactions
contemplated by the Merger Agreement will be consummated as described in the
Merger Agreement and in this Proxy Statement.
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The projections furnished to J.P. Morgan by the Company were prepared by
the management of the Company. The Company does not publicly disclose internal
management projections of the type provided to J.P. Morgan in connection with
J.P. Morgan's analysis of the Merger, and such projections were not prepared
with a view toward public disclosure. These projections were based on numerous
variables and assumptions that are inherently uncertain and may be beyond the
control of management, including, without limitation, factors related to general
economic and competitive conditions and prevailing interest rates. Accordingly,
actual results could vary significantly from those set forth in such
projections.
J.P. Morgan's opinion is based on economic, market and other conditions as
in effect on, and the information made available to J.P. Morgan as of, the date
of such opinion. Subsequent developments may affect the written opinion dated
May 28, 1998, and J.P. Morgan does not have any obligation to update, revise or
reaffirm such opinion.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its opinion.
Public Trading Multiples. J.P. Morgan compared selected financial data of
the Company with similar historical and current data for publicly traded
companies engaged in businesses which J.P. Morgan judged to be analogous to the
Company. The companies selected by J.P. Morgan for such analysis were Arch Coal,
Inc., Zeigler Coal Holding Co. and Pittston Minerals Group. Because the public
market for coal companies is thin and relatively illiquid, the multiples derived
from such analysis were modified by J.P. Morgan and then applied to the
Company's operating cash flow ("OCF") and earnings before interest, taxes,
depreciation, depletion and amortization ("EBITDDA"), yielding implied trading
values for the Company's Common Stock of approximately $21.00 to $36.00 per
share.
Selected Transaction Analysis. Using publicly available information, J.P.
Morgan examined selected transactions with respect to the coal industry from
1989 to the present. The transactions selected by J.P. Morgan for such analysis
were Arch Mineral Corporation's acquisition of Agipcoal U.S.A., CONSOL's
acquisition of Kentucky Criterion from Westmoreland Coal Company, Rheinbraun
A.G.'s acquisition of 50% of CONSOL from E.I. DuPont de Nemours & Co. ("DuPont")
and Ashland Coal Inc.'s acquisition of the Mingo Logan coal property from
British Petroleum Co. PLC. The analysis was conditioned by J.P. Morgan to
account for economic trends in the coal-property markets and adjusted to suit
the specific production and market conditions for the Company. J.P. Morgan
applied a range of multiples of dollars per ton of annual production derived
from such analysis to the Company's annual production, and arrived at an
estimated range of equity values for the Company's Common Stock of between
approximately $36.00 and $45.00 per share.
Discounted Cash Flow Analysis. J.P. Morgan conducted a discounted cash flow
analysis for the purpose of determining the fully diluted equity value per share
for the Company's Common Stock. J.P. Morgan calculated the unlevered free cash
flows that the Company is expected to generate during fiscal years 1998 through
2008, the year by which all of the Company's current mines are projected to
exhaust their assigned reserves, based upon
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financial projections prepared by the management of the Company through the
years ended 2002 and upon management projections adjusted by J.P. Morgan to
reflect more moderate growth in revenues and lower operating margins during the
11-year period. J.P. Morgan also estimated the present value of the Company's
unassigned reserves. The unlevered free cash flows were then discounted to
present values using a range of real discount rates from 11% to 13%, which were
chosen by J.P. Morgan based upon an analysis of the risk associated with the
unlevered free cash flows of the Company. The present value of the unlevered
free cash flows and the present value of the unassigned reserves were then
adjusted for the Company's estimated March 31, 1998 balances of excess cash and
total debt. Based on the adjusted management projections and real discount rates
of 11% to 13%, the discounted cash flow analysis indicated a range of equity
values of between approximately $39.00 and $45.00 per share of the Common Stock
on a stand-alone basis (i.e., without synergies).
The summary set forth above describes all material parts of J.P. Morgan's
analysis but does not purport to be a complete description of the analyses or
data presented by J.P. Morgan. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. J.P. Morgan believes that the summary set forth above and
its analyses must be considered as a whole and that selecting portions thereof,
without considering all of its analyses, could create an incomplete view of the
processes underlying its analyses and opinion. J.P. Morgan based its analyses on
assumptions that it deemed reasonable, including assumptions concerning general
business and economic conditions and industry-specific factors. The other
principal assumptions upon which J.P. Morgan based its analyses are set forth
above under the description of each such analysis. J.P. Morgan's analyses are
not necessarily indicative of actual values or actual future results that might
be achieved, which values may be higher or lower than those indicated. Moreover,
J.P. Morgan's analyses are not and do not purport to be appraisals or otherwise
reflective of the prices at which businesses could actually be bought or sold.
As a part of its investment banking business, J.P. Morgan and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. J.P. Morgan was selected to advise the Company
with respect to the Merger on the basis of such experience and its familiarity
with the Company.
J.P. Morgan and its affiliates maintain banking and other business
relationships with the Company and its affiliates, for which it receives
customary fees. In the ordinary course of their businesses, affiliates of J.P.
Morgan may actively trade the debt and equity securities of the Company for
their own accounts or for the accounts of customers and, accordingly, they may
at any time hold long or short positions in such securities.
For services rendered in connection with the Merger, the Company has paid
J.P. Morgan retainer fees totaling $500,000 and has agreed to pay J.P. Morgan a
transaction fee of approximately $1,760,000, against which the retainer fees
will be credited, upon consummation of the Merger. In addition, the Company has
agreed to reimburse J.P. Morgan for its expenses incurred in connection with its
services, including the fees and disbursements of counsel, and
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will indemnify J.P. Morgan against certain liabilities, including liabilities
arising under the federal securities laws.
Reasons for the Merger; Recommendation of the Board of Directors
At its meeting on May 28, 1998, the Board of Directors determined that the
Merger is fair to, and in the best interests of, the Company and its
shareholders. Therefore, the Board of Directors approved and adopted the Merger
Agreement. The Board of Directors unanimously recommends that the Company's
shareholders vote FOR approval and adoption of the Merger Agreement.
The determination of the Board of Directors to approve and adopt the Merger
Agreement was based upon consideration of a number of factors. The following
list includes all material factors considered by the Board of Directors:
(1) Alternatives to the Merger were considered, including prospects for the
Company resulting from the continued operation of the Company as an independent
publicly owned entity in view of competitive conditions prevailing in the coal
industry as well as recent and significant developments and consolidations in
the coal industry, weighed against the risks associated with such alternatives,
including current industry, economic and market conditions and the Company's
recent operating losses which led the Board of Directors to conclude that
sufficient uncertainties existed about the consistency of desirable cash flows
and profitability from the continued operation of the Company as an independent
entity that it would be prudent to accept the CONSOL proposal rather than risk a
future diminution in the value of the Company's Common Stock;
(2) The process conducted by J.P. Morgan on behalf of the Company in which
a number of companies were contacted to see if they had an interest in the
acquisition of the Company, of which several expressed sufficient interest to
conduct due diligence and submit preliminary, non-binding indications of
interest and of the final, binding process in which the CONSOL proposal was the
only definitive proposal received, which led the Board of Directors to conclude
there were no other potential acquirors of the Company prepared to pay a price
greater than the $43.50 per share offered by CONSOL notwithstanding the $45.00
price the Company and CONSOL had discussed in March 1997;
(3) The Board of Directors did not consider the trading price of the
Company's Common Stock on the OTC Bulletin Board during April and May 1998
necessarily reflective of the value of the Company's Common Stock because of the
fluctuations in the trading price of the Company's Common Stock between a low of
$25.25 per share in the first quarter of 1997 and a high of $47.00 per share in
the second quarter of 1998 and because of J.P. Morgan's analysis of (a) market
multiples of other publicly traded coal companies which reflect a multiple of
EBITDDA of five to five and one-half (which, based on the Company's estimated
EBITDDA for 1998, would result in a value of $29.29 to $35.88 per share of the
Company's Common Stock), (b) an OCF multiple of five to six (which, based on the
Company's estimated OCF for 1998, would result in a value of $21.15 to $32.69
per share of the Company's Common Stock, (c) trading price multiplies as applied
to the Company's Common Stock price (a value per share ranging from $21.15 to
$35.88), (d) transaction multiples (a value per share ranging
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from $36.02 to $45.09) and (e) a discounted cash flow analysis of the Company (a
value per share ranging from $39.30 to $44.55) which led the Board of Directors
to conclude that the merger consideration offered by CONSOL was fair to the
Company's shareholders;
(4) The Board of Directors also concluded that the book value per share of
the Company's Common Stock ($59.73 per share at December 31, 1997) may not be a
fair indicator of the value of the Company's Common Stock because of the reasons
indicated herein under "Information Concerning the Company - Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
principal such reasons are the failure of Mine No. 84 and the Company's Helvetia
subsidiary to provide consistent desirable rates of cash flow and profitability,
the Company's estimate that Mine No. 84 would incur a pretax loss of
approximately $11 million for 1998 after elimination of interest charges from
consolidated affiliates, termination of the Keystone and the Helvetia
coal-supply agreements in 2003 and 2004, respectively, and the additional
capital requirements of Mine No. 84 for further mine development after
exhaustion of its assigned coal reserves, which led the Company's Board of
Directors to conclude the acquisition of the Company by CONSOL was advisable and
that the merger consideration offered by CONSOL was fair to the Company's
shareholders;
(5) The reduction in the annual dividend rate on the Company's Common Stock
from $1.50 per share in 1992, 1993 and 1994 to $.75 per share in 1995 and to
$.60 per share in 1996, 1997 and 1998 which led the Board of Directors to
conclude that the Company's shareholders would receive a greater return on their
investment if the Company were acquired and the proceeds thereof reinvested in
other securities; and
(6) The opinion of J.P. Morgan delivered in writing to the Board of
Directors at its May 28, 1998 meeting to the effect that, based upon and subject
to various considerations set forth therein, as of the date of such opinion, the
consideration to be paid to the Company's shareholders pursuant to the Merger
Agreement was fair from a financial point of view to the shareholders of the
Company which, when coupled with the other factors considered by the Board of
Directors relating to the uncertainties about the consistency of desirable cash
flows and profitability from the Company's continued operation as an independent
entity, the lack of interest of others in acquiring the Company, the valuation
considerations relating to the trading price and book value per share of the
Company's Common Stock and the significant reduction in the annual rate of
dividends on the Company's Common Stock, caused the Board of Directors to
conclude that the Merger is fair to and in the best interests of the Company's
shareholders. See "Opinion of Financial Advisor" above.
The Board of Directors recognizes that if the Merger is consummated, the
Company's shareholders will not have the opportunity to continue their equity
interest in any future earnings and growth of the Company as an independent
entity. See "Certain Other Effects of the Merger."
However, the Board of Directors placed special consideration on the losses
and difficulties encountered since Mine No. 84 become operational and the
uncertainty that Mine No. 84 will achieve consistent desirable rates of cash
flows and profitability, the Company's relatively small size in a consolidating
and heavily competitive coal industry, the valuation analyses conducted by J.P.
Morgan, the extensive auction process conducted by J.P. Morgan
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and the reduction in the rate of the annual dividend on the Company's Common
Stock. The foregoing discussion of the information and factors considered by the
Board of Directors is not meant to be exhaustive but includes the material
factors considered by the Board of Directors. The Board of Directors did not
quantify or attach any specific weight to the various factors that it considered
in reaching its determination that the Merger Agreement and the transactions
contemplated thereby, including the Merger, are fair to and in the best
interests of the shareholders of the Company. In reaching its determination, the
Board of Directors took the various factors into account collectively and the
Board of Directors did not perform a factor-by-factor analysis.
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors with respect to
the Merger, shareholders should be aware that members of the Company's
management and the Board of Directors have certain interests in connection with
the Merger.
Severance Payments. In connection with the consummation of the Merger and
the resultant change in control of the Company, 21 officers and senior employees
of the Company with long-term service to the Company will be entitled to receive
severance payments from the Company at the Effective Time, whether or not their
employment with the Company is terminated, in cash, without interest aggregating
approximately $6.5 million. Under the Merger Agreement, such costs are excluded
from the limitation on increases in the Company's current liabilities and
long-term indebtedness. This exclusion was not contained in CONSOL's initial
April 20, 1998 proposal to the Company. See "Background of the Merger."
Indemnification. CONSOL, Merger Sub and the Company have agreed that
neither CONSOL nor the Company as the Surviving Corporation in the Merger shall
have any claim or right to damages or indemnification from any current or former
officer, director or shareholder of the Company or any of its subsidiaries
acting in their capacities as such based upon a breach of the representations
and warranties of the Company contained in the Merger Agreement with respect to
any information (whether written or oral), documents or material furnished to
CONSOL by the Company or any of its subsidiaries or any of their respective
officers, directors, employees, agents, counsel, accountants or advisors with
respect to the transactions contemplated by the Merger Agreement. In addition,
the Merger Agreement does not affect the rights of the Company's directors,
officers or employees to indemnification under the Company's Articles of
Incorporation and By-laws.
Effective Time of the Merger
The Effective Time of the Merger will occur upon the filing of Articles of
Merger with the Department of State of the Commonwealth of Pennsylvania in
accordance with the PBCL. The Articles of Merger are expected to be presented
for filing as soon as practicable after the approval and adoption of the Merger
Agreement by the Company's shareholders at the Special Meeting and upon
satisfaction or waiver of all other conditions to consummation of the Merger.
See "Conditions to Consummation of the Merger; Representations and Warranties;
Certain Covenants."
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Payment for Common Stock
As a result of the Merger, holders of certificates formerly representing
Common Stock will cease to have any equity interest in the Company. After
consummation of the Merger, all certificates formerly evidencing Common Stock,
other than Dissenting Shares and Treasury Shares, will be required to be
surrendered to the Exchange Agent in order to receive the Merger Price to which
holders thereof will be entitled as a result of the Merger. No interest will be
paid or accrued on the cash payable upon the surrender of such certificates.
Detailed instructions with regard to the surrender of certificates, together
with a letter of transmittal, will be forwarded to former holders of Common
Stock by the Exchange Agent as promptly as practicable following the Effective
Time. Holders of Common Stock should not submit their certificates to the
Exchange Agent until they have received such materials. Upon surrender of stock
certificates and other required documents to the Exchange Agent, the Exchange
Agent will distribute by bank check the Merger Price for each share represented
by such stock certificates to the holder thereof. See "Terms of the Merger;
Amendments." If payment in respect of cancelled Common Stock is to be made to a
person other than the person in whose name a surrendered certificate or
instrument is registered, it shall be a condition to such payment that the
certificate or instrument so surrendered shall be properly endorsed or shall be
otherwise in proper form for transfer and that the person requesting such
payment shall have paid any transfer and other taxes required by reason of such
payment in a name other than that of the registered holder of the certificate or
instrument surrendered or shall have established to the satisfaction of the
Surviving Corporation or the Exchange Agent that such tax either has been paid
or is not payable.
Shareholders Should Not Send Any Stock Certificates at This Time.
Certain Other Effects of the Merger
If the Merger is consummated, the Company's shareholders will not have an
opportunity to continue their equity interest in the Company as an independent
entity and therefore will not share in future earnings and growth, if any, of
the Company.
If the Merger is consummated, the Common Stock will cease to be traded in
the over-the-counter market and the registration of the Common Stock under the
Exchange Act will be terminated. See "Additional Information - Available
Information" for information concerning the effect of the Merger on the
Surviving Corporation's obligation to file periodic reports and other
information with the Commission.
For information concerning the income tax consequences of the Merger, see
"Federal Income Tax Consequences of the Merger."
Antitrust Matters
The HSR Act provides that certain acquisition transactions may not be
consummated unless certain information has been furnished to the Department of
Justice and the FTC and certain waiting period requirements have been satisfied.
The expiration or termination of any
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applicable HSR Act waiting period or extension thereof is a condition precedent
to the obligations of CONSOL, Merger Sub and the Company to consummate the
Merger. See "Conditions to Consummation of the Merger; Representations and
Warranties; Certain Covenants."
Clearance under or the inapplicability of waiting periods under the HSR Act
does not confer antitrust immunity and therefore it is possible that at any time
before or after the Effective Time, notwithstanding the expiration of the HSR
Act waiting periods or the termination or inapplicability thereof, the FTC or
the Department of Justice could take such action under the antitrust laws as it
deems necessary or desirable in the public interest, including seeking to enjoin
the consummation of the Merger or seeking divestiture of certain assets of the
Company or CONSOL. In addition, at any time before or after consummation of the
Merger notwithstanding the expiration, termination or inapplicability of the HSR
Act waiting periods, any state could take such action under the antitrust laws
as it deems necessary or desirable in the public interest, including seeking to
enjoin the consummation of the Merger, rescission of the Merger or divestiture
of certain assets by CONSOL or the Company. Private parties may also seek to
take legal action under the antitrust laws under certain circumstances.
Accounting Treatment
The Merger will be accounted for by CONSOL as a "purchase" for accounting
and financial reporting purposes.
Terms of the Merger; Amendments
General. The Company has agreed in the Merger Agreement to submit the
Merger Agreement to its shareholders for approval and adoption at a meeting to
be held as soon as practicable in accordance with the PBCL and the Company's
Articles of Incorporation and Bylaws and, in connection therewith, to prepare
and file a proxy statement and cause the proxy statement to be mailed to the
Company's shareholders as soon as practicable. If the Merger Agreement is
approved and adopted by the Company's shareholders and the other conditions
contained in the Merger Agreement are satisfied or waived, Merger Sub will be
merged with and into the Company. Upon the filing of Articles of Merger, or at
such later time as specified in such filing, each share of Common Stock that is
issued and outstanding at the Effective Time, other than Dissenting Shares and
Treasury Shares, will be cancelled and extinguished and converted automatically
into the right to receive an amount, in cash, without interest, equal to the
Merger Price. The obligations of the Company, CONSOL and Merger Sub to effect
the Merger are subject to the fulfillment of certain conditions set forth in the
Merger Agreement, including the approval and adoption of the Merger Agreement by
the shareholders of the Company. See "Conditions to Consummation of the Merger;
Representations and Warranties; Certain Covenants."
The terms of the Merger are set forth in the Merger Agreement which is
attached as Appendix A to this Proxy Statement, and the description of the
Merger contained herein is qualified in its entirety by reference to the Merger
Agreement. Shareholders are urged to review the Merger Agreement carefully.
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Amendments. The Merger Agreement may be amended at any time before or after
shareholder approval by written agreement of CONSOL, Merger Sub and the Company,
except that after approval and adoption of the Merger Agreement by the
shareholders of the Company, no amendment may be made which by law requires
further approval by the shareholders of the Company without the further approval
of the shareholders of the Company.
Conditions to Consummation of the Merger; Representations and Warranties;
Certain Covenants
Conditions to Consummation of the Merger. Under the Merger Agreement, the
obligations of the Company, CONSOL and Merger Sub to consummate the Merger are
subject to the satisfaction, on or before the Closing Date, of certain
conditions or the waiver thereof. Among such conditions are that (i) the Merger
Agreement shall have been approved and adopted by a majority of the votes cast
by the holders of the outstanding shares of Common Stock entitled to vote at the
Special Meeting; (ii) no Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any law, rule, regulation or order which is
then in effect and has the effect of making the Merger illegal or otherwise
prohibiting the consummation of the Merger, (iii) any waiting period or any
extension thereof under the HSR Act shall have expired or been terminated and
(iv) all consents, approvals and authorizations legally required to be obtained
to consummate the Merger shall have been obtained from all Governmental
Entities, except for such consents, approvals and authorizations the failure of
which to obtain would not have a material adverse effect on CONSOL, Merger Sub
or the Company assuming that the Merger shall have been effected.
Under the Merger Agreement, the obligations of CONSOL and Merger Sub to
consummate the Merger are also subject to the satisfaction or waiver by CONSOL
on or prior to the Closing Date of the following conditions: (i) the
representations and warranties of the Company contained in the Merger Agreement
that are qualified by materiality shall be true and correct on and as of the
Closing Date as if made on and as of such date (other than representations and
warranties which address matters only as of a certain date which shall be true
and correct as of such certain date) and each of the representations and
warranties that is not so qualified shall be true and correct in all material
respects on and as of the Closing Date as if made on and as of such date (other
than representations and warranties which address matters only as of a certain
date which shall be true and correct in all material respects as of such certain
date), and CONSOL shall have received a certificate of the President or Chief
Financial Officer of the Company to such effect; (ii) the Company shall have
performed or complied in all material respects with all material agreements and
covenants required by the Merger Agreement to be performed or complied with by
it on or prior to the Closing Date (in each case except as contemplated or
permitted by the Merger Agreement) and CONSOL shall have received a certificate
of the President or Chief Financial Officer of the Company to that effect and
(iii) all permits, authorizations, licenses, approvals and notifications of
Governmental Entities that are necessary for the Company and its subsidiaries to
conduct their businesses after the Effective Time in the same manner as such
businesses are conducted as of the Effective Time, including, but not limited
to, Environmental Permits, shall have been provided, issued, obtained,
transferred or reissued, to the extent necessary under applicable law, except
for such permits, authorizations, licenses, approvals
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and notifications the failure of which to provide, issue, obtain, transfer or
reissue would not have a material adverse effect on the Company and its
subsidiaries taken as a whole.
Under the Merger Agreement, the obligations of the Company to consummate
the Merger are subject to the satisfaction or waiver by the Company on or prior
to the Closing Date of the following conditions: (i) each of the representations
and warranties of each of CONSOL and Merger Sub contained in the Merger
Agreement that is qualified by materiality shall be true and correct on and as
of the Closing Date as if made on and as of such date (other than
representations and warranties which address matters only as of a certain date
which shall be true and correct as of such certain date) and each of the
representations and warranties that is not so qualified shall be true and
correct in all material respects on and as of the Closing Date as if made on and
as of such date (other than representations and warranties which address matters
only as of a certain date which shall be true and correct in all material
respects as of such certain date), in each case except as contemplated or
permitted by the Merger Agreement, and the Company shall have received a
certificate of the President or Chief Financial Officer of each of CONSOL and
Merger Sub to such effect; (ii) each of CONSOL and Merger Sub shall have
performed or complied in all material respects with all material agreements and
covenants required by the Merger Agreement to be performed or complied with by
it on or prior to the Closing Date, and the Company shall have received a
certificate of the President or Chief Financial Officer of each of CONSOL and
Merger Sub to such effect and (iii) the Company shall have received the written
opinion of its financial advisor, J.P. Morgan, that the consideration to be
received in the Merger by the holders of the Common Stock is fair to the holders
of the Common Stock from a financial point of view.
Representations and Warranties. The representations and warranties of the
Company and of CONSOL and Merger Sub contained in the Merger Agreement include
various representations and warranties typical in such agreements and are
included in Articles III and IV, respectively, of the Merger Agreement, a copy
of which is included in this Proxy Statement as Appendix A.
Certain Covenants. The Company, CONSOL and Merger Sub covenanted to certain
matters in the Merger Agreement including, among others, the following:
Conduct of Business by the Company Pending the Merger. The Merger Agreement
provides that between the date of the Merger Agreement and the Effective Time,
unless CONSOL shall otherwise agree in writing or except as otherwise expressly
contemplated by the Merger Agreement, (i) the Company and its subsidiaries will
carry on their respective businesses in the usual, regular and ordinary course
in substantially the same manner as theretofore conducted, shall preserve intact
their present business organizations and shall use commercially reasonable
efforts to keep available the services of their present officers and employees
and preserve their relationships with customers, suppliers and others having
business dealings with the Company and its subsidiaries; (ii) except for the
payment on June 1, 1998 of a cash dividend of $.15 per share, the Company shall
not (a) declare or pay any quarterly dividends on or make any other
distributions in respect of any of its capital stock, (b) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or (c) repurchase, redeem or otherwise acquire,
or permit any subsidiary to
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repurchase, redeem or otherwise acquire, any shares of its capital stock; (iii)
the Company shall not, and it shall not permit any of its subsidiaries to,
issue, deliver or sell or authorize or propose the issuance, delivery or sale
of, any shares of its capital stock of any class or any securities convertible
into, or any rights, warrants, calls, subscriptions or options to acquire, any
such shares or convertible securities, or any other ownership interest other
than issuances by a wholly owned subsidiary of the Company of its capital stock
to the Company; (iv) the Company shall not amend or propose to amend its
Articles of Incorporation or By-laws; (v) the Company shall not, and it shall
not permit any of its subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof; (vi) the Company shall not, and it shall not permit any of its
subsidiaries to, sell, lease, encumber or otherwise dispose of, any of its
assets, other than (a) sales of equipment between the Company and its
subsidiaries in the ordinary course of business that do not result in the
generation of taxable income on a consolidated basis, (b) assets having an
aggregate book value of not more than $100,000 with it being understood that
this provision shall not permit the sale or other disposition of Helvetia Coal
Company and (c) those properties listed on a schedule to the Merger Agreement;
(vii) with the exception of indebtedness between the Company and its
subsidiaries, the Company shall not, and it shall not permit any of its
subsidiaries to, incur (which shall include entering into credit agreements,
lines of credit or similar arrangements) any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or warrants
or rights to acquire any debt securities of the Company or any of its
subsidiaries or guarantee any debt securities of others, other than (a)
indebtedness outstanding on February 28, 1998 and (b) takedowns under the
Company's and its subsidiaries existing credit facilities, provided, however,
that at the Closing Date the sum of the Company's indebtedness and current
liabilities (excluding the current portion of the Company's long-term
indebtedness and the deferred compensation and severance pay payable to
employees of the Company and its subsidiaries in connection with the Merger)
less the Company's current assets, determined in accordance with generally
accepted accounting principles, shall not be greater than the amount thereof at
February 28, 1998 plus $12,000,000; (viii) the Company shall not make, and will
not permit any of its subsidiaries to make, any tax election or settle or
compromise any income tax liability of the Company or of any of its subsidiaries
for an amount in excess of $25,000, and the Company shall, before filing or
causing to be filed any material tax return of the Company or any of its
subsidiaries, consult with CONSOL and its advisors as to the positions and
elections that may be taken or made with respect to such return; (ix) the
Company shall not, and it shall not permit any of its subsidiaries to, pay,
discharge, settle or satisfy any claim, liabilities or obligations (absolute,
asserted or unasserted, contingent or otherwise) for an amount in excess of
$100,000 in the aggregate (other than the settlement of certain litigation
matters set forth in a schedule to the Merger Agreement, payments of accounts
payable and accrued liabilities and reductions of indebtedness of the Company
and its subsidiaries in the ordinary course of business of the Company and its
subsidiaries and payments for goods and services under the written agreements in
effect on the date of the Merger Agreement and listed on a schedule to the
Merger Agreement) or waive the benefit of, or agree to modify in any manner, any
confidentiality, standstill or similar agreement to which the Company or any of
its subsidiaries is a party; (x) the Company shall not, and shall not permit any
of its subsidiaries to, enter into, modify, amend or terminate, any contract to
which the Company or any subsidiary is a party
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or waive, release or assign any material rights or claims thereunder other than
spot purchases of supplies necessary for the operation of the business of the
Company and its subsidiaries in the ordinary course which do not result in the
Company's acquisition of supplies in excess of those that would be consumed in
30 days of operations in the ordinary course of business; (xi) the Company shall
not, and shall not permit any of its subsidiaries to, (a) grant any increase in
the compensation of any of its directors, officers or key employees, (b) pay or
agree to pay any pension, retirement allowance or other employee benefit not
required or contemplated by any of the existing Company Benefit Plans (as
defined in the Merger Agreement) as in effect on the date of the Merger
Agreement to any director, officer or key employee, (c) enter into any new
employment, severance or termination agreement with any such director, officer
or key employee or (d) except as may be required to comply with applicable law,
become obligated under any Company Benefit Plan which was not in effect on the
date of the Merger Agreement or amend any such plan in existence on the date of
the Merger Agreement to enhance the benefits thereunder; (xii) except as listed
in a schedule to the Merger Agreement for the month of June 1998, the Company
shall not, and shall not permit any of its subsidiaries to, authorize or make
any capital expenditures (excluding capital expenditures for which commitments
existed as of the date of the Merger Agreement) which in the aggregate exceed
$250,000, except for repairs and rebuilding expenditures of less than $250,000
each necessary to keep existing mining equipment in operation and (xiii) the
Company shall not, and shall not permit any of its subsidiaries to, take any
action that would, or would reasonably be expected to, result in (a) any of the
conditions to the Merger set forth in Article VII of the Merger Agreement not
being satisfied, (b) any of the representations and warranties of the Company
contained in the Merger Agreement that are qualified as to materiality becoming
untrue or (c) any of such representations and warranties that are not so
qualified becoming untrue in any material respect.
Conduct of Business by CONSOL Pending the Merger. The Merger Agreement
provides that between the date of the Merger Agreement and the Effective Time,
unless the Company shall otherwise agree in writing or except as otherwise
expressly contemplated by the Merger Agreement, (i) CONSOL Energy, Inc. ("CEI"),
the parent of CONSOL, shall not, and shall not permit any of its subsidiaries
other than in conjunction with the sale of capital stock of CEI held directly or
indirectly by DuPont to, acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of or equity in, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or otherwise acquire or
agree to acquire any assets if the entering into of a definitive agreement
relating to or the consummation of such acquisition, merger or consolidation
would (a) impose any material delay in the obtaining of, or increase the risk of
not obtaining, any authorizations, consents, orders, declarations or approvals
of any Governmental Entity necessary to consummate the Merger or the expiration
or termination of any applicable waiting period, (b) increase the risk of any
Governmental Entity entering an order prohibiting the consummation of the Merger
or (c) increase the risk of not being able to remove any such order on appeal or
otherwise; (ii) CEI shall not, and shall not permit any of its subsidiaries to,
take other than in conjunction with the sale of capital stock of CEI held
directly or indirectly by DuPont, or fail to take, any other action which would,
or would reasonably be expected to, impede, interfere with, prevent or
materially delay the Merger; (iii) CONSOL shall take all necessary action to
cause Merger Sub to perform its obligations under the Merger Agreement and to
consummate the Merger on the terms set forth in the Merger
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Agreement and (iv) each of CONSOL and Merger Sub shall not, and shall not permit
any of its subsidiaries to, take any action that would, or would reasonably be
expected to, result in (a) any of the conditions to the Merger set forth in
Article VII of the Merger Agreement not being satisfied, (b) any of its
representations or warranties set forth in the Merger Agreement that are
qualified as to materiality becoming untrue or (c) any of such representations
and warranties that are not so qualified becoming untrue in any material
respect.
Certain Other Agreements of the Parties
In the Merger Agreement, CONSOL agrees as follows with respect to the
Company's Benefit Plans:
(i) CONSOL shall cause the Surviving Corporation to maintain the
Company's existing compensation, severance, welfare and pension benefit plans,
programs and arrangements (the "Existing Plans") for the benefit of the current
and former employees of the Company and its subsidiaries, subject to such
modification as may be required by applicable law or to maintain the tax exempt
status of any such plan; provided, however, that the Merger Agreement does not
prohibit CONSOL from (a) replacing any such existing plans, programs or
arrangements with plans, programs or arrangements (the "Replacement Plans")
which provide current active or inactive employees or former employees with
benefits which, in the reasonable opinion of CONSOL, are not less favorable in
the aggregate than the benefits that would have been provided under the Existing
Plans to the extent such replacement is permitted under the terms of the
Existing Plans; provided, however, CONSOL may not subsequently replace such
Replacement Plans with other plans, programs or arrangements unless such plans,
programs or arrangements provide such employees with benefits which, in the
reasonable opinion of CONSOL, are not less favorable in the aggregate than the
benefits provided under CONSOL's plans, programs or arrangements or (b)
including the current active or inactive employees or former employees of the
Company in the plans, programs and arrangements generally available to employees
of CONSOL and its subsidiaries other than the Surviving Corporation in lieu of
participation in any Company plan, program or arrangement provided that such
CONSOL plans, programs and arrangements (1) provide such employees with benefits
which, in the reasonable opinion of CONSOL, are not less favorable in the
aggregate than the benefits that would have been provided under the Existing
Plans and (2) do not discriminate against such employees compared to other
employees of CONSOL and its subsidiaries;
(ii) (a) all service credited to each employee by the Company or its
subsidiaries through the Effective Time shall be recognized by CONSOL for all
purposes, including for purposes of eligibility, vesting and benefit accruals
under any employee benefit plan provided by CONSOL, provided, however, that to
the extent necessary to avoid duplication of benefits, amounts payable under
employee benefit plans provided by CONSOL may be reduced by amounts payable
under similar Company plans with respect to the same periods of service; (b) any
benefits accrued by employees of the Company and its subsidiaries prior to the
Effective Time under any of the Company's defined benefit pension plans that
employ a final average pay formula shall be calculated based on such employees'
final average pay with the Surviving Corporation or any successor to the
Surviving Corporation or other affiliate of CONSOL employing such employees and
(c) with respect to any welfare benefit
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plan established or maintained by CONSOL or its subsidiaries for the benefit of
employees of the Company, CONSOL shall, or shall cause the relevant subsidiary
to, waive any pre-existing condition exclusion other than any pre-existing
condition exclusion that was not waived by the Existing Plans and provide that
any covered expense incurred on or before the Effective Time in respect of the
current plan year by any employee of the Company or any covered dependent of
such an employee shall be taken into account for purposes of satisfying
applicable deductible, coinsurance and maximum out-of-pocket provisions after
the Effective Time in respect of such current plan year;
(iii) CONSOL agrees to cause the Surviving Corporation to honor,
without modification, and assume the severance policies, employment agreements,
executive termination agreements and individual benefit arrangements previously
disclosed to CONSOL; and
(iv) the foregoing provisions are not applicable to any employee of the
Company or its subsidiaries subject to the terms of a collective bargaining
agreement.
Management of the Company After the Merger
After the Effective Time, the directors and officers of Merger Sub
immediately before the Effective Time will be the initial directors and officers
of the Surviving Corporation, in each case until their successors are duly
elected or appointed.
Termination; Fees and Expenses; Plans of the Company If the Merger Is Not
Consummated
Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether before or after the
approval and adoption thereof by the shareholders of the Company: (i) by mutual
written consent of the Boards of Directors of the Company and CONSOL; (ii) by
either the Company or CONSOL if the Effective Time shall not have occurred on or
before September 30, 1998; provided that the right to terminate the Merger
Agreement in such event will not be available to any party whose failure to
fulfill any obligation thereunder has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date; (iii) by either
the Company or CONSOL if a court of competent jurisdiction or a Governmental
Entity shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by the Merger Agreement, provided that the party seeking to
terminate the Merger Agreement shall have used commercially reasonable efforts
to remove such injunction, order or decree; (iv) by CONSOL in the event of a
breach by the Company of any representation, warranty, covenant or other
agreement in the Merger Agreement which (a) would give rise to the failure of a
condition precedent to the obligations of CONSOL and Merger Sub under the Merger
Agreement and (b) has not been cured or cannot be cured within 20 days after the
giving by CONSOL of written notice to the Company; (v) by the Company in the
event of a breach by CONSOL of any representation, warranty, covenant or other
agreement in the Merger Agreement which (a) would give rise to the failure of a
condition precedent to the obligations of the Company under the Merger Agreement
and (b) has not been cured or cannot be cured within 20 days after the giving by
the Company of written notice to CONSOL or (vi) by CONSOL or the Company if the
Merger
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<PAGE>
Agreement shall not have been approved and adopted by the requisite vote of the
Company's shareholders at the Special Meeting.
Fees and Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger and the Merger Agreement and the
transactions contemplated thereby will be paid by the party incurring such
expenses.
Plans of the Company If the Merger Is Not Consummated. If the shareholders
fail to approve and adopt the Merger Agreement, the Merger will not be
consummated. In the event the Merger Agreement is not approved and adopted by
the shareholders of the Company, the Merger Agreement will terminate, and it is
not known whether an acquisition of the Company would occur in the foreseeable
future.
Source and Amount of Funds
CONSOL will require approximately $150 million to pay the Merger Price for
all of the outstanding Common Stock of the Company. CONSOL has advised the
Company that it currently expects that the funds necessary to pay the aggregate
Merger Price will be financed from available cash and proceeds from various
transactions in commercial paper.
Federal Income Tax Consequences of the Merger
The discussion set forth below concerning federal income tax consequences
to a particular shareholder may vary depending upon such shareholder's
particular circumstances. Each shareholder is urged to consult such
shareholder's own tax advisor with respect to the particular tax consequences to
such shareholder of the Merger or the exercise of dissenters appraisal rights,
including the applicability and effect of state, local, foreign and other taxes.
Exchange of Common Stock pursuant to the Merger and the receipt of cash in
respect of the exercise of dissenters appraisal rights will be taxable
transactions for federal income tax purposes under the Internal Revenue Code of
1986, as amended, and may also be taxable transactions under applicable state,
local and other tax laws. For federal income tax purposes, each holder of Common
Stock whose shares are exchanged in the Merger will generally recognize gain or
loss equal to the difference between the amount of cash received by such
shareholder in the Merger and such shareholder's tax basis in such shares. Gain
or loss recognized will be treated as a long-term capital gain or loss if the
Common Stock is held as a capital asset and if the Common Stock exchanged has a
holding period of more than one year at the Effective Time.
If a noncorporate shareholder recognizes a capital loss in connection with
the sale of Common Stock, the shareholder may offset such capital loss against
any other capital gains realized by such shareholder in the taxable year and
against up to $3,000 of such shareholder's ordinary income for individuals
filing joint returns. Any excess loss may be carried forward indefinitely. A
corporate shareholder may use a capital loss recognized in connection with the
Merger to offset any capital gains realized by it in the same taxable year but
not to offset ordinary income. Any unused capital loss of a corporation may
generally be carried back to
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its three preceding taxable years and then, to the extent unused, forward for
five succeeding taxable years, in each case to offset capital gains, if any.
Dissenters Appraisal Rights
For purposes of this section, the term "Company" will be deemed to refer
also to the Surviving Corporation with respect to actions taken after the
Effective Time.
Pursuant to the Merger Agreement and the PBCL, the owners of Common Stock
will have dissenters rights in connection with the Merger under Sections 1571
through 1580 of Subchapter 15D of the PBCL (hereinafter "Subchapter 15D"), a
copy of which (as well as a copy of Section 1930 of the PBCL) is included in
this Proxy Statement as Appendix D, and may object to the Merger Agreement and
demand in writing that the Company pay the fair value of their Common Stock.
If any holders of Common Stock properly exercise dissenters rights of
appraisal in connection with the Merger under Subchapter 15D (a "Dissenting
Shareholder"), any shares held by such holders will not be converted into the
right to receive the Merger Price, but instead will be converted into the right
to receive the "fair value" of such shares pursuant to Subchapter 15D. THE
FOLLOWING SUMMARY OF THE PROVISIONS OF SUBCHAPTER 15D IS NOT INTENDED TO BE A
COMPLETE STATEMENT OF SUCH PROVISIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUBCHAPTER 15D, A COPY OF WHICH (AS WELL AS A COPY
OF SECTION 1930 OF THE PBCL) IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX D
AND INCORPORATED HEREIN BY REFERENCE. The Company will not give any notice of
the following requirements other than as described in this Proxy Statement and
as required by the PBCL.
General. Any holder of Common Stock who has duly demanded the payment of
the fair value of his or her shares under Subchapter 15D will not, after the
Effective Time, be a shareholder of the Company for any purpose or be entitled
to the payment of dividends or other distributions on any such Common Stock;
moreover, the Common Stock of any Dissenting Shareholder will be converted into
the right to receive either (i) the fair value of such Common Stock, determined
in accordance with Subchapter 15D, or (ii) the right to receive the Merger
Price, if any Dissenting Shareholder effectively withdraws his or her demand for
appraisal rights.
SHAREHOLDERS OF THE COMPANY SHOULD NOTE THAT, UNLESS ALL THE REQUIRED
PROCEDURES FOR CLAIMING DISSENTERS RIGHTS ARE FOLLOWED WITH PARTICULARITY,
DISSENTERS RIGHTS WILL BE LOST. VOTING AGAINST APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT, WHETHER IN PERSON OR BY PROXY, IS NOT SUFFICIENT NOTICE TO
PERFECT DISSENTERS RIGHTS.
Filing Notice of Intention to Demand Fair Value. Before any shareholder
vote is taken on the Merger Agreement, a Dissenting Shareholder must deliver to
the Company a written notice of his or her intention to demand the fair value of
his or her Common Stock if the Merger is effected. Such written notice may be
sent to the Secretary of the Company at the Company's address set forth on Page
1 of this Proxy Statement. Neither the return of a proxy
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by the Dissenting Shareholder with instructions to vote the Common Stock
represented thereby against the approval and adoption of the Merger Agreement
nor a vote against the approval and adoption of the Merger Agreement or an
abstention from voting on the approval and adoption of the Merger Agreement is
sufficient to satisfy the requirement of delivering a written notice to the
Company. In addition, the Dissenting Shareholder must not effect any change in
the beneficial ownership of his or her Common Stock from the date of filing the
notice with the Company through the Effective Time, and the Dissenting
Shareholder must not vote his or her Common Stock for which payment of fair
value is sought in favor of the approval and adoption of the Merger Agreement.
The submission of a signed blank proxy will serve to waive appraisal rights if
not revoked, but a failure to vote, a vote against or an abstention from voting
on the approval and adoption of the Merger Agreement will not waive such rights.
Proper revocation of a signed blank proxy or a signed proxy instructing a vote
for approval and adoption of the Merger Agreement will also preserve dissenters
rights under the PBCL. Failure by a Dissenting Shareholder to comply with any of
the foregoing will result in such Dissenting Shareholder's forfeiting any right
to payment of the fair value of such Dissenting Shareholder's Common Stock.
Record and Beneficial Owners. A record holder of Common Stock may assert
dissenters rights as to fewer than all the Common Stock of the same class or
series registered in his or her name only if the holder dissents with respect to
all the Common Stock beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he or she dissents. A
beneficial owner of Common Stock who is not the record holder may assert
dissenters rights with respect to Common Stock held on his or her behalf if such
Dissenting Shareholder submits to the Company the written consent of the record
holder not later than the time of assertion of dissenters rights. The beneficial
owner may not dissent with respect to less than all the Common Stock he or she
owns, whether or not such Common Stock is registered in the beneficial owner's
name.
Notice to Demand Payment. If the Merger is approved and adopted by the
requisite vote at the Special Meeting, the Company shall mail to all Dissenting
Shareholders who gave due notice of their intention to demand payment of fair
value and who refrained from voting in favor of the Merger a notice stating
where and when a demand for payment must be sent, and stock certificates
representing the Common Stock held by the Dissenting Shareholder must be
deposited to obtain payment. The notice shall be accompanied by a copy of
Subchapter 15D of the PBCL and include a form for demanding payment, which form
shall have a request for certification of the date that beneficial ownership of
the Common Stock was acquired by the Dissenting Shareholder or the person on
whose behalf the Dissenting Shareholder dissents. The time set for the receipt
of a demand and the Dissenting Shareholder's stock certificates shall not be
less than 30 days from the mailing of the notice. Failure by a Dissenting
Shareholder to timely demand payment and deposit the stock certificates pursuant
to such notice will cause such Dissenting Shareholder to lose all right to
receive payment of the fair value of his or her Common Stock. All mailings to
the Company are at the risk of the dissenter. However, the Company recommends
that the notice of intention to dissent, the demand form and the holder's stock
certificates be sent by certified mail. If the Merger has not been effected
within 60 days after the date set for demanding payment and depositing stock
certificates, the Company shall return any stock certificates that
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have been deposited. The Company, however, may at any later time send a new
notice regarding demand for payment and deposit of stock certificates with like
effect.
Payment of Fair Value of Common Stock. Promptly after the Effective Time,
or upon timely receipt of demand for payment if the Merger has already been
effected, the Company shall either remit to Dissenting Shareholders who have
made demand and deposited their stock certificates the amount the Company
estimates to be the fair value of the Common Stock or give written notice that
no remittance will be made under Section 1577 of the PBCL. Such remittance or
notice shall be accompanied by:
(i) the Company's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months prior to the date of remittance or
notice, together with the latest available interim financial statements;
(ii) a statement of the Company's estimate of the fair value of the
Common Stock; and
(iii) a notice of the right of a Dissenting Shareholder to demand
payment or supplemental payment, as the case may be, accompanied by a copy of
Subchapter 15D.
If the Company does not remit the amount of its estimate of the fair value of
the Common Stock, it will return all stock certificates that have been deposited
and may make a notation thereon that a demand for payment has been made. If
shares carrying such notation are thereafter transferred, each new stock
certificate issued therefor will bear a similar notation, together with the name
of the original dissenting holder or owner of such shares. A transferee of such
shares will not acquire by such transfer any rights in the Company other than
those which the original dissenter had after making demand for payment of their
fair value.
Estimate by Dissenting Shareholder of Fair Value of Common Stock. If a
Dissenting Shareholder believes that the amount estimated or paid by the Company
for his or her Common Stock is less than their fair value, the Dissenting
Shareholder may send to the Company his or her own estimate of the fair value,
which shall be deemed a demand for payment of the amount of the deficiency. If
the Dissenting Shareholder does not file his or her own estimate of the fair
value within 30 days after such remittance or notice has been mailed by the
Company, the Dissenting Shareholder will be entitled to no more than the amount
estimated in the notice or remitted by the Company.
Valuation Proceedings. Within 60 days after the latest of (i) the Effective
Time, (ii) timely receipt of any demands for payment or (iii) timely receipt of
any Dissenting Shareholder estimates of fair value, if any demands for payment
remain unsettled, the Company may file in court an application for relief
requesting that the fair value of the Common Stock be determined by the court.
Each Dissenting Shareholder whose demands have not been settled will be made a
party to the proceeding and will be entitled to recover the amount by which the
fair value of such Dissenting Shareholder's Common Stock is found to exceed the
amount, if any, previously remitted. Such Dissenting Shareholder will also be
entitled to interest on such amount from the Effective Time until the date of
payment. There is no assurance, however, that the Company will file such an
application. If the Company fails to file an
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application within the 60-day period, any Dissenting Shareholder who has not
settled his or her claim may do so in the Company's name within 30 days after
the expiration of the 60-day period. If no Dissenting Shareholder files an
application within such 30-day period, each Dissenting Shareholder who has not
settled his or her claim will be paid no more than the Company's estimate of the
fair value of the Common Stock and may bring an action to recover any amount not
previously remitted.
Costs and Expenses of Valuation Proceedings. The costs and expenses of any
valuation proceeding, including the reasonable compensation and expenses of any
appraiser appointed by the court, will be determined by the court and assessed
against the Company, except that any part of such costs and expenses may be
assessed as the court deems appropriate against all or some of the Dissenting
Shareholders whose action in demanding supplemental payment is found by the
court to be dilatory, obdurate, arbitrary, vexatious or in bad faith. The court
may also assess the fees and expenses of counsel and experts for any or all of
the Dissenting Shareholders against the Company if it fails to comply
substantially with Subchapter 15D or acts in a dilatory, obdurate, arbitrary or
vexatious manner or in bad faith. The court can also assess any such fees or
expenses incurred by the Company against any Dissenting Shareholder if such
Dissenting Shareholder is found to have acted in a dilatory, obdurate, arbitrary
or vexatious manner or in bad faith. If the court finds that the services of
counsel for any Dissenting Shareholder were of substantial benefit to the other
Dissenting Shareholders and should not be assessed against the Company, it may
award to such counsel reasonable fees to be paid out of the amounts awarded to
the Dissenting Shareholders who were benefited.
Under the PBCL, a shareholder of the Company has no right to obtain, in the
absence of fraud or fundamental unfairness, an injunction against the Merger,
nor any right to valuation and payment of the fair value of the holder's shares
because of the Merger, except to the extent provided by the dissenters rights
provisions of Subchapter 15D. The PBCL also provides that absent fraud or
fundamental unfairness, the rights and remedies provided by Subchapter 15D are
exclusive.
The foregoing description of the rights of dissenters under Subchapter 15D
should be read in conjunction with Appendix D to this Proxy Statement, and is
qualified in its entirety by reference to the provisions of Subchapter 15D.
The Board of Directors recommends that shareholders vote "FOR" the proposal
to approve and adopt the Merger Agreement.
THE STOCKHOLDERS AGREEMENT
Simultaneously with the execution of the Merger Agreement and in
consideration thereof, on May 28, 1998 the Majority Shareholders entered into
the Stockholders Agreement with CONSOL and Merger Sub. The following summary of
the Stockholders Agreement is qualified in its entirety by reference to the
Stockholders Agreement, a copy of which is included as Appendix B to this Proxy
Statement.
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In the Stockholders Agreement, the Majority Shareholders agree, until the
termination of the Merger Agreement in accordance with its terms, that none of
the Majority Shareholders shall, in his or her capacity as such, directly or
indirectly, initiate, solicit or knowingly encourage, including by way of
furnishing non-public information or assistance, or take any other action
knowingly to facilitate, any inquiries or the making of any proposal that
constitutes, or reasonably may be expected to lead to, a competitive proposal,
or enter into or maintain or continue discussions or negotiate with any person
or entity in furtherance of such inquiries or to obtain, or agree to or endorse,
a competitive proposal, or authorize or permit any person or entity acting on
behalf of a Majority Shareholder to do any of the foregoing. The Majority
Shareholders further agree that if any of them receives any inquiry or proposal
regarding a competitive proposal, such Majority Shareholder shall provide
reasonable notice to CONSOL of that inquiry or proposal. For purposes of the
Stockholders Agreement, "competitive proposal" means any tender or exchange
offer involving the Company, any proposal for a merger, consolidation, business
combination or similar transaction involving the Company or its subsidiaries,
any proposal or offer to acquire in any manner more than 10% of the Common Stock
of the Company or a substantial portion of the business or assets of the Company
or its subsidiaries, other than immaterial or insubstantial assets or inventory
in the ordinary course of business or assets held for sale, any proposal or
offer with respect to any recapitalization or restructuring with respect to the
Company or its subsidiaries or any proposal or offer with respect to any other
transaction similar to any of the foregoing with the Company other than pursuant
to the transactions to be effected pursuant to the Merger Agreement.
The Majority Shareholders and CONSOL make certain representations and
warranties to each other in the Stockholders Agreement typical in agreements of
that nature, including the incorporation by reference of CONSOL's
representations and warranties in Article IV of the Merger Agreement.
Pursuant to the Stockholders Agreement, each of the Majority Shareholders
revokes any previously granted proxies with respect to the Majority Shares and
appoints each of Michael F. Nemser and Samuel P. Skeen, who are officers of
CONSOL, as such Majority Shareholders' attorney and proxy, with full power of
substitution, to attend any and all meetings of shareholders of the Company and
to vote the Majority Shares and any voting securities issued in exchange
therefor or in respect thereof, and to represent and otherwise to act for such
Majority Shareholders in the same manner and with the same effect as if such
Majority Shareholders were personally present, when any matter, including, but
not limited to, any proposed merger or other transaction, is submitted to the
shareholders of the Company for a vote. The Stockholders Agreement provides that
such appointment as a proxy shall (i) be irrevocable, (ii) remain in effect
until September 30, 1998 and (iii) be deemed to be coupled with an interest in
that CONSOL has the right to purchase the Majority Shares and is also a party to
the Merger Agreement.
Pursuant to the Merger Agreement, each of the Majority Shareholders also
grants CONSOL an irrevocable option (the "Option") to purchase all of the
Majority Shares at a price per share payable in cash of $43.50. The Stockholders
Agreement provides that the Option may be exercised, in full and not in part,
until September 30, 1998. In order to exercise the Option, CONSOL must give the
Majority Shareholders written notice thereof specifying a
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place, time and date not earlier than one day and not later than 20 days from
the date of notice for the closing of the purchase. The obligation of the
Majority Shareholders to sell and deliver the Majority Shares upon exercise of
the Option by CONSOL is subject to the condition that there shall be no
preliminary or permanent injunction or other order preventing or restricting the
purchase of the Majority Shares. CONSOL agrees in the Stockholders Agreement
that if it purchases the Majority Shares, it shall vote the Majority Shares in
favor of the approval and adoption of the Merger Agreement at the Special
Meeting.
The Majority Shareholders also agree in the Stockholders Agreement that,
except as provided in the Stockholders Agreement and prior to the termination of
the Merger Agreement in accordance with its terms, (i) no Majority Shareholder
shall, directly or indirectly, offer for sale, sell, transfer, tender, pledge,
encumber, assign or otherwise dispose of or enter into any agreement,
arrangement or understanding with respect to, or consent to, the offer for sale,
transfer, tender, pledge, encumbrance, assignment or other disposition of, any
of the Majority Shares or any interest in the Majority Shares; (ii) grant any
proxies or powers of attorney with respect to any of the Majority Shares,
deposit any of the Majority Shares into a voting trust or enter into a voting
agreement with respect to any of the Majority Shares or (iii) take any action
that would make any representation of a Majority Shareholder in the Stockholders
Agreement untrue or have the effect of preventing or disabling the Majority
Shareholders from performing their obligations under the Stockholders Agreement.
In the Stockholders Agreement, each of the Majority Shareholders also waives any
dissenters appraisal rights that any Majority Shareholder may have to dissent
from the Merger.
The Stockholders Agreement further provides that (i) no person executing
the Stockholders Agreement who is, or during the term of the Stockholders
Agreement becomes, a director of the Company makes any agreement in his or her
capacity as a director of the Company, (ii) each of the Majority Shareholders
executed the Stockholders Agreement solely in his or her capacity as the record
and beneficial owner of the Majority Shares and (iii) notwithstanding anything
to the contrary in the Stockholders Agreement, no action or inaction by a
Majority Shareholder in his or her capacity as a director of the Company shall
be deemed to contravene the Stockholders Agreement.
INFORMATION CONCERNING THE COMPANY
Business
The Company and its predecessors have been engaged in the mining of coal in
central and western Pennsylvania since 1881. From the mid-1960's, the Company
and its subsidiaries have been principally engaged in the deep mining of
bituminous steam coal for sale to electric generating plants located adjacent to
or near the Company's mines. During 1997, sales to two of the utility customers
of the Company's subsidiaries were close to minimum contract requirements and
represented approximately 43% of the Company's sales of deep-mined coal.
Deep-mined coal included coal produced by Eighty-Four Mining Company
("Eighty-Four") incidental to the development of the mine. In 1992, through a
subsidiary, the Company acquired coal properties and an underground coal mine
(Mine No. 84) in southwestern Pennsylvania. Development and rehabilitation work
continued at Mine No. 84 through
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October 31, 1997 when Mine No. 84 completed its development stage. As a result,
the Company is engaged, as a material portion of its planned operations, in the
eastern and midwestern utility coal markets in addition to the continuing sales
of coal pursuant to long-term coal supply contracts.
The Company, through its subsidiaries, is currently principally engaged in
deep and, to a minor extent, surface mining of bituminous coal in Pennsylvania
serving the eastern and midwestern coal markets. The only customers of the
Company who constituted more than 10% of the Company's consolidated revenues in
the years ended December 31, 1995, 1996 and 1997 were (i) the Owners of the
Keystone Steam Electric Station (the "Keystone Owners"), who accounted for 65%,
58% and 52% of the Company's consolidated revenues in the years ended December
31, 1995, 1996 and 1997, respectively and (ii) the Owners of the Homer City
Steam Electric Station (the "Homer City Owners"), who accounted for 26%, 34% and
24% of the Company's consolidated revenues in the years ended December 31, 1995,
1996 and 1997, respectively. The Keystone Owners are Atlantic City Electric
Company, Baltimore Gas and Electric Company, Delmarva Power & Light Company,
Jersey Central Power & Light Company, Pennsylvania Power & Light Company, PECO
Energy Company and Public Service Electric and Gas Company. The Homer City
Owners are New York State Electric & Gas Corporation and General Public
Utilities. The following table indicates the amount of revenues and the
percentage of total revenues during the Company's last three fiscal years
attributable to deep mining, excluding deep-mined production and revenues
produced by Eighty-Four incidental to development of the mine.
<TABLE>
<CAPTION>
Deep-Mined Production Surface-Mined Production
------------------------------ ------------------------------
Percent of Percent of
Period Revenues Total Revenues Revenues Total Revenues
----------------- -------- -------------- -------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Year ended
December 31, 1995............. $181,746 84% $6,337 3%
Year ended
December 31, 1996............. 151,316 75 4,304 2
Year ended
December 31, 1997............. 149,743 71 3,108 1
</TABLE>
In 1992, the Company established two wholly owned subsidiaries, Eighty-Four
and Lucerne Land Company ("Lucerne Land"), which acquired coal properties and
Mine No. 84 from Bethlehem Steel Corporation and affiliated entities
("Bethlehem") on December 31, 1992. The final purchase price of the coal
properties and Mine No. 84 was $53.6 million after taking into account
post-closing adjustments.
From February 1993 through October 1997, while producing some coal
incidental to development of the mine, Eighty-Four was primarily engaged in the
renovation, rehabilitation and replacement of key operating systems at Mine No.
84. This work included installation of a new five-mile long, 6,700 ton per hour
underground belt conveyor system, a new portal and ventilating shaft and other
underground rehabilitation work, construction of new above-ground coal storage
and unit-train load out facilities, upgraded coal handling and preparation
facilities and development work to accommodate the installation of two planned
longwall
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mining units. The first longwall commenced operations in the third quarter of
1995 and the second unit became operational in the fourth quarter of 1997.
Eighty-Four's facilities will permit production of approximately 6.3 to 6.7
million tons of coal in 1998 and approximately 7.0 million tons of coal per year
thereafter. In connection with the development of the longwall panels and
initial mining in longwall panels, Eighty-Four produced 4.8 million tons of coal
in 1997, substantially all of which were sold in the commercial market to 18
customers which included utilities, industrial coal users and, to a lesser
degree, foreign customers.
Since longwall operations commenced in 1995, Eighty-Four has experienced
problems in achieving continuous miner advance rates required for economical
longwall mining. Longwall panels (or areas of extraction) are developed by
mining parallel entries through the use of continuous mining machines. The
"continuous miner advance rate" is the linear measurement of mining those
entries on a per shift, per unit or per day basis. Continuous miner advance
rates must meet a schedule associated with scheduled moves of the longwall
mining equipment to successive panels to avoid idle time or delays in the
ability to move the longwall equipment. The failure to achieve and maintain
desirable continuous miner advance rates at Mine No. 84 has caused the
inefficient utilization of the longwall mining equipment and resulted in
inconsistent cash flows and results of operations at Mine No. 84 since it became
operational. A plan to enhance advance rates in the continuous miner sections,
developed with an independent consultant, was implemented during 1997 and
advance rates improved in 1997 and in 1998. However, the cumulative effect of
past delays has increased the time required for scheduled longwall moves in the
first half of 1998. Future longwall delays cannot be avoided unless improved
advance rates are maintained in the continuous miner sections. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
A citizens group has appealed various provisions of Eighty-Four's Mining
Activity Permits (the "Permits"). The appeals are pending before the
Pennsylvania Environmental Hearing Board (the "EHB"). See also "Legal
Proceedings."
The properties acquired from Bethlehem are estimated to contain
approximately 175 million saleable1 tons of high quality Pittsburgh Seam steam
and metallurgical coal, of which approximately 75 million tons are within
Eighty-Four's current mine plan which provides for mining through 2008. The 175
million ton estimate, which was developed by the Company's Geology and
Engineering personnel and which is subject to continuing review and verification
by them, is based upon the Company's review of data and test results provided by
Bethlehem, data available from outside sources, application of generally
accepted mining practices in the geographic area of mining by Eighty-Four and
generally accepted mining practices in the Pittsburgh Seam utilizing longwall
mining techniques.
Eighty-Four expects to sell between 6.3 and 6.7 million tons of coal from
Mine No. 84 in 1998 to utility and industrial customers, in either spot market
sales or under longer-term contracts none of which, at present, extends beyond
2002. Eighty-Four has been successful
--------
1 Saleable means total coal mine output less tonnage rejected during
processing for market.
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<PAGE>
selling Mine No. 84 coal to utilities that use the coal as blender with Western
low sulphur coals.
All of the Company's operations produce a raw coal product generally
characterized as mid-sulphur, and has a sulphur content ranging generally from
1.0% to 2.5%. After cleaning conducted by the Company, the sulphur content of
its coal is reduced to a lower mid-sulphur range. When coal is burned, the
amount of sulphur dioxide emitted is a direct function of the sulphur content of
the coal before burning. Consequently, the sulphur content of coal is an
important factor in determining whether particular coals are suitable for
specific electric generating stations. Another important factor is the
strategies employed by specific electric generating stations for compliance with
air pollution laws, including the use of scrubbers and the blending of
higher-sulphur and lower-sulphur coals. Scrubbers are devices employed by
coal-fired electric generating stations to remove sulphur dioxide from flue gas
emissions. As noted in the following discussion of the environmental legislation
applicable to the Company's business, significant uncertainty remains as to the
long-term effect of the Clean Air Act Amendments of 1990 (the "Amendments") on
the demand for coal.
The Keystone Station and the Homer City Station are able, under current
law, to utilize the coal produced at the Company's Keystone and Homer City
mines. Based upon the location of Mine No. 84, the quality of the coal produced
from Mine No. 84, the availability of adequate rail transportation capacity and
the announced compliance strategies of its customers, Eighty-Four believes its
coal will continue to have a strong market because, after cleaning, the coal
will remain a cost-effective product for electric generating stations utilizing
scrubbers, emission allowances or blending. Additionally, a significant portion
of the coal from Mine No. 84 has historically been sold on the domestic and
international metallurgical market. Marketing activities undertaken by
Eighty-Four are directed to a diverse geographic and customer base in order to
reduce reliance upon a single customer, group of customers or type of market
while enabling price escalation risks to be partially hedged due to varying
contract durations.
The Company's wholly owned subsidiary, Keystone Coal Mining Corporation
("KCMC") is a party to a coal supply agreement effective as of January 1, 1991
(the "Keystone Agreement") with the Keystone Owners that own the Keystone Steam
Electric Station (the "Keystone Station") near Shelocta, Pennsylvania. The
Keystone Agreement, which was amended in 1995, has a term ending on December 31,
2004, and provides that KCMC will sell and deliver 3,250,000 tons annually
subject to increase or decrease by up to 250,000 tons through 1999. In 1997,
KCMC delivered 3,000,013 tons to the Keystone Station pursuant to the Keystone
Agreement. Should the parties not agree prior to 2000 to an extension of the
Keystone Agreement beyond 2004, as to which no assurance can be given,
production and deliveries will decrease between 2000 and 2004 with an aggregate
of 6,500,000 tons to be delivered during that five-year period. Coal sold
pursuant to the Keystone Agreement is delivered by a series of conveyor belts
directly from KCMC's mines (the "Keystone Mines") or by truck.
In connection with its Keystone Mines, KCMC also owns and operates a coal
handling and preparation facility (the "Keystone Cleaning Plant") which
processes coal to enhance its thermal value prior to delivery to the Keystone
Station.
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<PAGE>
The price paid by the Keystone Owners to KCMC pursuant to the Keystone
Agreement consists of an amount, subject to a price cap, equal to all costs of
production incurred by KCMC in mining, processing and delivering the coal,
including mine development costs and capital expenditures, mine closing costs,
general and administrative costs and interest costs plus a profit that varies
according to KCMC's ability to meet or exceed certain cost standards plus a
royalty of $.25 per ton, with an annual minimum royalty payment of $375,000. The
profit calculation is subject to adjustment for cumulative changes in the Gross
National Product Implicit Price Deflator ("GNP Deflator") based upon the Btu
content of the coal delivered and KCMC's cost of production compared to standard
costs established in the Keystone Agreement. The standard costs are adjusted
according to various cost and market price indices.
KCMC dedicated approximately 90 million tons of coal at January 1, 1991
pursuant to the Keystone Agreement which coal cannot be mined for sale to others
without the Keystone Owners' consent. Substantially all of the dedicated coal
properties are leased or subleased by KCMC from the Company. Under certain
limited conditions described in the Keystone Agreement, the Keystone Owners have
the option to purchase all of the capital stock of KCMC at the net book value
thereof at the time of exercising the option ($16,680,961 at December 31, 1997)
or KCMC's net assets at book value and to lease KCMC's coal properties from the
Company. In such event, the Company would receive a royalty equal to
approximately $1.03 per ton, a substantial portion of which would be adjusted
for changes in the GNP Deflator from December 1990. The Keystone Owners also
have the right to terminate the Keystone Agreement effective at the end of 1999
or any calendar year thereafter, upon five years prior notice, if the Keystone
Owners determine, in their sole discretion, that it is unlawful or commercially
impracticable, in light of the then applicable governmental regulations, to
operate the Keystone Station with the quality of the coal KCMC is able to
produce. The Keystone Owners also have the right to terminate the Keystone
Agreement if certain coal size and quality requirements are not met by KCMC.
In 1997, KCMC delivered 1,938,546 tons of coal from its Keystone Mines and
1,061,466 tons of purchased coal to the Keystone Station, compared with
deliveries to the Keystone Station in 1996 of 2,404,753 tons of coal from its
Keystone Mines and 777,827 tons of purchased coal.
The Company's wholly owned subsidiary, Helvetia Coal Company ("Helvetia"),
is a party to a coal sales agreement effective January 1, 1995 (the "Homer City
Agreement") with the Homer City Owners that own the Homer City Steam Electric
Station (the "Homer City Station") near Homer City, Pennsylvania.
The Homer City Agreement provides that Helvetia will sell and deliver to
the Homer City Owners approximately 14 million tons of coal through 2003 at an
initial rate of 1.8 million tons of coal per year. Helvetia's coal reserves are
leased from the Company. Coal sold pursuant to the Homer City Agreement is
delivered to the Homer City Station by conveyor belts and trucks. To enhance the
quality of delivered coal and thereby gain the benefit of premiums under the
pricing structure of the Homer City Agreement, Helvetia built a new coal
cleaning plant (the "Helvetia Cleaning Plant") which began operation in February
1995.
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<PAGE>
The price paid by the Homer City Owners to Helvetia pursuant to the Homer
City Agreement is a base price with escalation and adjustments based on the
quality of the coal delivered. The Homer City Agreement also provides for early
termination by either party under hardship provisions as defined in the Homer
City Agreement and further allows the Homer City Owners to terminate the Homer
City Agreement for their convenience, in which event they are required to make
certain payments to Helvetia.
In 1997, Helvetia delivered 1,695,738 tons of coal from its deep mines and
106,221 tons of purchased coal to the Homer City Station compared with
deliveries to the Homer City Station in 1996 of 1,822,792 tons of deep-mined
coal and 115,677 tons of purchased coal.
In 1997, five deep mines of the Company's subsidiaries supplied coal to the
Homer City and Keystone Stations (the "Stations"). See "Properties" for a
description of the mines.
The Company maintains comprehensive general liability and umbrella
liability, pollution liability and boiler and machinery insurance for all of its
operations. The Company also maintains business interruption and property damage
insurance for all of its subsidiaries' operations and properties except for
KCMC. KCMC, pursuant to agreement with the Keystone Owners, is not fully insured
for business interruption and property damage because it is able to recover such
losses in whole or in part under the Keystone Agreement. The Company has
self-insurance programs for workers' compensation and has insurance coverage for
catastrophic losses. The Company also has automobile liability, fiduciary
liability and fidelity insurance.
The bituminous coal industry in general is intensely competitive. Although
approximately 43% of the Company's deep-mined coal production in 1997 was sold
pursuant to the Keystone and Homer City Agreements (the "Agreements"), because
of the nature of the power supply system in the Mid-Atlantic Region of the
United States, the Company remains subject to material competition from other
coal suppliers primarily as to price, coal quality and environmental
considerations, and suppliers of other types of fuel, principally oil, natural
gas, hydroelectric power and nuclear fuel. That system is operated as a pool of
electric power so that to the extent other sources of power within the system,
or available to it, are cheaper than the power produced at the Stations, the
Keystone and Homer City Owners could reduce the amount of power produced by
those Stations and, consequently, the amount of coal purchased from the Company
under the Agreements could be reduced. In addition, the deregulation of the
electric generating industry, the dimensions of which are not yet fully
apparent, could have a material effect on the Company's business if the
utilities to which its subsidiaries supply coal are unable to compete
effectively in a deregulated environment.
During 1997, a substantial portion of the Company's surface-mined coal was
sold to Helvetia. To the extent that the Company is engaged in the wholesale and
retail sale of coal, it constitutes a minor competitive factor in such industry
and is in competition with other sellers of coal and other fuels, principally
oil and natural gas.
The Company's business is materially dependent on the Agreements. Gross
sales pursuant to the Keystone Agreement and the Homer City Agreement accounted
for approximately 52% and 24%, respectively, of the Company's sales in the year
ended December
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31, 1997, excluding development stage coal sales of Eighty-Four. If the Owners
of the Stations were to use other stations not served by the Company to meet a
greater percentage of their power generation demand, or if power were procured
from other sources, their requirements for the Stations could decrease, and if
such decrease were significant, the change could materially adversely affect the
business of the Company.
The following table provides year by year estimates of the tons of coal the
Company has committed for sale under long-term (more than one year) coal sales
agreements as of June 30, 1998:
Year Ended
December 31, Thousands of Tons
------------ -----------------
1998 8,570
1999 8,570
2000 6,700
2001 4,900
2002 4,300
The coal sales agreements relating to a certain portion of the tonnage
reflected in the table above are subject to periodic price renegotiation, which
can result in termination of the agreement by the purchaser or the seller prior
to the scheduled expiration of the agreement in case the parties are unable to
agree on price.
United Eastern Coal Sales Corporation ("United Eastern"), a wholly owned
subsidiary of the Company, is a coal broker and sales agent which buys and
sells, either as principal or agent, coal produced in the United States. The
Company's wholly owned subsidiary, Rochester & Pittsburgh Coal Co. (Canada)
Limited ("R&P Canada"), is engaged in the sale of coal to customers in Canada.
United Eastern and R&P Canada serve customers principally in the Mid-Atlantic
states and the Province of Ontario, respectively.
Leatherwood, Inc. ("Leatherwood"), a wholly owned subsidiary of the
Company, was formed to engage in developing solid waste management facilities.
In 1995, the Pennsylvania Department of Environmental Protection (the "DEP")
issued a permit to operate a 1,500 ton-per-day municipal solid waste landfill
in Jefferson County, Pennsylvania. In October 1996, Congress passed the Federal
Aviation Reauthorization Act of 1996 (the "Reauthorization Act"). Leatherwood's
site does not comply with a provision of the Reauthorization Act which addresses
the siting of landfills in relation to the location of a municipal airport. The
DEP subsequently suspended Leatherwood's permit until such time as the site is
in compliance with the Reauthorization Act. Leatherwood is not actively engaged
in efforts to challenge the suspension of its permit or to develop its business.
Information concerning backlog is not considered material to an
understanding of the Company's business.
At December 31, 1997, the Company had estimated recoverable reserves (those
portions of the reserves that are owned or leased by the Company that are
potentially extractable using
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an appropriate recovery factor(s) to account for coal lost-in-mining and
dilution introduced during the mining process) in leased or owned properties in
Armstrong, Indiana, Westmoreland, Washington and other nearby Pennsylvania
counties, of approximately 701 million tons of coal calculated as indicated in
the reserve table appearing under "Properties." During 1997, the Company
produced approximately 4,985,000 tons of coal excluding coal produced from Mine
No. 84 during the development stage. Of the 701 million tons of estimated
recoverable reserves, approximately 66 million tons of coal (9%), are dedicated
under the Agreements. With the exception of approximately 80 million of the 175
million saleable tons of coal acquired from Bethlehem, recovery of the remaining
unassigned recoverable reserves would require new mines which would entail
substantial capital expenditures the amount of which cannot be estimated at this
time. The Company has made no decision regarding any new mines and, depending
upon the Company's continuing evaluation of economic conditions affecting the
sale of coal in the Company's present area of operations and the effect of
increasingly stringent environmental requirements, the Company might not open
new mines to access its existing, undedicated coal. The estimated recoverable
reserves stated herein were determined by the Company's staff based upon the
prior experience of the Company in mining in the area of its present recoverable
reserves and upon data from tests conducted by the Company, and the Company's
mining experience in the seams and area of the Company's present recoverable
reserves and represents coal which is recoverable on the basis of current mining
practices and techniques. Consequently, the Company's estimates are subject to
continuing review and refinement.
The Company also owns coal lands in West Virginia, some of which are under
lease to CONSOL. The leased reserves are near exhaustion. The Company also
subleases coal lands in West Virginia to CONSOL.
Patents and licenses are not material to the operation of the Company's
business.
The Company has made no public announcement, nor has information otherwise
become public, about any new product or line of business which would require the
investment of a material amount of the Company's total assets, other than the
possible development of Leatherwood. While a substantial capital investment may
ultimately be made in development of Leatherwood's projects, the amount of such
investment has not yet been determined. Through December 31, 1997, the Company
has made an investment in the Mine No. 84 project of $160 million in the form of
equity and loans (including the $53.6 million adjusted purchase price). In
addition, Eighty-Four has entered into $36 million of capital leases. Over the
life of Mine No. 84, additional funding, including capital and operating leases
to provide remaining funding requirements of the project, will be necessary.
Numerous federal and state laws and regulations pertaining to the discharge
of materials into the environment impose requirements for capital expenditures
in the normal course of mine development and for subsequent events which cause
adverse environmental effects, irrespective of fault or willfulness by the
mining company involved. These statutes have in the past and will in the future
require substantial capital investments and may adversely affect productivity of
the Company's subsidiaries. Because of the inclusion of environmental-related
elements in the normal expenditures for mine development and operation,
environmental-related costs cannot be precisely isolated but the Company does
not believe such costs have materially adversely affected the Company's
financial condition.
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The Company's business is subject to numerous state and federal statutes
which establish strict standards with respect to mining health and safety and
environmental consequences. In addition to prescribing civil and criminal
penalties for violations, both state and federal laws authorize the closure
under certain circumstances of noncomplying operations. Pennsylvania statutes
applicable to the Company's mining operations are both more and less stringent
than the federal statutes. The applicable Pennsylvania statutes are more
material to the Company's coal mining operations than the applicable federal
statutes. However, several Pennsylvania laws and regulations are driven by
federal law and in many instances there is federal oversight of state
enforcement. The following summary describes the more significant laws and
regulations impacting the Company:
Federal Mine Health and Safety Acts. Stringent safety and health standards
have been imposed by federal legislation since 1969 when the federal Coal Mine
Health and Safety Act of 1969 (the "1969 Act") was adopted. The 1969 Act
resulted in increased operating costs and reduced productivity. The Federal Mine
Safety and Health Act of 1977 (the "1977 Act") significantly expanded the
enforcement of health and safety standards. The 1977 Act imposes safety and
health standards on all mining operations. Regulations are comprehensive and
affect numerous aspects of mining operations, including training of mine
personnel, mining procedures, blasting, the equipment used in mining operations
and other matters. The Mine Safety and Health Administration monitors compliance
with these federal laws and regulations. In addition, as part of the 1969 Act
and the 1977 Act, the Black Lung Benefits Act of 1969 and the Black Lung
Benefits Reform Act of 1977 require payments of benefits by all businesses
conducting current mining operations to coal miners with pneumoconiosis (black
lung) as described below.
The Pennsylvania Bituminous Coal Mine Act is a comprehensive statute
enforced independently of federal legislation and addresses certain areas not
covered by existing federal legislation. The combination of this Act and the
1977 Act provides a comprehensive regulation of virtually all aspects of
underground mining as it relates to the health and safety of employees.
Pennsylvania's Surface Mining Conservation and Reclamation Act, Bituminous
Mine Subsidence and Land Conservation Act, Clean Streams Law and Coal Refuse
Disposal Control Act in combination constitute the regulatory system in
Pennsylvania for permitting, bonding and operating coal mines in Pennsylvania.
These laws provide a highly detailed process of applying for a mining permit and
performance standards for operations that address the surface and hydrologic
impacts of mining, the control and treatment of discharges from mines and
surface areas and obligations relating to the repair or restoration of certain
surface structures affected by mining.
Clean Water Act. The federal Clean Water Act imposes restrictions on
effluent discharge into waters. Regular monitoring, as well as compliance with
reporting requirements and performance standards, are preconditions to the
issuance and renewal of permits by Pennsylvania governing the discharge of
pollutants into waters.
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Pennsylvania's Air Pollution Control Act also requires a permit for the
emission of, and controls the nature of, air pollutants from mine-related
facilities such as refuse disposal areas and preparation facilities.
Resource Conservation Recovery Act. The federal Resource Conservation
Recovery Act ("RCRA") imposes requirements for the treatment, storage and
disposal of hazardous wastes. Although many mining wastes are excluded from the
regulatory definition of hazardous waste, the EPA is studying the possibility of
expanding regulation of mining wastes under RCRA.
Black Lung Benefits. In order to compensate miners who were last employed
as miners prior to 1970, the Black Lung Benefits Revenue Act of 1977 and the
Black Lung Benefits Reform Act of 1977, as amended by the Black Lung Benefits
Revenue Act of 1981 and the Black Lung Benefits Amendments of 1981 (the "1981
Acts"), levied a tax on production of $1.10 per ton for deep-mined coal and
$0.55 per ton for surface-mined coal, but not to exceed 4.4% of the sales price.
In addition, the 1981 Acts provide that certain claims for which coal operators
had previously been responsible will be obligations of the government trust
funded by the tax. The Revenue Act of 1987 extended the termination date of the
tax from January 1, 1996 to the earlier of January 1, 2014 or the date on which
the government trust becomes solvent. Most companies have set aside reserves for
workers last employed as miners after 1969.
Clean Air Act Amendments of 1990. Both federal and state law and
regulations impose sulphur emission standards on uses of coal, which will
increase in stringency during the next several years. One of the largest
challenges the coal industry in general has faced is the implementation of the
Amendments. Phase I was effective January 1, 1995 and called for a reduction in
sulphur dioxide emissions to 2.5 pounds per mmBTU, for certain power plants,
multiplied by each plant's annual average fuel consumption between 1985 and
1987. Phase II, effective January 1, 2000, requires further reduction of sulphur
dioxide emissions to 1.2 pounds per mmBTU for nearly all power plants. The
Amendments require coal users to either purchase lower-sulphur products, invest
in scrubbers or purchase emission allowances in order to comply. The
effectiveness of these standards will cause an increase in demand for
"compliance" coal (coal that emits less than 1.2 pounds of sulphur dioxide per
mmBTU) with a corresponding decrease in demand for higher-sulphur coal.
Utilities have been using a combination of lower-sulphur coal, the installation
of scrubbers and emission allowances to meet the requirements of Phase I of the
Amendments. So far, it has generally not been necessary for utilities to change
drastically their operations to meet the requirements of Phase I. It is
difficult to predict how utilities will meet the challenges of the Phase II
requirements, and the resulting effect on coal demand.
However, to the extent the Company's coal is sold pursuant to the
Agreements, which contain no provisions warranting that the sulphur content of
the coal will meet emission standards when burned, such regulations will not
adversely affect the Company. Should the cost of compliance as an element of
production costs become burdensome to the customers of the Company's
subsidiaries, the competitive position and earnings of the Company could be
adversely affected. The impact of recent legislation and related regulations,
especially the Amendments and related regulations, on the Company's business
remains uncertain at this
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<PAGE>
time. The Company believes that improvements in clean coal technologies or in
techniques to neutralize or treat emissions from generating stations are such
that, with the benefit of such technologies, its coal will meet standards under
currently enacted legislation. However, the Amendments could have an adverse
effect on the sales of coal to the Stations. Also, as described above, at the
end of 1999 and any year thereafter, the Keystone Owners have the right to
terminate the Keystone Agreement if it is unlawful or commercially
impracticable, in light of then applicable government regulations, to operate
the Keystone Station with the quality of the coal KCMC is able to produce.
Moreover, in the event of the enactment of legislation or regulations imposing
more stringent environmental standards on the Stations, the Company could be
adversely affected if the owners of the Stations purchased more coal from others
or generated less electricity from the Stations. Environmental legislation and
regulation may have an adverse effect on the Company's ability to market its
coal reserves not dedicated under existing contracts and may require
modifications to the marketing plans of Eighty-Four.
As indicated in the consolidated financial statements included herein, the
Company has made substantial capital investments in the past three years in
addition to the development of Mine No. 84. Inasmuch as a substantial portion of
these investments has been for several purposes, e.g., to extend mine and
equipment life, to increase productivity and to comply with safety and/or
environmental legislation, the Company cannot indicate with precision capital
investments required solely to comply with environmental and safety legislation.
However, the Company estimates such expenditures totaled approximately $3.3
million in the five years ended December 31, 1997, and it is estimated that
annual capital expenditures of approximately $1.2 million per year for the next
several years will be attributable to environmental and safety laws. Such
legislation also has a negative effect on productivity. No assurance can be
given that additional, more stringent, mining and environmental legislation will
not be enacted or that such legislation, if enacted, would not have a material
adverse effect upon the Company's operations.
The Company currently employs approximately 1,800 persons, of whom 1,650
are engaged directly in the production and processing of coal for sale and 150
are engaged in executive, administrative, engineering, exploration, sales and
clerical functions. The Company's subsidiaries have approximately 1,365
employees who are covered by the National Bituminous Coal Wage Agreement of 1998
(the "1998 Agreement") with the United Mine Workers of America (the "UMWA"). The
1998 Agreement has a term from January 1, 1998 until December 31, 2002, and may
be terminated on or after December 31, 2002 by either party giving at least 60
days written notice to the other party. Apart from work stoppages which may
occur upon termination of a collective bargaining agreement, the Company may
from time to time be subject to certain unauthorized work stoppages or wildcat
strikes. Typically, these events are isolated, short in duration and localized.
The Company considers its relationships with its employees to be satisfactory.
The Company's business is not seasonal in any material respect because coal
deliveries under the Keystone Agreement and the Homer City Agreement to the
Keystone Station and the Homer City Station, both of which are base-load units,
and more than 80% of the coal delivered pursuant to Eighty-Four's coal sales
agreements, are made in equal monthly amounts, except for vacation shutdown
periods.
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<PAGE>
The Company is engaged principally in a single line of business, the mining
and sale of coal. Excluding the sales of Eighty-Four during its development
stage, the following table sets forth the amount of the Company's sales
contributed by each class of the Company's products which accounted for more
than 10% of the Company's total sales during each of the Company's three fiscal
years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Sales of
Coal Under
Year Ended Long-Term Other Sales
December 31 Contracts of Coal Other Total Sales
----------- ----------- ------------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
1997 $172,865 $27,390 $10,090 $210,345
1996 185,841 7,450 8,974 202,265
1995 198,394 10,730 7,562 216,686
</TABLE>
In the years ended December 31, 1997, 1996 and 1995, R&P Canada had sales
of $13,528,685, $7,235,578 and $10,268,032, respectively, primarily to customers
located in Canada. The Company does not consider its sales of coal in Canada to
be subject to any particular risks merely because its customers are located in
Canada. However, foreign business in general can be subject to special risks,
including exchange controls, changes in currency valuations, restrictions on the
repatriation of funds, restrictions on the ownership of foreign corporations or
the composition of their boards of directors, export restrictions, the
imposition or increase of taxes and tariffs and international financial
instability. No assurance can be given that any of these factors might not have
an adverse effect on the Company's future foreign operations.
Properties
The Company's executive and administrative offices are located in a 76,309
square foot building in Indiana, Pennsylvania, which the Company owns. The
Company also owns approximately 24,000 acres of surface land in Pennsylvania.
The Company's subsidiaries lease various properties in the United States and
Canada under leases having a current annual aggregate rental of approximately
$294,000. These leases expire at various times over the next five years and the
amount of aggregate rental payable during that period will depend on the extent
of renewals.
As of December 31, 1997, based upon the prior experience of the Company in
mining in the area of the Company's operations and data from tests conducted by
it and, in the case of the coal properties acquired by Eighty-Four and Lucerne
Land, a review of data provided by others and mining practices in the area and
seam acquired, the Company had estimated recoverable reserves in leased or owned
properties in Indiana, Armstrong, Westmoreland, Washington and other nearby
Pennsylvania counties of approximately 701 million tons of coal calculated as
indicated in the following table. Substantially all of the coal leased by the
Company is leased until exhaustion. The Company has not conducted sufficient
tests to determine the degree to which reserves, if any, exist on its owned or
leased properties located
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<PAGE>
outside of Indiana, Armstrong, Westmoreland, Washington and other nearby
Pennsylvania counties.
The Company operated six underground mines in 1997. Information on the
production of those mines and on the estimated recoverable reserves of these
mines and the estimated recoverable reserves of the Company is provided in the
following table:
<TABLE>
<CAPTION>
Recoverable Reserves
---------------------------------
(Tons x 1000) (1) Production in Tons(2)
---------------------------------------
Proven Probable Total 1997 1996 1995
------ -------- ----- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Underground:
KCMC
Assigned - Dedicated
Emilie 2,007 862 2,869 996,162 1,004,314 843,104
Emilie #4 0 0 0 0 0 249,617
Jane 0 0 0 0 0 358,813
Margaret #11-2 0 0 0 0 0 361,343
Plumcreek #1 2,543 1,816 4,359 464,654 440,942 296,244
Urling #1 0 2,516 2,516 599,055 865,027 726,567
Unassigned - Dedicated 35,508 12,417 47,925 0 0 0
Helvetia
Assigned - Dedicated
Lucerne #6-E 3,423 2,257 5,680 956,864 999,245 988,945
Marshall Run 1,630 657 2,287 723,321 819,850 451,768
Unassigned - Dedicated 0 0 0 0 0 0
Lucerne Land
Assigned
Mine No. 84 78,026 0 78,026 4,783,950 3,026,551 1,344,189
Unassigned 0 92,166 92,166 0 0 0
Company
Unassigned 192,086 270,331 462,416 0 0 0
Total - Underground 315,223 383,022 698,245 8,523,956 7,155,929 5,620,590
------- ------- ------- --------- --------- ---------
Surface:
Assigned 165 44 209 113,955 160,981 210,827
Unassigned 847 1,269 2,116 0 0 0
Total - Surface 1,012 1,313 2,325 113,995 160,981 210,827
------- ------- ------- --------- --------- ---------
TOTAL 316,235 384,334 700,569 8,637,951 7,316,910 5,831,417
======= ======= ======= ========= ========= =========
</TABLE>
Notes:
Recoverable - Those portions of the reserves that are owned or leased
by the Company that are potentially extractable using an
appropriate recovery factor(s) to account for coal
lost-in-mining and dilution introduced during the mining
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<PAGE>
process. Reference is made to Note 1 below for information
relating to mining and dilution losses and coal lost during
processing.
Assigned - Areas that can be mined through the use of existing mine
openings and coal handling and processing facilities based
on the Company's current mining plans. Additional
ventilation openings may be required for underground mines
due to normal mine expansion.
Unassigned - Areas that would require substantial capital expenditures
for new mine openings and equipment prior to any mining
activity.
Dedicated - Areas committed under coal sales agreements.
(1) These figures represent calculations based upon continuing evaluation and
refinement of estimates reflecting evaluation of new and existing geologic
data, improved computational methods and the effects of legal and
environmental considerations. "Proven" tonnage is estimated by projection
of thickness and quality data for a radius of 2,000 feet from a point of
measurement. "Probable" tonnage is estimated by projection of thickness and
quality data for a radius greater than 2,000 feet and less than 5,000 feet
from a point of measurement and when consideration is made for other
factors, such as mining conditions, coal quality and mine operating
experience. The calculations for estimated proven and probable reserves
take into account the differences between the Pittsburgh seam (Lucerne
Land) and other seams mined by the Company and the different mining methods
employed: long-wall mining in the Pittsburgh seam and conventional room and
pillar underground mining in the other seams. Recovery rates are
approximately 85% for Mine 84, 55% for the unassigned Lucerne Land reserves
(for which no mine plans have been developed) and 60% for the remaining
reserves, each net of losses due to mining and dilution, including pillars.
The Lucerne Land estimates are net of an approximately 9% loss in
post-mining processing and cleaning. The stated underground reserve
estimates for KCMC, Helvetia and the Company are calculated without
reduction of an estimated loss in post-mining processing and cleaning of
approximately 15% of the 528,053,000 tons of reserves listed in the table
because of the uncertainties relating to market requirements and
competitive factors in the future when such reserves would be mined.
(2) Production tonnage figures represent clean coal after washing and
preparation at the Keystone Cleaning Plant, the Helvetia Cleaning Plant and
Mine No.H84's preparation facilities.
The following maps show the location and accessability of each coal
property shown under the proven and probable columns in the above table:
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<PAGE>
[IN THE PRINTED VERSION A LOCATION MAP OF DEEP MINE RESERVES
EXCLUDING WASHINGTON COUNTY AND WEST VIRGINIA PROPERTIES]
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<PAGE>
[IN THE PRINTED VERSION A LOCATION MAP OF DEEP MINE RESERVES
OF WASHINGTON COUNTY PROPERTIES]
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<PAGE>
Surface mining is also conducted by the Company and by independent
contractors utilized by the Company, who are obligated by law and by contract
with the Company to restore the surface in accordance with Pennsylvania and
federal laws. Production from surface mining for the last three years has been
as follows: 1995 -- 210,827 tons, 1996 -- 160,982 tons and 1997 -- 113,995 tons.
All surface-mined coal produced in 1997 was sold on the commercial market. The
Company anticipates limited surface-mining activity in the near future. No
assurance can be given that the Company will be able to maintain adequate
resources for surface-mined coal in the future.
All of the properties of the Company and KCMC dedicated under the Keystone
Agreement are subject to a mortgage given as security for indebtedness of KCMC.
All of the properties of Eighty-Four and Lucerne Land are subject to a mortgage
given as security for their indebtedness.
The Company has miscellaneous other non-coal mineral interests, primarily
natural gas, which it leases to unrelated parties. The Company also participates
in gas well joint ventures in Pennsylvania and nearby states.
Legal Proceedings
The nature of the Company's business subjects it to numerous state and
federal laws and regulations pertaining to environmental matters and
administrative and judicial proceedings involving alleged violations thereof are
considered incidental to the Company's business.
Other than the matter discussed herein, the Company is not a party to any
pending litigation which it deems material to its consolidated financial
condition, although it is a party to litigation incidental to the conduct of its
business.
A citizens group, People United To Save Homes (the "Appellant") filed an
appeal of the issuance by DEP of Eighty-Four's Permit. The appeal is pending
before the EHB at EHB Docket No. 95-233-R. Briefing has been completed and the
matter is pending before the entire EHB. During 1997, DEP issued a new Mining
Activity Permit (the "1997 Permit") to Eighty-Four, the previous one (the
subject of the appeal at EHB Docket No. 95-233-R) having expired by its terms.
The Appellant has also filed an appeal to the issuance of the 1997 Permit. The
appeal, which addresses issues substantially identical to those raised in Docket
No. 95-233-R, is pending before the EHB at Docket No. 97-262-R. Motions for
consolidation of the two appeals and incorporation of portions of the record
from Docket No. 95-233-R into the appeal at Docket No. 97-262-R are pending.
While the Company believes that the appeals of the Permit are not meritorious
and will be denied by the EHB, the outcome of such appeals cannot be determined
at this time. In the event that the Appellant were to prevail with respect to
material provisions of the Permit and/or the 1997 Permit, Eighty-Four might then
be required to amend its mining plan or to incur additional operating expenses
which could have an adverse financial effect on the Company.
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<PAGE>
Selected Consolidated Financial Data
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Ended June 30,(3) Year Ended December 31,(3)
------------------- ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- ------
(unaudited) (audited)
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations
Tons of coal produced 4,905 2,906 4,985 4,290 4,492 4,976 3,218
Sales $162,232 $101,784 $210,345 $202,265 $216,686 $191,991 $153,628
Depreciation, depletion
and amortization 18,373 6,711 17,765 11,795 13,285 12,215 10,406
Provision (credit) for
income taxes (2,850) (8) 1,493 3,969 (337) 1,838 1,502
Net income (loss) (1)(2) (150) (5,914) (3,724) 11,261 (3,535) 2,466 7,083
Financial Position
Working capital $ 28,295 $ 32,742 $ 30,838 $ 36,547 $ 41,969 $ 50,145 $ 31,025
Property, plant and
equipment - net 348,618 362,847 355,446 356,625 322,363 230,169 183,009
Net capital expenditures 11,221 27,390 32,452 46,878 88,090 58,848 48,213
Total assets 526,807 506,275 518,134 531,398 491,407 410,994 356,884
Long-term debt 75,744 98,565 84,535 100,501 120,784 75,693 29,455
Shareholders' equity 204,303 204,069 205,515 211,185 203,114 207,450 210,794
Per Share Data
Average shares outstanding 3,441 3,4441 3,441 3,441 3,439 3,439 3,441
Net income (loss) (1)(2) $(.04) $(1.72) $(1.08) $3.27 $(1.03) $.72 $2.06
Cash dividends declared .30 .30 .60 .60 .75 1.50 1.50
Book value at period end 59.37 59.31 59.73 61.37 59.06 60.33 61.31
</TABLE>
- ------------------
(1) Net income (loss) and net income (loss) per share for 1997 was impacted by
a $17,000,000 write-down of the property, plant and equipment related to
Helvetia, which was substantially offset by pretax gains on the sales of
nonstrategic coal reserves and land of $14,000,000.
(2) Net income (loss) and net income (loss) per share for 1993 include a credit
of $4,709,000 and $1.37, respectively, for the cumulative effect to January
1, 1993 of a change in accounting for income taxes.
(3) The Company's subsidiary, Eighty-Four, completed development of its Mine
No. 84 in October 1997. Prior to the completion of development,
Eighty-Four's provision for income taxes, certain real estate tax expenses
and certain general and administration expenses, which were not considered
costs of mine development, were included in operating results.
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<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 and
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Results of Operations
As discussed in Note B to the consolidated financial statements, the second
longwall mining system was installed at Eighty-Four in September 1997. Major
underground construction and development projects necessary to prepare the mine
for two operating longwall mining systems were essentially complete as of
October 31, 1997 and, thus, the capitalization of mine development costs in
effect since 1993 ended as of that date. A total of $161 million in cost of
development, net of sales revenue from coal produced incidental to development,
was capitalized during the development period. The provisions for income taxes,
certain property taxes and certain general and administrative costs for the Mine
No. 84 project, which were not considered mine development costs, were included
in operating results in the Statements of Consolidated Operations for prior
periods through October 31, 1997. These recorded pretax losses amounted to $4.2
million, $2.8 million and $1.9 million for the years 1997, 1996 and 1995,
respectively. The inclusion of Eighty-Four's sales, cost of sales, interest
expense and depreciation, depletion and amortization in the consolidated
operating results for the months of November and December 1997 affect the
comparison of 1997 amounts to those of prior years.
As previously reported, the underground construction and development
projects reduced the efficiency, availability and advancement rates of the
continuous miner units resulting in advancement rates which continued to fall
short of levels necessary for economical operations of the Mine No. 84 project.
Projections for 1998 indicate that the first longwall, which completed mining a
section of the mine in early February 1998, will experience a delay of up to
three and one-half months in starting its next mining panel. This delay is due
to the cumulative effect of not attaining acceptable continuous miner advance
rates over the last several years. This delay, coupled with the idle capacity
associated with the scheduled outage for the movement of the second longwall
unit to a new mining section in April 1998, will result in sizeable losses at
Eighty-Four for the first and second quarters of 1998. Such losses are not
expected to be offset by profitable operations at Eighty-Four for the balance of
the year. Current projections indicate that the Mine No. 84 project will incur a
pretax loss for 1998 of approximately $11 million after elimination of interest
charges from consolidated affiliates. Many factors influence this estimate. For
example, continued improvement in continuous miner advance rates, which have
improved thus far in 1998, could shorten the delay and reduce projected losses,
while lower advance rates would increase losses.
Eighty-Four's profitability beyond 1998 will be dependent on improvements
in productivity, cost reductions and overall better performance of all aspects
of its operations. In addition, sales price increases will be required to cover
cost increases resulting from inflation.
Eighty-Four and Lucerne Land, as borrowers, and the Company, as guarantor,
are party to a long-term credit agreement that provides for (i) a term loan of
$24,785,000, all of which
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<PAGE>
was outstanding as of December 31, 1997, (ii) a revolving credit facility with
an availability of $34,699,000 of which $20,000,000 was borrowed as of December
31, 1997 and (iii) a working capital facility of $8,000,000 with no borrowings
as of December 31, 1997. The Company, as guarantor, and Eighty-Four and Lucerne
Land as the borrowers, are subject to numerous financial covenants and
restrictions under the long-term credit agreement.
The financial covenants and restrictions applicable to the Company under
the long-term credit agreement include (i) a limitation on additional
indebtedness and operating leases of the Company in excess of $3,000,000, (ii) a
limitation on encumbrances, (iii) a limitation on additional guarantees, (iv)
maintenance of a current ratio of not less than 1.0 to 1.0, (v) maintenance of a
tangible net worth of not less than $200 million, (vi) maintenance of a ratio of
consolidated funded indebtedness to total capitalization of not more than 50%,
(vii) maintenance of a consolidated fixed charge ratio of not less than 1.25 to
1.00, (viii) maintenance of consolidated cash flow for the most recent four
quarters of not less than $8,000,000, (ix) a limitation on additional loans to
and investments in third parties, including subsidiaries, and capital
expenditures to $28,480,000 at December 31, 1997, (x) a limitation on the
declaration and payment of dividends to shareholders based on a cumulative
formula (at December 31, 1997 cumulative dividends declared and paid were
approximately $2,170,000 less than the limited amount) and (xi) a requirement
that the Company retain the net proceeds from the disposals of certain
nonstrategic coal and surface lands (amounting to $6,228,000 as of December 31,
1997).
The financial covenants and restrictions applicable to Eighty-Four and
Lucerne Land under the long-term credit agreement include (i) the submission of
quarterly reports to the banks by an independent engineering company detailing
progress at Mine No. 84 compared to forecast, (ii) a requirement that
Eighty-Four contract by December 31 of each year for the delivery of not less
than 4 million tons of coal in the next succeeding year, (iii) a requirement
that the debt be prepaid in an amount equal to the Company's dividend payments
to its shareholders, (iv) a limitation on additional indebtedness, (v) a
limitation on guaranties' to those required by a bonding company in the ordinary
course of business, (vi) a limitation on encumbrances, (vii) a rolling
four-quarter limitation on capital expenditures in line with operating
forecasts, (viii) a requirement that tangible net worth be not less than
$83,000,000 at December 31, 1997, and stipulated levels thereafter, (ix)
maintenance of a leverage ratio of total funded indebtedness to total
capitalization of not more than 65% through June 30, 1998, 62.5% from July 1,
1998 through March 31, 1999 and 60% thereafter, (x) maintenance of a ratio of
cash flow from operations to cash uses for a rolling four-quarter basis of not
less than 1.0 to 1.0 at December 31, 1997 and (xi) maintenance of a fixed charge
coverage ratio of not less than 1.0 to 1.0.
At December 31, 1997, Eighty-Four and Lucerne Land were in violation of
certain terms of the long-term credit agreement and forecasted noncompliance
with other covenants in subsequent years. As a result, in January 1998, the
long-term credit agreement was amended to waive the violations as of December
31, 1997 and reset several covenants for future periods which are reflected
above.
The term note includes interest at the prime rate plus 2% or, at the option
of the borrowers, at LIBOR plus 3.5%. The revolving credit note is subject to
mandatory reductions
-57-
<PAGE>
in the amount available of $7 million in 1998, $20 million in 1999 and
$7,699,000 in 2000 and provides for interest based on the prime rate plus an
amount up to 1.5%, or, at the borrowers' option, the LIBOR rate plus an amount
from 2% to 2.5% for fixed periods. Commitment fees of .5% per annum are payable
on the unused portion of the line of credit and revolving credit note.
Eighty-Four has entered into capitalized lease agreements for longwall
mining equipment amounting to $12,894,000 in 1997, $6,616,000 in 1996 and
$16,963,000 in 1995 with payments commencing in August 1995 and continuing
through July 2005 with effective interest rates ranging from 7.0% to 7.66%. The
agreement includes buy out options during and at the end of the lease term.
Future minimum lease payments are $37,730,000 including imputed interest of
$7,679,000. These payments for the next five years are as follows: 1998 -
$7,358,000; 1999 - $5,748,000; 2000 - $5,629,000; 2001 - $4,946,000 and 2002 -
$4,908,000. The gross amount of capitalized lease assets and related accumulated
depreciation included in the Consolidated Balance Sheets was $36,473,000 and
$7,783,000, respectively, at December 31, 1997; $23,578,000 and $3,708,000,
respectively, at December 31, 1996 and $16,963,000 and $837,000, respectively,
at December 31, 1995.
KCMC had essentially break-even operating results in 1997 after recording a
pretax profit of $750,000 in 1996 and a pretax loss of $8.4 million in 1995.
KCMC recorded profits of $1.1 million for the first nine months of 1997.
However, it shipped approximately 82% of its annual delivery obligations under
its coal supply agreement during that period. The consequent limitation on
fourth quarter deliveries and the normally fewer operating days in that quarter
compared to other quarters resulted in higher operating costs and losses for the
fourth quarter. Productivity at KCMC's deep mines increased slightly in 1997.
However, increased costs of coal purchased from third parties for resale
impaired profit margins.
The closing of three of KCMC's six deep mines at the end of 1995, which is
discussed in Note C to the consolidated financial statements, and replacement of
this production with raw coal purchased from third parties improved KCMC's
operating costs in 1996. The remaining mines had productivity improvements in
1996 despite a major roof fall at one mine in the fourth quarter. Improvements
at KCMC's cleaning plant operations resulted in an enhanced quality of coal
sold. KCMC's 1996 results also benefitted from the favorable effect of
decreasing coal inventories under the pricing provisions of its coal supply
agreement and the effect of slightly improved market prices over 1995 on its
profit formula.
In 1995, KCMC had experienced continuing problems in conjunction with major
modifications made to its coal cleaning plant in 1994, which caused inventories
of unprocessed coal to build to unusually high levels at the end of 1994 and in
early 1995. As a result, production was idled for over a month and further
modifications to the cleaning plant were completed in mid-1995. In addition, in
1995 KCMC continued to experience poor geological conditions, a reduction in the
market price index used to adjust its sales price and declining productivity
levels. As a result of these factors, KCMC's operating costs in 1995 were higher
than its sales revenue, which, while determined under a cost-plus pricing
mechanism, is subject to a maximum price cap.
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<PAGE>
As described in Note D to the consolidated financial statements, KCMC has a
credit agreement with two commercial banks to provide a revolving credit
facility with permitted maximum borrowings of $20,000,000 as of December 31,
1997 and a $10,000,000 line of credit facility. The revolving credit facility
terminates on December 31, 2000 and requires annual reductions in the amount
available of $5,000,000 at December 31, 1998 and $7,500,000 each at December 31,
1999 and 2000. At December 31, 1997, there were no borrowings under the line of
credit which expires on March 31, 1999. These facilities bear interest at the
prime rate (8.5% at December 31, 1997) or at KCMC's option, a CD rate plus 1.5%
or LIBOR rate plus 1.5%. Traditionally, KCMC has utilized the CD rate option
and, at December 31, 1997, all of KCMC's borrowings were based on that rate
which was 7.5%. The credit agreement contains numerous financial covenants,
including (i) maintenance of cash flow equal to the sum of the current portion
of the long-term indebtedness and dividends declared by KCMC during the period,
(ii) maintenance of tangible net worth of not less than $11,000,000, (iii)
maintenance of a ratio of depreciation, depletion and amortization at the end of
any quarter to the current portion of long-term debt during that period of at
least 1.0 to 1.0 and (iv) a prohibition of dividends if payment thereof would
reduce net worth below $17,980,000. KCMC has been in compliance with these
covenants since 1995.
Helvetia, which recorded a pretax loss of $4.6 million in 1995 and pretax
income of $2.2 million in 1996, recorded a loss of $18.3 million in 1997. As
discussed in Note C to the consolidated financial statements, Helvetia reduced
the $17 million carrying value of its fixed assets to zero in the second quarter
of 1997 in accordance with Statement of Financial Accounting Standards No. 121.
This write-down was based on the existence of continuing operating losses, net
of cash outflows, and forecasts which indicated that such adverse conditions
were expected to continue at its existing operations. In 1996, Helvetia
benefitted from a full year of production from its Marshall Run mine, which
commenced operations during 1995, and the favorable effect on operating profit
of the adjustment to estimated workers' compensation liabilities for prior years
which is discussed more fully in Note H to the consolidated financial
statements. While Marshall Run has continued to be profitable, Helvetia's other
mine, Lucerne 6E, has experienced losses in each of the past three years.
Efforts to improve its productivity continue.
The Company's continuing program of selling certain nonstrategic coal and
surface properties resulted in pretax income of $14 million in 1997, $7.7
million in 1996 and $2.2 million in 1995.
In 1997, the Company's other operating subsidiaries recorded pretax income
of $1.9 million compared to $1.7 million and $1.9 million for 1996 and 1995,
respectively. These profits derive from surface mining operations and
reclamation contracts with the Commonwealth of Pennsylvania for the restoration
of abandoned mine lands.
Interest and dividend income decreased in 1997 due to the liquidation of a
$35 million investment portfolio, the proceeds of which were utilized for Mine
No. 84. The increases in interest and dividend income in 1996 compared to 1995
were due to higher amounts invested.
Depreciation, depletion and amortization was substantially higher in 1997
due to the inclusion of Eighty-Four's operating results since November 1, 1997.
This category was lower
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<PAGE>
in 1996 compared to 1995 due to the recording of additional amounts of
depreciation relating to the closure of three KCMC mines in 1995.
Interest expense reflects the inclusion of amounts relating to Eighty-Four
for the period beginning November 1, 1997. Interest on Eighty-Four's debt was
capitalized as mine development costs through October 1997. Interest expense in
1996 was lower than in 1995 due to reductions in the amount borrowed to finance
KCMC's operations. KCMC required financing for certain strike costs in 1995,
which were deferred in accordance with its long-term coal sales agreement, and
to finance higher inventory levels in that year.
The Company's effective income tax rates are discussed in Note F to the
consolidated financial statements.
Coal prices, which stabilized and then increased slightly in 1996, after
five years of steady decline, decreased slightly in 1997. The general downward
trend in prices has forced the Company's subsidiaries, as well as its
competitors, to mitigate the effects of inflation on costs by endeavoring to
increase productivity and reduce overall operating costs. The change in market
prices is a significant element in the determination of sales prices under
KCMC's and Helvetia's long-term coal sales agreements. Thus, as a result of
lower market price indices, the respective sales prices have not kept pace with
cost inflation. While staff reductions and operating efficiencies have been
implemented over the past several years by the Company and its subsidiaries,
these subsidiaries have not been able to cover these inflationary effects and
there can be no assurance that they can do so in the future. The Company expects
market prices to remain highly competitive. The profitability of these
subsidiaries, including Eighty-Four, will be highly dependent on their ability
to maximize productivity and continue to implement additional sustained cost
reduction programs. In addition, market prices and competition in the Eastern
and Midwestern utility coal markets could be affected by the pending breakup of
Conrail, Eighty-Four's primary rail carrier.
Eighty-Four's initial coal mining Permit is the subject of litigation
before the EHB. In November 1997, a new Permit was issued upon the expiration of
the initial Permit. A challenge to the new Permit has also been filed and is
concurrently pending before the EHB. Both Eighty-Four and the DEP, which issued
the Permits, have vigorously defended DEP's actions and believe that the
Permits' issuance will be upheld in all material respects. This litigation does
not involve a contingent liability, but a final adverse decision could have a
material adverse effect on the Company. See "Legal Proceedings."
There has been no activity on Leatherwood's permit to develop and operate a
solid waste landfill in Jefferson County, Pennsylvania. The permit was suspended
in 1996 pursuant to enactment of new federal legislation which purports to ban
construction of Leatherwood's landfill. Even if successfully pursued, completion
of the Leatherwood project will be delayed indefinitely. Leatherwood has
previously expensed a substantial portion of the costs incurred in securing its
permit. Thus, if Leatherwood were to terminate development of the landfill, the
effect on the Company's consolidated financial statements would not be material.
In 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was issued which establishes new rules for the reporting
and display of
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<PAGE>
comprehensive income and its components. The Company intends to adopt this
statement for its 1998 fiscal year. Also in 1997, Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued which changes the way segment information is
required to be reported. The standard is required to be adopted in 1998 and the
additional disclosure, if any, will be determined during 1998. In February 1998,
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," was issued. Statement 132
does not change the recognition or measurement of pension or postretirement
benefit plans, but standardizes disclosure requirements for pensions and other
postretirement benefits, eliminates unnecessary disclosure and requires
additional information. Statement 132 is required to be adopted in 1998 and
restatement of disclosures for prior periods provided for comparative purposes
is required. Statement 132 is not expected to have a material effect on the
disclosures included in the consolidated financial statements.
The Company is in the process of making modifications to a portion of its
computer programs that contain time sensitive software with a limitation on
accepting dates after 1999. The Company has made an assessment of which computer
programs require modification or replacement and has, in fact, been making such
modifications over the last several years. All systems are scheduled to be
complete within one year. During the fourth quarter of 1998, the Company plans
to initiate contact with third party vendors (i.e., vendors, bankers, etc.) to
determine their Year 2000 compliance efforts. However, there can be no assurance
that the computer systems of other companies on which the Company may rely also
will be timely modified or that the failure to modify would not have an adverse
effect on the Company. The costs of making necessary modifications or ultimately
replacing the software, if necessary, is not expected to be material to the
Company's financial condition or its results of operations in any given year.
Liquidity and Capital Resources
As discussed in Notes B and D to the consolidated financial statements, as
of December 31, 1997, the Company had contributed equity in the amount of $105
million and loaned $55 million through a consolidated affiliate to the Mine No.
84 project. In addition, long-term debt totaling $74.8 million and operating
leases of equipment have been utilized to provide the remaining funding
requirements of the Mine No. 84 project.
Eighty-Four, Lucerne Land and the Company, because of its guaranty, are
subject to numerous financial covenants and restrictions. At December 31, 1997,
Eighty-Four and Lucerne Land were in violation of certain covenants and were
projecting violations of several other covenants in the future. In January 1998,
the debt agreement was amended to waive the violations in existence at year end
and amend several other provisions affecting 1998 and future periods.
Eighty-Four and Lucerne Land are currently in compliance with the covenants in
their debt agreement.
Working capital was $31 million, $37 million and $42 million at December
31, 1997, 1996 and 1995, respectively. The Company's current ratio (ratio of
current assets to current liabilities) was 1.6 to 1 at December 31, 1997
compared to 1.6 to 1 and 2.2 to 1 at December 31, 1996 and 1995, respectively.
The decrease in working capital and current ratio in 1996
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<PAGE>
from 1995 was primarily due to reductions in KCMC's coal inventory and
receivables to more normal operating levels. The classification of a portion of
Eighty-Four's debt, which was prepaid in March 1997 along with securities
liquidated to provide for the repayment, as current at December 31, 1996 also
contributed to the lower current ratio in 1996. An increase in scheduled debt
repayment due within one year caused the working capital to decline at December
31, 1997. As discussed in Note D to the consolidated financial statements, the
amount of subsidiaries' net assets which are restricted from being transferred
to the Company under debt agreements totals $105,225,000.
Despite the losses incurred in 1997 and the reduction of the amount of
long-term debt during the year, the Company was able to maintain adequate levels
of cash and investments, primarily because the sale of nonstrategic coal and
surface lands provided approximately $16 million in cash flow. Efforts to
improve liquidity by the sale of nonstrategic assets are expected to continue in
1998.
Even though losses are projected for the Company in 1998, due principally
to Eighty-Four's losses, forecasts indicate the Company will maintain adequate
levels of cash flow. These projections indicate that present debt facilities are
adequate to provide funding for debt requirements; however, leasing arrangements
will continue to be utilized for acquiring equipment to replace older equipment
previously under lease agreement.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Results of Operations
Eighty-Four completed development of Mine No. 84 as of October 31, 1997,
and the capitalization of mine development costs in effect since 1993 ended as
of that date. Amounts for the provisions for income taxes, certain property
taxes and certain general and administrative costs are included in Eighty-Four's
operating results for the periods through October 31, 1997, since such costs
were not considered mine development costs. Therefore, amounts for Eighty-Four's
sales, cost of sales, interest expense and depreciation, depletion and
amortization included in the consolidated condensed operating results for the
six months ended June 30, 1998 affects the comparison to the consolidated
condensed operating results for the six months ended June 30, 1997.
The 1998 losses at Eighty-Four are due to the first longwall experiencing a
delay, from early February until late April, in starting its new mining panel.
This delay was due to the cumulative effect of not attaining acceptable
continuous miner advance rates. In addition, the second longwall mining unit
experienced poor mining conditions in its mining panel completed in early April
and was out of operation through mid-May. These longwall mining units performed
well when they resumed operations in April and May, respectively, and Mine No.
84 was profitable in June. At present, the development of future longwall panels
is sufficient to prevent delays during the remainder of 1998. However, unless
suitable continuous miner advance rates are maintained, future longwall delays
cannot be avoided.
KCMC recorded profits of $1.2 million for the six months ended June 30,
1998 which were comparable to the corresponding period in the prior year. Lower
costs of coal
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<PAGE>
purchased from third party suppliers and the favorable effect in 1998 of
decreasing coal inventories under the pricing provisions of KCMC's coal supply
agreement offset the effects of lower productivity in 1998 compared to 1997.
Helvetia recorded pretax losses of $300,000 for the six months ended June
30, 1998. Productivity, which experienced improvements in the first quarter,
declined in the second quarter. Helvetia recorded pretax losses of $18 million
in the six months ended June 30, 1997, including the write-down of the $17
million carrying value of Helvetia's fixed assets to zero in the second quarter
of 1997 in accordance with Statement of Financial Accounting Standards No. 121
and other nonrecurring adjustments. Helvetia's 1998 results do not include
depreciation expense due to the write-down of Helvetia's plant and equipment to
zero in the second quarter of 1997. Had the write-down not occurred,
depreciation expense in the six months ended June 30, 1998 would have been
approximately $2 million.
The Company's pretax income was enhanced in the six months ended June 30,
1998 from the sale of certain nonstrategic properties resulting in gains of $4.7
million compared to similar gains in the six months ended June 30, 1997 of $10.3
million.
Depreciation, depletion and amortization was substantially higher in the
1998 period due to the inclusion of amounts for Eighty-Four. The increase was
partially offset by the aforementioned reduction in Helvetia's depreciation and
amortization due to the SFAS No. 121 write-off in the second quarter of 1997.
While average long-term debt balances were lower in 1998 than 1997,
interest expense thereon, as recorded in the consolidated condensed statements
of operations increased. This increase was due to the inclusion of amounts
relating to Eighty-Four in the consolidated condensed statements of operations
for the six months ended June 30, 1998. Such amounts were capitalized as
development costs through October 31, 1997.
The decrease in miscellaneous expense in the six months ended June 30, 1998
reflects the write-off in the first quarter of 1997 of certain debt issuance
costs relating to the modification of Eighty-Four's debt arrangement in March
1997.
The income tax provision for the six months ended June 30, 1998 is based on
the estimated effective rate for 1998. The estimated effective tax rate differs
from statutory rates due to the reversal of state and federal deferred tax
liabilities for temporary differences that arose during the development of the
Mine No. 84 project and the relationship of those amounts to pretax operating
results.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits" was
issued. Statement 132 does not change the recognition or measurement of pension
or postretirement benefit plans, but standardizes disclosure requirements for
pensions and other postretirement benefits, eliminates unnecessary disclosure
and requires additional information. Statement 132 is required to be adopted in
1998 and restatement of disclosures for prior periods provided for comparative
purposes is required. The application of Statement 132 is not expected to have a
material effect on the disclosures included in the consolidated financial
statements.
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<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of Statement 133 will have a significant effect on the results of
operations or the financial position of the Company.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. The failure to correct any such programs or hardware could result in
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. Based on recent assessments,
the Company has determined that it will be required to modify or replace
significant portions of its software, and, to a lesser extent, its hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company believes that with modification and replacement of existing software and
hardware, the Year 2000 Issue can be substantially mitigated. However, if such
modifications and replacements are not made, or are not completed on a timely
basis, which the Company currently does not anticipate, the Year 2000 Issue
could have a material impact on the operations of the Company.
The Company's plan to resolve Year 2000 Issues involves four phases:
assessment, remediation, testing and implementation. In November 1997, the
Company completed its assessment of all material information technology systems
that would be affected by the Year 2000 Issue if not modified. To date, the
Company is 40% complete on the remediation and testing phase of the systems
identified in November 1997. The Company expects software reprogramming and
replacement, testing and implementation to be completed by the second quarter of
1999.
The Company is in the process of assessing its operating equipment that
uses microprocessors to determine the extent that they are at risk for Year 2000
problems. This equipment includes coal mining, processing and loadout equipment.
The remediation of operating equipment depends primarily on the manufacturers of
that equipment for modifications. While the Company has communicated with most
of the applicable vendors, it has not obtained timetables of expected completion
dates of modification, testing and implementation from all of the vendors. The
Company plans to have such timetables in the fourth quarter of 1998. The effect
on operations of the Company not having these systems remediated, while not
estimable at this time, could be significant.
The Company conducts a limited amount of transactions that interface
directly with systems of suppliers or customers. The Company plans to complete
its inquiry of its important suppliers and customers, which do not have system
interfaces, as to their Year 2000 readiness in the fourth quarter of 1998. The
responses received to date from such third parties to the Company's inquiries do
not indicate that these third parties expect to be non-compliant by the Year
2000. However, the inability of third parties to complete their Year 2000
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<PAGE>
resolution process could materially impact the Company. For example, the failure
to be Year 2000 compliant by a bank with whom the Company has a material banking
relationship could cause significant disruptions in the Company's ability to
make payments, deposit funds and make investments, which could have a material
adverse effect on the Company's financial condition.
The Company is utilizing both internal and external resources to reprogram
or replace, test and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated to be
less than $250,000 and is being funded through operating cash flows. To date,
the Company has incurred less than $100,000 related to all phases of the Year
2000 project.
The Company has not established contingency plans in case of failure of its
information technology systems since it expects to have its material systems in
place by the second quarter of 1999. In connection with the Company's assessment
of third party readiness and operating equipment, in the fourth quarter of 1998
the Company will evaluate the necessity of contingency plans based on the level
of uncertainty regarding such compliance. In the event the Company's
intermediaries or vendors do not expect to be Year 2000 compliant, the Company's
contingency plan would include replacing such intermediaries or vendors or
conducting the particular operations itself.
The Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected completion
dates are based on progress to date compared to the timetable established in
November 1997. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from these plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.
Liquidity and Capital Resources
Working capital at June 30, 1998 was $28 million compared to $33 million at
June 30, 1997. The Company's current ratio (ratio of current assets to current
liabilities) was 1.5 to 1 at June 30, 1998 compared to 1.9 to 1 at June 30,
1997. The reduction is due to the operating losses at Eighty-Four for the first
six months of 1998 and the increase in amounts due within one year on long-term
debt.
At June 30, 1998, Eighty-Four and KCMC had unused borrowing capacity of
$6.5 million and $18 million, respectively.
All statements contained in this Proxy Statement that are not historical
facts are based on current expectations. Such statements are forward-looking (as
defined in the Private Securities Litigation Reform Act of 1995) in nature and
involve a number of risks and uncertainties. Actual results may vary materially.
The factors that could cause actual results to vary materially include: the
ability of the Company to maintain profitable operations,
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<PAGE>
general business and economic conditions in the coal mining industry, the
Company's ability to maintain acceptable advance rates at Mine No. 84, labor
developments, the cost of coal compared to the cost of other fuels used by the
Company's utility customers, the quality of the coal mined by the Company, the
accuracy of the Company's estimates of average dilution losses and average
processing losses used in calculating the Company's proven and probable
recoverable coal reserves, the availability of adequate rail transportation,
Year 2000 compliance and other risks that may be described from time to time in
reports the Company files with the Commission. Undue reliance should not be
placed on any such forward-looking statements.
ADDITIONAL INFORMATION
Independent Public Auditors
A representative of Ernst & Young LLP, independent auditors of the
Company's financial statements, is expected to be present at the Special
Meeting, will have an opportunity to make a statement if such representative so
desires and will be available to respond to appropriate questions.
Available Information
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files periodic reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Regional Offices of the Commission at the
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and Suite 1300, Seven World Trade Center, New York, New York 10048. In addition,
copies of such materials may also be obtained at prescribed rates from the
Public Reference Section of the Commission at its principal office at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549. In addition, copies of such
documents may be obtained through the Commissions's Internet address at
http://www.sec.gov.
After the Effective Time, the Common Stock will no longer be traded in
over-the-counter market. Moreover, the Surviving Corporation will no longer be
required to file informational reports under the Exchange Act, such as proxy
statements, and its officers, directors and more than 10% shareholders will be
relieved of the reporting requirements under, and the "short-swing" profit
recapture provisions of, Section 16 of the Exchange Act.
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<PAGE>
OTHER PROPOSALS
The Board of Directors does not know of any matters to be presented for
consideration other than the matters described in the Notice of Special Meeting,
but if any matters are properly presented, it is the intention of the persons
named in the accompanying proxy to vote on such matters in accordance with their
judgement.
By Order of the Board of Directors,
Thomas W. Garges, Jr.,
President and Chief Executive Officer
September 4, 1998
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Audited:
- --------
Report of Independent Auditors........................................ F-1
Consolidated Balance Sheets as of December 31, 1997, 1996 and 1995.... F-2
Statements of Consolidated Operations for the years ended
December 31, 1997, 1996 and 1995.................................... F-4
Statements of Consolidated Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995................ F-5
Statements of Consolidated Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................... F-6
Notes to Consolidated Financial Statements............................ F-7
Unaudited:
- ----------
Consolidated Condensed Balance Sheets as of June 30,
1998 and 1997....................................................... F-22
Consolidated Condensed Statements of Operations for
the six months ended June 30, 1998 and 1997......................... F-23
Consolidated Condensed Statements of Cash Flows for
the six months ended June 30, 1998 and 1997......................... F-24
Notes to Consolidated Condensed Financial Statements.................. F-25
-68-
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders
Rochester & Pittsburgh Coal Company
Indiana, Pennsylvania
We have audited the accompanying consolidated balance sheets of Rochester &
Pittsburgh Coal Company and subsidiaries as of December 31, 1997, 1996 and 1995,
and the related statements of consolidated operations, shareholders' equity, and
cash flows for the years then ended. 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 consolidated financial position of Rochester &
Pittsburgh Coal Company and subsidiaries at December 31, 1997, 1996, and 1995,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 12, 1998
F-1
<PAGE>
Rochester & Pittsburgh Coal Company and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 37,026 $ 34,466 $ 27,437
Short-term investments and
marketable securities -- 25,000 2,645
Receivables 29,414 21,945 29,576
Coal inventories 9,189 5,835 6,128
Mine supply inventories 1,792 1,579 1,532
Prepaid expenses and other current assets 2,933 4,475 6,086
Deferred income taxes 4,714 2,093 2,166
-------- -------- --------
TOTAL CURRENT ASSETS 85,068 95,393 75,570
OTHER ASSETS
Investments in marketable securities 20,166 28,558 44,410
Funding for:
Workers' compensation benefits 12,950 14,229 16,915
Mine closing reserves 12,135 11,651 10,271
Deferred income taxes 14,894 8,839 7,712
Prepaid royalties 5,903 6,242 6,323
Miscellaneous 11,572 9,861 7,843
-------- -------- --------
77,620 79,380 93,474
PROPERTY, PLANT AND EQUIPMENT
Coal and surface lands 85,159 87,640 87,638
Plant and equipment 333,125 291,125 294,815
Mine development 160,660 133,236 108,720
Construction in progress 6,412 29,543 20,452
-------- -------- --------
585,356 541,544 511,625
Less allowances for depreciation,
depletion and amortization 229,910 184,919 189,262
-------- -------- --------
355,446 356,625 322,363
-------- -------- --------
$518,134 $531,398 $491,407
======== ======== ========
</TABLE>
(continued on next page)
See notes to consolidated financial statements.
F-2
<PAGE>
(continued from previous page)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable $ 16,264 $ 15,329 $ 14,809
Accrued payrolls and related expenses 8,553 8,116 9,823
Other accrued liabilities 12,485 5,282 5,939
Dividends payable 516 516 516
Income taxes payable 6,111 1,367 --
Current portion of long-term debt 10,301 28,236 2,514
-------- -------- --------
TOTAL CURRENT LIABILITIES 54,230 58,846 33,601
OTHER LIABILITIES
Other postretirement benefits 81,469 72,346 46,458
Workers' compensation benefits 42,006 40,384 40,292
Mine closing reserves 24,300 23,929 23,153
Black lung benefits 8,708 9,231 11,348
Deferred income taxes 13,853 11,079 8,169
Miscellaneous 3,518 3,897 4,488
-------- -------- --------
173,854 160,866 133,908
LONG-TERM DEBT (less current maturities) 84,535 100,501 120,784
LONG-TERM AGREEMENTS
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, no par value (stated value
$15); authorized, 5,000,000 shares;
issued, 3,989,121 shares 59,837 59,837 59,837
Capital in excess of stated value 133,125 133,125 133,162
Retained earnings 40,358 46,028 38,007
-------- -------- --------
233,320 238,990 231,006
Less treasury stock at cost--
548,137; 548,137 and 549,846 shares 27,805 27,805 27,892
-------- -------- --------
205,515 211,185 203,114
-------- -------- --------
$518,134 $531,398 $491,407
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Rochester & Pittsburgh Coal Company and Subsidiaries
Statements of Consolidated Operations
(dollars in thousands, except those stated on a per share basis)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Sales $ 210,345 $ 202,265 $ 216,686
Other Income
Gain on sale of property 13,955 7,678 2,164
Interest and dividends 3,299 4,723 3,917
Net investment gains (losses) (165) 776 1,262
Miscellaneous 1,594 1,840 1,850
--------- --------- ---------
229,028 217,282 225,879
Costs and Expenses
Cost of sales 185,344 180,302 205,283
Depreciation, depletion and
amortization 17,765 11,795 13,285
Selling, general and administrative 5,911 6,589 6,321
Interest 3,090 2,032 3,238
Write-down of property, plant and
equipment 17,047 -- --
Miscellaneous 2,102 1,334 1,624
--------- --------- ---------
231,259 202,052 229,751
--------- --------- ---------
Income (loss) before income taxes (2,231) 15,230 (3,872)
Provision (credit) for income taxes 1,493 3,969 (3,535)
--------- --------- ---------
Net income (loss) $ (3,724) $ 11,261 $ (3,535)
========= ========= =========
Net income (loss) per share $ (1.08) $ 3.27 $ (1.03)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Rochester & Pittsburgh Coal Company and Subsidiaries
Statements of Consolidated Shareholders' Equity
(dollars in thousands, except those stated on a per share basis)
<TABLE>
<CAPTION>
Capital in
Common Excess of Retained Treasury
Stock Stated Value Earnings Stock
------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $59,837 $133,170 $42,360 $27,917
Net loss for the year (3,535)
Treasury stock issued (8) (25)
Cash dividends - $.75 per share (2,579)
Change for the year in net
unrealized securities gains,
net of income tax of $878 1,701
Foreign currency translation gain 60
------- -------- ------- -------
Balance at December 31, 1995 59,837 133,162 38,007 27,892
Net income for the year 11,261
Treasury stock issued (37) (87)
Cash dividends - $.60 per share (2,065)
Change for the year in net
unrealized securities losses,
net of income tax benefit of $598 (1,160)
Foreign currency translation loss (15)
------- -------- ------- -------
Balance at December 31, 1996 59,837 133,125 46,028 27,805
Net loss for the year (3,724)
Cash dividends -- $.60 per share (2,065)
Change for the year in net
unrealized securities gains,
net of income tax of $139 269
Foreign currency translation loss (150)
------- -------- ------- -------
Balance at December 31, 1997 $59,837 $133,125 $40,358 $27,805
======= ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Rochester & Pittsburgh Coal Company and Subsidiaries
Statements of Consolidated Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (3,724) $ 11,261 $ (3,535)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion and amortization 17,765 11,795 13,285
Write-down of property, plant and equipment 17,047 -- --
Gain on sale of property (13,955) (7,678) (2,164)
Deferred income taxes (6,040) 2,454 1,713
Gain on investment activity (109) (956) (1,523)
Loss on investment activity 282 180 261
Changes in certain assets and liabilities
(using) or providing cash:
Receivables (7,469) 7,631 (4,363)
Inventories (3,567) 246 9,255
Income taxes payable 4,745 3,186 2,194
Workers' compensation benefits and funding 2,321 661 4,471
Mine closing reserves and funding (147) (604) 2,267
Other postretirement benefits 9,123 25,888 13,648
Accounts payable 935 520 (2,268)
Accrued liabilities 7,638 (2,364) 4,278
Other 373 (1,901) 890
--------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 25,218 50,319 38,409
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from available-for-sale securities 38,572 42,082 45,886
Acquisition of available-for-sale securities (2,775) (48,740) (43,077)
Acquisition and development of property,
plant and equipment (23,231) (41,164) (72,223)
Proceeds from the sale of property, plant
and equipment 15,899 7,721 3,261
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 28,465 (40,101) (66,153)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings 124,425 109,925 151,790
Payments on borrowings (171,220) (111,099) (123,156)
Debt issue costs (2,263) -- --
Cash dividends paid (2,065) (2,065) (4,126)
Issuance of treasury stock -- 50 17
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (51,123) (3,189) 24,525
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,560 7,029 (3,219)
Cash and cash equivalents at beginning of year 34,466 27,437 30,656
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 37,026 $ 34,466 $ 27,437
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Rochester & Pittsburgh Coal Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
NOTE A - OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Operations - Rochester & Pittsburgh Coal Company and its subsidiaries are
principally engaged in the deep mining of bituminous steam coal for sale to
electric generating plants in the eastern and midwestern United States. A
significant portion of these sales is made pursuant to long-term coal supply
contracts.
A substantial portion of the employees of the Company's operating
subsidiaries are covered by the National Bituminous Coal Wage Agreement of 1998
(the "1998 Agreement") with the United Mine Workers of America (UMWA) which
became effective January 1, 1998 and expires December 31, 2002.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries, all of
which are wholly owned. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents, which are primarily
maintained at three financial institutions, include highly liquid investments
that are readily convertible to known amounts of cash.
Investments - The Company accounts for investments in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities".
The appropriate classification of securities is determined at the time of
purchase. Marketable equity securities and debt securities for which the Company
does not have the intent or ability to hold to maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value
based on quoted market prices, with the unrealized gains and losses, net of tax,
reported as a component of equity. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of discounts.
Realized gains and losses, determined using specific cost identification, and
declines in the value of held-to-maturity and available-for-sale securities
determined to be other-than-temporary are included in investment income.
Inventories - Inventories are carried at the lower of average cost or
market.
Property, Plant, and Equipment - Property, plant, and equipment is recorded
on the basis of cost including capitalized mine development costs and the cost
of equipment leased under capital leases. Depreciation is computed principally
at rates applied to tonnage produced. Such rates are based on estimates of tons
to be produced, the cost of property, plant, and equipment employed, the
estimated economic lives of the mines and equipment, and the remaining lives of
the long-term coal sales agreements referred to in Note C. The
F-7
<PAGE>
rates are revised periodically to reflect operating experience and the
provisions of the long-term coal sales agreements. The resulting rates
approximate straight-line depreciation for normal annual periods. Depletion of
coal lands and amortization of mine development costs are computed on a tonnage
basis calculated to amortize their costs fully over the estimated recoverable
reserves.
Foreign Currency Translation - The Canadian subsidiary's balance sheet
accounts are translated at the year-end exchange rate and the resulting
adjustment is made directly to equity. Income statement items are translated at
the average exchange rate for the year. Gains or losses resulting from foreign
currency transactions, which are not material, are reported in income. As of
December 31, 1997, accumulated foreign currency translation losses charged to
equity amounted to $1,176,000.
Per Share Amounts - Per share computations are based on the average number
of shares of common stock outstanding during the respective years.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Newly Issued Accounting Statements - In the first quarter of 1997, the
Company adopted Statement of Position 96-1, "Environmental Remediation
Liabilities," which was issued by the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants. Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," was also adopted
by the Company in 1997. The adoption of these statements had no effect on the
accompanying financial statements.
In 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was issued which establishes new rules for the reporting
and display of comprehensive income and its components. The Company intends to
adopt this statement for financial statements for the 1998 fiscal year. Also in
1997, Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued which changes the
way segment information is required to be reported. The standard is required to
be adopted in 1998 and the additional disclosure, if any, will be determined
during 1998. In February 1998, Statement of Financial Accounting Standards No.
132, "Employers' Disclosure about Pensions and Other Postretirement Benefits,"
was issued. Statement 132 does not change the recognition or measurement of
pension or postretirement benefit plans, but standardizes disclosure
requirements for pensions and other postretirement benefits, eliminates
unnecessary disclosure and requires additional information. Statement 132 is
required to be adopted in 1998 and restatement of disclosures for prior periods
provided for comparative purposes is required. These Statements are not expected
to have a material effect on the disclosures included in the consolidated
financial statements.
Reclassifications - Certain accounts in the consolidated financial
statements for prior years have been reclassified to conform to the statement
presentation for the current year. The reclassifications had no effect on net
income.
F-8
<PAGE>
NOTE B - ACQUISITION AND DEVELOPMENT OF MINING ASSETS
In December 1992, the Company, through its wholly owned subsidiaries,
Eighty-Four Mining Company (Eighty-Four) and Lucerne Land Company (Lucerne
Land), acquired Mine No. 84 and approximately 175,000,000 tons of coal reserves
in Washington County, Pennsylvania.
Development of the underground haulage system began in February 1993 and
additional surface handling and preparation facilities have been upgraded.
Development mining commenced in the second quarter of 1994 to prepare for the
first longwall system which became operational in the third quarter of 1995. The
second longwall mining unit was installed in September 1997, and became
operational in November 1997. During the period from February 1993 to the
installation and operation of the second longwall unit, Eighty-Four was in the
development stage since principally all of its activities were related to the
development and rehabilitation of the mine. Costs of mine development, net of
sales revenue from coal produced incidental to development during the period
through October 1997, were capitalized and will be amortized over the estimated
life of the coal reserves. Subsequent to October 1997, Eighty-Four was no longer
considered to be in the development stage and production substantially replaced
mine development activities as the principal activity. Operating results include
revenues and expenses associated with the mining operations of Eighty-Four
commencing in November 1997.
The costs of rehabilitating and developing these facilities in 1997 and
cumulatively amounted to $27,424,000 and $160,660,000, respectively, exclusive
of expenditures for plant and equipment of $20,520,000 and $125,562,000,
respectively. Eighty-Four has obtained the necessary permits to develop the mine
as planned; however, these permits have been appealed by several parties. The
Company believes that the issuance of these permits will be upheld. This
litigation does not involve a contingent liability, but a final adverse decision
could have a material adverse effect on the Company.
The Company has made an equity investment of $105,000,000 in this project
and has loaned $55,000,000 to the project under a line of credit with a
consolidated affiliated company.
NOTE C - LONG-TERM COAL SALES AGREEMENTS
Two of the Company's subsidiaries have long-term contracts to supply coal
to two mine-mouth electric generating stations, as follows: Keystone Coal Mining
Corporation to the Keystone Steam Electric Station under the Keystone Coal
Supply Agreement (Keystone, Keystone Station, and Keystone Agreement) and
Helvetia Coal Company to the Homer City Steam Electric Station under the 1995
Coal Sales Agreement for deliveries commencing January 1, 1995 and the Homer
City Coal Sales Agreement for deliveries through 1994 (Helvetia, Homer City
Station, 1995 Homer City Agreement, and Prior Homer City Agreement).
Keystone - Under the terms of the Keystone Agreement, the price of coal
sold is based on the cost of production plus profit, subject to an annual price
cap which, if exceeded, can result in losses. Profitability also depends on the
quality of the coal sold, and the ability to
F-9
<PAGE>
control costs of production. Certain funds generated by Keystone must be
utilized within the operations covered by the Keystone Agreement. The agreement,
as well as debt agreements of Keystone, includes certain restrictions on its net
worth. Also, if Keystone is in default under its loan agreements or the Keystone
Agreement, the Keystone Station Owners have an option to acquire Keystone at its
net book value and to lease the related coal and surface lands.
In 1995, Keystone's costs exceeded the price cap which resulted in losses
before income taxes of $8,432,000 and a net loss of $5,045,000. On December 27,
1995, Keystone permanently closed its Jane, Emilie #4 and Margaret #11 mines.
Approximately $12 million in estimated costs associated with these mine closings
were accrued in 1995. Revenues increased by a similar amount as such costs were
recovered under terms of the Keystone Agreement. Keystone sales were
$110,282,000, $116,990,000 and $141,692,000, for 1997, 1996 and 1995,
respectively. At December 31, 1997, Keystone's net book value was $16,681,000.
Helvetia - The 1995 Homer City Agreement provides for deliveries in excess
of 14 million tons from January 1, 1995 through 2003 at an initial rate of 1.8
million tons per year. The price to be paid by the Homer City Station is a base
price with escalation and adjustment based on quality of the coal delivered. The
1995 Homer City Agreement also provides for early termination by either party
under hardship provisions and further allows the Homer City Station Owners to
terminate the agreement for their convenience, in which event they would have to
make certain payments to Helvetia.
In addition, the Prior Homer City Agreement was amended in November 1994 to
provide for the payment to Helvetia by the Homer City Station Owners for certain
costs including those for past service postretirement benefits not paid pursuant
to deliveries under that agreement. Substantially all of the costs under this
provision were settled and paid by the Homer City Station Owners in 1996 and
1997.
In the second quarter of 1997, Helvetia's operating losses increased which
prompted management to revise forecasts of Helvetia's future operations. In
light of Helvetia's anticipated future operating losses and estimated discounted
future cash flows, property, plant, and equipment relating to Helvetia with a
carrying value of $17,047,000 was reduced to fair market value through a charge
to operations of an equivalent amount.
Sales to the Homer City Station were $51,251,000 in 1997, $68,859,000 in
1996 and $56,701,000 in 1995.
While Keystone and Helvetia each sell primarily to one customer,
Eighty-Four has sales agreements with a variety of customers the durations of
which vary from one to five years.
F-10
<PAGE>
NOTE D - LONG-TERM DEBT AND COMMITMENTS
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
Keystone:
<S> <C> <C> <C>
Revolving credit note $ 20,000 $ 20,000 $ 25,000
Line of credit note -- 2,800 10,000
Term note -- -- 640
Eighty-Four and Lucerne Land:
Revolving credit notes 20,000 50,000 36,000
Term note 24,785 -- --
Senior fixed rate construction notes -- 35,000 35,000
Capitalized lease obligations 30,051 20,937 16,658
-------- -------- --------
94,836 128,737 123,298
Less current portion 10,301 28,236 2,514
-------- -------- --------
$ 84,535 $100,501 $120,784
======== ======== ========
</TABLE>
Interest paid (net of capitalized interest) in 1997, 1996 and 1995 was
$3,148,000, $2,120,000 and $3,712,000, respectively. Aggregate maturities on
long-term debt outstanding at December 31, 1997 for the next five years, are as
follows: 1998 - $10,301,000; 1999 - $23,548,000; 2000 - $44,532,000; 2001 -
$3,859,000 and 2002 - $4,113,000 .
The amount of subsidiaries' net assets which are restricted from being
transferred to the Company under these debt agreements totals $105,225,000.
Keystone - Keystone has a revolving credit agreement with two commercial
banks permitting maximum borrowings of $20,000,000 as of December 31, 1997. The
agreement terminates on December 31, 2000 and requires reductions in the amount
available of $5,000,000 in 1998 and $7,500,000 each in 1999 and 2000. Keystone
has a total of $10,000,000 available under a line of credit which expires March
31, 1999. The weighted-average interest rates on borrowings on the line of
credit were 8.5% in 1997, 8.4% in 1996 and 9.2% in 1995.
These credit facilities provide for a commitment fee of 1/4 of 1% per annum
and interest at the prime rate (8.50% at December 31, 1997). Keystone, at its
option, can select fixed interest rates for periods up to six months based on
the CD rate plus 1.5% or LIBOR rates plus 1.5%. At December 31, 1997, all of
Keystone's borrowings on the revolver were at the CD rate, which was
approximately 7.5%. Borrowings are secured by the assignment of the Keystone
Agreement and by Keystone's assets including the noncurrent funding for workers'
compensation and mine closing obligations which has been pledged to secure these
borrowings.
Eighty-Four and Lucerne Land - In March 1997, Eighty-Four and Lucerne Land
(borrowers) amended and restructured their long-term credit agreement with four
banks and an institutional lender which provided financing for the Mine No. 84
project. Investment securities of the Company having a market value of
$25,000,000, which had been pledged to
F-11
<PAGE>
secure the debt, were liquidated and the proceeds, combined with additional cash
amounts, were loaned by a consolidated affiliate to Eighty-Four and used to
repay the Senior Fixed Rate Notes to the institutional lender. The amendment
waived covenant violations in existence at year-end and revised covenants and
restrictions including limitations on the payment of interest and principal on
the amounts loaned from affiliate companies.
As of December 31, 1997, the amended facilities with the four banks totaled
$67,484,000 consisting of the following: 1) a senior secured term loan totaling
$24,785,000, 2) a revolving credit note totaling $34,699,000 and 3) a working
capital line of credit totaling $8,000,000. These credit facilities are secured
principally by all of the assets of the borrowers and are to be repaid by June
30, 2000.
The borrowers and the Company, as guarantor, are subject to various
financial covenants and restrictions regarding acquisitions, earnings, cash
flows, financial position and dividends. At December 31, 1997, the borrowers
were in violation of certain terms of the agreement and forecasted noncompliance
with several covenants in subsequent years. As a result, in January 1998,
amendments to the credit agreement were executed to waive the violations as of
December 31, 1997 and reset several covenants for future periods. The Company,
as guarantor, is also required to retain the proceeds from the disposals of
properties since May 15, 1997, net of costs of such sales and related income
taxes, amounting to $6,228,000 as of December 31, 1997.
The new senior secured term note includes interest at prime rate plus 2%
or, at the option of the borrowers, at LIBOR plus 3.5%. The revolving credit
note is subject to mandatory reductions in the amount available of $7,000,000 in
1998, $20,000,000 in 1999 and $7,699,000 in 2000 and provides for interest based
on the prime rate plus an amount up to 1.5%, or, at the borrowers' option, the
LIBOR rate plus an amount from 2% to 2.5% for fixed periods. Commitment fees of
.5% per annum are payable on the unused portion of the line of credit and
revolving credit note.
Eighty-Four has entered into capitalized lease agreements for longwall
mining equipment amounting to $12,894,000 in 1997, $6,616,000 in 1996 and
$16,963,000 in 1995 with payments commencing in August 1995 and continuing
through July 2005 with effective interest rates ranging from 7.0% to 7.66%. The
agreement includes buy out options during and at the end of the lease term.
Future minimum lease payments are $37,730,000 including imputed interest of
$7,679,000. These payments for the next five years are as follows: 1998 -
$7,358,000; 1999 - $5,748,000; 2000 - $5,629,000; 2001 - $4,946,000 and 2002 -
$4,908,000. The gross amount of capitalized lease assets and related accumulated
depreciation included in the Consolidated Balance Sheets was $36,473,000 and
$7,783,000, respectively, at December 31, 1997; $23,578,000 and $3,708,000,
respectively, at December 31, 1996 and $16,963,000 and $837,000, respectively,
at December 31, 1995.
In addition to interest expense shown on the Statements of Consolidated
Operations, the Company capitalized interest in the amount of $7,581,000 in
1997, $9,666,000 in 1996 and $5,965,000 in 1995 as part of mine development
costs.
F-12
<PAGE>
Eighty-Four has a commitment with a vendor who will provide rebuilt
longwall shearers under an exchange program in order to avoid delays during
longwall moves. The commitment is for ten exchanges at a cost of approximately
$500,000 each beginning in 1998 and is expected to be completed in 2000. The
exchange program is cancelable by Eighty-Four with a payment of approximately
$700,000, which would begin to decrease after the second exchange.
NOTE E - OPERATING LEASES
The Company's deep mining subsidiaries are parties to operating lease
agreements for mining equipment. Rental expense under these leases was
$5,145,000 in 1997 including $2,177,000 which was capitalized as mine
development, $6,169,000 in 1996 including $2,132,000 which was capitalized as
mine development and $8,177,000 in 1995 including $1,217,000 which was
capitalized as mine development. Aggregate remaining rental payments on these
leases are $16,610,000 with the following minimum rentals over the next five
years: 1998 - $5,170,000; 1999 - $4,073,000; 2000 - $1,668,000; 2001 - $524,000
and 2002 - $30,000.
NOTE F - INCOME TAXES
The provision (credit) for income taxes consists of the following for the
years ended December 31:
1997 1996 1995
------- ------- -------
(in thousands)
Provision (credit) for income taxes:
Current:
Federal $ 5,423 $ (130) $(3,146)
State 1,762 1,298 524
Canadian 348 347 572
------- ------- -------
7,533 1,515 (2,050)
------- ------- -------
Deferred:
Federal (8,334) (112) (2,407)
State 2,303 2,579 4,122
Canadian (9) (13) (2)
------- ------- -------
(6,040) 2,454 1,713
------- ------- -------
$ 1,493 $ 3,969 $ (337)
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been recognized due to the effects of statutory depletion and limited state
operating loss utilization on certain of the Company's operations. Significant
components of the Company's deferred tax assets and liabilities are as follows
at December 31:
F-13
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Deferred tax assets:
Other postretirement benefits $ 43,685 $ 34,182 $ 26,961
Self-insurance 18,946 17,784 17,721
Net operating loss
(begins to expire in 2009) 13,069 20,135 16,154
Alternative minimum tax 10,519 5,902 5,696
Black lung 3,011 3,119 2,604
Vacation pay 2,029 1,881 1,679
Other deferred tax assets 5,923 2,762 2,693
-------- -------- --------
97,182 85,765 73,508
Valuation allowance (9,835) (7,375) (6,585)
-------- -------- --------
Total deferred tax assets 87,347 78,390 66,923
Deferred tax liabilities:
Depreciation and related charges 75,714 73,567 59,840
Pension 3,793 2,817 1,570
Intangible drilling costs 543 695 817
Unrealized securities gains 192 73 671
Other deferred tax liabilities 1,350 1,385 2,316
-------- -------- --------
Total deferred tax liabilities 81,592 78,537 65,214
-------- -------- --------
Net deferred tax (liabilities) assets $ 5,755 $ (147) $ 1,709
======== ======== ========
</TABLE>
Income (loss) before income taxes includes income (losses) attributable to
United States operations of $(2,997,000) in 1997, $14,469,000 in 1996 and
$(5,140,000) in 1995 and income attributable to Canadian operations of $765,000
in 1997, $761,000 in 1996 and $1,268,000 in 1995.
The reconciliations between income tax expense (credit) and the amount
computed by applying the statutory U.S. income tax rate to income (loss) before
income taxes are as follows for the years ended December 31:
1997 1996 1995
------ ------ ------
Tax at U.S. statutory rates (35.0)% 35.0% (35.0)%
Increase (decrease) resulting from:
State taxes, net of federal benefits 118.4 16.6 76.8
Depletion (71.8) (18.1) (79.0)
Prior year accruals (65.1) (9.2) (19.4)
Canadian dividend withholding -- -- 2.9
Rates 3.2 (3.9) (19.5)
Valuation allowance 110.3 5.2 63.9
Other items 6.9 .5 .6
----- ----- -----
66.9% 26.1% (8.7)%
===== ===== =====
The Company's effective income tax rates are impacted by credits for
certain prior year accruals and the inability to carry back or carry forward tax
deductions in excess of current year income for state income tax purposes. In
addition, these excess deductions which are created principally by Eighty-Four's
mine development expenditures cannot be offset against state taxable income of
affiliates. For federal income tax purposes, these expenditures are
F-14
<PAGE>
being utilized to offset current year income and are being carried forward to
affect future taxable income. As of December 31, 1997, the federal net operating
loss approximates $37,000,000. Federal and state deferred tax liabilities are
being provided with respect to these expenditures even though no benefit is
being realized for state income tax purposes.
Income taxes paid (refunds) in 1997, 1996 and 1995 were $3,251,000,
($1,672,000) and ($4,356,000), respectively.
NOTE G - PENSION AND BENEFIT PLANS
Pensions - Non-UMWA Employees - The Company has a trusteed pension plan
which provides for monthly pensions and other benefits for substantially all
employees of the Company and its subsidiaries not covered by the retirement
plans of the United Mine Workers of America (UMWA). Benefits are determined
based on years of service and the employees' average earnings near the end of
service. The Company's funding policy is to contribute to the plan amounts which
are actuarially determined to provide assets sufficient to meet benefits to be
paid to plan members in accordance with the requirements of the Employee
Retirement Income Security Act of 1974 (ERISA). Since plan assets are currently
in excess of the Internal Revenue Code full funding limitation, no contributions
were made to the plan in 1997, 1996 and 1995 nor are any expected to be made in
1998. The plan's assets at December 31, 1997 are comprised primarily of
government and corporate debt securities and equities.
Amounts credited to expense relating to the pension plan include the
following components for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net periodic pension (credit) expense:
Service cost--benefits earned during the period $ 1,509 $ 1,368 $ 1,525
Interest cost on projected benefit obligation 3,292 3,085 3,056
Actual (return) loss on plan assets (17,720) (9,470) (15,902)
Net amortization and deferral 10,871 3,339 10,182
-------- -------- --------
(2,048) (1,678) (1,139)
Amounts capitalized as mine development 363 334 160
-------- -------- --------
Net periodic pension credit $ (2,411) $ (2,012) $ (1,299)
======== ======== ========
</TABLE>
A curtailment gain of $1,671,000, and a charge of $640,000 for special
early retirement benefits relating to the closure of certain Keystone mines
discussed in Note C, were recorded in 1995. A substantial portion of these
amounts were included as revenues and cost of sales under terms of the Keystone
Agreement.
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets for the Company's defined benefit pension plan
at December 31:
F-15
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 41,636 $ 38,090 $ 37,779
Nonvested benefits 1,684 1,276 1,303
--------- --------- ---------
Accumulated benefits 43,320 39,366 39,082
Effect of projected future salary increases 9,315 8,338 8,069
--------- --------- ---------
Total projected benefit obligation 52,635 47,704 47,151
Plan assets at fair value 100,406 85,460 78,795
--------- --------- ---------
Plan assets in excess of projected benefit obligation 47,771 37,756 31,644
Unrecognized net gain (34,922) (26,267) (21,112)
Unrecognized prior service cost 1,030 1,125 1,187
Unrecognized transition asset (7,370) (8,153) (8,936)
--------- --------- ---------
Prepaid pension asset $ 6,509 $ 4,461 $ 2,783
========= ========= =========
</TABLE>
The weighted-average discount rates used in determining the actuarial
present value of the projected benefit obligations were 6.75% at December 31,
1997, 7.125% at December 31, 1996 and 6.75% at December 31, 1995 and the rates
of increase in future compensation levels were 4.75% for each year. The
weighted-average expected long-term rate of return on plan assets was 8% for
1997 and 1996, and 7.75% for 1995.
In addition, the Company and its subsidiaries have a 401(k) Plan for
management employees. Company contributions and administrative costs
approximated $277,000 for 1997, $262,000 for 1996 and $288,000 for 1995.
UMWA Health and Retirement Funds - In accordance with the collective
bargaining agreement between the Bituminous Coal Operators' Association and the
UMWA, the Company's mining subsidiaries are required to pay amounts, based
principally on hours worked, to the UMWA Retirement Funds which are defined
benefit pension plans. Health benefits for the Company's UMWA employees who
retired prior to 1976 are provided by the United Mine Workers' of America
Combined Benefit Fund (Combined Fund). The Combined Fund and the 1992 Benefit
Plan (1992 Plan) which were created by the Coal Industry Retiree Health Benefit
Act of 1992 (The 1992 Coal Act) also provide benefits to retirees whose
employers are out of business. The companies' contributions to these health
plans are assessed primarily on the basis of the number of beneficiaries
assigned to each employer.
Expense is being recognized as contributions are made to these plans.
Amounts charged to expense applicable to benefits administered by these various
multi-employer plans were $4,913,000 in 1997, including $1,846,000 which was
capitalized as mine development, $4,312,000 in 1996, including $1,574,000 which
was capitalized as mine development, and $5,459,000 in 1995, including
$1,516,000 which was capitalized as mine development. The present value of the
expected future assessments from the Combined Fund and the 1992 Plan is
estimated to be in the range of $35,000,000. The Company's obligations for these
funds could increase if other companies become unable to fund their obligations.
Certain of the Company's subsidiaries would be required under federal law to
contribute additional amounts upon withdrawal from or termination of certain of
the plans.
F-16
<PAGE>
Other Postretirement Benefits - The Company provides life insurance
benefits and certain self-insured health care benefits for substantially all
UMWA employees who retire after 1975 and all salaried retirees. In addition,
employees terminated due to layoff are eligible for certain benefits for periods
up to twelve months. These layoff benefit costs are charged to expense in the
month in which the layoff occurs.
Certain of the Company's subsidiaries have guaranteed the benefits of their
UMWA employees who retired prior to October 1, 1994 and are required to provide
approximately $9,000,000 in security to the 1992 Plan for these retirees. The
Company's subsidiaries are discussing appropriate forms of security with
representatives of the 1992 Plan in light of the substantial funding in place
for postretirement benefits.
The Company and its subsidiaries accrue retiree medical and life
insurance benefits over the employees' years of service to full eligibility in
accordance with Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits other than Pensions" (FASB 106). The
Company is amortizing past service liabilities at the date of adoption over the
average remaining service of the active employees.
Postretirement benefit expense under FASB 106 includes the following
components for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net annual expense:
Service cost - benefits earned during the period $ 2,729 $ 3,636 $ 2,914
Interest cost on accumulated postretirement
benefit obligation 13,422 12,926 11,315
Actual return on plans' assets (13,080) (4,573) (9,659)
Amortization of transition obligation 4,175 19,012 11,723
Net amortization and deferral 5,910 82 3,614
-------- -------- --------
13,156 31,083 19,907
Amounts capitalized as mine development (2,830) (2,912) (2,247)
-------- -------- --------
Net annual expense $ 10,326 $ 28,171 $ 17,660
======== ======== ========
</TABLE>
A curtailment loss of $578,000 relating to the closure of certain Keystone
mines as discussed in Note C was recorded in 1995.
In 1995, Eighty-Four recorded the past service liability of $12,224,000
associated with the recall of UMWA miners at Mine No. 84 not previously employed
by the Company. This amount was recorded as an adjustment to the original
acquisition cost of Mine No. 84's assets.
The unrecognized cost of postretirement benefits attributable to service
prior to January 1, 1995 of Helvetia's employees is being reimbursed by the
Homer City Station Owners and recognized over a period of not more than three
years beginning in 1995. The amounts recognized in 1997, 1996 and 1995 and
included as a component of net amortization were $1,772,000, $16,720,000 and
$8,843,000, respectively.
F-17
<PAGE>
Charges for postretirement benefits at the Company's Keystone subsidiary
are being funded, net of estimated taxes, in custodial accounts and union and
salary VEBA trusts. The funding is comprised primarily of equity securities and
government and government agency securities. Liabilities for the Company and its
other subsidiaries are not currently being funded. The weighted-average expected
long-term rate of return on plans' assets assumption was 7.6% in 1997, 7.2% in
1996 and 7.2% in 1995.
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets for the Company's postretirement benefit plans
at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ 67,501 $ 65,651 $ 63,261
Fully eligible active plan participants 86,227 65,561 62,611
Other active plan participants 58,782 46,811 58,658
--------- --------- ---------
212,510 178,023 184,530
Plans' assets at fair value 102,385 90,212 85,430
--------- --------- ---------
Accumulated postretirement benefit obligation in
excess of plans' assets (110,125) (87,811) (99,100)
Unrecognized net loss 18,899 1,816 20,264
Unrecognized prior service cost (credit) (1,608) (1,891) (2,174)
Unrecognized transition obligation 11,365 15,540 34,552
--------- --------- ---------
Accrued postretirement benefit cost $ (81,469) $ (72,346) $ (46,458)
========= ========= =========
</TABLE>
The weighted-average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) is 9.1% for 1997 and is
assumed to decrease gradually to 5.2% for 2006 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. For example, increasing the assumed health care cost
trend rates by one percentage point would increase the APBO as of December 31,
1997 by $42,896,000 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1997 by $3,420,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation (APBO) was 6.88% at December 31, 1997, 7.38%
at December 31, 1996 and 7.12% at December 31, 1995. In 1997, the APBO increased
due to a decrease in the discount rate. In 1996, the APBO decreased due to an
increase in the discount rate.
NOTE H - SELF-INSURANCE AND OTHER LIABILITIES
Workers' Compensation Benefits - The Company and its mining subsidiaries
have self-insurance programs for workers' compensation liabilities for which
provisions are made based upon actuarial evaluations of claims. In 1997 and
1996, the actuarial valuations of future payouts of prior years' workers'
compensation claims resulted in reductions of the recorded liabilities for those
years in the amount of $1,600,000 and $2,000,000, respectively. Since a portion
of these costs were recoverable under the Prior Homer City Agreement, the effect
on pretax income was $1,400,000 and $1,100,000, respectively. Insurance coverage
is maintained for catastrophic losses. These benefits are funded as accrued for
the Company's Keystone
F-18
<PAGE>
subsidiary. However, a portion of this funding is utilized to reimburse working
capital for the payment of income taxes directly attributable to the
nondeductibility of these liabilities for income tax reporting purposes until
payments on workers' compensation claims are made. In future years, when income
tax deductions for this item exceed book expenses, the Company intends to
restore funds from working capital. These funds are mainly comprised of U.S.
Government and agency securities.
Mine Closing Reserves - The Company's mining subsidiaries provide for
projected costs of closing mine facilities. These costs are based on engineering
estimates, which consider the estimated economic lives of the facilities and the
remaining lives of the long-term coal sales agreements. The related reserves are
reviewed periodically to reflect operating experience and the provisions of the
long-term coal sales agreements and are funded as accrued for the Company's
Keystone subsidiary. Funding consists principally of U.S. Government notes and
bonds.
Black Lung Benefits - The Company and its mining subsidiaries have
self-insurance programs for coal workers' pneumoconiosis (black lung)
liabilities and, except for Eighty-Four, have established black lung trusts
under the provisions of the Internal Revenue Code. The principal purpose of the
trusts is to pay federal and state black lung liabilities for miners covered by
Company administered self-insured programs. These liabilities are being accrued
over the estimated average working life of the subject employees based on annual
actuarial calculations. These calculations are based on various assumptions,
among which are future benefit levels, mortality, claim frequencies and discount
rates. The Company also maintains escrowed insurance arrangements for certain
liabilities not covered by the trusts. At December 31, 1997, the market value of
trust assets, which are comprised of U.S. Government notes and bonds, totaled
$55,549,000, compared to an actuarial liability of $29,000,000, of which
$8,708,000 relating to employees of Eighty-Four is recorded as a liability on
the Consolidated Balance Sheets. Eighty-Four's actuarial liabilities at December
31, 1997 and 1996 reflected reductions of $1,350,000 and $3,230,000,
respectively, due to changes in actuarial assumptions, which were credited to
mine development. Funding of the trusts has ceased until such time that the
actuaries determine additional provisions and funding are required.
In 1995, Eighty-Four recorded the past service liability of $4,156,000
associated with the recall of miners at Mine No. 84 not previously employed by
the Company. This amount was recorded as an adjustment to the original
acquisition cost of Mine No. 84's assets.
F-19
<PAGE>
NOTE I - INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Available-for-sale securities
- -----------------------------
U.S. Government and agencies $41,369 $ 609 $ 44 $ 41,934
Other debt securities 200 13 -- 213
------- ----- ------ --------
Total debt securities 41,569 622 44 42,147
Equities 9 45 -- 54
-------- ------ ------ --------
41,578 667 44 42,201
Cash equivalents included
in noncurrent funding 3,050 -- -- 3,050
------- ------ ------ --------
$44,628 $ 667 $ 44 $ 45,251
======= ====== ====== ========
Schedule of maturities
One year or less $ 6,985 $ 7,024
One year through three years 22,452 22,709
After three years 12,132 12,414
------- --------
41,569 42,147
Equities 9 54
------- --------
$41,578 $ 42,201
======= ========
<CAPTION>
December 31, 1996 Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Available-for-sale securities
- -----------------------------
U.S. Government and agencies $57,039 $ 488 $ 299 $ 57,228
Corporate 12,015 58 54 12,019
Other debt securities 250 3 -- 253
------- ------ ------ --------
Total debt securities 69,304 549 353 69,500
Equities 9 18 -- 27
------- ------ ------ --------
69,313 567 353 69,527
Cash equivalents included
in noncurrent funding 9,911 -- -- 9,911
------- ------ ------ --------
$79,224 $ 567 $ 353 $ 79,438
======= ====== ====== ========
<CAPTION>
December 31, 1995 Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Available-for-sale securities
- -----------------------------
U.S. Government and agencies $46,388 $1,470 $ 17 $ 47,841
Corporate 12,902 167 22 13,047
Other debt securities 250 3 -- 253
------- ------ ------ --------
Total debt securities 59,540 1,640 39 61,141
Equities 4,623 425 53 4,995
------- ------ ------ --------
64,163 2,065 92 66,136
Cash equivalents included
in noncurrent funding 8,105 -- -- 8,105
------- ------ ------ --------
$72,268 $2,065 $ 92 $ 74,241
======= ====== ====== ========
</TABLE>
F-20
<PAGE>
The following balance sheet captions are comprised of the
available-for-sale securities at December 31, 1997: investments in marketable
securities and noncurrent funding for workers' compensation benefits and mine
closing reserves.
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts reported approximate fair
value.
Short-term Investments and Marketable Securities - Fair values are based on
quoted market prices.
Long-term Debt - Fair value of debt is based on the borrowing rates for
loans with similar terms and average maturities.
Carrying Fair
Value Value
-------- ------
(in thousands)
Summary by Balance Sheet caption:
Cash and cash equivalents $37,026 $37,026
Investments in marketable securities -
available-for-sale 20,166 20,166
Funding for workers' compensation -
available-for-sale 12,950 12,950
Funding for mine closing reserves -
available-for-sale 12,135 12,135
Long-term debt (excluding
capitalized leases) 64,785 64,785
F-21
<PAGE>
ROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 38,479 $ 30,617
Short-term investments -- --
Receivables 35,221 25,085
Inventories and other current assets 11,962 10,254
Deferred income taxes 4,618 2,362
--------- ---------
Total Current Assets 90,280 68,318
Other Assets
Investments in marketable securities 22,131 17,836
Funding for:
Workers' compensation benefits 13,863 13,782
Mine closing reserves 12,606 12,062
Deferred income taxes 20,734 12,664
Miscellaneous 18,575 18,766
--------- ---------
87,909 75,110
Property, plant, and equipment 596,045 576,757
Less allowances for depreciation, depletion and amortization 247,427 213,910
--------- ---------
348,618 362,847
--------- ---------
$ 526,807 $ 506,275
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 17,064 $ 13,219
Accrued liabilities 22,985 17,117
Income taxes payable 3,624 145
Current maturities of long-term debt 18,312 5,095
--------- ---------
Total Current Liabilities 61,985 35,576
Other Liabilities and Long-Term Debt
Other postretirement benefits 88,457 77,397
Workers' compensation benefits 45,048 39,482
Mine closing reserves 25,321 24,543
Black lung benefits 9,128 9,787
Deferred income taxes 13,429 13,675
Miscellaneous 3,392 3,181
Long-term debt (less current maturities) 75,744 98,565
--------- ---------
260,519 266,630
Shareholders' Equity
Common stock issued, 3,989,121 shares 59,837 59,837
Capital in excess of stated value 133,125 133,125
Retained earnings 39,942 39,967
Accumulated other comprehensive income (loss) (796) (1,055)
--------- ---------
232,108 231,874
Less treasury stock at cost - 548,137 shares 27,805 27,805
--------- ---------
204,303 204,069
--------- ---------
Total Liabilities & Shareholders' Equity $ 526,807 $ 506,275
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-22
<PAGE>
ROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for outstanding shares and per share amounts)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Production Tonnage 4,905 2,096
=========== ===========
Sales Tonnage 5,408 2,840
=========== ===========
Sales $ 162,332 $ 101,784
Other Income:
Gain on sale of property 4,717 10,253
Interest and dividends 1,570 1,759
Net investment gains (losses) 13 (173)
Miscellaneous 718 721
----------- -----------
169,350 114,344
Costs and Expenses:
Cost of sales 145,196 91,121
Depreciation, depletion and amortization 18,373 6,711
Selling, general, and administrative 3,420 3,212
Interest 4,798 874
Write-down of property, plant and equipment -- 17,047
Miscellaneous 563 1,301
----------- -----------
172,350 120,266
----------- -----------
Income (Loss) Before Income Taxes (3,000) (5,922)
Provision (Credit) for Income Taxes (2,850) (8)
----------- -----------
Net Income (Loss) $ (150) $ (5,914)
=========== ===========
Net Income (Loss) Per Share $ (.04) $ (1.72)
=========== ===========
Average shares outstanding used in the computation
of per share amounts 3,440,984 3,440,984
Shares issued and outstanding at June 30 3,440,984 3,440,984
Cash dividends declared per share $ .30 $ .30
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-23
<PAGE>
ROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended June 30,
-------------------------
1998 1997
--------- ---------
(unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (150) $ (5,914)
Adjustments for non-cash items 7,448 12,151
Changes in certain assets and liabilities
providing cash 4,776 2,230
--------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 12,074 8,467
--------- ---------
INVESTING ACTIVITIES
Proceeds from investment activity 2,700 38,400
Acquisition of investments (4,489) (2,775)
Acquisition and development of property,
plant and equipment (11,763) (16,473)
Proceeds from sale of property, plant
and equipment 5,259 11,040
--------- ---------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (8,293) 30,192
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings 46,347 83,625
Payments on borrowings (47,127) (122,322)
Cash dividends paid (1,548) (1,548)
Debt issuance costs -- (2,263)
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (2,328) (42,508)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,453 (3,849)
Cash and cash equivalents at beginning of year 37,026 34,466
--------- ---------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 38,479 $ 30,617
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of capitalized interest) $ 4,750 $ 559
========= =========
Income taxes paid $ 5,838 $ 315
========= =========
Noncash financing and investing activities --
capital leases and seller financing of
equipment to be leased $ -- $ 11,704
========= =========
See accompanying notes to consolidated condensed financial statements.
F-24
<PAGE>
ROCHESTER & PITTSBURGH COAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1998
Note A - Basis for Presentation
- -------------------------------
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six-month period ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
The Company's subsidiary, Eighty-Four, completed development of its Mine
No. 84 in October 1997. Prior to completion of development, Eighty-Four's
provision for income taxes, certain real estate tax expenses and certain general
and administration expenses, which were not considered costs of mine
development, were included in the results in the accompanying Consolidated
Condensed Statements of Operations.
Note B - Comprehensive Income
- -----------------------------
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes new rules for the reporting and display of comprehensive income and
its components. The adoption of this Statement had no impact on the Company's
results of operations or shareholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
The components of comprehensive income (loss), net of related tax, for the
six-month periods ended June 30, 1998 and 1997 are as follows:
Six Months Ended June 30,
-------------------------
1998 1997
------- -------
(in thousands)
Net income (loss) $ (150) $(5,914)
Unrealized gains (losses) on securities 64 (141)
Foreign currency translation adjustments (94) (28)
------- -------
Comprehensive income (loss) $ (180) $(6,083)
======= =======
F-25
<PAGE>
The components of accumulated other comprehensive income (loss), net of
related tax, at June 30, 1998 and June 30, 1997 are as follows:
1998 1997
------- -------
(in thousands)
Unrealized gains (losses) on securities $ 474 $ --
Foreign currency translation adjustments (1,270) (1,055)
------- -------
Accumulated other comprehensive income (loss) $ (796) $(1,055)
======= =======
Note C - Newly issued accounting standards
- ------------------------------------------
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosure about Pensions and other Postretirement Benefits," was
issued. Statement 132 does not change the recognition or measurement of pension
or postretirement benefit plans, but standardizes disclosure requirements for
pensions and other postretirement benefits, eliminates unnecessary disclosure
and requires additional information. Statement 132 is required to be adopted in
1998 and restatement of disclosures for prior periods provided for comparative
purposes is required. The application of Statement 132 is not expected to have a
material effect on the disclosures included in the consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of Statement 133 will have a significant effect on earnings or the
financial position of the Company.
F-26
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
Among
CONSOL INC.,
CONSOL COMMONWEALTH INC.
and
ROCHESTER & PITTSBURGH COAL COMPANY
Dated as of May 28, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
Page
----
1.01 The Merger............................................................1
1.02 Closing...............................................................2
1.03 Effective Time........................................................2
1.04 Articles of Incorporation and By-laws of the Surviving Corporation....2
1.05 Directors.............................................................2
1.06 Officers..............................................................2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.01 Capital Stock of Merger Sub...........................................3
2.02 Cancellation of Treasury Stock and Parent Owned Stock.................3
2.03 Conversion of Company Common Stock....................................3
2.04 Shares of Dissenting Shareholders.....................................3
2.05 Exchange of Certificates..............................................4
2.06 Stock Transfer Books..................................................6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.01 Organization..........................................................6
3.02 Capitalization........................................................7
3.03 Authority.............................................................7
3.04 Noncontravention; Filings and Consents................................8
3.05 Company SEC Documents; Financial Statements...........................9
3.06 Information Supplied..................................................9
3.07 Absence of Certain Changes or Events..................................9
3.08 Litigation...........................................................10
3.09 Tax Matters..........................................................10
3.10 Compliance with Applicable Laws......................................11
3.11 Voting Requirements..................................................11
3.12 Opinion of Financial Advisor.........................................12
3.13 Brokers..............................................................12
3.14 Disclosure...........................................................12
3.15 CERCLA Notice........................................................12
3.16 Environmental Matters................................................12
i
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Page
----
4.01 Organization.........................................................12
4.02 Capitalization of Merger Sub.........................................13
4.03 Authority............................................................13
4.04 Noncontravention; Filings and Consents...............................13
4.05 Information Supplied.................................................14
4.06 Brokers..............................................................14
4.07 Disclosure...........................................................14
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.01 Conduct of Business of the Company...................................15
5.02 Conduct of Business of Parent........................................17
5.03 Other Actions........................................................18
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01 Company Shareholders' Meeting........................................18
6.02 Proxy Statement......................................................18
6.03 Information; Confidentiality.........................................19
6.04 Approvals and Consents; HSR Filings..................................19
6.05 Company Benefit Plans................................................20
6.06 Fees and Expenses....................................................21
6.07 Notification.........................................................22
6.08 Obligations of Merger Sub............................................22
6.09 Public Announcements.................................................22
ARTICLE VII
CONDITIONS TO THE MERGER
7.01 Conditions to the Obligations of Each Party..........................22
7.02 Conditions to the Obligations of Parent and Merger Sub...............23
7.03 Conditions to the Obligations of the Company.........................23
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.01 Termination..........................................................24
8.02 Effect of Termination................................................25
ii
<PAGE>
Page
----
8.03 Amendment............................................................25
8.04 Extension; Waiver....................................................25
ARTICLE IX
GENERAL PROVISIONS
9.01 Nonsurvival of Representations.......................................26
9.02 Exclusive Remedy.....................................................26
9.03 Notices..............................................................26
9.04 Definitions..........................................................27
9.05 Interpretation.......................................................28
9.06 Counterparts.........................................................28
9.07 Entire Agreement; Third-Party Beneficiaries..........................29
9.08 Assignment...........................................................29
9.09 Governing Law........................................................29
9.10 Enforcement..........................................................29
SCHEDULES
3.01 Subsidiaries
3.02 Pledged Shares
3.04 Consents
3.07 Certain Changes or Events
3.08 Litigation
3.09 Tax Matters
5.01(f) Properties for Sale
5.01(i) Discharge of Liabilities
5.01(l) Capital Expenditures
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of May 28, 1998 among CONSOL
Inc., a Delaware corporation ("Parent"), CONSOL Commonwealth Inc., a
Pennsylvania corporation, a direct or indirect wholly owned subsidiary of Parent
("Merger Sub"), both of 1800 Washington Road, Pittsburgh, Pennsylvania 15241 and
Rochester & Pittsburgh Coal Company, a Pennsylvania corporation (the "Company")
of 655 Church Street, Indiana, Pennsylvania 15701.
WITNESSETH:
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and
the Company have approved the acquisition of the Company by Parent upon the
terms and subject to the conditions set forth in this Agreement and Plan of
Merger (this "Agreement");
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and
the Company have approved the merger of Merger Sub with and into the Company
(the "Merger") upon the terms and subject to the conditions set forth in this
Agreement, whereby each issued and outstanding share of common stock, no par
value, of the Company ("Company Common Stock"), other than shares owned directly
or indirectly by Parent or by the Company, will be converted into the right to
receive cash; and
WHEREAS, Parent, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe certain conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Parent, Merger Sub and the Company hereby agree as follows:
ARTICLE I
THE MERGER
1.01 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Pennsylvania Business
Corporation Law of 1988, as amended (the "PBCL"), Merger Sub shall be merged
with and into the Company at the Effective Time (as defined in Section 1.03) of
this Agreement. Following the Merger, the separate corporate existence of Merger
Sub shall cease, and the Company shall continue as the surviving corporation
(the "Surviving Corporation") and shall succeed to and assume all the rights,
assets, liabilities and obligations of Merger Sub in accordance with the PBCL.
1
<PAGE>
1.02 Closing. The closing of the Merger (the "Closing") shall take
place at 10:00 a.m. on a date to be specified by the parties which shall be no
later than the second business day after the satisfaction or waiver of the
conditions set forth in Article VII (the "Closing Date") at the offices of
Duane, Morris & Heckscher LLP, 4200 One Liberty Place, Philadelphia,
Pennsylvania 19103, unless another date or place is agreed to in writing by the
parties hereto.
1.03 Effective Time. On the Closing Date, or as soon as practicable
thereafter, the parties shall execute and file in the offices of the Corporation
Bureau of the Commonwealth of Pennsylvania appropriate articles of merger or
other appropriate documents (in any such case, the "Articles of Merger")
executed in accordance with the relevant provisions of the PBCL and shall make
all other filings or recordings required under the PBCL. The "Effective Time" or
"Effective Date" shall be the date of filing the Articles of Merger, or the
effective date specified therein, whichever is later.
1.04 Articles of Incorporation and By-laws of the Surviving
Corporation.
(a) The Articles of Incorporation of Merger Sub as in effect
immediately prior to the Effective Time shall become the Articles of
Incorporation of the Surviving Corporation after the Effective Time, and
thereafter may be amended as provided therein and as permitted by law and this
Agreement.
(b) The By-laws of Merger Sub as in effect immediately prior
to the Effective Time shall become the By-laws of the Surviving Corporation
after the Effective Time, and thereafter may be amended as provided therein and
as permitted by law and this Agreement.
1.05 Directors. The directors of Merger Sub immediately prior to the
Effective Time shall become the directors of the Surviving Corporation on the
Effective Time, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
1.06 Officers. The officers of Merger Sub immediately prior to the
Effective Time shall become the officers of the Surviving Corporation on the
Effective Time, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.01 Capital Stock of Merger Sub. As of the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
Company
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Common Stock or any shares of capital stock of Merger Sub, each share of common
stock, par value $.01 per share, of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into and become one
fully paid and nonassessable share of common stock, par value $.01 per share, of
the Surviving Corporation.
2.02 Cancellation of Treasury Stock and Parent Owned Stock. As of the
Effective Time, by virtue of the Merger and without any action on the part of
the holder of any shares of Company Common Stock or any shares of capital stock
of Merger Sub, each share of Company Common Stock issued and held immediately
prior to the Effective Time in the Company's treasury or by any of the Company's
direct or indirect wholly owned subsidiaries and each share of Company Common
Stock that is owned by Parent, Merger Sub or any other subsidiary of Parent
shall automatically be canceled and retired and shall cease to exist, and no
consideration shall be delivered in exchange therefor.
2.03 Conversion of Company Common Stock.
(a) As of the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any shares of Company Common
Stock or any shares of capital stock of Merger Sub, subject to the provisions of
Section 2.04 with respect to dissenters' rights, if any, each share of Company
Common Stock issued and outstanding immediately prior to the Effective Time
other than (x) Dissenting Shares (as defined in Section 2.04) and (y) shares to
be canceled in accordance with Section 2.02 ("Canceled Shares") shall be
converted into the right to receive in cash from Parent, without interest, an
amount equal to $43.50 (the "Merger Consideration").
(b) As of the Effective Time, all such shares of Company
Common Stock shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of a certificate
representing any such shares of Company Common Stock shall cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration.
2.04 Shares of Dissenting Shareholders. Notwithstanding anything in
this Agreement to the contrary, any shares of Company Common Stock that are
issued and outstanding as of the Effective Time and that are held by a
shareholder who has exercised and has not failed to perfect or effectively
withdrawn or lost his right (to the extent such right is available by law) to
demand and to receive the "fair value" of such shares (the "Dissenting Shares")
under the PBCL shall not be converted into the right to receive the Merger
Consideration unless and until the holder shall have failed to perfect, or shall
have effectively withdrawn or lost, his right to dissent from the Merger under
the PBCL and to receive such consideration as may be determined to be due with
respect to such Dissenting Shares pursuant to and subject to the requirements of
the PBCL. If any such holder shall have so failed to perfect or have effectively
withdrawn or lost such right, each share of such holder's Company Common Stock
shall thereupon be deemed to have been converted into and to have become, as of
the Effective Time, the right to receive, without any interest thereon, the
Merger Consideration. The Company shall give Parent
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(i) prompt notice of any notice or demand for appraisal or payment for shares of
Company Common Stock received by the Company and (ii) the opportunity to
participate in and direct all negotiations and proceedings with respect to any
such demands or notices. The Company shall not, without the prior written
consent of Parent, make any payment with respect to, or settle, offer to settle
or otherwise negotiate, any such demands.
2.05 Exchange of Certificates.
(a) Exchange Agent. From and after the Effective Time, Parent
shall make available to a bank or trust company designated by Parent and
satisfactory to the Company (the "Exchange Agent") cash for the benefit of the
holders of shares of Company Common Stock (other than Dissenting Shares and
Canceled Shares) in the amount required to be exchanged for shares of Company
Common Stock in the Merger pursuant to Section 2.03 (such cash hereinafter
referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to
irrevocable instructions, deliver the cash pursuant to Section 2.03 out of the
Exchange Fund. Except as contemplated by Section 2.05(g), the Exchange Fund
shall not be used for any other purpose.
(b) Exchange Procedures. As promptly as practicable after the
Effective Time, Parent shall cause the Exchange Agent to mail to each holder of
a certificate or certificates (to the extent such certificates have not already
been submitted to the Exchange Agent) which immediately prior to the Effective
Time represented outstanding shares of Company Common Stock other than
Dissenting Shares and Canceled Shares (the "Certificates") (i) a letter of
transmittal which shall be in customary form and shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for cash.
(c) Exchange of Certificates. Upon surrender to the Exchange
Agent of a Certificate for cancellation, together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, and such other documents as may be reasonably required pursuant to such
instructions, the holder of such Certificate shall be entitled to receive in
exchange therefor a check in the amount equal to the cash which such holder has
the right to receive pursuant to the provisions of this Article II and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of shares of Company Common Stock which is not registered
in the transfer records of the Company, the Merger Consideration may be issued
to a transferee if the Certificate representing such shares of Company Common
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.05, each Certificate shall be deemed at all times after the Effective Time to
represent only the right to receive upon such surrender the Merger Consideration
with respect to the shares of Company Common Stock formerly represented thereby.
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(d) No Further Rights in Company Common Stock. All cash paid
upon conversion of the shares of Company Common Stock in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock.
(e) Termination of Exchange Fund. To the extent permitted by
applicable law, any portion of the Exchange Fund which remains undistributed to
the holders of Company Common Stock on the second anniversary of the Effective
Time shall be delivered to Parent, upon demand, and any holders of Company
Common Stock who have not theretofore complied with this Article II shall
thereafter look only to Parent for the Merger Consideration. Any portion of the
Exchange Fund remaining unclaimed by holders of shares of Company Common Stock
as of a date which is immediately prior to such time as such amounts would
otherwise escheat to or become property of any government entity shall, to the
extent permitted by applicable law, become the property of Parent free and clear
of any claims or interest of any person previously entitled thereto.
(f) No Liability. None of the Exchange Agent, Parent nor the
Surviving Corporation shall be liable to any holder of shares of Company Common
Stock for any cash delivered to a public official pursuant to any abandoned
property, escheat or similar law.
(g) Withholding Rights. The Exchange Agent shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of Company Common Stock such amounts as it is
required to deduct and withhold with respect to the making of such payment under
the Internal Revenue Code of 1986, as amended (the "Code") or any provision of
state or local tax law. To the extent that amounts are so withheld by the
Surviving Corporation or Parent, as the case may be, such withheld amounts shall
be treated for all purposes of this Agreement as having been paid to the holder
of the shares of Company Common Stock in respect of which such deduction and
withholding was made by the Surviving Corporation or Parent, as the case may be.
(h) Lost Certificates. If any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such person of a bond, in
such reasonable amount as the Surviving Corporation may direct, as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration.
(i) Further Assurances. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the Merger Sub or the
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Company acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger or otherwise to carry out this Agreement, the
officers of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of the Merger Sub and the Company or
otherwise, all such deeds, bills of sale, assignments and assurances and to take
and do, in such names and on such behalves or otherwise, all such other actions
and things as may be necessary or desirable to vest, perfect or confirm any and
all right, title and interest in, to and under such rights, properties or assets
in the Surviving Corporation or otherwise to carry out the purposes of this
Agreement.
2.06 Stock Transfer Books. At the Effective Time, the stock transfer
books of the Company shall be closed and there shall be no further registration
of transfers of shares of Company Common Stock thereafter on the records of the
Company. From and after the Effective Time, the holders of Certificates
representing shares of Company Common Stock outstanding immediately prior to the
Effective Time shall cease to have any rights with respect to such shares of
Company Common Stock, except as otherwise provided herein or by law. On or after
the Effective Time, any Certificates presented to the Exchange Agent or Parent
for any reason shall be converted into cash as provided herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub
as follows:
3.01 Organization. Each of the Company and its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority and all necessary government approvals to own, lease and operate
its properties and to carry on its business as now being conducted, except where
the failure to be so organized, existing and in good standing or to have such
power, authority and governmental approvals would not have a material adverse
effect. The Company and each of its subsidiaries is duly qualified or licensed
to do business and in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except where the failure to be
so duly qualified or licensed and in good standing would not have a material
adverse effect. The Company has made available to Parent complete and correct
copies of its Restated Articles of Incorporation, as amended, and By-laws and
the articles of incorporation and by-laws or other comparable charter or
organizational documents of its subsidiaries, in each case as amended to the
date of this Agreement. All the outstanding shares of capital stock of each
material subsidiary of the Company are owned by the Company or by another wholly
owned subsidiary of the Company, and, except as set forth in the Company SEC
Documents (as hereafter defined), free and clear of all liens and are duly
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authorized, validly issued, fully paid and nonassessable. A list of all
subsidiaries of the Company is attached hereto as Schedule 3.01.
3.02 Capitalization. The authorized capital stock of the Company
consists of 5,000,000 shares of Company Common Stock. As of the date of this
Agreement, (i) 3,440,984 shares of Company Common Stock were issued and
outstanding and (ii) 548,137 shares of Company Common Stock were held in the
treasury of the Company. All the outstanding shares of Company Common Stock are
duly authorized, validly issued, fully paid and nonassessable and free of any
pre-emptive rights in respect thereof. As of the date hereof, no bonds,
debentures, notes or other indebtedness of the Company convertible into voting
securities of the Company are issued or outstanding and, except as set forth
above, (i) no shares of capital stock or other voting securities of the Company
are outstanding, (ii) no equity equivalents, interests in the ownership or
earnings of the Company or other similar rights are outstanding and (iii) there
are no existing options, warrants, calls, subscriptions or other rights or
agreements or commitments relating to the capital stock of the Company or any of
its subsidiaries or obligating the Company or any of its subsidiaries to issue,
transfer or sell any shares of capital stock or other equity interest in the
Company or any of its subsidiaries or obligating the Company or any of its
subsidiaries to grant, extend or enter into any such option, warrant, call,
subscription or other right, agreement or commitment. As of the date of this
Agreement, there are no outstanding contractual obligations of the Company or
any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company or any of its subsidiaries, except for the pledge
of shares of capital stock of certain of the Company's subsidiaries listed on
Schedule 3.02 hereto.
3.03 Authority. The Company has the requisite corporate power and
authority to execute and deliver this Agreement and, subject to the requisite
approval of this Agreement by the holders of the outstanding shares of Company
Common Stock, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of the Company, subject to the requisite
approval of this Agreement by the holders of the outstanding shares of Company
Common Stock. This Agreement has been duly executed and delivered by the Company
and, assuming this Agreement constitutes the valid and binding obligation of
Parent and Merger Sub, constitutes the valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
and similar laws, now or hereafter in effect, affecting creditors' rights and
remedies and to general principles of equity.
3.04 Noncontravention; Filings and Consents.
(a) Except as set forth in Schedule 3.04 hereto, the execution
and delivery of this Agreement by the Company do not, and the consummation of
the transactions contemplated by this Agreement and compliance with the
provisions of this Agreement
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will not, conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation, or acceleration of any obligation or to loss of a
material benefit under, or result in the creation of any lien upon any of the
properties or assets of the Company or any of its subsidiaries under (i) the
Restated Articles of Incorporation, as amended, or By-laws of the Company or the
comparable charter or organizational documents of any of its subsidiaries, (ii)
any loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable to
the Company or any of its subsidiaries or their respective properties or assets
or (iii) subject to the governmental filings and other matters referred to in
paragraph (b) below, any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to the Company or any of its subsidiaries or their
respective properties or assets, other than, in the case of clauses (ii) and
(iii), any such conflicts, violations, defaults, rights or liens that
individually or in the aggregate would not (x) impair in any material respect
the ability of the Company to perform its obligations under this Agreement or
(y) prevent or impede, in any material respect, the consummation of the
transactions contemplated by this Agreement.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any federal, state or local government
or any court, administrative or regulatory agency or commission or other
governmental authority or agency (a "Governmental Entity") is required by the
Company or any of its subsidiaries in connection with the execution and
delivery of this Agreement by the Company or the consummation by the Company of
the transactions contemplated by this Agreement, except for (i) the filing of a
premerger notification and report form by the Company under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
(ii) the filing with the Securities and Exchange Commission (the "SEC") of (x)
the Proxy Statement (as defined in Section 6.02) and (y) such reports under
Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the transactions
contemplated by this Agreement, (iii) the filing of the Articles of Merger with
the Corporation Bureau of the Commonwealth of Pennsylvania and the Certificate
of Merger with the Secretary of State of the State of Delaware and appropriate
documents with the relevant authorities of other states in which the Company is
qualified to do business, (iv) such as may be required by any applicable state
securities or "blue sky" laws, (v) notice of consummation of the Merger to the
Pennsylvania Department of Environmental Protection (the "DEP") and (vi) such
other consents, approvals, orders, authorizations, registrations, declarations
and filings the failure of which to be obtained or made would not, individually
or in the aggregate, (x) impair in any material respect the ability of the
Company to perform its obligations under this Agreement or (y) prevent or
impede, in any material respect, the consummation of the transactions
contemplated by this Agreement.
3.05 Company SEC Documents; Financial Statements. The Company has
filed all required reports, proxy statements, forms, and other documents,
including any amendments thereto, with the SEC since December 31, 1994 and prior
to the date of this
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Agreement (the "Company SEC Documents"). As of their respective dates, (i) the
Company SEC Documents complied, and all similar documents filed prior to the
Closing Date will comply, in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act,
as the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such Company SEC Documents and (ii) none of the Company
SEC Documents contained, nor will any similar document filed after the date of
this Agreement contain, any untrue statement of a material fact or omitted, or
will omit, to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of the Company
included in the Company SEC Documents (including any similar documents filed
after the date of this Agreement): (i) comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, (ii) have been prepared in
accordance with generally accepted accounting principles (except, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved except as may be indicated in the
notes thereto and (iii) fairly present the consolidated financial position of
the Company and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended. Neither the Company nor any of its subsidiaries has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by generally accepted accounting principles to be set forth on a
consolidated balance sheet or financial statement of the Company and its
subsidiaries or in the notes thereto which have not been so noted or disclosed
to Parent.
3.06 Information Supplied. None of the information to be supplied by
the Company expressly for inclusion or incorporation by reference in the Proxy
Statement will, (i) on the date the Proxy Statement (as hereafter defined) is
first mailed to the shareholders of the Company and (ii) at the time of the
Company Shareholders' Meeting (as hereafter defined), contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy Statement
will comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder.
3.07 Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Documents or in Schedule 3.07 hereto or as contemplated by this
Agreement, since February 28, 1998, the Company and its subsidiaries have
conducted their respective businesses only in the ordinary course, and there has
not been (i) any material adverse change in the Company, (ii) any declaration,
setting aside or payment of any dividend or other distribution with respect to,
or repurchase or redemption of, the Company's capital stock other than the
dividends on the shares of Company Common Stock not in excess of the amount of
dividends declared, paid or set aside in the comparable year-earlier period,
(iii) any split, combination or reclassification of any of the Company's capital
stock or any issuance or the authorization of any issuance of any other
securities
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in respect of, in lieu of or in substitution for shares of its capital stock,
(iv) (A) any granting by the Company or any of its subsidiaries to any officer
of the Company or any of its subsidiaries of any increase in compensation,
except in the ordinary course of business consistent with past practice, (B) any
granting by the Company or any of its subsidiaries to any such officer any
increase in severance or termination pay, except as part of a standard
employment package to any person promoted or hired, (C) except termination
arrangements in the ordinary course of business consistent with past practice
with employees other than any executive officer of the Company, any entry by the
Company or any of its subsidiaries into any employment, severance or termination
agreement with any such officer or (D) any material modification to any existing
Company Benefit Plans (as hereafter defined) other than such modifications
required by law, except as listed on Schedule 3.07 hereto, (v) any damage,
destruction or loss, whether or not covered by insurance, that has or reasonably
would be expected to have a material adverse effect on the Company or (vi) any
change in accounting methods, principles or practices by the Company materially
affecting its assets, liabilities or business, except insofar as may have been
required by a change in generally accepted accounting principles. Since
September 30, 1996, the Company's dividends to shareholders have not been in
excess of $.15 per share of Company Common Stock per quarter.
3.08 Litigation. Except as set forth on Schedule 3.08 hereto, there
are no suits, actions or proceedings pending or, to the knowledge of the
Company, threatened against the Company or any of its subsidiaries that would
reasonably be expected to have, individually or in the aggregate, a material
adverse effect. Except as set forth on Schedule 3.08 hereto, neither the
Company nor any of its subsidiaries is subject to any outstanding order, writ,
injunction or decree that would reasonably be expected to have a material
adverse effect.
3.09 Tax Matters.
(a) Except as set forth on Schedule 3.09 hereto, each of the
Company and each of its subsidiaries has (i) filed, or caused to be filed, with
the appropriate taxing authorities all Tax Returns required to be filed on or
before the date hereof, and such Tax Returns are true, correct and complete in
all material respects and (ii) paid, or caused to be paid, all Taxes shown to be
due and payable on such Tax Returns or established adequate reserves in
accordance with generally accepted accounting principles for the payment of all
such Taxes.
(b) Except as set forth on Schedule 3.09 hereto, neither the
Company nor any of its subsidiaries has (i) received any notice of deficiency or
assessment from any taxing authorities with respect to liability for Taxes that
have not been fully paid or finally settled or (ii) granted any requests,
agreements, consents or waivers to extend the statutory period of limitations
applicable to the assessment of any Taxes.
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(c) Except as set forth on Schedule 3.09 hereto, no taxing
authority is now asserting, or to the knowledge of the Company is threatening to
assert, any deficiency or assessment for additional Taxes of the Company or any
of its subsidiaries.
(d) No payment which will, or may, be made to any employee,
director, officer or agent of the Company or any of its subsidiaries will
constitute an "excess parachute payment" within the meaning of Section 280G of
the Code.
For purposes of this Agreement, "Taxes" means all federal, state,
foreign and local taxes, levies and other assessments, including, without
limitation, all income, sales, use, transfer, profits, capital gains,
withholding, payroll, severance and reclamation, black lung, real property and
personal property and any other taxes, assessments and similar charges in the
nature of a tax (including interest and penalties attributable thereto) imposed
by any governmental authority; "Tax Returns" means any return, report,
information return or other document (including relating or supporting
information) relating to Taxes.
3.10 Compliance with Applicable Laws. Except as disclosed in the
Company SEC Documents, to the knowledge of the Company, since January 1, 1996
neither the Company nor any of its subsidiaries has violated or failed to comply
with any statute, law, permit, regulation, rule, judgment, decree or order of
any Governmental Entity applicable to its business or operations, except for
violations and failures to comply that would not, individually or in the
aggregate, reasonably be expected to result in a material adverse effect. The
conduct of the business of the Company and its subsidiaries is in conformity
with all federal, state and local governmental and regulatory requirements
applicable to its business and operations, except where such nonconformities
would not, in the aggregate, reasonably be expected to result in a material
adverse effect. The Company and its subsidiaries have all permits, licenses and
franchises from governmental agencies required to conduct their businesses as
now being conducted, except for such permits, licenses and franchises the
absence of which would not, in the aggregate, reasonably be expected to result
in a material adverse effect.
3.11 Voting Requirements. The affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote
approving this Agreement is the only vote of the holders of any class of the
Company's capital stock necessary to approve this Agreement and the transactions
contemplated by this Agreement.
3.12 Opinion of Financial Advisor. The Company has received an
opinion from J.P. Morgan Securities Inc. to the effect that, as of the date of
this Agreement, the consideration to be received in the Merger by the holders of
Company Common Stock is fair to the holders of Company Common Stock from a
financial point of view.
3.13 Brokers. No broker, investment banker, financial advisor or
other person, other than J.P. Morgan Securities Inc., the fees and expenses of
which will be paid by the
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Company, is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company.
3.14 Disclosure. No representation or warranty hereunder or
information contained in the financial statements referred to in Section 3.05,
the Schedules or any certificate, statement, or other document delivered by the
Company hereunder contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
therein or herein, in light of the circumstances in which they were made, not
misleading.
3.15 CERCLA Notice. Neither the Company nor any of its subsidiaries
has received any request for information with respect to or been notified that
it is a potentially responsible party for any contaminated site under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"), or any similar state statute.
3.16 Environmental Matters. To the knowledge of the Company, neither
the Company nor any of its subsidiaries has stored, disposed of or released any
hazardous or toxic substance in violation of CERCLA, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act or any other federal or
state law, rule or regulation which protects the environment.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby jointly and severally represent and
warrant to the Company as follows:
4.01 Organization. Each of Parent and Merger Sub and Parent's
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority and all necessary government approvals
to own, lease and operate its properties and to carry on its business as now
being conducted, except where the failure to be so organized, existing and in
good standing or to have such power, authority and governmental approvals would
not have a material adverse effect. Each of Parent and Merger Sub and each of
Parent's subsidiaries is duly qualified or licensed to do business and in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not have a material adverse effect. All
outstanding shares of capital stock of each subsidiary of Parent are owned by
Parent or by another direct or indirect wholly owned
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subsidiary of Parent, free and clear of all liens and are duly authorized,
validly issued, fully paid and nonassessable.
4.02 Capitalization of Merger Sub. The authorized capital stock of
Merger Sub consists of 1,000 shares of common stock, par value $.01 per share,
all of which are duly authorized, validly issued, fully paid and nonassessable
and free of any pre-emptive rights in respect thereof and all of which are owned
directly or indirectly by Parent.
4.03 Authority. Each of Parent and Merger Sub has the requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement by Parent and Merger Sub and the consummation by
Parent and Merger Sub of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Merger
Sub and does not require the approval of the shareholders of Parent. This
Agreement has been duly executed and delivered by Parent and Merger Sub and,
assuming this Agreement constitutes the valid and binding obligation of the
Company, constitutes the valid and binding obligation of Parent and Merger Sub,
enforceable against Parent and Merger Sub in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and
similar laws, now or hereafter in effect, affecting creditors' rights and
remedies and to general principles of equity.
4.04 Noncontravention; Filings and Consents.
(a) The execution and delivery of this Agreement by either
Parent or Merger Sub do not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation, or acceleration of any obligation or to loss
of a material benefit under, or result in the creation of any lien upon any of
the properties or assets of Parent or Merger Sub or any of Parent's other
subsidiaries under (i) the Certificate or Articles of Incorporation or By-laws
of either Parent or Merger Sub or the comparable charter or organizational
documents of any of Parent's other subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Parent or
Merger Sub or any of Parent's other subsidiaries or their respective properties
or assets or (iii) subject to the governmental filings and other matters
referred to in paragraph (b) below, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Parent or Merger Sub or any of
Parent's other subsidiaries or their respective properties or assets, other
than, in the case of clauses (ii) and (iii), any such conflicts, violations,
defaults, rights or liens that individually or in the aggregate would not (x)
impair in any material respect the ability of Parent or Merger Sub to perform
their respective obligations under this Agreement or (y) prevent or impede, in
any material respect, the consummation of the transactions contemplated by this
Agreement.
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(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, is required
by Parent or Merger Sub or any of Parent's other subsidiaries in connection with
the execution and delivery of this Agreement by Parent or Merger Sub or the
consummation by Parent or Merger Sub of the transactions contemplated by this
Agreement, except for (i) the filing of a premerger notification and report form
by Parent and Merger Sub under the HSR Act, (ii) the filing of the Articles of
Merger with the Corporation Bureau of the Commonwealth of Pennsylvania and
appropriate documents with the relevant authorities of other states in which
Parent is qualified to do business, (iii) such as may be required by any
applicable state securities or "blue sky" laws, (iv) notice of consummation of
the Merger to the DEP and (v) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of which to
be obtained or made would not, individually or in the aggregate, (x) impair in
any material respect the ability of Parent or Merger Sub to perform their
respective obligations under this Agreement or (y) prevent or impede, in any
material respect, the consummation of the transactions contemplated by this
Agreement.
4.05 Information Supplied. None of the information supplied or to be
supplied by Parent or Merger Sub expressly for inclusion or incorporation by
reference in the Proxy Statement will, (i) on the date the Proxy Statement is
first mailed to the shareholders of the Company and (ii) at the time of the
Company Shareholders' Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
4.06 Brokers. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent or Merger
Sub.
4.07 Disclosure. No representation or warranty hereunder or
information contained in any certificate, statement, or other document delivered
by Parent hereunder contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
therein or herein, in light of the circumstances in which they were made, not
misleading.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.01 Conduct of Business of the Company. Prior to the Effective Time,
the Company agrees (except as expressly contemplated or permitted by this
Agreement, as set forth herein or to the extent that Parent shall otherwise
consent in writing) as follows:
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(a) Ordinary Course. The Company and its subsidiaries shall
carry on their respective businesses in the usual, regular and ordinary course
in substantially the same manner as heretofore conducted, shall preserve intact
their present business organizations and shall use commercially reasonable
efforts to keep available the services of their present officers and employees
and preserve their relationships with customers, suppliers and others having
business dealings with the Company and its subsidiaries.
(b) Dividends; Changes in Stock. Except for the payment on
June 1, 1998 of a cash dividend of $.15 per share declared on May 4, 1998, the
Company shall not (i) declare or pay any quarterly dividends on or make other
distributions in respect of any of its capital stock, (ii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or (iii) repurchase, redeem or otherwise
acquire, or permit any subsidiary to repurchase, redeem or otherwise acquire,
any shares of capital stock.
(c) Issuance of Securities. The Company shall not, and it
shall not permit any of its subsidiaries to, issue, deliver or sell or authorize
or propose the issuance, delivery or sale of, any shares of its capital stock of
any class or any securities convertible into, or any rights, warrants, calls,
subscriptions or options to acquire, any such shares or convertible securities,
or any other ownership interest other than issuances by a wholly owned
subsidiary of the Company of its capital stock to the Company.
(d) Governing Documents. The Company shall not amend or
propose to amend its Restated Articles of Incorporation, as amended, or By-laws.
(e) No Acquisitions. The Company shall not, and it shall not
permit any of its subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof.
(f) No Dispositions. The Company shall not, and it shall not
permit any of its subsidiaries to, sell, lease, encumber or otherwise dispose
of, or agree to sell, lease, encumber or otherwise dispose of, any of its
assets, other than (i) sales of equipment between the Company and its
subsidiaries that do not result in the generation of taxable income on a
consolidated basis in the ordinary course of business, (ii) assets having an
aggregate book value of not more than $100,000 it being understood that this
clause (ii) shall not permit the sale or other disposition of Helvetia Coal
Company and (iii) those properties listed on Schedule 5.01(f) hereto.
(g) Indebtedness. With the exception of indebtedness between
the Company and its subsidiaries, the Company shall not, and it shall not permit
any of its subsidiaries to, incur (which shall include entering into credit
agreements, lines of credit or similar arrangements) any indebtedness for
borrowed money or guarantee any such
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indebtedness or issue or sell any debt securities or warrants or rights to
acquire any debt securities of the Company or any of its subsidiaries or
guarantee any debt securities of others, other than (i) indebtedness outstanding
on February 28, 1998 and (ii) take downs under the Company's and its
subsidiaries' existing credit facilities, provided, however, that at the Closing
Date the sum of the Company's indebtedness and current liabilities (excluding
the current portion of the Company's long-term indebtedness) less the Company's
current assets determined in accordance with generally accepted accounting
principles shall not be greater than the amount thereof at February 28, 1998
plus $12,000,000. For the purpose of this Section 5.01(g), the Company's current
liabilities shall exclude deferred compensation and severance pay payable to
employees of the Company and its subsidiaries in connection with the Merger.
(h) Tax Matters. The Company shall not make, and will not
permit any of its subsidiaries to make, any tax election or settle or compromise
any income tax liability of the Company or of any of its subsidiaries for an
amount in excess of $25,000. The Company shall, before filing or causing to be
filed any material Tax Return of the Company or any of its subsidiaries, consult
with Parent and its advisors as to the positions and elections that may be taken
or made with respect to such return.
(i) Discharge of Liabilities. The Company shall not, and it
shall not permit any of its subsidiaries to, pay, discharge, settle or satisfy
any claim, liabilities or obligations (absolute, asserted or unasserted,
contingent or otherwise) for an amount in excess of $100,000 in the aggregate
(other than settlement of the litigation matters set forth on Schedule 5.01(i)
hereto, payments of accounts payable and accrued liabilities and reductions of
indebtedness in the ordinary course of business of the Company and its
subsidiaries and payments for goods and services under the written agreements in
effect on the date hereof and listed on Schedule 5.01(i) hereto),0. or waive the
benefit of, or agree to modify in any manner, any confidentiality, standstill or
similar agreement to which the Company or any of its subsidiaries is a party.
(j) Contracts. Without the consent of Parent, the Company
shall not, and shall not permit any of its subsidiaries to, enter into, modify,
amend or terminate any contract to which the Company or such subsidiary is a
party or waive, release or assign any material rights or claims thereunder other
than spot purchases of supplies necessary for the operation of the business of
the Company and its subsidiaries in the ordinary course which do not result in
the Company's acquisition of supplies in excess of those that would be consumed
in 30 days of operations in the ordinary course of business. Parent agrees to
respond in not more than two full business days to any request from the Company
to enter into, modify, amend or terminate any contract or to waive, release or
assign any material rights or claims thereunder.
(k) Employee Benefits. The Company shall not, and shall not
permit any of its subsidiaries to, (i) grant any increase in the compensation of
any of its directors, officers or key employees, (ii) pay or agree to pay any
pension, retirement allowance or other employee benefit not required or
contemplated by any of the existing Company
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Benefit Plans as in effect on the date hereof to any director, officer or key
employee, (iii) enter into any new employment, severance or termination
agreement with any such director, officer or key employee or (iv) except as may
be required to comply with applicable law, become obligated under any Company
Benefit Plan which was not in existence on the date hereof or amend any such
plan in existence on the date hereof to enhance the benefits thereunder. As used
herein, "Company Benefit Plans" shall mean all "employee pension benefit plans"
(as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and sometimes referred to herein as "Company Pension
Plans"), "employee welfare benefit plans" (as defined in Section 3(1) of ERISA
and sometimes referred to herein as "Welfare Plans"), and each other plan,
arrangement or policy (written or oral) relating to stock options, stock
purchases, compensation, deferred compensation, severance, fringe benefits or
other employee benefits, in each case maintained, or contributed to, by the
Company or any of its subsidiaries or any other person or entity that, together
with the Company is treated as a single employer under Section 414(b), (c), (m)
or (o) of the Code (each, together with the Company, a "Commonly Controlled
Entity"), for the benefit of any current or former employees, officers, agents
or directors of the Company or any of its subsidiaries.
(l) Capital Expenditures. Except as listed in Schedule 5.01(l)
hereto for the month of June 1998 or as otherwise approved in advance by Parent,
the Company shall not, and shall not permit any of its subsidiaries to,
authorize or make any capital expenditures (excluding capital expenditures for
which commitments exist as of the date of this Agreement) which in the aggregate
exceed $250,000, except for repairs and rebuilding expenditures of less than
$250,000 each necessary to keep existing mining equipment in operation. Parent
agrees to respond in not more than two full business days to any request
received from the Company to make or authorize any capital expenditures which in
the aggregate exceed $250,000 and, in emergency situations, Parent shall reply
to any such request within two hours of Parent's receipt of notification
thereof.
5.02 Conduct of Business of Parent. Prior to the Effective Time,
Parent agrees (except as expressly contemplated or permitted by this Agreement,
or to the extent that the Company shall otherwise consent in writing) as
follows:
(a) Material Acquisitions. CONSOL Energy, Inc. ("CEI") shall
not, and shall not permit any of its subsidiaries other than in conjunction with
the sale of capital stock of CEI held directly or indirectly by DuPont to,
acquire or agree to acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of or equity in, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets if the entering into of a definitive agreement relating to or the
consummation of such acquisition, merger or consolidation would (A) impose any
material delay in the obtaining of, or increase the risk of not obtaining, any
authorizations, consents, orders, declarations or approvals of any Governmental
Entity necessary to consummate the Merger or the expiration or termination of
any applicable waiting period, (B) increase the risk of any Governmental Entity
entering an order prohibiting the consummation of
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the Merger or (C) increase the risk of not being able to remove any such order
on appeal or otherwise.
(b) Other Actions. CEI shall not, and shall not permit any of
its subsidiaries to take other than in conjunction with the sale of capital
stock of CEI held directly or indirectly by DuPont, or fail to take, any other
action which would, or would reasonably be expected to, impede, interfere with,
prevent or materially delay the Merger.
5.03 Other Actions. Each of Parent, Merger Sub and the Company shall
not and shall not permit any of its subsidiaries to, take any action that would,
or that would reasonably be expected to, result in (i) any of its
representations and warranties set forth in this Agreement that are qualified as
to materiality becoming untrue, (ii) any of such representations and warranties
that are not so qualified becoming untrue in any material respect or (iii) any
of the conditions to the Merger set forth in Article VII not being satisfied.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01 Company Shareholders' Meeting. As soon as practicable after the
date hereof, the Company shall call a meeting of its shareholders (the "Company
Shareholders' Meeting") to consider and vote upon the approval of this Agreement
and the Company shall take all reasonable lawful action to solicit such
approval, including, without limitation, timely mailing the Proxy Statement.
6.02 Proxy Statement. As promptly as practicable after the execution
of this Agreement, the Company shall mail a proxy statement to its shareholders
relating to the Company Shareholders' Meeting (the "Proxy Statement"). The
Company will cause the Proxy Statement to comply as to form in all material
respects with the applicable provisions of the Securities Act, the Exchange Act
and the rules and regulations thereunder.
6.03 Information; Confidentiality.
(a) From the date of this Agreement until the mailing of the
Proxy Statement to the Company's shareholders to the extent permitted by law,
the Company shall afford to Parent, and to Parent's officers, employees,
accountants, counsel, financial advisors and other representatives, full and
complete access to all the officers, employees, properties, books, contracts,
commitments and records of the Company and its subsidiaries as Parent may
request in its sole discretion; provided, however, that Parent and its
representatives shall not interfere materially with the operation of the
business of the Company and such investigation and examination shall be
conducted at all times during normal business hours and under reasonable
circumstances. From the date of this
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Agreement until the Effective Date, the Company shall furnish promptly to Parent
(i) a copy of each report, schedule, registration statement and other document
filed by it or its subsidiaries during such period pursuant to the requirements
of applicable federal or state securities laws and (ii) all other material
information concerning its business, properties and current and former personnel
as Parent may reasonably request. Parent will keep such information provided to
it by the Company confidential, except to the extent such information (i) is or
becomes generally available to the public other than as a result of a disclosure
by Parent, (ii) was available to Parent on a nonconfidential basis prior to
disclosure by the Company to Parent or (iii) becomes available to Parent on a
nonconfidential basis from a source other than the Company which is entitled to
disclose it, and except as required by law or as otherwise agreed to by the
Company.
(b) Only to the extent required by law, Parent shall provide
to the Company, and to the Company's officers, employees, accountants, counsel,
financial advisors and other representatives, all information which is necessary
in connection with preparing the Proxy Statement, and during the period prior to
the Effective Time, Parent shall furnish promptly to the Company a copy of each
report, schedule, registration statement and other document filed by it or its
subsidiaries during such period pursuant to the requirements of federal or state
securities laws. The Company will keep such information provided to it by Parent
confidential, except to the extent such information (i) is provided to the
Company for its use in connection with the preparation of the Proxy Statement,
(ii) is or becomes generally available to the public other than as a result of a
disclosure by the Company, (iii) was available to the Company on a
nonconfidential basis prior to disclosure by Parent to the Company or (iv)
becomes available to the Company on a nonconfidential basis from a source other
than Parent which is entitled to disclose it, and except as required by law or
as otherwise agreed to by Parent.
6.04 Approvals and Consents; HSR Filings.
(a) Upon the terms and subject to the conditions set forth in
this Agreement, each of the parties agrees to use all commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective the Merger and
the other transactions contemplated by this Agreement, including (i) the
obtaining of all necessary actions or nonactions, waivers, consents and
approvals from Governmental Entities and the making of all necessary
registrations and filings (including filings with Governmental Entities) and the
taking of all reasonable steps as may be necessary to obtain an approval or
waiver from, or to avoid an action or proceeding by, any Governmental Entity,
(ii) the obtaining of all necessary consents, approvals or waivers from third
parties, including consents under all of the sales contracts of the Company and
its subsidiaries, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, investigating or challenging
this Agreement or the consummation of any of the transactions contemplated by
this Agreement, including seeking to have any stay or temporary restraining
order entered by any court or other Governmental Entity vacated or reversed and
(iv) the execution and
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delivery of any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, this Agreement.
(b) Parent and the Company shall file as soon as practicable
after the date of this Agreement notifications under the HSR Act and shall
respond as promptly as practicable to all inquiries or requests received from
the Federal Trade Commission or the Antitrust Division of the Department of
Justice for additional information or documentation and shall respond as
promptly as practicable to all inquiries and requests received from any State
Attorney General or other Governmental Entity in connection with antitrust
matters. The parties shall cooperate with each other in connection with the
making of all such filings or responses, including providing copies of all such
documents to the other party and its advisors prior to filing or responding.
Parent and Merger Sub agree to use their respective reasonable efforts to avoid
the entry of (or, if entered, to lift, vacate or reverse) any order, decree,
judgment or ruling of any court or Governmental Entity restraining or preventing
the consummation of the Merger on the basis of any federal, state or local
antitrust laws or regulations.
6.05 Company Benefit Plans.
(a) Parent shall cause the Surviving Corporation to maintain
the Company's existing compensation, severance, welfare and pension benefit
plans, programs and arrangements for the benefit of current and former employees
of the Company and its subsidiaries (subject to such modification as may be
required by applicable law or to maintain the tax exempt status of any such plan
which is intended to be qualified under Section 401(a) of the Code); provided,
however, that nothing herein shall prohibit Parent from (i) replacing any such
existing plans, programs or arrangements with plans, programs or arrangements
("Replacement Plans") which provide current active or inactive employees or
former employees with benefits which, in the reasonable opinion of Parent, are
not less favorable in the aggregate than the benefits that would have been
provided under such existing plans, programs or arrangements to the extent such
replacement is permitted under the terms of the applicable plans, programs or
arrangements; provided, that Parent may not subsequently replace such
Replacement Plans with other plans, programs or arrangements, unless such plans,
programs or arrangements provide such employees with benefits which, in the
reasonable opinion of Parent, are not less favorable in the aggregate than the
benefits provided under Parent's plans, programs or arrangements or (ii)
including current active or inactive employees or former employees of the
Company in the plans, programs and arrangements generally available to employees
of Parent and its subsidiaries other than the Surviving Corporation in lieu of
participation in any Company plan, program or arrangement; provided, that such
Parent plans, programs and arrangements (A) provide such employees with benefits
which, in the reasonable opinion of Parent, are not less favorable in the
aggregate than the benefits that would have been provided under the Company
plans, programs or arrangements and (B) do not discriminate against such
employees compared to other employees of Parent and its subsidiaries.
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(b) All service credited to each employee by the Company or
its subsidiaries through the Effective Time shall be recognized by Parent for
all purposes, including for purposes of eligibility, vesting and benefit
accruals under any employee benefit plan provided by Parent for the benefit of
the employees; provided, however, that, to the extent necessary to avoid
duplication of benefits, amounts payable under employee benefit plans provided
by Parent may be reduced by amounts payable under similar Company plans with
respect to the same periods of service. Any benefits accrued by employees of the
Company and its subsidiaries prior to the Effective Time under any of the
Company's defined benefit pension plans that employ a final average pay formula
shall be calculated based on such employees' final average pay with the
Surviving Corporation or any successor to the Surviving Corporation or other
affiliate of Parent employing such employees. In addition, with respect to any
welfare benefit plan established or maintained by Parent or its subsidiaries for
the benefit of employees of the Company, Parent shall, or shall cause the
relevant subsidiary to, waive any pre-existing condition exclusions other than
any pre-existing condition that was not waived by a Company plan and provide
that any covered expenses incurred on or before the Effective Time in respect of
the current plan year by any employee of the Company (or any covered dependent
of such an employee) shall be taken into account for purposes of satisfying
applicable deductible, coinsurance and maximum out-of-pocket provisions after
the Effective Time in respect of such current plan year.
(c) Parent hereby agrees to cause the Surviving Corporation to
honor (without modification) and assume the severance policies, employment
agreements, executive termination agreements and individual benefit arrangements
previously disclosed to Parent.
(d) The provisions of this Section 6.05 shall not apply to any
employee subject to the terms of a collective bargaining plan.
6.06 Fees and Expenses. All fees and expenses incurred in connection
with this Agreement and the Merger and any other transaction contemplated by
this Agreement shall be paid by the party incurring such fees or expenses,
whether or not the Merger is consummated.
6.07 Notification. Each of the Company and Parent shall give prompt
notice to the other of (i) any representation or warranty made by it contained
in this Agreement that is qualified as to materiality becoming untrue or
inaccurate in any respect or any such representation or warranty that is not so
qualified becoming untrue or inaccurate in any material respect or (ii) the
failure by it to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
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6.08 Obligations of Merger Sub. Parent shall take all action
necessary to cause Merger Sub to perform its obligations under this Agreement
and to consummate the Merger on the terms and subject to the conditions set
forth in this Agreement.
6.09 Public Announcements. Unless otherwise required by applicable
law or the requirements of any listing agreement with any applicable stock
exchange, Parent and the Company shall each use their reasonable efforts to
consult with each other before issuing any press release or otherwise making any
public statements with respect to this Agreement or any transaction contemplated
by this Agreement and shall not issue any such press release or make any such
public statement prior to such consultation.
ARTICLE VII
CONDITIONS TO THE MERGER
7.01 Conditions to the Obligations of Each Party. The obligations of
the Company, Parent and Merger Sub to consummate the Merger are subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Company Shareholder Approval. This Agreement shall have
been approved by the requisite affirmative vote of the shareholders of the
Company in accordance with the Company's Restated Articles of Incorporation, as
amended, By-laws and the PBCL.
(b) No Injunction or Restraint. No Governmental Entity shall
have enacted, issued, promulgated, enforced or entered any law, rule, regulation
or order which is then in effect and has the effect of making the Merger illegal
or otherwise prohibiting consummation of the Merger.
(c) HSR Act. Any waiting period and any extension thereof
applicable to the consummation of the Merger under the HSR Act shall have
expired or been terminated.
(d) Consents and Approvals. All consents, approvals and
authorizations legally required to be obtained to consummate the Merger shall
have been obtained from all Governmental Entities, except for such consents,
approvals and authorizations the failure of which to obtain would not have a
material adverse effect on Parent, Merger Sub or the Company assuming for
purposes of this paragraph (d) that the Merger shall have been effected.
7.02 Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the Merger are subject to the
satisfaction or waiver by Parent on or prior to the Closing Date of the
following further conditions:
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(a) Company Representations and Warranties. Each of the
representations and warranties of the Company contained in this Agreement that
is qualified by materiality shall be true and correct on and as of the Closing
Date as if made on and as of such date (other than representations and
warranties which address matters only as of a certain date which shall be true
and correct as of such certain date) and each of the representations and
warranties that is not so qualified shall be true and correct in all material
respects on and as of the Closing Date, as if made on and as of such date (other
than representations and warranties which address matters only as of a certain
date which shall be true and correct in all material respects as of such certain
date), in each case except as contemplated or permitted by this Agreement, and
Parent shall have received a certificate of the President or Chief Financial
Officer of the Company to such effect.
(b) Company Agreements and Covenants. The Company shall have
performed or complied in all material respects with all material agreements and
covenants required by this Agreement to be performed or complied with by it on
or prior to the Closing Date, and Parent shall have received a certificate of
the President or Chief Financial Officer of the Company to that effect.
(c) Permits; Authorizations. All permits, authorizations,
licenses, approvals and notifications of Governmental Entities that are
necessary for the Company and its subsidiaries to conduct their businesses after
the Effective Date in the same manner as such businesses are conducted as of the
Effective Date, including, but not limited to, Environmental Permits, shall have
been provided, issued, obtained, transferred or reissued, to the extent
necessary under applicable law, except for such permits, authorizations,
licenses, approvals and notifications the failure of which to provide, issue,
obtain, transfer or reissue would not have a material adverse effect on the
Company and its subsidiaries taken as a whole.
7.03 Conditions to the Obligations of the Company. The obligations of
the Company to consummate the Merger are subject to the satisfaction or waiver
by the Company on or prior to the Closing Date of the following further
conditions:
(a) Parent Representations and Warranties. Each of the
representations and warranties of each of Parent and Merger Sub contained in
this Agreement that is qualified by materiality shall be true and correct on and
as of the Closing Date as if made on and as of such date (other than
representations and warranties which address matters only as of a certain date
which shall be true and correct as of such certain date) and each of the
representations and warranties that is not so qualified shall be true and
correct in all material respects on and as of the Closing Date as if made on and
as of such date (other than representations and warranties which address matters
only as of a certain date which shall be true and correct in all material
respects as of such certain date), in each case except as contemplated or
permitted by this Agreement, and the Company shall have received a certificate
of the President or Chief Financial Officer of each of Parent and Merger Sub to
such effect.
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(b) Parent Agreements and Covenants. Each of Parent and Merger
Sub shall have performed or complied in all material respects with all material
agreements and covenants required by this Agreement to be performed or complied
with by it on or prior to the Closing Date, and the Company shall have received
a certificate of the President or Chief Financial Officer of each of Parent and
Merger Sub to that effect.
(c) Fairness Opinion. The Company shall have received the
written opinion of its financial advisor, J.P. Morgan Securities Inc., dated as
of the date of this Agreement, that the consideration to be received in the
Merger by the holders of Company Common Stock is fair to the holders of Company
Common Stock from a financial point of view.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.01 Termination. This Agreement may be terminated and the Merger and
the other transactions contemplated by this Agreement may be abandoned at any
time prior to the Effective Time, whether before or after approval thereof by
shareholders of the Company, as follows:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the Effective Time
shall not have occurred on or before September 30, 1998; provided, however, that
the right to terminate this Agreement under this Section 8.01(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before September 30, 1998;
(c) by either Parent or the Company if any Governmental Entity
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger and such
order, decree or ruling or other action shall have become final and
nonappealable; provided, however, that the party seeking to terminate this
Agreement under this Section 8.01(c) shall have used its commercially reasonable
efforts to remove such injunction, order or decree;
(d) by Parent in the event of a breach by the Company of any
representation, warranty, covenant or other agreement contained in this
Agreement which (A) would give rise to the failure of a condition set forth in
Section 7.02 and (B) cannot be or has not been cured within 20 days after the
giving by Parent of written notice to the Company;
(e) by the Company in the event of a breach by Parent or
Merger Sub of any representation, warranty, covenant or other agreement
contained in this Agreement
24
<PAGE>
which (A) would give rise to the failure of a condition set forth in Section
7.03 or (B) cannot be or has not been cured within 20 days after the giving by
the Company of written notice to Parent or Merger Sub, as applicable; or
(f) by Parent or the Company if the shareholders of the
Company do not approve this Agreement at the Company Shareholders' Meeting or
any adjournment or postponement thereof.
8.02 Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 8.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Parent, Merger Sub or the Company, other than the
provisions of Section 3.14, Section 4.06, this Section 8.02 and Article IX, and
except to the extent that such termination results from the willful and material
breach by a party of any of its representations, warranties, covenants or
agreements set forth in this Agreement.
8.03 Amendment. This Agreement may be amended by the parties at any
time before or after any required approval of this Agreement by the shareholders
of the Company; provided, however, that after any such approval, there shall not
be made any amendment that by law requires further approval by such shareholders
without the further approval of such shareholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties.
8.04 Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the provision of Section
8.03, waive compliance with any of the agreements or conditions contained in
this Agreement. Any agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party to this Agreement to assert any
of its rights under this Agreement or otherwise shall not constitute a waiver of
those rights.
ARTICLE IX
GENERAL PROVISIONS
9.01 Nonsurvival of Representations. None of the representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Effective Time. This Section 9.01 shall not limit
any covenant or agreement of the parties which by its terms contemplates
performance after the Effective Time. In the event of a breach of any of such
covenants or agreements, the party to whom such covenants or agreements have
been made shall have all rights and remedies for such
25
<PAGE>
breach available to it under applicable law and the provisions of this
Agreement, regardless of any disclosure to, or investigation made by or on
behalf of, such party.
9.02 Exclusive Remedy.
(a) Parent acknowledges and agrees that (i) other than the
representations and warranties of the Company specifically contained in this
Agreement, there are no representations or warranties of the Company or any of
its subsidiaries or any other person either expressed or implied with respect to
the Company or any of its subsidiaries or their respective assets, liabilities
and businesses and (ii) neither Parent nor the Surviving Corporation shall have
any claim or right to damages or indemnification from the Company or any of its
subsidiaries or any current or former officer, director or shareholder of the
Company or any of its subsidiaries acting in their capacities as such based upon
a breach of such representations and warranties with respect to any information
(whether written or oral), documents or material furnished by the Company or any
of its subsidiaries or any of their respective officers, directors, employees,
agents, counsel, accountants or advisors to Parent with respect to the
transactions contemplated by this Agreement, including any information,
documents or material made available to Parent in certain "data rooms,"
management presentations or in any other form in expectation of the transactions
contemplated by this Agreement.
(b) The Company acknowledges and agrees that (i) other than
the representations and warranties of Parent and Merger Sub specifically
contained in this Agreement, there are no representations or warranties of
Parent or Merger Sub or any other person either expressed or implied with
respect to Parent or Merger Sub and (ii) it shall not have any claim or right to
damages or indemnification from Parent or Merger Sub or any current or former
officer, director or shareholder of Parent or Merger Sub based upon a breach of
such representations or warranties with respect to any information (whether
written or oral), documents or material furnished by Parent or Merger Sub or any
of their respective officers, directors, employees, agents, counsel, accountants
or advisors to the Company.
9.03 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such address for a
party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
CONSOL Inc.
1800 Washington Road
Pittsburgh, PA 15241
Attention: Vice President and General Counsel
Facsimile No.: (412) 831-4635
26
<PAGE>
with a copy to:
CONSOL Inc.
1800 Washington Road
Pittsburgh, PA 15241
Attention: Senior Vice President - Administration
Facsimile No.: (412) 831-4994
(b) if to the Company, to:
Rochester & Pittsburgh Coal Company
655 Church Street
Indiana, Pennsylvania 15701
Attention: Thomas W. Garges, Jr.
President and Chief Executive Officer
Facsimile No.: (724) 349-5460
with a copy to:
Duane, Morris & Heckscher LLP
4200 One Liberty Place
Philadelphia, Pennsylvania 19103-7396
Attention: Frederick W. Dreher, Esq.
Facsimile No.: (215) 979-1213
9.04 Definitions. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such first person;
(b) "control" (including the terms "controlled by" and "under
common control with") means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract or otherwise;
(c) "knowledge" or "known" means, with respect to the matter
in question, if any of the officers of the Company or any of its subsidiaries or
Parent, as the case may be, has actual knowledge of such matter;
(d) "lien" means any encumbrance, hypothecation, infringement,
lien, mortgage, pledge, restriction, security interest, title retention or other
security arrangement, or any adverse right or interest, charge or claim of any
nature whatsoever of, on, or with respect to any asset, property or property
interest; provided, however, that the term "lien" shall not include (i) liens
for water and sewer charges and current taxes not
27
<PAGE>
yet due and payable or being contested in good faith, (ii) mechanics',
carriers', workers', repairers', materialmen's, warehousemen's and other similar
liens arising or incurred in the ordinary course of business or (iii) all liens
approved in writing by the other party hereto;
(e) "material adverse change" or "material adverse effect"
means, when used in connection with the Company or Parent, any change or effect
or any development that is likely to result in any change or effect that would
impair the business, financial condition or results of operations of such party
and its subsidiaries in an amount of $5,000,000 or more;
(f) "person" means an individual, corporation, partnership,
joint venture, association, trust, unincorporated organization or other entity;
and
(g) a "subsidiary" of any person means another person, an
amount of the voting securities, other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its Board of
Directors or other governing body or, if there are no such voting interests, 50%
or more of the equity interests of which is owned directly or indirectly by such
first person.
9.05 Interpretation. When a reference is made in this Agreement to a
Section, Exhibit or Schedule, such reference shall be to a Section of, or an
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
9.06 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.07 Entire Agreement; Third-Party Beneficiaries. This Agreement
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement provided, however, that the provisions of the
Confidentiality Agreement between the Company and Parent dated December 18, 1997
shall remain valid and in effect and, except for the provisions of Article II of
which the shareholders of the Company shall be third-party beneficiaries, is not
intended to confer upon any person other than the parties any rights or remedies
hereunder.
9.08 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of
28
<PAGE>
law or otherwise by any of the parties without the prior written consent of the
other parties, except that Merger Sub may assign, in its sole discretion, any or
all rights, interests and obligations under this Agreement to Parent or to
Parent's parent entity or to any direct or indirect wholly owned subsidiary of
Parent but no such assignment shall be permitted if it would materially impede
or delay the Merger.
9.09 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Pennsylvania,
without regard to any applicable conflicts of law, except to the extent that the
PBCL and the DGCL shall be held to govern the terms of the Merger.
9.10 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the Commonwealth of Pennsylvania or in Pennsylvania state court,
this being in addition to any other remedy to which they are entitled at law or
in equity. In addition, each of the parties hereto (a) consents to submit itself
to the personal jurisdiction of any federal court located in the Commonwealth of
Pennsylvania or any Pennsylvania state court in the event any dispute arises
out of this Agreement or any of the transactions contemplated by this Agreement,
(b) agrees that it will not attempt to deny or defeat such personal jurisdiction
by motion or other request for leave from any such court and (c) agrees that it
will not bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a federal or state court
sitting in the Commonwealth of Pennsylvania.
29
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused
this Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
CONSOL INC.
By:/s/ Michael F. Nemser
-----------------------------------------
Michael F. Nemser, Senior Vice President
CONSOL COMMONWEALTH INC.
By:/s/ Michael F. Nemser
-----------------------------------------
Michael F. Nemser, Vice President
ROCHESTER & PITTSBURGH COAL COMPANY
By:/s/ Thomas W. Garges, Jr.
-----------------------------------------
Thomas W. Garges, Jr., President and
Chief Executive Officer
30
<PAGE>
APPENDIX B
STOCKHOLDERS AGREEMENT
<PAGE>
May 28, 1998
The parties to this Stockholders Agreement (this "Agreement") are
CONSOL Inc., a Delaware corporation ("Parent"), CONSOL Commonwealth Inc., a
Pennsylvania corporation and a direct or indirect subsidiary of Parent ("Merger
Sub"), and the other parties to this Agreement (each, a "Stockholder," and
collectively, the "Stockholders").
Parent, Merger Sub and Rochester & Pittsburgh Coal Company, a
Pennsylvania corporation (the "Company") are simultaneously with the execution
and delivery of this Agreement entering into an agreement and plan of merger,
which may be amended from time to time (the "Merger Agreement"), pursuant to
which Merger Sub would merge with and into the Company (the "Merger").
The parties agree as follows:
1. No Solicitation. Until the termination of the Merger Agreement in
accordance with its terms, no Stockholder shall, in that Stockholder's capacity
as such, directly or indirectly, initiate, solicit or knowingly encourage,
including by way of furnishing non-public information or assistance, or take any
other action knowingly to facilitate, any inquiries or the making of any
proposal that constitutes, or reasonably may be expected to lead to a
"competitive proposal", or enter into or maintain or continue discussions or
negotiate with any person or entity in furtherance of such inquiries or to
obtain, or agree to or endorse a competitive proposal, or authorize or permit
any person or entity acting on behalf of that Stockholder to do any of the
foregoing. If any Stockholder receives any inquiry or proposal regarding any
competitive proposal, that Stockholder shall provide reasonable notice to Parent
of that inquiry or proposal. For purposes of this Agreement, "competitive
proposal" shall mean any tender or exchange offer involving the Company, any
proposal for a merger, consolidation, business combination or similar
transaction involving the Company or its subsidiaries, any proposal or offer to
acquire in any manner more than 10% of the Common Stock of the Company or a
substantial portion of the business or assets of the Company or its
subsidiaries, other than immaterial or insubstantial assets or inventory in the
ordinary course of business or assets held for sale, any proposal or offer with
respect to any recapitalization or restructuring with respect to the Company or
its subsidiaries or any proposal or offer with respect to any other transaction
similar to any of the foregoing with the Company other than pursuant to the
transactions to be effected pursuant to the Merger Agreement.
2. Representations and Warranties of the Stockholders. Each Stockholder
represents and warrants to Parent as follows:
(a) Ownership of Shares. That Stockholder is the beneficial
owner of the number of shares of Common Stock, no par value, of the Company (the
"Shares") set forth opposite that Stockholder's name on Schedule 1. The Shares
set forth opposite that
<PAGE>
Stockholder's name on Schedule 1 constitute all the Shares beneficially owned by
the Stockholder and such Stockholder does not have any option to purchase or
right to subscribe for or otherwise acquire any securities of the Company and
has no other interest in or voting rights with respect to any other securities
of the Company. That Stockholder's Shares are held by that Stockholder or by a
nominee or custodian for the benefit of that Stockholder, free and clear of all
liens, claims, security interests and other encumbrances, except for
encumbrances arising under this Agreement.
(b) Power; Binding Agreement. That Stockholder has the legal
capacity to enter into and perform all of that Stockholder's obligations under
this Agreement. The execution, delivery and performance of this Agreement by
that Stockholder will not violate any other agreement to which that Stockholder
is a party, including, without limitation, any voting agreement, stockholders
agreement or voting trust. This Agreement has been duly and validly executed and
delivered by that Stockholder and constitutes a valid and binding obligation of
that Stockholder, enforceable against that Stockholder in accordance with its
terms. There is no other person or entity not a party to this Agreement whose
consent is required for the execution and delivery of this Agreement by that
Stockholder or the consummation by that Stockholder of the transactions
contemplated by this Agreement. If that Stockholder is married and that
Stockholder's Shares constitute community property, this Agreement has been duly
authorized, executed and delivered by, and constitutes a valid and binding
obligation of, that Stockholder's spouse, enforceable against that spouse in
accordance with its terms.
(c) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by that Stockholder nor the
consummation by that Stockholder of the transactions contemplated by this
Agreement will: (i) require any consent, approval, authorization or permit of,
or filing with or notification to, any governmental or regulatory authority
("Governmental Entity"), except in connection with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, (the "HSR Act") or pursuant to
the Securities Exchange Act of 1934, as amended, (the "1934 Act"); (ii) result
in a default, or give rise to a right of termination, cancellation or
acceleration, under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which that Stockholder
is a party or by which that Stockholder or any of that Stockholder's assets may
be bound or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to that Stockholder or by which any of that Stockholder's
assets are bound.
(d) Brokers. No broker, finder or other investment bank is
entitled to any broker's, finder's or other similar fee or commission in
connection with this Agreement or the transactions contemplated by this
Agreement based upon agreements made by or on behalf of that Stockholder.
3. Representations and Warranties of Parent.
(a) The representations and warranties of Parent contained in
Article 4 of the Merger Agreement are hereby incorporated herein by reference in
their entirety as if made on the date hereof;
-2-
<PAGE>
(b) Each of the representations and warranties of Parent
incorporated herein by reference that is qualified by materiality shall be true
and correct on and as of the Closing Date (as defined in the Merger Agreement)
as if made on and as of such date, other than representations and warranties
which address matters only as of a certain date which shall be true and correct
as of such date, and each of the representations and warranties that is not so
qualified shall be true and correct in all material respects on and as of the
Closing Date as if made on and as of such date, other than representations and
warranties which address matters only as of a certain date which shall be true
and correct in all material respects as of such certain date, in each case
except as contemplated or permitted by the Merger Agreement.
4. Grant of Proxy. Each Stockholder hereby revokes any and all proxies
previously granted by such Stockholder with respect to the Shares and each
Stockholder hereby appoints each of Michael F. Nemser and Samuel P. Skeen as
such Stockholder's attorney and proxy, with full power of substitution, to
attend any and all meetings of the stockholders of the Company and to vote the
Shares and any voting securities hereafter issued in exchange therefor or in
respect thereof, and to represent and otherwise to act for such Stockholder in
the same manner and with the same effect as if such Stockholder were personally
present, when any matter, including, but not limited to any proposed merger or
other transaction, is submitted to the stockholders of the Company for a vote.
The foregoing appointment shall (a) be irrevocable, (b) remain in effect until
September 30, 1998 and (c) be deemed to be coupled with an interest in that
Parent has the right to purchase the Shares hereunder and is also a party to the
Merger Agreement.
5. Option to Purchase the Shares.
(a) Each Stockholder hereby grants to Parent an irrevocable
option, exercisable as provided herein (the "Option"), to purchase all Shares
owned by such Stockholder (the "Option Shares") at a price per share payable in
cash of $43.50 (the "Exercise Price").
(b) Each Option may be exercised by Parent at any time, in
whole but not in part, from the date of this Agreement, until September 30,
1998. If Parent exercises any Option hereunder, it must exercise all Options
granted hereunder. If Parent wishes to exercise the Option, Parent shall give
written notice to the Stockholders of its intention to exercise the Options,
specifying a place, time and date not earlier than one day and not later than 20
days from the date such notice is given for the closing of such purchase, which
shall be the same for all Options being exercised simultaneously as required by
the provisory clause in the preceding sentence (the "Closing"). The Closing
shall be held on the date specified in such notice unless, on such date, there
shall be any preliminary or permanent injunction or other order by any court of
competent jurisdiction or any other legal restraint or prohibition preventing
the consummation of such purchase, in which event such Closing shall be held as
soon as practicable following the lifting, termination or suspension of such
injunction, order, restraint or prohibition preventing the consummation of such
purchase, but in any event within two days thereof. The obligation of the
Stockholders to sell, transfer and deliver the Option Shares upon exercise of
any Option is subject to the conditions that (i) any waiting period under the
HSR Act applicable to the
-3-
<PAGE>
purchase of the Option Shares shall have expired or been terminated and (ii)
there shall be no preliminary or permanent injunction or other order preventing
or restricting the purchase of the Option Shares.
(c) At the Closing hereunder (i) Parent shall deliver or cause
to be delivered a certified or bank cashier's check payable to the order of each
Stockholder in such amount as equals the Exercise Price times the number of
Option Shares being purchased hereunder from such Stockholder and (ii) the
Stockholders shall deliver to or cause to be delivered to Parent a certificate
or certificates, representing the number of Option Shares so purchased
accompanied by duly executed blank stock transfer powers.
(d) Parent shall, with respect to each of the Option Shares so
purchased, vote in favor of the Merger Agreement.
6. Restrictions on Transfer, Etc. Except as provided in this Agreement
and prior to the termination of the Merger Agreement in accordance with its
terms, (i) no Stockholder shall, directly or indirectly, offer for sale, sell,
transfer, tender, pledge, encumber, assign or otherwise dispose of or enter into
any agreement, arrangement or understanding with respect to, or consent to the
offer for sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, any or all of that Stockholder's Shares or any interest in those
Shares; (ii) grant any proxies or powers of attorney with respect to any Shares,
deposit any Shares into a voting trust or enter into a voting agreement with
respect to any Shares or (iii) take any action that would make any
representation or warranty of that Stockholder in this Agreement untrue or have
the effect of preventing or disabling that Stockholder from performing that
Stockholder's obligations under this Agreement.
7. Waiver of Appraisal Rights. Each Stockholder waives any rights of
appraisal or rights to dissent from the Merger that such Stockholder may have.
8. Stockholder Capacity. No person executing this Agreement who is or
becomes during the term of this Agreement a director of the Company makes any
agreement in his or her capacity as a director. Each Stockholder is executing
and delivering this Agreement solely in that Stockholder's capacity as the
record and beneficial owner of that Stockholder's Shares. Notwithstanding
anything to the contrary in this Agreement, no action or inaction by a
Stockholder in his capacity as a director of the Company shall be deemed to
contravene this Agreement.
9. Further Assurances. Each Stockholder shall use its reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with Parent in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by the
Merger Agreement and this Agreement, including (i) obtaining all necessary
actions and nonactions, waivers, consents and approvals from Governmental
Entities and the making of all necessary registrations and filings and the
taking of all reasonable steps as may be necessary to obtain an approval or
waiver from, or to avoid any action or proceeding by, any Governmental Entity,
(ii) the obtaining of all
-4-
<PAGE>
necessary consents, approvals or waivers from third parties, (iii) the defending
of any lawsuits or other legal proceedings, whether judicial or administrative,
challenging the Merger Agreement or this Agreement, including seeking to have
any stay or temporary restraining order entered by any court or Governmental
Entity vacated or reversed and (iv) the execution and delivery of any additional
instruments necessary or advisable to consummate the transactions contemplated
by, and to fully carry out the purpose of, the Merger Agreement and this
Agreement.
10. Miscellaneous.
(a) Definition. The terms "beneficially own" and "beneficial
ownership" with respect to any securities shall have the same meaning as in, and
shall be determined in accordance with, Rule 13d-3 under the 1934 Act.
(b) Liability After Transaction. Each Stockholder agrees that,
notwithstanding any transfer of the Shares in accordance with Section 5, that
Stockholder shall remain liable for its performance of all obligations under
this Agreement.
(c) Amendments, Waivers, Etc. This Agreement may not be
amended, changed, supplemented, waived or otherwise modified or terminated with
respect to any one or more Stockholders, except upon the execution and delivery
of a written agreement executed by the party to be charged, it being understood,
however, that Schedule 1 may be supplemented unilaterally by Parent adding the
name and other relevant information concerning any stockholder of the Company
who agrees to be bound by this Agreement, and thereafter the added stockholder
shall be treated as a "Stockholder" for all purposes of this Agreement.
(d) Notices. All notices, requests, claims, demands and other
communications in this Agreement shall be in writing and shall be deemed to have
been duly given when delivered in person, by facsimile transmission with
confirmation of receipt or by registered or certified mail, postage prepaid,
return receipt requested, to the respective parties as follows:
If to a Stockholder:
Duane, Morris & Heckscher LLP
4200 One Liberty Place
Philadelphia, PA 19103
Attention: Frederick W. Dreher, Esq.
If to Parent or Merger Sub:
CONSOL Inc.
Consol Plaza
1800 Washington Road
Pittsburgh, PA 15241-1421
Attention: Michael F. Nemser, Senior Vice President
-5-
<PAGE>
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above,
provided that notice of any change of address shall be effective only upon
receipt of notice of the change.
(e) Severability. If any provision of this Agreement is
invalid, illegal or unenforceable, the invalidity, illegality or
unenforceability shall not affect any other provision.
(f) Special Performance. Each party agrees that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement, this being in addition
to any other remedy to which they are entitled at law or in equity.
(g) No Waiver. The failure of any party to exercise any right,
power or remedy under this Agreement or otherwise available in respect of this
Agreement at law or in equity, or to insist upon compliance by any other party
with that party's obligations under this Agreement, shall not constitute a
waiver of any right to exercise any such or other rights, power or remedy or to
demand such compliance.
(h) Governing Law. This Agreement shall be governed and
construed in accordance with the law of the Commonwealth of Pennsylvania,
regardless of the law that might otherwise govern under principles of conflicts
of laws applicable thereto.
(i) Headings. The headings in this Agreement are for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
(j) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same agreement.
(k) Entire Agreement. This Agreement constitutes the enter
agreement among the parties with respect to its subject matter and supersedes
all other prior agreements and understandings, both written and oral, among the
parties with respect to that subject matter.
-6-
<PAGE>
(l) Successors and Assigns. The provisions of this Agreement
shall be binding and inure to the benefit of the parties hereto and their
respective legal successors and permitted assigns; provided, however, that no
party may assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement without the consent of the other party.
CONSOL INC.
By: /s/ Michael F. Nemser
-------------------------------------
Title: Senior Vice President
STOCKHOLDERS:
On behalf of the Trusts
listed on Schedule A
hereto:
By: /s/ Emilie I. Wiggin
------------------------------------
Emilie I. Wiggin, Co-Trustee
/s/ Urling I. Searle
----------------------------------------
Urling I. Searle, Co-Trustee
/s/ Peter Iselin
----------------------------------------
Peter Iselin
/s/ Emilie I. Wiggin
----------------------------------------
Emilie I. Wiggin
/s/ O'Donnell Iselin II
----------------------------------------
O'Donnell Iselin II
/s/ Columbus O'D. Iselin
----------------------------------------
Columbus O'D. Iselin
/s/ Gordon B. Whelpley, Jr.
----------------------------------------
Gordon B. Whelpley, Jr.
-7-
<PAGE>
SCHEDULE A
LIST OF STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Shares of
Rochester & Pittsburgh Currently Acting
Name of Trust or Individual Coal Company Trustees
--------------------------- ---------------------- ----------------
<S> <C> <C>
Trust Under Article EIGHTH A of the Last 243,982 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o Peter Iselin
- ---------------------------------------------------------------------------------------------------------------------
Trust Under Article EIGHTH A of the Last 55,551 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o O'Donnell Iselin II
- ---------------------------------------------------------------------------------------------------------------------
Trust Under Article EIGHTH A of the Last 55,551 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o Maud Iselin Welles
- ---------------------------------------------------------------------------------------------------------------------
Trust Under Article EIGHTH A of the Last 55,551 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o Urling Iselin Searle
- ---------------------------------------------------------------------------------------------------------------------
Trust Under Article EIGHTH B of the Last 218,780 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o Emilie I. Wiggin
- ---------------------------------------------------------------------------------------------------------------------
Trust Under Article EIGHTH B of the Last 47,753 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o Anne Whelpley
Shaw
- ---------------------------------------------------------------------------------------------------------------------
Trust Under Article EIGHTH B of the Last 47,753 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o Patricia Whelpley
Barton
- ---------------------------------------------------------------------------------------------------------------------
Trust Under Article EIGHTH B of the Last 47,753 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o Gordon B.
Whelpley, Jr.
- ---------------------------------------------------------------------------------------------------------------------
Trust Under Article EIGHTH B of the Last 47,753 shares as of 8/31/97 Emilie I. Wiggin and
Will and Testament of O'Donnell Iselin Urling I. Searle
dated July 27, 1970 f/b/o Katharine W.
Draper
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of
Rochester & Pittsburgh Currently Acting
Name of Trust or Individual Coal Company Trustees
--------------------------- --------------------- ----------------
<S> <C> <C>
Trust Under Article SIXTH of the Last Will 118,141 shares as of 8/31/97 Emilie I. Wiggin and
and Testament of Urling S. Iselin dated Urling I. Searle
March 5, 1948 f/b/o Peter Iselin and Emilie
I. Whelpley (n/k/a Emilie I. Wiggin)
- ----------------------------------------------------------------------------------------------------------------------
Trust Under Agreement dated July 6, 1964 667,178 shares as of 7/31/97 Emilie I. Wiggin and
by and between O'Donnell Iselin, as Settlor, -------- Urling I. Searle
and Emilie I. Whelpley and Peter Iselin, as
Trustees
- ----------------------------------------------------------------------------------------------------------------------
Subtotal 1,605,746 shares
=========
- ----------------------------------------------------------------------------------------------------------------------
Peter Iselin 62,751 shares
- ----------------------------------------------------------------------------------------------------------------------
Emilie I. Wiggin 15,942 shares
- ----------------------------------------------------------------------------------------------------------------------
O'Donnell Iselin II 20,552 shares
- ----------------------------------------------------------------------------------------------------------------------
Columbus O'D. Iselin 14,908 shares
- ----------------------------------------------------------------------------------------------------------------------
Gordon B. Whelpley, Jr. 21,796 shares
---------
- ----------------------------------------------------------------------------------------------------------------------
Subtotal 135,949 shares
=========
- ----------------------------------------------------------------------------------------------------------------------
Total 1,741,695 shares
=========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
-9-
<PAGE>
APPENDIX C
OPINION OF J.P. MORGAN SECURITIES INC.
<PAGE>
APPENDIX C
----------
May 28, 1998
The Board of Directors
Rochester & Pittsburgh Coal Company
655 Church Street
Indiana, PA 15701
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Rochester & Pittsburgh Coal Company (the "Company")
of the consideration proposed to be paid to them in connection with the proposed
merger (the "Merger") of the Company with CONSOL Commonwealth Inc. ("Merger
Sub"), a wholly owned subsidiary of CONSOL Inc. (the "Buyer"). Pursuant to the
Agreement and Plan of Merger, dated as of May 28, 1998 (the "Agreement"), among
the Company, the Buyer and Merger Sub, Merger Sub will be merged with and into
the Company, the Company will become a wholly-owed subsidiary of the Buyer, and
each share of common stock, no par value, of the Company (other than shares held
by dissenting shareholders and shares cancelled in accordance with the
Agreement) shall be converted into the right to receive $43.50 in cash, without
interest.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
publicly available information concerning the business of the Company and of
certain other companies engaged in businesses comparable to those of the
Company, and the reported market prices for certain other companies' securities
deemed comparable; (iii) publicly available terms of certain transactions
involving companies comparable to the Company and the consideration received for
such companies; (iv) current and historical market prices of the common stock of
the Company; (v) the audited financial statements of the Company for the fiscal
year ended December 31, 1997, and the unaudited financial statements of the
Company for the period ended March 31, 1998; (vi) certain agreements with
respect to outstanding indebtedness or obligations of the Company; (vii) certain
internal financial analyses and forecasts prepared by the Company and its
management; and (viii) the terms of other business combinations that we deemed
relevant.
In addition, we have held discussions with certain members of the management of
the Company with respect to certain aspects of the Merger, and the past and
current business operations of the Company, the financial condition and future
prospects and operations of the Company, the effects of the Merger on the
financial condition and future prospects of the Company, and certain other
matters we believed necessary or appropriate to our inquiry. We have visited
certain representative facilities of the Company, and reviewed such other
financial studies and analyses and considered such other information as we
deemed appropriate for the purposes of this opinion.
C-1
<PAGE>
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company or otherwise reviewed by us, and
we have not assumed any responsibility or liability therefor. We have not
conducted any valuation or appraisal of any assets or liabilities, nor have any
such valuations or appraisals been provided to us. In relying on financial
analyses and forecasts provided to us, we have assumed that they have been
reasonably prepared based on assumptions reflecting the best currently available
estimates and judgments by management as to the expected future results of
operations and financial condition of the Company to which such analyses or
forecasts relate. We have also assumed that the Merger will have the tax
consequences described in discussions with, and materials furnished to us by,
representatives of the Company, and that the other transactions contemplated by
the Agreement will be consummated as described in the Agreement. We have relied
as to all legal matters relevant to rendering our opinion upon the advice of
counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We have acted as financial advisor to the Company with respect to the proposed
Merger and will receive a fee from the Company for our services. We will also
receive an additional fee if the proposed Merger is consummated. Please be
advised that we are currently engaged by the parent of the Buyer in an advisory
assignment. In the ordinary course of their businesses, our affiliates may
actively trade the debt and equity securities of the Company or the Buyer for
their own account or for the accounts of customers and, accordingly, they may at
any time hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the consideration to be paid to the Company's shareholders in the
proposed Merger is fair, from a financial point of view, to such shareholders.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote with respect to the Merger. This opinion may be
reproduced in full in any proxy or information statement mailed to shareholders
of the Company.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ D. Leslie Morrison
----------------------
Name: D. Leslie Morrison
Title: Managing Director
C-2
<PAGE>
APPENDIX D
DISSENTERS RIGHTS PROVISIONS OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW
<PAGE>
APPENDIX D
----------
DISSENTERS RIGHTS PROVISIONS OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW
SUBCHAPTER D - DISSENTERS RIGHTS
ss.1571. Application and effect of subchapter.
(a) General rule. Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special
treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share
exchanges).
Section 1932(c) (relating to dissenters rights in asset
transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a
restriction on transfer of a security is held
invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach
of qualifying conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.
(1) Except as otherwise provided in paragraph (2), the holders of
the shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting at
which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to
be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
D-1
<PAGE>
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the case
of:
(i) Shares converted by a plan if the shares are not converted
solely into shares of the acquiring, surviving, new or other corporation or
solely into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the
articles, the plan or the terms of the transaction entitle all shareholders of
the class to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of the votes
cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section
1906(c) (relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase,
lease, exchange or other disposition all or substantially all of the shares,
property or assets of another corporation by the issuance of shares, obligations
or otherwise, with or without assuming the liabilities of the other corporation
and with or without the intervention of another corporation or other person,
shall not be entitled to the rights and remedies of dissenting shareholders
provided in this subchapter regardless of the fact, if it be the case, that the
acquisition was accomplished by the issuance of voting shares of the corporation
to be outstanding immediately after the acquisition sufficient to elect a
majority or more of the directors of the corporation.
(c) Grant of optional dissenters rights. The bylaws or a resolution of
the board of directors may direct that all or a part of the shareholders shall
have dissenters rights in connection with any corporate action or other
transaction that would otherwise not entitle such shareholders to dissenters
rights.
(d) Notice of dissenters rights. Unless otherwise provided by statute,
if a proposed corporate action that would give rise to dissenters rights under
this subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) A statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value of
their shares by complying with the terms of this subchapter; and
(2) A copy of this subchapter.
(e) Other statutes. The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective. This subchapter may not
be relaxed by any provision of the articles.
D-2
<PAGE>
(g) Cross references. See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
ss.1572. Definitions.
The following words and phrases when used in this subchapter shall have
the meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purposes of
this subchapter. The successor corporation in a division shall have the sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this subchapter and who has performed every
act required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects, taking into
account all relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors, including the average
rate currently paid by the corporation on its principal bank loans.
ss.1573. Record and beneficial holders and owners.
(a) Record holders of shares. A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that event,
his rights shall be determined as if the shares as to which he has dissented and
his other shares were registered in the names of different shareholders.
(b) Beneficial owners of shares. A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
D-3
<PAGE>
ss.1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his shares
under this subchapter. Neither a proxy nor a vote against the proposed corporate
action shall constitute the written notice required by this section.
ss.1575. Notice to demand payment.
(a) General rule. If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action is
to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer
of shares will be restricted from the time that demand for payment is received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment. The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
ss.1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act. A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required
D-4
<PAGE>
by a notice pursuant to section 1575 (relating to notice to demand payment)
shall not have any right under this subchapter to receive payment of the fair
value of his shares.
(b) Restriction on uncertificated shares. If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or the release of restrictions under the terms of
section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder. The dissenter shall retain all
other rights of a shareholder until those rights are modified by effectuation of
the proposed corporate action.
ss.1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action. Within 60 days after the
date set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment. When uncertificated shares
have been released from transfer restrictions and deposited certificates have
been returned, the corporation may at any later time send a new notice
conforming to the requirements of section 1575 (relating to notice to demand
payment), with like effect.
(c) Payment of fair value of shares. Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer
of the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the latest
available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of
the shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment. If the corporation does not remit the
amount of its estimate of the fair value of the shares as provided by subsection
(c), it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such
D-5
<PAGE>
uncertificated shares that such demand has been made. If shares with respect to
which notation has been so made shall be transferred, each new certificate
issued therefor or the records relating to any transferred uncertificated shares
shall bear a similar notation, together with the name of the original dissenting
holder or owner of such shares. A transferee of such shares shall not acquire by
such transfer any rights in the corporation other than those that the original
dissenters had after making demand for payment of their fair value.
ss.1578. Estimate by dissenter of fair value of shares.
(a) General rule. If the business corporation gives notice of its
estimate of the fair value of the shares, without remitting such amount, or
remits payment of its estimate of the fair value of a dissenter's shares as
permitted by section 1577(c) (relating to payment of fair value of shares) and
the dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
(b) Effect of failure to file estimate. Where the dissenter does not
file his own estimate under subsection (a) within 30 days after the mailing by
the corporation of its remittance or notice, the dissenter shall be entitled to
no more than the amount stated in the notice or remitted to him by the
corporation.
ss.1579. Valuation proceedings generally.
(a) General rule. Within 60 days after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to section 1578
(relating to estimate by dissenter of fair value of shares);
If any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
(b) Mandatory joinder of dissenters. All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court. The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision
D-6
<PAGE>
on the issue of fair value. The appraiser shall have such power and authority as
may be specified in the order of appointment or in any amendment thereof.
(d) Measure of recovery. Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application. If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
ss.1580. Costs and expenses of valuation proceedings.
(a) General rule. The costs and expenses of any proceeding under
section 1579 (relating to valuation proceedings generally), including the
reasonable compensation and expenses of the appraiser appointed by the court,
shall be determined by the court and assessed against the business corporation
except that any part of the costs and expenses may be apportioned and assessed
as the court deems appropriate against all or some of the dissenters who are
parties and whose action in demanding supplemental payment under section 1578
(relating to estimate by dissenter of fair value of shares) the court finds to
be dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters. If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
ss.1930. Dissenters rights.
(a) General rule. If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan of merger
or consolidation objects to the plan of merger or consolidation and complies
with the provisions of Subchapter D of
D-7
<PAGE>
Chapter 15 (relating to dissenters rights), the shareholder shall be entitled to
the rights and remedies of dissenting shareholders therein provided, if any. See
also section 1906(c) (relating to dissenters rights upon special treatment).
(b) Plans adopted by directors only. Except as otherwise provided
pursuant to section 1571(c) (relating to grant of optional dissenters rights),
Subchapter D of Chapter 15 shall not apply to any of the shares of a corporation
that is a party to a merger or consolidation pursuant to section 1924(1)(i)
(relating to adoption by board of directors).
(c) Cross references. See sections 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
D-8
<PAGE>
ROCHESTER & PITTSBURGH COAL COMPANY
PROXY
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD SEPTEMBER 22, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Thomas M. Hyndman, Jr.,
Thomas W. Garges, Jr. and Columbus O'D. Iselin, Jr., and each of them, proxies
of the undersigned, with full power of substitution, to vote all of the shares
of Common Stock of Rochester & Pittsburgh Coal Company (the "Company") which the
undersigned may be entitled to vote at a Special Meeting of Shareholders of the
Company to be held at the offices of Duane, Morris & Heckscher LLP, 42nd Floor,
One Liberty Place, 1650 Market Street, Philadelphia, Pennsylvania 19103 at 10:00
a.m., local time, on Tuesday, September 22, 1998, and at any adjournment,
postponement or continuation thereof, as follows:
1. Proposal to approve and adopt the Agreement and Plan of Merger dated
as of May 28, 1998 (the "Merger Agreement") among Rochester &
Pittsburgh Coal Company, CONSOL Inc. and CONSOL Commonwealth Inc. The
Board of Directors recommends a vote FOR this proposal.
|_| FOR |_| AGAINST |_| ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the Special Meeting and any
adjournment, postponement or continuation thereof.
(continued, and to be signed on reverse side)
<PAGE>
This proxy will be voted as specified. If a choice is not specified, the proxy
will be voted FOR the approval and adoption of the Merger Agreement.
This proxy should be dated, signed by the
shareholder exactly as his or her name appears
below and returned promptly to Rochester &
Pittsburgh Coal Company in the enclosed
envelope. Persons signing in a fiduciary
capacity should so indicate.
Date:_________________, 1998
-----------------------------------------
Signature of Shareholder
-----------------------------------------
Signature of Shareholder
