|
|
|
Deficient management leads INDITEX on the verge of fail BUCHAREST, ROMANIA - Zara wants to cover losses from theft with employees’ money. The management, theft and losses give headaches to the Spanish group INDITEX, the owner of the ZARA chain. Only 10 months before, on July 25th, 2011, the publication Ziarul Financiar announced the fact that “INDITEX takes the manager from the Douglas perfumeries” pointing at Paul Cuza, who previously had the function of General Manager for Parfumerie Douglas SRL. Currently, the Romanian INDITEX group performs salary and structural changes without precedent, which the management team from Bucharest doesn’t want to explain. The problem of the clothes theft is a known phenomenon, especially when it comes to expensive brands such as ZARA or Massimo Dutti. The phenomenon was publicly recognized even by the management of the INDITEX Group Romania, two years before. Probably worried by this fact, Mihai Cioltea, the development manager of the INDITEX Group from Romania, also named by the press as “the Zara man”, stated in 2010 for the economic website InCont the following: “They steal a lot. Only for the stores in Bucharest we have 10 cases of stealing per day, which we discover and, depending on the severity, we call the police”.[...] Read the rest of the article... |
We respect intellectual property rights and will take appropriate steps to protect these rights.
As filed on April
Reg. No. 333-72327
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 Amendment No. 1
To
REGISTRATION STATEMENT
AEI Resources, Inc. and
1500 North Big Run Road
Kevin Crutchfield, President
With copies to:
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. CALCULATION OF REGISTRATION FEE
(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
TABLE OF ADDITIONAL REGISTRANT GUARANTORS
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
THIS PROSPECTUS, DATED APRIL 29, 1999, IS SUBJECT TO
PROSPECTUS Exchange Offer for $200,000,000 10-1/2% Senior Notes due December 15, 2005 of AEI RESOURCES, INC. and AEI HOLDING COMPANY, INC., its wholly owned subsidiary Terms of the Exchange Offer
We are not making an offer to exchange notes in any jurisdiction where the offer is not permitted. Investing in the notes issued in the exchange offer involves certain risks. See "Risk Factors" beginning on page . Neither the Securities and Exchange Commission nor any state securities commission has approved the notes to be distributed in the exchange offer, nor have any of these organizations determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. , 1999 PROSPECTUS SUMMARY On the cover page, in this summary and in the "Risk Factors" section, the words "Company," "we," "our," "ours," and "us" refer only to AEI Resources, Inc. and not to any of our subsidiaries. The following summary contains basic information about this offering. It likely does not contain all the information that is important to you. For a more complete understanding of this offering, we encourage you to read this entire document and the documents we have referred you to. The Company AEI Resources, Inc. AEI Holding Company, Inc. 1500 North Big Run Road Ashland, Kentucky 41102 (606) 928-3433 AEI Resources, Inc. is one of the largest coal producers in the United States. We mine and market coal at our 49 mines in Kentucky, West Virginia, Tennessee, Indiana, Illinois, Ohio and Colorado. Our primary customers are electric utility companies in the eastern United States. Since October 1, 1997, we have grown substantially by acquiring coal mining operations. We would have been the fourth largest steam coal company in the United States as measured by revenues for 1997 when these transactions are taken into account. The Exchange Offer On December 14, 1998, AEI Resources and our subsidiary co-issuer, AEI Holding, issued $200,000,000 aggregate principal amount of 10 1/2% Senior Notes due 2005 in exchange for $200,000,000 aggregate principal amount of debt securities of AEI Holding. The transaction was exempt from the registration requirements of the Securities Act of 1933. In connection with that issuance, we agreed to complete this exchange offer as soon as practicable. Under the terms of the exchange offer, you are entitled to exchange the notes initially issued in December 1998 in this exchange offer for registered exchange notes with substantially identical terms. The initial notes may be tendered only in integral multiples of $1,000. You should read the discussion under the heading "Description of the Notes" for further information about the exchange notes.
1
2
3
4
Risk Factors We urge you to carefully read the Risk Factors beginning on page for a discussion of factors you should consider before exchanging your initial notes for exchange notes. Market Share Data Except as otherwise indicated, the market share data included in this prospectus are based upon estimates by our management, using third-party sources where available. While we believe that these estimates are reasonable, they have not been independently verified. Accordingly, we cannot assure you that the market share data are accurate in all material respects.
5
Coal Reserve Data The estimates of our proven and probable reserves described in this prospectus are based on the reports of the engineering firms listed in the "Experts" section of this prospectus. While we believe that these estimates are reasonable, we cannot assure you that the coal reserve data shown in this prospectus are accurate in all material respects. Trademarks and Tradenames Addcar is a trademark that is federally registered in the United States pursuant to applicable intellectual property laws and is the property of Mining Technologies, Inc., an indirect subsidiary of AEI Resources, Inc.
6
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA We have summarized below the unaudited consolidated pro forma financial information of AEI Resources for the year ending December 31, 1998. The information should be read in conjunction with the unaudited pro forma consolidated financial statements included on pages through of this Prospectus and in conjunction with our historical financial statements and related notes included beginning on page F-1 of this prospectus. You should be aware that this pro forma information may not be indicative of what actual results will be in the future or would have been for the periods presented.
7
(1) In connection with integrating acquired operations, the Company closed certain of its preexisting mines. Accordingly, estimated non-recoverable assets of $2.0 million were written off and estimated reclamation and closure costs of $14.5 million were recorded. (2) Other income (expense), net reflects the inclusion of gain or loss on asset sales.
(3) Adjusted EBITDA as presented above and as used elsewhere in this Prospectus
consists of earnings before interest, taxes, depletion, depreciation,
amortization and other non-cash charges as adjusted to exclude certain
unusual or nonrecurring charges, all in accordance with the term
"Consolidated Cash Flow" as that term is used in the term "Fixed Charge
Coverage Ratio" in the Indenture governing the Notes. The Fixed Charge
Coverage Ratio restricts the Company's ability to incur additional
indebtedness above an approved limit if the ratio is below 2.0 to 1.0. As
of December 31, 1998 the ratio (calculated on a pro forma basis) was 2.2 to
(4) Cash interest expense is calculated as interest expense plus capitalized interest less interest accreted on discounted notes and amortization of deferred financing costs. (5) Coal sales do not give effect to sales from purchased coal tonnage, which was 1.9 million tons in the twelve months ended December 31, 1998. (6) Average cost per ton sold is calculated based on total coal operating costs included in the cost of operations, plus depreciation costs related to mining, divided by coal sold. NA = Not Available
8
SUMMARY HISTORICAL FINANCIAL DATA We have summarized below consolidated financial data derived from the annual financial statements of AEI Resources Holding, Inc. as of December 31, 1997 and 1998, and for the three years in the period ended December 31, 1998, which have been audited by Arthur Andersen LLP, independent public accountants, and are included in this prospectus. Consolidated financial data as of December 31, 1996 has been derived from the annual financial statements of AEI Resources Holding, Inc., which have been audited by Arthur Andersen LLP, independent public accountants, and are not included elsewhere in this prospectus. The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages through and the historical financial statements and related notes beginning on page F-1 of this prospectus.
AEI Resources Holding, Inc. (including its predecessors)
9
(1) Other income (expense), net reflects the inclusion of gain or loss on asset sales. (2) In April 1997, Bowie changed its tax reporting status from an S-corporation to a C-corporation, resulting in an initial deferred tax liability of $1.6 million. In November 1997, the other subsidiaries of AEI Holding Company, Inc. likewise changed from S-corporations to C-corporations, resulting in an initial deferred tax liability of $18.0 million. (3) Net income (loss) from continuing operations is prior to extraordinary items and accounting changes. (4) Adjusted EBITDA as presented above and as used elsewhere in this Prospectus consists of earnings before interest, taxes, depletion, depreciation, amortization and other non-cash charges as adjusted to exclude certain unusual or nonrecurring charges, all in accordance with the term "Consolidated Cash Flow" as that term is used in the term "Fixed Charge Coverage Ratio" in the indenture. The Fixed Charge Coverage Ratio restricts the Company's ability to incur additional indebtedness above an approved limit if the ratio is below 2.0 to 1.0. As of December 31, 1998 the ratio (calculated on a pro forma basis) was 2.2 to 1.0. See "Description of Notes" for a complete presentation of the methodology employed in calculating Adjusted EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness and because it is used in the Indenture to determine compliance with certain covenants. However, Adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. (5) Average cost per ton sold is calculated based on total coal operating costs included in cost of operations, plus depreciation costs related to mining, divided by coal sold.
10
RISK FACTORS Before investing in the Notes, a prospective investor should consider the specific factors set forth below, as well as the other information set forth elsewhere in this prospectus. This prospectus includes "forward looking statements" including, in particular, the statements about our plans, strategies and prospects under the headings "Prospectus Summary," "Unaudited Pro Forma Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "The Coal Industry," "Business" and "Government Regulation." Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that we will achieve these plans, intentions or expectations. Important factors that could cause actual results to differ materially from the forward looking statements we make in this prospectus are set forth below and elsewhere in this prospectus. All forward-looking statements attributable to AEI Resources or to persons acting on our behalf are expressly qualified in their entirety by the following cautionary statements. Substantial Leverage--Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under these notes. We have a significant amount of indebtedness. The following chart shows certain important credit statistics.
Our substantial indebtedness could have important consequences to you. For example, it could: . make it more difficult for us to satisfy our obligations with respect to the notes, including in particular our obligations to pay principal, interest and penalties due on the notes and to redeem the notes upon the occurrence of specific kinds of change of control events; . increase our vulnerability to general adverse economic and industry conditions; . limit our ability to fund future working capital, capital expenditures, research and development costs and other general corporate requirements; . require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; . limit our ability to obtain additional financing to fund future acquisitions of coal producers or coal reserves; . limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; . place us at a competitive disadvantage compared to our competitors that have less debt; and . limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us.
11
See "Capitalization," "Description of the Notes--Repurchase at the Option of Holders--Change of Control" and "Description of Other Indebtedness--The Senior Credit Facility." Secured Indebtedness--Any claims of holders of the Notes will be effectively subordinated to claims of holders of any of our or our subsidiaries' secured indebtedness. Holders of any of our or our subsidiaries' secured indebtedness will have claims that have priority over claims of the holders of the Notes with respect to the assets securing such indebtedness. We and our subsidiaries are currently parties to our credit facility. Our credit facility is secured by liens on all of the capital stock of the Company and our subsidiaries, as well as all of our and our subsidiaries' present and future assets and properties. The Notes will remain effectively subordinated to all such secured indebtedness. In the event of any distribution or payment of our assets in any bankruptcy, liquidation or distribution or similar proceeding, holders of secured indebtedness will have a prior claim to our assets that constitute their collateral. Holders of the Notes will participate ratably with all holders of our unsecured indebtedness that is deemed to be of the same class as the Notes. They may also be able to participate with all of our other general creditors, based upon the respective amounts owed to each holder or creditor, in any distribution of our remaining assets. If any of these events occur, we cannot assure you that there would be sufficient assets to pay amounts due on the Notes. As a result, holders of the Notes may receive less, ratably, than holders of secured indebtedness. As of December 31, 1998, the Company and its subsidiaries would have had $692.0 million(after giving effect to payments and borrowings after that date) in aggregate amount of secured indebtedness (excluding the guarantees of borrowings under our credit facility), and $156.9 million would have been available for additional borrowing under our credit facility, after giving effect to approximately $26.1 million of outstanding letters of credit. Additional Borrowings Available--Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks described above. We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indenture do not fully prohibit us or our subsidiaries from doing so. Our senior credit facility will permit additional borrowings of up to $156.9 million as of December 31, 1998 (after giving effect to payments and borrowings after that date) and all of those borrowings would be senior to these notes and the guarantees by our subsidiaries. If we or the guarantors incur additional debt or contingent liabilities to fund future acquisitions or for other purposes, the related risks that we now face could intensify. See "Capitalization," "Selected Historical Consolidated Financial Data" and "Description of the Notes--Repurchase at the Option of Holders--Change of Control" and "Description of Other Indebtedness--The Senior Credit Facility." Ability to Service Debt--To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. Our ability to make payments on and to refinance our indebtedness, including the notes, and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We have not generated cash flows from operations for our 1997 and 1998 fiscal years. Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow from operations, available cash and available borrowings under our credit facility, will be adequate to meet our future liquidity needs for at least the next few years. We cannot assure you, however, that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or at all, or that
12
future borrowings will be available under our credit facility in amounts sufficient to enable us to pay our indebtedness, including the notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the notes, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including our credit facility and the notes, on commercially reasonable terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity." Financing Change of Control Offer--We may not have sufficient funds, or the ability to raise the funds necessary to finance the change of control offer required by the indenture. If certain specific kinds of change of control events occur, we will be required to offer to repurchase all outstanding notes. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of notes or that restrictions in our credit facility will not allow those repurchases. In addition, certain important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a "Change of Control" under the indenture. See "Description of the Notes--Repurchase at the Option of Holders-- Change of Control." Fraudulent Conveyance Matters--Federal and state statutes allow courts, under specific circumstances, to void guarantees and require noteholders to return payments received from guarantors. Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee: . received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and . was insolvent or rendered insolvent by reason of such incurrence; or . was engaged in a business or transaction for which the guarantor's remaining assets constituted unreasonably small capital; or . intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor. The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if: . the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets, or . if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature, or . it could not pay its debts as they become due. On the basis of historical financial information, recent operating history and other factors, we believe that each guarantor, after giving effect to its guarantee of these notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making such determinations or that a court would agree with our conclusions in this regard.
13
No Prior Market for the Notes--You cannot be sure that an active trading market will develop for these notes. There is no existing market for these notes and we cannot assure you as to the liquidity of any markets that may develop for the notes, the ability of holders of the notes to sell their notes, or the prices at which holders would be able to sell their notes. In addition, changes in the overall market for high yield securities and changes in our financial performance or prospects or in the prospects for companies in our industry generally may adversely affect the liquidity of the trading market in the notes, and the market price quoted for the notes. As a result, you cannot be sure that an active trading market will develop for the notes. Limited Operating History and Prior Losses--Our operations may not be profitable in the future. We have a limited operating history and incurred losses in 1997 and 1998. Our future profitability will depend on our ability to effectively integrate the businesses, we acquired in recent years, to achieve cost saving, to continue to obtain profitable coal supply contracts, and other factors described in this prospectus. We may not be profitable in the future. Integration of Acquisitions--We may not be able to effectively integrate the various businesses we have acquired. We have grown principally through the acquisition of established coal businesses. Our prospects should be considered in light of the numerous risks commonly encountered in business combinations. We cannot assure you that our management group will be able to effectively integrate the businesses we have acquired since October 1, 1997, or generate the cost savings and operating improvements we currently anticipate. Our business, financial condition and results of operations could be materially adversely affected if we are unable to retain the key operational personnel that have contributed to our historical performance and that of the businesses we have acquired. See "--Dependence on Key Management and Control by Principal Shareholder." Each of the businesses we have acquired since October 1, 1997 operated independently before we acquired it. Our Unaudited Pro Forma Combined Financial Statements in this prospectus include the combined operating results of these acquired businesses during periods before they were under our control. Thus, the statements may not indicate what our results would have been if we had operated the acquired businesses on a combined basis during such periods. While we intend to pursue acquisitions of additional coal reserves and other coal companies, in the future, we have no present binding commitments or agreements with respect to any such acquisitions. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services and products of the acquired companies and the diversion of management's attention from other business concerns. If we complete such an acquisition in the future, we may not successfully manage its integration into our business and our business may suffer. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity." Ability to Achieve Anticipated Cost Savings--We may not be able to achieve cost savings in the manner and on the schedule currently anticipated. If we cannot achieve the anticipated cost savings, we may encounter financing constraints in the future. Our management currently estimates that if we had completed all of our recent acquisitions by January 1, 1997, we could have achieved cost savings of approximately $71 million through integration of the businesses acquired. These estimates are based on assumptions made by our management that, although believed to be reasonable, are inherently uncertain and difficult to predict and, with respect to industry and general economic conditions, are beyond our control. We cannot assure you that we will achieve the anticipated cost savings on the schedule currently anticipated or at all, nor can we assure you that unforeseen costs and expenses or other factors will not offset any estimated or actual cost savings.
14
Reliance on Long-Term Coal Supply Contracts--Many of our long-term contracts allow contract price renegotiation, contract termination and other provisions that may adversely affect our operating margins. We sell a substantial portion of our coal under long-term coal supply contracts, which are significant to the stability and profitability of our operations. For our 1998 fiscal year, approximately 72% of our revenues came from coal sales under long-term sales contracts. As of December 31, 1998, we had 55 long-term sales contracts with a volume-weighted average term of approximately 5.7 years. As of December 31, 1998, 52 of our contracts provide for coal to be sold at a price higher than the price at which such coal could be sold in the spot market. Most of our recently negotiated contracts with a term of more than three years contain price reopeners. Reopeners allow the contract price to be renegotiated at specific times during the term of the contract to be in line with the market price prevailing at the time. In some circumstances, the utilities have an option to terminate the contract if prices have increased by over 10% from the price at the commencement of the contract or if the parties do not agree on a new price. We cannot assure you that our long-term contracts will not terminate before their current terms expire or that the prices we obtain for coal under such contracts will not decrease. Our operating profit margins under our long-term coal supply contracts depend on a variety of factors, many of which are beyond our control. In addition, price adjustment, price reopener and other provisions may reduce the insulation from short-term coal price volatility that long-term contracts provide and may adversely impact our operating profit margins. If any of our long-term sales contracts are modified or terminated, we could be adversely affected to the extent that we cannot find alternate customers at the same level of profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Price Fluctuations and Markets--Any significant decline in coal prices may adversely affect our ability to meet our obligations. Our results of operations depend upon the prices we receive for our coal. Any significant decline in prices for coal could have a material adverse effect on our financial condition, results of operation and quantities of reserves recoverable on an economic basis. Should the industry experience significant price declines from current levels or other adverse market conditions, we may not be able to generate sufficient cash flow from operations to meet our obligations and make planned capital expenditures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" and "Government Regulation." The availability of a ready market for our higher sulfur coal production also depends on a number of other market factors, including the demand for and supply of low-sulfur coal, and the availability of pollution credits. See "--Government Regulation of the Mining Industry--Impact of Clean Air Act Amendments on Coal Consumption." Highly Competitive Industry--The high level of competition in the coal industry may make it difficult for us to continue to obtain long-term sales contracts, making us vulnerable to changes in spot market coal prices.
We compete with other large producers and hundreds of small producers in the
United States and abroad. The markets in which we sell our coal are highly
competitive and affected by factors beyond our control. We cannot assure you
that we will continue to be able to obtain long-term sales contracts with
reliable customers as existing contracts expire. If the percentage of our
revenues generated from long-term sales contracts decreases, changes in spot
market coal prices will have a greater impact on our results. Demand for coal
and the prices that we obtain for our coal are closely linked to coal
consumption patterns of the domestic electric utility industry, which has
accounted for approximately 87% of domestic coal consumption in recent years.
Competition resulting from excess coal production capacity encourages producers
to reduce prices and to pass
15
utility industry and increased pressure from customers and regulators to lower electricity prices, public utilities are lowering fuel costs by buying higher percentages of spot coal through a competitive bidding process and by only buying the amount of coal necessary under existing contracts to meet their contractual requirements. See "Business--Long-Term Coal Contracts." Need to Lease Additional Coal Reserves--Our inability to lease coal reserves on federal lands could have a material adverse effect on the financial results of our Colorado mining operations. In 1998 we signed a ten-year contract to sell low sulfur coal from our Bowie mine to the Tennessee Valley Authority. Our costs to supply coal for this contract will be higher if we cannot lease coal reserves located on federal lands in Colorado. We have applied to the federal Bureau of Land Management for a lease, and the Bureau plans to prepare a environmental impact statement to study the effects of existing and potential coal developments in this area, which will take approximately 12 to 18 months. We cannot assure you that we will succeed in leasing the coal reserves. Our failure to do so could harm financial results of our Bowie mine. See "Business--Mining Operations--Rocky Mountain Region--Bowie." Transportation--Any disruption in our transportation services or any significant increase in transportation costs may adversely affect our business. We deliver approximately 75% of our coal tonnage by railroad. We deliver the remaining 25% by truck to either the customer's plant or designated barge loading facility. If problems related to weather, labor, industry consolidation or other events disrupt these transportation services, it could temporarily impair our ability to supply coal to our customers and thus adversely affect our business and operating results. In addition, transportation costs range from 10% to 90% of the total mining cost to our customers which can significantly affect a coal producer's competitive position and profitability. Increases in our transportation costs, or changes in such costs relative to transportation costs incurred by providers of competing coal or of other fuels, could harm our business and operating results. Risks Inherent in Mining Operations--Mining operations are vulnerable to weather and other conditions that are beyond our control. Conditions beyond our control can increase or decrease the cost of mining at particular mines for varying lengths of time. These conditions include weather and natural disasters, such as heavy rains and flooding, unexpected maintenance problems, variations in coal seam thickness, variations in the amount of rock and soil overlying the coal deposit, variations in rock and other natural materials and variations in geological and other conditions. The highwall mining process can also be more sensitive to adverse geological conditions that may diminish coal recovery, and in extreme cases, contribute to the loss or damage of highwall mining equipment. Government Regulation of the Mining Industry--Government regulations may impose costly requirements on us. The coal mining industry is subject to regulation by federal, state and local authorities on matters such as employee health and safety, limitations on land use, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining, the discharge of materials into the environment, surface subsidence from underground mining and the effects that mining has on groundwater quality and availability. Legislation mandating certain benefits for current and retired coal miners also affects the industry. Mining operations require numerous governmental permits and approvals. We may be required to prepare and present to federal, state or local authorities data pertaining to the impact that any proposed exploration for or production of coal may have upon the environment. Compliance with these requirements may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. New legislation and/or regulations and orders may materially adversely affect our mining operations, our cost structure and/or our customers' ability to
16
use coal. New legislation, including proposals related to the protection of the environment that would further regulate and tax the coal industry, may also require us or our customers to change operations significantly or incur increased costs. All of these factors could have a material adverse effect on our business, financial condition and results of operations. See "Government Regulation." Reclamation and Mine Closure Accruals. Federal and state statutes require us to restore mine property in accordance with specified standards and an approved reclamation plan, and require that we obtain and periodically renew permits for mining operations. We expense the cost of reclaiming current mine disturbance which is performed before final mine closure. We review our entire final mine reclamation liability annually, make necessary adjustments, and generally record the economic impact of those adjustments prospectively to cost of coal sales as remaining tons are mined. We accrue the entire final mine reclamation liability for operating mines that we acquire at the date of purchase and begin to accrue for the cost of final mine closure at new mines when mining activities begin. Although our management believes it is making adequate provisions for all expected reclamation and other costs associated with mine closures, our future operating results would be adversely affected if our accruals for these costs are later determined to be insufficient. Impact of Clean Air Act Amendments on Coal Consumption. The Federal Clean Air Act, including the Clean Air Act Amendments of 1990, and corresponding state laws that regulate emissions of materials into the air, affect coal mining operations both directly and indirectly. Measures intended to improve air quality could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. Any reduction in coal's share of the capacity for power generation could have a material adverse effect on our business, financial condition and results of operations. We cannot predict how present or future regulations will affect the coal industry in general and us in particular. They may limit the ability of some of our customers to burn higher sulfur coal unless our customers have or are willing to install scrubbers, blend coal or bear the cost of acquiring emission credits that permit them to burn higher sulfur coal. We cannot assure you, however, that the implementation of the new air quality standards under the Clean Air Act or any other future regulatory provisions will not materially increase our costs of doing business. The Clean Air Act affects coal mining operations indirectly by extensively regulating the emissions of sulfur dioxide, nitrogen oxide and other compounds by coal-fueled utility power plants, which are our primary customers. The limits on sulfur dioxide emissions will be reduced in 2000 when Phase II under the 1990 Clean Air Act Amendments takes effect. We currently cannot determine completely how the implementation of the stricter Phase II emission limits will affect us. We believe the price of higher sulfur coal is likely to decrease as more coal-fueled utility power plants become subject to the lower sulfur dioxide emission limits, which may have an adverse effect on our revenues. The Clean Air Act Amendments could also require utilities in areas where ozone levels are a problem to install reasonably available control technology for nitrogen oxides, which are precursors of ozone. Installation of this technology and additional control measures required under a proposed implementation plan will make it more costly to operate coal-fueled utility power plants. Because coal mining operations emit particulate matter, our mining operations are likely to be affected directly when the states revise their implementation plans to comply with the stricter standards for particulate matter and ozone adopted in 1997. State and federal regulations relating to the new standards may restrict our ability to develop new mines or could require us to modify our existing operations. The extent of the potential direct impact of the new standards on the coal industry will depend on the policies and control strategies associated with the state implementation process, but could increase our costs of doing business. See "Government Regulation--Environmental Laws-- Clean Air Act." Impact of the Framework Convention on Global Climate Change on the Coal Industry. In 1997 the signatories to the 1992 Framework Convention on Global Climate Change established the Kyoto Protocol, a binding set of targets for emissions of greenhouse gases, for developed nations. The United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012.
17
Although the United States has not ratified the Kyoto Protocol and no comprehensive requirements focusing on greenhouse gas emissions are in place, legislative or regulatory requirements to control greenhouse gas emissions, if established, could reduce the use of coal if electric power generators switch to lower carbon sources of fuel. It is unclear what impact, if any, greenhouse gas restrictions may have on our operations. However, such restrictions, if established through regulation or legislation could substantially reduce our sales. Black Lung and Workers' Compensation Obligations. Under federal law, each coal mine operator must secure payment of federal black lung benefits to claimants who are current and former employees and to a trust fund for the payment of benefits and medical expenses to claimants who last worked in the coal industry before July 1, 1973. Less than 7% of the miners currently seeking federal black lung benefits are awarded such benefits by the federal government. The trust fund is funded by an excise tax on production of up to $1.10 per ton for deep- mined coal and up to $0.55 per ton for surface-mined coal, neither amount to exceed 4.4% of the per ton sales price. We pass this tax on to the purchaser of our coal under many of our long-term sales contracts. If legislation similar to recently proposed but unenacted legislation ultimately is enacted, the number of claimants who are awarded benefits could significantly increase. In addition, the U.S. Department of Labor has proposed amendments to the regulations implementing the federal black lung laws which, among other things, establish a presumption in favor of a claimant's treating physician and limit a coal operator's ability to introduce medical evidence regarding the claimant's medical condition. If new laws or regulations such as these are adopted, the number and award size of claims could significantly increase and substantially harm our business. Additionally, we are required to compensate employees for work-related injuries. Although our management believes it is making adequate provisions for our workers' compensation liabilities, including black lung claims, our future operating results would be adversely effected if our accruals for these costs are later determined to be insufficient. See "Government Regulation--Black Lung." Postretirement Benefits and Pension Plan Liabilities--If our actuarial assumptions regarding our post-retirement benefit obligations do not materialize, our cash expenditures and costs incurred could be higher than anticipated. We provide post-retirement health and life insurance benefits to eligible union and union-free employees. We have estimated our total accumulated post- retirement benefit obligation obligations based on assumptions described in the notes to the financial statements. If our actuarial assumptions do not materialize as expected, cash expenditures and costs that we would incur could be materially higher than those reflected in the Unaudited Pro Forma Combined Financial Statements. Replacement and Recoverability of Reserves--Our business may be adversely affected if we are unable to continue acquiring coal reserves that are economically recoverable. Our continued success depends, in part, upon our ability to find, develop or acquire additional coal reserves that we can recover economically. Our proven and probable reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration and development activities or acquire properties containing proven and probable reserves. Our current strategy includes increasing our reserve base through acquisitions of complementary properties and by continuing to exploit our existing properties. We cannot assure you, however, that our planned development and exploration projects and acquisition activities will increase our reserves significantly or that we will have continuing success developing additional mines. We conduct most of our mining operations on properties we own or lease. Because we do not thoroughly verify title to most of our leased properties and mineral rights until we apply for a permit to mine the property, defects in title or boundaries can adversely affect our right to mine certain of our reserves. In addition, we cannot assure you that we can successfully negotiate new leases or mining contracts for properties containing additional reserves or maintain our leasehold interest in properties on which we do not begin mining operations during the term of the lease. See "Business--Coal Reserves."
18
Reliance on Estimates of Proven and Probable Reserves--Estimates on proven and probable reserves may vary substantially from actual results and you should not rely on these estimates unduly. There are numerous uncertainties inherent in estimating quantities of proven and probable reserves, including many factors beyond our control. Estimates of economically proven and probable coal reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions. These include historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions concerning future coal prices, future operating costs, severance and excise taxes, development costs and reclamation costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of coal attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of future net cash flows expected from them prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances will likely be material. As a result, prospective holders of the notes should not place undue reliance on the coal reserve data included herein. See "Business--Coal Reserves." Future Availability of Leased Coal Reserves--If we cannot renew the leases for our coal reserves that we do not currently mine, and cannot obtain leases for additional reserves, the coal reserves we could need in the future may not be available when we wish to mine them. The extent to which we will mine our coal reserves depends upon factors over which we have no control, such as future economic conditions, the price and demand for the quality and type of coal available to us, the price and supply of alternative fuels, and future mining practices and regulation. Our ability to mine in areas covered by the reserve studies depends upon our ability to maintain control of the reserves we lease through extensions or renewals of the leases or other agreements and our ability to obtain new leases or agreements for other reserves. Having these reserves available to us at the present time does not assure that the reserves will be available to us when we may wish to mine them. Moreover, uncertainties that arise from such matters as the lessor's title to the coal and precise boundaries can often limit the availability of reserves on leased property. See "Business--Coal Reserves." Intellectual Property--Any of our patents may be challenged in the future. Our Addcar highwall mining technology is patented, and these patents give us the exclusive right to use this technology for the life of the patent. We believe this technology is a competitive advantage. However, we cannot guarantee the validity and enforceability of any of our patents. The validity of a patent is open to challenge on a number of grounds, including lack of novelty and the failure to adequately describe the invention in the patent claim. Our patents may be successfully challenged in the future, although we do not consider this to be likely. Any loss of patent protection could harm our business because it might allow competitors to use our technology. See "Business--Highwall Mining Business--The Addcar Highwall Mining System." Dependence on Key Management and Control by Principal Shareholder--We depend on our experienced management team and the loss of any of them may adversely affect us. In addition, one principal shareholder can control our corporate and management policies. Our senior management team averages 20 years of experience in the coal industry, which includes developing innovative, low-cost mining operations, maintaining strong customer relationships and making strategic, opportunistic acquisitions.The loss of any of them could have a material adverse effect on us. In addition, as our business develops and expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled personnel with coal industry experience. We cannot assure you that we will continue to employ key personnel or that we will be able to attract and retain qualified personnel in the future. Our failure to retain or attract such key personnel could have a material adverse effect on us. See "Management."
19
Larry Addington beneficially owns 100% of the outstanding voting securities of our parent company, which owns 100% of common stock. Accordingly, Mr. Addington is able to control the election of our directors and to determine our corporate and management policies, including decisions relating to any mergers or acquisitions, the sale of all or substantially all of our assets and other significant corporate transactions that could result in a Change of Control under the indenture. See "Security Ownership of Principal Stockholders and Management." Unionization of Labor Force--If we cannot extend existing collective bargaining agreements before they expire, our unionized labor may go on strike. In addition, our competitors who employ non-unionized employees may have a competitive advantage over us. Approximately 32% of the Company's coal employees and the mines at which those employees work. These mines accounted for 29% of the Company's coal production for the year ended December 31, 1998, are represented by the United Mine Workers of America. We have several collective bargaining agreements with the United Mine Workers. We cannot assure you that our unionized labor will not go on strike upon expiration of existing contracts. Some of our competitors have union-free work forces. Because of the increased risk of strikes and other work-related stoppages in addition to higher labor costs which may be associated with union operations in the coal industry, our union-free competitors may have a competitive advantage in areas where they compete with our unionized operations. We know of only one short and unsuccessful effort to organize any of our union-free operations during the last three years. If some or all of our current union-free operations were to become unionized, we could incur an increased risk of work stoppages and higher labor costs. See "Business--Employees." Surety Bonds--Federal and state laws require us to place and maintain surety bonds in connection with reclamation, workers' compensation and other obligations. We cannot assure you that the surety bond holders will continue to renew or refrain from demanding additional collateral upon any renewal. Federal and state laws require bonds to secure our obligations to reclaim lands disturbed for mining, to pay federal and state workers' compensation benefits and to satisfy other miscellaneous obligations. As of December 31, 1998, we had outstanding surety bonds with third parties for post-mining reclamation totaling $567.8 million and an additional $182.3 million is in place for federal and state workers' compensation obligations and other miscellaneous obligations. These surety bonds are typically renewable on a yearly basis. We cannot assure you that the surety bond holders will continue to renew the surety bonds or refrain from demanding additional collateral upon such renewals. The failure to maintain, or the inability to acquire, sufficient surety bonds, as required by state and federal law, would have a material adverse effect on us and therefore create certain risks for holders of these notes. We may not be able to maintain or acquire surety bonds for a variety of reasons, including: . lack of availability, higher expense or unreasonable terms of new surety bonds, . restrictions on the demand for collateral by current and future third- party surety bond holders due to the terms of the indenture for these or other of our notes or our credit facility; or . the exercise by third-party surety bond holders of their right to refuse to renew the surety. Impact of Year 2000 Issue--Although we believe that the Year 2000 Issue will not pose significant operational problems for our business systems, any failure to make needed conversions may adversely affect our operations. In addition, we will need to monitor our customers and suppliers and we cannot guarantee that the systems of other companies on which we rely will be timely converted. We presently believe that the year 2000 issue will not pose significant operational problems for our business systems. However, if any needed modifications and conversions are not made, or are not completed on time, the year 2000 issue would likely have a material impact on our operations. We anticipate completing our year 2000 testing and remediation by third quarter 1999, before any anticipated impact on our operating systems. This timetable however, may not allow sufficient time for additional remediation if testing reveals additional year 2000 related problems.
20
Our total year 2000 project cost is not expected to be material, based on presently available information. However, we cannot guarantee that the systems of other companies on which our systems rely will be timely converted and would not have an adverse effect on our systems. We have determined that we have no exposure to claims related to the year 2000 issue for the majority of the products we have sold. If any of our suppliers or customers do not, or if we do not, successfully deal with the year 2000 issue, we could experience delays in receiving or shipping coal and equipment that would increase costs and that could cause us to lose revenues and even customers and could subject us to claims for damages. Customer problems with the year 2000 issue could also result in delays in invoicing our customers or in our receiving payments from them that would affect our liquidity. Problems with the year 2000 issue could affect the activities of our customers to the point that their demand for our products is reduced. The severity of these possible problems would depend on the nature of the problem and how quickly it could be corrected or an alternative implemented, which is unknown at this time. In the extreme, such problems could bring our operations to a standstill. Some risks of the year 2000 issue are beyond our control and that of our suppliers and customers. For example, we do not believe that we can develop a contingency plan which will protect us from a downturn in economic activity caused by the possible ripple effect throughout the entire economy that could be caused by problems of others with the year 2000 issue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Impact of Year 2000 Issue."
21
AEI RESOURCES History From 1982 to 1984, Larry Addington and his brothers, Robert and Bruce, developed several coal and coal-related companies in eastern Kentucky and Ohio. In 1984, ownership of these companies was consolidated into Addington Resources, Inc., which became a public company in 1987. From 1984 through 1995, Addington Resources expanded its coal operations and developed various other business lines, including integrated waste disposal operations, metal mining operations and citrus operations. In 1995, Messrs. Addington resigned from the board of directors of Addington Resources. Shortly thereafter, they purchased the coal mining operations of Addington Resources through Addington Enterprises, Inc., their wholly owned corporation. In 1997, the Addington brothers transferred the coal mining operations and assets they controlled through Addington Enterprises and other entities to a newly organized company, AEI Holding Company. These included the eastern Kentucky and Tennessee mining operations and coal reserves acquired from Addington Resources in 1995 and mining operations and coal reserves in Colorado acquired in 1994 and 1995. Since October 1997, AEI Holding Company and its parent and successor AEI Resources have grown substantially by acquiring several additional coal mining businesses, which we describe below. Recent Acquisitions Ikerd-Bandy Coal, Inc. . Acquired in October 1997 for $5.3 million in cash, including $0.3 million of related fees and expenses. We also agreed to pay the former owners of Ikerd-Bandy Coal, Inc. a $6.5 million promissory note. . 1998 revenues totaled $30.1 million. . 1998 production totaled 1.1 million tons. . Added approximately 27.0 million tons of proven and probable reserves. . Other assets include a storage facility, a preparation plant and a loadout facility at each of two mines. . The Ikerd-Bandy acquisition: . provided reserves strategically located for our contract with the Tennessee Valley Authority's Kingston plant; . broadened our customer base to include industrial customers; and . allowed us to build market share in southeastern Kentucky. Leslie Resources . Acquired in January for $12.0 million in cash, including $0.3 million of related fees and expenses. We also gave the former owners of Leslie Resources an $11.1 million promissory note. . 1998 revenues totaled $94.3 million. . 1998 production totaled 5.2 million tons from five mines in Knott, Perry and Leslie counties in Kentucky. . Added approximately 63.0 million tons of proven and probable reserves. . The Leslie Resources acquisition provided significant uncommitted production capacity, allowing us the opportunity to seek new contracts to be filled by production from the lower-cost Leslie Resources mines.
22
Crockett Collieries Co. . Acquired in June 1998 for $4.0 million, including $0.2 million of related fees and expenses. . 1998 revenues totaled $6.5 million. . 1998 production totaled 0.6 million tons. . Added approximately 9.0 million tons of proven and probable reserves and a significant contract with the Tennessee Valley Authority. Cyprus Amax Subsidiaries . Acquired in June 1998 for a purchase price of $98.0 million, excluding $8.9 million of related fees and expenses, plus a working capital adjustment. . In the transaction, we also: . purchased certain mining equipment that had previously been leased by the Cyprus Amax subsidiaries for $30.0 million; . assumed a $1.0 million debt obligation; and . agreed to pay Cyprus Amax a royalty on all coal mined from properties owned or controlled by the subsidiaries at closing. These royalty payments will commence on June 1, 2002 and will be $0.50 per ton in Indiana, Illinois, Ohio or California and $0.35 per ton in West Virginia, Kentucky or Tennessee. . If we receive, directly or indirectly, an equity investment of $75.0 million or more, we must pay Cyprus Amax $25.0 million (less 55% of any prior royalty payments) in satisfaction of the royalty obligation. . 1998 revenues totaled $372.7 million. . 1998 production totaled approximately 14.5 million tons. . Added approximately 707 million tons of proven and probable reserves. . Our acquisition of the Cyprus Amax subsidiaries: . strengthened our position in the markets served by our eastern Kentucky mines. . added West Virginia operations that provide us an entry to the markets served by barge transportation from the Kanawha River in West Virginia. Many of these markets are the same markets served by our eastern Kentucky mines, which transport coal through barge loading facilities on the Big Sandy River in eastern Kentucky. Both the Kanawha River and the Big Sandy River are navigable tributaries of the Ohio River, which accesses the largest river-borne market for coal in the United States. . added Indiana operations that provide above-market contracts and access to utilities in Indiana that have installed scrubber technology to control sulfur dioxide emissions from their plants. Battle Ridge Assets . Acquired in July 1998 for approximately $6.8 million, including $0.2 million of related fees and expenses. . 1998 revenues totaled $8.3. . 1998 production totaled 0.4 million tons. . Added approximately 37.0 million tons of proven and probable coal reserves, approximately half of which is compliance coal and the remainder of which is low-sulfur coal. . We also acquired two river dock facilities on the Kanawha River, and one on the Big Sandy River. . The assets acquired from Battle Ridge complement our West Virginia operations acquired from Cyprus Amax.
23
Mid-Vol Leasing . Acquired in July 1998 for $21.2 million, including $0.4 million of related fees and expenses. We also agreed to pay the former owners a $15.0 million promissory note and a production payment on coal mined in the future from specified properties we acquired in the transaction. . 1998 revenues totaled $31.6 million. . 1998 production totaled 1.0 million tons. . Added 51.0 million tons of proven and probable reserves. . Mid-Vol produces high-quality mid- and low-volatile coking coals, a coal product with a niche market. We believe that we can use our Addcar highwall mining systems and our efficient tailored cast blasting and heavy dozer pushing mining methods to increase Mid-Vol's production tonnage and reduce its costs. Kindill . Acquired in September 1998 for $11.3 million, including $0.3 million of related fees and expenses, and the assumption of $50.0 million of indebtedness. The sellers included Stephen Addington, who is one of our directors and the brother of our controlling shareholder. We received an opinion from Rothschild, Inc. that the transaction was fair from a financial point of view. See "Certain Related Party Transactions." . 1998 revenues totaled $73.5 million. . 1998 production totaled approximately 4.5 million tons. . Added 183.0 million tons to our proven and probable reserves. . The Kindill acquisition: . provides us an opportunity to move production for specific long-term sales contracts to Kindill's lower-cost operations, and . complements our Indiana operations acquired from Cyprus Amax. Zeigler Coal Holding Company . Acquired in September 1998 for $872.8 million, including the assumption of $255.0 million of indebtedness and the payment of $18.0 million of related fees and expenses. . 1998 revenues totaled $534.6 million, excluding Zeigler businesses we later sold. . 1998 production totaled approximately 13.2 million tons, excluding Zeigler businesses we later sold. . Added 1.2 billion tons of proven and probable reserves. . Before the transaction, Zeigler was the second largest publicly traded coal company and ninth largest coal producer in the United States, in each case measured by tons produced. The Zeigler acquisition: . Added a strong portfolio of long-term sales contracts, which generated over [75%] of Zeigler's sales in 1998; . added about 4.8 million tons of annual production in 1998 in Eastern Kentucky, making us the largest producer and marketer of coal in this region as measured by production; . enhanced our ability to optimize our mix of production and sales; and . improved our position in West Virginia and in the Illinois Basin region. . In December 1998, we sold certain noncomplementary assets we acquired in the Zeigler acquisition for $310.0 million. See "--Recent Dispositions."
24
Martiki . Acquired in November 1998 from MAPCO Coal Inc. for $32.4 million, including $0.4 million of related fees and expenses. . 1998 revenues totaled $69.3 million. . 1998 production totaled 2.5 million tons. . Added approximately 25.0 million tons of proven and probable reserves. . We also acquired a 1,000 ton per hour preparation plant and a high speed unit train loading facility on the Norfolk Southern rail line. . Due to the strategic location of Martiki's operations, the acquisition allowed us to consolidate significant Addington and Zeigler reserve positions. Princess Beverly . Acquired in February 1999 for $11.6 million. . 1998 revenues totaled $45.0 million. . 1998 production totaled 2.1 million tons. . Added approximately 33.0 million tons of proven and probable reserves. . The Princess Beverly acquisition provides us an ongoing mining operation with substantial compliance reserves that are located near dock facilities on the Kanawha River. MTI Acquisition In January 1998, we purchased a substantial portion of the assets of the Mining Technologies Division of Addington Enterprises for $51.0 million. The assets we acquired included facilities, equipment and intellectual property relating to the Addcar highwall mining system. In the transaction we acquired: . 13 patents, which will expire between December 10, 2010 and November 20, 2015; . one registered trademark in North America relating to the Addcar highwall mining system, which will expire September 28, 2013; . certain mobile mining equipment, spare parts, and continuous mining machines; . an 80,000 square foot manufacturing and warehousing facility; . the equipment and facility for manufacturing Addcar highwall mining systems; and . six existing, operable Addcar highwall mining systems. We believe that our recent acquisitions added significant opportunities to use the Addcar highwall mining system. We believe that the Addcar highwall mining system will allow us to reduce our mining costs significantly and increase the amount of economically mineable reserves at many of our acquired operations. At the time of the MTI acquisition, Larry Addington owned 80% of Addington Enterprises, and Robert Addington and Bruce Addington each owned 10%. Larry Addington is a director of AEI Resources. Robert Addington is a director and officer of AEI Resources. Robert Addington and Bruce Addington are employees of AEI Resources. Recent Dispositions We recently sold the following mining operations and reserves that we acquired in our recent acquisitions because they did not complement our business strategy.
25
Triton Disposition In December 1998, we sold Triton Coal Company, LLC, for $275.0 million. Triton holds the operations in the Powder River Basin of Wyoming that we acquired from Zeigler. We retained assets and liabilities relating to lignite reserves in Texas and Arkansas and coal reserves in Montana previously held by Triton's predecessor. We also agreed to provide transition services to the purchaser of Triton following the closing. Dock Disposition In December 1998, we sold the coal transshipment terminal facilities and related assets in Newport News, Virginia and Charleston, South Carolina that we acquired from Zeigler. The purchaser purchased all land, personal property, fixtures, and equipment used in connection with the operation of the terminal facilities for $35.0 million. R&F Disposition In December 1998, we sold coal mining equipment, inventories, real property, and a coal supply contract used in the operations of our R&F Coal Company subsidiary for $7.6 million. Other Assets Held for Sale In addition to the assets we already have sold, we acquired other assets in the Zeigler acquisition that we currently hold for possible sale or liquidation. The book value of these assets at December 31, 1998, was $3.0 million. See "Business--Non-Coal Businesses."
26
Ownership Structure Larry Addington owns approximately 85.5% of the outstanding capital stock of AEI Resources Holding (47.5% directly and 38% through Addington Enterprises) while 9.5% is owned together by Robert and Bruce Addington through Addington Enterprises, and approximately 5% is owned by Robert Addington individually. The following chart illustrates the organizational structure: [FLOW CHART APPEARS HERE]
27
CAPITALIZATION The following table sets forth, as of December 31, 1998, our historical capitalization of including AEI Holding, our predecessor. This table should be read in conjunction with "Description of the Notes," "Description of Other Indebtedness," the Unaudited Pro Forma Combined Financial Statements and the notes thereto and the Selected Historical Consolidated Financial Statements and the notes thereto appearing elsewhere in this prospectus.
(1) Up to approximately $47.0 million would have been available to us under our credit facility after giving effect to $178.0 million of outstanding letters of credit including those related to the Industrial revenue bonds of Zeigler Coal Holding Company. See "Description of Other Indebtedness-- The Senior Credit Facility," "--Zeigler IRBs."
28
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements are based on the audited financial statements of our parent, AEI Resources Holding and its predecessor appearing elsewhere in this prospectus as adjusted to illustrate the estimated effects of the transactions that we completed between January 1, 1998, and December 31, 1998. The transactions include, among other things: . The acquisitions of the following businesses: .Martiki (November 1998) .The Cyprus Subsidiaries (June 1998) .Zeigler (September 1998) .Mid-Vol (July 1998) .Kindill (September 1998) .The dispositions of Triton, the coal transshipment facilities and certain assets of our R&F Coal Company Subsidiary; . The issuance of the Notes; . The sale of $150 million principal amount of our 11 1/2% Senior Subordinated Notes Due 2006; and . The amendment and restatement of our credit facility. The unaudited pro forma combined financial statements do not reflect the pro forma effect of the acquisition of Princess Beverly or the consummation of the transactions contemplated by the reoffering of the Zeigler IRBs on April 1, 1999. The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. You should read the unaudited pro forma combined financial statements and accompanying notes in conjunction with our historical financial statements and the other financial information appearing elsewhere in this prospectus, including "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The unaudited pro forma combined financial statements have been prepared to give effect to the transactions referenced above as if such transactions had occurred on January 1, 1998, for the statement of income for the year ended December 31, 1998. Since all of the transactions occurred on or before December 31, 1998, no adjustments to our audited historical consolidated balance sheet as of December 31, 1998 were necessary to give effect to the transactions so we did not include an unaudited pro forma combined balance sheet as of December 31, 1998. The unaudited pro forma combined financial statements reflect the application of the principles of purchase accounting to our recent acquisitions. We based the allocation of the purchase price, in part, on preliminary information, which we expect to finalize in 1999. Management is awaiting additional information related to certain reclamation estimates and legal and related preacquisition contingencies. Certain of the businesses acquired in the recent acquisitions followed different accounting policies with respect to the expensing of overburden removal costs. While we capitalize such costs, certain of the acquired entities expensed such costs as they were incurred. Because the information needed to conform most of the acquirees' historical accounting to our accounting for overburden inventory is not available, no pro forma adjustment has been recorded to the unaudited pro forma combined income statements. As a result of these factors, the unaudited pro forma combined financial statements may not be comparable to, or indicative of, our results of operations in future periods. The unaudited pro forma combined financial statements do not purport to indicate what our financial position or results of operation would actually have been had the transactions been completed on such date or at the beginning of the periods indicated or to project our results of operations for any future date.
29
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT For the year ended December 31, 1998
30
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT--Other Acquisitions For the year ended December 31, 1998
31
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
For the year ended December 31, 1998
Note A: This column reflects the historical results of operations of the subsidiaries acquired from Cyprus Amax for the periods indicated and is prior to any adjustments for certain seller retained activities and other items described in Note D below. Note B: This column reflects the historical results of operations of Zeigler and is prior to any adjustment for the net assets held for sale and other items described in Note D below. Note C: This column reflects the pre-acquisition actual combined historical results of operations for each of Martiki, Kindill and Mid-Vol for the year ended December 31, 1998. Set forth on the following pages is a presentation of the combination of the preacquisition results of operations for the entities. Note D: This column reflects the elimination of the historical results of operations of our R&F Coal Company subsidiary. We sold certain operating assets of R&F on December 21, 1998 for $7.6 million. Note E: Pro forma adjustments include purchase accounting, accounting policy conformity and financing entries necessary to reflect the pre-acquisition periods for the following acquisitions: Martiki (November 1998), Zeigler (September 1998), Kindill (September 1998), Mid-Vol (July 1998), and the Cyprus Subsidiaries (June 1998), as well as the debt related financing transactions completed prior to December 31, 1998. The following notes describe the pro forma adjustments. 1. Reflects the elimination of intercompany transactions involving contract mining and purchased coal among us and the acquired companies. 2. Reflects the elimination of Cyprus Amax's retained activities, which consist primarily of the resale of purchased coal by the Cyprus Subsidiaries under a coal sales contract retained by Cyprus Amax. 3. Reflects the elimination of amortized gain on a sale-leaseback transaction and deferred income related to a sales contract amendment where such proceeds were retained by Cyprus Amax. 4. Reflects the elimination of revenues and direct expenses related to certain assets of Zeigler that are currently held for sale or have been sold (i.e. Triton, the coal transshipment facilities, energy trading, and fuel technology). 5. Reflects the decrease in operating expenses resulting from inventory adjustments to conform the Cyprus Subsidiaries to our accounting policies. We defer the cost of removing overburden above coal seams, while the acquired companies expensed such cost as incurred. The information to reflect this accounting policy conformity item is not known for any of the acquired companies, except the Cyprus Subsidiaries, as the engineering estimates to perform the necessary calculations are not available. 6. Reflects adjustments for changes to end-of-mine reclamation expense to conform to our reclamation cost accounting policy. We record end-of-mine reclamation at the date of acquisition. Operating expenses of the acquired companies have been adjusted to eliminate the provision for end-of-mine reclamation expense.
32
7. Reflects adjustments for changes in employee benefits expense resulting from the purchase accounting treatment of the Zeigler, Kindill and Cyprus Subsidiary acquisitions. Operating expenses of these acquired companies have been adjusted to eliminate the expense impact of the amortization of unrecognized prior service costs and unrecognized net gains and losses in connection with defined benefit plans because we will not have any such unrecognized costs or gains and losses under purchase accounting. 8. Reflects adjustments for change in accounting for liabilities under the Coal Retiree Health Benefit Act of 1992. The acquired companies expensed such costs on a pay-as-you-go method and we record the present value of these obligations as a liability at the date of purchase. Operating expenses of the acquired companies have been adjusted to eliminate the cash payment and record the interest accretion. 9. Reflects the elimination of operating leases on assets controlled by Cyprus Amax and leased to the Cyprus Subsidiaries pursuant to operating leases. The Company separately purchased these assets in connection with the acquisition of the Cyprus Subsidiaries and their depreciation is reflected in Note (E) 12. 10. Reflects the reduction in operating expenses from the Cyprus Subsidiary and Zeigler acquisitions. Such reduction resulted from non-acquired employees and related costs as well as costs associated with terminated redundant administrative employees and closed administrative offices. 11. Reflects the reduction in cost of operations for a bonus paid to one of our officers for the consummation of financing transactions and acquisitions. 12. Reflects the increase in depreciation, depletion, and amortization expense from purchase accounting entries. 13. Reflects the elimination of stock options and retention and special bonuses and other selling costs directly attributable to the acquisition of Zeigler. 14. Reflects increased interest expense on the following indebtedness:
15. Reflects the increase in amortization expense resulting from the increase in deferred financing costs in conjunction with the offering of the Senior Subordinated Notes, offset by finance cost amortization on retired debt.
16. Reflects pro forma tax expense (benefit) estimated at 30% of pretax income
Note F: Net Income (loss) from continuing operations is prior to any extraordinary items.
33
Note G: Adjusted EBITDA as presented above and as used elsewhere in this prospectus consists of earnings before interest, taxes, depletion, depreciation, amortization and other non-cash charges as adjusted to exclude certain unusual or nonrecurring charges, all in accordance with the term "Consolidated Cash Flow" as that term is used in the term "Fixed Charge Coverage Ratio" in the indenture governing the Notes. The Fixed Charge Coverage Ratio restricts our ability to incur additional indebtedness above an approved limit if the ratio is below 2.0 to 1.0. As of December 31, 1998 the ratio (calculated on a pro forma basis) was 2.2 to 1.0. See "Description of Notes" for a complete presentation of the methodology employed in calculating Adjusted EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness and because it is used in the Indenture to determine compliance with certain covenants. However, Adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. Adjusted EBITDA is calculated as follows for the year ended December 31, 1998:
In connection with integrating acquired operations, we closed certain of our preexisting mines. Accordingly estimated non-recoverable assets of $2.0 million were written off and estimated reclamation and closure costs of $14.5 million were recorded. Note H: Cash interest expense is calculated as interest expense plus capitalized interest less interest accreted on discounted notes and amortization of deferred financing costs. Note I: In calculating the ratio of earnings to fixed charges, earnings consist of income before income tax provision plus fixed charges (excluding capitalized interest). Fixed charges consist of interest incurred (which includes amortization of deferred financing costs) whether expensed or capitalized and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. Our pro forma earnings were inadequate to cover pro forma fixed charges for the year ended December 31, 1998 by $78.6.
34
Note J This column reflects our income statement for the year ended December 31, 1998 which includes the post-acquisition results of our recent acquisitions. The purchase price for each acquisition is as follows:
No equity securities or other non-cash consideration was issued in connection with our recent acquisitions. We depreciate acquired property, plant and equipment over its estimated useful life (ranging from 2 to 20 years). Allocations to mineral reserves are amortized on a units-of-production method based on estimated recoverable tons. Estimated mine lives, which consider recoverable tons and current mining plans, range from 1 to 40 years.
35
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected consolidated financial data below as of December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998, have been derived from the Consolidated Annual Financial Statements of AEI Resources Holding, which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 1996 has been derived from the Consolidated Annual Financial Statements of AEI Resources Holding, Inc. which have been audited by Arthur Andersen LLP, independent public accountants, and are not included elsewhere in this prospectus. The selected consolidated financial data as of and for the years ended December 31, 1994 and 1995 have been derived from the unaudited Consolidated Financial Statements of our predecessor business and are not included elsewhere in this prospectus. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes included elsewhere in this prospectus.
AEI Resources Holding, Inc. (including its predecessors)
NA = Not Available
36
(1) The operations data for the year ended December 31, 1995, combine the
audited results of operations for AEI Holding (Holdings' predecessor) for
the period from January 1, 1995 through December 31, 1995 and the results
of Addington Coal Operations (the predecessor to AEI Holding) for the
period from January 1, 1995 through November 1, 1995. The operations data
for the year ended December 31, 1995 do not purport to represent what our
combined results of operations would have been if the predecessor
businesses had actually been acquired as of January 1, 1995.
(3) In April 1997, Bowie Resources, Limited changed its tax reporting status
from an S-corporation to a C-corporation, resulting in an initial deferred
tax liability of $1.6 million. In November 1997, the other subsidiaries of
AEI Holding likewise changed from S-corporations to C-corporations,
resulting in an initial deferred tax liability of $18.0 million.
(5) Adjusted EBITDA as presented above and as used elsewhere in this prospectus consists of earnings before interest, taxes, depletion, depreciation, amortization and other non-cash charges as adjusted to exclude certain unusual or nonrecurring charges, all in accordance with the term "Consolidated Cash Flow" as that term is used in the term "Fixed Charge Coverage Ratio" in the Indenture. The Fixed Charge Coverage Ratio restricts our ability to incur additional indebtedness above an approved limit if the ratio is below 2.0 to 1.0. As of December 31, 1998, the ratio (calculated on a pro forma basis) was 2.2 to 1.0. See "Description of Notes" for a complete presentation of the methodology employed in calculating Adjusted EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness and because it is used in the Indenture to determine compliance with certain covenants. However, Adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity.
(6) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income tax provision plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest incurred (which
includes amortization of deferred financing costs) whether expensed or
capitalized and one-third of rental expense, deemed representative of that
portion of rental expense estimated to be attributable to interest.
Earnings were inadequate to cover fixed charges for 1997 and 1998 by $3.8
million and $57.9 million, respectively.
37
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA Prior to June, 1998, the historical results of AEI Holding were identical to that of its parent, Holdings. The selected consolidated financial data below as of December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998, have been derived from the Consolidated Annual Financial Statements of AEI Holding, which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 1996, has been derived from the Consolidated Annual Financial Statements of AEI Holding which have been audited by Arthur Andersen LLP, independent public accountants, and are not included elsewhere in this prospectus. The selected consolidated financial data for the years ended December 31, 1994 and 1995 has been derived from the unaudited Consolidated Financial Statements of the Company's predecessor business and is not included elsewhere herein. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes included elsewhere in this Prospectus. AEI Holding Company, Inc. (including its predecessors) (Dollars in millions, except per ton data)
NA = Not Available
38
(1) The operations data for the year ended December 31, 1995 combine the audited results of operations for AEI Holding, Holdings' predecessor for the period from January 1, 1995 through December 31, 1995 and the results of Addington Coal Operations (the predecessor to AEI Holding) for the period from January 1, 1995 through November 1, 1995. The operations data for the year ended December 31, 1995, do not purport to represent what our combined results of operations would have been if the predecessor businesses had actually been acquired as of January 1, 1995. (2) Other income (expense), net reflects the inclusion of gain or loss on asset sales. (3) In April 1997, Bowie Resources, Limited changed its tax reporting status from an S-corporation to a C-corporation, resulting in an initial deferred tax liability of $1.6 million. In November 1997, the other subsidiaries of AEI Holding likewise changed from S-corporations to C-corporations, resulting in an initial deferred tax liability of $18.0 million. (4) Net income (loss) from continuing operations is prior to any extraordinary items. (5) Adjusted EBITDA as presented above and as used elsewhere in this Prospectus consists of earnings before interest, taxes, depletion, depreciation, amortization and other non-cash charges as adjusted to exclude certain unusual or nonrecurring charges, all in accordance with the term "Consolidated Cash Flow" as that term is used in the term "Fixed Charge Coverage Ratio" in the Indenture. The Fixed Charge Coverage Ratio restricts our ability to incur additional indebtedness above an approved limit if the ratio is below 2.0 to 1.0. As of December 31, 1998 the ratio (calculated on a pro forma basis) was 2.2 to 1.0. See "Description of the Notes" for a complete presentation of the methodology employed in calculating Adjusted EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness and because it is used in the Indenture to determine compliance with certain covenants. However, Adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. (6) In calculating the ratio of earnings to fixed charges, earnings consist of income before income tax provision plus fixed charges (excluding capitalized interest). Fixed charges consist of interest incurred (which includes amortization of deferred financing costs) whether expensed or capitalized and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. Earnings were inadequate to cover fixed charges for 1997 and 1998 by $3.8 million and $24.4 million, respectively. (7) Average cost per ton sold is calculated based on total coal operating costs included in cost of operations, plus depreciation costs related to mining, divided by coal sold.
39
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected financial data below as of and for the period from inception, December 11, 1998, through December 31, 1998, have been derived from the annual financial statements of Employee Benefits Management, Inc., which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this prospectus. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and related notes included elsewhere in this prospectus. Employee Benefits Management, Inc. (In millions)
40
The selected consolidated financial data below as of and for the years ended December 31, 1996 and 1997, and for the two years in the period ended December 31, 1997, have been derived from the Consolidated Annual Financial Statements of Zeigler which have been audited by Deloitte & Touche LLP, independent auditors, and are included elsewhere in this prospectus. The selected consolidated financial data as of August 31, 1998 and for the eight-month periods ended August 31, 1997 and 1998, have been derived from Zeigler's Unaudited Consolidated Financial Statements for those periods included elsewhere in the prospectus and include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the eight months ended August 31, 1998, are not necessarily indicative of the results that may be expected for the entire year. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of Zeigler and related notes included elsewhere in this Prospectus. Ziegler was acquired on September 2, 1998, and the following presents the respective preacquisition periods.
Zeigler
41
(1) Depreciation, depletion and amortization is included in cost of operations and selling, general and administrative per the audited financials elsewhere in this prospectus. It is segregated here to conform with the presentation of the Company and the Cyprus Subsidiaries. (2) Reflects acceleration of the accruals related to mine closing costs and pre-tax writedowns in certain asset carrying values, primarily in connection with the idling, closing, and projected closing of certain mines earlier than previously forecast. (3) Interest expense is reported net of interest income per the audited financials (see F-Section). It is segregated here to conform with the presentation of the financial statements of the Company. (4) Net income (loss) from continuing operations is prior to any extraordinary items. (5) Adjusted EBITDA as presented above and as used elsewhere in this prospectus consists of earnings before interest, taxes, depletion, depreciation, amortization and other non-cash charges as adjusted to exclude certain unusual or nonrecurring charges, all in accordance with the term "Consolidated Cash Flow" as that term is used in the term "Fixed Charge Coverage Ratio" in the Indenture. See "Description of Notes" for a complete presentation of the methodology employed in calculating Adjusted EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness and because it is used in the Indenture to determine compliance with certain covenants. However, Adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. (6) In calculating the ratio of earnings to fixed charges, earnings consist of income before income tax provision plus fixed charges, excluding capitalized interest. Fixed charges consist of interest incurred, which includes amortization of deferred financing costs, whether expensed or capitalized and one-third of rental expense, deemed representative of that portion of rental expense estimated to be attributable to interest. (7) Average cost per ton sold is calculated based on total coal operating costs included in cost of operations, plus depreciation costs related to mining, divided by coal sold.
42
The selected combined financial data below as of December 31, 1996 and 1997, and for the two years in the period ending December 31, 1997, have been derived from the Combined Annual Financial Statements of the Cyprus Subsidiaries which have been audited by PricewaterhouseCoopers, LLP, independent public accountants, and are included elsewhere in this prospectus. The selected financial data as of June 30, 1998 and for the six-month periods ended June 30, 1997 and 1998, have been derived from the Cyprus Subsidiaries' Unaudited Combined Financial Statements for those periods included elsewhere in the prospectus and include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the entire year. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined Financial Statements of the Cyprus Subsidiaries and related notes included elsewhere in this prospectus. The Cyprus Subsidiaries were acquired on June 29, 1998 and following presents the respective preacquisition periods.
The Cyprus Subsidiaries
43
(1) In 1996, write downs and special items consist of the write down of mining properties, due to weak demand, transportation and coal quality disadvantages, and impending long-term contract expirations, among other factors, in accordance with SFAS 121, and the write down of supplies inventory to their net realizable value. In 1997, the Cyprus Subsidiaries recorded write downs and special items of $92.1 million. Such write downs and special items consist of: 1) charges of $35.8 million for the anticipated closure of the Armstrong Creek mine (which includes a $9.6 million charge related to end-of-mine reclamation); 2) $2.3 million charge to increase current reclamation accruals for the Chinook mine; 3) charges of $6.9 million to write down land assets and prepaid royalties to net realizable value; and 4) write downs of $33.5 million and $13.6 million in asset values at the Cyprus Subsidiaries' West Virginia and Chinook mines, respectively. The write downs resulted from updated mine and business plans that reflected the views of the Cyprus Subsidiaries' management regarding the domestic market for mid- to high-sulfur coal and updated reserve information. (2) Other income (expense), net reflects the inclusion of minority interest and gain or loss on asset sales. In the audited financials (set forth elsewhere herein) gain on asset sales is included in revenues. It is included here to conform with the presentation of the financial statements of the Company. (3) No income tax provision (benefit) has been allocated by Cyprus Amax to the Cyprus Subsidiaries. (4) Adjusted EBITDA as presented above and as used elsewhere in this prospectus consists of earnings before interest, taxes, depletion, depreciation, amortization and other non-cash charges as adjusted to exclude certain unusual or nonrecurring charges, all in accordance with the term "Consolidated Cash Flow" as that term is used in the term "Fixed Charge Coverage Ratio" in the Indenture. See "Description of Notes" for a complete presentation of the methodology employed in calculating Adjusted EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness and because it is used in the Indenture to determine compliance with certain covenants. However, Adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity.
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income tax provision plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest incurred (which
includes amortization of deferred financing costs) whether expensed or
capitalized and one-third of rental expense, deemed representative of that
portion of rental expense estimated to be attributable to interest.
Earnings were inadequate to cover fixed charges for 1996, 1997, the six
months ended June 30, 1997, and the six months ended June 30, 1998 by $1.5
million, $99.1 million, $2.4 million and $3.5 million, respectively.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data," "Financial Statements" and the notes thereto. Our actual results may vary materially from forward-looking statements included in this section and elsewhere in this prospectus due to factors described below and under "Risk Factors." General We derive our revenues primarily from the sale of coal to electric utilities and other industrial users under long-term sales contracts. We sell a substantial portion of our coal under long-term sales contracts and sells the remainder under short-term contracts and on the spot market. Sales pursuant to long-term sales contracts accounted for 72% of our coal sales revenue during 1998, with the remainder being accounted for by sales pursuant to short-term contracts and on the spot market. The principal components of our expenses are costs relating to the production and transportation of its coal, including labor expenses, royalty and lease payments, reclamation expenditures and rail, barge and trucking costs. Other expenses include depletion, depreciation, amortization, selling, general and administrative and interest expenses. Certain Factors Affecting Current and Future Operating Results The Company's current and future operating results will likely be affected by the following events and factors: Certain Contract Revenues. Under certain long-term sales contracts, in relation to contract revenues from coal sales, we have been receiving additional periodic payments with such payments included in revenues as coal shipments occur pursuant to contract terms. Such proceeds amounted to $9.7 million in 1998. The contracts call for $46.4 million of additional payments to be paid to us in 1999. The contracts call for $91.0 million of additional payments over the following four years. Significant Customers. We derive our revenues primarily from long-term coal supply contracts with utilities. Through December 31, 1998, we were in arrears in delivering coal under one coal supply contract with a customer whose purchases under several contracts represented approximately 15% of our consolidated revenues in 1998. We expect to prospectively ship all tonnage for which we are currently in arrears and do not believe the arrearages will have a material adverse effect on our financial condition. Recent Acquisitions. In connection with the recent acquisitions, we expect to incur certain one-time acquisition charges aggregating approximately $22.1 million, approximately $3.8 million of which has been paid as of December 31, 1998. The costs relate primarily to severance plan obligations and change of control provisions contained in employment agreements assumed we in connection with its acquisition of Zeigler on September 2, 1998. We also wrote off $16.3 million of deferred financing costs related to the bridge financing for the acquisitions of the Cyprus Subsidiaries and Zeigler. Other integration costs are expected to include closing redundant facilities and relocating certain business processes of the businesses acquired in the recent acquisitions. Increased Interest Costs. As a result of increased indebtedness we incurred in connection with the recent acquisitions, our interest expense increased substantially from 1997 to 1998 and is expected to further increase in 1999. Interest costs in 1999 could increase significantly if we acquire additional coal companies or coal reserves financed through debt. Reclamation and Mine Accruals. Annually, we review our entire reclamation liability and makes necessary adjustments, including mine plan and permit changes and revisions to production levels to optimize mining reclamation and efficiency. The financial impact of any such adjustment is generally recorded to cost of coal sales prospectively as remaining tons are mined. Although our management believes it is making adequate provisions for all expected reclamation and other costs associated with mine closures, future operating results would be adversely affected if such accruals were later determined to be insufficient.
45
Anticipated Cost Savings and Synergies. The unaudited Pro Forma Combined Financial Statements do not include the effect of certain cost savings and synergies we believe are possible to achieve as a result of our recent acquisitions. On a pro forma basis, we expect that we would have generated approximately $71 million in additional cost savings over the twelve-month period ended December 31, 1997. Potential cost-savings and synergies from these items include approximately $17 million related to overhead and closure of unneeded offices, approximately $13 million related to certain personnel reductions and benefit plan consolidations, and approximately $41 million related to mining and material sourcing synergies. The reduction in overhead and closure of unneeded offices are expected to result from reduction in costs due to duplication of corporate management and regional offices at Zeigler. The benefit plans of the various existing and acquired companies will be consolidated into a company-wide plan. The mining synergies are expected to include 1) sourcing coal supply contracts from lower cost mines, 2) mine plan changes at the Marrow-bone and Armstrong Creek Mines and 3) materials sourcing activities as we become a larger volume customer of its suppliers. However, there can be no assurances that we will be able to achieve such cost savings or synergies or, even if it is able to achieve such cost savings or synergies, that it will be able to do so within the time period currently anticipated. In the event such anticipated cost savings and synergies are not achieved, we may encounter financing constraints in our future operations. See "Risk Factors-- Ability to Achieve Anticipated Cost Savings and Synergies." Results of Operations AEI Resources Holding, Inc. (including the Company's predecessor) The following table sets forth, for the periods indicated, certain operating and other data of AEI Resources Holding, Inc., including our predecessor, AEI Holding, presented as a percent of revenues.
Year Ended December 31, 1998, Compared to Year Ended December 31, 1997 Due to the completion of our recent acquisitions, the changes in results of operations discussed below may not be illustrative of operations if we had operated the businesses acquired in the recent acquisitions from January 1, 1998. Revenues. Revenues were $733.4 million for the year ended December 31, 1998, compared to $175.3 million for the year ended December 31, 1997, an increase of $558.1 million or 318%. The increase in revenues is attributable to mining revenues from recently acquired businesses included in the results of operations in the year ended December 31, 1998, and not in the results of operations in the year ended December 31, 1997, which primarily consisted of $20.8 million from Ikerd-Bandy; $94.2 million from Leslie Resources; $177.5 million from the Company's subsidiaries it acquired from Cyprus Amax Coal Company; and $199.4 million from Zeigler. Revenues exclusive of the acquirees increased from $169.0 million to $193.4 million ($24.4 million or 14%). The increase is due to increased tonnage delivery (6.2 million tons to 7.3 million tons or 18%) partially offset by a decrease in revenue per ton ($27.07 to $26.35 or 3%).
46
Cost of Operations. The cost of operations totaled $590.8 million for the year ended December 31, 1998, compared to $145.2 million for the year ended December 31, 1997, an increase of $445.6 million or 307%. The increase is primarily attributable to acquirees included in 1998 and not in 1997, including Ikerd- Bandy ($28.6 million), Leslie Resources ($95.6 million), the Cyprus Subsidiaries ($162.2 million), and Zeigler ($148.2 million). Cost of operations exclusive of the acquirees increased from $139.2 million to $160.8 million ($21.6 million or 16%). This increase is due primarily to the increased production volumes brought about by increased sales opportunities. Partially offsetting was a decrease in average cost per ton sold (from $22.29 to $21.92 or 2%). Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the year ended December 31, 1998, totaled $76.8 million compared to $10.8 million for the year ended December 31, 1997, an increase of $66.0 million or 611%. The increase in depreciation, depletion and amortization resulted primarily from: 1) increased depreciation from the property and equipment acquired in our recent acquisitions, 2) additional depreciation and amortization from 1997 and 1998 capital expenditures, and 3) increased depletion of mineral reserves. Writedowns and Special Items. In connection with integrating acquired operations, we closed certain of our higher-cost non-acquiree mines during the year ended December 31, 1998. As a result, estimated non-recoverable assets of $2.0 million were written off and additional estimated reclamation and mine closure costs of $14.5 million were recorded. There were no such charges for the year ended December 31, 1997. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 1998, were $32.5 million compared to $13.9 million for the year ended December 31, 1997, an increase of $18.6 million or 134%. The increase in such expenses primarily resulted from acquirees included in 1998 and not in 1997 and the expansion of management and administrative functions to support the recent growth. Interest Expense. Interest expense for the year ended December 31, 1998, was $65.3 million compared to $9.2 million for the year ended December 31, 1997, an increase of $56.1 million or 610%. The increase resulted primarily from interest associated with: 1) the increase in debt levels from $217.0 million as of December 31, 1997, to $1.2 billion as of December 31, 1998, brought about by the recent acquisitions and 2) the related amortization of debt financing costs. Other Income (Expense), Net. Other income (expense) increased $4.3 million in 1998, primarily due to a $1.0 million gain on the sale of an aircraft and an increase in interest income resulting from the investment of excess debt proceeds from the 1997 Notes. Provision for income taxes. There was a $20.4 million income tax benefit for the year ended December 31, 1998, as compared to a $17.5 million provision for the year ended December 31, 1997. During the year ended December 31, 1997, we operated primarily under S corporation tax status. During April of 1997, Bowie Resources, Limited, experienced a change in the tax status from an S corporation to a C corporation, which resulted in the recording of a $1.6 million provision and deferred tax liability. In addition, during November of 1997, the mining businesses transferred from Addington Enterprises (as an S corporation) to the Company (as a C corporation) initially recorded a net deferred tax liability of $18.0 million, with an increase to the income tax provision for the differences in book and tax bases in assets and liabilities. Prior to September 1, 1998, a deferred tax benefit was not recorded, due to uncertainties in realization, until after the acquisitions of Zeigler and Kindill and the establishment of a deferred tax liability in September 1998. This will allow the utilization of certain tax benefits, including NOL's and AMT credits, which resulted in a deferred tax benefit for 1998. Extraordinary Loss From Debt Refinancing. For the year ended December 31, 1998, we incurred an extraordinary loss of $10.2 million (net of a $6.8 million tax benefit) compared to $1.3 million (net of a $0.9 million tax benefit) for the year ended December 31, 1997. During the year ended December 31, 1998, we retired a $25 million credit facility early and extinguished bridge facilities related to the acquisitions of Zeigler and the Cyprus Subsidiaries. All unamortized debt issuance costs associated with the retired facilities were written off.
47
Net Income (Loss). For the year ended December 31, 1998, we had a net loss of $33.6 million compared to a net loss of $22.2 million for the year ended December 31, 1997, an increase of $11.4 million. The increase primarily was due to increased depreciation associated with our recent acquisitions, increased interest expense associated with financing those acquisitions and the extraordinary loss related to the write-off of unamortized debt issuance costs. Year Ended December 31, 1997, Compared to Year Ended December 31, 1996 Revenues. Revenues were $175.3 million for the year ended December 31, 1997, compared to $123.2 million for the year ended December 31, 1996, an increase of $52.1 million or 42%. The increase in revenues is attributable to a 56% increase in coal mining revenues (up $59.2 million from $104.8 million to $164.0 million), partially offset by a 49% decrease in equipment sales, rental and repair (down $7.9 million from $16.0 million to $8.1 million). Coal sales tonnage increased 55% from 4.2 million tons for the year ended December 31, 1996, to 6.5 million tons for the year ended December 31, 1997. This increased volume resulted primarily from increased sales from the eastern Kentucky operations. Revenue per ton also increased $0.35 or 1% (from $24.84 for the year ended December 31, 1996, to $25.19 for the year ended December 31, 1997). This increase in revenues per ton is attributable to the expiration of lower priced contracts and the inclusion of new higher priced contracts. Equipment sales, rental and repair declined in 1997 from 1996 due to 1) revenues from highwall miner equipment repair and sales to Mining Technologies Australia, Pty. Ltd. ("MTA") (an Australian entity formerly majority owned by Larry Addington) in 1996 exceeding 1997 revenues by $3.2 million due to decreased operations in Australia in 1997, and 2) rental of four Addcar/TM/highwall mining systems by Mining Technologies, Inc. and Bowie (totaling $5.4 million in revenue) during 1996 which were instead deployed to internal jobs in 1997. Cost of Operations. The cost of operations totaled $145.2 million for the year ended December 31, 1997, compared to $97.1 million for the year ended December 31, 1996, an increase of $48.1 million or 50%. The increase was primarily due to the increase in tons produced from 4.2 million in 1996 to 6.3 million in 1997 which correspond with the increased sales volume in 1997. Our average cost per ton sold was $22.08 per ton for the year ended December 31, 1997, compared to $21.32 per ton for the year ended December 31, 1996, an increase of $0.76 per ton or 4%. This increase was attributable to adverse mining conditions, primarily increased stripping ratios. Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the year ended December 31, 1997, totaled $10.8 million compared to $6.9 million for the year ended December 31, 1996, an increase of $3.9 million of 57%, which is consistent with the increase in cost of operations. The increase in depreciation, depletion and amortization primarily resulted from the use of an Addcar/TM/ highwall mining system and the amortization of mines developments costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 1997, were $13.9 million compared to $9.1 million for the year ended December 31, 1996, an increase of $4.8 million or 53%. The increase in such expenses primarily resulted from increased costs associated with organizational growth, 1997 bonuses totalling $3.0 million paid to 37 employees and other sales-related costs. Interest Expense. Interest expense for the year ended December 31, 1997, was $9.2 million compared to $5.5 million for the year ended December 31, 1996, an increase of $3.7 million or 67%. This increase resulted primarily from interest associated with our 1997 Notes and increased stockholder loans used to fund the development of our operations. Provision for Income Taxes. The provision for income taxes for the year ended December 31, 1997, was $17.5 million compared to no provision for the year ended December 31, 1996. The increase in the provision for income taxes is due primarily to the provision for deferred income taxes resulting from the change in tax status from an S corporation to a C corporation.
48
Net Income (Loss). For the year ended December 31, 1997, we had a net loss of $22.2 million compared to net income of $5.1 million for the year ended December 31, 1996, a decrease of $27.3 million or 535%. The decrease primarily resulted from increased tax expenses caused by the change in tax status from an S corporation to a C corporation in 1997 and the increase in selling, general and administrative and interest expense. AEI Holding Company, Inc. Through June 30, 1998, AEI Holding (and its predecessors) was the predecessor to AEI Resources, Inc. and AEI Resources Holding, Inc. Accordingly, the results of operations for periods prior to June 30, 1998 for AEI Holding are discussed in the preceding section headed AEI Resources Holding, Inc. After June 30, 1998, AEI Holding functioned as subsidiary operations within the Company. Accordingly, the December 31, 1998 results of operations of AEI Holding are discussed below.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues. Revenues were $316.2 million for the year ended December 31, 1998, compared to $175.3 million for the year ended December 31, 1997, an increase of $140.9 million or 81%. The increase in revenues was primarily attributable to a 103% increase in coal sales volumes, up 6.7 million tons from 6.5 million tons for the year ended December 31, 1997 to 13.2 million tons for the year ended December 31, 1998. The increased sales volume was primarily due to the acquisitions of Leslie Resources and Ikerd-Bandy. During 1998, these companies sold a combined 6.6 million tons. Cost of Operations. The cost of operations totaled $267.8 million for the year ended December 31, 1998, compared to $145.2 million for the year ended December 31, 1997, an increase of $122.6 million or 84%. The increase was primarily attributable to a 106% increase in coal production, up 6.7 million tons from 6.3 million tons for the year ended December 31, 1997 to 13.0 million tons for the year ended December 31, 1998. This increase in production corresponds with an increase in sales volumes that resulted from the acquisitions of Leslie Resources and Ikerd-Bandy. During 1998, these companies produced a combined 6.4 million tons. Depreciation, Depletion, and Amortization. Depreciation, depletion, and amortization for the year ended December 31, 1998 totaled $21.1 million compared to $10.8 million for the year ended December 31, 1997, an increase of $10.3 million or 95%, which is consistent with the increase in cost of operations. The increase in depreciation, depletion and amortization resulted primarily from the following factors: 1) the additions of Ikerd-Bandy and Leslie Resources, which totaled a combined $8.1 million for the year ended December 31, 1998, 2) additional depreciation and amortization from 1998 capital expenditures and 3) increased depletion of mineral reserves.
49
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses for the year ended December 31, 1998 were $14.4 million compared to $13.9 million for the year ended December 31, 1997, an increase of $0.5 million or 4%. The increase in such expenses primarily resulted from increased costs associated with organizational growth, including such items as executive and other compensation and benefits, professional fees, etc. Writedowns and Special Items. In connection with integrating other parent acquired operations, AEI Holding closed certain higher-cost mines during the year ended December 31, 1998. As a result, estimated non-recoverable assets of $2.0 million were written off and additional estimated reclamation and mine closure costs of $14.5 million were recorded. There were no such charges for the year ended December 31, 1997. Interest Expense. Interest expense for the year ended December 31, 1998 was $20.7 million compared to $9.2 million for the year ended December 31, 1997, an increase of $11.5 million or 125%. This increase resulted primarily from interest associated with the issuance of the 1997 Notes in November 1997. Provision for Income Taxes. There was an $8.7 million income tax benefit for the year ended December 31, 1998, as compared to a $17.5 million provision for the year ended December 31, 1997. During the year ended December 31, 1997, AEI Holding operated primarily under S Corporation tax status. During April of 1997, Bowie Resources, Limited experienced a change in tax status from an S corporation to a C corporation, which resulted in the recording of a $1.6 million provision and deferred tax liability. In addition, during November of 1997, the mining businesses transferred from Addington Enterprises (as an S corporation) to AEI Holding (as a C corporation) initially recorded a deferred tax liability of 18.0 million with an increase to the income tax provision for the differences in book and tax bases in assets and liabilities. Prior to September 1, 1998, a deferred tax benefit was not recorded, due to uncertainties in realization, until after the acquisitions of Ziegler and Kindill and the establishment of a deferred tax liability in September 1998. This will allow the utilization of certain tax benefits, including NOL's and AMT credits, resulting in a deferred tax benefit for 1998 based upon an allocation from the Company. Extraordinary Loss From Debt Refinancing. For the year ended December 31, 1998, AEI Holding incurred an extraordinary loss of $0.4 million (net of a $0.3 million tax benefit) compared to $1.3 million (net of a $0.9 million tax benefit) for the year ended December 31, 1997. In 1997, AEI Holding extinguished a line of credit and bridge financing resulting in prepayment penalties of $1.6 million and the write-off of $0.6 million in deferred debt issuance costs. During 1998, AEI Holding extinguished a line of credit which resulted in the write-off of approximately $0.7 million in deferred debt issuance costs. Net Income (Loss). For the year ended December 31, 1998, AEI Holding had a net loss of $13.4 million compared to a net loss of $22.2 million for the year ended December 31, 1997. The decreased loss primarily resulted from the recognition of the $8.7 million income tax benefit in 1998 as compared to the $17.5 million of expense in 1997, partially offset by the $16.5 million of write-downs and special items recognized in 1998. Employee Benefits Management, Inc. (EBMI) The following table sets forth certain operating and other data of EBMI presented as a percent of revenues.
50
EBMI is an indirect subsidiary of the Company which was recapitalized on December 11, 1998. EBMI's results of operations for the period from inception (December 11, 1998) to December 31, 1998 is comprised of interest income ($1.0 million) related to notes receivable from affiliates and expenses ($0.9 million) attributable to service and interest costs related to the vested union postretirement benefit obligations it manages. EBMI's liquidity is largely dependent upon its parent as well as its ability to effectively manage claims related to the postretirement obligations it acquired in connection with the recapitalization. Cash flows to cover post retirement obligations come from interest income on intercompany notes. Additionally, EBMI has a revolving credit note with Holdings in the amount of $10 million, which was not drawn upon at December 31, 1998. Zeigler The following table sets forth, for the pre-acquisition periods indicated, certain operating and other data of Zeigler presented as a percent of revenues.
Eight Months Ended August 31, 1998 Compared to Eight Months Ended August 31, 1997 Because the Zeigler acquisition was consummated on September 2, 1998, the results of operations for September 1998 are included in the Company's results of operations. Revenues. Revenues were $533.4 million for the eight months ended August 31, 1998, compared to $524.3 million for the eight months ended August 31, 1997, an increase of $9.1 million or 2%. The increase in revenues resulted primarily from increased coal revenues of $16.7 million, partially offset by lower energy trading revenue of $6.2 million reflecting a management decision to reduce electricity and gas trading during the second quarter of 1998. Increased coal sales primarily resulted from higher volumes at Pike County from the start-up of the new Matrix Mining operations ($19.4 million), and increased revenues of $5.3 million at Evergreen mine due to higher production, partially offset by decreased revenues of $7.6 million in the Midwest due to the expiration of a contract and lower spot volume primarily due to the closure of Old Ben Coal Company's Spartan mine in the fourth quarter of 1997. Cost of Operations. The cost of operations totaled $438.2 million for the eight months ended August 31, 1998 compared to $423.5 million for the eight months ended August 31, 1997, an increase of $14.7 million or 4%. The increase primarily reflects a $13.0 million increase related to 1997 revisions in mine closing estimates and employee benefit obligations, higher production costs at Marrowbone due to lower yield caused by continued geologic problems ($6.4 million) and higher expenses associated with the increased sales volumes at Pike County and Evergreen mine as discussed above. These increases were partially offset by $7.6 million of lower energy trading expense as discussed above, and $3.9 million of lower expense associated with Zeigler's clean coal demonstration plant.
51
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the eight months ended August 31, 1998 totaled $43.5 million compared to $38.1 million for the eight months ended August 31, 1997, an increase of $5.4 million or 14%. The increase in depreciation, depletion and amortization primarily resulted from depreciation in 1998 for the full nine-month period on 1997 capital expenditures and a revision in certain asset lives. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the eight months ended August 31, 1998 were $9.2 million compared to $17.2 million for the eight months ended August 31, 1997, a decrease of $8.0 million or 47%. The decrease in such expenses primarily resulted from lower incentive compensation and consulting costs. Write Downs and Special Items. Write downs and special items of $21.2 million for the eight months ended August 31, 1998 consist of charges related to the sale of Zeigler to the Company, including professional sales fees, and retention and special bonuses. No write-downs and special charges were incurred for the eight months ended August 31, 1997. Interest Expense. Interest expense for the eight months ended August 31, 1998 was $8.0 million compared to $15.2 million for the eight months ended August 31, 1997, a decrease of $7.2 million or 47%. This decrease reflects the prepayment in January 1998 of Zeigler's 8.61% senior secured notes. Other Income (Expense), Net. In the second quarter of 1998, Zeigler received a $5.2 million distribution of surplus funds from Old Ben's investment in a reciprocal insurance association. The distribution was offset by a decrease in interest income due to decreased levels of excess cash. Provision for Income Taxes. The provision for income taxes for the eight months ended August 31, 1998 was $2.8 million compared to $6.2 million for the eight months ended August 31, 1997. The decrease in the provision for income taxes is due to a decrease of pretax income of $15.6 million or 46%. Net Income. For the eight months ended August 31, 1998, Zeigler had net income of $15.7 million compared to net income of $27.9 million for the eight months ended August 31, 1997, a decrease of $12.2 million or 44%. The decrease is due of $18.0 million of expense associated with the sale of the Company in September 1998, the 1997 nonrecurring benefits from changes in mine closing estimates, employee benefit obligations, and lost cost claims totaling $14.4 million, and higher production costs at Marrowbone of $5.4 million. These items were partially offset by lower selling, general and administrative expenses of $3.9 million, higher margins from purchased coal of $4.2 million, lower expense at Zeigler's clean coal demonstration plant of $3.7 million, lower interest expense of $3.6 million, distribution of surplus funds from an investment in a reciprocal insurance association of $3.2 million, improved productivity at Pike County of $2.9 million and lower property taxes at Old Ben of $1.6 million. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues. Revenues were $800.8 million for the year ended December 31, 1997, compared to $731.6 million for the year ended December 31, 1996, an increase of $69.2 million or 10%. EnerZ Corporation's energy trading and marketing activities commenced in January 1997. Approximately 80% of EnerZ's fiscal 1997 revenues of $166.5 million were generated from electricity transactions with the remainder attributable to natural gas trading. Coal sales declined $95.0 million in fiscal 1997 compared to 1996, of which $80.2 million reflected the 1996 closures of Old Ben Mine #24 and Old Ben Mine #26, $30.5 million reflected the 1996 closure of Old Ben Mine #20, and $20.4 million reflected the 1996 expiration of Triton's contract with Western Farmers Electric Cooperative. These decreases were partially offset by a $14.3 million increase in revenues related to the reactivation of Old Ben Mine #11 and other small sales increases. Other revenues include throughput fees of $19.3 million at Zeigler's two east coast transshipment terminals; farm, timber, coal trucking, and ash disposal income; royalty and rental income from land and mineral interests; and gains from sales of surplus properties. The fiscal 1997 revenue decline was mainly due to lower revenue from third-party coal leases and timber sales.
52
Since we acquired Zeigler in September 1998, we have sold or are in the process of winding up several of Zeigler's non-coal businesses, including EnerZ and Encoal Corporation. We hold the remaining non-coal businesses as assets held for sale. See "Business--Non-coal Businesses." Cost of Operations. The cost of operations totaled $641.3 million for the year ended December 31, 1997 compared to $559.6 million for the year ended December 31, 1996, an increase of $81.7 million or 15%. The increase was primarily due to higher trading costs of $173.2 million reflecting the first year of operations for EnerZ, a $16.3 million 1996 curtailment gain resulting from a reduction in Zeigler's recorded obligation to provide retiree medical benefits to certain former midwestern mining employees as a result of their re- employment or termination prior to vesting, and higher costs for operating the Encoal Corporation plant after the 1996 expiration of Department of Energy co- funding. Partially offsetting these increases was a decrease in cost of coal sales primarily reflecting the impact of 1996 mine closings and reductions in certain recorded liabilities. During 1997, Zeigler also reduced accrued mine closing costs by approximately $23.4 million, including decreases in the Old Ben reclamation obligations and contingent claims liabilities. In addition, actuarially-based liability reductions reducing cost of operations included $8.2 million for accrued pneumoconiosis benefits, $3.2 million for postemployment benefits and $2.4 million for postretirement benefits. Various other estimated liabilities were reevaluated and reduced cost of operations in total by $4.5 million. Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the year ended December 31, 1997 totaled $57.9 million compared to $60.1 million for the year ended December 31, 1996, a decrease of $2.2 million or 4%. The decrease in depreciation, depletion and amortization primarily resulted from the 1995 closing of Old Ben Mine #1 and the 1996 closing of Old Ben Mine #24. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 1997 were $15.6 million compared to $20.9 million for the year ended December 31, 1996, a decrease of $5.3 million or 25%. Lower 1997 expenses were mainly the result of lower stock appreciation unit and compensation-related charges and the timing of other expenses. Interest Expense. Interest expense for the year ended December 31, 1997 was $24.9 million compared to $23.8 million for the year ended December 31, 1996, a decrease of $1.1 million or 5%. The higher expense in fiscal 1997 primarily resulted from increased average borrowings. Other Income (Expense), Net. Other Income (expense), net for the year ended December 31, 1997 was $7.9 million compared to $2.1 million for the year ended December 31, 1996, an increase of $5.8 million or 276%. The increase primarily reflects higher interest income earned due to larger cash investments. Provision for Income Taxes. The provision for income taxes for the year ended December 31, 1997 was $10.4 million compared to $11.3 million for the year ended December 31, 1996. The decrease in the provision for income taxes is due to the slightly lower pretax income and lower tax rate. Zeigler's effective tax rate was 15.0% in 1997 versus 16.3% in 1996. The 1997 rate improvement was mainly due to the benefits of tax loss carryforwards. The valuation allowance on deferred tax assets decreased $10.5 million from 1996 to 1997. This valuation allowance primarily relates to alternative minimum tax ("AMT") credit carryforwards. Although management believes that it is unlikely to realize all of its AMT credit carryforward under existing law and company structure, AMT credit carryforward is recognized to reduce the deferred tax liability from the amount of regular tax on temporary differences to the amount of tentative minimum tax on AMT temporary differences. Net Income. For the year ended December 31, 1997, Zeigler had net income of $58.6 million compared to $58.0 million for the year ended December 31, 1996, an increase of $0.6 million or 1%. The increase primarily resulted from a $9.0 million positive change in customer claims expense representing reversal in 1997 of a $4.5 million contingent claims liability accrued in 1996, reduced 1997 estimates of Old Ben reclamation liabilities totaling $8.2 million, a $6.2 million actuarially-based reduction in the accrued liability for black lung benefits, an unusually large $8.2 million increase in accrued workers' compensation expense in 1996, and a
53
$3.9 million reduction in net interest expense. These factors were substantially offset after taxes by a $16.4 million reduction in net earnings attributable to the 1996 closings of Old Ben Mine #24 and Old Ben Mine #26, a $16.3 million nonrecurring gain in 1996 on curtailment of postretirement benefits, a $6.8 million net earnings decrease related to the December 1996 expiration of Triton's contract with WFEC, a $5.6 million net loss at EnerZ, and a $4.2 million increase in the net loss at Zeigler's technology unit. The Cyprus Subsidiaries The following table sets forth, for the preacquisition periods indicated, certain operating and other data of the Cyprus Subsidiaries presented as a percent of revenues.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Because the Cyprus Acquisition was consummated on June 29, 1998, the results of operations for the three-month period ended September 30, 1998, are included in the Company's results of operations. Revenues. Revenues were $201.8 million for the six months ended June 30, 1998, compared to $193.8 million for the six months ended June 30, 1997, an increase of $8.0 million or 4%. The increase in revenues resulted primarily from increased sales from the Straight Creek deep mine, which began mining operations in July 1997, and the Straight Creek surface mine, which were partially offset by reduced sales from other mines. The increased sales were the result of a new contract for 1.2 million tons per year. Cost of Operations. The cost of operations totaled $180.5 million for the six months ended June 30, 1998 compared to $165.8 million for the six months ended June 30, 1997, an increase of $14.7 million or 9%. The increase was primarily due to increased coal production to provide for the increased coal sales and increased production costs of approximately $1.50 per ton at the Cyprus Subsidiaries' West Virginia mines, which were primarily due to operating inefficiencies arising from adverse weather conditions and reduced production volumes. Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the six months ended June 30, 1998 totaled $18.7 million compared to $20.9 million for the six months ended June 30, 1997, a decrease of $2.2 million or 11%. The decrease was primarily the result of the write down of assets at the Armstrong Creek mine in December 1997 when the mine's economic life was shortened. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 1998 were $6.7 million compared to $8.3 million for the six months ended June 30, 1997, a decrease of $1.6 million or 19%. The decrease in such expenses primarily resulted from a decrease in consulting and other third party administrative charges.
54
Interest Expense. Interest expense for the six months ended June 30, 1998 was $0.2 million compared to $0.3 million for the six months ended June 30, 1997, a decrease of $0.1 million or 33%. This decrease was primarily the result of decreased capital lease obligations. Pre-tax Net Income. For the six months ended June 30, 1998, the Cyprus Subsidiaries had a pre-tax net loss of $3.5 million compared to a pre-tax net loss of $2.4 million for the six months ended June 30, 1997, an increase of $1.1 million or 46%. The increase primarily resulted from the increased production costs at the West Virginia mines which were partially offset by decreases in depreciation, depletion and amortization and selling, general and administrative expenses. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues. Revenues were $422.9 million for the year ended December 31, 1997, compared to $412.2 million for the year ended December 31, 1996, an increase of $10.7 million or 3%. The increase in revenues resulted primarily from increased coal sales from the Cyprus Subsidiaries' Kentucky mines. The increased sales were the result of shipments under new contracts providing for 2.2 million tons per year. Cost of Operations. The cost of operations totaled $377.9 million for the year ended December 31, 1997 compared to $360.3 million for the year ended December 31, 1996, an increase of $17.6 million or 5%. The increase was primarily due to the increase in production coupled with increased production costs of approximately $2.50 per ton and $2.00 per ton at the Cyprus Subsidiaries' Kentucky and Tennessee mines, respectively, which were primarily due to roof control problems at the Straight Creek deep mine and increased stripping ratios at the Skyline mine. Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the year ended December 31, 1997 totaled $41.9 million compared to $39.6 million for the year ended December 31, 1996, an increase of $2.3 million or 6%. The increase in depreciation, depletion and amortization primarily resulted from accelerated depletion of the Cyprus Subsidiaries' West Virginia coal reserves due to the economic lives of the West Virginia mines being shortened and increased amortization of purchase price allocated to various coal contracts acquired in a previous merger, which resulted from increased sales under such contracts. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 1997 were $16.4 million compared to $14.6 million for the year ended December 31, 1996, an increase of $1.8 million or 12%. The increase in such expenses primarily resulted from increased administrative costs driven by increased sales. Interest Expense. Interest expense for the year ended December 31, 1997 was $0.6 million compared to $0.8 million for the year ended December 31, 1996, a decrease of $0.2 million or 25%. This decrease was primarily the result of decreased capital lease obligations. Pre-tax Net Income. For the year ended December 31, 1997, the Cyprus Subsidiaries had a pre-tax net loss of $99.1 million compared to a pre-tax net loss of $1.5 million for the year ended December 31, 1996, a decrease of $97.6 million. The decrease primarily resulted from the special charge of $92.1 million taken in 1997, which provided for the shortened economic lives of the Armstrong Creek and Chinook mines and the write down of a portion of the purchase price allocated to the coal contracts acquired in a previous merger, the increased production costs at the Kentucky and Tennessee mines and increased depreciation, depletion and amortization, selling, general and administrative expenses.
55
Liquidity Our cash flow/(usage) from operations was ($49.4 million), ($11.4 million) and $4.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. During the year ended December 31, 1998, the Company had a net loss of $33.6 million, compared to a net loss of $22.2 million for the year ended December 31, 1997, and net income of $5.1 million for the year ended December 31, 1996. During the year ended December 31, 1998, cash flow from operations was decreased by the increase in the net loss of $11.4 million and a decrease in non-current liabilities of $65.7 million primarily due to increased reclamation activities resulting from the closure of higher-cost operations. Partially offsetting were decreases in accounts receivable of $13.3 million and an increase in accounts payable of $5.1 million. During the year ended December 31, 1997, cash flow from operations was decreased due to an increase in accounts receivable of $8.0 million, an increase in inventories of $6.2 million, an increase in other non-current assets of $2.2 million and a decrease in other non-current liabilities of $2.7 million which was more than offset by a provision for deferred income tax of $16.6 million, prepayment penalties on debt refinancing of $1.6 million, depreciation of $10.8 million and an increase in accounts payable of $4.2 million. During the year ended December 31, 1996, cash flow from operations was decreased by an increase in accounts receivable of $6.1 million, an increase in inventories of $3.1 million, a decrease in other non-current liabilities of $5.7 million which was partially offset by an increase in accounts payable of $9.5 million and depreciation of $6.9 million. At various times during the first nine months of 1998, events of default existed under our prior $25 million credit facility as a result of non- compliance with certain financial covenants contained therein and under the indenture governing the notes issued by AEI Holding Company in 1997 as a result of cross default provisions. In addition, a default existed under the one of our old credit facilities and the indenture because we failed to timely provide certain required notices, reports and certificates. We remedied our non- compliance by obtaining a waiver and amendment to the old credit facility, which has subsequently been retired, providing the required information and curing the other defaults under the prior indenture. The prior credit facility subsequently was retired. We have substantial indebtedness and significant debt service obligations. As of December 31, 1998, the Company had total long-term indebtedness, including current maturities, aggregating $1.2 billion. The loan agreement and the guaranty related to Zeigler's industrial revenue bonds and the indentures governing the Company's Senior Notes and its Senior Subordinated Notes will permit the Company to incur substantial additional indebtedness in the future, including secured indebtedness, subject to certain limitations. Such limitations will include certain covenants that, among other things: (1) limit the incurrence by the Company of additional indebtedness and the issuance of certain preferred stock; (2) restrict the ability of the Company to make dividends and other restricted payments (including investments); (3) limit transactions by the Company with affiliates; (4) limit the ability of the Company to make asset sales; (5) limit the ability of the Company to incur certain liens; (6) limit the ability of the Company to consolidate or merge with or into, or to transfer all or substantially all of its assets to, another person and (7) limit the ability of the Company to engage in other lines of business. The Senior Credit Facility will contain additional and more restrictive covenants as compared to the guaranty and the loan agreement related to Zeigler's industrial revenue bonds and will require the Company to maintain specified financial ratios and satisfy certain tests relating to its financial condition. We may continue to engage in evaluating potential strategic acquisitions. We expect that funding for any such future acquisitions may come from a variety of sources, depending on the size and nature of such acquisition.
56
Potential sources of capital include cash generated from operations, borrowings under our credit facility, or other external debt or equity financings. There can be no assurance that such additional capital sources will be available to us on commercially reasonable terms or at all. On December 14, 1998, we amended and restated our credit facility, which currently provides for aggregate borrowings of up to $875.0 million. As of December 31, 1998, we had approximately $47.0 million of borrowings available under our credit facility (after giving effect to approximately $178.0 million of outstanding letters of credit). On April 1, 1999, Zeigler converted its industrial revenue bonds, in the aggregate principal amount of $145.8 million, from a daily interest rate to a fixed interest rate for the term of the bonds. In connection with the conversion, we and our majority-owned subsidiaries, other than Yankeetown Dock Corporation, guaranteed the bonds and created a mechanism whereby, upon the satisfaction of certain conditions, the letters of credit issued by our lender in support of the bonds will be released. If all of the letters of credit supporting the bonds are released, we will have approximately $156.9 million of borrowings available under our credit facility (after giving effect to approximately $26.1 million of outstanding letters of credit). Interest rates on the revolving loans under our credit facility will be based, at our option, on the Base Rate (as defined therein) or LIBOR (as defined therein). The revolving loan portion ($300 million) of our credit facility will mature on the last business day of December 2003, and the repayment of the term loan portion ($575 million) of our credit facility will occur in unequal installment payments between September 1999 and December 2004. Our credit facility will contain certain restrictions and limitations, including financial covenants that will require us to maintain and achieve certain levels of financial performance and limit the payment of cash dividends and similar restricted payments. We made capital expenditures of $14.1 million, $32.2 million and $40.9 million for the years ended December 31, 1996, 1997 and 1998, respectively. We currently anticipate a total of $52.3 million of capital expenditures in the year ending December 31, 1999, $40.8 million for replacement of and improvements to equipment and facilities, 4.5 million for expansion at Bowie, and $7.0 million for the manufacture of an additional Addcar(TM) highwall mining system and rebuild of an existing system. Since September 30, 1998, our principal liquidity requirements have been for debt service requirements under the industrial revenue bonds, the Notes, the Senior Subordinated Notes, our credit facility, other outstanding indebtedness, and for working capital needs and capital expenditures, including future acquisitions. Our ability to make scheduled payments of principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance, its indebtedness (including each issue of the industrial revenue bonds, the Notes and the Senior Subordinated Notes), or to fund planned capital expenditures will depend on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Based upon the current level of operations and anticipated cost savings and operating improvements, we believe that cash flow from operations and available cash, together with available borrowings under our credit facility, will be adequate to meet our liquidity needs for the reasonably foreseeable future. We will likely need to refinance our credit facility, the Notes and the Senior Subordinated Notes upon or prior to their respective maturities. There can be no assurance that our business will generate sufficient cash flow from operations, that anticipated cost savings and operating improvements will be realized or that future borrowings will be available under our credit facility in an amount sufficient to enable us to service our indebtedness, including the industrial revenue bonds, the Notes and the Senior Subordinated Notes, or to fund our other liquidity needs. In addition, there can be no assurance that we will be able to effect any such refinancing on commercially reasonable terms or at all. Hedging Policy We have not historically purchased or sold coal future contracts or engaged in financial hedging transactions to any material extent, although it may do so in the future. A subsidiary of Zeigler was actively engaged in financial hedging transactions through June 2, 1998, however, that subsidiary will wind down its operations during the fourth quarter of 1999 and the first quarter of 2000. We may from time to time enter into contracts to supply coal to utilities or other customers prior to acquiring the coal reserves necessary to meet all of its obligations under these contracts but it does not expect this practice to impact its results of operations materially in the near term.
57
Inflation Due to the capital-intensive nature of our activities, inflation may have an impact on the development or acquisition of mining operations, or the future costs of final mine reclamation and the satisfaction of other long-term liabilities, such as health care or pneumoconiosis (black lung) benefits. However, inflation in the United States has not had a significant effect on our operations in recent years. Recent Accounting Pronouncements In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued which establishes new rules for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income generally represents all changes in shareholder's equity except those resulting from investments by or distributions to shareholders. We adopted this statement in 1998 with no impact on us as we currently have no transactions which give rise to differences between Net Income and Comprehensive Income. Also in June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131") was issued which establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The new standard was adopted for our 1998 fiscal year-end, comparative information from earlier years were restated to conform to requirements of this standard. In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued which improves and standardizes disclosures by eliminating certain existing reporting requirements and adding new disclosures. The statement addresses disclosure issues only and does not change the measurement of recognition provisions specified in previous statements. The statement supersedes SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." We adopted this statement for its 1998 fiscalyear-end. Effective January 1, 1999, we will adopt Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities." The new statement requires that the costs of start-up activities be expensed as incurred. We do not expect the impact of this statement to be material on our results of operations or financial position. Impact of Year 2000 Issue The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations and the ability to engage in normal business activities. Based on our ongoing assessment of our business information systems, we have determined that our key business systems are substantially compliant with year 2000 requirements. We have substantially completed deployment of a new Company-wide management accounting system. This system is year 2000 compliant and is being installed due to additional functionality needed due to our growth. Non-information technology components could have an impact on us. Management is currently in the final stages of reviewing all non-information technology components including embedded technology and equipment related hardware and software utilized in mobile mining machinery, coal preparation plants, conveyor belt lines, draglines, etc., as well as our communication systems. Such review was substantially completed in March 1999, with any necessary upgrades or replacements expected to be completed by the third quarter of 1999. All of the recent acquisitions have been considered in our assessment and are not believed to pose any additional risks related to year 2000 readiness. We are not materially reliant on third party systems (e.g. electronic data interchange) to conduct business.
58
We presently believe that the year 2000 issue will not pose significant operational problems for our business systems. However, if any needed modifications and conversions were not made, or were not completed timely, the year 2000 issue would likely have a material impact on our operations. Our total year 2000 project cost is not expected to be material, based on presently available information. However, there can be no guarantee that the systems of other companies on which our systems rely will be timely converted and would not have an adverse effect on our systems. We have determined we have no exposure to contingencies related to the year 2000 issue for the majority of the products we have sold. If any of our suppliers or customers do not, or if we do not, successfully deal with the year 2000 issue, we could experience delays in receiving or shipping coal and equipment that would increase its costs and that could cause us to lose revenues and even customers and could subject us to claims for damages. Customer problems with the year 2000 issue could also result in delays in us invoicing our customers or in us receiving payments from them that would affect our liquidity. Problems with the year 2000 issue could affect the activities of our customers to the point that their demand for our products is reduced. The severity of these possible problems would depend on the nature of the problem and how quickly it could be corrected or an alternative implemented, which is unknown at this time. In the extreme such problems could bring us to a standstill. We, based on our normal interaction with our customers and suppliers and the wide attention the year 2000 issue has received, believe that our suppliers and customers will be prepared for the year 2000 issue. There can, however, be no assurance that this will be so. In February 1999, we requested written assurances from approximately 300 of our major customers and suppliers as to their year 2000 compliance. As of April 1999, approximately one-third of the assurance requests have been complied with. Some risks of the year 2000 issue are beyond our control and the control of our suppliers and customers. For example, we do not believe that we can develop a contingency plan which will protect us from a downturn in economic activity caused by the possible ripple effect throughout the entire economy that could be caused by problems of others with the year 2000 issue. We will utilize both internal and external resources to test its business systems for year 2000 compliance. We anticipate completing our year 2000 testing by December 2000, which is prior to any anticipated impact on our operating systems. For 1999, we have budgeted $0.1 million for assessment and testing of year 2000 compliance by outside service providers. Information technology costs specifically for the year 2000 issue in excess of normal operations to cover assessment, remediation and testing are not expected to exceed $0.5 million and will be expensed as incurred. We have not yet seen any need for contingency plans for the year 2000 issue, but this need will be continuously monitored as we acquire more information. The costs of the project and the date on which we believe we will complete the year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the ability to locate and correct all relevant computer codes, the ability to successfully integrate the business systems of newly acquired entities and similar uncertainties. See "Risk Factors--Impact of Year 2000 Issue."
59
THE COAL INDUSTRY According to data compiled by the Energy Information Administration of the U.S. Department of Energy, U.S. coal production totaled 1.09 billion tons in 1997, a 2.8% increase from the 1.06 billion tons produced in 1996 and a record high. Factors driving the increase in 1997 coal production include: . the lower cost of generating electricity with coal, compared to oil, natural gas and nuclear power; . decreased reliance on nuclear powered generation; . volatile natural gas prices; and .strong economic growth. Total U.S. coal consumption reached 1.06 billion tons in 1997, a 2.1% increase from 1996. Utilities used approximately 89.0% of the coal consumed in the United States for the generation of electricity. Coal continues to be the principal energy source for U.S. utilities, with its share of total electricity generation rising from 56.0% in 1996 to 57.0% in 1997, as compared with 20.1% from nuclear, 10.8% from hydroelectric and 9.1% from gas-fired facilities in 1997. In the last three years, coal prices under long-term sales contracts have generally remained steady. However, spot market coal prices have fluctuated due to seasonal variations in supply and demand caused by weather. Despite the increased consumption and the many inefficient mines that have closed in the last 10 years, coal mining companies with improving productivity have filled the increasing demand without price increases. As a result of increased competition among generators of electricity, utility buyers must purchase coal more selectively. This heightened fiscal responsibility has led to lower stockpiles, increased spot market activity and shorter contract terms, which may create greater price volatility than in the past. According to statistics compiled by the federal government, the number of operating mines has declined 47.3% from 1987 through 1997, even though production during that same time has increased 21.2%. Productivity gains have contributed to the stability of coal prices in recent years. The United States coal industry has undergone significant consolidation since 1987. The 10 largest coal producers in 1987 accounted for 36.4% of total domestic coal production. After giving pro forma effect to our acquisitions since October 1997, the 10 largest coal companies accounted for 62% of total domestic coal production in 1997. A recent report by Energy Ventures Analysis, Inc. forecasts that the demand for steam coal and the demand for coal by electric utilities in the United States generally will increase steadily over the next 13 years. In addition, clean air concerns and legislation have increased consumption of coal with a lower sulfur content mined in Central Appalachia and the western United States. The following table highlights the increases in coal demand as projected by Energy Ventures Analysis:
60
Coal Types In general, coal is classified by Btu content and sulfur content. In ascending order of heat values, measured in British Thermal Units or "Btus," the four basic types of coal are lignite, subbituminous, bituminous and anthracite. Coal of all geological composition may be used as steam coal. Bituminous coals must have certain characteristics to qualify for use as metallurgical coal. Lignite Coal. Lignite coal is a brownish-black coal with a Btu content that generally ranges from 3,500 to 8,300 Btus per pound. Major lignite operations are located in Texas, North Dakota, Montana and Louisiana. Lignite coal is used almost exclusively in power plants adjacent to the mine because the addition of any transportation costs to the mining costs would exceed the price a customer would pay for such low-Btu coal. Subbituminous Coal. Subbituminous coal is a black coal with a Btu content that ranges from approximately 8,300 to 11,500 Btus per pound. Most subbituminous reserves are found in Montana, Wyoming, Colorado, New Mexico, Washington and Alaska. Subbituminous coal is used almost exclusively by electric utilities and some industrial consumers. Bituminous Coal. Bituminous coal is a "soft" black coal with a Btu content that ranges from 10,500 to 14,000 Btus per pound. This coal is found in Appalachia, the Midwest, Colorado and Utah, and is the type most commonly used for electric power generation in the United States. Bituminous coal is used to generate steam by utility and industrial customers, and as a feedstock for metallurgical purposes in steel production. Coal used in metallurgical processes has higher expansion/contraction characteristics than steam coal. Anthracite Coal. Anthracite coal is a "hard" coal with a Btu content as high as 15,000 Btus per pound. Anthracite deposits are found primarily in eastern Pennsylvania, and are used primarily for utility, industrial and home heating purposes. Coal Qualities Steam Coal The primary factors considered in determining the value and marketability of steam coal include the Btu content, sulfur content, and the percentage of ash (small particles of inert material), moisture and volatile matter. Btu Content. The Btu content provides the basis for satisfying the heating requirements of boilers. Coal having a lower Btu content frequently must be blended with coal having a higher Btu content to allow the consumer to use the coal efficiently in its operations. Sulfur Content. Due to the restrictive environmental regulations regarding sulfur dioxide emissions, coal is commonly described with reference to its sulfur content, measured by pounds of sulfur dioxide produced per million Btus (SO/2/ /MMBtu).
Super-compliance and compliance coal exceed the current requirements of Phase I of the Clean Air Act Amendments of 1990 and meet or exceed the prospective requirements of Phase II of that legislation. Consumers using super-compliance and compliance coal can either earn sulfur emission credits, which they can sell to other coal consumers, or blend the coal with higher sulfur coal to lower the overall sulfur emissions without having to install expensive sulfur-reduction "scrubber" technology. Super- compliance
61
coal is desirable because utilities can burn it without blending and earn sulfur emission credits or blend it with higher-sulfur non-compliance coal even under Phase II requirements. Generally, a utility can burn near low- sulfur coal without scrubbing by blending with super-compliance coal or by purchasing reasonable quantities of emissions credits to comply with the Phase II requirements. Ash Content. The non-combustible nature of ash diminishes the heating value of the coal. Therefore, coal with a higher percentage of ash will have a lower heating value. For electric utilities, the percentage of ash is important not only for its effect on heating value, but also because it affects the amount of combustion by-products. Electric utilities typically require coal with an ash content ranging from 6% to 15%, depending on individual power plant specifications. More stringent ash standards apply for metallurgical coal, typically requiring less than 8% ash. Moisture content also diminishes the heating value of coal. A high percentage of moisture also may cause customers to experience problems handling the coal. Moisture concerns arise principally with coal from the Powder River Basin. Volatile matter, combustible matter that vaporizes easily during combustion, is important for electric utilities because most utility power plant boilers are designed to burn coal having a medium to high percentage of volatile matter. Metallurgical Coal Sulfur content, ash content, volatility, carbon content and certain other coking characteristics are especially important for determining the value and marketability of metallurgical coal. Metallurgical coal is fed into a coke oven where it is heated in an oxygen deficient environment, producing porous coke with a high carbon content which is then used to fuel blast furnaces. It is important in the coking process to create a stable and high strength coke. This is done by careful blending low volatile and high volatile metallurgical coals to create the proper coke characteristics. The lower the volatile characteristics and percentage of ash in coal, the higher the yield and carbon content of the coke. However, too much low volatility coal may cause coke to stick in the coke oven if it is an expanding coal. Coal Regions The majority of U.S. coal production comes from six regions: Northern Appalachia, Central Appalachia, Southern Appalachia, the Illinois Basin, the Rocky Mountains, and the Powder River Basin. Northern Appalachia. Northern Appalachia includes northern West Virginia, Pennsylvania and Ohio. Coal from this region generally has a high Btu content (12,000-13,000 Btus per pound of coal). However, its sulfur content (1.5%-2.5%) generally does not meet the Phase II standards. Central Appalachia. Central Appalachia includes southern West Virginia, eastern Kentucky and Virginia. Coal from this region generally has a low sulfur content (0.7%-1.5%) and high Btu content (12,000-13,500 Btus per pound of coal). Most of this coal complies with Phase I standards. After the implementation of Phase II of that legislation, demand for this coal is expected to increase. Central Appalachia sources provide most of the U.S.'s overseas export coal. Southern Appalachia. Southern Appalachia includes Tennessee and Alabama. Coal from this region also has a low sulfur content (0.7%-1.5%), which generally satisfies Phase I standards, and a high Btu content (12,000- 13,000 Btus per pound of coal). While the region's highly variable thin seams impair productivity, readily accessible waterways and proximity to southern utility plants help to reduce delivery costs of coal from this region to utility customers. The Illinois Basin. The Illinois Basin includes western Kentucky, Illinois and Indiana. Coal from this region varies in Btu content (10,000-12,000 Btus per pound of coal) and has a high sulfur content (2.5%-3.5%). Generally, unwashed Illinois Basin coal will not satisfy the Phase I or Phase II standards. However, Illinois Basin coal is burned in plants equipped with scrubbers, blended with low-sulfur coal or burned by plants with sulfur dioxide emission credits.
62
The Rocky Mountains. The Rocky Mountain region consists of Utah and Colorado. The coal from this region has a low sulfur content (0.4%-0.5%) and varies in Btu content (10,500-12,800 Btus per pound of coal). This coal complies with Phase I and Phase II standards. A portion of U.S. coal exports come from this region. The Powder River Basin. The Powder River Basin consists mainly of northeastern Wyoming and southeastern Montana. This coal has a very low sulfur content (0.25% to 0.65%), a low Btu content (8,000-9,200 Btus per pound of coal) and very high in moisture content (20%-35%). All of this coal complies with Phase I and Phase II standards, but many utilities cannot burn it without derating [explain term] their plants, unless it is blended with higher Btu coal. Mining Methods Coal is mined using either surface or underground methods. The method used depends upon several factors, including the proximity of the target coal seam to the earth's surface, and the geology of the surrounding area. We describe the mining methods used at each of our mining operations under "Business-- Mining Operations." Surface techniques generally require a favorable stripping ratio, the amount of overburden that must be removed to excavate a given quantity of coal. Underground techniques are used for deeper seams. In 1996, surface mining accounted for approximately 62% of total U.S. coal production, with underground mining accounted for the balance of production. Surface mining generally costs less and has a higher recovery percentage than underground mining. Surface mining typically results in the recovery of 80% to 90% of the total coal from a particular deposit, while underground mining typically results in the recovery of 50% to 60%. Surface Mining Methods Mountaintop Removal Mining. Mountaintop removal mining involves removing all material above the coal seam before removal of the coal, leaving a relatively level plateau in place of the hilltop after mining. This method achieves a more complete recovery of the coal. However, its feasibility depends on the amount of overlying material in relation to the coal to be removed. Area Mining. Area mining essentially involves a large-scale moving trench. After removal of the initial overburden from a trench, the trench progresses forward over the coal seam. As the trench moves forward, the stripped overburden is moved to the back side of the trench. Area mining is usually performed with draglines, truck and shovel units and large dozers. Contour Mining. Contour mining is conducted on coal seams where mountaintop removal is not feasible because of the high overburden ratios. Mining proceeds laterally around a hillside, at essentially the same elevation, assuming the seam is fairly flat. The contour cut in a coal seam provides a flat surface that can be used to facilitate highwall mining or the less efficient auger mining (both discussed below). This is a common surface mining method in the steeper slopes of the Appalachian coalfields. Auger Mining. In auger mining, the miners remain outside of the mine and a large, corkscrew-like machine (the "auger") bores into the side of a hill and extracts coal by "twisting" it out. Many of our competitors use this method, which is less efficient than highwall mining. Auger mining generally permits the extraction of coal to depths of only 300 feet or less. Highwall Mining. Highwall mining is an innovative mining method that uses the patented Addcar highwall mining system developed by Addington Resources under the guidance of Larry Addington. The Addcar mining system bores into the face of a coal seam using a continuous miner and transports coal to the mine opening using cascading conveyor belts with wheels on a series of cars connected to the continuous miner. An employee controls the system from the launch vehicle located at the mine entrance on the surface. Projects requiring large volumes of coal production can use the highwall mining equipment
63
as the primary production machine for mining in trench, box, open-pit or contour cuts which are types of excavations commonly used in surface mining to gain access to coal seams. The Addcar system allows us to reduce operating costs and extract coal profitably from reserves that would otherwise have been uneconomical to mine. The Addcar system allows the Company to drive down stripping ratios, decreasing the extraction cost per ton significantly. Deep Mining Methods Room and Pillar Mining. Room and pillar mining uses remote-controlled continuous miners that cut a network of interconnected 20-foot wide passages as high as the coal seam. Roof bolters stabilize the mine roof and pillars are left to provide overall roof support. As a result of significant technological advances, this mining method has become the most common method of deep mining. Room and pillar mining is used as a primary recovery method in smaller mines and for developing a network of panels for longwall mining. Longwall Mining. Longwall mining uses powerful hydraulic jacks, varying from four feet to 12 feet in height, to support the roof of the mine while mobile shearing machines extract the coal. High capacity chain conveyors then move the coal to a high capacity mine belt system for delivery to the surface. The longwall machine generally cuts blocks of coal, referred to as longwall panels, that have a width of approximately 900 feet and a length ranging from 9,000 to 11,000 feet. Longwall mining is a low-cost, high- output method of deep mining that results in the recovery of approximately 60% of coal reserves. In addition, longwall mining is much faster than room and pillar mining. After a longwall panel is cut, the longwall machine must be disassembled and moved to the next panel location, a process which generally takes one to two weeks. Coal Preparation and Blending Depending on coal quality and customer requirements, raw coal may be shipped directly from the mine to the customer. Generally, raw coal from mountaintop removal, contour and strip mines can be shipped in this manner. However, the quality of most raw coal does not allow it to be shipped directly to the customer without processing in a preparation plant. Preparation plants separate impurities from coal. This processing upgrades the quality and heating value of the coal by removing or reducing sulfur and ash-producing materials, but entails additional expense and results in some loss of coal. Coals of various sulfur and ash contents can be mixed or "blended" at a preparation plant or loading facility to meet the specific combustion and environmental needs of customers. Coal blending helps increase profitability by reducing the cost of meeting the quality requirements of specific customer contracts, thereby optimizing contract revenue. Customers Over the last 10 years, annual coal consumption in the United States has grown steadily, reaching a record level of 1.06 billion tons in 1997. This steady growth in coal consumption reflects the growth in the demand for electricity over the same period, because the electric utility industry accounts for 87% of domestic coal consumption. In 1997, coal-fired utilities generated approximately 57% of the nation's electricity, followed by nuclear (20.1%), hydroelectric (10.8%) and gas-fired (9.1%) utilities. Energy Venture Analysis and other industry sources expect electricity usage to increase at an average annual rate of 1.4% to 1.9% over the next several years. Because coal is one of the least expensive and most abundant resources for the production of electricity, and imports of coal historically have not exceeded 1.0% of domestic coal consumption, industry analysts expect domestically produced coal to continue to play a significant role in generating electricity in the future.
64
[PIE CHART APPEARS HERE] * "Other" includes oil, petroleum coke, biomass, wind, geothermal, and other renewable energy sources. Source: Department of Energy, EIA Monthly Review, March 1998. Electricity can be generated less expensively using coal than natural gas, oil or nuclear energy. The delivered cost of coal for utilities averaged $1.273/MMBtu in 1997 compared to $2.761/MMBtu for natural gas and $2.879/MMBtu for oil. Although the cash operating costs of nuclear and hydroelectric energy are less expensive than coal, no new nuclear plant permits have been issued since 1978, and many existing plants are near the end of their useful lives. Additionally, the availability of hydroelectricity is limited. Oil and all other petroleum by-products accounted for less than 2.5% of all utility fuel consumption in both 1990 and 1997. The table below illustrates the relative cost advantage of coal over certain other power generation sources: Average Total Generating Costs(1)
(1) Average annual generating costs per Mwh produced for all U.S. power plants;
costs are all-in and include the cost of fuel, depreciation of plant, and
overhead and maintenance.
(2) Source: RDI Power Data 1996. FERC Form 1 Data. (3) Source: Monthly operating data from RDI, 1998 from FERC reports. 65 Utility Deregulation Since 1935, domestic electric utilities have operated in a regulated environment, with prices and return on investment being determined by state utility and power commissions. In April 1996, the Federal Energy Regulatory Commission established rules providing for open access to electricity transmission systems, thereby initiating consumer choice in electricity purchasing and encouraging competition in electricity generation. Industry analysts anticipate that the open access rules will create a national market for the sale of wholesale electricity where competition will primarily focus on price. Within the electric utility industry, the increased focus on price should favor low-cost producers of electricity. Among the eastern states, Kentucky, South Carolina, West Virginia, Indiana, Virginia, Ohio and Georgia are in the top half of low cost electricity producers. Competition will likely benefit the coal industry generally because coal is a relatively low-cost fuel for electricity generation. Within the coal industry, companies with customers that are low-cost producers and have excess capacity are likely to see the greatest increase in coal demand. Our primary customers are low-cost electricity producers located in the eastern half of the United States, where we focus our marketing efforts. The following table highlights the states east of the Mississippi River where we sell significant quantities of coal. Since utilities are currently regulated, we believe that the sales price of their electricity is a reasonable proxy for the relative generation costs within those states. We believe that we are a low cost coal supplier to those utilities which have relatively low cost and can benefit from deregulation. Consequently, we believe that we share the opportunity to benefit from electric utility deregulation.
An asterisk indicates States where the Company has significant customers.
SOURCE: Department of Energy/Energy Information Administration, Electric Sales
and Revenue, 1996.
66 Environmental Laws Various federal, state and local environmental laws have had, and will continue to have, a significant effect on the domestic coal industry. These laws govern matters such as employee health and safety, limitations on land use, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, discharge of materials into the environment, surface subsidence from underground mining and the effects of mining on groundwater quality and availability. In addition, the electric utility industry is subject to extensive regulation regarding the environmental impact of electricity generation activities which could affect demand for coal. New legislation or regulations could be adopted that may have a significant impact on coal mining operations or the ability of coal customers to use coal. See "Risk Factors-- Government Regulation of the Mining Industry" and "Government Regulation-- Environmental Laws."
67
BUSINESS AEI Resources is one of the largest coal producers in the United States. On a pro forma basis for 1998, we would have been: . the fourth largest steam coal company in the United States as measured by revenues; . the second largest steam coal producer in the Central Appalachian coal region as measured by production; . the largest steam coal producer in eastern Kentucky as measured by production; and . among the top 25% of coal producers in productivity in eastern Kentucky as measured by tons per manhour. Since October 1, 1997 we have grown substantially by acquiring coal mining businesses and assets. By integrating the acquired businesses, we intend to strengthen our market position while realizing the benefits of consolidation. We believe our acquisitions provide the opportunity to reduce costs by: . allowing us to meet our customers' coal orders from multiple mines, thereby decreasing transportation costs and production costs; . increasing productivity by applying more efficient, lower-cost mining methods; and . eliminating certain corporate overhead expenses by consolidating administrative functions. The coal we mine and market from our 49 mines in Kentucky, West Virginia, Tennessee, Indiana, Illinois, Ohio and Colorado is primarily steam coal. Based on the reserve studies prepared by independent mining consultants, we estimate we have, on a pro forma basis, approximately 1.1 billion tons of proven and probable coal reserves assigned to mining projects. We estimate that approximately 0.4 billion tons, or 39%, of our assigned coal reserves are low- sulfur coal. A total of 0.8 billion tons, or 73%, of our assigned reserves consist of low-sulfur coal or coal generating less than 2.5 pounds of sulfur dioxide per million Btus. Our proven or probable coal reserves, including both assigned and unassigned reserves, total 2.4 billion tons. Our primary customers are low-cost electric utility companies located in the eastern half of the United States. On a pro forma basis for 1998, we generated 72% of our revenues under 55 long-term sales contracts for sale of steam coal to domestic electric utilities. Long-term contracts are contracts having an original term of more than one year. As of December 31, 1998, on a pro forma basis, our long-term sales contracts had a volume-weighted average remaining term of 5.7 years, excluding option periods. We sell the remainder of our steam coal under short-term sales contracts and on the spot market. We believe that the transportation, mining method and corporate efficiencies we can realize from our recent acquisitions enhance our opportunity to maintain and increase our base of long-term sales contracts with these customers. We also supply premium-quality, mid- and low-volatility metallurgical coal to certain integrated steel producers. On a pro forma basis for 1998, we sold 50.0 million tons of steam coal and 1.0 million tons of metallurgical coal, and generated $1.4 billion of revenues and $260.2 million of Adjusted EBITDA. We believe that we will benefit if demand for coal grows as anticipated by industry analysts. See "The Coal Industry." Based on studies by Hill and Associates, Resource Data International and Energy Venture Analysis, we believe that the demand for coal will continue to increase among low-cost producers of electricity with excess capacity in Kentucky, Tennessee, Indiana, Ohio, South Carolina and West Virginia. If any of the factors driving the recent increases in coal production change, however, it could reduce future demand.
68
Competitive Strengths We believe we possess the following competitive strengths: Regional Market Focus. We have focused our recent growth on the Central Appalachian and Illinois Basin coal regions. With 42 mines in those regions, we can deliver coal from multiple sources to our principal customers, reduce transportation expense for both ourselves and our customers, and maximize production at lower-cost mines. On a pro forma basis for 1998, we believe we would have been the second largest steam coal producer in the Central Appalachian coal region and the third largest steam coal producer in the Illinois Basin coal region. Approximately 51% of our reserves in the Central Appalachian coal region consist primarily of low- sulfur and compliance coal. We believe this will give us a competitive advantage because of the more stringent air quality requirements under Phase II of the Clean Air Act Amendments that currently are scheduled to go into effect in 2000. Most of our higher sulfur coal reserves are located in the Illinois Basin. On a pro forma basis, we sold 76% of the coal we produced from the Illinois Basin 1998 under long-term sales contracts to electric utilities which operate "scrubbed" facilities that reduce sulfur dioxide emissions. Our Portfolio of Long-Term Sales Contracts. As of December 31, 1998, we had 55 long-term sales contracts with utilities and other industrial customers. Our utility customers include the Tennessee Valley Authority, Carolina Power & Light, Georgia Power, American Electric Power, Cincinnati Gas & Electric and Dayton Power & Light. The remaining term on our long-term contracts, on a volume-weighted basis, averaged approximately 5.7 years as of that date. On a pro forma basis for 1998, we generated approximately 72% of our revenues from long-term sales contracts. Low-Cost Operations. We believe our production costs are lower than those of our primary competitors. We attribute our ability to maintain low-cost operations to several factors: . use of our patented Addcar highwall mining system. This allows us to recover coal at up to 30% less cost, or to mine coal that would otherwise be unprofitable due to its high stripping ratios; . our substantial use of mountaintop removal mining; . our tailored cast blasting techniques, which reduce the cost of overburden removal; . the close proximity of our coal reserves to customers, which enhances transportation efficiencies; and . blending raw coals to fullest extent possible, which minimizes costs and optimizes revenues. We believe we can apply these competitive advantages to many of the properties we have acquired since October 1, 1997. Successful Integration of Acquisitions. Since November 1995, we have expanded operations through a series of acquisitions, growing from annual production of approximately 3 million tons in fiscal 1995 to approximately 50.9 million tons in fiscal 1998 on a pro forma basis. We attribute our success in integrating acquired properties and companies to: . reducing operating costs through the implementation of better mining methods, including use of the Addcar highwall mining system; . shifting production to lower-cost operations; and . reducing corporate overhead expense through headcount reduction. We believe that similar opportunities exist to improve the operating performance of our more recently acquired businesses.
69
Addcar Highwall Mining System. Our patented Addcar highwall mining system gives us both a proprietary low-cost mining method and a source of revenue from leasing Addcar systems to non-competing third parties. The Addcar system reduces effective stripping ratios, which significantly decreases the extraction cost per ton of coal. In addition, the Addcar system reduces operating costs and allows us to extract coal profitably from reserves that may otherwise be uneconomical to mine. We plan to expand our use of the Addcar highwall mining system whenever possible to the mining operations we have recently acquired. Experienced Management. Our senior management team averages 20 years of experience in the coal industry. This management team has a proven record of developing innovative, low-cost operations, maintaining strong customer relationships and making strategic, opportunistic acquisitions. Business Strategy We have adopted a business strategy of consolidating regionally. This involves integrating the businesses we have acquired since October 1997, acquiring complementary reserves, and continuing to focus on our existing customer base. To implement this strategy, we will seek to: Continue Reducing Costs. We continue to focus on reducing costs at our current and recently acquired operations. By increasing production at our most efficient mines and shifting production to sites that are nearest to our customers' facilities, we believe we can improve our operating margins. We will concentrate our cost reduction efforts on using low-cost mining methods to the fullest possible extent, reducing transportation costs by producing coal from multiple mines, and eliminating certain redundant corporate expenses. We believe we can also increase productivity by investing capital prudently in new production technologies, such as the Addcar highwall mining system. Expand Our Use of Addcar Systems. We believe our Addcar highwall mining system provides significant competitive advantages by reducing costs and allowing us to mine coal reserves that our competitors cannot economically mine. For example, we plan to use the Addcar systems in our West Virginia and eastern Kentucky operations, where we believe they will allow us to increase coal production and reduce costs. We are also leasing three Addcar systems to a third party and intend to pursue additional leasing opportunities with noncompetitors to increase our revenue stream from the Addcar. Focus on Key Electric Utility Customers. We intend to focus on maintaining and increasing our portfolio of long-term sales contracts with customers. Except for certain customers served by our Rocky Mountain mine, all of such customers are located in the eastern half of the United States. We made more than 35% of our pro forma sales for the 1998 fiscal year to operating divisions of the Tennessee Valley Authority, American Electrical Power, the Southern Company and Carolina Power & Light. Our recent acquisitions have enabled us to add new electric utility customers and increase the volume of coal sold to these customers. Focus on Complementary Acquisitions. Our recent acquisitions established our position as a leading low-cost coal producer in the Central Appalachian and Illinois Basin coal regions. To enhance our regional market position, we will seek to make acquisitions that complement our existing operations or reserves whenever opportunities arise. We plan to expand our low-cost operations in the Central Appalachian region through acquisitions of complementary coal reserves or operations. Develop Growth Opportunities. We believe the metallurgical coal business we acquired in 1998 and our super-compliance, high Btu coal operations in Colorado present niche opportunities for incremental revenue growth. We believe that by using more advanced mining methods at our metallurgical coal operation we can enhance production and increase sales at this high- margin operation, while also reducing production costs. We have also developed our Colorado reserves to produce super-compliance coals that our key customers can blend with our eastern coals to produce a very low- sulfur-burn. By expanding our low-cost operations in Colorado, we believe we can improve our opportunity to capture a greater share of the coal market if demand for high-Btu, compliance coal increases as more stringent air quality standards take effect.
70
Coal Production We currently conduct mining operations at 28 surface mines and 17 deep mines in five regions: Northern Appalachia, Central Appalachia, Southern Appalachia, the Illinois Basin and the Rocky Mountains. Historically, approximately 69% of our production has come from surface mines, and 31% has come from deep mines. The following table presents each mining region's production, in millions of tons, for each of the years 1996 and 1997:
We use mountaintop removal mining wherever possible because it allows us to recover more tons of coal per acre and facilitates the permitting of larger projects, which allows mining to continue over a longer period of time than would be the case using other mining methods. We also use other surface mining techniques, including contour mining, to the extent practicable. We currently use six Addcar highwall mining systems for our highwall mining operations. The Addcar system is more cost-effective than traditional mining methods in areas where it can be used. As part of our strategy to expand our low-cost operations, we are developing longwall panels at our Bowie mine to install a longwall mining system in the fourth quarter of 1999. Using the longwall mining system will enhance our ability to produce large volumes of high quality compliance coal at lower cost to support a recently acquired contract with the Tennessee Valley Authority. It will also improve our ability to procure additional long-term sales contracts as long as we can lease additional reserves on adjacent federal land. See "Rocky Mountain Region--Bowie."
71
Mining Operations The following table sets forth (in millions of tons) estimated proven and probable coal reserves for our mining operations as of December 31, 1998. The data are derived from reserve studies prepared by the mining engineering firms identified under "Expert." While we believe the estimates are reasonable, we cannot assure you that the coal reserve data are accurate in all respects.
72
(1) Assigned Proven and Probable Reserves are those reserves that are currently being mined or have been developed so they could be mined with minimal additional preparation. Unassigned Reserves are those reserves which are not yet developed. (2) DM = Deep Mining; SM = Surface Mining and HWM = Highwall Mining. An asterisk indicates locations where Addcar highwall mining systems are currently being used. You should note that reserve studies are estimates based on an evaluation of available data. Actual reserves may vary substantially from the estimates. Estimated minimum recoverable reserves are comprised of coal that is considered to be merchantable and economically recoverable by using mining practices and techniques prevalent in the coal industry at the time of the reserve study, based upon then-current prevailing market prices for coal. We use the mining method that we believe will be most profitable with respect to particular reserves. We believe the volume of our current reserves exceed the volume of our contractual delivery requirements. Although the reserves shown in the table above include a variety of qualities of coal, we presently blend coal of different qualities to meet contract specifications. We have blended coal to meet contract specifications for many years. See "Risk Factors--Reliance on Estimates of Proven and Probable Reserves." In the following sections, we describe the operating characteristics of the principal mines and reserves of each of our mining units. Northern Appalachia Region This region includes all of our mining operations in Ohio and northern West Virginia. Our one surface mine in this region produced 2.0 million tons of coal during fiscal 1998, or approximately 1% of the total coal production in the region. As of December 31, 1998, we had 129 union-free employees in this region. In 1998, our coal production in this region accounted for approximately 4% of our total coal production. Evergreen The Evergreen mine is located in Webster County, West Virginia. We use the mountaintop removal method to mine five seams of coal at this mine. Production from this mine in 1998 totaled approximately 2.0 million tons, which had an average sulfur content of 0.9%, an average ash content of 12.7% and an average Btu content of 12,300. We employ 129 union-free employees at this mine. Coal from this mine is transported by rail to a loadout. We estimate that the Evergreen mine contains 22 million tons of proven and probable reserves. We own and operate a preparation plant and a unit train loading facility in connection with this mine. Central Appalachia Region This region includes all of our mining operations in southern West Virginia, and eastern Kentucky. We own and operate 36 surface and deep mines in this region which produced 35.4 million tons of coal in 1998, or
73
approximately 13% of the total coal production in the region. As of December 31, 1998, we had 766 union and 1,526 union-free employees in this region. In 1998, our production in this region accounted for approximately 70% of our total coal production. Kentucky Addington Mining Addington Mining's four mines are located in Pike and Breathitt Counties in eastern Kentucky. We use the mountaintop removal method and the Addcar highwall mining system to mine four seams of coal at these mines. Production from these mines in 1998, was approximately 4.2 million tons, which had an average sulfur content of 0.9%, an average ash content of 10% and an average Btu content of 12,300. We employ 295 union-free employees at these mines. Coal from these mines is trucked to river and rail loadout facilities. We estimate these mines contain approximately 23 million tons of proven and probable reserves. We own and operate a storage facility, a preparation plant and a unit train loadout facility in connection with these mines. Crockett Crockett's mine is located in Bell County, Kentucky. We use room and pillar mining to mine one seam of coal at this mine. Production from this mine in 1998, was approximately 0.6 million tons, which had an average sulfur content of 1.6%, an average ash content of 8% and an average Btu content of 12,800. We employ 19 union-free employees at this mine. Coal from this mine is trucked to a preparation plant. We estimate this mine contains 9 million tons of proven and probable reserves. We own and operate a preparation plant and a unit train loading facility in connection with this mine. Ikerd-Bandy Ikerd-Bandy's two mines are located in Perry and Bell counties in eastern Kentucky. We use surface and highwall mining methods to mine six seams of coal at these mines. Production from these mines in 1998, was approximately 1.1 million tons, which had an average sulfur content of 1.1%, an average ash content of 10% and an average Btu content of 12,500. We employ 91 union-free employees at these mines. Coal from these mines is transported by rail either to a barge or directly to the customer. We estimate these mines contain 27 million tons of proven and probable reserves. We own and operate a storage facility, a preparation plant and a loadout facility at each of these mines. Leslie Resources The Leslie Resources mines are located in Perry, Knott and Leslie Counties in eastern Kentucky. We use mountaintop removal mining and contour mining to mine 12 seams of coal at these mines. Production from these mines in 1998, was approximately 5.2 million tons, which had an average sulfur content of 1.1%, an average ash content of 12% and an average Btu content of 12,000. We employ 419 union-free employees at these mines. Coal from these mines is trucked to a barge loadout on the Big Sandy River and a unit train loading facility. We estimate these mines contain 63 million tons of proven and probable reserves. We own and operate a preparation plant, a coal blending facility and a unit train loading facility in connection with these mines. Pike County Coal--Clark Elkhorn We operate the Ratliff-Elkhorn and Sunset #2 underground mines and the #460 surface mine at our Pike County Coal--Clark Elkhorn operations in Pike County, Kentucky. We use the room and pillar method to mine one seam of coal at the Ratliff Elkhorn and Sunset #2 mines and the mountaintop removal method to mine 8 to 10 seams of coal at the #460 mine. Production from these mines in 1998, was approximately 1.8 million tons, which had an average sulfur content of 1.1%, an average ash content of 9.0% and an average Btu content of 12,700. We employ 114 union-free employees at these mines. Coal from these mines is trucked to barge loading facilities located on the Big Sandy River or to one of two nearby processing and loading facilities. We estimate these mines contain 9 million tons of proven and probable reserves.
74
Pike County Coal--Knott County We own and operate the Hollybush mine and the Brimstone mine at our operations in eastern Knott County, Kentucky. We use the room and pillar method to mine two seams of coal at these mines. Production from these mines in 1998, was approximately 1.4 million tons, which had an average sulfur content of 1.1%, an average ash content of 9% and an average Btu content of 12,700. We employ 137 union-free employees at these mines. Coal from these mines is trucked to the Bates Branch processing complex. We estimate these mines contain 8 million tons of proven and probable reserves. We own and operate a preparation plant, a coal blending facility and a unit train loading facility in connection with these mines. Pike County Coal--Matrix Coal We own and operate the Shop Branch mine and Tuscarora mine at our Pike County Coal--Matrix Coal operations in Pike County, Kentucky. We use the mountaintop removal mining method to mine three seams of coal at the Shop Branch mine and room and pillar mining to mine one seam of coal at Tuscarora. Production from these mines in 1998, was approximately 1.4 million tons, which had an average sulfur content of 1.1%, an average ash content of 9% and an average Btu content of 12,700. We employ 42 union-free employees at these mines. Coal from these mines is trucked to either the Big Sandy River docks or a rail loadout. We estimate these mines contain 11 million tons of proven and probable reserves. We own and operate a preparation plant in connection with these mines. Pine Mountain The Pine Mountain mines are located in Bell and Harlan Counties, Kentucky. We use the room and pillar mining method to mine two seams of coal at these mines. Production from these mines in 1998, was approximately 1.7 million tons, which had an average sulfur content of 1.2%, an average ash content of 8% and an average Btu content of 12,800. We employ 19 union-free employees at these mines. Coal from these mines is trucked to a unit train loading facility. We estimate these mines contain 6 million tons of proven and probable reserves. We own and operate a preparation plant and a truck loading facility in connection with these mines. Star Fire The Star Fire mine is located near Perry and Knott Counties in eastern Kentucky. We use mountaintop removal, highwall mining and contour mining to mine five seams of coal at this mine. Production from this mine in 1998, was approximately 2.4 million tons, which had an average sulfur content of 1.1%, an average ash content of 13% and an average Btu content of 11,800. We employ 25 union and 8 union-free employees at this mine. Coal from this mine is transported by rail. We estimate this mine contains 39 million tons of proven and probable reserves. We own and operate a preparation plant, a coal blending facility and a unit train loading facility in connection with this mine. The Star Fire mine shut down in November 1998 following an order of the Office of Surface Mining that closed the main haul road from the mine. We have challenged the order in an administrative proceeding before the U. S. Department of the Interior. We expect the administrative law judge will issue a decision in the third quarter of 1999. Straight Creek The Straight Creek mines are located in Bell County, Kentucky. We use room and pillar mining and mountaintop removal mining to mine four seams of coal at these mines. Production from these mines in 1998, was approximately 2.2 million tons, which had an average sulfur content of 1.0%, an average ash content of 8% and an average Btu content of 12,800. We employ 27 union-free employees at these mines. Coal from these mines is trucked to a unit train loading facility. We estimate these mines contain 6 million tons of proven and probable reserves. We own and operate a preparation plant, a coal blending facility and a unit train loading facility in connection with these mines. Martiki The Martiki mine is located in Martin County, Kentucky. We use mountain top removal and contour mining to produce coal from three seams. Production from this mine totaled 2.5 million tons for 1998. Coal quality
75
averaged 1.0% sulfur, 10% ash and 12,500 Btus per pound. We estimate that this mine contains 25 million tons of proven and probable reserves. The workforce is currently being restructured, but we expect to have about 150 union-free employees at this mine. We own and operate a 1,000 ton per hour preparation plant and a unit train loading facility. West Virginia Battle Ridge We own the former Battle Ridge mines in Kanawha and Boone Counties, West Virginia. We use the mountaintop method to mine 11 seams of coal. Production from these mines in 1998, was approximately 0.4 million tons, which had an average sulfur content of 0.8%, an average ash content of 13% and an average Btu content of 12,200. These mines are currently idle. Coal from these mines is trucked. We estimate these mines contain 37 million tons of proven and probable reserves. We own two river dock facilities on the Kanawha River and one on the Big Sandy River. Kanawha River Operations We own and operate the Dunn, Armstrong Creek, Stockton and Cannelton #165 mines at our Kanawha River operations. These mines are located in Kanawha County, West Virginia. We use the mountaintop removal method to mine 10 seams of coal at Dunn and Armstrong Creek, and room and pillar mining at Stockton and Cannelton #165 to mine one seam of coal. Production from these mines in 1998, was approximately 5.7 million tons, which had an average sulfur content of 0.9%, an average ash content of 11% and an average Btu content of 12,300. We employ 466 union and 70 union-free employees at these mines. Coal from these mines is transported by truck and conveyor to the coal blending yard. We estimate these mines contain 16 million tons of proven and probable reserves. We own and operate a preparation plant in connection with these mines. Marrowbone Operations We own and operate the Marrowbone Creek mine, the Northern Mingo #2 mine and the Triad mine at Marrowbone operations in Mingo County, West Virginia. We use the room and pillar method to mine one seam of coal at the Marrowbone Creek mine and the Northern Mingo #2 mine, and the mountaintop removal mining method to mine three seams of coal at the Triad mine. Production from these mines in 1998, was approximately 3.8 million tons, which had an average sulfur content of 0.6%, an average ash content of 12% and an average Btu content of 12,000. We employ 275 union and 64 union-free employees at these mines. Coal from these mines is transported by conveyor or truck to a preparation plant. We estimate these mines contain 25 million tons of proven and probable reserves. We own and operate the Tug Valley processing plant and a unit train loading facility in connection with these mines. Mid-Vol The Mid-Vol mine is located in McDowell County, West Virginia. We use mountaintop removal and contour mining to mine 5 seams of coal at these mines. Production from these mines in 1998, was approximately 1.0 million tons, which had an average sulfur content of 0.6%, an average ash content of 5%. We employ 71 union-free employees at these mines. Coal from these mines is trucked to the Norfolk Southern rail line. We estimate these mines contains 51 million tons of proven and probable reserves. We own and operate a preparation plant, a coal blending facility and a rail loading facility in connection with these mines. Princess Beverly The Princess Beverly mine is located in Kanawha and Raleigh Counties, West Virginia. We use the mountaintop removal mining method to mine ten seams of coal at this mine. Production from this mine in 1998, was approximately 2.1 million tons, which had an average sulfur content of .70%, and an average ash content of 12.5%, and an average Btu content of 12,650. We employ 82 union and 9 union-free employees at this mine. Coal from this mine is transported by truck. We estimate this mine contains 7.5 million tons of proven and probable reserves with another 25 million tons available on another permit.
76
Southern Appalachia Region This region includes all of our mining operations in eastern Tennessee. We own and operated two surface mines in this region, which produced approximately 1.0 million tons of coal in 1998, or approximately 4% of the total coal production in the region. We closed one of the mines in August 1998. As of December 31, 1998, we had 74 union-free employees in this region. In 1998, our coal production in this region accounted for approximately 2% of our total coal production. Cumberland The Cumberland mine is located in Campbell County, Tennessee. We used surface, highwall and deep mining methods to mine one seam of coal at this mine. Production from this mine in 1998, was approximately 0.2 million tons, which had an average sulfur content of 2.2%, an average ash content of 17% and an average Btu content of 12,200. We employ 11 union-free employees at this mine. We estimate this mine contains 42 million tons of proven and probable reserves. The mine was closed in August 1998. Skyline The Skyline mine is located in Sequatchie County in eastern Tennessee. We use the area mining method to mine one seam of coal at this mine. Production from this mine in 1998, was approximately 0.5 million tons, which had an average sulfur content of 1.0%, an average ash content of 14% and an average Btu content of 12,300. We employ 63 union-free employees at this mine. Coal from this mine is trucked directly to the customers. We estimate this mine contains 14 million tons of proven and probable reserves. We own and operate a coal blending yard at this mine. Illinois Basin Region This region includes all of our mining operations in Illinois and Indiana. We own and operate six surface and deep mines in this region which produced 11.3 million tons of coal in 1998, or approximately 10% of the total coal production in the region. As of December 31, 1998, we had 614 union and 395 union-free employees in this region. In 1998, our coal production in this region accounted for approximately 22% of our total coal production. Illinois Elkhart Mine The Elkhart mine is located approximately 20 miles northeast of Springfield, Illinois. We use the room and pillar mining method to mine one seam of coal at this mine. Production from this mine in 1998, was approximately 2.4 million tons, which had an average sulfur content of 3.2%, an average ash content of 9.0% and an average Btu content of 10,500. We employ 253 union-free employees at this mine. Coal from this mine is trucked directly to the customers. We estimate this mine contains 71 million tons of proven and probable reserves. We own and operate a preparation plant in connection with this mine. Mine #11 Mine No. 11 is located in Randolph County, Illinois. We use the room and pillar mining method to mine one seam of coal at this mine. Production from this mine in 1998, was approximately 2.4 million tons, which had an average sulfur content of 3.1%, an average ash content of 9.5% and an average Btu content of 11,075. We employ 223 union and 49 union-free employees at this mine. Coal from this mine is transported by truck or rail. We estimate this mine contains 17 million tons of proven and probable reserves. We own and operate a preparation plant and a unit train loading facility in connection with this mine. Indiana Chinook The Chinook mine is located in Clay and Vigo Counties. We use the area mining method to mine three seams of coal at this mine. Production from this mine in 1998, was approximately 1.4 million tons, which had an
77
average sulfur content of 3.8%, an average ash content of 10% and an average Btu content of 11,000. Coal from this mine is transported by rail. We estimate this mine contains 8 million tons of proven and probable reserves. We own and operate a preparation plant and a unit train loading facility in connection with this mine. The Chinook mine was closed indefinitely in December 1998. The market for coal having the sulfur content of coal mined at Chinook is limited. At this time, we have no apparent customer for coal from this mine and no specific plans for a return to production. Chinook was one of several mines we acquired in a transaction with Cyprus Amax Coal Company in June 1998. Kindill #1 The Kindill #1 mine is located in Davies County, Indiana. We use the area mining method to mine one seam of coal at this mine. Production from this mine in 1998, was approximately 1.7 million tons, which had an average sulfur content of 3.9%, an average ash content of 8% and an average Btu content of 11,500. We employ 135 union and 33 union-free employees at this mine. Coal from this mine is transported by rail. We estimate this mine contains 68 million tons of proven and probable reserves. We own and operate a preparation plant and a unit train loading facility in connection with this mine. Kindill #2 The Kindill #2 mine is located in Davies County, Indiana. We use the area mining method to mine one seam of coal at this mine. Production from this mine in 1998, was approximately 1.0 million tons. We employ 95 union and 19 union- free employees at this mine. Coal from this mine is transported by rail. We estimate this mine contains 57 million tons of proven and probable reserves. We own and operate a preparation plant and a unit train loading facility in connection with this mine. Kindill #3 The Kindill #3 mine is located in Sullivan County, Indiana. We use the area mining method to mine three seams of coal at this mine. Production from this mine in 1998, was approximately 1.8 million tons, which had an average sulfur content of 0.9%, an average ash content of 8% and an average Btu content of 10,900. We employ 109 union and 20 union-free employees at this mine. Coal from this mine is transported by rail. We estimate this mine contains 58 million tons of proven and probable reserves. We own and operate a preparation plant and a unit train loading facility in connection with this mine. Sycamore The Sycamore mine is located in Knox County, Indiana. We use the area mining method to mine three seams of coal at this mine. Production from this mine in 1998, was approximately 0.6 million tons, which had an average sulfur content of 2.4%, an average ash content of 12% and an average Btu content of 11,000. We employ 44 union and 11 union-free employees at this mine. Coal from this mine is transported by truck. We estimate this mine contains 6 million tons of proven and probable reserves. We own and operate a preparation plant and a coal blending facility in connection with this mine. Rocky Mountain Region This region includes all of our mining operation in Colorado. We own and operate one deep mine in this region which produced approximately 1.2 million tons of coal in 1998, or approximately 1% of the total coal production in the region. We have 147 union-free employees in this region. In 1998, our coal production in this region accounted for approximately 2% of our total coal production. Bowie The Bowie mine is located in Delta County, Colorado. We use the room and pillar mining method to mine one seam of coal at this mine. Production from Bowie in 1998, was approximately 1.2 million tons, which had an average sulfur content of 0.4%, an average ash content of 8% and an average Btu content of 12,800. We employ 147 union-free employees at Bowie. Coal from Bowie is transported by rail. We estimate Bowie contains 47 million tons of proven and probable reserves. We own and operate a unit train loading facility at Bowie.
78
We plan to increase production at the Bowie mine by installing a longwall mining system. Our ability to fully implement our plan depends on our obtaining a lease to mine reserves located on federal lands adjacent to our Bowie operations. In 1996 we applied for a lease with the U.S. Department of the Interior's Bureau of Land Management to mine 1.5 to 2.0 million tons per year from the reserves. The Bureau granted a lease for this purpose, but later vacated the grant after we increased the annual volume of coal we planned to mine from the reserves by using the longwall mining system. The Bureau is preparing an environmental impact statement to study the effects of existing and potential coal development in this area. The Bureau expects to complete its study by August 2000, at which time it will determine whether the federal lands are suitable for mining. We believe that if the Bureau determines that the land is suitable for mining, the proximity of our current operations and reserves to the federal reserves gives us a significant advantage over any other potential competitor in a bidding process. We do not know if any other coal producers or other parties intend to apply to lease these reserves. We believe we could meet our current contractual commitments from other sources even if we cannot lease the federal reserves in Colorado. Although our failure to obtain the lease would materially diminish growth prospects for our Bowie operation, it would not have a material adverse effect on our business taken as a whole. The developments regarding the lease will not impede the planned installation of the longwall mining system at our Bowie mine. Coal Reserves Existing Reserves The majority of our reserves are bituminous and subbituminous coal. Studies of our reserves assigned to existing operations prepared by the mining engineering firms identified under "Experts" indicate: . approximately 3% of our coal reserves is super compliance coal, . approximately 25% of our reserves meet or exceed compliance coal requirements, . approximately 39% of our reserves meet or exceed low-sulfur coal; and . approximately 71% of our reserves meet or exceed near low-sulfur coal requirements. The high percentage of our reserves comprised of super compliance, compliance, low-sulfur and near low-sulfur coal gives us a long-term competitive advantage as more stringent air quality requirements under Phase II of the Clean Air Act Amendments take effect. According to Energy Venture Analysis, 94% of the utilities that will be affected by Phase II and have made a decision on their compliance strategy have indicated they will switch to compliance coal, whereas only 5% of those utilities have indicated they will use scrubbers. We lease a substantial part of the reserves currently available to us. Most of our leases expire after a fixed term, usually less than five years, and, in most cases, less than two years. Most of our leases give us an option to renew, usually on the condition that mining shall have begun on or near the leased property. Most of our leases require us to periodically pay either an advance royalty or a delay rental payment as long as mining has not begun on the property. After mining commences, the leases generally require the payment of a royalty based on the tonnage mined and sold. We believe that we can satisfy our current requirements under long-term sales contracts from leased reserves for which we have preserved our renewal rights together with the reserves that we own. We have additional reserves on other leased properties. However, having these reserves available to us at the present time does not assure that the reserves will be available to us when we may wish to mine them. Moreover, uncertainties that arise from such matters as the lessor's title to the coal and precise boundaries can often limit the availability of reserves on leased property. The extent to which we will mine our coal reserves depends upon factors over which we have no control, such as future economic conditions, the price and demand for the quality and type of coal available to us, the price and supply of alternative fuels, and future mining practices and regulation. Our ability to mine in areas covered
79
by the reserve studies depends upon our ability to maintain control of the reserves we lease through extensions or renewals of the leases or other agreements and our ability to obtain new leases or agreements for other reserves. We have title examinations performed on the properties we own by qualified title examiners. Because of the short-term nature of our leases and the expense involved, we do not have all titles to the leases reviewed by qualified title examiners. In most cases, we conduct a limited title investigation and, to the extent possible, a determination of the precise boundaries of a leased property only as a part of the process of securing a mining permit shortly before we begin mining operations. We verify title to a property before we begin mining operations. We believe our practices are consistent with customary industry practices in the region in which the reserves are located and are adequate to enable us to acquire the right to mine such properties. Acquisition of Additional Reserves We intend to continue expanding our coal reserves by making strategic acquisitions of reserves. . To reduce production and transportation costs and maintain our position as a low-cost operator, we will continue to focus on acquiring reserves that are both suitable for low-cost mining methods and located near our customers, existing operations or efficient transportation facilities. . We will continue to add low-sulfur and compliance coal reserves because they are more likely to yield a premium as environmental regulations become more stringent. . We will seek to utilize the competitive advantage our Addcar system provides by acquiring, at below-market rates, reserves that our competitors cannot economically mine. . We will seek to increase our market share in geographic areas where we currently have operations by acquiring additional coal reserves in those areas. . We also will acquire additional reserves as necessary to insure we can meet the coal quality requirements under our current and future contracts. Coal Transportation We deliver our coal to customers by rail, barge and truck. Depending on the proximity of a customer to the mine and the transportation available for delivering coal to that customer, transportation costs can range from 10% to 90% of the mine cost of a customer's coal. We generally pay truck charges to deliver coal to a barge or rail loadout facility, and customers typically pay the transportation costs from the loadout facilities to the customer's plant. As a result, the availability and cost of transportation constitute important factors for the marketability of coal. In 1998, approximately 75% of our tonnage traveled by rail on Norfolk Southern, CSX Corporation and Union Pacific Railroad Company trains. The remaining 25% traveled by truck to either the customer's plant or its designated barge loading facility. The rates set and practices followed by the railroad serving a particular mine can affect, either adversely or favorably, how we market coal produced from the mine. See "Risk Factors--Transportation." Operations representing approximately 50% of our production have access to alternative transportation sources. Mining Permits and Approvals Before we begin mining on a particular property, we must obtain mining permits. State regulatory authorities must also approve a reclamation plan for restoring the mined property to its prior condition, productive use or another permitted condition. We typically begin the permitting process between 18 and 24 months before we plan to mine a specific area. Based on prior experience, permits generally are approved within 12 months after a completed application is submitted. We have not experienced difficulties in obtaining mining permits in the areas where our current reserves are located. However, we could experience difficulty in obtaining mining permits in the future.
80
As mining operations on a property advance, we reclaim and restore mined areas by grading, shaping and preparing the soil for seeding. Upon completion of mining, we generally complete reclamation by seeding with grasses or planting trees for use as pasture or timberland, as specified in the approved reclamation plan. We believe that we have all material permits required to carry on our mining operations and that we have complied in all material respects with applicable regulations relating to reclamation. Over the past 10 years, the Company has received several reclamation awards, including: . Kentucky Outstanding Reclamation Award; . Ohio Greening of the Lands Award; . Kentucky Department for Surface Mining Reclamation & Enforcement Reclamation Award; . Governor's Conference on the Environment Outstanding Reclamation Award; and . Nomination for the Kentucky Natural Resources and Environmental Protection Cabinet's 1997 Mining Reclamation (Eastern Kentucky) Award. Long-Term Coal Contracts General We have a large portfolio of long-term sales contracts. In 1998 we generated 72% of our revenues under long-term sales contracts. As of December 31, 1998, we had long-term sales contracts for more than 226 million tons of coal. At December 31, 1998, our long-term sales contracts had terms ranging from one to 13 years, with an average volume-weighted remaining term of 5.7 years. Typically, customers enter into long-term sales contracts to secure reliable sources of coal at predictable prices, while we seek stable sources of revenue to support the investments required to open, expand, maintain or improve productivity at mines needed to supply such contracts. We negotiate sales contracts in the ordinary course of business. Contract Terms Long-term sales contracts involve bidding and extensive negotiations with customers. Consequently, the terms of such contracts typically vary significantly in many respects, including price adjustment features, price reopener terms, coal quality requirements, quantity parameters, flexibility and adjustment mechanics, permitted sources of supply, treatment of environmental constraints, options to extend and force majeure, termination and assignment provisions. Most of our recently negotiated contracts over three years in duration include price reopeners, which usually occur midway through a contract or every two to three years, depending upon the length of the contract. Reopeners allow the parties to renegotiate the contract price in order to be in line with the market price prevailing at the time. In some circumstances, the utilities have an option to terminate the contract if prices have increased by over 10% from the price at the commencement of the contract or if the parties do not agree on a new price. Base prices are set at the start of a contract and then adjust at intervals for changes due to inflation and, in many cases, changes in costs such as taxes, reclamation fees, black lung charges and royalties. The inflation adjustments are measured by public indices, the most common of which is the implicit price deflator for the gross domestic product as published by the U.S. Department of Commerce. The base price is then adjusted to a negotiated market price when a price reopener occurs. Long-term sales contracts stipulate quality and volumes for the coal, although buyers normally have the option to vary volume by up to 10% if necessary. Variations to the quality and volumes of coal may lead to adjustments in the contract price. Long-term sales contracts typically stipulate procedures for quality control, sampling and weighing.
81
Contract provisions in some cases set out how to make up coal volumes lost due to the occurrence of an event of force majeure, which includes such events as strikes, adverse mining conditions or serious transportation problems. More recent contracts stipulate that lost tonnage can be made up by mutual agreement or at the discretion of the buyer. Buyers often insert similar clauses covering changes in environmental laws. We have negotiated the right to supply coal that complies with any new environmental requirements rather than allowing the contract to terminate if the customer claims that the coal type supplied previously may no longer be used. Long-term sales contracts typically contain termination clauses if either party fails to comply with the terms and conditions of the contract. In certain contracts, we have a right of substitution, allowing us to provide coal from different mines as long as it is of a certain specified quality and will be sold at the same delivered cost. Most contracts contain the terms set out above. There are certain contracting terms that differ between a standard "eastern U.S." contract and a standard "western U.S." contract. One difference relates to the sampling locations. In the eastern United States, approximately 50% of customers require that the coal be sampled and weighed at the destination, whereas in the western United States all samples are taken at source. Also, historically, contracts have been shorter in eastern regions. Eastern and western contacts are now of a more similar length, although a larger percentage of eastern coal is purchased on the spot market compared to western coal. Traditionally, the eastern market is a short-term market. There are more smaller mining operations in the eastern coal market, which enables customers to negotiate new contracts more frequently in order to obtain a better price. This has also led to a larger number of spot market transactions in eastern regions. Western U.S. contracts normally stipulate that the buyer must reimburse the seller for certain production taxes and coal royalties rather than being a pricing component within the contract. These items comprise a more significant portion of the western coal price than the eastern coal price. Historically, coal prices under long-term sales contracts were higher than the spot prices for coal. However, in the past several years the price of coal has been very competitive, and coal prices under new contracts have not differed significantly from existing spot rates. The term of sales contracts has decreased significantly over the last two decades as competition in the coal industry has increased and, more recently, as the electricity generators have prepared themselves for the Clean Air Act Amendments and the impending deregulation of their industry. We believe that the average term of long-term sales contracts was 20 years in the 1970s and 10 years in the 1980s. It decreased to two to five years in the early 1990s. Although, in the last three years contracts of five to ten years in duration have become more prevalent, customers have insisted on price reopeners every two or three years, which provide them with the security of having coal under contract and knowing that the price will not significantly exceed the market price. We sell most of the coal we sell to utilities under long-term contracts. These long-term sales contracts tend to limit our exposure to any fluctuation in spot market prices and the uncertainty of marketing our production capacity. Contract Expirations On a pro forma basis as of March 31, 1999, our long-term sales contracts had an average volume-weighted remaining term of 5.7 years. As our long-term sales contracts expire, we intend to negotiate new contracts in order to maintain our high percentage of volume sold through long-term sales contracts. When a coal company's contracts expire without being replaced, that company is exposed to the risk of having to sell coal into the spot market, which may be subject to lower and more volatile prices. As of December 31, 1998, we had commitments to sell approximately 226 million tons of coal under our long-term contracts, assuming all the contracts run through to their expiration date. This tonnage commitment may vary depending on future performance, buyer contractual elections and other contractual provisions. Our profits could decline as our major contracts reprice from the existing prices to market rates at the contract reopener or expiration dates. We believe that our volume of coal sales will not change and that we will enter
82
into new coal sales contracts as current contracts expire. Our challenge is to negotiate prices at above-spot rates to lessen the potential loss of profits. We cannot assure you that we can carry out this strategy successfully. Highwall Mining Business The Addcar Highwall Mining System We operate or lease seven Addcar highwall mining systems and will build additional systems as required. The Addcar highwall mining system is an innovative, efficient mining system, capable of producing more than 300,000 tons of raw coal per month. This equates to more than twenty miles of tunnel or 7 million cubic feet of excavation in a single month. The system is often deployed at reserves that cannot be economically mined with surface methods. The main elements of the Addcar system are: . a continuous miner; . conveyor cars (the Addcars); . a launch vehicle; . an elevating stacker/conveyor; and . a wheel-loader with a forklift attachment. The continuous miner, located at the front of the Addcar system, mines coal and conveys it to the first Addcar. The miner forms a rectangular opening in the coal seam at the highwall and continues to cut a roadway into the seam, approximately 10 feet wide. The cutting end of the miner is hydraulically raised and lowered as it rotates, allowing the machine to mine a variety of seam thicknesses and follow the contours of the seam. A gathering head loads the cut coal onto a chain conveyor, and the coal passes on to the first Addcar. The Addcars form a modular conveyor system that transports the coal to the surface. As the miner cuts into the seam, Addcars are added individually behind the miner in a manner that does not interrupt the flow of coal. The continuous nature of this operation is a key feature of the Addcar system, which adds significantly to its overall productivity and efficiency. The mined coal moves from one car to the next until it reaches the launch vehicle on the surface. Each Addcar weighs approximately 12 tons, and is approximately 40 feet long. The launch vehicle is a two-deck steel structure placed on the floor of the pit at the base of the highwall. The launch vehicle serves as a stable work platform, propulsion unit, and utility supply center for the equipment in the highwall entry. It contains an electric powered distribution center, a control cabin where a person operates the entire system by remote control, two separate hydraulic power systems, and cable and hose reels for electrical power, coaxial cable, dust suppression, water, and, when required, either inert gas or compressed air, for ventilation at the cutting face. The elevating stacker/conveyor receives the coal from the belt on the launch vehicle, and pours it into a pile, from where the coal can be loaded by the wheel-loader into trucks, or onto a conveyor. The stacker/conveyor is wheel- mounted and easy to move with the launch vehicle. The highwall mining system weighs over 450 tons and has more than 2,000 horsepower. The wheel-loader transports the Addcars by replacing its bucket with a forklift attachment. The wheel-loader operator positions the forklift under the Addcars and transports them to and from the launch vehicle during the mining cycle. The Highwall Mining Process The highwall mining process involves the following steps: Step One: Geological Analysis. Each coal seam must be analyzed before mining begins. Analysis includes geological surveys and, in some instances, test mining. The mine operator also may be able to provide details of the seam geology based on the operator's mining experience and previous exploration.
83
Step Two: Geotechnical Design. Before mining commences, a coal extraction pattern for the target mine must be designed. The primary design parameters include the thickness of the seam, the strength of the coal, the thickness of the overburden, the nature of the intermediate roof and the identification and configuration of any joints and weaknesses in roof and floor strata. Step Three: Positioning the Launch Vehicle. To start the mining cycle, the launch vehicle is moved into position in accordance with the survey stations established prior to mining. Step Four: Initiating Mining. The miner starts cutting with only the lead Addcar behind it. The launch vehicle assists the mining by applying continuous hydraulic pressure to the continuous miner. Step Five: Adding Addcars. As the miner and Addcars move forward, the loader collects and places another Addcar on the work platform, holding it in position while it is connected to the cable. The newly added Addcar is then lowered into position and secured. This process is completed without halting the continuous flow of coal. Step Six: On-Line Maintenance. While each Addcar is on the launch vehicle, the mining crew has access to it for about 15 minutes until it moves into the entry. This gives the crew an opportunity to service the Addcar and check its functions before it goes underground. Each 1,200-foot entry will take approximately 12 hours to complete. Step Seven: Remote Operation. The remote control system is connected by coaxial cable to a receiver on the miner. The coaxial cable carries signals from a diagnostics package that monitors equipment performance, methane and other gas levels, and other mining parameters. The cable also provides a visual link for the operator through three video cameras mounted in strategic locations on the miner and the first Addcar. Step Eight: System Retreat. When the highwall mining entry has been completed, removal of the Addcar system involves a simple reverse operation. The combination of the miner pushing from the front and the hydraulic cylinders pulling from the rear allows efficient recovery of the Addcar system so that it can be relocated quickly and mining can resume without significant delay. Step Nine: General Maintenance. After the Addcar system has been removed from the mine, routine maintenance is performed while the system is being relocated to the next entry. Under normal circumstances, the withdrawal from one entry and the commencement of mining in the next entry requires 45 to 60 minutes. Step Ten: Relocation. Once maintenance is complete, a hydraulic skid propulsion system on the launch vehicle assists the system in relocating quickly and efficiently to the next entry. Patents and Trademark Mining Technologies, Inc., our wholly owned subsidiary holds 13 U.S. patents and one registered trademark in North America relating to the Addcar highwall mining system. MTI acquired the patents and trademark from Addington Enterprises in 1998. The patents will expire between December 10, 2010 and November 20, 2015, and the registered trademark will expire September 28, 2013. Manufacturing Facilities We manufacture Addcar systems at facilities in Ashland, Kentucky. The facilities include the fabrication shop, where we construct launch vehicles and continuous miners, and the car shop, where we construct Addcars. Skilled subcontractors perform machining, heat treating, electric motor repair, and other aspects of manufacturing and repairing of the Addcar systems at the fabrication shop. The car shop has a complete set of jigs, which have been built for the efficient manufacture of Addcars. These jigs significantly reduce manufacturing costs, while improving the quality control of the finished product. Both the fabrication shop and the car shop also perform major repairs and rebuilds on a routine basis. The rebuilds range from minor repairs
84
on Addcars as part of routine maintenance, to a fullscale overhaul of a continuous miner or launch vehicle. We have the capacity to manufacture eight Addcar systems per year. This capacity permits us to expand our highwall mining operations and to lease, sell or license Addcar systems to other coal companies. Non-Coal Businesses In addition to its coal operations, we acquired several non-coal businesses in the Zeigler acquisition. These include a technology segment, a power segment, an environmental services segment, an import/export services segment and a property development segment. We sold the properties managed by the import/export services segment and expect to wind up the operations of the power segment by the end of 1999. We have classified the other non-coal businesses as assets held for sale. Zeigler's technology segment, headed by its wholly owned subsidiary Encoal, focuses on producing two new clean burning, high heating fuels from subbituminous coal. Both fuels are developed by a process known as "liquids from coal," which is owned by the TEK-KOL Partnership. The environmental services segment provides Zeigler with its own in-house support for mining construction activities as well as reclamation of closed mines. The property development segment focuses on Zeigler's expertise in land management through the development of real estate trust quality assets. Zeigler's power segment operated through Zenergy, Inc. and EnerZ, which are energy marketing companies in the process of winding up their operations. Historically, EnerZ has entered into contracts to purchase fixed amounts of energy during a calendar year and concurrently entered into contracts to sell offsetting amounts of energy during the same period. EnerZ has not entered into any such contracts since June 2, 1998, and all of its remaining contract obligations terminate near the end of 1999. Administrative Offices We maintain administrative offices in Ashland and five other cities in Kentucky; Charleston, West Virginia; and Evansville, Indiana. We are currently evaluating elimination of certain duplicative or unnecessary administrative facilities. Certain Liabilities Our long-term liabilities for pensions, retiree health care, work-related injuries and illnesses, and mine reclamation reflect our commitment to our employees and to environmental stewardship. The total amount of these liabilities reflects our size, diversity and changing nature. The majority of these liabilities relate to the operating subsidiaries we have recently acquired, and the resulting increase in the number of our employees and mines. All U.S. coal companies must comply with laws and regulations governing mine reclamation and other environmental liabilities for work-related injuries and illnesses. In addition, labor contracts with unionized employees include long- term benefits, notably health care coverage for retirees and their dependents. These obligations fall into four principal categories: reclamation, workers' compensation (including black lung), pensions and retiree health care. Reclamation. All coal mining companies must return the land on which they mine to its original state or to an alternative productive use, as applicable. Reclamation liabilities primarily represent the future costs to restore the lands as required by law. We undertake short-term ongoing reclamation activities as we disturb areas in the mining process. We project long-term reclamation and mine closing costs, which we accrue, upon commencement of mining, over the life of the mine. The end of mine reclamation and mine-closing costs accruals totaled approximately $376.8 million on our balance sheet as of December 31, 1998, of which $45.6 million is a current liability. See "Risk Factors--Government Regulation of the Mining Industry."
85
Workers' Compensation. These liabilities represent the actuarial estimates for compensable, work-related injuries (traumatic claims) and occupational disease, primarily black lung disease (pneumoconiosis). Federal law requires employers to pay black lung awards to former employees who filed claims after July 1, 1973. The federal black lung trust fund, which is supported by an excise tax on all U.S. coal production, pays prior claims. On a pro forma basis, these liabilities will be discounted at 7.25%. These liabilities totaled approximately $93.5 million on our balance sheet as of December 31, 1998, $10.0 million of which is a current liability. Pension Related Provisions. These costs represent the unfunded actuarially- estimated cost of paying pension benefits to current active employees when they retire. Provisions for active employees reflect their service to date and additional amounts are provided so that the total liability is accrued when the employee actually retires. Consulting actuaries determine annual contributions to the pension plans based on ERISA minimum funding standards. These liabilities are discounted at 7.25%. The pension liability totaled approximately $1.5 million on our balance sheet as of December 31, 1998, $0.1 million of which is a current liability. Post Employment Benefits. These liabilities represent actuarial estimates of various benefits to be provided to former or inactive employees after employment but before retirement. Examples of such benefits are severance benefits and disability-related benefits. We accrue postemployment benefits over the working life of the employee in accordance with generally accepted accounting principles. These liabilities are discounted at an average rate of 7.25%. These liabilities totaled approximately $4.5 million on our balance sheet as of December 31, 1998, $1.2 million of which is a current liability. Retiree Health Care. Consistent with SFAS 106, we record a liability representing the estimated cost of providing retiree health care benefits to current retirees and active employees who will retire in the future. Provisions for active employees represent the amount recognized to date, based on their service to date; additional amounts are provided periodically so that the total liability is accrued when the employee retires. These liabilities are discounted at 7.25%. Our retiree health care obligations also include a liability representing future contributions to the Combined Fund. This multi-employer fund provides health care benefits to a closed group of former employees who retired prior to 1977. No new retirees will be added to this group unless the Social Security Administration assigns new retirees to us. The liability may increase or decrease depending on changes in per capita health care costs, offset by the mortality curve in this aging population of beneficiaries. See "Government Regulation--Mine Health and Safety." As a result of a 1998 U.S. Supreme Court decision, companies that first signed the National Bituminous Coal wage agreement after 1974 may bear a greater portion of liability to ensure that the Combined Fund is fully funded. The premiums we pay to the Combined Fund are relatively small, totaling $5.0 million in 1998. We do not expect that any increase in our contributions to the Combined Fund will have a material adverse effect on our financial condition or results of operations. Retiree health care liabilities totaled approximately $391.9 million on our balance sheet as of December 31, 1998, $16.9 million of which is a current liability. Obligations to the Combined Fund totaled $48.0 million on our balance sheet as of December 31, 1998, of which $5.0 million is a current liability. Our senior executives focus on actively managing these liabilities. Provisions for these liabilities reflect standard U.S. coal industry accounting practices. These costs are borne by the operating subsidiaries from which the obligations arose. Employees As of December 31, 1998, we had a total of 4,081 employees, 3,668 of whom worked in coal production, and 413 of whom worked in the management of its coal business. Approximately 32% of our coal employees are affiliated with unions. Relations with union labor are extremely important to us. The United Mine Workers of America represents our union employees, who are subject to separate wage agreements negotiated with the United Mine Workers or under the National Bituminous Coal
86
Wage Agreement. We have several collective bargaining agreements with the United Mine Workers. These agreements contain rolling provisions requiring two weeks notification prior to any termination. We cannot assure you that our unionized labor will not go on strike upon expiration of existing contracts. Legal Proceedings A subsidiary of Pittston Minerals Group, Inc. has made claims for indemnification from our Company. The claimed indemnification covers a number of items, including allegedly delinquent taxes and fees, allegedly assumed liabilities, alleged failure to transfer specific licenses, assets and permits and alleged non-compliance with certain agreements and applicable laws and permits. The claims arise from the January 1994 sale of several indirect subsidiaries by Addington Resources to the Pittston subsidiary. Addington Resources also guaranteed the obligations of its subsidiaries under the transaction agreement. Addington Enterprises assumed Addington Resources' indemnity obligations when Addington Enterprises purchased Addington Resources' coal mining subsidiaries in 1995. AEI Holding assumed those obligations when it acquired substantially all of Addington Enterprises' coal assets in November 1997. Addington Enterprises is investigating and negotiating the claims with the Pittston subsidiary. Many of the claims have been resolved without any payment by or liability to our Company. To our knowledge, no lawsuit has been filed or otherwise threatened by the Pittston subsidiary against our Company. We intend to defend these claims vigorously, and at this time it is not possible to predict the outcome of the claims. However, even if the Pittston subsidiary successfully pursued its indemnification claims, we believe that the liability arising from those claims would not have a material adverse effect on the business of AEI Resources and its subsidiaries, taken as a whole. See "Certain Related Party Transactions--Indemnification." In 1996, Cyprus Amax Coal Company was sued in the Circuit Court of Perry County, Kentucky, with the plaintiffs alleging competing claims to approximately 1,425 acres of property in eastern Kentucky upon which we conduct coal mining activities. The lawsuit claims damages of approximately $400.0 million. We assumed this potential liability in our June 1998 acquisition of subsidiaries of Cyprus Amax. Based on a prior federal appellate court decision related to a similar claim of different plaintiffs based on the same alleged source of claim rights, we believe we are likely to prevail. We believe that an adverse result would not require us to pay significant damages and would not likely have a material adverse effect on AEI Resources and its subsidiaries, taken as a whole. In addition, our Company or its subsidiaries are defendants in various actions in the ordinary course of our business. These actions generally involve such matters as property boundaries, mining rights, blasting damage, personal injury and royalty payments. We believe these proceedings are incidental to our business and are not likely to result in materially adverse judgments.
87
GOVERNMENT REGULATION Federal, state and local authorities regulate the U.S. coal mining industry as to several matters, including: .employee health and safety, .limitations on land use, .permitting and licensing requirements, .air quality standards, .water pollution, .plant and wildlife protection, .reclamation and restoration of mining properties after mining is completed, .the discharge of materials into the environment, .surface subsidence from underground mining .the effects of mining on groundwater quality and availability. In addition, taxes on coal production fund health benefits paid to current and retired coal miners. Mining operations require many federal, state and local governmental permits and approvals. We believe we have obtained all permits currently required to conduct our present mining operations. We also believe that we will not encounter substantial difficulty obtaining or renewing necessary permits in the future, which generally requires us to file required information with the appropriate regulatory agencies. We may be required to prepare and present to federal, state and local authorities data pertaining to the effect or impact that proposed exploration or production of coal may have on the environment. These requirements could prove costly and time consuming, and could delay our exploration or production operations. Future environmental legislation and administrative regulations could cause our operations to become more closely regulated. New legislation and regulations, or more rigorous interpretations and enforcement of existing laws, could cause our equipment and operating costs to increase substantially and cause delays, interruptions or termination of our operations. We cannot predict the extent to which these regulatory changes might affect our operations. In addition, as discussed below, the extensive regulation of the environmental impact of electricity generation by utilities may affect demand for coal. See "Risk Factors -- Governmental Regulation of the Mining Industry." We attempt to conduct our mining operations in compliance with all applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements, violations during mining operations occur from time to time in the industry. None of our violations to date or the monetary penalties assessed upon us has been material, and we believe we are in substantial compliance with all applicable laws and regulations. Environmental Laws Our operations are subject to various federal, state and local environmental laws. These laws require approval of many aspects of our coal mining operations, and both federal and state inspectors regularly visit our mines and facilities to ensure compliance.
88
Surface Mining Control and Reclamation Act The Federal Surface Mining Control and Reclamation Act is administered by the Office of Surface Mining Reclamation and Enforcement, establishes mining and reclamation standards for all aspects of surface mining as well as many aspects of deep mining. The Reclamation Act and similar state statutes, among other things, require that mined property be restored in accordance with specified standards and an approved reclamation plan. In addition, the Abandoned Mine Lands Act, which is part of the Reclamation Act, imposes a tax on all current mining operations the proceeds of which are used to restore mines closed before 1977. The maximum tax is $0.35 per ton on surface-mined coal and $0.15 per ton on deep-mined coal. The Reclamation Act also requires that we meet comprehensive environmental protection and reclamation standards during the course of and upon completion of mining activities. For example, the Reclamation Act requires us to restore a surface mine to the approximate original contour as contemporaneously as practicable during surface coal mining operations. The mine operator must submit a bond or otherwise secure the performance of these reclamation obligations. Either the Office of Surface Mining or the appropriate state regulatory authority issues and renews permits for surface mining operations. We accrue for the liability associated with all end of mine reclamation on a ratable basis as we mine the coal reserve. We also evaluate our annually estimated cost of reclamation, and the corresponding accrual on our financial statements. A reclamation bond can not be released sooner than five years after reclamation to the approximate original contour or to a productive use, as applicable. We currently have posted more than $567.8 million in reclamation bonds. Because much of the reclamation process occurs contemporaneously with mining activities in accordance with the approved reclamation plan, the estimated reclamation cost to immediately cease mining operations substantially exceeds the recorded reclamation accrual. Most states in which we conduct active mining operations have primary jurisdiction for the Reclamation Act enforcement through approved state programs. These state programs have established reclamation and environmental standards that generally correspond to, and are not less stringent than, those of the Reclamation Act. Each state must enforce its own laws and, subject to federal oversight, the Reclamation Act. The Reclamation Act requires the issuance and periodic renewal of permits to conduct mining operations. Although we do not anticipate significant permit issuance or renewal problems, we cannot assure you that our permits will be renewed or granted in the future or that permit issues will not adversely affect operations. Under previous Reclamation Act regulations, responsibility for any coal operator currently in violation of the Reclamation Act could be imputed to other companies deemed, according to regulations, to "own or control" the coal operation. Sanctions included being blocked from receiving new permits and rescission or suspension of existing permits. Because of a recent federal court action invalidating these Reclamation Act regulations, the scope and potential impact of the "ownership and control" requirements on us is not clear. The Office of Surface Mining has responded to the court action by promulgating interim regulations that more narrowly apply the ownership and control standards to coal companies. Although the federal action should, by analogy, have a precedential effect on state "ownership and control" regulations, which in many instances are similar to the invalidated federal regulation, we cannot predict the impact the federal court decision will have on these state regulations. Clean Air Act The Federal Clean Air Act, including the Clean Air Act Amendments, and corresponding state laws that regulate the emissions of materials into the air, affect coal mining operations both directly and indirectly. Direct impacts on coal mining and processing operations may occur through Clean Air Act permitting requirements or emissions control requirements relating to particulate matter (e.g., "fugitive dust"), including future regulation of fine particulate matter measuring 2.5 micrometers in diameter or smaller. In July 1997, the U.S. Environmental Protection Agency, or "EPA," adopted new, more stringent National Ambient Air Quality
89
Standards for particulate matter and ozone. As a result, some states must change their existing implementation plans to comply with the new air quality standards. Because coal mining operations emit particulate matter, our mining operations and utility customers will likely be affected directly when the states revise their implementation plans. Any related state and federal regulations could restrict our ability to develop new mines or require us to modify our existing operations. The potential direct impact of the new air quality standards on the coal industry will depend on the policies and control strategies associated with the state implementation process under the Clean Air Act. The new air quality standards could have a material adverse effect on our business, financial condition and results of operations. The Clean Air Act indirectly affects coal mining operations by extensively regulating the emissions of sulfur dioxide (believed to be a cause of "acid rain"), nitrogen oxide and other compounds by coal-fueled utility power plants. The limits on sulfur dioxide emissions were reduced in 1995 by Phase I of the Clean Air Act Amendments and will be reduced again in 2000 when Phase II takes effect. The affected utilities may be able to meet these requirements by, among other ways, switching to low-sulfur fuels, installing pollution control devices such as scrubbers, reducing electricity generating levels or purchasing or trading emission allowances. Utilities and industrial concerns will receive these emission allowances for specific emission sources they operate, and they can trade or sell the allowances to permit other units to emit higher levels of sulfur dioxide. We currently cannot determine completely how the implementation of the stricter Phase II emission limits will affect us. We believe the price of higher sulfur coal is likely to decrease as more coal-fueled utility power plants become subject to the lower sulfur dioxide emission limits. We expect this price effect to occur after the large surplus of emission allowances that has accumulated in connection with Phase I has been reduced, and before the utilities that choose to comply with Phase II by installing sulfur-reduction technologies can do so. The Clean Air Act Amendments also require utilities that currently are major sources of nitrogen oxides in moderate or higher ozone nonattainment areas to install reasonably available control technology for nitrogen oxides, which are precursors of ozone. In addition, the EPA is expected to implement stricter ozone standards by 2003. The EPA announced an implementation plan that will require 22 eastern states to amend their state implementation plans to reduce nitrogen oxide emissions substantially. Installation of reasonably available control technology and additional control measures required under the proposal will make it more costly to operate coal-fueled utility power plants. Depending on requirements of individual state attainment plans and the development of revised new source performance standards, these measures could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. The Clean Air Act Amendments also require a study of utility power plant emissions of certain toxic substances, including mercury, and direct the EPA to regulate these substances if warranted. Although the EPA recently indicated that it plans to study the issue further, it does not plan to propose regulations in the near future. However, future federal or state regulatory or legislative activity may seek to reduce mercury emissions. If these requirements are enacted, they could result in reduced use of coal if utilities switch to other sources of fuel. In addition, Clean Air Act Amendment regulations that protect visibility in Class I Federal areas, such as national parks and wilderness areas, apply to air emissions of sulfur dioxide, particulate matter, and nitrogen oxide. Currently, these regulations address visibility impairment reasonably attributable to a single source or small group of sources in 35 states and one territory. In July 1997, the EPA proposed regulations that would expand the applicability of the regional haze program to all states, including those that may not have any Class I areas, and would establish presumptive reasonable progress targets for states. If these proposed regional haze regulations take effect, some states may be required to change their existing implementation plans. Although the proposed regulations do not identify specific sources as potential contributors to visibility impairment, coal-fueled utilities emit these substances. Depending on the requirements of the final rule and individual state implementation plans, efforts to reduce sulfur dioxide, particulate matter, and nitrogen oxide emissions may make it more costly to operate coal-fueled utility power plants. Existing strategies for other air quality programs, such as those previously discussed, may improve visibility and thereby limit the potential adverse effects of any final regulations on us.
90
Clean Water Act The Federal Water Pollution Control Act (the "Clean Water Act") affects coal mining operations by: .imposing effluent discharge restrictions on pollutants discharged into water; .imposing regular monitoring and reporting requirements; .requiring the issuance and renewal of permits for the discharge of pollutants into waters; and .imposing performance standards as a requirement for the issuance of permits. In addition, states in which we operate regulate the water pollution effects of coal mining operations. Each state must enforce its state laws and the Clean Water Act in its jurisdiction, subject to federal oversight. The environmental impact of valley fills associated with surface mining activities, including mountaintop removal mining, is currently the subject of litigation and various state and federal initiatives. Clean Water Act provisions that authorize the discharge of fill material into navigable waters currently permit valley fills. Ongoing citizen suits against permitting authorities in federal court in both Pennsylvania and West Virginia allege that valley fill permits violate the anti-degradation provisions of the Clean Water Act and therefore should not be issued. In addition, various task forces and agencies at the state and federal level are currently exploring environmental issues associated with valley fills in general, as well as environmental issues associated with mountaintop removal mining in particular. We cannot predict the outcome of the pending litigation or whether legislation and/or regulations, if enacted, regarding valley fills or mountaintop removal mining could have a material adverse effect on us. Resource Conservation and Recovery Act The Federal Resource Conservation and Recovery Act and similar state laws affect coal mining operations by imposing requirements for the treatment, storage and disposal of hazardous wastes. Although the Resource Conservation and Recovery Act exempts coal mining wastes covered by Reclamation Act permits, we cannot predict whether this exclusion will continue. Federal and State Superfund Statutes The Federal Comprehensive Environmental Response, Compensation and Liability or "Superfund" Act, and similar state laws affect coal mining operations by . creating investigation and remediation obligations for releases of hazardous substances that may endanger public health or the environment, and .providing for natural resource damages. Under the Superfund Act, waste generators, past and present site owners and operators, as well as others, may be jointly and severally liable regardless of fault or the legality of the disposal activity at the time it occurred. Waste substances generated by coal production and processing are generally not considered hazardous substances covered by the Superfund Act. However, the statute governs products used by coal companies in operations, such as certain chemicals, and the disposal of these products. Although we do not currently anticipate that we will incur material liabilities or costs associated with the Superfund Act or similar state laws, we cannot assure you that we will not do in the future. Global Climate Change The United States and over 160 other nations have signed the 1992 Framework Convention on Global Climate Change, which is intended to limit or capture emissions of greenhouse gases such as carbon dioxide. The December 1997 Kyoto Protocol established a binding set of emissions targets for developed nations. The specific limits under the terms of the Kyoto Protocol vary from country to country. The United States would be
91
required to reduce emissions to 93% of its 1990 levels over a five-year budget period from 2008 through 2012. The United States has not ratified the Kyoto Protocol, and no comprehensive requirements focusing on greenhouse gas emissions are currently in place. However, the imposition of measures intended to stabilize or reduce greenhouse gas emissions, whether through ratification of the Kyoto Protocol or otherwise, could adversely affect the price and demand for coal. According to the Department of Energy's Annual Energy Outlook for 1998, coal accounts for 34% of the man-made greenhouse gas emissions in the United States. Efforts to control greenhouse gas emissions could result in reduced use of coal if electric generators switch to lower carbon sources of fuel. Mine Health and Safety Since the Federal Coal Mine Health and Safety Act of 1969 was adopted, federal legislation has imposed stringent health and safety standards. That legislation resulted in increased operating costs and reduced productivity. The Federal Mine Health and Safety Act of 1977 significantly expanded the enforcement of health and safety standards and imposed health and safety standards on all aspects of mining operations. All of the states in which we conduct coal mining operations have programs for mine health and safety regulation and enforcement. In combination, federal and state health and safety regulation in the coal mining industry is perhaps the most comprehensive and pervasive system for protection of employee health and safety affecting any segment of U.S. industry. Together with the federal requirements, these programs provide extensive and comprehensive requirements for protection of employee safety and health. Black Lung Under the Black Lung provisions of the Coal Mine Health and Safety Act of 1969, the Black Lung Benefits Revenue Act of 1977, the Black Lung Benefits Reform Act of 1977, as amended in 1981, and provisions of state workers' compensation acts, each coal mine operator must secure payment of federal black lung benefits .to claimants who are current and former employees, and . to a federal trust fund for the payment of benefits and medical expenses to claimants who last worked in the coal industry prior to July 1, 1973. On a program-wide basis, the federal government awards federal black lung benefits to fewer than 7% of the miners who currently seek these benefits. The trust fund is funded by an excise tax on production of up to $1.10 per ton for deep-mined coal and up to $0.55 per ton for surface-mined coal, and neither amount can exceed 4.4% of the sales price. We pass this tax on to the purchaser under many of our coal sales agreements. Since 1980, sponsors have repeatedly introduced federal legislation to increase the black lung approval rate. The last such bill died when Congress adjourned in 1997. Similar legislation will likely be introduced in future sessions of Congress. Black lung claims may also be filed under the provisions of workers compensation laws in states in which a company operates. Kentucky, the state with the most costly black lung provisions, has seen a significant decrease in claims awards since a 1996 law reformed the state workers' compensation system. However, future changes in Kentucky's workers' compensation statutes could result in a return to higher levels of claims. In 1997, the U.S. Department of Labor issued proposed amendments to the regulations implementing the federal black lung laws which, among other things, establish a presumption in favor of a claimant's treating physician and limit a coal operator's ability to introduce medical evidence regarding the claimant's medical condition. If adopted, the amendments could have an adverse impact on us, the extent of which we cannot accurately predict. The House subcommittee with oversight authority for the Federal Black Lung program has included provisions in the current budget bill that would prohibit the Department of Labor from implementing these regulations until the Department addresses issues related to the cost of the regulations.
92
Coal Industry Retiree Health Benefit Act of 1992 The Coal Industry Retiree Health Benefit Act of 1992, or "Coal Act," provides for the funding of health benefits for certain UMWA retirees. The Coal Act merged previously established UMWA benefit plans into a newly created fund called the "Combined Fund," into which "signatory operators" and "related persons" are obligated to pay annual premiums for beneficiaries. The Coal Act also created a second benefit fund, the "1992 Fund," for miners who retired between July 21, 1992 and September 30, 1994 and whose former employers are no longer in business. Companies that sign labor agreements under the National Bituminous Coal Wage Agreement must pay premiums to the Combined Fund and the 1992 Fund. The Social Security Administration assigns retired miners and their beneficiaries to the coal companies with which they were formerly employed or related for purposes of assessing the premium. A 1998 U.S. Supreme Court held that the assessment of premiums under the Coal Act against only those coal companies that were signatories to UMWA wage agreements only before 1974 is an unconstitutional taking under the Fifth Amendment. We currently must pay premiums to both the Combined Fund and the 1992 Fund. The possibility exists that we will be assessed for more miners than could be reasonably foreseen, or that higher premiums will be assessed for the Combined Fund and the 1992 Fund. Federal Land Policy The U.S. government is the largest owner of coal reserves in the nation. It exercises its authority through several agencies, but primarily through the Bureau of Land Management. The majority of these reserves are located in the western United States. Some are on lands on which we have conducted surface coal mining operations since 1995 and on which we will mine in the future. The federal government's authority over public lands exceeds the rights of any private owner of coal. The federal government possesses both the customary property rights of a private owner and the rights of the sovereign over the management of public lands. Although the relevant statutes and regulations, including the Mineral Leasing Act of 1920, as amended by the Federal Coal Leasing Amendments Act of 1976, the Federal Land Policy Management Act of 1977 and the Reclamation Act, are well-established, they create a complex and cumbersome process for a lease applicant. The consequence is that an opponent of federal coal leasing has numerous opportunities to delay the issuance of a federal coal lease. Penalties Under certain circumstances, the Bureau of Land Management can impose substantial fines and penalties, including revocation of mining permits, under the laws described above. The Bureau can impose monetary sanctions and, in severe circumstances, criminal sanctions for failure to comply with these laws. Regulations also provide that the Bureau can deny or revoke a mining permit if an officer, director or a shareholder with a 10% or greater interest in the entity is affiliated with another entity which has outstanding permit violations. Although we have been cited for violations, neither we nor our subsidiaries has ever had a permit suspended or revoked because of any violation by us, our subsidiaries or any of our affiliates. The penalties assessed for these violations have not been material, and most of the violations have been abated without any penalty being assessed. Compliance with Regulatory Requirements We try to conduct our mining operations in compliance with all applicable federal, state and local laws and regulations. We believe we currently are in substantial compliance with all of these laws and regulations. However, because of the extensive and comprehensive regulatory requirements, minor, inadvertent violations during mining operations are not unusual. Although we have no intention to commit infractions, and seek to prevent their occurrence, we may have violations in the future. We believe our compliance record compares favorably with that of other coal mining companies.
93
Because of the extensive nature of our land holdings, we have not undertaken an investigation of environmental conditions on most of our land holdings that might subject us to liability under existing environmental laws. From time to time during the course of normal operations there have been discharges of hazardous materials onto our lands. We are not aware of other adverse environmental conditions on our lands that might subject us to material liability under existing environmental laws. In addition to environmental liability at our own properties, we are potentially liable for environmental conditions on properties our predecessor transferred to a subsidiary of Pittston Coal in 1994. Addington Holding Company, Inc. transferred certain mining properties to the Pittston subsidiary and agreed to indemnify the subsidiary for specific liabilities, including specific environmental liabilities, associated with the transferred properties. We agreed to assume these indemnification liabilities when we purchased our current operating properties from Addington Holding in 1995. The Pittston subsidiary has notified us of various environmental conditions existing on the transferred properties for which it claims to have the right to be indemnified. We contested the applicability of the indemnification provisions to many of these conditions. However, it is possible that we may incur liability as a result of these conditions. See "Certain Related Party Transactions -- Indemnification." We do not believe any such liability would have a material adverse effect on our business and the business of our subsidiaries, taken as a whole. We believe that our continued compliance with regulatory standards will not substantially affect our ability to compete with similarly situated coal mining companies. The cost of compliance, however, does increase the cost of mining coal and to this extent makes coal less competitive with alternative fuels. We are not aware of any pending or proposed legislation or regulatory action relating to environmental issues that materially affect us other than those discussed above. However, new legislation may be enacted or new regulations may be adopted that will have the effect of materially increasing the cost of mining coal.
94
MANAGEMENT Directors and Executive Officers The following information is furnished with respect to the directors and executive officers of the Company.
Larry Addington, Robert Anderson, Robert Addington, Stonie Barker and Stephen Addington are the directors of the Company. All directors hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Officers serve at the discretion of the Board of Directors. All officers spend substantially full time working for the Company or its subsidiaries. Larry Addington, Chairman of the Board since the formation of AEI Resources and its predecessor AEI Holding, has substantial experience in the operation of coal mining ventures. His first mining company, Addington Brothers Mining Company, began mining coal in eastern Kentucky in 1972 and was sold to Ashland Oil, Inc. in 1976. In 1978, Larry Addington formed Pyramid Mining Company, which mined coal in western Kentucky and was sold to First Mississippi Corporation in 1981. In 1984, Larry Addington formed Addington Resources, which became a public company in 1987, and which primarily conducted coal mining and integrated solid waste disposal operations. In 1995, he resigned from the board of directors of Addington Resources and shortly thereafter purchased the coal mining operations of Addington Resources through Addington Enterprises, Inc., a corporation owned by Mr. Addington and his brothers Robert and Bruce. In 1997, the Addington brothers transferred the coal mining operations and assets they controlled through Addington Enterprises and other entities to a newly organized company, AEI Holding. Larry Addington is the brother of Robert Addington and Stephen Addington. See "The Company" for more details. Don Brown, Vice Chairman of the Company since January 1999, has worked in the coal industry since 1968, and has extensive experience in all phases of coal mining operations. From 1987 to 1993, Mr. Brown served as President of Cyprus Coal Company. From 1993 to 1995, Mr. Brown served as President of Cyprus Amax, and directed that company's increase in annual production from 10 million tons of coal to over 80 million tons of coal, making it the second largest coal company in the United States. From 1995 until September 1997, Mr. Brown was Chief Executive Officer of International Executive Services LLC, a coal mining consulting business, and Chief Executive Officer of Beaver Brook Coal Company, LLC, a coal leasing and exploration company. From September 1997 until January 1999, Mr. Brown served as President and Chief Executive Officer of the Company. Kevin Crutchfield, Chief Operating Officer of the Company since July 1, 1998, and President of the Company since January 1999, has worked in the coal industry since 1981. From 1993 to 1995, he worked for Pittston Coal Company and its subsidiaries as a Vice President. From 1995 until his employment by the Company, he served in various capacities for Cyprus Amax, including President and Chairman of Cyprus Australia Coal Company, where he directed operations employing 1,600 workers and producing 16 million tons of coal per year.
95
John Baum, Chief Financial Officer of the Company since November 1997, has been involved in the coal industry since 1981. From 1991 through April 1993, Mr. Baum served as Vice President of Business Development for Cyprus Coal. From May 1993 until June 1995, Mr. Baum was employed by Cyprus Australia as Deputy Chairman and Chief Financial Officer of its Australian operations. From June 1996 until his employment by the Company, he was a general consultant with J.E. Baum & Associates. Keith Sieber, Vice President--Western Operations of the Company since November 1997, has worked in the coal industry since 1972. From 1992 until his employment by the Company, he was employed as a Vice President by Cyprus Amax. Mr. Sieber was responsible for the operations of Twentymile mine when it set a world record for monthly coal production by a longwall mine (944,443 tons). Robert Addington, Senior Vice President--Eastern Operations of the Company since 1970, has worked in the coal industry since 1970. With Larry Addington and Bruce Addington, he founded Addington Brothers Mining, which was sold to Ashland Oil in 1976. He served as an officer and director of Addington Resources from 1986 until 1995. Since 1995, he has been employed by the Company or its predecessor. Bernie Mason, Senior Vice President--Technical Services and Business Development of the Company since January 1999, has worked in the coal industry since 1978. From 1986 until his employment by the Company, Mr. Mason worked as a manager and geologist for various Addington-related entities. Marc Merritt, Senior Vice President--Sales and Marketing of the Company since January 1998, has worked in the coal industry since 1977. From 1986 until 1994, he was a sales manager for Addington, Inc., and from 1994 until 1997, he was the Executive Vice President--Coal Sales for Pittston Coal Sales Corp. From 1997 until his employment by the Company, he was President of M&M Management, Inc., a coal industry consulting company. Vic Grubb, Treasurer/Controller has worked in the coal industry since 1989. From 1989 to 1995, he was an accountant with Addington Resources, and since 1995 he has been the Chief Financial Officer of Addington Enterprises. John Lynch, Vice President--Supply/Maintenance and Secretary of the Company since September 1997 and has worked in the coal industry since 1983. From 1983 until his employment by the Company, he worked as a manager and an equipment purchaser for various Addington-affiliated companies. He has been the Vice President and Secretary of Addington Enterprises since 1987. Stonie Barker, director of the Company since November, 1997, has worked in the coal industry since 1951. He has served as President, Chief Executive Officer and Chairman of the Board of Island Creek Coal Company and Executive Vice President of Occidental Petroleum Corporation. Since 1984, Mr. Barker has served as President of the Executive Energy Company, a coal industry consulting group. He is also a director of Kaiser Steel Corporation. Robert Anderson, director of the Company since August, 1998, has worked in the coal industry since 1953. He has served in various senior executive capacities, including as President of ANDALEX Resources, Inc. ("ANDALEX") from 1990 until 1994 and Vice Chairman of the Board of Directors of ANDALEX from 1990 until 1995. From 1995 until 1996, he served as Chief Executive Officer and from 1995 until October 1998 he served as Chairman of the Board of Directors of Centennial Resources, Inc. ("Centennial"). On October 13, 1998, Centennial filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court, District of Delaware. Stephen Addington, director of the Company since its formation, has worked in the coal industry since 1991. He was a Regional Manager of Addington Resources from 1990 until 1992. From 1992 until 1995, he was the Vice President of Operations for Addington Environmental, Inc. Since 1995 he has been a Division Manager of Tennessee Mining, Inc. and a consultant to Kindill Mining, Inc., positions he continues to hold.
96
Directors of the Company who are also officers or shareholders of the Company or Holdings receive no compensation for their services as directors. Non- management directors are paid $25,000 per year for services as directors, plus an additional $2,000 per meeting actually attended and $500 for each committee meeting actually attended which was not held in conjunction with a Board of Directors meeting. Limitation on Liability of Directors AEI Resources' Certificate of Incorporation provides that no director will be personally liable to the Company or its stockholders for monetary damages for breaches of fiduciary duty as a director, except for: . a breach of the director's duty of loyalty to us or our shareholders; . acts and omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; . transactions from which a director derived an improper personal benefit; or . unlawful payment of dividends or stock purchases or redemptions pursuant to Section 174 of the Delaware General Corporation Law. This provision protects persons who serve on the Company's board of directors against awards of monetary damages for negligence in the performance of their duties. It does not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of the duty of care. Executive Compensation The following table presents certain summary information concerning compensation paid or accrued by the Company for services rendered in all capacities for the year ended December 31, 1998,for (i) the Chief Executive Officer of the Company, and (ii) each of the four other most highly compensated executive officers of the Company who received in excess of $100,000, (the "Named Executive Officers") determined as of December 31, 1998. Summary Compensation Table
(1) Perquisites and other personal benefits paid in 1998 for the Named
Executive Officers aggregated less than the lesser of $50,000 and 10% of
the total annual salary and bonus set forth in the columns entitled
"Salary" and "Bonus" for each Named Executive Officer.
(2) The Company accrued discretionary cash bonuses in 1998 for extraordinary services provided by certain key employees in connection with the restructuring of the Company and its predecessors. (3) Represents payment of moving expenses. 97 Employment Contracts Don Brown The Company entered into an amended and restated employment agreement with Don Brown on June 30, 1998. The agreement terminates on October 1, 1999, but is automatically renewed for one-year periods unless either party gives notice not to renew. Under the terms of the agreement, Mr. Brown is responsible for advising the Company on strategic acquisitions and dispositions, the Company's restructuring and reorganization and financing matters. The Company will pay Mr. Brown an annual base salary of $600,000, plus such annual merit increases and bonus compensation as determined by the Company. Under the terms of the agreement, Mr. Brown earned bonus compensation of $1.5 million in connection with his participation in the September 1998 acquisition of Zeigler Coal Holding Company and $1.0 million in connection with his participation in the December 1998 offerings of its senior and senior subordinated notes and the September 1998 refinancing of its senior credit facility. The Company paid Mr. Brown $2.5 million in January 1999 in connection with a separate bonus agreement for services rendered in the Company's disposition of Triton Coal Company, LLC. The Company will provide Mr. Brown a house in Ashland, Kentucky during the term of his employment and a life insurance policy in the amount of $500,000. He is also entitled to participate in any employee benefit plan sponsored by the Company. If Mr. Brown's employment is terminated prior to October 1, 1999 for any reason other than death, disability or for cause, the Company will continue to pay Mr. Brown his then existing annual base salary, and any bonuses that would otherwise have been paid if he had remained employed, for the remaining term of his contract. In addition, the Company paid Mr. Brown's moving expenses and the real estate commission on the sale of his prior residence. The Company also provided Mr. Brown a $150,000 bridge loan, which was repaid upon the sale of his prior residence. Mr. Brown received options to purchase 6,600 shares of the stock of Holdings pursuant to the stock option plan. The Company entered into a Stock Option Purchase Agreement with Mr. Brown on June 30, 1998. Under the terms of the agreement, Mr. Brown may cause the Company to purchase his stock options, and the Company may cause Mr. Brown to sell to the Company such stock options, for a purchase price of $2.5 million if Mr. Brown remains in the Company's employment through October 1, 1999. This agreement is triggered upon the termination of Mr. Brown's employment and expires ninety (90) days thereafter. Kevin Crutchfield The Company entered into an employment agreement with Kevin Crutchfield on June 26, 1998. The agreement was amended, effective January 11, 1999, and Mr. Crutchfield assumed his current position of President and retained his position as Chief Operating Officer. Under the terms of the agreement, which expires on July 20, 2003, Mr. Crutchfield receives an annual base salary of $500,000, with such annual merit increases and bonus compensation as determined by the Company. If the Company employs Mr. Crutchfield in any position other than President and Chief Operating Officer, his annual base salary will be reduced to $350,000. The Company paid Mr. Crutchfield a sign-on bonus of $700,000 as an incentive to join its management team. Mr. Crutchfield is also entitled to participate in any incentive, savings, retirement, welfare, fringe or employee benefit plan sponsored by the Company. If Mr. Crutchfield remains employed with us through the first anniversary of a change of control (as defined in the employment agreement), Mr. Crutchfield will receive an additional bonus equal to the sum of his annual base salary plus the greater of the "Annual Bonus" and the "Recent Average Bonus" (each as defined in the employment agreement). The Company will provide Mr. Crutchfield a life insurance policy in the amount of $1,000,000 and a disability policy for the amount of the maximum insurable interest permitted. The Company paid Mr. Crutchfield's moving expenses from Sydney, Australia. If Mr. Crutchfield remains employed by the Company for two years and the Company terminates his employment prior to July 20, 2003, other than for death, disability or cause, then the Company will continue to pay Mr. Crutchfield his then existing annual base salary, and any bonuses that would otherwise have been paid if he had remained employed, for one year from the date of termination of employment or such shorter period as may remain under the term of the employment agreement. If Mr. Crutchfield remains employed for three years, he may terminate his employment for good reason (as defined in the employment
98
agreement) and the Company will continue to pay Mr. Crutchfield his then existing annual base salary, and any bonuses that would otherwise have been paid if he had remained employed, for one year from the date of termination of employment or such shorter period as may remain under the term of the employment agreement. Mr. Crutchfield received options to purchase 2,284 shares of the stock of Holdings pursuant to the stock option plan. Keith Sieber The Company entered into an employment agreement with Keith Sieber on November 1, 1997, which was then amended on February 5, 1998. The agreement expires on October 31, 2000. As compensation for his services as Senior Vice President-- Western Operations, the Company will pay Mr. Sieber an annual base salary of $235,000, with such annual merit increases and bonus compensation as determined by the Company. Mr. Sieber is also entitled to participate in any employee benefit plan sponsored by the Company. For the initial year of his employment, the Company leased an apartment in Grand Junction, Colorado for Mr. Sieber, and loaned Mr. Sieber $10,300 per month. The balance of such loan is currently $144,200. During the term of his employment, Mr. Sieber receives a life insurance policy in the amount of $500,000. If Mr. Sieber's employment with the Company is terminated at any time prior to October 31, 2000, other than due to death, disability or cause, the Company must continue to pay him the compensation remaining over the term of his contract. Mr. Sieber has received options to purchase 2,200 shares of the stock of Holdings pursuant to the stock option plan. John Baum The Company entered into an amended and restated employment agreement with John Baum on December 22, 1998. The agreement expires on November 1, 2001, but may be terminated by the Company upon giving 60 days prior written notice. Mr. Baum is employed as the Chief Financial Officer at an annual base salary of $190,000, with such annual merit increases and bonus compensation as determined by the Company. Mr. Baum is also entitled to participate in any employee benefit plan sponsored by the Company. The Company paid Mr. Baum $1.0 million in consideration of the modification of his prior employment agreement and the cancellation of his options to purchase 1,760 shares of the stock of Holdings pursuant to the Stock Option Plan. Marc R. Merritt The Company entered into an employment agreement with Marc R. Merritt on January 1, 1998. The agreement expires on January 15, 2001. Mr. Merritt is employed as Senior Vice-President of Sales and Marketing at an annual base salary of $165,000, with such annual merit increases and bonus compensation as determined by the Company. Mr. Merritt is also entitled to participate in any employee benefit plan sponsored by the Company. The Company paid Mr. Merritt's moving expenses and the real estate commission on the sale of his residence located at Abbington, Virginia. Mr. Merritt receives a life insurance policy in the amount of $500,000. If Mr. Merritt's employment with the Company is terminated at any time prior to January 15, 2001, other than due to death, disability or cause, the Company must continue to pay him the remaining compensation over the term of his contract. Mr. Merritt has received options to purchase 1,702 shares of the stock of Holdings pursuant to the stock option plan. Deferred Compensation Stock Option Plan Holdings adopted the AEI Resources Holding, Inc. Stock Option Plan, which provides for the issuance to certain key employees of or advisors to Holdings, its parent and its subsidiaries (as defined in the plan) for up to 75,000 shares of Common Stock (as defined in the plan) of Holdings. The options will be issued from time
99
to time, subject to adjustment to reflect certain events such as stock dividends, stock split-ups, subdivisions or consolidations of share or other events which necessitate a similar adjustment. The stock option plan is intended to: . increase the profitability and growth of Holdings and its subsidiaries; . motivate key employees to contribute to the success of Holdings and its subsidiaries; and . provide competitive compensation while obtaining the benefits of tax deferral. The Board of Directors of Holdings or a committee appointed by the Board of Directors will administer the plan. The Board or the committee has the authority to designate which employees and advisors are granted options and the number of shares of Common Stock for each grant, subject to various limitations and conditions specified in the Stock Option Plan (including certain legal restrictions). Holdings has granted options to employees or advisors that, if fully exercised, would result in individuals other than Larry, Robert, Bruce and Stephen Addington owning a significant (but less than 50%) portion of the outstanding capital stock of Holdings. The Board has the authority to make amendments to any terms and conditions applicable to outstanding grants as are consistent with the stock option plan, unless the optionee's prior approval is required. Any amendment which adversely affects any rights of an optionee requires the consent of the optionee. Stock Option Agreements The exercise price of any options granted under the stock option plan is determined by the Board or committee and set forth in a stock option agreement. The exercise price cannot be less than the fair market value of Common Stock on the date the option is granted. If the optionee receives an incentive stock option and owns more than 10% of the total combined voting power of Holdings, a subsidiary or a parent, then the exercise price cannot be less than 110% of the fair market value. Options are exercisable based upon a date set forth in each optionee's stock option agreement. Any vesting period for an option may be subject to acceleration upon a change in control (as defined in the stock option plan). The exercise period for an option may be shortened due to a termination of employment (as defined in the stock option plan). No option can be exercised more than 10 years from the date it was granted. If the optionee receives an incentive stock option and owns more than 10% of the total combined voting power of Holdings, a subsidiary or a parent, no option can be exercised more than five years from the date it was granted.
100
CERTAIN RELATED PARTY TRANSACTIONS General AEI Resources Holding parent corporation of AEI Resources, is closely held and has entered into transactions and loans with related individuals and entities. As provided in the indenture, all future related party transactions or loans must be for a bona fide business purpose on terms at least as favorable as those obtainable from an unaffiliated party unless otherwise authorized under the indenture. In addition, all such transactions or loans will be approved or ratified by a majority of the independent and disinterested directors of AEI Resources. In situations where there will be an ongoing relationship with related parties for the purchase of services or products, a majority of the independent and disinterested directors must approve continuation or initiation of the relationship and will periodically review such transactions to assure that they meet the aforementioned standard. See "Description of the Notes-- Certain Covenants--Transactions with Affiliates" and "Description of Other Indebtedness--The New Senior Notes" for a further description of the procedure for review and approval of transactions with affiliates. Arrangements Involving Affiliates TASK Trucking Company, which is owned by Austin Dickerson, Larry Addington's brother-in-law, provides trucking brokerage services to us, for which TASK receives compensation per ton hauled. We paid TASK gross payments of $9.8 million, $12.9 million and $18.2 million for trucking services in 1995, 1996 and 1997, respectively, and $18.2 million for the year ended December 31, 1998. Based upon our annual review of prices charged by competing trucking companies, we believe that the price charged for such trucking services was not greater than the prices generally charged by non-affiliated entities in the area. We have a service agreement dated October 22, 1997 with Mining Machinery, Inc. ("MMI"), of which John Lynch and Larry Addington own more than 10% and more than 86% of the capital stock, respectively. The service agreement expires November 30, 2007, but may be terminated earlier upon written notice by MMI. Under this agreement, MMI repairs and maintains some of our mining equipment. In 1997, we paid MMI $5.8 million, and for the year ended December 31, 1998, we paid MMI $13.7 million for repairs and maintenance. Based upon our annual review of prices charged by competing equipment repair and maintenance companies, we believe that the price charged for such repair and maintenance services is not greater than prices generally charged by non-affiliated entities in the area. We have several month-to-month equipment leases with MMI, whereby MMI leases mining equipment. In 1997, we paid MMI $3.8 million, and for the year ended December 31, 1998, we paid MMI $5.9 million pursuant to such equipment leases. Based on our annual review of prices charged by competing equipment leasing companies, we believe that the price charged for such leases is not greater than prices generally charged by non-affiliated entities in the area. In connection with the September 1998 Kindill acquisition, Stephen Addington, a director of AEI Resources and the brother of Larry Addington, received approximately $3.6 million in exchange for his interest in a company that owned an option to purchase a controlling interest in Kindill Holding, Inc. Rothschild, Inc., delivered an opinion in connection with the Kindill acquisition which stated that the transaction was fair to the Company from a financial point of view. For the years ended December 31, 1996 and December 31, 1997, we paid Bruce Addington, Larry Addington's brother, approximately $230,000 and $232,000, respectively, for services rendered as an employee of the Company. Bruce Addington assists in managing Addington Mining's operations in eastern Kentucky. On August 4, 1998, AEI Resources Holding and AEI Resources entered into a Tax Allocation Agreement providing for the filing of consolidated income tax returns by the consolidated group of corporations of which the two companies are members, and the allocation among the members of such consolidated group of the tax liabilities or credits arising from such consolidated filings. Under the terms of Keith Sieber's employment agreement, AEI Resources will pay Mr. Sieber $10,300 per month for the shorter of 12 consecutive months or until he sells his previous home. As of December 31, 1998, the balance of this loan was $144,200. The rate of interest on the loan is 6.02%.
101
Pursuant to a Technology Sharing Agreement, dated as of April 29, 1998, between MTI and Addington Enterprises, MTI and Addington Enterprises agreed to share with each other certain technology and technological developments relating to highwall mining. We have not acquired, and currently do not intend to acquire from Addington Enterprises, the foreign patent rights for Addcar highwall mining systems, which are in effect in Australia, China, France, Germany, Spain, the United Kingdom, India, Indonesia, Poland, Russia and South Africa. Pursuant to a Manufacture and Service Agreement, dated as of November 12, 1998, between MTI and Addington Enterprises, MTI agreed to manufacture Addcar highwall mining systems for Addington Enterprises on a cost plus ten percent basis. Indemnification In 1995, when Addington Enterprises purchased the stock of the Addington Resources' subsidiaries engaged in coal mining operations, Addington Enterprises assumed Addington Resources indemnity obligations to a Pittston subsidiary that acquired coal operations from Addington Resources in January 1994. Our predecessor, AEI Holding assumed those obligations when it acquired substantially all of Addington Enterprises' coal assets in November, 1997. See "Business--Legal Proceedings."
102
DESCRIPTION OF CAPITAL STOCK The following description of the material rights and provisions of the capital stock of AEI Resources, its parent corporation, AEI Resources Holding, and its subsidiary and predecessor AEI Holding does not purport to be complete and is subject in all respects to applicable Delaware law and to the provisions of each company's Certificate of Incorporation. The common shares of each company have substantially identical rights, preferences and limitations. The common shares of each corporation have one vote per share on all matters presented to its stockholders. Each common share is entitled to receive such dividends or other distributions as may be declared by the board of directors from funds legally available for payment of dividends. Covenants in the indenture and our credit facility restrict the declaration and payment of dividends. Each common share cannot be redeemed at the sole option of either the corporation or the stockholder and has no preemptive, conversion or cumulative voting rights. In the event of a liquidation, dissolution or winding-up of the corporation, the stockholders of that corporation will share equally and ratably in the assets, if any, remaining after the payment of all debts and liabilities of the corporation. These notes are debts of each of the three corporations. No established public trading market exists for the common shares of any of the three corporations. AEI Resources, Inc. The authorized capital stock of AEI Resources, Inc. consists of 150,000 shares of common stock, par value $0.01 per share, of which 52,802 shares were issued and outstanding as of December 31, 1998. AEI Resources Holding, Inc. The authorized capital stock of AEI Resources Holding, Inc. Consists of 150,000 shares of common stock, par value $0.01 per share, of which 52,804 shares were issued and outstanding as of December 31, 1998. AEI Holding Company, Inc. The authorized capital stock of AEI Holding Company, Inc. consists of 120,000 shares of common stock, par value $0.01 per share, of which 52,800 shares were issued and outstanding as of December 31, 1998.
103
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT The following table sets forth certain information concerning ownership of the common stock of Holdings as of the consummation of the Offering by each director, each person who is known to Holdings to be the beneficial owner of more than 5% of its common stock, all Named Executive Officers and all directors and officers of Holdings as a group. Each stockholder listed below has sole voting and dispositive power with respect to the shares listed next to his name. Holdings owns all of the issued and outstanding capital stock of the Company as of the consummation of the Offering.
(1) Larry Addington's beneficial ownership includes 38% beneficial ownership
through Addington Enterprises and 9.5% beneficial ownership attributed
based on Robert Addington's and Bruce Addington's interest in Addington
Enterprises, and 5% beneficial ownership is attributed based on shares
owned by Robert Addington..
(2) Addington Enterprises is owned 80%, 10% and 10% by Larry Addington, Robert Addington and Bruce Addington, respectively. (3) The 3,100 shares are owned by Robert Addington. Beneficial ownership includes Robert Addington's 4.8% beneficial ownership through Addington Enterprises and 90.2% beneficial ownership attributed through Bruce Addington's interest in Addington Enterprises and Larry Addington's direct ownership and his interest in Addington Enterprises. (4) Beneficial ownership is attributable to the beneficial ownership of Larry Addington and Robert Addington set forth above. Reports to Noteholders The Indenture provides that the Company will furnish the holders of the Notes with annual reports containing audited financial statements and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year.
104
THE EXCHANGE OFFER We issued the initial notes in exchange for $200,000,000 aggregate principal amount of debt securities of AEI Holding. As a condition to the exchange, AEI Resources, its subsidiary AEI Holding, its parent AEI Resources Holding, and the subsidiary guarantors of the notes entered into a registration rights agreement with Warburg Dillon Read LLC, which served as dealer manager in connection with the transaction. The registration rights agreement requires the two co-issuers, AEI Resources and AEI Holding, and the guarantors, AEI Resources Holding and the subsidiary guarantors, to file a registration statement for a registered exchange offer relating to an issue of new notes identical in all material respects to the initial notes but containing no restrictive legend. The registration rights agreement has been filed as an exhibit to the registration statement and a copy of it is available as set forth under the heading "Where You Can Find More Information." Under the registration rights agreement, the co-issuers and the guarantors are required to: .file the registration statement as soon as reasonably practicable; .use all reasonable commercial efforts to cause the registration statement to become effective under the Securities Act at the earliest possible time; and . upon effectiveness of the registration statement, commence this exchange offer and offer the eligible holders of initial notes the opportunity to exchange them for the same principal amount of exchange notes. General Terms of the Exchange Offer Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept for exchange all initial notes validly tendered and not withdrawn before 5:00 p.m., New York City time, on , 1999, or such date and time to which we extend the offer. We will issue exchange notes in exchange for an equal principal amount of outstanding initial notes accepted in the exchange offer. Initial notes may be tendered only in integral multiples of $1,000. This prospectus, together with the letter of transmittal, is being sent to all record holders of initial notes as of May , 1999. The exchange offer is not conditioned upon any minimum principal amount of initial notes being tendered in exchange. However, our obligation to accept initial notes for exchange is subject to certain conditions stated in this section under "-- Conditions." Our acceptance of initial notes will occur when, as and if we have given oral or written notice to the exchange agent. The exchange agent will act as agent for the tendering holders of initial notes for the purposes of receiving the exchange notes and delivering them to the holders. Based on interpretations by the staff of the SEC, as set forth in no-action letters issued to other issuers, we believe that the exchange notes issued in the exchange offer may be offered for resale, resold or otherwise transferred by each holder without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that: . the holder is not a broker-dealer who acquires the initial notes directly from us for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act; .the holder is not an "affiliate" of ours, as that term is defined in Rule 405 under the Securities Act; . the exchange notes are acquired in the ordinary course of the holder's business and the holder is not engaged in, and does not intend to engage in, a distribution of the exchange notes and has no arrangement or understanding with any person to participate in a distribution of the exchange notes. By tendering the initial notes in exchange for exchange notes, each holder, other than a broker-dealer, will represent to us that: .the holder is acquiring any exchange notes to be received by it in the ordinary course of its business;
105
. it is not engaged in, and does not intend to engage in, a distribution of such exchange notes and has no arrangement or understanding to participate in a distribution of the exchange notes; and .it is not an affiliate of ours, within the meaning of Rule 405 under the Securities Act. If a holder of initial notes is engaged in or intends to engage in a distribution of the exchange notes or has any arrangement or understanding with respect to the distribution of the exchange notes to be acquired pursuant to the exchange offer, the holder may not rely on the applicable interpretations of the staff of the SEC and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Each broker-dealer that receives exchange notes for its own account in the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of those exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for initial notes when the broker-dealer acquired those initial notes as a result of market-making activities or other trading activities. We have agreed to make this prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." .If the exchange offer is not permitted by applicable law or SEC policy; or .If a holder notifies us within 20 business days after the exchange offer commences that: .the holder is prohibited by applicable law or SEC policy from participating in the offer, or . the holder may not resell the exchange notes it acquires in the exchange offer to the public without delivering a prospectus, and this prospectus is not appropriate or available for use in resales by the holder, or . the holder is a broker-dealer and holds initial notes acquired directly from the co-issuers or one of their affiliates; or . we do not complete the exchange offer within 45 days following the effectiveness of the registration statement for the exchange offer, then we must use our reasonable best efforts to: . file a shelf registration statement with the SEC covering resales of the initial or exchange notes subject to the transfer restrictions listed above; . cause the shelf registration statement to be declared effective as promptly as practicable; and . keep the shelf registration statement continuously effective until the earlier of two years or such time as all of the applicable initial notes have been sold under the shelf registration. If we file a shelf registration statement, we will provide to each holder of initial or exchange notes subject to transfer restrictions copies of the prospectus that is a part of the shelf registration statement, notify each holder when the shelf registration statement has become effective and take certain other actions as are required to permit unrestricted resales of the notes covered by the shelf registration. A holder that sells notes pursuant to the shelf registration statement will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with its sales, and will be bound by the provisions of the registration rights agreement that are applicable to that holder, including certain indemnification rights and obligations. From December 8, 1998 to March 8, 1999, we paid to each holder of initial notes, as liquidated damages, $0.15 per $1,000 principal amount of initial notes per week. Beginning on March 8, 1999, the amount of liquidated damages payable increased to $0.20 per $1,000 principal amount per week. If we do not complete the exchange
106
offer during the 90 days ending June 6, 1999, the amount of liquidated damages payable weekly during the subsequent 90 days will increase to $0.25 per $1,000 principal amount. Until we complete the exchange offer, the amount of liquidated damages payable will increase by an additional $0.05 per $1,000 principal amount per week for every subsequent 90-day period, up to a maximum of $0.50 payable weekly per $1,000 principal amount of initial notes. In addition, we must pay liquidated damages to holders of initial notes before completion of the exchange or to broker-dealers who exchange initial notes for exchange notes if a "registration default" occurs. Any of the following events would be a registration default: . the exchange offer registration statement or the shelf registration statement, as the case may be, is not filed with the SEC as soon as practicable; .the exchange offer registration statement or the shelf registration statement, as the case may be, is not declared effective as soon as practicable, or . the exchange offer registration statement or the shelf registration statement, as the case may be, is filed and declared effective, but subsequently ceases to be effective and usable in connection with resales of notes. In any such event, we would be obligated to pay liquidated damages during the period of one or more such registration defaults, in an amount equal to $0.05 per week per $1,000 principal amount of notes held by an applicable holder until all registration defaults are cured. The amount of liquidated damages payable will increase by an additional $0.05 per $1,000 principal amount per week for every subsequent 90-day period while a registration default exists, up to a maximum of $0.50 payable weekly per $1,000 principal amount of transfer restricted notes. Upon consummation of the exchange offer, subject to certain exceptions, holders of initial notes who do not exchange their initial notes for exchange notes in the exchange offer will no longer be entitled to registration rights and will not be able to offer or sell their initial notes, unless the initial notes are subsequently registered under the Securities Act (which, subject to certain limited exceptions, we will have no obligation to do), except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Expiration Date; Extensions; Amendments; Termination The term "expiration date" means , 1999 (30 calendar days following the commencement of the exchange offer), unless the exchange offer is extended if and as required by applicable law, in which case the term "expiration date" will mean the latest date to which the exchange offer is extended. To extend the expiration date, we will notify the exchange agent of any extension by oral or written notice and may notify the holders of the initial notes by mailing an announcement or by means of a press release or other public announcement before 9:00 A.M., New York City time, on the next business day after the previously scheduled expiration date. We reserve the right to delay acceptance of any initial notes, to extend the exchange offer or to terminate the exchange offer and not permit acceptance of initial notes not previously accepted if any of the conditions set forth herein under "--Conditions" occurs and is not waived by us (if permitted to be waived), by giving oral or written notice of such delay, extension or termination to the exchange agent. We also reserves the right to amend the terms of the exchange offer in any manner we deem to be advantageous to the holders of the initial notes. If we materially change terms of the exchange offer, the exchange offer will remain open for a minimum of an additional five business days, if the exchange offer would otherwise expire during that period. We will provide oral or written notice of the delay to the exchange agent as promptly as practicable after any such delay in acceptance, extension, termination or amendment. If we amend the exchange offer in a manner we determine
107
to be material, we will promptly disclose the amendment in a manner reasonably calculated to inform the holders of the initial notes of the amendment, including by making public announcement or giving oral or written notice to the holders of the initial notes. A material change in the terms of the exchange offer could include, among other things, a change in the timing of the exchange offer, a change in the exchange agent, and other similar changes in the terms of the exchange offer. Without limiting the manner in which we may choose to publicly announce any delay, extension, amendment or termination of the exchange offer, we are not required to obligation to publish, advertise, or otherwise communicate any such public announcement. Interest on the Exchange Notes The exchange notes will accrue interest payable in cash at 10 1/2% per year, from the date of the last periodic payment of interest on the initial notes, or, if no interest has been paid on the initial notes, from December 14, 1998. Procedures for Tendering To tender in the exchange offer, a holder of initial notes must: .complete, sign and date the letter of transmittal or a facsimile of it, .have the signatures guaranteed if required by the letter of transmittal, . mail or otherwise deliver the letter of transmittal or facsimile, or an agent's message together with the initial notes and any other required documents, to the exchange agent before 5:00 p.m., New York City time, on the expiration date. In addition, one of the following must occur: .the exchange agent must receive certificates for the initial notes along with the letter of transmittal, . the exchange agent must receive a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of the initial notes, if such procedure is available, into the exchange agent's account at The Depository Trust Company (the "Book- Entry Transfer Facility" or "DTC") pursuant to the procedure for book-entry transfer described below before 5:00 p.m., New York City time, on the expiration date, or .the holder must comply with the guaranteed delivery procedures described below. The method of delivery of initial notes, letters of transmittal and all other required documents is at the election and risk of the holder. Instead of delivery by mail, we recommend that holders use an overnight or hand-delivery service. If delivery is by mail, we recommend that holders use registered mail, properly insured, with return receipt requested, be used. In all cases, holders should allow sufficient time to assure timely delivery. No letters of transmittal or initial notes should be sent to AEI Resources. All documents must be delivered to the exchange agent, IBJ Whitehall Bank & Trust Company, at its address set forth below. Holders of initial notes may also request their respective brokers, dealers, commercial banks, trust companies or nominees to tender initial notes for them. The term "agent's message" means a message, transmitted by the Book-Entry Transfer Facility to, and received by, the exchange agent and forming a part of a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has received an express acknowledgment from the participant in the Book-Entry Transfer Facility tendering initial notes that are the subject of the Book- Entry Confirmation that the participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce this agreement against the participant.
108
The tender by a holder of initial notes will constitute an agreement between that holder and us in accordance with the terms and subject to the conditions set forth here and in the letter of transmittal. Only a holder of initial notes may tender the initial notes in the exchange offer. The term "holder" for this purpose means any person in whose name initial notes are registered on our books or any other person who has obtained a properly completed bond power from the registered holder. Any beneficial owner whose initial notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct the registered holder to tender on his or her behalf. If the beneficial owner wishes to tender on his or her own behalf, that beneficial owner must, before completing and executing the letter of transmittal and delivering his or her initial notes, either make appropriate arrangements to register ownership of the initial notes in the beneficial owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor" institution within the meaning of Rule 17Ad-15 under the Exchange Act (each, an "Eligible Institution"), unless the initial notes are tendered: . by a registered holder (or by a participant in DTC whose name appears on a security position listing as the owner) who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal and the exchange notes are being issued directly to such registered holder (or deposited into the participant's account at DTC); or .for the account of an Eligible Institution. If the letter of transmittal is signed by the recordholder(s) of the tendered initial notes, the signature must correspond with the name(s) written on the face of the initial notes without alteration, enlargement or any change whatsoever. If the letter of transmittal is signed by a participant in DTC, the signature must correspond with the name as it appears on the security position listing as the holder of the initial notes. If the letter of transmittal is signed by a person other than the registered holder of any initial notes listed in the letter, those initial notes must be endorsed or accompanied by bond powers and a proxy that authorize the signing person to tender the initial notes on behalf of the registered holder, in each case as the name of the registered holder or holders appears on the initial notes. If the letter of transmittal or any initial notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, each of the signing persons should indicate his or her capacity when signing, and unless waived by us, evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal. A tender will be deemed to have been received as of the date when the exchange agent receives: .the tendering holder's duly signed letter of transmittal accompanied by initial notes, or .a timely confirmation received of a book-entry transfer of initial notes into the exchange agent's account at DTC with an agent's message, or .a notice of guaranteed delivery from an Eligible Institution. Issuances of exchange notes in exchange for initial notes tendered pursuant to a notice of guaranteed delivery by an Eligible Institution will be made only against delivery of the letter of transmittal and any other required documents, and the tendered initial notes or a timely confirmation received of a book- entry transfer of initial notes into the exchange agent's account at DTC with the exchange agent.
109
We will determine all questions as to the validity, form, eligibility, time of receipt, acceptance and withdrawal of the tendered initial notes in our sole discretion, which determination will be final and binding. We reserve the absolute right to reject any and all initial notes not properly tendered or any initial notes which, if accepted, would, in our opinion or the opinion of our counsel, be unlawful. We also reserve the absolute right to waive any conditions of the exchange offer or irregularities or defects in tender as to particular initial notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of initial notes must be cured within such time as we determine. Neither we, the exchange agent nor any other person will be under any duty to give notification of defects or irregularities with respect to tenders of initial notes, nor shall any of them incur any liability for failure to give that notification. Tenders of initial notes will not be deemed to have been made until such irregularities have been cured or waived. Any initial notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost by the exchange agent to the tendering holders of such initial notes, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date. In addition, we reserve the right in our sole discretion, subject to the provisions of the Indenture, to: .purchase or make offers for any initial notes that remain outstanding after the expiration date or, . to terminate the exchange offer in accordance with the terms of the registration rights agreement, as set forth under "--Expiration Date; Extensions; Amendments; Termination"; and . to the extent permitted by applicable law, purchase initial notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the exchange offer. Acceptance of Initial Notes for Exchange; Delivery of Exchange Notes Upon satisfaction or waiver of all of the conditions to the exchange offer, we will accept all initial notes properly tendered promptly after the expiration date, and will issue the exchange notes promptly after acceptance of the initial notes. For purposes of the exchange offer, we will accept initial notes as validly tendered for exchange when, as and if we give oral or written notice of acceptance to the exchange agent. See "--Conditions" below. In all cases, we will issue exchange notes for initial notes accepted for exchange only after timely receipt by the exchange agent of certificates for those initial notes or a timely Book-Entry Confirmation of those initial notes into the exchange agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed letter of transmittal and all other required documents. If we do not accept any tendered initial notes for any reason set forth in the terms and conditions of the exchange offer or if initial notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or non-exchanged initial notes will be returned without expense to the tendering holder as promptly as practicable after the expiration or termination of the exchange offer. In the case of initial notes tendered by the book-entry transfer procedures described below, the non-exchanged initial notes will be credited to an account maintained with the Book-Entry Transfer Facility. Book-Entry Transfer The exchange agent will make a request to establish an account with respect to the initial notes at the Book-Entry Transfer Facility for purposes of the exchange offer within two business days after the date of this prospectus. Any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of initial notes by causing the Book-Entry Transfer Facility to transfer those initial notes into the exchange agent's account at the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures for transfer. However, although initial notes may be delivered through book-entry transfer into the exchange agent's account at the Book-Entry Transfer Facility, the exchange agent must
110
receive an agent's message or the letter of transmittal or facsimile thereof with any required signature guarantees and any other required documents at one of the exchange agent's addresses set forth below under "--Exchange Agent" on or before the expiration date, or the guaranteed delivery procedures described below must be complied with. Delivery of documents to DTC does not constitute delivery to the exchange agent. All references in the prospectus to deposit of initial notes will be deemed to include the Book-Entry Transfer Facility's book-entry delivery method. Guaranteed Delivery Procedure If a registered holder of the initial notes desires to tender the notes, and the notes are not immediately available, or time will not permit the holder's initial notes or other required documents to reach the exchange agent before the expiration date, or the procedures for book-entry transfer cannot be completed on a timely basis and an agent's message delivered, the holder may tender its initial notes if: .the tender is made through an Eligible Institution; . before the expiration date, the exchange agent receives from that Eligible Institution a properly completed and duly executed letter of transmittal or facsimile thereof and notice of guaranteed delivery, substantially in the form provided by us, by facsimile transmission, mail or hand delivery, stating: .the name and address of the holder of the initial notes, .the amount of initial notes tendered, .that the tender is being made thereby, . a guarantee that within five business days after the expiration date, the certificates for all physically tendered initial notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the letter of transmittal will be deposited by the Eligible Institution with the exchange agent; and . the exchange agent actually receives the certificates for all physically tendered initial notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the letter of transmittal within five business days after the expiration date. Withdrawal of Tenders Except as otherwise provided in this prospectus, tenders of initial notes may be withdrawn at any time before 5:00 p.m., New York City time, on the expiration date. For a withdrawal of tendered notes to be effective, the exchange agent must receive a written notice of withdrawal before 5:00 p.m., New York City time on the business day before the expiration date at the address stated below under "--Exchange Agent" and before we accept the tendered notes. Any notice of withdrawal must: .specify the name of the person having tendered the initial notes to be withdrawn (the "Depositor"); . identify the initial notes to be withdrawn, including, if applicable, the registration number or numbers and total principal amount of those initial notes; . be signed by the Depositor in the same manner as the original signature on the letter of transmittal by which those initial notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to permit the Trustee to register the transfer of those initial notes into the name of the Depositor withdrawing the tender; . specify the name in which any of those initial notes are to be registered, if different from that of the Depositor; and . if the initial notes have been tendered pursuant to the book-entry procedures, the notice of withdrawal must specify the name and number of the participant's account at DTC to be credited, if different than that of the Depositor.
111
We will determine all questions as to the validity, form and eligibility, time of receipt of notices of withdrawal, and our determination will be final and binding on all parties. Any initial notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any initial notes that have been tendered for exchange and that are not exchanged for any reason will be returned to the holder without cost to the holder as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. In the case of initial notes tendered by book-entry transfer, the initial notes will be credited to an account maintained with the Book-Entry Transfer Facility for the initial notes. Properly withdrawn initial notes may be re-tendered by following one of the procedures described above under "-- Procedures for Tendering" and "--Book-Entry Transfer" at any time on or before the expiration date. Conditions Notwithstanding any other term of this exchange offer, we will not be required to complete the exchange offer if, because of any change in law or applicable interpretations thereof by the SEC, or any order of any government agency or court, we determine that we are not permitted to complete the exchange offer. Exchange Agent IBJ Whitehall Bank & Trust Company has been appointed as exchange agent for the exchange offer. Questions and requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal should be directed to the exchange agent addressed as follows:
By Facsimile: IBJ Whitehall Bank & Trust Company Attn: Reorganization Operations Facsimile No: (212) 858-2611 with a confirmation by telephone to: Telephone No: (212) 858-2103 Fees and Expenses We will pay the expenses of soliciting tenders under the exchange offer. The principal solicitation for tenders pursuant to the exchange offer is being made by mail; however, additional solicitations may be made by telegraph, telephone, telecopy or in person by our officers and regular employees. We will not make any payments to brokers, dealers or other persons soliciting acceptances of the exchange offer. However, we will pay the exchange agent reasonable and customary fees for its services and will reimburse the exchange agent for its reasonable out-of-pocket expenses in connection therewith. We may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of the prospectus, letters of transmittal and related documents to the beneficial owners of the initial notes, and in handling or forwarding tenders for exchange. We will pay the expenses to be incurred in connection with the exchange offer, including fees and expenses of the exchange agent and Trustee and accounting, legal, printing and related fees and expenses.
112
We will pay all transfer taxes, if any, applicable to the exchange of initial notes pursuant to the exchange offer. If, however: . certificates representing exchange notes or initial notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the initial notes tendered, or . tendered initial notes are registered in the name of any person other than the person signing the letter of transmittal, or . if a transfer tax is imposed for any reason other than the exchange of initial notes pursuant to the exchange offer, then the amount of any such transfer taxes, whether imposed on the registered holder or any other persons, will be payable by the tendering holder. If a holder does not submit satisfactory evidence of payment of any transfer taxes or exemption from payment with the letter of transmittal, the amount of the transfer taxes will be billed directly to the tendering holder. Accounting Treatment We will record the exchange notes at the same carrying value as the initial notes, as reflected in our accounting records on the date of the exchange. Accordingly, we will not recognize any gain or loss for accounting purposes. The costs of the exchange offer and the unamortized expenses related to the issuance of the initial notes will be amortized over the term of the exchange notes. Federal Income Tax Consequences of the Exchange Offer The following discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended applicable Treasury regulations, judicial authority and administrative rulings and practice. The Internal Revenue Service could take a contrary view, and we have not and will not seek a ruling from the IRS. In the future legislative, judicial or administrative changes or interpretations could alter or modify the statements and conditions in this section. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences to holders. Certain holders of the initial notes (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. The issuance of the exchange notes to holders of the initial notes pursuant to the terms of the exchange offer set forth in this prospectus will not constitute an exchange for federal income tax purposes. Consequently, holders of the initial notes will not recognize gain or upon receipt of the exchange notes, and ownership of the exchange notes will be considered a continuation of ownership of the initial notes. For purposes of determining gain or loss upon the subsequent sale or exchange of the exchange notes, a holder's basis in the exchange notes should be the same as that holder's basis in the initial notes exchanged for exchange notes. A holder's holding period for the exchange notes should include the holder's holding period for the initial exchanged for exchange notes. The issue price, original issue discount inclusion and other tax characteristics of the exchange notes should be identical to the issue price, original issue discount inclusion and other tax characteristics of the initial notes exchanged for exchange notes. Holders of initial notes should consult their own tax advisors as to the particular tax consequences of exchanging them for exchange notes, including the applicability and effect of any state, local or foreign tax laws.
113
DESCRIPTION OF NOTES You can find the definitions of certain capitalized terms used in this description under the subheading "Certain Definitions." In this description: . the word "Company" refers only to AEI Resources and not to any of its subsidiaries; . the word "Issuers" refers to AEI Resources and its wholly owned subsidiary and co-issuer of the Notes, AEI Holding; . the word "Notes" refers to both the initial notes and the exchange notes. The form and terms of the exchange notes are the same as the form and terms of the initial notes, except that the exchange notes will be registered under the Securities Act. Pursuant to this exchange offer, the Issuers will issue the exchange notes for the initial notes accepted for exchange under the Indenture among the Issuers, the Guarantors and IBJ Whitehall Bank & Trust Company, as Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939. The following description is a summary of the material provisions of the Indenture. It does not restate the Indenture in its entirety. We urge you to read the Indenture because it, and not this description, defines your rights as holders of these Notes. We have filed a copy of the Indenture as an exhibit to the registration statement that includes this prospectus. Brief Description of the Notes and the Guarantees The Notes These Notes: . are general, unsecured obligations of the Issuers; . are on a parity in right of payment with all existing and future Senior Indebtedness of the Company, but are subordinated to our credit facility because it is secured by the capital stock of the Company and each guarantor and substantially all of our current and future assets; . are senior in right of payment to all subordinated Indebtedness of the Company; and . are unconditionally guaranteed by the Guarantors. The Guarantees These Notes are guaranteed by: . AEI Resources Holding, the corporate parent of AEI Resources, and . 71 subsidiary corporations of AEI Resources The Guarantees of these Notes: .are senior unsecured obligations of each Guarantor; . are on a parity in right of payment with all existing and future Senior Indebtedness of each Guarantor, but are subordinated to each guarantee of our credit facility because each guarantee is secured by substantially all of each guarantor's current and future assets; and . are senior in right of payment to all subordinated Indebtedness of each Guarantor. As of December 31, 1998, the Company and the Guarantors would have had total Senior Indebtedness of approximately $692.0 million (after giving effect to payments and borrowings after that date). The Indenture will permit us and the Guarantors to incur additional Senior Indebtedness. As of the date of this prospectus, all of our subsidiaries are "Restricted Subsidiaries." However, under the circumstances described below under the subheading "Certain Covenants--Designation of Restricted and Unrestricted Subsidiaries," we will be permitted to designate certain of our subsidiaries as "Unrestricted Subsidiaries." Unrestricted Subsidiaries will not be subject to many of the restrictive covenants in the Indenture. Unrestricted Subsidiaries will not guarantee these Notes.
114
Principal, Maturity and Interest As of the date of this prospectus, the Issuers had issued initial notes with a $200 million aggregate principal amount. In this exchange offer, the Issuers will issue exchange notes with the same aggregate principal amount as the initial notes accepted for exchange. The Issuers will issue Notes in denominations of $1,000 and integral multiples of $1,000. The Notes will mature December 15, 2005. Interest on these Notes will accrue at the rate of 10 1/2% per annum and will be payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 1999. The Company will make each interest payment to the Holders of record of these Notes on the immediately preceding June 1 and December 1. Interest on these Notes will accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Methods of Receiving Payments on the Notes If a Holder has given us wire transfer instructions, we will make all principal, premium and interest payments on those Notes in accordance with those instructions. All other payments on these Notes will be made at the office or agency of the Paying Agent and Registrar within the City and State of New York unless we elect to make interest payments by check mailed to the Holders at their address set forth in the register of Holders. Paying Agent and Registrar for the Notes The Trustee will initially act as Paying Agent and Registrar. We may change the Paying Agent or Registrar without prior notice to the Holders of the Notes, and we or any of our Subsidiaries may act as Paying Agent or Registrar. Transfer and Exchange A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and we may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. We are not required to transfer or exchange any Note selected for redemption. Also, we are not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. The registered Holder of a Note will be treated as the owner of it for all purposes. Guarantees The Guarantors will jointly and severally guarantee the Company's obligations under these Notes. Each Subsidiary Guarantee will be on a parity in right of payment with all Senior Indebtedness of that Guarantor. The obligations of each Guarantor under its Guarantee will be limited as necessary to prevent that Guarantee from constituting a fraudulent conveyance under applicable law. See "Risk Factors--Fraudulent Conveyance Matters." The Notes will not be guaranteed by Yankeetown Dock Corporation or any of its direct and indirect Subsidiaries or by any current or future foreign subsidiaries of the Company. The aggregate net assets, earnings and equity of the Guarantors and the Company are substantially equivalent to the net assets, earnings and equity of the Company on a consolidated basis. The claims of creditors (including trade creditors) of any non-Guarantor subsidiary will generally have priority as to the assets of those subsidiaries over the claims of the holders of the Notes.
115
A Guarantor may not sell or otherwise dispose of all or substantially all of its assets, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another Person unless: (1) immediately after giving effect to that transaction, no Default or Event of Default exists; (2) the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger assumes all the obligations of that Guarantor pursuant to a supplemental indenture satisfactory to the Trustee; and (3) the Company would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock." The Subsidiary Guarantee of a Guarantor will be released: (1) in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation), if the Company applies the Net Proceeds of that sale or other disposition, in accordance with the applicable provisions of the Indenture; or (2) in connection with any sale of all of the capital stock of a Guarantor, if the Company applies the Net Proceeds of that sale in accordance with the applicable provisions of the indenture; or (3) if the Company designates any Restricted Subsidiary that is a Guarantor as an Unrestricted Subsidiary. See "Redemption or Repurchase at Option of Holders--Asset Sales." Ranking The Notes are general unsecured obligations of the Issuers. In right of payment, the Notes rank equal with all current and future Senior Indebtedness of the Company, including its credit facility, and senior to all subordinated Indebtedness of the Company, including the Senior Subordinated Notes. However, the Company's borrowings under its current Credit Facility are secured by a first priority lien on certain of the assets of the Company and its Restricted Subsidiaries. As a result, the Notes are effectively subordinated to the credit facility to the extent of that collateral. As of December 31, 1998, on a pro forma basis after giving effect to the acquisitions and dispositions of businesses in 1999, $692.0 million would have been outstanding under the Company's credit facility and approximately $156.9 million would have been available for borrowing (after giving effect to approximately $26.1 million of outstanding letters of credit). The Indenture will permit substantial additional borrowings under the credit facilities in the future. See "Risk Factors--Secured Indebtedness." Optional Redemption At any time on or before December 15, 2000, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of Notes originally issued under the Indenture at a redemption price of 110.50% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages to the redemption date, with the net cash proceeds of one or more Public Equity Offerings; provided that (1) at least $130 million in aggregate principal amount of Notes remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its Subsidiaries); and (2) the redemption must occur within 45 days of the date of the closing of such Public Equity Offering. Beginning on December 15, 2002, the Company may redeem all or a part of these Notes upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth
116
below plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on December 15 of the years indicated below:
In addition, before December 15, 2000, the Company may redeem all or a part of these Notes at the a price (expressed as percentages of principal amount) equal to 100% of the principal amount plus an applicable Make Whole Premium, plus, to the extent not included in the Make Whole Premium, accrued and unpaid interest and Liquidated damage, if any, to the date of redemption. The applicable Make Whole Premium will be equal to the greater of: . 105.25%, and . the excess of: . the present value of the remaining interest, premium, if any, and principal payments due on the Notes if they were redeemed on December 15, 2002, computed using a discount rate equal to the Treasury Rate plus 50 basis points, . over the outstanding principal amount of the Notes. Repurchase at the Option of Holders Change of Control If a Change of Control occurs, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of that Holder's Notes pursuant to the Change of Control Offer. In the Change of Control Offer, the Company will offer a Change of Control Payment in cash equal to 101% of the aggregate principal amount of Notes repurchased plus accrued and unpaid interest thereon, if any, to the date of purchase. Within ten days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the Change of Control Payment Date specified in such notice, pursuant to the procedures required by the Indenture and described in such notice. The Change of Control Payment Date will be no earlier than 30 days and no later than 60 days from the date the notice is mailed. The Company will comply with the requirements of Rule l4e-1 under the Exchange Act and any other, securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. On the Change of Control Payment Date, the Company will, to the extent lawful: (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer; (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered; and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. The
117
Company will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The provisions described above that require the Company to make a Change of Control Offer following a Change of Control will be applicable regardless of whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. The Company's outstanding Senior Indebtedness currently prohibits the Company from purchasing any Notes, and also provides that certain change of control events with respect to the Company would constitute a default under the agreements governing the Senior Indebtedness. Any future credit agreements or other agreements relating to Senior Debt to which the Company becomes a party may contain similar restrictions and provisions. If a Change of Control occurs at a time when the Company is prohibited from purchasing Notes, the Company could seek the consent of its senior lenders to the purchase of Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Notes. In such case, the Company's failure to purchase tendered Notes would constitute an Event of Default under the Indenture which would, in turn, constitute a default under such Senior Indebtedness. In such circumstances, the first priority lien on the assets of the Company and its Restricted Subsidiaries that secures borrowings under the Company's Credit Facility would likely limit any payments to the Holders of Notes. The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company and its Subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Notes to require the Company to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain. Asset Sales The Company will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless: (1) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of; (2) such fair market value is determined by the Company's Board of Directors and evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee; and (3) except in the case of assets the Company holds for sale, at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash, cash equivalents or marketable securities. For purposes of this provision, each of the following shall be deemed to be cash: (a) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet), of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Subsidiary Guarantee) that are
118
assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability; (b) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are contemporaneously (subject to ordinary settlement periods) converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received in that conversion); (c) any noncash consideration received by the Company or any of its Restricted Subsidiaries in such Asset Sales, and designated as such in a certificate of officers of the Company. The aggregate value of such designated noncash consideration, taken together with the value at the time of receipt of all other designated noncash consideration received in prior Asset Sales less the amount of Net Proceeds previously realized in cash from prior designated noncash consideration must be less than 5% of Total Assets at the time of the receipt of such designated noncash consideration; and (d) additional assets received in an exchange of assets transaction. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Company may apply those Net Proceeds at its option: (1) to repay Senior Indebtedness; (2) to acquire all or substantially all of the assets of, or a majority of the Voting Stock of, another Permitted Business; (3) to make a capital expenditure; (4) to acquire other long-term assets that are used or useful in a Permitted Business; or (5) to make an investment in additional assets Pending the final application of any Net Proceeds from an Asset Sale, the Company may temporarily reduce revolving credit borrowings or otherwise invest those Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding paragraph will constitute Excess Proceeds. When the aggregate amount of Excess Proceeds exceeds $15.0 million, the Company will make an Asset Sale Offer to all Holders of Notes and all holders of other Indebtedness that is on a parity with the Notes containing provisions similar to those set forth in the Indenture with respect to offers to purchase or redeem with the proceeds of sales of assets to purchase the maximum principal amount of Notes and such other Indebtedness that maybe purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of principal amount plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase, and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of Notes and such other Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and such other Indebtedness to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. Selection and Notice If less than all of the Notes are to be redeemed at any time, the Trustee will select Notes for redemption as follows: (1) if the Notes are listed, in compliance with the requirements of the principal national securities exchange on which the Notes are listed; or (2) if the Notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate.
119
Notes of $1,000 or less cannot be redeemed in part. Notices of redemption must be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Note is to be redeemed in part only, the notice of redemption that relates to that Note must state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion of the original Note will be issued in the name of the Holder thereof upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. Mandatory Redemption The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. Certain Covenants Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any payment of the types described in (1) and
(1) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests (including without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Restricted. Subsidiaries) or to the direct or indirect holders of the Company's or any of its Restricted Subsidiaries' Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company); (2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company), any Equity Interests of the Company or any direct or indirect parent of the Company or any Restricted Subsidiary of the Company (other than any Such Equity Interests owned by the Company or any Restricted Subsidiary of the Company); (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is subordinated to the Notes or the Subsidiary Guarantees, except a payment of interest or principal at the Stated Maturity thereof; or (4) make any Restricted Investment (all such payments and other actions set forth in clauses (1) through (4) above being collectively referred to as "Restricted Payments"), unless, at the time of and after giving effect to a Restricted Payment: (1) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (2) the Company would, at the time of the Restricted Payment and after giving pro forma effect to that Restricted Payment as if it had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (3) the Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of the Indenture (excluding Restricted
120
Payments permitted by clauses (2), (3), (4), (5), (7), (8), and (9) of the next succeeding paragraph), is less than the sum, without duplication, of (a) 50% of the Consolidated Net Income of the Company for the period (taken as one accounting period) from the date of the Indenture to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (b) 100% of the aggregate net cash proceeds received by the Company since the date of the Indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock) or from the issue or sale of Disqualified Stock or debt securities of the Company that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Company), plus
(c) to the extent that any Restricted Investment that reduced the
amount available for restricted Payments under this clause (3) is sold
for cash or otherwise liquidated or repaid for cash or any dividend or
payment is received by the Company or a Restricted Subsidiary after the
date of the closing of the Acquisitions in respect of such Investment,
100% of the amount of Net Proceeds or dividends or payments (including
the fair market value of property) received in connection therewith, up
to the amount of the Restricted Investment that reduced this clause
(d) to the extent that any Unrestricted Subsidiary of the Company is redesignated as a Restricted Subsidiary after the date of the Exchange Note Indenture, 100% of the fair market value of the Company's Investment in such Subsidiary as of the date of such redesignation up to the amount of the Restricted Investments made in such Subsidiary that reduced this clause (3) and 50% of the excess of the fair market value of the Company's Investment in such Subsidiary as of the date of such redesignation over (1) the amount of the Restricted Investment that reduced this clause (3) and (2) any amounts that increased the amount available as a Permitted Investment provided that with respect to any redesignation pursuant to this clause (d) the Company shall deliver to the Exchange Note Trustee (I) in the case of any such redesignation involving aggregate fair market value greater than $2.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying such value or (II) in the case of any such redesignation involving aggregate fair market value greater than $10.0 million, an independent appraisal or valuation opinion issued by an accounting, appraisal or investment banking firm of national standing; provided that any amounts that increase this clause (3) shall not duplicatively increase amounts available as Permitted Investments. The preceding provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration thereof, if at the date of declaration the dividend payment would have complied with the provisions of the Indenture; (2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of, Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (3)(b) of the preceding paragraph;
121
(3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of the Company or any Guarantor with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (4) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its common Equity Interests on a pro rata basis; (5) Investments in Unrestricted Subsidiaries having an aggregate fair market value not to exceed the amount, at the time of such Investment, substantially concurrently contributed in cash or Cash Equivalents to the common equity capital of the Company after the date of the closing of the Acquisitions; provided that any such amount contributed shall be excluded from the calculation made pursuant to clause (3) of the preceding paragraph; (6) the payment of dividends on the Company's Common Stock, following the first public offering of the Company's Common Stock after the date of the closing of the Acquisitions, of up to 6% per annum of the net proceeds received by the Company in such public offering, other than public offerings with respect to the Company's Common Stock registered on Form S- 8; (7) the repurchase, redemption or other acquisition or, retirement for value of any Equity Interests of the Company or any Restricted Subsidiary held by any member of the Company's (or any of its Restricted Subsidiaries') management or directors, other than Equity Interests held by the Principals or any of their Related Parties, pursuant to any management equity subscription agreement or stock option agreement or any other management or employee benefit plan; provided that (A) the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $2.0 million in any calendar year (with unused amounts in any calendar year being carried over to succeeding calendar years subject to a maximum (without giving effect to the following proviso) of $5.0 million in any calendar year); provided further that such amount in any calendar year may be increased by an amount not to exceed (x) the cash proceeds from the sale of Equity Interests (not including Disqualified Stock) of the Company or a Restricted Subsidiary to members of management and directors of the Company and its Subsidiaries that occurs after the date of the Indenture, plus (y) the cash proceeds of key-man life insurance policies received by the Company and its Restricted Subsidiaries after the date of the Indenture, less (z) the amount of any Restricted Payments previously made pursuant to clauses (x) and (y) of this subparagraph (7) and (B) no Default or Event of Default shall have occurred and be continuing immediately after such transaction; and, provided further, that cancellation of Indebtedness owing to the Company from members of management of the Company or any of its Restricted Subsidiaries (other than the Principals or any of their Related Parties) in connection with a repurchase of Equity Interests of the Company or a Restricted Subsidiary pursuant to any employment agreement or arrangement or any stock option or similar plan will not be deemed to constitute a Restricted Payment for purposes of this covenant or any other provision of the Indenture; (8) repurchases of Equity Interests deemed to occur upon exercise of stock options if such Equity Interests represent a portion of the exercise price of such options; (9) the payment of dividends or distributions to Holdings (I) pursuant to a tax allocation agreement in effect on the date of the Indenture, in amounts required by Holdings to pay income taxes; (II) in amounts required by Holdings to pay administrative expenses not to exceed $500,000 in any calendar year; and (III) in order to permit Holdings to repay Indebtedness under the Bridge Facilities; and (10) the use of any and all Net Proceeds received from the sale of Assets Held for Sale to repay Indebtedness outstanding under the Bridge Facilities. The amount of all Restricted Payments (other than cash) will be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Restricted Subsidiary, as the case maybe, pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant will be determined by the Board of Directors whose resolution with respect thereto must be delivered to the Trustee. The Board of Directors' determination
122
must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if the fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Company must deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this "Restricted Payments" covenant were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. Incurrence of Indebtedness and Issuance of Preferred Stock The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt). The Company will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock. However, the Company and any Guarantor may incur Indebtedness (including Acquired Debt), or issue Disqualified Stock or preferred stock, if the Fixed Charge Coverage Ratio for the Company's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock or preferred stock is issued would have been at least 2 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock or preferred stock had been issued, as the case may be, at the beginning of such four-quarter period. The provisions of the preceding paragraph will not prohibit the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (1) the incurrence by the Company of Indebtedness under Credit Facilities (and the Guarantee thereof by the Subsidiary Guarantors); provided that the aggregate principal amount of all Indebtedness outstanding under this clause (1) after giving effect to such incurrence does not exceed an amount equal to $875.0 million (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Company and its Restricted Subsidiaries thereunder) less the amount of proceeds of Asset Sales applied to repay any such term Indebtedness or revolving Indebtedness if such repayment of revolving Indebtedness resulted in a corresponding commitment reduction (excluding any such payments to the extent refinanced at the time of repayment); (2) the incurrence by the Company and its Subsidiaries of Existing Indebtedness, the Senior Subordinated Notes issued in the Offering and the Guarantees thereof; (3) (A) the guarantee by the Company or any of the Subsidiary Guarantors of Indebtedness of the Company or a Restricted Subsidiary of the Company or (B) the incurrence of Indebtedness of a Restricted Subsidiary to the extent that such Indebtedness is supported by a letter of credit, in each case that was permitted to be incurred by another provision of this covenant; (4) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness (including Capital Lease Obligations) to finance the acquisition (including by direct purchase, by lease or indirectly by the acquisition of the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of such acquisition) or improvement of assets or property (real or personal) in an aggregate principal amount which, when aggregated with the principal amount of all other Indebtedness then outstanding pursuant to this clause (4) and including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (4), does not exceed an amount equal to 5% of Total Assets at the time of such incurrence; (5) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the Indenture to be incurred under the first paragraph hereof or clauses (2), (3) or (4) of this paragraph;
123
(6) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, however, that (a) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes and (b)(I) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary thereof and (II) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary thereof shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (6); (7) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred in the ordinary course of business for the purpose of risk management and not for the purpose of speculation; (8) the incurrence by the Company's Unrestricted Subsidiaries of Non- Recourse Debt, provided, however, that if any such Indebtedness ceases to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the Company that was not permitted by this clause (8), and the issuance of preferred stock by Unrestricted Subsidiaries; (9) the incurrence of Indebtedness solely in respect of performance, surety and similar bonds or completion or performance guarantees (including, without limitation, performance guarantees pursuant to coal supply agreements or equipment leases and including letters of credit issued in support of such performance, surety and similar bonds), to the extent that such incurrence does not result in the incurrence of any obligation for the payment of borrowed money to others; (10) the incurrence of Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or a Subsidiary; provided, however, that (a) such Indebtedness is not reflected on the balance sheet of the Company or any Restricted Subsidiary (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this clause (a)) and (b) the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds including noncash proceeds (the fair market value of such noncash proceeds being measured at the time received and without giving effect to any subsequent changes in value) actually received by the Company and its Restricted Subsidiaries in connection with such disposition; and (11) the incurrence by the Company or any of its Restricted Subsidiaries of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (11), not to exceed the greater of (a) (I) $25.0 million and (II) 1% of Total Assets if incurred on or prior to December 15, 2000 or (b) (I) $50.0 million and (II) 2% of Total Assets if incurred thereafter. For purposes of determining compliance with this "Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (11) above, or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company will be permitted to classify such item of Indebtedness on the date of its incurrence in any manner that complies with this covenant. Incurrence of Senior Indebtedness The Company will not, and will not permit any of its Restricted Subsidiaries to, directly, or indirectly, incur any Senior Indebtedness (other than (a) secured Indebtedness pursuant to the Senior Credit Facilities not in excess of $875.0 million at any one time outstanding thereunder and (b) Indebtedness incurred pursuant to
124
clauses (3) through (ii) of the definition of Permitted Debt); provided, however, that the Company or any of its Restricted Subsidiaries may incur Senior Indebtedness (including Acquired Debt that is Senior Indebtedness) if the Company's Debt to Cash Flow Ratio at the time of incurrence of such Senior Indebtedness, after giving pro forma effect to such incurrence as of such date and to the use of proceeds therefrom as if the same had occurred at the beginning of the most recently ended four full fiscal quarter period of the Company for which internal financial statements are available, would have been no greater than 3.0 to 1; provided, further, that any unsecured Senior Indebtedness to be issued in compliance with this proviso must have a maturity date or mandatory redemption or repurchase date which is the same as or later than the maturity date of the Notes. Liens The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind, except Permitted Liens, upon any of their property or assets, unless all payments due under the Indenture and the Notes are secured on an equal and ratable basis. Dividend and Other Payment Restrictions Affecting Subsidiaries The Company will not and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to: (1) pay dividends or make any other distributions on its Capital Stock to the Company or any of the Company's Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any indebtedness owed to the Company or any of its Restricted Subsidiaries; (2) make loans or advances to the Company or any of the Company's Subsidiaries; or (3) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries. However, the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) Existing Indebtedness as in effect on the date of the Indenture; (2) our credit facility, as in effect on the date of this Indenture and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in such Existing Indebtedness, as in effect on the date of the Indenture; (3) this Indenture and these Notes, and the Indenture for the Senior Subordinated Notes and the Senior Subordinated Notes; (4) applicable law; (5) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the Indenture to be incurred; (6) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices; (7) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on the property so acquired of the nature described in clause (3) of the preceding paragraph;
125
(8) any agreement for the sale or other disposition of a Restricted Subsidiary that restricts distributions by such Restricted Subsidiary pending its sale; (9) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; (10) Secured Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenant described above under the caption "--Liens" that limits the right of the debtor to dispose of the assets securing such Indebtedness; (11) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business; (12) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; and (13) any encumbrances or restrictions imposed by any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of the contracts, instruments or obligations referred to in clauses (1) through (12) above, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are, in the good faith judgment of the Company's Board of Directors, not materially more restrictive in the aggregate with respect to such dividend and other payment restrictions than the dividend or other payment restrictions (considered as a whole) prior to such amendment, modification, restatement, renewal, increase, supplement, refunding, replacement or refinancing. Merger, Consolidation, or Sale of Assets The Company may not, directly or indirectly: (1) consolidate or merge with or into another Person (whether or not the Company is the surviving corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets, in one or more related transactions, to another Person; unless: (1) either: (a) the Company is the surviving corporation; or (b) the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (2) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Notes, this Indenture and the Registration Rights Agreement pursuant to agreements reasonably satisfactory to the Trustee; (3) immediately after such transaction no Default or Event of Default exists; and (4) except in the case of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of the Company, immediately after giving pro forma effect to such transaction, as if such transaction had occurred at the beginning of the applicable four-quarter period, (A) the entity surviving such consolidation or merger would be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" or (B) the Fixed Charge Coverage Ratio for the Company or the Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made would, immediately after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, not be less than such Fixed Charge Coverage Ratio for the Company and its Restricted Subsidiaries immediately prior to such transaction.
126
In addition, the Company may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. This "Merger, Consolidation, or Sale of Assets" covenant will not apply to a sale, assignment, transfer, conveyance or other disposition of assets between or among the Company and any of its Restricted Subsidiaries. Notwithstanding the foregoing clause (4), any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company and the Company may merge with an Affiliate that has no significant assets or liabilities and was formed solely for the purpose of changing the jurisdiction of organization of the Company in another State of the United States or the form of organization of the Company so long as the amount of Indebtedness of the Company and its Restricted Subsidiaries is not increased thereby and provided that the successor assumes all the obligations of the Company under the Registration Rights Agreement, the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee. Transactions with Affiliates The Company will not, and will not permit any of its Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate Transaction"), unless: (1) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Subsidiary with an unrelated Person; and (2) the Company delivers to the Trustee: (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $2.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with this covenant and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors; and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The following items will not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph: (1) agreements between the Company and Affiliates or related parties in effect on the date of, and listed in the Indenture; (2) any employment agreement entered into by the Company or any of its Subsidiaries or any employee benefit plan available to employees of the Company and its Subsidiaries, in each case in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary; (3) transactions between or among the Company and/or its Subsidiaries; (4) payment of reasonable directors fees to Persons who are not otherwise Affiliates of the Company; and (5) Restricted Payments that are permitted by the provisions of the Indenture described above under the caption "--Restricted Payments" or pursuant to the definition of Permitted Investments.
127
Additional Subsidiary Guarantees If the Company or any of its Domestic Subsidiaries acquires or creates another Domestic Subsidiary after the date of the Indenture and such Domestic Subsidiary provides a guarantee of our credit facility, then that newly acquired or created Domestic Subsidiary must become a Guarantor and execute a supplemental indenture satisfactory to the Trustee. This covenant will not apply to any Domestic Subsidiary that has been properly designated as an Unrestricted Subsidiary in accordance with the Exchange Note Indenture for so long as it continues to constitute an Unrestricted Subsidiary. Designation of Restricted and Unrestricted Subsidiaries The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if that designation would not cause a Default. If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, all outstanding Investments owned by the Company and its Restricted Subsidiaries in the Subsidiary so designated will be deemed to be Restricted Payments made as of the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of the covenant described above under the caption "--Restricted Payments." All such outstanding Investments will be valued at their fair market value at the time of such designation. That designation will only be permitted if such Restricted Payment would be permitted at that time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a Default. Limitation on Issuances and Sales of Equity Interests in Wholly Owned Subsidiaries The Company will not, and will not permit any of its Wholly Owned Restricted Subsidiaries to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests in any Wholly Owned Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless: (1) such transfer, conveyance, sale, lease or other disposition is of all the Equity Interests in such Wholly Owned Restricted Subsidiary; and (2) the cash Net Proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with the covenant described above under the caption "--Asset Sales." In addition, the Company will not permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity Interests (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Restricted Subsidiary of the Company. Notwithstanding the preceding paragraph, any Subsidiary Guarantee of the Notes will provide by its terms that it will be automatically and unconditionally released and discharged under the circumstances described above under the caption "--Subsidiary Guarantees." The form of the Subsidiary Guarantee will be attached as an exhibit to the Indenture. Business Activities The Company will not, and will not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole. Payments for Consent The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder of Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such
128
consideration is offered to be paid and is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. Reports Whether or not required by the Commission, so long as any Notes are outstanding, the Company will furnish to the Holders of Notes, within the time periods specified in the Commission's rules and regulations: (1) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report on the annual financial statements by the Company's certified independent accountants; and (2) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. If the Company has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph shall include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in Management's Discussion and Analysis, of Financial Condition and Results of Operations, of the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company. In addition, whether or not required by the Commission, the Company will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the Commission for public availability within the time periods specified in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. Events of Default and Remedies Each of the following is an Event of Default: (1) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to the Notes; (2) default in payment when due of the principal of or premium, if any, on the Notes; (3) failure by the Company or any of its Subsidiaries to comply with the provisions described under the captions "--Repurchase at the Option of Holders--Change of Control," or "--Repurchase at the Option of Holders-- Asset Sales;" (4) failure by the Company or any of its subsidiaries for 30 days after notice to comply with the provisions of the covenants described above under the caption "--Certain Covenants--Restricted Payments" or "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" or failure for 60 days after notice to comply with any of its other agreements in the Indenture of the Notes; (5) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, if that default: (a) is caused by a failure to pay principal of or premium, if any, or interest on such Indebtedness before the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default"); or (b) results in the acceleration of such Indebtedness before its express maturity, and, in each case, the principal amount of any such Indebtedness, together with the principal amount, of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $25.0 million or more;
129
(6) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $25.0 million, which judgments are not paid, discharged or stayed for a period of 60 days; (7) except as permitted by the Indenture, any Guarantee of the Notes shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Guarantee; and (8) certain events of bankruptcy or insolvency with respect to the Company or any of its significant subsidiaries that are Restricted Subsidiaries. In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes. In the case of any Event of Default occurring by reason of any willful action or inaction taken or not taken by or on behalf of the Company, with the intention of avoiding payment of the premium that the Company would have had to pay if the Company then had elected to redeem the Notes pursuant to the optional redemption provisions of the Indenture, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law upon the acceleration of the Notes. If an Event of Default occurs prior to December 15, 2002, by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding paying the premium upon redemption of the Notes prior to December 15, 2002, then the premium specified in the event of an optional redemption using the net cash proceeds of an Equity Offering shall also become immediately due and payable to the extent permitted by law upon the acceleration of the Notes. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture. Upon becoming aware of any Default or Event of Default, the Company is required to deliver to the Trustee a statement specifying such Default or Event of Default. No Personal Liability of Directors, Officers, Employees and Stockholders No director, officer, employee, incorporator or stockholder of the Company or any person controlling such person, as such, shall have any liability for any obligations of the Company under the Notes, the Indenture, the Subsidiary Guarantees, or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. The waiver may not be effective to waive liabilities under the federal securities laws.
130
Legal Defeasance and Covenant Defeasance The Issuers may, at their option and at any time, elect to have all of its obligations discharged with respect to the outstanding Notes ("Legal Defeasance") except for: (1) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, premium, if any, and interest and Liquidated Damages, if any, on such Notes when such payments are due from the trust referred to below; (2) the Issuers' obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust; (3) the rights, powers, trusts, duties and immunities of the Trustee, and the Issuers' obligations in connection therewith; and (4) the Legal Defeasance provisions of the Indenture. In addition, the Issuers may, at their option and at any time, elect to have the obligations of the Issuers released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with those covenants will not constitute a Default or Event of Default with respect to the Notes. If Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance: (1) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest and Liquidated Damages, if any, on the outstanding Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (2) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that: (a) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or; (b) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (3) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred;
131
(4) no Default or Event of Default shall have occurred and be continuing either: (a) on the date of such deposit (other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit); or (b) insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (6) the Company must have delivered to the Trustee an opinion of counsel to the effect that the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (7) the Company must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (8) the Company must deliver to the trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with. Amendment, Supplement and Waiver Except as provided in the next two succeeding paragraphs, the Indenture, the Notes or the Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding, and any existing default or event of default (other than a default or event of default in the payment of the principal of premium, if any, or interest on the Notes) compliance with any provision of the Indenture, the Notes or the Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder): (1) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any Note or alter or waive the provisions with respect to the redemption of the Notes (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"); (3) reduce the rate of or change the time for payment of interest on any Note; (4) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (5) make any Note payable in money other than that stated in the Notes;
132
(6) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of or premium, if any, or interest on the Notes; (7) waive a redemption payment with respect to any Note (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders"); (8) make any change in the preceding amendment and waiver provisions; or (9) release any Guarantor from any of its obligations under its Guarantee of the Notes or the Indenture, except in accordance with the terms of the Indenture Notwithstanding the preceding, without the consent of any Holder of Notes, the Issuers, the Guarantors and the Trustee may amend or supplement the Indenture, the Notes or the Guarantees: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated Notes in addition to or in place of certificated Notes; (3) to provide for the assumption of an Issuer's or a Guarantor's obligations to Holders of Notes in the case of a merger or consolidation or sale of all or substantially all of the Issuer's or Guarantor's assets; (5) to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights under the Indenture of any such Holder; (6) to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act; or (7) to allow any Guarantor to execute a supplemental indenture and/or a Guarantee with respect to the Notes. Concerning the Trustee If the Trustee becomes a creditor of the Company or any Guarantor, the Indenture limits its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. The Holders of a majority in principal, amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur and be continuing, the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. Certain Definitions We have listed below certain defined terms used in the Indenture. You should refer to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person: (1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Subsidiary of, such specified Person; and (2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person.
133
"Acquisitions" means the acquisition by the Company of: (1) all of the outstanding capital stock of Zeigler Coal Holding Company, (2) all of the outstanding capital stock of certain subsidiaries of Cyprus Amax Coal Company and certain mining equipment used by such subsidiaries together with an agreement to pay Cyprus Amax Coal Company or its affiliate certain royalties, (3) all of the outstanding capital stock of Mid-Vol Leasing, Inc., Mega Minerals, Inc. and Premium Processing, Inc. together with an agreement to pay the former owners of Mid-Vol Leasing, Inc. certain royalties, (4) all of the outstanding capital stock of Kindill Holding, Inc. and Hayman Holdings, Inc., (5) certain of the assets of The Battle Ridge Companies, (6) the stock of Leslie Resources, Inc. and Leslie Resources Management, Inc., (7) certain facilities, equipment, and intellectual property through the purchase of a substantial portion of the assets of the Mining Technologies Division of Addington Enterprises, Inc.,
(8) all of the outstanding capital stock of Martiki Coal Corporation and
"Additional Assets" means (1) any property or assets (other than Capital Stock, Indebtedness or rights to receive payments over a period greater than 180 days, other than with respect to coal supply contract restructurings) that are usable by the Company or a Restricted Subsidiary in a Permitted Business or (2) the Capital Stock of a Person that is at the time, or becomes, a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. "Asset Sale" means (1) the sale, lease, conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than sales of coal or rights to acquire coal or sales of mining equipment and related parts and services, in each case, in the ordinary course of business (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Exchange Note Indenture described above under the caption "--Change of Control" and/or the provisions described above under the caption "--Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant), and (2) the issue or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Company's Restricted Subsidiaries, in the case of either clause (1) or (2), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $2.0 million or (b) for Net Proceeds in excess of $2.0 million. Notwithstanding the foregoing, the following items shall not be deemed to be Asset Sales: (1) a transfer of assets by the Company to a Subsidiary Guarantor Restricted Subsidiary or by a Subsidiary Guarantor Restricted Subsidiary to the Company or to another Restricted Subsidiary,
134
(2) an issuance of Equity Interests by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, (3) a Restricted Payment that is permitted by, or an Investment that is not prohibited by, the covenant described above under the caption "-- Certain Covenants--Restricted Payments," (4) a disposition of Cash Equivalents or obsolete equipment, (5) foreclosures on assets, (6) the sale or discount, in each case without recourse, of accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof, (7) the factoring of accounts receivable arising in the ordinary course of business pursuant to arrangements customary in the industry and (8) the sale or disposition by the Company or a Restricted Subsidiary of its Equity Interest in, or all or substantially all of the assets of, an Unrestricted Subsidiary. "Assets Held for Sale" means (1) assets of the Company that are reported on the pro forma financial statements of the Company contained in the offering memorandum for the issuance of the Notes as assets held for sale in accordance with GAAP and (2) the office building in Fairview Heights, Illinois. "Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular "person" (as such term is used in Section 13(d)(3) of the Exchange Act), such "person" shall be deemed to have beneficial ownership of all securities that such "person" has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. "Board of Directors" means the board of directors of AEI Resources, Inc. or any authorized committee of the Board of Directors. "Bridge Facilities" means the (1) Senior Subordinated Credit Agreement, dated as of September 2, 1998, among the Company, the Guarantors, Warburg Dillon Read LLC, as Arranger and Syndication Agent, UBS AG, Stamford Branch, as Administrative Agent, and the lenders party thereto and (2) Senior Credit Agreement, dated as of September 2, 1998, among Holdings, Warburg Dillon Read LLC, as Arranger and Syndication Agent, UBS AG, Stamford Branch, as Administrative Agent, and the lenders party thereto. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and (4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means: (1) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the U.S. Government or any agency thereof,
135
(2) certificates of deposit and time deposits with maturities of one year or less from the date of acquisition and overnight bank deposits of any lender under our credit facility or of any commercial bank having capital and surplus in excess of $500.0 million and a Thompson Bank Watch Rating of "B" or better, except that up to $10.0 million of such certificates of deposit, time deposits and overnight deposits may be of or with the Kentucky Bank and Trust Company at any one time, (3) repurchase obligations of any lender under our credit facility or of any commercial bank satisfying the requirements of clause (2) of this definition, having a term of not more than 90 days with respect to securities issued or fully guaranteed or insured by the United States Government, (4) commercial paper of a domestic issuer rated at least A-2 by Standard and Poor's Rating Group ("S&P") or P-2 by Moody's Investors Service, Inc. ("Moody's"), or carrying an equivalent rating by a nationally recognized rating agency if both of S&P and Moody's cease publishing ratings of investments, (5) securities with maturities of one year or less from the date of acquisition, rated at least A by S&P or A by Moody's, issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, (6) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any lender under our credit facility or any commercial bank satisfying the requirements of clause (2) of this definition, or
(7) shares of money market mutual or similar funds which invest
exclusively in assets satisfying the requirements of clauses (1) through
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole to any "person" (as such term is used in
(2) the adoption of a plan relating to the liquidation or dissolution of the Company; (3) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the Beneficial Owner, directly or indirectly, of more than 50% of the Voting Stock of the Company, measured by voting power rather than number of shares; or (4) the Company consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of the Company outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person immediately after giving effect to such issuance. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus: (1) provision for taxes based on, income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was deducted in computing such Consolidated Net Income; plus (2) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt
136
issuance costs, deferred financing fees and original issue discount, non- cash interest payments, the interest component of any deferred payment obligations (other than employee benefit obligations), the interest component of all payments associated with Capital Lease Obligations commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income; plus (3) depreciation, depletion, amortization (including amortization of goodwill and other intangibles and other non-cash expenses (including, without limitation, writedowns and impairments of property, plant and equipment and intangibles and other long-lived assets) (excluding any such non-cash expense for periods after the date of this Indenture to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation, depletion, amortization and other non- cash expenses were deducted in computing such Consolidated Net Income; minus (4) non-cash items increasing such Consolidated Net Income for such period, other than items that were accrued in accordance with GAAP; and (5) unusual or nonrecurring charges incurred either (A) prior to the date of this Indenture or (B) within twelve months thereafter and in connection with any of the transactions contemplated by the Transaction Documents, in each case to the extent deducted in computing such Consolidated Net Income, plus (6) noncash items decreasing such Consolidated Net Income for such period (other than accruals in accordance with GAAP), in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the preceding, the provision for taxes based on the income or profits of, and the depreciation, depletion and amortization and other non-cash charges of, a Restricted Subsidiary that is not a subsidiary guarantor shall be added to Consolidated Net Income to compute Consolidated Cash Flow of the Company only to the extent that a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior governmental approval (that has not been obtained), without direct or indirect restriction pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to that Restricted Subsidiary or its stockholders. "Consolidated Net Income" means, with respect to any specified Person for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that: (1) the Net Income of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person or a Restricted Subsidiary thereof; (2) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders; (3) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded; (4) the Net Income (or loss) of any Unrestricted Subsidiary shall be excluded, whether or not distributed to the Company or one of its Restricted Subsidiaries;
137
(5) the cumulative effect of a change in accounting principles shall be excluded; (6) any non-cash expense related to employee equity participation programs or stock option or similar plans shall be disregarded; and (7) losses of TEK-KOL prior to the date of the Indenture shall be disregarded. "Credit Facilities" means, with respect to the Company or any of its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Debt to Cash Flow Ratio" means, as of any date of determination, the ratio of
"Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible, or for which it is exchangeable, at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the Holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the Senior Notes mature; provided, however, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require the Company to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Domestic Subsidiary" means a Restricted Subsidiary that is (1) formed under the laws of the United States of America or a state or territory thereof or (2) as of the date of determination, treated as a domestic entity or a partnership or a division of a domestic entity for United States federal income tax purposes. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means any public or private sale of equity securities (excluding Disqualified Stock) of the Company or Holdings (to the extent that the net proceeds therefrom are contributed to the Company as common equity capital), other than any private sales to an Affiliate of the Company. "Existing Indebtedness" means Indebtedness of the Company and its Restricted Subsidiaries (other than Indebtedness under the Senior Credit Facilities, the Notes, the Senior Subordinated Notes and related Guarantees) in existence on the date of the Indenture, including without duplication, outstanding letters of credit which support such Indebtedness, until such amounts are repaid.
138
"Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of: (1) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations (other than employee benefit obligations) commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Hedging Obligations; plus (2) the consolidated interest of such Person and its Restricted Subsidiaries that was capitalized during such period (but excluding amortization of debt issuance costs); plus (3) any interest expense on Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries, whether or not such Guarantee or Lien is called upon; plus (4) the product of (a) all dividend payments, whether or not in cash, on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests of the Company (other than Disqualified Stock) or to the Company or a Restricted Subsidiary of the Company, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then effective combined federal, state and local tax rate of such Person for such period, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any specified Person and its Restricted Subsidiaries for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the specified Person or any of its Restricted Subsidiaries incurs; assumes, Guarantees or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of calculating the Fixed Charge Coverage Ratio: (1) acquisitions that have been made by the specified Person or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (3) of the proviso set forth in the definition of Consolidated Net Income; (2) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date or held for sale as of the date of the Indenture, shall be excluded; and (3) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the specified Person or any of its Restricted Subsidiaries following the Calculation Date. "Foreign Subsidiaries" means Subsidiaries of the Company that are not Domestic Subsidiaries. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and
139
pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantors" means each of: (1) AEI Resources Holding, Inc.; and (2) any subsidiary of the Company that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture; and their respective successors and assigns. "Hedging Obligations" means, with respect to any Person, the obligations of such Person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; and (2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates, currency exchange or commodity prices; in each case for the purpose of risk management and not for speculation. "Indebtedness" means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent: (1) in respect of borrowed money; (2) evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof); (3) evidenced by banker's acceptances; (4) representing Capital Lease Obligations; (5) representing the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or (6) representing any Hedging Obligations, if and to the extent any of the preceding items (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of the specified Person prepared in accordance with GAAP. In addition, the term "Indebtedness" includes all Indebtedness of others secured by a Lien on any asset of the specified Person (whether or not such Indebtedness is assumed by the specified Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. Notwithstanding the foregoing, the term "Indebtedness" will not include any of the foregoing that constitutes: (1) an accrued expense, (2) trade payables, (3) Obligations in respect of reclamation, workers' compensation, including black lung, pensions and retiree health care, in each case to the extent not overdue for more than 90 days, and
140
(4) agreements to make royalty payments, including minimum royalty payments, that are entered into in connection with the acquisition of assets to be used in a Permitted Business and which comprise part of the purchase price of the assets acquired. The amount of any Indebtedness outstanding as of any date will be: (1) the accreted value thereof, in the case of any Indebtedness issued with original issue discount; and (2) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the form of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Restricted Payments." "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction. "Net Income" means, with respect to any Person, the net income or loss of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision for taxes on
such gain (or loss), realized in connection with: (a) any Asset Sale; or
(2) any extraordinary or nonrecurring item, together with any related provision for taxes on such extraordinary or nonrecurring item. "Net Proceeds" means the aggregate proceeds (cash or property) received by the Company or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any noncash consideration received in any Asset Sale) or the sale or disposition of any Investment, net of the direct costs relating to such Asset Sale, sale or disposition, (including, without limitation, legal, accounting and investment banking fees, and sales commissions) and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Guarantor Subsidiaries" means (i) Yankeetown Dock Corporation and its direct and indirect Subsidiaries, (ii) the Company's future Unrestricted Subsidiaries and (iii) the Company's current and future Foreign Subsidiaries.
141
"Non-Recourse Debt" means Indebtedness: (1) as to which neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness) other than a pledge of the Equity Interests of any Unrestricted Subsidiaries, (b) is directly or indirectly liable as a guarantor or otherwise other than by virtue of a pledge of the Equity Interests of any Unrestricted Subsidiaries, or (c) constitutes the lender; and (2) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit upon notice, lapse of time or both any holder of any other Indebtedness (other than the Notes) of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Obligations" means any principal, premium (if any), interest, penalties, fees, charges, expenses, indemnifications, reimbursement obligations, damages, Guarantees and other liabilities and amounts payable under the documentation governing any Indebtedness or in respect thereto. "Permitted Business" means coal production, coal mining, coal brokering, coal transportation, mine development, energy related businesses, coal, natural gas, petroleum or other fossil fuel exploration, production, marketing, transportation and distribution and other related businesses, and activities of the Company and its Subsidiaries as of the date of the Indenture and any business or activity that is reasonably similar to any of the foregoing or a reasonable extension, development or expansion thereof or ancillary to any of the foregoing. "Permitted Group" means any group of investors that is deemed to be a "person" (as such term is used in Section 13(d)(3) of the Exchange Act) by virtue of any agreement or arrangement among two or more Persons, provided that no single Person (together with its Affiliates), other than the Principals and their Related Parties, is the beneficial owner and beneficial ownership shall be determined without regard to such agreement or arrangement directly or indirectly, of (A) more than 50% of the Voting Stock of the Company that is "beneficially owned" (as defined above) by such group of investors and (B) more of the Voting Stock of the Company than is at the time "beneficially owned" (as defined above) by the Principals and their Related Parties in the aggregate (Voting Stock, in each case, measured by voting power rather than number of shares). "Permitted Investments" means (1) any Investment in the Company or in a Restricted Subsidiary of the Company; (2) any Investment in Cash Equivalents; (3) any Investment by the Company or any Restricted Subsidiary of the Company in a Person, if as a result of such Investment (a) such Person becomes a Restricted Subsidiary of the Company or (b) such Person, in one transaction or a series of related transactions, is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Company or a Restricted Subsidiary of the Company; (4) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Company; (5) any Investment existing on the date of the Exchange Note Indenture (an "Existing Investment") and any Investment that replaces, refinances or refunds an Existing Investment, provided that the new Investment is in an amount that does not exceed the amount replaced, refinanced or refunded and is made in the same Person as the Investment replaced, refinanced or refunded, (6) advances to employees not in excess of $5.0 million outstanding at any one time; (7) Hedging Obligations permitted under clause (7) of "Certain Covenants-- Incurrence of Indebtedness and Issuance of Preferred Stock;" (8) loans and advances to officers, directors and employees for business- related travel expenses, moving expenses and other similar expenses, in each case incurred in the ordinary course of business;
142
(9) any Investment in a Permitted Business (whether or not an Investment in an Unrestricted Subsidiary) having an aggregate fair market value, that when taken together with all other Investments made pursuant to this clause (9), does not exceed in aggregate amount the sum of (a) 5% of Total Assets at the time of such Investment (with the fair market value of each Investment being measured at the time made and without giving effect to subsequent changes in value) plus (b) 100% of the Net Proceeds from the sale or disposition of any Investment previously made pursuant to this clause (9) or 100% of the amount of any dividend, distribution or payment from any such Investment, net of income taxes paid or payable in respect thereof, in each case up to the amount of the Investment that was made pursuant to this clause (9) and 50% of the amount of such Net Proceeds or 50% of such dividends, distributions or payments, in each case received in excess of the amount of the Investments made pursuant to this clause (9); (10) guarantees (including Guarantees) of Indebtedness permitted under "-- Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" (11) any Investment acquired by the Company or any of its Restricted Subsidiaries (a) in exchange for any other Investment or accounts receivable held by the Company or any such Restricted Subsidiary in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other Investment or accounts receivable or (b) as a result of the transfer of title with respect to any secured Investment in default as a result of a foreclosure by the Company or any of its Restricted Subsidiaries with respect to such secured Investment; (12) that portion of any Investment by the Company or a Restricted Subsidiary in a Permitted Business to the extent that the Company or such Restricted Subsidiary will receive in a substantially concurrent transaction an amount in cash equal to the amount of such Investment (or the fair market value of such Investment), net of any obligation to pay taxes or other amounts in respect of the receipt of such cash; and (13) any Investment made by the Company or any Restricted Subsidiary in an Unrestricted Subsidiary with the proceeds of any equity contribution to or sale of Equity Interest by the Company or any Restricted Subsidiary, provided that such proceeds shall not increase the amount available pursuant to clause (3) of the first paragraph of the covenant described above under "--Certain Covenants--Restricted Payments;" provided that the receipt of such cash does not carry any obligation by the Company or such Restricted Subsidiary to repay or return such cash; provided, however, that with respect to any Investment, the Company may, in its sole discretion, allocate all or any portion of any Investment to one or more of the above clauses so that the entire Investment would be a Permitted Investment. "Permitted Liens" means (1) Liens securing Indebtedness under Credit Facilities that was permitted by the terms of the Exchange Note Indenture to be incurred; (2) Liens in favor of the Company; (3) Liens on property of a Person existing at the time such Person is merged into or consolidated with the Company or any Restricted Subsidiary of the Company; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Company; (4) Liens on property existing at the time of acquisition thereof by the Company or any Restricted Subsidiary of the Company, provided that such Liens were in existence prior to the contemplation of such acquisition; (5) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (6) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance or other kinds of social security;
143
(7) Liens existing on the date of the Exchange Note Indenture; (8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (9) Liens on assets of Subsidiary Guarantors to secure Senior Indebtedness of such Subsidiary Guarantors that was permitted by the Exchange Note Indenture to be incurred;
(10) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that
(11) Liens on assets of Foreign Subsidiaries to secure Indebtedness that was permitted by the Exchange Note Indenture to be incurred; (12) statutory liens of landlords, mechanics, suppliers, vendors, warehousemen, carriers or other like Liens arising in the ordinary course of business; (13) judgment Liens not giving rise to an Event of Default so long as any appropriate legal proceeding that may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such legal proceeding may be initiated shall not have expired; (14) easements, rights-of-way, zoning and similar restrictions and other similar encumbrances or title defects incurred or imposed, as applicable, in the ordinary course of business and consistent with industry practices which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto (as such property is used by the Company or its Subsidiaries) or interfere with the ordinary conduct of the business of the Company or such Subsidiaries; provided, however, that any such Liens are not incurred in connection with any borrowing of money or any commitment to loan any money or to extend any credit; (15) Liens to secure Indebtedness (including Capital Lease Obligations) permitted by clause (d) of the second paragraph of the covenant entitled "Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" and other purchase money Liens to finance property or assets of the Company or any Restricted Subsidiary acquired in the ordinary course of business; provided that such Liens are only secured by such property or assets so acquired or improved (including, in the case of the acquisition of Capital Stock of a Person who becomes a Restricted Subsidiary, Liens on the assets of the Person whose Capital Stock was so acquired); (16) Liens securing Indebtedness under Hedging Obligations, provided that such Liens are only secured by property or assets that secure the Indebtedness subject to the Hedging Obligation; (17) Liens to secure Indebtedness permitted by clause (11) of the second paragraph of the covenant entitled "Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" and (18) Liens on the Equity Interests of Unrestricted Subsidiaries securing obligations of Unrestricted Subsidiaries not otherwise prohibited by the Indenture. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of the Company or any of its Restricted Subsidiaries (other than intercompany Indebtedness); provided that: (1) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest and premium, if any, on the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith);
144
(2) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the Notes on terms at least as favorable to the Holders of Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced defeased or refunded; and (4) such Indebtedness is incurred either by the Company or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Principals" means Larry Addington, Bruce Addington and Robert Addington. "Public Equity Offering" means an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. A "Public Market" shall be deemed to exist if (1) a Public Equity Offering has been consummated and (2) at least 35% of the total issued and outstanding common stock of the Company immediately prior to the consummation of such Public Equity Offering has been distributed by means of an effective registration statement under the Securities Act. "Related Party" with respect to any Principal means: (1) any controlling stockholder, Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal; or (2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding a 50% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (1). "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Senior Indebtedness" means any Indebtedness of the Company or any of its Restricted Subsidiaries (other than intercompany Indebtedness that is not contractually subordinated to any other Indebtedness). "Senior Subordinated Notes" mean the Senior Subordinated Notes of the Company due 2006, to be issued concurrently herewith. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person: (1) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and
145
(2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "Subsidiary Guarantee" means a guarantee endorsed on the Senior Notes by a Subsidiary Guarantor. "Subsidiary Guarantors" means each of (1) the Company's Domestic Subsidiaries at the date of the closing of the Acquisition, other than Yankeetown Dock Corporation and the Subsidiaries of Yankeetown Dock Corporation at the date of the Exchange Note Indenture and (2) any other subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of the Exchange Note Indenture, and their respective successors and assigns. "Technology Sharing Agreement" means that certain agreement dated as of April 29, 1998 between the Company and Addington Enterprises, Inc., as the same may be extended or renewed from time to time without alteration of the material terms thereof. "Total Assets" means the total assets of the Company and its Restricted Subsidiaries on a consolidated basis determined in accordance with GAAP, as shown on the most recently available consolidated balance sheet of the Company and its Restricted Subsidiaries.
"Transaction Documents" means the documents related to (1) the Acquisitions,
"Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled by, and published in, the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two business days prior to the date fixed for redemption of the Notes (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining Weighted Average Life to Maturity of the Notes; provided, however, that if the Weighted Average Life of Maturity of the Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the Weighted Average Life to maturity of the Notes is less than one year, the weekly average yield on actually traded Unites States Treasury securities adjusted to a constant maturity of one year shall be used. "Unrestricted Subsidiary" means any Subsidiary that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (1) has no Indebtedness other than Non-Recourse Debt; (2) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (3) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any obligation (a) to subscribe for additional Equity Interests in unrestricted subsidiaries or (b) to maintain or preserve such Person's net worth; and (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries provided, however, that the Company and its Restricted Subsidiaries may guarantee the performance of Unrestricted Subsidiaries in the ordinary course of business except for guarantees of Obligations in respect of borrowed money. Any designation of a Subsidiary of the Company as an Unrestricted Subsidiary shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the preceding conditions and was
146
permitted by the covenant described above under the caption "Certain Covenants- Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall be in default of such covenant. The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (1) such Indebtedness is permitted under the covenant described under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one- twelfth) that will elapse between such date and the making of such payment; by (2) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries of such Person.
147
DESCRIPTION OF OTHER INDEBTEDNESS The Senior Credit Facility General We have entered into a Senior Credit Agreement dated as of September 2, 1998 and amended and restated as of December 14, 1998 with UBS AG, Stamford Branch, an affiliate of the Initial Purchaser, pursuant to which UBS and a syndicate of financial institutions provided us with: (a) a $575.0 million senior secured term loan facility consisting of (a) a term loan A facility in an aggregate principal amount of $325.0 million and (b) a term loan B facility in an aggregate amount of $250.0 million and (b) a $300.0 million senior secured revolving credit facility. The Revolving Credit Facility includes a $225.0 million sublimit for the issuance of letters of credit. Security Our Indebtedness under the senior credit facility is secured by a perfected first priority security interest in: (a) all of our capital stock and the capital stock of our subsidiaries; (b) all of the capital stock of each of the entities comprising the businesses acquired in the Recent Acquisitions; and (c) substantially all accounts receivable, inventory, property, plant and equipment, intangibles, contract rights, other personal property and real property of the Company, its Subsidiaries and the businesses acquired in the Recent Acquisitions. Holdings and each of our Subsidiaries has guaranteed the senior credit facility. Interest Our Indebtedness of the Company under the senior credit facility shall bear interest, at the option, at a rate as follows: LIBOR plus the Applicable LIBOR Spread or ABR plus the Applicable ABR Spread. LIBOR borrowings may have interest periods of one, two, three or six months at the election of the Company. The "Applicable LIBOR Spread" will initially be: (a) under the revolving credit facility, 3.00% per annum; (b) under the term loan A facility, 3.00% per annum; and (iii) under the term loan B facility, 3.50% per annum. Thereafter, the Applicable LIBOR Spread will be determined pursuant to a grid-based test adjusted in accordance with the financial performance of the Company. The "Applicable ABR Spread" initially will be: (a) under the Revolving Credit Facility, 2.00% per annum; (b) under the term loan A facility, 2.00% per annum; and (c) under the term loan B facility, 2.50% per annum. Thereafter, the Applicable ABR Spread will be described pursuant to a grid- based test adjusted in accordance with the financial performance of the Company. "ABR" (Alternate Base Rate) is the higher of the Prime Rate of the reference bank set forth in the Senior Credit Facility documentation and the Federal Funds effective rate plus 0.5%. Maturity The term loan facility matures on September 30, 2005. The revolving credit facility matures on December 31, 2003. Fees We have agreed to pay the lenders unused commitment fees of 0.50% per annum on the undrawn committed amount under the revolving credit facility, payable quarterly in cash. We have agreed to pay the issuing bank per annum letter of credit fees equal to the Applicable LIBOR Spread on the undrawn face amounts of outstanding letters of credit, payable quarterly in arrears. Fronting fees of 0.25% will be payable to the issuing bank along with customary issuance and administrative fees.
148
Covenants The senior credit facility contains certain customary covenants including, without limitation, restrictions on our ability to: (a) incur additional indebtedness, pay certain dividends and make certain other restricted payments and investments; (b) make acquisitions or dispose of assets; (c) create liens; (d) engage in transactions with affiliates; (e) issue disqualified capital stock; (f) merge, consolidate or transfer substantially all of their respective assets, and (g) make capital expenditures. In addition, we are required to maintain compliance with certain financial tests, including a maximum leverage ratio of 4.00, decreasing over time to 2.75 in December 2001, a minimum interest coverage ratio of 2.50, increasing over time to 3.50 in December 2001 and thereafter, and a minimum net worth of negative $125.0 million plus 50% of consolidated net income from October 1, 1998 plus 100% of the proceeds of equity issuances and capital contributions. Events of Default The senior credit facility contains customary events of default including, without limitation: (a) the non-payment of principal, interest, fees or other amounts when due under the loans issued under the Senior Credit Facility; (b) certain changes in our control and ownership; (c) cross defaults to certain other indebtedness; (d) certain events of bankruptcy and insolvency; (e) judgment defaults; and (f) failure of any guaranty or security agreement supporting the credit facility to be in full force and effect. Optional and Mandatory Prepayment and Commitment Reductions We may prepay and reduce in whole or in part the senior credit facility at any time without penalty, subject to reimbursement of the lenders' breakage costs and payments of any and all accrued interest. We will be required, subject to certain exceptions, to prepay the senior credit facility with: (a) 75.0% of annual excess cash flow, reduced to 50.0% in any fiscal year where the year-end leverage ratio is less than 3.0:1, (b) 100.0% of the net proceeds of our asset sales and other asset dispositions, (c) 100.0% of the net proceeds of our issuance or incurrence of debt or sale lease-back transactions, and (d) 50.0% of the net proceeds from any issuance of equity securities. "Excess cash flow" is defined to mean (1) the sum of operating cash flow, net decrease in working capital and cash received from any life insurance or "key man policies" minus
149
(2) the sum of cash interest expense, capital lease expense, principal payments on indebtedness, capital expenditures, income taxes and certain dividends, cash paid for acquisitions to the extent funded from internally generated funds, and net increases in working capital. Mandatory prepayments will be applied pro rata among the outstanding amounts of the term loans. Any excess amount to be applied against the Term Loans over the then outstanding amount of the term loans shall be applied to the revolving credit facility. Loans made pursuant to the revolving credit facility will be prepaid to the extent the aggregate extensions of credit under the revolving credit facility exceed the commitments then in effect. Any excess amount to be applied against the revolving credit loans over the then outstanding amount of such revolving credit loans will be applied to cash collateralize outstanding letters of credit. The Senior Subordinated Credit Facility We have entered into a Senior Subordinated Credit Agreement, dated as of September 2, 1998 (the "Bridge Credit Facility") with UBS, pursuant to which UBS and a syndicate of financial institutions provided the Company with a $500.0 million secured loan facility. The outstanding principal balance under the Bridge Credit Facility is approximately $8.0 million. In the event that the Company does not repay the Bridge Credit Facility on or before April 30, 1999, UBS is entitled to receive 2.5% of the common stock of Holdings. Surety Bonds Federal and state laws require surety bonds to secure our obligations to reclaim lands disturbed for mining, to pay federal and state workers' compensation and to satisfy other miscellaneous obligations. The amount of these bonds varies constantly, depending upon, among other things, the amount of acreage disturbed, the degree to which each property has been reclaimed and the number of persons we employ. Under federal law, partial bond release for reclamation bonds is provided as mined lands (i) are backfilled and graded to approximate original contour, (ii) are re-vegetated and (iii) achieve pre- mining vegetative productivity levels on a sustained basis for a period of five to ten years. As of December 31, 1998, we had outstanding surety bonds with third parties for post-mining reclamation totaling $524.4 million. Surety bonds valued at an additional $123.3 million are in place for federal and state workers' compensation obligations and other miscellaneous obligations. Zeigler IRBs Charleston County, South Carolina On August 21, 1997, Charleston County, South Carolina, issued $30.8 million of Industrial Revenue Refunding Bonds, Series 1997, due August 1, 2028. The bonds will be paid from revenues derived from or in connection with a Loan Agreement between Charleston County, South Carolina, and Zeigler, dated as of August 1, 1997. The bonds bear interest at a term rate equal to 6.95%. The bonds are subject to various optional and mandatory tender and redemption provisions upon the occurrence of certain events, and are guaranteed by the same entities that have guaranteed the Notes and the Company. Peninsula Ports Authority of Virginia On August 20, 1997, the Peninsula Ports Authority of Virginia issued $115.0 million of Port Facility Refunding Revenue Bonds (Zeigler Coal Project), Series 1997, due May 1, 2022. The bonds will be paid from revenues derived from or in connection with a Financing Agreement between the Port Authority and Zeigler, dated as of August 1, 1997. The bonds bear interest at term rate equal to 6.90%. The bonds are subject to various optional and mandatory tender and redemption provisions upon the occurrence of certain events, and are guaranteed by the same entities that have guaranteed the Notes and the Company.
150
The Senior Subordinated Notes The Senior Subordinated Notes are senior subordinated obligations of the Company and will mature December 15, 2006. Interest on the Senior Subordinated Notes will accrue at a rate of 11 1/2%, and be payable semiannually in arrears on June 15 and December 15 of each year, commencing June 15, 1999. The Senior Subordinated Notes are guaranteed on a senior subordinated basis by the Guarantors. The Senior Subordinated Notes are redeemable, at the Company's option, in whole or in part, on or after December 15, 2002 at specified redemption prices, together with accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. Prior to that date, the Company may redeem the Notes in whole or in part subject to payment of a make-whole premium. Upon the occurrence of a Change of Control (as defined in the Senior Subordinated Note Indenture), the Company is required to make an offer to repurchase the Senior Subordinated Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. The Senior Subordinated Note Indenture contains restrictive covenants that, among other things, limit the ability of the Company and its subsidiaries to: . dispose of assets; engage in mergers and consolidations; . engage in certain transactions with subsidiaries and affiliates; . incur or guarantee additional indebtedness; . pay dividends or make other payments or investments; and limit the ability of subsidiaries to make certain distributions. Events of Default under the Senior Subordinated Note Indenture include (a) failure to pay interest on the Senior Subordinated Notes within 30 days after such payments are due; (b) failure to repay principal when due at its maturity date, upon optional redemption, upon required repurchase, upon acceleration or otherwise; (c) failure to comply for 30 days after notice with the covenants regarding restricted payments and incurrence of indebtedness and failure to comply for 60 days after notice with the other covenants contained in the Senior Subordinated Note Indenture; (d) the default by the Company or any Significant Subsidiary (as defined in the Senior Subordinated Note Indenture) in respect of any indebtedness above specified levels; (e) certain events of bankruptcy; (f) certain judgments against the Company or any Significant Subsidiary remain unsatisfied for a period of 60 days; (g) any Guarantee (as defined in the Senior Subordinated Note Indenture) ceasing to be in full force and effect (except as contemplated by the terms thereof); and (h) the denial or disaffirmation by any Guarantor (as defined in the Senior Subordinated Note Indenture) of its obligations under the applicable indenture or any Guarantee.
151
UNITED STATES INCOME TAX CONSIDERATIONS The following summary describes the material U.S. federal income tax consequences of the exchange of the initial notes for exchange notes that may be relevant to a beneficial owner of notes that is a citizen or resident of the United States or a U.S. domestic corporation or that otherwise is subject to United States federal income taxation on a net income basis in respect of such Notes (a "U.S. holder"). This summary is based on laws, regulations, rulings and decisions now in effect, all of which are subject to change. This summary deals only with U.S. holders that hold the initial notes as capital assets, and does not address tax considerations applicable to investors that may be subject to special tax rules, such as, but not limited to, banks, tax-exempt entities, insurance companies or dealers in securities or currencies, traders in securities electing to mark to market, persons that hold the initial notes as a position in a "straddle" or conversion transaction, or as part of a "synthetic security" or other integrated financial transaction or persons that have a "functional currency" other than the U.S. dollar. An Exchange pursuant to this exchange offer will not be a taxable event for U.S. federal income tax purposes. As a result, a U.S. holder of an initial note whose initial note is accepted in the exchange offer will not recognize gain or loss on the Exchange. A tendering U.S. holder's tax basis in the exchange notes will be the same as such U.S. holder's tax basis in its initial notes. A tendering U.S. holder's holding period for the exchange notes received pursuant to the exchange offer will include its holding period for the initial notes surrendered therefor. Investors should consult their own tax advisors in determining the tax consequences to them, as a result of their individual circumstances, of the exchange of the initial notes for the exchange notes and of the ownership and disposition of exchange notes received in the exchange offer, including the application of state, local, foreign or other tax laws.
152
PLAN OF DISTRIBUTION Each broker-dealer that receives exchange notes for its own account in exchange for initial notes pursuant to the exchange offer, where such initial notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for initial notes where such initial notes were acquired as a result of market-making activities or other trading activities. We have agreed that, for a period of up to one year after the expiration date, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. We will not receive any proceeds from any sale of exchange notes by broker- dealers. Exchange notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such exchange notes. Any broker- dealer that resells exchange notes that were received by it for its own account pursuant to such exchange notes may be deemed to be an "underwriter" within the meaning of the Securities Act, and any profit on any such resale of exchange notes and any commission or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver any by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of up to one year after the expiration date, we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents at any time during such period. We have agreed to pay all expenses incident to the exchange offer, including the expenses of one counsel for the holders of the initial notes, other than commissions or concessions of any broker-dealers, subject to certain prescribed limitations. We will indemnify the Holders of the initial notes, including any broker-dealers, against certain liabilities, including liabilities under the Securities Act. By its acceptance of the exchange offer, any broker-dealer that receives Notes pursuant to the exchange offer agrees to notify us prior to using this prospectus in connection with the sale or transfer of Notes, and acknowledges and agrees that, upon receipt of notice from us of the happening of any event which makes any statement in this prospectus untrue in any material respect or which requires the making of any changes in this prospectus in order to make the statements therein not misleading or which may impose upon us disclosure obligations that may have a material adverse effect on us (which notice we agree to deliver promptly to such broker-dealer), such broker-dealer will suspend use of this prospectus until we have notified such broker-dealer that delivery of this prospectus may resume and has furnished copies of any amendment or supplement to the Prospectus to such broker-dealer. The Notes will constitute a new issue of securities with no established trading market. We do not intend to list the Notes on any national securities exchange or to seek approval for quotation through any automated quotation system. We have been advised by the initial purchaser of the Notes that following completion of the exchange offer, it may make a market in the Notes. In addition, the initial purchaser may bid for, and purchase, the Notes on the open market. These activities may stabilize or maintain the market price of the Notes above independent market levels. The initial purchaser is not obligated to make a market for, bid for or purchase the Notes, and any market-making activities with respect to the Notes may be discontinued at any time without
153
notice. Accordingly, no assurance can be given that an active public or other market will develop for the Notes or as to the liquidity of or the trading market for the Notes. If a trading market does not develop or is not maintained, holders of the Notes may experience difficulty in reselling the Notes or may be unable to sell them at all. If a market for the Notes develops, any such market may cease to continue at any time. If a public trading market develops for the Notes, future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, our results of operations and the market for similar securities and other factors, including our financial condition.
154
LEGAL MATTERS The validity of the exchange notes will be passed upon for us by Latham & Watkins, New York, New York. Certain legal matters relating to the exchange offer will be passed upon for us by Brown, Todd & Heyburn PLLC, Lexington and Louisville, Kentucky. ENGINEERS The information appearing in this prospectus concerning estimates of our proven and probable coal reserves have been included in this prospectus in reliance on the following experts: . the estimates of the proven and probable coal reserves of AEI Holding Company, Inc. were reviewed and evaluated by Marshall Miller & Associates in June 1997 and September 1997, and updated in September 1998; . the estimated proven and probable coal reserves of Zeigler Coal Holding Company are based on a reserve study prepared by Weir International Mining Consultants in 1994, as updated in May 1998; . the estimated proven and probable coal reserves acquired from Cyprus Amax as of April 1998, have been reviewed and evaluated by Marshall Miller & Associates as of that date; . the estimated proven and probable coal reserves of Crockett Collieries were reviewed and evaluated by Stagg Engineering Services, Inc. in February 1998; . the estimated proven and probable coal reserves acquired from The Battle Ridge Companies were reviewed and evaluated by Marshall Miller & Associates in November 1997; . the estimated proven and probable coal reserves of Mid-Vol Leasing and related companies were reviewed and evaluated by Marshall Miller & Associates in May 1998; . the estimated proven and probable coal reserves of Kindill Holding, Inc. and a related company, as of November 1997, as updated in August 1998, have been reviewed and evaluated by Norwest Mine Services; and . the estimated proven and probable coal reserves of Martiki Coal Corporation and related companies were reviewed and evaluated by Marshall Miller & Associates in October 1998.
155
WHERE YOU CAN FIND MORE INFORMATION AEI Resources and AEI Holding have filed a registration statement on Form S-4 to register the exchange notes to be issued in exchange for the initial notes with the Securities and Exchange Commission. This prospectus is part of that registration statement. As allowed by the SEC's rules, this prospectus does not contain all of the information you can find in the registration statement or the exhibits to the registration statement. You may read and copy the registration statement and exhibits at the SEC's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please call 1-800-SEC-0330 for further information on the public reference rooms. Our registration statement is also available to the public from commercial document retrieval services and at the website maintained by the SEC at http://www.sec.gov. We have not authorized anyone to give you any information or to make any representations about the transactions we discuss in this prospectus other than those contained herein or in the registration statement. If you are given any information or representations about these matters that is not discussed in this prospectus or included in the registration statement, you must not rely on that information. This prospectus is not an offer to sell or a solicitation of an offer to buy securities anywhere or to anyone where or to whom we are not permitted to offer or sell securities under applicable law. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains certain forward-looking statements about our final condition, results of operations, and business. You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates," or similar expressions used in this prospectus. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by us in those forward-looking statements include, among others, the following: .Our ability to pay interest and principal on a very large amount of debt; .Our ability to successfully integrate our recent acquisitions; .Our ability to achieve cost savings from integrating our recent acquisitions; .A significant decline in coal prices and any resulting impact on our operating margins; . Our ability to continue to obtain long-term sales contracts, due to the high level of competition in the coal industry; and . Changes in governmental regulation of the coal industry, including among other things, employee health and safety, limitations on land use, and environmental matters. Because forward-looking statements are subject to risks and uncertainties, actual results differ materially from those expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Prospectus. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this Prospectus. In addition, we don't undertake any responsibility to update you on the occurrence of any unanticipated events that may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this Prospectus.
156
INDEX TO FINANCIAL STATEMENTS
F-1
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of AEI Resources Holding, Inc.: We have audited the accompanying consolidated balance sheets of AEI Resources Holding, Inc. and subsidiaries (see Note 1), as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AEI Resources Holding, Inc. and subsidiaries (see Note 1) as of December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Louisville, Kentucky April 9, 1999
F-3
AEI RESOURCES HOLDING, INC. (Note 1) CONSOLIDATED BALANCE SHEETS As of December 31, 1997 and 1998
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
F-4
AEI RESOURCES HOLDING, INC. (Note 1) CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1996, 1997 and 1998
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-5
AEI RESOURCES HOLDING, INC. (Note 1) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 1996, 1997 and 1998
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-6
AEI RESOURCES HOLDING, INC. (Note 1) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996, 1997 and 1998
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-7
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1997 and 1998 (Dollars in thousands) 1. ORGANIZATIONAL TRANSACTIONS AND BASIS OF PRESENTATION a. Organizational Transactions During November 1997, pursuant to an exchange agreement, the mining assets of Addington Enterprises, Inc. (Enterprises) and 69.8% of the common stock of Bowie Resources, Ltd. (Bowie) were transferred to a newly formed entity, AEI Holding Company, Inc. (AEI HoldCo.--a Delaware company) in exchange for the issuance of AEI HoldCo.'s shares to Enterprises (50%) and Larry Addington (50%). Additionally, AEI HoldCo. purchased Harold Sergent's 7.7% ownership interest in Bowie for $2,000. Enterprises is owned by Larry Addington (80%), Robert Addington (10%) and Bruce Addington (10%), who are brothers. Enterprises retained, in November 1997, certain non-coal mining properties as well as technology related assets which were subsequently disposed in the MTI agreement (see below). The MTI Agreement was between Mining Technologies, Inc., a newly formed subsidiary of AEI HoldCo. (as purchaser) and Enterprises (as seller) for Enterprises' ownership interest in its North American (N.A.) mining technologies division. The purchase price of $51,000 (cash) was delivered at closing on January 2, 1998. The net assets acquired include mining equipment (primarily Highwall Mining Systems), contract mining agreements, real property and the intellectual property for the N.A. Highwall Mining Systems (patents, trademarks, etc.). Enterprises retained ownership of the non-N.A. intellectual property. The November 1997 Exchange and MTI transactions described above were treated for accounting purposes as a transfer of entities and net assets under common control with accounting similar to that of a pooling of interests. Accordingly, the historical cost basis of the underlying assets and liabilities transferred (from Enterprises and Bowie) were carried over from the transferring entity to AEI HoldCo. Due to common control, the MTI cash purchase price of $51,000 paid by AEI HoldCo. to Enterprises was recorded as a charge to equity when paid in January 1998. During May 1998, the owners of AEI HoldCo. (Larry Addington and Enterprises) established a new company, Coal Ventures, Inc. (CVI--a Delaware company) and in June 1998 transferred their shares of AEI HoldCo. to CVI in exchange for similar proportionate CVI shares, thereby making CVI the owner of AEI HoldCo. During August 1998, CVI changed its name to AEI Resources, Inc. (Resources). In addition, during July 1998, the owners of Resources established a new company, AEI Resources Holding, Inc. (ARHI--a Delaware company--collectively, the Company) and transferred their shares of Resources to ARHI in exchange for similar proportionate ARHI shares, thereby making ARHI the owner of Resources. ARHI has no other assets or activities other than the ownership of Resources. b. Basis of Presentation The accompanying financial statements include the historical accounts of ARHI and Subsidiaries as well as its predecessors: Resources, AEI HoldCo. and Enterprises, all under the common control of Larry Addington. The accompanying financial statements also include the purchase accounting and post-acquisition operations of the following significant acquisitions since their date of acquisition: Ikerd-Bandy (October 1997), Leslie Resources (January 1998), Cyprus Subsidiaries (June 1998), Mid-Vol (July 1998), Zeigler (September 1998), Kindill (September 1998) and Martiki (November 1998). See Note 3 for discussion of acquisitions. Significant intercompany transactions and balances have been eliminated in consolidation. Minority interests for 1997 and 1998 have not been recorded due to insignificance or deficit equity. Various allocations and carve-out adjustments have been made in the preparation of the accompanying consolidated financial statements. Such allocations have been recorded to segregate the historical accounts to
F-8
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) reflect the businesses transferred. Management believes that the method used for allocations and carve-out adjustments is reasonable. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL a. Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b. Company Environment and Risk Factors The Company's principal business activities consist of surface and deep mining and marketing of bituminous coal, performance of contract mining for third parties, construction and licensing of mining equipment, as well as leasing and repairing mining equipment. These operations are primarily located in Kentucky, Indiana, Illinois, West Virginia, Tennessee and Colorado. The Company, in the course of its business activities, is exposed to a number of risks including: the possibility of the termination or alteration of coal sales contracts, fluctuating market conditions of coal and transportation costs, competitive industry and overcapacity, changing government regulations, unexpected maintenance and equipment failure, employee benefits cost control, misestimates of proven and probable coal reserves, satisfactory labor relations, loss of key employees, satisfactory resolution of the year 2000 issue and the ability of the Company to obtain financing, necessary mining permits and control of adequate recoverable mineral reserves. In addition, adverse uncontrollable (wet) weather and geological conditions tend to increase mining costs, sometimes substantially. Precipitation is generally highest at most of the Company's mining operations in early spring and late fall. The Company is exposed to risks associated with a highly leveraged organization. Such risks include: increased vulnerability to adverse economic and industry conditions, limited ability to fund future working capital, capital expenditures, business acquisitions or other corporate requirements, possible liquidity problems as well as financing and credit constraints. Management believes it has adequate financing resources (including cash equivalents, cash generated from operations and additional borrowings) to meet its needs in 1999. The Company's current business plans include on-going growth in its coal mining operations, primarily through acquisitions. The Company faces numerous risks in the successful identification, consummation and post-acquisition integration of such acquisitions. c. Inventories Inventories are stated at average cost, which approximates first-in, first-out (FIFO) cost and does not exceed market. Components of inventories consist of coal, deferred overburden and parts and supplies (Note 4). Coal inventories represent coal contained in stockpiles and exposed in the pit. Deferred overburden represents the costs to remove the earthen matter (i.e., overburden) covering the coal seam in surface mining. Costs to remove overburden are accumulated and deferred on a pro-rata basis as overburden is removed and eventually charged to cost of operations when the coal is sold. The calculation of deferred overburden requires significant estimates and assumptions, principally involving engineering estimates of overburden removal and coal seam characteristics.
F-9
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) d. Advance Royalty Payments (current portion included in Prepaid Expenses and Other) The Company is required, under certain royalty lease agreements, to make minimum royalty payments whether or not mining activity is being performed on the leased property. These minimum payments are recoupable once mining begins on the leased property. The Company capitalizes these minimum royalty payments and amortizes the deferred costs once mining activities begin or expenses the deferred costs when the Company has ceased mining or has made a decision not to mine on such property. Included in prepaid expenses and other is $3,491 and $8,669 for 1997 and 1998, respectively, relating to advanced royalties. e. Net Assets Held for Sale At the time of the Zeigler acquisition, the Company identified various Zeigler items which it would resell including the Wyoming coal mines (within Triton Coal Company) and non-coal mining activities. Net assets held for sale as of December 31, 1998 in the accompanying financial statements includes net assets related to Zeigler's power marketing and fuel technology. On December 14, 1998, the Company sold all issued and outstanding stock of its subsidiary, Triton Coal Company for $275,000 (the Triton Disposition). Prior to the closing of the Triton Disposition, all assets and liabilities of Triton which were not related to the Wyoming Mines were transferred to another subsidiary of the Company. The Company has agreed to provide certain transition services as well as temporary credit support via letters of credit (Note 7b) to the purchaser of Triton following the closing. Net proceeds from the Triton Disposition were used to partially retire the remaining amount due on the bridge financing facility for the Zeigler acquisition (Note 7). On December 18, 1998, the Company sold the Pier IX and Shipyard River Terminals and related assets (the Pier Disposition) for an aggregate purchase price of $35,000. Through an energy-trading subsidiary, Zeigler began entering into power and gas forward contracts and options for trading purposes in 1997. These forward contracts and options were recorded at their estimated fair market values by the Company at the date of purchase. At December 31, 1998, open net contract and option positions were not material and did not represent significant credit related exposure. The net assets held for sale balance is $3,038 at December 31, 1998 and is included in prepaid expenses and other current assets. The Company assigned amounts to assets held for sale based on expected sale proceeds as well as earnings, advances and allocated interest during the holding period prior to disposal. The Company expects the remaining assets held for sale to be disposed during 1999. No gain or loss was recorded on the Triton Disposition and Pier Disposition. A recap of net assets held for sale for 1998 follows:
f. Depreciation, Depletion and Amortization Property, plant and equipment are recorded at cost, including construction overhead and interest, where applicable. Expenditures for major renewals and betterments are capitalized while expenditures for maintenance
F-10
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and repairs are expensed as incurred. Depreciation, depletion and amortization are provided using either the straight-line or units of production method with estimated useful lives under the straight-line method comprising substantially the following ranges:
Mineral reserves and mine development costs (included in property, plant and equipment) are amortized using the units-of-production method, based on estimated recoverable reserves. Coal sales contract related costs are amortized as tons are delivered, based on contracted tonnage requirements. Debt issuance costs are being amortized using the effective interest method, over the life of the related debt, or using the straight-line method, over the life of the related debt, if the result approximates the effective interest method. g. Restricted Cash (Included in Other Non-Current Assets) The Company pays amounts as required by various royalty agreements. Certain of these agreements have been disputed by third parties, requiring that cash be paid into an escrow account until the rightful recipient is determined. Included in other non-current assets is $93 and $843 for 1997 and 1998, respectively, relating to restricted cash. h. Coal Mine Reclamation and Mine Closure Costs The Company estimates its future cost requirements for reclamation of land where it has conducted surface and deep mining operations, based on its interpretation of the technical standards of regulations enacted by the U.S. Office of Surface Mining, as well as state regulations. The Company accrues for the cost of final mine closure and related exit costs over the estimated useful mining life of the developed property or, if purchased, at the date of acquisition. These costs relate to reclaiming the pit and support acreage at surface mines and sealing portals at deep mines. Other costs common to both types of mining are related to reclaiming refuse and slurry ponds as well as holding period and related termination/exit costs. The Company expenses the reclamation of current mine disturbance which is performed prior to final mine closure. The establishment of the final mine closure reclamation liability and the current disturbance is based upon permit requirements and requires various significant estimates and assumptions, principally associated with cost and production levels. Annually, the Company reviews its end of mine reclamation and closure liability and makes necessary adjustments, including mine plan and permit changes and revisions to cost and production levels to optimize mining and reclamation efficiency. The economic impact of such adjustments is generally recorded to cost of coal sales prospectively as remaining tons are mined. Also, as described in Note 2l., when a mine life is shortened due to change in mine plan, mine closing obligations are accelerated and the related accrual is increased accordingly. Although the Company's management believes it is making adequate provisions for all expected reclamation and other costs associated with mine closures, future operating results would be adversely affected if such accruals were later determined to be insufficient. End of mine reclamation and closure expense for 1996, 1997 and 1998 was $596, $2,196 and $18,188, respectively.
F-11
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) i. Income Taxes For 1996 and part of 1997 (Note 8), Enterprises and Bowie were S corporations under the Internal Revenue Code and similar state statutes. As a result, Enterprises and Bowie were not subject to income taxes and their taxable income or loss was reported in the stockholders' individual tax returns. Accordingly, the historical net income (loss) presented in the accompanying financial statements during the S corporation periods is exclusive of an income tax provision (See Notes 8 and 21). The provision for income taxes includes the change in tax status matters as described above plus federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities. The Company records income taxes under the liability method. Under this method, deferred income taxes are recognized for the estimated future tax effects of differences between the tax basis of assets and liabilities and their financial reporting amounts as well as net operating loss carryforwards and tax credits based on enacted tax laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. j. Revenue Recognition Most of the Company's revenues have been generated under long-term coal sales contracts with electric utilities, industrial companies or other coal-related organizations, primarily in the eastern United States. Revenues are recognized on coal sales in accordance with the sales agreement, which is usually when the coal is shipped to the customer and title is passed. Advance payments received are deferred and recognized in revenue as coal is shipped. The Company also rents and sells equipment and provides repair and contract mining services, and the revenue from such rental, sale and service is recognized when earned. Revenue from the construction of mining equipment is recognized on a percentage of completion basis. The Company grants credit to its customers based on their creditworthiness and generally does not secure collateral for its receivables. The allowance for doubtful accounts for 1997 and 1998 is $0 and $2,489, respectively. Historically, accounts receivable write-offs have been insignificant. k. Stockholders' Equity (Deficit) The 1996 and 1997 historical owners' equity accounts (retained earnings (deficit) and additional capital) for legal entities (Bowie) which have been carried over from the transferor under the exchange agreement (Note 1) have remained unchanged as presented within the accompanying consolidated statements of stockholders' equity (deficit). The businesses transferred from Enterprises have operated as divisions and, accordingly, the 1996 and 1997 historical equity account changes (earnings and losses and owners' contributions and distributions) have been presented within additional capital in the accompanying consolidated statements of stockholders' equity (deficit) for the pre-transfer period. Prior to the formation of Resources in May 1998, the common stock activity presented in the accompanying consolidated statement of stockholders' equity (deficit) represents that of the predecessor company AEI HoldCo. The common stock activity in July 1998 relates to ARHI. As described in Note 8, in connection with the consummation of the November 1997 exchange agreement, the mining businesses transferred from Enterprises required that deferred taxes be recorded by AEI HoldCo. Because a portion of the mining assets transferred from Enterprises were stepped up for tax purposes, but not book (similar to a taxable pooling), the resulting deferred tax benefit of approximately $5,500 was recorded in November 1997 with a corresponding increase in additional capital.
F-12
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As described in Note 1a, on January 2, 1998, AEI HoldCo. made a payment of $51,000 for the purchase of MTI which was recorded as a charge to equity in January 1998. In addition, because the tax basis of the MTI net assets transferred were stepped up for tax purposes, but not book (similar to a taxable pooling), the resulting deferred tax benefit of $10,000 was recorded in January 1998 with a corresponding increase in equity. l. Asset Impairments and Accelerated Mine Closing Accruals In certain situations, expected mine lives are shortened because of changes to planned operations. When that occurs and it is determined that the mine's underlying costs are not recoverable in the future, reclamation and mine closing obligations are accelerated and the mine closing accrual is increased accordingly. Also, to the extent that it is determined that asset carrying values will not be recoverable during a shorter mine life, a provision for such impairment is recognized. The Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in prior years. SFAS No. 121 expanded the Company's criteria for loss recognition, and provides methods for both determining when an impairment has occurred and for measuring the amount of the impairment. SFAS No. 121 requires that projected future cash flows from use and disposition of all the Company's assets be compared with the carrying amounts of those assets. When the sum of projected cash flows is less than the carrying amount, impairment losses are recognized. m. Employee Benefits Postretirement Benefits Other Than Pensions--As prescribed by SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pension, the Company accrues, based on annual independent actuarial valuations, for the expected costs of providing postretirement benefits other than pensions, which are primarily medical benefits, during an employee's actual working career until vested. Workers Compensation and Black Lung Benefits--Certain of the Company's subsidiaries are liable under federal and state laws to pay workers compensation and pneumoconiosis (black lung) benefits to eligible employees, former employees and their dependents. The Company is self-insured for significant federal and state workers compensation and black lung benefits. The remaining portion of workers compensation and black lung claims are covered by state insurance funds into which the Company pays premiums. The accrual for self-insured workers compensation and black lung is adjusted to equal the present value of future claim payments, determined based on outside actuarial valuations performed annually. Postemployment Benefits--The Company provides certain postemployment benefits, primarily long-term disability and medical benefits, to former and inactive employees and their dependents during the time period following employment but before retirement. The Company accrues the discounted present value of expected future benefits, based on annual outside actuarial valuations. n. Stock-Based Compensation The Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which the Company has adopted. This standard defines a fair value method of accounting for stock options and similar equity instruments. Pursuant to this standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the financial statements pro forma net income as if the Company had applied SFAS No. 123. The accounting requirements of SFAS No. 123 are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has elected to account for such transactions under APB No. 25.
F-13
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) o. Reclassifications
Certain reclassifications of prior year amounts were made to conform with the
current year presentation with no effect on previously reported net income
p. Statements of Cash Flows For purposes of the statements of cash flows, the Company considers investments having maturities of three months or less at the time of the purchase to be cash equivalents. Supplemental disclosure:
The 1997 Statement of Cash Flows is exclusive of non-cash deferred tax asset and equity increase of $5,515, non-cash property additions of $2,253, non-cash capitalized loan fees of $238, non-cash transfers of inventory items to development costs of $1,062 and settlement of a note (included in other assets) for property and mine development work valued at $1,220. The 1998 statement of cash flows is exclusive of non-cash deferred tax asset and equity increase of $10,000. 3. ACQUISITIONS The following significant acquisitions in Notes 3a through 3g have each been accounted for as a purchase, and their results of operations have been included with that of the Company since the date of acquisition. a. Ikerd-Bandy Co., Inc. In October 1997, Enterprises acquired all of the capital stock of Ikerd-Bandy Co., Inc., a coal mining business with operations in eastern Kentucky, for the purchase price of approximately $5,300 (including $300 in related fees and expenses) plus the assumption of approximately $5,600 in debt. b. Leslie Resources In January 1998, AEI HoldCo. acquired all the capital stock of Leslie Resources, Inc. and Leslie Resources Management, Inc., (collectively, Leslie Resources) a coal mining business with operations in eastern Kentucky, for the purchase price of $12,000 (including $300 in related fees and expenses), plus the assumption of approximately $11,100 in debt. c. Cyprus Subsidiaries On June 29, 1998, pursuant to a May 28, 1998 stock purchase and sale agreement with Cyprus Amax Coal Company (Cyprus), CVI acquired various Cyprus Subsidiaries, a coal mining business with operations in Kentucky, West Virginia, Indiana and Tennessee. The purchase price was $98,000 plus a working capital adjustment as well as payments for purchased and leased equipment and a royalty owed to Cyprus for future production. d. Mid-Vol On July 10, 1998, CVI acquired the capital stock of Mid-Vol Leasing, Inc., Mega Minerals, Inc. and Premium Processing, Inc. (collectively, Mid-Vol), a coal mining business with operations in West Virginia for the
F-14
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) purchase price of approximately $21,200 (including $400 in related fees and expenses) plus the assumption of $15,000 in debt as well as production royalty payments. e. Zeigler On August 5, 1998, Resources (via a subsidiary) submitted a cash tender offer to acquire all of the common stock of Zeigler Coal Holding Company (Zeigler), a diversified publicly held coal mining and energy business with operations primarily in Kentucky, West Virginia, Ohio, Illinois and Wyoming. The cash purchase price for the stock was approximately $600,000, and Resources assumed approximately $255,000 of Zeigler's debt. This acquisition closed on September 2, 1998. Certain acquired assets were held for resale as discussed in Note 2e. f. Kindill On September 2, 1998, the Company acquired the capital stock of Kindill Holding, Inc. and Hayman Holdings, Inc. (collectively Kindill) (a related party) for the purchase price of $11,000 plus assumption of approximately $50,000 of Kindill's debt. Kindill is a coal mining business with operations in Indiana. g. Martiki On November 6, 1998, the Company acquired the capital stock of Martiki Coal Corporation (Martiki), a subsidiary of MAPCO Coal, Inc. for $32,000. Martiki is a coal mining business with operations in eastern Kentucky. The following unaudited pro forma information for the periods shown below gives effect to the aforementioned acquisitions as if they had occurred at the beginning of each period:
The unaudited pro forma information assumes that the Company owned the aforementioned acquisitions at the beginning of the periods presented and includes adjustments for depreciation, depletion and amortization, interest expense and an inventory adjustment to conform to the Company's accounting policies. The unaudited pro forma financial data is presented for information purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had such acquisitions been consummated at the beginning of these periods, and is not intended to be a projection of future results. The purchase accounting entries recorded from the acquisitions noted in 3c through 3g above are preliminary and are expected to be finalized in 1999. Upon acquisition of Zeigler, the Company assumed a transition and severance plan covering up to approximately 500 former Zeigler employees. Subject to certain conditions, employees will receive severance payments if terminated up to one year after acquisition (through September 1, 1999). Included in other current accruals at December 31, 1998 are $18,216 of future payments anticipated under this plan. In 1998, the Company incurred costs of $3,846 which reduced the accrual.
F-15
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. INVENTORIES As of December 31, 1997 and 1998, inventories consisted of the following:
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including mineral reserves and mine development and contract costs, at December 31, 1997 and 1998 are summarized by major classification as follows:
Included in property, plant and equipment is $24,721 for 1997 and $24,458 for 1998 related to development and construction projects for which depreciation, depletion and amortization have not yet commenced. The Company reviews realization of these projects on a periodic basis. 6. ACCRUED EXPENSES AND OTHER Accrued expenses and other as of December 31, 1997 and 1998 consisted of the following:
F-16
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. DEBT a. Long-Term Debt and Capital Leases Long-term debt and capital leases as of December 31, 1997 and 1998 consisted of the following:
Principal maturities of long-term debt and capital leases as of December 31, 1998 are as follows:
Upon early extinguishment in 1997 of the Company's previously outstanding credit facility and bridge financing, the Company expensed as an extraordinary item in November 1997 approximately $1,600 of prepayment penalties and bridge financing costs and $571 of deferred debt issuance costs. In connection with arranging the November 1997 financing transactions, the Company paid a fee of $4,375 to a related party. b. Senior Credit Facility The Senior Credit Facility term loan and revolver (collectively the "Credit Facility") are with UBS AG (an affiliate of Warburg Dillon Read LLC), as administrative agent and a syndicate of other lending institutions (lenders). The Credit Facility consists of a Term Loan A Facility of $325,000 (maturing through 2003), a Term Loan B Facility of $250,000 (maturing through 2004) (the "term loan facilities") and a $300,000 senior secured revolving credit facility (Revolver), maturing through 2003. The revolver includes a $225,000 sublimit for the issuance of letters of credit. Interest is calculated at the option of the Company based on LIBOR or
F-17
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ABR (alternative base rate) plus the applicable "spread", as defined. The applicable "spread" shall be determined pursuant to a formula based on the Company's financial performance. The ABR is the higher of the Federal Funds effective rate plus 0.5% and the Prime Rate. As of December 31, 1998, the average interest rates were as follows: Term loan A (9.65%), Term Loan B (9.91%) and Revolver (9.49%). The Credit Facility is collateralized primarily by capital stock of the Company and its subsidiaries, along with all accounts receivable; inventory; property, plant and equipment; intangibles; contract rights and other personal and real property of the Company. The Company and most of its subsidiaries have guaranteed the Credit Facility. The Credit Facility also contains various financial covenants which, among other things, limits additional indebtedness, dividend and other restricted payments, affiliate transactions, mergers and capital expenditures as well as meeting certain financial ratios including, but not limited to interest coverage, minimum net worth and maximum leverage ratio, all as defined. In addition, the credit facilities are required to be prepaid with either 75% of annual Excess Cash Flow (or 50%, depending on leverage ratio), as defined, 100% of proceeds from the incurrence of additional debt, 100% of proceeds from asset sales or dispositions above certain defined thresholds or 50% of the net proceeds from the issuance of equity securities. There was no such required pre-payment during 1998. As of December 31, 1998, the Company has $75,000 in outstanding borrowings under the Revolver. In addition, the Company has letters of credit in the amount of $178,047 issued under the Revolver. These letters of credit cover the following:
The amount available for borrowing under the revolver at December 31, 1998 was $46,953. On June 29, 1998, the Company replaced a former credit facility and, consequently, expensed as an extraordinary item in June 1998 approximately $424 of related deferred debt issuance costs, net of a tax benefit of $283. At December 31, 1997, there were no borrowings under the former credit facility. c. 10.5% Senior Notes and 11.5% Senior Subordinated Notes On December 14, 1998, Resources and AEI HoldCo. co-issued $200,000 of 10.5% Senior Notes due 2005 (Senior Notes). These 10.5% Senior Notes were exchanged for previously issued $200,000 10% Senior Notes of AEI HoldCo. due 2007. As part of the $200,000 Senior Notes exchange, the old indenture was modified to eliminate substantially all of the covenants and certain related definitions and events of default. Warburg Dillon Read LLC was the dealer manager of the Senior Notes exchange. Also on December 14, 1998, Resources issued $150,000 of 11.5% Senior Subordinated Notes due 2006 (Subordinated Notes). Warburg Dillon Read LLC was the initial purchaser of the Subordinated Notes. The Senior Notes mature in their entirety on December 15, 2005 and the Subordinated Notes mature in their entirety on December 15, 2006. The Senior Notes and Subordinated Notes are general, unsecured obligations of the issuers. Interest is payable on June 15 and December 15 of each year. The Company has the option to redeem the Senior Notes and Subordinated Notes on or after December 15, 2002, at redemption prices ranging
F-18
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) from 105.75% in 2002 to 100% in 2005. Before December 15, 2002, the Company may redeem the Senior Notes and Subordinated Notes at the face amount plus accrued and unpaid interest, liquidated damages, if any, and an applicable "make whole premium" of up to $35,446 and $32,109, respectively. Upon a change in control (as defined), the Company will be required to make an offer to purchase all outstanding Senior Notes and Subordinated Notes at 101% of the principal amount. The Senior Notes and Subordinated Notes are jointly and severally guaranteed on a senior unsecured basis by ARHI and each of the Company's current and future domestic majority-owned subsidiaries, other than Yankeetown Dock Corporation. In addition to containing various restrictive financial covenants, the Senior Notes and subordinated Note Indentures will restrict, among other things, additional indebtedness, issuance of preferred stock, dividend payments, mergers, sale of subsidiaries and assets and affiliate transactions. The Company has agreed to file a registration statement under the U.S. Securities Act for the Senior Notes and Subordinated Notes which would provide for their resale. If such registration statement is not filed or declared effective within the time periods allotted in the Indentures (such effective date being March 14, 1999 for the Subordinated Notes), the Company will be required to pay liquidated damages to Senior Notes and Subordinated Notes holders. For the Senior Notes, the Company has agreed to pay each noteholder liquidated damages of 20c per one thousand dollars principal amount (aggregating to $40 per week) per week commencing December 8, 1998 for 90 days. If the registration statement is not declared effective by March 8, 1999, then the amount of liquidated damages payable weekly will increase by an additional 5c per one thousand dollars principal amount for each 90-day period up to a maximum of 50c payable weekly per one thousand dollars principal amount. For Subordinated Notes, the Company will be required to pay liquidated damages commencing March 14, 1999 at a weekly rate of 5c per one thousand dollars principal amount (aggregating to $7.5 per week) for the first 90 days and increasing 5c each 90 days thereafter until up to a maximum of 50c payable weekly per one thousand dollars principal amount. The Company has filed an initial registration statement with the Securities and Exchange Commission on February 12, 1999; however, it is uncertain when or if this filing will become effective. d. Bridge Facilities The Company has funded the acquisitions of Cyprus Subsidiaries, Mid-Vol, Kindill and Zeigler (see Note 3) with short-term (bridge) financing arranged by UBS AG, an affiliate of Warburg Dillon Read LLC. The bridge financing facility for the Cyprus Subsidiaries and Mid-Vol acquisitions was for $200,000. The bridge financing facility for the Zeigler and Kindill acquisitions was for $600,000. As of December 31, 1998, the Cyprus/Mid-Vol bridge was retired and only $10,000 of the Zeigler bridge facility remained outstanding, which the Company plans to repay in 1999. In connection with the extinguishment of the bridge facilities, the Company recorded in 1998 an extraordinary loss on extinguishment of $9,772, net of a tax benefit of $6,518. The Company has also committed to issue common equity shares to UBS AG (aggregating from 2.5% to 10% of the total outstanding common equity), under certain circumstances, in the event all outstanding loans under the bridge loan agreements are not repaid prior to April 30, 1999. The Company does not believe these agreements will result in UBS AG acquiring any equity interest in the Company. Nothing has been recorded in the December 31, 1998 financial statements related to this matter as the Company believes no significant amount of consideration was provided to UBS AG under these agreements. e. Industrial Revenue Bonds The Company has industrial revenue bonds which are floating rate obligations issued by the Peninsula Ports Authority of Virginia ($115,000) and Charleston County, South Carolina ($30,800) (collectively, Zeigler IRBs).
F-19
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Both obligations are backed by letters of credit issued under the Company's revolver (Note 7b). The principal of the obligation by the Peninsula Ports Authority of Virginia is due in one lump-sum payment on May 1, 2022, and the principal of the obligation by Charleston County, South Carolina is due in one lump-sum payment on August 1, 2028. The Zeigler IRBs are not secured by any assets of the Company. Interest on these obligations is variable and payable monthly. The weighted-average interest rate for these borrowings was 3.61% as of December 31, 1998. Refer to Note 18c for subsequent refinancing of the Zeigler IRBs. f. Seller Notes Payable In connection with the acquisitions of Ikerd-Bandy, Leslie Resources, Cyprus Subsidiaries and Mid-Vol (Note 3), the Company entered into notes payable to the sellers of these businesses (Seller Notes). The Cyprus Subsidiaries Sellers Notes are secured and the other Seller Notes are unsecured and bear interest (or have been discounted) at rates ranging from 5% to 10%. These Seller Notes also mature from 2002 to 2004. 8. INCOME TAXES As discussed in Note 2i., during April 1997 Bowie's S corporation status was terminated. Upon such termination, Bowie initially recorded a net deferred tax liability of $1,600 with an increase to income tax provision for the differences in book and tax bases in assets and liabilities. In addition, during November 1997, the mining businesses transferred from Enterprises (see Note 1, as an S corporation) to the Company (as a C corporation) initially recorded a net deferred tax liability of $17,963 with an increase to income tax provision for the differences in book and tax bases in assets and liabilities. Presented below are income tax disclosures as of and for the years ended December 31, 1997 and 1998. Prior to 1997, the Company operated as an S corporation, and no corporate income taxes were recorded. The provision (benefit) for income taxes is comprised of the following:
The following table presents the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% to the 1997 and 1998 net loss before income taxes.
F-20
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Significant components of the Company's deferred tax assets and liabilities as of December 31, 1997 and 1998 are summarized as follows:
Certain subsidiaries have carryforwards for net operating losses (NOL) of approximately $20,000 which may only be used by these subsidiaries, and if not used will expire between 2011 and 2018. NOL carryforwards may also be limited under certain ownership changes. The valuation allowance was recorded in purchase accounting due to uncertainties in realization using the more likely than not methodology. 9. EMPLOYEE BENEFITS Employee benefits at December 31, 1998 is summarized as follows:
a. Postretirement Benefits Other than Pensions Prior to the Cyprus Subsidiaries acquisition on June 29, 1998, the Company did not have any defined benefit pension plans, postretirement or postemployment benefits or UMWA Combined Benefit Fund obligations. In conjunction with certain of the acquisitions described in Note 3, the Company acquired, or agreed to put in place, benefit plans providing defined benefits to certain non-union employees and post-retirement healthcare and life insurance to eligible union employees.
F-21
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's non-contributory pension plans cover certain of its non-union employees and union employees at one of the Company's acquired mines. Benefits are generally based on the employee's years of service and compensation during each year of employment. The Company's funding policy is to make the minimum payment required by the Employee Retirement Income Security Act of 1974. There were no minimum contributions required in 1998. Summaries of the changes in the benefit obligations, plan assets (consisting principally of common stocks and U.S. government and corporate obligations) and funded status of the plans are as follows:
The expense and liability estimates can fluctuate by significant amounts based upon the assumptions used by the actuaries. If the healthcare cost trend rates were increased by one percent in each year, the accumulated
F-22
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) postretirement benefit obligation would increase by $60,200 or 15.4% as of December 31, 1998. The effect of this change on the 1998 expense accrual would be an increase of $4,500 or 45%. b. Multi-Employer Pension and Benefits Plans UMWA Pension Plan--Certain of the Company's recently acquired subsidiaries are required under their respective contracts with the UMWA to pay amounts based on hours worked to the 1974 UMWA Pension Plan and Trust, a multi-employer pension plan covering all employees who are members of the UMWA. The accompanying consolidated statements of operations include $348 of expense in 1998, applicable to the plan. The Employee Retirement Income Security Act of 1974 (ERISA) as amended in 1980, imposes certain liabilities on contributors to multi-employer pension plans in the event of a contributor's complete or partial withdrawal from the plan. The withdrawal liability would be calculated based on the contributor's proportionate share of the plan's unfunded vested liabilities. c. UMWA Combined Benefit Fund The Company provides healthcare benefits to eligible retirees and their dependents. Retirees who were members of the United Mine Workers of America (UMWA) and who retired on or before December 31, 1975 received these benefits from multi-employer benefit plans. The Company contributed to these funds based on the number of its retirees in one of the funds and based on hours worked by current UMWA members for the other fund. Current and projected operating deficits of these trusts led to the passage of the Coal Industry Retiree Health Benefit Act of 1992 (the Coal Act). The Coal Act established a new multi- employer benefit trust that will provide healthcare and life insurance benefits to all beneficiaries of the earlier trusts who were receiving benefits as of July 20, 1992. The Coal Act provides for the assignment of beneficiaries to their former employers and any unassigned beneficiaries to employers based on a formula. Based upon an independent actuarial valuation, the Company estimates the amount of its obligation (discounted at 7.25%) under the Coal Act to be approximately $69,356 as of December 31, 1998. The Company recorded expenses related to the Coal Act of $0, $0 and $1,919 for 1996, 1997 and 1998, for 1996, 1997 and 1998, respectively. d. Workers Compensation and Black Lung The operations of the Company are subject to the federal and state workers' compensation laws. These laws provide for the payment of benefits to disabled workers and their dependents, including lifetime benefits for black lung. The Company's subsidiary operations are either fully insured or self-insured for their workers compensation and black lung obligations. The actuarially determined liability for self-insured workers compensation and black lung benefits is based on a 7.25% discount rate and various other assumptions including incidence of claims, benefit escalation, terminations and life expectancy. The annual black lung expense consists of actuarially determined amounts for self-insured obligations plus the premiums paid to the state insurance funds. The estimated amount of discounted obligations for self- insured workers compensation and black lung claims plus an estimate for incurred but not reported claims is $93,533 as of December 31, 1998. The Company recorded self-insured expenses related to workers compensation and black lung of $0, $0 and $2,470, for 1996, 1997 and 1998, respectively. e. Post-Employment Benefits Other than Pensions The Company has a long-term disability plan which provides for three years of disability benefits and for three years of continuation in the medical plan. Claimants on disability at January 1, 1999 will receive three additional years of indemnity and medical benefits, at which point further eligibility will end. The actuarially determined liability for long-term disability benefits is based on a 7.25% discount rate and various other
F-23
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) assumptions including life expectancy. The present value of the long-term disability claimants is $4,452 at December 31, 1998. The Company recorded expenses related to long-term disability benefits of $0, $0 and $334 for 1996, 1997 and 1998, respectively. f. 401(k) Plans The Company and certain subsidiaries sponsor savings and long-term investment plans for substantially all employees other than employees covered by the contract with the UMWA. Some of the plans matched the voluntary contributions of participants up to a maximum contribution based upon a percentage of a participant's salary with an additional matching contribution possible at the Company's discretion. The expense for 1998 under these plans was $401. 10. COMMITMENTS AND CONTINGENCIES a. Coal Sales Contracts and Contingency As of December 31, 1998, the Company had commitments under 55 long-term sales contracts to deliver scheduled base quantities of coal annually to 34 customers. The contracts expire from 1999 through 2010, with the Company contracted to supply a minimum of approximately 226 million tons of coal over the remaining lives of the contracts at prices which are at or above market. The Company also has commitments to purchase certain amounts of coal to meet its sales commitments. These purchase amounts are insignificant to sales commitments. Certain of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on changes in specified production costs. Larry Addington has guaranteed the Company's obligations under one of the coal sales contracts. Under a ten-year contract dated July 1, 1998, the Company is required to sell coal from its Bowie mine to TVA. The Company cannot satisfy the delivery requirements in full from its Bowie mine if it is unable to lease certain additional reserves located on federal land in Colorado. The failure to do so could materially adversely impact the profitability of the Bowie mine. The Company is in process of procuring the necessary leases and permits, however, it may encounter resistance in its efforts. b. Leases The Company has various operating and capital leases for mining, transportation and other equipment. Lease expense for the years ended December 31, 1996, 1997 and 1998 was approximately $6,000, $9,600 and $30,128 (net of amount capitalized in mine development cost of $1,800 and $463 in 1997 and 1998, respectively). Property under capital leases included in property, plant and equipment in the accompanying balance sheets at December 31, 1997 and 1998 was approximately $21,400 less accumulated depreciation of approximately $5,810 and $7,400, respectively. Depreciation of assets under capital leases is included in depreciation expense. The Company also leases coal reserves under agreements that call for royalties to be paid as the coal is mined. Total royalty expense for the years ended December 31, 1996, 1997 and 1998 was approximately $11,200, $13,600 and $61,700, respectively. Certain agreements require minimum annual royalties to be paid regardless of the amount of coal mined during the year. However, such agreements are generally cancelable at the Company's discretion. The assets of the Bowie mine are held as collateral for one of these agreements.
F-24
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Approximate future minimum lease and royalty payments are as follows:
Included in the above operating lease commitments are $47,034 to a related party. c. Legal Matters The Company is named as defendant in various actions in the ordinary course of its business. These actions generally involve disputes related to contract performance, property boundaries, mining rights, blasting damages, personal injuries and royalty payments, as well as other civil actions that could result in additional litigation or other adversary proceedings. Certain actions are described as follows: In connection with the acquisition of the Cyprus Subsidiaries (Note 1), the Company became potentially liable under a suit filed in the Circuit Court of Perry County, Kentucky in 1996 by Joseph D. Weddington and Kentucky Land & Exploration Company ("Kentucky Land"). Kentucky Land has asserted claims to approximately 1,425 acres of property upon which the Company mines coal and is claiming substantial damages. Based on a prior federal appellate court decision related to a similar claim by different plaintiffs, the Company believes that it is likely to prevail. The Company does not believe the ultimate outcome of this matter will result in a material adverse effect on the financial position or results of operations of the Company. A subsidiary of Pittston Minerals Group, Inc. has made claims for indemnification from the Company under the terms of a sale agreement between a predecessor of the Company (as seller) and the Pittston subsidiary. The claimed indemnification covers a number of items, including allegedly assumed liabilities, alleged failure to transfer specific licenses, assets and permits and alleged non-compliance with certain agreements, applicable laws and permits. The Company is in process of investigating and negotiating the claims with the Pittston subsidiary. Many of the claims have been resolved without any payment by or liability to the Company. To the Company's knowledge, no lawsuit has been filed or otherwise threatened by the Pittston subsidiary against the Company. The Company intends to defend these claims vigorously, and at this time it is not possible to predict the outcome of the claims. However, the Company believes that the liability arising from such claims would not have a material adverse effect on the financial position or results of operations of the Company. In October 1998, Cyprus Amax Coal Company filed a complaint against the Company alleging that under the terms of the purchase agreement, the Company is responsible for certain long-term disability coverage to current and former employees of the acquired Cyprus subsidiaries. The Company contends that the obligations in question were retained by Cyprus and intends to defend the claims vigorously. At this time, it is not possible
F-25
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) to determine the likely outcome of the claim, but the Company does not believe the ultimate outcome of this matter will result in a material adverse effect on the financial position or results of operations of the Company taken as a whole. Through December 31, 1998, the Company is in arrears in delivering coal under a certain coal supply contract with TVA. The Company intends to prospectively ship all tons for which it is currently in arrears. The Company does not believe the ultimate outcome of this matter will result in a material adverse impact upon the financial position or results of operations of the Company. In August 1998, the Company settled a claim by Robert C. Billips, d/b/a Peter Fork Mining Company for an initial cash payment of $150 and payments over the next 49 years estimated at a present value of $250. The Company has a litigation accrual to cover the settlement. While the final resolution of any matter may have an impact on the Company's financial results for a particular reporting period, management believes that the ultimate disposition of these matters will not have a materially adverse effect upon the financial position or results of operations of the Company. d. Commissions The Company has various Sales and Agency Agreements with third parties, whereby the Company pays a $.10-$2.00 per ton commission on various coal sales agreements. The costs are expensed as the coal is delivered, and in 1998 the Company paid approximately $3,900 in commissions. e. Addcar(TM) Highwall Mining System Lease Agreement Effective May 1998, the Company entered into an agreement with Independence Coal Company, Inc. (Independence) whereby the Company (as lessor) shall lease an Addcar(TM) Highwall Mining System to Independence (as lessee) for a term of 24 months from initial set up or until all mineable coal from the lessee's Twilight mine is recovered, for $220 per month subject to various terms and conditions. Additionally, effective September 1998 the Company leased to Independence a second Addcar(TM) Highwall Mining System and agreed to lease a third System in January, 1999. Each lease is for two years and requires a $4,125 prepaid rental payment upon delivery, and at the lessee's option each may be extended for a third year with a rental prepayment of $1,547. Additionally, a monthly rental payment of $37 for each system is payable by the lessee. Payment terms are subject to various terms and conditions. f. Environmental Matters Based upon current knowledge, the Company believes that it is in material compliance with environmental laws and regulations as currently promulgated (also, see Note 2h). However, the exact nature of environmental control problems, if any, which the Company may encounter in the future cannot be predicted, primarily because of the increasing number, complexity and changing character of environmental requirements that may be enacted by federal and state authorities. g. Performance Bonds The Company has outstanding performance bonds of approximately $750,000 as of December 31, 1998, to secure reclamation, workers compensation and other performance commitments.
F-26
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) h. Employment Agreements The Company has entered into employment agreements with individuals for various officer positions. These agreements expire through February 2003 and contain termination benefits and other matters. i. Collective Bargaining Agreements Approximately 32% of the Company's coal employees are affiliated with unions. The Company has several collective bargaining agreements with the United Mine Workers of America (UMWA). These agreements expire from 1999 through 2002. j. Indemnifications and Other Pursuant to various stock and asset purchase agreements with sellers, the Company has granted indemnification for performance guarantees made by certain sellers relating to mineral lease obligations and employee benefits. The Company believes no significant obligation will result relating to such indemnifications. Pursuant to the purchase agreement for the Cyprus Subsidiaries (Note 3c), the Company has committed to pay Cyprus up to $25,000 in satisfaction of its royalty obligations in the event the Company receives an equity investment of $75,000 or more. k. The Year 2000 Issue (Unaudited) The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure, which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting an entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 11. STOCK OPTION PLAN During 1998, the Company's Board of Directors adopted a Stock Option Plan (the Option Plan). A total of 75,000 shares of Common Stock are reserved for issuance upon exercise of options granted under the Option Plan. The Option Plan is administered by the Benefits Committee of the Board of Directors which determines the terms of the options granted including the exercise price, number of shares subject to the option and exercisability. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plan. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the Option Plan. The following summarizes the stock option transactions under the Option Plan for the year ended December 31, 1998:
F-27
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock options are granted with exercise prices which are equal to the market value of the stock on the date of grant, have a maximum term of ten years and vest over periods ranging from three months to five years. In February 1999, an option holder exercised options to purchase 3,100 shares of the Company. The weighted average fair value at date of grant for options granted during 1998 was $34.46 per option. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted-averaged assumptions:
A summary of stock options outstanding at December 31, 1998 follows:
As previously discussed, the Company accounts for the Option Plan in accordance with APB No. 25 under which no compensation expense has been recognized for stock option awards. Had compensation cost for the Company's stock option plan been determined on the fair vale at the grant date for awards for the year ended December 31, 1998 consistent with the provisions of SFAS No. 123, the Company's net income (loss) would have been reduced to the pro forma amounts indicated below:
12. OTHER SUBSIDIARY MATTERS a. Bowie Resources, Ltd. In April 1997, Bowie's shareholders (Larry Addington (90%) and Harold Sergent (10%)) collectively sold 22.5% of their shares of Bowie common stock to Mitsui Matasushima (Mitsui). In November 1997, in connection with the exchange agreement described in Note 1, the Company purchased a 7.7% ownership interest in Bowie from Harold Sergent for $2,000, bringing the Company's total interest in Bowie to 77.5%. On September 2, 1998, the Company reacquired the 22.5% minority interest in Bowie for the purchase price of $11,500. This acquisition was accounted for as a purchase. b. Employee Benefits Management, Inc. Employee Benefits Management, Inc. (EBMI), a renamed subsidiary of the Company, was recapitalized on December 11, 1998 in the State of Delaware whereby it authorized 1,000 shares of Class A stock and 176
F-28
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) shares of Class B stock. The Class A stock was issued on December 11, 1998 to Enterprises (1 share) and to Zeigler (999 shares). The Class B shares were initially issued on December 18, 1998 to several subsidiaries of the Company. On December 29, 1998, these subsidiaries holding Class B shares of EBMI aggregately sold their shares to Employers Risk Services, Inc. (ERSI) (an unrelated party) for $300. All voting rights of EBMI are vested solely in the holders of the Class A Common Stock, except that the holders of the Class B Common Stock shall be entitled as a class to elect one of the six directors of EBMI. The Class B Shares can be put to EBMI after July 1, 2007 for the lesser of 15% of EBMI's net worth or $7,000. EBMI has the right to call the Class B Shares after January 1, 2008 for the lesser of 15.75% of EBMI's net worth or $7,350. c. R&F Coal Company In December 1998, R&F Coal Company (R&F), a subsidiary of the Company, sold coal mining assets including inventories, property, equipment and a coal supply contract for approximately $7,600. No gain or loss on sale was recorded. 13. MAJOR CUSTOMERS The Company had coal mining sales to the following major customers that in any period exceeded 10% of revenues:
14. WRITEDOWNS AND SPECIAL ITEMS In connection with integrating acquired operations, the Company closed certain of its (non-acquiree) mines. Accordingly, estimated non-recoverable assets of $2,000 were written off and estimated reclamation and closure costs of $14,400 were recorded. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The book values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of their respective fair values because of the immediate short-term maturity of these financial instruments. The book value of the Company's debt instruments approximate fair value given the refinancing in December 1998.
F-29
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. RELATED PARTY TRANSACTIONS AND BALANCES The Company has dealt with certain companies or individuals which are related parties either by having stockholders in common or because they are controlled by stockholders/officers of the Company or by relatives of stockholders/officers of the Company. In addition to related party transactions and balances described elsewhere, the following related party transactions and balances are summarized and approximated as follows below:
The Company leases mining equipment and aircraft as well as constructs, repairs and sells equipment to related parties. The Company has employed related parties for trucking, consulting, equipment rental and repair and other administrative services. Equipment sales (listed above) are primarily to a related party in Australia (formerly majority-owned by Larry Addington) that performs contract mining using the Highwall Miner. For 1997, the Company earned $1,592 in fees when a related party cancelled a mining arrangement with the Company. 17. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, (SFAS No. 130) became effective during 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Implementation of SFAS No. 130 had no impact on the Company as the Company does not currently have any transactions which give rise to differences between net income and comprehensive income. Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS No. 131) will be implemented in the financial statements for the year ended
F-30
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation and major customers. See Note 19 for segment information. In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits was issued which improves and standardizes disclosures by eliminating certain existing reporting requirements and adding new disclosures. The statement addresses disclosure issues only and does not change the measurement of recognition provisions specified in previous statements. See Note 9 for SFAS No. 132 disclosures. Effective January 1, 1999, the Company will adopt Statement of Position (SOP) 98-5 Reporting on the Costs of Start-Up Activities. The new statement requires that the costs of start-up activities be expensed as incurred. The Company does not expect the impact of this statement will be material to its results of operations or financial position. 18. EVENTS SUBSEQUENT TO DECEMBER 31, 1998 a. Energy Resources, LLC In January 1999, the Company acquired 95% of Energy Resources, LLC from the Harold Sergent family for $3,000. The acquisition was accounted for as a purchase. b. Princess Beverly In February 1999, the Company acquired all the capital stock of Princess Beverly Coal Company, a coal mining business with operations in West Virginia, for the purchase price of approximately $11,500. This acquisition will be accounted for as a purchase. The Company also acquired approximately a 1% interest in Hanna Land Company LLC, a limited liability company established to develop a coal mining property in West Virginia owned by the Company. The Company also has an option to purchase (and the owner has the right to put) the remaining 99% in Hanna Land Company LLC for $12,000 upon the successful permitting of the mining property. c. Industrial Revenue Bonds On April 1, 1999, the Company refinanced their Zeigler IRBs (Note 7e). The old IRBs were retired and new IRBs were issued under the following terms: $145,800 principal amount, secured by letters of credit, 6.91% average interest, maturing in 2022 and 2028 with the ability to release letters of credit as security upon the satisfaction of certain conditions. d. Sunny Ridge On April 9, 1999, the Company entered into a stock purchase agreement to acquire all the common stock of Sunny Ridge Enterprises, Inc., a coal mining business with operations in Kentucky for the purchase price of $50,000.
F-31
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 19. SEGMENT DATA The Company's principal industry segments are as follows: coal mining, equipment sales, rental and repair and other. Included in the segment "other" is the Company's railcar earnings, non-coal royalty fee and management fee income. The Company's segments are managed separately because each requires different operating and marketing strategies. Products and services are generally sold between segments on a cost basis. Operating earnings for each segment includes all costs and expenses directly related to the segment before financing charges and corporate allocations. Corporate items principally represent general and administrative costs. Identifiable assets are those used in the operations of each business segment. Corporate assets consist primarily of cash and unamortized financing costs. Information about the Company's operations for each segment is as follows:
Financial Data by Business Segment
F-32
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 20. PARENT AND SUBSIDIARY GUARANTEES The following tables summarize the financial position, operating results and cash flows for ARHI, Resources and its guarantor and non-guarantor subsidiaries regarding the Senior Notes and Subordinated Notes (Note 7c) as of December 31, 1997 and 1998 and for the three years in the period ended December 31, 1998. Each of the guarantor subsidiaries (except EBMI--Note 12b) is a wholly-owned subsidiary of Resources and each has fully and unconditionally guaranteed the Senior Notes and Subordinated Notes on a joint and several basis. Separate financial statements and other disclosures concerning ARHI and the Guarantor subsidiaries are not presented because the Company has determined that they are not material to investors. Yankeetown Dock Corporation (60% owned by the Company) is the only non-guarantor subsidiary. Resources was organized in May 1998 and commenced operations in June 1998. ARHI was organized in July 1998.
F-33
AEI RESOURCES HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. UNAUDITED PRO FORMA INFORMATION A pro forma adjustment has been made to historical net income (loss) to reflect a provision for federal, state and local income taxes during the respective S corporation periods (see Note 2i) using a combined effective rate of 38%.
F-34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
We have audited the accompanying consolidated balance sheets of AEI Holding Company, Inc. (see Note 1), as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AEI Holding Company, Inc. (see Note 1) as of December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP
Louisville, Kentucky
F-35
AEI HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
F-36
AEI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-37
AEI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-38
AEI HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-39
AEI HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATIONAL TRANSACTIONS AND BASIS OF PRESENTATION a. Organizational Transactions During November 1997, pursuant to an exchange agreement, the mining assets of Addington Enterprises, Inc. (Enterprises) and 69.8% of the common stock of Bowie Resources, Ltd. (Bowie) were transferred to a newly formed entity, AEI Holding Company, Inc. (AEI HoldCo. or the Company--a Delaware company) in exchange for the issuance of AEI HoldCo.'s shares to Enterprises (50%) and Larry Addington (50%). Additionally, AEI HoldCo. purchased Harold Sergent's 7.7% ownership interest in Bowie for $2,000. Enterprises is owned by Larry Addington (80%), Robert Addington (10%) and Bruce Addington (10%), who are brothers. Enterprises retained, in November 1997, certain non-coal mining properties as well as technology related assets which were subsequently disposed in the MTI agreement (see below). The MTI Agreement was between Mining Technologies, Inc., a newly formed subsidiary of AEI HoldCo. (as purchaser) and Enterprises (as seller) for Enterprises' ownership interest in its North American (N.A.) mining technologies division. The purchase price of $51,000 (cash) was delivered at closing on January 2, 1998. The net assets acquired include mining equipment (primarily Highwall Mining Systems), contract mining agreements, real property and the intellectual property for the N.A. Highwall Mining Systems (patents, trademarks, etc.). Enterprises retained ownership of the non-N.A. intellectual property. The November 1997 Exchange and MTI transactions described above were treated for accounting purposes as a transfer of entities and net assets under common control with accounting similar to that of a pooling of interests. Accordingly, the historical cost basis of the underlying assets and liabilities transferred (from Enterprises and Bowie) were carried over from the transferring entity to AEI HoldCo. Due to common control, the MTI cash purchase price of $51,000 paid by AEI HoldCo. to Enterprises was recorded as a charge to equity when paid in January 1998. During May 1998, the owners of AEI HoldCo. (Larry Addington and Enterprises) established a new company, Coal Ventures, Inc. (CVI--a Delaware company) and in June 1998 transferred their shares of AEI HoldCo. to CVI in exchange for similar proportionate CVI shares, thereby making CVI the owner of AEI HoldCo. During August 1998, CVI changed its name to AEI Resources, Inc. (Resources or Parent). In addition, during July 1998, the owners of Resources established a new company, AEI Resources Holding, Inc. (ARHI--a Delaware company) and transferred their shares of Resources to ARHI in exchange for similar proportionate ARHI shares, thereby making ARHI the owner of Resources. ARHI has no other assets or activities other than the ownership of Resources. Resources owns numerous other coal mining related subsidiaries besides AEI HoldCo. b. Basis of Presentation The accompanying financial statements include the historical accounts of AEI Holding Company, Inc. and subsidiaries as well as its predecessor: Enterprises, all under the common control of Larry Addington. The predecessor operations of Enterprises exclude the non-coal mining properties and non-N.A. intellectual property. The accompanying financial statements also include the purchase accounting and post-acquisition operations of the following significant acquisitions since their date of acquisition: Ikerd-Bandy (October 1997) and Leslie Resources (January 1998). See Note 3 for discussion of acquisitions. Significant intercompany transactions and balances have been eliminated in consolidation. Minority interests for 1997 or 1998 have not been recorded due to insignificance or deficit equity.
F-40
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Various allocations and carve-out adjustments have been made in the preparation of the accompanying consolidated financial statements. Such allocations have been recorded to segregate the historical accounts to reflect the businesses transferred. Management believes that the method used for allocations and carve-out adjustments is reasonable. As of December 31, 1997, the Company owned 77.5% of Bowie and 22.5% is considered minority interest. As of December 31, 1998, the Company owned 100% of BRL (see Note 10). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL a. Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b. Company Environment and Risk Factors The Company's principal business activities consist of surface and deep mining and marketing of bituminous coal, performance of contract mining for third parties, construction and licensing of mining equipment, as well as leasing and repairing mining equipment. These operations are primarily located in Kentucky, Tennessee and Colorado. The Company, in the course of its business activities, is exposed to a number of risks including: the possibility of the termination or alteration of coal sales contracts, fluctuating market conditions of coal and transportation costs, competitive industry and overcapacity, changing government regulations, unexpected maintenance and equipment failure, employee benefits cost control, misestimates of proven and probable coal reserves, satisfactory labor relations, loss of key employees, satisfactory resolution of the year 2000 issue and the ability of the Company to obtain financing, necessary mining permits and control of adequate recoverable mineral reserves. In addition, adverse uncontrollable (wet) weather and geological conditions tend to increase mining costs, sometimes substantially. Precipitation is generally highest at most of the Company's mining operations in early spring and late fall. The Company is exposed to risks associated with a highly leveraged organization. Such risks include: increased vulnerability to adverse economic and industry conditions, limited ability to fund future working capital, capital expenditures, business acquisitions or other corporate requirements, possible liquidity problems as well as financing and credit constraints. Management believes it has adequate financing resources (including cash equivalents, cash generated from operations and additional borrowings or parent financing) to meet its needs in 1999. The Company and its parent faces numerous risks in the successful consummation and post-acquisition integration of its acquisitions. c. Inventories Inventories are stated at average cost, which approximates first-in, first-out (FIFO) cost and does not exceed market. Components of inventories consist of coal, deferred overburden and parts and supplies (Note 4). Coal inventories represent coal contained in stockpiles and exposed in the pit. Deferred overburden represents the costs to remove the earthen matter (i.e., overburden) covering the coal seam in surface mining. Costs to remove overburden are accumulated and deferred on a pro-rata basis as overburden is removed and eventually charged
F-41
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) to cost of operations when the coal is sold. The calculation of deferred overburden requires significant estimates and assumptions, principally involving engineering estimates of overburden removal and coal seam characteristics. d. Advance Royalty Payments (current portion included in Prepaid Expenses and Other) The Company is required, under certain royalty lease agreements, to make minimum royalty payments whether or not mining activity is being performed on the leased property. These minimum payments are recoupable once mining begins on the leased property. The Company capitalizes these minimum royalty payments and amortizes the deferred costs once mining activities begin or expenses the deferred costs when the Company has ceased mining or has made a decision not to mine on such property. Included in prepaid expenses and other is $3,491 and $3,553 for 1997 and 1998, respectively, relating to advanced royalties. e. Depreciation, Depletion and Amortization Property, plant and equipment are recorded at cost, including construction overhead and interest, where applicable. Expenditures for major renewals and betterments are capitalized while expenditures for maintenance and repairs are expensed as incurred. Depreciation, depletion and amortization are provided using either the straight-line or units of production method with estimated useful lives under the straight-line method comprising substantially the following ranges:
Mineral reserves and mine development costs (included in property, plant and equipment) are amortized using the units-of-production method, based on estimated recoverable reserves. Coal sales contract related costs are amortized as tons are delivered, based on contracted tonnage requirements. Debt issuance costs are being amortized using the effective interest method, over the life of the related debt, or using the straight-line method, over the life of the related debt, if the result approximates the effective interest method. f. Restricted Cash (included in Other Non-Current Assets) The Company pays amounts as required by various royalty agreements. Certain of these agreements have been disputed by third parties, requiring that cash be paid into an escrow account until the rightful recipient is determined. Included in other non-current assets is $93 and $843 for 1997 and 1998, respectively, relating to restricted cash. g. Coal Mine Reclamation and Mine Closure Costs The Company estimates its future cost requirements for reclamation of land where it has conducted surface and deep mining operations, based on its interpretation of the technical standards of regulations enacted by the U.S. Office of Surface Mining, as well as state regulations. The Company accrues for the cost of final mine closure and related exit costs over the estimated useful mining life of the developed property or, if purchased, at the date of acquisition. These costs relate to reclaiming the
F-42
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) pit and support acreage at surface mines and sealing portals at deep mines. Other costs common to both types of mining are related to reclaiming refuse and slurry ponds as well as holding period and related termination/exit costs. The Company expenses the reclamation of current mine disturbance which is performed prior to final mine closure. The establishment of the final mine closure reclamation liability and the current disturbance is based upon permit requirements and requires various significant estimates and assumptions, principally associated with cost and production levels. Annually, the Company reviews its end of mine reclamation and closure liability and makes necessary adjustments, including mine plan and permit changes and revisions to cost and production levels to optimize mining and reclamation efficiency. The economic impact of such adjustments is generally recorded to cost of coal sales prospectively as remaining tons are mined. Also, as described in Note 2k., when a mine life is shortened due to change in mine plan, mine closing obligations are accelerated and the related accrual is increased accordingly. Although the Company's management believes it is making adequate provisions for all expected reclamation and other costs associated with mine closures, future operating results would be adversely affected if such accruals were later determined to be insufficient. End-of-mine reclamation and closure expense for 1996, 1997 and 1998 was $596, $2,196 and $18,188, respectively. h. Income Taxes For 1996 and part of 1997 (Note 8), Enterprises and Bowie were S corporations under the Internal Revenue Code and similar state statutes. As a result, Enterprises and Bowie were not subject to income taxes and their taxable income or loss was reported in the stockholders' individual tax returns. Accordingly, the historical net income (loss) presented in the accompanying financial statements during the S corporation periods is exclusive of an income tax provision (See Notes 8 and 18). The provision for income taxes includes the change in tax status matters as described above plus federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities. The Company records income taxes under the liability method. Under this method, deferred income taxes are recognized for the estimated future tax effects of differences between the tax basis of assets and liabilities and their financial reporting amounts as well as net operating loss carryforwards and tax credits based on enacted tax laws. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. i. Revenue Recognition Most of the Company's revenues have been generated under long-term coal sales contracts with electric utilities, industrial companies or other coal-related organizations, primarily in the eastern United States. Revenues are recognized on coal sales in accordance with the sales agreement, which is usually when the coal is shipped to the customer and title is passed. Advance payments received are deferred and recognized in revenue as coal is shipped. The Company also rents and sells equipment and provides repair and contract mining services, and the revenue from such rental, sale and service is recognized when earned. Revenue from the construction of mining equipment is recognized on a percentage of completion basis. The Company grants credit to its customers based on their creditworthiness and generally does not secure collateral for its receivables. The Company has no allowance for doubtful accounts for 1997 and 1998, respectively. Historically, accounts receivable write-offs have been insignificant. j. Stockholder's Equity (Deficit) The 1996 and 1997 historical owner's equity accounts (retained earnings (deficit) and additional capital) for legal entities (Bowie) which have been carried over from the transferor under the exchange agreement (Note 1) have remained unchanged as presented within the accompanying consolidated statements of stockholder's equity (deficit).
F-43
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The businesses transferred from Enterprises have operated as divisions and, accordingly, the 1996 and 1997 historical equity account changes (earnings and losses and owners' contributions and distributions) have been presented within additional capital in the accompanying consolidated statements of stockholder's equity (deficit) for the pre-transfer period. The common stock activity represents that of AEI HoldCo. The consolidated operations of AEI HoldCo. after the consummation of the exchange agreement (Note 1) on November 12, 1997, are included in retained earnings (deficit) in the accompanying consolidated statements of stockholder's equity (deficit). As described in Note 8, in connection with the consummation of the November 1997 exchange agreement, the mining businesses transferred from Enterprises required that deferred taxes be recorded by AEI HoldCo. Because a portion of the mining assets transferred from Enterprises were stepped up for tax purposes, but not book (similar to a taxable pooling), the resulting deferred tax benefit of approximately $5,500 was recorded in November 1997 with a corresponding increase in additional capital. As described in Note 1a, on January 2, 1998, AEI HoldCo. made a payment of $51,000 for the purchase of MTI which was recorded as a charge to equity in January 1998. In addition, because the tax basis of the MTI net assets transferred were stepped up for tax purposes, but not book (similar to a taxable pooling), the resulting deferred tax benefit of $10,000 was recorded in January 1998 with a corresponding increase in equity. k. Asset Impairments and Accelerated Mine Closing Accruals In certain situations, expected mine lives are shortened because of changes to planned operations. When that occurs and it is determined that the mine's underlying costs are not recoverable in the future, reclamation and mine closing obligations are accelerated and the mine closing accrual is increased accordingly. Also, to the extent that it is determined that asset carrying values will not be recoverable during a shorter mine life, a provision for such impairment is recognized. The Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in prior years. SFAS No. 121 expanded the Company's criteria for loss recognition, and provides methods for both determining when an impairment has occurred and for measuring the amount of the impairment. SFAS No. 121 requires that projected future cash flows from use and disposition of all the Company's assets be compared with the carrying amounts of those assets. When the sum of projected cash flows is less than the carrying amount, impairment losses are recognized. l. Reclassifications
Certain reclassifications of prior year amounts were made to conform with the
current year presentation with no effect on previously reported net income
m. Statements of Cash Flows For purposes of the statements of cash flows, the Company considers investments having maturities of three months or less at the time of the purchase to be cash equivalents. Supplemental disclosure:
F-44
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The 1997 Statement of Cash Flows is exclusive of non-cash deferred tax asset and equity increase of $5,515, non-cash property additions of $2,253, non-cash capitalized loan fees of $238, non-cash transfers of inventory items to development costs of $1,062 and settlement of a note (included in other assets) for property and mine development work valued at $1,220. The 1998 statement of cash flows is exclusive of non-cash property additions of $4,000, non-cash property disposals of $3,126, and settlement of a capital lease of $2,505. 3. ACQUISITIONS The following significant acquisitions have each been accounted for as a purchase, and their results of operations have been included with that of the Company since the date of acquisition. a. Ikerd-Bandy Co., Inc. In October 1997, Enterprises acquired all of the capital stock of Ikerd-Bandy Co., Inc., a coal mining business with operations in eastern Kentucky, for the purchase price of approximately $5,300 (including $300 in related fees and expenses) plus the assumption of approximately $5,600 in debt. b. Leslie Resources In January 1998, AEI HoldCo. acquired all the capital stock of Leslie Resources, Inc. and Leslie Resources Management, Inc., (collectively, Leslie Resources) a coal mining business with operations in eastern Kentucky, for the purchase price of approximately $12,000 (including $300 in related fees and expenses), plus the assumption of approximately $11,100 in debt. The following unaudited pro forma information for the period ending December 31, 1997 gives effect to the aforementioned acquisitions as if they had occurred at the beginning of 1997:
The unaudited pro forma information assumes that the Company owned the aforementioned acquisitions at the beginning of the periods presented and includes adjustments for depreciation, depletion and amortization, interest expense and an inventory adjustment to conform to the Company's accounting policies. The unaudited pro forma financial data is presented for information purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had such acquisitions been consummated at the beginning of these periods, and is not intended to be a projection of future results. 4. INVENTORIES As of December 31, 1997 and 1998, inventories consisted of the following:
F-45
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including mineral reserves and mine development and contract costs, at December 31, 1997 and 1998 are summarized by major classification as follows:
Included in property, plant and equipment is $24,721 for 1997 and $-- for 1998 related to development and construction projects for which depreciation, depletion and amortization have not yet commenced. The Company reviews the realization of these projects on a periodic basis. 6. ACCRUED EXPENSES AND OTHER Accrued expenses and other as of December 31, 1997 and 1998 consisted of the following:
7. DEBT a. Long-Term Debt and Capital Leases Long-term debt and capital leases as of December 31, 1997 and 1998 consisted of the following:
F-46
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Principal maturities of long-term debt and capital leases as of December 31, 1998 are as follows:
b. 10.5% Senior Notes On December 14, 1998, Resources and AEI HoldCo. (Issuers) co-issued $200,000 of 10.5% Senior Notes due 2005 (Senior Notes). These 10.5% Senior Notes were exchanged for previously issued $200,000 10% Senior Notes of AEI HoldCo. due 2007. As part of the $200,000 Senior Notes exchange, the old indenture was modified to eliminate substantially all of the covenants and certain related definitions and events of default. Warburg Dillon Read LLC was the dealer manager of the Senior Notes exchange. The Senior Notes mature in their entirety on December 15, 2005. The Senior Notes are general, unsecured obligations of the issuers. Interest is payable on June 15 and December 15 of each year. The Issuers have the option to redeem the Senior Notes on or after December 15, 2002, at redemption prices ranging from 105.75% in 2002 to 100% in 2005. Before December 15, 2002, the Issuers may redeem the Senior Notes at the face amount plus accrued and unpaid interest, liquidated damages, if any, and an applicable "make whole premium" of up to $35,446. Upon a change in control (as defined), the Issuers will be required to make an offer to purchase all outstanding Senior Notes at 101% of the principal amount. The Senior Notes are jointly and severally guaranteed on a senior unsecured basis by ARHI and the Issuers and each of the Issuers' current and future domestic majority-owned subsidiaries, other than Yankeetown Dock Corporation. In addition to containing various restrictive financial covenants, the Senior Notes Indentures will restrict, among other things, additional indebtedness, issuance of preferred stock, dividend payments, mergers, sale of subsidiaries and assets and affiliate transactions. The Issuers have agreed to file a registration statement under the U.S. Securities Act for the Senior Notes which would provide for their resale. If such registration statement is not filed or declared effective within the time periods allotted in the Indenture, the Issuers will be required to pay liquidated damages to Senior Notes holders. For the Senior Notes, the Issuers have agreed to pay each noteholder liquidated damages of 20c per one thousand dollars principal amount (aggregating to $40 per week) per week commencing December 8, 1998 for 90 days. If the registration statement is not declared effective by March 8, 1999, then the amount of liquidated damages payable weekly will increase by an additional 5c per one thousand dollars principal amount for each 90-day period up to a maximum of 50c payable weekly per one thousand dollars principal amount. The issuers have filed an initial registration statement with the Securities and Exchange Commission on February 12, 1999; however, it is uncertain when or if this filing will become effective. c. Seller Notes Payable In connection with the acquisitions of Ikerd-Bandy and Leslie Resources, the Company entered into notes payable to the sellers of these businesses (Seller Notes). The Seller Notes are unsecured and bear interest (or have been discounted) at rates ranging from 6% to 10%. These Seller Notes also mature from 2003 to 2004.
F-47
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) d. Debt Extinguishment Upon early extinguishment in 1997 of the Company's previously outstanding credit facility and bridge financing, the Company expensed as an extraordinary item in November 1997 approximately $1,600 of prepayment penalties and bridge financing costs and $571 of deferred debt issuance costs. In connection with arranging the November 1997 financing transactions, the Company paid a fee of $4,375 to a related party. On June 29, 1998, the Company replaced a former credit facility and, consequently, expensed as an extraordinary item in June 1998 approximately $424 of related deferred debt issuance costs, net of a tax benefit of $283. At December 31, 1997, there were no borrowings under the former credit facility. 8. INCOME TAXES ARHI and its subsidiaries (including the Company) file a consolidated federal income tax return. Pursuant to a written tax sharing agreement, the subsidiaries provide for federal and state income taxes on their financial statements as if they were an independent taxpayer filing separately. As such, ARHI follows the policy of allocating taxes payable and tax benefits to its subsidiaries on the basis of taxes or benefits applicable to each subsidiary. As discussed in Note 2h., during April 1997 Bowie's S corporation status was terminated. Upon such termination, Bowie initially recorded a net deferred tax liability of $1,600 with an increase to income tax provision for the differences in book and tax bases in assets and liabilities. In addition, during November 1997, the mining businesses transferred from Enterprises (see Note 1, as an S corporation) to the Company (as a C corporation) initially recorded a net deferred tax liability of $17,963 with an increase to income tax provision for the differences in book and tax bases in assets and liabilities. Presented below are income tax disclosures as of and for the years ended December 31, 1997 and 1998. Prior to 1997, the Company operated as an S corporation, and no corporate income taxes were recorded. The provision (benefit) for income taxes is comprised of the following:
The following table presents the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% to the 1997 and 1998 net loss before income taxes.
F-48
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Significant components of the Company's deferred tax assets and liabilities as of December 31, 1997 and 1998 are summarized as follows:
Bowie has carryforwards for net operating losses (NOL) of $14,333 and may only be used by Bowie and if not used will expire in 2012. AEI HoldCo. has NOL carryforwards of $14,382 which if not used will expire in 2017. NOL carryforwards may also be limited under certain ownership changes. The valuation allowance was recorded due to uncertainties in realization using the more likely than not methodology. 9. COMMITMENTS AND CONTINGENCIES a. Coal Sales Contracts and Contingency As of December 31, 1998, the Company had commitments under 15 long-term sales contracts to deliver scheduled base quantities of coal annually to nine customers. The contracts expire from 1999 through 2008, with the Company contracted to supply a minimum of approximately 67 million tons of coal over the remaining lives of the contracts at prices which are at or above market. The Company also has commitments to purchase certain amounts of coal to meet its sales commitments. These purchase amounts are insignificant to sales commitments. Certain of the contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on changes in specified production costs. Larry Addington has guaranteed the Company's obligations under one of the coal sales contracts. Under a ten-year contract dated July 1, 1998, the Company is required to sell coal from its Bowie mine to TVA. The Company cannot satisfy the delivery requirements in full from its Bowie mine if it is unable to lease certain additional reserves located on federal land in Colorado. The failure to do so could materially adversely impact the profitability of the Bowie mine. The Company is in process of procuring the necessary leases and permits; however, it may encounter resistance in its efforts. b. Leases The Company has various operating and capital leases for mining, transportation and other equipment. Lease expense for the years ended December 31, 1996, 1997 and 1998 was approximately $6,000, $9,600 and $24,594 (net of amount capitalized in mine development cost of $1,800 and $463 in 1997 and 1998, respectively). Property under capital leases included in property, plant and equipment in the accompanying
F-49
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) balance sheets at December 31, 1997 and 1998 was approximately $21,400 less accumulated depreciation of approximately $5,810 and $7,400, respectively. Depreciation of assets under capital leases is included in depreciation expense. The Company also leases coal reserves under agreements that call for royalties to be paid as the coal is mined. Total royalty expense for the years ended December 31, 1996, 1997 and 1998 was approximately $11,200, $13,600 and $29,922, respectively. Certain agreements require minimum annual royalties to be paid regardless of the amount of coal mined during the year. However, such agreements are generally cancelable at the Company's discretion. The assets of the Bowie mine are held as collateral for one of these agreements. Approximate future minimum lease and royalty payments are as follows:
Included in the above operating lease commitments are $11,412 to a related party. c. Legal Matters The Company is named as defendant in various actions in the ordinary course of its business. These actions generally involve disputes related to contract performance, property boundaries, mining rights, blasting damages, personal injuries and royalty payments, as well as other civil actions that could result in additional litigation or other adversary proceedings. Certain actions are described as follows: A subsidiary of Pittston Minerals Group, Inc. has made claims for indemnification from the Company under the terms of a sale agreement between a predecessor of the Company (as seller) and the Pittston subsidiary. The claimed indemnification covers a number of items, including allegedly assumed liabilities, alleged failure to transfer specific licenses, assets and permits and alleged non-compliance with certain agreements, applicable laws and permits. The Company is in the process of investigating and negotiating the claims with the Pittston subsidiary. Many of the claims have been resolved without any payment by or liability to the Company. To the Company's knowledge, no lawsuit has been filed or otherwise threatened by the Pittston subsidiary against the Company. The Company intends to defend these claims vigorously, and at this time it is not possible to predict the outcome of the claims. However, the Company believes that the liability arising from such claims would not have a material adverse effect on the financial position or results of operations of the Company. Through December 31, 1998, the Company is in arrears in delivering coal under a certain coal supply contract with TVA. The Company intends to prospectively ship all tons for which it is currently in arrears. The
F-50
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company does not believe the ultimate outcome of this matter will result in a material adverse impact upon the financial position or results of operations of the Company. In August 1998, the Company settled a claim by Robert C. Billips, d/b/a Peter Fork Mining Company for an initial cash payment of $150 and payments over the next 49 years estimated at a present value of $250. The Company has a litigation accrual to cover the settlement. While the final resolution of any matter may have an impact on the Company's financial results for a particular reporting period, management believes that the ultimate disposition of these matters will not have a materially adverse effect upon the financial position or results of operations of the Company. d. Commissions The Company has various Sales and Agency Agreements with third parties, whereby the Company pays a $.10-$2.00 per ton commission on various coal sales agreements. The costs are expensed as the coal is delivered, and in 1998 the Company paid approximately $1,409 in commissions. e. Addcar(TM) Highwall Mining System Lease Agreement Effective May 1998, the Company entered into an agreement with Independence Coal Company, Inc. (Independence) whereby the Company (as lessor) shall lease an Addcar(TM) Highwall Mining System to Independence (as lessee) for a term of 24 months from initial set up or until all mineable coal from the lessee's Twilight mine is recovered, for $220 per month subject to various terms and conditions. Additionally, effective September 1998 the Company leased to Independence a second Addcar(TM) Highwall Mining System and agreed to lease a third System in January, 1999. Each lease is for two years and requires a $4,125 prepaid rental payment upon delivery, and at the lessee's option each may be extended for a third year with a rental prepayment of $1,547. Additionally, a monthly rental payment of $37 for each system is payable by the lessee. Payment terms are subject to various terms and conditions. f. Environmental Matters Based upon current knowledge, the Company believes that it is in material compliance with environmental laws and regulations as currently promulgated (also, see Note 2g). However, the exact nature of environmental control problems, if any, which the Company may encounter in the future cannot be predicted, primarily because of the increasing number, complexity and changing character of environmental requirements that may be enacted by federal and state authorities. g. Performance Bonds The Company has outstanding performance bonds of approximately $161,000 as of December 31, 1998, to secure reclamation, workers compensation and other performance commitments. h. Indemnifications and Guarantees Pursuant to various stock and asset purchase agreements with sellers, the Company has granted indemnification for performance guarantees made by certain sellers relating to mineral lease obligations and employee benefits. The Company believes no significant obligation will result relating to such indemnifications.
F-51
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company (including its subsidiaries) has guarantees in place related to Resources' financing arrangements. The Company's capital stock and most corporate assets have been pledged as collateral in connection with Resources' $875,000 Credit Facility with UBS AG (an affiliate of Warburg Dillon Reed LLC). In addition, the Company is a guarantor on a subordinated basis of: 1) Resources' $150,000 11.5% Senior Subordinated Notes due 2006 and 2) Resources $145,800 6.91% (average interest) Zeigler Industrial Revenue Bonds due 2022 and 2028. Reference is made to the consolidated financial statements of ARHI for a more detailed description of the terms of such indebtedness in the notes to financial statements. i. The Year 2000 Issue (Unaudited) The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure, which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting an entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 10. OTHER SUBSIDIARY MATTERS In April 1997, Bowie's shareholders (Larry Addington (90%) and Harold Sergent (10%)) collectively sold 22.5% of their shares of Bowie common stock to Mitsui Matasushima (Mitsui). In November 1997, in connection with the exchange agreement described in Note 1, the Company purchased a 7.7% ownership interest in Bowie from Harold Sergent for $2,000, bringing the Company's total interest in Bowie to 77.5%. On September 2, 1998, Resources reacquired the 22.5% minority interest in Bowie for the purchase price of $11,500. This acquisition was accounted for as a purchase. In December 1998, this minority interest was contributed by Resources to the Company. 11. MAJOR CUSTOMERS The Company had coal mining sales to the following major customers that in any period exceeded 10% of revenues:
12. WRITEDOWNS AND SPECIAL ITEMS In connection with integrating other acquired operations by the Parent, the Company closed certain of its (non-acquired) mines. Accordingly, estimated non- recoverable assets of $2,000 were written off and estimated reclamation and closure costs of $14,400 were recorded.
F-52
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The book values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of their respective fair values because of the immediate short-term maturity of these financial instruments. The book value of the Company's debt instruments approximate fair value given the refinancing in December 1998. 14. RELATED PARTY TRANSACTIONS AND BALANCES The Company has dealt with certain companies or individuals which are related parties either by having stockholders in common or because they are controlled by stockholders/officers of the Company or by relatives of stockholders/officers of the Company. In addition to related party transactions and balances described elsewhere, the following related party transactions and balances are summarized and approximated as follows below:
The Company shares general and administrative duties with its parent. The Company also participates in the Parent's cash management program. In addition, employees of the Company participate in employee benefit plans sponsored by the Parent. The Company leases mining equipment and aircraft as well as constructs, repairs and sells equipment to related parties. The Company has employed related parties for trucking, consulting, equipment rental and repair and other administrative services. Equipment sales (listed above) are primarily to a related party in Australia (formerly majority-owned by Larry Addington) that performs contract mining using the Highwall Miner. For 1997, the Company earned $1,592 in fees when a related party cancelled a mining arrangement with the Company.
F-53
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, (SFAS No. 130) became effective during 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Implementation of SFAS No. 130 had no impact on the Company as the Company does not currently have any transactions which give rise to differences between net income and comprehensive income. Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS No. 131) will be implemented in the financial statements for the year ended December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation and major customers. See Note 16 for segment information. Effective January 1, 1999, the Company will adopt Statement of Position (SOP) 98-5 Reporting on the Costs of Start-Up Activities. The new statement requires that the costs of start-up activities be expensed as incurred. The Company does not expect the impact of this statement will be material to its results of operations or financial position. 16. SEGMENT DATA The Company's principal industry segments are as follows: coal mining, equipment sales, rental and repair and other. Included in the segment "other" is the Company's railcar earnings, non-coal royalty fee and management fee income. The Company's segments are managed separately because each requires different operating and marketing strategies. Products and services are generally sold between segments on a cost basis. Operating earnings for each segment includes all costs and expenses directly related to the segment before financing charges and corporate allocations. Corporate items principally represent general and administrative costs.
F-54
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Identifiable assets are those used in the operations of each business segment. Corporate assets consist primarily of cash and unamortized financing costs. Information about the Company's operations for each segment is as follows: Financial Data by Business Segment
F-55
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. SUBSIDIARY GUARANTEES The following tables summarize the financial position, operating results and cash flows for the Company and its guarantor subsidiaries regarding the Senior Notes (Note 7b) as of December 31, 1997 and 1998 and for the three years in the period ended December 31, 1998. Each of the guarantor subsidiaries is a wholly- owned subsidiary of the Company and each has fully and unconditionally guaranteed the Senior Notes on a joint and several basis. Separate financial statements and other disclosures concerning the Guarantor subsidiaries are not presented because the Company has determined that they are not material to investors. The Company was organized in October 1997 (see Note 1 for organizational transactions). The following tables exclude data related to ARHI and Resources (and its subsidiaries) which are also guarantors of the Senior Notes. Reference for such data is made to the consolidated financial statements of ARHI which present similar tables in the notes to financial statements.
F-56
AEI HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. UNAUDITED PRO FORMA INFORMATION A pro forma adjustment has been made to historical net income (loss) to reflect a provision for federal, state and local income taxes during the respective S corporation periods (see Note 2h) using a combined effective rate of 38%.
F-57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
We have audited the accompanying balance sheet of Employee Benefits Management, Inc. as of December 31, 1998, and the related statements of income and comprehensive income, stockholders' equity and cash flows for the period from inception (December 11, 1998) through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Employee Benefits Management, Inc. as of December 31, 1998 and the results of its operations and its cash flows for the period from inception (December 11, 1998) through December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP
Louisville, Kentucky
F-58
EMPLOYEE BENEFITS MANAGEMENT, INC.
BALANCE SHEET
(Dollar amounts in thousands)
The accompanying notes to financial statements are an integral part of this balance sheet.
F-59
EMPLOYEE BENEFITS MANAGEMENT, INC. STATEMENT OF INCOME AND COMPREHENSIVE INCOME For the Period from Inception (December 11, 1998) through December 31, 1998 (Dollar amounts in thousands)
The accompanying notes to financial statements are an integral part of this statement.
F-60
EMPLOYEE BENEFITS MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from Inception (December 11, 1998) through December 31, 1998 (Dollar amounts in thousands)
The accompanying notes to financial statements are an integral part of this statement.
F-61
EMPLOYEE BENEFITS MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
For the Period from Inception (December 11, 1998) through December 31, 1998 (Dollar amounts in thousands)
The accompanying notes to financial statements are an integral part of this statement.
F-62
EMPLOYEE BENEFITS MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS For the Period from Inception (December 11, 1998) through December 31, 1998 (Dollar amounts in thousands) 1. ORGANIZATIONAL TRANSACTIONS AND BASIS OF PRESENTATION a. Organizational Transactions Employee Benefits Management, Inc. (EBMI or the Company), a renamed dormant indirect subsidiary of AEI Resources, Inc. (Resources), was recapitalized on December 11, 1998 in the State of Delaware whereby it authorized 1,000 shares of Class A stock and 176 shares of Class B stock. The Class A stock was issued on December 11, 1998 to Addington Enterprises, Inc. (a related party) (1 share) and to Zeigler Coal Holding Company, Inc. (Zeigler--an affiliate) (999 shares). Zeigler subsequently contributed its Class A shares to Fairview Land Company, an affiliate. Affiliates referred to herein include AEI Resources Holding, Inc. (ARHI--parent of Resources) and its consolidated subsidiaries, a coal mining organization. The Class B shares were initially issued on December 18, 1998 to several subsidiaries of Resources. Net consideration received by EBMI for issuance of these Class B shares to affiliates was Notes Receivable of $357,384 (Note 3) and post-retirement benefit obligations of $357,084 (Note 5). On December 29, 1998, these subsidiaries holding Class B shares of EBMI aggregately sold their shares to Employers Risk Services, Inc. (ERSI) (an unrelated party) for $300. All voting rights of EBMI are vested solely in the holders of the Class A Common Stock, except that the holders of the Class B Common Stock shall be entitled as a class to elect one of the six directors of EBMI. The Class B Shares can be put to EBMI after July 1, 2007 for the lesser of 15% of EBMI's net worth (as defined) or $7,000. EBMI has the right to call the Class B Shares after January 1, 2008 for the lesser of 15.75% of EBMI's net worth (as defined) or $7,350. Because the Class B shares are redeemable, they have been excluded from stockholders' equity in the accompanying balance sheet. In addition, EBMI has recorded the redemption accretion as a charge to retained earnings and an increase to redeemable common stock. b. Basis of Presentation The accompanying financial statements include the accounts of EBMI as of December 31, 1998 and for the period from inception (December 11, 1998) through December 31, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL a. Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b. Company Environment and Risk Factors The Company's principal business is managing liabilities related to certain post-retirement benefits for vested union (United Mine Workers of America-- UMWA) employees of affiliates. Its results of operations are comprised of interest income related to notes receivable from affiliates and expenses attributable to service and interest costs for the post-retirement benefit obligations it manages as well as incidental administrative fees. The Company, in the course of its business activities, is exposed to risks including employee benefits cost control and financing credit constraints.
F-63
EMPLOYEE BENEFITS MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) c. Post-Retirement Benefits Other Than Pensions As prescribed by SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, the Company has accrued, based on independent actuarial valuation, for the expected costs of providing post-retirement benefits other than pensions, which are primarily medical benefits, for eligible vested current or former employees. d. Statement of Cash Flows The statement of cash flows is exclusive of the following non-cash items: notes receivable and equity increases totaling $1,700, exchange of debt securities and post-retirement liabilities for an equity interest totaling $357,384, deferred tax asset and affiliate payable increase of $142,824. EBMI participates in the Parent's cash management program. 3. NOTES RECEIVABLE FROM AFFILIATES Notes receivable from affiliates are comprised of the following:
4. INCOME TAXES ARHI and its subsidiaries (including EBMI) file a consolidated federal income tax return. Pursuant to a written tax sharing agreement, the subsidiaries provide for federal and state income taxes on their financial statements as if they were an independent taxpayer filing separately. As such, ARHI follows the policy of allocating taxes payable and tax benefits to its subsidiaries on the basis of taxes or benefits applicable to each subsidiary. Presented below are income tax disclosures as of and for the period from inception (December 11, 1998) through December 31, 1998. The provision for income taxes is comprised of the following:
F-64
EMPLOYEE BENEFITS MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The following table presents the difference between the actual tax provision and the amounts obtained by applying the statutory U.S. federal income tax rate of 35% to the 1998 net income before income taxes.
The Company's deferred tax asset of $143,067 is entirely related to non-current post-retirement benefit obligations. 5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company manages obligations related to certain vested union employee post- retirement healthcare and life insurance benefits. Plan benefits are stipulated under agreements with UMWA. Summaries of the changes in the benefit obligations, plan assets and funded status of the plans are as follows:
F-65
EMPLOYEE BENEFITS MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The expense and liability estimates can fluctuate by significant amounts based upon the assumptions used by the actuaries. If the healthcare cost trend rates were increased by one percent in each year, the accumulated post-retirement benefit obligation would increase by $54,900 or 15% as of December 31, 1998. The effect of this change on the 1998 expense accrual would be an increase of $4,100 or 16%. 6. REVOLVING CREDIT AGREEMENT On December 21, 1998, the Company established a revolving credit note in the amount of $10,000 with Resources. The outstanding principal of this credit facility is payable in full on January 1, 2009. Interest accrues at 7.75% and is payable semi-annually. As of December 31, 1998, there were no outstanding amounts related to this note. 7. RELATED PARTY TRANSACTIONS AND BALANCES The Company has dealt with certain companies or individuals which are related parties either by having stockholders in common or because they are controlled by stockholders/officers of the Company or by relatives of stockholders/officers of the Company. In addition to related party transactions and balances described elsewhere, the following related party transactions and balances are summarized and approximated as follows:
The long-term payable is non-interest bearing with no fixed maturity date (beyond one year) will be reduced as the deferred tax asset is realized. EBMI also participates in the parent's cash management program. 8. COMMITMENTS AND CONTINGENCIES a. Administrative Services Agreement On December 21, 1998 EBMI entered into an agreement with Resources whereby Resources will provide various management, financial and technical services to assist the Company in its administrative duties to service the post-retirement benefit obligations with charges based on allowable costs and fees, as defined. The agreement has a term of one year, but is automatically extended for successive six-month periods, unless written notice is provided. No amounts were recorded related to this agreement for the period from inception (December, 11, 1998) through December 31, 1998. b. Limitations on Stock Redemption The Company is prohibited from redeeming or acquiring any issued or outstanding Class A Common Shares as long as there are Class B Common Shares issued and outstanding. c. Indemnifications and Guarantees The Company has guarantees in place related to Resources' financing arrangements. The Company's capital stock and most corporate assets have been pledged as collateral in connection with Resources' $875,000 Credit Facility with UBS AG (an affiliate of Warburg Dillon Reed LLC). In addition, the Company is a guarantor of: 1) Resources' $200,000 10.5% Senior Notes due 2005, 2) Resources' $150,000 11.5% Senior Subordinated Notes due 2006 and 3) Resources' $145,800 6.91% (average interest) Zeigler Industrial Revegue Bonds due
F-66
EMPLOYEE BENEFITS MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 2022 and 2028. Reference is made to the consolidated financial statements of ARHI for more detailed description of the terms of such indebtedness in the notes to financial statements. d. The Year 2000 Issue (Unaudited) The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. The effects of the Year 2000 Issue may be experienced before, on or after January 1, 2000, and if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure, which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting an entity, including those related to the efforts of customers, suppliers or other third parties, will be fully resolved. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The book values of current receivable and payables are considered to be representative of their respective fair values because of the immediate short- term maturity of these financial instruments. The book value of the Company's notes receivable and debt obligations approximate fair value given their inception in December 1998. 10. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, (SFAS No. 130) became effective during 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Implementation of SFAS No. 130 is presented on the statement of income and comprehensive income. Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS No. 131) will be implemented in the financial statements for the period from inception (December 11, 1998) through December 31, 1998. SFAS No. 131 requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation and major customers. Separate segment information is unnecessary as it is not applicable. In February 1998, SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits was issued which improves and standardizes disclosures by eliminating certain existing reporting requirements and adding new disclosures. The statement addresses disclosure issues only and does not change the measurement of recognition provisions specified in previous statements. See Note 5 for SFAS No. 132 disclosures.
F-67
INDEPENDENT AUDITORS' REPORT To Zeigler Coal Holding Company: We have audited the accompanying consolidated balance sheets of Zeigler Coal Holding Company and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1997. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP
St. Louis, Missouri
F-68
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
F-69
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
See notes to consolidated financial statements.
F-70
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
F-71
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
F-72
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See notes to consolidated financial statements.
F-73
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
1. Summary of Significant Accounting Policies Principles of Consolidation--The consolidated financial statements include the accounts of Zeigler Coal Holding Company and Subsidiaries (Zeigler or the "Company"), all of which are wholly-owned. All material intercompany transactions and accounts have been eliminated in consolidation. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Interim Financial Information--The interim financial statements as of June 30, 1998 and for the six months ended June 30, 1997 and 1998 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 the Company's management, the unaudited interim financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. Cash and Equivalents--Cash and equivalents include cash on deposit and highly liquid investments with an original maturity of three months or less. Inventories--Coal inventory is valued using the average cost method and is stated at the lower of cost or market. Coal inventory costs include labor, equipment costs and operating overhead. Coal work in process includes partially uncovered coal and unprocessed coal. Mine supply inventory is valued using the average cost method and is stated at the lower of cost or market. Property, Plant and Equipment--Additions and betterments are capitalized at cost. Maintenance and repair costs are expensed as incurred. Depreciation of plant and equipment is computed principally by the straight-line method over the expected useful lives of the assets. Mine development costs and the net amount of associated interest cost are capitalized. Exploration costs are expensed as incurred. Depletion of mineral rights and capitalized mine development costs is provided on the basis of tonnage mined in relation to total estimated recoverable tonnage. Zeigler pays royalties to certain landowners and holders of mineral interests for the rights to perform certain mining activities. Amounts advanced to landowners, which are recoupable against future production, are capitalized; as the coal is mined, these prepayments are offset against earned royalties and included in the cost of coal sales. Deferred Financing Costs--The costs of issuing and restructuring long-term debt are capitalized and amortized using the effective interest method over the term of the related debt. Income Taxes--Zeigler accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred taxes are established for the temporary differences between the financial reporting basis and the tax basis of Zeigler's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.
F-74
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Postretirement Benefits Other Than Pensions---As prescribed by SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, Zeigler accrues, based on annual independent actuarial valuations, for the expected costs of providing postretirement benefits other than pensions, primarily medical benefits, during an employee's actual working career until vested. Pneumoconiosis Benefits--Certain Zeigler subsidiaries are liable under the Federal Black Lung Benefits Act of 1972, as amended, to pay pneumoconiosis (black lung) benefits to eligible employees, former employees and their dependents for claims filed after June 30, 1973. These subsidiaries are also liable under certain state statutes for black lung claims. Zeigler acts as self-insurer for most federal and state black lung benefits. The remaining portion of black lung claims are covered by state insurance funds into which Zeigler pays premiums. The accrual for self-insured pneumoconiosis benefits is adjusted to equal the present value of future claim payments, determined as of the beginning of the year, based on outside actuarial valuations performed annually. Postemployment Benefits--Zeigler provides certain postemployment benefits, primarily long-term disability and medical benefits, to former and inactive employees and their dependents during the time period following employment but before retirement. The Company accrues the discounted present value of expected future benefits, determined as of the beginning of the year, based on annual outside actuarial valuations. Reclamation and Mine Closing Costs--Zeigler provides for the estimated costs of future mine closings over the expected lives of active mines. Those costs relate to sealing portals at deep mines and to reclaiming the final pit and support acreage at surface mines. Other costs common to both types of mining are related to removing or covering refuse piles and slurry (or settling) ponds and dismantling preparation plants and other facilities. The regular provision for future mine closing costs is calculated under the units-of-production method based on a per ton charge determined by dividing estimated unrecorded closing costs by estimated remaining recoverable tons. These estimates are updated annually and the accrual rate is adjusted on a prospective basis accordingly. The cost of restoring land and water resources affected by normal ongoing surface mining operations is expensed as incurred. Asset Impairments and Accelerated Mine Closing Accruals--In certain situations, expected mine lives are shortened because of changes to planned operations. When that occurs, and it is determined that the mine's underlying costs are not recoverable in the future, reclamation and mine closing obligations are accelerated and the mine closing accrual is increased accordingly. Also, to the extent that it is determined that asset carrying values will not be recoverable during a shorter mine life, a provision for such impairment is recognized. The Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995. SFAS No. 121 expanded the Company's criteria for loss recognition, and provides methods for both determining when an impairment has occurred and for measuring the amount of the impairment. SFAS No. 121 requires that projected future cash flows from use and disposition of all the Company's assets be compared with the carrying amounts of those assets. When the sum of projected cash flows is less than the carrying amount, impairment losses are recognized. Revenue Recognition--Coal sales are recognized at contract prices at the time title transfers to the customer. Coal sales are reduced and an allowance is established for pricing disputes. Revenue at the import/export terminals is recognized at the time of throughput. Energy Trading Revenues and Costs--Energy trading revenues and costs represent revenues and costs derived from the trading of power and gas forward and future contracts and options. These forward and future contracts and options are marked-to-market with gains and losses recognized currently. Revenue and cost on forward and future contracts is recognized on settlement date.
F-75
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other Revenues, Costs and Expenses--Other revenues represent amounts primarily related to the terminals, coal leases to third parties, farming, timber, gains on sales of surplus assets, and oil and gas royalties. Costs and expenses related to other revenues and those related to Zeigler's clean coal plant are included in other costs and expenses. Stock-Based Compensation--In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which required adoption in 1996. The new standard defines a fair value method of accounting for stock options and similar equity instruments. Pursuant to the new standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. Companies are also permitted to continue to account for such transactions under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the financial statements pro forma net income and earnings per share as if the Company had applied the new method of accounting. The accounting requirements of the new method are effective for all employee awards granted after the beginning of the fiscal year of adoption. The Company has elected to continue to account for such transactions under APB No. 25. Reclassifications--Certain amounts in the 1995, 1996, and 1997 financial statements and notes have been reclassified to conform with the 1998 presentation. 2. Description of Business Zeigler is engaged principally in the mining of coal for sale primarily to electric utilities in the United States. In addition, during 1997, the Company began power and gas trading through its new energy trading and marketing subsidiary, EnerZ Corporation. 3. Income Taxes Income tax expense (benefit) is comprised of the following:
F-76
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 35% to earnings before income taxes due to the following:
The components of the net deferred tax liability are as follows:
Zeigler also has an AMT credit carryforward of $32,419 and $33,811 at December 31, 1996 and 1997, respectively, available to be used in future periods. Although management believes that it is unlikely to realize all of its AMT credit carryforward under existing law and company structure, AMT credit carryforward is recognized to reduce the deferred tax liability from the amount of regular tax on temporary differences to the amount of tentative minimum tax on AMT temporary differences.
F-77
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Long-Term Debt Long-term debt consists of the following:
8.61% Senior Secured Notes--The 8.61% Senior Secured Notes are payable to a group of insurance companies and other financial institutions under Note Purchase Agreements dated as of November 16, 1992. Interest on the notes is payable semiannually. Annual principal payments begin on November 15, 1998 at the rate of 20% of the original outstanding amount of $400,000. The notes require Zeigler to offer to make mandatory prepayments in the event Zeigler generates excess cash flow, as defined in the Note Purchase Agreements, or makes asset sales above specified levels. The amount of excess cash flow that must be offered as a prepayment to the Noteholders is based upon the percentage of debt due to the Noteholders divided by the total indebtedness to both the Noteholders and the lenders under the Credit Agreement described in the fourth following paragraph. The Noteholders were offered a prepayment of $25,050 in 1997 based on free cash flow, as defined, for 1996, of which $628 of the prepayments were accepted by the Noteholders. The notes are collateralized by a first mortgage on substantially all of Zeigler's assets. The collateral is shared pari passu with the lenders involved with the Credit Agreement. The notes may be prepaid at Zeigler's discretion; however, the Noteholders are entitled to receive a prepayment premium that protects the yield to the Noteholders over the remainder of the term of notes. In effect, this yield maintenance premium is the net present value of the reduced yield to the Noteholders over the remaining scheduled term of the Notes based upon an assumed reinvestment rate of 50 basis points (0.5%) over the then available yield for U.S. Treasury securities with a maturity equal to that of the Senior Secured Notes. No yield maintenance premium is payable on mandatory prepayments out of excess cash flow. On January 5, 1998, Zeigler prepaid $198,342 to the Noteholders, using $68,342 of cash and borrowing $130,000 under a new Credit Agreement's revolving credit facility (see below). A related yield maintenance premium of $7,604 was also paid to the Noteholders as required by the Note Purchase Agreement. Accordingly, Zeigler will recognize an extraordinary loss of $8,849 ($6,637 net of taxes) in the first quarter of 1998, consisting of the yield maintenance premium and the write-off of deferred financing costs related to the early extinguishment of debt. Industrial Revenue Bonds--In August 1997, the Company completed the refunding of its industrial revenue bonds. The industrial revenue bonds are floating rate obligations issued by the Peninsula Ports Authority of Virginia ($115,000) and Charleston County, South Carolina ($30,800). Both obligations are backed by letters of credit issued under the Company's revolving credit facility. These refundings served to extend the maturities of the industrial revenue bonds and to release Shell Oil Company from its guarantees of the underlying obligations. The principal of the obligation by the Peninsula Ports Authority of Virginia is due in one lump-sum payment on May 1, 2022, and the principal of the obligation by Charleston County, South Carolina is due in one lump-sum payment on August 1, 2028. Interest on these obligations is payable monthly. The weighted average interest rate for these borrowings was 3.38% and 3.66% as of December 31, 1996 and 1997, respectively.
F-78
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Credit Agreement--On October 19, 1994, Zeigler amended and restated its Credit Agreement dated November 16, 1992, as previously amended and restated on March 15, 1994. The Credit Agreement provides for a $200,000 revolving credit facility, with a three year term, and can be used for both loans and letters of credit. As of December 31, 1997, Zeigler had used $186,107 out of the total $200,000 revolving credit facility for outstanding letters of credit. The provisions of the Credit Agreement require a commitment fee to be paid on the unused portion of the revolving credit facility. Interest is paid based on floating rates which fluctuate based on the prime rate, or the London Interbank Offer Rate (LIBOR) plus various increments. The interest rate was 6.42% at December 31, 1997. The Credit Agreement is collateralized by a first mortgage on substantially all of Zeigler's assets. The collateral is shared pari passu with the holders of the Senior Secured Notes. In April 1997, the Company executed a new Credit Agreement (the "New Credit Agreement") with certain financial institutions, which provides for senior unsecured revolving credit and letter of credit facilities aggregating $700,000. Interest on the revolving credit facility is paid in arrears based on rates which fluctuate based on the prime rate or a certain Interbank Offer Rate, as the Company may elect. Amounts outstanding under the New Credit Agreement are not secured. The New Credit Agreement and the facilities thereunder terminate five years from the initial advance. The New Credit Agreement requires the Company to maintain a minimum net worth and maximum long-term debt to EBITDA ratio, and contains other customary covenants and events of default. The New Credit Agreement, which replaces the Amended and Restated Credit Agreement dated October 19, 1994, became effective on January 5, 1998, in conjunction with the payment of the Company's outstanding Senior Secured Notes. Maturities--At December 31, 1997, aggregate scheduled maturities of all long- term debt for each year through 2002 are as follows:
5. Financial Instruments The fair value of Zeigler's long-term debt has been calculated based on quoted market prices for similar issues or current rates offered to Zeigler for debt of the remaining maturities. Long-term debt has an estimated fair value of $349,451 and $351,746 compared to the carrying amount of $344,770 and $344,142 at December 31, 1996 and 1997, respectively. The carrying amount of all other financial instruments, including cash and equivalents, accounts receivable and accounts payable approximates fair value due to the short-term nature of these instruments. Through its energy trading subsidiary, the Company began entering into power and gas forward contracts and options for trading purposes in 1997. These forward contracts and options were marked-to-market with any gains and losses recognized currently. At December 31, 1997, open net contract and option positions were not material and did not represent significant credit related exposure.
F-79
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Pension and Savings Plans Salaried Pension Plan--Zeigler has a non-contributory pension plan covering substantially all employees other than those who are members of the United Mine Workers of America ("UMWA"). The plan is a cash balance retirement plan which provides benefits based upon the employee's length of credited service and compensation during each year of employment. Zeigler's funding policy is to make, as a minimum contribution, the equivalent of the minimum payment required by the Employee Retirement Income Security Act of 1974. The Company contributed $123 in 1997 to the pension plan. There were no minimum contributions required in 1995 and 1996. The pension cost components for the year ended December 31, are as follows:
A reconciliation of the plan's status to amounts recognized in Zeigler's balance sheets as of December 31, are as follows:
The unrecognized net transition asset, representing the excess of the fair value of plan assets over the projected benefit obligation at the date of adoption, is being amortized over the average expected future service periods of employees. Assumptions used in developing the projected benefit obligation as of December 31, are as follows:
Plan assets consist principally of common stocks and U.S. government and corporate obligations.
F-80
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) UMWA Pension Plan--Old Ben Coal Company ("Old Ben"), a wholly-owned subsidiary, and Marrowbone Development Company, a division of Mountaineer Coal Development Company, an indirect subsidiary, are required under their respective contracts with the UMWA to pay amounts based on hours worked to the UMWA Pension Plan and Trust, a multi-employer pension plan covering all employees who are members of the UMWA. The accompanying consolidated statements of operations include $2,778, $2,102, and $1,578, of expense in 1995, 1996 and 1997, respectively, applicable to the plan. The National Bituminous Coal Wage Agreement of 1998 ("NBCWA") authorizes the Bituminous Coal Operators Association to increase the rate of contributions from employers to assure payment of benefits. The union contract requires all currently participating employers to guarantee benefits jointly, but not severally, with all other currently participating employers. It is not practical to determine each subsidiaries' allocable share of the plan's net assets and accumulated benefits. 401(k) Plans--Zeigler and certain subsidiaries sponsor savings and long-term investment plans for substantially all employees other than employees covered by the contract with the UMWA. One of the plans will match 50% of the voluntary contributions up to a maximum contribution of 3% of a participant's salary with an additional matching contribution subject to certain performance criteria. The expense under these plans was $1,036, $1,391, and $1,276, in 1995, 1996 and 1997, respectively. Stock Appreciation Units--Zeigler has a long-term incentive plan which entitles certain officers and key employees to receive a cash award for an amount equal to the excess of the fair market value of Zeigler's common stock on the date the unit matures over the base price at the date of grant of the award. The plan permits an aggregate of 1,635,200 such stock appreciation units of which 284,320 and 73,600 were outstanding at December 31, 1996 and 1997, respectively. The vesting period ranges from three to five years. During 1997, 210,080 stock appreciation units matured. Costs and expenses include approximately $3,178, $2,917, and $141, of charges in connection with this plan for 1995, 1996 and 1997, respectively. Outstanding stock appreciation units with maturities less than one year are included as a component of other accrued expenses. 7. Postretirement Benefits Other Than Pensions UMWA Combined Benefit Fund--Zeigler provides healthcare benefits to eligible retirees and their dependents. Retirees who were members of the UMWA and who retired on or before December 31, 1975 received these benefits from multi- employer benefit plans. Old Ben contributed to these funds based on the number of its retirees in one of the funds and based on hours worked by current UMWA members for the other fund. Current and projected operating deficits of these trusts led to the passage of the Coal Industry Retiree Health Benefit Act of 1992 (the "Act"). The Act established a new multi-employer benefit trust that will provide healthcare and life insurance benefits to all beneficiaries of the earlier trusts who were receiving benefits as of July 20, 1992. The Act provides for the assignment of beneficiaries to their former employers and any unassigned beneficiaries to employers based on a formula. The expense under these plans, which is recognized as contributions are made, amounted to $3,527, $2,968, and $3,431, in 1995, 1996 and 1997, respectively. Based upon an independent actuarial valuation, Zeigler estimates the amount of its obligation under the new plan to be approximately $21,637 as of December 31, 1997.
F-81
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Zeigler Benefit Plans--Net postretirement healthcare cost for the year ended December 31, includes the following:
A reconciliation of the plan's status to amounts recognized in Zeigler's balance sheets as of December 31, follows:
In 1996, as a result of the re-employment or termination prior to vesting of certain Midwestern employees, the Company recorded a $16,295 gain related to the curtailment of its postretirement benefit plan. The discount rate used to determine the accumulated postretirement benefit obligation was 7.5% and 7.25% at January 1, 1997 and December 31, 1997, respectively. The assumed healthcare cost trend rates used in determining the net expense for 1997 are shown in the following table. Healthcare cost trends were assumed to decline from 1997 levels to an ultimate ongoing level over five years as follows:
The expense and liability estimates can fluctuate by significant amounts based upon the assumptions used by the actuaries. If the healthcare cost trend rates were increased by one percent in each year, the accumulated postretirement benefit obligation would be 14 percent higher as of December 31, 1997. The effect of this change on the 1997 expense accrual would be an increase of 14 percent. 8. Pneumoconiosis Benefits The actuarially determined liability for pneumoconiosis (black lung) benefits is based on a 6% discount rate and various other assumptions including incidence of claims, benefit escalation, terminations and life expectancy. The annual black lung expense is comprised of the net change in the beginning accrual balance, a charge for interest on the unfunded accrual balance plus the premiums paid to the state insurance funds. The January 1, 1995 and January 1, 1997 actuarial studies reduced the estimated pneumoconiosis liability by $23,299 and $8,244, respectively, as compared to the previous study. The lower estimates resulted primarily from favorable claims experience and reduced projected future claims.
F-82
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The cost of black lung benefits charged to operations for Zeigler and its subsidiaries, excluding the changes in estimated liability mentioned above, was $2,967, $157, and $2,280 in 1995, 1996 and 1997, respectively. 9. Stock Option Plan In February 1994, Zeigler's Board of Directors and shareholders adopted a Stock Option Plan (the "Option Plan"). A total of 2,560,000 shares of Common Stock are reserved for issuance upon exercise of options granted under the Option Plan. The Option Plan is administered by the Compensation Committee of the Board of Directors which determines the terms of the options granted including the exercise price, number of shares subject to the option and exercisability. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plan. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the stock option plan. The following summarizes the stock option transactions under the Option Plan for the three years ended December 31, 1997:
The outstanding stock options at December 31, 1995, 1996 and 1997 have a weighted average remaining contractual life of 8.51, 8.28, and 7.64 years, respectively. The number of stock option shares exercisable at December 31, 1995, 1996, and 1997 were 213,400, 362,710, and 717,464, respectively. Generally, stock options are granted at prices which are equal to the market value of the stock on the date of grant, have a maximum term of ten years, and vest in equal annual increments over five years. The weighted average fair value at date of grant for options granted during 1995, 1996, and 1997 was $3.96, $5.76, and $10.66 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
F-83
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As previously discussed, the Company accounts for the Option Plan in accordance with APB No. 25 under which no compensation expense has been recognized for stock option awards. Had compensation cost for the Company's stock option plan been determined on the fair value at the grant date for awards for the three year period ended December 31, 1997 consistent with the provisions of SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 10. Asset Impairments and Accelerated Mine Closing Costs The following summarizes the components of asset impairments and accelerated mine closing costs:
In July 1995, the Company closed Old Ben Mine #1 in Indiana after termination of its supply contract with Southern Indiana Gas and Electric Company. Accordingly, the carrying value of the mine and other related assets that supported the contract were reduced to their estimated net realizable values, which resulted in asset write-downs of $15,762. In addition, a provision for accelerated mine closing costs of $16,500 was recorded, based on the amount of estimated closing costs that would have been expensed during the full term of the contract. In the fourth quarter of 1995, the Company recorded asset impairments and accelerated accruals totaling $82,400 in connection with the idling, closing and projected closing of certain mines. Of that amount, $49,100 relates to Old Ben's operations in southern Illinois. Old Ben idled one mine in Randolph County, Illinois on December 31, 1995, and made plans to close two other mines in Franklin County, Illinois later in 1996, mainly due to a sharp reduction in demand for the Illinois Basin's high-sulfur coal. Management did not expect the high-sulfur market to improve significantly in the foreseeable future. The remaining $33,300 fourth quarter charge was associated with the indefinite idling of Wolf Creek's underground mine in eastern Kentucky on October 1, 1995. That amount consists of asset write-downs totaling $26,000 and increased reclamation liabilities of $7,300. Operations were suspended at the mine chiefly due to the new sourcing flexibility negotiated in the amended contract with Carolina Power & Light Company which allows the Company to supply the contract with coal purchased from lower-cost producers. The ongoing high costs at the Wolf Creek mine were mainly attributable to unfavorable geology and declining productivity.
F-84
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Sale of Indiana Assets On February 12, 1996, the Company closed the sale of the majority of its assets in Indiana to Kindill Mining, Inc. ("Kindill"). These assets had a combined book value of $13,400 and included Old Ben Mine #1 and Old Ben Mine #2, along with various other coal properties and interests. The Company also agreed to make cash payments to Kindill of $7,000 in 1996 and $4,000 in 1997. In exchange, Kindill assumed the associated reclamation liabilities, estimated at approximately $23,400. This sale was completed on April 30, 1996, after Kindill secured the required mining permits. The sale of these assets did not have a material effect on current income. 12. Preferred Stock Zeigler is authorized to issue 1,000,000 shares of preferred stock, $0.01 par value, with such issuance to be in one or more classes or series. The Board of Directors is authorized to determine the designations, preferences, qualifications, limitations and restrictions of any class or series with respect to, among other things, the rate and nature of dividends, the price and terms, the amount payable in the event of liquidation, the terms and conditions for conversion or exchange into any other class or series of the stock or other securities and voting rights. 13. Significant Customers Coal sales include transactions involving both produced and purchased coal. Two customers accounted for 18% and 13% of coal sales in 1995, 18% and 14% of coal sales in 1996, and 29% and 16% of coal sales in 1997. 14. Related Party Transactions Shell Oil Company, a former indirect shareholder, provides guarantees for certain letters of credit and surety bonds of Zeigler. Zeigler reimburses Shell for its costs in providing these guarantees. 15. Commitments and Contingencies (Also see Note 16--Legal Proceedings) Zeigler and its subsidiaries have operating lease commitments expiring at various dates, primarily for equipment. Minimum rental obligations under these leases at December 31, 1997 are summarized by fiscal year as follows:
Rental expense relating to operating leases amounted to $9,733, $7,834, and $7,626 in 1995, 1996 and 1997, respectively. As of December 31, 1997, Zeigler and its subsidiaries had $192,571 of surety bonds issued by an insurance company to secure self-insured workers' compensation and pneumoconiosis claims, reclamation and other performance commitments. Of that amount, $23,061 was backed by guarantees of Shell (see Note 14). Letters of credit of $246,161 were outstanding at December 31, 1997, of which amount $60,053 was also guaranteed by Shell.
F-85
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 1997, upon completion of planned development, the Company idled Encoal Corporation's clean coal demonstration plant in Wyoming. In 1998, marketing of the LFC technology, both domestically and internationally, will continue as well as the evaluation of options regarding Encoal. The net book value of Encoal Corporation's assets and the Company's related investment in clean coal technology was $6.7 million as of December 31, 1997. 16. Legal Proceedings Cajun Electric Power Cooperative--On December 21, 1994, Cajun Electric Power Cooperative Inc. ("Cajun") filed with the U.S. Bankruptcy Court for the Middle District of Louisiana (the "Bankruptcy Court") for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. Triton Coal Company ("Triton") has a requirements contract (the "Triton Contract") with Cajun through Western Fuels Association, Inc., with a term extending through the life of Big Cajun Plant No. 2. During 1997, Triton shipped 5.8 million tons of coal to Cajun (representing 3.0% of the Company's total consolidated revenues), while 1996 shipments to Cajun totaled 5.0 million tons. To date during the bankruptcy, Triton has continued to ship coal to Cajun and Cajun has continued to pay for such coal. The price for coal sold under the Triton Contract is at or near the market price for this coal. The Triton Contract provides for a price reopener effective January 1, 1998. The parties were unable to reach agreement on the price to be effective January 1, 1998 and are attempting to resolve that matter through the procedure set forth in the Triton Contract. An Appellate Court affirmed a District Court's ruling that a court-appointed trustee will manage Cajun's affairs during the bankruptcy. At this time, it appears likely that the trustee will reject the Triton Contract. In the event that the contract is rejected, it may be necessary for Triton to find other markets for this coal, possibly including sales to the new operator of Cajun's coal fired units. Louisiana Generating LLC (an affiliate of the Company, Southern Energy, Inc. and NRG Energy, Inc.) has executed an Amended and Restated Asset Purchase and Reorganization Agreement to purchase substantially all of Cajun's non-nuclear assets. This Agreement is incorporated in the trustee's plan of reorganization, which is subject to Bankruptcy Court approval (including evaluation of competing plans of reorganization) and a number of other conditions. As a result of Louisiana Generating's entering into this Agreement, Western Fuels Association, Inc. has formally requested certain assurances regarding Triton's performance under the Triton Contract and informed the Company that it reserves the right to assert certain claims against Triton if the trustee rejects the Triton Contract.
Entergy-Gulf States Utilities, Inc.--Entergy-Gulf States, Inc. ("GSU") owns 42%
of Unit 3 at the Big Cajun II coal-fired power station. Pursuant to the Triton
Contract, Triton supplies the coal requirements of all three units at Big Cajun
F-86
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On August 21, 1997, GSU filed additional claims against the Company, Triton and Western Fuels Association, Inc. In these claims, GSU alleged that these parties violated the Sherman Antitrust Act and Louisiana Fair Trade Statutes in the course of settlement discussions between the parties. The Company believes that these allegations have no merit and a Motion to Dismiss these claims is pending. If the Triton Contract is rejected by the Bankruptcy Court, Triton will suffer damages for breach of contract, for which its only remedies will be a claim against GSU (as described above) and/or a claim in Cajun's bankruptcy proceeding as a creditor of Cajun, and Triton will have to find other markets for this coal, possibly including sales to the new operator of Cajun's coal- fired units. Triton is currently in negotiations with alternative customers for this coal. Triton has executed an agreement with Louisiana Generating pursuant to which Triton will supply coal to Big Cajun II in the event Cajun's court- appointed trustee's plan of reorganization is confirmed by the Bankruptcy Court and Louisiana Generating completes the purchase of Cajun's non-nuclear assets. Triton, Western Fuels Association, Inc., and the Trustee have also executed an agreement which provides that if Louisiana Generating is successful in purchasing the Cajun assets and the Triton Contract is rejected, Triton will release any and all claims in Cajun's bankruptcy and will receive approximately $4,000. Janet Saad-Cook et al. v. Zeigler Coal Holding Company and R. & F. Coal Company--In March, 1995, plaintiff filed a lawsuit against the Company and its subsidiary, R. & F. Coal Company. The complaint includes several causes of action based on alleged actions of the defendant companies involving fraud, deceit, misrepresentation, and tortuous breach of contract with respect to two coal mining leases made among the plaintiffs and R. & F. Coal Company. The plaintiffs' complaint has since been amended to add Bluegrass Coal Development Company as a named defendant, to eliminate the allegations that the defendants' behavior violated the U.S. Racketeer Influenced and Corrupt Organizations Act and to include additional causes of action involving trespass and breach of lease. The defendant companies have denied the allegations in the complaint, believe they have meritorious defenses to plaintiffs' claims, and intend to defend vigorously against the claims. The Company believes that Shell Oil Company is obligated to indemnify the Company against any loss (over certain minimum amounts) that the Company may incur as a result of plaintiff s' claims in the litigation and has given Shell notice thereof in accordance with the terms of the purchase agreement under which the Company acquired Shell Mining companies. The Company believes that ultimate resolution of the claims in the lawsuit will have no material adverse effect on the Company's consolidated results of operations or financial position. Other--Various lawsuits and claims, including those involving ordinary routine matters incidental to its business, to which the Company and its subsidiaries are a party, are pending, or have been asserted, against the Company. Although the outcome of these matters cannot be predicted with certainty, management believes that their disposition will not have materially adverse effects on the Company's consolidated results of operations or financial position. 17. Segment Reporting The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, beginning with the Company's fourth quarter of 1997. The Company has two reportable segments: coal and energy. The coal segment is engaged in the mining of coal for utilities in the United States. The energy segment is principally responsible for the trading and marketing of electricity and natural gas within the U.S. These reportable segments are separately managed strategic business units that offer different products and services, and whose performance is evaluated based on earnings from operations before interest, taxes and extraordinary items, not including nonrecurring gains and losses. The accounting policies of the segments are the same as those described in Note 1. There were no sales or transfers between segments in 1995, 1996, or
F-87
ZEIGLER COAL HOLDING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1997 and in the first half of 1998. The "Other" category below consists of five operating segments that did not meet the quantitative thresholds for determining reporting segments. These segments consist primarily of amounts related to two import/export terminals, a clean coal plant in Wyoming, the Company's environmental subsidiary, coal leases to third parties, farming, timber, gains on sales of surplus assets, oil and gas royalties, and selling, general and administrative costs.
18. Sale of Company On December 3, 1997, the Company announced that it was retaining an investment banking firm to explore various strategic alternatives to maximize value for shareholders, including the possible sale of the entire Company. In connection therewith, the Board of Directors adopted a change-in-control severance plan and retention bonus plan for all salaried employees as well as special incentives for certain key employees. The Company subsequently retained the investment banking firm Credit Suisse First Boston and prepared materials for interested parties. On September 2, 1998, the Company was acquired by, and became the successor by merger to, Zeigler Acquisition Corporation, a wholly owned subsidiary of AEI Resources, Inc.
F-88
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
We have audited the accompanying combined statements of assets, liabilities and parent investment of the Cyprus Eastern Coal Operations (as defined in Note 1) at December 31, 1997 and 1996, and the related combined statement of operating revenues and expenses, of cash flows, and of parent investment for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the management of Cyprus Amax Coal Company (parent of Cyprus Eastern Coal Operations). 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, assessing the accounting principles used and significant estimates made by management, and evaluating overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 1 and are not intended to be a complete presentation of the Cyprus Eastern Coal Operations financial position or results of operations. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined assets, liabilities and parent investment of the Cyprus Eastern Coal Operations, as described in Note 1, at December 31, 1997 and 1996, and their combined operating revenues and expenses and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. PricewaterhouseCoopers LLP
Denver, Colorado
F-89
CYPRUS EASTERN COAL OPERATIONS COMBINED STATEMENTS OF ASSETS, LIABILITIES AND PARENT INVESTMENT (NOTE 1)
The accompanying notes are an integral part of these statements.
F-90
CYPRUS EASTERN COAL OPERATIONS COMBINED STATEMENTS OF OPERATING REVENUES AND EXPENSES (NOTE 1)
The accompanying notes are an integral part of these statements.
F-91
CYPRUS EASTERN COAL OPERATIONS COMBINED STATEMENTS OF PARENT INVESTMENT
The accompanying notes are an integral part of these statements.
F-92
CYPRUS EASTERN COAL OPERATIONS COMBINED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these statements.
F-93
CYPRUS EASTERN COAL OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. ACQUISITION AND BASIS OF PRESENTATION Acquisition--In accordance with a stock purchase and sale agreement (the Agreement) dated May 28, 1998, between a subsidiary of Cyprus Amax Minerals Company (Cyprus or the Parent) and AEI Holding Company, Inc. (AEI), Cyprus agreed to sell to AEI the stock of certain of its coal mining subsidiaries (collectively referred to as Cyprus Eastern Coal Operations or the Company) as follows:
.Amax Coal Company, a Delaware corporation
.Amax Coal Sales Company, a Delaware corporation
.Ayrshire Land Company, a Delaware corporation
.Beech Coal Company, a Delaware corporation
.Bentley Coal Company, a partnership organized under the laws of the State
of New York
All of the subsidiaries listed above are wholly-owned, except for Yankeetown Dock Corporation, which is 60%-owned. The Company represents the majority of Cyprus's coal mining operations in Indiana, Kentucky, West Virginia and Tennessee. Included in the businesses to be acquired are coal producing properties (7 surface mining and 4 underground mining operations) and related coal reserves, coal wash plants, tipples, land, buildings, machinery and equipment, coal sales contracts and certain other liabilities and working capital items. Excluded from the accompanying financial statements are certain mines previously included in the subsidiaries to be sold, which will be retained by Cyprus. As consideration for the acquisition, AEI will pay to Cyprus approximately $93,000 in cash. The Agreement also includes a clause stating that AEI will pay to Cyprus a royalty per ton produced by the Company after June 1, 2002 in amounts ranging from thirty-five cents to fifty cents per ton (the Royalty Agreement). In addition, in the event the Company's undeveloped reserves are not mined, then an additional minimum undeveloped reserve royalty (Undeveloped Reserve Royalty Agreement) is due, beginning December 31, 2002, with a total minimum due of $4,000 by December 31, 2006. If AEI has a sale transaction, as defined, that produces aggregate proceeds greater than $75,000, then AEI will pay a one-time royalty buyout to terminate the Royalty Agreement and the Undeveloped Reserve Royalty Agreement (payment up to $25,000, as defined), otherwise the royalty agreement will continue until the aggregate proceeds of the royalty payments and undeveloped royalty payments total $45,455. Further, as defined in the agreement, Cyprus will retain certain
F-94
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) assets and will indemnify AEI for certain obligations of the Company that exist as of the closing date, including, among others, certain post-retirement medical obligations, certain pension assets, certain workers compensation obligations, black lung trust assets, certain black lung obligations and certain disability obligations. The Company's mining operations mine, clean, market, and sell coal to electric utilities and industrial users. The Company's coal is primarily sold to domestic electric utilities under both term contracts, with an initial term of at least one year, and spot sales orders. New sales are predominantly one to three year term contracts and spot orders. As of December 31, 1997, the Company had 11 operating mines of which 7 were governed by union contracts. As of December 31, 1997, union representation accounts for approximately 76% percent of the Company's employees and 74% percent of production. The contract with the United Mine Workers of America, which covers all the union coal operations except the Kentucky operations and Sycamore mine, expires in August of 1998. The union contracts covering employees of the Kentucky and Sycamore operations expire in June of 1999 and April of 1999, respectively. Basis of Presentation--The accompanying combined financial statements of the Company contain the historical accounts of the subsidiaries included under the Agreement and include certain assets and liabilities that will be retained by Cyprus as described above. In addition various direct and indirect expense allocations from Cyprus have been recorded in the financial statements of the Company. Such allocations were based primarily on actual and estimated usages and include expenses related to executive management, accounting, treasury, land administration, environmental management, investor relations, legal and information and technology services. Management believes its method for expense allocations is reasonable. Certain carve-out adjustments have been made to segregate the historical accounts of the Company from those of Cyprus. In addition, certain expenses and related assets and liabilities incurred by Cyprus on behalf of the Company have been excluded from the Company's statements of operations. Among the expenses excluded is interest expense on parent long-term debt and provisions related to income taxes. These exclusions result in a financial statement presentation that is not complete in accordance generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated in combination. Interim Financial Information--The interim financial statements as of June 30, 1998 and for the six months ended June 30, 1997 and 1998 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 the Company's management, the unaudited interim financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. Company Environment and Risks--The Company's principal business activities consist of surface and deep mining and marketing of bituminous coal located in Indiana, Kentucky, Tennessee and West Virginia. The Company, in the course of its business activities, is exposed to a number of risks including: the possibility of the termination of sales contracts, fluctuating market conditions for coal and transportation services, competitive industry and over capacity, changing government regulations, labor disruption, loss of key employees and the ability of the Company to obtain necessary mining permits and control adequate recoverable mineral reserves. In addition, adverse weather and geological conditions could significantly impact operations and mining costs. Precipitation is generally highest at the Company's mining operations in early spring and late fall. In the past, the Company has operated under the ownership of Cyprus Amax, which may have resulted in operating results or financial position of the Company significantly different from those that would have been obtained if the Company were autonomous.
F-95
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates--The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates relate to mineral reserves; reclamation and environmental obligations; postemployment, postretirement, and other employee benefit liabilities; future cash flows associated with assets; and useful lives for depreciation, depletion, and amortization. Actual results could differ from those estimates. Cash Equivalents and Statements of Cash Flows--The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Overdrafts representing outstanding checks in excess of funds on deposit are classified as accounts payable. The Combined Statements of Cash Flows provide information about changes in cash and cash equivalents. All interest payments were paid by the Parent and thus such payments are presented in Changes in Parent Investment, net on the accompanying statements. See Notes 3 and 4 for additional supplemental information on non-cash investing activities. Inventories--Coal inventories are carried at the lower of current market or average production cost. Materials and supplies inventories are carried at average cost less allowance for obsolete and surplus items. Advanced Royalties--The Company is required, under certain royalty lease agreements, to make minimum royalty payments whether or not mining activity is being performed on the leased property. These minimum payments are recoupable once mining begins on the leased property. The Company capitalizes these minimum royalty payments and expenses the prepaid balances as they are offset against production royalties once mining activities begin or expenses the prepaid balances when the Company has ceased mining or has made a decision not to mine on such property. Included in the accompanying Combined Statements of Assets, Liabilities and Parent Investment at December 31, 1996 and 1997, the advanced royalties included in Prepaid Expenses was $970 and $1,019, respectively, and the advanced royalties included in Other Noncurrent Assets was $7,010 and $10,722, respectively. Properties--Costs for mineral rights and certain tangible assets, and mine development costs incurred to expand capacity of operating mines or develop mine areas substantially in advance of current production are capitalized and charged to operations generally on the units-of-production method. Mobile mining equipment and most other assets are depreciated on a straight-line basis over their estimated useful lives. Interest costs for the construction or development of significant long-term assets are capitalized and amortized over the related assets' estimated useful lives or the life of the mine, whichever is shorter. Gains or losses upon retirement or replacement of equipment and facilities are credited or charged to income. Expenditures for betterments are capitalized. Ongoing maintenance and repairs are expensed as incurred; expenditures for renewals in excess of defined limits (generally $250) are deferred and charged to expense over the period benefited. Included in Coal Properties are values assigned to coal reserves at certain of the Company's mines as a result of the Amax acquisition. The affected mines are Chinook and Sycamore in Indiana and Stockton, Dunn and Mine 155 in West Virginia. These values are being cost depleted on a unit-of-production basis over the recoverable reserves at each mine. Impairment of Long-Lived Assets--The Company follows Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 prescribes that an impairment loss is recognized in the event that facts and circumstances
F-96
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Impairment is recorded based on an estimate of future discounted cash flows. The implementation impact of SFAS No. 121 is discussed in Note 3. Reclamation and Environmental Costs--Minimum standards for mine reclamation have been established by various governmental agencies and affect certain operations of the Company. Reclamation is performed and expensed on an ongoing basis as mining operations are performed. Reclamation costs and other shutdown expenses related to the period after mine closure are accrued and charged against income on a units-of-production basis over the life of the mine. The Company is subject to various environmental regulations. Environmental liabilities are accrued on an ongoing basis when such losses are probable and reasonably estimable and reflect management's best estimates of future obligations. Costs of future expenditures for reclamation and environmental remediation obligations are not discounted to their present value. Revenue Recognition--Revenues are recognized on coal sales when title passes, in accordance with the sales agreement, which usually occurs when the coal is shipped to the customer. Income Taxes--As previously noted, income tax accounts have not been "pushed down" to the Company as such accounts are maintained by Cyprus on a consolidated basis. Therefore, no income tax benefit (provision) nor deferred income tax balances are recorded in the accompanying statements. NOTE 3. WRITE-DOWNS AND SPECIAL CHARGES Write-Downs and Special Charges reported in the accompanying Combined Statements of Operating Revenues and Expenses consist of the following: In 1995, coal reserves were reduced and the Company wrote down certain of its mining properties by $98,051 in response to weak demand and lower prices, ongoing transportation and coal quality disadvantages compared to other regions, the impending expiration of certain long-term contracts in 1995 and 1998 and the adoption of revised mining plans. Included in the charge was $86,800 of write-downs related to the Kentucky mining operations, $2,220 for West Virginia, and $9,031 related to the Indiana properties. The write-downs were calculated in accordance with SFAS No. 121. In 1996, the Company recorded a one-time special charge of $1,819 related to the write-down of Midwest materials and supplies inventories to net realizable value. In 1997, a $92,134 charge was recorded. This included a $35,767 charge for the anticipated closure of the Armstrong Creek mine, reclamation adjustments of $2,332 at the Chinook mine and other asset adjustments and accruals of $6,935. Additionally, asset impairment charges of $33,500 and $13,600, were recorded at the West Virginia steam coal properties and the Chinook mine, respectively, due to updated mine and business plans that reflected the current views of the domestic markets for mid- to high-sulfur coal and updated reserve information. These impairments were calculated in accordance with SFAS No. 121. NOTE 4. DIVESTITURE OF MINNEHAHA MINE In the fourth quarter of 1995, the Company sold a majority of the assets of one of its Indiana mines, Minnehaha. The Company paid $3,750 and conveyed title to the assets in exchange for the purchaser's assumption of reclamation and mine closure liabilities that were recorded at $8,235. The transaction resulted in no gain or loss. In 1995, the mine had sales and an operating loss of approximately $8,863 and $6,895 (including write-offs and special charges of $7,067). The mine also had total assets of approximately $8,346 as of the date of divestiture.
F-97
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 5. INVENTORIES Inventories detailed by component are summarized below:
NOTE 6. PROPERTIES Properties consist of the following at December 31, 1996 and 1997:
NOTE 7. EMPLOYEE BENEFIT PLANS Pension Plans--The Company (through a Cyprus plan) participates in a number of defined benefit pension plans covering most of its employees. Benefits are based on either the employee's compensation prior to retirement or stated amounts for each year of service with the Company. The Company makes annual contributions to these plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Plan assets consist of cash and cash equivalents, equity and fixed income securities, and real estate. Net annual pension cost includes the following components:
F-98
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) The following table sets forth the funded status of the plans:
Prepaid pension cost is included in Prepaid Expenses on the Combined Statements of Assets, Liabilities and Parent Investment at December 31, 1996 and 1997, respectively. The significant actuarial assumptions at December 31 were as follows:
Net periodic pension cost is determined using the assumptions as of the beginning of the year, and the funded status is determined using the assumptions as of the end of the year. Substantially all domestic employees not covered under the plans administered by the Company are covered under multi-employer defined benefit plans administered by the United Mine Workers of America. Contributions by the Company to these multi-employer plans, which are expensed when paid, are based primarily upon hours worked and amounted to $965, $977 and $1,212 in 1995, 1996 and 1997. Postretirement Benefits Other Than Pensions--In addition to the Company's defined benefit pension plans, the Company has plans that provide postretirement medical benefits and life insurance benefits. The medical plans provide benefits for most employees who reach normal, or in certain cases, early retirement age while employed by the Company. The postretirement medical plans are contributory, with annual adjustments to retiree contributions, and contain certain other cost-sharing features such as deductibles and coinsurance. Net periodic postretirement benefit cost consists of the following components:
F-99
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) The following table sets forth the plans' combined status:
The accumulated postretirement benefit obligation at December 31, 1996 and 1997, consisted of a current liability of $7,000 included in Accrued Payroll and Benefits each year, and a long-term liability of $85,714 and $84,655, respectively, included in Deferred Employee and Retiree Benefits. The weighted average annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) for medical benefits is 7.0 percent for 1998 and is assumed to decrease gradually (one-half of one percent per year) to 4.25 percent by the year 2003 and remain at that level thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plans as of December 31, 1997, by $3,700 and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1997 by $470. The weighted average discount rate used in determining the accumulated postretirement benefit obligation as of December 31, 1995, 1996, and 1997, was 7.25 percent, 7.75 percent, and 7.25 percent, respectively. The change in the discount rate and a reduction in the assumed health care cost trend rate resulted in a $1,100 unrecognized net gain as of December 31, 1997. In addition, health care and life insurance benefits of certain retirees are covered by multi-employer benefit trusts established by the United Mine Workers of America and the Bituminous Coal Operators Association, Inc. Current and projected operating deficits of these trusts led to the passage of the Coal Industry Retiree Health Benefit Act of 1992 (the "Act"). The Act established a new multi-employer benefit trust called the United Mine Workers of America Combined Benefit Fund (the "Fund") that will provide health and life insurance benefits to all beneficiaries of the earlier trusts who were receiving benefits as of July 20, 1992. The Act provides for the assignment of beneficiaries to former employers and the allocation of any unassigned beneficiaries to enterprises using a formula included in the legislation. It also established a second trust fund known as the 1992 Plan that covers beneficiaries whose employers cease providing benefits. The Company has chosen to account for its obligation under the Act on a cash basis in accordance with established accounting guidance. The 1995, 1996, and 1997 contributions to the Funds were $2,136, $1,923, and $2,060, respectively. Based upon independent actuarial valuation, the Company estimates the present value of its obligations under the Act to be approximately $21,676 as of December 31, 1997. The Company is liable under the federal Mine Safety and Health Act of 1977, as amended, to provide for pneumoconiosis (black lung) benefits to eligible employees, former employees, and dependents with respect to claims filed by such persons on or after July 1, 1973. The Company is also liable under various states' statutes for black lung benefits. The Company currently provides for federal and state claims principally through self-
F-100
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) insurance programs. Benefits and related expenses are paid from a dedicated trust fund qualified under Section 501(C) (21) of the Internal Revenue Code. The assets of the trust fund exceed the actuarial present value of black lung benefits at December 31, 1996 and 1997. Total future black lung obligations of the Company as of December 31, 1996 and 1997 approximated $19,000 and $20,000, respectively. These amounts were actuarially determined using the following key assumptions: discount rate of 8%, black lung benefit cost escalation rate of 3.5%. The existence of the trust assets results in a net liability of $172 and $70 in 1996 and 1997, respectively, which is included in Deferred Employee and Retiree Benefits. The Company also has a number of postemployment plans covering severance, disability income, and continuation of health and life insurance for disabled employees. At December 31, 1996 and 1997, the accumulated postemployment benefit liability consisted of a current amount of $538 and $496, respectively, which is included in Accrued Payroll and Benefits, and $4,722 and $4,143, respectively, which is included in Deferred Employee and Retiree Benefits. NOTE 8. DEBT The Company's long-term debt consists of a $1,000 note securing an Industrial Revenue Bond issued by Perry County, Kentucky, the proceeds of which were used to construct facilities at the Company's mine site. The note is due on May 1, 2013, with interest payable semiannually based upon a floating rate, as defined (5.10% at December 31, 1996 and 1997). NOTE 9. LEASES AND MINERAL ROYALTY OBLIGATIONS The Company leases mineral interests and various other types of properties, including draglines, shovels, offices, computers, and miscellaneous equipment. Certain of the Company's mineral leases require minimum annual royalty payments, whereas others provide only for royalties based on production. Summarized below as of December 31, 1997, are future minimum rentals and royalties under non-cancelable leases:
F-101
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Rentals and mineral royalties charged to expense were as follows:
Other Noncurrent Liabilities includes $2,104 and $1,722 at December 31, 1996 and 1997, respectively, which represents deferred gains on mining equipment that was sold and leased-back by the Company in 1986 and 1994. The 1986 lease is accounted for as an operating lease; the 1994 lease is accounted for as a capital lease. These gains are being recognized as revenue over the terms of the respective leases that expire in 2000 and 2003. The future minimum lease commitments, operating lease expense and capital lease obligations for these two leases are included in the above disclosures. See below for subsequent modifications of these lease agreements. Certain of the operating and capital leases discussed above are included in lease agreements entered into by other subsidiaries of Cyprus. As part of the stock purchase and sale agreement, AEI entered into various agreements to sublease and purchase equipment subject to these leases. According to the sublease agreement and the first purchase agreement, AEI is required to make semi-annual lease payments of $1,485 through July 2000, at which time AEI will purchase the equipment through semi-annual installments of $1,485 from January 2001 through January 2002. The second purchase agreement requires semi-annual installments of $1,977 through January 2002, and the third purchase agreement requires monthly installments of $249 from July 1998 through December 1998 and monthly installments of $67 from January 1999 through December 1999. The sublease and purchase agreements are secured by the equipment and any monies to become due under insurance policies, up to the amount of the obligations. In addition, a $3,500 equipment surety bond secures and guarantees the obligations. NOTE 10. PARENT INVESTMENT AND RELATED PARTY TRANSACTIONS Parent investment is comprised of the Company's equity (see Note 1) and advances to and from Cyprus at December 31, 1996 and 1997. The Company had sales to a subsidiary of Cyprus not included in the acquisition of $1,856 and $2,982 in 1996 and 1997, respectively. Certain obligations of the Company have been guaranteed by the Parent. Such obligations include, among others, obligations for the following: workers compensation claims, lease agreements, industrial revenue bonds and coal supply agreements. NOTE 11. COMMITMENTS AND CONTINGENCIES Coal Sales Contracts--As of December 31, 1997, the Company had commitments to deliver scheduled base quantities of coal annually to 34 customers. The contracts expire between January 1, 1998 and December 31, 2003, with the Company contracted to supply a minimum of approximately 42 million tons over the remaining lives of the contracts at prices ranging from $14.21 to $37.00 per ton. Certain contracts have sale price adjustment provisions, as defined, over the life of the contracts. Environmental Remedial Action--The Company's past and present operations include activities which are subject to extensive federal and state environmental regulations. Based upon current knowledge, the Company believes it is in material compliance with environmental laws and regulations as currently promulgated. The extent of environmental control problems which the Company may encounter in the future cannot be predicted, primarily because of the increasing number, complexity and changing character of environmental requirements that may be enacted by federal and state authorities.
F-102
CYPRUS EASTERN COAL OPERATIONS NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Mine Closure Costs--At December 31, 1997, the Company's accruals for deferred closure, shutdown, and reclamation totaled approximately $75,700. Reclamation is an ongoing activity and a cost associated with the Company's mining operations. Accruals for closure and final reclamation liabilities are established on a life of mine basis. The Company's reclamation reserve component is largely a result of reclamation obligations incurred for grading, replacing soils, and revegetation of mined areas as required by provisions and permits pursuant to the Surface Mining Control and Reclamation Act. Total reclamation and mine closure costs for the Company at the end of current mine lives are estimated at approximately $120,000. Legal Proceedings--The Company is a party to numerous claims and lawsuits with respect to various matters. The Company provides for costs related to contingencies when a loss is probable and the amount is reasonably estimable. The Company estimates that the amount of probable aggregate loss, included in current accrued liabilities, is approximately $3,100 at December 31, 1997. The Company is named as defendant in various other actions occurring in the ordinary course of its operations for which an estimation of the likelihood of probable outcome is not possible. These actions generally involve disputes as to property boundaries, contract performance, mining rights, royalty payments, blasting damages, personal injuries and other civil actions which could result in additional litigation or other adversary proceedings. While the final resolution of any matter may have an impact on the Company's financial results for a particular period, management believes the ultimate disposition of these matters will not have a material adverse effect upon the financial position of the Company. Subsequent to December 31, 1997, $2,959 of the accrued legal contingencies were settled for an amount equal to the Company's recorded estimate. NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The book value of cash and cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values because of the immediate or short-term maturity of these financial instruments. The fair value of the Company's debt instruments approximated the book value because the instruments bear interest at a variable rate and re-price frequently. NOTE 13. MAJOR CUSTOMERS The Company had sales to the following major customers:
F-103
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
We have audited the accompanying combined balance sheet of Leslie Resources, Inc. and Leslie Resources Management, Inc. as of December 31, 1997, and the related combined statements of operations and retained earnings and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Leslie Resources, Inc. and Leslie Resources Management, Inc. as of December 31, 1997 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Louisville, Kentucky
F-104
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. COMBINED BALANCE SHEET As of December 31, 1997
The accompanying notes to combined financial statements are an integral part of this balance sheet.
F-105
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS For The Year Ended December 31, 1997
The accompanying notes to combined financial statements are an integral part of this statement.
F-106
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. COMBINED STATEMENT OF CASH FLOWS For The Year Ended December 31, 1997
The accompanying notes to combined financial statements are an integral part of this statement.
F-107
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997
1. DESCRIPTION OF BUSINESS Leslie Resources, Inc. (a Kentucky corporation) and Leslie Resources Management, Inc. (a Kentucky corporation) (collectively the Company) and its subsidiaries are owned by Greg Wells and engage in coal mining activities using the surface mining method. Coal mining and the operation of loading facilities are conducted in four counties in Southeast Kentucky. The Company's sales are predominantly to utility and industrial users of coal. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Presentation The accompanying combined financial statements include those of Leslie Resources, Inc. (an S corporation) and Leslie Resources Management, Inc. (a C corporation) and its subsidiaries because of common ownership. All significant intercompany transactions and balances have been eliminated in combination. b. Principles of Consolidation The accompanying combined financial statements include the consolidated accounts of Leslie Resources Management, Inc. and its subsidiaries. All material intercompany transactions have been eliminated in its consolidation. c. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. d. Statements of Cash Flows For purposes of the statements of cash flows, the Company considers investments having maturities of three months or less at the time of purchase to be cash equivalents. Supplemental disclosure:
The 1997 statement of cash flows excludes non-cash dividends of property with a book value of $280 distributed to the sole shareholder and a deferred tax asset and equity increase of $297. e. Inventories Inventories consist of coal that is available for sale at various loading facilities, and is stated at an average cost using direct operating costs of mining coal, which is less than market.
F-108
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) f. Advance Royalties Recoupable advance royalties obtained in the 1995 purchase of the subsidiary companies of Leslie Resources Management, Inc. had a higher recoupable amount than the portion of the purchase price that was allocated to them in purchase accounting (a valuation allowance was established). As these advance royalties become recoupable, the expense recognized is partially offset by a reduction in the valuation allowance. Other recoupable royalties the Company has paid in the normal course of operations are expensed as the coal is mined or the royalty no longer becomes recoupable. g. Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company provides for depreciation of the depreciable assets by using accelerated and other methods with useful lives that range from 5 to 31 years. Depreciation expense was $3,172 for 1997. h. Depletion Cost depletion is calculated on a per ton basis to allocate the cost of mineral reserves against the related coal sales. Cost depletion expense was $59 for 1997. i. Mine Development Costs Mine development costs are amortized over the expected life of the respective mine sites which range from 5 to 10 years. Amortization expense was $57 for 1997. j. Revenue Recognition The Company's revenues have been generated under coal sales contracts with electric utilities or other coal-related organizations, primarily in the eastern United States. Revenues are recognized on coal sales in accordance with the sales agreement, which is usually when the coal is shipped to the customer and title is passed. The Company grants credit to its customers based on their creditworthiness and generally does not secure collateral for its receivables. No allowance for doubtful accounts is recorded for 1997, as management does not believe it is necessary. Historically, accounts receivable write-offs have been insignificant. k. Asset Impairment If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value. l. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation with no effect on previously reported net income or shareholder's equity. 3. CONCENTRATION OF CREDIT RISK The Company maintains its cash in bank deposits at financial institutions. The balances, at times, may exceed federally insured limits. The Company exceeded the insured limit by $3,651 for 1997.
F-109
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including mineral reserves and mine development costs at December 31, 1997 are summarized by major classifications as follows:
5. INVESTMENT IN SECURITY Included in other long-term assets, at December 31, 1996 and 1997, is 800 shares of preferred stock in Reclamation Surety Holding Company, Inc. (RSHC) purchased for $2,000. A subsidiary of RSHC, Cumberland Surety Insurance Company, provides the Company insurance coverage for reclamation bonds (see Note 9), and the purchase of this preferred stock was required in lieu of the Company placing $2,000 in an escrow collateral account. This preferred stock pays a dividend of 6% annually. The Company and RSHC both have options to redeem this stock after January 1, 1998. The Company also has an option to convert to common shares of RSHC after January 1, 1998. Under present bonding arrangements, an option to redeem this stock would result in similar funds being placed into an escrow collateral account. 6. DEBT a. Revolving Lines of Credit The Company has the following outstanding balances under lines of credit at December 31, 1997:
F-110
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) b. Long-Term Debt Long-term debt consists of the following:
Principal payments required for long-term debt after December 31, 1997 are as follows:
In connection with the GE Capital Corporation note maturing in May 2001, the Company is required to maintain, at the end of each fiscal year, adequate, as defined, debt service coverage. 7. ACCRUED ROYALTIES DUE TO TRANSCO As part of the 1995 purchase of the subsidiary companies by Leslie Resources Management, Inc., the Company recorded a liability for minimum royalties due to Transco Coal Company. The liability is reduced as coal is mined, and as of December 31, 1997, a liability of $399, remained. This amount is included in current portion of accrued royalties and based on mining plans is expected to be paid in 1998. 8. OVERRIDE ROYALTY OBLIGATION DUE TO TRANSCO As part of the 1995 purchase of the subsidiary companies by Leslie Resources Management, Inc., the Company is obligated to pay to Transco Coal Company 75c for each ton of coal mined from the Ball Creek Property
F-111
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) until all reserves are mined. In 1997, $438 were paid. Payments are required monthly as the coal is mined or, at the Company's option, this obligation can be canceled at any time by paying Transco an amount that, when aggregated with previously paid amounts, totals a discounted $4,000 (discounted from the date of the purchase (November 20, 1995) to each payment date at 15%). At the date of purchase from Transco Coal, the Company recorded as an accrual $4,000 for what it estimated as the aggregate amount to be paid under this obligation. Beginning in the calendar year 1997, this royalty payment requires minimum annual payments of $150; however, the aggregate payments of the two preceding years in excess of the yearly minimum may be used in meeting the $150 annual minimum. The Company projects to mine 480,000 tons from the Ball Creek Property in 1998. As of December 31, 1997, $360 is included in current portion of accrued royalties and $3,175 is included in long-term accrued royalties related to this obligation. 9. ACCRUED RECLAMATION AND MINE CLOSURE COSTS Although the majority of the reclamation process is performed contemporaneously with mining, the Company will incur additional reclamation costs when a particular mine site closes, currently estimated at approximately $7,000 for all sites. The Company accrues on a per ton basis the expected remaining reclamation and mine closure costs. As of December 31, 1997, an aggregate of $1,407 has been accrued for reclamation and mine closure costs. These reclamation and mine closure costs, when mining is completed, represent the estimated costs to reclaim the land at the end of the mining process, as well as other required activities. However, the Company is contingently liable to reclaim the land whenever the mining process stops and these costs could exceed the accrued amounts. According to Kentucky law, the Company is required to post reclamation bonds to assure the reclamation work is completed. Outstanding reclamation bonds totaled $42,712 at December 31, 1997. The Company pays an insurance bonding premium monthly. In addition, as Note 5 explains, the Company purchased $2,000 in preferred stock in lieu of having an escrow collateral account for 1997. Beginning in January 1997, the Company was required to fund an escrow collateral account. As of December 31, 1997, $284 had been paid into the escrow account (included in other long-term assets) with total future obligations totaling $1,216 at a rate of $20 per month.
F-112
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) 10. INCOME TAXES Leslie Resources, Inc. elected to be taxed as a Sub-chapter S corporation, effective for the tax year beginning January 1, 1989, whereby its taxable income is reported by its stockholders. Accordingly, there was no income tax reported at the corporate level. Dividends have been paid to stockholders at various times during the year and totaled $2,782. Leslie Resources Management, Inc. and its subsidiaries are C corporations, and therefore incur income taxes at the corporate level. Income tax disclosures for the C corporation group follows: Income tax expense (benefit) is comprised of the following:
During 1997, certain assets (machinery and equipment) were transferred from the S corporation to the C corporation. These assets were stepped up for tax purposes, but not book. The deferred tax benefit of $297 was recorded with a corresponding increase in equity. 11. COMMITMENTS AND CONTINGENCIES a. Coal Sales Contracts As of December 31, 1997, the Company had commitments to deliver base quantities of coal to four customers. Three contracts expire in 1998, and one expires in 2000 with the Company contracted to supply a minimum of approximately 2.7 million tons over the remaining lives of the contracts at prices which are at or above market. b. Commissions The Company has an agreement to pay a 10c per ton commission on all tonnage delivered on a coal contract expiring in 2000. Additionally, beginning in 1998 the Company will pay a $15 per month commission for sales made under various contracts. c. Contract Mining Agreements The Company has an agreement with a contract miner to mine at two job sites at a cost to the Company of $13.00 and $14.00 per ton mined, respectively. The contract has no minimum tonnage requirements and is cancelable by either party.
F-113
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) d. Aminex As part of the 1995 purchase of the subsidiary companies by Leslie Resources Management, Inc., the Company is contingently liable under a February 14, 1979 agreement to pay a portion of its "coal proceeds" (as defined) related to certain leases on specified properties to a group of partnerships in bankruptcy that were previously owners of these certain leases. This potential contingent liability exists until January 1, 2004. The computation and definition of "coal proceeds" under this agreement is different than net income according to generally accepted accounting principles. Any prior year deficiencies in calculating "coal proceeds" is carried forward to future years for application to positive amounts. According to the most recent audit report for the period ended June 1, 1996, there exists a deficiency of $2,361 that the Company may carry forward to future years. Due to this deficiency carry forward, no liability for this Aminex agreement has been recorded, nor is any liability expected in the near future. e. Litigation The Company is named as defendant in various actions in the ordinary course of its business. These actions generally involve disputes related to contract performance, property boundaries, mining rights, blasting damages, personal injuries and royalty payments, as well as other civil actions that could result in additional litigation or other adversary proceedings. While the final resolution of any matter may have an impact on the Company's financial results for a particular reporting period, management believes that the ultimate disposition of these matters will not have a materially adverse effect upon the financial position of the Company. f. Leases The Company has various operating leases for mining equipment and rental of tipples from a related party (see Note 15b). Rental expense for the year ended December 31, 1997 was approximately $370. The Company also leases coal reserves under agreements that call for royalties to be paid as the coal is mined. Total royalty expense for the years ended December 31, 1997 was approximately $8,700. Certain agreements require minimum annual royalties to be paid regardless of the amount of coal mined during the year. However, such agreements are generally cancelable at the Company's discretion. These minimum royalties are recoverable against future royalty payments due on subsequent coal sales and are expensed as the related coal is mined. Approximate future minimum rental and royalty payments for subsequent years are:
F-114
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) 12. MAJOR CUSTOMERS The Company had sales to the following major customers that in any period exceeded 10% of revenues:
13. STOCKHOLDER'S EQUITY Stockholder's equity consists of:
14. TREASURY STOCK In November 1995, Leslie Resources, Inc. signed an option agreement with three of its stockholders to purchase all the shares of their common stock for $3,903, which was exercised in March 1996. After this transaction, only one stockholder, Greg Wells, owns all the outstanding shares of Leslie Resources, Inc. In 1990 Leslie Resources, Inc. purchased 20 shares from a previous stockholder for $349. Greg Wells is the only stockholder of Leslie Resources Management, Inc. and its subsidiaries, and no treasury stock has ever been purchased.
F-115
LESLIE RESOURCES, INC. AND LESLIE RESOURCES MANAGEMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) 15. RELATED PARTY TRANSACTIONS As indicated in Note 2b, all material related party transactions among the combining Companies have been eliminated. Other related corporations with common ownership with the Company which had transactions are: (a) Resource Trucking, Inc. was paid $884 for contract trucking and equipment rental. These services are continually provided to the Company on a month to month basis. (b) Mountain Properties, Inc. was paid $1,494 for coal royalties, rents and wheelage and $299 for tipple lease. The Company has leases for varying lengths of time with Mountain Properties, Inc. for future rental and royalty obligations. Approximate minimum payments are included in Note 11f. No material receivables or payables with these related companies exist at December 31, 1997. 16. NEW ACCOUNTING STANDARDS Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121). The new standard requires that long-lived assets and certain identified intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing such impairment reviews, companies are required to estimate the sum of future cash flows from an asset and compare such amount to the asset's carrying amount. Any excess of carrying amount over expected cash flows will result in a possible write-down of an asset to its fair value. Adopting SFAS No. 121 had no impact on the Company's financial position or results of operations. The Company will implement Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, (SFAS No. 130) during 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. Such changes are not significant to the Company. Effective January 1, 1999, the Company will adopt Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. The new statement requires that the costs of start-up activities be expensed as incurred. The Company has not yet evaluated the impact of this statement on the results of operations or financial position. 17. SUBSEQUENT EVENTS In December 1997, the shareholder agreed to sell all of the stock of the Company to AEI Holding Company, Inc., the closing of which took place January 15, 1998. Prior to January 15, 1998, the Company committed to sell, and subsequently sold, property classified as held for resale to Caterpillar Finance for settlement of three notes (see Note 6b). The property sold is leased back from Caterpillar Finance under operating leases.
F-116
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AEI Resources, Inc. and
We have audited the accompanying combined balance sheets of Mid-Vol Leasing, Inc. and Affiliates (Mid-Vol Leasing, Inc., Mega Minerals, Inc. and Premium Processing, Inc., see Note 1) as of December 31, 1996 and 1997, and the related combined statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1997. 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 combined financial position of Mid-Vol Leasing, Inc. and Affiliates as of December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Louisville, Kentucky
F-117
MID-VOL LEASING, INC. AND AFFILIATES (NOTE 1)
COMBINED BALANCE SHEETS
The accompanying notes to combined financial statements are an integral part of these balance sheets.
F-118
MID-VOL LEASING, INC. AND AFFILIATES (NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For The Years Ended December 31, 1995, 1996 and 1997 And The Six Months Ended June 30, 1997 and 1998
The accompanying notes to combined financial statements are an integral part of these statements.
F-119
MID-VOL LEASING, INC. AND AFFILIATES (NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1995, 1996 and 1997 And For The Six Months Ended June 30, 1997 and 1998
The accompanying notes to combined financial statements are an integral part of these statements.
F-120
MID-VOL LEASING, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS Mid-Vol Leasing, Inc. and Affiliates consists of Mid-Vol Leasing, Inc. (a West Virginia S corporation), Mega Minerals, Inc. (a West Virginia S corporation) and Premium Processing, Inc. (a West Virginia C corporation), collectively referred to as "the Company". Mid-Vol Leasing, Inc. (MVL) engages in the brokering of coal with sales predominantly to international coal brokering firms. MVL uses contract miners (including a related party, see Note 7b) to mine the coal. Coal mining and the operation of the loading facilities are conducted in McDowell County in southern West Virginia.
Mega Minerals, Inc. (MMI) leases land for coal mining purposes primarily to
Richard Preservati owns 81% of MVL and MMI and 9% of PPI. Tim Boggess, Richard Preservati's son-in-law, owns 75% of PPI. The remaining shares of each of the three companies are owned by Richard Preservati's wife, Nancy, and their three children, Richard Preservati II, Nicholas Preservati and Gina Boggess. See Note 12b regarding sale to Coal Ventures, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Method of Accounting and Basis of Presentation The accompanying combined financial statements include those of Mid-Vol Leasing, Inc., Mega Minerals, Inc. and Premium Processing, Inc. because of common ownership and control. All significant intercompany transactions and balances have been eliminated in the combination. The Company's books and records are maintained on an income tax basis of accounting which differs from and is a comprehensive basis of accounting other than generally accepted accounting principles. Adjustments have been made to the income tax records via "memorandum" entries in order for the financial statements to be prepared in accordance with generally accepted accounting principles. b. Interim Financial Information The interim financial statements as of June 30, 1998 and for the six months ended June 30, 1997 and 1998 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 the Company's management, the unaudited interim financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. c. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-121
d. Statements of Cash Flows For purposes of the statements of cash flows, the Company considers investments having maturities of three months or less at the time of purchase to be cash equivalents. Supplemental disclosure:
Not included in the statement of cash flows for 1995 is an addition to property, plant and equipment of $500 which was financed through a $400 note in 1995 and a $100 option payment in 1993. Additionally in 1995, a line of credit of $800 was refinanced into a long-term note of $800, which has been excluded from the 1995 statement of cash flows. e. Restricted Cash In accordance with a 1989 coal mining sublease agreement with USX Corporation (USX), the Company was required to maintain $100 in escrow for the purpose of satisfying any obligations owed to USX. During 1997, this requirement was released. f. Inventories Inventories are stated at the lower of cost (using the first-in, first-out method) or market. All inventories consists of stock piled coal. g. Advance Royalties (included in prepaid expenses and other) The Company is required under certain royalty lease agreements to make minimum royalty payments whether or not mining activity is being performed on the leased property. These minimum payments are recoupable once mining begins on the leased property. The Company capitalizes these minimum royalty payments and expenses them once mining activities begin. As of December 31, 1996 and 1997, the Company had advance royalties of $56 and $49, respectively. h. Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company provides for depreciation of the depreciable assets by using accelerated methods with useful lives that range from 7 to 15 years. Depreciation expense was $229, $199 and $177 for 1995, 1996 and 1997, respectively. i. Depletion Cost depletion is calculated on a per ton basis to allocate the cost of mineral reserves against the related coal sales. Cost depletion expense was $93, $101 and $152 for 1995, 1996 and 1997, respectively. j. Revenue Recognition The Company's revenues have primarily been generated under coal sales contracts with coal brokerage firms, primarily internationally based. All sales are consummated in US dollars, and revenues are recognized at the time the train cars are loaded as all sales agreements are FOB mine site. The Company grants credit to its customers based on their creditworthiness and generally does not secure collateral for its receivables. No allowance for doubtful accounts is recorded for 1996 and 1997, as management does not believe it is necessary. Historically, accounts receivable write-offs have been insignificant.
F-122
MID-VOL LEASING, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) k. SFAS No. 121 Effective January 1, 1996, for purposes of this presentation in accordance with generally accepted accounting principles, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121). The new standard requires that long-lived assets and certain identified intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing such impairment review, companies are required to estimate the sum of future cash flows from an asset and compare such amount to the asset's carrying amount. Any excess of carrying amount over expected cash flows will result in a possible write-down of an asset to its fair value. Adopting SFAS No. 121 had no impact on the Company's financial position or results of operations. l. New Accounting Standard Effective January 1, 1999, for purposes of this presentation in accordance with generally accepted accounting principles, the Company will adopt Statement of Position (SOP) 98-5 Reporting on the Costs of Start-Up Activities. The new statement requires that the costs of start-up activities be expensed as incurred. The Company has not yet evaluated the impact of this statement on the results of operations or financial position. m. Reclassifications
Certain reclassifications of prior year amounts were made to conform with the
current year presentation with no effect on previously reported net income
3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including mineral reserves at December 31, 1996 and 1997, are summarized by major classifications as follows:
F-123
MID-VOL LEASING, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) 4. DEBT a. Long-Term Debt Long-term debt consists of the following:
Principal payments required for long-term debt after December 31, 1997 are as follows:
b. Note payable As of December 31, 1996, the Company had a $400 note payable to One Valley Bank, bearing interest at 5.29%, payable on demand principal and interest for 180 days. This note was paid in 1997. c. Letters of Credit MVL has a letter of credit, secured by affiliate equipment, amounting to $800 to cover certain debt obligations. d. Guarantor As of December 31, 1997, MVL guarantees an affiliates' term loans of approximately $1.4 million that mature on January 15, 2001. Subsequent to year- end, MVL was released from its guarantor obligations (see Note 12a). 5. RECLAMATION COSTS Under current federal and state surface mine laws, the Company is required to reclaim land where surface mining operations are conducted. As the Company obtained the permits relating to the surface mining of its controlled reserves, they have the ultimate responsibility for ensuring that reclamation is completed. Under agreements entered into by the Company with its contract miners, such contract miners are contractually responsible for reclamation. In the event that the contract miners do not perform the required reclamation, the
F-124
MID-VOL LEASING, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) Company would become liable for this reclamation. The Company assesses the financial stability of the contract miners before entering into agreements. The Company may require contract miners to maintain $250 in escrow to be released upon completion of reclamation. If the contract miner obtains its own bonding, the escrow requirement is waived. No additional amounts for reclamation have been provided in the accompanying financial statements as the Company does not believe it will be required to perform such activities. As of December 31, 1997, the Company had approximately $2.8 million in mining bonds. 6. INCOME TAXES MVL and MMI have elected to be recognized as S corporations under the Internal Revenue Code and similar state statutes. As a result, both entities are not subject to income taxes and their taxable income or loss is reported in the stockholders' individual tax returns. PPI (organized in 1996) has elected to be recognized as a C corporation under the Internal Revenue Code and similar state statutes. During 1996 and 1997, PPI had no temporary differences between financial statement and tax bases of assets and liabilities. Accordingly, the income tax provision for 1997 is entirely current with no deferred portion. There are no significant differences between the statutory tax rate and effective tax rate for PPI earnings. 7. COMMITMENTS AND CONTINGENCIES a. Coal Sales Contracts As of December 31, 1997, MVL had commitments to deliver base quantities of coal to two customers. One contract expires at the end of 1998, with MVL contracted to supply a minimum of approximately 60,000 tons of coal over the remaining life of this contract at prices which are at or above market. MVL also has a contract with CoalArbed, which extends through June 30, 1999 (see Note 9). MVL is to supply a minimum of approximately 600,000 tons of coal at prices which are at or above market. b. Contract Mining Agreements As of December 31, 1997, MVL had commitments to purchase quantities of coal from three contract miners (including one affiliate) under various agreements. In 1998, MVL is committed to purchase approximately 1,000,000 tons of coal at cost which will not exceed the ultimate sales prices. Included in the aforementioned tonnage purchase commitment is approximately 360,000 tons of coal to be purchased from a party related by common ownership, Extra Energy, Inc. (EEI). MVL has used EEI as a contract miner since 1993. Prior to January 1, 1998, EEI's per ton selling price to MVL was equal to EEI's cost per ton to mine the coal, exclusive of any profit or cost of capital. As of December 31, 1995, 1996 and 1997, EEI's price per ton was $28.20, $34.60 and $16.00, respectively. Beginning January 1, 1998, EEI's sales price to MVL was set at $23.00 per ton. These rates exclude additional mining costs such as production taxes and royalty fees. c. Litigation The Company is named as defendant in two pending civil actions that relate to an on-the-job accident. While the final resolution of any matter may have an impact on the Company's financial results for a particular reporting period, management believes that the ultimate disposition of these matters will not have a materially adverse effect upon the financial position of the Company.
F-125
MID-VOL LEASING, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) d. Leases Lease Cost The Company leases equipment from a related party. Lease expense for the years ended December 31, 1995, 1996 and 1997 was $254, $243 and $619, respectively. MMI and MVL also lease coal reserves under agreements that call for royalties to be paid as the coal is mined. Total royalty expense for the periods ending December 31, 1995, 1996 and 1997 was $259, $398 and $1,062, respectively. Approximate future minimum lease and royalty payments are as follows:
Subsequent to year-end, the leases relating to royalties were amended (see Note 11b). Lease Income MMI leases certain coal reserve rights. During 1995, 1996 and 1997, MMI recognized royalty income of $139, $198 and $353, respectively. The Company has two lease agreements extending through 2001 and 2008, which call for minimum annual payments to be received of $10 and $7, respectively. 8. STOCKHOLDERS' EQUITY Stockholders' equity consists of:
F-126
MID-VOL LEASING, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) 9. MAJOR CUSTOMERS The Company had sales to the following major customers that in any period exceeded 10% of revenues:
10. RELATED PARTY TRANSACTIONS As indicated in Note 2, all material related party transactions among the combining Companies have been eliminated. Transactions with other corporations related via common ownership were as follows:
11. SUBSEQUENT EVENTS a. Pace Carbon West Virginia Synthetic Fuels #3, L.L.C. Refuse Plant In January 1998, MVL (as Lessor) and Pace Carbon West Virginia Synthetic Fuels #3, L.L.C. (Pace) entered into a sub-lease agreement pertaining to 7 acres at the Dan's Branch Location. The agreement runs through June 30, 2008, with Pace paying $7 per year in rent to MVL. Pace is constructing a coal palletizing plant on the leased property. Pace plans to blend refuse type material with low quality coal to produce coal briquettes, which will be sold to utilities. As of December 31, 1997, Pace had advanced to MVL $100 towards the construction of a beltway (conveyor). In March 1998, Pace advanced MVL an additional $1,900. The beltway will run to MVL's Eckman loadout facility. MVL and Pace will both have access to the beltway with MVL gaining ownership upon its completion. If MVL cannot construct the beltway for $2,000 but can complete for up to $3,000, Pace will loan MVL up to $1,000 at 8% interest. If MVL cannot complete the project for the $3,000, the parties will decide who will fund the additional amount. If the belt is determined to be not economically feasible (prior to beginning construction), MVL is obligated to use the $2,000 advanced from Pace to improve the haul roads at the Dan's Branch location. The Company estimates construction costs of approximately $3,700. Due to the conveyor project not being economically feasible, the Company plans on using the $2,000 towards improving the haul roads.
F-127
MID-VOL LEASING, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) b. Amendment to Pocahontas Land Corporation (Pocahontas) Leases On April 1, 1998, MVL and MMI amended their individual leases with Pocahontas, bringing all leases under the same terms. All leases extend through December 31, 2012, with renewal periods of 15 years. The Company will pay Pocahontas a royalty rate of 3.25% on the average gross selling price per ton, beginning April 1, 1998 through March 31, 2000; thereafter, the royalty rate increases to 3.50%. The advance minimum annual payment will be $185 payable in quarterly payments of $46, effective January 1, 1998. c. Potential Acquisition by AEI Holding Company, Inc. In March 1998, the shareholders signed a letter of intent to sell all of the stock of MVL, MMI and PPI to AEI Holding Company, Inc. 12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED) a. Release from Obligations Subsequent to April 23, 1998, MVL was released from its guarantor obligation (see Note 4d). Additionally, MVL was released from its operating lease obligations (see Note 7d). b. Purchase Agreement On July 10, 1998, the shareholders entered into a stock purchase agreement and immediately sold all their shares to Coal Ventures, Inc. (CVI), which is an entity related to AEI Holding Company, Inc. CVI subsequently change its name to AEI Resources, Inc. (Resources). The purchase price was $35,000 plus a working capital adjustment as well as production royalty payments. c. Debt Retirement In July 1998 the Company paid off its remaining debt with company cash and net proceeds from the $750 short-term note payable. Subsequently, the Company's major shareholder retired the $750 note payable. 13. Unaudited Pro Forma Information Upon acquisition by CVI (see note 12b) MVL and MMIs tax status changed from S corporation to C corporation. A pro forma adjustment has been made to historical net income to reflect a provision for federal, state and local income taxes during the respective S corporation periods (see note 6) using a combined effect rate of 38%.
F-128
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Kindill Holding, Inc.
We have audited the accompanying consolidated balance sheets of Kindill Holding, Inc. (Company) as of December 31, 1996 and 1997, and the related statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Deloitte & Touche LLP
Louisville, Kentucky
F-129
KINDILL HOLDING, INC CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
F-130
KINDILL HOLDING, INC CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
F-131
KINDILL HOLDING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See notes to consolidated financial statements.
F-132
KINDILL HOLDING, INC CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
F-133
KINDILL HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Description of Business--Kindill Holding, Inc., (Company) is primarily engaged in the extraction and processing of coal in Southern Indiana. The principal market for the Company's coal is electric utilities located in Southern Indiana and Western Kentucky. Coal sales are made under long-term contracts and on the spot market, and are made on an unsecured basis. A substantial portion of the Company's labor force is under a contract with the United Mine Workers of America (UMWA). Basis of Presentation--The consolidated financial statements include the accounts of Kindill Holding, Inc. and its subsidiary. All significant intercompany transactions and balances have been eliminated. Any information as of June 30, 1998 and for the six months ended June 30, 1997 and 1998 is unaudited; however, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of these interim periods have been included. The result for its interim periods ended June 30, 1997 and 1998, are not necessarily indicative of the results to be obtained for the full year. Acquisitions--On December 6, 1995 and February 12, 1996, the Company acquired certain assets, primarily mineral reserves and mining machinery and equipment of approximately $79,019, assumed certain liabilities, primarily reclamation and postretirement benefit obligation of approximately $81,754, and received cash of $2,735. Liabilities assumed also include a payable to a relative of a stockholder of the Parent for fees related to the acquisitions of approximately $16,600. The purchase method was used to account for the acquisitions. Cash and Cash Equivalents--Cash and cash equivalents include cash on deposit and highly liquid investments with original maturities of three months or less. Inventories--Coal inventory is stated at the lower of costs (first-in, first- out method) or market. Coal inventory costs primarily include labor, equipment, drilling, blasting and stripping costs. Expenditures for mine supply inventory, which totaled approximately $11,130 and $10,804 in 1996 and 1997, respectively, are charged to expense when incurred. Property, Plant and Equipment--Property, plant and equipment are stated at cost. Depreciation is determined using principally the straight-line method over the estimated useful lives of the related assets. Expenditures for mineral rights are capitalized. Mineral rights costs are depleted or amortized using the units of production method. Expenditures for maintenance and repair costs which totaled approximately $8,270 and $9,013 in 1996 and 1997, respectively, are charged to expense when incurred. Deferred Financing Costs--The cost of issuing long-term debt is capitalized and amortized using the effective interest method over the term of the related debt. Advanced Royalties--Advanced, or recoupable, royalties represent prepayments on leases for the rights to mine minerals. These royalties are charged to expense based on the units of production method or charged to operations when the Company has ceased mining or has made the decision not to mine such property. Asset Impairment--In certain situations, expected mine lives are shortened because of changes to planned operations. To the extent that it is determined that asset carrying values will not be recoverable during the shorter mine life, a provision for such impairment is recognized. In addition, the Company elected to adopt Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of in 1996. SFAS No. 121 expanded the Company's criteria
F-134
for loss recognition, and provides methods for both determining when an impairment has occurred and for measuring the amount of the impairment. SFAS No. 121 requires that projected future cash flows from use and disposition of all the Company's assets be compared with the carrying amounts of those assets. When the sum of projected cash flows is less than the carrying amount, impairment losses are to be recognized. There are no asset impairments at December 31, 1996 and 1997. Accrued Reclamation Liability--The Company is required to reclaim land on which mining operations are conducted. An estimated reclamation liability associated with acquired properties is recognized on the purchase date. The costs of normal ongoing surface mining reclamation are charged to cost of sales as incurred. Reclamation costs primarily include reclaiming the final pit and support acreage at surface mines, removing or covering refuse piles and slurry (or settling) ponds and dismantling preparation plants and other facilities. Accrued Postretirement Benefit Obligation--As prescribed by SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, the Company accrues, based on annual independent actuarial valuation, for expected costs of providing postretirement benefits other than pensions, primarily medical benefits, during an employee's actual working career. Income Taxes--The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred taxes are established for temporary differences between financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Revenue Recognition--Coal sales are recognized at contract prices as the time title transfers to the customer. Net Income Per Common Shares--The Company adopted SFAS No. 128, Earnings Per Share, which requires the Company to present its basic net income per common share. Net income per common share is determined by dividing the weighted average number of common shares outstanding during the year into net income. Rate Ceiling Agreement--The Company centered into a rate ceiling agreement to reduce the impact of changes in interest rates on $21,000 of its floating rate debt for the period from October 2, 1997 through September 30, 2000. The rate available under the agreement caps the 10.25% rate under a term note at 12.25%. Net cash amounts paid or received under the agreement, if any, are accrued and recognized as an adjustment to interest expense. There were no amounts paid or received under the agreement in 1997. Use of Estimates--Financial statements prepared in conformity with a generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. 2. FINANCIAL INSTRUMENTS The Company is a party to financial instruments with off-balance sheet risk. No losses are anticipated due to nonperformance by the counterparties relating to financial instruments. Pursuant to SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company is required to disclose the fair value of financial instruments where practicable. The carrying amounts of cash equivalents, accounts receivable and accounts payable reflected on the balance sheets approximate the fair value of these instruments due to the short duration to maturity. The fair value of long-term debt is based on the interest rates available to the Company for debt with similar terms and maturities. The fair value of the rate ceiling agreement is based on the quoted market price as provided by the financial institution which is the counterparty to the agreement.
F-135
KINDILL HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fair value of the Company's long-term debt and rate ceiling agreement as of December 31 is as follows:
3. OTHER CURRENT ASSETS Other current assets consist of the following:
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
5. OTHER ASSETS Other assets consist of the following:
F-136
KINDILL HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. LONG-TERM DEBT Long-term debt consists of the following:
Annual principal payments on long-term debt are as follows:
At December 31, 1997, the Company has interest notes of $8,000 for additional interest payable to the term note lenders. The interest notes are secured by substantially all assets, bear interest at prime (8.5% at December 31, 1997) plus 2%, and are payable in installments through March 2005. The cost related to these notes has been recorded as a contra account to long-term debt and is being amortized using the effective interest method over the period of the term notes. The Company can prepay the interest notes, for $5,000 at any time on or prior to December 31, 1998, for $6,000 at any time on or prior to June 30, 1999, or for $7,000 at any time on or prior to December 31, 1999. At present, Company management intends to pay the interest notes in installments through March 2005. However, if the Company prepays the term and additional interest notes, interest will be adjusted to include the amount of the interest prepayment not yet recognized under the effective interest method. The approximate amount of the interest that would be adjusted to include the amount of interest prepayment not yet recognized under the effective interest method is $2,933 in 1998 if prepaid on December 31, 1998, is $2,362 in 1998 and $647 in 1999 if prepaid on June 30, 1999, or is $2,044 in 1998 and 1999 if prepaid on December 31, 1999. Loan agreements related to the term notes require the Company to maintain certain minimum financial ratios and also contain certain restrictive provisions, including, among others, restrictions on selling or transferring assets, incurring additional indebtedness, making distributions without prior consent of the lenders, leasing of real or personal property and purchasing fixed assets. The Company was not in compliance with its interest coverage ratio covenant and, on May 15, 1998, received a waiver from the term note lenders.
F-137
KINDILL HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. ACCRUED POSTRETIREMENT BENEFIT OBLIGATION Pursuant to Article XX, Health and Retirement Benefits, of the National Bituminous Coal Wage Agreement of 1993 (NBCWA), the Company is required to provide for postretirement benefits other than pensions to eligible beneficiaries covered by the NBCWA. The net postretirement healthcare cost for 1996 and 1997 includes the following:
A reconciliation of the plan's status to amounts recognized in the Company's balance sheets at December 31, follows:
The discount rate used to determine the accumulated postretirement benefit obligation was 7% at December 31, 1996 and 1997. The assumed healthcare cost trend rates used in determining the net expense for 1997 are shown in the following table. Healthcare cost trends were assumed to decline from 1997 levels to an ultimate ongoing level over four years as follows:
The expense and liability estimates can fluctuate by significant amounts based upon the assumptions used by actuaries. If the healthcare cost trend rate was increased by 1% in each year, the accumulated postretirement benefit obligation would be approximately $5,670 higher as of December 31, 1997. The effect of this change on the 1997 expense would be an increase of approximately $440. 8. INCOME TAXES Income tax expense consists of the following:
F-138
KINDILL HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income tax expense does not differ materially from the amount computed by applying the statutory federal income tax rate of 34% to income before income taxes. The components of deferred tax assets and liabilities are as follows:
9. RELATED PARTY TRANSACTIONS The following summarizes expenses incurred during 1996 and 1997 and for the six months ended June 30, 1998 and amounts payable at December 31, 1996 and 1997 and June 30, 1998 to related parties:
F-139
KINDILL HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. COAL SUPPLY CONTRACTS The Company has commitments to deliver scheduled base quantities of coal annually to various customers, which require the Company to supply a minimum supply of coal over the remaining lives of the contracts at prices as defined under the contracts. The annual requirements of tons to be delivered under coal supply contracts are as follows:
11. LEASES The Company has certain noncancelable royalty and equipment operating lease agreements with terms in excess of one year. The annual minimum commitments are as follows:
Royalty and lease expense for 1996 and 1997 was approximately $8,950 and $4,100, respectively. 12. BENEFIT TRUST AND PLANS The Company is required under their contract with the UMWA to pay amounts based on hours worked to the UMWA Pension Plan and Trust, a multi-employer pension plan covering all employees who are members of the UMWA. The accompanying statements of income include approximately $540 and $466 of expense in 1996 and 1997, respectively, applicable to the plan. The NBCWA authorizes the Bituminious Coal Operators Association to increase the rate of contributions from employers to assure payment of benefits. The union contract requires all currently participating employers to guarantee benefits jointly, but not severally, with all other currently participating employers. The Company has a defined contribution savings plan under the provisions of Sec. 401(k) of the Internal Revenue Code that provides retirement benefits to substantially all employees other than employees covered by the contract with the UMWA. The Company's contribution is discretionary. The Company did not make any contributions in 1996 or 1997.
F-140
KINDILL HOLDING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. SELF-INSURED EMPLOYEE HEALTH AND DISABILITY BENEFITS The Company maintains self-insurance programs for that portion of nonadministrative employees' workers' compensation costs not covered by the Company's stop loss insurance policy. During 1996 and 1997, the maximum cash outlays were $250 in annual claims for each accident and aggregate annual claims of $750 and $500, respectively. Workers' compensation costs charged to expense in 1996 and 1997 were approximately $185 and $132, respectively. Effective August 1, 1997, the Company began a self-insurance program for that portion of employees' health care costs not covered by the Company's stop loss insurance policy, which sets the maximum cash outlays for annual claims for each employee or employee's dependent up to $35 and individual lifetime maximum of $1,000 at December 31, 1997. Health care costs charged to expense in 1997 were approximately $63. 14. NET INCOME PER COMMON SHARE The following are reconciliations of the numerators and denominators used for the determination of net income per common share for the years ended December 31, 1996 and 1997.
15. MAJOR CUSTOMERS The Company has sales to the following major customers that exceed 10% of revenues. These revenues and each customer's relative percentage of total trade receivables are summarized below:
16. SUBSEQUENT EVENT On August 17, 1998 the stockholders of the Company agreed to sell all of the outstanding common stock of the Company to West Virginia--Indiana Coal Holding Company, Inc. for approximately $11,000.
F-141
INDEPENDENT AUDITORS' REPORT To the Board of Directors of AEI Resources, Inc.: We have audited the accompanying balance sheets of Martiki Coal Corporation (a wholly-owned subsidiary of MAPCO Coal, Inc.) as of December 31, 1997, and September 30, 1998, and the related statements of operations, stockholder's equity, and cash flows for the seven months ended July 31, 1996 (predecessor), and for the five months ended December 31, 1996, the year ended December 31, 1997, and the nine months ended September 30, 1998 (successor). 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, such financial statements present fairly, in all material respects, the financial position of Martiki Coal Corporation at December 31, 1997, and September 30, 1998, and the results of its operations and its cash flows for the seven months ended July 31, 1996 (predecessor), and for the five months ended December 31, 1996, the year ended December 31 1997, and the nine months ended September 30, 1998 (successor), in conformity with generally accepted accounting principles. As discussed in Note 1, effective August 1, 1996, Martiki Coal Corporation's parent became a wholly owned subsidiary of Alliance Coal Corporation in a business combination accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on fair values. Accordingly, the predecessor financial statements for the seven months ended July 31, 1996, are not necessarily comparable to the successor financial statements subsequent to August 1, 1996. DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
F-142
MARTIKI COAL CORPORATION
BALANCE SHEETS
December 31, 1997 and September 30, 1998
See notes to financial statements.
F-143
MARTIKI COAL CORPORATION (A Wholly-Owned Subsidiary of MAPCO Coal, Inc.) STATEMENTS OF OPERATIONS Seven Months Ended July 31, 1996 (Predecessor) and for the Five Months Ended December 31, 1996, Year Ended December 31, 1997, and Nine Months Ended September 30, 1998 (Successor)
See notes to financial statements.
F-144
MARTIKI COAL CORPORATION
STATEMENTS OF OPERATIONS Seven Months Ended July 31, 1996 (Predecessor) and for the Five Months Ended December 31, 1996, Year Ended December 31, 1997, and Nine Months Ended September 30, 1998 (Successor)
See notes to financial statements.
F-145
MARTIKI COAL CORPORATION
STATEMENTS OF CASH FLOWS Seven Months Ended July 31, 1996 (Predecessor) And For The Five Months Ended December 31, 1996, Year Ended December 31, 1997, And Nine Months Ended September 30, 1998 (Successor)
See notes to financial statements.
F-146
MARTIKI COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS Seven Months Ended July 31, 1996 (Predecessor) and for the Five Months Ended December 31, 1996, Year Ended December 31, 1997 and Nine Months Ended September 30, 1998 (Successor) 1. ORGANIZATION AND BASIS OF PRESENTATION Organization--Martiki Coal Corporation (the "Company") produces and markets coal from a surface mine complex located in Kentucky. Coal is sold primarily to electric utilities located in the eastern United States. The Company is a wholly-owned subsidiary of MAPCO Coal, Inc., that, since August 1, 1996, has been a wholly-owned subsidiary of Alliance Coal Corporation ("Alliance") and represents the successor company ("Successor"). Prior to August 1, 1996, MAPCO Coal, Inc. was a wholly-owned subsidiary of MAPCO Inc. ("MAPCO") and represents the predecessor company ("Predecessor"). Basis of Presentation--The accompanying financial statements present the assets, liabilities, revenues and expenses related to the Company. Effective August 1, 1996, pursuant to a stock purchase agreement by and between Alliance and MAPCO, Alliance acquired all of the outstanding stock of MAPCO Coal, Inc. The allocation of the acquisition costs among the acquired assets and assumed liabilities was based on fair values using appraisals, actuarial valuations, and management estimates using the purchase method of accounting for business combinations. Operating results prior to August 1, 1996 for the Predecessor are presented on a historical cost basis and are not necessarily comparable to operating results subsequent to August 1, 1996 for the Successor primarily due to depreciation and amortization. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Estimates in the Financial Statements--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Fair Value of Financial Instruments--The carrying amounts for accounts receivable, accounts payable and amounts due from Parent approximate fair value because of the short maturity of those instruments. Cash Management--The Company participated in the cash management program of Alliance subsequent to August 1, 1996 and MAPCO prior to August 1, 1996. All cash transactions for the Company, including current income taxes attributable to the Company, were processed by Alliance and MAPCO's treasury function during the respective periods and reflected through Due to Parent. Inventories--Inventories are stated at the lower of cost or market. Coal and supplies inventories are determined on an average cost basis. Property, Plant, and Equipment--Property, plant, and equipment were presented at fair value at August 1, 1996 and at historical cost prior to that date. Additions and replacements constituting improvements are capitalized. Maintenance, repairs, and minor replacements are expensed as incurred. Depreciation and amortization is computed principally on the straight-line method based upon the estimated useful lives of the assets or the estimated life of the mine (6 years at revaluation date of August 1, 1996), whichever is less. Depreciable lives for mining equipment and processing facilities range from 3 to 6 years. Depreciable lives for land and land improvements range from 6 to 10 years. Depreciable lives for buildings, office equipment and improvements are 6 years. Gains or losses arising from retirements are included in current operations.
F-147
MARTIKI COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued) The Company reviews the carrying value of property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable based upon estimated future cash flows. As of September 30, 1998, the Company had not recorded any impairments. Advance Royalties--Advance royalties are included in Other Assets and represent rights to coal mineral leases acquired through advance royalty payments. Management assesses the recoverability of royalty prepayments based on estimated future production and capitalizes these amounts accordingly. As mining occurs on those leases, the royalty prepayments are included in the cost of mined coal. Royalty prepayments estimated to be nonrecoverable are expensed. Coal Supply Agreement--A portion of the acquisition costs ($3.2 million) at August 1, 1996 was allocated to a coal supply agreement which was amortized to expense during the five months ended December 31, 1996 due to the expiration of the coal supply agreement on December 31, 1996. Reclamation and Mine Closing Costs--Estimates for the cost of future mine reclamation and closing procedures are recorded on a present value basis. Accruals for estimated future reclamation and mine closing costs are subject to potential changes in conditions, such as regulatory requirements, that affect these estimates. Ongoing reclamation costs are expensed as incurred. Workers' Compensation and Pneumoconiosis ("Black Lung") Benefits--The Company is self-insured for workers' compensation benefits, including black lung benefits. The Company accrues a workers' compensation liability for the estimated present value of current and future workers' compensation benefits based on actuarial valuations. These estimates are subject to potential changes in benefit development factors that affect management's projections of the ultimate benefits liability. Income Taxes--The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. For the predecessor, the Company's operations were included in the consolidated U.S. income tax return of MAPCO. For the successor, the Company's operations have been included in the consolidated U.S. income tax return of Alliance. Accordingly, income tax balances will ultimately be settled through the intercompany account with the Parent. The Company files a separate state income tax return in Kentucky. For purposes of preparing the financial statements, federal and state income taxes are determined as if the Company filed separate income tax returns. Revenue Recognition--Revenues are recognized when coal is shipped from the mine. Return of Capital--By way of directive from Alliance, $9,540,000 and $4,045,000 of capital was returned to Alliance on December 31, 1997 and September 30, 1998, respectively. New Accounting Standards - Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires publicly-held companies to report financial and descriptive information about operating segments in financial statements issued to shareholders for interim and annual periods. SFAS No. 131 also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The Company adopted SFAS No. 131 effective January 1998. The Company has no reportable segments due to its operations consisting solely of producing and marketing coal, and the Company has disclosed major customer sales information (Note 10) and geographic areas of operation (Note 1) in accordance with SFAS No. 131.
F-148
MARTIKI COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued) In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has not determined the impact on its financial statements that may result from adoption of SFAS No. 133, which is required no later than January 1, 2000. 3. INVENTORIES Inventories consist of the following (in thousands):
4. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consist of the following (in thousands):
5. INCOME TAXES The Company recognizes a deferred tax asset for the future tax benefits attributable to deductible temporary differences to the extent that realization of such benefits is more likely than not. Realization of these future tax benefits is dependent on the Company's ability to generate future taxable income. Management believes that future taxable income will be sufficient to recognize a portion of the tax benefits and has established a valuation allowance for the remaining portion. There can be no assurance, however, that the Company will generate sufficient taxable income in the future. The Company has approximately $1,305,000 and $6,715,000 of net operating loss carryforwards ("NOLs") as of December 31, 1997 and September 30, 1998, respectively, that expire during 2012 and 2013. The Company has established a 100% valuation allowance for the tax benefit of these NOLs due to the uncertainty of realizing these benefits on future consolidated tax returns for Alliance.
F-149
MARTIKI COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued) The tax effects of significant items comprising the Company's net deferred tax asset are as follows (in thousands):
Income (loss) before income taxes is derived from domestic operations. Significant components of income tax expense (benefit) are as follows (in thousands):
F-150
MARTIKI COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued) Income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate of 35% to income (loss) before income taxes due to the following (in thousands):
6. EMPLOYEE BENEFIT PLANS Defined Contribution Plans--Prior to August 1, 1996, the Company's employees participated in a defined contribution profit sharing and savings plan sponsored by MAPCO which covered substantially all full-time employees. The plan provisions were similar to the provisions of the plan sponsored by Alliance discussed below. The Company's employees currently participate in a defined contribution profit sharing and savings plan sponsored by Alliance which covers substantially all full-time employees. Plan participants may elect to make voluntary contributions to this plan up to a specified amount of their compensation. Alliance makes contributions based on matching 75% of employee contributions up to 3% of their annual compensation. Additionally, Alliance contributes a defined percentage of eligible earnings for employees not covered by the defined benefit plan described below. The Company's expense for the profit sharing and savings plans allocated by MAPCO and Alliance was approximately $40,000 for the seven months ended July 31, 1996, $20,000 for the five months ended December 31, 1996, $78,000 for the year ended December 31, 1997, and $55,000 for the nine months ended September 30, 1998. Defined Benefit Plans--Prior to August 1, 1996, the Company participated in MAPCO's defined benefit plan which covered substantially all employees at the mining operations. Effective January 1, 1997, Alliance established a defined benefit plan covering substantially all employees at its mining operations, including those employed by the Company. Total accrued pension expense (benefit) included in the Company's operating expenses was allocated to the Company by MAPCO and Alliance, respectively, based on its proportional number of employees participating in the plans. The allocated net pension expense (benefit) included in operating expenses for the seven months ended July 31, 1996, the year ended December 31, 1997, and the nine months ended September 30, 1998 was approximately $(116,000), $239,000, and $192,000, respectively. The allocated pension expense (benefit) were settled through Due to Parent. The Company did not participate in a defined benefit plan during the five months ended December 31, 1996. 7. RECLAMATION AND MINE CLOSING COSTS The Company is governed by state statutes and the Federal Surface Mining Control and Reclamation Act of 1977 which establish reclamation and mine closing standards. These regulations, among other requirements, require restoration of property in accordance with specified standards and an approved reclamation plan. The
F-151
MARTIKI COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued) Company has estimated the costs and timing of future reclamation and mine closing costs and recorded those estimates on a present value basis using a 6% discount rate. 8. PNEUMOCONIOSIS ("BLACK LUNG") BENEFITS The Company is liable under state statutes and the Federal Coal Mine Health and Safety Act of 1969, as amended, to pay black lung benefits to eligible employees and former employees and their dependents. The Company provides self- insurance accruals, determined by independent actuaries, at the present value of the actuarially computed present and future liabilities for such benefits. The actuarial studies utilize a 6% discount rate and various assumptions as to the frequency of future claims, inflation, employee turnover, and life expectancies. The cost of black lung benefits charged to operations for the seven months ended July 31, 1996, the five months ended December 31, 1996, the year ended December 31, 1997, and the nine months ended September 30, 1998 was approximately $57,000, $30,000, $92,000, and $69,000, respectively. 9. COMMITMENTS AND CONTINGENCIES General Litigation--The Company is involved in various lawsuits, claims, and regulatory proceedings incidental to its business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company's business, financial position, or results of operations. 10. MAJOR CUSTOMERS The Company has significant long-term coal supply agreements at sales prices above current spot market prices. The contracts contain price adjustment provisions designed to reflect changes in market conditions, labor, and other production costs and, when the coal is sold other than FOB shipping point, changes in railroad and/or barge freight rates. Sales to major customers which exceed ten percent of total revenues are as follows (in thousands):
The coal supply agreements with customers B and C expired in December 1998 and January 1998, respectively. The coal supply agreement with customer A expired at the end of 1996. 11. DUE TO PARENT The Company was charged for certain corporate services rendered by MAPCO for the seven months ended July 31, 1996 and by Alliance for the periods subsequent to August 1, 1996. The expenses allocated to the Company primarily related to executive management, accounting, treasury, land administration, environmental management, legal and information and technology services. These allocations were primarily based on the relative size of the direct mining operating costs incurred by the respective mine locations of MAPCO
F-152
MARTIKI COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued) Coal Inc., including the Company. The allocations of general and administrative expenses were approximately $1,231,000, $932,000, $2,963,000 and $2,434,000 for the seven months ended July 31, 1996, the five months ended December 31, 1996, year ended December 31, 1997 and the nine months ended September 30, 1998. Management is of the opinion that the allocations used are reasonable and appropriate and reasonably approximate costs that would be incurred and paid to unrelated parties for similar services. 12. SUBSEQUENT EVENT On November 6, 1998, pursuant to a stock purchase agreement, AEI acquired all of the outstanding common stock of the Company for $32 million. * * * * * *
F-153
We have not authorized anyone to give you any information or to make any rep- resentations about the transactions we discuss in this Prospectus other than those contained herein or in the documents we incorporate herein by reference. If you are given any information or representations about these matters that is not discussed or incorporated in this Prospectus, you must not rely on that information. This Prospectus is not an offer to sell or a solicitation of an offer to buy securities anywhere or to anyone where or to whom we are not per- mitted to offer or sell securities under applicable law. The delivery of this Prospectus offered hereby does not, under any circumstances, mean that there has not been a change in our affairs since the date hereof. It also does not mean that the information in this Prospectus or in the documents we incorpo- rate herein by reference is correct after this date. TABLE OF CONTENTS
Until , 1999, All dealers effecting transactions in the new Notes, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Exchange Of fer for $200,000,000 10 1/2% Senior Notes Due December 15, 2005 of AEI Resources, Inc. and AEI Holding Company, Inc., its wholly owned subsidiary PROSPECTUS , 1999 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes indemnification of directors, officers, employees, and agents of the Company, allows the advancement of costs of defending against litigation, and permits companies incorporated in Delaware to purchase insurance on behalf of directors, officers, employees, and agents against liabilities whether or not in the circumstances such companies would have the power to indemnify against such liabilities under the provisions of the statute. The Company's Certificate of Incorporation provides that no director will be personally liable to the Company for monetary damages for any breach of fiduciary duty by such director as a director. However, a director will be liable, to the extent provided by applicable law, (i) for any breach of a director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) as provided in Section 174 of the DGCL, or (iv) for any transaction from which a director derived an improper personal benefit. The Company's Certificate of Incorporation and Bylaws also require the Company, to the extent permitted by the DGCL and any other applicable law, to indemnify and advance expenses to directors and executive officers with respect to all threatened, pending or completed actions, suits or proceedings in which the director or executive officer was, is, or is threatened to be made a named defendant or respondent because he is or was a director or executive officer of the Company. The Certificate of Incorporation obligates the Company to indemnify and advance expenses to the executive officer or director only in connection with proceedings arising from the person's conduct in his official capacity with the Company to the extent permitted by the DGCL, as amended from time to time. The Company's Bylaws allow it to purchase and maintain insurance on behalf of a person who is or was a director, officer, employee, fiduciary or agent of the Company, or was, at the Company's request, serving in a similar capacity for another entity. The Company currently maintains insurance covering its executive officers and directors. Insofar as indemnification by the Company for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors and executive officers of the Company pursuant to the foregoing provisions, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Item 21. Exhibits and Financial Statement Schedules. (a) Exhibits. The exhibits to the Registration Statement are listed in the Exhibit Index which precedes the exhibits to this Registration Statement and is hereby incorporated herein by reference. (b) Financial Statement Schedules. The financial statement schedules (1) are listed in the Exhibit Index which immediately precedes the exhibits to this Registration Statement and is hereby incorporated herein by reference, or (2) have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. II-1 Item 22. Undertakings. The undersigned registrant hereby undertakes that: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed to be underwriters, in addition to the information called for by the other items of the applicable form. The Registrant undertakes that every prospectus (i) that is filed pursuant to the immediately preceding undertaking or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any II-2 action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post- effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. AEI Resources, Inc.
POWER OF ATTORNEY We, the undersigned directors and officers of AEI Resources, Inc. do hereby constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch, or any one of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and on our behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Act and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February , 1999. AEI Holding Company, Inc.
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. AEI Resources Holding, Inc.
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-6 SIGNATURES Pursuant to the requirements of the Securities Act, each of the Co- Registrants listed on Attachment A hereto has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. The Co-Registrants Listed on Attachment A Hereto
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-7 ATTACHMENT A
Aceco, Inc.
II-8 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. Bowie Resources Limited
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-9 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. Tennessee Mining, Inc.
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-10 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. Bentley Coal Company Kentucky Prince Mining Company Skyline Coal Company By: Grassy Cove Coal Mining Company, Roaring Creek Coal Company, each as General Partner of each of the entities listed above.
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-11 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. Kermit Coal Company
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-12 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. Nu Coal LLC
By: American Development Company,
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-13 SIGNATURES Pursuant to the requirements of the Securities Act, each of the Co- Registrants listed on Attachment B hereto has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. The Co-Registrants Listed on Attachment B Hereto
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-14 ATTACHMENT B
West Virginia--Indiana Coal Holding Company, Inc.
Cannelton, Inc.
II-15 SIGNATURES Pursuant to the requirements of the Securities Act, each of the Co- Registrants listed on Attachment C hereto has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, February 8, 1999. The Co-Registrants Listed on Attachment C Hereto
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-16 ATTACHMENT C
Beech Coal Company
II-17 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, April 26, 1999. Employee Claims Administration LLC
POWER OF ATTORNEY We, the undersigned directors and officers of Employee Claims Administration LLC, do hereby constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch, or any one of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and on our behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Act and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-18 SIGNATURES Pursuant to the requirements of the Securities Act, each of the Co- Registrants listed on Attachment D hereto has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, April 26, 1999. The Co-Registrants Listed on Attachment D Hereto
POWER OF ATTORNEY We, the undersigned directors and officers of the Co-Registrants listed on Attachment D hereto do hereby constitute and appoint William H. Haselhoff, Vic Grubb and John Lynch, or any one of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and on our behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Act and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
II-19 ATTACHMENT D Princess Beverly Coal Company Princess Beverly Coal Holding Company, Inc. II-20 EXHIBIT INDEX DESCRIPTION OF DOCUMENT
2
3
4
* Previously filed. ** To be filed by Amendment.
5
Exhibit 2.2
STOCK PURCHASE AND SALE AGREEMENT dated as of May 28, 1998 between
CYPRUS AMAX COAL COMPANY,
and
AEI HOLDING COMPANY,INC.
TABLE OF CONTENTS
DISCLOSURE SCHEDULES
EXHIBITS
STOCK PURCHASE AND SALE AGREEMENT STOCK PURCHASE AND SALE AGREEMENT, dated as of ________ ___, 1998 (the "Agreement") between CYPRUS AMAX COAL COMPANY, a Delaware corporation ("Seller"), and AEI HOLDING COMPANY, INC., a Delaware corporation ("Purchaser").
WITNESSETH:
WHEREAS, Seller is, directly and indirectly through various subsidiaries, engaged in the production, processing, exploration, storing, shipment, transshipment, ownership, leasing, loading, unloading, marketing and sale of coal and activities directly or indirectly relating thereto (the "Coal Business"); WHEREAS, Seller desires to sell some, but not all, of its subsidiaries that engage in the Coal Business, consisting of those specific direct and indirect subsidiaries set forth on Schedule I hereto (each such subsidiary listed on Schedule I hereto, a "Subsidiary" and, collectively, the "Subsidiaries"); and WHEREAS, upon the terms and subject to the conditions contained herein, Purchaser desires to purchase the Subsidiaries; NOW, THEREFORE, in consideration of the premises and the representations, warranties and covenants hereinafter set forth, Purchaser and Seller hereby agree as follows:
ARTICLE I
DEFINITIONS SECTION 1.1 Definitions. Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Agreement and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Certain terms defined in the text of this Agreement similarly shall have the meanings therein given for all purposes of this Agreement: "Affiliate" means, with respect to any specified Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified Person, where "control" as used with respect to any Person shall mean the power to direct the business and affairs of such Person, as evidenced by equity ownership of twenty-five percent or greater, or by agreement or otherwise. "Affiliate Plan" shall have the meaning specified in Subsection 3.11.1 hereof. "Agreement", "this Agreement", "herein", "hereunder", "hereof", "hereby" or other like words mean this Stock Purchase and Sale Agreement as originally executed or as modified or amended pursuant to the applicable provisions hereof. "Allocation Arbiter" shall have the meaning specified in Subsection 2.4.2 hereof.
"Amax Coal Company" shall mean Amax - Coal Company, a Delaware
corporation.
"Amax Coal Company Shares" shall have the meaning specified in Subsection 2.3.2 hereof. "Amax Coal Sales Company" shall mean Amax Coal Sales Company, a Delaware corporation. "Amax Coal Sales Company Shares" shall have the meaning specified in Subsection 2.3.2 hereof. "Ancillary Agreements" shall mean, collectively, the Transition Services Agreement, the Equipment Sublease, the Equipment Sale Agreements and the Farm Management Agreements. "Asset Acquisition Statement" shall have the meaning specified in Subsection 2.4.1 hereof. "Average Contingent Amount" shall have the meaning specified in Subsection 5.17.1 hereof "Ayrshire Land" shall mean Ayrshire Land Company, a Delaware corporation. "Ayrshire Land Shares" shall have the meaning specified in Subsection 2.3.2 hereof. "Ayrshire Mine" shall mean the Ayrshire surface coal mine and related facilities and operations of Amax Coal Company located in the State of Indiana. "Balance Sheet Date" shall mean March 31, 1998. "Base Royalty" shall have the meaning specified in Subsection 5.10.1 (d) hereof. "Beech Coal" shall mean Beech Coal Company, a Delaware corporation. "Beech Coal Shares" shall have the meaning specified in Section 2.3.2 hereof. "Bentley Coal" shall mean Bentley Coal Company, a general partnership organized under the laws of the State of New York. "Black Lung Liabilities" and "Black Lung Benefits Obligations" mean any Liability or benefit obligations related to black lung claims and benefits under the Black Lung Benefits Act of 1972, 30 U. S.C. (S)(S) 901 et. seq., the Federal Mine Safety and Health Act of 1977, 30 U.S.C. (S)(S) 801 et. seq., the Black Lung Benefits Ref6im Act of 1977, Pub. L. No. 95- 239, 92 Stat. 95 (1978), the Black Lung Benefits Amendments of 1981, Pub. L. No. 97-119, Title 11, 95 Stat. 1643, in each case as amended, if applicable, and occupational pneumoconiosis, 2 silicosis or other lung disease liabilities and benefits arising under state law or regulation or any other Federal law or regulation now or hereafter in existence.
"Black Lung Trust" shall have the meaning specified in Subsection
5.12.2 hereof.
"Business" shall mean the Coal Business as conducted by the Subsidiaries (excluding, for all purposes of this Agreement, the Excluded Assets and Excluded Liabilities). "Cannelton" shall mean Cannelton Inc., a Delaware corporation hereof. "Cannelton Industries" shall mean Cannelton Industries, Inc., a West Virginia corporation. "Cannelton Land" shall mean Cannelton Land Company, a Delaware corporation. "Cannelton Sales" shall mean Cannelton Sales Company, a Delaware corporation. "Cannelton Shares" shall have the meaning specified in Subsection 2.3.2 hereof. "Cash Advance Period" shall have the meaning specified in Subsection 5.18.1 "Cash Advances" shall have the meaning specified in Subsection 5.18.3 hereof. "Castle Gate Mine" shall mean the former Castle Gate underground coal mine -and related facilities and operations of Amax Coal Company located in the State of Utah. "CERCLA and Superfund Liabilities" shall mean any and all Liabilities arising under or related to the Comprehensive Environmental Response, Compensation and Liability Act of 1980. 42 U.S.C. (S)(S) 9601 et. seq., and the Superfund Amendments and Reauthorization Act of 1986, Pub. L. 99-499, 100 Stat. 1613, and any successor Federal Law or any similar state or local Law. "Claim Notice" shall have the meaning specified in Section 8.3.1 hereof. "Closing" shall have the meaning specified in Section 2.2 hereof. "Closing Date" shall have the meaning specified in Section 2.2 hereof. "Closing Deposit" shall have the meaning specified in Subsection 5.18.5 hereof. "Closing Statement" shall have the meaning specified in Subsection 5.18.6 hereof. "Coal Act" shall mean the Coal Industry Retiree Health Benefit Act of 19 U.S.C. (S)(S) 9701 et. seq. "Coal Business" shall have the meaning specified in the first whereas clause hereof 3
"Coal Components" shall have the meaning specified in Subsection
5.10.1(a) hereof
"Coal Reserves" shall have the meaning specified in Subsection 5.10.1 (a) hereof "Code" means the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreement" shall mean that agreement between Seller
and Purchaser, dated November 21, 1997, and any supplements thereto or
amendments thereof, pertaining to the confidential treatment of information
provided by Seller to Purchaser and its representatives regarding the Coal
Business.
"Consents" shall have the meaning specified in Subsection 6.1.5 hereof. "Controlled Subs" shall have the meaning specified in Subsection 5.10.2 hereof. "Controlling Party" shall have the meaning set forth in Section 5.11.8 hereof "CPI-U" shall have the meaning specified in Subsection 5.10.1(d) hereof "Cyprus Amax's Pension Plans" shall have the meaning specified in Subsection 5.12.2 hereof. "Cyprus Cumberland" shall mean Cyprus Cumberland Coal Corporation, a Kentucky corporation. "Cyprus Cumberland Shares" shall have the meaning specified in Subsection 2.3.2 hereof "Cyprus Kanawha" shall mean Cyprus Kanawha Corporation, a Delaware corporation. "Cyprus Kanawha Shares" shall have the meaning specified in Subsection 2.3.2 hereof "Cyprus Mountain" shall mean Cyprus Mountain Coals Corporation, a Delaware corporation. "Cyprus Mountain Shares" shall have the meaning specified in Subsection 2.3.2 hereof. "Cyprus Southern Realty" shall mean Cyprus Southern Realty Corporation, a Kentucky corporation. 4
"Cyprus Southern Realty Shares" shall have the meaning specified in
Subsection 23.2 hereof.
"Deficit Amount" shall have the meaning specified in Subsection 5.18.7 hereof. "Delta Mine" shall mean the Delta surface coal mine and related facilities and operations of Amax Coal Company located in the State of Illinois. "Dunn Coal & Dock" shall mean Dunn Coal & Dock Corporation. a West Virginia corporation. "Employee" shall have the meaning specified in Subsection 3.11.3 hereof. "Environmental Laws" means any Laws (including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. (S)(S) 9601 et. seq.; the Superfund Amendments and Reauthorization Act of 1986, Pub. L. 99-499, 100 Stat. 1613; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. (S) 6901; the Clean Air Act, 42 U.S.C. (S) 7401; the Clean Water Act, 33 U.S.C. (S) 1251 et. seq.; SMCRA; the Safe Drinking Water Act, 42 U.S.C. (S)(S) 300f et. seq.; and the Toxic Substances Control Act, 15 U.S.C. (S)(S) 2601 et. seq.), including any plan, judgment, injunction, notice or demand letter issued, entered, promulgated or approved by any Governmental Authority, now or hereafter in effect relating to the generation, production, installation, use, storage, treatment, handling, distribution, transportation, release, threatened release or disposal of Hazardous Materials, noise control, or 'the protection of human health, natural resources or the environment. "Equipment Sale Agreements" shall have the meaning specified in Subsection 2.3.3 hereof. "Equipment Sublease" shall have the meaning specified in Subsection 2.3.3 hereof. "Equipment Surety Bond" shall have the. meaning specified in Section 5.22 hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules, regulations and forms promulgated thereunder. "Excluded Assets" shall have the meaning specified in Section 2.1 hereof. "Excluded Liabilities" shall have the meaning specified in Section 2.1 hereof. "Farm Management Agreements" shall have the meaning specified in Subsection 2.3.3 hereof. 5
"Fee Coal" shall have the meaning specified in Subsection 5.10.1(a)
hereof.
"Fee Land" shall have the meaning specified in Subsection 5.10.1(a) hereof. "Final Closing Statement" shall have the meaning specified in Subsection 5.18 hereof "Final Determination" shall mean the final resolution of liability for any Tax for a Taxable period: (i) pursuant to IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxing authority, or by a comparable form under the laws of other jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund and/or the right of the taxing authority to assert a further deficiency shall not constitute a Final Determination; (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code (or'-'any successor provisions thereto), or comparable agreements under the laws of other jurisdictions; (iv) by any allowance of a refund or credit in respect of an overpayment of tax, but only after the expiration of all periods during which such refund may be recovered (including the way of offset) by the taxing authority; or (v) by any other final disposition, including by mutual agreement of the parties. "Governmental Authority" means any federal, state, local or foreign court, tribunal, legislative, administrative or regulatory authority or agency. "Grassy Cove" shall mean Grassy Cove Coal Mining Company, a Delaware corporation. "Grassy Cove Shares" shall have the meaning specified in Section 2.3.2 hereof. "Hazardous Materials" mean any wastes, substances, radiation or materials (whether solids, liquids or gases) (a) which are hazardous, toxic, infectious, explosive, radioactive, carcinogenic or mutagenic; (b) which are or become defined as a "pollutants", "contaminants", "hazardous materials", "hazardous wastes", "hazardous substances", "toxic substances", "radioactive materials", "solid wastes" or other similar designations in, or otherwise subject to regulation under, any Environmental Laws; (c) the presence of which on, above or under any real property cause or threaten to cause a nuisance pursuant to applicable statutory or common law upon such real property or to adjacent properties; (d) without limitation, which contain polychlorinated biphenyls (PCBs), asbestos and asbestos-containing materials, lead-based paints, urea-formaldehyde foam insulation, and petroleum or petroleum products (including, without limitation, crude oil or any fraction thereof); or (e) which pose a hazard to natural resources, human health or safety, industrial hygiene or the environment. "Headquarters" shall refer to the headquarters offices of Seller in respect Business located in Denver, Colorado. 6
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and the regulations and Premerger Notification and Report Form
promulgated thereunder.
"Indemnitee"shall mean any Person which may be entitled to seek indemnification pursuant to the provisions of Sections 8.1 or 8.2. "Indemnitor" shall mean any Person which may be obligated to provide indemnification pursuant to Sections 8.1 or 8.2. "Initial Amount" shall have the meaning specified in Subsection 2.3.1 hereof "Interest Rate" shall mean a per annum interest rate equal to 1% above the prime rate published in the Wall Street Journal on the Closing Date. "Interim Period" shall mean the period commencing on the date hereof and ending on the Closing Date. "Kentucky Prince Mining" shall mean Kentucky Prince Mining Company, a general partnership organized under the laws of the State of New York. "Knowledge of Purchaser", "Purchaser's Knowledge" or "Known to Purchaser" or other like words means the actual knowledge of the individuals set forth on Schedule II hereto, without any duty of inquiry other than the duty to review the representations and warranties of Seller and Purchaser contained herein as qualified by the Schedules attached hereto. "Knowledge of Seller", "Seller's Knowledge" or "Known to Seller" or other like words means the actual knowledge of the individuals set forth on Schedule III hereto, without any duty of inquiry other than the duty to review Seller's representations and warranties contained herein as qualified by the Schedules attached hereto. "Laws" means any law, statute, code, treaty, rule, directive, plan,
regulation, promulgation, decree, ruling, injunction or order of any
Governmental Authority, or any common law principle, doctrine or judgment.
"Leased Coal" shall have the meaning specified in Subsection 5.10.1(a) hereof. "Leases" shall have the meaning specified in Subsection 5.10.1(a) hereof. "Liability" or "Liabilities" means any liability, obligation, loss or contingency, whether known or unknown, asserted or unasserted, absolute or conditional, accrued or unaccrued, liquidated or unliquidated, and whether due or to become due, regardless of when asserted or arising. "Liens" shall mean all liens, claims, charges, restrictions, pledges, security interests, mortgage interests or encumbrances of any kind or nature. 7
"Loss" or "Losses" means any and all losses, costs, Liabilities,
damages, demands, penalties, fines. settlements, response, remedial,
reclamation or inspection costs, reasonable expenses (whether or not known
or asserted prior to the date hereof), including without limitation,
interest on any amount payable to a third party as a result of the
foregoing, Liabilities on account of Taxes (including interest and
penalties thereon) and any legal. accounting, auditing, consulting, or
other expenses reasonably incurred in connection with investigating or
defending any claims, actions or Proceedings, whether or not resulting in
an' Liability; provided, however, that Losses shall be net of any insurance
proceeds received by an Indemnitee from an insurance company on account of
such Losses (after taking into account any costs incurred in obtaining such
proceeds and any increase in insurance premiums as a result of a claim with
respect to such proceeds); and provided further, however, that the term
"Losses" shall not be deemed to include lost profits, opportunity costs,
any other consequential damages or punitive damages.
"Lost Mountain Plan" shall have the meaning specified in Subsection 5.12.2 hereof. "March Balance Sheet" shall have the meaning specified in Section 3.6 hereof "Material Adverse Effect" shall mean, with respect to any Person, changes in the business, assets, financial condition or results of operations of such Person resulting in a loss therefrom in excess of $1,000,000; provided however that, to the extent Material Adverse Effect shall relate to more than one Person, then Material Adverse Effect shall mean, with respect to such group of Persons, changes in the business, assets, financial condition or results of operations of such group of Persons (taken as a whole) resulting in a loss therefrom, in the aggregate, in excess of $ 1,000,000. "Material Contracts" shall have the meaning specified in Subsection 3.9.1 hereof. "Meadowlark" shall mean Meadowlark, Inc., an Indiana corporation. "Meadowlark Shares" shall have the meaning specified in Subsection 2.3.2 hereof. "Minerals" shall mean Cyprus Amax Minerals Company, a Delaware corporation and ultimate parent of Seller. "Minerals Plan" shall have the meaning specified in Subsection 3.11.1 hereof. "Minimum Royalty Payment" shall have the meaning specified in Subsection 5.10.2 hereof. "MSHA" shall mean the Mine Safety and Health Act of 1977, as
amended, 30 U.S.C. (S)(S) 801 et. seq., any rule or regulation promulgated
thereunder, and any similar state or local Law.
"Multi-employer Plan" shall have the meaning specified in Subsection 3.11.1 hereof. 8
"Net Cash Advance Balance" shall have the meaning specified in
Subsection 5.183 hereof.
"Notice Period" as applied to any Third-Party Claim for which an Indemnitee seeks to be indemnified pursuant to this Agreement, shall mean the period ending the earlier of the following: (a) 45 days after the time at which the Indemnitee has either (i) received notice of the facts giving rise to such Third-Party Claim or (ii) commenced an active investigation of circumstances likely to give rise to such Third-Party Claim and, in each case, where such Indemnitee believes or should reasonably believe that such facts or circumstances would give rise to such Third-Party Claim for which such Indemnitee would be entitled to indemnification pursuant to this Agreement; and (b) 45 days after the time at which any Third-Party Claim against the Indemnitee has become the subject of Proceedings before any court or tribunal, or such shorter time as would allow the Indemnitor sufficient time to contest, on the assumption that there is an arguable defense to such Third- Party Claim, such Proceeding prior to any judgment or decision thereon.
"Other Tax Returns" means any Tax Return in respect of Other Taxes.
"Other Taxes" or "Other Tax" shall mean any Tax other than a Tax in respect of the income of any Subsidiary. "Permits" shall have the meaning specified in Subsection 3.12.1 hereof. "Permitted Liens" shall mean (a) Liens for taxes and assessments or governmental charges not yet due or which are being contested in good faith and by appropriate proceedings as to which adequate reserves exist (to the extent such reserves are required by Seller's Accounting Principles), (b) Liens in favor of landlords, car warehousemen, mechanics, workmen and materialmen and construction or similar arising by operation of law or incurred in the ordinary course of business for sums n due or that are being contested in good faith as to which adequate reserves exist (to extent such reserves are required by Seller's Accounting Principles), (c) Liens in re of pledges or deposits under worker's compensation laws or similar legislation unemployment insurance or other types of social security or to secure the performance tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return of money bonds and similar obligations, (d) reflected in the Financial Statements, (e) Liens to be discharged at or prior to Closing and (f) rights reserved to or vested in any Governmental Authority to control or regulate any real property or interests therein in any manner, and all Laws of any Governmental Authority. 9
"Person" means any corporation, partnership (whether general. limited
or otherwise), limited liability company. trust, association.
unincorporated organization. governmental entity, agency or branch or
department thereof, or any other legal entity, or any natural person.
"Personal Property" shall have the meaning specified in Subsection 3-8.2 hereof "Plans" shall have the meaning specified in Subsection 3.11.1 hereof. "Pre-Balance Sheet Period" shall have the meaning specified in Subsection 5.11.1 hereof. "Pre-Closing Tax Period" shall have the meaning specified in Subsection 5.11 .1 hereof. "Proceeding" shall mean any action, suit, claim, investigation (which, for the avoidance of doubt, shall not include any audit) or proceeding, whether involving a court of law, administrative body, governmental agency, arbitrator, or alternative dispute resolution mechanism. "Production Royalty" shall mean the "Production Royalty" payable pursuant to and in accordance with the Royalty Deeds. "Purchase Price" shall have the meaning specified in Section 2.3 hereof. "Purchaser" shall have the meaning specified in the preamble hereof "Purchaser Indemnitees" shall have the meaning specified in Section 8.1 hereof. "Purchaser Pension Plans" shall have the meaning specified in Subsection 5.12.2 hereof. "Purchaser Surety Bond" shall have the meaning specified in Subsection 5.17.1 hereof. "Purchaser's Retiree Plans" shall have the meaning specified in Subsection 5.12.2 hereof. "Purchaser's Savings Plan" shall have the meaning specified in Subsection 5.12.2 hereof. "Purchaser's Welfare Plans" shall have the meaning specified in Subsection 5.12.2 hereof. "Release" means any emission. spill, seepage, leak, escape, leaching, discharge, injection, pumping, pouring, emptying, dumping, disposal or release of Hazardous Materials 10 from any source (including, without limitation, the real property and property adjacent to such parcel) into or upon the environment. including the air. soil. improvements. surface water, groundwater, the sewer, septic system. storm drain, publicly owned treatment works, or waste treatment, storage or disposal systems at. on, from, above or under such parcel of real property or any other property at which Hazardous Materials originating on or from such parcel of real property have been stored, treated or disposed.
"Restructuring" shall mean the collective reference to the
transactions, actions, distributions, transfers and assignments
contemplated by Section 2.1 hereof.
"Revised Statement" shall have the meaning specified in Subsection 2.4.1 hereof. "Roaring Creek" shall mean Roaring Creek Coal Company, a Delaware corporation. "Roaring Creek Plan"shall have the meaning specified in Subsection 5.12.2 hereof. "Roaring Creek Shares" shall have the meaning specified in Section 2.3.2 hereof. "Royal" shall have the meaning specified in Subsection 5.10. 1 (a) hereof "Royalty Buy-Out Amount" shall have the meaning specified in Section 5.10 hereof. "Royalty Deeds" shall mean, collectively, (i) each royalty deed or royalty agreement, dated _______________, 1998, between Ayrshire Land and Cyprus Amax Royalty Company, (ii) each royalty deed or royalty agreement, dated ________________, 1998, between Cyprus Cumberland and Cyprus Amax Royalty Company, (iii) each royalty deed or royalty agreement, dated ________________, 1998, between Cyprus Kanawha and Cyprus; Amax Royalty Company, (iv) each royalty deed or royalty agreement, dated, 1998, between Cyprus Southern and Cyprus Amax Royalty Company, (v) each royalty deed or royalty agreement, dated __________, 1998, between Meadowlark and Cyprus Amax Royalty Company, (vi) each royalty deed or royalty agreement, dated __________, 1998, between Cannelton Land and Cyprus Amax Royalty Company, (vii) each royalty deed or royalty agreement, dated1998, between Cannelton Industries and Cyprus Amax Royalty Company. "SMCRA" shall mean the Surface Mining Control and Reclamation Act, as amended, 30 U.S.C. (S)(S) 1201, et. seq., any rule or regulation promulgated thereunder, and any similar state law or regulation. "Salaried Plan" shall have the meaning specified in Subsection 5.12.2 hereof. "Savings Plan" shall have the meaning specified in Subsection 5.12.2 hereof. "Scheduled Bonds" shall have the meaning specified in Subsection 5.17.1 hereof. "Section 338(h)(10) Election" shall have the meaning specified in Section 5.9 hereof. 11
"Securities Act" means the Securities Act of 193-31. as amended. and
the rules. regulations and forms promulgated thereunder.
"Seller" shall have the meaning specified in the preamble hereof. "Seller Consolidated Group" means the consolidated group filing a federal income tax return of which Seller and the Subsidiaries. among others. are members. "Seller Indemnitees" shall have the meaning specified in Section 8.2 hereof. "Seller's Accounting Principles" shall mean generally accepted accounting principles, consistently applied, except to the extent otherwise provided in Schedule IV hereto. "Seller's Welfare Plans" shall have the meaning specified in Subsection 5.12.2 hereof. "Shares" shall have the meaning specified in Subsection 2.3.2 hereof. "Skyline Coal" shall mean Skyline Coal Company, a partnership organized under the laws of the State of New York. "Subsidiary" and "Subsidiaries" shall have the respective meanings specified in the second whereas clause hereof. "Substantial Loss" shall have the meaning specified in Section 8.7 hereof. "Substantial Third Party Claim" shall have the meaning specified in Section 8.7 hereof. "Taxes" or "Tax" (and, with correlative meanings, "Taxable" or Taxing") means, with respect to any Person, (a) any federal, state, local, provincial or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, business, occupation, premium, windfall profits, environmental, mineral, unmined coal, abandoned mined land fee, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, ad valorem, transfer, registration, value added, advance corporation, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether or not disputed, with respect to which such Person could be held liable; and (b) any liability for the payment of any amount of the type described in the immediately preceding clause (a) as a result of (i) being a transferee (within the meaning of section 6901 of the Code) of another Person, or (ii) being a member of an affiliated or combined group. "Tax Contest" shall mean. without limitation. any audit, examination, claim, suit, action or other proceeding relating to Taxes in which an adjustment to Taxes may be proposed, collected or assessed. 12
"Tax Returns" means all federal. state, local, provincial and
foreign returns. declarations, claims for refunds, forms, statements,
reports, schedules, and information returns or statements, and any
amendments thereof (including. without limitation, any related or
supporting information or Schedule attached thereto) required to be filed
with any Taxing authority in connection with any Tax or Taxes.
"Third Party Claims" means any and all Losses which arise out of or result from (a) any claims or actions asserted against an Indemnitee by any Person not a party hereto, (b) any rights of any Person not a party hereto asserted against an Indemnitee, or (c) any Liabilities of, or amounts payable by, an Indemnitee to any Person not a party hereto arising out of subclauses (a) or (b), including without limitation, claims or actions asserted against an Indemnitee by any Governmental Authority on account of Taxes; provided, however, that the term "Person" as used for purposes of this definition of Third Party Claims shall be deemed to exclude any Affiliate, partner, director or officer of any party hereto, or any equity investor in Purchaser. "Transition Services Agreement" shall have the meaning specified in Subsection 2.3.3 hereof. "Undeveloped Reserves" mean all Coal Reserves under or on real property owned, leased or otherwise held by any Subsidiary as of the Closing Date and as to which no SMCRA permit is in effect or no SMCRA permit application has been filed for the mining of such coal reserves as of such date. "Undeveloped Reserves Royalty" shall mean the Production Royalty payable pursuant to and in accordance with the separate Royalty Deeds and the Royalty payable pursuant to Section 5.10.1 hereof, in each case with respect to the production of Coal Reserves in the Undeveloped Reserves. "Unrelated Business" shall mean all of the businesses and operations of Minerals and its Affiliates, other than the Business. "Wabash Mine" shall mean the Wabash surface coal mine and related facilities and operations of Amax Coal Company located in the States of Illinois and Indiana. "WARN Act" means the Worker Adjustment and Retraining Notification Act of 1968, 29 U.S.C. (S) (S) 2 101 el. seq., or any similar state or local Law. "Workers' Compensation Liabilities" shall mean any Liabilities which are or may be imposed upon an employer (or its Affiliates) under any Laws due to an employee claiming or having suffered or incurred any accident, injury, disease, exposure, illness, disability or other adverse mental or physical condition, including those Liabilities arising out of an employee's and his beneficiaries' rights under (i) the Longshore and Harbor Workers' Compensation Act (33 U.S.C. (S)(S) 901 et. seq.). (ii) the Indiana Workers' Compensation and occupational Diseases Act (Indiana Code, Title 2,, Article 3), (iii) the West Virginia Workers' Compensation Act (West Virginia Code, Chapter 2' )). (iv) the Tennessee Workers' 13 Compensation Law (Tennessee Code. Title 50. Chapter 6). and (y) the Kentucky Workers' Compensation Act (Kentucky Revised Statutes. Title 27. Chapter 342).
"Yankeetown" shall mean Yankeetown Dock Corporation, an Indiana
corporation.
ARTICLE II PURCHASE AND SALE; CLOSING SECTION 2.1. Certain Assets and Liabilities. At or prior to the Closing and consummation of the purchase and sale of the Shares contemplated hereby, and subject to the terms and conditions of this Agreement, Seller or a wholly owned subsidiary thereof (other than the Subsidiaries) shall retain and assume, as the case may be, pursuant to agreements and instruments (including instruments of conveyance) reasonably acceptable to Seller and Purchaser, the assets and rights listed on Schedule 2.1(a) hereof (collectively, the "Excluded Assets") and the liabilities and obligations listed on Schedule 2.1(b) hereof (collectively, the "Excluded Liabilities"). All costs and expenses incurred in connection with the transfer to Seller or such wholly owned subsidiary of the Excluded Assets and Excluded Liabilities as contemplated by this Section 2.1 shall be for the account of and shall be paid by Seller, and Seller shall pay and discharge, and indemnify Purchaser and hold Purchaser harmless from and against, all such costs and expenses, including all transfer or stamp duty taxes, if any, due and payable in connection with the transfer of the Excluded Assets and Excluded Liabilities. SECTION 2.2. Closing. The closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Seller, 9100 East Mineral Circle, Englewood, Colorado 80112 at 10:00 a.m. local time on the last business day of the month in which all of the conditions to closing set forth in Articles VI and VII have been met, or such other business day mutually acceptable to the parties hereto following the day on which all such conditions shall have been met (the "Closing Date"). If the Closing has not occurred by June 30, 1998, this Agreement shall terminate as provided in Article IX SECTION 2.3 Purchase Price: Closing Deliveries. At the Closing, the parties shall make the following deliveries: 2.3.1 Purchase Price. Against delivery of the Shares described in Section 2.3.2, Purchaser shall deliver to Seller, by wire transfer in same day funds to an account designated by Seller in writing at least two (2) business days prior to the Closing Date, an amount equal to $98,000,000.00 (the "Initial Amount"), adjusted as follows: (x) if the net working capital amount of the
Subsidiaries as at March 31, 1998. as set forth in Section 3.6 hereof and as
determined in accordance with the provisions of Section 3.6, is less than
$39,602,000, the amount of such deficit shall be subtracted from the Initial
Amount, and (Y) if such net working capital amount is greater than S39.602.000,
the amount of such excess shall be added to the Initial Amount (such
S98.000.000.00. as so increased or reduced, the "Purchase Price").
Notwithstanding anything to the contrary contained in the March Balance Sheet,
the parties hereto agree that the net working capital amount of the Subsidiaries
as at March 31, 1998 as set forth in Section 3.6 hereof shall be conclusive and
binding on the parties hereto for all purposes of the calculation of the
Purchase Price pursuant this Subsection 2.3.1. In addition, if the Closing shall
not have occurred on or prior to May
14 29, 1998, at the Closing, (i) Purchaser shall pay to Seller simple interest on the Purchase Price, at a rate per annum equal to 6%, for the period from May 30, 1998 to (but not including) the Closing Date, if any, unless the Closing shall not have occurred on or after May 29, 1998 due to Seller's breach of its obligations hereunder, in which case Purchaser shall have no liability for such interest to the extent the Closing shall not have occurred on or after May 29, 1998 as a result of such breach, and (ii Seller shall pay to Purchaser simple interest on the Net Cash Advance Balance as of the close of business on May 29, 1998 to the extent such balance, as reflected in the financial statements of Seller provided to Purchaser pursuant to Subsection 5.18.2 hereof, consists of an amount owing from Seller. to the Subsidiaries, at a rate per annum. equal to 6%, for the period from May 30, 1998 to (but not including) the Closing Date, if any, unless the Closing shall not have occurred on or after May 29, 1998 due to Purchaser's breach of its obligations hereunder, in which case Seller shall have no liability for such interest to the extent the Closing shall not have occurred on or after May 29, 1998 as a result of such breach. All interest paid under this Subsection 2.3.1 shall be computed on the basis of a 360 days year, actual days elapsed.
2.3.2 Shares. Against delivery of the Purchase Price, Seller shall
sell, assign, transfer and deliver to purchaser all of its right, title and
interest in and to all of the issued and outstanding shares of capital stock of
(i) Amax Coal Company (the "Amax Coal Company Shares"), (ii) Amax Coal Sales Company (the "Amax Coal Sales Company Shares"), (iii) Ayrshire Land (the
"Ayrshire Land Shares"), (iv) Beech Coal (the "Beech Coal Shares"), (y)
Cannelton (the "Cannelton Shares"), (vi) Cyprus Cumberland (the "Cyprus
Cumberland Shares"), (vii) Cyprus Kanawha (the "Cyprus Kanawha Shares"), (viii)
Cyprus Mountain (the "Cyprus Mountain Shares"), (ix) Cyprus Southern Realty (the
"Cyprus Southern Realty Shares"), (x) Grassy Cove (the"Grassy Cove Shares"),
(xi) Roaring Creek (the "Roaring Creek Shares") and (xii) Meadowlark (the
"Meadowlark Shares"; and all such shares of capital stock of each of the
aforementioned Subsidiaries, the "Shares"). In furtherance thereof, Seller shall
deliver and surrender to Purchaser at Closing the following:
(a) a stock certificate, duly endorsed in blank or with a stock transfer power duly endorsed in blank or affixed thereto with respect to the following:
(i) The Amax Coal Company Shares:
(ii) The Amax Coal Sales Company Shares;
(iii) the Ayrshire Land Shares;
(iv) the Beech Coal Shares;
(v) the Cannelton Shares;
(vi) the Cyprus Cumberland Shares;
(vii) the Cyprus Kanawha Shares;
(vii) the Cyprus Mountain Shares;
(ix) the Cyprus Southern Realty Shares;
(x) the Grassy Cove Shares;
(xi) the Roaring Creek Shares; and
(xii) the Meadowlark Shares;
(b) a certificate stating whether any stock transfer. stamp duty or sales tax applicable to the sale or transfer of any of the Shares shall be due. in which case Seller shall pay such taxes and Purchaser shall reimburse Seller at Closing fifty percent (50%) of the amount thereof,
15
(c) to the extent in the possession of Seller or any of its
Affiliates (or any agent or representative of any thereof), the corporate minute
books, stock transfer book or stock ledger, and the corporate seal for each of
Amax Coal Company, Amax. Coal Sales Company, Ayrshire Land, Beech Coal,
Cannelton, Cannelton Industries, Cannelton Land, Cannelton Sales, Cyprus
Cumberland, Cyprus Kanawha, Cyprus Mountain, Cyprus Southern Realty, Dunn Coal &
Dock, Grassy Cove, Meadowlark, Roaring Creek and Yankeetown (it being understood
that the books and records required to be delivered by Seller under this clause
(d) to the extent in the possession of Seller or any of its Affiliates (or any agent or representative of any thereof), the company minute books and partnership records for each of Bentley Coal, Kentucky Prince Mining and Skyline Coal (it being understood that the books and records required to be delivered by Seller under this clause (d) shall include all such extant books and records since January 1, 1994); (e) long form certificates of incorporation and good standing certified by an official of the state of incorporation for each of Am&x Coal Company, Amax Coal Sales Company, Ayrshire Land, Beech Coal, Cannelton, Cannelton Industries, Cannelton Land, Cannelton Sales, Cyprus Cumberland, Cyprus Kanawha, Cyprus Mountain, Cyprus Southern Realty, Dunn Coal & Dock, Grassy Cove, Meadowlark, Roaring Creek and Yankeetown, together with a certificate of the Secretary or Assistant Secretary of such corporation as to its bylaws; and (f) to the extent available from an official of any state, a certificate of valid existence and franchise tax status by an official of the state of organization of each of Bentley Coal, Kentucky Prince Mining and Skyline Coal, together with a certificate of the Secretary or Assistant Secretary of such partnership as to the due formation and good standing of such partnership and its certificate of formation.
2.3.3 Other Deliveries. At the Closing:
(a) Seller shall deliver or cause to be delivered, as the case may be, to Purchaser (a) an executed Transition Services Agreement, substantially in the form of Exhibit A hereto (the "Transition Services Agreement"), pursuant to which Seller shall provide to Purchaser after Closing certain transition services upon the terms and conditions set forth therein, (ii) an executed
Sublease, substantially in the form of Exhibit B hereto (the "Equipment
Sublease"). pursuant to which Seller shall sublease to Purchaser or certain of
the Subsidiaries after Closing certain items of equipment for use in the
Business upon the terms and conditions set forth therein, (iii) executed
Equipment Purchase and Security Agreements. substantially in the form of
Exhibits C-1. C-2 and C-3 hereto, respectively (collectively. the "Equipment
Sale Agreements"), pursuant to which Seller shall agree to sell. and Purchaser
or certain Subsidiaries shall agree to purchase. certain items of equipment upon
the terms and conditions set forth therein. (iv) one or more executed Farm
Management Agreements, substantially in the form of Exhibit D hereto
(collectively, the "Farm Management Agreements"), pursuant to which Ayrshire
Land shall agree to administer certain real property held by Delta Mine Holding
Company, Wabash Mine Holding Company and Warrick Holding Company, (y) the
instruments, certificates and opinions required to be delivered by Seller
pursuant to Article VI hereof
16
and (vi) such other documents, instruments and certificates as Purchaser shall
reasonably request for the purpose of giving effect to the transactions
contemplated hereby; and
(b) Purchaser shall deliver or cause to be delivered, as the case may be, to Seller (a) an executed Transition Services Agreement, (ii) an executed
Equipment Sublease Agreement, (iii) executed Equipment Sale Agreements, (:iv)
executed Farm Management Agreements, (v) the instruments, certificates and
opinions required to be delivered by Purchaser pursuant to Article VI hereof and
(vi) such other documents, instruments and certificates as Seller shall
reasonably request for the purpose of giving effect to the transactions
contemplated hereby.
SECTION 2.4. Allocation of the Purchase Price. 2.4.1 Asset Acquisition Statement. Within 60 days after the Closing Date, Purchaser will provide to Seller copies of IRS Form 8023 and any required exhibits thereto (the "Asset Acquisition Statement") with Purchaser's proposed allocation of the Purchase Price among the assets and Liabilities of the Subsidiaries. In connection therewith, Purchaser may obtain an independent appraisal as to any of the assets and Liabilities of any Subsidiary at its expense, which appraisal will be made available to Seller if requested. Within 60 days after the receipt of such Asset Acquisition Statement, Seller will propose to Purchaser any changes to such Asset Acquisition Statement or will be deemed to have indicated its concurrence therewith. Thereafter, Purchaser will provide to Seller from time to time revised copies of the Asset Acquisition Statement (each, a "Revised Statement") so as to report any matters on the Asset Acquisition Statement that require updating. Within 30 days after the receipt of any Revised Statement, Seller will propose to Purchaser in writing any changes to such Revised Statement or will be deemed to have indicated its concurrence therewith. Purchaser and Seller will endeavor in good faith to resolve any differences with respect to the Asset Acquisition Statement or any Revised Statement within 30 days after Purchaser's receipt of notice of suggested changes from Seller. 2.4.2 Tax Returns. Subject to the provisions of the following sentence of this Subsection 2.4.2, the Purchase Price will be allocated among the assets and Liabilities of the Subsidiaries in accordance with the Asset Acquisition Statement or, if applicable, the last Revised Statement provided by Purchaser to Seller pursuant to Subsection 2.4.1, and subject to the requirements of any applicable tax law or election, all Tax Returns. and reports filed by Purchaser and Seller will be prepared consistently with such allocation. If Seller withholds its consent to such allocation and thereafter Purchaser and Seller are unable to resolve any differences that, in the aggregate. are material in relation to the Purchase Price, then any remaining disputed matters will be finally and conclusively determined by an independent accounting firm of national standing (the "Allocation Arbiter") selected by Purchaser and Seller, which firm will not be the regular accounting firm of Purchaser or Seller. Promptly but not later than 10 days after its acceptance of its appointment, the Allocation Arbiter will determine (based solely on presentations by Seller and Purchaser and not by independent review) only those matters in dispute and will render a written report as to the disputed matters and the resulting allocation of the Purchase Price. which report will be conclusive and binding upon the parties. The fees and expenses of the Allocation Arbiter shall be shared equally by Seller and Purchaser. Purchaser and Seller will, subject to the requirements of any applicable tax law or election, file all Tax Returns and reports consistent with the allocation 17 provided in the Asset Acquisition Statement or the last Revised Statement and, if applicable, the determination of the Allocation Arbiter.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER As of the date hereof and as of the Closing Date (except to the extent any of the following representations and warranties relate solely to an earlier date, in which case such representations and warranties are made as of such earlier date), Seller represents and warrants to Purchaser and each of the Subsidiaries as follows:
SECTION 3.1. Corporate Status and Authority. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware. Seller has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted, and to execute and deliver this Agreement and the Ancillary
Agreements, to perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby. On the Closing
Date, the execution, delivery and performance by Seller of this Agreement and
the Ancillary Agreements have been duly authorized by the Board of Directors of
Seller, which constitutes all necessary corporate action on the part of Seller
for such authorization. Subject to the immediately preceding sentence, this
Agreement has been duly executed and delivered by Seller and constitutes the
valid and binding obligation of Seller, enforceable against Seller in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application referring to or affecting the enforcement of creditors' rights, or
by general equitable principles. Upon the Closing, the Ancillary Agreements
shall be duly executed and delivered by Seller and shall constitute the valid
and binding obligations of Seller, enforceable against Seller in accordance with
their respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application referring to or affecting the enforcement of creditors'
rights, or by general equitable principles.
SECTION 3.2. No Conflicts. etc. Except as set forth in Schedule 3.2: 3.2.1 Charter Documents. The execution, delivery and performance by Seller of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby will not result in (a) any conflict with or violation of the certificate of incorporation or by-laws of Seller, or of the certificate of incorporation and bylaws, or the partnership agreement of any of the Subsidiaries, (b) any material breach or violation of or default under, or result in the creation or imposition of any Liens under, any statute, regulation, judgment, order or decree, or any mortgage, deed of trust, indenture, security agreement, pledge or any other similar instrument to which Seller or any of the Subsidiaries is a party or by which any of them or their respective properties or assets are bound or (c) any material breach, violation or termination of or default under any Material Contract or any material real property leases listed on Schedule 3.8.1 except for (x) such material real
property leases listed on Schedule 6.1.5 hereof and (y) such other material real
property leases such breach, violation or termination of or default under shall
not result in a Material Adverse Effect upon the Subsidiaries; and
18
3.2.2 Governmental Consents. No consent, approval or
authorization of or filing with any Governmental Authority is required on the
part of Seller or any of the Subsidiaries in connection with the execution and
delivery of this Agreement and the Ancillary Agreements or the consummation of
the transactions contemplated hereby or thereby, except (a) filings required
with respect to the HSR Act, (b) such filings, consents and approvals required
in connection with the transfer to and assumption by Seller or a wholly owned
subsidiary thereof (other than the Subsidiaries) of the Excluded Assets and
Excluded Liabilities, and (c) filings, consents, change-in-ownership notices or
approvals which, if not made or obtained prior to Closing are not, individually
or in the aggregate, reasonably expected to have a Material Adverse Effect on
Seller or on the Subsidiaries.
SECTION 3.3. Corporate and Company Status and Authority of the Subsidiaries. Each of the corporate Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has all requisite corporate power and authority to conduct its business and to own or lease its properties, as presently conducted, owned or leased, and (c) is duly qualified to do business in each jurisdiction in which the nature of its business or the location of its assets requires it to be so qualified, other than those jurisdictions in which the failure to be so qualified is not, individually or in the aggregate, reasonably 'expected to have a Material Adverse Effect on the Subsidiaries, taken as a whole. Each of Bentley Coal, Kentucky Prince Mining and Skyline Coal (i) is a partnership duly formed, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) has all requisite partnership power and authority to conduct its business and to own or lease its properties, as presently conducted, owned or leased, and (iii) is duly qualified to do business in each jurisdiction in which the nature of its business or the location of its assets requires it to be so qualified, other than those jurisdictions in which the failure to be so qualified is not, individually or in the aggregate, reasonably expected to have a Material Adverse Effect on the Subsidiaries. Schedule 3.3 lists each jurisdiction in which each Subsidiary is qualified to be in business. No Subsidiary has any equity interest or investment in any corporation, partnership, limited liability company, association, joint venture or other business organization other than as set forth on Schedule 3.3. SECTION 3.4. Ownership of the Subsidiaries. With respect to the shares of capital stock or partnership interests issued by the Subsidiaries. (a) Seller I owns beneficially and of record all of the Shares of the Subsidiaries listed as being directly owned by it on Schedule 33 ) in the percentages specified therein, free and clear of any Lien other than Liens for taxes and assessments and other governmental charges not yet due or which are being contested in good faith and by appropriate proceedings as to which adequate reserves or insurance exist, (b) Amax Coal Company owns beneficially and of record 60% of the issued and outstanding shares of capital stock of Yankeetown Dock, free and clear of any Lien other than Liens for taxes and assessments and other governmental charges not yet due or which are being contested in good faith and by appropriate proceedings as to which adequate reserves or insurance exist, (c) Cannelton owns beneficially and of record all of the issued and outstanding shares of capital stock of each of Cannelton Industries, Cannelton Sales and Cannelton Land, and Cannelton Industries owns beneficially and of record all of the issued and outstanding shares of capital stock of Dunn Coal & Dock, in each case free and clear of any Lien other than Liens for taxes and assessments and other governmental charges not yet due or which are being contested in good faith and by appropriate proceedings as to which adequate reserves or insurance exist, and (d) each of Roaring Creek and Grassy Cove own beneficially and of record 50% 19 of the partnership interests in each of Bentley Coal, Kentucky Prince Mining and Skyline Coal, free and clear of any Lien other than Liens for taxes and assessments and other governmental charges not yet due or which are being contested in good faith and by appropriate proceedings as to which adequate reserves or insurance exist. All such shares of capital stock or partnership interests listed as being owned by Seller or any Subsidiary on Schedule 3.3 have been duly authorized, validly issued and are fully paid and nonassessable. There are no outstanding options, warrants, conversion or other rights or agreements of any kind (except as contemplated hereby) for the purchase from, or the sale or issuance by, Seller or any of the Subsidiaries of any shares of capital stock or partnership interests of any of the Subsidiaries to the extent that such shares or partnership interests are listed as being owned by Seller or any Subsidiary on Schedule 1.3 and no authorization therefor has been given. To the Knowledge of Seller, no ownership of Seller in 'the Shares, none of Amax Coal's ownership interests in Yankeetown, none of Cannelton's direct or indirect ownership interests in each of Cannelton Industries, Cannelton Sales Cannelton Land and Dunn Coal & Dock and none of Grassy Cove's and Roaring Creek's ownership interests in each of Bentley Coal, Kentucky Prince Mining and Skyline Coal has ever been challenged and no Person has ever threatened to challenge such interest. Neither Seller nor any Subsidiary is a party to any obligation (contingent or otherwise) to buy or sell shares of capital stock or partnership interests of the Subsidiaries, except as contemplated by this Agreement. Except as set forth on Schedule 3.4, Seller is not a party to any agreement with respect to the voting or transfer of the capital stock or partnership interests of the Subsidiaries owned, either directly or indirectly, by Seller. For the period from January 1, 1994 to the date hereof (or, if the Closing shall occur, the Closing Date), the minute books (containing the records of meetings of the shareholders, board of directors and any committee of the board of directors), stock certificate books and stock transfer books of each Subsidiary are true and correct in all material respects.
SECTION 3.5. Title. At the Closing, Purchaser will- receive good and
valid title to the Shares. free and clear of any Lien, except for Liens for
taxes and assessments and other governmental charges not yet due or which are
being contested in good faith and by appropriate proceedings as to which
adequate reserves or insurance exist. Liens described in the Schedules attached
hereto, Liens that may arise from acts or omissions of Purchaser and except for
restrictions on transfer under the Securities Act.
SECTION 3.6. Financial Statements. Schedule 3.6 sets forth on a consolidated basis as at March 3 1, 1998 an unaudited statement of net working capital and an unaudited balance sheet for the period then ended. together with an unaudited income statement of the Subsidiaries for the three months ended March 31, 1998 (the "March Balance Sheet"), all of which have been adjusted to exclude therefrom all of the Excluded Assets and Excluded Liabilities and to present intercompany balances between any Subsidiary and any of its Affiliates as though they had been settled as of March 31, 1998. The March Balance Sheet shows net working capital of the Subsidiaries determined on a consolidated basis as at March 31, 1998 equal to $34,975,000, which amount has been computed by subtracting current liabilities from current assets. The March Balance Sheet has been prepared in accordance with Seller's Accounting Principles, except that the March Balance Sheet shall include line items in respect of pro forma noncurrent liabilities for Black Lung Benefits Obligations and post retirement obligations other than pension obligations. The March Balance Sheet has been prepared from the books and records of the Subsidiaries as at March 31, 1998 and includes all material adjustments. Classification of balances between current and noncurrent assets and 20 liabilities reflected on the March Balance Sheet have been conformed to the Subsidiaries' prior practice, with regard to asset and liability inclusion and classification, in calculating the above net working capital amount.
SECTION 3.7. Absence of Undisclosed Liabilities. Except as set forth on
Schedule 3.7, the Subsidiaries do not have any material Liabilities other than
such Liabilities as are Ci) reflected or reserved against in the March Balance
Sheet or the notes thereto, if any, (ii) set forth on the Schedules delivered
hereunder or (iii) incurred since the Balance Sheet Date (A) in the ordinary
course of business consistent with past practices or (a) as contemplated or
permitted by this Agreement, including Liabilities arising under the Royalty
Deeds.
SECTION 3.8. Assets. 3.8.1 Real Property. Schedule 3.8.1 sets forth a true and complete list (identified by physical file and legacy identification numbers) of all material real property and leasehold interests and other material interests in real property owned, leased or otherwise held by any Subsidiary, and such Schedule indicates whether such real property is owned or leased or otherwise held by such Subsidiary. Except as set forth on Schedule 3.8.1, each lease and sublease set forth on Schedule 3.8.1 is in full force and effect as against the Subsidiary a party thereto and, to the Knowledge of Seller, as against each other party thereto, and there is not under any such lease or sublease any existing breach or default by any Subsidiary, as applicable, or, to the Knowledge of Seller, by any other party thereto, except for such breaches and defaults which are not reasonably expected to have a Material Adverse Effect upon the Subsidiaries. Except as set forth on Schedule 3.8.1 hereof, neither Seller nor any Subsidiary has received written notice of any act or omission on the part of such Subsidiary that constitutes or, with the passage of time or the giving of notice or both, would constitute a material default under any of the leases or subleases listed on Schedule 3.8.1 hereof except for such acts or omissions that have been cured or would not. individually or in the aggregate. reasonably be expected to result in a Material Adverse Effect upon the Subsidiaries, and no Subsidiary has granted to any Person a security interest in its leasehold interests in any lease or sublease listed on Schedule 3.8.1 hereof. To Seller's Knowledge and except as set forth on Schedule 3.8.1 hereof, no notice of any violation of any applicable zoning or building law or ordinance or administrative regulation ha's been received by any Subsidiary, and Seller does not Know, or have any reasonable grounds to Know. of the threat of any such notice. Except as set forth on Schedule 3.8.1 hereof. no condemnation proceeding has been instituted or, to the Knowledge of Seller, is threatened with respect to any of the real property listed on Schedule 3.8.1 hereof. To the Knowledge of Seller, no Subsidiary has conducted mining on or from any coal reserves to which it did not reasonably believe it had, as of the time such mining was conducted, color of title. 3.8.2 Personal Property. All equipment, machinery, motor vehicles, furniture, fixtures, computer hardware and other tangible personal property (other than coal) owned or leased by any Subsidiary that (x) in the case of any such owned property, has a net book value as of the Balance Sheet Date of $5,000 or more or, if less, is material to the operations of the business of any Subsidiary, or (y) in the case of any such leased property, requires aggregate annual payments by any Subsidiary in excess of $10,000, are listed on Schedule 3.8.2 (the "Personal Property"). Except as set forth in Schedule 3.8.2, each Subsidiary has good and valid title to the Personal Property owned by it and a good and valid leasehold interest in all Personal Property leased by it, in each case free 21 and clear of any and all Liens except for Permitted Liens. True and complete copies of each lease related to Personal Property requiring an aggregate payment by any Subsidiary of $ 100,000 or more in any single year has been, or prior to Closing will be made available and delivered, if requested, to Purchaser. At the Closing, the Subsidiaries shall have title to or a leasehold interest in coal mining equipment and machinery that, in the aggregate, is reasonably adequate for the coal mining operations of the Subsidiaries as such mining operations have been conducted during the six (6) month period preceding the Closing.
3.8.3 Intellectual Property. Other than with respect to
intellectual property embedded in the machinery and equipment owned or leased by
the Subsidiaries or intellectual property licensed to the Subsidiaries under
"shrink-wrap" license, there is no intellectual property (including patents and
patent applications) developed by any of the Subsidiaries or by Seller for use
by the Subsidiaries, or used by the Subsidiaries, that is material to the
operations of the Business.
SECTION 3.9. Material Contracts. 3.9.1 Schedule. Schedule 3.9.1 lists all written agreements, contracts and commitments of the following types to which any Subsidiary is a party and which have not expired or been fully performed in accordance with its terms, other than deeds, leases, conveyances and other documents relating to real property, which are provided for in Section 3.8, labor or employment- related agreements, which are provided for in Section 3.11, Permits, which are provided for in Subsection 3.12.1 and any such agreement, contract or commitment relating to the Excluded Assets and Excluded Liabilities (collectively, the "Material Contracts"): (a) Any agreement to purchase. sell or transport coal. (b) Any agreement to supply or provide contract mining services: (c) Any joint venture agreement, limited liability company operating agreement or general or limited partnership agreement; (d) Any mortgage, loan or trust indenture. loan or credit agreement., security agreement and other agreements and instrument relating to the borrowing of money to the extent any Subsidiary will be liable thereunder after the Closing; (e) Any corporate guarantee provided directly by any Subsidiary of any obligations of any of their respective Affiliates or any other Person; (f) Any letter of credit, surety bond or other credit support instrument issued by any insurance company, bank or other financial institution for the account of any Subsidiary or as to which the assets of any Subsidiary collateralize the reimbursement obligations in respect of such letter of credit, surety bond or other credit support instrument;
(g) Any agreement for the (i) pending sale, lease or other
disposition of any real property listed on Schedule 3.8.1 and owned by any
Subsidiary, (ii) pending sublease of any real
22
property listed on Schedule 3.8.1 and leased by any Subsidiary or (iii) pending
purchase or lease by any Subsidiary of any real property;
(h) Any agreement for the (i) pending sale of any Personal Property
listed on Schedule 3.8.2, (ii) lease to any Person of any Personal Property
listed on Schedule 3.8.2 or (iii) pending purchase or lease by any Subsidiary of
any personal property of the type listed on Schedule 3.8.2, in each case;
(i) Any lease for Personal Property requiring an aggregate payment by any Subsidiary of $ 100,000 or more in any single year; (j) Any agreement limiting the freedom of any Subsidiary to compete in any line of business or in any area or with any Person to do business with any Person; and (k) Any other agreements, contracts and commitments having a term of one (1) year or more which are not of a type referred to in paragraphs (a) through 0) above which require payment or provide for the receipt by any of the Subsidiaries after the date hereof of more than $100,000, other than standing purchase orders or basic ordering arrangements for materials and supplies to be used in the ordinary course of business.
3.9.2 Effectiveness. True and complete copies of all Material
Contracts have been previously made available to Purchaser. Except as set forth
on Schedule 3.9.1, each Material Contract is in full force and effect in
accordance with its terms as against the Subsidiary a party thereto and, to the
Knowledge of Seller, is valid and binding as to the other parties thereto,
except as may be limited by laws affecting bankruptcy, insolvency,
reorganization, moratorium or creditors rights generally, or by general
equitable principles. Except as set forth on Schedule 3.9.1. no Subsidiary is in
default in the payment or performance or observance of, and neither Seller nor
any Subsidiary has received written notice of any act or omission on the part of
such Subsidiary that constitutes or. with the passage of time or the giving of
notice or both. would constitute a material default under. any Material Contract
to which any of them is a party or by which any of them or their respective
properties or assets may be bound. and to Seller's Knowledge, no other party is
in default in the payment or performance or observance of any Material Contract.
SECTION 3.10. Affiliate Arrangements. Except as set forth in Schedule 3.10, no Subsidiary will be a party to or will be bound by any contract, agreement or other commitment, whether or not in the ordinary course of business, with Seller or any Affiliate of Seller (other than the Subsidiaries) or any senior executive, director or officer of Seller or any Subsidiary, other than such contracts, agreements or other commitments (x) as are specifically
provided herein or are contemplated by this Agreement, including the Ancillary
Agreements and any agreement in respect of the Excluded Assets and Excluded
Liabilities, and (y) that will not be in effect following the Closing Date.
SECTION 3.11. Employee Benefits.
3.11.1 Employee Benefit Plans. Schedule 3.11.1 lists all deferred compensation, pension, profit sharing and retirement plans, and all life or other welfare or employee benefit insurance, incentive compensation, stock option, severance or termination pay, hospitalization or 23 other medical plan, arrangement or agreement, bonus and other employee benefit, welfare or fringe benefit plans with respect to which contributions, premiums or other payments are made or required by Minerals or any of its Affiliates covering any current or former employee of any Subsidiary (the "Plans"). Schedule 3.11.1 identifies each such Plan as either a Plan maintained by any such Affiliates (each, an "Affiliate Plan") or a Plan maintained by Minerals (each a "Minerals Plan"). (a) Except as otherwise provided on Schedule 3.11.1, true and complete copies of the Plans have been provided to or otherwise have been made available to Purchaser by designating their location. Seller has notified Purchaser of any amendments, modifications, extensions, changes in benefits or benefit structures, or other alterations, to the Plans which are currently in effect. Seller shall notify Purchaser of any amendments, modifications, extensions, changes in benefits or benefit structures or other alterations to any of the Plans which the Seller has undertaken to become effective in the future but before the Closing, if such alteration has or is reasonably expected to have a direct impact on the Employees; (b) Minerals and the Subsidiaries, as the case may be, have executed, managed and administered the Plans in compliance, in all material respects, with all laws, rules and regulations applicable thereto, except where noncompliance could not reasonably be expected to have a Material Adverse Effect upon the Subsidiaries or Minerals; (c) Each Plan which is intended to be "qualified" within the meaning of Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service and, to the Knowledge of Seller. no event has occurred and no condition exists which could reasonably be expected to result in the revocation of any such determination; (d) All contributions which are due from Minerals and the Subsidiaries under any Plan have been paid to each such Plan or accrued in accordance with the past practice of the Subsidiaries or Minerals, as the case may be. All premiums. claims for benefits or other payments that are due and which would have been paid in the normal course before the Closing Date have been paid with respect to each Plan that is an employee welfare benefit plan (as defined in Section 3)(1) of ERISA);
(e) None of the Subsidiaries, Minerals or any of Minerals' Affiliates
that is not a Subsidiary or, to the Knowledge of Seller, any other "disqualified
person" or "party in interest" as defined in Section 4975(e)(2) of the Code and
(f) Except as set forth on Schedule 3.11.1 (f), no Proceeding with respect to any Plan (other than routine claims for benefits) is pending or, to Seller's Knowledge, threatened which could reasonably be expected to have a Material Adverse Effect upon the Subsidiaries; (g) Each Plan that is a "group health plan" (as defined in Section 607(l) of ERISA and Section 5000(b)(1) of the Code) is in compliance with the requirements of Parts 6 and 7 of
24
Subtitle B of Title I of ERISA and of Section 4980B of the Code, except where noncompliance could not reasonably be expected to have a Material Adverse Effect upon the Subsidiaries; (h) Neither Seller nor any Subsidiary nor, to Seller's Knowledge, any other fiduciary (as that term is defined in Section 3(21) of ERISA)) of any Plan subject to ERISA has any material liability for any breach of fiduciary duties under ERISA; (i) No Plan subject to Title IV of ERISA nor any of the related trusts have been terminated or is or has been the subject of termination proceedings pursuant to Title IV of ERISA. No Plan that is subject to Part 3 of Subtitle B of Title I of ERISA has an accumulated funding deficiency (as that term is defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived. To the Knowledge of Seller, no event which constitutes a reportable event (as that term is defined in Section 40431(c) of ERISA) for which the notice requirement has not been waived by the Pension Benefit Guaranty Corporation has occurred with respect to any Plan; (j) The present value of all accrued benefits, as calculated for purposes of determining the minimum required contribution under Section 302 of ERISA, whether or not forfeitable, under each Plan that is an employee pension benefit plan subject to Title IV of ERISA does not exceed the value of the assets of such Plan allocable to such accrued benefits; (k) Each Plan that is a Multi-employer plan (as defined in Section 4001(a)(3) of the Code) to which any Subsidiary is obligated to contribute (each. a "Multi-employer Plan") is listed on Schedule 3.11.1 (k). Except as set forth on Schedule 3.11.1 (k). all contributions required to have been made by such Subsidiaries to any Multi-employer Plan have been made on a timely basis. None of the Subsidiaries has been advised by any Multi-employer Plan that it has any withdrawal liability or potential liability under Sections 4201 or 4204 of ERISA with respect to any Multi-employer Plan, and. to Seller's Knowledge, none of the Subsidiaries has any such withdrawal liability as of the Closing Date;
(l) Schedule 3.11.1(1) contains (i) a list of all retirees and
dependents Known to Seller that have been assigned to or assumed by any
Subsidiary as of the Closing Date pursuant to Section 9706 of the Coal Act and
for whom yearly premiums are being paid to the UMWA Combined Benefit Fund (the
"Combined Fund") pursuant to Section 9704 of the Coal Act and UH a list of each
pending challenge as of the Closing Date by any Subsidiary to Combined Fund
beneficiaries assigned to the such Subsidiary to the extent such challenge has
not been finally resolved;
(m) Schedule 3.11.1(m) contains a list of all retirees and dependents
Known to Seller for whom any Subsidiary as of the Closing Date is paying pre-
funding premiums to the UMWA 1992 Benefit Plan (the "1992 Plan") pursuant to
(n) Schedule 3.11.1 (n) contains a list of all retirees and dependents Known to Seller for whom any Subsidiary as of the Closing Date is. paying premiums to the 1992 Plan pursuant to Section 9712(d)(1)(B) of the Coal Act.
25
3.11.2 Labor Matters. Except as set forth on Schedule 3.11.2, (a)
no employee of any of the Subsidiaries is currently represented by a labor union
or other collective labor organization or association, (b) there are no
collective bargaining agreements or memoranda of understanding by which any of
the Subsidiaries are bound or applicable to any employee of any of the
Subsidiaries, (c) no material strikes, slowdowns, lockouts or work stoppages or
material labor disputes involving employees of any of the Subsidiaries are
pending, nor have any occurred since June 1, 1996, (d) to the Knowledge of
Seller, there is no union or independent organizational activity among any
employees underway at any of the Subsidiaries, (e) the Subsidiaries are not
parties to any grievance proceeding by any Employees under a collective
bargaining agreement, which grievance has been appealed to arbitration, (f) no
Subsidiary has been charged or, to Seller's Knowledge, threatened with a charge
of any unfair labor practice since January 1, 1994 that has not been resolved,
(g) no Subsidiary has committed any act in violation of the WARN Act resulting in Liability resulting therefrom except such violations which have been resolved and for which no Liability currently exists, (h) no Subsidiary is a party to any written employment contract with any Employee (other than any collective bargaining agreement), and (i) Seller, with respect to the Business, and the Subsidiaries have complied in all material respects with all Laws relating to the employment of labor, including any provision thereof relating to wages, hours, collective bargaining, and the payment of social security and similar taxes, unemployment and workers' compensation laws, and any labor relations laws, except for violations or failures to so comply which are not. individually or in the aggregate, reasonably expected to have a Material Adverse Effect upon the Subsidiaries. 3.11.3 Employees. Schedule 3.11.3 provides a list as of the date hereof of each person who is an employee of any Subsidiary (including those active employees and employees on maternity. military. disability or other leave), and Seller shall update such list prior to Closing as close as practical to the Closing Date. Promptly following the Closing. Purchaser shall update the list to the Closing Date and provide a copy thereof to Seller. which updated list shall be deemed the final and complete list of all such employees (collectively, the "Employees"). Schedule 3.11.3) correctly reflects the salary or hourly wage, date of employment, position of each Employee and, with respect to hourly Employees, those such hourly Employees that are not subject to a collective bargaining agreement, all as of the date of such Schedule. Except as set forth on Schedule 3.13, there are no discrimination or harassment charges (relating to sex, age, religion, national origin, ethnicity, disability or veteran status) pending or, to the Knowledge of Seller, threatened before any federal or state agency or authority against Seller or any of the Subsidiaries with respect to the Employees, and to the Knowledge of Seller there is no basis therefor. To the Knowledge of Seller, all of the information with respect to the Plans that has been provided by Seller or its Affiliates to Purchaser, or by Seller or its Affiliates to third parties providing goods or services to related to the Plans, is true and accurate. To the Knowledge of Seller, all of the employee census data provided by Seller or its Affiliates to Purchaser with respect to FASB 106 and 112 is true and accurate. SECTION 3.12. Governmental Authorizations, Compliance with Law. 3.12.1 Permits. Set forth on Schedule 3.12.1 is a list of all material licenses, permits, waivers and other governmental authorizations currently in existence for the conduct of the assets (other than the Excluded Assets) and operations of the Subsidiaries, including, without limitation, all coal mining and reclamation operations as presently conducted (the "Permits"), together with any application for any Permit. Complete and correct copies of each Permit and Permit application have 26 been, or prior to Closing will be, made available to Purchaser. The Permits constitute all of the material permits necessary for the conduct of the coal mining operations of the Business as such Business is conducted as of the Closing Date. All Permits material to such coal mining operations are currently in full force and effect, and no Permit application filed by any Subsidiary contains an intentional or willful misstatement or omission of a material fact.
3.12.2 Compliance. Except as set forth on Schedule 3.12.2, Seller, in
respect of the Business, and the Subsidiaries are in compliance with all
material Laws and Permits applicable to Seller with respect to the Business or
the Subsidiaries except for violations or failures to so comply which are not,
individually or in the aggregate, reasonably expected to result in a Material
Adverse Effect on the Subsidiaries. Except as set forth on Schedule 3.12.2,
there is not pending or, to the Knowledge of Seller, threatened any application,
petition, complaint, challenge, objection or other pleading or notice of
violation from any Governmental Authority which challenges or questions the
validity of any rights of the holder under any issued Permit (including any
Permit issued pursuant to SMCRA) or any Permit application. Except as set forth
on Schedule 3.12.2, no Proceeding by any Governmental Authority has been
instituted or, to the Knowledge of Seller, threatened or is contemplated seeking
the suspension. termination. modification. revocation. alteration or amendment
of any Permit or to declare any Permit invalid in any material respect. Except
as set forth on Schedule 3.12.2. neither Seller nor any Subsidiary has received
and written notice of noncompliance with respect to any Permit since January 1.
1995.
SECTION 3.13. Litigation. Except asset forth in Schedule 3.1-3). there is no Proceeding pending or, to the Knowledge of Seller, threatened against or affecting Seller, with respect to the Business, or any Subsidiary or any real property listed on Schedule 3.8.1 (i) other than such Proceedings which individually or in the aggregate would. if adversely determined. require the payment of damages by any Subsidiary in excess of $250,000 or, in the case of an injunction and if not obeyed, would result in a civil fine or penalty in excess of S250,000, or (ii) which challenges the lawfulness or validity of the transactions contemplated by this Agreement. Schedule 3.13 sets forth a list of each outstanding judgment, order or decree, and each injunction, of any Governmental Authority against or affecting any Subsidiary or any of their respective properties requiring the payment of damages in excess of $250,000 or, in the case of an injunction and if not obeyed, would result in a civil fine or penalty in excess of $250,000. Except as set forth on Schedule 3.13, no Subsidiary is in material default under any such judgment, order, decree or injunction. SECTION 3.14. Taxes. Except as set forth in Schedule 3.14: (a) (i) Each of the Subsidiaries have (or by the Closing Date will have) timely and duly filed with the appropriate governmental authorities all Tax Returns required to be filed on or prior to the Closing Date or have (or by the Closing Date will have) validly extended the time for filing such Tax Returns to a date after the Closing Date (and all such Tax Returns were correct and complete in all material respects), (ii) all Taxes required to be shown as due on such Tax Returns and all Taxes required to be withheld on or prior to the Closing Date have (or by the Closing Date will have) been timely and duly paid or withheld. (iii) no claim or proposal for assessment, adjustment or collection of Taxes with respect to which Seller or any of its Affiliates has received a written notice or as to which Seller has Knowledge is being asserted against any of the Subsidiaries, (iv) each of the Subsidiaries have established (and until the Closing will continue to establish and maintain) on their books and records accruals in compliance with Seller's Accounting Principles for the payment of all Taxes for which they will be required to file Tax Returns and which are not yet due and payable as of the Closing Date, and (v) Seller has (or by the Closing Date will have) paid or withheld all Taxes due and payable or required to be withheld prior to or on the Closing Date, for which any of the Subsidiaries (or their successors) may be held liable as a member of the Seller Consolidated Group pursuant to section 1.1502-6(a) of the Treasury Regulations or as a member of any combined, consolidated or unitary group of which Seller or any of the Subsidiaries is or was a member pursuant to any similar provision of any state, local or foreign law with respect to Taxes; (b) All tax allocation or tax sharing agreements between any of the Subsidiaries, on the one hand, and Seller or any other Person, on the other hand, shall have been canceled on or prior to the Closing Date; (c) No written agreement or other document extending or waiving. or having the effect of extending or waiving. the period of assessment or collection of any Taxes against any of the Subsidiaries. and no power of attorney with respect to any Taxes. has been executed or filed with any Governmental Authority-. (d) Except with respect to any Proceeding in respect of the Excluded Assets and Excluded Liabilities: (i) no Proceedings with respect to which Seller or any of its Affiliates has received a written notice or as to which Seller has Knowledge are presently pending or have been proposed against any of the Subsidiaries with respect to any Taxes other than such Proceedings which are not, individually or in the aggregate. reasonably expected to result in a Material Adverse Effect upon the Subsidiaries; and (ii) no written notice relating to any such Proceeding has been received by Seller or any of the Subsidiaries; (e) Except for the Seller Consolidated Group, none of the Subsidiaries is currently a member of any affiliated, consolidated, combined or unitary group with respect to Taxes; (f) Since January 1, 1997, Seller has not received any written notice from any Governmental Authority where Seller or any of the Subsidiaries currently files Tax Returns to the effect that Seller, with respect to the Business, or any Subsidiary may be subject to taxation by such Governmental Authority; and (g) None of the Subsidiaries has made, or is or may become obligated (under any contract entered into on or before the Closing Date) to make, any payments that will be non-deductible under Section 280G of the Code (or any corresponding provision of state or local income tax law).
SECTION 3.15. Absence of Changes. Except as set forth on Schedule 3.15
and except as otherwise contemplated or permitted by this Agreement, including
without limitation Section 2.1 hereof, since the Balance Sheet Date, Seller,
with respect to the Business, and each Subsidiary has conducted its operations
and maintained its assets and performed, paid and discharged its Liabilities
only in the ordinary course, consistent with past practices, and no events or
conditions have occurred or been discovered that are, individually or in the
aggregate, reasonably expected to have a Material
28
Adverse Effect on the Subsidiaries. In addition, except as set forth on Schedule
(a) Incurred any material Liabilities or obligations, except Liabilities and obligations incurred in the ordinary course of business consistent with past practice; (b) Discharged or satisfied any Lien, or paid any obligation or liability (absolute or contingent), other than liabilities due and payable in the ordinary course of business; (c) Paid or agreed to pay, conditionally or otherwise, any bonus, extra compensation, pension or severance pay to any present of former shareholders, directors, officers, agents or employees of the Subsidiaries, except for such payments or agreements to make payments made or entered into in the ordinary course of business consistent with past practices; (d) Changed any accounting practice followed or employed in preparing the March Balance Sheet. (e) Mortgaged, pledged or subjected to any Lien any of its properties or assets. except for Permitted Liens or any Lien not in excess of $100,000 and which, together with all such other Liens, are not in excess of $500,000;
(f) Increased the compensation of any officer or employee, other than
(g) Disposed of, sold, leased, transferred or assigned, or agreed to dispose of, sell, lease, transfer or assign, any properties or assets (other than in the ordinary course of business consistent with past practice) having a net book-value as of the date of such disposition in excess of $100,000; (h) Declared, set aside or paid any dividend, distribution, or payment on, or issued, sold, purchased or redeemed any shares of any class of its capital stock or partnership interest or made any commitment therefor; (i) Canceled, waived or forgiven any material debts, rights or claims therefor other than intercompany debts as contemplated by Subsection 5.18.9 hereof-, or (j) Entered into any transaction for the purchase or sale of goods or services in excess of $100,000 other than in the ordinary course of business.
SECTION 3.16. Environmental Compliance. Except as described on Schedule
1.16:
(a) Each Subsidiary (and its business, operations. assets, equipment and real property) is in compliance with all applicable Environmental Laws, except for violations or failures
29
to comply which are not, individually or in the aggregate, reasonably expected to result in a Material Adverse Effect upon the Subsidiaries. None of Seller, with respect to the Business, or any Subsidiary has received any written notice of violation, hearing, correction order, cessation order, notice of fine or penalty, notice of proposed assessment or other written notice from any Governmental Authority that Seller. with respect to the Business, or any Subsidiary is not in compliance with any Environmental Laws or Permits which relate to any matters or conditions that are not, or have not been, resolved as of the date hereof except for such matters or conditions which, if not resolved as of the date hereof, are not, individually or in the aggregate, reasonably expected to result in a Material Adverse Effect upon the Subsidiaries;
(b) There have been no Releases of Hazardous Materials by any of the
Subsidiaries or their Affiliates on, in, under, over or in any way affecting the
real property owned or leased by any Subsidiary as of the date hereof, except
(c) None of the real property owned or leased by any Subsidiary is used to produce, manufacture, process, generate, store, use, handle, recycle, treat, dispose of, manage, ship or transport Hazardous Materials, other than as customary in the normal course of coal mining operations of the type conducted or previously conducted on such real property; (d) To the Knowledge of Seller, none of the real property owned by any Subsidiary and listed on Schedule 3.8.1 contains any underground storage tanks; (e) No Subsidiary has received notice from any Governmental Authority that such Subsidiary is a "potentially responsible party" under Section 107 of CERCLA for any matter that has, not been resolved as of the Closing Date; and (f) All Hazardous Materials disposed of, treated or stored by Seller or any of its Affiliates on any real property listed on Schedule 3.8.1 have been disposed of, treated or stored, as the case may be, in compliance in all material respects with all applicable laws, codes and ordinances and all rules and regulations promulgated thereunder.
SECTION 3.17. Brokers. All negotiations relating to this Agreement and
the transactions contemplated hereby have been carried out without the
intervention of any person acting on behalf of Seller in such manner as to give
rise to any valid claim against Purchaser, Seller or any Subsidiary for any
brokerage or finder's commission, fee or similar compensation.
SECTION 3.18. Insurance. Schedule 3.18 hereto contains a true and complete list of all policies of fire, property and casualty, liability, workers' compensation, business interruption and other forms of insurance policies (other than surety or performance bond policies) in effect on the date hereof and maintained by any Subsidiary or Seller or its Affiliates (other than the Subsidiaries) with respect to the Business. All of such policies are in full force and effect on the date hereof, and all premiums, assessments and other charges required thereunder have been paid when due. 30
SECTION 3.19. Bank Accounts. Schedule 3.19 contains a correct and
complete list of the names of each bank or other financial institution in which
any Subsidiary has an account (including lockbox accounts) or safe deposit box,
and the names of all persons authorized to draw thereon or to have access
thereto.
SECTION 3.20. Audits. Except as set forth on Schedule 3.20, (i) no Subsidiary is currently the subject of any audit with respect to any Tax Return filed by such Subsidiary or by any member of the Seller Consolidated Group to the extent such Tax Return and the audit thereto relates to the Business which, if adversely determined, could reasonably be expected to result in a Material Adverse Effect upon the Subsidiaries, and (ii) no Subsidiary is a party to any other audit with respect to the Material Contracts or the leases or subleases listed on Schedule 3.8.1 which, if adversely determined, could reasonably be expected to result in a Material Adverse Effect upon the Subsidiaries. SECTION 3.21. Bonds. Minerals and its Affiliates (including, prior to the Closing. the Subsidiaries) have posted all reclamation and performance bonds required to be posted in connection with the operations of the Business except for such bonds the failure to post are not, individually or in the aggregate, reasonably expected to result in a Material Adverse Effect upon the Subsidiaries. All such reclamation and performance are listed on Schedule 3 .2 1. SECTION 3.22. Permit Blocking. Neither Seller nor any Subsidiary has been notified (nor to the Knowledge of Seller is there any pending or threatened notification) by the Federal Office of Surface Mining or the agency of any state administering SMCRA that it is (i) ineligible to receive additional surface mining permits or (ii) under investigation to determine whether its eligibility to receive a SMCRA permit should be revoked (i.e. "permit blocked"), and to the Knowledge of Seller there is no basis therefor. SECTION 3.23. Powers of Attorney. Except as set forth on Schedule 3.23, there is no executed power of attorney to which any Subsidiary is a party that will remain in effect following the Closing Date. SECTION 3.24. Certain Customer Matters. No customer to a coal supply contract listed on Schedule 3.9.1 pursuant to Subsection 3.9.1(a) hereof has issued to Seller or any Subsidiary written notice of its intention to terminate any such coal supply contract pursuant to an express termination right specified in such coal supply contract. SECTION 3.25. Documents. True, complete and correct copies of all leases and subleases listed on Schedule 3.8.1 and of all Material Contracts have been furnished to Purchaser or its representatives or made available to Purchaser or its representatives for inspection at the offices of Seller or its Subsidiaries. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants; to Seller as of the date hereof and as of the Closing Date as follows:
31
SECTION 4.1. Corporate Status and Authority. Purchaser is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware. Purchaser has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted, and to execute and deliver this Agreement and the Ancillary
Agreements, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. The execution,
delivery and performance by Purchaser of this Agreement and the Ancillary
Agreements have been duly authorized by the Board of Directors of Purchaser,
which constitutes all necessary corporate action on the part of Purchaser for
such authorization. This Agreement has been duly executed and delivered by
Purchaser and constitutes the valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application referring to or
affecting the enforcement of creditors' rights, or by general equitable
principles. Upon the Closing, the Ancillary Agreements shall be duty executed
and delivered by Purchaser and shall constitute the valid and binding
obligations of Purchaser. enforceable against Purchaser in accordance with their
respective terms. except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization. moratorium or other laws of general
application referring to or affecting the enforcement of creditors' rights, or
by general equitable principles.
SECTION 4.2. No Conflicts. Except as set forth in Schedule 4.2: 4.2.1 Charter Documents. The execution. delivery and performance by Purchaser of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby will not result in (a) any conflict with the Certificate of Incorporation or by-laws of Purchaser, or (b) any breach or violation of or default under, or result in the creation or imposition of any Lien under, any statute, regulation, judgment, order or decree, or any mortgage, deed of trust, indenture, security agreement, pledge or any other similar instrument to which Purchaser is a patty or by which Purchaser or any of its properties or assets are bound; and 4.2.2 Governmental Consents. No consent, approval or authorization of or filing with any Governmental Authority is required on the part of Purchaser in connection with the execution and delivery of this Agreement and the. Ancillary Agreements or the consummation of the transactions contemplated hereby and thereby, except filings required with respect to the HSR Act and such other filings, consents or approvals which, if not made or obtained prior to Closing, are not, individually or in the aggregate, reasonably likely to have a material adverse effect on the ability of Purchaser to perform its obligations hereunder or thereunder or to consummate the transactions contemplated hereby or thereby. SECTION 4.3. Litigation. There is no claim, legal action, suit, arbitration, governmental investigations or other proceedings, nor any order, decree or judgment, in progress, pending or in effect, or, to the Knowledge of Purchaser, threatened, which is related to the transactions contemplated by this Agreement or any action taken or to be taken by Purchaser pursuant to or in connection with this Agreement. SECTION 4.4. Purchase for Investment. Purchaser is acquiring the Shares for its own account for purposes of investment and not with a view toward any resale or distribution thereof 32 except as otherwise permitted by the Securities Act and any other applicable law. Purchaser .understands and acknowledges that the offer and sale of the Shares as contemplated hereby have not been registered under the Securities Act, any state "Blue Sky" law, or any applicable foreign law or regulation, and that any subsequent transfer or offer to transfer by Purchaser or any representative thereof of the Shares are subject to registration requirements or other restrictions arising under such laws and regulations in the absence of an available exemption therefrom. The stock certificates representing the Shares to be delivered at Closing as contemplated by Section 2.3.2 hereof shall carry a restrictive legend to such effect.
SECTION 4.5. Financial Ability to Perform. Purchaser has available to it
funds sufficient to enable Purchaser to deliver the Purchase Price to Seller as
contemplated by this Agreement at the Closing and perform its obligations
hereunder. including causing the issuance of the Purchaser Surety Bond
contemplated by Section 5.17.1(b) hereof and the Equipment Surety Bond
contemplated by Section 5.22 hereof.
SECTION 4.6. Brokers. All negotiations relating to this Agreement and the transactions contemplated hereby have been carried out without the intervention of any person acting on behalf of Purchaser in such manner as to give rise to any valid claim against Seller or any Affiliate of Seller for any brokerage or finder's commission, fee or similar compensation, except for such brokers whose names have been disclosed in writing to Seller prior to the execution hereof and whose fees in respect hereof shall be paid by Purchaser. SECTION 4.7. Disclosure. None of Purchaser or its authorized representatives (including but not limited to Purchaser's non-employee consultants) has any knowledge of any fact, event or circumstance that constitutes (or would constitute) or indicates (or would indicate) a breach of any representation, warranty or covenant made by Seller in this Agreement. SECTION 4.8. Permit Blocking. Neither Purchaser nor any Affiliate thereof has been notified (nor to the Knowledge of Purchaser is there any pending or threatened notification) by the Federal Office of Surface Mining or the agency of any state administering SMCRA that it is (i) ineligible to receive surface mining permits or (ii) under investigation to determine whether its eligibility to receive a SMCRA permit should be revoked (i.e. "permit blocked"), and to the Knowledge of Purchaser there is no basis therefor. ARTICLE V COVENANTS SECTION 5.1. Consents. Further Assurances. 5.1.1 Consents. The parties shall promptly apply for and diligently prosecute all applications for, and shall use all reasonable efforts promptly to obtain, such consents, authorizations and approvals from such Governmental Authorities and third parties as shall be necessary or appropriate to permit the consummation of the transactions contemplated by this Agreement, and shall use all reasonable efforts to bring about the satisfaction as soon as practicable of all the conditions contained in Article VI and VII to effect the consummation of the transactions contemplated by this Agreement. Notwithstanding anything to the contrary contained herein, the 33 parties hereto agree that as a condition to obtaining the consent of any third party to any coal supply contract, real property lease, personal property lease or any other agreement to permit the consummation of the transactions contemplated hereby, no party hereto shall have any obligation to (i) file any lawsuit or take other legal action as against such third party with respect to any thereof or (ii) make any amendment thereof or waive any rights thereunder if as a result of such amendment or waiver such coal supply contract, real property lease, personal property lease or any other agreement would contain terms and conditions that are less favorable in any material respect than the terms and conditions of such coal supply contract, real property lease or personal property lease as in existence on the Closing Date.
5.1.2 Further Assurances. From time to time. each of the parties
hereto will, at their own cost and expense, execute and deliver such further
instruments and will take such other actions as Purchaser or Seller may
reasonably request in order to effectuate the purposes of this Agreement, to
carry out the terms hereof, to fully and completely convey the Business to
Purchaser and to enable Seller or its Affiliates to retain and assume, as the
case may be, the Excluded Assets and Excluded Liabilities. Without limiting the
generality of the foregoing, at any time and from time to time after the Closing
Date (a) at the request of Purchaser, Seller will execute and deliver or cause
to be executed and delivered such other instruments and take or cause to be
taken such actions as Purchaser may reasonably deem necessary in order to
consummate the transactions contemplated by this Agreement, to evidence and
effect the sale, delivery and transfer of the Shares to Purchaser, to effectuate
the purposes and intent of this Agreement and to put Purchaser in actual
possession and operating control of the business and assets of the Subsidiaries
(other than the Excluded Assets and Excluded Liabilities) and to permit
Purchaser to exercise all rights with respect thereto (including, without
limitation, rights under contracts and other arrangements as to which any
required consent of any third party shall not have previously been obtained) and
(b) at the request of Seller, Purchaser will execute and deliver such other instruments and agreements, and take such action, as Seller may reasonably deem necessary in order to consummate the transactions contemplated hereby (including enabling Seller or its Affiliates to retain and assume, as the case may be, the Excluded Assets and Excluded Liabilities) and to effectuate the purposes and intent of this Agreement. SECTION 5.2. Conduct of Operations; Access and Information. 5.2.1 Conduct of Operations. From the date hereof until the Closing, except as otherwise permitted or contemplated by this Agreement (including without limitation any action described below to the extent necessary or appropriate to consummate the transactions contemplated by Section 2.1 hereof) or as otherwise consented to by Purchaser in writing, such consent not to be unreasonably withheld or delayed, Seller shall cause the Subsidiaries: (a) To carry on the business and operations of the Subsidiaries in the ordinary course consistent with past practices and use commercially reasonable efforts to preserve intact their present organization, to keep available the services of the present officers and employees and to preserve intact their relationships with customers, suppliers and others having material business dealings with each of them; (b) To maintain their books of account and records in their usual, regular and ordinary manner, consistent with their past practice;
34
(c) To promptly make available to Purchaser copies of all filings made by Seller with any federal, state or foreign Governmental Authority in connection with this Agreement and the transactions contemplated hereby; (d) Not to settle or compromise any Proceeding or threatened Proceeding involving any of them, their assets or any real property owned or leased by any of them if the amount at issue exceeds $50,000.00, except for any Proceeding included among the Excluded Assets or Excluded Liabilities; (e) Not to enter into any contract or agreement which involves total consideration to be paid or received by any Subsidiary in excess of $50,000 other than in the ordinary course of business consistent with past practice; (f) Not to modify, amend or terminate any Material Contract in any material respect, waive, release, relinquish or assign any material right under any Material Contract or other material right or claim, or cancel or forgive any. indebtedness owed to any of them, other than, in each case, in the ordinary course of business consistent with past practice; (g) Not to declare or pay dividends or make other shareholder distributions; (h) Not to amend the articles of incorporation or by-laws or other charter documents (including any partnership agreement) of any Subsidiary; (i) Not to increase the compensation payable or to become payable to any officer, director or employee of any Subsidiary, other than in the ordinary course of business consistent with past practice or as required by law (and in no event in excess of 15% of such individual's compensation); (j) Not to incur or refinance any indebtedness for borrowed money in excess of $50,000; (k) Not to make any loans to any Person other than in the ordinary course of business (including loans and advances to employees for business travel); (1) Not to sell or otherwise dispose of any assets or Liabilities of the Subsidiaries, except in the ordinary course of business consistent with past practice; (m) Not to enter into any collective bargaining agreement or, except in the ordinary course of business consistent with past practice, any other agreement with any labor union; (n) Not to enter into any agreement to undertake any of the actions listed in clauses (a) through (n) above; (o) To conduct the mining operations of the Subsidiaries in accordance with the current mine plans except for such deviations therefrom as are necessary or appropriate to
35
compensate for mining, weather, marketing factors or other conditions or for such other deviations as are customary based on past practice; (p) To pay creditors and employees on a timely basis;.and (q) To preserve the possession and control of the assets and properties of the Subsidiaries.
5.2.2 Access and Information. Seller shall cause the
Subsidiaries to give to Purchaser and its representatives reasonable access,
during normal business hours, to all real property owned or leased by the
Subsidiaries, to the offices of the Subsidiaries, the Headquarters, and all of
the books and records and other information related thereto and furnish such
information and documents in its or their possession as Purchaser may reasonably
request. All such information and documents obtained by Purchaser shall be
subject to the terms of the Confidentiality Agreement. Seller shall have no
obligation to disclose, and Purchaser shall not disclose, to any representative
of Purchaser any confidential information relating to Seller, the Coal Business
or any Subsidiary unless such representative shall have agreed in writing to be
bound by the terms the Confidentiality Agreement and such writing shall have
been delivered to Seller. At the request of Seller, Purchaser shall provide to
Seller copies of all environmental reports (including any Phase I or Phase II
study) conducted by or at the request of Purchaser with respect to any
Subsidiary or any assets and liabilities thereof; provided that, at the
reasonable request of Purchaser, Seller shall, as a condition to receiving any
such environmental report, execute a joint defense agreement reasonably
acceptable to Seller and Purchaser with respect to the information contained in
such study and the defense of any action relating thereto.
5.2.3 Notification by Purchaser of Certain Matters. Purchaser agrees to notify Seller in writing promptly upon Purchaser's or its authorized representatives' (including, but not limited to, Purchaser's non-employee consultants) discovery of any information by Purchaser or such authorized representative prior to the Closing Date relating to the operations (including the financial condition, assets and properties) of the Business or any Subsidiary which constitutes (or would constitute) or indicates (or would indicate) a breach of any representation, warranty or covenant of Seller contained herein. SECTION 5.3. Publicity. All press releases, filings and other public announcements concerning the transactions contemplated hereby will be subject to review and approval 'by each of Seller or Purchaser, such approval not to be unreasonably withheld. Such approval shall not be required if the Person issuing such release, filing or public announcement reasonably believes, based on advice of counsel, that it is required by law to do so, but in any such case, all reasonable efforts shall be made to consult with the other party in advance of such release, filing or announcement. SECTION 5.4. Exclusivity. During the Interim Period, unless this Agreement shall have been terminated pursuant to Section 9.1 in accordance with its terms, Seller shall not and shall cause the Subsidiaries and the officers, directors and employees of Seller and the Subsidiaries not to (i) directly or indirectly solicit, initiate, authorize the solicitation of or enter into any discussions with any Person other than Purchaser involving the possible acquisition of all or part of the Business or any Subsidiary (other than the Excluded Assets and Excluded Liabilities) and (ii) enter into any 36 transaction with any Person, other than Purchaser, involving the possible acquisition of all or part of the Business or any Subsidiary (other than the Excluded Assets and Excluded Liabilities). Seller shall notify Purchaser of any unsolicited offer or proposal to enter into discussions or to buy all or part of the Business or any Subsidiary (other than the Excluded Assets and Excluded Liabilities). and shall provide Purchaser with a copy thereof.
SECTION 5.5. Notification by Seller of Certain Matters. Throughout the
period beginning on the date hereof and ending on earlier of the Closing Date
and the date on which this Agreement shall have terminated pursuant to Section
9.1 hereof Seller shall notify Purchaser in writing promptly upon the occurrence
of any event or development that comes to Seller's Knowledge which has had or
could reasonably expected to have a Material Adverse Effect upon any Subsidiary.
SECTION 5.6. Company Records 5.6.1 Retention. With respect to the books and records of the Subsidiaries relating to matters prior to the Closing Date, Purchaser shall retain or cause the Subsidiaries to retain copies of all Tax Returns, related schedules and work papers, and all material records and other documents relating thereto existing on the date hereof or created through or with respect to taxable periods ending on or before or including the -Closing Date, until six months after the expiration of the statute of limitations (including extensions) of the taxable years-to which such Tax Returns and other documents relate; provided, however, that Purchaser shall cause any Person to whom it shall have sold or otherwise transferred any Subsidiary (or a significant portion of the assets of such Subsidiary) to agree to be bound by the provisions of this Subsection 5.6.1 by written acknowledgment delivered to Seller prior to such sale or transfer. 5.6.2 Cooperation With Respect to Examinations and Controversies. Purchaser and Seller shall use all reasonable efforts to cooperate with each other and their respective representatives, in a prompt and timely manner, in conjunction with any inquiry, audit, examination, investigation, dispute or litigation involving any Tax Return relating to the Subsidiaries filed or required to be filed by or for any Subsidiary for any taxable period beginning before the Closing Date, and relating to any federal, state or local Taxes, Such cooperation shall include, but not be limited to, making available to Seller or Purchaser', as the case may be, during normal business hours, and within ten (10) days of any reasonable request therefor, all books, records and information, and the assistance of all officers and employees, reasonably required in connection with any Tax inquiry, audit, examination, investigation, dispute, litigation or any other matter. 5.6.3 Remedy for Failure to Comply. If Seller or Purchaser reasonably determines that the other party is not fulfilling its obligations in a reasonable manner under Subsection 5.6.2, then the party making such determination shall have the right to select and appoint, at the reasonable expense of defaulting party, an independent entity such as a nationally recognized public accounting firm to assist such defaulting party in meeting its obligations under Subsection 5.6.2; provided, however, that if such independent entity concludes that such defaulting party shall have fulfilled its obligations under Subsection 5.6.2, then such reasonable expenses shall be for the account of and shall be paid by the party making the determination of non-compliance. Such entity shall have complete access to all books and records and information, and the complete cooperation of all officers and employees of Seller, Purchaser and the Subsidiaries, as the case may be, as reasonably 37
requested by the party making the determination of non-compliance.
SECTION 5.7. Disclosure Schedules; Updates.
5.7.1 Delivery. Concurrently with the execution hereof. Seller is delivering to Purchaser the disclosure Schedules required to be delivered by Seller hereunder. By its execution hereof, Purchaser acknowledges that the Schedules delivered by Seller concurrently with the execution hereof are in form and substance acceptable to Purchaser. No later than five business days prior to the scheduled Closing Date, Seller shall amend or supplement the Schedules with respect to any matter which is necessary or desirable to complete, update or correct any information contained therein in order to make the statements, representations and warranties contained in this Agreement true and correct on the Closing Date or on a date as close to the Closing Date as is practical. 5.7.2 Special Right to Update Schedules Within Five Business Days o Execution of this Agreement. The parties hereto acknowledge that the disclosure Schedules delivered hereunder on the date of execution hereof may not be complete as they have not been fully reviewed by all persons listed on Schedule III hereof. Not later than five (5) business days following the execution hereof, Seller shall, to the extent necessary in its sole judgment in order to make the statements, representations and warranties contained herein true, correct and complete as of the date of execution hereof, deliver to Purchaser amendments, supplements or corrections (any such amendment, supplement or correction, an "Update") to all disclosure Schedules delivered to Purchaser concurrently with the execution hereof, in which case such updated disclosure Schedules, together with all disclosure Schedules delivered by Seller concurrently with the execution hereof, that do not require updating pursuant to this Subsection 5.7.2, shall constitute the disclosure Schedules delivered by Seller concurrently with the execution hereof for all purposes of this Agreement, including determining the accuracy of Seller's representations and warranties as of the date hereof. Purchaser shall have one (1) business day following the end of such five (5) business day period to accept or reject any Update, it being understood and agreed that Purchaser shall have no right to reject any information contained in any updated disclosure Schedule to the extent such information was set forth on the disclosure Schedules delivered concurrently with the execution hereof. Notwithstanding anything to the contrary contained in this Subsection 5.7.2, Purchaser shall have no right to reject any Update described in any updated disclosure Schedule to the extent that such Update, together with all such other Updates, shall not have a Material Adverse Effect upon the Subsidiaries (as determined by the parties in good faith within one (1) business day following the end of such 5 business day period). If such Updates shall result in a Material Adverse Effect upon the Subsidiaries, or if the parties hereto fail to agree within one (1) business day following the end of such 5 business day period as to whether such Updates result in a Material Adverse Effect upon the Subsidiaries, then either party may terminate this Agreement by giving the other written notice thereof within one (1) business day after such determination or failure to reach such agreement. 5.73 Interpretation. Matters reflected on the Schedules delivered hereunder are not necessarily limited to matters required by this Agreement to be reflected in such Schedules. Any such 38 additional matters are set forth for informational purposes and do not necessarily include other matters of a similar nature. A disclosure contained in any of the Schedules delivered hereunder. which identifies information that clearly and on its face is relevant or applicable to one or more Schedules to this Agreement. constitutes disclosure for such other Schedules to the extent this Agreement requires such disclosure. The exhibits and attachments to the Schedules form an integral part of the Schedules and are incorporated by reference for all purposes as if set forth fully therein.
SECTION 5.8. Officers and Directors.
5.8.1 Obligations of Seller. Contemporaneously with the Closing, Seller shall take such actions as shall be necessary or appropriate to cause Ux any individual who is an employee of Seller and an officer or director of any Subsidiary to be removed from the employ or Board of Directors (or similar governing body) of such Subsidiary and (y) each Subsidiary that has issued a power of attorney (or similar instrument) to any employee of such Subsidiary or of Seller or its Affiliates to terminate such power of attorney (or similar instrument) as of the Closing Date. As soon as practicable following the Closing, Seller shall take such actions and file such documents as Seller shall deem necessary or appropriate for the purpose of giving notice to all Governmental Authorities of the termination date of such officer's or director's relationship with the Subsidiaries. 5.8.2 Obligations of Purchaser. Contemporaneously with the Closing, Purchaser shall take such actions as shall be necessary or appropriate to cause each officer of director so removed by Seller to be replaced by an officer or director elected by Purchaser. As soon as practicable following the Closing (but in any event not later than 5 business days following the Closing), Purchaser shall take such actions and file such documents as shall be necessary or appropriate for the purpose of giving notice to all governmental Authorities of the names of each officer, director and shareholder of the Subsidiaries (including each officer and director elected by Purchaser as provided herein) and such other information with respect to the transactions contemplated by this Agreement as shall be necessary or appropriate, including without limitation all information required by any Governmental Authority with respect to such Governmental Authorities "ownership and control" reporting requirements of the "applicant violator system". SECTION 5.9 Section 338(h)(10) Election. From and after the Closing, Seller and Purchaser shall join together in making an election under Section 338(h)(10) of the Code (and any corresponding elections under state, local, or foreign tax law) (collectively, a "Section 338(h)(10) Election") with respect to the direct and indirect purchase and sale of the Subsidiaries (other than Yankeetown, Bentley Coal, Kentucky Prince Mining Company and Skyline Coal) hereunder. Purchaser shall indemnify and defend Seller for, and hold Seller harmless from and against, and pay and reimburse Seller for, Purchaser's failure to join with Seller in making the Section 338 (h)(10) Election and take such actions in connection therewith as shall be necessary to give effect thereto. SECTION 5.10. Royalty, etc. 5.10.1 Production Royalty on Fee and Leased Land as of the Closing Date. Subject to the provisions of this Section 5.10, Purchaser shall pay to
Seller a royalty as follows:
39
(a) Royalty. Commencing June 1, 2002 and thereafter, Purchaser
shall pay to Seller a royalty (the "Royalty") on the production and sale of any
and all coal underlying (x) all real property owned by any Subsidiary as of the
Closing Date, whether such real property is owned in fee simple or otherwise
(all such land, the "Fee Land", and all coal underlying the Fee Land, the "Fee
Coal"), and (y) all real property held under lease or sublease by any Subsidiary
as of the Closing Date, together with any and all renewals, extensions,
replacements or modifications (prior to the expiration or termination of such
lease or sublease) of such leases after the Closing Date by any Subsidiary (or
assignee or successor thereof) for any reason whatsoever (all such leases, the
"Leases", and all coal underlying such leases, the "Leased Coal"; the Fee Coal
and the Leased Coal, together with the Coal Components, are collectively
referred to herein as the "Coal Reserves").
(i) With respect to the Leases, the Royalty payable hereunder is not intended to and shall not apply to any subsequent leasehold estate acquired by a Subsidiary (or assignee or successor thereof) in any Leased Coal covered by a Lease, after the expiration or termination of the current leasehold estate created by said Lease. Notwithstanding the preceding sentence, the Purchaser and the Subsidiaries will not take any action nor permit any omission with the intent of allowing the early expiration or termination of the current leasehold estate in any Leased Coal on all or a portion of a Lease, and thereafter acquiring a subsequent leasehold estate in some or all of said Leased Coal, in an effort to eliminate or avoid the obligations to pay Seller the Royalty. (ii) In addition to the Royalty payable with respect to the Fee Coal and Leased Coal, the Royalty payable hereunder is intended to and shall apply to any gases mixed with the Fee Coal and Leased Coal, together with all gas, solid or liquid components derived from the Fee Coal and Leased Coal (all such gases and components are referred to herein collectively as the "Coal Components").
(b) Covenant Running with the Land. To the maximum extent
permitted by applicable law, the Royalty created by this Subsection 5.10.1 shall
be a covenant running with the Coal Reserves and Fee Land and the Leases
notwithstanding that this Agreement shall not be recorded in the real estate
records offices of any jurisdiction, it being agreed that this Subsection 5.10.1
and the Royalty payable hereunder shall be binding upon the assignees,
transferees, sublessees, trustees, receivers, creditors and all other successors
of Purchaser and its Affiliates, including the Subsidiaries, that may hold now
or in the future any interest in the Coal Reserves.
(c) Effective Date: Term. The Royalty payable hereunder shall be effective on the Closing Date, but shall only be due and owing for the production of Coal Reserves from and after June 1, 2002. To the maximum extent permitted by applicable law, the existence of and the obligation to pay the Royalty hereunder shall be perpetual and shall apply to any all production from the Coal Reserves from and after June 1, 2002. If the duration of the Royalty as to all or any portion of the Coal Reserves is void in any jurisdiction for any reason, based on any legal or equitable theory, including the rule against perpetuities, then, in that jurisdiction only, the duration of the Royalty shall be adjusted to the longer of (i) 40 years from the Closing Date and (ii) the maximum duration permissible by applicable laws. In the event of any such challenge to the duration, it is the intent of Seller and Purchaser that the duration of the Royalty for the pertinent Coal Reserves subject to the challenge shall be adjusted, rather than voiding, invalidating or rendering unenforceable the 40 Royalty, if possible, in order to achieve to the fullest extent possible the intent of Seller and Purchaser.
(d) Royalty Amount and Adjustment.
(i) The amount of the Royalty due and owing as of the Closing Date shall be $0.50 per ton of all Fee Coal and Leased Coal sold from coal production in the State of Indiana, Illinois, Ohio or California, and shall be $0.35 per ton of all Fee Coal and Leased Coal sold from coal production in the State of West Virginia, Kentucky or Tennessee (such per ton amounts, the "Base Royalty"), Tonnage shall be determined by use of certified scales, or if certified scales are not utilized or otherwise available, then by procedures standard in the coal industry and mutually agreed to by Seller and Purchaser. If Coal Components are produced and sold, then the Royalty due and owing on all such Coal Components shall be two percent (2.0%) of the gross proceeds received from the sale thereof. Gross proceeds shall include any cash consideration, as well as the value of any non-cash consideration received, without allowance for any deductions of any kind or character. The two percent (2%) Royalty on Coal Components shall not be adjusted and shall remain fixed. (ii) Beginning on June 1, 1999, and on each June 1 thereafter, for so long as any Royalty may be due under this Subsection 5.10.1 on any Fee Coal or Leased Coal, the Royalty shall be adjusted up or down, but never below the initial Base Royalty set forth in clause (i) above. This annual adjustment shall be made starting June 1, 1999, notwithstanding the fact that the Royalty is not payable except on the production from and sale of Coal Reserves from and after June 1, 2002. Calculation of the adjustment shall be made during May 1999, and during each May thereafter, to be effective for all production of Fee Coal and Leased Coal from and after the immediately following June 1. The Royalty shall be adjusted by multiplying the Base Royalty by a fraction. The denominator of the fraction shall always be the Consumer Price Index for All Urban Consumers (reference base 1982-84=100), unadjusted index, all items, as first published by the United States Department of Labor, Bureau of Labor Statistics ("CPIU") for the month of March 1998. The numerator of the fraction shall be the CPI-U for March of the year in which the adjustment is being made. (iii) In the event of any dispute regarding the calculation of the adjustment to the Royalty as provided in subclause (ii) above, Purchaser shall continue to pay the Royalty at the previous rate, and after the dispute is finally resolved refunds to Purchaser, or additional Royalty to Seller, as the case may be, shall be paid promptly, together with interest on the amount due at the Interest Rate, compounded monthly. In the event the reference base of the CPI-U is rebased, the CPI-U shall continue to be used by the parties as rebased. If during any May when the Royalty is being adjusted the CPIU for the preceding March is no longer published or issued by a governmental authority, then Seller and Purchaser shall use such other index as is then generally recognized and utilized for similar determinations of purchasing power. If there is a failure to agree on the replacement index, then the parties hereto authorize a court sitting in equity to select the replacement index, and the provisions in this subclause (iii) regarding payment of the Royalty pending resolution of a dispute shall apply.
41
(e) Royalty Payment on Coal Reserves.
(i) The Royalty payable on the Fee Coal and Leased Coal hereunder shall be due on the last business day each calendar month, commencing with July 31, 2002 for each ton of Fee Coal and Leased Coal produced and sold from the Fee Land and the Leases in the immediately preceding calendar month, regardless of when payment by the purchaser of such coal is actually received by Purchaser, any Subsidiary or any other Person. (ii) The Royalty payable on the Coal Components hereunder shall be due on the last business day each calendar month, commencing July 31, 2002, for all Coal Components produced and sold in the preceding calendar month, regardless of when payment by the purchaser of such Coal Components is actually received by Purchaser, any Subsidiary or any other Person. If Coal Components are sold to an Affiliate or a related Person of Purchaser, or sold in any other transaction that results in the gross proceeds therefore being less than fair market value, then the gross proceeds therefore shall be deemed to be the fair market value of the Coal Components. For the purposes of this Subsection, "fair market value" shall be the same as the price received for similar Coal Components in comparable sales that are bona fide, arms-length transactions between a willing buyer and a willing seller, neither of which are under duress to buy or sell. Comparable sales by Purchaser or its Affiliates in bona fide, arms length transactions may be considered, but are not controlling, in determining fair market value.
(f) Agreement Not to Challenge: Modification. Purchaser will
not, and will cause its Affiliates not to, either directly or indirectly
challenge or cause any challenge to the validity, scope or enforceability of all
or any portion of this Section 5.10, to the Royalty created by this Section 5.10
or to the Production Royalty created under the Royalty Deeds, or the other
rights and benefits of Seller and its Affiliates created under this Section
5.10.
(g) Royalty Set Off. It is the intention of the parties hereto that the Royalty payable hereunder for each ton of Fee Coal or Leased Coal or each pertinent quantity of Coal Components shall not be duplicative of the Production Royalty payable under the Royalty Deeds. In furtherance thereof, there shall be a credit against the Royalty due and payable by Purchaser under this Subsection 5.10.1 in the amount of any Production Royalty that shall be payable (and actually received) under the Royalty Deeds for the same ton of Fee Coal or Leased Coal or the same pertinent quantity of Coal Components without giving effect to any Person or court declaring or rendering such Royalty Deeds invalid or unenforceable. (h) Royalty Payable Whether any Subsidiary, or its Transferee Produces Coal or Coal Components. Subject to the provisions of Subsection 5.10.5, Purchaser's obligation to pay the Royalty shall be unconditional and absolute and shall be payable regardless of whether Coal Reserves shall be produced by (i) any Subsidiary, (ii) Purchaser or any of its Affiliates, (iii)
any Person to whom any Subsidiary shall have sold, conveyed, leased or otherwise
transferred any of the Coal Reserves or (iv) any contract miner of the Coal
Reserves, whether such contract miner shall be producing Coal Reserves from the
Leases or Fee Land owned, leased or otherwise held by any Subsidiary or by any
transferee or sublessee of such Subsidiary. In furtherance thereof and for the
42 avoidance of doubt, Purchaser hereby acknowledges and agrees that no sale, lease, conveyance, transfer or other disposition of any Lease or Fee Land by any Subsidiary shall have the effect of releasing Purchaser from its obligations to pay the Royalty, and that such obligation shall only be discharged in accordance with the provisions of this Section 5.10; provided however that the parties hereto agree that no Royalty shall be payable on the production and sale of any Coal Reserves covered by any Lease if such Lease expires or terminates by its terms and a leasehold interest is subsequently acquired, as contemplated by Subsection 5.10.1(a)(i) hereof.
(i) Royal Not Affected by Invalidity of Royally Deeds. Neither
the declaration or claim by any Person or the decision of any court that one or
more Royalty Deeds is invalid or unenforceable, in whole or in part, nor the
pendency of any Proceeding with respect to any such claim, shall render
unenforceable the Royalty payable by Purchaser hereunder, and Purchaser agrees
that it shall continue to be bound by and comply with the provisions of this
Section 5.10 in the event of any such declaration or decision. 5.10.2 Royalty Buy-Out. If, at any time following the Closing Date, (i) any equity securities of the Purchaser shall have been sold or issued
in any public or private transaction (other than not more than 50% of
Purchaser's equity securities issued to Purchaser's employees pursuant to any
stock option plan or executive compensation plan), (ii) Purchaser shall have
sold any shares of equity securities of any directly or indirectly owned Person
in which Purchaser shall own 20% or more of the equity interests (each, a
"Controlled Sub"), (iii) any equity securities of any Controlled Sub shall have
been sold or issued in any public or private transaction (other than not more
than 50% of such Controlled Sub's equity securities issued to such Controlled
Sub's employees pursuant to any stock option plan or executive compensation
plan), (iv) any Controlled Sub shall have sold or otherwise transferred any
shares of equity securities of any of its Controlled Subs, (v) Purchaser shall
have sold or otherwise transferred all or substantially all of its assets, or
shall have sold or otherwise transferred a significant portion of its assets not
in the ordinary course of business, or (vi) any Controlled Sub shall have sold
or otherwise transferred all or substantially all of its assets, or shall have
sold or otherwise transferred a significant portion of its assets not in the
ordinary course of business, and the effect of any one or more of the
transactions described in clauses (i) through (viii), as determined on a
cumulative basis and whether in a series of related or unrelated transactions,
is that Purchaser and its Controlled Subs, taken as a whole, shall have received
aggregate proceeds therefrom (whether in the form of cash or securities
(including those not registered under the Securities Act), including without
limitation any deferred purchase price or earn-out payments) in excess of
$75,000.000, then Purchaser shall give written notice thereto to Seller and
shall promptly pay to Seller, by wire transfer of immediately available funds to
an account designated by Seller in writing, the amount by which (x) $25,000,000
exceeds (y) fifty-five percent (55%) of the aggregate of all payments received
by Seller and its Affiliates pursuant to the Royalty Deeds, the Royalty payable
pursuant to Subsection 5.10.1 hereof and the Undeveloped Reserves Royalty
payable pursuant to Subsection 5.10.3 hereof (the "Royalty Buy-Out Amount"). As
soon as practicable following receipt of the Royalty Buy-Out Amount, Seller
shall cause the Royalty Deeds to be terminated and shall take such actions as
shall be necessary, including the filing of any and all documents with any
Governmental Authority, to cause the Subsidiaries to be fully released and
discharged from all of their obligations and liabilities under the Royalty
Deeds. It is the intention of the parties hereto that any transaction not
specifically described in clauses (i) through (vi) but which is structured to
enable Purchaser to avoid its royalty buy-out obligation contemplated hereby
shall
43 nonetheless be deemed to be a transaction of the type described in clauses (i) though (vi) and the proceeds thereof shall be taken into account for the purpose of determining whether the $75,000,000 threshold described above has been satisfied. Purchaser shall give Seller notice of the transaction of the type contemplated by clauses (i) through (vi) hereof which results in the aggregate proceeds of all such transactions exceeding $25,000,000, $50,000,000 and $75,000,000 promptly after consummation thereof by Purchaser or such Affiliate, describing in reasonable detail the type of and parties to such transaction, the closing date thereof and the proceeds received in connection therewith, Seller shall have the right, upon not less than 3 days' prior written notice to Purchaser, to inspect the books and records of Purchaser and such Affiliates during normal business hours for the purpose of determining Purchaser's compliance with the provisions of this Section 5.10.2 and to make copies of such books and records, including any agreement, instrument or certificate relating to any such transaction, as Seller shall reasonably request.
5.10.3 Minimum Royalty Payment on Undeveloped Reserves: Certain
Matters Relating to the Production Royalty. After the Closing, Purchaser shall
pay a minimum royalty to Seller in respect of the Undeveloped Reserves in
accordance with the following provisions:
(a) Minimum Undeveloped Reserves Royalty. Purchaser acknowledges that the Subsidiaries are obligated to pay the Production Royalty to Seller (or one of its Affiliates) under the Royalty Deeds. In the event that Seller shall not have received payments pursuant to Section 5.10.1 or the Royalty Deeds attributable to the Undeveloped Reserves Royalty at least equal to the amounts set forth below for each of the periods set forth below:
then, Purchaser shall pay to Seller a minimum royalty payment (each, a "Minimum
Royalty Payment" and, collectively, the "Minimum Royalty Payments") equal to (i)
in the case of the period ending December 31, 2003, the amount by which
$1,000,000 exceeds the Undeveloped Reserves Royalty received by Seller (or its
Affiliate) under the Royalty Deeds for the period commencing from the Closing
Date and ending December 31, 2003, (ii) in the case of the year ending December
31, 2004, the amount by which $2,000,000 exceeds the sum of (x) the Undeveloped
Reserves Royalty received by Seller (or its Affiliate) for the period commencing
from the Closing Date and ending
44
December 31, 2004 and (y) the amount received by Seller under subclause (i) of
this sentence, (iii) in the case of the year ending December 31, 2005, the
amount by which $3,000,000 exceeds the sum of (x) the Undeveloped Reserves
Royalty received by Seller (or its Affiliate) for the period commencing from the
Closing Date and ending December 31, 2005 and (y) the amount actually paid
Seller under subclauses (i) and (ii) of this sentence, and (iv) in the case of
the year ending December 31, 2006, the amount by which $4,000,000 exceeds the
sum of (x) the Undeveloped Reserves Royalty received by Seller (or its
Affiliate) for the period commencing from the Closing Date and ending December
31, 2006 and (y) the amount actually paid Seller under subclauses (i), (ii) and
(iii) of this sentence. Notwithstanding anything to the contrary contained in
this Subsection 5.10.3, all payments required to be made to Seller pursuant to
this subclause (a) shall be recoupable against future Undeveloped Reserves
Royalty payments. All payments required to be made by Purchaser to Seller under
this subclause (a) shall be paid not later than 30 days following the end of the
year for which such payment shall accrue by wire transfer of immediately
available funds to an account designated by Seller in writing to Purchaser.
(b) Minimum Royalty Payments Payable Whether any Subsidiary or its Transferee Produces Coal. Subject to the provisions of Subsection 5.10.5, Purchaser's obligation to pay the Minimum Royalty Payments shall be unconditional and absolute and shall be payable regardless of whether coal from the Undeveloped Reserves shall be produced by (a) any Subsidiary, (ii) Purchaser
or any of its Affiliates, (iii) any Person to whom any Subsidiary shall have
sold, conveyed, leased or otherwise transferred any of the Undeveloped Reserves
or (iv) any contract miner of the Undeveloped Reserves, whether such contract
miner shall be producing coal from the Undeveloped Reserves owned, leased or
otherwise held by any Subsidiary or by any transferee or sublessee of such
Subsidiary. In furtherance thereof and for the avoidance of doubt, Purchaser
hereby acknowledges and agrees that no sale, lease, conveyance, transfer or
other disposition of any Undeveloped Reserves by any Subsidiary shall have the
effect of releasing Purchaser from its obligations to pay the Minimum Royalty
Payments, and that such obligation shall only be discharged in accordance with
the provisions of this Subsection 5.10.3.
5.10.4 Audit and Inspection of Reserves. Seller and its agents shall have the right, upon not less than 3 business days' prior written notice to Purchaser and at Seller's cost and sole expense, to (i) inspect, audit and
copy the books and records of Purchaser and its Affiliates during normal
business hours for the purpose of reviewing tonnage produced from the Coal
Reserves (including the Undeveloped Reserves) and such other matters relating
thereto (including any permits or pending permit applications and' financial,
land, engineering, production, sales and other books and records) or to
Purchaser's compliance with the provisions of this Section 5.10 as Seller shall
reasonably request and (ii) have access to the mines, the Coal Reserves
(including the Undeveloped Reserves), the Fee Land and land under Lease during
normal business hours to review coal mining activities and operations thereon or
thereunder (including all activities directly and indirectly related to the
production, processing, handling, weighing, sampling, loading or transporting of
Coal Reserves and Coal Components). Purchaser shall give Seller 15 days' advance
written notice of any pending sale, lease, conveyance, transfer or other
disposition of any Coal Reserves (including any Undeveloped Reserves) and shall
use its reasonable best to efforts to cause the transferee or lessee thereof to
agree, pursuant to an agreement in writing delivered to Seller prior to or
contemporaneously with any such sale, lease, conveyance, transfer or other
disposition, to be bound
45 by the provisions of this Subsection 5.10.3. The rights granted to Seller under this Subsection 5.10.4 shall be in addition to any rights granted to Seller (or its Affiliate) under the Royalty Deeds.
5.10.5 Termination of Royalty and Minimum Royalty Payments.
Purchaser's obligations to pay the Royalty and the Minimum Royalty Payments
under Subsections 5.10.1 and 5.10.3 hereof, respectively, shall terminate
concurrently upon the earlier of (i) Purchaser's payment of the Royalty Buy-Out
Amount pursuant to Subsection 5.10.2 hereof and (ii) the receipt by Seller of
Royalty payments and Minimum Royalty Payments which, in the aggregate, total
$45,454,545.00; provided, however, that all Royalty payments and Minimum Royalty
Payments accruing in accordance with the provisions of Subsections 5.10.1 and
5.10.3 hereof, respectively, prior to the date of payment of the Royalty Buy-Out
Amount shall remain due and owing by Purchaser hereunder.
5.10.6 Royalty and Undeveloped Reserves Royalty Payable During Pendency of a Dispute. During the pendency of any dispute brought by any Person regarding the validity, scope or enforceability of all or any portion of this Section 5.10, Purchaser shall continue to pay the Royalty and the Minimum Royalty Payments to Seller as provided in this Section 5.10 except to the extent otherwise directed by a court of competent jurisdiction. SECTION 5.11. Taxes.
to be prepared and filed all Tax Returns relating to income Tax for each Subsidiary required to be filed for any Taxable period that ends on or before the Closing Date (a "Pre-Closing Tax Period"). Seller will prepare and, if required to do so by applicable law, deliver to Purchaser for signing and filing any Tax Returns relating to income Tax of each Subsidiary with respect to any Pre-Closing Tax Period (including any short or stub period) that have not been filed prior to the Closing Date. Seller will make all payments shown thereon as owing with respect to any such Tax Returns; provided, however, that all income Taxes of the Subsidiaries accruing during the Cash Advance Period on the pre-tax earnings of the Subsidiaries shall be charged, at the rate of 25% of such pre- tax earnings, as a Cash Advance.
(b) Other Taxes. Seller will prepare and file or cause to
be prepared and filed all Other Tax Returns for each Subsidiary required to be
filed during any Pre-Closing Tax Period. Seller will make all payments shown
thereon as owing with respect to any such Other Tax Returns, provided, however,
that:
(i) to the extent of the aggregate accrual on the March Balance Sheet for Other Taxes, all Other Taxes of a Subsidiary accrued with respect to any Taxable period ending on or before the Balance Sheet Date (a "Pre-Balance Sheet Date Period") and which are paid by the Seller shall be charged as a Cash Advance; and (ii) all Other Taxes of a Subsidiary accrued with respect to a Taxable period other than a Pre-Balance Sheet Date Period and which are paid by the Seller shall be charged as a Cash Advance;
46
prepare and file or cause to be prepared and filed all Tax Returns for each Subsidiary that are required to be filed for all Tax periods which begin on or after the Closing Date. Purchaser will pay or cause to be paid all Taxes required to be paid with respect to such Tax Return.
(b) Other Taxes Accruing During Pre-Closing Tax Period.
Purchaser shall prepare and file or cause to be prepared and filed all Other Tax
Returns for each Subsidiary that are required to be filed after the Closing Date
with respect to any Pre-Closing Tax Period. Purchaser will pay or cause to be
paid all Other Taxes required to be paid with respect to such Other Tax Returns;
provided, however, that if Purchaser pays Other Taxes pursuant to this
Subsection 5.11.2(b) with respect to a Pre-Balance Sheet Date Period, then to
the extent the sum of all such Other Taxes so paid by Purchaser exceeds the
aggregate accrual on the March Balance Sheet for Other Taxes, Seller shall
promptly reimburse Purchaser for the amount of such excess.
5.11.3 Straddle Periods. With respect to any Taxable period that would otherwise include but not end on the Closing Date, to the extent permissible pursuant to applicable law, Seller will, and Purchaser will cause each Subsidiary to, (a) take all steps as are or may be reasonably necessary, including, without limitation, the filing of elections or returns with applicable Taxing authorities, to cause such period to end on the Closing Date; or (b) if clause (a) is inapplicable, to the extent permitted by applicable law, report the operations of each Subsidiary only for the portion of such period ending on or immediately before the Closing Date in a combined, consolidated, or unitary Tax Return filed by Seller, notwithstanding that such Taxable period does not end on the Closing Date. If clause (b) applies to a Taxable period of a Subsidiary, the portion of such Taxable period included in such return filed by Seller will be treated as a Pre-Closing Tax Period described in Subsection 5.11.1; provided, however, that Purchaser shall be responsible for filing all Tax Returns with respect to all such straddle periods. If neither clause (a) nor (b) is applicable, then Purchaser and the Subsidiaries shall prepare and file the appropriate Tax Returns, Purchaser shall pay any Taxes with respect thereto, and Seller shall reimburse Purchaser for the portion of any income Taxes shown as due and payable thereon that relate to the portion of such straddle period that ends on the Closing Date. 5.11.4 Access. In order to assist Seller in the preparation of all, Tax Returns that Seller is required to prepare pursuant to this Section 5.11. Purchaser will prepare and deliver, or cause each Subsidiary to prepare and deliver, Seller's standard Federal and state tax return data gathering packages relating to the Subsidiaries not later than 60 days following receipt of such packages from Seller (or sooner, to the extent practicable). In addition to providing such packages, Purchaser will promptly provide or cause to be provided to Seller such other information as Seller may reasonably request (including access to books, records and personnel) in order for the operations of the Subsidiaries to be properly reported in such Tax Returns, for the preparation for any Tax audit or for the prosecution or defense of any claim, suit or proceeding relating to Taxes. 5.11.5 Refunds and Credits. Purchaser will pay or cause to be paid to Seller all refunds, offsets or credits (a) of Other Taxes for which there shall not have existed any accrual on the March Balance Sheet (including any interest thereon) received by Purchaser or any Subsidiary 47
after the Closing Date and attributable to Taxes paid by Seller or any
Subsidiary that accrued with respect to any Pre-Balance Sheet Date Period and
5.11.6 Seller Group Liabilities. Seller will indemnify, defend and
hold Purchaser and the Subsidiaries harmless from and against, and pay and
reimburse each of them for, any and all Liability for any Taxable period as a
result of Treasury Regulation Section 1.1502-64(or any comparable provision of
state or local Law) for Taxes of any Person, other than the Subsidiaries, which
is or has been affiliated with the Seller to the extent such Taxes are
attributable to periods in which such entity was a member of the Seller
Consolidated Group (or affiliated with Seller under such comparable provision of
foreign, state or local law).
5.11.7 Retention of Tax Returns. Seller and each other member of the Seller Consolidated Group shall retain, and Purchaser shall cause the Subsidiaries to retain, all Tax Returns, schedules and work papers, and all material records or other documents relating thereto, until the expiration of the statute of limitations (including any waivers or tensions thereof) with respect to the Taxable periods to which such Tax Returns and other documents relate or until the expiration of any additional period that either Purchaser or Seller, as the case may be, may reasonably request in writing with respect to specifically designated material records or documents. If Seller or any other member of the Seller Consolidated Group, or Purchaser or any of the Subsidiaries, intends to destroy any material and relevant records or documents, Seller or Purchaser, as the case may be, shall provide the other party with advance notice and the opportunity to copy or take possession of such records or documents. The parties hereto will notify each other in writing of any waivers or extensions of the applicable statute of limitations that may affect the period for which the foregoing records or documents must be retained. 5.11.8 Tax Contests. In the event any adjustment is made or proposed by a Taxing authority with respect to any Tax subject to this Section 5.11, the person ultimately responsible for paying any additional Tax (the "Controlling Party"), shall have the right to contest, litigate, compromise and settle the Tax Contest with respect thereto. The Controlling Party shall permit the other party and the counsel of its choice to participate in any such contest, litigation, compromise or settlement of any adjustment in such Tax Contest. All costs, including legal and accounting expenses, of any Tax Contest are to be borne by the party incurring such costs. SECTION 5.12. Compensation and Benefits of Employees. 5.12.1 Continuation of Employment. Purchaser shall cause the Subsidiaries to (i) continue employment for each Employee to the extent required
to do so under the notification provisions of the WARN Act, and (ii) abide by
the-provisions of the collective bargaining agreements listed on Schedule
3.11.2, including, if applicable, any obligations with respect to
48 successorship in the ownership of any operations, and with respect to recall to work rights of any individual, whether or not such individual is an active employee at the time of Closing.
Employees shall cease to participate in the Retirement Plan for Salaried Employees of Cyprus Amax Minerals Company (the "Salaried Plan") and each Subsidiary shall cease to be a participating employer thereunder. As of the Closing, the Employees shall be fully vested in their accrued benefits under the Salaried Plan, determined as of the Closing. Effective as of the Closing, the Employees shall accrue no additional benefits under the Salaried Plan and shall accumulate no further years of service thereunder after the Closing. Such accrued benefits shall be distributed to the Employees in accordance with the terms of the Salaried Plan and applicable laws and regulations;
(b) Lost Mountain Plan. Effective as of the Closing, the
Employees shall cease to participate in the Retirement Plan for Hourly Employees
of Cyprus Amax Coal Company -Lost Mountain (the "Lost Mountain Plan") and each
Subsidiary shall cease to be a participating employer thereunder. As of the
Closing, the Employees shall be fully vested in their accrued benefits under the
Lost Mountain Plan, determined as of the Closing. Effective as of the Closing,
the Employees shall accrue no additional benefits under the Lost Mountain Plan
and shall accumulate no further years of service thereunder after the Closing.
Such accrued benefits shall be distributed to the Employees in accordance with
the terms of the Lost Mountain Plan and applicable laws and regulations;
(c) Roaring Creek Plan. Effective as of the Closing, the Employees shall cease to participate in the Roaring Creek Coal Company Pension Plan for Hourly Employees (the "Roaring Creek Plan"), and the Subsidiaries shall cease to be a participating employer thereunder. As of the Closing, the Employees shall be fully vested in their accrued benefits under the Roaring Creek Plan, determined as of the Closing. Effective as of the Closing, the Employees shall accrue no additional benefits under the Roaring Creek Plan and shall accumulate no further years of service thereunder after the Closing. Such accrued benefits shall be distributed to the Employees in accordance with the terms of the Roaring Creek Plan and applicable laws and regulations; (d) Savings Plan. Effective as of the Closing, the Employees shall cease to participate in the Cyprus Amax Minerals Company Savings Plan and Trust (the "Savings Plan"), and each Subsidiary shall cease to be a participating employer thereunder. As of the Closing, the Employees shall be fully vested in their accounts under the Savings Plan. Effective as of the Closing, no further Employee or employer contributions shall be credited to the accounts of the Employees, except as may be required by the terms of the Savings Plan. Account balances shall be distributed to the Employees in accordance with the terms of the Savings Plan and applicable laws and regulations; (e) Purchaser's Pension Plans. Effective as of Closing, Purchaser shall cause the Subsidiaries to establish or become participating employers in one or more defined benefit pension plans that qualify under Section 401(a) of the Code. Such plans (the "Purchaser's Pension Plans") shall cover immediately as of the Closing Date each Employee who was a participant in 49 either the Lost Mountain Plan, the Roaring Creek Plan or the Salaried Plan (collectively, "Cyprus Amax's Pension Plans") as in effect immediately prior to the Closing. The Purchaser's Pension Plans shall credit Employees for purposes of eligibility and vesting with years of service for employment with Minerals, the Subsidiaries or any of their Affiliates prior to the Closing as reflected in the records of Cyprus Amax's Pension Plans;
(f) Purchaser's Savings Plan. Effective as of the Closing, Purchaser
Shall cause the Subsidiaries to establish or become participating employers in a
savings plan that qualifies under Sections 401(a) and 401(k) of the Code
("Purchaser's Savings Plan"). Purchaser's Savings Plan shall credit employees
for purposes of eligibility and vesting with years of service for employment
with Minerals, the Subsidiaries or any of their Affiliates as reflected in the
records of the Minerals' Savings Plans and Trust listed on Schedule 3.11.1;
(g) Purchaser's Welfare Plans. Effective as of the Closing, Purchaser shall cause the Subsidiaries to establish or become participating employers in one or more welfare benefit plans (including plans providing medical, dental, vision care, group term life insurance and a cafeteria plan under Section 125 of the Code with a health care spending account and a dependent care spending account) to provide benefits to the Employees ("Purchaser's Welfare Plans"). Employees and their dependents shall commence participation in Purchaser's Welfare Plans as of the Closing Date. Except as noted in the sentence immediately following this sentence, all claims for benefits of Employees which have not been paid in the normal course of business as of the Closing Date under the Plans that are employee welfare benefit plans as defined in Section 3(l) of ERISA (the "Seller's Welfare Plans") shall be assumed by Purchaser's Welfare Plans, and all claims for services or benefits provided to Employees and their dependents or survivors on and after the Closing Date shall be the sole responsibility of Purchaser, and Seller shall have no liability for any such claims and Purchaser shall indemnify, defend and hold harmless Seller and its Affiliates, and pay and reimburse each of them, therefor. With respect to the claims for benefits under Seller's Welfare Plans for legal services, financial counseling, long term disability, dependent life insurance, and business travel accident insurance. Seller shall indemnify, defend and hold harmless Purchaser, and pay and reimburse Purchaser, therefor:
(h) Purchaser's Retiree Plans.
(i) Any individual that retires before the Closing Date,
provided such individual is otherwise eligible in accordance with the terms of
the Plan, shall be entitled to the benefits afforded under the then current
retiree medical Plan maintained by Minerals or the Subsidiaries. After the
Closing, Purchaser shall not be obligated to provide any retiree medical plan;
provided, however, that retiree health care benefits under plans maintained
pursuant to a collective bargaining agreement shall be administered, modified or
terminated in accordance with the terms of the collective bargaining agreement
and the retiree health care plan maintained pursuant thereto.
(ii) With respect to former employees of the Subsidiaries not
covered by a collective bargaining agreement on the Closing Date, Purchaser
shall indemnify and defend Minerals and its Affiliates for, and hold each of
them harmless from and against, and pay and
50
reimburse each of them for, all retiree medical benefit obligations and
Liabilities of each such former employee provided such former employee was
employed by such Subsidiary at its operations in the State of Kentucky or
Tennessee, including those former employees and their dependents who are
eligible to receive (or are receiving) retiree medical benefits as of the
Closing. Effective as of the Closing, Purchaser shall cause the Subsidiaries
with retirees and their dependents at current or former operations in the State
of Kentucky or Tennessee to establish or become participating employers in one
or more retiree medical plans that provide benefits comparable to those medical
benefits provided by Minerals to retirees and their dependents on the day
immediately preceding the Closing. Seller shall indemnify and defend Purchaser
and its Affiliates for, and hold each of them harmless from and against, and pay
and reimburse, each of them for, all retiree medical benefit obligations and
Liabilities of each Employee and former employee of each Subsidiary provided (A)
such Employee or former employee was employed by such Subsidiary at its
operations in the State of West Virginia, Illinois or Indiana, and (B) such
Employee or former employee separated from service with such Subsidiary prior to
the Closing Date. Notwithstanding anything to the contrary contained in this
Subsection 5.12.2(h)(ii), Seller shall have no obligation to indemnify and pay
and reimburse Purchaser or its Affiliates with respect to any retiree that works
(as an employee or contractor) for Purchaser or its Affiliates at any time after
the Closing.
(iii) With respect to Employees and former employees of the
Subsidiaries covered by a past or present collective bargaining agreement, for
retiree medical benefit plans maintained under collective bargaining agreements
and under Section 9711 of the Coal Act, Seller shall indemnify and defend
Purchaser and its Affiliates for, and hold each of them harmless from and
against, and pay and reimburse each of them for, all retiree medical benefit
obligations and Liabilities of each former employee of each Subsidiary who was
represented by the United Mine Workers of America at the time of his retirement
provided that such former employee ceased to be actively employed by Minerals,
the Subsidiaries or their Affiliates prior to the Closing Date. Notwithstanding
anything to the contrary contained in this Subsection 5.12.2(h)(iii), Seller
shall have no obligation to indemnify and pay and reimburse Purchaser or its
Affiliates with respect to any retiree that works (as an employee or contractor)
for Purchaser or its Affiliates at any time after the Closing:
(i) Severance Plans. Effective as of the Closing, Purchaser shall cause the Subsidiaries to establish or become participating employers in one or more severance pay plans comparable to that of Mineral's severance pay plan as it applies to the Employees on the day immediately preceding the Closing. Purchaser shall indemnify, defend and hold harmless Seller and its Affiliates for, and pay and reimburse each of them for, any and all claims made by any Employee for severance pay and other benefits on account of their severance after the Closing, Purchaser has provided Seller with a list dated May 19, 1998 containing the names of twenty (20) salaried individuals that Purchaser does not want to be employed by any Subsidiary on the Closing Date (the "Excess Staff"). If prior to the Closing Date Seller is not able to place the Excess Staff in other positions within Seller or its Affiliates, then prior to the Closing Date the pertinent Subsidiary shall terminate the employment of all such Excess Staff not so placed. Seller hereby assumes and shall indemnify and defend Purchaser and its Affiliates (including the Subsidiaries) for, and hold each of them harmless from, and pay and reimburse each of them for, the payment of any and all severance benefits to which the Excess Staff are entitled under the Plans; 51
(j) Multi-employer Plans. Except as otherwise expressly provided in
this Agreement, effective as of the Closing, Purchaser shall cause the
Subsidiaries to comply with and discharge all obligations and Liabilities under
or arising out of the Multi-employer Plans, including any obligations and
Liabilities arising under the labor agreements listed on Schedule 3.11.2; n
(k) Workers' Compensation and Black Lung. (i) Notwithstanding anything to the contrary under applicable
Law or by action of a Governmental Authority, effective as of the Closing
Date and subject to the provisions of this clause (k), Purchaser hereby
assumes and shall indemnify and defend Seller and its Affiliates for, and
hold each of them harmless from and against, and pay and reimburse each of
them for, any and all past, present or future Liabilities, Losses,
premiums, audits, assessments or other obligations relating to or arising
out of Workers' Compensation Liabilities, Black Lung Liabilities and Black
Lung Benefit Obligations in respect of the Business, including any past,
present or future employee of any Subsidiary.
(ii) Notwithstanding anything to the contrary under applicable
Law or, by action of a Governmental Authority, and notwithstanding anything to
the contrary contained in subclause (i) of this clause (k), effective as of the
Closing Date and subject to the provisions of subclause (iii) of this clause
(A) Workers' Compensation Liabilities in respect of (1) any
claim filed on or prior to the Closing Date by any employee (including any
former employee) of any Subsidiary that was employed by such Subsidiary at
its operations in the State of West Virginia (unless such Subsidiary
subscribed to the West Virginia Workers' Compensation Fund), Illinois or
Indiana or by Amax Coal Company at its operations in western Kentucky, but
only to the extent such claims relate to the death of such employee or the
permanent total disability of such employee, all of which claims are
specifically set forth on Schedule 5.12.2(k)(ii)(A), and (2) any claim
filed by any employee of any Subsidiary (whether such claim is filed on,
prior to or after the Closing Date) to the extent such claim arises out of
such employee's employment at the Castle Gate Mine, Wabash Mine, Delta Mine
or Ayrshire Mine; and
(B) Black Lung Liabilities and Black Lung Benefit Obligations in respect of (1) any claim filed on or prior to the Closing
Date by any employee (including any former employee) of any Subsidiary that
was employed by such Subsidiary at its operations in the State of West
Virginia (unless such Subsidiary subscribed to the West Virginia Workers'
Compensation Fund), Illinois or Indiana or by Amax Coal Company at its
operations in western Kentucky, but only to the extent such claim (x) has
been awarded by any Governmental Authority as of the Closing Date and such
award is final and nonappealable or (v) has been awarded by any
Governmental Authority as of the Closing Date and is the subject of a
pending Proceeding or has not been awarded by any Governmental Authority as
of the Closing Date but is the subject of a Proceeding, all of which claims
are
52
specifically set forth on Schedule 5.12.2.(k)(ii)(B), and (2) any claim
filed by any employee of any Subsidiary (whether such claim is filed on,
prior to or after the Closing Date) to the extent such claim arises out of
such employee's employment at the Castle Gate Mine, Wabash Mine, Delta Mine
or Ayrshire Mine.
(iii) The parties hereto agree that Seller shall have no
liability for any Black Lung Liabilities and Black Lung Benefit Obligations
under clause (k)(ii)(B)(1) of this Section 5.12.2 for or with respect to (A) any
new claim that is filed after the Closing Date by any employee of any
Subsidiary, regardless of whether such employee has previously filed a claim for
which Seller has agreed to indemnify Purchaser pursuant to such clause
(k)(ii)(B)(1), (B) any claim that is filed after the Closing Date by an employee
of such Subsidiary if such claim constitutes the re-filing or resubmission of a
claim that has been previously denied, (C) any claim for the reopening,
expansion or modification with respect to any previously awarded claim, or (D)
any claim covered by such clause (k)(ii)(B)(1) if the employee as to which such
claim relates shall be employed by any Subsidiary for a period of twelve (12)
months or more following the Closing Date (in which case Seller shall have no
liability for such claim from and after such 12 month period).
(iv) Purchaser, for itself and its Affiliates (including, as of
the Closing Date, the Subsidiaries) hereby expressly acknowledges and agrees
that none of them are acquiring, as a result of the transactions contemplated
hereby, and none of the Subsidiaries are retaining, any past, present or future
rights to, interests in or ability to assert or file claims against or seek
reimbursement from the Cyprus Amax Minerals Company Black Lung Benefits Trust
(the "Black Lung Trust") or the assets thereof, and Purchaser, on behalf of
itself and each of them, hereby irrevocably and unconditionally waives, releases
and relinquishes any and all such rights, interests and claims of every kind or
character with respect to the Black Lung Trust, Purchaser shall not, and shall
cause each of its Affiliates (including, as of the Closing Date, the
Subsidiaries) and its and their respective representatives, agents, receivers,
trustees and creditors not to, make any claim against or seek reimbursement from
the Black Lung Trust or its trustee, under any circumstances whatsoever. For the
avoidance of doubt, the parties hereto agree that the Black Lung Trust is to be
an asset owned exclusively and in its entirety by Minerals for the sole and
exclusive benefit of Minerals and its Affiliates (other than the Subsidiaries).
For the purposes of this subclause (iv), all references to the Black Lung Trust
shall be deemed to include any past, present or future trust agreement,
investment agreement or other agreement or instrument directly or indirectly
relating thereto.
(v) In the event that after Closing Seller and Purchaser shall
in good faith disagree as to which party is responsible for a claim with respect
to any Workers' Compensation Liabilities or Black Lung Liabilities and Black
Lung Benefit Obligations, Purchaser agrees to assume the defense of such claim
during the pendency of such dispute provided Seller is in good faith proceeding
to resolve such dispute with Purchaser. Upon a determination that Seller is
responsible for such claim, then Seller shall promptly reimburse Purchaser for
all Losses incurred by Purchaser in connection therewith in accordance with the
indemnification provisions contained in Article VIII hereof, together with
simple interest thereon at the Interest Rate computed based on a 360 day year,
actual days elapsed.
53
(vi) Without limiting the obligations of Purchaser under
Sections 5.15 and 5.17 hereof, as of the Closing Date Purchaser shall have taken
all such actions as shall be necessary to obtain and put in place for the
Subsidiaries and their respective operations all required subscriptions to state
funds, insurance, self-insurance, bonding, guarantees and other coverage of any
kind or character required to be maintained by the Subsidiaries under any
applicable Law related to Workers' Compensation Liabilities or Black Lung
Liabilities and Black Lung Benefit Obligations (collectively, the "Required
Coverages"). Except with respect to Dunn Coal & Dock (which is a subscriber to
the West Virginia Workers' Compensation Fund and as to which Purchaser shall
assume the account and remain in such fund as a successor employer), Purchaser
may select in its sole discretion the method or type of Required Coverage so
long as such Required Coverage accomplishes the intention of the parties under
this Subsection 5.12.2(k). The actions required to be taken as of the Closing
Date by Purchaser under this clause (vi) shall be sufficient, as determined in
the reasonable judgment of Seller, to ensure Seller that no Governmental
Authority shall have the right to impose any Liability or Losses on Seller or
its Affiliates after the Closing for any item or matter assumed by Purchaser
under this Subsection 5.12.2(k).
(vii) Minerals and its Affiliates, together with the Black Lung
Trust and any trustee or investment advisor thereof, are intended third party
beneficiaries of this Subsection 5.12.2 and shall have the right to enforce the
benefits intended to be conferred upon each of them under this Subsection 5.12.2
as though they were parties to this Agreement.
(1) Purchaser shall indemnify and defend Seller and its Affiliates
for, and hold each of them harmless from and against, and pay and reimburse each
of them for, all Liabilities related to the Subsidiaries' obligations under the
Coal Act (or any subsequently enacted statutory or regulatory liability or levy
for health and death benefits for those individuals deemed eligible
beneficiaries for purposes of the Coal Act) that become due after the Closing
Date, except for those retiree health care obligations of the Subsidiaries under
(m) With respect to represented, hourly Employees, their rights to disability, payments, if any, shall be governed by the terms of any collective bargaining agreements to which the Subsidiaries are now or hereafter a party. With respect to salaried and non-represented hourly employees that are receiving short term disability payments as of the Closing Date, Purchaser assumes direct liability for, and shall indemnify and defend Seller and its Affiliates for, and hold each of them harmless from and against, and pay and reimburse each of them for, any and all payments due said Employees, or other Loss relating to and arising under the terms of the Mineral's
54
short term disability plan currently in place. With respect to salaried and non-
represented hourly employees that (i) are receiving long term disability
payments as of the Closing Date, or (ii) are receiving short term disability
payments as of the Closing Date, and thereafter become eligible for long term
disability in accordance with the applicable Plan, Seller assumes direct
liability for, and shall indemnify and defend Purchaser and its Affiliates for,
and hold each of them harmless from and against, and pay and reimburse each of
them for, any and all payments due said Employees, or other Loss relating to or
arising under the terms of the Minerals long term disability plan currently in
place.
(n) Except as otherwise provided in Section 5.12 of this Agreement:
(i) Seller shall indemnify and defend Purchaser and the
Subsidiaries for, and hold each of them harmless from and against, and pay
and reimburse each of them for, any and all claims, Liabilities, Losses,
payments, premiums, audits, assessments or other obligations relating to,
or arising out of, the Plans; and
(ii) Purchaser shall indemnify and defend Seller and its
Affiliates for, and hold each of them harmless from and against, and pay
and reimburse each of them for, any and all claims, Liabilities, Losses,
payments, premiums, audits, assessments or other obligations relating to,
or arising out of, the pension benefit plans, whether or not tax-qualified,
welfare benefit plans, fringe benefit plans, or any policies, procedures,
plans, funds, programs or payroll practices, including without limitation,
those maintained by Purchaser or its Affiliates, including the
Subsidiaries, on and after the Closing Date.
SECTION 5.13. HSR Act Notification. Unless the notification and report referred to in this sentence shall have been filed prior to the execution hereof, Seller and Purchaser shall, as promptly as practicable, but in no event later than ten business days after the date of this Agreement, file with the Federal Trade Commission (the "FTC') and the Antitrust Division of the Department of Justice (the "Antitrust Division") the notification and report form required for the transactions contemplated hereby pursuant to the HSR Act and request early termination of the statutory waiting period thereunder. Seller and Purchaser shall famish to each other such necessary information and reasonable assistance as may be requested in connection with the preparation of any filing required to be made under the HSR Act. Seller and Purchaser shall use all reasonable efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation and to obtain as promptly as practicable any clearance required under the HSR Act for the transactions contemplated hereby. SECTION 5.14. Fees and Expenses. Except as otherwise specifically provided in this Agreement, Seller and Purchaser shall bear their own fees and expenses incurred in connection with this Agreement and in connection with all obligations required to be performed by each of them under this Agreement. SECTION 5.15. Guarantees.
55
(a) Replacement of Corporate Guarantees. Purchaser shall use
commercially reasonable efforts to replace and cause Seller and its Affiliates
(other than the Subsidiaries) to be discharged from, effective as of the Closing
Date, all corporate guarantees and indemnities issued by Seller or any of its
Affiliates (other than the Subsidiaries) on behalf of any Subsidiary including,
without limitation, all corporate guarantees and indemnities set forth on
Schedule 5.15.1 (including any supplement to Schedule 5.15.1 on account of any
corporate guarantee or indemnity issued by Seller or its Affiliates (other than
the Subsidiaries) and on behalf of any Subsidiary during the Interim Period).
With respect to all such corporate guarantees and indemnities listed on Schedule
5.15.1 which are not, as of the Closing Date, replaced with corporate guarantees
or indemnities of Purchaser, Purchaser shall continue to use its commercially
reasonable efforts to replace and cause Seller and its Affiliates (other than
the Subsidiaries) to be discharged from their respective Liabilities under such
guarantees and indemnities; provided, however, that Purchaser shall have no
obligation to replace any such guarantee or indemnity (x) to the extent that
acceptance of such replacement guarantee or indemnity by the beneficiary thereof
shall be conditioned upon the amendment of the underlying obligation to which
such guarantee or indemnity relates or waiver by any Subsidiary of any rights in
respect of such underlying obligation and (y) as a result of such amendment or
waiver such underlying obligation would contain terms and conditions that are
less favorable in any material respect than the terms and conditions of such
underlying obligation as in existence on the Closing Date.
(b) Indemnification After Closing. Purchaser shall indemnify and defend Seller and its Affiliates (other than the Subsidiaries) for and hold Seller and such Affiliates harmless from and against, and pay and reimburse Seller and such Affiliates for, any and all Liabilities of Seller or such Affiliates, as the case may be, in respect of any corporate guarantee or indemnity issued by Seller or such Affiliates on behalf of any Subsidiary (including any such corporate guarantee or indemnity set forth on Schedule 5.15.1 (or any supplement thereof)) (a) arising out of a payment by Seller or such Affiliate under such guarantee or indemnity after the Closing Date or (ii)
any Proceeding arising out of or relating to such guarantee or indemnity;
provided, however, that neither Seller nor its Affiliates shall be entitled to
indemnification under this clause (b) to the extent the Liabilities in respect
of such corporate guarantee or indemnity shall arise out of or relate to the
Excluded Assets or Excluded Liabilities or to an Unrelated Business. Any payment
required to be made by Purchaser under this clause (b) shall be made within ten
(10) business days of Purchaser's receipt of written notice from Seller or such Affiliate describing in reasonable detail the amount then due. 5.15.2 Reimbursement During Interim Period. In addition to Purchaser's obligations under Subsection 5.15.1, effective as of the Closing Date, Purchaser shall indemnify and defend Seller and its Affiliates (other than the Subsidiaries) for and hold Seller and such Affiliates harmless from and against, and pay and reimburse Seller and such Affiliates for, any and all Liabilities of Seller or such Affiliates, as the case may be, arising out of (ii) any payment made by Seller and such Affiliates during the Interim Period under any corporate guarantee or indemnity issued by Seller or such Affiliates on behalf of any Subsidiary, including without limitation any such corporate guarantee or indemnity set forth on Schedule 5.15.1 (including any supplement to Schedule 5.15.1 on account of any corporate guarantee or indemnity issued by Seller or such Affiliates and on behalf of any Subsidiary during the Interim Period) and (ii) any Proceeding relating to any such corporate guarantee or indemnity; provided, however, that neither Seller nor its Affiliates shall be entitled to 56 indemnification under this clause (c) to the extent the Liabilities in respect of such corporate guarantee or indemnity shall arise out of or relate to the Excluded Assets or Excluded Liabilities or to an Unrelated Business. Seller shall deliver written notice to Purchaser at least two (2) business days prior to the Closing (except with respect to any payment made by Seller and such Affiliates within two (2) business days of Closing, in which case Seller shall deliver written notice thereof as soon as practicable prior to Closing) describing in reasonable detail the amounts due Seller and such Affiliates under this Subsection 5.15.2 as of the Closing Date, and Purchaser shall pay such amount to Seller at Closing, to an account designated by Seller in writing prior to the Closing, by wire transfer of immediately available funds.
5.15.3 Third Party Beneficiaries. All Affiliates of Seller that are
liable under any corporate guarantee or indemnity obligation referenced in this
Section 5.15 (other than the Subsidiaries) are intended third-party beneficiaries of this Section 5.15 and shall have the right to enforce the benefits intended to be conferred upon each of them under this Section 5.15 as though they were parties to this Agreement. SECTION 5.16. Name Changes. No later than ten (10) business days following the Closing Date, Purchaser shall amend the certificate of incorporation or other organization document of each Subsidiary to remove the word "Cyprus Amax," "Cyprus" or "Amax" or any similarity or reference thereto. The new corporate or partnership name of the Subsidiaries adopted by Purchaser shall not contain any word or words confusingly similar to "Cyprus Amax", "Cyprus" or "Amax." No later than 90 days following the Closing Date, Purchaser shall remove the marks and names "Cyprus Amax", "Cyprus" or "Amax" and the logo "C" with two lions appearing therein and any other words, names or symbols proprietary to Seller, from all tangible and intangible properties, real and personal, acquired by Purchaser hereunder. SECTION 5.17. Surety Bonds. 5.17.1 Replacement of Surety Bonds: Indemnification after Closing; Collateral; Fee; Refund of Premiums. (a) Replacement of Surety Bonds. At the Closing, Purchaser shall post a replacement letter of credit or surety bond in respect of each letter of credit and surety bond issued for the account of Minerals or any of its Affiliates (including the Subsidiaries) on behalf of any Subsidiary and listed on Schedule 5.17.1 (including any supplement to Schedule 5.17.1 on account of any letter of credit or surety bond issued for the account of Minerals or any of its Affiliates (including the Subsidiaries) on behalf of any Subsidiary during the Interim Period (collectively, the "Scheduled Bonds"). (b) Indemnification after Closing: Collateral. Purchaser shall indemnify and defend Minerals and its Affiliates for and hold Minerals and its Affiliates harmless from and against, and pay and reimburse Minerals and its Affiliates for, any and all Liabilities of Minerals and its Affiliates, as the case may be, in respect of all letters of credit and surety bonds issued for the account of Minerals and its Affiliates and on behalf of any Subsidiary (i) arising out of a draw made by any beneficiary of such letter of credit or surety bond after the Closing Date or (ii) any Proceeding arising out of or relating to such letter of credit or surety bond; provided, however, that neither 57
Minerals nor its Affiliates shall be entitled to indemnification under this
Subsection 5.17.1 to the extent the Liabilities in respect of such letter of
credit or surety bond shall arise out of or relate to the Excluded Assets or
Excluded Liabilities or to an Unrelated Business. Any payment required to be
made by Purchaser under this clause (b) shall be made within ten (10) business
days of Purchaser's receipt of written notice from Minerals or such Affiliate
describing in reasonable detail the amount then due, On the Closing Date,
Purchaser shall deliver to Seller a surety bond, substantially in the form of
Exhibit E hereto and from a surety or financial institution reasonably
acceptable to Seller, as collateral security for Purchaser's obligations under
this clause (b) (the "Purchaser Surety Bond"). The Purchaser Surety Bond shall
be issued initially in the face amount equal to $15,000,000 and shall permit
Seller to make draws thereunder from time to time. In the event that Purchaser
shall have failed from time to time to make any payment required to be made by
Purchaser to Minerals or its Affiliates, as the case may be, under this clause
(b), Purchaser hereby irrevocably authorizes Seller, on behalf of itself or Minerals or its Affiliates, as the case may be, to draw down under the Purchaser Surety Bond in the amount then due Minerals or its Affiliates, as the case may be, pursuant to this clause (b). Not earlier than sixty (60) days following the Closing, and thereafter upon the expiration of each calendar month, Purchaser shall have the right, at its option, to replace the Purchaser Surety Bond delivered at Closing provided that (1) the replacement surety bond shall be issued by a surety or financial institution reasonably acceptable to Seller and shall contain terms and conditions (except as to amount) identical in all material respects to the Purchaser Surety Bond then in effect, and (2) the
replacement surety bond shall be issued in a face amount equal to not less than
ten percent (10%) of the aggregate amount of all then outstanding Scheduled
Bonds (it being agreed that in no event shall such replacement surety bond be
issued in a face amount equal to less than $2,000,000), in which case such
replacement surety bond shall be deemed to be the "Purchaser Surety Bond" for
all purposes of this Section 5.17. Upon the delivery to Seller of such
replacement surety bond, Seller shall return to Purchaser for cancellation the
Purchaser Surety Bond then being replaced. A Scheduled Bond shall be deemed to
be outstanding until such time as the beneficiary thereof has provided Seller
with written documentation sufficient to cause the surety or financial
institution to fully and completely release and discharge Minerals or its
Affiliate (or any Subsidiary, if applicable) from the Scheduled Bond, and the
Scheduled Bond has been returned to Seller.
(c) Fee. With respect to all Scheduled Bonds that are not
replaced by Purchaser within one hundred eighty (180) days following the Closing
Date and resulting in a full and complete release of Mineral's and its
Affiliates liabilities with respect thereto, Purchaser shall pay to Seller a
monthly fee, on the average daily maximum contingent amount outstanding under
such Scheduled Bonds during the applicable month (the "Average Contingent
Amount"). The fee payable by Purchaser hereunder shall equal one-half of one
percent (0.5%) of the Average Contingent Amount. Any fee payable by Purchaser
pursuant to this clause (c) shall become due and payable on the first day
following the month (or portion thereof) in which such fee shall have accrued
and shall be computed on a per annum basis based on a 360 days year, actual days
elapsed.
5.17.2 Reimbursement During Interim Period. In addition to Purchaser's obligations under Subsection 5.17.1, effective as of the Closing Date, Purchaser shall indemnify and defend Minerals and its Affiliates for and hold Minerals and its Affiliates harmless from and against, and pay and reimburse Minerals and its Affiliates for, any and all Liabilities of Minerals or its Affiliates (including, prior to the Closing, the Subsidiaries) arising out of (i) any draw made by any beneficiary
58
during the Interim Period under any letter of credit or surety bond issued for
the account of Minerals or its Affiliates (including the Subsidiaries) and on
behalf of any Subsidiary (including without limitation any letter of credit or
surety bond listed on Schedule 5.17.1 (including any supplement to Schedule
5.17.1 on account of any letter of credit or surety bond issued for the account
of Minerals or its Affiliates (including, prior to the Closing, the
Subsidiaries) and on behalf of any Subsidiary during the Interim Period) and
(ii) any Proceeding relating to or arising out of such letter of credit or
surety bond: provided, however, that neither Minerals nor its Affiliates shall
be entitled to indemnification under this Subsection 5.17.2 to the extent the
Liabilities in respect of such letter of credit or surety bond shall arise out
of or relate to the Excluded Assets or Excluded Liabilities or to an Unrelated
Business. Seller shall deliver written notice to Purchaser at least ten (10)
business days prior to the Closing (except with respect to any draw that shall
have occurred within ten (10) business days of Closing, in which case Seller
shall deliver written notice thereof as soon as practicable prior to Closing)
describing in reasonable detail the amounts due Minerals and its Affiliates
under this Subsection 5.17.2 as of the Closing Date, and Purchaser shall pay
such amount to Seller (on behalf of Minerals and its Affiliates) at Closing, to
an account designated by Seller in writing prior to the Closing, by wire
transfer of immediately available funds.
5.17.3 Refund of Premiums. All funds in respect of premiums that are refunded by the issuer of any letter of credit or surety bond on ac count of the replacement by Purchaser of such letter of credit or surety bond as provided by clause (a) of Subsection 5.17.1 shall be for the account of Seller and its Affiliates. Purchaser shall pay over or cause any Subsidiary to pay over to Seller any such refunds received by any Subsidiary after the Closing promptly upon receipt of such refunds by such Subsidiary. 5.17.4 Cooperation for Replacement of Bonds. (a) Following the Closing, the parties hereto shall cooperate and cause their respective Affiliates to cooperate for the purpose of giving effect to the replacement of the letters of credit and surety bonds contemplated by this Section 5.17 and the full and complete release of Minerals' and its Affiliates' liabilities with respect thereto. In furtherance thereof, each party hereto shall (a) prepare and submit such documents and applications and provide such information (including financial information) to financial institutions and insurance companies as shall be necessary or appropriate, and (ii) cooperate
with such reasonable requests of the beneficiaries of all letters of credit and
surety bonds required to be replaced hereunder.
(b) The parties hereto acknowledge that some of the Scheduled Bonds requiring replacement by Purchaser under Subsection 5.17.1 secure both liabilities of the Subsidiaries that are not retained by Seller and, in addition, liabilities in respect of the Excluded Assets and Excluded Liabilities or other Liabilities retained by Seller under this Agreement, including certain Workers' Compensation Liabilities, Black Lung Liabilities and Black Lung Benefit Obligations retained by Seller under Subsection 5.12.2(k) hereof In such event, the parties hereto further acknowledge that Minerals and its Affiliates may not be released from their liability in respect of such Scheduled Bonds until both Purchaser and Seller or their respective Affiliates deliver such credit support instruments as are, in the aggregate, sufficient in the judgment of the beneficiaries of such Scheduled Bonds to collateralize the obligations secured thereby. Without limiting the generality of clause (a) of this Subsection 5.17.4, Purchaser and Seller hereby agree to
59
cooperate with each other for the purpose of causing the replacement of such
Scheduled Bonds including, in the case of Seller, causing to be issued surety
bonds or other credit support instruments in respect of the Excluded Assets and
Excluded Liabilities or other Liabilities retained by Seller under this
Agreement, including certain Workers' Compensation Liabilities, Black Lung
Liabilities and Black Luna Benefit Obligations retained by Seller under
Subsection 5.12.2(k) hereof, in form and substance reasonably acceptable to the
beneficiaries of such Scheduled Bonds, in connection Purchaser's obligations to
post replacement surety bonds and letters of credit pursuant to Subsection
5.17.5 Third Party Beneficiaries. Minerals and all other Affiliates
of Seller are intended third party beneficiaries of this Section 5.17 and shall
have the right to enforce the benefits intended to be conferred upon each of
them under this Section 5.17 as though they were parties to this Agreement.
SECTION 5.18. Special Provisions Relating to Financial Matters. 5.18.1 Close of Books and Records as of Balance Sheet Date. The parties hereto agree that the Business shall be operated and conducted for the account of Purchaser from and after April 1, 1998. In furtherance thereof, Seller shall establish separate books and records for each Subsidiary and cause such books and records to be maintained, commencing April 1, 1998 and ending on the Closing Date (the "Cash Advance Period"), in accordance with Seller's Accounting Principles. The parties hereto agree that all cash and cash equivalents of the Subsidiaries (other than Yankeetown) as at the Balance Sheet Date shall be for the account of and shall be retained by Seller. Purchaser and Seller hereby agree that Seller shall have no Liability to Purchaser in connection with the transactions contemplated hereby arising out of or resulting from Seller's management of the operations and business of the Subsidiaries during the Cash Advance Period except to the extent of Seller's willful misconduct, and Purchaser hereby releases Seller from any Liability for such management and agrees that it shall not institute any Proceeding against Seller on account of such management of such operations and business. 5.18.2 Financial Reports. Within 25 days following the end of each monthly accounting period beginning with the monthly accounting period ending April 30, 1998 (it being agreed that, with respect to any such monthly accounting period ending prior to the execution of this Agreement, Seller shall deliver to Purchaser the statements required by this Subsection 5.18.2 for such month or months contemporaneously with the execution hereof provided such monthly accounting period shall have ended 25 days prior to the execution hereof), Seller shall deliver to Purchaser an unaudited financial report of the Subsidiaries on a consolidated basis (excluding the Excluded Assets and Excluded Liabilities), which report shall be prepared in accordance with Seller's Accounting Principles and which shall include (i) a balance sheet as of the last
day of such monthly accounting period, (ii) an income statement for such monthly
accounting period and (iii) a statement showing the Net Cash Advance Balance for
such monthly accounting period.
5.18.3 Cash Advances. During the Cash Advance Period, all working capital requirements of the Business shall be advanced by Seller or Minerals to the Subsidiaries, as applicable, in the form of a cash advance (each, a "Cash Advance" and, collectively, the "Cash Advances"). Seller shall continue to manage the working capital requirements of the Subsidiaries 60
and the cash balances maintained in Seller's, Minerals' and the Subsidiaries'
bank accounts in a manner consistent with Seller's past treasury practices and
procedures. In furtherance thereof, all receivables and other amounts received
by the Subsidiaries or by Seller or by Minerals on behalf of the Subsidiaries
(including cash deposited into any lockbox maintained by or on behalf of any
Subsidiary) shall be swept into Seller's main disbursement account and may be
used by Seller or Minerals to satisfy and discharge obligations of the
Subsidiaries, including the funding of any Cash Advance, as well as any
obligation of the Seller or applied in any other manner consistent with Seller's
past practices. The books and records of Seller or Minerals, as the case may be,
shall reflect the amount of all receivables received by Seller, Minerals or the
Subsidiaries during the Cash Advance Period and the amount of all Cash Advances
made by Seller or Minerals to or on behalf of the Subsidiaries during the Cash
Advance Period, and the net amount thereof (exclusive of any (i) receivable to
which Seller or its Affiliates (other than the Subsidiaries) shall be entitled
to retain in accordance with the provisions of this Agreement (including all
receivables in respect of the Excluded Assets and Excluded Liabilities) and (ii)
Cash Advance in respect of any Liability attributable to the Excluded Assets and
Excluded Liabilities) shall constitute the "Net Cash Advance Balance."
5.18.4 Certain Services Following the Balance Sheet Date. During the Cash Advance Period, Seller and its Affiliates (other than the Subsidiaries) shall continue to provide certain administrative and other support services to and on behalf of the Subsidiaries consistent with past practices, including services in respect of treasury management, accounting, maintenance and administrative computer applications, insurance coverage and risk management, organizational services and benefit plan administration, land administration, capital and materials procurement, environmental and legal. All charges for such services shall be allocated to the Subsidiaries as Cash Advances in a manner consistent with Seller's past practices and recorded on the books and records of Seller. Except as to the extent any such services are provided by Seller to Purchaser after Closing pursuant to the Transition Services Agreement, Seller and such Affiliates shall cease to provide such services to the Subsidiaries following the Closing. 5.18.5 Cash at Closing. Contemporaneously with the Closing, Seller shall deposit, by wire transfer of immediately available funds, an amount of cash equal to $10,000,000.00 (such amount, the "Closing Deposit") into a bank account designated in writing by Purchaser to Seller at least 2 business days prior to the Closing. The Closing Deposit shall be recorded on the books and records of Seller as a Cash Advance. 5.18.6 Post Closing Statement. Not later than 25 days following the Closing, Seller shall prepare and deliver to Purchaser an unaudited financial report (the "Closing Statement") as of the Closing Date of the Subsidiaries on a consolidated basis (excluding the Excluded Assets and Excluded Liabilities), which report shall be prepared in accordance with Seller's Accounting Principles and which shall include (i) a balance sheet, (ii) an income statement, and (iii)
a statement showing the Net Cash Advance Balance. The income statement referred
to in clause (ii) of this Subsection 5.18.6 shall be net of, and shall contain a
line item showing, the Federal and state income Taxes accruing on the pre-tax
earnings of the Subsidiaries during the Cash Advance Period, which Taxes shall
be equal to the product of 25% multiplied by the amount of such pre-tax
earnings. The aggregate amount of such income Tax accrual shall be charged to
the Subsidiaries as a Cash Advance and reflected on the books and records of
Seller. At the request of Seller. Purchaser shall
61 cause the Subsidiaries at their expense to assist in the preparation of the Closing Statement and, in furtherance thereof to perform such accounting closing functions and procedures as shall be requested by Seller.
Closing. Purchaser shall have 30 days following receipt of the Closing
Statement to conduct a review of the Cash Advance statement contained therein.
Seller's determination of the Net Cash Advance Balance shall be conclusive and
binding on the parties hereto, absent manifest error (it being understood and
agreed that no Cash Advance in respect of the Excluded Assets or Excluded
Liabilities or relating to an Unrelated Business shall be included on the
Closing Statement). If Purchaser fails to raise an objection to the Net Cash
Advance Balance during such 30 days period, Purchaser shall be deemed to have
accepted the Net Cash Advance Balance as set forth in the Closing Statement. Any
objections to the Net Cash Advance Balance raised by Purchaser shall be resolved
in good faith by the parties hereto within 15 days of receipt of any timely
objection. Purchaser shall have no right to object to the methods, procedures
and principles used by Seller in determining or recording the Cash Advances. If
Seller and Purchaser cannot resolve Purchaser's objections within such 15 days
period, Seller and Purchaser shall, within 10 days following the expiration of
such 15 days period, select a mutually acceptable accounting firm to resolve
such objections. If Seller and Purchaser are unable to agree as to the selection
of such accounting firm before the expiration of such 10 days period, the
parties hereto irrevocably designate Deloitte & Touche as the accounting firm.
The selected accounting firm shall be retained jointly by Seller and Purchaser
on the condition, among other things, that it shall resolve Purchaser's
objections and provide a revised Closing Statement to Seller and Purchaser
within 30 days after its selection. The Closing Statement, as accepted by
Purchaser without objection or as revised by mutual agreement of the parties
hereto or by the accounting firm (in any such case, the "Final Closing
Statement"), shall be conclusive and binding on the parties hereto. Seller and
Purchaser shall each pay one-half of the fees and expenses of any accounting
firm retained pursuant to this Subsection 5.18.7. Purchaser shall make the
books, records and financial staff of the Subsidiaries available to Seller, its
accountants and other representatives at reasonable time and upon reasonable
request, in connection with the preparation of the Closing Statement. Each of
Seller and Purchaser shall make their books, records and financial staff, and
the books and records of the Subsidiaries, available to any accounting firm
engaged by them pursuant to this Subsection 5.18.7 for the purpose of resolving
any of Purchaser's objections to the Closing Statement.
(b) Adjustment. Promptly following the determination of the Net Cash Advance Balance, (i) if the Net Cash Advance Balance appearing on the Final Closing Statement reflects an amount owing from Seller to the Subsidiaries, the amount thereof shall be paid by Seller to Purchaser, and (ii)
if the Net Cash Advance Balance appearing on the Final Closing Statement
reflects an amount owing from the Subsidiaries to Seller, the amount thereof
(the "Deficit Amount") shall be paid by Purchaser to Seller, provided that,
solely with respect to the Deficit Amount payable by Purchaser to Seller, (x)
the Deficit Amount shall be paid by Purchaser in cash to the extent of the
aggregate amount of all cash and cash equivalents collected by the Subsidiaries
from and after the Closing up to the date of payment, and (y) to the extent the
Subsidiaries shall not have collected an amount of cash and cash equivalents
equal to the Deficit Amount, then, with respect to the balance thereof,
Purchaser shall cause to be transferred and assigned to Seller, pursuant to
documentation
62 reasonably acceptable to Seller, account receivables from trade creditors of such Subsidiaries reasonably acceptable to Seller in an amount at least equal to such balance. Purchaser shall, and shall cause such Subsidiaries to, cooperate with Seller and take such reasonable actions as shall be necessary or appropriate to vest in Seller all right, title and interest in and to the account receivables assigned to Seller pursuant to this Subsection 5.18.7 (and, in the event any such account receivable may not be assigned and transferred to Seller but for the consent of the debtor thereunder, which consent shall not have been obtained. Purchaser shall cooperate with Seller and take such actions reasonable with respect to such account receivable in the name of such Subsidiary but for the benefit of Seller so as to provide Seller with the economic benefits under such account receivable). Seller shall promptly return to Purchaser the proceeds of such account receivables following receipt thereof to the extent such proceeds exceed the balance owing to Seller hereunder.
(c) Immediately Available Funds. Any payment required to
be made by Purchaser or Seller pursuant to Subsection 5.18.7(b) shall be made by
wire transfer of immediately available funds to an account designated in writing
by Purchaser or Seller, as the case may be, to the other party hereto.
5.18.8 Assistance in Preparation of Exchange Act Filings. In order to assist Seller in the preparation of all documents and reports required to be filed by Seller or its Affiliates (other than the Subsidiaries) under the Securities Act or Exchange Act with respect to any quarter ending on or prior to the Closing Date or any quarter that would include but not end on the Closing Date, Purchaser shall cause the Subsidiaries to prepare, at Seller's reasonable expense, Seller's "standard C - packages" and other related data gathering packages and to deliver such packages to Seller within the time frames required by Seller in accordance with past practices. Purchaser will promptly provide or cause to be provided to Seller, at Seller's reasonable expense, such other information as Seller may request (including access to books, records and personnel) in order for the operations of the Subsidiaries to be property reported in such filings. Neither Purchaser nor any of the Subsidiaries shall have any liability for the failure of any of the Subsidiaries to provide the information or meet the time frames set forth in Subsection 5.18.8 provided Purchaser or such Subsidiary is diligently proceeding to complete such packages. 5.18.9 Intercompany Balances as at the Closing. At or prior to the Closing, Seller shall cause all intercompany balances as at the Closing Date and existing between any Subsidiary and any of its Affiliates, including without limitation intercompany balances in respect of any promissory note issued by any Subsidiary to any of its Affiliates, to be settled such that the net amount thereof shall be equal to $0.00. SECTION 5.19. Insurance. The parties hereto agree that no insurance policy (other than performance and surety bonds, which are specifically governed by Section 5.17 hereof) maintained by Seller and its Affiliates (other than the Subsidiaries) with respect to the Business shall cover any of the Subsidiaries or their respective assets, properties, operations and liabilities after the Closing Date, and all benefits and coverage under each such insurance policy shall terminate following the Closing Date. Following the Closing Date, Purchaser shall be responsible for obtaining and maintaining any and all insurance policies and coverages in respect of the Subsidiaries and their respective assets, properties, operations and liabilities. The parties hereto further agree that any and all refunds of premiums paid by Seller and its Affiliates prior to the Closing Date under any 63 insurance maintained by Seller and its Affiliates on behalf of any Subsidiary shall be for the account of and retained by Seller.
SECTION 5.20. Liabilities of the Subsidiaries Generally. Purchaser
hereby acknowledges and agrees that, except for the Distributed Liabilities, the
Assigned Liabilities, and such other Liabilities of the Subsidiaries that are
specifically assumed by Seller hereunder or as to which Seller has agreed to
indemnify Purchaser for, Seller shall have no obligation or liability for or
with respect to the Liabilities of the Subsidiaries and the Business, whether
accruing prior to, on or after the Closing, and Purchaser shall indemnify and
defend Seller for and hold Seller harmless from and against, and pay and
reimburse Seller for, all such Liabilities of the Subsidiaries and the Business
to the extent Seller or any of its Affiliates shall become liable therefor or
any party shall have alleged that Seller or any of its Affiliates is liable
therefor.
SECTION 5.21. Audit of Financial Statements. Prior to the Closing, Purchaser shall have engaged Price Waterhouse LLP to conduct an audit of certain historical financial statements of the Subsidiaries, and such audit shall have been completed prior to the Closing. Copies of such audits (and any draft thereof) shall be delivered to Seller promptly following the completion of any thereof. Seller shall make available to Purchaser and Price Waterhouse LLP such books and records and cooperate with Purchaser as shall be reasonably requested by Purchaser in connection with such audit. The costs and expenses of conducting such audit shall be borne by Purchaser and Seller as mutually agreed in writing; provided, however, that Seller shall have no liability for the costs and expenses incurred by Price Waterhouse LLP in connection with conducting such audit. SECTION 5.22. Equipment Surety Bond. At the Closing, Purchaser shall deliver or cause to be delivered to Seller (or to such Affiliates of Seller that are a party to the Equipment Sublease and the Equipment Purchase Agreements) a surety bond, substantially in the form of Exhibit F hereto and from a surety or financial institution reasonably acceptable to Seller, as collateral security for Purchaser's or the Subsidiaries', as the case may be, obligations under the Equipment Sublease and the Equipment Sale Agreements (the "Equipment Surety Bond"). The Equipment Surety Bond shall be issued in the face amount equal to $3,500,000 and shall permit Seller (or such Affiliates) to make draws thereunder from time to time. SECTION 5.23. Undertaking Not to Interfere With Mine Plans. Seller, for itself and its Affiliates, agrees that it will not, directly or indirectly, for a period of 3 years after the Closing Date (i) acquire or enter into
negotiations for the acquisition of any interest in any land within a linear
distance of ten (10) miles from the boundary of any SMCRA Permit or application
for SMCRA Permit held or applied for by any Subsidiary as of the Closing Date
(the "Non-Interference Area"), and (ii) solicit Hoosier Rural Electric
Cooperative, Inc. ("Hoosier") to reopen that certain Coal Supply Agreement
between Amax Coal Sales Company and Hoosier dated March 28, 1991, as amended;
provided, however, that neither Seller nor its Affiliates shall be prohibited
from responding to any request for proposals issued or submitted by or at the
direction of Hoosier in connection with open bids for the supply of coal, and
such response shall not constitute a breach of the provisions of this Section
5.23. Notwithstanding anything to the contrary contained in this Section 5.23 ), following the Closing Date, neither any purchaser of the equity interests or assets of Seller or any of its Affiliates nor any Person with whom Seller or any of its Affiliates shall merge or consolidate (regardless of whether Seller or such Affiliate shall be the surviving entity) or enter into any joint 64 venture, business combination or similar arrangement (and no joint venture company or similar entity resulting therefrom) shall be bound by the provisions of this Section 5.23 ).
SECTION 5.24. Permits. In the event that any of the Permits are not
available for use by the Subsidiaries following the Closing of the transactions
contemplated hereby, Seller, Purchaser and the Subsidiaries shall cooperate in
any commercially reasonable arrangement designed to provide Purchaser or the
Subsidiaries, as the case may be, the benefits under such Permits until such
time as such Permit transfer or assignment has been completed, and Purchaser
hereby indemnifies and defends Seller and its Affiliates. for, and shall pay and
reimburse each of them for, any and all Losses each of them may suffer or incur
in connection with such arrangement. Not later than 30 days following the
Closing Date, Purchaser shall file all change of control notices (except to the
extent previously filed pursuant to Subsection 5.8.2 hereof) and all other
appropriate or required documentation with all appropriate Governmental
Authorities in connection with the transfer or reissuance of any Permit or the
replacement of the surety bonds and letters of credit as contemplated by Section
5.17 hereof.
SECTION 5.25. Administration of Accounts. 5.25.1 In Trust for Purchaser. All payments and reimbursements by any third party after the Closing Date in the name of or Seller to which any Purchaser or any Subsidiary is entitled in accordance with the provisions of this Agreement and the transactions contemplated hereby shall be held by Seller in trust for the benefit of Purchaser and, within five (5) business days of receipt by Seller of any such payment or reimbursement, Seller shall pay over to Purchaser the amount of such payment or reimbursement without right of set off. 5.25.2 In Trust for Seller. All payments and reimbursements by any third party after the Closing Date in the name of or to Purchaser or any Subsidiary to which Seller is entitled in accordance with the provisions of this Agreement and the transactions contemplated hereby shall be held by Purchaser in trust for the benefit of Seller and, within five (5) business days of receipt by Purchaser or such Subsidiary of any such payment or reimbursement, Purchaser shall pay over to Seller the amount of such payment or reimbursement without right of set off. ARTICLE VI CONDITIONS PRECEDENT OF PURCHASER SECTION 6.1. Conditions Precedent. The obligations of Purchaser to consummate the transactions contemplated by this Agreement at the Closing to be held pursuant to Article II herein shall be subject to the fulfillment, to its reasonable satisfaction, on or prior to the Closing Date, of all of the following conditions precedent: 6.1.1 Representations, Warranties and Obligations of Seller. The representations and warranties contained in Article III shall be true and correct as of the date hereof, and except to the extent such representations and warranties relate solely to an earlier date, as of the Closing Date as though made on and as of the Closing date, provided, however, that if any such representation and warranty is not qualified by a standard of materiality, such representation and warranty need only be true and correct in all material respects. Seller shall have duly performed and complied in all material 65 respects with all agreements and covenants contained herein required to be performed or complied with by it at or before the Closing.
6.1.2 Officer's Certificate. Seller shall have delivered to
Purchaser a certificate, dated the Closing Date and signed by its President or a
Vice President, as to the fulfillment of the conditions set forth in Subsection
6.1.1.
6.1.3 Ancillary Agreements. Seller and the Subsidiaries shall have executed all Ancillary Agreements, stock powers or other instruments required to be executed at or before Closing in connection with the transactions contemplated hereby. 6.1.4 Material Adverse Change. Since the Balance Sheet Date, there shall have been no change which has or has had a material adverse effect on the financial condition, business, assets or results of operations of the Subsidiaries, taken as a whole. 6.1.5 Consents. All material statutory requirements, authorizations, consents, orders or approvals from, filings with, or expirations of waiting periods by any Governmental Authority required to be obtained to consummate the transactions contemplated hereby and all consents of third parties listed on Schedule 6.1.5 hereto (collectively, the "Consents") shall have been fulfilled, filed, occurred or been obtained and delivered to the parties hereto, other than such Consents which, if not obtained, are not reasonably expected to have a Material Adverse Effect on the Subsidiaries. 6.1.6 No Injunction. There shall not be in effect any injunction or other order or any statute, ruling or law issued by a court of competent jurisdiction or Governmental Authority restraining, enjoining or prohibiting, and no such action or Proceeding by any Governmental Authority or third Person shall be pending before any court of competent jurisdiction or threatened in writing to restrain, enjoin or prohibit the consummation of, or challenge the validity or legality of, the transactions contemplated by this Agreement. 6.1.7 HSR Act. The waiting period under the HSR Act shall have expired or been terminated. 6.1.8 Disclosure Schedules. Purchaser shall have received and reviewed the updated Schedules referenced herein, and any updates or amendments thereto, and the effect of any change to any Schedule delivered on the date hereof, together with any matter disclosed in any Schedule not required to be delivered on the date hereof but which is required to be delivered on or prior to the Closing Date, shall not result in a Material Adverse Effect upon the Subsidiaries. 6.1.9 Forms 8023. Seller shall have delivered an executed copy of IRS Form 8023). appropriately completed to extent practicable as of the Closing Date, with respect to each Subsidiary referenced in Subsection 2.3.2(a) hereof. 6.1.10 Restructuring. The Restructuring shall have been completed in all material respect's except for obtaining the consent of any Governmental Authority to the transfer of the permits included in the Excluded Assets and Excluded Liabilities. 66
6.1.11 Board Approval. The transactions contemplated by this
Agreement shall have been approved by all necessary corporate action on the part
of Purchaser.
6.1.12 Financial Statements. Purchaser shall be satisfied, in its sole and absolute discretion, with the audited financial statements of the Subsidiaries prepared by Price Waterhouse LLP as contemplated by Section 5.21 hereof. SECTION 6.2. Waiver. Purchaser may waive in writing fulfillment of any or all of the conditions set forth in Section 6.1 of this Agreement. ARTICLE VII CONDITIONS PRECEDENT OF SELLER SECTION 7.1. Conditions Precedent. The obligations of Seller to consummate the transactions contemplated by this Agreement at the Closing to be held pursuant to Article II herein shall be subject to the fulfillment, to its reasonable satisfaction, on or prior to the Closing Date of all of the following conditions precedent. 7.1.1 Representations, Warranties and Obligations of Purchaser. The representations and warranties contained in Article IV shall be true and correct as of the date hereof and as of the Closing Date as through made on and as of the Closing Date; provided, however, that if any such representation and warranty is not qualified by a standard of materiality, such representation and warranty need only be true and correct in all material respects. Purchaser shall have duly performed and complied in all material respects with all agreements contained herein required to be performed or complied with by it at or prior to the Closing. 7.1.2 Officer's Certificate. Purchaser shall have delivered to Seller a certificate, dated the Closing Date and signed by a President or Vice President, as to the fulfillment of the conditions set forth in Subsection 7.1.1. 7.1.3 Ancillary Agreement. Purchaser shall have executed all Ancillary Agreements, stock powers or other instruments required to be executed at or before Closing in connection with the transactions contemplated hereby. 7.1.4 Consents. All Consents shall have been fulfilled, filed, occurred or been obtained and delivered to the parties hereto, other than such Consents which, if not obtained, are not reasonably expected to have a Material Adverse Effect on the Seller. 7.1.5 No Injunction. There shall not be in effect any injunction or other order or any statute, ruling or law issued by a court of competent jurisdiction or Governmental Authority restraining, enjoining or prohibiting, and no such action or Proceeding by any Governmental Authority or third Person shall be pending before any court of competent jurisdiction or threatened in writing to restrain, enjoin or prohibit the consummation of, or challenge the validity or legality of, the transactions contemplated by this Agreement. 67
7.1.6 HSR Act. The waiting period under the HSR Act shall have
expired or been terminated.
7.1.7 Restructuring. The Restructuring shall have been completed in all material respects except for obtaining the consent of any Governmental Authority to the transfer of the permits included in the Excluded Assets and Excluded Liabilities. 7.1.8 Board Approval. The transactions contemplated by this Agreement shall have been approved by all necessary corporate action on the part of Seller. 7.1.9 Replacement Credit Support Instruments for Scheduled Bonds. Purchaser shall have delivered to Seller a letter of credit or surety bond, duly executed by the financial institution that is the issuer thereof, in respect of, and as replacement for, each Scheduled Bond, together with such filings, transmittal letters, applications and other documents as shall be necessary or as shall be reasonably requested by Seller in order to effect Mineral's and its Affiliates' (including the Subsidiaries) release of their obligations with respect to the Scheduled Bonds. 7.1.10 Forms 8023. Purchaser shall have delivered an executed copy of IRS Form 8023, appropriately completed to extent practicable as of the Closing Date, with respect to each Subsidiary referenced in Subsection 2.3.2(a) hereof. 7.1.11 Certain Bonds. Purchaser shall have delivered the Purchaser Surety Bond and the Equipment Surety Bond. SECTION 7.2. Waiver. Seller may waive in writing fulfillment of any or all of the conditions set forth in Section 7.1 of this Agreement. ARTICLE VIII INDEMNIFICATION SECTION 8.1 Indemnity by Seller. From and after the Closing, Seller agrees to indemnify, defend and hold harmless each of Purchaser, the Subsidiaries and each of their Affiliates, and their respective directors, officers, employees, agents and representatives (each of whom may be an Indemnitee pursuant to this Section 8.1) (collectively, the "Purchaser Indemnitees") from and against, and pay and reimburse each Such Purchaser Indemnitee for, whether or not any of the following Losses arise out of any Third Party Claim, the following: 8.1.1 Excluded Liabilities. Any and all Losses in respect of the Excluded Assets or Liabilities. 8.1.2 Third Party Claims. Any and all Third Party Claims which may be asserted against any such Purchaser Indemnitee or which any such Purchaser Indemnitee shall incur or suffer to the extent that such Third-Party Claims arise out of, result from or relate to: (a) any Excluded Assets or Excluded Liabilities; or
68
(b) (i) any untrue, representation or breach of warranty of Seller in this Agreement, or (ii) a default or breach of any covenant or agreement made by Seller under this Agreement.
8.1.3 Breach of Representation, Warranty, Etc. Any and all Losses
which may be asserted against such Purchaser Indemnitee or which such Purchaser
Indemnitee. may incur or suffer and which arise out of, result from or relate
to:
(a) any untrue representation or breach of warranty of Seller in this Agreement; or (b) any default or breach of any covenant or agreement on the part of Seller under this Agreement.
SECTION 8.2. Indemnity by Purchaser. From and after the Closing,
Purchaser shall indemnify, defend and hold harmless Seller and its Affiliates
and their respective directors, officers, employees, agents and representatives
(each of whom may be an Indemnitee pursuant to this Section 8.2) (collectively,
the "Seller Indemnitees") from and against, and pay and reimburse each such
Seller Indemnitee for, whether or not any of the following Losses arise out of
any Third Party Claim, the following:
8.2.1 Certain Liabilities. Any and all Losses in respect of the matters specified on Schedule 8.2.1 hereof. 8.2.2 Third Party Claims. Any and all Third Party Claims which may be asserted against any such Seller Indemnitee, or which any such Seller Indemnitee shall incur or suffer to the extent that such Third Party Claims arise out of, result from or relate to: (a) any of the matters specified on Schedule 8.2.1 hereof; or (b) (i) any untrue representation or breach of warranty of Purchaser in this Agreement, or (ii) a default or breach of any covenant or agreement made by Purchaser in this Agreement.
8.2.3 Breach of Representation, Warranty, Etc. Any and all Losses
which may be asserted against any such Seller Indemnitee or which any such
Seller Indemnitee shall incur or suffer and which arise out of. result from or
relate to:
(a) any untrue representation or breach of warranty of Purchaser in this Agreement; or (b) any default or breach of any covenant or agreement on the part of Purchaser under this Agreement.
69
8.2.4 Post-Closing. Except as otherwise expressly assumed or
retained by Seller hereunder, any and all Liabilities, Losses or Third Party
Claims relating to or arising out of the past, present or future operations of
the Business.
SECTION 8.3. Notification of Claims. In no case shall any Indemnitor under this Agreement be liable with respect to any Third Party Claim against any Indemnitee unless the Indemnitee shall have delivered to the Indemnitor a Claim Notice and the following conditions are satisfied: 8.3.1 Timely Delivery of Claim Notice. Except as provided in Subsections 8.3.2 or 8.3.3, no right to indemnification under this Article VIII shall be available to an Indemnitee with respect to a Third Party Claim unless the Indemnitee shall have delivered to the Indemnitor within the Notice Period a notice describing in reasonable detail the facts giving rise to such Third Party Claim (a "Claim Notice") and stating that the Indemnitee intends to seek indemnification for such Third Party Claim from the Indemnitor pursuant to this Article VIII. 8.3.2 Late Delivery of Claim Notice. If, in the case of a Third Party Claim, a Claim Notice is not given by the Indemnitee within the Notice Period, the Indemnitee shall nevertheless be entitled to be indemnified under this Article VIII except to the extent that the Indemnitor can establish that it has been prejudiced by such time elapsed. 8.3.3 Paid or Settled Claims. If a Claim Notice is not given by the Indemnitee prior to the payment or settlement of a Third Party Claim, the Indemnitee shall be entitled to be indemnified under this Article VIII only to the extent that the Indemnitee can establish that the Indemnitor has not been prejudiced by such payment or settlement. SECTION 8.4. Defense of Claims. Upon receipt of a Claim Notice from an Indemnitee with respect to any Third Party Claim, the Indemnitor shall have the right to assume and control the defense thereof (and any related settlement negotiations) with counsel reasonably satisfactory to such Indemnitee and the Indemnitee shall cooperate in all reasonable respects in such defense. The Indemnitee shall have the right to employ separate counsel at such Indemnitee's expense in any action or claim and to participate in the defense thereof; provided, however, that the reasonable fees and expenses of counsel employed by the Indemnitee shall be at the expense of the Indemnitor if such counsel is retained pursuant to the following sentence or if the employment of such counsel has been specifically authorized in writing by the Indemnitor. If the Indemnitor does not notify the Indemnitee within 30 days after receipt of the Claim Notice of its intention to assume the defense of such Third Party Claim, the Indemnitee shall have the right to defend the claim with counsel of its choosing reasonably satisfactory to the Indemnitor, subject to the right of the Indemnitor to assume the defense of any claim at any time prior to settlement or final determination thereof. Notwithstanding anything to the contrary contained in this Section 8.4, (i) the Indemnitee shall have the right to employ separate counsel at its own expense if there shall be available one or more defenses or one or more counterclaims available to the Indemnitee which conflicts with one or more defenses or one or more counterclaims available to the Indemnitor, and (:ii) the Indemnitor shall not be entitled to control (but shall be entitled participate at its own expense in the defense of), and the Indemnitee shall be entitled to have sole control over, the defense or settlement of any Third Party Claim to the extent such Third Party Claim seeks an order, injunction, non-monetary or other 70
equitable relief against the Indemnitee which, if successful, could result in a
material adverse effect upon the business, financial condition, results of
operations or assets of the Indemnitee. The Indemnitee shall send a written
notice to the Indemnitor of any proposed settlement of any claim, which
settlement the Indemnitor may reject, in its reasonable judgment, within thirty
SECTION 8.5. Access and Cooperation. After the Closing Date, Purchaser
and Seller shall (a) each cooperate fully with the others as to all Third Party
Claims, shall make available to the others, as reasonably requested, all
information, records and documents relating to all Third-Party Claims and shall
preserve all such information, records and documents until the termination of
any Third-Party Claim, and (b) make available to the others, as reasonably
requested, personnel (including technical and scientific), agents and other
representatives who are responsible for preparing or maintaining information,
records or other documents, or who may have particular knowledge with respect to
any Third-Party Claim.
SECTION 8.6. Assessment of Claims. In the event that any of the Losses for which an Indemnitor is or is allegedly responsible pursuant to Sections 8.1 or 8.2 are recoverable or potentially recoverable against any third party at the time when payment is due hereunder, following payment by the Indemnitor to the Indemnitee for such Losses the Indemnitee shall assign any and all rights that it may have to recover such Losses to the Indemnitor, or, if such rights are not assignable under applicable law or otherwise, the Indemnitee shall attempt in good faith to collect any and all Losses on account thereof from such third party for the benefit of, and at the expense and direction of, the Indemnitor. SECTION 8.7. Limits on Indemnification. 8.7.1 Limitations on Indemnification for Breach of Representations and Warranties. Purchaser Indemnitees shall not be entitled to seek payment under Subsections 8.1.2(b)(i) and 8.1.3(a), and Seller Indemnitees shall not be entitled to seek payment under Subsections 8.2.2(b)(i) and 8.2.3(a), in respect of any specific indemnified Loss or Third- Party Claim arising from a breach of a representation or warranty until such Loss or Third-Party Claim is equal to or exceeds S100.000 (in either case, a "Substantial Loss" or a "Substantial Third- Party Claim"), and not then until the aggregate total of such Substantial Losses and Substantial Third-Party Claims under such Subsections 8.1.2(b)(i) and 8.1.3(a), or Subsections 8.2.2(b)(i) and 8.2.3(a), as applicable, exceed S3,000,000, and then the Indemnitee(s) may seek payment and indemnity from the Indemnitor only for such excess; provided, however, that neither the Purchaser Indemnitees, with respect to Subsections 8.1.2(b)(i) and 8.1.3(a), nor the Seller Indemnitees, with respect to Subsection 8.2.1(b)(i) and 8.2.3)(a), shall be entitled to seek payment thereunder to extent the aggregate total of such Substantial Losses and Substantial Third-Party Claims exceeds $50,000,000. 71
8.7.2 No Limitations on Certain Indemnification Claims. Purchaser
Indemnitees may seek payment and full and complete indemnity from Seller in
respect of any and all Losses or Third-Party Claims under Subsections 8.1.1,
8.1.2(a), 8.1.2(b)(ii) and 8.1.3(b), and the Seller Indemnitees may seek payment
and full, and complete indemnity from Purchaser in respect of any and all Losses
or Third-Party Claims under Subsections 8.2.1, 8.2.2(a), 8.2.2(b)(ii), 8.2.31(b)
and 8.2.4, and such indemnity shall not be subject to any dollar limitations or
cap.
SECTION 8.8. Survival of Representations and Warranties. All representations and warranties of the parties contained in this Agreement shall survive the Closing hereunder and continue in full force and effect thereafter, regardless of any investigation made or to be made by or on behalf of any party hereto, for a period of two (2) years following the Closing Date, except for the representations and warranties (a) of Seller provided for (i) in Section 3.14, which shall survive the Closing hereunder and continue in full force and effect thereafter, regardless of any investigation made or to be made by or on behalf of any party hereto, for a period ending sixty (60) days after the expiration of the relevant statutes of limitations including any extension or waiver thereof regarding the filing of Tax Returns and the payment of Taxes, and (ii) in Sections 3.1, 3.2.1, 3.3, 3.4, 3.5 and 3.17, which shall survive the Closing hereunder and continue in full force and effect thereafter, regardless of any investigation made or to be made by or on behalf of any party hereto, without end or termination, and (b) of Purchaser provided for in Sections 4.1, 4.2.1, 4.4 and 4.6, which shall survive the Closing hereunder and continue in full force and effect thereafter, regardless of any investigation made or to be made by or on behalf of any party hereto, without end or termination. Except as set forth in this Section 8.8, after the end of such period, an Indemnitor's obligation to an Indemnitee under this Article VIII with respect to such representations and warranties shall expire except with respect to a matter set forth in a Claim Notice theretofore delivered by an Indemnitee. It is further agreed that each Purchaser Indemnitee's rights to indemnification set forth in Subsections 8.1.1, 8.1.2(a), 8.1.2(b)(ii) and 8.1.3(b), and each Seller Indemnitee's rights to indemnification set forth in Subsections 8.2.1, 8.2.2(a), 8.2.2(b)(ii), 8.2.3(b) and 8.2.4, shall remain in full force and effect indefinitely. SECTION 8.9. After-Tax Nature of Indemnity Payments. Any payment or indemnity required to be made pursuant to Sections 8.1 or 8.2 hereof shall include any amount necessary to hold the Indemnitee harmless on an after-tax basis from all Taxes required to be paid with respect to the receipt of such payment or indemnity (after taking into account any reduction in Taxes realized by the Indemnitee as a result of the Loss giving rise to the payment or indemnity). In determining the amount necessary to be added to any payment or indemnity in order to accomplish the foregoing, the parties hereto agree (a) to treat all Taxes required to be paid by, and all reductions in Tax realized by any Indemnitee, as if such Indemnitee were subject to tax at the highest marginal tax rates (for both federal and state, as determined on a combined basis) applicable to such Indemnitee and (b) to treat any indemnification payments made to Purchaser or any Subsidiary pursuant to this Agreement as an adjustment to the Purchase Price, subject to any Final Determination with respect to such payments, unless, subject to any Final Determination with respect to such payments, either party or Purchaser receives a written opinion, reasonably satisfactory in form and substance to the other party, of a law firm with appropriate experience and expertise to the effect that it is not or is not likely to be permissible to treat such payments in that manner on a federal, state or local income tax return. 72
SECTION 8.10. Third Party Beneficiaries. All Persons included with the
terms "Purchaser Indemnitees" and "Seller Indemnitees" are intended third party
beneficiaries of this Article VIII and shall have the right to enforce the
benefits intended to be conferred upon each them under this Article VIII as
though they were parties to this Agreement.
ARTICLE IX TERMINATION SECTION 9.1. Termination Events. Subject to the provisions of Section 9.2, this Agreement may, by written notice given at or prior to the Closing in the manner hereinafter provided, be terminated and abandoned only as follows: 9.1.1 Breach. By either Purchaser or Seller, upon written notice, if a material default or breach shall be made by the other, with respect to the due and timely performance of any of the other party's respective covenants and agreements contained herein, or with respect to the due compliance with any of its respective representations and warranties contained in Article III or IV, as applicable, and such default cannot be cured prior to Closing and has not been
shall not have occurred by close of business on June 30, 1998.
SECTION 9.2. Effect of Termination. In the event this Agreement is
terminated pursuant to Section 9.1 herein, all further fights and obligations of
the Parties hereunder shall terminate (other than the obligations to keep
confidential information as provided in Subsection 5.2.2), and none of Purchaser
or Seller nor any of their Affiliates, nor any of the respective directors,
officers or employees shall have any liability to any of the others; it being
specifically agreed that if this Agreement is so terminated by any party because
one or more of the conditions or their respective obligations hereunder as set
forth in Articles VI and VII herein is not satisfied as a result of the other
party's failure to comply with its obligations under this Agreement, the rights
of the terminating party to pursue all legal remedies for breach of contract and
damages shall survive such termination and the breaching party shall be fully
liable for any and all damages, costs and expenses sustained or incurred by the
terminating party as a result of such breach.
SECTION 9.3. Fees and Expenses; Damages. Except as otherwise provided in Section 9.2 herein, in the event this Agreement is terminated for any reason and the Closing is not consummated each party shall be responsible for its own costs, fees and expenses, including fees and expenses of its accountants, investment advisers and counsel. ARTICLE X MISCELLANEOUS SECTION 10.1. Remedies, Exclusivity of Representations and Warranties; Relationship Between the Parties. 73
10.1.1 Remedies. The remedies expressly set forth in this Agreement
following the Closing with respect to any breach of any representation or
warranty herein contained are the sole and exclusive remedies for any such
breach, and such remedies are intended to be non-cumulative with respect to, and
shall preclude the assertion by any party of, any other remedies which would
otherwise have been available in common law or by statute, except for any right
that may exist to seek redress for common law fraud.
10.1.2 Exclusivity of Representations and Warranties; Relationship Between the Parties. It is the explicit intent and understanding of the parties hereto that none of the parties nor any of their respective affiliates, representatives, advisors or agents is making any representation or warranty whatsoever, oral or written, express or implied, other than those set forth in this Agreement and the Ancillary Agreements and none of the parties is relying on any statement, representation or warranty, oral or written, express or implied, made by an other party or such other party's affiliates, representatives, advisors or agents, except for the representations and warranties expressly set forth in such Agreements. EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH IN THIS AGREEMENT, THE PARTIES EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION, MERCHANTABILITY OR SUITABILITY AS TO ANY OF THE ASSETS OR LIABILITIES OF THE BUSINESS OR ANY SUBSIDIARY AND, EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH IN THIS AGREEMENT, IT IS UNDERSTOOD THAT PURCHASER TAKES THE ASSETS OF THE BUSINESS AND THE SUBSIDIARIES "AS IS" AND "WHERE IS." Without limiting the generality of, and in furtherance of, the immediately preceding sentences, Purchaser acknowledge that Seller makes no representations or warranties to Purchaser regarding any forecasts, projections, estimates, business plans or budgets heretofore delivered to or made available to Purchaser or its affiliates, representatives, advisors or agents in respect of future revenues, expenses or expenditures, future results of operations (or any component thereof), future cash flows or future financial condition (or any component thereof) of any Subsidiary. The parties hereto agree that this is an arm's length transaction in which the parties' undertakings and obligations are limited to the performance of their obligations under this Agreement. Purchaser acknowledges that it is a sophisticated investor, that it has undertaken, and that Seller has given Purchaser such opportunities as it has requested to undertake a full investigation of the Business (including the Subsidiaries' assets, contracts, permits, licenses, coal reserve data and information, premises, properties, facilities, books and records), and that it has only a contractual relationship with Seller, based solely on the terms of this Agreement, and that there is no special relationship of trust or reliance between Purchaser and Seller. SECTION 10.2. Amendment. This Agreement shall not be amended or modified except by an agreement in writing duly executed by each of Purchaser and Seller. SECTION 10.3. Entire Agreement. This Agreement, including the Exhibits and Schedules hereto, contain all of the terms, conditions and representations and warranties agreed upon by the parties relating to the subject matter of this Agreement and supersede all prior and contemporaneous agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, respecting such subject matter. SECTION 10.4. Notices. All notices, requests, demands and other communications made in connection with this Agreement shall be in writing and shall be deemed to have been duly given 74
(i) on the date of delivery, if personally delivered to the person identified
below, (ii) three (3) days after mailing if mailed by certified or registered
mail, postage prepaid, return receipt requested, (iii) one business day after
delivery to any overnight express courier service, and (iv) on the business day
of receipt if sent by facsimile or other customary means of telecommunication,
provided receipt thereof is orally confirmed and a copy thereof is sent in the
manner provided by clause (i) hereof, addressed as follows:
If to Purchaser:
AEI Holding Company, Inc.
with a copy to: Brown, Todd & Heyburn 2700 Lexington Financial Center Lexington, Kentucky 40507 Attention: Paul E. Sullivan, Esq.
Telephone: (606) 231-0000
If to Seller:
Cyprus Amax Coal Company
with a copy to: Cyprus Amax Coal Company 9100 East Mineral Circle Englewood, Colorado 80155 Attention: Greg A. Walker, Esq.
Telephone: (303) 643-5215
and to:
75
Steven C. Schnitzer, Esq.
Crowell & Moring LLP
Such addresses may be changed, from time to time, by means of a notice given in the manner provided in this Section. Copies delivered to outside counsel shall not constitute notice.
SECTION 10.5 Severability. If any provision of this Agreement is held to
be unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the parties to this Agreement to the
extent possible. In any event, all other provisions of this Agreement shall be
deemed valid and enforceable to the fullest extent possible.
SECTION 10.6. Waiver; Survival. Waiver of any term or condition of this Agreement by either of the respective parties shall only be effective if in writing and shall not be construed as a waiver of any subsequent breach or failure of the same term or condition, or a waiver of any other term or condition, of this Agreement. Except as otherwise specifically provided herein, the rights and obligations of Purchaser and Seller contained herein shall survive the Closing. SECTION 10.7. Binding Effect; Assignment. No party to this Agreement may assign or delegate, by operation of law or otherwise, all or any portion of its rights, obligations or Liabilities under this Agreement without the prior written consent of the other party to this Agreement, which it may withhold in its absolute discretion; provided however that AEI Holding Company, Inc. may, without the consent of Seller, assign all of its rights and delegate all of its obligations hereunder to Coal Ventures, Inc., a Delaware corporation and the owner of all of the issued and outstanding shares of capital stock of AEI Holding Company, Inc. pursuant to an assignment and assumption reasonably acceptable to Seller, whereupon Coal Ventures, Inc. shall be deemed to the "Purchaser" hereunder for all purposes of this Agreement. This Agreement is binding upon each party hereto, and upon each party's respective successors and permitted assigns. SECTION 10.8. No Third Party Beneficiaries. Except as otherwise provided in Sections 5.12, 5.15 and 5.17 and Article VIII hereof, there are no third party beneficiaries to this Agreement and nothing herein shall confer any rights upon any person or entity who or which is not a party to this Agreement. SECTION 10.9. Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures to each counterpart were upon a single instrument, and all such counterparts together shall be deemed to constitute an original and the same instrument. SECTION 10.10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of Delaware without giving effect to the doctrine of conflict of laws. 76
SECTION 10.11. Consent to Jurisdiction; Waiver of Jury Trial.
10.11.1 Consent to Jurisdiction. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any Delaware State court or Federal court sitting in the State of Delaware and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby or for recognition or enforcement of any judgment relating thereto, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such Delaware State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment of in any other manner provided by law. (b) Each of the parties hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby in any Delaware State or Federal court. Each of the parties hereto hereby irrevocably and unconditionally waives, to the fullest extent permitted by law, the defense of any inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each of the parties hereto irrevocably consents to service of process in the manner provided for notices in Section 10.4 hereof. Notwithstanding the foregoing, each of the parties hereto shall have the right to serve process in any other manner permitted by law.
10.11.2 Waiver of Punitive Damages and Jury Trial.
(a) THE PARTIES TO THIS AGREEMENT EXPRESSLY WAIVE AND FOREGO ANY RIGHT TO RECOVER PUNITIVE, EXEMPLARY, CONSEQUENTIAL OR SIMILAR DAMAGES IN ANY LAWSUIT, LITIGATION, ARBITRATION OR PROCEEDING ARISING OUT OF OR RESULTING FROM ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. (b) EACH PARTY HERETO ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. (c) EACH PARTY HERETO CERTIFIES AND ACKNOWLEDGES THAT (a) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS
77
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE WAIVERS SET FORTH IN CLAUSE (A) OF THIS
SECTION 10.11.2, (II) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH
WAIVERS (III) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (IV) IT HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS
IN SUCH SECTION.
SECTION 10.12. Mutual Right of Setoff. In the event any party hereto Party") has admitted in writing an amount owing to the other party hereto (the "Other Party") in connection with the transactions contemplated hereby and has failed to pay such amount in accordance with this Agreement or has filed against it a final, non-appealable judgment awarding money damages to the Other Party in connection any Proceeding arising out of the transactions contemplated hereby and has failed to pay such judgment in accordance with its terms, then the Other Party may, upon 5 days written notice to the Defaulting Party, set off and appropriate and apply any and all amounts then owing by the Other Party to the Defaulting Party under this Agreement against and on account of such amount or damages owing by the Defaulting Party. The rights granted to the Other Party under this Section 10.12 shall be in addition to any other rights available to the Other Party under this Agreement. SECTION 10.13. Interpretation and Construction of this Agreement. The definitions in this Agreement shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine or neuter form. The words "include, "includes" and "including" shall be deemed to be followed by the phrase "without limitation." The headings contained in this Agreement are inserted for convenience only and shall not constitute a part hereof. All references herein to Articles, Sections, (other than references to Sections of the Code or other statute) and Subsections shall be deemed to be references to Articles, Sections and Subsections of this Agreement unless the context shall otherwise require. Unless the context shall otherwise require or provide, any reference to any agreement or other instrument or statute or regulation is to such agreement, instrument, statute or regulation as amended and supplemented from time to time (and, in the case of a statute or regulation, to any successor provision); provided, however, that no covenant herein shall be deemed to have been breached because of a change in law or regulation issued subsequent to the completion of the action or conduct which is the subject of the covenant. This Agreement shall be construed in accordance with its fair meaning and shall not be construed strictly against either party. References in this Agreement to any Article shall include all Sections, Subsections, Paragraphs in such Article; references in this Agreement to any Section shall include all Subsections and Paragraphs in such Section; and references in this Agreement to any Subsection shall include all Paragraphs in such Subsection. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed with legal and binding effect by their respective authorized officers, in their individual capacity, as of the day and year first above written.
78
CYPRUS AMAX COAL COMPANY
AEI HOLDING COMPANY, INC.
79
Exhibit 2.4
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August 3, 1998 by and among AEI Resources, Inc., a Delaware corporation ("Parent"), Zeigler Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent (the "Purchaser"), and Zeigler Coal Holding Company, a Delaware corporation (the "Company"). WHEREAS, the respective Boards of Directors of Parent, the Purchaser and the Company have approved the acquisition of the Company by Parent on the terms and subject to the conditions set forth in this Agreement; and WHEREAS, the parties hereto desire that the Purchaser commence a tender offer (the "Offer") to purchase all of the shares of Common Stock, par value $.01 per share, of the Company (the "Common Shares") in accordance with the terms of this Agreement; and WHEREAS, the respective Boards of Directors of Parent, the Purchaser and the Company have approved the merger of the Purchaser with and into the Company, as set forth below (the "Merger"), in accordance with the General Corporation Law of the State of Delaware (the "GCL") and upon the terms and subject to the conditions set forth in this Agreement, whereby each issued and outstanding Common Share not owned directly or indirectly by Parent or the Company will be converted into the right to receive $21.25 per Common Share, in cash (the "Merger Consideration"); and WHEREAS, Parent, the Purchaser and the Company desire to make certain representations, warranties, covenants and agreements in connection with the acquisition of the Company by Parent pursuant to the Offer and the Merger and also to prescribe various conditions to the Offer and the Merger; and WHEREAS, certain capitalized terms used in this Agreement have the meaning as set forth or referred to in Article X hereof. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, Parent, the Purchaser and the Company agree as follows: ARTICLE I THE OFFER
SECTION 1.01 The Offer.
(a) Provided that this Agreement shall not have been terminated in accordance with its terms and none of the events set forth in Paragraphs (a) through (f) of Annex I hereto shall have occurred or be existing, no later than two (2) business days after the public announcement of
the terms of this Agreement, the Purchaser shall commence the Offer, in
accordance with the requirements of Regulations 14D and 14E promulgated under
the Exchange Act, and any applicable State securities laws, to purchase all of
the issued and outstanding Common Shares for the Offer Price net to the seller
thereof in cash, provided, however, that the Purchaser shall use its best
efforts to commence the Offer as soon as practicable after the public
announcement of the terms of this Agreement, but in no event later than two
business days after such public announcement. The Offer shall expire and
terminate on the twentieth (20th) business day from the commencement of the
Offer (the "Expiration Date"); provided, however, that the Purchaser shall have
the right to extend the Expiration Date up to ten (10) additional business days
in order to satisfy any of the conditions set forth in Annex I hereto other than
the Offer Financing Condition, provided that the failure of such conditions to
be satisfied is not due to a breach of this Agreement by Parent or Purchaser.
Provided that this Agreement shall not have been terminated in accordance with
its terms and none of the events set forth in Paragraphs (a) through (f) of
Annex I hereto shall have occurred or be existing, no later than (2) two
business days after the public announcement of the terms of this Agreement, the
Purchaser shall file with the Securities and Exchange Commission (the "SEC") the
Purchaser's Tender Offer Statement on Schedule 14D-1 (together with any
supplements or amendments thereto, the "Offer Documents"), which shall contain
(as an exhibit) the Purchaser's offer to purchase the Common Shares (the "Offer
to Purchase") which shall be mailed to the holders of Common Shares with respect
to the Offer, which shall contain the conditions set forth in Annex I hereto and
no others; it being understood that the Offer shall be on the terms and subject
to the conditions that are agreed to by the parties hereto and no others and
that the Purchaser shall use its best efforts to file the Tender Offer Statement
on Schedule 14D-1 as soon as practicable, but in no event later than two
business days after such public announcement. The obligation of Purchaser to
accept for payment or pay for any Common Shares tendered pursuant to the Offer
will be subject only to the satisfaction of the condition set forth in Annex I
hereto. Without the prior written consent of the COMPANY, the Purchaser shall
not decrease the price per Common Share or change the form of consideration
payable in the Offer, decrease the number of Common Shares sought to be
purchased in the Offer, change the conditions set forth in Annex I, waive the
Minimum Condition (as defined in Annex I), impose additional conditions to the
Offer or amend any other term of the Offer in any manner adverse to the holders
of Common Shares; provided that the Purchaser expressly reserves the right to
waive any condition to the Offer (other than the Minimum Condition) without the
consent of the COMPANY. Subject to the terms of the Offer and this Agreement and
the satisfaction of all the conditions of the Offer set forth in Annex I hereto
as of any expiration date, Purchaser will accept for payment and pay for all
Common Shares validly tendered and not withdrawn pursuant to the Offer as soon
as practicable after such Expiration Date (the time of such purchase being
referred to herein as the "Offer Purchase Closing"). Purchaser shall make
reasonable provision for the payment of Offer proceeds to be made by wire
transfer of immediately available funds to any person tendering Common Shares
representing more than 1% of the COMPANY's outstanding Common Shares. Subject to
-2-
Annex I to be fulfilled and avoid the occurrence of any event or to cure any event which may prevent such conditions precedent set forth in Annex I from being fulfilled. (b) The Offer Document will comply in all material respects with the provisions of applicable federal securities laws and, on the date filed with the SEC and on the date first published, sent or given to the Company's stockholders, shall not 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 made therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by Parent or the Purchaser with respect to information supplied by the Company in writing for inclusion in the Offer Documents. Each of Parent and the Purchaser, on the one hand, and the Company, on the other hand, agrees promptly to correct any information provided by it for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect and the Purchaser further agrees to take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to stockholders of the Company, in each case, as and to the extent required by applicable federal securities laws.
SECTION 1.02 Company Actions.
(a) The Company shall promptly (an in any event within two (2) business days after the public announcement of the terms of this Agreement) file with the SEC and mail it to the holders of Common Shares the Company's Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer (together with any amendments or supplements thereto, the "Schedule 14D- 9"). The Schedule 14D-9 will set forth, and the Company hereby represents, that the Board, at a meeting duly called and held, has (i) determined that the Offer and the Merger are fair to and in the best interests of the Company and its stockholders, (ii) approved the Offer and the Merger in accordance with Section 203 of the GCL, and (iii) resolved to recommend and continues to recommend acceptance of the Offer and approval and adoption of the Merger and this Agreement by the Company's stockholders (if such approval is required by applicable law) (such recommendation to the Company's stockholders being referred to as the "Board Recommendation"); provided, however, that such recommendation and approval may be withdrawn, modified or amended as provided in Section 6.09. The Company further represents the Credit Suisse First Boston Corporation ("CSFB") has delivered to the Board its written opinion to the effect that, as of the date of this Agreement, the cash consideration to be received for the Common Shares pursuant to the Offer and the Merger is fair to the holders of the Common Shares (other than Parent and its affiliates) from a financial point of view. (b) Each of the Company, on the one hand, and Parent and the Purchaser, on the other hand, agree promptly to correct any information provided by either of them for use in the Schedule 14D-9 if and to the extent that it shall have become false or misleading, and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be disseminated to the holders of the Common Shares, in each case, as and to the extent required by applicable federal securities law.
-3-
(c) In connection with the Offer, the Company will use reasonable best efforts to cause to be furnished to Purchaser mailing labels, security position listings and any available listing or computer file containing the names and addresses of the record holders of the Shares as of a recent date and shall furnish Purchaser with such additional information and assistance (including, without limitation, updated lists of stockholders, mailing labels and lists of securities positions) as Purchaser or its agents may reasonably request in communicating the Offer to the record and beneficial holders of Shares. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Merger, Purchaser and its affiliates and associates shall hold in confidence the information contained in any such labels, listings and files, will use such information only in connection with the Offer and the Merger, and if this Agreement shall be terminated, will deliver to the Company all copies of such information then in their possession.
SECTION 1.03 Directors.
(a) Subject to compliance with applicable law, promptly upon the payment by the Purchaser for Common Shares pursuant to the Offer, and from time to time thereafter, Parent shall be entitled to designate at least such number of directors, rounded up to the next whole number, on the Board as is equal to the product of the total number of directors on the Board (determined after giving effect to the directors elected pursuant to this sentence) multiplied by the percentage that the aggregate number of Common Shares beneficially owned by Parent or its affiliates bears to the total number of Common Shares then outstanding, and the Company shall, upon request of Parent, promptly take all actions necessary to cause Parent's designees to be so elected, including, if necessary, seeking the resignations of one or more existing directors. (b) The Company's obligations to appoint Parent's designees to the Board shall be subject to Section 14(1) of the Exchange Act and Rule 14f-1 thereunder. The Company shall promptly take all actions required pursuant to such Section and Rule in order to fulfill its obligations under this Section 1.03 and shall include in the Schedule 14D-9 such information with respect to the Company and its officers and directors as is required under such Section and Rule in order to fulfill its obligations under this Section 1.03. Parent will supply any information with respect to itself and its officers, directors and affiliates required by such Section and Rule to the Company. (c) Following the election or appointment of Parent's designees pursuant to this Section 1.03 and prior to the Effective Time, any amendment or termination of this Agreement by the Company, the Company shall not extend the time for the performance of any of the obligations or other acts of Parent or the Purchaser or waive any of the Company's rights hereunder, or take any other action if such amendment, termination, extension, waiver or action would have an adverse effect on the minority stockholders of the Company.
SECTION 1.04 Stock Options. Promptly following the commencement of
the Offers the Company shall offer to cancel any or all of the outstanding
options to purchase Common Shares and each outstanding stock appreciation unit
(each such option to purchase one share and each
-4- such unit representing one share being referred to as an "Option") granted under the Company's Incentive Stock Option Plan and the Company's Stock Appreciation Rights Plan (collectively the "Option Plan") for cash consideration as set forth herein. Each holder of an Option which is vested (after giving consideration to any acceleration of vesting provided in the Option Plan or the Company's Special Bonus and Severance Plan (the "SBS Plan")) shall be offered the right to have 100% of his or her Options canceled by the Company in consideration of a payment by the Company to such holder for each Option in an amount equal to the excess of the Offer Price over the Applicable exercise price for such Option. Cancellation of the Options and payment of the consideration therefor shall be conditioned upon the purchase of Common Shares by the Purchaser pursuant to the Offer. If such condition is met, the cancellation of Options and payment of the consideration therefor in accordance with this section shall be made as promptly as possible following the Offer Purchase Closing. ARTICLE II THE MERGER
SECTION 2.01 The Merger. Upon the terms and subject to the
satisfaction or waiver of the conditions of this Agreement, and in accordance
with the applicable provisions of this Agreement and the GCL, at the Effective
Time (as defined in Section 2.02) the Purchaser shall be merged with and into
the Company. Following the Merger, the separate corporate existence of the
Purchaser shall cease and the Company shall continue as the surviving
corporation and shall succeed to and assume all the rights and obligations of
Purchaser in accordance with the GCL. In its capacity as the surviving
corporation of the Merger, the Company is sometimes referred to herein as the
"Surviving Corporation."
SECTION 2.02 Closing Effective Time. The closing of the Merger (the "Closing") will take place as promptly as practicable following the satisfaction or waiver of the conditions set forth in Section 7.01 of this Agreement (the "Closing"), at the offices of Brown, Todd & Heyburn PLLC, Lexington, KY. Immediately following the Closing, the parties hereto shall cause the Merger to become effective by filing a Certificate of Merger or, if permitted, a Certificate of Ownership and Merger, with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of the GCL (the time of such filing being the "Effective Time") and shall make all other filings or recordings required under the GCL. SECTION 2.03 Effects of the Merger. (a) The Merger shall have the effects set forth in the GCL. (b) The Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation, until thereafter amended in accordance with the provisions thereof and hereof and applicable law.
-5-
(c) Subject to the provisions of Section 6.07 of this Agreement, the By-Laws of the Purchaser in effect at the Effective Time shall be the By-Laws of the Surviving Corporation until amended in accordance with the provisions thereof and applicable law.
(d) Subject to applicable law, the directors of the Purchaser
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation and shall hold office until their respective successors
are duly elected and qualified, or their earlier death. resignation or removal.
SECTION 2.04 Additional Actions. If, at any time after the
Effective Time, the Surviving Corporation shall consideration shall consider or
be advised that any further deeds, assignments or assurances in law or any other
acts are necessary or desirable to (a) vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation its rights, title or interest in, to or
under any of the rights, properties or assets of the Company or its
Subsidiaries, or (b) otherwise carry out the provisions of this Agreement, the
Company and its officers and directors shall be deemed to have granted the
Surviving Corporation an irrevocable power of attorney to execute and deliver
all such deeds, assignments or assurances in law and to take all acts necessary,
proper or desirable to vest, perfect or confirm title to and possession of such
rights, properties or assets in the Surviving Corporation and otherwise to
carry out the provisions of this Agreement, and the officers and directors of
the Surviving Corporation are authorized in the name of the Company or otherwise
to take any and all such action.
SECTION 2.05 Conversion of Common Shares. At the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof, (i) each Common Share issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares(as defined in Section 3.01) and Shares held by the Company, Parent, Purchaser and their respective Subsidiaries) shall be converted into the right to receive the Merger consideration in cash, payable to the holder thereof, without interest thereon, upon surrender of the certificate formerly representing such Common Share, and (ii) each Common Share owned by the Company or one of its Subsidiaries or by Parent or Purchaser or one of its Subsidiaries shall be canceled without payment and without surrender of the certificate formerly representing such Common Shares. SECTION 2.06 Conversion of Purchaser Common Stock. At the Effective Time, each share of common stock, par value $.01 per share, of the Purchaser issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into and become one validly issued, fully paid and non-assessable share of common stock, par value $.01 per share, of the Surviving Corporation. SECTION 2.07 Company Option Plans. At the Effective Time, by virtue of the Merger and without any action on the parts of the holders thereof, each then outstanding Option shall -6-
be converted into the right to receive an amount determined by multiplying (i)
the excess, if any, of the Offer Price over the applicable exercise price of
such Option by (ii) the number of Common Shares such holder could have purchased
is such holder had exercised such Option immediately prior to Effective Time,
but only to the extent then vested and exercisable, provided that the
determination of the exercisablility of Options shall take into account the
acceleration of vesting provided for in the Option Plan or the SBS Plan. The
Surviving Corporation will pay any amount required to be paid pursuant to this
Section 2.07 upon exercise or delivery of any then outstanding Options to the Surviving Corporation by or on behalf of the holder thereof. SECTION 2.08 Merger Without Meeting of Stockholders. The Purchaser and Parent agree to take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after the acceptance for payment of and payment for Common Shares by the Purchaser pursuant to the Offer without a meeting of stockholders of the Company, in accordance with Section 253 of the GCL. ARTICLE III DISSENTING SHARES; PAYMENT FOR SHARES
SECTION 3.01 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, Common Shares outstanding immediately prior to the
Effective Time and held by a holder who has demanded appraisal for such Shares
in accordance with Section 262 of the GCL, if such Section 262 provides for
appraisal rights for such shares in the Merger ("Dissenting Shares"), shall not
be converted into the right to receive the Merger Consideration as provided in
Section 2.05, unless and until such holder fails to perfect or withdraws or otherwise loses his right to appraisal, such Dissenting Shares shall thereupon be treated as if they had been converted as of the Effective Time into the right to receive the Merger Consideration, if any, to which such holder is entitled, without interest or dividends thereon. The Company shall give Parent prompt notice of any demands received by the Company for appraisal of Common Shares and Parent shall have the right to participate in all negotiations and proceedings with respect to such demands. Prior to the Effective Time, the Company shall not, except with the prior written consent of Parent, make any payment with respect to, or settle or offer to settle, any such demands. SECTION 3.02 Payment for Common Shares. (a) From and after the Effective Time, the Bank of New York, or such other bank or trust company as shall be mutually acceptable to Parent and the Company, shall act as paying agent (the "Paying Agent") in effecting the payment of the Merger Consideration in respect of certificates (the "Certificates") that, prior to the Effective Time, represented Common Shares entitled to payment of the Merger Consideration pursuant to Section 2.05. At the Effective Time, Parent or the Purchaser shall deposit, or cause to be deposited, in trust with the Paying Agent the aggregate Merger Consideration to which holders of Common Shares shall be entitled at the Effective Time pursuant to Section 2.05.
-7-
(b) Promptly after the Effective Time, the Paying Agent shall mail to each record holder of Certificates that immediately prior to the Effective Time represented Common Shares (other than Certificates representing Dissenting Shares and Certificates representing Common Shares held by Partner, the purchaser, or the Company) a form of letter of transmittal which 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 Paying Agent and instructions for use in surrendering such certificates and receiving the Merger Consideration in respect thereof. Upon the surrender of each such Certificate, the Paying Agent shall, in consideration for the shares represented by such Certificates, pay he holder of such Certificate the Merger consideration multiplied by the number of Common Shares formerly represented by such Certificate, in consideration therefor, and such Certificate shall forthwith be canceled. Until so surrendered, each such Certificate (other than Certificates representing Dissenting Shares and Certificates representing Common Shares held by Parent, the Purchaser, or the Company) shall represent solely the right to receive the aggregate Merger Consideration relating thereto. No interest or dividends shall be paid or accrued on the Merger Consideration. If the Merger Consideration (or any portion thereof) is to be delivered to any person other than the person in whose name the Certificate formerly representing Common Shares surrendered therefor is registered, it shall be a condition to such right to receive such Merger Consideration that the Certificate so surrendered shall be properly endorsed or otherwise be in proper from for transfer and that the person surrendering such Common Shares shall pay to the Paying Agent any transfer or other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered, or shall establish to the satisfaction of he Paying Agent that such tax has been paid or is not applicable. Promptly after he Effective Time, the Paying Agent shall mail to each record holder of Certificates that immediately prior to the Effective Time represented Dissenting Shares a notice of appraisal rights.
(c) Promptly following the date which is 180 days after the Effective
Time, the Paying Agent shall deliver to the Surviving Corporation all cash,
Certificates and other documents in its possession relating to the transactions
described in this Agreement, and the Paying Agent's duties shall terminate.
Thereafter, holders of Common Shares who have not theretofore complied with this
(d) None of Parent, the Purchaser, the Surviving Corporation or the Paying Agent shall be liable to any person in respect of any Common Shares (or dividends or distributions with respect thereto) or cash deposited by Parent or the Purchaser with the Paying Agent that is delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. If any Certificates shall not have been surrendered prior to seven years after the Effective Time (or immediately prior to such earlier date on which any cash would otherwise escheat to or become the property of any Governmental Entity), any such cash in respect of such Certificate shall, to the extent permitted by applicable law become the property of Parent, free and clear of all claims or interest of any person previously entitled thereto.
-8-
(e) Parent, the Purchaser and the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable or issuable pursuant to this Agreement to any holder of Common Shares such amounts as Parent, the Purchaser or the Paying Agent are required to deduct and withhold with respect to such payment or issuance under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holders of Common Shares in respect of which such deduction and withholding was made. (f) All cash issued upon surrender of Certificates in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Common Shares formerly represented thereby. After the Effective Time, there shall be no transfers on the stock transfer books of the Surviving Corporation of any Common Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates formerly representing Common Shares are presented to the Surviving Corporation or the Paying Agent, they shall be surrendered and canceled in return for the payment of the aggregate Merger Consideration relating thereto, as provided in this Article III, subject to applicable law in the case of Dissenting Shares. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and the Purchaser that except as set forth in the Disclosure Schedules (as hereinafter defined) as of the date hereof (or such other later date as is specified):
SECTION 4.01 Organization and Qualification: Subsidiaries. (a) The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Set forth on the Subsidiary Schedule
is a list of every corporation, limited liability company, partnership or other
business organization or entity of which the Company owns, either directly or
through its Subsidiaries, (a) more than 50% of (i) the total combined voting
power of all classes of voting securities of such entity, (ii) the total
combined equity interests therein, or (iii) the capital or profit interests
therein, in the case of a partnership; or (b) otherwise has the power to vote or
direct the voting of sufficient securities to elect a majority of the board of
directors or similar governing body of such entity (the "Subsidiaries"). Each
of the Subsidiaries listed on the Subsidiary Schedule is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. The Company and each of the Subsidiaries has
the requisite corporate power to own, operate or lease its properties and to
carry on its business as it is now being conducted, and is duly qualified or
licensed to do business, and is in good standing, in each jurisdiction in which
the nature of its business or the properties owned, operated or leased by it
makes such qualification, licensing or good standing necessary, except where the
failure to have such power, or the failure to be so qualified, licensed or in
good standing, would not have a Material Adverse Effect on the Company. The
term "Material Adverse Effect on the Company," as used in this
-9- Agreement, means any development, condition or circumstance having an effect on the assets, business, operations, or financial condition of the Company or any of its Subsidiaries that is materially adverse to the Company and its Subsidiaries taken as a whole other than any development, condition or circumstance resulting from general economic conditions or relating generally to the coal or electric power industries.
SECTION 4.02 Charter and By-Laws. The Company has heretofore made
available to Parent and the Purchaser a complete and correct copy of the charter
and the by-laws or comparable organizational documents, each as amended to the
date hereof, of the Company and each of the Subsidiaries.
SECTION 4.03 Capitalization. The authorized capital stock of the Company consists of 50,000,000 Common Shares and 1,000,000 shares of Preferred Stock, no par value. As of the close of business on July 28, 1998, 28,222,671 Common Shares were issued and outstanding, and 244,000 Common Shares were in the Company's treasury, and no shares of Preferred Stock were issued and outstanding. The Company has no shares reserved for issuance, except that, as of July 28, 1998, there were 1,666,760 Common Shares reserved for issuance pursuant to outstanding Options under the Option Plan, all of which were granted prior to March 31, 1998. The Options Schedule sets forth the name of each holder of an outstanding Option under the Option Plan, and with respect to each Option held by any such holder, the grant date, exercise price and number of Common Shares for which such Option is exercisable. As of the date hereof, the Company has no options to purchase Common Shares outstanding other than those granted and outstanding under the Option Plan. Since December 31, 1997, the Company has not issued any shares of capital stock except pursuant to the exercise of Options outstanding as of such date. All of the outstanding Common Shares are, and all Common Shares which may be issued pursuant to the exercise of outstanding Options will be, when issued in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and nonassessable. There are no bonds, debentures, notes or other indebtedness having general voting rights (or convertible into securities having such rights) of the Company or any of its Subsidiaries issued and outstanding. Except as set forth on the Options Schedule and except as contemplated by this Agreement, or between the Company and one or more of its direct or indirect wholly-owned subsidiaries, there are no existing options, warrants, calls, subscriptions or other rights, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Company or any of the Subsidiaries, obligating the Company or any of the Subsidiaries to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock of, or other equity interest in or voting security of, the Company or any of the Subsidiaries or securities convertible into or exchangeable for such shares or equity interests or voting securities and neither the Company nor any of the Subsidiaries is obligated to grant or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment. Except as contemplated by this Agreement or between the Company and one or more of its direct or indirect wholly-owned subsidiaries, there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any Common Shares or the capital stock of the Company or any of the Subsidiaries. Each of the outstanding shares of capital stock of each of the Company's -10- Subsidiaries is duly authorized, validly issued, fully paid and nonassessable, and such shares of the Company's Subsidiaries as are owned by the Company or by a subsidiary of the Company are owned in each case free and clear of any Lien (as hereinafter defined). Other than as set forth on the Contracts Schedule, the Company has not agreed to register any securities under the Securities Act or under any state securities law or granted registration rights to any person or entity.
SECTION 4.04 Authority Relative to this Agreement. The Company has
all necessary corporate power and authority to execute and deliver this
Agreement and 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 and validly
authorized and approved by the Board and no other corporate proceedings on the
part of the Company or on the part of the stockholders of the Company are
necessary to authorize or approve this Agreement or to consummate the
transactions contemplated hereby except as required by Delaware law. This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due and valid authorization, execution and delivery of this
Agreement by Parent and the Purchaser, this Agreement constitutes a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except that such enforceability (i) may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to the enforcement of creditors' rights generally and (ii) is subject to general
principles of equity.
SECTION 4.05 No Conflict; Required Filings and Consents. (a) None of the execution and delivery of this Agreement by the Company, the consummation by the Company of the Merger, compliance by the Company with any of the provisions hereof or consummation of the Merger or any other transaction contemplated hereby will (i) conflict with or violate the Certificate of Incorporation or By-Laws of the Company or the comparable organizational documents of any Subsidiary, (ii) conflict with or violate any statute, ordinance, rule, regulation, Order, judgment or decree applicable to the Company or its subsidiaries, or by which any of them or any of their respective properties or assets may be bound, or (iii) result in a violation or breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in any loss of any material benefit, or the creation of any Lien on any of the property or assets of the Company or any of its Subsidiaries (any of the foregoing referred to in clause (ii) or this clause (iii) being a "Violation") pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective properties may be bound or affected, except, in the cases of clauses (ii) and (iii) for any such Violations which would not individually or in the aggregate have a Material Adverse Effect on the Company. (b) None of the execution and delivery of this Agreement by the Company, the consummation by the Company of the Merger or any other transaction contemplated hereby or compliance by the Company and its Subsidiaries with any of the provisions hereof will require any consent, waiver, approval, authorization or permit of, or registration or filing with or notification to
-11-
(any of the foregoing being a "Consent") any government or subdivision thereof, domestic, foreign or supranational or any administrative, governmental or regulatory authority, agency, commission, tribunal or body, domestic, foreign or supranational (a "Governmental Entity") or any third party, except for (I) compliance with any applicable requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act"), (ii) the filing of a certificate of merger, or, if permitted, a certificate of ownership and merger, pursuant to the GCL, (iii) compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and any requirements of any foreign or supranational Antitrust Laws (as hereinafter defined), (iv) other Consents identified in the Consents Schedule (including notices and Consents relating to or in connection with mining, reclamation and environmental Permits), and (v) other Consents the failure of which to obtain or make would not individually or in the aggregate have a Material Adverse Effect on the Company.
SECTION 4.06 SEC Reports and Financial Statements.
(a) The Company has filed with the SEC all forms, reports, schedules, registration statements and definitive proxy statements required to be filed by the Company with the SEC since January 1, 1995 (the "SEC Reports"). As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Exchange Act or the Securities Act of 1933 and the rules and regulations of the SEC promulgated thereunder applicable, as the case may be, to such SEC Reports, and none of the SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. (b) The consolidated balance sheets as of December 31, 1997, 1996, 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997 (including the related notes and schedules thereto) of the Company contained in the Form 10-Ks for the years ended December 31, 1997 1996 and 1995 included in the SEC Reports and the consolidated balance sheet as of March 31, 1998 and the related consolidated statements of income, stockholders' equity and cash flows for the quarter ended March 31, 1998 contained in the Form 10-Q for the quarter ended March 31, 1998 and the related consolidated statements of income, stockholders' equity and cash flows for the six months ended June 30, 1998 contained in the Form 10-Q for the quarter ended June 30, 1998 present, fairly, in all material respects, the consolidated financial position and the consolidated results of operations and cash flows of the Company and its consolidated Subsidiaries as of the dates or for the periods presented therein in conformity with United States generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved except as otherwise noted therein, including the related notes. The audited balance sheet as of December 31, 1997 is herein referred to as the "December Balance Sheet," the unaudited balance sheet as of March 31, 1998 is herein referred to as the "March Balance Sheet," and the unaudited balance sheet as of June 30, 1998 is herein referred to as the "June Balance Sheet." The amounts accrued or reserved for in the December Balance Sheet, the March Balance Sheet and the June Balance Sheet with respect to future costs associated with workers' compensation liabilities, Reclamation Obligations (as hereinafter defined) and Black Lung liabilities (as hereinafter defined) have been accrued or reserved for in
-12-
accordance with GAAP, consistently applied. The amounts reflected in the December Balance Sheet, the March Balance Sheet and the June Balance Sheet with respect to coal and mineral reserves have been included or will be included in such financial statements in accordance with GAAP, consistently applied. The Company has accrued its and its Subsidiaries' and affiliates' obligations for retiree medical benefits in accordance with Statement of Financial Account Standards No. 106.
(c) Since March 31, 1998, except as disclosed in the SEC Reports or
the Developments Schedule, there has not been any Material Adverse Effect on the
Company or any event, condition or development which the Company believes is
reasonably likely to result in a Material Adverse Effect on the Company.
(d) The Company and its Subsidiaries are not subject to any material liabilities or obligations (absolute, accrued, contingent or otherwise) other than (i) arising under contracts or circumstances reflected on or otherwise referred to in the Disclosure Schedules (subject to Section 4.12(c)), (ii) reflected in, reserved against or otherwise disclosed in the December Balance Sheet, March Balance Sheet or June Balance Sheet, or (iii) incurred in the ordinary course of business consistent with past practice.
SECTION 4.07 Information. None of the information supplied by
the Company in writing specifically for inclusion or incorporation by reference
in (i) the Offer Documents, (ii) the Schedule 14D-9, or, (iii) any other
document to be filed with the SEC or any other Governmental Entity in connection
with the transactions contemplated by this Agreement (the "Other Filings") will,
at the respective times filed with the SEC or other Government Entity, 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 made
therein, in light of the circumstances under which they were made, not
misleading. The Schedule 14D-9 will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
SECTION 4.08 Absence of Certain Developments. Except as set forth on the Developments Schedule and except as expressly contemplated by this Agreement, since March 31, 1998, neither the Company nor any of its Subsidiaries has engaged in any material transaction outside the ordinary course of business consistent with past practice or: (a) Incurred any indebtedness for borrowed money, except borrowings from banks (or other financial institutions) necessary to meet ordinary course working capital requirements and to finance capital expenditures in the ordinary course of business consistent with past practice; (b) Mortgaged, pledged or subjected to any Lien, any asset or related group of assets having a net book value in excess of $500,000; (c) Sold, leased, assigned or transferred any tangible asset or related group of assets having a net book value in excess of $500,000 except for the sale of inventory and obsolete or used machinery and equipment in the ordinary course of business consistent with past practice;
-13-
(d) Sold, leased, assigned or transferred any interest in real estate having a net book value in excess of $500,000; (e) Sold, licensed, assigned or transferred any patents, trademarks, trade names, copyrights, trade secrets or other intangible assets having a fair market value in excess of $500,000 individually or in the aggregate; (f) Waived or relinquished any right or claim or related group of rights or claims except any such item which the Company believes has a fair value of less than $500,000 individually or in the aggregate; (g) (x) Issued or sold any of its Common Shares or other equity securities or any warrants, options or other rights to acquire its Common Shares or other securities of the Company, except for the issuance of Common Shares upon exercise of Options outstanding as of March 31, 1998 or (y) purchased or redeemed or agreed to purchase or redeem any Common Shares or other equity securities; (h) Made or entered into binding commitment for any capital expenditures or related group of capital expenditures in excess of $1,000,000 other than such expenditures contemplated in the financial statements and plans provided to the Purchaser by the Company; (i) Modified or amended in any material manner or terminated or entered into any Material Contract (as hereinafter defined); (j) Granted any increase in the base compensation of, or made any other material change in the employments terms for, any of its directors, officers, and employees other than normal periodic increases or changes reflecting or based upon changed responsibilities or duties made in the ordinary course of business consistent with past practice or changes made pursuant to any collective bargaining agreements or existing contracts; (k) Adopted, modified, or terminated any bonus, profit-sharing, incentive, severance or other plan or contract for the benefit of any of its directors, officers, and employees, other than for changes which are required by law or a collective bargaining agreement; or (l) Declared or paid any dividend or other distribution with respect to the Common Shares except regular quarterly dividends not in excess of $0.075 per share.
SECTION 4.09 Real Property.
(a) The Owned Real Property Schedule includes all material real property interests owned in fee by the Company or its Subsidiaries and identifies those interests which constitute Active Operating Properties and Reserves and/or Operating Facilities.
-14-
(b) The Company and its Subsidiaries shall promptly provide the following information with regard to each material parcel or tract of owned real property (exclusive of oil and gas properties): (i) an identification of the deed or other instrument of conveyance; (ii) recording information (if available, and if not, the state and county where the relevant parcel or tract is located; (iii) the names of at least one grantor and one grantee thereunder; and (iv) the approximate size of the relevant parcel or tract when acquired. The company and its Subsidiaries shall also promptly provide an accurate listing of all owned real property within the currently existing five (5) year mining plan of the Company and its Subsidiaries. (c) The Leased Real Property Schedule includes all material real property interests in which the Company has or its Subsidiaries have a leasehold interest and identifies those leasehold interests which constitute Active Operating Properties and Reserves and/or Operating Facilities. (d) The Company and its Subsidiaries shall promptly provide the following information with regard to each material parcel or tract of leased real property (exclusive of oil and gas properties): (i) an identification of the lease or sublease agreement and any and all amendments, modifications and side letters; (ii) recording information (if available), and if not, the state and county where the relevant parcel or tract is located; (iii) the names of at least one lessor and one lessee (or sublessor or sublessee) thereunder; (iv) the approximate size of the relevant parcel or tract leased thereunder when acquired; and (v) the term thereof, including any extension options. The Company and its Subsidiaries shall also promptly provide an accurate listing of all leased real property within the currently existing five (5) year mining plan of the Company and its Subsidiaries.
(e) Except as set forth on the Real Property Disclosure Schedule and
except Permitted Encumbrances which individually or in the aggregate do not
constitute a Material Adverse Effect on the Company, the Company and its
Subsidiaries hold (i) good and marketable Mining Title, as hereinafter defined,
to the Active Operating Properties and Reserves and to the Operating Facilities
and (ii) as to the Other Real Property an interest of record or a leasehold
interest from a person or entity which the Company or its Subsidiaries
reasonably believe has an interest of record. As used in this subparagraph (e),
Mining Title means fee simple title to surface and/or coal or an undivided
interest in fee simple title thereto or a leasehold interest in all or an
undivided interest in surface and/or coal together with (i) for Active Operating
Properties and Reserves designated for surface mining no less than those
easements, licenses, privileges, rights, and appurtenances as are necessary to
mine, remove, and transport coal by surface mining methods; (ii) for Active
Operating Properties and Reserves designated for underground mining, no less
than those easements, licenses, privileges, rights, and appurtenances as are
necessary to mine, remove, and transport coal by underground mining methods; and
(f) Except as disclosed in the Real Property Disclosure Schedule, neither the Company nor its Subsidiaries have received any written notice alleging that the Company or its Subsidiaries are in default under any material lease. Except as disclosed on the Real Property
-15-
Disclosure Schedule and except as could not reasonably be expected to have a Material Adverse Effect on the Company, neither the Company nor its Subsidiaries are in default under any lease relating to Active Operating Properties and Reserves, Operating Facilities or Other Real Property. (g) Except for leases which would not have a Material Adverse Effect on the Company if found to be invalid or unenforceable, each of the leases on the Leased Real Property Schedule is, and will be on and immediately following the Closing Date, valid and enforceable against the lessor or other parties thereto in accordance with its terms. To the Knowledge of the Company there are no unwritten modifications to such leases. (h) To the Knowledge of the Company, except as set forth on the Real Property Disclosure Schedule, neither the Company nor any of its Subsidiaries have received any notice of claims that the Company or any Subsidiary has mined any coal that did not belong to it, or mined any coal in such reckless or imprudent fashion as to give rise to any material claims for loss, waste or trespass. (i) All existing maps, surveys, title insurance policies, title insurance, abstracts and other evidence of title have been made available by the Company and its Subsidiaries to the Purchaser. (j) To the Knowledge of the Company, and other than set forth on the Real Property Disclosure Schedule, no condemnation or eminent domain proceeding against any part of such property is pending or threatened, and the Company and its Subsidiaries have no knowledge that any such proceeding is contemplated. (k) To the Knowledge of the Company, except as set forth on the Real Property Disclosure Schedule, there are no adverse possession claims regarding those real property interests which constitute Active Operating Properties and Reserves and/or Operating Facilities. (l) "Permitted Encumbrances" as used in this Agreement means: (i) rights of co-tenants, if any; (ii) rights and easements of owners of undivided interests in the property where the Company or its Subsidiaries own less than 100% of the fee interest; (iii) rights and easements of owners of interests in the surface where the Company or its Subsidiaries do not own or lease the surface; (iv) rights and easements of owners and lessees, if any, of coal or other minerals, including oil and gas, where the Company or its Subsidiaries do not own coal or other minerals; (v) rights and easements of owners and lessees of other coal seams and other minerals, including oil and gas, not owned or leased by the Company or its Subsidiaries; (vi) all existing easements or rights of way, whether of record or apparent on the premises, including, but not limited to, roads, highways, pipelines, underground gas storage rights, railroad and utility easements or rights-of-way, none of which could reasonably be expected to have a Material Adverse Effect on the Company; (vii) real estate taxes not yet due and payable; (viii) statutory liens for mechanics, materialmen or laborers for work and labor delivered to or performed on the premises securing obligations of the Company or its Subsidiaries or their contractors incurred in the Ordinary Course of Business and in the aggregate
-16-
do not exceed $1,000,000; (ix) specific encumbrances and exceptions noted in a Disclosure Schedule; (x) conditions, encumbrances, and covenants of record and other title exceptions, defects and encumbrances which could not reasonably be expected to have a Material Adverse Effect on the Company; (xi) terms, agreements, provisions, conditions, and limitations contained in leases and rights of lessors, their heirs, executors, administrators, successors, and assigns (applies to leasehold estates); (xii) farm, grazing, hunting, recreational and residential leases in which the Company or any Subsidiary is the lessor; (xiii) royalty obligations to sellers or transferors of fee coal or lease properties; (xiv) rights of others to subjacent or lateral support and absence of subsidence rights; and (xv) rights of repurchase when mining and reclamation re completed.
SECTION 4.10 Personal Property. Except as would not have a Material
Adverse Effect on the Company:
(a) The Company and its Subsidiaries have good and marketable title to, or a valid leasehold interest in, the personal property owned or used by them, including the Leased Personal Property that is listed on the Personal Property Lease Schedule (but excluding, to he extent applicable, any leased real property), in each case, free and clear of all Liens. (b) The machinery and equipment owned or used by the Company and its Subsidiaries have been maintained in accordance with industry practice, are in generally good operating condition and adequate for carrying out the purposes for which such personal property is employed, except for normal obsolescence and wear and tear incurred in the ordinary course of business.
SECTION 4.11 Tax Matters. The Company and its Subsidiaries have
filed all income Tax Returns and other Tax Returns required to be filed by them,
excluding those Tax Returns the failure of which to file would not have Material
Adverse Effect on the Company. All Tax Returns for the Company in respect of
all years not barred by the statute of limitations have heretofore been made
available by the Company to Purchaser and such returns are true, correct, and
complete in all material respects. Except as set forth on the Taxes Schedule or
the Litigation Schedule: (A) all Taxes shown thereon as owing by the Company
and the Subsidiaries on all such Tax Returns have been fully paid; (b) to the
Company's Knowledge, (i) the provision for taxes on the March Balance Sheet and
the June Balance Sheet are sufficient for all accrued and unpaid Taxes as of he
date thereof and (ii) all material Taxes which the Company or any of its
Subsidiaries is obligated to withhold from amounts owing to any employee,
creditor or third party have been fully paid or properly accrued; (c) there are
no material claims pending, or to the Company's Knowledge, threatened, for Taxes
against the Company or any Subsidiary with respect to any period ending as of or
prior to the date hereof; (d) neither he Company nor any Subsidiary has waived,
or agreed to the extension of, the statute of limitations with respect to any
Tax Return; (e) neither the Company nor any Subsidiary has any liability for
Taxes for any Person (other than the Company and its Subsidiaries) under
Treasury Regulation 1.1502-6 (or any similar provision of state, local or
foreign income Tax law) as a transferee or successor by contract or otherwise;
and (f) the Company and its Subsidiaries have maintained their respective
records with respect to Taxes in a commercially reasonable manner.
-17-
SECTION 4.12 Contracts and Commitments.
(a) Except as set forth on the Contract Schedule, the Lease Schedules,
the Employee Benefits Schedule or the Development Schedule, neither the Company
nor any of its Subsidiaries is a party to any: (i) collective bargaining
agreement with any labor union; (ii) bonus, pension, profit sharing, retirement
or other form of deferred compensation plan which may provide compensation or
benefits of at least Two Hundred Thousand Dollars ($200,000.00) or which when
aggregated with all such other plans not included on the schedules may provide
compensation or benefits of at Least One Million Dollars ($1,000,000.00); (iii)
stock purchase, stock option, stock appreciation or similar plans; (iv) contract
for the employment of any officer, individual employee or other person on a
full-time or consulting basis involving an annual compensation commitment by the
Company or a Subsidiary in excess of $200,000; (v) agreement or indenture
relating to the borrowing of money in excess of $1,000,000 or to mortgaging,
pledging or otherwise placing a lien (other than a Permitted Lien) on any
portion of the Company's assets, other than assets that, individually or in the
aggregate, would not be material to the operations of the Company and, its
Subsidiaries in the ordinary course of business consistent with past practice;
(b) Purchaser either has been supplied with, or has been given access to, a true and correct copy of all written contracts which are referred to on the Contracts Schedule and the Lease Schedules, together with all material amendments, arbitration decisions and grievance settlements related to collective bargaining agreements and contracts with any labor union, waivers or other changes thereto.
-18-
(c) Each contract listed on the Contracts Schedule or the Lease Schedule is legal, valid, binding, enforceable and in full force and effect, and will continue to be legal, valid, binding, enforceable and in full force and effect following consummation of the transactions contemplated hereby, except as would not individually or in the aggregate, have a Material Adverse Effect on the Company. To the Company's Knowledge, neither the Company nor its Subsidiaries are in default, breach or violation (or would be in default, breach or violation with notice or lapse of time, or both) under any contract listed on the Contracts Schedule or the Lease Schedules, except for such defaults which individually or in the aggregate, would not have a Material Adverse Effect on the Company and except that Leased Real Property shall be excluded from this representation.
SECTION 4.13 Intellectual Property. Set forth on the attached
Intellectual Property Schedule are all of the material patents, trademarks,
copyrights and service marks (and any registrations or applications therefor)
and all material trade names and corporate names used in the conduct of the
business of the Company and its Subsidiaries as now conducted (collectively, the
"Intellectual Property"). Except as set forth on the Intellectual Property
Schedule, the Company and its Subsidiaries own or have sufficient rights to use
the Intellectual Property to conduct their current operations. Except as set
forth on the Intellectual Property Schedule, neither the Company nor any
Subsidiary has received any written notices of material infringement or
misappropriation from any third party with respect to the Intellectual Property,
and to the Company's Knowledge, neither the Company nor any Subsidiary has
infringed nor is it currently infringing the intellectual property of any other
Person, except where such infringement would not individually or in the
aggregate, have a Material Adverse Effect.
SECTION 4.14 Licenses and Permits. Except as would not have a Material Adverse Effect on the Company, the Company and its Subsidiaries possess all necessary mining permits, leases, mining rights, mining licenses, re-mining agreements and similar authorizations and approvals (collectively, the "Mining Permits"), including those listed on the Mining Permits Schedule, and other licenses, permits, certifications and other governmental or regulatory "Permits"), necessary to enable the Company and its Subsidiaries to carry on their mining business as presently conducted, and all such permits are valid, and in full force and effect and there exists no default thereunder. Except as set forth on the Mining Permits Schedule, to the Company's Knowledge, the Company and its Subsidiaries have obtained all material Mining Permits necessary for the Company and its Subsidiaries to conduct the mining operations proposed to be conducted under the Company's current five-year mining plan (the "Mining Plan") within the twelve month period commencing on the date of this Agreement. Except as set forth on the Mining Permits Schedule, to the Company's Knowledge, the Company and its Subsidiaries have initiated the process to obtain all material Mining Permits necessary for the Company and its Subsidiaries to conduct the mining operations proposed to be conducted under the Mining Plan within the twelve month period following the twelve month period commencing on the date of this Agreement. Except as set forth on the Mining Permits Schedule, to the Company's Knowledge, with respect to any material Mining Permits which can reasonably be expected to take more than two years to obtain, the Company and its Subsidiaries have its Subsidiaries have initiated the process so that such Mining Permits may reasonably be expected to be issued not less than six months prior to the applicable commencement date for the mining -19- operations covered by such Mining Permits. Except as disclosed on the Mining Permits Schedule, based upon a good faith determination of Senior Managers of the Company's Subsidiaries, Engineering and/or Permitting Departments, the time remaining prior to the commencement of all mining operations under the Mining Plan is sufficient to obtain any Mining Permits not yet obtained by the Company and its Subsidiaries which are necessary to conduct the mining operations contemplated in the Mining Plan not less than six months prior to the proposed commencement of such mining operations under the Mining Plan. Except as set forth on the Permits Schedule or the Litigation Schedule, to the Company's Knowledge, there is no pending or threatened litigation or other proceeding under which any material Mining Permit or other Permit could reasonably be expected to be revoked, terminated or suspended.
SECTION 4.15 Litigation. Except as set forth on the attached
Litigation Schedule, there are no actions, suits or proceedings pending or, to
the Company's Knowledge, threatened against the Company or any of its
Subsidiaries (or, in each case, in which the Company or its Subsidiaries is a
party), at law or in equity, or before or by any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, except those which are not individually or
in the aggregate, reasonably likely to have a Material Adverse Effect on the
Company. Except as set forth on the attached Litigation Schedule, neither the
Company nor any of its Subsidiaries is subject to any outstanding judgment,
injunction, order or decree of any court or Government Entity to which this
Company or its Subsidiaries is a party which adversely affects the operations of
the Company or such Subsidiary.
SECTION 4.16 Governmental Consents, etc.. Except as set forth in Section 4.05, on the Governmental Consents Schedule or in connection with the Purchaser's financing of the transactions contemplated in this Agreement, no consent, waiver, approval or authorization, order, permit or qualification of, or declaration to or filing with, any governmental or regulatory authority is required in connection with the execution, delivery or performance of this Agreement by the Company or the consummation by the Company of any other transaction contemplated hereby, the failure of which individually or in the aggregate have a Material Adverse Effect on the Company. SECTION 4.17 Employee Benefit Plans.
Except as listed on the Employee Benefits Schedule or the Contracts
Schedule attached hereto, with respect to employees of the Company and its
Subsidiaries , (i) neither the Company nor any of its Subsidiaries maintains or
contributes to any qualified defined contribution retirement plan, or qualified
defined benefit Pension plan (either being referred to as a "Pension Plan") and
-20-
Plan. The Plans (other than any Multiemployer Plans) comply in form and in operation in all material respects with the requirements of the Code and the Employee Retirement Income Security Act of 1974, as amended ("MSA") and any other laws, rules and regulations applicable thereto.
(b) With respect to the Plans (other than the Multiemployer Plans),
(c) The Company has furnished to Purchaser true and complete copies of
(d) Neither the Company nor any Subsidiary, nor, to the Company's Knowledge, any of its directors, officers, employees or any other "fiduciary," as such term is defined in Section 3 of ERISA, has committed any material breach of fiduciary responsibility imposed by ERISA or any other applicable law with respect to the Plans which would subject Parent or Purchaser or any of their respective directors, officers or employees to any material liability under ERISA or any applicable law. (e) The Company has not incurred any material liability for any tax or civil penalty imposed by Section 4975 of the Code or Section 502 of ERISA. (f) Except as listed on the Employee Benefits Schedule attached hereto, (i) no Plan is a Multiemployer Plan (as defined in Section 4001(a)(3) of ERISA) ("Multiemployer Plan") or a plan that has two or more contributing sponsors at least two of whom are not under common control, within the meaning of Section 4063 of ERISA (a "Multiple Employer Plan"), and (ii) none of the Company and its Subsidiaries nor any ERISA Affiliates has incurred any withdrawal liability that has not been satisfied in full, nor been advised by a Multiemployer Plan that any withdrawal liability or potential liability, as a result of a complete or partial withdrawal from such Multiemployer Plan, as those terms are defined in Part I of Subtitle E of Title IV of ERISA, has been incurred. With respect to each Plan that is a Multiemployer Plan, except as set forth in the Employee Benefits Schedule: (1) none of the Company and its Subsidiaries, nor any of the respective ERISA Affiliates has received any written notification, nor does the Company have Knowledge that any such Plan is in reorganization, has been terminated or is insolvent, or (2) reasonably expected to be in reorganization, to be insolvent, or to be terminated, and (3) the Company and its Subsidiaries and their respective ERISA Affiliates have made all required contributions to such Plans substantially when due. (g) The Company has not incurred any liability (i) under Title TV of ERISA, (h) under section 302 of ERISA, (iii) under sections 412 and 4971 of the Code, (iv) as a result of a failure
-21-
to comply with the continuation coverage requirements of section 601 et seq. of
ERISA and section 4980B of the Code, (v) under Section 701, et seq. of ERISA, or
(h) Except as disclosed in the Employee Benefits Schedule or the SEC Reports. the Company has no liability for life, health, medical or other welfare benefits to former employees or beneficiaries or dependents thereof, except for health continuation coverage as required by Section 4980B of the Code or Parts 6 and 7 of Title 1 of ERISA. (i) Except as disclosed in the Employee Benefits Schedule, the Contracts Schedule and the Employee Arrangements Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) result in. cause the accelerated vesting or delivery of, or increase the amount or value of, any payment or benefit to any employee, officer or director of the Company or any of its Subsidiaries.
SECTION 4.18 Insurance. The attached Insurance Schedule lists the
material insurance policies maintained by the Company and its Subsidiaries and
their respective coverage and renewal dates. All of such insurance policies are
in full force and effect and the Company is not in material default with respect
to its obligations under any of such insurance policies. No notice of
cancellation or termination or rejection of any claim in excess of S 1,000,000
has been received by the Company or its Subsidiaries with respect to any such
policy in the last year (or such shorter period as such entity has been in
existence or has been a Subsidiary of the Company). The Company and each of its
Subsidiaries has been covered during the past five years (or such shorter period
as such entity has been in existence or has been a Subsidiary of the Company) by
insurance in scope and amount customary and reasonable for the businesses in
which they have engaged during such period, and to the Company's Knowledge, all
contractors, lessees and licensees which performed services and/or engaged in
the production of coal on behalf of the Company have been covered by insurance
in scope and amount customary and reasonable for the business in which they have
engaged during such period.
SECTION 4.19 Compliance with Laws. Except as set forth on the Legal Compliance Schedule, the Taxes Schedule, the Developments Schedule or the Litigation Schedule, to the Company's Knowledge, the Company and each of its Subsidiaries is in compliance with every statute, rule, restriction, law, regulation, order, judgment or decree of any governmental entity applicable to it or by which it is bound (other than Environmental and Safety Requirements and any permit requirements or related regulations), including, without limitation, the Fair Labor Standards -22- Act or regulations under such act or other laws and regulations relating to wages, hours, labor agreements, the payment of Social Security and similar taxes, unemployment or workers' compensation including Black Lung benefits and obligations and the West Virginia Wage Payment Collections Payment Act and/or similar state laws and regulations, except for such failures as would not have a Material Adverse Effect on the Company. Except as set forth on the Legal Compliance Schedule, the Taxes Schedule or the Developments Schedule, neither the Company nor any Subsidiary has received from any governmental or regulatory authority any written notice alleging any material violation of law or claiming any material liability of the Company or any of its Subsidiaries as a result of any such alleged material violation.
SECTION 4.20 Environmental, Mining and Safety Matters. Except as
set forth on the attached Environmental Compliance Schedule:
(a) The Company and its Subsidiaries are in compliance in all material respects with all Environmental, Mining, and Safety Requirements (including without limitation in cases where the Company or its Subsidiaries operate any property or facility under a contractual arrangement but are not the named permittee under relevant surface mining permits), and have filed all notices and compliance reports required to be filed to maintain such compliance in all material respects under any Environmental, Mining, and Safety requirements (including without limitation. where material, notices and reports indicating past or present treatment, storage or disposal, or reporting a spill or release into the environmental, of any Hazardous Substances, Oils, Pollutants or Contaminants), and (i) neither the Company nor any of its Subsidiaries has received any written communication or other written notice from any Government Entity (which has not been substantially resolved) alleging that the Company or any of its Subsidiaries is not in compliance, in all material respects, with Environmental, Mining, and Safety Requirements, (ii) to the Company's Knowledge all contract mining activities performed on Real Property owned or leased by the Company or any of its. Subsidiaries are in compliance, in all material respects, with all Environmental, Mining, and Safety Requirements, (iii) to the Company's Knowledge, no material action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed or commenced against or otherwise given to the Company or any of its Subsidiaries alleging any failure so to comply in all material respects, and, to the Company's Knowledge, no such action, suit, proceeding, hearing, investigation, charge, complaint, claim demand or notice has been threatened, and (iv) neither the Company nor any of its Subsidiaries has any material contingent liabilities with respect to its business under any Environmental, Mining, or Safety Requirements. (b) (i) Neither the Company nor any of its Subsidiaries has received notice to the effect that it is a potentially responsible party, or that any Governmental Entity or other individual is seeking information in connection with or advising it that it is responsible for, or potentially responsible for costs under Environmental, Mining, and Safety Requirements, including, without limitation, CERCLA, for cleanup of or investigatory, remedial, or other corrective action related to Hazardous Substances, Oils, Pollutants or Contaminants at any Real Property currently or previously owned or leased by the Company or any of its Subsidiaries at any other location, (ii) no Real Property owned or leased by the Company nor any of its Subsidiaries is listed on any federal or state
-23-
contaminated site list, including the national priority list under CERCLA, the CERCLTS, or any state counterparts, and (iii) neither the Company nor any of its Subsidiaries has knowledge of any release of Hazardous Substances, Oils, Pollutants, or Contaminants in quantities requiring investigation or cleanup at any of the Real Property owned or leased by the Company or any of its Subsidiaries or at any location where, in any of the foregoing cases (i)-(iii) the Company or any of its Subsidiaries could reasonably be excepted to bear material liability. (c) Each of the Company and its Subsidiaries has provided the Purchaser (to the extent in the possession of the Company or its Subsidiaries) with all material environmental audits. site assessments, or reports, all Environmental Impact Statements, and all liability studies prepared within the past five years by or for the Company or any of its Subsidiaries, or by any third party, including Government Entities or insurance companies. (d) For purposes of this Agreement, "Release" shall mean any emission, spill, release, discharge or threatened release into or upon: (i) the air. (ii) the soils or any improvements located thereon; (iii) the surface water or ground water, or (iv) the sewer, septic system or waste treatment, storage or disposal system.
SECTION 4.21 Affiliated Transactions. Except as set forth on the
Affiliated Transactions Schedule, the Employee Benefits Schedule, the
Developments Schedule or the contracts Schedule, no officer, director, or
principal stockholder of the Company or, to the Company's Knowledge, any
individual in such officer's or directors immediate family is a party to any
material agreement, contract, commitment or transaction with the Company or any
of its Subsidiaries or has any interest in any material real or personal
property used by the Company or any of its Subsidiaries other than arrangements
with employees that are available to similarly situated employees.
SECTION 4.22 Brokers. Except for the fees of CSFB pursuant to the engagement letter listed on the Contracts Schedule, none of the Company, any of its Subsidiaries.. or any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated by this Agreement. SECTION 4.23 Labor Relations. Except as set forth in the Compliance Schedule or the Litigation Schedule: (a) The Company and its Subsidiaries are in compliance with applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, excluding Environmental and Safety Requirements, except for such failures as would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The Company and its Subsidiaries are in compliance with applicable collective bargaining agreements, and arbitration, administrative and judicial decisions interpreting and/or affecting such agreements, except for such failures as would not individually or in the aggregate, have a Material Adverse Effect on the Company.
-24-
(b) There is no unfair labor practice charge or complaint or any other labor employment matter against or involving the Company or any Subsidiary pending or threatened before the National Labor Relations Board or any court of law as of the date of this Agreement. There is, and, except as disclosed on the Compliance Schedule, since January 1, 1996 there has been, no labor organizing activity, strike, dispute, lockout, slowdown or stoppage actually pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against the Company or any of its Subsidiaries. (c) There is, and except as disclosed on the Compliance Schedule, since January 1, 1994 there has been, no certified collective bargaining representative of the Company's or any of its Subsidiaries' employees, no demand made to the Company or its Subsidiaries for recognition by any collective bargaining representative, and no petition for an election filed with the National Labor Relations Board or any other governmental authority or Person with respect to the Company's or any of its Subsidiaries employees. (d) Except as set forth on the Litigation Schedule, there are no charges, investigations administrative proceedings or formal complaints of discrimination (including discrimination based upon sex, age, marital status, race, color, religion, national origin, sexual preference, disability, handicap or veteran status) pending or, to the knowledge of the Company or any of its Subsidiaries, threatened before the Equal Employment Opportunity Commission or any federal, state or local agency or court against the Company or any Subsidiary.
SECTION 4.24 Permit Blocking. Except as set forth in the Compliance
Schedule or Litigation Schedule, neither the Company nor any of its Subsidiaries
has been notified in writing by the Federal Office of Surface Mining or the
agency of any state administering the Surface Mining Control and Reclamation Act
of 1977, as amended ("SMCRA"), or any comparable state statute, that it is (i)
ineligible to receive additional surface mining permits that arc material to its
business; or (ii) under investigation to determine whether its eligibility to
receive such permits should be revoked, i.e., "permit block," and, to the
Company's Knowledge, there is no basis therefor.
SECTION 4.25 Section 6 of the Joint Development Agreement. No Acquisition Closing (as such term is defined in the Joint Development Agreement) or other event has occurred. that prevents, prohibits or limits or otherwise renders moot any rights of the Company and/or one or more of its Subsidiaries pursuant to Section 6 of the Joint Development Agreement 1(including, without limitation, the right thereunder to withdraw from the Project (as defined in the Joint Development Agreement)). SECTION 4.26 Takeover Provisions Inapplicable. Assuming the accuracy and correctness or Section 5.06 hereof as of the date hereof and at all times on or prior to the Effective Time, Section 203 of the GCL is and shall be inapplicable to the Merger and the transactions contemplated hereby. -25- ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER Parent and the Purchaser represent and wan-ant to the Company as follows:
SECTION 5.01 Organization and Qualification. Parent is a
corporation duly organized, validly existing and in good standing under the laws
of Delaware. The Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Parent and
Purchaser each have the requisite corporate power and authority to own, operate
or lease its properties and to carry on its business as it is now being
conducted and to enter into this Agreement and to perform all of their
respective obligations hereunder.
SECTION 5.02 Authority Relative to this Agreement. The execution and delivery of this Agreement by Parent and the Purchaser and the consummation by Parent and the Purchaser of the transactions contemplated hereby have been duly and validly authorized and approved by the Boards of Directors of Parent and the Purchaser and by Parent as stockholder of the Purchaser and no other corporate proceedings on the part of Parent or the Purchaser are necessary to authorize or approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of Parent and the Purchaser and, assuming the due and valid authorization, execution and delivery by the Company, each such agreement constitutes a valid and binding obligation of each of Parent and the Purchaser enforceable against each of them in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to the enforcement of creditors' rights generally and (ii) is subject to general principles of equity. SECTION 5.03 No Conflict: Required Filings and Consents. (a) None of the execution and delivery of this Agreement by Parent or the Purchaser, the consummation by Parent or the Purchaser of the transactions contemplated hereby or compliance by Parent or the Purchaser with any of the provisions hereof will (i) conflict with or violate the organizational documents of Parent or the Purchaser, (ii) conflict with or violate any statute, ordinance, rule, regulation, order, judgment or decree applicable to Parent or the Purchaser, or any of their Subsidiaries, or by which any of them or any of their respective properties or assets may be bound or affected, or (iii) result in a Violation pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or the Purchaser, or any of their Subsidiaries, is a party or by which any of their respective properties or assets may be bound or affected, except for any such actions which would not have a material adverse effect on Parent or adversely affect the ability of Parent or the Purchaser to consummate the transactions contemplated hereby. (b) None of the execution and delivery of this Agreement by Parent and the Purchaser, the consummation by Parent and the Purchaser of the transactions contemplated hereby or compliance by Parent and the Purchaser with any of the provisions hereof will require any Consent of any Government Entity or third party, except for (i) compliance with any applicable requirements
-26-
of the Exchange Act, (ii) the filing of a certificate of merger, or, if permitted, a certificate of ownership and merger, pursuant to the GCL, and (iii) compliance with the Hart-ScotRodino Act and any requirements of any foreign or supranational Antitrust Laws, and (iv) Consents the failure of which to obtain or make would not have a material adverse effect on Parent or adversely affect the ability of Parent or the Purchaser to consummate the transactions contemplated hereby.
SECTION 5.04 Information. None of the information supplied or to be
supplied by Parent and the Purchaser in writing specifically for inclusion in
(a) the Schedule 14D-1. (b) the Offer Documents or (c) the Other Filings will, at the respective times filed with the SEC or such other Governmental Entity 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 made therein, in light of the circumstances under which they were made, not misleading. SECTION 5.05 Financing. The Purchaser is a newly formed corporation which has not conducted any business other than in connection with the transactions contemplated by this Agreement. The Purchaser has received a written commitment (the "Commitment Letters") to obtain, subject to the terms and conditions therein, the funds necessary for the consummation of the transactions contemplated hereby, including payment of the Offer Price and the Merger Consideration with respect to all Common Shares and all payments with respect to Options and all related costs and expenses. The Purchaser has delivered true, correct and complete copies of the Commitment Letters to the Company. The Purchaser has paid all commitment fees required to be paid and taken all other actions required to cause such Commitment Letters to be effective and to constitute the valid commitment of the issuer of such letter, and each such commitment Letter is a valid and binding commitment of the Purchaser and the issuer thereof. The Purchaser is not as of the date hereof, aware of any fact, occurrence or condition that makes any of the assumption statements therein inaccurate in any material respect or that would cause the commitment provisions in the Commitment Letters to be terminated or ineffective or any of the conditions contained therein not to be met. SECTION 5.06 Parent and Purchaser Not an Interested Stockholder. As of the date of this Agreement, neither Parent nor Purchaser nor any of their affiliates is an "Interested Stockholder" as such term is defined in Section 203 of the GCL. SECTION 5.07 No Knowledge of Misrepresentations or Omissions. Neither Parent nor Purchaser has any actual knowledge that (i) the representations and warranties of the Company in this Agreement are not true and correct in all material respects or (ii) there are any material errors in or material omissions from, the Schedules to this Agreement which Individually or in the aggregate constitute a Material Adverse Effect on the Company. SECTION 5.08 Solvency. Assuming the correctness of the representations and warranties in Article TV hereof the Company and its Subsidiaries will immediately after the Offer Purchase Closing and immediately after the Effective Time be solvent and capable of meeting their obligations as they become due, have assets exceeding their liabilities and have a reasonable amount of capital for the conduct of their business. Parent and Purchaser will procure the solvency opinion -27- that is required by the Commitment Letters and will provide that such opinion is addressed to and delivered to the Board as well as to the issuer of the Commitment Letters. Additionally, Parent and Purchaser will assure that a draft of such solvency opinion is provided to the Board and counsel to the Company for their review and comment not less than three days prior to the formal delivery thereof.
SECTION 5.09 Disclaimer Regarding Estimates and Projections. In
connection with Parent or Purchaser's investigation of the Company and its
Subsidiaries, Parent or Purchaser has received certain Company projections,
including projected statements of income from operations of the Company and its
Subsidiaries for the fiscal year ending in December 1997 and for succeeding
fiscal years and certain business plan information for such fiscal year and
succeeding fiscal years. The Company makes no representation or warranty with
respect to such estimates and projections and other forecasts and plans
(including the reasonableness of the assumptions underlying such estimates and
projections and forecasts). In addition, except as set forth herein. the
Company makes no representation or warranty with respect to information relating
to historical income from operations set forth in the Information Memorandum, in
any supplemental due diligence information provided to Parent or Purchaser, in
connection with discussions or access to management of the Company and its
Subsidiaries, or otherwise, and Parent and Purchaser acknowledge and agree that
it is not relying on such information in any manner whatsoever. The disclosures
in the Schedules hereto are to be taken as relating to the representations and
warranties of the Company as a whole. The inclusion of information in the
Schedules hereto shall not be construed as an admission that such information is
material to the Company or its Subsidiaries. In addition, matters reflected in
the Schedules are not necessary limited to matters required by this Agreement to
be reflected in such Schedules. Such additional matters are set forth for
information purposes only and do not necessarily include other matters of a
similar nature.
ARTICLE VI COVENANTS
SECTION 6.01 Conduct of Business of the Company. Except as provided
in Section 6.09 hereof or as otherwise contemplated by this Agreement or with
the written Consent of Parent or as set forth in the Developments or Contracts
Schedule, during the period from the date of this Agreement to the Offer
Purchase Closing, the Company will, and will cause each of its Subsidiaries to,
conduct its operations only in the ordinary course of business consistent with
past practice and will use all reasonable efforts, and will cause each of its
Subsidiaries to use all reasonable efforts, to preserve intact the business
organization of the Company and each of its Subsidiaries, to keep available the
services of its and their present officers and key employees, and to preserve
the good will of those having business relationships with it. Without limiting
the generality of the foregoing, and except as provided in Section 6.09 hereof.
as otherwise contemplated by this Agreement with respect to the Non-Mining
Assets, or with the written consent of Parent or as set forth in the
Developments Schedule or Contracts Schedule, the Company will not, and will not
permit any of its Subsidiaries to, prior to the Effective Time:
-28- (a) Adopt any amendment to its charter or by-laws or comparable organizational documents; (b) Except for issuances of capital stock of the Subsidiaries to the Company or a wholly owned subsidiary of the Company, and other than the issuance of Common Shares pursuant to the exercise of Options outstanding on the date hereof, issue, reissue, pledge or sell, or authorize the issuance, reissuance. pledge or sale or (i) additional Common Shares or other shares of capital stock of any class, or securities convertible into Common Shares or other capital stock of any class. or any rights, warrants or options to acquire any convertible securities or capital stock, or (ii) any other securities in respect of, in lieu of, or in substitution for, Common Shares outstanding on the date hereof. (c) Declare, set aside or pay any dividend or other distribution (whether in cash. securities or property or any combination thereof) in respect of any class or series of its capital stock other than between any of the Company and any of its wholly owned Subsidiaries. (d) Split, combine, subdivide, reclassify or redeem. purchase or otherwise acquire, or propose to redeem, purchase or otherwise acquire, any Common Shares or any other capital stock; (e) Make any loans, advances or capital contributions to, or investments in, any other person in excess of $500,000, except for loans, advances, capital contributions or investments between any Subsidiary of the Company and the Company or another wholly owned subsidiary of the Company; (f) Fail to (i) maintain (except for sales or other transactions not constituting a breach of this Agreement) the Real Property in a manner consistent with past practice, (ii) pay when due all Taxes, water and sewer rents, assessments and insurance premiums affecting the Real Property, other than those being contested in good faith for which appropriate reserves have been established on the Company's or its Subsidiary's books and records, (iii) timely comply with the term and provisions of all Leases (including but not limited to timely payment of all minimum and production royalties, other than those being contested in good faith for which appropriate reserves have been established on the Company's or its Subsidiary's books and records), contracts and agreements relating to or affecting the Real Property and the use and operation thereof, in each case, other than such failures that would not, individually or in the aggregate, have a Material Adverse Effect on the Company; (g) Enter into, establish, adopt, amend or renew any material employment, consulting, severance or similar agreements or arrangements with any director, officer or employee; grant any salary or wage increase (other than in the ordinary course of business consistent with past practice or as may be required by law); or establish, adopt, amend, or increase benefits under, any pension, retirement, stock option, stock purchase. savings, profit sharing, deferred compensation, consulting, welfare benefit contract, plan or arrangement (other than in the ordinary course of business consistent with past practice or as may be required by law);
-29-
(h) Enter into any material labor or collective bargaining agreement, memorandum of understanding, grievance settlement or any other agreement or commitment to or relating to any labor union, except in the ordinary course of business consistent with past practice; (i) Take any action that, if taken after March 31, 1999 but prior to the date hereof, would have caused the representations and warranties contained in Section 4.08. to be untrue in any material respect; (j) Consummate its investment in Louisiana Generating LLC, contemplated by, or waive, modify or terminate in any manner adverse to the Company its rights under Section 6 of that certain Joint Development Agreement, dated September 29, 1996, as amended, among the Company, Southern Electric International, Inc. and NRG Energy Inc. (the "Joint Development Agreement"), in connection with the transactions contemplated by that certain Asset Purchase and Reorganization Agreement, dated as of July 3 0, 1996, with Ralph P. Mabey, Trustee in Bankruptcy of Cajun Electric Power Cooperative, Inc. ("Cajun Electric"), for the acquisition of substantially all of the non-nuclear assets of Cajun Electric; (k) Waive, modify, amend or terminate any confidentiality, standstill or other similar agreement (each a "Standstill Agreement") to which the Company or any of its Subsidiaries is a party and which was entered into in correction with the sale process undertaken by the Company to identify a purchaser of the Company that resulted in the execution of this Agreement;
(l) or Agree to take any of the foregoing actions prohibited under
Notwithstanding the foregoing, nothing herein shall limit the Company's ability to, nor require the Company to obtain the consent of Parent in order to sell, convey or otherwise dispose of any of the Non-Mining Assets referred to on the Non-Mining Assets Schedule attached hereto at any time following the date hereof in any transaction approved by the Board; provided that, with respect to any sale of assets, such sale is not to an Affiliate of the Company, such assets are sold in an arms-length transaction, and the Company provides at least three business days prior written notice of such sale to Parent.
SECTION 6.02 Access to Information. From the date of this Agreement
until the Closing, the Company will, and will cause its Subsidiaries, and each
of their respective officers, directors, counsel, advisors and representatives
(collectively, the "Company Representatives") to, give Parent and the Purchaser
and their respective officers, employees, counsel, advisors and representatives
(collectively, the "Parent Representatives") full access (subject, however,
during the term of this Agreement and following any termination hereof, to
Parent and Purchaser keeping and causing their respective subsidiaries and
affiliates to keep such information confidential in a manner consistent with
existing confidentiality and similar non-disclosure obligations, including those
contained in the Confidentiality Agreement, and the preservation of attorney
client and work product privileges), during normal business hours, to the
offices and other facilities and to the books and records of the Company and its
Subsidiaries and will cause the Company Representatives to furnish
-30- Parent, the Purchaser and the Parent Representatives to the extent available with such financial and operating data and such other information with respect to the business and operations of the Company and its Subsidiaries as Parent and the Purchaser may from time to time reasonably request; provided that if the Company determines in good faith that any such data or information is competitively sensitive, Parent and the Company will reasonably agree to appropriate limitations on the dissemination of such information within the Purchases and Parent's respective organizations. Prior to the Offer Purchase Closing, neither Parent or Purchaser nor the Parent Representatives shall contact or in any manner communicate with the employees, customers, lessors and suppliers of the Company and its Subsidiaries with respect to any matter related to the transactions contemplated hereby, except with the prior consent of the Company.
SECTION 6.03 Reasonable Efforts Notice of Certain Developments.
(a) Subject to the terms and conditions herein provided and to applicable legal requirements, each of the parties hereto agrees to use reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done (in the case of the Company consistent with the fiduciary duties of the Company's Board of Directors under applicable law), and to assist and cooperate with the other parties hereto in doing, as promptly as practicable, all things necessary, proper or advisable under applicable laws and regulations to ensure that the conditions set forth in Article VII are satisfied and to consummate and make effective the transactions contemplated by the Offer, the Merger and this Agreement. (b) If at any time prior to the Effective Time any event or circumstance relating to either the Company or Parent or the Purchaser or any of their respective Subsidiaries, is discovered by the Company or Parent, as the case may be, which should be set forth in an amendment to the Offer Documents or Schedule 14D-9, the discovering party will promptly inform the other party of such event or circumstance. If at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, including the execution of additional instruments, the proper officers and directors of each party to this Agreement shall take all such necessary action. (c) Parent and Purchaser covenant and agree to do all other things reasonably necessary to obtain the financing necessary for fulfillment of the Offer Financing Condition (whether from the issuers of the Commitment Letters or from other sources), on terms and conditions that are not less favorable in the aggregate to Parent and Purchaser than those contemplated by the Commitment Letters. (d) Parent and Purchaser further covenant and agree that they will not, at any 'time prior to the termination of this Agreement, terminate or modify, amend or alter the obligations of the issuer of the Commitment Letter in any way that would be materially adverse to the Parent's or Purchasees ability to cause the Offer Financing Condition to be satisfied.
-31-
SECTION 6.04 Consents.
(a) Each party hereby agrees to use its reasonable best efforts to file the premerger notification report, and all other documents to be filed in connection therewith, required by the HSR Act and the Premerger Notification Rules promulgated thereunder with the United States Federal Trade Commission ("FTC") and the United States Department of Justice ("DOJ") as soon as practicable following the date hereof. but in any event (i) with respect to Parent and Purchaser, within five days following the date hereof and (ii) with respect to the Company, within ten days following the date hereof. Each party shall respond promptly to any request for additional information that may be issued by either FTC or DOJ and shall use commercially reasonable efforts to
assure that the waiting period required by the HSR Act has expired or been
terminated prior to the date that is 20 days following the commencement of the
Offer.
(b) Each of the parties will use commercially reasonable efforts to obtain as promptly as practicable all Consents of any Governmental Entity or any other person required in connection with, and waivers of any Violations that may be caused by, the consummation of the transactions contemplated by the this Agreement. (c) In furtherance and not in limitation of the foregoing, Parent shall use commercially reasonable best efforts to resolve such objections, if any, as may be asserted with respect to the transactions contemplated by this Agreement under any antitrust, competition or trade regulatory laws, rules or regulations of any domestic or foreign government or governmental authority or any multinational authority ("Antitrust Laws"). If any suit is instituted challenging any of the transactions contemplated by this Agreement as violative of any Antitrust Law, Parent shall take such action (including without limitation, agreeing to hold separate or to divest any of the businesses, product lines or assets of Parent or any of its affiliates or of any of the Company, its Subsidiaries or affiliates (a "Business Unit") (but only if the Business Units required to be held separate or divested do not in the aggregate have a fair market value of more than $25,000,000 or revenues for the most recently completed 12 months of more than $25,000,000) as may be required (a) by the applicable government or governmental or multinational authority (including, without limitation, the Antitrust Division of the United States Department of Justice, the Federal Trade Commission or the European Economic Area) in order to resolve such objections as such government or authority may have to such transactions under such Antitrust Law, or (b) by any domestic or foreign court or similar tribunal, in any suit brought by a private party or governmental or multinational authority challenging the transactions contemplated by this Agreement as violative of any Antitrust Law, in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order that has the effect of preventing the consummation of any of such transactions. The entry by a court, in any suit brought by a private party or governmental or multinational authority challenging the transactions contemplated by this Agreement as violative of any Antitrust Law, of an order or decree permitting the transactions contemplated by this Agreement, but requiring that any Business Units of any of Parent or its affiliates, the Company or its Subsidiaries or affiliates be divested or held separate by Parent (but only if such Business Units required to be held separate or divested do not in the aggregate have a fair market value of more than $25,000,000 or revenues for the most recently completed 12 months of more than $25,000,000), or that would otherwise limit Parent's freedom of action with respect to, or its ability to retain, the Company and
-32-
its Subsidiaries or any portion thereof or any of Parent's or its affiliates' other assets or businesses, shall not be deemed a failure to satisfy the conditions specified in Annex I or Section 7.01(b) hereof. (d) Any party hereto shall promptly inform the others of any material communication from the United States Federal Trade Commission, the Department of Justice or any other domestic or foreign government or governmental or multinational authority regarding any or the transactions contemplated by this Agreement. If any party or any affiliate thereof receives a request for additional information or documentary material from any such government or authority with respect to the transactions contemplated by this Agreement, then such party will endeavor in good faith to make, or cause to be made, as soon as reasonably practicable and after consultation with the other party, an appropriate response in compliance with such request Parent will advise the Company promptly in respect of any understandings, undertakings or agreements (oral or written) which Parent proposes to make or enter into with the Federal Trade Commission. the Department of Justice, or any other domestic or foreign government or governmental or multinational authority in connection with the transactions contemplated by this Agreement.
SECTION 6.05 Public Announcements. Prior to the Closing, except as
required by applicable law or by any rule or regulation of the New York Stock
Exchange, no party hereto shall issue any press release or otherwise make any
public statement with respect to this Agreement and the transactions
contemplated hereby without the prior written consent of the other parties
hereto. With respect to any public statement of either party that does not
require the consent of the other party, the party making such statement shall
prior to public disclosure thereof, first consult with and provide the other
party a reasonable opportunity to review the contents of such statement.
SECTION 6.06 Employee Benefit Arrangements. Parent shall cause the Company to honor 0 accrued obligations as of the date hereof under the employee arrangements (the "Employee Arrangements") to which the Company or any of its Subsidiaries is presently a party which are listed in the Employee Arrangements Schedule and the Developments Schedule in accordance with the terms and conditions of such arrangement. In addition, from and after the Closing until the first anniversary of the Closing, subject to the remaining provisions of this Section 6.06, the Surviving Corporation shall not amend, modify, alter or terminate any severance or change of control agreements, policies or practices of the Company or its Subsidiaries, including the SBS Plan; provided that any such action after the first anniversary of the Closing shall not adversely affect the accrued or vested rights of any employees or other beneficiaries which shall have arisen under any severance or change of control agreements, policies or practices of the Company or its Subsidiaries, including the SBS Plan prior to such amendment, modification, alteration or termination. Parent shall cause the Company for a period of one year following the Effective Time, to continue to provide to employees of the Company and its Subsidiaries who are employed by the Surviving Corporation (excluding employees covered by collective bargaining agreements) broad-based employee benefit plans and Employee Arrangements which are in the aggregate no less favorable than those provided to such employees as of the date hereof provided that it is understood that the Surviving Corporation may alter, amend, modify and/or terminate specific benefit plans and/or arrangements (including Employee Arrangements) subject to the aggregate limitations set forth above. Subject to the -33- foregoing, nothing in this Section shall be deemed to limit or otherwise affect the right of the Surviving Corporation to terminate employment or change the place of work. responsibilities, status or designation of any employee or group of employees as the Surviving Corporation may determine in the exercise of its business judgment and in compliance with applicable laws. Solely for purposes of eligibility and vesting under Employee Arrangements (including without limitation plans or programs of Parent and its affiliates after the Effective Time), and to the extent permitted by law, all service with the Company or any of its Subsidiaries or their predecessors prior to the Effective Time shall be treated as service with Parent and its affiliates (to the extent such service was recognized by the Company or any of its Subsidiaries for similar purposes under comparable plans before the Effective Time).
SECTION 6.07 Indemnification.
(a) Parent agrees that all rights to indemnification now existing in favor of any director or officer of the Company and its Subsidiaries (the "Indemnified Parties") as provided in their respective charters or by-laws or, in an agreement between an Indemnified Party and the Company or one of its Subsidiaries, shall survive the Merger and shall continue in full force and effect for a period of not less than six years from the Effective Time; provided that in the event any claim or claims are asserted or made within such six-year period, a rights to indemnification in respect of any such claim or claims shall continue until final disposition of any and all such claims. Parent agrees to cause the Surviving Corporation to honor all rights to indemnification referred to in the preceding sentence. Without limitation of the foregoing, in the event any such Indemnified Party is or becomes involved in any capacity in any action, proceeding or investigation in connection with any matter, including, without limitation, the transactions contemplated by this Agreement, occurring prior to, and including, the Effective Time, Parent will cause to be paid in accordance with the applicable charters, by-laws and agreements, as incurred such Indemnified Party's legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith. The Surviving Corporation shall pay all reasonable expenses, including attorneys' fees, that may be incurred by any Indemnified Party in enforcing the indemnity and other obligations provided for in this Section 6.07 subject to the limitations of the GCL to the extent applicable. (b) Parent agrees that the Company, and from and after the Effective Time, the Surviving Corporation shall cause to be maintained in effect for not less than six years from the Effective Time for the benefit of all current and former directors and officers of the Company the current policies of the directors' and officers' liability insurance maintained by the Company; provided, that the Surviving Corporation may substitute therefor other policies not less advantageous (other than to a de minimus extent) to the beneficiaries of the current policies and provided that such substitution shall not result in any gaps or lapses in coverage with respect to matters occurring prior to the Effective Time; and provided, further, that the Surviving Corporation shall not be required to pay an annual premium in excess of 300% of the last annual premium paid by the Company prior to the date hereof which is set forth in the Insurance Schedule and if the Surviving Corporation is unable to obtain the insurance required by this Section 6.07(b) it shall obtain as much comparable insurance as possible for an annual premium equal to such maximum amount. -34-
SECTION 6.08 Notification of Certain Matters. Parent and the
Company shall promptly notify each other of (a) (i) it becoming aware of any
fact or event which would be reasonably likely to demonstrate that any
representation or warranty of any party hereto contained in this Agreement was
or is untrue or inaccurate in any material respect as of the date of this
Agreement or (ii) the occurrence or non-occurrence of any fact or event which
would be reasonably likely to cause any material covenant, condition or
agreement of -any party hereto under this Agreement not to be complied with or
satisfied in all material respects and (b) any failure of any party hereto to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder in any material respect; provided, however, that no
such notification shall affect the representations or warranties of any party or
the conditions to the obligations of any party hereunder.
SECTION 6.09 No Solicitation; Termination Right. (a) The Company agrees that, during the term of this Agreement it shall not. and shall not authorize support or encourage any of its Subsidiaries or any of its or its Subsidiaries directors, officers, employees, agents or representatives. directly or indirectly, to solicit, initiate, encourage, facilitate or furnish or disclose non-public information in furtherance of, any inquiries or the making of any proposal with respect to any recapitalization, merger, consolidation or other business combination involving the Company, or acquisition of any capital stock (other than upon exercise of the Options which are outstanding as of the dare hereof) or any portion of the assets (except for acquisition of assets in the ordinary course of business consistent with past practice) of the Company and its Subsidiaries, or any combination of the foregoing (a "Competing Transaction"), or negotiate, or otherwise engage in discussions with any person (other than Parent, the Purchaser or their respective directors, officers, employees, agents and representatives) for the purpose! of facilitating any Competing Transaction or enter into any agreement., arrangement or understanding requiring it to abandon, terminate or fail to consummate the Merger or any other transactions contemplated by this Agreement; provided that the Company shall use its reasonable best efforts to ensure that none of its Subsidiaries and none of its or its Subsidiaries' directors, officers, employees, agents or representatives, directly or indirectly, undertakes any such actions, and, if the Board learns of any such action, the Company shall take reasonable steps to cause the party undertaking such action to cease such action immediately or shall immediately terminate the Company's and/or any Subsidiary's employment or other relationship with any such director, officer, employee, agent or representative that breaches this Section 6.09; provided further that prior to the purchase of the Common Shares by the Purchaser pursuant to the Offer; the Company may furnish information to, and negotiate or otherwise engage in discussions with, any party who makes a bona fide proposal regarding a Competing Transaction which was not solicited by the Company after the date of this Agreement and which does not violate any Standstill Agreement if and so long as the Board after consultation with its counsel determines in good faith that failing to consider and cooperate with such other party regarding such Competing Transaction would constitute a breach of the fiduciary duties of the Board to the Company's stockholders under applicable law, and, provided further that in no event does the term "Competing Transaction" include a sale or other disposition of any of the assets specified on the Non-Coal Asset Schedule or that is otherwise specifically permitted hereunder. ne -35- Company shall and shall use its reasonable best efforts to cause its Subsidiaries, directors, officers, employees, agents and representatives immediately to cease all existing activities, discussions and negotiations with any parties conducted heretofore with respect to any Competing Transaction. The Company agrees that neither the Board of Directors nor any committee thereof will, during the period referenced in the first sentence of this subsection (a), (A) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to Parent or the Purchase, the Board Recommendation, or (B) approve or recommend, or propose publicly to approve or recommend, any Competing Transaction. The foregoing notwithstanding, in the event that prior to the purchase of Common Shares by the Purchaser pursuant to the Offer the Board of Directors after consultation with its counsel determines in good faith that failure to do so will result in breach of the fiduciary duties of the Board to the Company's stockholders under applicable law, the Board of Directors may (subject to this and the following sentences) withdraw or modify the Board Recommendation, provided that it gives Parent three days' prior written notice of its intention to do so. Any such withdrawal or modification of the Board Recommendation shall not change the approval of the Board of Directors for purposes of causing any state takeover statute or other state law to be inapplicable to the transactions contemplated hereby, including the Offer, the Merger or the Tender Commitments. The Company shall immediately advise Parent in writing of the receipt, directly or indirectly, of any inquiries, discussions, negotiations, or proposals relating to a Competing Transaction, which becomes known to the Board during the tent of this Agreement. The Company shall keep Parent fully apprised of the status and terms of any proposal relating to a Competing Transaction on a current basis. (b) If, prior to the purchase of Common Shares by the Purchaser pursuant to the Offer, the Board after consultation with its financial and legal advisors determines in good faith that any written proposal from a third party for a Competing Transaction received after the date hereof that was not solicited by the Company or any of its Subsidiaries or affiliates in violation of this Agreement (and that does not violate or breach any Standstill Agreement executed by such party with respect to the Company prior to the date of this Agreement) is more favorable to the stockholders of the Company from a financial point of view than the transactions contemplated by this Agreement (including any adjustment to the terms and conditions of such transaction proposed in writing by the Company in response to such Competing Transaction) and is in the best interest of the stockholders of the Company, the Company may terminate this Agreement at any time prior to the Offer Purchase Closing and enter into a letter of intent, agreement-in-principle, acquisition agreement or other similar agreement (each, an "Acquisition Agreement") with respect to such Competing Transaction provided that, the Company provides written notice of such termination to Parent at least three full business days prior to the effectiveness of such termination and, the Company delivers to Parent within five business days following such termination (A) by check or wire transfer of same day funds, (i) an amount equal to Parents Costs (as defined in Section 8.02) as the same may have been estimated by Parent in good faith prior to the date of such delivery (subject to an adjustment payment between the parties upon Parent's definitive determination of such costs), but in any event not to exceed $10,000,000, and (ii) the amount of the Termination Fee as provided in Section 8.02 and (13) a written acknowledgment from the Company and the other party to the Competing Transaction that the Company and such other party have irrevocably waived any right to contest such payments.
-36-
SECTION 6.10 Cooperation for Financing. The Company agrees that,
during the term of this Agreement it shall provide reasonable cooperation to the
Purchaser to facilitate the Purchaser's efforts to obtain the financing
contemplated by the Commitment Letters (including assisting the Purchaser in
obtaining required consents) and provide all information reasonably requested by
the Purchaser in connection with the Purchaser's efforts to satisfy the Offer
Financing Condition.
SECTION 6.11 Tender Commitments. The Company shall cause each of the Stockholders to execute a Tender Commitment. The Company shall not permit the amendment, modification, release under or otherwise lessen the obligations of the Stockholders under the Tender Commitments. The Company agrees to enforce fully and promptly all provisions of the Tender Commitments, including, without limitation. seeking specific performance of (or other equitable and legal remedies with respect to) each Stockholder's obligations under its Tender Commitment. ARTICLE VII CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.01 Conditions. The respective obligations of Parent, the
Purchaser and the Company to consummate the Merger are subject to the
satisfaction, at or before the Effective Time, of each of the following
conditions:
(a) Purchase of Common Shares. The Purchaser shall have accepted for payment and paid for Common Shares pursuant to the Offer in accordance with the tern s hereof; provided that this condition shall be deemed to have been satisfied with respect to Parent and the Purchaser if the Purchaser fails to accept for payment or pay for Common Shares pursuant to the Offer in violation of the terms of the Offer. (b) No Injunctions or Restrictions; Illegality. No (i) order or preliminary or permanent injunction shall be entered in any action or proceeding before any court of competent jurisdiction or any statute, rule, regulation, legislation, or order shall be enacted, entered, enforced, promulgated, amended or issued by any United States legislative body, court, government or governmental, administrative or regulatory authority or agency (other than the waiting period provisions of the HSR Act) which shall remain in effect and which shall have the effect of (x) making illegal or restraining or prohibiting the making of the Offer, the acceptance for payment of, or payment for, the Common Shares by Parent, the Purchaser or any other affiliate of Parent, or the consummation of the Offer or the Merger or (y) imposing material limitations on the ability of the Purchaser effectively to acquire or hold or exercise full fights of ownership of the Common Shares, including, without limitation, the right to vote the Common Shares purchased by the Purchaser on all matters properly presented to the stockholders of the Company; provided, that Parent, to the extent provided in this Agreement, shall, if necessary to prevent the taking of such action, or the enactment, enforcement, promulgation, amendment, issuance or application of any statute, rule, regulation, legislation, judgment., order or injunction, offer to accept an order to divest such of the -37- Company's or Parent's assets and businesses as may be necessary to forestall such in unction or order and to hold separate such assets and business pending such divestiture; (ii) proceeding brought by an administrative agency or commission or other domestic Governmental Entity seeking any of the foregoing shall be pending; or (iii) action or proceeding shall be commenced following the date of this Agreement and be pending before any court of competent jurisdiction which would have a Material Adverse Effect on the Company. ARTICLE VIII TERMINATION; AMENDMENTS; WAIVER
SECTION 8.01 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time prior to the Effective
Time, notwithstanding approval thereof by the stockholders of the Company (with
any termination by Parent also being an effective termination by the Purchaser):
(a) By the mutual written consent of Parent and the Company; (b) By the Company if (i) the Purchaser fails to commence the Offer as provided in Section 1.01 hereof or, (iii) the Purchaser fails to purchase validly tendered Common Shares in violation of the terms of the Offer or this Agreement; (c) By Parent or the Company if the Offer is terminated or withdrawn pursuant to its terms without any Common Shares being purchased thereunder; provided, however, that neither Parent nor the Company may terminate this Agreement pursuant to this Section 8.01 (c) if such party shall have materially breached this Agreement or, in the case of Parent, if it or the Purchaser is in material violation of the terms of the Offer. (d) By Parent or the Company if any court or other Governmental Entity shall have issued, enacted, entered, promulgated or enforced any order, judgment, decree, injunction, or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, judgment, decree, injunction, ruling or other action shall have become final and nonappealable; provided that the party seeking to terminate the Agreement shall have used its reasonable efforts to remove or lift such order, decree or ruling;
(e) By Parent or the Company if the Offer Financing Conditions shall
be impossible to satisfy by the end of the twentieth (20th) business day
following commencement of the Offer and by the Parent or the Company if any
other condition set forth in Annex I attached hereto shall be impossible to
satisfy by the end of the thirtieth (30th) business day following commencement
of the Offer unless such circumstance results from the failure of the
terminating party to perform in any material respect its obligations under this
Agreement, provided, however, that the Company may not terminate this Agreement
pursuant to this Section 8.01(e) if Parent waives in writing the relevant
condition (other than the Minimum Condition as defined in Annex I, which cannot
be waived);
-38- (f) By Parent if prior to the Offer Purchase Closing the Board shall have withdrawn or modified in a manner adverse to Parent, or refrained from making the Board Recommendation, or shall have publicly disclosed its intention to change such recommendation, or shall have failed to reaffirm the Board Recommendation within five (5) days of receipt from Parent or the Purchaser of a request to so reaffirm the Board Recommendation, in each case except due to Parent or Purchaser's material breach of this Agreement or material violation of the terms of the Offer; (g) By the Company. pursuant to and in accordance with Section 6.09(b); (h) By the Company in the event or any breach of the covenants and/or representations and warranties of Parent and Purchaser contained in this Agreement which has a material adverse effect on the consummation of the transactions contemplated by this Agreement; or (i) By Parent, if any Stockholder who holds more than five percent of the Shares shall have breached any of his, her or its obligations under the Tender Commitment.
SECTION 8.02 Effect of Termination; Fees and Expenses.
(a) In the event of the termination of this Agreement pursuant to Section 8.01, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party or its directors, officers or stockholders, other than the provisions of this Section 8.02 and the confidentiality provisions referenced in the first sentence of Section 6.02, which shall survive any such termination. Nothing contained in this Section 8.02 shall relieve any party from liability for any breach of this Agreement or the Confidentiality Agreement, and provided, further, however. that if it shall be judicially determined that termination of this Agreement was caused by an intentional breach of this Agreement then, in addition to other remedies at law or equity for breach of this Agreement, the party so found to have intentionally breached this Agreement shall indemnify and bold harmless the other parties for their respective costs, fees and expenses of their counsel, accountants, financial advisors and other experts and advisors as well as fees and expenses incident to negotiation, preparation and execution of this Agreement and the transactions contemplated hereby ("Costs"). If this Agreement is terminated pursuant to Section 9.01(t) or (g), the Company will within five business days following any such termination pay to Parent in cash by wire transfer in immediately available funds to an account designated by Parent (i) in reimbursement for Parent's expenses an amount equal to the aggregate amount of Parent's reasonable documented Costs incurred in connection with pursuing the transactions contemplated by this Agreement, including, without limitation, legal, accounting and investment banking fees, up to but not in excess of $10,000,000 in the aggregate and (ii) a payment in an amount equal to $18,000,000 (the "Termination Fee"). Purchaser shall terminate the Offer as soon as practicable following termination of this Agreement for any reason. -39- (b) The prevailing party in any legal action undertaken to enforce this Agreement or any provision hereof shall be entitled to recover from the other parry the costs and expenses (including attorneys' and expert witness fees) incurred in connection with such action.
SECTION 8.03 Amendment. Subject to Section 1.03(c), this Agreement
and the Offer may be amended by the Company, Parent and the Purchaser at any
time before or after any approval of this Agreement by the stockholders of the
Company but, after any the purchase of shares pursuant to the Offer, no
amendment shall be made which decreases the Merger Consideration or which
materially adversely affects the rights of the Company's stockholders hereunder
without the approval of such stockholders. This Agreement and the Offer may not
be amended except by an instrument in writing signed on behalf of all the
parties.
SECTION 8.04 Extension; Waiver. Subject to Section 1.03(c), at any time prior to the Effective Time, the parties hereto may (i) extend the time for the performance of any of the obligations or other acts of any other party hereto, (ii) waive any inaccuracies in the representations and warranties contained herein by any other party or in any document, certificate or writing delivered pursuant hereto by any other party or (iii) waive compliance with any of the agreements of any other party or with any conditions to its own obligations. Any agreement on the part of any 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. ARTICLE IX MISCELLANEOUS
SECTION 9.01 Non-Survival of Representations and Warranties. The
representations and warranties made in this Agreement shall not survive beyond
the Effective Time. Notwithstanding the foregoing, the agreements set forth in
Section 3.02, the last sentence of Section 6.02, Section 6.06 and Section 6.07 shall survive the Effective Time indefinitely (except to the extent a shorter period of time is explicitly specified therein). SECTION 9.02 Entire Agreement; Assignment. (a) This Agreement (including the documents and the instruments referred to herein) and the letter agreement dated March 62, 1998 between Credit Suisse First Boston Corporation and Addington Enterprises Inc. (the "Confidentiality Agreement"), constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof. (b) Neither this Agreement nor any of the rights, interests or obligations hereunder will be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other party; provided however that after the Effective Time Parent and/or the Purchaser may, without the consent of the Company, (i) assign their rights under this Agreement
-40-
to any of their respective Affiliates, or (ii) collaterally assign their rights under this Agreement to the lender of Parent or the Purchaser. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.
SECTION 9.03 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, each of which shall remain in full force
and effect
SECTION 9.04 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by overnight courier or facsimile to the respective parties as follows: If to Parent or the Purchaser:
AE1 Resources, Inc.
With a copy to:
Brown, Todd & Heyburn PLLC
If to the Company:
Zeigler Coal Holding Company
Attention: Brent L. Motchan, Esq.
Fax: 618-394-2518
-41-
with a copy to:
Kirkland & Ellis
or to such other address as the person to whom notice is given may have previously furnished to the other in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof).
SECTION 9.05 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof or otherwise.
SECTION 9.06 Descriptive Headings. The descriptive headings herein are inserted far convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. SECTION 9.07 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. SECTION 9.08 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and, except with respect to Sections 2.03(d), 3.01, 3.02 and 6.07 nothing in this Agreement express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 9.09 Specific Performance. The parties hereto 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 hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. -42- ARTICLE X DEFINITIONS
SECTION 10.0 Certain Definitions. As used in this Agreement:
"Active Operating Properties and Reserves" means all property included in mining permits currently issued to the Company or any of its Subsidiaries or which will be issued prior to the Closing. "Acquisition Agreement" has the meaning given thereto in Section 6.09(b) hereof. "Affiliate", as applied to any person, shall mean any other person directly or indirectly controlling, controlled by, or under common control with, that person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" has the meaning given thereto in the preamble hereof. "Antitrust Laws" has the meaning given thereto in Section 6.04(b) hereof. "Board" has the meaning given thereto in the recitals hereof. "Board Recommendation" has the meaning given thereto in Section 1.02(a) hereof. "Certificates" has the meaning given thereto in Section 3.02 hereof. "Closing" has the meaning given thereto in Section 2.02 hereof. "Closing Date" the meaning given thereto in Section 2.02 hereof "Code" has the meaning given thereto in Section 4.17(a) hereof.
"Commitment Letter" has the meaning given thereto in Section 5.05
hereof.
"Common Share" and "Common Share" have the meaning given thereto in the recitals hereof. "Company" has the meaning given thereto in the first paragraph hereof. -43-
"Company's Knowledge" and words of similar import shall mean actual
knowledge of a particular fact being known by any of (i) the current serving
directors of the Company, (ii) or any of the following officers of the Company:
Chand B. Vyas, Douglas Blackburn, Frank Barkofske and Brent Motchan, (iv) with respect to labor and employment matters, David Young; (iv) with respect to information concerning any Subsidiary, division or business unit of the Company, the president or most senior executive of such Subsidiary, and (v) any person succeeding to the position currently of any of the persons indicated in clauses (ii), (iii) and (iv) above. "Company Representatives" has the meaning given thereto in Section 6.02 hereof. "Competing Transaction" has the meaning given thereto in Section 6.09(a) hereof. "Confidentiality Agreement" has the meaning given thereto in Section 9.02(a) hereof. "Consent" has the meaning given thereto in Section 4.05(b) hereof. "Costs" has the meaning given thereto in Section 8.02 hereof. "CSFB" has the meaning given thereto in Section 1.02(a) hereof.
"December Balance Sheet" has the meaning given thereto in Section
4.06(b) hereof.
"Disclosure Schedules" shall mean all of the separate schedules referred to in Article IV and all Supplemental Schedules taken together. "Dissenting Shares" has the meaning given thereto in Section 3.01 hereof. "Effective Time" has the meaning given thereto in Section 2.02 hereof. "Employee Arrangements" has the meaning given thereto in Section 6.06 hereof. "Environmental Mining and Safety Requirements" means all federal, state and local statutes, regulations, notices of violations, abatement orders, closure orders, ordinances, permits, judicial and administrative orders and determinations, and similar provisions having the force and effect of law, and all common law concerning public health and safety, worker health and safety, mine health or safety, surface and underground mining, mineral processing or transport, mine reclamation, pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, release, runoff, containment, control, or cleanup of any Hazardous Substances, Oils. Pollutants or Contaminants (as such terms as defined in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. 300.5), and any mining wastes or byproducts as the foregoing are enacted and in effect an or prior to the date hereof -44-
"ERISA" has the meaning given thereto in Section 4.17(a) hereof.
"Exchange Act" has the meaning given thereto in Section 4.05 (b) hereof. "Expiration Date" has the meaning given thereto in Section 1.01. "GAAP" has the meaning given thereto in Section 4.06(b) hereof.
"GCL" has the same meaning given thereto in the recitals hereof
"Government Entity" has the meaning given thereto in Section 4.05(b)
hereof.
"HSR Act" has the meaning given thereto in Section 4-05(b) hereof. "Indemnified Parties" the meaning given thereto in Section 6.07(a) hereof. "Information Memorandum" means that certain Offering Memorandum. dated February, 1998, prepared by CSFB regarding the Company and its Subsidiaries. "Intellectual Property" has the meaning given thereto in Section 4.13 hereof. "Joint Development Agreement" has the meaning given thereto in Section 6.01(j). "June Balance Sheet" has the meaning given thereto in Section 4.06(b). "Liens" means liens, security interests, options, rights of first refusal, casements, mortgages, charges, pledges, deeds of trust, rights-of-way, restrictions, encroachments, licenses, leases, permits, security agreements, or any other encumbrances, restrictions or limitations on the use of real or personal property, whether or not they constitute specific or floating charges. "March Balance Sheet" has the meaning given thereto in Section 4- 06(b). "Material Adverse Effect on the Company" has the meaning given thereto in Section 4.01 hereof. "Material Contract" has the meaning given thereto in Section 4.12(a). "Merger" as the meaning given thereto in the recitals hereof. "Merger Consideration" has the meaning given thereto in Section 2.05 hereof. "Mining Permits" as the meaning given thereto in Section 4.14 hereof. -45-
"Multiemployer Plan" has the meaning given thereto in Section 4.17(f)
hereof.
"Non-Mining Assets" means the operations and business of the Company and its Subsidiaries and any assets related thereto that are described on the Non-Mining Assets Schedule attached hereto. "Offer" has the meaning given thereto in the recitals hereof. "Offer Documents" has the meaning given thereto in Section 1.01 (a) hereof. "Offer Price" has the meaning given thereto in the recitals hereof. "Offer Purchase Closing" has the meaning given thereto in Section 1.01 (a) hereof. "Offer to Purchase" has the meaning given thereto in Section 1.01 (a) hereof. "Operating Facilities" means any real property rights owned, leased or otherwise controlled by the Company or any of its subsidiaries where the Company or any of its Subsidiaries has facilities currently used in the coal mining business including office and administrative buildings, mine openings, air shafts, preparation and processing plants, slurries and gob disposal areas, retention and drainage ponds, unfinished reclamation areas, coal terminals, and coal loading and storage facilities.. "Option" has the meaning given thereto in Section 1.04 hereof. "Option Plan" has the meaning given thereto in Section 1.04 hereof. "Other Filings" has the meaning given thereto in Section 4.07 hereof. "Other Real Property" means any real property rights owned, leased or otherwise controlled by the Company or any of its Subsidiaries other than "Active Operating Properties and Reserves" and "Operating Facilities." "Parent" has the meaning given thereto in the first paragraph hereof. "Parent Representatives" has the meaning given thereto in Section 6.02 hereof. "Paying Agents" has the meaning given thereto in Section 3.02 hereof. "Pension Plan" has the meaning given thereto in Section 4.17(a) hereof. "Permitted Encumbrances" has the meaning given thereto in Section 4.09 hereof. -46-
"Person" or "person" shall include individuals, corporations,
partnerships, trusts, other entities and groups (which term shall include a
"group" as such term is defined in Section 13 (d)(3) of the Exchange Act).
"Permits" has the meaning given thereto in Section 4.15 hereof. "Plans" has the meaning given thereto in Section 4.17(a) hereof. "Proxy Statement" has the meaning given thereto in Section 2.08 (a)(ii) hereof. "Purchaser" has the meaning given thereto in the first paragraph hereof. "Release" has the meaning given thereto in Section 4.20(d) hereof. "SBS Plan" has the meaning given thereto in Section 1.04. "Schedule 14D-9" has the meaning given thereto in Section 1.02(a). "SEC" has the meaning given thereto in Section 1.01 hereof.
"SEC Reports" has the meaning given thereto in Section 4.06(a) hereof.
"SMCRA" has the meaning given thereto in Section 3.24 hereof. "Special Meeting" has the meaning given thereto in Section 2.09(a)(1) hereof. "Standstill Agreement" has the meaning given thereto to in Section 6.01 (k). "Stockholder" each or any of Kinman Limited Partnership, Michael K. Reilly, Chand B. Vyas, Roland E. Casati and John F. Manley, and such person collectively are referred to as the "Stockholders." "Subsidiary" or "Subsidiaries" has the meaning given thereto in Section 4.01 hereof. "Surviving Corporation" has the meaning given thereto in Section 2.01 hereof. "Taxes" mean any federal, state, local, or foreign income, gross receipts, license. payroll, employment, excise, severance, stamp, occupation, premium, windfall profits. environmental (including taxes under Code (S) 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property. sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest penalty, or addition thereto, whether disputed or not. -47-
"Tax Returns" means any return, declaration, report. estimate, claim
for refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Tender Commitment" means each of those certain Support Agreements, dated the date hereof, by and between the Company and each of the Stockholders, and such agreements collectively are referred to as the "Tender Commitments." "Violation" has the meaning given them-to in Section 4.05(a) hereof. "Welfare Plans" has the meaning given thereto in Section 4.17(a) hereof. * * * *
-48-
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its responsive officer thereunto duly authorized, all as of the day and year first above written. AEI RESOURCES, INC.
ZEIGLER ACQUISITION CORPORATION
ZEIGLER COAL HOLDING COMPANY
By:
Name: Title:
-49-
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its responsive officer thereunto duly authorized, all as of the day and year first above written. AEI RESOURCES, INC.
ZEIGLER ACQUISITION CORPORATION
ZEIGLER COAL HOLDING COMPANY
-50-
ANNEX I
Conditions to the Offer. Notwithstanding any other provisions of the Offer, the Purchaser shall not be required to accept for payment or pay for any tendered Common Shares, unless (1) there are validly tendered and not properly withdrawn prior to the Expiration Date that number of Common Shares which represent at least 90% of the total number of outstanding Common Shares on a fully diluted basis (excluding options tendered for cancellation under Section 1.04) on the date of purchase (the "Minimum Condition"), and (ii) the Purchaser shall have obtained, as contemplated by the Commitment Letters, on terms that are not less favorable to Parent and the Purchaser (or from such alternative financing sources on terms and conditions that are not less favorable to Parent and the Purchaser than those contemplated by the Commitment Letters), the funds necessary for the consummation of the transactions contemplated by the Merger Agreement, including the purchase of all of the Common Shares tendered in the Offer, payment of the Merger Consideration with respect to all Common Shares, all payments with respect to Options and all related costs and expenses (the "Offer Financing Condition"). Furthermore, notwithstanding any other provisions of the Offer, the Purchaser shall not be required to accept for payment and may; subject to the terms of the Merger Agreement, amend the Offer, postpone the acceptance for payment of or payment for tendered Common Shares or terminate the Offer and not accept for payment any Common Shares if at any time on or after the date of the Merger Agreement (unless otherwise indicated below) and before the time of payment for any Common Shares, any of the following events (each, an "Event") shall occur: (a) (i) The waiting period applicable to the Offer or the Merger pursuant to the provisions of the HSR Act and any applicable foreign or supranational Antitrust Laws shall fail to have expired or to have been terminated; or (ii) action by the Department of Justice or Federal Trade Commission or any foreign or supranational agency or entity charged with enforcement of Antitrust Laws that are applicable to the transactions contemplated hereby challenging or seeking to enjoin the consummation of the Offer or the Merger shall have been instituted and be pending; or (b) Any order or preliminary or permanent injunction shall be entered in any action or proceeding before any court of competent jurisdiction or any statute, rule, regulation, legislation. or order shall be enacted, entered, enforced, promulgated, amended or issued by any United States legislative body, court, government or governmental, administrative or regulatory authority or agency (other than the waiting period provisions of the HSR Act) which shall remain in effect and which shall have the effect of (x) making illegal or restraining or prohibiting the making of the Offer, the acceptance for payment of, or payment for, the Common Shares by Parent, the Purchaser or any other affiliate of Parent, or the consummation of the Offer or the Merger or (y) imposing material limitations on the ability of the Purchaser effectively to acquire or hold or exercise full rights of ownership of the Common Shares, including. without limitation, the right to vote the Common Shares purchased by the Purchaser on all matters properly presented to the stockholders of the Company; provided, that Parent, to the extent provided in the Merger Agreement, shall, if necessary to prevent the taking of such action, or the enactment, enforcement, promulgation, amendment, issuance or application of any statute, rule, regulation, legislation, judgment, order or injunction, offer to accept an order to divest such of the Company's or Parent's assets and businesses as may be necessary to
I-1
forestall such injunction or order and to hold separate such assets and business pending such divestiture; (ii) any proceeding brought by am administrative agency or commission or _______ domestic Governmental Entity seeking any of the foregoing shall be pending, or (iii) any action or proceeding shall be commenced following the date of the Merger Agreement and be pending before any court of competent jurisdiction which would have a Material Adverse Effect on the Company; or (c) The Company and the Purchaser and Parent shall have reached an agreement that the Offer or the Merger Agreement be terminated, or the Merger Agreement shall have been terminated in accordance with its terms; or (d) The Company or any of its Subsidiaries shall have breached one or more of its representations and warranties set forth in the Merger Agreement or failed to perform any of its obligations, covenants or agreements under the Merger Agreement and such breaches or failures to perform shall in the aggregate materially and adversely affect the ability of Parent to own or control the Company, its equity securities and its assets; or (e) On or after the date of the Merger Agreement any Material Adverse Effect on the Company shall I have occurred or be occurring; or
(f) The representations and warranties set forth in Section 4.03 or
The Offer shall terminate if the Merger Agreement is terminated pursuant to its terms. Pursuant to the Merger Agreement, Parent and Purchaser have agreed to use their respective reasonable best efforts to obtain financing for the Offer and to cause all other conditions to be fulfilled. The foregoing conditions are for the benefit of Parent and the Purchaser and may be asserted by Parent or the Purchaser regardless of the circumstances giving rise to any such conditions and may be waived by Parent or the Purchaser in whole or in part at any time and from time to time in their reasonable discretion, in each case, subject to the terms of the Merger Agreement. The failure by Parent or the Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such Right shall be deemed an ongoing Tight which may be asserted at any time and from time to time. The capitalized terms used in this Annex I shall have the meanings set forth in the Agreement to which it is annexed, except that the term "Merger Agreement" shall be deemed to refer to the Agreement to which this Annex I is appended.
I-2
INTRODUCTION Reference is made to the Agreement and Plan of Merger Agreement (the "Agreement"), dated as of August 3, 1998 among Zeigler Coal Holding Company, a Delaware corporation (the "Company"), Coal Ventures, Inc., a Delaware corporation ("Parent") and Zeigler Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent ("Purchaser"). Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in the Agreement. The following Schedules were prepared by the Company on August 3, 1998 based upon information reasonably available to the Company as of such date. The following Schedules are subject in their entirety to revision and supplementation following such date and at any time prior to the Closing. As revised and supplemented, the following schedules are the "Disclosure Schedules" referred to in the Agreement. The Disclosure Schedules are qualified in their entirety by reference to specific provisions of the Agreement, and are not intended to constitute, and shall not be construed as constituting, representations or warranties of Seller except as and to the extent provided in the Agreement. Inclusion of information herein shall not be construed as an admission that such information is material to the operations or financial condition of the Company or its Subsidiaries. Matters reflected in the Disclosure Schedules may not necessarily be limited to matters strictly required by the Agreement to be reflected in the Disclosure Schedules. To the extent that any such additional matters are included they are included for information purposes only. No inference should be made that all matters of a similar nature are so included in the same or any other Schedule. Headings have been inserted on the sections of the Schedules for convenience of reference only and shall not to any extent have the effect of amending or changing the express description of the Schedules as set forth in the Agreement. To the extent that any disclosure set forth in any particular Schedule is applicable to the disclosure required by any other Schedule included in the Disclosure Schedules, such disclosure shall for purposes of the Agreement be deemed to be made on all relevant Schedules. The information contained herein is in all events subject to the Confidentiality Agreement.
Ziegler Coal Holding Company
(vii) Coal sales agreements > $3 MM
Zeigler Coal Holding Company
1. The Assets related to the business conducted by EnerZ Corporation, a Delaware corporation, including the capital stock of such corporation. 2. The Assets related to the TEK-Coal Joint Venture ("Encoal") including the Company's equity interest in such joint venture. 3. Any parcel or parcels of real property that are not directly used in coal mining activities with a value not exceeding $2,million individually or $10 million in the aggregate. 4. Phoenix Land Company is currently negotiating three transactions to dispose of mined out properties at Old Ben Mine #24, Old Ben Mine #26 and La Myra (R&F) in return solely for the assumption of reclamation liabilities. The aggregate liabilities to be assumed by the purchasers is approximately of $5 million. 5. Phoenix Land Company is currently negotiating to sell 226 acres of surface land located east of Evansville, Indiana. The anticipated selling price is $2.0 to 2.3 million. Exhibit 2.6
STOCK PURCHASE AGREEMENT
This is a Stock Purchase Agreement, dated September 2, 1998 (this "Agreement"), among (i) West Virginia-Indiana Coal Holding Company, Inc., a Delaware corporation ("Purchaser"); and (ii) Ronnie G. Dunnigan, Gary L. Barker, the Gary Lynn Barker Trust, the Tawnya Ann Barker Trust, the Steffanie April Francis Green Trust, the Samuel Aaron Francis Trust, Royce K. Traylor, Carl D. Heldt, Jack C. Fowler, Daniel R. Rambo, David R. Adams and Harry W. Hearn (collectively, the "Shareholders"), who are the Shareholders of Kindill Holding, Inc. (the "Company").
RECITALS
A. The Company is engaged in the business of mining coal in Indiana. B. The Shareholders collectively own one hundred percent (100%) of the issued and outstanding shares of the capital stock of the Company (the "Shares") in the following amounts:
C. The Shareholders wish to sell, and Purchaser wishes to purchase, all of the pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual benefits and covenants contained herein, and subject to the terms and conditions set forth herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS 1.1 Definitions. As used in this Agreement, the following terms shall ha following meanings: (a) "Affiliate" of any Person shall mean (i) a Person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is controlled by a Person that controls, such Person; (ii) any trust or estate in which such Person has a beneficial interest or as to which such Person serves as a trustee or in another fiduciary capacity; and (iii) any spouse, parent or lineal descendent of such Person. As used in this definition, "control" shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies, whether through ownership of securities, partnership or other ownership interests, by contract or otherwise. (b) "Agent" shall mean Ronnie G. Dunnigan in his capacity as agent for the Shareholders as provided in Section 12. 1 (c). (c) "Approval" shall mean each and every authorization , approval, consent, license, filing and registration by, with or from any nation or state or other political subdivision thereof or by or with any regulatory or governmental authority of any nation or state or other political subdivision thereof or by or with any regulatory or governmental authority of any nation or state or other political subdivision thereof or international organization, self regulatory organization or stock exchange, necessary to authorize or permit the execution, delivery or performance of this Agreement or any other document contemplated hereby or for the validity enforceability hereof or thereof. (d) "AWW" shall have the meaning given in Section 3.6 (e) "Bassco Option" shall mean the option held by Bassco Valley, LLC to purchase unissued shares of the common stock of the Company representing Fifty-Eight and One Tenth percent (58. 1 %) of the outstanding shares of common stock of the Company on a fully diluted basis currently held by the Shareholders. (f) "Bonds" shall have the meaning given in Section 3.34(b). (g) "Business Days" shall have the meaning given in Section 1.3(i).
(h) "CERCLA" shall mean the Comprehensive Environmental Response,
Compensation & Liability Act, 42 USC (S)(S) 9601, et seg. and "CERCLIS" shall
mean the Comprehensive Environmental Response, Compensation and Liability
Information System.
(i) "Charges" shall have the meaning given in Section 3.3. (j) "Closing" shall mean the consummation of the transactions contemplated in this Agreement in accordance with the provisions of Article 9. (k) "Closing Date" shall have the meaning given in Section 7.8 (l) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(m) "Controlled Group Liability" shall mean any and all liabilities
2
as a result of a failure to comply with the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code, and (v) under corresponding or similar provisions of foreign laws or regulations, other than such liabilities that arise solely out of, or relate solely to, the Employee Benefit Plans. (n) "Employee Benefit Plan" shall mean any employee benefit plan, program, policy, practices or other arrangement providing benefits to any current or former employee, officer or director of the Company or the Subsidiary or any beneficiary or dependent thereof that is sponsored or maintained by the Company or the Subsidiary or to which the Company or the Subsidiary contributes or is obligated to contribute, whether or not written, including, without limitation, any employee welfare benefit plan within the meaning of Section 3(l) of ERISA, any employee pension benefit plan within the meaning of Section 3(2) of ERISA (whether or not such plan is subject to ERISA) and any bonus, incentive, deferred compensation, vacation, stock purchase, stock option, severance, employment, change of control or fringe benefit plan, program or agreement, and "Employee Benefit Plans" means all such plans, programs, policies, practices and arrangements, collectively. (o) "Environmental, Mining and Safety Requirements" shall mean all federal, state and local statutes, regulations, ordinances, permits, judicial and administrative orders and determinations, and similar provisions having the force and effect of law, all contractual obligations and all common law concerning public health and safety, worker health and safety, mine health or safety, surface and underground mining, mineral processing or transport, mine reclamation, pollution or protection of the environment, including, without limitation, all those relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, release, runoff, containment, control, or clean-up of any Hazardous Substances, Oils, Pollutants or Contaminants (as such terms are defined in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. (S) 300.5) and any mining wastes or byproducts. (p) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended and all regulations promulgated thereunder as in effect from time to time. (q) "ERISA Affiliates," with respect to any entity, trade or business that is a member of a group described in Section 414(b), (c), (in) or (o) of the Code or Section 4001(b)(1) of ERISA that includes the first entity, trade or business or that is a member of the same "controlled group" as the first entity, trade or business pursuant to Section 4001(a)(14) of ERISA. (r) "Financial Statements" shall have the meaning given in Section 3.7(a), copies of the Financial Statements being attached hereto as Annex 1.1(p). (s) "GAAP" shall mean generally accepted accounting principles in effect from time to time. (t) "Hayman Agreement" shall mean that certain Stock Purchase Agreement dated September 2, 1998, between Hayman Holdings, Inc. and Purchaser pursuant to which
3
Purchaser shall acquire all the outstanding capital stock of Hayman Holdings, Inc. and thereby acquire the Bassco Option. (u) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the regulations and Pre-merger Notification and Report Form promulgated thereunder. (v) "Instrument" shall mean any written agreement, contract, arrangement, mortgage, indenture, obligation or commitment. (w) "Intellectual Property" shall mean trade names, trademarks or service marks, together with the good will associated therewith; copyrights; pending or issued registrations for any of the foregoing; patents and patent applications; unpatented inventions; trade secrets and other confidential or proprietary information, computer programs, processes, formulas and methods; and all other intangible property rights of any kind. (x) "IRS" shall mean the Internal Revenue Service. (y) "Kindill Mining" shall mean Kindill Mining, Inc. an Indiana corporation. (z) "Kindill Permits" shall have the meaning given in Section 3.34(a). (aa) "Leased Real Property" shall have the meaning given in Section 3.27(a). (bb) "Leased Tangible Assets" shall have the meaning given in Section 3.12(b). (cc) "Liabilities" (whether or not capitalized) shall mean all accounts payable, notes payable, liabilities, commitments, indebtedness or obligations of any kind whatsoever, whether absolute, accrued, contingent, matured or unmatured, of the Company, or to which any property or assets of the Company are subject. (dd) "Licenses" shall have the meaning given in Section 3. 11. (ee) "Loss" shall have the meaning given in Section 10-2. (ff) "Material" (whether or not capitalized) shall include any matter which might influence Purchaser's decision to consummate the transactions contemplated herein. (gg) "Material Adverse Effect" shall mean an effect, event, occurrence or state of facts that, individually or when aggregated with other effects, events, occurrences or states of facts, is materially adverse to (i) the assets, business, property, results of operations, condition (financial or otherwise) or prospects of the specified entity and its subsidiaries taken as a whole, (ii) the ability of the specified entity to perform its obligations under this Agreement or any of the Other Documents, or (iii) the validity or enforceability of this Agreement or any of the Other Documents or, when used with respect to the Company, the material rights or remedies of Purchaser thereunder (in any capacity).
4
(hh) "Mid-Year Balance Sheet" shall have the meaning given in Section 3.7(a). (ii) "Multi-employer Plan" shall mean any "multi-employer plan" within the meaning of Section 4001(a)(3) of ERISA. (jj) "Notices" shall have the meaning given in Section 12.1. (kk) "Other Documents" shall mean the Royalty Termination Agreement and all other agreements, certificates, opinions, Instruments or documents contemplated by, required by or referred to in, this Agreement for the consummation of the transactions contemplated hereby. (ll) "Owned Real Property" shall have the meaning given in Section 3.27(b). (mm) "Owned Tangible Assets" shall have the meaning given in Section 3.12(a).
(nn) "Permitted Charges" shall mean (i) Charges for taxes and
assessments or governmental charges not yet due or which are being contested in
good faith and by appropriate proceedings and for which adequate reserves have
been established and which are accurately reflected in the Financial Statements;
(oo) "Permits" shall have the meaning given in Section 3.34(a). (pp) "Person" shall mean any person, firm, trust, partnership, corporation or other business entity. (qq) "Plan" shall mean any Employee Benefit Plan other than a Multi employer Plan. (rr) "Purchase Price" shall have the meaning given in Section 2.2. (ss) "Qualified Plans" shall have the meaning given in Section 3.21(c).
5
(tt) "Real Property" shall mean the Owned Real Property and the Leased Real Property, collectively.
(uu) "Related Party Transactions" shall have the meaning given in
(vv) "Return" shall mean any tax return, statement, report or form (including) estimated tax returns and reports and information returns and reports) required to be filed with any Taxing Authority with respect to Taxes. (ww) "Rules" shall have the meaning given in Section 11.4. (xx) "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as the same may be amended from time to time.
(yy) "Shareholders' knowledge" shall have the meaning given in
(zz) "SMCRA" shall mean the Surface Mining Control and Reclamation Act of 1977, as amended. (aaa) "Subsidiary" shall mean Kindill Mining and AWW, collectively. (bbb) "Tax" or "Taxes" shall mean any income, alternative or add-on, ad valorem, transfer, withholding, franchise, profits, license, payroll, employment, excise, severance, stamp, occupation, premium, property, land value increment, environmental or windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever imposed on the Company or its Subsidiary and together with any interest or any penalty, addition to tax or additional amount imposed with respect to any interest or any penalty, addition to tax or additional amount imposed with respect to any of the foregoing taxes by any Taxing Authority. (ccc) "Taxing Authority" shall mean any U.S. federal, state, local or foreign governmental authority responsible for the imposition of any relevant Tax. (ddd) "Royalty Termination Agreement" shall mean the agreement among the Company, Kindill Mining, Power Equity Sales, LLC and Sam Francis, dated September 2, 1998, terminating the Exclusive Sales Agreement, dated October 1, 1997, among the Company, Kindill Mining and Power Equity Sales, LLC!, attached hereto as Annex 1.1 (ddd). (eee) "Withdrawal Liability" shall mean liability to a Multi-employer Plan as a result of a complete or partial withdrawal from such Multi-employer Plan.
1.2 Additional Terms. Other capitalized terms used in this Agreement but
not defined in Section 1.1 above shall have the meanings ascribed to them
wherever such terms first appear in this Agreement; or, if no meanings are so
ascribed, the meanings customarily associated with such terms in the coal mining
industry.
6
1.3 Rules of Interpretation.
(a) The singular includes the plural and the plural includes the singular. (b) The word "or" is not exclusive. (c) A reference to a Person includes its permitted successors and permitted assigns. (d) Except as otherwise defined herein, accounting terms have the meanings assigned to them by generally accepted accounting principles, as applied by the accounting entity to which they refer. (e) The words "include," "includes" and "including" are not limiting. (f) A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document. (g) References to any document, Instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, Instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, Instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. (h) The words "hereof," "herein" and "hereunder" and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document. (g) References to "days" shall mean calendar days, unless the term "Business Days" shall be used. "Business Days" shall mean all days other than any Saturday, Sunday or legal holiday in Kentucky. (h) This Agreement and the Other Documents are the result of negotiations among, and have been reviewed by, Purchaser and the Shareholders. Accordingly, this Agreement and the Other Documents shall be deemed to be the product of all parties thereto, and no ambiguity shall be construed in favor of or against any party.
ARTICLE 2
PURCHASE AND SALE 2.1 PURCHASE OF THE SHARES. Subject to the terms and conditions of this Agreement, the Shareholders hereby agree to sell, transfer and deliver to Purchaser, and Purchaser hereby agrees to purchase, the Shares.
7
2.2 Purchase Price. The purchase price (the "Purchase Price") for the
Shares shall be Three Million Eight Hundred Eight Thousand Four Hundred Twenty-
Five Dollars ($3,808,425.00), which shall be paid to the Shareholders by wire
transfer of immediately available funds.
2.3 Allocation of Purchase Price. The Shareholders agree to allocate the Purchase Price with respect to the Shares among themselves as provided in Schedule 2.3 attached hereto. The parties agree to file any and all applicable Tax Returns and other required tax schedules in accordance with such allocation and Code Section 1060 and will not adopt or otherwise assert tax positions inconsistent therewith. The parties each shall prepare and file completed Form 8594 for the taxable year in which the Closing takes place, which form shall be consistent with the requirements set forth in this Section 2.3. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS The Shareholders, jointly and severally, represent and warrant to Purchaser that to the best of the knowledge of each of the Shareholders (except with respect to the representations and warranties contained in Sections 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6, which shall not be qualified with respect to the knowledge of any Shareholder) as of the date hereof and as of the Closing Date:
3.1 Organization, Power, Authority, Etc.
(a) The Company is validly organized and existing and in good standing under the laws of the Commonwealth of Kentucky and the Subsidiary is validly organized and existing and in good standing under the laws of the State of Indiana. Each of the Company and the Subsidiary is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary except for such failures to be so qualified as would not, individually or in the aggregate, have a Material Adverse Effect on the Company, and it has full corporate power and authority to own and hold under lease its property and to conduct its business substantially as presently conducted by it, except for such failures to have power and authority as could not reasonably be expected to have a Material Adverse Effect on the Company. Schedule 3.01 lists the jurisdictions in which each of the Company and the Subsidiary is qualified to do business. (b) The corporate minute books of the Company and the Subsidiary correctly reflect all corporate actions taken by the Company's and the Subsidiary's directors and shareholders, and correctly record all resolutions adopted by them. All corporate actions required of the Company and the Subsidiary have been taken, and all reports or returns required to be filed by the Company and the Subsidiary have been filed. Each of the Company and the Subsidiary has full power and authority to enter into and perform its obligations under this Agreement and each Other Document.
8
3.2 Due Authorization.
(a) The Shareholders have full right, power, authority, and capacity to execute and deliver this Agreement and the Other Documents, and to perform their respective obligations under this Agreement and the Other Documents.
(b) Except as set forth on Schedule 3.2, the execution, delivery and
performance by the Company and the Subsidiary of this Agreement and each of the
Other Documents, as the case may be, including each of the transactions
contemplated hereby and thereby: (1) have been duly authorized by all necessary
proceedings on the part of the Company and the Subsidiary, as the case may be;
(2) do not require any Approval which has not been obtained or will not be obtained prior to the Closing Date; (3) will not conflict with or result in any violation of, any provision of the certificate of incorporation and by-laws (or any equivalent organizational documents) of the Company or the Subsidiary, as the case may be; (4) do not and will not conflict with any provision of any Material Instrument of the Company or the Subsidiary or any present law or governmental. regulation applicable to the Company or the Subsidiary, or their assets, properties or operations or any court decree or order applicable to the Company or the Subsidiary, or their assets, properties or operations; (5) do not and will not result in or require the creation or imposition of any Charges on any of the properties of the Company or the Subsidiary; and (6) do not require any notices, filings or authorizations to be given, filed or obtained from any governmental authority other than notices required under the HSR Act. 3.3 Title to Stock. The Shareholders have, and at the Closing will have, good and marketable (legal and beneficial) title to the Shares, free and clear of all liens, pledges, proxies, voting trusts, licenses, security interests, easements, rights-of-way, use restrictions, options, title defects, mortgages, claims, charges, restrictions or encumbrances of any kind or nature whatsoever (collectively, "Charges"), and there are no outstanding purchase agreements, options (other than the Bassco Option), warrants or other rights of any kind whatsoever entitling any Person to purchase or acquire an interest in any of the Shares or restricting their transfer in accordance with this Agreement. Each Shareholder owns of record and beneficially the Shares set forth by his name in Recital B. Upon delivery of the certificates representing the Shares, and upon receipt of the Purchase Price, good and valid title to the Shares will pass to Purchaser, free and clear of all Charges. 3.4 Validity, Etc. Assuming due execution as necessary by Purchaser, this Agreement and each Other Document executed by the Shareholders, the Company or the Subsidiary in accordance herewith constitutes the legal, valid and binding obligations of each such Person executing such document enforceable in accordance with its respective terms. 3.5 Capitalization of the Company.
(a) As of the date hereof, the authorized capital stock of the Company
consists of thirty thousand (30,000) shares of common stock, par value ten cents
9
for the Bassco Option, or (C) obligations of the Company to issue such shares, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. No person has preemptive or similar rights with respect to the securities of the Company. There are no obligations of the Company or the Subsidiary to vote or to repurchase, redeem or otherwise acquire, or to register under the Securities Act, any shares of capital stock of the Company or the Subsidiary. (b) Except as set forth on Schedule 3.5, all of the outstanding capital stock of the Company has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Shareholders, free and clear of any Charges of any kind, there are no rights granted to or in favor of any third party, other than the Company, to acquire any such capital stock, any additional capital stock or any other securities of the Company (including securities convertible into or exchangeable for capital stock), and there exists no restriction on the payment of cash dividends by the Company.
3.6 Subsidiaries. Kindill Mining is the only direct subsidiary of the
Company. Kindill Mining owns one-half of the issued and outstanding capital
stock of AWW. The other one-half interest in AWW is owned by Norfolk Southern
Railway Company, which operates and manages AWW. All of the issued and
outstanding capital stock of Kindill Mining has been duly authorized and validly
issued, is fully paid and non-assessable and is owned by the Company free and
clear of any Charges of any kind. All of the issued and outstanding capital
stock of AWW has been duly authorized and validly issued, is fully paid and non-
assessable and the shares of AWW which are owned by Kindill Mining are free and
clear of any Charges of any kind. There are no rights granted to or in favor of
any third party, other than the Company, to acquire any such capital stock, any
additional capital stock or any other securities in the Subsidiary (including
securities convertible into or exchangeable for capital stock), and there exists
no restriction on the payment of cash dividends by the Subsidiary. Except for
the Company's interest in Kindill Mining and Kindill Mining's interest in AWW,
neither the Company nor Kindill Mining or AWW owns or controls, directly or
indirectly, any capital stock of any other corporation or any interest in any
other Person.
3.7 Financial Statements. (a) The audited consolidated balance sheets of the Company as of December 31, 1997 and 1996 and the related combined statements of operations and cash flow of the Company for the years. then ended, and the unaudited combined balance sheet of the Company as of June 30, 1998 (the "Mid-Year Balance Sheet") and the statements of operations and cash flow of the Company for the six months then ended are set forth as Annex 3.7, said unaudited statements being without footnotes (all of such balance sheets and related statements, collectively, the "Financial Statements"). The Financial Statements: (i) were prepared: (x) from and in accordance with the books and records of the Company and the Subsidiary and (y) in accordance with GAAP, consistently applied; and (ii) fairly present the financial condition, results of operations and cash flows of the Company and the Subsidiary at the dates and for the period to which they relate, subject, in the case of unaudited statements, to normal year-end audit adjustments (consisting only of normal recurring accruals). (b) The Company was incorporated on April 25, 1997.
10
(c) The reserves for future costs associated with workers' compensation, Black Lung and unemployment compensation as stated in the Financial Statements and in the books, records and Financial Statements of the Company are fair and reasonable and in accordance with GAAP and the appropriate financial accounting standards. The Company has accrued its and the Subsidiary's obligations for retiree medical benefits in accordance with Statement of Financial Accounting Standards No. 106.
3.8 Contingent Liabilities. Except for the guarantee of indebtedness of
Western Leasing, Inc. to Senstar Capital Corporation, the Company and the
Subsidiary do not have any Material liabilities other than (i) as set forth on
the Financial Statements, (ii) as reflected in, reserved against or otherwise
disclosed in the Mid-Year Balance Sheet or the notes thereto, and (iii)
Liabilities and obligations which would not individually or in the aggregate
have a Material Adverse Effect on the Company.
3.9 Approvals. Except as set forth on Schedule 3.9 of the Disclosure Schedule, no approval is required to be obtained by the Company or the Subsidiary for the consummation of the transactions contemplated by this Agreement. 3.10 No Existing Violation, Default, Etc. Neither the Company nor the Subsidiary is, or upon consummation of the transactions contemplated hereby will be, in violation of (a) its certificate of incorporation, by-laws or other organization documents, (b) except as set forth in Schedule 3.10, any applicable law, rule, restriction, order, judgment, decree, ordinance, rule or regulation of any governmental entity or administrative body, which violation has or could reasonably be expected to have a Material Adverse Effect on the Company, or (c) except as set forth in Schedule 3.10 any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or the Subsidiary, which violation has or could reasonably be expected to have a Material Adverse Effect on the Company. Except as disclosed in Schedule 3.10, no breach or event of default or event that, with the giving of notice or the lapse of time or both, would constitute a breach or event of default exists or, upon the consummation by the Company of the transactions contemplated by this Agreement, will exist under any Instrument to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary is bound or to which any of the properties, assets or operations of the Company or the Subsidiary is subject, which breach or event of default, or event that, but for the giving of notice or the lapse of time or both, would constitute a breach or event of default, has or could reasonably be expected to have a Material Adverse Effect on the Company. 3.11 Licenses, Etc. The Company and the Subsidiary hold, own and possess all Material governmental, regulatory and other filings, licenses, Approvals, registrations, Permits, consents, franchises and concessions (collectively, "Licenses") necessary for the ownership of the property and conduct of the businesses of the Company and the Subsidiary, as now conducted. Such Licenses are held without any infringement upon rights of other Persons, any violation of law or regulation or any breach of a contractual or other obligation except for such infringements, violations or breaches as could not reasonably be expected to have a Material Adverse Effect on the Company. None of such Licenses is being or has been challenged or revoked and no statement of intention to challenge, revoke or fail to renew any such License has been received by the Company or the Subsidiary. The Company and the Subsidiary are in compliance with their respective obligations under such Licenses, 11 with such exceptions as individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect on the Company, and no event has occurred that allows or, after notice or lapse of time or both, would allow revocation, suspension, limitation or termination of such Licenses, except such events as could not reasonably be expected to have a Material Adverse Effect on the Company.
3.12 Tangible Personal Property.
(a) Schedule 3.12(a) sets forth a true and complete list of all the principal items of machinery, equipment, vehicles, and other tangible personal property now owned by the Company or the Subsidiary in their business (the "Owned Tangible Assets"). Except as set forth on Schedule 3.12(a), as of the Closing Date and immediately following the consummation of the transactions at Closing, the Company, or the Subsidiary as applicable, will have good and marketable title to all of its fixed assets, operating assets and other tangible personal property including, without limitation, its Owned Tangible Assets, free and clear of all Charges. The execution and delivery of this Agreement, and the consummation of the transactions contemplated by this Agreement, will not result in the creation of any Charge on any of the Owned Tangible Assets. The Owned Tangible Assets shall be in good working order on the Closing Date, except for normal wear and tear and deterioration associated with the operation of such assets in the ordinary course of the Company's or the Subsidiary's business, and are suitable for the purposes for which they are presently used. (b) Schedule 3.12(b) sets forth a true and complete list of all the principal items of machinery, equipment, vehicles, and other tangible personal property now leased by each Company in its business, together with a brief description of the principal terms of each lease (the "Leased Tangible Assets"). Except as set forth on Schedule 3.12(b), as of the Closing Date and immediately following the consummation of the transactions at Closing, the Company, or the Subsidiary as applicable, will have good and transferable leasehold interests in all of its Leased Tangible Assets, in each case under valid leases enforceable against the lessors thereunder. The execution and delivery of this Agreement, and the consummation of the transactions contemplated by this Agreement, will not result in the creation of any Charge on any of the Leased Tangible Assets or result in any default under or violation of any applicable lease agreement. The Leased Tangible Assets shall be in good working order on the Closing Date, except for normal wear and tear and deterioration associated with the operation of such assets in the ordinary course of the Company's or the Subsidiary's business, and are suitable for the purposes for which they are presently used. 3.13 Sufficiency of Assets. The tangible real and personal property, including, without limitation, plants, buildings, structures, equipment, machinery and vehicles, owned or leased by the Company or the Subsidiary or used or employed by either of them in their respective business, are sufficient and adequate to carry on their respective businesses as presently conducted. 3.14 Environmental Matters. Except as set forth in Schedule-3.14: (a) Without limiting Section 3. 10, except as could not reasonably be expected to have a Material Adverse Effect on the Company, the Company and the Subsidiary are in compliance in all respects with all Environmental, Mining and Safety Requirements, and have filed
12
all notices and compliance reports required to be filed under any Environmental,
Mining and Safety Requirements (including, without limitation, notices and
reports indicating past or present treatment, storage or disposal, or reporting
a spill or release into the environment, of any Hazardous Substances, Oils,
Pollutants or Contaminants), and (i) neither the Company nor the Subsidiary has
received any written communication or other notice from any governmental
authority alleging that the Company or the Subsidiary is not in compliance, in
all material respects, with Environmental, Mining and Safety Requirements, (ii)
all contract mining activities performed on Real Property for which the Company
or the Subsidiary retains liability under Environmental, Mining and Safety
Requirements have been conducted in compliance in all material respects with all
Environmental, Mining and Safety Requirements, (iii) no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand, or notice
have been filed or commenced against or otherwise given to the Company or the
Subsidiary alleging any failure so to comply, and (iv) neither the Company nor
the Subsidiary has any material contingent liability with respect to its
business in connection with any Hazardous Substances, Oils, Pollutants, or
Contaminants or under any Environmental, Mining, or Safety Requirements.
(b) The Company and the Subsidiary maintain reserves for future costs associated with reclamation and mine closings for all Real Property (including any formerly owned or leased Real Property for which the Company or the Subsidiary has retained or assumed liability either contractually or by operation of law) in accordance with GAAP and the Company's and the Subsidiary's reclamation projects and procedures are on schedule in accordance with SMCRA, in all material respects and are being conducted in a manner that complies with all other legal requirements in all material respects (including those governing bonding and financial responsibility for reclamation and all Environmental, Mining and Safety Requirements). (c) (i) Neither the Company nor the Subsidiary has been notified that it is a potentially responsible party, or that any governmental authority or other individual is seeking information in connection with or advising the Company or the Subsidiary that it is responsible for, or potentially responsible for, costs under Environmental, Mining and Safety Requirements, including CERCLA, for cleanup of, or investigatory, remedial or other corrective action required with respect to Hazardous Substances, Oils, Pollutants or Contaminants at any Real Property or at any other location; (ii) to the knowledge of the Company, no Real Property is listed on any federal or state contaminated site list, including the national priority list under CERCLA, the CERCLIS, or any state counterparts; and (iii) neither the Company nor the Subsidiary has knowledge of any release of Hazardous Substances, Oils, Pollutants or Contaminants in quantities requiring investigation or cleanup at any of the Owned Real Property or Leased Real Property or at any other location. (d) The Company has provided Purchaser with (i) all information within its possession regarding the environmental history of the operations of the Company and the Subsidiary, including any audits, site assessments, sampling or test results related to Hazardous Substances, Oils, Pollutants or Contaminants, environmental impact statements, and liability studies prepared by or for the Company or the Subsidiary, or by any third party, including governmental agencies or insurance companies, and (ii) a list of all material Licenses held by the Company and the Subsidiary under Environmental, Mining and Safety Requirements.
13
(e) The Company and the Subsidiary have duly complied with, and their respective businesses, operations, assets, equipment, leaseholds and facilities, including, without limitation, the Real Property, are in full compliance with, the provisions of all federal, state and local environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder, including, without limitation, all laws and regulations with respect to reporting releases of Hazardous Substances and the registration, testing and maintenance of underground storage tanks.
(f) Except in accordance with a valid License listed on Schedule 3.14,
there has been no emission, spill, release, discharge or threatened release into
or upon (i) the air; (ii) the soils or any improvements located thereon; (iii)
the surface water or ground water; or (iv) the sewer, septic system or waste
treatment, storage or disposal system servicing the Real Property, of any
Hazardous Substance, Oil, Pollutant or Contaminant at or from any of the Real
Property.
3.15 Taxes. Except as set forth on Schedule 3.15: (a) each of the Company and the Subsidiary has duly filed all reports and returns relating to federal, state, local or foreign income Tax required to be filed by it up to and including the date hereof; (b) each of the Company and the Subsidiary has maintained all required records with respect to Taxes and has duly paid all Taxes shown as due on all Returns filed by it; and (c) reserves for Taxes reflected in the Mid-Year Balance Sheet (other than for deferred Taxes) are not less, by a material amount, than the Taxes that are attributable to periods up to and including the periods contemplated by the Mid-Year Balance Sheet or that have otherwise accrued as of the date of the Mid-Year Balance Sheet; (d) there are no Tax liens upon any property or assets of the Company or the Subsidiary, except liens for current Taxes not yet due; (e) no deficiencies have been proposed, asserted or assessed against the Company or the Subsidiary in writing, and no issue has been raised by any taxing authority in writing in any examination about which any of the officers or directors of the Company or the Subsidiary (and employees responsible for Tax matters of the Company or is Subsidiary) have knowledge which, by application of the same or similar principles, reasonably could be expected to result in a deficiency for any other period not so examined, except for any deficiency which could not reasonably be expected to have a Material Adverse Effect on the Company; (f) with respect to periods commencing after December 31, 1992 and ending before January 1, 1998, neither the Company, nor the Subsidiary or any of their respective predecessors in interest has incurred any liability for Taxes that is unpaid; (g) there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any Taxes or Returns of the Company or the Subsidiary for any period; (h) all Returns for the Company and the Subsidiary in respect of all years not barred by the statute of limitations have heretofore been made available by the Company to Purchaser and such Returns are true, correct and complete in all material respects; (i) neither the Company nor the Subsidiary has, with regard to any assets or property held, acquired or to be acquired by it, filed a consent to the application of Section 341(f)(2) of the Code; and (j) no amount of compensation paid by the Company or the Subsidiary in 1097 or the part of 1998 preceding the Closing Date is non-deductible for purposes of federal, or any applicable state or local income Tax, except for any amount which could not reasonably be expected to have a Material Adverse Effect on the Company. 3.16 Litigation. Except as set forth in Schedule 3.16, there is no pending action, suit, proceeding, arbitration or investigation (nor any group of actions, suits, proceedings, arbitrations or, 14
investigations arising out of the same event, transaction, occurrence or pattern
of activity by the Company or the Subsidiary) against or affecting the Company
or the Subsidiary or any of their respective properties, businesses, assets or
operations, or with respect to which the Company or the Subsidiary is
responsible by way of indemnity or otherwise, (i) that questions the validity of
this Agreement or any action to be taken pursuant to this Agreement or seeks to
impose material damages in connection with the transactions contemplated hereby,
or (ii) that could reasonably be expected to have, an adverse effect on the
Company or the Subsidiary in the amount of Two Hundred Fifty Thousand Dollars
($250,000.00) or more or that could materially affect the ability of the Company
to perform its obligations under this Agreement. Except as set forth in Schedule
3.16, no such actions, suits, proceedings or investigations are threatened or
contemplated.
3.17 Compliance with Laws. (a) Except as set forth on Schedule 3.17, each of the Company and the Subsidiary is in compliance with every statute, rule, restriction, law, regulation, order, judgment or decree of any governmental entity applicable to it or by which it is bound, including, without limitation, the Fair Labor Standards Act or regulations under such act or other laws and regulations relating to wages, hours, labor agreements, the payment of Social Security and similar taxes, unemployment or workers' compensation, including black lung benefits, except for such failures as would not have a Material Adverse Effect on the Company. Neither the Company nor the Subsidiary has received from any governmental or regulatory authority any written notice alleging any material violation of law or claiming any material liability of the Company or its Subsidiarily as a result of any such alleged material violation. (b) Except for acts, omissions or liabilities that could not reasonably be expected to have a Material Adverse Effect on the Company, neither the Company nor the Subsidiary is liable for any arrearages, taxes or penalties with respect to any of their employees in regard to any violation or potential violation of the Fair Labor Standards Act or regulations under such act or other laws and regulations relating to wages, hours, labor agreements, payment of Social Security and similar taxes, unemployment or workers' compensation including Black Lung benefits and obligations and/or similar state laws and regulations.
3.18 Labor Relations. Except as set forth in Schedule 3.18:
(a) The Company and the Subsidiary are in compliance in all respects with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, excluding Environmental, Mining and Safety Requirements (which are addressed separately in Section 3.14), except for such failures as could not reasonably be expected to have a Material Adverse Effect on the Company. (b) The Company and the Subsidiary are in compliance with all provisions of applicable collective bargaining agreements, and arbitration, administrative and judicial decisions interpreting and/or affecting such agreements, except for such failures as could not reasonably be expected to have a Material Adverse Effect on the Company.
15
(c) There is no unfair labor practice charge or complaint or any other labor employment matter against or involving the Company or the Subsidiary pending or, to the Shareholders' knowledge, threatened before the National Labor Relations Board or any court of law which could reasonably be expected to have a Material Adverse Effect on the Company. (d) There is no labor organizing activity, strike, dispute, lockout, slowdown or stoppage actually pending or, to the Shareholders' knowledge, threatened against the Company or the Subsidiary. (e) There has been no certified collective bargaining representative of the Company's or the Subsidiary's employees, no demand made to the Company or the Subsidiary for recognition by any collective bargaining representative, and no petition for an election filed with the National Labor Relations Board or any other governmental authority or Person with respect to the Company's or the Subsidiary's employees. (f) There are no charges, investigations, administrative proceedings or formal complaints of discrimination (including discrimination based upon sex, age, marital status, race, color, religion, national origin, sexual preference, disability, handicap or veteran status) pending or threatened before the Equal Employment Opportunity Commission or any federal, state or local agency or court against the Company or the Subsidiary, except for those which could not reasonably be expected to have a Material Adverse Effect on the Company. (g) Neither the Company nor the Subsidiary has any liability for current or future obligations under the Industry Retiree Health Benefit Coal Act of 1992, as amended.
3.19 Contract Miners, Truckers and Others. Schedule 3.19 contains a
complete and accurate list of all Persons with whom the Company or the
Subsidiary has at any time since January 1, 1998, had any contract,
understanding or agreement (oral or written but exclusive of any employment
agreement with any hourly or salaried employees) or joint venture agreement or
partnership to perform services relating to the operations and facilities of the
Company or the Subsidiary, including, but not limited to, contracts,
understandings and/or agreements involving sludge and/or slurry, the mining of
coal, the preparation of coal, or the loading or hauling by truck, railroad,
barge or otherwise of coal or refuse in connection with any coal mining
operations. To the Shareholders' knowledge, each such person and each
subcontractor thereof has all insurance required by the terms of any agreement
between such person and the Company or the Subsidiary. Neither the Company nor
the Subsidiary or their respective Affiliates are either a common or joint
employer with respect to, or have exercised any control over the employees or
labor relations of any such person.
3.20 Contracts and Commitments. (a) Except as set forth on Schedule 3.20, neither the Company nor the Subsidiary is a party to any: (i) collective bargaining agreement or contract with any labor union; (ii) bonus, pension, profits sharing, retirement or other form of deferred compensation plan; (iii) stock purchase, stock option, stock appreciation or similar plan; (iv) contract for the employment of any officer, individual employee or other person on a full-time or consulting basis involving annual 16
compensation by the Company or the Subsidiary in excess of One Hundred Thousand
Dollars ($100,000.00); (v) agreement or indenture relating., to borrowing money
in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) or to mortgaging,
pledging or otherwise placing a lien on any material portion of the Company's or
the Subsidiary's assets; (vi) guaranty of any obligation for borrowed money in
excess of Two Hundred Fifty Thousand Dollars ($250,000.00); (vii) lease or
agreement under which it is lessee of, or holds or operates any personal
property owned by any other party, for which the annual rental exceeds One
Hundred Thousand Dollars ($100,000.00); (viii) contract or group of related
contracts with the same party for the supply of coal to any Person in an amount
of more than One Million Dollars ($1,000,000.00) or providing for deliveries
extending beyond December 31, 1998; (ix) contract or group of related contracts
with the same party for the purchase of inventories, supplies or services, under
which the undelivered balance of such inventories, supplies or services has a
price in excess of Two Hundred Fifty Thousand Dollars ($250,000.00); (x)
contract or group of related contracts with the same party for the sale of
products or services (other than coal sales contracts referred to in (viii)
above) under which the undelivered balance of such products or services has a
sales price in excess of Two Hundred Fifty Thousand Dollars ($250,000.00); (xi)
any agreement to acquire, by merging, consolidating with or by purchasing a
substantial equity interest in or substantial portion of the assets of, any
business or corporation, partnership or other business organization or otherwise
acquire any material assets; (xii) tariff agreements and other transportation
contracts for the shipment of coal made in the ordinary course of business; or
(b) Purchaser either has been supplied with or has been given access
to a true and correct copy of all written contracts which are referred to in
Schedule 3-20, together with all material amendments, waivers or other changes
thereto.
(c) Neither the Company nor the Subsidiary, or, to the Shareholders' knowledge, any third party thereto, is in default, breach or violation under any contract listed in Schedule 3.20, except for such defaults, breaches or violations which could not reasonably be expected to have a Material Adverse Effect on the Company. 3.21 Employee Benefits. (a) Schedule 3,21(a) includes a complete list of all material Employee Benefit Plan. (b) With respect to each Plan, the Company has delivered or made available to Purchaser a true, correct and complete copy of: (i) each writing constituting a part of such Plan including, without limitation, all plan documents, employee communications, benefit schedules, trust agreements, and insurance contracts and other funding vehicles; (ii) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (iii) the current summary plan description and any material modifications thereto, if any (in each case, whether or not required to be furnished under ERISA); (iv) the most recent annual financial report, if any; (v) the most recent actuarial report, if any; and (vi) the most recent determination letter from the IRS, if any. There are no
17
amendments to any Plan that have been adopted or approved nor has the Company or the Subsidiary undertaken to make any such amendments or to adopt or approve any new Plan.
(c) Schedule 3.21(c) identifies each Plan that is intended to be a
"Qualified Plan" within the meaning of Section 401(a) of the Code ("Qualified
Plans"). Except as set forth in Schedule 3.21, the IRS has issued a favorable
determination letter with respect to each Qualified Plan and the related trust
that has not been revoked, and, to the Shareholders' knowledge, there are no
existing circumstances or events that have occurred that could adversely affect
the qualified status of any Qualified Plan or the related trust. No Plan is
intended to meet the requirements of Code Section 501(c)(9).
(d) All contributions required to be made to any Plan by applicable
law or regulation or by any plan document or other contractual undertaking, and
all premiums due or payable with respect to insurance policies funding any Plan,
for any period through the date hereof have been timely made or paid in full or,
to the extent not required to be made or paid on or before the date hereof, have
been fully reflected in the Financial Statements. Each Employee Benefit Plan
that is an employee welfare benefit plan under Section 3(l) of ERISA is either
(e) With respect to each Employee Benefit Plan, the Company and the Subsidiary have complied, and are now in compliance, in all material respects with all provisions of ERISA, the Code and all laws and regulations applicable to such Employee Benefit Plans and each Employee Benefit Plan has been administered in all material respects in accordance with its terms, except where such noncompliance could not reasonably be expected to have a Material Adverse Effect upon the Subsidiary or the Company. To the Shareholders' knowledge, there is not now, nor do any circumstances exist that could give rise to, any requirement for the posting of security with respect to a Plan or the imposition of any lien on the assets of the Company or the Subsidiary under ERISA or the Code. (f) No Employee Benefit Plan is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code.
(g) Except as set forth on Schedule 3.21(g), no Employee Benefit Plan
is a Multi-employer Plan or a plan that has two or more contributing sponsors at
least two of whom are not under common control, within the meaning of Section
4063 of ERISA (a "Multiple Employer Plan"). Except as set forth on Schedule
3.21(g), neither the Company, nor the Subsidiary or any of their respective
ERISA Affiliates have, at any time during the last six years, contributed to or
been obligated to contribute to any Multi-employer Plan or Multiple Employer
Plan. Neither the Company, nor the Subsidiary or any ERISA Affiliates have
incurred any Withdrawal Liability.
(h) To the Shareholders' knowledge, there does not now exist, nor do any circumstances exist that could result in, any Controlled Group Liability that would be a Liability of the Company, or the Subsidiary. following the Closing. Without limiting the generality of the foregoing, none of the Company or the Subsidiary, their Affiliates or any ERISA Affiliate of the
18
Company or the Subsidiary has engaged in any transaction described in Section 4069 or Section 4204 or 4212 of ERISA.
(i) Except as set forth on Schedule 3.21(i), the Company and the
Subsidiary have no liability for life, health, medical or other welfare benefits
to former employees or beneficiaries or dependents thereof, except for health
continuation coverage as required by Section 4980B of the Code or Part 6 of
Title I of ERISA and at no expense to the Company or the Subsidiary.
(j) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) result in, cause the accelerated vesting or delivery of, or increase the amount or value of an y payment or benefit to any employee, officer or director of the Company or the Subsidiary. Without limiting the generality of the foregoing, no amount paid or payable by the Company or the Subsidiary in connection with the transactions contemplated hereby (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an "excess parachute payment" within the meaning of Section 280G of the Code. (k) To the Shareholders' knowledge, none of the Company, the Subsidiary or any other Person, including any fiduciary, has engaged in any "prohibited transaction" (as defined in Section 4975 of the Code or Section 406 of ERISA), which could subject any of the Employee Benefit Plans or their related trusts, the Company, the Subsidiary, or any Person that the Company or the Subsidiary has an obligation to indemnify, to any material tax or penalty imposed under Section -4975 of the Code or Section 502 of ERISA. (l) There are no pending or threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations which have been asserted or instituted, and to the Shareholders' knowledge, no set of circumstances exists which may reasonably give rise to a claim or lawsuit, against the Plans, any fiduciaries thereof with respect to their duties to the Plans or the assets of any of the trusts under any of the Plans which could reasonably be expected to result in any material Liability of the Company or the Subsidiary to the Department of Treasury, the Department of Labor, any Multi- employer Plan, any Plan or any participant in a Plan. (m) The Company, the Subsidiary, and each member of their respective business enterprises have complied with the Worker Adjustment and Retraining Notification Act. (n) For purposes of this Section 3.21, the term "employee" shall be considered to include individuals rendering personal services to the Company or the Subsidiary as independent contractors.
3.22 Banks, Directors and Officers, Life insurance and Employees. Schedule
3.22 sets forth (a) a list of all banks with which the Company or the Subsidiary
has an account, deposit, certificate of deposit, or safe deposit box along with
identifying numbers and the names of all persons authorized to draw thereon or
having access thereto; (b) the names of all incumbent directors and officers of
the Company and the Subsidiary and of all incumbent trustees and committee
members under any of the Plans (as that term is defined in Section 3.22) or
related trusts; (c) a
19 description and identification of any insurance policies held or paid for by the Company or the Subsidiary on the lives of any of their respective key employees, officers, directors or shareholders; and (d) the names and job descriptions of all of the Company's and the Subsidiary's employees whose total compensation from the Company and the Subsidiary for the fiscal year ending December 31, 1998, will exceed Twenty-Five Thousand Dollars ($25,000.00), together with a statement of the full amount paid or payable to each such person in respect of such year, a summary of the basis on which each such person is compensated if the basis is other than a fixed salary rate, and any changes in any of the foregoing since December 31, 1990. Except for any currently effective collective bargaining agreements listed on Schedule 3.26(a), no person is employed by the Company or the Subsidiary other than at the will of the Company or the Subsidiary for an indefinite period of time, and at the option of either the Company or the employee, such employee's employment with the Company may be terminated with or without cause, and with or without notice, at any time.
3.23 No Material Adverse Change. Except as set forth on Schedule 3.23,
since December 31, 1997, except as contemplated by this Agreement: (a) neither the Company nor the Subsidiary has incurred any liability, guarantee or obligation (indirect, direct or contingent), or entered into any oral or written agreement or other transaction, that is not in the ordinary course of business or that could reasonably be expected to be material to the Company; and (b) there has been no Material Adverse Effect on the Company or the Subsidiary, nor any developments that could reasonably be expected to result in a Material Adverse Effect on the Company or the Subsidiary. 3.24 Insurance. Schedule 3.24 sets forth a list and description of all policies of fire, liability, product liability, workers compensation, health and other forms of insurance presently in effect with respect to the Company's and the Subsidiary's business, true and complete copies of which have previously been made available to Purchaser. All such policies are valid, outstanding and enforceable policies. No notice of cancellation, termination or rejection of any material claim has been received by the Company or the Subsidiary with respect to any such policy in the last year. The activities and operations of the Company and the Subsidiary have been conducted in a manner so as to conform in all material respects to all applicable provisions of such insurance policies. The Company and the Subsidiary have been covered during the past five (5) years (or such shorter period as the entity has been in existence or has been a subsidiary of the Company) by insurance in scope and amount customary and reasonable for the businesses in which they have engaged during such period. 3.25 Intellectual Property Rights. (a) Schedule 3.25 lists all material Intellectual Property owned or licensed by the Company or the Subsidiary. Except as set forth on Schedule 3.25, such Intellectual Property is vested in or validly granted to the Company
or the Subsidiary free and clear of all Charges and is not restricted in any
material way. Neither the Company nor the Subsidiary has performed any act or
permitted any omission which has resulted or could reasonably be expected to
result in the cessation of the Company's or the Subsidiary's valid and
enforceable rights in such Intellectual Property. Except as set forth on
Schedule 3.25, neither the Company nor the Subsidiary has granted or is
obligated to grant any license, sub-license or assignment in respect to any of
such Intellectual
20 Property. Neither the Company nor the Subsidiary is in breach of any license, sublicense or assignment granted to it with respect to any such Intellectual Property. (b) The Company and the Subsidiary own, or have the defensible right to use, all of the Intellectual Property used in their respective businesses as currently conducted, except where the failure to own or have the right to use such Intellectual Property could not reasonably be expected to have a Material Adverse Effect on the Company. (c) To the Shareholders' knowledge, (i) the operation of the businesses ' of the Company and the Subsidiary do not infringe upon the Intellectual Property rights of any other Person, and (ii) the Intellectual Property of the Company and the Subsidiary is not infringed by the operations of any other Person.
3.26 Proprietary Information. Prior to or in conjunction with the Closing,
the Shareholders shall have fully disclosed to Purchaser all customer lists,
trade secrets, processes, inventions, formulas, methods, know-how and other
proprietary information used or developed by the Company and the Subsidiary in
connection with their respective business. Neither the Company nor the
Subsidiary has disclosed or permitted the disclosure of any such proprietary
information to any other Person, and the use by the Company and the Subsidiary
of such proprietary information does not violate any other Person's proprietary
rights.
3.27 Real Property. (a) Schedule 3.27(a) sets forth a true and complete list of all leases and other agreements (including wheelage and right-of-way agreements) by which the Company or the Subsidiary has a leasehold interest or other contractual right in or to any real property, or has the right to receive income from any third party as a result of the use or occupancy of any real property by such third party (collectively, the "Leased Real Property"). For each Leased Real Property, the list includes: (i) an identification of the lease, sublease or license agreement therefor (or any other agreement with respect to the use or occupancy thereof) and any and all amendments or modifications thereof or side letters with respect thereto (collectively, the "Leases"); (ii) the approximate size of the premises leased thereunder (if available); (iii) the term of the lease, including any extension options; (iv) the use of such premises and the nature of any improvements located thereon; (v) the recording information of any Leases which have been recorded in the applicable real estate records offices; and (vi) the current rental or royalty (minimum and production) rate as well as the amount of royalty paid and subject to recoupment. Except as could not reasonably be expected to have a Material Adverse Effect on the Company, the Company and the Subsidiary have good and valid leasehold title to lawfully and exclusively conduct mining operations on the Leased Real Property used for mining purposes, free and clear of all Charges except for Permitted Charges. Except as could not reasonably be expected to have a Material Adverse Effect on the Company, the Company and the Subsidiary have good and marketable leasehold title to the Leased Real Property other than the Leased Real Property used for mining purposes, free and clear of all Charges except for Permitted Charges. 21
(b) Schedule 3.27(b) sets forth a true and complete list of all real
property that the Company and the Subsidiary own in fee, whether surface or
mineral (collectively, the "Owned Real Property"; the Owned Real Property and
the Leased Real Property are, collectively, the "Real Property"). For each
parcel of Owned Real Property, the list includes: (i) the entity in which title
is vested and the deed or other Instrument by which such entity acquired title
(including the Instrument date, the recording information and, if title is
vested in more than one entity, the percentage ownership of such entity); (ii)
the approximate acreage thereof; and (iii) the use thereof and the nature of any
improvements thereon. Except as could not reasonably be expected to have a
Material Adverse Effect on the Company, the Company and the Subsidiary have good
and valid fee title to lawfully and exclusively conduct mining operations on the
Owned Real Property used for mining purposes, free and clear of all Charges
except for Permitted Charges. Except as could not reasonably be expected to have
a Material Adverse Effect on the Company, the Company and the Subsidiary have
good and marketable fee title to the Owned Real Property other than the Owned
Real Property used for mining purposes, free and clear of all Charges except for
Permitted Charges.
(c) Except as set forth on Schedule 3.27(a): (i) there is no past due payment obligation or other material default under any of the Leases; (ii) neither the Company nor the Subsidiary or any Shareholder has received any notice (oral or written) of, or has knowledge of, any act, omission or condition which constitutes a material default, or with the passage of time and/or the giving of notice, would constitute a material default under any of the Leases; (iii) except as could not reasonably be expected to have a Material Adverse Effect on the Company, neither the Company nor the Subsidiary has mined any coal that did not belong to it, nor mined any coal in such a reckless or imprudent manner as to give rise to any material claims for Loss or waste by any lessor under any Lease; and (iv) except as could not reasonably be expected to have a Material Adverse Effect on the Company, the Leases are in good standing and in full force and effect, valid and enforceable against the parties thereto in accordance with their terms. (d) Subject to all of the lessors listed on Schedule 3.27(a) giving their consent to the transactions contemplated herein, the consummation of such transactions will not constitute a default under the terms of any of the Leases. (e) Except as set forth on Schedules 3.27(a) or (b), the Company and the Subsidiary are in actual and peaceful possession of: (i) the Real Property other than the Real Property used for mining purposes; and (ii) that portion of the Real Property used for mining purposes on which the Company or the Subsidiary is actively conducting coal mining operations. (f) Except as could not reasonably be expected to have a Material Adverse Effect on the Company, no applicable zoning or building law, ordinance, administrative regulation, urban redevelopment law, or any other law, regulation, rule, order, decree or use restriction, prohibits or interferes with, limits or impairs the use, operation, maintenance of or access to, or affects the value of, the Real Property, as now used, operated or maintained by the Company or the Subsidiary. Except as set forth on Schedules 3.27(a) or (b), no notice of any violation of any applicable zoning or building law, ordinance, administrative regulation, or any other law, regulation, rule, order, decree or use restriction has been received by the Company or the Subsidiary, and neither the Company nor 22 the Subsidiary does not know of the threat of any such notice, and no condemnation proceeding has been instituted or is threatened with respect to any Real Property. (g) All parcels of land included in the Real Property are, and except as could not reasonably be expected to have a Material Adverse Effect on the Company, all improvements located on any parcel of Real Property are, suitable, sufficient and appropriate in all respects for their current and contemplated uses. Each parcel or contiguous parcels, as applicable, of Real Property is located adjacent to roads or streets with adequate lawful ingress and egress available between such roads or streets and such Real Property for all purposes related to the operations of the Company and the Subsidiary. To the best of the Shareholders' knowledge, no material portion of any Real Property lies in any flood plain area (as defined by the U.S. Army Corps of Engineers or otherwise) or includes any wetlands protected by any applicable law.
(h) Except as set forth in Schedules 3.27(a) or (b) and except for
Permitted Charges, neither the Company nor the Subsidiary has granted any
outstanding options or has entered into any outstanding contracts with others
for or in connection with the sale, mortgage, pledge, hypothecation, assignment,
sublease, lease or other transfer of all or any part of the Real Property.
Except as could not reasonably be expected to have a Material Adverse Effect on
the Company, no Person or entity has any right or option to acquire, or right of
first refusal or opportunity (or any similar right) with respect to, the
interest of the Company and the Subsidiary in any Real Property.
3.28 Securities Law Matters. Neither the Company nor the Subsidiary has made, directly or indirectly, any offer or sale of the common shares or securities of the same or a similar class, or taken any other action as a result of which the offer and sale of any such common shares or securities contemplated hereby could fail to be entitled to exemption from the registration requirements of the Securities Act. As used herein, the terms "offer" and "sale" have the meanings specified in Section 2(3) of the Securities Act. 3.29 Related Party Transactions. (a) Except as disclosed in Schedule 3.29, neither the Company nor the Subsidiary or any of the Shareholders, has, either directly or indirectly, a material interest in (i) any Person that purchases from or sells, leases, licenses or furnishes to the Company or the Subsidiary any goods, property, technology or intellectual or other property rights or services, or has other material business relations with the Company or the Subsidiary; or (ii) any Person who is a party to a contract or agreement to which the Company or the Subsidiary are also parties or by which they may be bound or affected (the matters set forth in clauses (i) and (ii) are [PAGES 25 AND 26 ARE MISSING]
23
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to the Shareholders as follows:
4.1 Organization. Purchaser is a corporation duly organized and validly
existing under the laws. of the State of Delaware, and has full corporate power
and authority to own and lease its properties as such properties are now owned
and leased, and to conduct its business as and where its business is now
conducted.
4.2 Authority. (a) Purchaser has full right, power, authority and capacity to execute and deliver this Agreement and the Other Documents, and to perform its obligations under this Agreement and the Other Documents. This Agreement and the Other Documents constitute valid and legally binding obligations of Purchaser, enforceable in accordance with their terms. (b) The execution and delivery of this Agreement and the Other Documents. the consummation of the transactions contemplated hereby and thereby, and the performance and fulfillment of the obligations and undertakings hereunder and thereunder by Purchaser will not violate any provision of, result in the breach of, cause or permit the acceleration of or result in the termination or cancellation of: (i) any performance required by the terms of Purchaser's articles of incorporation or bylaws; (ii) any contract, agreement, arrangement or undertaking to which Purchaser is a party or by which it may be bound; (iii) any judgment, decree, writ, injunction, order or award of any arbitration panel, court or governmental authority; or (iv) any applicable law, ordinance, rule or regulation of any governmental body. (c) The execution, delivery, performance and consummation of the transactions contemplated by this Agreement and the Other Documents have been duly authorized by all requisite corporate action. All other consents, approvals, authorizations, releases or orders required of or for Purchaser for the authorization, execution, delivery, performance and consummation of the transactions contemplated by, this Agreement and the Other Documents will be obtained by the Closing.
ARTICLE 5
COVENANTS OF THE SHAREHOLDERS The Shareholders hereby covenant and agree with Purchaser that:
5.1 Consents. The Shareholders shall: (i) procure, upon reasonable terms
and conditions, all consents and approvals; (ii) complete all filings,
registrations and certificates; and (iii) satisfy all other requirements
prescribed by law, including obtaining any Approval necessary under antitrust
laws, which are necessary to consummate the transactions contemplated in this
Agreement and the Other Documents.
24
5.2 Post-Closing Assistance. In case at any time after the Closing any
further action is necessary or desirable to consummate the transactions
contemplated by this Agreement and the Other Documents, the Shareholders will
promptly take or cause to be taken such further action (including the execution
and delivery of such further Instruments and documents) as Purchaser may
reasonably request.
5.3 Cooperation. The Shareholders shall cooperate fully, completely and promptly with Purchaser in connection with satisfying all conditions to, and effecting the transactions contemplated by, this Agreement and the Other Documents. 5.4 Representations and Warranties. The Shareholders shall not cause or permit any representations or warranties made in this Agreement, including, without limitation, representations and warranties contained in Article 3 of this Agreement, to be untrue or incomplete as of the Closing. 5.5 Publicity. Except as required by applicable law, without the prior written consent of Purchaser, none of the Shareholders shall disclose or publish, or permit the disclosure or publication of, any information concerning the execution and delivery of this Agreement and the Other Documents, or the transactions contemplated by this Agreement and the Other Documents, to any Person. 5.6 Resignations. At the Closing, the Shareholders shall cause the individuals identified as officers or directors of the Company, Kindill Mining or the AWW to resign as officers and/or directors of the Company, Kindill Mining and the AWW, and shall cause the Persons identified as trustees or committee members of the Plans to resign as trustees and/or committee members of the Plans, which resignations shall be effective immediately after the Closing. 5.7 Permits. In the event that not all of the Permits are available for use by the Company and the Subsidiary immediately following the transactions contemplated by this Agreement, the Shareholders, Purchaser, the Company and the Subsidiary shall cooperate in any reasonable arrangement designed to provide Purchaser, the Company and the Subsidiary the benefits under any such Permits until such Permits are available for use by the Company and the Subsidiary, provided that the Company, the Subsidiary and the Purchaser shall bear all of the expenses of so doing and shall indemnify the Shareholders for any Losses relating thereto in accordance with Article 10. ARTICLE 6 COVENANTS OF PURCHASER Purchaser covenants and agrees with the Shareholders that from the date hereof through the Closing:
6.1 Cooperation. Purchaser shall cooperate fully, completely and promptly
with the Shareholders in connection with satisfying all conditions to, and
effecting the transactions contemplated by, this Agreement and the Other
Documents.
25
6.2 Representations and Warranties. Purchaser will not cause or permit
any of its representations and warranties made in this Agreement, including,
without limitation, its representations and warranties contained in Article 4 of
this Agreement, to be untrue or incomplete as of the Closing.
6.3 Publicity. Except as required by applicable law, without the prior written consent of the Shareholders, Purchaser shall not disclose or publish, or permit the disclosure or publication of, any information concerning the execution and delivery of this Agreement, or the transactions contemplated by this Agreement, to any Person. 6.4 Ownership and Control. As soon as practicable after the Closing, and in any event within thirty (30) Business Days after the Closing Date, Purchaser shall take all necessary and appropriate action, pursuant to all applicable statutes or regulations, to give notice to any appropriate agencies, of the change in ownership and control of the Company resulting from the Purchase pursuant to this Agreement. 6.5 Post-Closing Liabilities. Purchaser will cause the Company and Kindill Mi 1 9 to assume all of the debts, obligations and Liabilities of the Company and Kindill Mining, as the case may be, following the Closing, and will protect the Shareholders from and indemnify them against, such debts, obligations and Liabilities, except in the case of any Shareholders to the extent such Shareholders are obligated to indemnify Purchaser pursuant to Article 10 below with respect to any such debts, obligations or Liabilities. ARTICLE 7 CONDITIONS TO OBLIGATIONS OF PURCHASER The obligations of Purchaser to consummate the transactions contemplated herein shall be subject to the satisfaction of the following conditions at or before the Closing:
7.1 Representations, Warranties and Covenants. The representations and
warranties of the Shareholders contained herein shall be true on the Closing
Date, with the same effect as though made at such time, except to the extent of
changes permitted by the terms of this Agreement. The Shareholders, the Company
and the Subsidiary shall have performed all obligations and complied with all
covenants required by this Agreement to be performed or complied with by them
prior to the Closing.
7.2 No Material Adverse Effect. No Material Adverse Effect with respect to the Company shall have occurred since the date of this Agreement. 7.3 Opinion of Counsel for the Shareholders. Purchaser shall have received an opinion from Greenebaum Doll & McDonald PLLC, counsel for the Shareholders, dated the Closing Date, substantially in the form attached hereto as Annex 7.3. 7.4 Statutory Requirements. All statutory requirements for the valid consummation by Purchaser of the transactions contemplated in this Agreement and the Other Documents shall have 26 been fulfilled, and all Approvals required to be obtained to permit the consummation by Purchaser of the transactions contemplated by this Agreement and the Other Documents, and to permit the businesses presently carried on by the Company and the Subsidiary to continue unimpaired in all material respects immediately following the Closing, shall have been obtained.
7.5 Ancillary Agreements. The Shareholders, the Company and the
Subsidiary shall have executed all Other Documents, and all such executed
agreements shall have been delivered to Purchaser.
7.6 Deliveries. At or before the Closing, the Shareholders shall (i) deliver to Purchaser all Instruments necessary or otherwise reasonably requested by Purchaser to duly and properly transfer and convey title to the Shares as contemplated by this Agreement and (ii) make all other deliveries contemplated in this Agreement. 7.7 Financing. Purchaser shall have arranged financing with such lenders, in such amounts, at such rates, and upon such terms as Purchaser deems, in Purchaser's sole discretion, necessary and sufficient to consummate the transactions contemplated in this Agreement and the Other Documents. 7.8 Closing. The Closing shall occur on or before September 2, 1998, (the "Closing Date"), unless the Closing Date is extended by the mutual written agreement of the parties hereto. 7.9 Third-Party Consents and Approvals. The parties shall have obtained all third-party consents and approvals (all on terms and conditions satisfactory to Purchaser in its sole and absolute discretion) that are necessary for: (a) the consummation of the transactions contemplated by this Agreement and the Other Documents; and (b) the assignment and transfer of the Shares to Purchaser; provided, however, that, notwithstanding the foregoing, neither Purchaser nor any Shareholder shall be required to pay any remuneration to third parties in exchange for such party's consent or approval, or to file any lawsuit or other action to obtain any such consent or approval. 7.10 No Injunction. No injunction or order of any court or administrative agency or Instrumentality shall be in effect, and no statute, rule or regulation of any governmental authority or competent jurisdiction shall have been promulgated or enacted, as of the Closing which restrains or prohibits the transactions contemplated by this Agreement and the Other Documents. 7.11 No Pending Action. No action, suit or other proceeding by any Person to restrain or prohibit the transactions contemplated by this Agreement and the Other Documents shall be pending. 7.12 Due Diligence. Purchaser shall be satisfied, in its sole discretion, with the results of its due diligence of the Company and the Subsidiary and their respective assets and Liabilities, including, without limitation: (i) all rights, title, interests and Liabilities of the Company and the Subsidiary; (ii) the terms and conditions of all agreements to which the Company or the Subsidiary is a party (including but not limited to the terms and conditions of all lease agreements under which the Company or the Subsidiary has any - interest, especially terms authorizing Purchaser to conduct highwall mining under such lease agreements); (iii) the mineability, quantity and quality of the coal 27 reserves of the Company and the Subsidiary; and (iv) the magnitude of the reclamation obligations (regardless of whether such obligations are "current" or in "deferred status ").
7.13 Board Approval. Purchaser's board of directors shall have approved
this Agreement, and the transactions contemplated hereunder.
7.14 Hayman Agreement. Purchaser shall have consummated the transactions contemplated by the Hayman Agreement. 7.15 Fairness Opinion. Purchaser shall have received an opinion of Rothschild Inc. that the transactions contemplated by this Agreement and the Other Documents are fair from a financial point of view to Purchaser. 7.16 Royalty Termination Agreement. The Royalty Termination Agreement shall have been executed and delivered by all of the parties thereto in a manner satisfactory to Purchaser. ARTICLE 8 CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS The obligations of the Shareholders to consummate the transactions contemplated herein shall be subject to the satisfaction of the following conditions at or before the Closing:
8.1 Representations, Warranties and Covenants. The representations and
warranties of Purchaser contained herein shall be true on the Closing Date, with
the same effect as though made at such time, except to the extent of changes
permitted by the terms of this Agreement. Purchaser shall have performed all
obligations and complied with all covenants required by this Agreement to be
performed or complied with by it prior to the Closing.
8.2 Statutory Requirements. All statutory requirements for the valid consummation by the Shareholders of the transactions contemplated in this Agreement and the Other Documents shall have been fulfilled, and all Approvals required to be obtained in order to permit the consummation by the Shareholders of the transactions contemplated in this Agreement and the Other Documents shall have been obtained. 8.3 Deliveries. At or before the Closing, Purchaser shall make all of its deliveries contemplated in this Agreement. 8.4 Third-Party Consents and Approvals. The parties shall have obtained all third-party consents and approvals that are necessary for: (a) the consummation of the transactions contemplated by this Agreement and the Other Documents; and (b) the assignment and transfer of the Shares to Purchaser; provided, however, that notwithstanding the foregoing, neither Purchaser nor the Shareholders shall be required to pay any remuneration to third parties in exchange for such party's consent or approval, or to file any lawsuit or other action to obtain any such consent or approval. 28
8.5 No Injunction. No injunction or order of any court or administrative
agency or Instrumentality shall be in effect, and no statute, rule or regulation
of any governmental authority or competent jurisdiction shall have been
promulgated or enacted, as of the Closing which restrains or prohibits the
transactions contemplated by this Agreement and the Other Documents.
8.6 No Pending Action. No action, suit or other proceeding by any Person to restrain or prohibit the transactions contemplated by this Agreement and the Other Documents shall be pending. 8.7 Closing. The Closing shall occur on or before the Closing Date, as such date may be extended by the mutual written agreement of the parties hereto. ARTICLE 9 THE CLOSING/TERMINATION 9.1 Date and Place. The Closing shall be held on the Closing Date at 10:00 a.m. simultaneously in the offices of Brown, Todd & Heyburn PLLC, 2700 Lexington Financial Center, 250 West Main Street, Lexington, Kentucky 40507 and Greenebaum Doll & McDonald PLLC, 3300 National City Tower, Louisville, Kentucky 40202, or at such other place or time on the Closing Date as the parties may mutually agree. 9.2 Deliveries. At or before the Closing, the parties shall make all of the deliveries contemplated in this Agreement. 9.3 Termination. In the event the Closing shall not be held by the Closing Date, as it may be extended by mutual written agreement of the parties hereto, any party may terminate this Agreement upon written notice to the other parties. If this Agreement is terminated pursuant to this Section 9.3, all parties shall be released from all further obligations under this Agreement and the Other Documents and shall have no further obligation to negotiate any such agreements; provided, however, that termination pursuant to this Section 9.3 shall not relieve the defaulting or breaching party hereunder from any liability to the other party hereto resulting from the default or breach hereunder of such defaulting or breaching party occurring prior to the date of termination. ARTICLE 10 SURVIVAL OF REPRESENTATIONS AND WARRANTIES -- INDEMNIFICATION 10.1 Survival. Each of the parties' representations, warranties, covenants and agreements (including undisclosed Liabilities) set forth in this Agreement shall survive the Closing for a period of one (1) year, with the exception, however; of the warranties and representations made by the Shareholders in Section 3.3, which shall survive indefinitely. 10.2 Indemnity by the Shareholders. Subject to the limitations set forth in Section 10.5 below, each of the Shareholders shall jointly and severally indemnify the Company, the Subsidiary and Purchaser against, and hold the Company, the Subsidiary and Purchaser harmless from, and shall pay to the Company, the Subsidiary or Purchaser, as applicable, the full amount of. any loss, claim, damage, liability or expense (including reasonable attorneys' fees, but excluding all special, 29 exemplary punitive and consequential damages) (each a "Loss") resulting to the Company, the Subsidiary or Purchaser, either directly or indirectly, from: (a) any material inaccuracy in any representation or warranty, or any breach of any covenant or agreement, by the Company, the Subsidiary, or the Shareholders contained in this Agreement or in any of the Other Documents; and (b) any liability for any fee or commission owed to a broker or other Person pursuant to an agreement signed by the Company, the Subsidiary or the Shareholders with respect to the transactions contemplated by this Agreement.
10.3 Indemnity by Purchaser. Purchaser shall indemnify and hold the
Shareholders harmless from and against, and shall pay to the Shareholders the
full amount of, any Loss resulting to the Shareholders, either directly or
indirectly, from: (a) any material inaccuracy in any representation or
warranty, or any breach of any covenant or agreement, by Purchaser contained in
this Agreement or any of the Other Documents; (b) any liability for any fee or
commission owed to a broker or Other Person pursuant to an agreement signed by
Purchaser with respect to the transactions contemplated by this Agreement; and
(c) any liability of the Shareholders arising from the Shareholders' maintaining any rights or obligations under Permits until such Permits are available for use by the Company and the Subsidiary as contemplated by Section 5.7. 10.4 Remedies; Rights of Offset. Upon the occurrence of any event for which Purchaser or any Shareholder is entitled to indemnification under this Agreement, they shall have all the rights and remedies at law and in equity available to them. Without limiting the foregoing, the Shareholders hereby agree to pay promptly upon receipt of notice from the Company, the Subsidiary or Purchaser the amounts which the Shareholders may owe to the Company, the Subsidiary or Purchaser from time to time by reason of the provisions of this Agreement or otherwise. If the Shareholders fail or refuse to pay any such amounts promptly after the request of the Company, the Subsidiary or Purchaser, then the Company, the Subsidiary and Purchaser, at their election, may offset any such amounts against any payments due and owing to the Shareholders. The party or parties suffering any Loss shall be obligated to take all reasonable actions to mitigate the damages suffered with respect to the Loss. 10.5 Limitations on Indemnity Obligations. (a) The Shareholders' liability under this Article 10 shall be limited to the following Losses incurred by Purchaser, the Company or the Subsidiary: (i) The Shareholders shall, in the aggregate, be liable for Losses pursuant to this Section 10 only to the extent that the cumulative aggregate amount of all such Losses exceeds Two Hundred Fifty Thousand Dollars ($250,000) (the "Deductible"); (ii) The aggregate amount of Losses for which each of the Shareholders shall be liable pursuant to this Section 10 shall not exceed the portion of the Purchase Price received by the Shareholder for his or her Shares; (iii) The Shareholders' liability for Losses shall be net of any insurance proceeds to which Purchaser, the Company or the Subsidiary is entitled under any applicable
30
insurance and net of any other compensatory payments received by Purchaser, the Company or the Subsidiary, so long as doing so does not cancel or void any insurance coverage or policy of Purchaser, the Company or the Subsidiary. (iv) The Shareholders' liability for Losses shall be limited to the net amount thereof after all tax benefits realized by Purchaser, the Company or the Subsidiary in connection therewith, and the amount of indemnification paid by the Shareholders with respect to Losses shall be deemed a reduction of the Purchase Price received by the Shareholders for their Shares; and (v) The trustees of trusts which are Shareholders shall have no personal liability of any nature except for wrongful distributions to the beneficiaries of such trusts after receipt of notice of a claim for indemnification hereunder. (b) Purchaser's liability under this Article 10 shall be limited to the following Losses incurred by the Shareholders:
(i) Purchaser shall be liable for Losses pursuant to this
(ii) The aggregate amount of Losses for which Purchaser shall be liable pursuant to this Section 10 shall not exceed the Purchase Price; and (iii) Purchaser's liability for Losses shall be limited to the net amount thereof after all tax benefits realized by the Shareholders in connection therewith.
10.6 Control of Indemnified Matters. If a third-party claim is made
against an indemnified party that may result in a Loss to the indemnified party,
the indemnifying party will be entitled to participate in the defense thereof,
and if it so chooses, to assume the defense thereof with counsel selected by the
indemnifying party and reasonably satisfactory to the indemnified party. If the
indemnifying party elects to assume the defense of such third-party claim, the
indemnifying party will not be liable to the indemnified party for legal
expenses subsequently incurred by the indemnified party in connection with the
defense thereof. If the indemnifying party assumes such defense, the indemnified
party shall have the right to participate in the defense thereof and to employ
counsel, AT ITS OWN EXPENSE, SEPARATE FROM THE COUNSEL EMPLOYED BY THE
indemnifying party, it being understood that the indemnifying party shall
control such defense. The indemnifying party shall be liable for the fees and
expenses of counsel employed by the indemnified party for any period during
which the indemnifying party has not assumed the defense thereof. If the
indemnifying party chooses to defend or prosecute any third-party claim, all of
the parties hereto shall cooperate in the defense or prosecution thereof. Such
cooperation shall include the retention and (upon the indemnifying party's
request) the provision to the indemnifying party of records and information
which are reasonably relevant to such third-party claim, and making employees
available on a mutually convenient and reasonable basis to provide additional
information and explanation of any material provided hereunder. Whether or not
the indemnifying party shall have assumed the defense
31 of a third-party claim, the indemnified party shall not admit any liability with respect to, or settle, compromise or discharge, such third-party claim without the indemnifying party's prior written consent (which consent shall not be unreasonably withheld). Notwithstanding any provision in this Section 10.6, an indemnifying party shall have no right to participate in or in any way assume the defense of a third-party claim if such third-party claim seeks an order, injunction, non-monetary claim or other equitable relief against the indemnified party.
ARTICLE 11
ARBITRATION 11.1 Dispute Resolution. All controversies, disputes or claims arising among the parties in connection with, or with respect to, any provision of this Agreement or any of the Other Documents, which has not been resolved within twenty (20) days after either Purchaser or the Shareholders have notified the other in writing of such controversy, dispute or claim, shall be submitted for arbitration in accordance with the Real Property of the American Arbitration Association or any successor thereof. Arbitration shall take place at an appointed time and place in Lexington, Kentucky. 11.2 Selection of Arbitrators. Purchaser and the Shareholders each shall select one (1) arbitrator (who shall not be counsel for such party), and the two (2) so designated shall select a third arbitrator. If either party shall fail to designate an arbitrator within seven (7) calendar days after arbitration is requested, or if the two (2) arbitrators shall fail to select a third arbitrator within fourteen (14) calendar days after arbitration is requested, then such arbitrator shall be selected by the American Arbitration Association or any successor thereto upon application of either party. Judgment upon any award of the majority of arbitrators shall be binding and shall be entered in a court of competent jurisdiction. Subject to the provisions of this Agreement, including but not limited to Section 12.14, the award of the arbitrators may grant any relief that a court of general jurisdiction has authority to grant, including, without limitation, an award of damages and/or injunctive relief, and shall assess, in addition, the cost of the arbitration, including the reasonable fees of the arbitrator, reasonable attorneys' fees and costs of all prevailing parties, against all non-prevailing parties. 11.3 Temporary Injunctive Relief. Nothing herein contained shall bar the right of any of the parties to seek and obtain temporary injunctive relief from a court of competent jurisdiction in accordance with applicable law against threatened conduct that will cause loss or damage, pending completion of the arbitration, and the prevailing party therein shall be entitled to an award of its reasonable attorneys' fees and costs. 11.4 Arbitration Rules. All disputes and claims shall be determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "Rules") in effect on the date hereof, except that such Rules shall be modified by this Agreement. 11.5 Arbitration Proceedings. All arbitral proceedings arising under, or in connection with, this Agreement shall be governed by the Federal Rules of Civil Procedure. Notwithstanding the previous sentence, the arbitrators' award shall be made no later than ninety (90) days after their 32 appointment. Subject to the parties' right to be treated fairly, the arbitrators may shorten the periods of time otherwise applicable to the arbitral proceedings under the Rules or the Federal Rules of Civil Procedure to permit the award to be made within the time limitation set forth in the previous sentence.
ARTICLE 12
MISCELLANEOUS 12.1 Notices and Agent. All Notices under this Agreement ("Notices") shall be given: (i) by personal delivery; (ii) by facsimile transmission; (iii) by registered or certified mail, postage prepaid, return receipt requested; or (iv) by nationally recognized overnight or other express courier services, as follows: (a) If to Purchaser:
West Virginia - Indiana Coal Holding Company, Inc.
1500 North Big Run Road
With a copy to:
Paul E. Sullivan, Esq.
Brown, Todd & Heyburn PLLC
Telephone No.: (606) 231-0000 Telecopy No.: (606) 231-0011 (b) If to the Shareholders:
Ronnie G. Dunnigan, Esq.
33
With a copy to: John H. Stites, III, Esq.
Greenebaum Doll & McDonald PLLC
Telephone No.: (502) 587-3544 Telecopy No.: (502) 540-2144 All Notices shall be effective and shall be deemed delivered: (i) if by personal delivery, on the date of delivery if delivered during normal business hours of the recipient, and if not delivered during such normal business hours, on the next Business Day following delivery; (ii) if by facsimile transmission or overnight courier service, on the next Business Day following dispatch of such facsimile (providing receipt thereof is confirmed by the sending operator) or overnight courier package; and (iii) if by mail, on the third (3rd) Business Day after dispatch thereof. Either party may change its address by Notice to the other party. (c) Ronnie G. Dunnigan is hereby appointed by the other Shareholders, and hereby agrees to act, as Agent for the Shareholders under this Agreement for the limited purpose of receiving Notices to the Shareholders under this Agreement from the Purchaser and providing services to the Shareholders as set forth below in this Section. The Agent hereby agrees to deliver copies of all Notices received from the Purchaser, the Company or the Subsidiary under this Agreement to the Shareholders promptly upon receipt. If the Agent is unable to deliver a copy of any notice to any Shareholder, the Agent will promptly notify Purchaser, the Company and the Subsidiary so that they can otherwise seek to deliver the notice. The Agent shall appoint arbitrators on behalf of the Shareholders as provided in Section 11.2 and shall otherwise, acting with Greenebaum Doll & McDonald PLLC as counsel to the Shareholders, oversee and handle the investigation, defense and resolution of any claims for indemnification against Shareholders asserted by Purchaser, the Company or the Subsidiary, unless a majority of the Shareholders elect to otherwise defend and handle any such claim for indemnification.
12.2 Waivers. No waiver or failure to insist upon strict compliance with
any obligation, covenant, agreement or condition of this Agreement shall operate
as a waiver of, or an estoppel with respect to, any subsequent or other failure.
12.3 Expenses. Each party shall assume its respective expenses incurred in connection with the transactions contemplated by this Agreement and the Other Documents. The Shareholders agree that the Company has not and will not bear any costs or expenses related to this Agreement, provided that the Company and the Subsidiary may pay their counsel. Greenebaum Doll & McDonald PLLC, an amount not exceeding $50,000 at the Closing for general services rendered since June 1, 1998 and for assistance to the Company and the Subsidiary in preparing the Schedules hereto and in otherwise facilitating the transactions contemplated under this Agreement. 12.4 Headings: Interpretation. The headings in this Agreement have been included solely for ease of reference and shall not be considered in the interpretation or construction of this 34 Agreement. All references herein to the masculine, neuter or singular shall be construed to include the masculine, feminine, neuter or plural, as applicable.
12.5 Annexes and Schedules. The Annexes and Schedules to this Agreement
are incorporated herein by reference and expressly made a part hereof.
12.6 Entire Agreement. All prior negotiations and agreements by and among the parties hereto with respect to the subject matter hereof are superseded by this Agreement and the Other Documents, and there are no representations, warranties, understandings or agreements with respect to the subject matter hereof other than those expressly set forth in the Agreement, the Other Documents or an Annex or Schedule delivered in connection herewith or therewith. No amendment, modification or other change to this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought. 12.7 Representations and Warranties, Etc. The representations and warranties of each party contained herein shall not be deemed to be waived or otherwise affected by any investigation made by any other party hereto. As used in this Agreement, the term "Shareholders' knowledge." and all other references to matters which are known by or to the Shareholders, shall refer to matters which are known, or which with the exercise of reasonable care should have been known, by the Shareholders after consultation with the Company's and the Subsidiary's current corporate officers, directors, plant managers, shift supervisors and foreman, and after their due investigation of corporate records (except that if the Shareholders are required to make "due inquiry" with respect to any matter, they shall make such additional inquiry as a reasonable person would make under the circumstances). 12.8 Governing Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the Commonwealth of Kentucky. Each party agrees that any action brought in connection with this Agreement against another shall be filed and heard in Fayette County, Kentucky, and each party hereby submits to the jurisdiction of the Circuit Court of Fayette County, Kentucky, and the U.S. District Court for the Eastern District of Kentucky, Lexington Division. 12.9 Brokers. The parties covenant and agree with one another that they have not dealt with any broker or finder in connection with any of the transactions contemplated in this Agreement and, insofar as they know, no broker or other Person is entitled to a commission or finders' fee in connection with these transactions. Each party shall indemnify and hold the other parties harmless from and against any claim by any agent or broker claiming by or through it or any of its Affiliates for any fee or other compensation due or allegedly due that broker or other Person. 12.10 Counterparts. This Agreement may be executed in any number of counterparts, including by means of facsimile, each of which shall be an original, but all of which together shall constitute one and the same Instrument. 12.11 Benefit and Binding Effect. This Agreement shall be binding upon, and shall inure to the benefit of, the Shareholders and their heirs, personal representatives, successors and assigns, 35 and Purchaser and each of its successors and assigns; provided, however, that no party to this Agreement shall assign his or its rights or obligations hereunder without the express written consent of the other parties, which consent shall not be unreasonably withheld, and no party shall be released of its obligations under this Agreement as a result of such assignment. However, notwithstanding anything to the contrary in this Section 12.11, Purchaser may assign its rights under this Agreement to an Affiliate of Purchaser.
12.12 Specific Performance. Subject to Article 11, the parties shall be
entitled to specific performance, injunctive relief and other equitable relief
for breaches of the other parties' covenants and agreements, and such relief may
be awarded by the arbitrators pursuant to Article 11. Therefore, it is agreed
the parties will not, in any action to enforce this Agreement, assert that there
is an adequate remedy at law for the default under which such action or
proceeding is based.
12.13 Severability. If any provision of this Agreement or its application will be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of all other applications of that provision, and of all other provisions and applications hereof, will not in any way be affected or impaired. If any court shall determine that any provision of this Agreement is in any way unenforceable, such provision shall be reduced to whatever extent is necessary to make such provision enforceable. 12.14 No Consequential Damages. Except as prohibited by law, each party waives any right it may have to claim or recover any special, exemplary, punitive or consequential damages, or any damages other than, or in addition to, actual damages. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date set forth in the preamble hereto.
36
*Ronnie G. Dunnigan as attorney in fact for these Shareholders.
37
EXHIBIT 2.7
STOCK PURCHASE AGREEMENT
This is a Stock Purchase Agreement, dated September 2, 1998 (this "Agreement"), among (i) West Virginia-Indiana Coal Holding Company, Inc., a Delaware corporation ("Purchaser"); and (ii) Stephen Addington, George Jackson Sparks, Robert Hatton, W. Todd Skaggs, Rhonda D. Cavender, Charles J. Helms, Jr., Gilbert Wayne Lawrence, David A. Ison, Willie Begley, Michael P. Moore, and Marvin Linwood Jones, who are the Shareholders (collectively, the "Shareholders") of Hayman Holdings, Inc., a Kentucky corporation (the "Company").
RECITALS
A. The Shareholders collectively own one hundred percent (100%) of the issued and outstanding shares of the capital stock of the Company (the "Shares") in the following amounts:
B. The Shareholders wish to sell, and Purchaser wishes to purchase, all of the Shares pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual benefits and covenants contained herein, and subject to the terms and conditions set forth herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS 1.1 Definitions. As used in this Agreement, the following terms shall have the following meanings: (a) "Affiliate" of any Person shall mean (i) a Person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is controlled by a Person that controls, such Person; (ii) any trust or estate in which such Person has a beneficial interest or as to which such Person serves as a trustee or in another fiduciary capacity; and (iii) any spouse, parent or lineal descendent of such Person. As used in this definition, "control" shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies, whether through ownership of securities, partnership or other ownership interests, by contract or otherwise. (b) "Agent" shall mean Charles J. Helms, Jr. in his capacity as agent for all of the Shareholders other than Stephen Addington as provided in (S) 12.1(c). (c) "Approval" shall mean each and every authorization, approval, consent, license, filing and registration by, with or from any nation or state or other political subdivision thereof or by or with any regulatory or governmental authority of any nation or state or other political subdivision thereof or by or with any regulatory or governmental authority of any nation or state or other political subdivision thereof or international organization, self regulatory organization or stock exchange, necessary to authorize or permit the execution, delivery or performance of this Agreement or any other document contemplated hereby or for the validity enforceability hereof or thereof. (d) "Balance Sheet" shall have the meaning given in Section 3.7(a). (e) "Bassco Option" shall mean the option held by the Subsidiary to purchase unissued shares of the common stock of Kindill Holding representing Fifty-Eight and One Tenth percent (58.1%) of the outstanding shares of common stock of Kindill Holding on a fully diluted basis. (f) "Bonds" shall have the meaning given in Section 3.34(b). (g) "Business Days" shall have the meaning given in Section 1.3(i).
(h) "CERCLA" shall mean the Comprehensive Environmental Response,
Compensation & Liability Act, 42 USC (S)(S) 9601, et seq. and "CERCLIS" shall
mean the Comprehensive Environmental Response, Compensation and Liability
Information System.
(i) "Charges" shall have the meaning given in Section 3.3. (j) "Closing" shall mean the consummation of the transactions contemplated in this Agreement in accordance with the provisions of Article 9. (k) "Closing Date" shall have the meaning given in Section 7.8. (l) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(m) "Controlled Group Liability" shall mean any and all liabilities
-2-
(n) "Employee Benefit Plan" shall mean any employee benefit plan, program, policy, practices or other arrangement providing benefits to any current or former employee, officer or director of the Company or the Subsidiary or any beneficiary or dependent thereof that is sponsored or maintained by the Company or the Subsidiary or to which the Company or the Subsidiary contributes or is obligated to contribute, whether or not written, including, without limitation, any employee welfare benefit plan within the meaning of Section 3(1) of ERISA, any employee pension benefit plan within the meaning of Section 3(2) of ERISA (whether or not such plan is subject to ERISA) and any bonus, incentive, deferred compensation, vacation, stock purchase, stock option, severance, employment, change of control or fringe benefit plan, program or agreement, and "Employee Benefit Plans" means all such plans, programs, policies, practices and arrangements, collectively. (o) "Environmental, Mining and Safety Requirements" shall mean all federal, state and local statutes, regulations, ordinances, permits, judicial and administrative orders and determinations, and similar provisions having the force and effect of law, all contractual obligations and all common law concerning public health and safety, worker health and safety, mine health or safety, surface and underground mining, mineral processing or transport, mine reclamation, pollution or protection of the environment, including, without limitation, all those relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, release, runoff, containment, control, or clean-up of any Hazardous Substances, Oils, Pollutants or Contaminants (as such terms are defined in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. (S) 300.5) and any mining wastes or byproducts. (p) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended and all regulations promulgated thereunder as in effect from time to time. (q) "ERISA Affiliates", with respect to any entity, trade or business that is a member of a group described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes the first entity, trade or business or that is a member of the same "controlled group" as the first entity, trade or business pursuant to Section 4001(a)(14) of ERISA. (r) "Exclusive Sales Agreement" shall mean the Exclusive Sales Agreement, dated October 1, 1997, among Kindill Holding, Kindill Mining and Power Equity Sales. (s) "Financial Statements" shall have the meaning given in (S)3.7(a), copies of the Financial Statements being attached hereto as Annex 1.1(s). (t) "Francis Release" shall mean the Release Agreement attached hereto as Annex 1.1(t). (u) "GAAP" shall mean generally accepted accounting principles in effect from time to time. (v) "Hayman Permits" shall have the meaning given in Section 3.34.
-3-
(w) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the regulations and Premerger Notification and Report Form promulgated thereunder. (x) "Instrument" shall mean any written agreement, contract, arrangement, mortgage, indenture, obligation or commitment. (y) "Intellectual Property" shall mean trade names, trademarks or service marks, together with the good will associated therewith; copyrights; pending or issued registrations for any of the foregoing; patents and patent applications; unpatented inventions; trade secrets and other confidential or proprietary information, computer programs, processes, formulas and methods; and all other intangible property rights of any kind. (z) "IRS" shall mean the Internal Revenue Service. (aa) "Kindill Agreement" shall mean the Stock Purchase Agreement, dated September 2, 1998, between the shareholders of Kindill Holding and Purchaser, pursuant to which Purchaser shall acquire all of the outstanding capital stock of Kindill Holding. (bb) "Kindill Holding" shall mean Kindill Holding, Inc., a Kentucky corporation. (cc) "Kindill Mining" shall mean Kindill Mining, Inc., an Indiana corporation. (dd) "Leased Real Property" shall have the meaning given in Section 3.27(a). (ee) "Leased Tangible Assets" shall have the meaning given in Section 3.12(b). (ff) "Liabilities" (whether or not capitalized) shall mean all accounts payable, notes payable, liabilities, commitments, indebtedness or obligations of any kind whatsoever, whether absolute, accrued, contingent, matured or unmatured, of the Company, or to which any property or assets of the Company are subject. (gg) "Loss" shall have the meaning given in Section 10.2. (hh) "Material" (whether or not capitalized) shall include any matter which might influence Purchaser's decision to consummate the transactions contemplated herein. (ii) "Material Adverse Effect" shall mean an effect, event, occurrence or state of facts that, individually or aggregated with other effects, events, occurrences or states of facts, is materially adverse to (i) the assets, business, property, results of operations, condition (financial or otherwise) or prospects of the specified entity and its subsidiaries taken as a whole, (ii) the ability of the specified entity to perform its obligations under this Agreement or any of the Other Documents, or (iii) the validity or enforceability of this Agreement or any of the Other Documents or, when used with respect to the Company or the Subsidiary, the material rights or remedies of Purchaser thereunder (in any capacity).
-4-
(jj) "Multi-employer Plan" shall mean any "multi-employer plan" within the of Section 4001(a)(3) of ERISA. (kk) "Notices" shall have the meaning given in Section 12.1. (ll) "Other Documents" shall mean the Power Equity Agreement, the Francis Release and all other agreements, certificates, opinions, instruments or documents contemplated by, required by or referred to in, this Agreement for the consummation of the transactions contemplated hereby. (mm) "Owned Real Property" shall have the meaning given in Section 3.27(b). (nn) "Owned Tangible Assets" shall have the meaning given in Section 3.12(a).
(oo) "Permitted Charges" shall mean (i) Charges for taxes and
assessments or governmental charges not yet due or which are being contested in
good faith and by appropriate proceedings and for which adequate reserves have
been established and which are accurately reflected in the Financial Statements;
(pp) "Permits" shall have the meaning given in Section 3.34(a). (qq) "Person" shall mean any person, firm, trust, partnership, corporation or other business entity. (rr) "Plan" shall mean any Employee Benefit Plan other than a Multi- employer Plan. (ss) "Power Equity Agreement" shall mean the Option Agreement and related agreements pursuant to which Kindill Holding and Kindill Mining are acquiring from Power Equity Sales an option to terminate the Exclusive Sales Agreement.
-5-
(tt) "Power Equity Sales" shall mean Power Equity Sales, LLC, a Kentucky limited liability company. (uu) "Purchase Price" shall have the meaning given in Section 2.2. (vv) "Qualified Plans" shall have the meaning given in Section 3.21(c). (ww) "Real Property" shall mean the Owned Real Property and the Leased Real Property, collectively.
(xx) "Related Party Transactions shall have the meaning given in
(yy) "Return" shall mean any tax return, statement, report or form (including) estimated tax returns and reports and information returns and reports) required to be filed with any Taxing Authority with respect to Taxes. (zz) "Rules " shall have the meaning given in Section 11. 4. (aaa) "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as the same may be amended from time to time.
(bbb) "Shareholders' knowledge" shall have the meaning given in
(ccc) "SMCRA" shall mean the Surface Mining Control and Reclamation Act of 1977, as amended. (ddd) "Subsidiary" shall mean Bassco Valley, LLC, a Delaware limited liability company. (eee) "Tax" or "Taxes" shall mean any income, alternative or add-on, ad valorem, transfer, withholding, franchise, profits, license, payroll, employment, excise, severance, stamp, occupation, premium, property, land value increment, environmental or windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever imposed on the Company or the Subsidiary and together with any interest or any penalty, addition to tax or additional amount imposed with respect to any interest or any penalty, addition to tax or additional amount imposed with respect to any of the foregoing taxes by any Taxing Authority. (fff) "Taxing Authority" shall mean any U.S. federal, state, local or foreign governmental authority responsible for the imposition of any relevant Tax. (ggg) "Withdrawal Liability" shall mean liability to a Multi-employer Plan as a result of a complete or partial withdrawal from such Multi-employer Plan.
1.2 Additional Terms. Other capitalized terms used in this Agreement but
not defined in Section 1. 1 above shall have the meanings ascribed to them
wherever such terms first appear in this
-6- Agreement; or, if no meanings are so ascribed, the meanings customarily associated with such terms in the coal mining industry.
1.3 Rules of Interpretation.
(a) The singular includes the plural and the plural includes the singular. (b) The word "or" is not exclusive. (c) A reference to a Person includes its permitted successors and permitted assigns. (d) Except as otherwise defined herein, accounting terms have the meanings assigned to them by generally accepted accounting principles, as applied by the accounting entity to which they refer. (e) The words include, includes " and " including " are not limiting. (f) A reference in a document to an Article, Section, Exhibit, Schedule, Annex or Appendix is to the Article, Section, Exhibit, Schedule, Annex or Appendix of such document unless otherwise indicated. Exhibits, Schedules, Annexes or Appendices to any document shall be deemed incorporated by reference in such document. (g) References to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. (h) The words "hereof," "herein" and "hereunder" and words of similar import when used in any document shall refer to such document as a whole and not to any particular provision of such document. (i) References to "days" shall mean calendar days, unless the term "Business Days" shall be used. "Business Days" shall mean all days other than any Saturday, Sunday or legal holiday in Kentucky. (j) This Agreement and the Other Documents are the result of negotiations among, and have been reviewed by, Purchaser and the Shareholders. Accordingly, this Agreement and the Other Documents shall be deemed to be the product of all parties thereto, and no ambiguity shall be construed in favor of or against any party.
-7-
ARTICLE 2
PURCHASE AND SALE 2.1 Purchase of the Shares. Subject to the terms and conditions of this Agreement, the Shareholders hereby agree to sell, transfer and deliver to Purchaser, and Purchaser hereby agrees to purchase, the Shares. 2.2 Purchase Price. The purchase price (the "Purchase Price") for the Shares shall be Four Million Six Hundred Ninety-One Thousand Five Hundred Seventy-Five Dollars ($4,691,575), which shall be paid to the Shareholders by wire transfer of immediately available funds in accordance with Schedule 2.2. 2.3 Allocation of Purchase Price. The Shareholders agree to allocate the Purchase Price for the Shares as provided in Schedule 2.2. The parties agree to file any and all applicable Tax Returns and other required tax schedules in accordance with such allocation and Code Section 1060 and will not adopt or otherwise assert tax positions inconsistent therewith. The parties each shall prepare and file completed Form 8594 for the taxable year in which the Closing takes place. which form shall be consistent with the requirements set forth in this Section 2.3. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS The Shareholders, jointly and severally, represent and warrant to the Purchaser that to the best of the knowledge of each of the Shareholders (except with respect to the representations and warranties contained in (S)(S)3.1, 3.2, 3.3, 3.4, 3.5, and 3.6, which shall not be qualified with respect to the knowledge of any Shareholder) as of the date hereof and as of the Closing Date:
3.1 Organization, Power, Authority, Etc.
(a) Each of the Company and the Subsidiary is validly organized and existing and in good standing under the laws of Kentucky and Delaware, respectively. Each of the Company and the Subsidiary (i) is duly qualified to do business and in good standing as a foreign corporation or a foreign limited liability company, as the case may be, in each jurisdiction where the nature of its business makes such qualification necessary except for such failures to be so qualified as would not, individually or in the aggregate, have a Material Adverse Effect on the Company or the Subsidiary, and (ii) has full corporate power and authority to own and hold under lease its property and to conduct its business substantially as presently conducted by it, except for such failures to have power and authority as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, as the case may be, Schedule 3.1 lists the jurisdictions in which each of the Company and the Subsidiary is
qualified to do business.
(b) The minute books of the Company and the Subsidiary correctly reflect all actions taken by the Company's directors and shareholders and the Subsidiary's members and managers in their capacity as such, and correctly record all resolutions adopted by them. All actions required of the Company and the Subsidiary have been taken, and all reports or returns required to
-8-
be filed by the Company and the Subsidiary have been filed. Each of the Company and the Subsidiary has full power and authority to enter into and perform its obligations under this Agreement and each Other Document.
3.2 Due Authorization.
(a) The Shareholders have full right, power, authority, and capacity to execute and deliver this Agreement and the Other Documents, and to perform their respective obligations under this Agreement and the Other Documents.
(b) Except as set forth on Schedule 3.2, the execution, delivery and
performance by the Company and the Subsidiary of this Agreement and each of the
Other Documents, as the case may be, including each of the transactions
contemplated hereby and thereby: (i) have been duly authorized by all necessary
proceedings on the part of the Company and the Subsidiary, as the case may be;
(ii) do not require any Approval which has not been obtained or will not be obtained prior to the Closing Date; (iii) will not conflict with or result in any violation of, any provision of the certificate of incorporation and by-laws (or any equivalent organizational documents) of the Company or the Subsidiary, as the case may be; (iv) do not and will not conflict with any provision of any material Instrument of the Company or the Subsidiary or any present law or governmental regulation applicable to the Company or the Subsidiary, or their assets, properties or operations or any court decree or order applicable to the Company or the Subsidiary, or their assets, properties or operations; (v) do not and will not result in or require the creation or imposition of any Charges on any of the properties of the Company or the Subsidiary; and (vi) do not require any notices, filings or authorizations to be given, filed or obtained from any governmental authority other than notices required under the HSR Act. 3.3 Title to Stock. The Shareholders have, and at the Closing will have, good and marketable (legal and beneficial) title to the Shares, free and clear of all liens, pledges, proxies, voting trusts, licenses, security interests, easements, rights-of-way, use restrictions, options, title defects, mortgages, claims, charges, restrictions or encumbrances of any kind or nature whatsoever (collectively, "Charges"), and there are no outstanding purchase agreements, options, warrants, or other rights of any kind whatsoever entitling any Person to purchase or acquire an interest in any of the Shares or restricting their transfer in accordance with this Agreement. Each Shareholder owns of record and beneficially the Shares set forth by his name in Recital A. Upon delivery of the certificates representing the Shares, and upon receipt of the Purchase Price, good and valid title to the Shares will pass to Purchaser, free and clear of all Charges. 3.4 Validity, Etc. Assuming due execution as necessary by Purchaser, this Agreement and each Other Document executed by the Shareholders, the Company or the Subsidiary in accordance herewith constitutes the legal, valid and binding obligations of each such Person executing such document enforceable in accordance with its respective terms. -9-
3.5 Capitalization of the Company.
(a) As of the date hereof, the authorized capital stock of the Company consists of Two Thousand (2,000) shares of common stock, no par value per share. There are no outstanding (A) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company any capital stock or any such convertible or exchangeable securities or obligations, except for the Bassco Option, or (C) obligations of the Company to issue such shares, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. No person has preemptive or similar rights with respect to the securities of the Company. There are no obligations of the Company or the Subsidiary to vote or to repurchase, redeem or otherwise acquire, or to register under the Securities Act, any shares of capital stock of the Company or membership interests in the Subsidiary. (b) Except as set forth on Schedule 3.5, all of the outstanding capital stock of the Company has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Shareholders, free and clear of any Charges of any kind, there are no rights granted to or in favor of any third party, other than the Company, to acquire any such capital stock, any additional capital stock or any other securities of the Company (including securities convertible into or exchangeable for capital stock), and there exists no restriction on the payment of cash dividends by the Company.
3.6 Subsidiary. As of the Closing, all of the membership interests of the
Subsidiary will be owned by the Company free and clear of any Charges of any
kind. There are no rights granted to or in favor of any third party to acquire
any such membership interests, any additional membership interests or any other
securities of the Subsidiary (including securities convertible into or
exchangeable for membership interests), and there exists no restriction on the
payment of cash dividends by the Subsidiary. Neither the Company nor the
Subsidiary owns or controls, directly or indirectly, any capital stock of any
other corporation or any interest in any other Person, except for the Bassco
Option.
3.7 Financial Statements. (a) The unaudited consolidated balance sheets of the Company as of December 31, 1997, are set forth as Schedule 3.7 (the "Balance Sheet" and the "Financial Statements"). The Financial Statements: (i) were prepared: (x) from and in accordance with the books and records of the Company and the Subsidiary and (y) in accordance with GAAP, consistently applied; and (ii) fairly present the financial condition, results of operations and cash flows of the Company and the Subsidiary at the dates and for the period to which they relate, subject, in the case of unaudited statements, to normal year-end audit adjustments (consisting only of normal recurring accruals). (b) The Company was incorporated on September 17, 1996. (c) The reserves for future costs associated with workers' compensation, Black Lung and unemployment compensation as stated in the Financial Statements and in the books, records and financial statements of the Company are fair and reasonable and in accordance with
-10-
GAAP and the appropriate financial accounting standards. The Company has accrued its and the Subsidiary's obligations for retiree medical benefits in accordance with Statement of Financial Accounting Standards No. 106.
3.8 Contingent Liabilities. The Company and the Subsidiary do not have
any material liabilities other than (i) as set forth on the Financial
Statements, (ii) as reflected in, reserved against or otherwise disclosed in the
Balance Sheet or the notes thereto, and (iii) liabilities and obligations which
would not individually or in the aggregate have a Material Adverse Effect on the
Company or the Subsidiary.
3.9 Approvals. Except as set forth on Schedule 3.9 of the Disclosure Schedule, no approval is required to be obtained by the Company or the Subsidiary for the consummation of the transactions contemplated by this Agreement. 3. 10 No Existing Violation, Default, Etc. Neither the Company nor the Subsidiary is, or upon consummation of the transactions contemplated hereby will be, in violation of (a) its certificate of incorporation, by-laws or other organization documents, (b) except as set forth in Schedule 3.10, any applicable law, rule, restriction, order, judgment, decree, ordinance, rule or regulation of any governmental entity or administrative body, which violation has or could reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, or (c) except as set forth in Schedule 3.10 any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or the Subsidiary, which violation has or could reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. Except as disclosed in Schedule 3.10, no breach or event of default or event that, with the giving of notice or the lapse of time or both, would constitute a breach or event of default exists or, upon the consummation of the transactions contemplated by this Agreement, will exist under any Instrument to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary is bound or to which any of the properties, assets or operations of the Company or the Subsidiary is subject, which breach or event of default, or event that, but for the giving of notice or the lapse of time or both, would constitute a breach or event of default, has or could reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. 3. 11 Licenses, Etc. The Company and the Subsidiary hold, own and possess all material governmental, regulatory and other filings, licenses, approvals, registrations, permits, consents, franchises and concessions (collectively, "Licenses") necessary for the ownership of the property and conduct of the businesses of the Company and the Subsidiary, as now conducted. Such Licenses are held without any infringement upon rights of other Persons, any violation of law or regulation or any breach of a contractual or other obligation except for such infringements, violations or breaches as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. None of such Licenses is being or has been challenged or revoked and no statement of intention to challenge, revoke or fail to renew any such License has been received by the Company or the Subsidiary. The Company and the Subsidiary are in compliance with their respective obligations under such Licenses, with such exceptions as individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, and no event has occurred that allows or, after notice or lapse of time or both, would allow revocation, -11- suspension, limitation or termination of such Licenses, except such events as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary.
3.12 Tangible Personal Property.
(a) Schedule 3.12(a) sets forth a true and complete list of all the principal items of machinery, equipment, vehicles, and other tangible personal property now owned by the Company or the Subsidiary in their business (the "Owned Tangible Assets"). Except as set forth on Schedule 3.12(a), as of the Closing Date and immediately following the consummation of the transactions at Closing, the Company, or the Subsidiary as applicable, will have good and marketable title to all of its fixed assets, operating assets and other tangible personal property including, without limitation, its Owned Tangible Assets, free and clear of all Charges. The execution and delivery of this Agreement, and the consummation of the transactions contemplated by this Agreement, will not result in the creation of any Charge on any of the Owned Tangible Assets. The Owned Tangible Assets shall be in good working order on the Closing Date, except for normal wear and tear and deterioration associated with the operation of such assets in the ordinary course of the Company's or the Subsidiary's business, and are suitable for the purposes for which they are presently used. (b) Schedule 3.12(b) sets forth a true and complete list of all the principal items of machinery, equipment, vehicles, and other tangible personal property now leased by each Company in its business, together with a brief description of the principal terms of each lease (the "Leased Tangible Assets"). Except as set forth on Schedule 3.12(b), as of the Closing Date and immediately following the consummation of the transactions at Closing, the Company, or the Subsidiary as applicable, will have good and transferable leasehold interests in all of its Leased Tangible Assets, in each case under valid leases enforceable against the lessors thereunder. The execution and delivery of this Agreement, and the consummation of the transactions contemplated by this Agreement, will not result in the creation of any Charge on any of the Leased Tangible Assets or result in any default under or violation of any applicable lease agreement. The Leased Tangible Assets shall be in good working order on the Closing, Date, except for normal wear and tear and deterioration associated with the operation of such assets in the ordinary course of the Company's or the Subsidiary's business, and are suitable for the purposes for which they are presently used. 3.13 Sufficiency of Assets. The tangible real and personal property, including, without limitation, plants, buildings, structures, equipment, machinery and vehicles, owned or leased by the Company or the Subsidiary or used or employed by either of them in their respective business, are sufficient and adequate to carry on their respective businesses as presently conducted. 3.14 Environmental Matters. Except as set forth in Schedule 3.14: (a) Without limiting Section 3.14, except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, the Company and the Subsidiary are in compliance in all respects with all Environmental, Mining and Safety Requirements, and have filed all notices and compliance reports required to be filed under any Environmental, Mining and Safety Requirements (including, without limitation, notices and reports indicating past or present treatment, storage or disposal, or reporting a spill or release into the environment, of any Hazardous
-12-
Substances, Oils, Pollutants or Contaminants), and (i) neither the Company nor the Subsidiary has received any written communication or other notice from any governmental authority alleging that the Company or the Subsidiary is not in compliance, in all material respects, with Environmental, Mining and Safety Requirements, (ii) all contract mining activities performed on Real Property for which the Company or the Subsidiary retains liability under Environmental, Mining and Safety Requirements have been conducted in compliance in all material respects with all Environmental, Mining and Safety Requirements, (iii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice have been filed or commenced against or otherwise given to the Company or the Subsidiary alleging any failure so to comply, and (iv) neither the Company nor the Subsidiary has any material contingent liability with respect to its business in connection with any Hazardous Substances, Oils, Pollutants, or Contaminants or under any Environmental, Mining, or Safety Requirements. (b) The Company and the Subsidiary maintain reserves for future costs associated with reclamation and mine closings for all Real Property (including any formerly owned or leased Real Property for which the Company or the Subsidiary has retained or assumed liability either contractually or by operation of law) in accordance with GAAP and the Company's and the Subsidiary's reclamation projects and procedures are on schedule in accordance with SMCRA, in all material respects and are being conducted in a manner that complies with all other legal requirements in all material respects (including those governing bonding and financial responsibility for reclamation and all Environmental, Mining and Safety Requirements). (c) (i) Neither the Company nor the Subsidiary has been notified that it is a potentially responsible party, or that any governmental authority or other individual is seeking information in connection with or advising the Company or the Subsidiary that it is responsible for, or potentially responsible for, costs under Environmental, Mining and Safety Requirements, including CERCLA, for cleanup of, or investigatory, remedial or other corrective action required with respect to Hazardous Substances, Oils, Pollutants or Contaminants at any Real Property or at any other location; (ii) to the knowledge of the Company, no Real Property is listed on any federal or state contaminated site list, including the national priority list under CERCLA, the CERCLIS, or any state counterparts; and (iii) neither the Company nor the Subsidiary has knowledge of any release of Hazardous Substances, Oils, Pollutants or Contaminants in quantities requiring investigation or cleanup at any of the Owned Real Property or Leased Real Property or at any other location. (d) The Company has provided Purchaser with (i) all information within its possession regarding the environmental history of the operations of the Company and the Subsidiary, including any audits, site assessments, sampling or test results related to Hazardous Substances, Oils, Pollutants or Contaminants, environmental impact statements, and liability studies prepared by or for the Company or the Subsidiary, or by any third party, including governmental agencies or insurance companies, and (ii) a list of all material Licenses held by the Company and the Subsidiary under Environmental, Mining and Safety Requirements. (e) The Company and the Subsidiary have duly complied with, and their respective businesses, operations, assets, equipment, leaseholds and facilities, including, without limitation, the Real Property, are in full compliance with, the provisions of all federal, state and local
-13-
environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder, including, without limitation, all laws and regulations with respect to reporting releases of Hazardous Substances and the registration, testing and maintenance of underground storage tanks.
(f) Except in accordance with a valid License listed on Schedule
3.14, there has been no emission, spill, release, discharge or threatened
release into or upon (i) the air; (ii) the soils or any improvements located
thereon; (iii) the surface water or ground water; or (iv) the sewer, septic
system or waste treatment, storage or disposal system servicing the Real
Property, of any Hazardous Substance, Oil, Pollutant or Contaminant at or from
any of the Real Property.
3.15 Taxes. Except as set forth on Schedule 3.15: (a) each of the Company and the Subsidiary has duly filed all reports and returns relating to federal, state, local or foreign income Tax required to be filed by it up to and including the date hereof; (b) each of the Company and the Subsidiary has maintained all required records with respect to Taxes and has duly paid all Taxes shown as due on all Returns filed by it; and (c) reserves for Taxes reflected in the Balance Sheet (other than for deferred Taxes) are not less, by a material amount, than the Taxes that are attributable to periods up to and including the periods contemplated by the Balance Sheet or that have otherwise accrued as of the date of the Balance Sheet; (d) there are no Tax liens upon any property or assets of the Company or the Subsidiary, except liens for current Taxes not yet due; (e) no deficiencies have been proposed, asserted or assessed against the Company or the Subsidiary in writing, and no issue has been raised by any taxing authority in writing in any examination about which any of the officers or directors of the Company or the Subsidiary (and employees responsible for Tax matters of the Company or is Subsidiary) have knowledge which, by application of the same or similar principles, reasonably could be expected to result in a deficiency for any other period not so examined, except for any deficiency which could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary; (f) with respect to periods commencing a after December 31, 1992 and ending before January 1, 1998, neither the Company, nor the Subsidiary or any of their respective predecessors in interest has incurred any liability for Taxes that is unpaid; (g) there are no outstanding agreements or waivers extending the statutory period of limitation applicable to any Taxes or Returns of the Company or the Subsidiary for any period; (h) all Returns for the Company and the Subsidiary in respect of all years not barred by the statute of limitations have heretofore been made available by the Company to Purchaser and such Returns are true, correct and complete in all material respects; (i) neither the Company nor the Subsidiary has, with regard to any assets or property held, acquired or to be acquired by it, filed a consent to the application of Section 341(f)(2) of the Code; and (j) no amount of compensation paid by the Company or the Subsidiary in 1997 or the part of 1998 preceding the Closing Date is non-deductible for purposes of federal, or any applicable state or local income Tax, except for any amount which could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. 3.16 Litigation. Except as set forth in Schedule 3.16, there is no pending action, suit, proceeding, arbitration or investigation (nor any group of actions, suits, proceedings, arbitrations or, investigations arising out of the same event, transaction, occurrence or pattern of activity by the Company or the Subsidiary) against or affecting the Company or the Subsidiary or any of their respective properties, businesses, assets or operations, or with respect to which the Company or the -14-
Subsidiary is responsible by way of indemnity or otherwise, (i) that questions
the validity of this Agreement or any action to be taken pursuant to this
Agreement or seeks to impose material damages in connection with the
transactions contemplated hereby, or (ii) that could reasonably be expected to
have an adverse effect on the Company or the Subsidiary in the amount of Two
Hundred Fifty Thousand Dollars ($250,000.00) or more or that could materially
affect the ability of the Shareholders to perform their obligations under this
Agreement. Except as set forth in Schedule 3.16, no such actions, suits,
proceedings or investigations are threatened or contemplated.
3.17 Compliance with Laws. (a) Except as set forth on Schedule 3.17, each of the Company and the Subsidiary is in compliance with every statute, rule, restriction, law, regulation, order, judgment or decree of any governmental entity applicable to it or by which it is bound, including, without limitation, the Fair Labor Standards Act or regulations under such act or other laws and regulations relating to wages, hours, labor agreements, the payment of Social Security and similar taxes, unemployment or workers' compensation, including black lung benefits, except for such failures as would not have a Material Adverse Effect on the Company or the Subsidiary. Neither the Company nor the Subsidiary has received from any governmental or regulatory authority any written notice alleging any material violation of law or claiming any material liability of the Company or its Subsidiarily as a result of any such alleged material violation. (b) Except for acts, omissions or liabilities that could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, neither the Company nor the Subsidiary is liable for any arrearages, taxes or penalties with respect to any of their employees in regard to any violation or potential violation of the Fair Labor Standards Act or regulations under such act or other laws and regulations relating to wages, hours, labor agreements, payment of Social Security and similar taxes, unemployment or workers' compensation including Black Lung benefits and obligations and/or similar state laws and regulations.
3.18 Labor Relations. Except as set forth in Schedule 3.18:
(a) The Company and the Subsidiary are in compliance in all respects with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, excluding Environmental, Mining and Safety Requirements (which are addressed separately in Section 3.18), except for such failures as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. (b) The Company and the Subsidiary are in compliance with all provisions of applicable collective bargaining agreements, and arbitration, administrative and judicial decisions interpreting and/or affecting such agreements, except for such failures as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. (c) There is no unfair labor practice charge or complaint or any other labor employment matter against or involving the Company or the Subsidiary pending or, to the Shareholders' knowledge, threatened before the National Labor Relations Board or any court of law
-15-
which could reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. (d) There is no labor organizing activity, strike, dispute, lockout, slowdown or stoppage actually pending or, to the Shareholders' knowledge, threatened against the Company or the Subsidiary. (e) Since January 1, 1994, there has been no certified collective bargaining representative of the Company's or the Subsidiary's employees, no demand made to the Company or the Subsidiary for recognition by any collective bargaining representative, and no petition for an election filed with the National Labor Relations Board or any other governmental authority or Person with respect to the Company's or the Subsidiary's employees. (f) There are no charges, investigations, administrative proceedings or formal complaints of discrimination (including discrimination based upon sex, age, marital status, race, color, religion, national origin, sexual preference, disability, handicap or veteran status) pending or threatened before the Equal Employment Opportunity Commission or any federal, state or local agency or court against the Company or the Subsidiary, except for those which could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. (g) Neither the Company nor the Subsidiary has any liability for current or future obligations under the Industry Retiree Health Benefit Coal Act of 1992, as amended.
3.19 Contract Miners. Truckers and Others. Schedule 3.19 contains a
complete and accurate list of all Persons with whom the Company or the
Subsidiary has at any time since January 1, 1998, had any contract,
understanding or agreement (oral or written but exclusive of any employment
agreement with any hourly or salaried employees) or joint venture agreement or
partnership to perform services relating to the operations and facilities of the
Company or the Subsidiary, including, but not limited to, contracts,
understandings and/or agreements involving sludge and/or slurry, the mining of
coal, the preparation of coal, or the loading or hauling by truck, railroad,
barge or otherwise of coal or refuse in connection with any coal 9 operations.
To the Shareholders' knowledge, each such person and each subcontractor thereof
has all insurance required by the terms of any agreement between such person and
the Company or the Subsidiary. Neither the Company nor the Subsidiary or their
respective Affiliates are either a common or joint employer with respect to, or
have exercised any control over the employees or labor relations of any such
person.
3.20 Contracts and Commitments. (a) Except as set forth on Schedule 3.20, neither the Company nor the Subsidiary is a party to any: (i) collective bargaining agreement or contract with any labor union; (ii) bonus, pension, profits sharing, retirement or other form of deferred compensation plan; (iii) stock purchase, stock option, stock appreciation or similar plan; (iv) contract for the employment of any officer, individual employee or other person on a full-time or consulting basis involving annual compensation by the Company or the Subsidiary in excess of One Hundred Thousand Dollars ($100,000.00); (v) agreement or indenture relating to borrowing money in excess of Two Hundred Fifty Thousand -16- Dollars ($250,000.00) or to mortgaging, pledging or otherwise placing a lien on any material portion of the Company's or the Subsidiary's assets; (vi) guaranty of any obligation for borrowed money in excess of Two Hundred Fifty Thousand Dollars ($250,000.00); (vii) lease or agreement under which it is lessee of, or holds or operates any personal property owned by any other party, for which the annual rental exceeds One Hundred Thousand Dollars ($100,000.00); (viii) contract or group of related contracts with the same party for the supply of coal to any Person in an amount of more than One Million Dollars ($1,000,000.00) or providing for deliveries extending beyond December 31, 1998; (ix) contract or group of related contracts with the same party for the purchase of inventories, supplies or services, under which the undelivered balance of such inventories, supplies or services has a price in excess of Two Hundred Fifty Thousand Dollars ($250,000.00); (x) contract or group of related contracts with the same party for the sale of products or services (other than coal sales contracts referred to in (viii) above) under which the undelivered balance of such products or services has a sales price in excess of Two Hundred Fifty Thousand Dollars ($250,000.00); (xi) any agreement to acquire, by merging, consolidating with. or by purchasing a substantial equity interest in or substantial portion of the assets of, any business or corporation, partnership or other business organization or otherwise acquire any material assets; (xii) tariff agreements and other transportation contracts for the shipment of coal made in the ordinary course of business; or (xiii) contract which prohibits or following the Closing will prohibit the Company or the Subsidiary in any material respect from. freely engaging in any business anywhere in the world.
(b) Purchaser either has been supplied with or has been given access
to a true and correct copy of all written contracts which are referred to in
Schedule 3.20, together with all material amendments, waivers or other changes
thereto.
(c) Neither the Company nor the Subsidiary, or, to the Shareholders' knowledge, any third party thereto, is in default, breach or violation under any contract listed in Schedule 3.20, except for such defaults, breaches or violations which could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. 3.21 Employee Benefits. (a) Schedule 3.21(a) includes a complete list of all material Employee Benefit Plans. (b) With respect to each Plan, the Company has delivered or made available re Purchaser a true, correct and complete copy of: (i) each writing constituting a part of such Plan including, without limitation, all plan documents, employee communications, benefit schedules, trust agreements, and insurance contracts and other funding vehicles; (ii) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (iii) the current summary_plan description and any material modifications thereto, if any (in each case, whether or not required to be furnished under ERISA); (iv) the most recent annual financial report, if any; (v) the most recent actuarial report, if any; and (vi) the most recent determination letter from the IRS, if any are no amendments to any Plan that have been adopted or approved nor has the Company the Subsidiary undertaken to make any such amendments or to adopt or approve any new Plan
-17-
(c) Schedule 3.21(c) identifies each Plan that is intended to be a
"qualified plan' within the meaning of Section 401(a) of the Code ("Qualified
Plans"). Except as set forth in, Schedule 3.21, the IRS has issued a favorable
determination letter with respect to each Qualified Plan and the related trust
that has not been revoked, and, to the Shareholders' knowledge, there are no
existing circumstances or events that have occurred that could adversely affect
the qualified status of any Qualified Plan or the related trust. No [Qualified]
Plan is intended to meet the requirements of Code Section 501(c)(9).
(d) All contributions required to be made to any Plan by applicable law of regulation or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any Plan, for any period through the date hereof have been timely made or paid in full or, to the extent not required to be made or paid on before the date hereof, have been fully reflected in the Financial Statements. Each Employ Benefit Plan that is an employee welfare benefit plan under Section 3(1) of ERISA is either (i) funded through an insurance company contract and is not a "welfare benefit fund" within the meaning of Section 419 of the Code, (ii) self-insured and considered unfunded, or (HE) a combination of (i) and (ii). (e) With respect to each Employee Benefit Plan, the Company and The Subsidiary have complied, and are now in compliance, in all material respects with all provisions of ERISA, the Code and all laws and regulations applicable to such Employee Benefit Plans and each Employee Benefit Plan has been administered in all material respects in accordance with its terms, except where such noncompliance could not reasonably be expected to have a Material Adverse Effect upon the Company or the Subsidiary. To the Shareholders' knowledge, there is not now, nor do any circumstances exist that could give rise to, any requirement for the posting of security with respect to a Plan or the imposition of any lien on the assets of the Company or the Subsidiary under ERISA or the Code. (f) No Employee Benefit Plan is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code.
(g) Except as set forth on Schedule 3.21(g), no Employee Benefit Plan
is a Multi-employer Plan or a plan that has two or more contributing sponsors at
least two of whom are not under common control, within the meaning of Section
4063 of ERISA (a "Multiple Employer Plan"). Neither the Company, nor the
Subsidiary or any of their respective ERISA Affiliates have, at any time during
the last six years, contributed to or been obligated to contribute to any Multi-
employer Plan or Multiple Employer Plan. Neither the Company, nor the Subsidiary
any ERISA Affiliates have incurred any Withdrawal Liability.
(h) To the Shareholders' knowledge, there does not now exist, nor do any circumstances exist that could result in, any Controlled Group Liability that would be a Liability the Company, or the Subsidiary, following the Closing. Without limiting the generality of the foregoing, none of the Company or the Subsidiary, their Affiliates or any ERISA Affiliate of the Company or the Subsidiary has engaged in any transaction described in Section 4069 or Section 4204 or 4212 of ERISA.
-18-
(i) Except as set forth on Schedule 3.21(i), the Company and the
Subsidiary have no liability for life, health, medical or other welfare benefits
to former employees or beneficiaries or dependents thereof, except for health
continuation coverage as required by Section 4980B of the Code or Part 6 of
Title I of ERISA and at no expense to the Company or the Subsidiary.
(j) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in conjunction with any other event) result in, cause the accelerated vesting or delivery of, or increase the amount or value of any payment or benefit to any employee, officer or director of the Company or the Subsidiary. Without limiting the generality of the foregoing, no amount paid or payable by the Company or the Subsidiary in connection with the transactions contemplated hereby (either solely as a result thereof or as a result of such transactions in conjunction with any other event) will be an "excess parachute payment" within the meaning of Section 280G of the Code. (k) To the Shareholders' knowledge, none of the Company, the Subsidiary or any other Person, including any fiduciary, has engaged in any "prohibited transaction" (as defined in Section 4975 of the Code or Section 406 of ERISA), which could subject any of the Employee Benefit Plans or their related trusts, the Company, the Subsidiary, or any Person that the Company or the Subsidiary has an obligation to indemnify, to any material tax or penalty imposed under Section 4975 of the Code or Section 502 of ERISA. (l) There are no pending or threatened claims (other than claims for benefits in the ordinary course), lawsuits or arbitrations which have been asserted or instituted, and to the Shareholders' knowledge, no set of circumstances exists which may reasonably give rise to a claim or lawsuit, against the Plans, any fiduciaries thereof with respect to their duties to the Plans or the assets of any of the trusts under any of the Plans which could reasonably be expected to result in any material Liability of the Company or the Subsidiary to the Department of Treasury, the Department of Labor, any Multi- employer Plan, any Plan or any participant in a Plan. (m) The Company, the Subsidiary, and each member of their respective business enterprises have complied with the Worker Adjustment and Retraining Notification Act. (n) For purposes of this Section 3.21, the term "employee" shall be considered to include individuals rendering personal services to the Company or the Subsidiary as independent contractors.
3.22 Banks, Directors and Officers, Life Insurance and Employees, Schedule
3.22 sets forth (a) a list of all banks with which the Company or the Subsidiary has an account, deposit, certificate of deposit, or safe deposit box along with identifying numbers and the names_of all persons authorized to draw thereon or having access thereto; (b) the names of all incumbent directors and officers of the Company and the Subsidiary and of all incumbent trustees and committee members under any of the Plans (as that term is defined in Section 3.22) or related trusts; (c) a description and identification of any insurance policies held or paid for by the Company or the Subsidiary on the lives of any of their respective key employees, officers, directors or shareholders, and (d) the names and job descriptions of all of the Company's and the Subsidiary's employees whose -19- total compensation from the Company and the Subsidiary for the fiscal year ending December 31, 1998, will exceed Twenty-Five Thousand Dollars ($25,000.00), together with a statement of the full amount paid or payable to each such person in respect of such year, a summary of the basis on which each such person is compensated if the basis is other than a fixed salary rate, and any changes in any of the foregoing since December 31, 1990. Except for any currently effective collective bargaining agreements listed on Schedule 3.26(a), no person is employed by the Company or the Subsidiary other than at the will of the Company or the Subsidiary for an indefinite period of time, and at the option of either the Company or the employee, such employee's employment with the Company may be terminated with or without cause, and with or without notice, at any time.
3.23 No Material Adverse Change. Except as set forth on Schedule 3.23,
since December 31, 1997, except as contemplated by this Agreement: (a) neither the Company nor the Subsidiary has incurred any liability, guarantee or obligation (indirect, direct or contingent), or entered into any oral or written agreement or other transaction, that is not in the ordinary course of business or that could reasonably be expected to be material to the Company; and (b) there has been no Material Adverse Effect on the Company or the Subsidiary, nor any developments that could reasonably be expected to result in a Material Adverse Effect on the Company or the Subsidiary. 3.24 Insurance. Schedule 3.24 sets forth a list and description of all policies of fire, liability, product liability, workers compensation, health and other forms of insurance presently in effect with respect to the Company's and the Subsidiary's business, true and complete copies of which have previously been made available to Purchaser. All such policies are valid, outstanding and enforceable policies. No notice of cancellation, termination or rejection of any material claim has been received by the Company or the Subsidiary with respect to any such policy in the last year. The activities and operations of the Company and the Subsidiary have been conducted in a manner so as to conform in all material respects to all applicable provisions of such insurance policies. The Company and the Subsidiary have been covered during the past five (5) years (or such shorter period as the entity has been in existence or has been a subsidiary of the Company) by insurance in scope and amount customary and reasonable for the businesses in which they have engaged during such period. 3.25 Intellectual Property Rights. (a) Schedule 3.25 lists all material Intellectual Property owned or licensed by the Company or the Subsidiary. Except as set forth on Schedule 3.25, such Intellectual Property is vested in or validly granted to the Company or the Subsidiary free and clear of all Charges and is not restricted in any material way. Neither the Company nor the Subsidiary has performed any act or permitted any omission which has resulted or could reasonably be expected to result in the cessation of the Company's or the Subsidiary's valid and enforceable rights in such Intellectual Property. Except as set forth on Schedule 3.21, neither the Company nor the Subsidiary has granted or is obligated to grant any license, sub-license or assignment in respect to any of such Intellectual Property. Neither the Company nor the Subsidiary is in breach of any license, sublicense or assignment granted to it with respect to any such Intellectual Property. -20- (b) The Company and the Subsidiary own, or have the defensible right to use. all of the Intellectual Property used in their respective businesses as currently conducted, except where the failure to own or have the right to use such Intellectual Property could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary. (c) To the Shareholders' knowledge, (i) the operation of the businesses of the Company and the Subsidiary do not infringe upon the intellectual property rights of any other Person, and (ii) the Intellectual Property of the Company and the Subsidiary is not infringed by the operations of any other Person.
3.26 Proprietary Information. Prior to or in conjunction with the Closing,
the Shareholders shall have fully disclosed to Purchaser all customer lists,
trade secrets, processes, inventions, formulas, methods, know-how and other
proprietary information used or developed by the Company and the Subsidiary in
connection with their respective business. Neither the Company nor the
Subsidiary has disclosed or permitted the disclosure of any such proprietary
information to any other Person, and the use by the Company and the Subsidiary
of such proprietary information does not violate any other Person's proprietary
rights.
3.27 Real Property. (a) Schedule 3.27(a) sets forth a true and complete list of all leases and other agreements (including wheelage and right-of-way agreements) by which the Company or the Subsidiary has a leasehold interest or other contractual right in or to any real property, or has the right to receive income from any third party as a result of the use or occupancy of any real property by such third party (collectively, the "Leased Real Property"). For each Leased Real Property, the list includes: (i) an identification of the lease, sublease or license agreement therefor (or any other agreement with respect to the use or occupancy thereof) and any and all amendments or modifications thereof or side letters with respect thereto (collectively, the "Leases"); (ii) the approximate size of the premises leased thereunder (if available); (iii) the term of the lease, including any extension options; (iv) the use of such premises and the nature of any improvements located thereon; (v) the recording information of any Leases which have been recorded in the applicable real estate records offices; and (vi) the current rental or royalty (minimum and production) rate as well as the amount of royalty paid and subject to recoupment. Except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, the Company and the Subsidiary have good and valid leasehold title to lawfully and exclusively conduct mining operations on the Leased Real Property used for mining purposes, free and clear of all Charges except for Permitted Charges. Except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, the Company and the Subsidiary have good and marketable leasehold title to the Leased Real Property other than the Leased Real Property used for mining purposes, free and clear of all Charges except for Permitted Charges. (b) Schedule 3.27(b) sets forth a true and complete list of all real property that the Company and the Subsidiary own in fee, whether surface or mineral (collectively, the "Owned Real Property"; the Owned Real Property and the Leased Real Property are, collectively, the "Real Property"). For each parcel of Owned Real Property, the list includes: (i) the entity in which title is -21- vested and the deed or other instrument by which such entity acquired title (including the instrument date, the recording, information and, if title is vested in more than one entity, the percentage ownership of such entity); (ii) the approximate acreage thereof; and (iii) the use thereof and the nature of any improvements thereon. Except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, the Company and the Subsidiary have good and valid fee title to lawfully and exclusively conduct mining operations on the Owned Real Property used for mining purposes, free and clear of all Charges except for Permitted Charges. Except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, the Company and the Subsidiary have good and marketable fee title to the Owned Real Property other than the Owned Real Property used for mining purposes, free and clear of all Charges except for Permitted Charges.
(c) Except as set forth on Schedule 3.27(a): (i) there is no past due
payment obligation or other material default under any of the Leases; (ii)
neither the Company nor the Subsidiary or any Shareholder has received any
notice (oral or written) of, or has knowledge of, any act, omission or condition
which constitutes a material default, or with the passage of time and/or the
giving of notice, would constitute a material default under any of the Leases;
(iii) except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, neither the Company nor the Subsidiary has mined any coal that did not belong to it, nor mined any coal in such a reckless or imprudent manner as to give rise to any material claims for loss or waste by any lessor under any Lease; and (iv) except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, the Leases are in good standing and in full force and effect, valid and enforceable against the parties thereto in accordance with their terms. (d) Subject to all of the lessors listed on Schedule 3.27(a) giving their consent to the transactions contemplated herein, the consummation of such transactions will not constitute a default under the terms of any of the Leases. (e) Except as set forth on Schedules 3.27(a) or (b), the Company and the Subsidiary are in actual and peaceful possession of: (i) the Real Property other than the Real Property used for mining purposes; and (ii) that portion of the Real Property used for ' i g purposes on which the Company or the Subsidiary is actively conducting coal mining operations. (f) Except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, no applicable zoning or building law, ordinance, administrative regulation, urban redevelopment law, or any other law, regulation, rule, order, decree or use restriction, prohibits or interferes with, limits or impairs the use, operation, maintenance of or access to, or affects the value of, the Real Property, as now used, operated or maintained by the Company or the Subsidiary. Except as set forth on Schedules 3.27(a) or (b), no notice of any violation of any applicable zoning or building law, ordinance, administrative regulation, or any other law, regulation, rule, order, decree or use restriction has been received by the Company or the Subsidiary, and neither the Company nor the Subsidiary does not know of the threat of any such notice, and no condemnation proceeding has been instituted or is threatened with respect to any Real Property. -22- (g) All parcels of land included in the Real Property are, and except as could not reasonably be expected to have a Material Adverse Effect on the Company or the Subsidiary, all improvements located on any parcel of Real Property are, suitable, sufficient and appropriate in all respects for their current and contemplated uses. Each parcel or contiguous parcels. as applicable, of Real Property is located adjacent to roads or streets with adequate lawful ingress and egress available between such roads or streets and such Real Property for all purposes related to the operations of the Company and the Subsidiary. To the best of the Shareholders' knowledge, no material portion of any Real Property lies in any flood plain area (as defined IN the U.S. Army Corps of Engineers or otherwise) or includes any wetlands protected by any applicable law.
(h) Except as set forth in Schedules 3.27(a) or (b) and except for
Permitted Charges, neither the Company nor the Subsidiary has granted any
outstanding options or has entered into any outstanding contracts with others
for or in connection with the sale, pledge, hypothecation, assignment, sublease,
lease or other transfer of all or any part of the Real Property. Except as could
not reasonably be expected to have a Material Adverse Effect on the Company or
the Subsidiary, no Person or entity has any right or option to acquire, or right
of first refusal or opportunity (or any similar right) with respect to, the
interest of the Company and the Subsidiary in any Real Property.
3.28 Securities Law Matters. Neither the Company nor the Subsidiary has made, directly or indirectly, any offer or sale of the common shares or securities of the same or a similar_class, or taken any other action as a result of which the offer and sale of any such common shares or securities contemplated hereby could fail to be entitled to exemption from the registration requirements of the Securities Act. As used herein, the terms "offer" and "sale" have the meanings specified in Section 2(3) of the Securities Act. 3.29 Related Party Transactions. (a) Except as disclosed in Schedule 3.29, neither the Company nor the Subsidiary or any of the Shareholders, has, either directly or indirectly, a material interest in (i) any Person that purchases from or sells, leases, licenses or furnishes to the Company or the Subsidiary any goods, property, technology or intellectual or other property rights or services or has other material business relations with the Company or the Subsidiary; or (ii) any Person who is a party to a contract or agreement to which the Company or the Subsidiary are also parties or by which they may be bound or affected (the matters set forth in clauses (i) and (ii, are collectively "Related Party Transactions"). A complete list of all Related Party Transactions is set forth in Schedule 3.29. (b) Other than as set forth in Schedule 3.29, and other than in or through :he Company and the Subsidiary, none of the Company, the Subsidiary, the Shareholder or any of their respective Affiliates conducts or engages in any business related to the exploring, mining, transporting, marketing and selling of coal. 3.30 Permit Blocking. Neither the Company nor the Subsidiary has been notified nor expects to be notified by the Federal Office of Surface Mining or the agency of any state administering the Surface Mining Control and Reclamation Act of 1977, as amended (or any comparable state statute), that it is (i) ineligible to receive additional surface mining permits; or (ii) -23- under investigation to determine whether its eligibility to receive such permits should be revoked, i.e., "permit blocked," and, to the Shareholders' knowledge, there is no basis therefor.
3.31 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Company or the Subsidiary, except as may exist in
customary form in loan or credit documentation with the Company's or the
Subsidiary's lenders with respect to the exercise by such creditors of rights
regarding collateral.
3.32 Notes and Accounts Receivables. Except as set forth in Schedule 3.32, all notes and accounts receivable of the Company and the Subsidiary shown on the Current Balance Sheet or thereafter acquired by the Company and any of the Subsidiary have been collected or are current and collectible in the ordinary course (in the case of any such note in accordance with its terms, and in the case of any such account within forty-five (45) days after billing) at the aggregate recorded amounts thereof on the Company's and the Subsidiary's books, less the bad debt reserves provided therefor on the Current Balance Sheet, as such reserves may have been adjusted on the Company's or the Subsidiary's books in the ordinary course of business to date. No note or account receivable of the Company or the Subsidiary is subject to counterclaim or setoff. 3.33 Inventory. The Company's coal inventory consists solely of coal which is usable or saleable at regular market prices in the ordinary course of the Company's and the Subsidiary's respective businesses. 3.34 Permits and Bonds. (a) The Company and the Subsidiary have all permits, licenses, franchises, approvals, certificates or authorizations (collectively, the "Permits") of any federal, state or local governmental or regulatory body required in order to permit them to carry on their respective businesses as presently conducted, all of which are in full force and effect, and none of which will be adversely affected by the transactions contemplated herein. All Permits held by the Company and the Subsidiary are listed on Schedule 3.34(a)(1), (the "Hayman Permits"). No misrepresentations or willful or negligent omissions were made of any material fact in obtaining 9C, any Hayman Permits. No action or claim is pending, threatened or contemplated to revoke, suspend, modify, alter, amend or terminate any Hayman Permit, or to declare any of Hayman Permit invalid in any respect, and none of the Shareholders know of any reason for such action. Except as set forth on Schedule 3.34(a)(2), neither the Company nor the Subsidiary has received any notice of noncompliance since December 31, 1997. (b) The Company and the Subsidiary have posted all reclamation and performance bonds required to be posted in connection with their operations. All reclamation and performance bonds posted by the Company and the Subsidiary in connection with their operations are listed on Schedule 3.34(b)(1) (collectively, the "Bonds"). Except as disclosed on Schedule 3.34(b)(2): (i) each of the Company and the Subsidiary has properly carried out all reclamation with respect to its coal mining and processing operations required to date by law; and (ii) the operation of the Company's and the Subsidiary's respective coal mining and processing operations, and the state of reclamation on all of the Leased Real Property and Owned Real Property are "current" or in "deferred status" -24- regarding reclamation obligations and otherwise are in material compliance with all applicable mining, reclamation, health and safety, zoning, land use and all other laws and regulations (including, without limitation, all aspects of the Federal Coal Mine Health and Safety Act of 1969, as amended, and the Federal Mine Safety and Health Act of 1977, as amended, and similar state laws and regulations) and in accordance with reclamation plans submitted with respect to the Hayman Permits.
3.35 Coal Supply Agreements. Schedule 3.35 lists all coal supply agreements
to which the Company or the Subsidiary is bound. Neither the Company nor the
Subsidiary or any of their Shareholders know, or has any reasonable ground to
know, that any customer under any coal supply contract or purchase order listed
on Schedule 3.35 has terminated or expects to terminate, other than in
accordance with the terms of such contract or purchase order, its normal
business with the Company and the Subsidiary, as a result of the transactions
contemplated by Agreement.
3.36 Completeness of Statements. No statement, schedule, annex, certificate, information, representation or warranty of the Company, the Subsidiary or any of the Shareholders contained in this Agreement, or furnished by or on behalf of the Company, the Subsidiary or any of the Shareholders to Purchaser or any of its representatives or agents pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary in order to make a statement contained herein or therein, in light of the circumstances in which they were made, not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to the Shareholders as follows:
4.1 Organization. Purchaser is a corporation duly organized and validly
existing under the laws of the State of Delaware, and has full corporate power
and authority to own and lease its properties as such properties are now owned
and leased, and to conduct its business as and where its business is now
conducted.
4.2 Authority, (a) Purchaser has full right, power, authority and capacity to execute and deliver this Agreement and the Other Documents, and to perform its obligations under this Agreement and the Other Documents. This Agreement and the Other Documents constitute valid and legally binding obligations of Purchaser, enforceable in accordance with their terms. (b) The execution and delivery of this Agreement and the Other Documents, the consummation of the transactions contemplated hereby and thereby, and the performance and fulfillment of the obligations and undertakings hereunder and thereunder by Purchaser will not violate any provision of, result in the breach of, cause or permit the acceleration of or result in the termination or cancellation of: (i) any performance required by the terms of Purchaser's articles of incorporation or bylaws; (ii) any contract, agreement, arrangement or undertaking to which Purchaser
-25-
is a party or by which it may be bound; (iii) any judgment, decree, writ, injunction, order or award of any arbitration panel, court or governmental authority; or (iv) any applicable law, ordinance, rule or regulation of any governmental body. (c) The execution, delivery, performance and consummation of the transactions contemplated by this Agreement and the Other Documents have been duly authorized by all requisite corporate action. All other consents, approvals, authorizations, releases or orders required of or for Purchaser for the authorization, execution, delivery, performance and consummation of the transactions contemplated by, this Agreement and the Other Documents will be obtained by the Closing.
ARTICLE 5
COVENANTS OF THE SHAREHOLDERS The Shareholders hereby covenant and agree with Purchaser that:
5.1 Consents. The Shareholders shall: (i) procure, upon reasonable terms
and conditions, all consents and approvals; (ii) complete all filings,
registrations and certificates; and (iii) satisfy all other requirements
prescribed by law, including obtaining any approval necessary under antitrust
laws, which are necessary to consummate the transactions contemplated in this
Agreement and the Other Documents.
5.2 Post-Closing Assistance. In case at any time after the Closing any further action is necessary or desirable to consummate the transactions contemplated by this Agreement and the Other Documents, the Shareholders will promptly take or cause to be taken such further action (including the execution and delivery of such further instruments and documents) as Purchaser may reasonably request. 5.3 Cooperation. The Shareholders shall cooperate fully, completely and promptly with Purchaser in connection with satisfying all conditions to, and effecting the transactions contemplated by, this Agreement and the Other Documents. 5.4 Representations and Warranties. The Shareholders shall not cause or permit any representations or warranties made in this Agreement, including, without limitation, representations and warranties contained in Article 3 of this Agreement, to be untrue or incomplete as of the Closing. 5.5 Publicity. Except as required by applicable law, without the prior written consent of Purchaser, none of the Shareholders shall disclose or publish, or permit the disclosure or publication of, any information concerning the execution and delivery of this Agreement and the Other Documents, or the transactions contemplated by this Agreement and the Other Documents, to any Person. 5.6 Resignations. At the Closing, the Shareholders shall, on request of Purchaser, cause the individuals identified as officers or directors of the Company or the Subsidiary to resign as officers and/or directors of the Company and the Subsidiary, and shall cause the Persons identified -26- as trustees or committee members of the Plans to resign as trustees and/or committee members of the Plans, which resignations shall be effective immediately after the Closing.
5.7 Permits. In the event that not all of the Permits are available for
use by the Company and the Subsidiary immediately following the transactions
contemplated by this Agreement, the Shareholders, Purchaser, the Company and the
Subsidiary shall cooperate in any reasonable arrangement designed to provide
Purchaser, the Company and the Subsidiary the benefits under any such Permits
until such Permits are available for use by the Company and the Subsidiary,
provided that the Company, the Subsidiary and Purchaser will bear all of the
expenses of so doing and Purchaser will see that the Shareholders are relieved
from any liability in connection therewith as quickly as practicable after the
Closing.
ARTICLE 6 COVENANTS OF PURCHASER Purchaser covenants and agrees with the Shareholders that from the date hereof through the Closing:
6.1 Cooperation. Purchaser shall cooperate fully, completely and promptly
with the Shareholders in connection with satisfying all conditions to, and
effecting the transactions contemplated by, this Agreement and the Other
Documents.
6.2 Representations and Warranties. Purchaser will not cause or permit any of its representations and warranties made in this Agreement, including, without limitation, its representations and warranties contained in Article 4 of this Agreement, to be untrue or incomplete as of the Closing. 6.3 Publicity. Except as required by applicable law, without the prior written consent of the Shareholders, Purchaser shall not disclose or publish, or permit the disclosure or publication of, any information concerning the execution and delivery of this Agreement, or the transactions contemplated by this Agreement, to any Person. 6.4 Ownership and Control. As soon as practicable after the Closing, and in any event within thirty (30) Business Days after the Closing Date, Purchaser shall take all necessary and appropriate action, pursuant to all applicable statutes or regulations, to give notice to any appropriate agencies, of the change in ownership and control of the Company resulting from the Purchase pursuant to this Agreement. 6.5 Post Closing Liabilities. Purchaser will cause the Company and the Subsidiary to pay and satisfy all of their debts, obligations and liabilities following the Closing, and will protect the Shareholders from and indemnify them against, such debts, obligations and liabilities, except in the case of any Shareholders to the extent such Shareholders are obligated to indemnify the Purchaser pursuant to Article 10 below with respect to any such debts, obligations or liabilities. -27-
ARTICLE 7
CONDITIONS TO OBLIGATIONS OF PURCHASER The obligations of Purchaser to consummate the transactions contemplated herein shall be subject to the satisfaction of the following conditions at or before the Closing:
7.1 Representations, Warranties and Covenants. The representations and
warranties of the Shareholders contained herein shall be true on the Closing
Date, with the same effect as though made at such time, except to the extent of
changes permitted by the terms of this Agreement. The Shareholders, the Company
and the Subsidiary shall have performed all obligations and complied with all
covenants required by this Agreement to be performed or complied with by them
prior to the Closing.
7.2 No Material Adverse Effect. No Material Adverse Effect with respect to the Company or the Subsidiary shall have occurred since the date of this Agreement. 7.3 Opinion of Counsel for the Shareholders. Purchaser shall have received an opinion from Greenebaum, Doll & McDonald, counsel for the Shareholders, dated the Closing Date, substantially in the form attached hereto as Annex 7.3. 7.4 Statutory Requirements. All statutory requirements for the valid consummation by Purchaser of the transactions contemplated in this Agreement and the Other Documents shall have been fulfilled, and all Approvals required to be obtained to permit the consummation by Purchaser of the transactions contemplated by this Agreement and the Other Documents, and to permit the businesses presently carried on by the Company and the Subsidiary to continue unimpaired in all material respects immediately following the Closing, shall have been obtained. 7.5 Ancillary Agreements. The Shareholders, the Company and the Subsidiary shall have executed all Other Documents, including, without limitation, the Power Equity Agreement and the Francis Release and all such executed agreements shall have been delivered to Purchaser. 7.6 Deliveries. At or before the Closing, the Shareholders shall (i) deliver to Purchaser all instruments necessary or otherwise reasonably requested by Purchaser to duly and properly transfer and convey title to the Shares as contemplated by this Agreement and (ii) make all other deliveries contemplated in this Agreement. 7.7 Financing. Purchaser shall have arranged financing with such lenders, in such amounts, at such rates, and upon such terms as Purchaser deems, in Purchaser's sole discretion, necessary and sufficient to consummate the transactions contemplated in this Agreement and the Other Documents. 7.8 Closing. The Closing shall occur on or before September 2, 1998 (the "Closing Date"), unless the Closing Date is extended by the mutual written agreement of the parties hereto. -28-
7.9 Third-Party Consents and Approvals. The parties shall have obtained
all third party consents and approvals (all on terms and conditions satisfactory
to Purchaser in its sole and absolute discretion) that are necessary for: (a)
the consummation of the transactions contemplated by this Agreement and the
Other Documents; and (b) the assignment and transfer of the Shares to Purchaser;
provided, however, that, notwithstanding the foregoing, neither Purchaser nor
any Shareholder shall be required to pay any remuneration to third parties in
exchange for such party's consent or approval, or to file any lawsuit or other
action to obtain any such consent or approval.
7.10 No In-junction. No injunction or order of any court or administrative agency or instrumentality shall be in effect, and no statute, rule or regulation of any governmental authority or competent jurisdiction shall have been promulgated or enacted, as of the Closing which restrains or prohibits the transactions contemplated by this Agreement and the Other Documents. 7.11 No Pending Action. No action, suit or other proceeding by any Person to restrain or prohibit the transactions contemplated by this Agreement and the Other Documents shall be pending. 7.12 Due Diligence. Purchaser shall be satisfied, in its sole discretion, with the results of its due diligence of the Company and the Subsidiary and their respective assets and liabilities, including, without limitation: (i) all rights, title, interests and Liabilities of the Company and the Subsidiary; (ii) the terms and conditions of all agreements to which the Company or the Subsidiary is a party (including but not limited to the terms and conditions of all lease agreements_under which the Company or the Subsidiary has any interest, especially terms authorizing Purchaser to conduct highwall mining under such lease agreements); (iii) the mineability, quantity and quality of the coal reserves of the Company and the Subsidiary; and (iv) the magnitude of the reclamation obligations (regardless of whether such obligations are "current" or in "deferred status "). 7.13 Board Approval. Purchaser's board of directors shall have approved this Agreement, and the transactions contemplated hereunder. 7.14 Kindill Agreement. Purchaser shall have consummated the transactions contemplated by the Kindill Agreement. 7.15 Fairness Opinion. Purchaser shall have received an opinion of Rothschild Inc. that the transactions contemplated by this Agreement and the Other Documents are fair from a financial point of view to Purchaser. 7.16 Subsidiary Ownership. The Company shall have acquired one hundred percent (100%) of the membership interests of the Subsidiary. ARTICLE 8 CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS The obligations of the Shareholders to consummate the transactions contemplated herein shall be subject to the satisfaction of the following conditions at or before the Closing:
-29-
8.1 Representations. Warranties and Covenants. The representations and
warranties of Purchaser contained herein shall be true on the Closing Date, with
the same effect as though made at such time, except to the extent of changes
permitted by the terms of this Agreement. Purchaser shall have performed all
obligations and complied with all covenants required by this Agreement to be
performed or complied with by it prior to the Closing.
8.2 Statutory Requirements. All statutory requirements for the valid consummation by the Shareholders of the transactions contemplated in this Agreement and the Other Documents shall have been fulfilled, and all Approvals required to be obtained in order to permit the consummation by the Shareholders of the transactions contemplated in this Agreement and the Other Documents shall have been obtained. 8.3 Deliveries. At or before the Closing, Purchaser shall make all of its deliveries contemplated in this Agreement. 8.4 Third-Party Consents and Approvals. The parties shall have obtained all third party consents and approvals that are necessary for: (a) the consummation of th |