Item 1. Business. --------
Addington Resources, Inc. and its subsidiaries (the "Company") are primarily engaged in the development and operation of integrated solid waste disposal systems. The Company is also engaged in the surface mining and marketing of bituminous coal. For certain financial information concerning the Company's mining and environmental industry segments, see Note 19 to the audited Consolidated Financial Statements. Addington Resources, Inc. was incorporated on September 29, 1986, under the laws of Delaware.
Disposition of Certain Coal Assets in the First Quarter of 1994. - ---------------------------------------------------------------
Pursuant to the Stock Purchase Agreement dated September 24, 1993 (the "Agreement") between Addington Holding Company, Inc., a wholly owned subsidiary of the Company, and Pittston Acquisition Company, an indirect wholly owned subsidiary of The Pittston Company ("Pittston"), the Company sold to Pittston (the "Pittston Transaction") all of the Company's stock in five of its indirect wholly owned coal subsidiaries, Addington, Inc., Appalachian Mining, Inc., Appalachian Land Company, Vandalia Resources, Inc. and Kanawha Development Corporation (collectively the "Subsidiaries"). The Pittston Transaction was consummated on January 14, 1994 (the "Closing Date").
In the Pittston Transaction, the Company transferred to Pittston all its long-term coal sales contracts with electric utilities except as set forth below under Coal Mining Operations-Major Sales Contracts. The Company also transferred to Pittston all of its coal reserves in Ohio, Virginia and West Virginia and, of its Kentucky coal reserves, only those reserves located in the Breathitt County Area of Kentucky. See Item 2.
Item 2. Properties. ----------
Coal Resources --------------
On January 14, 1994, the Company sold a substantial portion of its coal- related assets to an indirect wholly owned subsidiary of The Pittston Company. See Item 1. Business-Disposition of Certain Coal Assets in the First Quarter of 1994. The information set forth in this Item relates only to the Company's properties retained following the Pittston Transaction.
The Company currently operates four active mines, all of which are in the Pike County Area (located in Pike County, Kentucky). The Job 17 mine, which began production in 1986, produced an average of 89,000 tons of coal per month during 1993. The Job 17A mine, which began production in September 1993, produced an average of 44,000 tons of coal per month during 1993 since it opened. The Ivy Creek mine, which began production in 1986, produced an average of 89,000 tons of coal per month in 1993. The Ivy-H mine, which began production in June 1993, produced an average of 30,000 tons of coal per month during 1993 since it opened. Each of these four mines has a production capability of up to approximately 100,000 tons of coal per month and produces high quality low-sulfur coal.
As of December 31, 1993, as adjusted for the Pittston Transaction, the Company owned in fee approximately 22,329 acres and controlled, primarily through short-term leases and contract mining agreements, an additional 26,156 acres of reserves in eastern Kentucky. In western Kentucky, the Company leased as of December 31, 1993, approximately 7,503 acres of reserves, and owned in fee approximately 354 acres. Approximately 44% of the Company's coal reserves are low-sulfur compliance reserves.
As adjusted for the disposition in The Pittston Transaction, the table below sets forth (in thousands of tons) estimated minimum surface minable coal reserves, recoverable and marketable, as of December 31, 1993. Since the completion of the reserve studies
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upon which the estimates are based, some leases have expired, and the Company has acquired control of additional properties. Mining has also occurred in most of the areas, and the information has been adjusted to reflect estimated production in each area since the dates of the respective studies. The Company believes that despite its mining activity and the expiration of some leases in the areas covered by reserve studies, the estimates of aggregate minimum surface minable remain accurate in all material respects.
Reserve studies are estimates based on an evaluation of available data, and actual reserves may vary substantially from the estimates. Estimated minimum surface minable reserves are comprised of coal that is considered to be merchantable and economically recoverable by using surface mining practices and techniques prevalent in the coal industry at the time of the reserve study. While the Company has historically used surface mining in almost all of its operations, deep mining may be considered where it would be more profitable than surface mining in the Company's judgment. The Company believes that it can recover a greater proportion of the coal reserves in certain areas through surface mining than is shown in the table below. The Company believes its current reserves exceed its current contractual requirements even if limited to recovery only by current surface mining recovery methods. In this regard, the reserves shown in the table below include a variety of qualities of coal. Where appropriate, the Company has blended coal of different qualities to meet contract specifications.
A substantial part of the reserves currently available to the Company are represented by leases which expire after a stated number of years. Most of the leases give the Company renewal options, which are usually subject to the condition that mining has commenced on or near the leased property. Most of the leases require various payments in order to maintain the lease if mining has not begun on the property. The Company believes that it has conducted mining activities and made payments to obtain renewal rights with regard to lease properties covering reserves which, when added to reserves owned in fee by the Company, are sufficient to satisfy its current requirements under long-term contracts. However, the availability of reserves on other leased property at the present time does not assure the Company that the reserves will be available at a time that the Company may wish to mine such reserves. Moreover, the availability of reserves on leased property is often subject to uncertainties relating to such matters as the title of the lessor to the coal and precise boundaries. See Item 2. Properties-Controlled Reserves.
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(1) All minable reserves are categorized as "Demonstrated Recoverable." Minimum Demonstrated Recoverable Reserves is the sum of Measured and Indicated Reserves.
(2) "Measured" reserves represent the portion of total reserve estimates which, in the opinion of the Company, is substantiated by adequate information, including that derived from exploration, current and previous mining operations, outcrop data and knowledge of mining conditions. "Indicated" reserves are computed from information of a more preliminary or limited extent. The divisions into these two categories are based upon the general guidelines of the U.S. Geological Survey and judgments related to a combination of factors. The Company believes that the division is a reasonably close estimate of the general order of relative tonnages involved. The figures listed above reflect a 90% recovery factor that has been applied to in-place surface minable reserves. Recovery factors for deep-minable reserves are 65% of the in-place tonnage, except for two coal seams which use 55% of in-place tonnage. "Surface Mining Permitted Reserves" are reserves which are approved for surface mining by having met conditions of the local, state and federal regulatory agencies for active disturbance of the reserves and the extraction of the mineral. Such approval under the Surface Coal Mining and Reclamation Act of 1977 is a prerequisite to production and marketing of the coal. This permit process varies from state to state; however, a 12 to 18 month time period is normal for the process in states in which the Company holds reserves.
(3) All reserves controlled by the Company are listed as "Steam" because of the quality characteristics and because current contracts are with electric utilities.
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(4) The Princess Area properties are located in Boyd, Carter and Greenup Counties, Kentucky. The Pike County Area properties are located in Floyd, Martin and Pike Counties, Kentucky. The Licking River Area is located in Elliott and Lawrence Counties, Kentucky. The South Hill Area and the Aberdeen Area are located in Butler County, Kentucky. The Knottsville Area and the West Louisville Area are located in Daviess County, Kentucky. The Hopkins County Area is located in Hopkins County, Kentucky.
The extent to which the Company's coal resources will be mined will depend upon factors over which it has no control, such as future economic conditions, the price and demand for coal of the quality and type controlled by the Company, the price and supply of alternative fuels and future mining practices and regulation. The ability of the Company to mine in areas covered by the reserve studies depends upon the ability of the Company to maintain control of the reserves (other than the properties owned in fee) through extensions or renewals of the leases or other agreements or the ability of the Company to obtain new leases or agreements for other reserves.
Controlled Reserves - -------------------
The Company has and plans to continue an active leasing and acquisition program to augment the reserves it controls, particularly in areas where it is currently operating. To date, the Company has not experienced any material difficulty in acquiring leases or the right to mine in areas where it has operations or in which it plans to commence mining in the future.
Generally, the Company's leases for its coal reserves are for an initial term, usually of five years. Most of the leases contain an option to renew on the part of the Company, with exercise of the option usually subject to the condition that mining shall have commenced on (or, as specified in some leases, near) the leased property. Most of the leases require the payment of some amount of advance royalties or delay rentals (payments to keep the lease in force if mining has not commenced) on a periodic basis during each year if mining has not begun on the property. After mining commences, the leases generally require the payment of a royalty based on the tonnage mined and sold. The Company's average royalty expense for the year ended December 31, 1993 on reserves retained following the Pittston Transaction was $3.36 per ton.
Notwithstanding the probable loss of some of its mining rights under its current and future leases due to their expiration, the Company believes that it can maintain or acquire sufficient reserves to enable it to fulfill all of its obligations under its sales contracts and, if it so chooses, sell additional amounts of coal on the spot market.
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Some of the Company's reserves are owned in fee or are on land owned in fee by the Company, and the balance of its reserves are on land leased or otherwise controlled by the Company. Most of the Company's leases describe the leased property in general terms, and these descriptions are usually not based on actual surveys or boundaries which are otherwise precisely identified. Moreover, because of the short-term nature of its leases and because of the expense involved, the Company does not have title to the leases reviewed by attorneys or other qualified title examiners. As to title to properties acquired by the Company, the Company has relied on the assurances of the parties from whom the properties were acquired, rather than on current title examinations. As to properties the Company leases, a limited title investigation and, to the extent possible, a determination of the precise boundaries of a property is made in most cases only as a part of the process of securing a mining permit shortly before commencement of mining operations. The Company believes that its practices in investigating title and determining boundaries to the properties it owns, leases or otherwise controls are consistent with customary industry practices in Kentucky and that such practices are adequate to enable it to acquire the right to mine such properties.
Landfill Operations - -------------------
The table below sets forth certain information as of December 31, 1993 with respect to the Company's six operating landfills. Permitted Capacity refers to the remaining capacity for which the Company has received construction permits from the appropriate state authorities. The Company constructs its landfills in a series of landfill cells as additional airspace is needed to accommodate customer demand.
(1) The Company has applied for a permit modification to increase the permitted size of the landfill to an aggregate airspace of 9,243,000 cubic yards or 5,544,000 tons.
(2) The Company has applied for a permit modification to increase the permitted size of the landfill to an aggregate airspace of 6,896,000 cubic yards or 4,138,000 tons.
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Item 3.
Item 3. Legal Proceedings. -----------------
The Company is named as defendant in various actions in the ordinary course of its business. These actions generally involve such matters as property boundaries, mining rights, blasting damage, personal injuries, and royalty payments. The Company believes these proceedings are incidental to its business and are not likely to result in adverse judgments which are material to the Company's results of operations and financial condition.
The Company previously sold coal to Consumers Power under a contract acquired by Pittston in January 1994. See Item 1. Business. Although the contract was transferred, the Company retains all obligations with respect to the litigation described below. The contract contains a provision that states that if Consumers Power is able to demonstrate an ability to purchase coal meeting certain requirements for a contract term of ten years or more from another producer located in the U.S. Department of Energy's District No. 8 at a price that is more than $.15 per million BTU below the average FOB mine price of coal purchased and sold under the contract for the previous three-month period, Consumers Power can terminate the contract if the parties negotiate but fail to agree upon the price of future coal shipments. On November 4, 1988, the Company was notified that Consumers Power was prepared to demonstrate its ability to purchase coal from another producer within the parameters of this termination provision. In response to this notice, the Company filed a complaint in Boyd Circuit Court on January 18, 1989, in Boyd County, Kentucky, against Consumers Power. The complaint, as subsequently amended, alleges, among other things, that the conditions necessary to trigger the termination provision have not occurred, that the termination provision is unconscionable and that the competitor's bid tortiously interferes with the Company's contractual relations with Consumers Power. On February 2, 1989, the Company obtained a restraining order preventing Consumers Power from terminating the contract pursuant to the termination provision. On March 21, 1989, Consumer Power filed an answer denying the complaint's allegations and asserting a counterclaim that the Company had breached the contract by not entering into negotiations to reduce the contract price. Consumers Power also alleged the breach of a guaranty by the Company. On May 4, 1989, the Boyd Circuit Court directed the parties to maintain the status quo in their contractual relationship, directed the Company to post a $750,000 bond, and directed the parties to provide for expedited discovery in the case. On November 9, 1990, the Boyd Circuit Court directed the Company to increase the amount of the bond to be posted from $750,000 to $3,000,000 in light of the additional amounts of coal shipped under the contract from the date of the court's previous order.
On April 30, 1993, the Boyd Circuit Court entered summary judgment in favor of the Company against Consumers Power that the termination provisions of the Company's coal supply contract with Consumers Power had not been appropriately triggered by Consumers Power. Consumers Power has appealed the grant of summary judgment to the Kentucky Court of Appeals. On June 3, 1993, Consumers Power also filed a motion in Boyd Circuit Court to dissolve the May 4,
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1989 temporary restraining order that prevents Consumers Power from seeking to terminate the contract pursuant to the contract provision. Although on September 1, 1993, the court subsequently dissolved the temporary restraining order and ordered that the Company's $3,000,000 bond could be released, Consumers Power has not terminated the contract in light of the April 30, 1993 summary judgment decision that the termination provision had not been appropriately triggered. By letter dated October 5, 1993, Consumers Power has notified the Company that it is currently prepared to demonstrate its ability to purchase coal from another producer within the parameters of the termination provision. Consumers Power states that it can obtain coal for approximately $24.90 per ton instead of the $34.16 per ton charged during the three months ended September 30, 1993.
On February 15, 1991, Bill Robinson, Sr. filed suit against Addwest Gold, Inc. ("Addwest Gold") and Addwest Mining, Inc. ("Addwest Mining") in the Montana Second Judicial District Court, Butte-Silver Bow County, Montana. The complaint alleged breach of contract, fraud and bad faith in relation to Robinson's employment with Addwest Gold. Robinson alleged that agents of Addwest Gold induced him to go to work for Addwest Gold by promising him a large bonus on the happening of certain contingencies, and then failed to pay him a bonus in the amount he expected. The Company sold Addwest Gold in January, 1990. On March 29, 1991, the action was removed to the U.S. District Court for the District of Montana, Butte Division. On March 25, 1992, Robinson amended his complaint to add, among others, as defendants Larry Addington and Larry Harrington, individually, and Addington Resources, Inc. and Addington Holding, Inc. Robinson did not claim a specific amount of damages in these pleadings.
At the time of the trial in October, 1992, Robinson made a claim for a total of approximately $19 million in damages. On November 5, 1992, the jury returned a verdict against the defendants for approximately $850,000 in compensatory damages, $1,000 in punitive damages against Larry Harrington, $6,000,000 in punitive damages against Larry Addington, and $4,500,000 in punitive damages against Addwest Gold.
On February 23, 1993, the judge entered a judgment stating that the defendants Larry Harrington, Addwest Gold, Addington Resources, Addington Holding Company and Addwest Mining are jointly and severally liable to Mr. Robinson for compensatory damages in the amount of $850,000 and that Mr. Robinson is entitled to punitive damages in the amount of $1,000 from Larry Harrington, $6,000,000 from Larry Addington, and $4,500,000 jointly and severally from defendants Addwest Gold, Addington Resources, Addington Holding Company and Addwest Mining.
With respect to claims against Larry Addington, although the jury specifically rejected a claim by Mr. Robinson that Mr. Addington had committed fraud upon him, the court found that there was sufficient evidence to sustain the finding of liability upon
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the plaintiff's claim for negligent misrepresentation and the imposition of punitive damages against Larry Addington. The court stated that there was sufficient evidence to support a finding that the alleged negligent misrepresentations made by Larry Addington to the plaintiff were accomplished with actual malicious intent within the meaning of the Montana statute relating to claims for punitive damages.
Following the court's denial on October 6, 1993, of post-judgment motions, the defendants filed a notice of appeal on November 1, 1993, to the U.S. Court of Appeals for the Ninth Circuit. After extensive settlement discussions conducted under the supervision of a mediator for the U.S. Court of Appeals for the Ninth Circuit, a settlement has been reached in which Mr. Robinson will release all parties from all claims. As a result of the settlement, the Company expects to pay Mr. Robinson $3,450,000 by April 15, 1994. The parties are currently in the process of drafting appropriate settlement documentation.
The Company is obligated for the full amount of this settlement pursuant to certain indemnification agreements. In accordance with Section 145 of the General Corporation Law of the State of Delaware and the Indemnity Agreement of August 1988 between the Company and Larry Addington, the Company agreed to indemnify Larry Addington with respect to this litigation. The Board of Directors (Larry Addington abstaining) found that Mr. Addington did at all times relevant to this litigation act in good faith and in a manner which he reasonably believed to in or not opposed to the best interests of the Company and, therefore, has agreed to indemnify him from and against the amount of any final judgment or settlement entered in the litigation and to pay (and/or advance) any and all expenses incurred by him in connection with the defense of the litigation or its appeal.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------
None.
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PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters. ----------------------------------------
The Company's Common Stock trades on the NASDAQ National Market System (symbol-ADDR). The table below sets forth the high and low sales prices as reported on NASDAQ for the periods indicated.
On March 25, 1994, the closing price of the Company's Common Stock on the NASDAQ National Market System was $16.50 per share. At March 17, 1994, the Company had 258 stockholders of record (including depositaries which hold stock in street name on behalf of other beneficial owners).
Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. The Company has not paid any dividends since its initial public offering but expects to reconsider that policy during 1994; no prediction can be made regarding the results of that reconsideration or whether dividends will be paid in the future.
The Company currently has a line of credit with a bank with a total commitment of $15 million. In connection with the line of credit, the Company has agreed to certain restrictive covenants which, among others, limit the amount of dividends that the Company can pay, limit its ability to incur additional indebtedness, require an as-defined minimum tangible net worth, and require a minimum current ratio.
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Item 6.
Item 6. Selected Financial Information ------------------------------
The following selected financial information of the Company for each of the five years in the period ended December 31, 1993 are derived from the audited Consolidated Financial Statements of the Company. The selected financial information should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto appearing elsewhere herein.
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_________________________ (1) The fully diluted net income per share calculation for 1989 has not been presented because the effect would be anti-dilutive. The fully diluted net income per share for 1990, 1991, 1992 and 1993 has not been presented due to the conversion of the Convertible Subordinated Debentures in November 1989.
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results ------------------------------------------------------------------------ of Operations. -------------
General - -------
Adverse weather conditions and particularly precipitation can affect the Company's ability to conduct its mining operations. Since heavier precipitation generally occurs in the areas in which the Company conducts its mining operations during late fall and early winter, the Company believes that its revenues and profitability may be adversely affected during those periods.
Results of Operations - ---------------------
1993 Compared with 1992 - -----------------------
Net loss during 1993 was $16,189,000 or $1.04 per share, compared to net income of $11,036,000 or $.72 per share for 1992. Net loss during 1993 was affected by the following:
(1) Pursuant to the Stock Purchase Agreement dated September 24, 1993, (the "Agreement"), the Company entered into an agreement to sell the stock of five of its coal subsidiaries to an indirect wholly owned subsidiary of The Pittston Company ("Pittston") for $157 million cash. The Agreement also contemplated that, before closing, certain property, plant and equipment (the net book value of which was approximately $43,000,000 as of December 31, 1993) would be transferred to other subsidiaries of the Company from the subsidiaries to be sold. In addition, the Company will retain all of the net working capital (the net book value of which was approximately $30,000,000 as of December 31, 1993) of the sold subsidiaries as of the date of closing (the "Closing Date"). The Agreement also required that within 60 days after the Closing Date, the Company would deliver to Pittston a statement of working capital for the Subsidiaries showing the Subsidiaries' Combined Net Working Capital, as defined in the Agreement, as of the close of business on the Closing Date. If the Combined Net Working Capital exceeds zero, Pittston is to pay the Company an appropriate adjustment. If the Combined Net Working Capital is less than zero, the Company is to pay Pittston an appropriate adjustment. By letter dated March 15, 1994, the Company asserted that Pittston should make a payment in the amount of $2,286,000 to the Company in light of the Subsidiaries' Combined Net Working Capital as of the Closing Date. In accordance with the terms of the Agreement, the Company and Pittston are currently seeking to resolve their differences with respect to the Subsidiaries' Combined Net Working Capital as of the Closing Date. Because the parties are not in agreement with respect to the appropriate adjustment, the
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Company cannot predict at this time the amount which will be owed by one party to the other with respect to such an adjustment. In connection with the sale, the Company has provided certain guarantees to Pittston.
This transaction was completed on January 14, 1994.
As a result of this transaction, the net assets related to the sale appear as a current asset at December 31, 1993 in the Company's audited Consolidated Financial Statements. Additionally, since the Company's $125,000,000 Senior Secured Notes were redeemed in connection with the transaction, they have been classified as a current liability at December 31, 1993 in the audited Consolidated Financial Statements.
The Company does not expect to record a loss on this transaction. The Company will record the actual economic impact of the disposal in its 1994 financial statements. However, principally due to the Company's de- emphasis on mining operations, the Company recorded approximately $14,506,000 of pre-tax asset write-offs during 1993. See Note 3 to the audited Consolidated Financial Statements. These write-offs consist principally of $9,384,000 related to the Company's decision to abandon its sulfur mine development project in the western United States. Additionally, the Company has written off approximately $5,122,000 of assets that it has abandoned associated with its environmental projects. These asset write-offs are reflected in income from operations and will be available to offset current and future federal and state income tax liabilities.
Other terms of the transaction include the Company entering into a coal supply contract with Pittston (the "Pittston Coal Supply Contract") for the sale of 4,920,000 tons over 3-1/2 years at a base price of $26.00 per ton, subject to adjustments. Additionally, the Company will receive a $1.00 per ton production royalty for coal produced from certain West Virginia properties being sold to Pittston with a minimum royalty of $100,000 per month, a maximum aggregate royalty in any one year of $1.5 million, and a maximum aggregate royalty under the agreement of $3.75 million. The Company will also pay Pittston a royalty of $0.50 per ton of coal produced by two highwall mining machines for 3-1/2 years.
After the transaction discussed above, the Company continues to own and operate four eastern Kentucky mines with estimated annual production capacity of 3,000,000 tons per year. During 1993, these mines produced 2,373,000 tons with an average cost of operations of $25.84 per ton. The average sales price received by the
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Company from coal produced by these eastern Kentucky mines during 1993 was $28.59 per ton.
Future production from these retained coal mines will be placed on the Pittston Coal Supply Contract and a new coal supply contract entered into with The Cincinnati Gas & Electric Company (the "CG&E Coal Supply Contract"). The CG&E Coal Supply Contract calls for the sale of 5,400,000 tons of coal over six years beginning January 1, 1994.
(2) During 1993, the Company reserved for certain litigation settlements which reduced pre-tax income by $4,050,000. (See Note 13 to the audited Consolidated Financial Statements.)
(3) During 1993, the Company established a $5,767,000 pre-tax reserve against the note receivable arising out of the 1992 sale of one of its subsidiaries; this write-off is reflected in other income and expense. (See Note 5 to the audited Consolidated Financial Statements.)
(4) Adverse wet weather conditions during the first four months of 1993 and the month of December 1993 caused major inefficiencies at the Company's mining operations and, as a result, a major increase in production costs.
Net income during 1992 was $11,036,000 or $.72 per share, compared to net loss of $9,686,000 or $.64 per share for 1991. Net income during 1992 was affected by the following:
(1) The Company recognized a $10,544,000 pre-tax gain on the sale of certain coal subsidiaries. (See Note 5 to the audited Consolidated Financial Statements.)
(2) During 1992, the Company recognized $4,285,000 in pre-tax gains on the sale of assets. The majority of this gain was recognized from the sale of certain West Virginia coal reserves.
(3) During 1992, the Company reached a litigation settlement which reduced pre- tax income by $5,100,000. (See Note 13 to the audited Consolidated Financial Statements.)
(4) During 1992, the Company recognized an approximately $5,000,000 pre-tax gain on the sale of highwall mining machines.
The Company's mining revenues increased from $292,225,000 in 1992 to $358,957,000 in 1993. Contributing to this 23% increase was revenue of $4,827,000 recognized on a fourth highwall mining machine sold to Pittston during 1993. Also contributing was a 31% increase in tons sold from 8,815,000
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tons sold during 1992 compared to 11,530,000 tons sold during 1993. Additionally,included in mining revenues was $4,255,000 realized from the Company's highwall miner contract mining activities during 1993 compared to $1,480,000 realized from the Company's highwall miner contract mining activities during 1992. This increase in tons sold is primarily a result of the acquisition described in Note 18 to the audited Consolidated Financial Statements.
Total environmental revenues and environmental income from operations increased to $24,929,000 and $3,722,000, respectively, during 1993 compared to total environmental revenues of $7,779,000 and environmental income from operations of $1,620,000 during 1992. Included in environmental revenues and environmental income from operations is revenue and income from operations generated by the Company's landfill operations and waste collection services. During 1993, the Company's landfill operations generated $17,264,000 of revenue and $5,818,000 of income from operations. During 1993, the Company's waste collection services generated $7,665,000 of revenues and $2,096,000 of losses from operations. During 1992, the Company's landfill operations generated $4,689,000 of revenues and $1,984,000 of income from operations. During 1992, the Company's waste collection services generated $3,090,000 of revenues and $364,000 of losses from operations. The primary reasons for the substantial increases in total environmental revenues and income from operations is the receipt of operating permits for certain contained landfills during 1992 and the commencement of operations at these landfills. The Company received approximately 753,000 tons of waste at Company-owned landfills during 1993 compared to 196,000 tons of waste received during 1992.
In June 1992, the Company entered into a 14-year exclusive licensing agreement that permits Joy Technologies, Inc. ("Joy") to manufacture and market a highwall mining system that the Company developed and currently uses in its own mining operations. In accordance with the terms of the June 1992 agreement, Joy plans to market the system to mining companies on the basis of a cost per ton of material mined by the system. If Joy successfully markets the system, the Company will receive approximately $130,000 in origination fees for each of the first eight machines leased and approximately $255,000 in origination fees for each machine leased thereafter, and a royalty based on tons of material mined by these other mining companies. The agreement provides that Joy will charge a lessee a minimum royalty per ton of material mined of $3.77, subject to adjustment for inflation and safety-related changes. The Company will receive 30% of the minimum royalty of $3.77 (as adjusted for inflation) and generally 50% of any part of such royalty payments in excess of $3.77 (as adjusted for inflation). While Joy has not met the Company's anticipated results for leases under the June
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1992 agreement, Joy has indicated to the Company that Joy's leases of highwall mining machines will increase significantly during 1994.
Included in the Company's other revenues and income from operations in 1993 was $260,000 in origination fees received from Joy. These fees relate to the two highwall miners leased by Joy to third parties during 1993. During 1993, Joy paid no per ton royalty fees related to these two machines.
As a percentage of total revenues, cost of operations increased from 79% for 1992 to 86% for 1993. This increase is primarily a result of higher costs being incurred at the Company's mining operations due to adverse weather conditions during the first part of the year and due to the asset write-offs discussed above.
Depreciation and amortization increased from $25,111,000 in 1992 to $29,939,000 in 1993. This 19% increase is primarily attributable to an increase in depreciation and amortization of landfill property and equipment.
Selling, general and administrative expenses during 1993 totalled $22,303,000 and remained relatively unchanged compared to $21,274,000 for 1992.
Interest expense increased from $13,483,000 during 1992 to $16,577,000 during 1993. The 23% increase is primarily due to the decline in the amount of interest capitalized in 1993. The amount of interest capitalized for 1993 was $2,111,000 compared to interest capitalized of $4,806,000 for 1992. The capitalized interest is related primarily to the Company's environmental operations. The decrease in capitalized interest occurred because the Company ceases to capitalize interest after a landfill becomes operational.
Interest income decreased from $791,000 during 1992 compared to $649,000 during 1993. This 18% decrease is due to a decrease in the average amount of short-term investments outstanding coupled with a decrease in the interest rate yields on short-term investments.
Gain on the sale of assets decreased from $4,285,000 for 1992 to $630,000 for 1993. This decrease is primarily due to a $4,626,000 pre-tax gain recognized from the sale of certain West Virginia coal reserves and land in 1992 which were not included in the Company's current mining plans.
The Company's effective tax rate decreased from a 32% provision in 1992 to a 25% benefit in 1993. This decrease in the effective tax rate is primarily a result of several factors, including percentage depletion, state income taxes and the allowance on utilization of minimum tax credits.
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The Company's cash and cash equivalents totalled $13,744,000 at December 31, 1993, compared to $32,955,000 at December 31, 1992. This 58% decrease is primarily due to the timing of the receipt of payments on receivables, as well as funding capital additions.
Accounts receivable at December 31, 1993 totalled $8,946,000, compared to the balance of $33,523,000 at December 31, 1992. This decrease is primarily due to including the accounts receivable related to the coal subsidiaries sold to Pittston in the net assets held for disposal as of December 31, 1993.
Inventories decreased from $28,060,000 at December 31, 1992, compared to $11,803,000 at December 31, 1993 primarily due to including the inventory related to the coal subsidiaries sold in the net assets held for disposal as of December 31, 1993.
Prepaid expenses and other at December 31, 1993 totalled $7,718,000 compared to the balance of $6,538,000 at December 31, 1992. This increase is primarily due to deferred selling costs of approximately $1,100,000 related to the sale of coal subsidiaries to Pittston on January 14, 1994.
Property, plant and equipment decreased to $139,055,000 at December 31, 1993 compared to $212,585,000 at December 31, 1992. This 35% decrease is primarily due to including property, plant and equipment related to the subsidiaries sold to Pittston in the net assets held for disposal to Pittston as of December 31, 1993. However, the Company had property additions during 1993 of approximately $49 million. These additions are primarily: 1) coal related acquisitions as described in Note 18 to the audited Consolidated Financial Statements and 2) landfill and other environmental related development costs.
The net balance of coal sales contracts and contract mining agreements decreased from $33,041,000 at December 31, 1992 compared to zero at December 31, 1993. This decrease is due to including the coal sales contracts related to the coal subsidiaries sold to Pittston in the net assets held for disposal as of December 31, 1993.
Accounts payable at December 31, 1993 decreased to $5,609,000 as compared to the December 31, 1992 balance of $21,865,000, primarily due to including the payables related to the coal subsidiaries sold to Pittston in the net assets held for disposal as of December 31, 1993.
Accrued expenses and other liabilities increased to $13,714,000 at December 31, 1993 as compared to $12,833,000 at December 31, 1992, primarily due to the litigation reserve
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established at year end, as discussed above, offset by a decrease in reclamation and closure costs.
The Company's line of credit balance at December 31, 1993 totalled $23,442,000 compared to the December 31, 1992 balance of $22,535,000. This increase is primarily due to the acquisition of certain coal reserves in West Virginia. (See Note 18 to the audited Consolidated Financial Statements.) The acquisition of these additional coal reserves was financed by drawing on this line of credit.
The Company's long-term debt outstanding increased from $3,232,000 at December 31, 1992 to $11,954,000 at December 31, 1993. This increase is primarily due to the $10,000,000 borrowed against the environmental company's line of credit during 1993.
The Company's other long-term liabilities increased from $1,331,000 at December 31, 1992 to $2,705,000 at December 31, 1993. This increase is primarily due to the normal increase in landfill closure and post-closure costs accrued, as well as an increase in the accrual for workers' compensation, including black lung benefits.
1992 Compared with 1991 - -----------------------
Net income during 1992 was $11,036,000 or $.72 per share, compared to net loss of $9,686,000 or $.64 per share for 1991. Net income during 1992 was affected by the following:
(1) The Company recognized a $10,544,000 pre-tax gain on the sale of coal subsidiaries. (See Note 5 to the audited Consolidated Financial Statements.)
(2) During 1992, the Company recognized $4,285,000 in pre-tax gains on the sale of assets. The majority of this gain was recognized from the sale of certain West Virginia coal reserves.
(3) During 1992, the Company reached a litigation settlement which reduced pre- tax income by $5,100,000. (See Note 13 to the audited Consolidated Financial Statements.)
(4) During 1992, the Company recognized an approximately $5,000,000 pre-tax gain on the sale of highwall mining machines.
Net loss during 1991 was affected by the following:
(1) During 1991, the Company elected to adopt SFAS No. 109 "Accounting for Income Taxes". The effect of adopting this new standard for accounting for income taxes as of January 1, 1991 was to increase the Company's net loss by
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$3,500,000. (See Note 1 to the audited Consolidated Financial Statements.)
(2) A significant increase in the cost of diesel fuel due to the Persian Gulf crisis caused a major increase in the cost of operations at the Company's mining operation during 1991.
(3) The high operating costs of three of the Company's mines located in western Kentucky resulted in the Company's decision to close these three mines in 1991. The Company incurred a net loss of approximately $10,681,000 at its western Kentucky operations during 1991, which includes a pre-tax charge to expense of approximately $9,000,000 to write off its investment in its western Kentucky mines and to reserve for future reclamation. See Note 7 to the audited Consolidated Financial Statements.
The Company's net mining revenues increased from $271,808,000 during 1991 to $292,225,000 during 1992. The Company's mining revenues increased primarily due to the sales of five of its highwall mining machines. Three of these highwall mining machines were sold to Pittston for aggregate revenues of $12,427,000, while two were sold and leased back from a financing company for aggregate revenues of $6,400,000. Under its licensing agreement with Joy discussed above, the Company is generally prohibited from selling the highwall mining machines to third parties in the future. Although the Company experienced an increase in tons sold from 8,220,000 tons sold during 1991 compared to 8,815,000 tons sold during 1992, the average sales price per ton decreased from $32.83 per ton for 1991 to $30.04 per ton for 1992. This 8.5% decrease in the average sales price is primarily attributable to the March 1992 sale of a coal subsidiary, the assets of which consisted primarily of two long- term coal sales contracts pursuant to which the Company sold during 1991 a total of 957,703 tons of coal at an average per ton sales price of $41.69. (See Note 5 to the audited Consolidated Financial Statements.) In addition, while approximately 90.2 percent of the Company's total coal sales in tons during 1992 were pursuant to contracts with a term of more than one year, see Item 1. "Business -- Coal Mining Operations," the Company is also subject to general conditions in the coal industry, currently including high coal inventories of electric utilities, generally weak demand, and low exports. During 1992, adverse conditions in the coal industry drove down spot coal prices, thus decreasing revenues from the Company's spot market sales which accounted for approximately 9.8 percent of the Company's total coal sales in tons in 1992. General conditions in the coal industry also affect the Company's efforts to negotiate new long-term contracts with utilities. For example, high inventory levels at utilities and low spot coal prices decrease the incentive for an electric utility to enter into a long-term coal sales contract.
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Environmental revenues and net income increased to $7,779,000 and $351,000, respectively, during 1992 compared to environmental revenues of $1,868,000 and net loss of $563,000 during 1993. The primary reasons for these substantial increases are the Company's receipt of operating permits for certain contained landfills in 1992 and the commencement of operations at these landfills; the Company also increased its waste collection services in 1992 through acquisitions of other waste hauling businesses.
Other revenue decreased to $1,470,000 during 1992 compared to $1,579,000 during 1991. This decrease is due to the Company's sale of its road construction subsidiary during July 1991. During 1992, the Company recorded licensing revenue from Joy of $1,470,000 resulting from the agreement between the Company and Joy that provides Joy the right to manufacture and sell the Company's highwall mining machines. (See Note 12 to the audited Consolidated Financial Statements.)
As a percentage of total revenues, cost of operations decreased from 81% during 1991 to 79% during 1992. This decrease is primarily due to the Company's pre-tax charge to expense in 1991 of approximately $9,000,000 to write off its investment in its western Kentucky mines and to reserve for future reclamation.
Depreciation and amortization decreased from $29,740,000 during 1991 to $25,111,000 during 1992. This 16% decrease is primarily attributable to the amortization of coal contracts no longer being included in depreciation and amortization since the contracts were sold during March 1992. (See Note 5 to the audited Consolidated Financial Statements.)
Selling, general and administrative expenses decreased from $23,410,000 during 1991 to $21,274,000 during 1992. This 9% decrease is primarily attributable to certain selling expenses associated with Kanawha Land Company, Inc. no longer being incurred since this subsidiary was sold during March 1992. (See Note 5 to the audited Consolidated Financial Statements.)
Interest expense decreased from $14,446,000 during 1991 to $13,483,000 during 1992. The 7% decrease is primarily due to an overall decrease in interest rates on bank debt tied to the prime interest rate and an overall reduction in outstanding indebtedness. In addition, the Company continued to capitalize interest associated with its investment in those projects still in the development phase. The amount of interest capitalized for 1992 was $4,806,000 compared to interest capitalized of $4,874,000 for 1991.
Interest income decreased from $2,365,000 during 1991 compared to $791,000 during 1992. This 67% decrease is due to a decrease in the interest rate yields on short-term investments.
Gain on the sale of assets increased from $1,840,000 for 1991 to $4,285,000 for 1992. This increase is primarily due to a $4,626,000 pre-tax gain recognized from the sale of certain West
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Virginia coal reserves and land which were not included in the Company's current mining plans.
The Company's effective income tax rate decreased from a 40% benefit in 1991 to a 32% provision in 1992. This decrease in the effective tax rate is primarily a result of several factors, including percentage depletion and state income taxes.
Liquidity and Capital Resources - -------------------------------
The working capital needs of the Company have been met primarily through a combination of funds provided by banks and other institutions and cash generated through operations.
As of December 31, 1993, the Company had approximately $16,558,000 remaining available under its lines of credit secured by certain accounts receivable and coal inventory and substantially all of its environmental assets bearing interest at rates ranging from prime to prime plus 1/2%.
There are certain environmental contingencies related to the Company's coal operations and integrated solid waste disposal system operations, primarily land reclamation obligations and landfill closure obligations, respectively. Under current federal and state surface mining laws, the Company is required to reclaim land where surface mining operations are conducted. Accruals for the estimated cost of restoring the land are provided as mining takes place, based upon engineering estimates of costs. The Company also estimates and records its costs associated with closure and post-closure monitoring and maintenance for operating landfills based upon relevant government regulations. Accruals for these closure and post-closure costs are provided as permitted airspace of the landfill is consumed. The Company revises its estimates on a periodic basis. As of December 31, 1993, the Company had accrued expenses for reclamation and closure costs of approximately $2,524,000. There is a possibility that such obligations, when ultimately paid, may differ substantially from the recorded accrued expenses thus affecting the Company's liquidity. See Note 1 and Note 11 to the audited Consolidated Financial Statements.
In 1990, the Company implemented a self-insurance program to cover most of its employees for workers' compensation, including black lung benefits. Black lung expense is being provided, based upon a recent actuarial study, over the estimated remaining working lives of the miners using accounting methods similar to that of a defined benefit pension plan. Benefits provided are subject to federal and state law and, thus, are not under the control of the Company. Workers' compensation (including black lung) expense for the year ended December 31, 1993 was approximately $3,755,000. There is a possibility that workers' compensation (including black lung) obligations, when ultimately settled and paid, may differ substantially from the recorded balance and thus affect the
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Company's liquidity. See Note 16 to the audited Consolidated Financial Statements.
The Company believes that its present financial condition, considering the funds available under the existing line of credit, the proceeds received from the sale of certain coal subsidiaries (see Note 2 of the audited Consolidated Financial Statements), and internal financial resources, provide adequate capital reserves and liquidity.
The overall net increase (decrease) in cash and cash equivalents was $(19,211,000), $30,650,000 and $(6,995,000) for 1993, 1992 and 1991, respectively. Such net increase (decrease) reflects net cash provided by (used in) operating, investing and financing activities.
Net cash provided by operating activities was $22,756,000, $17,147,000 and $30,699,000 for 1993, 1992 and 1991, respectively. These fluctuations among years primarily reflect changes in working capital terms whereby increases in net working capital would cause a decline in net cash provided by operating activities.
During 1993, the Company's working capital increased by $10,093,000, which primarily consists of a $11,899,000 increase in accounts receivable, a $6,358,000 increase in inventories and a $4,510,000 decrease in deferred income taxes, net of a $10,706,000 increase in accrued expenses and other current liabilities. During 1992, the Company's working capital increased by $5,112,000, primarily due to a $6,584,000 increase in inventories. During 1991, the Company's working capital decreased by $5,833,000, primarily due a $5,087,000 decrease in inventories.
Net cash provided by (used in) investing activities was $(47,399,000), $26,275,000 and $(37,172,000) for 1993, 1992 and 1991, respectively. The 1993 amount consists of property, plant and equipment purchases of $44,752,000, mineral reserve additions of $6,493,000, and net of proceeds of $3,846,000 received from sale of property, plant and equipment. The major components of the 1992 amount consist of net proceeds from sale of $39,355,000 primarily received from the sale of Kanawha Land Company, Inc. (see Note 5 to the audited Consolidated Financial Statements); net of property, plant and equipment purchases of $38,182,000; the liquidation of $15,000,000 of short-term investments; and net proceeds of $11,831,000 received from the sale of property, plant and equipment. The major components of the 1991 amount consist of property, plant and equipment purchases of $52,209,000, net of the liquidation of $10,382,000 of short-term investments.
Net cash provided by (used in) financing activities was $5,432,000, $(12,772,000) and $(522,000) for 1993, 1992 and 1991, respectively. The 1993 amount primarily represents proceeds of $4,312,000 from the issuance of common stock and net borrowings of $1,648,000 on long-term debt and the revolving line of credit. The
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1992 and 1991 amounts primarily represent net repayments of long-term debt and the revolving line of credit.
Inflation has not had a significant effect on the Company's business primarily because the United States economy has been experiencing a period of relatively low inflation.
The Company's capital needs, earnings and cash flow are somewhat dependent on events beyond the Company's control, such as weather patterns, the state of the economy, and changes in existing governmental and environmental regulations.
Item 8.
Item 8. Financial Statements and Supplementary Data. -------------------------------------------
See accompanying Table of Contents to Consolidated Financial Statements and Schedules.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and ---------------------------------------------------------------- Financial Disclosure. --------------------
None.
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant. --------------------------------------------------
The following information is furnished as of March 15, 1994, with respect to the executive officers and directors of the Company.
All directors hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Officers serve at the discretion of the Board of Directors. All officers spend substantially full time working for the Company or its subsidiaries.
Larry Addington, Robert Addington and Bruce Addington have been directors since the organization of the Company. Jack C. Fisher and Carl R. Whitehouse were elected to the Board of Directors on October 21, 1987. Larry Addington, Robert Addington and Bruce Addington are brothers.
Messrs. Addington have substantial experience in the operation of coal mining ventures. Their first mining company, Addington Brothers Mining Company, began mining coal in eastern Kentucky in 1972 and was sold to Ashland Oil, Inc. in 1976. In 1978, Larry Addington formed Pyramid Mining, Inc. ("Pyramid"), which mined coal in western Kentucky and was sold to First Mississippi Corporation, a diversified energy company in 1981.
Larry Addington has been President of the Company since its organization and was the founder of each of the corporate entities acquired by the Company pursuant to the Company's 1987 reorganization.
Robert Addington has been Vice President of Operations and Engineering of the Company since its organization. He served in a
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similar capacity for each of the corporate entities acquired by the Company pursuant to the Company's 1987 reorganization.
Bruce Addington has functioned as Vice President of Operations of the Company since its organization.
William R. Nelson has been Vice President of the Company directing its environmental operations since August 1992. From November 1981 to July 1992, he worked with the Chambers Development Company, Inc., most recently as its Treasurer.
R. Douglas Striebel has served as Vice President and Chief Financial Officer of the Company since 1988. From 1984 until joining the Company, Mr. Striebel was an Audit Manager with Arthur Andersen & Co.
Jack C. Fisher served as Mayor of Owensboro, Kentucky from 1984 to 1987. He is currently retired. Before 1984, he served as Manager of Mail Processing with the U.S. Postal Service in Owensboro. Mr. Fisher is a member of the Company's Audit Committee.
Carl R. Whitehouse retired in December 1988 as the Chairman of the Board of Citizens State Bank in Owensboro, Kentucky, where he had served as President and Chief Executive Officer for over five years. Mr. Whitehouse is a member of the Company's Audit Committee.
Compliance with Section 16(a) of The Exchange Act - -------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of the Company's common stock, to file reports (including a year-end report) of ownership and changes in ownership with the Securities and Exchange Commission and to furnish the Company with copies of all reports filed.
Based solely on a review of the forms furnished to the Company, or written representations from certain reporting persons, the Company believes that all persons who were subject to Section 16(a) in 1993 complied with the filing requirements.
Limitation on Liability of Directors - ------------------------------------
Pursuant to the Company's Certificate of Incorporation, no director shall be personally liable to the Company or its stockholders for monetary damages for breach of his fiduciary duty as a director, except for a breach of the director's duty of loyalty, for acts and omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, for transactions from which a director derived an improper personal benefit or for unlawful payment of dividends or stock purchases or redemptions pursuant to Section 174 of the Delaware General Corporation Law. This provision offers persons who serve on the Board of Directors of the Company protection against awards of monetary damages for
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negligence in the performance of their duties. It does not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of the duty of care.
In addition, the Company has entered into Indemnity Agreements with its executive officers and directors which establish contractual rights for the executive officers and directors to be indemnified by the Company to the fullest extent permitted by law. See Item 13. Certain Relationships and Related Transactions.
Item 11.
Item 11. Executive Compensation. ----------------------
The following table sets forth the aggregate cash compensation paid by the Company for 1993, 1992 and 1991 to the five most highly compensated executive officers of the Company whose salary and bonus compensation exceeded $100,000 in 1993.
Summary Compensation Table --------------------------
/(1)/ Employment began August 1, 1982.
/(2)/ Represents the premium on term life insurance with a $500,000 death benefit.
/(3)/ Employment began July 1, 1992; Mr. Quillen resigned effective January 14, 1994.
The Company has entered into an employment agreement with William R. Nelson. Pursuant to the employment agreement, the Company will employ Mr. Nelson as the President and Chief Executive Officer of its subsidiary, Addington Environmental, Inc. ("Addington Environmental"). Mr. Nelson will be paid an annual
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salary of $200,000, with a possible bonus pursuant to a plan to be agreed upon by the parties. The employment agreement provides a three-year term ending on July 31, 1995. If Mr. Nelson becomes disabled during the term of the employment agreement, he will be entitled to his full salary during the 12 months following the onset of such disability. Mr. Nelson's employment pursuant to the agreement will terminate upon the occurrence of certain events, including death, mutual agreement, termination for Cause, as defined, a material breach by Mr. Nelson of his obligations, or the expiration of the three-year term. If a Change of Control (as defined) occurs, Mr. Nelson will be entitled to certain severance benefits upon a termination of his employment within three years after the Change of Control, unless his termination is due to death or retirement, for Cause, as defined, or by Mr. Nelson other than for Good Reason, as defined. If Mr. Nelson is entitled to receive severance benefits, the Company will pay him on the 30th day following his termination an amount equal to any accrued but unpaid balance of his salary and prorated bonus, plus an amount equal to his salary at the rate then in effect for a period of three years minus a period equal to the time elapsed between the date upon which a Change of Control occurs and his date of termination. Upon the termination of his employment under the agreement for any reason, Mr. Nelson is subject to certain restrictive covenants set forth in the agreement for a period of three years from the termination. The Company will provide Mr. Nelson the use of an automobile, limited country club dues, and a term life insurance policy with a death benefit of $500,000. The agreement also provided that the Company would incur certain costs in connection with Mr. Nelson's move to Kentucky, including the purchase of his Pennsylvania home. The employment agreement also provides that upon the satisfaction of certain conditions, the Company will grant Mr. Nelson either options to purchase shares of common stock in the entity holding the material portion of the waste management businesses owned by the Company, or options to acquire shares of the Company. No such options have yet been granted.
Each of Messrs. Addington and the Company's Chief Financial Officer are entitled to receive bonuses if the Company achieves certain target performance levels in sales, operating profits and mining productivity as established annually by the Audit Committee. For the twelve months ended December 31, 1993, the target for annual sales was between 5,000,000 tons and 6,500,000 tons and the target for pre-tax net profit was between $10,000,000 and $22,000,000. Bonuses are paid if the return on stockholders' equity for the twelve months ended December 31, 1993 is at least 12.5%, with the amount of the bonus to be based upon the target performance levels and the return on stockholders' equity achieved. Pursuant to the incentive provision, if the return on stockholders' equity were 12.5%, the minimum bonus to be paid would be $3,432 to each participant; if the maximum target performance levels were achieved and the return on stockholders' equity were 20% or more, the maximum bonus of $120,120 would be paid to each participant. Pursuant to this management incentive program, no bonuses were paid for 1993.
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Compensation of Directors - -------------------------
Directors of the Company who are also officers of the Company receive no compensation for their services as directors. During 1993, the Company's standard directors fees for non-management directors were a base salary of $10,000 per year for services as directors, with an additional $1,000 per Board meeting actually attended, and $500 for each committee meeting actually attended which was not held in conjunction with a meeting of the Board of Directors.
Stock Option Plan - -----------------
During 1988, the Company adopted, with stockholder approval, the Restated Stock Option Plan (the "Option Plan"). The purposes of the Option Plan are to encourage certain officers, employees, and independent contractors to use their best efforts for the Company's success and to provide a valuable means of retaining key personnel as well as attracting new personnel when needed for future operations and growth.
Pursuant to the Option Plan, the Company has reserved for issuance 1,500,000 shares of Common Stock for which options may be granted by the Option Committee of the Board of Directors (currently consisting of Messrs. Addington) to officers, employees and independent contractors of the Company and its subsidiaries in amounts and upon terms and conditions to be determined from time to time by the Option Committee. Messrs. Addington are not eligible to receive options pursuant to the Option Plan. During 1993, no options were granted to, or exercised by, any of the executive officers named in the Summary Compensation Table above.
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Aggregated 1993 Year-End Option Value ---------------------
(1) Based on December 31, 1993 price per share of $19.00.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------
Except as otherwise noted in the footnote following the table, the following table sets forth certain information concerning ownership of the Common Stock as of March 15, 1994, by each director, each executive officer named in Item 11, each person or entity who is known to the Company to be the beneficial owner of more than 5% of the Common Stock and all directors and executive officers of the Company as a group. Except as otherwise noted in the footnote following the table, each beneficial owner listed below has sole voting and dispositive power with respect to the shares listed next to his name.
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_______________ *Represents less than 1% of outstanding shares.
(1) Mr. Berkowitz, as managing partner of HPB Associates, L.P., has sole voting and dispositive powers with respect to the shares owned by the partnership. Information on the partnership's beneficial ownership is according to a Schedule 13D dated January 20, 1992.
(2) Includes 1,100 shares owned by Mr. Whitehouse's wife; Mr. Whitehouse has no voting or dispositive powers with respect to these 1,100 shares.
Item 13.
Item 13. Certain Relationships and Related Transactions. ----------------------------------------------
In situations where there will be an ongoing relationship with related parties for the purchase of services or products, it is the Company's policy that a majority of the independent and disinterested directors will be required to approve continuation or initiation of the relationship and will periodically review such transactions to assure that they meet the aforementioned standard.
TASK Trucking Company ("TASK") provides trucking services to the Company and is owned by a brother-in-law of Messrs. Addington. During 1993, the Company's expense was $19,186,000 for trucking services provided through TASK. The Company believes that the price charged for such trucking services was not greater than the prices generally charged by non-affiliated entities in the area.
Larry Addington owns a 50% interest in an office building in Owensboro, Kentucky in which the Company leases approximately 7,300 square feet of office space for a rent of $110,015 during 1993 plus utilities. The lease is for a term of five years, expiring in 1996. The annual rental beginning in 1994 will be $117,350 plus utilities. The Company believes that the rental paid is not greater than that charged by non-affiliated entities in the area for similar facilities and is comparable to the rate charged to other tenants in the building, none of whom are related to the Company or Messrs. Addington.
On February 23, 1993, the U.S. District Court for the District of Montana entered a judgment in a suit by Bill Robinson, Sr.
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stating that the defendants Larry Addington, Larry Harrington, Addwest Gold, Inc., Addington Resources, Inc., Addington Holding Company, and Addwest Mining, Inc. are jointly and severally liable to Mr. Robinson for compensatory damages in the amount of $850,000 and that Mr. Robinson is entitled to punitive damages in the amount of $1,000 from Larry Harrington, $6,000,000 from Larry Addington, and $4,500,000 jointly and severally from defendants Addwest Gold, Inc., Addington Resources, Inc., Addington Holding Company, and Addwest Mining, Inc. A settlement has been reached in which Mr. Robinson will release all parties from all claims. As a result of the settlement, the Company expects to pay Mr. Robinson $3,450,000 by April 15, 1994. The parties are currently in the process of drafting appropriate settlement documentation. Pursuant to indemnification agreements, including an agreement with Larry Addington discussed below, the Company is obligated for the full amount of the settlement, none of which will be covered by insurance. See Item 3. Legal Proceedings and Note 13 to the audited Consolidated Financial Statements.
With respect to claims against Larry Addington, although the jury specifically rejected a claim by Mr. Robinson that Mr. Addington had committed fraud upon him, the court found that there was sufficient evidence to sustain the finding of liability upon the plaintiff's claim for negligent misrepresentation and the imposition of punitive damages against Larry Addington. The court stated that there was sufficient evidence to support a finding that the alleged negligent misrepresentations made by Larry Addington to the plaintiff were accomplished with actual malicious intent within the meaning of the Montana statute relating to claims for punitive damages.
Upon a determination by the Board of Directors (Larry Addington abstaining) that Larry Addington did at all times relevant to the litigation act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, the Company would be obligated to indemnify Mr. Addington against the amount of any final judgment entered against him and any and all expenses incurred by him in connection with the litigation. Because the interests of all the defendants were coincident, no marginal expenses were incurred by Mr. Addington during the trial phase of the litigation. However, Mr. Addington did engage separate counsel on appeal. This indemnification is pursuant to an indemnity agreement entered into with Mr. Addington in August 1988, the form of which was previously approved by the Company's stockholders. The indemnification is also in accordance to Section 145 of the General Corporation Law of the State of Delaware and the Company's Certificate of Incorporation and Bylaws. The Board of Directors, in meetings held on December 18, 1992 and March 29, 1993, at which times it received reports from counsel on the litigation, determined to indemnify Mr. Addington for past and future expenses as well as the trial court judgment.
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Larry Addington had guaranteed the Company's obligations in connection with the assignment of a coal sales contract subsequently transferred in the Pittston Transaction.
On September 4, 1992, in accordance with the terms of an employment agreement, the Company purchased the Pennsylvania home of William R. Nelson, a Vice President of the Company, for a purchase price of $325,000. The Company sold the home on September 16, 1993. The Company incurred aggregate expenses on the purchase and disposition of Mr. Nelson's home, including a loss on the sale of the home and carrying and disposition costs, of approximately $135,000.
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PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. -----------------------------------------------------------------
(a) (1) List of Financial Statements Filed. See accompanying Index to Consolidated Financial Statements and Schedules.
(a) (2) List of Financial Statement Schedules Filed. See accompanying Index to Consolidated Financial Statements and Schedules.
(a) (3) List of Exhibits Filed.
(3) (A)/1/ Restated Certificate of Incorporation of Registrant
(B)/1/ Bylaws of Registrant
(10)(A)/2/ Deed dated June 18, 1985 by and between Martiki Coal Corporation and ARMM Coal, Inc.
(B)/2/ Deed of Conveyance dated June 7, 1984 by and between Franklin Real Estate Company and ARMM Land Co., Inc.
(C)/2/ Contract Mining Agreement and Related Agreements dated June 10, 1986 among Addington, Inc., CJC Leasing, Inc., N.O.R. Mining, Inc., Adams Resources & Energy, Inc., and Third National Bank
(D)/3/ Form of Lease Agreement among Larry Addington and Larry K. Harrington and Addwest Mining, Inc.
(E)/4/ Employment Agreement between R. Douglas Striebel and the Registrant, as amended
(F)/5/ Agreement dated as of April 18, 1990, between Indiana-Kentucky Electric Corporation and Addwest Mining Company, Inc.
(G) Addington Resources, Inc. Restated Stock Option Plan, as amended.
(H) Form of Indemnity Agreement between the Registrant and its directors and officers
(I) Employment Agreement dated as of July 14, 1992, between Addington Environmental, Inc. and William R. Nelson.
(11) Statement re computation of per share earnings. See page of the audited Consolidated Financial
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Statements and Schedules filed as part of this report.
(21) List of subsidiaries of Registrant
(23) Consent of Arthur Andersen & Co.
(99)(A)/2/ Coal Purchase and Sales Agreement dated September 1, 1984 by and between Fossil Fuels, Inc., Delta Energy Corporation and Consumers Power Company
(99)(B)/2/ Amended and Restated Contract for Purchase and Sale of Coal dated June 27, 1986 by and between Tennessee Valley Authority and Addington, Inc. [Contract No. 86P-65-T4] (See Exhibit (99)(D) and Exhibit (99)(G) pertaining to amendments to Contract No. 86P-65-T4)
(99)(C)/2/ Contract for Purchase and Sale of Coal dated September 12, 1986 by and between Tennessee Valley Authority and Addwest Mining, Inc. [Contract No. 86P-16-T1] (See Exhibit (99)(E) and Exhibit 99(H) pertaining to amendments to Contract No. 86P-16-T1)
(99)(D)/6/ Supplemental Agreement to Contract 86P-65-T4 for Purchase and Sale of Coal dated May 1989, by and between Tennessee Valley Authority and Addington, Inc.
(99)(E)/6/ Supplemental Agreement to Contract 86P-16-T1 for Purchase and Sale of Coal dated February 1, 1989 by and between Tennessee Valley Authority and Addwest Mining, Inc.
(99)(F)/6/ Transfer Agreement dated as of April 3, 1989, by and among Addwest Mining, Inc. and Addington, Inc. and the Tennessee Valley Authority
(99)(G)/7/ Supplemental Agreement dated October 23, 1990, to Contract 86P-16-T4 by and between Addington, Inc. and Tennessee Valley Authority.
(99)(H)/3/ Supplemental Agreements to Contract 86P-16-T1 for Purchase and Sale of Coal dated May 11, 1989 and October 30, 1991 by and between Tennessee Valley Authority and Addwest Mining, Inc.
____________________
/1/ Incorporated by reference to the Registration Statement on Form S-1 [File No. 33-22164]
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/2/ Incorporated by reference to the Registration Statement on Form S-1 [File No. 33-11918]
/3/ Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 [File No. 0-16498].
/4/ Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 [File No. 0-16498].
/5/ Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1990 [File No. 0-16498].
/6/ Incorporated by reference to the Registration Statement on Form S-1 [File No. 33-29848]
/7/ Incorporated by reference to the Registrant's Annual Report Form 10-K for the fiscal year ended December 31, 1990 [File No. 0-16498].
(b) Reports on Form 8-K. -------------------
During the quarter ended December 31, 1993, the Company filed no Current Reports on Form 8-K.
(c) Exhibits. --------
The exhibits listed in response to Item 14(a)(3) are filed as a part of this report.
(d) Financial Statement Schedules. -----------------------------
The financial statement schedules listed in response to Item 14(a)(2) are filed as part of this report.
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ADDINGTON RESOURCES, INC.
TABLE OF CONTENTS TO
CONSOLIDATED FINANCIAL STATEMENTS & SCHEDULES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Addington Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Addington Resources, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1992 and 1993, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Addington Resources, Inc. and subsidiaries as of December 31, 1992 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.
As explained in Note 1(g) to the financial statements, effective January 1, 1991, the Company changed its method of accounting for income taxes.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
March 23, 1994 Louisville, Kentucky
ADDINGTON RESOURCES, INC. CONSOLIDATED BALANCE SHEETS ASSETS
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
ADDINGTON RESOURCES, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
ADDINGTON RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes to consolidated financial statements are an integral part of these statements.
ADDINGTON RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
The accompanying notes to consolidated financial statements are an integral part of these statements.
ADDINGTON RESOURCES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these statements.
ADDINGTON RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1)
The accompanying notes to consolidated financial statements are an integral part of these statements.
ADDINGTON RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 1) (Continued)
The accompanying notes to consolidated financial statements are an integral part of these statements.
ADDINGTON RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies ------------------------------------------
a. Financial Statement Presentation and Organization- -------------------------------------------------
The accompanying consolidated financial statements as of December 31, 1991, 1992 and 1993 include the accounts of Addington Resources, Inc. (the Company) and its wholly-owned subsidiary, Addington Holding Company, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain 1991 and 1992 amounts have been reclassified to conform to 1993 presentation with no effect on net income (loss).
b. Company Environment- -------------------
The mining and environmental industries expose the Company to a number of issues including: the possibility of the termination of sales contracts, fluctuating market conditions, changing governmental regulations, unfavorable mining conditions, loss of key employees and the ability of the Company to control adequate recoverable mineral reserves and obtain the necessary permits for its landfills.
Most of the Company's revenues have been generated under long-term coal sales contracts with electric utilities located in the eastern United States. Revenues are recognized on coal sales in accordance with the sales agreement, which is usually when the coal is shipped to the customer. Revenues are recognized on environmental sales as services are provided or waste is received in the landfill. The Company grants credit to its customers based on their creditworthiness and generally does not secure collateral for its receivables.
c. Inventories- -----------
Inventories are stated at average cost, which approximates first-in, first- out (FIFO) cost, and does not exceed market.
d. Depreciation and Amortization- -----------------------------
Property, plant and equipment are stated at cost. Depreciation and amortization are provided using either the straight-line or units produced or consumed methods. The following estimated useful lives are used under the straight-line method:
Years ----- Mining and other equipment and related facilities 5 to 40 Environmental equipment and related facilities 5 to 40 Transportation equipment 3 to 10 Barge loading facilities 5 to 25 Mine development costs 3 to 15 Furniture and fixtures 3 to 10
Capitalized environmental development costs include landfill related expenditures for land, permitting and preparation costs. Such landfill costs represent costs related to starting up the operation, developing the entire site and constructing the individual cells. Landfill costs are amortized as the relevant permitted airspace is consumed.
Mineral reserves are amortized using the units-of-production method, based on estimated recoverable reserves.
Financing costs (included in Other Assets) are being amortized using the straight-line method, over the life of the related debt, which approximates the interest method.
Intangible assets primarily consist of customer lists and covenants not to compete. These assets are amortized over their estimated useful lives, usually no longer than five years, using the straight- line method.
The amounts assigned to coal sales contracts are amortized to expense based on tons shipped to the customer.
e. Advance Royalty Payments (included in Other Assets)- ---------------------------------------------------
The Company is required, under certain royalty lease agreements, to make minimum royalty payments whether or not mining activity is being performed on the leased property. These minimum payments are recoupable once mining begins on the leased property. The Company capitalizes these minimum royalty payments and amortizes them once mining activities begin or expenses them when the Company has ceased mining or has made a decision not to mine on such property.
f. Restricted Cash (included in Other Assets)- ------------------------------------------
The Company is mining reserves whose ownership is currently being disputed. Royalty payments related to these reserves are being deposited by the Company into an escrow account and will be paid as the disputes are settled.
The Company also pays amounts into escrow as required under state regulations related to closure and post-closure costs of its landfills.
As of December 31, 1992 and 1993, total restricted cash was $2,221,000 and $2,348,000, respectively.
g. Accounting Change- -----------------
Effective January 1, 1991, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, the standard for accounting for income taxes issued by the Financial Accounting Standards Board. The cumulative effect of this accounting change at December 31, 1990 was recorded effective January 1, 1991 and increased net loss by $3,500,000 ($.23 per share).
h. Net Income (Loss) Per Share- ---------------------------
Net income (loss) per share is based on the weighted average number of common shares and common equivalent shares outstanding, as applicable, during the periods.
i. Statements of Cash Flows- ------------------------
For purposes of the statements of cash flows, the Company considers investments having maturities of three months or less at the time of purchase to be cash equivalents.
The cash amounts of interest and income taxes paid by the Company in 1991, 1992 and 1993 are as follows:
For 1993, the statement of cash flows excludes the impact of the reclassification of net assets held for disposal, as such reclassification is non-cash in nature.
During 1991, 1992 and 1993, the Company acquired certain assets, primarily property, plant and equipment and mineral reserves, by assuming liabilities, primarily notes and other payables, and making cash payments. The non-cash portions of approximately $1,005,000, $1,131,000 and $14,788,000 for the years ended December 31, 1991, 1992 and 1993, respectively, have been excluded from the statements of cash flows.
During 1992, the Company also disposed of certain assets, primarily property, plant and equipment and mineral reserves, by accepting a note receivable. The non-cash portion of $10,399,000 has been excluded from the 1992 statement of cash flows.
j. Reclamation and Closure Cost- ----------------------------
Under current Federal and state surface mine laws, the Company is required to reclaim land where surface mining operations are conducted. Accruals for the estimated cost of restoring the land are provided as mining takes place, based upon engineering estimates of costs.
The Company also estimates and records its costs associated with closure and post-closure monitoring and maintenance for operating landfills based upon relevant government regulations. Accruals for these closure and post-closure costs are provided as permitted airspace of the landfill is consumed. The Company revises its estimates on a periodic basis.
k. Income Taxes- ------------
The provision (benefit) for income taxes is based on income for financial statement purposes. Deferred income taxes, which arise from temporary differences between the period in which certain income and expenses are recognized for financial reporting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes.
2. Sale of Certain Coal Subsidiaries ---------------------------------
During September, 1993, the Company entered into an agreement to sell the stock of five of its coal subsidiaries to Pittston Minerals Group, Inc. ("Pittston") for $157 million cash. Before closing, certain property, plant and equipment (the net book value of which was approximately $43 million as of December 31, 1993) was transferred to other subsidiaries of the Company from the subsidiaries to be sold. In addition, the Company retained all of the net working capital (the net value of which was approximately $30 million as of December 31, 1993) of the sold subsidiaries as of the date of closing. In connection with the sale, the Company has provided certain guarantees to Pittston.
This transaction was completed on January 14, 1994.
The subsidiaries sold to Pittston include: Addington, Inc. and its wholly-owned subsidiary, Ironton Coal Company; Appalachian Mining, Inc.; Appalachian Land Company; Vandalia Resources, Inc.; and Kanawha Development Corporation. The operations of these subsidiaries are located in Ohio, West Virginia and Kentucky.
Other terms of the transaction include the Company entering into a coal supply contract with Pittston for the sale of 4,920,000 tons over 3-1/2 years at a base price of $26 per ton. Additionally, the Company will receive a $1 per ton production royalty for coal produced from certain West Virginia properties being sold to Pittston with a minimum royalty of $100,000 per month, a maximum aggregate royalty in any one year of $1.5 million, and a maximum aggregate royalty under the agreement of $3.75 million. The Company will also pay Pittston a royalty of $0.50 per ton of coal produced by two retained highwall mining machines for 3-1/2 years.
With respect to the $157,000,000 sale price and the net working capital retained by the Company, approximately $2,500,000 was used to pay the Company's closing costs for the transaction, including a $1,000,000 payment to a consultant for the Company and $500,000 to the financial advisors for their services. The Company used approximately $131,725,000 of the proceeds to provide for the early redemption of its 12% Senior Secured Notes due July 1, 1995, including the payment of $4,288,000 as a redemption premium and approximately $2,437,000 in net interest through March 15, 1994 (the redemption date). In addition, the Company used certain of the proceeds to retire all indebtedness outstanding under the Company's revolving line of credit agreement related to its coal operations. The oustanding balance on the line of credit as of January 14, 1994 was $23,442,000. The Company also used approximately $3,800,000 to compensate its employees for extraordinary efforts expended in connection with the consummation of the transaction, including approximately $416,500 in connection with the termination of stock options held by employees who will become employees of Pittston as a result of the transaction.
As a result of this transaction, the net assets relating to the sales transaction appear as net assets held for disposal in the accompanying December 31, 1993 balance sheet. Additionally, since the $125,000,000 Senior Secured Notes were redeemed in connection with the transaction, they have been classified as a current liability in the accompanying December 31, 1993 balance sheet.
The Company does not expect to record a loss on this transaction. Accordingly, the Company will record the actual economic impact of the disposal in its 1994 financial statements. However, principally due to the Company's de-emphasis on mining operations, the Company recorded approximately $14,506,000 of asset write-offs in its 1993 financial statements. These write-offs principally relate to its sulfur mine development project ($9,384,000) which has been abandoned. Additionally, the Company has written off approximately $5,122,000 of assets that it has abandoned associated with its environmental projects. These asset write-offs are included in cost of operations in the accompanying 1993 consolidated statement of operations.
The Company will continue to own and operate four eastern Kentucky mines with estimated annual production capacity of 3,000,000 tons per year.
3. Stock Option and Stock Grant Plans ----------------------------------
The Company has a non-qualified stock option plan pursuant to which 1,500,000 shares of common stock were reserved for issuance and may be granted to officers, directors, and key employees of the Company and to key independent contractors of the Company in amounts and upon terms and conditions to be determined from time to time by the Company. Stock options generally are exercisable either three years or five years from the date of issuance. The following stock options have been issued, exercised or cancelled as of December 31, 1993:
As of December 31, 1993, 278,000 shares were exercisable and 500,000 options were available for issue.
In connection with the transaction discussed in Note 2, the Company has determined to terminate all stock options previously granted under its stock option plan to employees who will become employees of Pittston as a result of the transaction. Options for a total of 59,000 shares of the Company's common stock previously granted to 11 employees will be terminated. The Company will compensate each of these employees in the amount of the number of options held by each employee multiplied by the difference between the per share option exercise price and $16. The Company estimates that the total cost for such terminations will be approximately $416,500.
On December 6, 1989, the Company adopted a non-qualified stock grant plan pursuant to which 500,000 shares of common stock were reserved for issuance to employees of the Company, except that officers, directors and owners of more than 10% of the Company's common stock are not eligible to receive stock grants. All stock grants issued to date specify that the recipient of the stock grant must remain employed by the Company for 5 years from the date of grant in order to exercise the grant. As of December 31, 1993, no grants were exercisable and the following stock grants were issued or cancelled:
As of December 31, 1993, stock grants for 173,900 shares of common stock were outstanding, with 326,100 available for issue.
In connection with the transaction discussed in Note 2, the Company has amended the stock grant plan to provide, among other things, that service by an employee with Pittston or an affiliate as a result of the transaction will be counted toward the time of service required under the stock grants and any termination of the employee without cause by Pittston within 120 days of the closing of the transaction shall not result in a cancellation of his stock grant but shall automatically vest his rights in the stock grant. Approximately 256 employees holding stock grants for a total of 92,400 shares of common stock will become employees of Pittston as a result of the transaction.
4. Environmental Commitments -------------------------
a. Municipal Agreements- --------------------
In July, 1990, a wholly-owned subsidiary, Ohio County Balefill ("Balefill"), entered into an exclusive 40-year agreement with Ohio County (Kentucky) Fiscal Court to operate the County's landfill. Balefill has been operating the County's landfill since that date.
In March, 1992, the Company entered into an agreement with Montgomery County, North Carolina concerning the operation of the County's landfill. During July, 1992, the Company began operating the County's landfill under a 20-year contract. Under the terms of the agreement, the Company has agreed to construct a recycling facility and a new contained landfill adjacent to the current operations.
b. Green Valley Environmental Corp.- --------------------------------
On September 22, 1992, the Company's subsidiary, Green Valley Environmental Corp. ("Green Valley") and Kentuckians for the Commonwealth ("KFTC") entered into a Settlement Agreement concerning a four-year dispute over Green Valley's landfill in Greenup County, Kentucky. The Settlement Agreement resolves all disputes between Green Valley and KFTC with respect to administrative and judicial actions filed by KFTC and others, including a citizens group known as GROWL. The two co-chairpersons of GROWL also executed the Settlement Agreement, although other individual members did not. Under the Settlement Agreement, Green Valley will install an additional liner to the bottom of the landfill and drill nine new monitoring wells. The new construction is consistent with Kentucky's stringent landfill regulations for landfills intending to operate beyond July 1, 1995. The Settlement Agreement limits the landfill's service area to a 38-county region in Kentucky, Ohio and West Virginia and provides for a full-time inspector. The size of the landfill will be capped at 138 acres or approximately 23 million cubic yards of airspace. The Settlement Agreement also provides that Green Valley will not operate other landfills in Greenup County or the 22,000-acre area contiguous to the landfill. Green Valley will donate three percent of its net profits from operation of the landfill to community cleanup efforts, recycling programs and community environmental education.
5. Sale of Subsidiaries --------------------
a. Kanawha Land Company, Inc.- --------------------------
During March, 1992, the Company entered into an agreement with Pittston Coal Sales Corp. ("Pittston") whereby Pittston acquired all of the outstanding stock of one of the Company's subsidiaries, Kanawha Land Company, Inc. ("Kanawha"), for $42.5 million in cash and agreed to purchase certain mining equipment for $17.2 million in cash. The Kanawha assets acquired by Pittston primarily include two long-term coal sales contracts with the Appalachian Power Company and four highwall mining machines. At the date of disposal, the two contracts called for a total of approximately 21 million tons of coal to be delivered over the next 14 years.
Other terms of the agreement call for Pittston's subsidiaries to purchase up to 1,790,000 tons of coal from one of Addington's mines in West Virginia for a purchase price of $27 per ton through 1994. During October, 1992, the Company modified this agreement, whereby the Company agreed to supply 900,000 tons per year for 1993 and 1994 at prices ranging from $25.50 to $26.00 per ton during 1993. The sales price per ton will escalate during 1994 based on certain producer price indices. The Company also agreed to purchase approximately 2,300,000 tons of low- sulfur compliance coal from one of Pittston's mines in eastern Kentucky through February, 1996 for a purchase price of $25 per ton, with a 3% price escalation per year. The subsidiaries which hold the coal contracts described in this paragraph were included in the sale to Pittston discussed in Note 2. Therefore, after January 14, 1994, the Company has no further committments under the two coal contracts discussed in this paragraph.
In connection with the sale of Kanawha, the Company increased its reclamation accrual by $5,000,000 for certain West Virginia operations. This increase in the reclamation accrual is a result of the sale of these two long-term contracts which were being supplied by the West Virginia operations that are currently being phased down. This $5,000,000 reclamation provision has been netted against the gain on sale of coal subsidiary in the accompanying 1992 consolidated statement of operations.
b. Southern Illinois Mining Company, Inc.- --------------------------------------
During April, 1992, the Company sold all of the outstanding stock of one of its subsidiaries, Southern Illinois Mining Company, Inc. ("SIMC"), to Marion Mining Corporation ("Marion") for $1 million in cash and an approximately $10.4 million promissory note (the "SIMC Note") bearing interest at six percent. The SIMC Note is secured by: (i) a pledge of the capital stock of SIMC; (ii) a Mortgage, a Security Agreement, Assignment of Rents and Profits, and Fixture Financing Statements, all of which encumber coal reserves and related real estate located in Williamson County, Illinois; and (iii) a Security
Agreement covering certain of the SIMC assets, excluding accounts receivable arising out of the sale of coal to TVA under Contract T-1. At the time of the sale, the assets of SIMC consisted primarily of Contract T-1 with the Tennessee Valley Authority, a deep mine, certain coal reserves and a coal preparation facility. The Company has guaranteed SIMC's performance of Contract T-1.
On September 15, 1992, the Company filed suit against Marion and SIMC in Boyd County Circuit Court, Boyd County, Kentucky for, among other claims, breach of contract and misrepresentations. The Company claims that SIMC has ceased its mining operations and is not shipping coal under Contract T-1. On September 21, 1992, the Company obtained a temporary restraining order requiring Marion and SIMC to protect and preserve the assets of SIMC for the Company's benefit. On February 1, 1993, both Marion and SIMC filed bankruptcy.
On November 5, 1993, the Company filed a foreclosure action in state court in Illinois to foreclose the security interest in the real property and personal property of SIMC. SIMC subsequently filed an adversary proceeding against the Company in United States Bankruptcy Court for the Eastern District of Kentucky on January 19, 1994. The Complaint seeks the return of $1,000,000 paid by Marion to the Company as partial consideration for its purchase of the SIMC stock, the return of $378,200 in royalties paid to the Company subsequent to the sale and $500,000 in punitive damages. The Company has filed an answer in which it denied the substantive allegations of the Complaint and asserted various affirmative defenses to the claims.
Because of the pendency of the adversary proceeding in U.S. Bankruptcy Court, the Company has advised SIMC that it has decided to (i) cease the Illinois Foreclosure Action, (ii) litigate the issues raised by SIMC in the adversary proceeding and (iii) allow the SIMC assets to be sold through the U.S. Bankruptcy Court, with the proceeds of such sale, if any, to be held by the U.S. Bankruptcy Court until it has issued a final order in the adversary proceeding.
Upon considering the current status of the SIMC proceedings, the Company has determined to record a reserve to the SIMC Note at December 31, 1993 in the amount of $5.8 million (included in other, net in the accompanying 1993 consolidated statement of operations). Such valuation was determined considering the estimated ultimate realizable value from the mineral reserves.
6. Closure of Western Kentucky Coal Operations -------------------------------------------
During 1991, the Company encountered substantial operating difficulties at its mines in Western Kentucky and, as a result, decided to close its Western Kentucky coal mines. Accordingly, as of December 31, 1991, the Company recorded a pre-tax charge to expense of approximately $9,000,000 to write- off its investment in its remaining Western Kentucky mines and to reserve for future reclamation of these mines.
7. Debt
As of December 31, 1992 and 1993 the Company's debt consisted of the following:
a. Revolving Lines of Credit-
The Company's coal subsidiaries had a revolving line of credit agreement with their bank which provided the coal subsidiaries with short-term borrowings up to a maximum line of credit of $30,000,000, bearing interest at the prime interest rate plus 1/2%. The outstanding balance of this line of credit as of December 31, 1992 and 1993 was approximately $22,535,000 and $23,442,000, respectively. This line of credit was paid off in 1994 in connection with the transaction described in Note 2.
Subsequent to yearend, the Company's remaining coal subsidiaries entered into a new revolving line of credit agreement with their bank. This new line of credit provides the coal subsidiaries with short-term borrowings, generally equal to 90% of certain accounts receivable plus 50% of certain coal inventory, up to a maximum line of credit of $15,000,000, bearing interest at the prime interest rate. This new $15,000,000 line of credit replaces the Company's former $30,000,000 line of credit. The prime interest rate as of December 31, 1993 was 6.0%.
During May, 1993, the Company's environmental subsidiaries entered into a new $20 million revolving credit agreement with a bank secured by virtually all of the assets and common stock of all environmental subsidiaries. This line of credit bears interest at 1-1/2% over the bank's base rate or 3-1/2% over the Eurodollar rate. Since principal payments are not required to be made on this line of credit until it expires in June, 1996, the outstanding balance of this line of credit as of December 31, 1993 of $10,000,000 has been classified as long-term debt.
In connection with these lines of credit, the Company has agreed to certain restrictive covenants which, among others, limit the amount of dividends that the Company can pay, limit its ability to incur additional indebtedness, and require the Company to maintain certain as defined financial ratios.
b. Long-term Debt-
As of December 31, 1992 and 1993, long-term debt consisted of the following:
c. Senior Secured Notes-
On July 11, 1988, the Company issued $125,000,000 of 12% Senior Secured Notes (the Notes) that mature on July 1, 1995 and received net proceeds of $120,625,000, which is net of underwriting discounts of $4,375,000. The Notes are secured by a first priority mortgage and security interest in certain real and personal property of the Company with a minimum fair market value of 150% of the outstanding principal amount of the Notes. In connection with the Notes, the Company has agreed to certain restrictive covenants which, among others, limit the amount of dividends that the Company can pay, limit its ability to incur additional indebtedness, require a minimum net equity, limit certain transactions with affiliates, restrict liens on the assets that secure the Notes and place certain restrictions on the Company's ability to receive funds from certain of its subsidiaries. In connection with the transaction dicussed in Note 2, these notes were called for redemption on March 15, 1994. Therefore, the entire $125,000,000 balance of these Senior Secured Notes has been classified as a current liability as of December 31, 1993.
Principal payments required for long-term debt and senior secured notes after December 31, 1993 are as follows:
8. Property, Plant and Equipment -----------------------------
Property, plant and equipment are recorded at cost. Expenditures for major renewals and betterments are capitalized while expenditures for maintenance and repairs are expensed as incurred.
Property, plant and equipment are summarized by major classification as follows:
Included in property, plant and equipment as of December 31, 1992 and 1993 are approximately $33,134,000 and $24,062,000, respectively, related to start-up development projects for which depreciation and amortization have not yet commenced. The Company reviews the realization of these projects on a periodic basis.
9. Inventories ----------- As of December 31, 1992 and 1993, inventories consisted of:
10. Accrued Expenses and Other -------------------------- As of December 31, 1992 and 1993, accrued expenses and other consisted of:
11. Income Taxes ------------ SFAS No. 109--"Accounting for Income Taxes" was issued by the Financial Accounting Standards Board in February, 1992. In conformity with SFAS No. 109 transition rules, the Company elected to adopt the new income tax accounting standard effective January 1, 1991. The cumulative effect at January 1, 1991 (Note 1) of this accounting change was to increase deferred income taxes by $3,500,000. This increase is primarily due to the elimination of the ability to record the benefits of future projected percentage depletion deductions as a reduction to deferred income taxes, as previously allowed by SFAS No. 96. A requirement of SFAS No. 109 is that deferred income tax liabilities or assets at the end of each period will be determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Accordingly, under the new standard, income tax provisions will increase or decrease in the same period in which a change in tax rates is enacted.
The income tax provision (benefit) for the years ended December 31, 1991, 1992, and 1993 consists of the following:
The following is a reconciliation of the income tax provision (benefit) at the statutory tax rate of 34% to the Company's effective rate for the years ended December 31, 1991, 1992, and 1993.
Deferred income taxes arise from recognizing revenue and expense in different years for tax and financial statement purposes. The provision (benefit) for deferred income taxes resulted from the following:
At December 31, 1993, the Company had approximately $24,525,000 of deferred tax assets (net of a valuation allowance of $3,788,000) and $31,597,000 of deferred tax liabilities, resulting in a net deferred tax liability of $7,072,000. At December 31, 1992, the Company had approximately $16,235,000 of deferred tax assets and $27,817,000 of deferred tax liabilities, resulting in a net deferred tax liability of $11,582,000. Included in the Company's 1993 deferred tax assets are regular tax net operating loss carryforwards of approximately $25,800,000 which, if not utilized, will expire in the years 2007 and 2008 and alternative minimum tax credit carryforwards of approximately $8,200,000, which have an unlimited carryforward period. In 1993, the Company recorded a valuation allowance of $3,788,000 against these credits due to realizability concerns.
12. Commitments and Contingencies -----------------------------
a. Coal Sales Contracts- --------------------
Subsequent to the transaction discussed in Note 2, the Company has commitments to deliver scheduled base quantities of coal annually to three customers under three coal sales contracts. One contract expires in 1994, one expires in 1997 and one expires in 2000. The contracts call for the Company to supply a minimum of 10.8 million tons over the remaining lives of the contracts at prices which are at or above market. The contracts have sales price adjustment provisions, subject to certain limitations and adjustments, based on changes in specified production costs.
For additional information concerning coal sales contracts, see Item 1 "Business - Major Coal Sales Contracts" of Form 10-K included herein.
b. Leases- ------
The Company has various operating leases for mining and other equipment. Lease expense for the years ending December 31, 1991, 1992 and 1993 was approximately $18,182,000, $22,125,000 and $27,500,000, respectively.
The Company also leases coal reserves under agreements that call for royalties to be paid as the coal is mined. Total royalty expense for the years ending December 31, 1991, 1992 and 1993 was approximately $17,006,000, $15,399,000 and $21,225,000, respectively. Certain agreements require minimum annual royalties to be paid regardless of the amount of coal mined during the year.
Approximate future minimum payments after the transaction discussed in Note 2 are as follows:
c. Legal Matters- -------------
The Company is named as defendant in various actions in the ordinary course of its business. These actions generally involve such matters as property boundaries, mining rights, blasting damage, personal injuries, and royalty payments. The Company believes these proceedings are incidental to its business and are not likely to result in materially adverse judgments.
The Company is presently involved in a legal dispute with a customer (Consumers Power) regarding the sales price of coal shipped under a coal sales contract and the potential termination of the contract. On May 4, 1989, the Boyd Circuit Court directed the parties to maintain the status quo in their contractual relationship, directed the Company to post a $750,000 bond and directed the parties to provide expedited discovery in the case. On November 9, 1990, the Boyd Circuit Court directed the Company to increase the amount of the bond to be posted from $750,000 to $3,000,000 in light of the additional amounts of coal shipped under the contract from the date of the court's previous order.
On April 30, 1993, the Boyd Circuit Court entered summary judgment in favor of the Company against Consumers Power that the termination provision of the Company's coal supply contract with Consumers Power had not been appropriately triggered by Consumers Power. Consumers Power has appealed the grant of summary judgment to the Kentucky Court of Appeals. On June 3, 1993, Consumers Power also filed a motion in Boyd Circuit Court to dissolve the May 4, 1989 temporary restraining order that prevents Consumers Power from seeking to terminate the contract pursuant to the contract provision. Although on
September 1, 1993, the court subsequently dissolved the temporary restraining order and ordered that the Company's $3,000,000 bond could be released, Consumers Power has not terminated the contract in light of the April 30, 1993 summary judgment decision that the termination provision had not been appropriately triggered. By letter dated October 5, 1993, Consumers Power has notified the Company that it is currently prepared to demonstrate its ability to purchase coal from another producer within the parameters of the termination provision. Consumers Power states that it can obtain coal for approximately $24.90 per ton instead of the $34.16 per ton charged during the three months ended September 30, 1993.
The Company will transfer the contract with Consumers Power to Pittston in the transaction discussed in Note 2. The Company, however, will retain all obligations with respect to any liabilities arising out of the above litigation. While the Company cannot predict the ultimate outcome of the above dispute, it is not anticipated that the outcome will have a materially adverse impact upon the Company's financial position and results of operations.
d. Licensing Agreement- -------------------
In June, 1992, the Company entered into a 14-year licensing agreement that permits Joy Technologies, Inc. to manufacture and market a highwall mining system that the Company developed and currently uses in its own mining operations. Under the terms of the agreement, Joy Technologies plans to market the system to mining companies on the basis of a cost per ton of material mined by the system. The Company and Joy Technologies will share revenues from origination fees and from usage fees based on tons of material mined by these other mining companies. During 1993, Joy Technologies, a world-wide manufacturer of mining equipment, manufactured and leased two highwall mining systems to third party coal companies. Such revenues from this agreement during 1993 were approximately $261,000.
13. Litigation Settlements ----------------------
a. Addwest Gold- ------------
On November 5, 1992, a U.S. District Court jury returned a verdict against Addington Resources, Inc. and others for approximately $850,000 in compensatory damages and $10,501,000 in punitive damages. Subsequently, the verdict was entered by a judgment of the court. The suit arose out of an alleged bonus payment due to a former employee of Addwest Gold in connection with the January, 1990 sale of Addwest Gold by the Company.
Subsequent to December 31, 1993, the Company reached a settlement with their former employee whereby all claims were dismissed. As a result of the settlement, the Company expects to pay the former employee $3,450,000 by April 15, 1994. The parties are currently in the process of drafting the appropriate settlement documents. This settlement amount is recorded in the December 31, 1993 financial statements.
b. Ohio River Company- ------------------
On August 11, 1992, the Company filed an action for a declaration of rights against the Ohio River Company ("ORCO") and SIMC (Note 5) in the U.S. District Court for the Eastern District of Kentucky at Ashland. The action arises from a dispute between the Company and ORCO concerning a transportation agreement for barge transportation of coal being delivered to TVA pursuant to Contract T-1. In connection with Marion's acquisition of SIMC, the Company assigned its rights and obligations under the transportation agreement to SIMC. SIMC's performance was guaranteed by the Company, and SIMC has apparently defaulted. The Company has asked the court to declare the rights of the parties in regard to the transportation agreement. ORCO has asserted counterclaims against both SIMC and the Company in the action. These counterclaims seek unspecified damages for lost future profits and at least $700,000 in damages from the Company for damages allegedly suffered by ORCO to date.
During 1993, the Company reached a settlement with ORCO whereby both parties dismissed their claims against each other and agreed to terminate the Company's obligation under the SIMC transportation agreement. As a result, the Company agreed to pay ORCO $600,000 which relates primarily to SIMC's unpaid transportation fees previously guaranteed by the Company. This settlement amount is recorded in the December 31, 1993 financial statements.
c. Pyramid Mining- --------------
On October 10, 1990, Pyramid Mining, Inc. and Pyramid Equipment, Inc. ("Pyramid"), subsidiaries of First Mississippi Corporation, filed a complaint alleging a number of charges against the Company and its wholly-owned subsidiary, Addwest Mining, Inc. ("Addington Companies"), among others. Pyramid's complaint sought compensatory and trebled damages against the Addington Companies in an undetermined amount believed to be in excess of $8.9 million. The complaint also sought $20 million in punitive damages and an order for an equitable accounting and constructive trust to recover, among other things, all profits made by Addwest Mining, Inc. through the operation of the Nickle mine and the Jetson mine.
During April, 1992, the Company reached a settlement with Pyramid whereby both parties dismissed their claims against each other. As a result of the settlement, the Company paid Pyramid $5,100,000.
14. Major Customers ---------------
Major customers accounted for 35%, 22%, 15% and 11% of total revenues for the year ended December 31, 1991; for 27%, 13% and 12% of total revenues for the year ended December 31, 1992; and for 28%, 12% and 11% of total revenues for the year ended December 31, 1993.
15. Workers' Compensation and Black Lung ------------------------------------
The operations of the Company are subject to the Federal Coal Mine Health and Safety Act of 1969, as amended, and the related state workers' compensation laws. These laws provide for the payment of benefits to disabled workers and their dependents, including lifetime benefits for pneumoconiosis (black lung).
The Company has implemented a self-insurance program to cover most of its employees for workers' compensation, including black lung benefits. Certain other employees are covered under state-administered workers' compensation programs.
Black lung expense is being provided, based upon a recent actuarial study, over the estimated remaining working lives of the miners using accounting methods similar to that of a defined benefit pension plan. Black lung expense consists of normal costs for the current period, amortization (over a ten year period) of the $1,750,000 prior service cost at the date the Company became self-insured, plus interest at 8%. Benefits provided are subject to federal and state laws and, thus, are not under the control of the Company.
Workers' compensation (including black lung) expense for the years ended December 31, 1991, 1992 and 1993 was approximately $3,379,000, $3,035,000 and $3,755,000, respectively.
16. Related Party Transactions --------------------------
The Company has dealt with certain companies or individuals which are related parties either by having stockholders in common or because they are controlled by stockholders/officers or by relatives of stockholders/ officers of the Company. The Company recorded various expenses to related parties consisting of approximately $11,627,000, $17,506,000 and $19,186,000 for trucking services for the years ended December 31, 1991, 1992 and 1993, respectively, approximately $110,000, $112,000 and $110,000 for office rent expense for the years ended December 31, 1991, 1992 and 1993, respectively, and approximately $25,000 for certain deep mining consulting services for the year ended December 31, 1991. The Company has also recorded flight fee income from related parties of approximately $3,000, $5,000 and zero for the years ended December 31, 1991, 1992 and 1993, respectively.
The Company had amounts payable to related parties of approximately $632,000 and $391,000 as of December 31, 1992 and 1993, respectively.
17. Fair Value of Financial Instruments -----------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments.
The carrying amount of cash equivalents approximates fair value because of the short maturity of cash equivalents. The long-term investment represents a less than 10% interest in a non-public company and fair value is estimated based on recent issue prices. The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The 12% Notes ($125 million carrying amount) are valued at a premium due to the relatively high interest rate.
The fair value estimates are made at discrete points in time based on relevant market information and information about the financial instruments. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.
18. Acquisitions ------------
a. NERCO Properties- ----------------
On February 4, 1993, in accordance with the terms of an Acquisition Agreement dated January 29, 1993 between coal subsidiaries of the Company and NERCO Coal Corp. ("NERCO"), the Company acquired the majority of NERCO's West Virginia mining operations, primarily consisting of inventories, property, plant, equipment, coal sales contracts and the assumption of certain reclamation liabilities, as well as the rights to approximately 80 million tons of coal reserves. The majority of these reserves are considered low sulfur coal.
As partial consideration for the acquisition, the Company issued to NERCO a promissory note (the "Note") for payment on April 1, 1993 of $3 million plus interest at the prime rate, as defined, plus 1% per annum from the date of closing. The Company will also pay NERCO an overriding royalty payment of $0.75 per ton of coal mined until a total of $9.5 million has been paid, with a minimum annual overriding royalty payment of $750,000. The Company also is assuming certain existing royalty obligations to previous owners with respect to the coal reserves acquired, including both production royalties and a minimum annual royalty payment of $1,625,000 for the next 17 years. In the event of certain defaults, all minimum annual royalty payments to NERCO and the previous owners may be accelerated. The assets acquired by the Company secure payment of the Note and the mining royalties in an amount not to exceed the unpaid principal and interest on the Note plus $5.5 million.
Unaudited pro forma information for the year ended December 31, 1992 and 1993 has been provided below to reflect the impact on the Company's historical operations as if the acquisition had occurred on January 1, 1992. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the acquisition occurred during the periods presented or of the future results of operations.
b. West Virginia Coal Reserves- ---------------------------
On August 13, 1993, Kanawha Development Corporation (KDC), a newly established coal-related subsidiary of Addington, entered into various agreements, the purpose being to acquire, among other items, a sublease interest in approximately 30 million tons of coal reserves in southern West Virginia.
Consideration for this acquisition includes the following: (a) KDC paid $2.5 million in recoupable advance royalties to the sublessor; (b) KDC paid $900,000 for related engineering data, permits and mine development; (c) a royalty of 4% of sales value on tonnage mined and sold will be paid to the sublessor with a minimum annual royalty of $1.0 million per year due for ten years; (d) KDC will pay to the former owner of the sublease an overriding royalty of $0.50 per ton for all tons mined and sold; and (3) KDC will assume certain obligations under the sublease agreement.
The Company has guaranteed the performance of KDC under the sublease terms. In the event KDC is sold by the Company, the new owner of KDC becomes the guarantor of performance under the sublease terms.
Both of the acquisitions discussed in this note were included in the transaction discussed in Note 2.
19. Segment Information -------------------
The Company considers its major business segments to be mining (including coal, gold, silver, sulfur and limestone) and environmental (including sanitary landfills and waste collection, recycling and disposal). Included in the segment "Other" for 1992 and 1993 is the Company's technology licensing activities (Note 12d) as well as citrus operations currently in the development stage. In prior years, "other" included highway construction activities.
Information about the Company's operations for each segment are as follows (in thousands of dollars):
(1) Includes asset writedown related to sulfur project ($9,384,000 - See Note 2).
(2) Includes asset writedown related to certain abandoned assets ($5,122,000 - see Note 2).
Revenues by industry segment are comprised of sales to unaffiliated customers; there are no intersegment sales.
Identifiable assets by industry segment are those assets that are used in the Company's operations in each industry. General corporate assets consist of cash and cash equivalents, short-term investments and deferred financing costs.
(1) Quarters may not add to annual net income per share due to changes in shares outstanding.
(2) Includes asset writedowns related to abandoned sulfur project ($9,384,000) and environmental projects ($5,122,000), as described in Note 2.
Exhibit 11
ADDINGTON RESOURCES, INC. CALCULATION OF NET INCOME (LOSS) PER SHARE
NOTE: The dilutive effect of the Company's common stock equivalents (grants and shares under option) for the primary net income per share calculation was insignificant for 1991, 1992 and 1993.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Addington Resources, Inc.:
We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Addington Resources, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated March 23, 1994. Our report on the consolidated financial statements includes an explanatory paragraph with respect to the change in the method of accounting for income taxes effective January 1, 1991, as discussed in Note 1(g) to the consolidated financial statements. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the table of contents (page) are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
March 23, 1994 Louisville, Kentucky
ADDINGTON RESOURCES, INC. SCHEDULE V PROPERTY, PLANT AND EQUIPMENT
(1) Represents reclassification of property, plant and equipment to net assets held for disposal.
ADDINGTON RESOURCES, INC. SCHEDULE VI ACCUMULATED DEPRECIATION
(1) Additions to accumulated depreciation that have been capitalized as environmental development costs
(2) Represents reclassification of accumulated depreciation to net assets held for disposal.
ADDINGTON RESOURCES, INC. SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS
ADDINGTON RESOURCES, INC. SCHEDULE IX SHORT-TERM BORROWINGS
(1) The average amount outstanding during the period was computed by dividing the total of the quarter-end outstanding principal balances by five.
(2) The weighted average interest rate during the period was computed by dividing the interest expense by the average principal amount outstanding during the period.
ADDINGTON RESOURCES, INC. SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION
Note: Amounts for advertising costs are not presented, as such amounts are less than 1% of total sales and revenues.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADDINGTON RESOURCES, INC.
Date: March 29, 1994 By /s/ Larry Addington --------------------- Larry Addington, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
/s/ Larry Addington President and Chairman March 29, 1994 - ------------------------ of the Board of Directors Larry Addington (Chief Executive Officer)
/s/ R. Douglas Striebel Vice President and Chief March 29, 1994 - ------------------------ Financial Officer (Chief R. Douglas Striebel Financial Officer) (Chief Accounting Officer)
/s/ Robert Addington Director March 29, 1994 - ------------------------ Robert Addington
/s/ Bruce Addington Director March 29, 1994 - ----------------------- Bruce Addington
/s/ Carl R. Whitehouse Director March 29, 1994 - ------------------------ Carl R. Whitehouse
/s/ Jack C. Fisher Director March 29, 1994 - ------------------------ Jack C. Fisher
INDEX TO EXHIBITS
Exhibit Number Exhibit - -------------- -------
(3)(A)/1/ Restated Certificate of Incorporation of Registrant
(B)/1/ Bylaws of Registrant
(10)(A)/2/ Deed dated June 18, 1985 by and between Martiki Coal Corporation and ARMM Coal, Inc.
(B)/2/ Deed of Conveyance dated June 7, 1984 by and between Franklin Real Estate Company and ARMM Land Co., Inc.
(C)/2/ Contract Mining Agreement and Related Agreements dated June 10, 1986 among Addington, Inc., CJC Leasing, Inc., N.O.R. Mining, Inc., Adams Resources & Energy, Inc., and Third National Bank
(D)/3/ Form of Lease Agreement among Larry Addington and Larry K. Harrington and Addwest Mining, Inc.
(E)/4/ Employment Agreement between R. Douglas Striebel and the Registrant, as amended
(F)/5/ Agreement dated as of April 18, 1990, between Indiana- Kentucky Electric Corporation and Addwest Mining Company, Inc.
(G) Addington Resources, Inc. Restated Stock Option Plan, as amended.
(H) Form of Indemnity Agreement between the Registrant and its directors and officers
(I) Employment Agreement dated as of July 14, 1992, between Addington Environmental, Inc. and William R. Nelson
(11) Statement re computation of per share earnings. See page of
the audited Consolidated Financial Statements and Schedules filed as part of this report.
(21) List of subsidiaries of Registrant
(23) Consent of Arthur Andersen & Co.
(99)(A)/2/ Coal Purchase and Sales Agreement dated September 1, 1984 by and between Fossil Fuels, Inc., Delta Energy Corporation and Consumers Power Company
(99)(B)/2/ Amended and Restated Contract for Purchase and Sale of Coal dated June 27, 1986 by and between Tennessee Valley Authority and Addington, Inc. [Contract No. 86P-65-T4] (See Exhibit (99)(D) and Exhibit 99(G) pertaining to amendments to Contract No. 86P-65-T4)
(99)(C)/2/ Contract for Purchase and Sale of Coal dated September 12, 1986 by and between Tennessee Valley Authority and Addwest Mining, Inc. [Contract No. 86P-16-T1] (See Exhibit 99(E) and Exhibit 99(H) pertaining to amendments to Contract No. 86P-16=T1)
(99)(D)/6/ Supplemental Agreement to Contract 86P-65-T4 for Purchase and Sale of Coal dated May 1989, by and between Tennessee Valley Authority and Addington, Inc.
(99)(E)/6/ Supplemental Agreement to Contract 86P-16-T1 for Purchase and Sale of Coal dated February 1, 1989 by and between Tennessee Valley Authority and Addwest Mining, Inc.
(99)(F)/6/ Transfer Agreement dated as of April 3, 1989, by and among Addwest Mining, Inc. and Addington, Inc. and the Tennessee Valley Authority
(99)(G)/7/ Supplemental Agreement dated October 23, 1990, to Contract 86P-16-T4 by and between Addington, Inc. and Tennessee Valley Authority.
(99)(H)/3/ Supplemental Agreements to Contract 86P-16-T1 for Purchase and Sale of Coal dated May 11, 1989 and October 30, 1991 by and between Tennessee Valley Authority and Addwest Mining, Inc. ____________________ /1/Incorporated by reference to the Registration Statement on Form S-1 [File No. 33-22164]
/2/Incorporated by reference to the Registration Statement on Form S-1 [File No. 33-11918]
/3/Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 [File No. 0-16498].
/4/Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 [File No. 0-16498].
/5/Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1990 [File No. 0-16498].
/6/Incorporated by reference to the Registration Statement on Form S-1 [File No. 33-29848]
/7/Incorporated by reference to the Registrant's Annual Report Form 10-K for the fiscal year ended December 31, 1990 [File No. 0-16498].