-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EmIjviiMKx6zvM4d5XHd3BSsSIxBG0muInJWW5/0Y570LDfqjuC8MgW5PAfAqoYt SejlhybDF55FGez1IIRKsA== 0001064728-99-000003.txt : 19990215 0001064728-99-000003.hdr.sgml : 19990215 ACCESSION NUMBER: 0001064728-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: P&L COAL HOLDINGS CORP CENTRAL INDEX KEY: 0001064728 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE SURFACE MINING [1221] IRS NUMBER: 134004153 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-59073 FILM NUMBER: 99537240 BUSINESS ADDRESS: STREET 1: 701 MARKET ST CITY: ST LOUIS STATE: MO ZIP: 63101-1826 BUSINESS PHONE: 3143423400 MAIL ADDRESS: STREET 1: 701 MARKET ST CITY: ST LOUIS STATE: MO ZIP: 63101-1826 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 ------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ----------------------- Commission File Number 333-59073 -------------------------------------------------------- P&L COAL HOLDINGS CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-4004153 - ----------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 701 Market Street, St. Louis, Missouri 63101-1826 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (314) 342-3400 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No ----- ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements. P&L COAL HOLDINGS CORPORATION UNAUDITED STATEMENT OF CONDENSED CONSOLIDATED OPERATIONS FOR THE QUARTER AND PERIOD ENDED DECEMBER 31, 1998 (In thousands) Quarter Period Ended Ended Dec. 31, 1998 Dec. 31, 1998* --------------- --------------- REVENUES Sales $ 546,620 $ 1,327,497 Other revenues 35,984 75,272 --------------- --------------- Total revenues 582,604 1,402,769 OPERATING COSTS AND EXPENSES Operating costs and expenses 460,042 1,137,323 Depreciation, depletion and amortization 53,124 130,598 Selling and administrative expenses 18,353 44,101 --------------- --------------- OPERATING PROFIT 51,085 90,747 Interest expense (47,369) (123,215) Interest income 4,686 12,439 --------------- --------------- INCOME (LOSS) BEFORE INCOME TAXES 8,402 (20,029) Income tax provision (benefit) 3,284 (5,188) --------------- --------------- NET INCOME (LOSS) $ 5,118 $ (14,841) =============== =============== * Includes results of operations for the nine-month period ended December 31, 1998; however, P&L Coal Holdings Corporation had no activity from April 1 to May 19, 1998. P&L COAL HOLDINGS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, March 31 1998 1998 ------------ ------------ (in thousands) (in dollars) ASSETS Current assets Cash and cash equivalents $ 267,106 $ 1 Accounts receivable, less allowance for doubtful accounts of $93 and $0, respectively 435,641 - Materials and supplies 63,466 - Coal inventory 176,418 - Assets from power trading activities 770,793 - Other current assets 21,632 - ------------ ------------ Total current assets 1,735,056 1 Property, plant, equipment and mine development, net of accumulated depreciation, depletion and amortization of $1,675,693 and $0, respectively 4,599,708 - Investments and other assets 530,885 - ------------ ------------ Total assets $ 6,865,649 $ 1 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings and current maturities of long-term debt $ 58,274 $ - Income taxes payable 21,930 - Deferred income taxes 3,153 - Liabilities from power trading activities 433,631 - Accounts payable and accrued expenses 736,875 - ------------ ------------ Total current liabilities 1,253,863 - Long-term debt, less current maturities 2,305,614 - Deferred income taxes 866,965 - Accrued reclamation and other environmental liabilities 463,352 - Workers' compensation obligations 222,063 - Accrued postretirement benefit costs 1,002,248 - Obligation to industry fund 61,709 - Other noncurrent liabilities 226,087 - ------------ ------------ Total liabilities 6,401,901 - Stockholders' equity: Preferred Stock - $.01 per share par value; December 31, 1998 - 10,000,000 shares authorized, 5,000,000 shares issued and outstanding; March 31, 1998 - no shares authorized, issued or outstanding 50 - Common Stock - Class A, $.01 per share par value; December 31, 1998 - 30,000,000 shares authorized, 16,000,000 shares issued and outstanding; March 31, 1998 - 1,000 shares authorized, 1 share issued and outstanding 160 1 Common Stock - Class B, $.01 per share par value; December 31, 1998 - 3,000,000 shares authorized, 554,125 shares issued and outstanding; March 31, 1998 - no shares authorized, issued or outstanding 5 - Additional paid-in capital 483,709 - Accumulated other comprehensive loss (5,335) - Accumulated deficit (14,841) - ------------ ------------ Total stockholders' equity 463,748 1 ------------ ------------ Total liabilities and stockholders' equity $ 6,865,649 $ 1 ============ ============
P&L COAL HOLDINGS CORPORATION UNAUDITED STATEMENT OF CONDENSED CONSOLIDATED CASH FLOWS FOR THE PERIOD ENDED DECEMBER 31, 1998 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (14,841) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 130,598 Deferred income taxes (23,066) Amortization of debt discount and debt issuance costs 12,273 Net gain on contract restructuring (5,300) Stock compensation 3,924 Changes in current assets and liabilities, excluding effects of acquisitions: Accounts receivable 21,091 Materials and supplies 1,079 Coal inventory 20,034 Other current assets 5,167 Accounts payable and accrued expenses (84,729) Income taxes payable 19,152 Net assets from power trading activities (2,079) Accrued reclamation and related liabilities 760 Workers' compensation obligations 324 Accrued postretirement benefit costs 8,912 Obligation to industry fund (1,957) Royalty prepayment 135,903 Other, net (8,394) ------------ Net cash provided by operating activities 218,851 ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant, equipment and mine development (133,514) Acquisition of P&L Coal subsidiaries, net of $70,359 cash acquired (1,994,635) Proceeds from contract restructuring 3,889 Proceeds from property and equipment disposals 8,392 ------------ Net cash used in investing activities (2,115,868) ------------ CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt (197,909) Proceeds from short-term borrowings and long-term debt 1,883,169 Net capital contribution 480,000 Other (940) ------------ Net cash provided by financing activities 2,164,320 Effect of exchange rate changes on cash and cash equivalents (197) ------------ Net increase in cash and cash equivalents 267,106 Cash and cash equivalents at beginning of period - ------------ Cash and cash equivalents at end of period $ 267,106 ============
P&L COAL HOLDINGS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation The accompanying condensed consolidated financial statements include the consolidated operations and balance sheets of P&L Coal Holdings Corporation (the "Company"), also known as Peabody Group. These financial statements include the subsidiaries of Peabody Holding Company, Inc. ("Peabody Holding Company"), Gold Fields Mining Corporation ("Gold Fields") which owns Lee Ranch Coal Company ("Lee Ranch"), Citizens Power LLC ("Citizens Power") and Peabody Resources Holdings Pty Ltd. ("Peabody Resources"), an Australian company (collectively, the "Predecessor Company" or "P&L Coal Group"). Through May 19, 1998, the Predecessor Company was a wholly owned indirect subsidiary of The Energy Group, PLC ("The Energy Group"). Effective May 20, 1998, the Predecessor Company was acquired by the Company, which at the time was wholly owned by Lehman Merchant Banking Partners II and its affiliates ("Lehman Merchant Banking"), an investment fund affiliated with Lehman Brothers Inc. The transaction was part of the sale of The Energy Group to Texas Utilities Company. P&L Coal Holdings Corporation, a holding company with no direct operations and nominal assets other than its investment in its subsidiaries, was formed by Lehman Merchant Banking on February 27, 1998 for the purpose of acquiring the Predecessor Company and had no significant activity until the acquisition. The accompanying condensed consolidated financial statements at December 31, 1998 and for the quarter and period ended December 31, 1998, and the notes thereto, are unaudited. However, in the opinion of management, these financial statements reflect all adjustments necessary for a fair presentation of the results of the periods presented. The results of operations for the period ended December 31, 1998 are not necessarily indicative of the results to be expected for the full year. Prior to the acquisition, the Predecessor Company represented the combined operations of the same subsidiaries currently owned by the Company. The financial statements should be read in connection with P&L Coal Group's audited financial statements as of March 31, 1998. (2) Comprehensive Income Effective with the quarter ended June 30, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires that noncash changes in stockholders' equity be combined with net income and reported in a new financial statement category entitled "comprehensive income." Adoption of SFAS No. 130 had no impact on the results of the Company's operations. The following table sets forth the components of comprehensive income (loss) for the quarter and period ended December 31, 1998 (in thousands): Quarter ended Period ended December 31, December 31, 1998 1998 --------- --------- Net income (loss) $ 5,118 $(14,841) Foreign currency translation adjustment 8,396 (5,335) --------- --------- Comprehensive income (loss) $ 13,514 $(20,176) ========= ========= (3) Commitments and Contingencies Legal Proceedings Eastern Enterprises On November 1, 1993, Eastern Enterprises filed suit in the U.S. District Court for the District of Massachusetts against the Social Security Administration and the Combined Fund claiming that the Coal Act, as applied to Eastern Enterprises, violated the due process and taking clauses of the Fifth Amendment. In 1994, Eastern Enterprises filed a third party complaint against Peabody Holding Company, Eastern Associated and Eastern Associated's parent company, Coal Properties Corp., seeking indemnification or contribution with respect to any liability that Eastern Enterprises may have under the Coal Act. Eastern Enterprises claimed that the amount of its Coal Act liabilities was approximately $100 million. The District Court held in 1996 that the Coal Act was constitutional. Eastern Enterprises filed an appeal with the First Circuit Court of Appeals, which affirmed the district court's decision. The U.S. Supreme Court accepted Eastern Enterprises' petition for certiorari on the constitutional claims. In a plurality decision issued on June 26, 1998, the Supreme Court found that the Coal Act as applied to Eastern Enterprises violated the takings clause of the Fifth Amendment. The UMWA beneficiaries that were assigned to Eastern Enterprises will continue to receive retiree health care benefits from the Combined Fund. Peabody Holding Company has had discussions with Eastern Enterprises regarding the third-party complaint. Eastern Enterprises has advised Peabody Holding Company that it is unwilling to dismiss the third-party complaint and intends to seek reimbursement for its attorneys fees and prejudgment interest which could amount to approximately $5 million. The Company continues to believe that the matter will be resolved without a material adverse effect on its financial condition or results of operation. Public Service Company of Colorado In August 1996, Seneca Coal Company ("Seneca") filed a demand for arbitration in accordance with the terms of an Amended Revised Coal Supply Agreement dated December 1, 1971 (the "1971 Agreement") between Seneca and three electric utilities, Public Service Company of Colorado, Salt River Project Agricultural Improvement District and PacifiCorp (the "Hayden Participants"). The Hayden Participants own the Hayden Electric Generating Station at Hayden, Colorado. The arbitration demand requested the entry of an award for Seneca and against the Hayden Participants for amounts attributable to final reclamation, mine decommissioning and environmental monitoring of the Seneca mine and life insurance and post-retirement health care costs ("post-mine closure costs"). In September 1996, the Hayden Participants filed a complaint for declaratory judgment in the District Court for the City and County of Denver seeking a judicial declaration that they were not responsible for post-mine closure costs as a matter of law. The Hayden Participants also requested declaratory and other relief with respect to other claims against Seneca. The arbitration provision in the 1971 Agreement limits the jurisdiction of the arbitrators to resolution of disputed issues of fact but the arbitrators are to determine the arbitrability of any dispute in the first instance. Accordingly, Seneca filed a motion to stay the judicial proceedings with respect to the issue of responsibility under the 1971 Agreement for post-mine closure costs pending the outcome of the arbitration. The District Court granted the motion in January 1997. The arbitration hearing is scheduled to take place in March of 1999. A decision from the arbitrators is expected later in 1999. The District Court's application of legal principles to the facts as found by the arbitrators would take place thereafter. The Company continues to believe that the dispute will be resolved without a material adverse effect on its financial condition or results of operation. Macquarie Generation In September 1997, Peabody Resources filed a lawsuit against Macquarie Generation in the Supreme Court of New South Wales, Commercial Division, seeking damages for certain coal deliveries which were not paid by Macquarie Generation and for a declaratory judgment regarding the assignment to Macquarie Generation of two long-term CSAs for the Ravensworth and Narama mines. The contracts expire in 2001 and 2012, respectively. Macquarie Generation later agreed that the two contracts were properly assigned to it. Macquarie Generation subsequently filed a cross-claim against Peabody Resources alleging that Peabody Resources breached the labor escalation provisions in the CSAs, committed misrepresentations regarding the labor costs and violated the Australian trade practices and fair trading laws in relation to the Narama contract. Macquarie Generation sought to terminate or rescind the Narama CSA and has sought damages from Peabody Resources for alleged breaches of both contracts. Even though the Company continued to deliver coal, Macquarie Generation unilaterally reduced the price that it is paying for coal deliveries under the Narama contract. A trial regarding these issues began on September 7, 1998 and concluded on September 25, 1998. On September 22, 1998, Macquarie Generation withdrew its breach of contract claims. The Supreme Court of New South Wales issued a decision on November 19, 1998 rejecting Macquarie Generation's claims to terminate the coal supply agreement for the Narama mine. The Court also rejected Macquarie Generation's claim for damages. The Court ordered Macquarie Generation to pay Peabody Resources the portion of the price that it had unilaterally withheld with interest. Macquarie Generation has made that payment to Peabody Resources and is paying Peabody Resources for deliveries of coal at the contract prices. Macquarie Generation has filed an appeal of the decision. The Company continues to believe that the matter will be resolved without a material adverse effect on its financial condition or results of operation. Environmental Claims Environmental claims have been asserted against a subsidiary of the Company at 18 sites in the United States. Some of these claims are based on the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and on similar state statutes. The majority of these sites are related to activities of former subsidiaries of the Company. The Company's policy is to accrue environmental cleanup-related costs of a noncapital nature when those costs are believed to be probable and can be reasonably estimated. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. For certain sites, the Company also assesses the financial capability of other potentially responsible parties and, where allegations are based on tentative findings, the reasonableness of the Company's apportionment. The Company has not anticipated any recoveries from insurance carriers or other potentially responsible third parties in its Consolidated Balance Sheets. The liabilities for environmental cleanup-related costs recorded in the Consolidated Balance Sheet at December 31, 1998 were $67.1 million. This amount represents those costs that the Company believes are probable and reasonably estimable. In the event that future remediation expenditures are in excess of amounts accrued, management does not anticipate that they will have a material adverse effect on the financial position, results of operations or liquidity of the Company. Other In addition, the Company at times becomes a party to claims, lawsuits, arbitration proceedings and administrative procedures in the ordinary course of business. Management believes that the ultimate resolution of pending or threatened proceedings will not have a material effect on the financial position, results of operations or liquidity of the Company. (4) Indebtedness As of December 31, 1998, the Company had total indebtedness of $2,363.9 million, consisting of the following: (In millions) 8.875% Senior Notes due 2008 ("Senior Notes") $ 398.8 9.625% Senior Subordinated Notes due 2008 ("Senior Subordinated Notes") 498.6 Term loans under Senior Credit Facilities 840.0 5.000% Subordinated Note 208.0 Non-Recourse Debt 297.7 Other 120.8 --------- $ 2,363.9 ========= The Senior Credit Facilities include a Revolving Credit Facility that provides for aggregate borrowings of up to $150.0 million and letters of credit of up to $330.0 million. As of December 31, 1998, the Company had no borrowings outstanding under the Revolving Credit Facility. Interest rates on the revolving loans under the Revolving Credit Facility are based on the Base Rate (as defined in the Senior Credit Facilities), or LIBOR (as defined in the Senior Credit Facilities) at the Company's option. On October 1, 1998, the Company entered into two interest rate swaps to fix the interest cost on $500 million of long-term debt outstanding under the Term Loan Facility. The Company will pay a fixed rate of approximately 7.0% on $300 million of such long-term debt for a period of three years, and on $200 million of such long-term debt for two years. The Revolving Credit Facility commitment matures in fiscal year 2005. The Company made an optional prepayment of $25 million on the Senior Credit Facilities in December 1998, which it applied against Term Loan A mandatory payments in order of maturity, and a mandatory payment of $2.5 million on Term Loan A. The Company also made a $50.0 million optional prepayment on the Senior Credit Facilities in August 1998, which it applied against Term Loan B mandatory payments in order of maturity. The following table sets forth the amortization schedule for the Senior Credit Facilities after giving effect to the payments: (In millions) Amortization Term Loan A Term Loan B ------------ ------------ ------------ Fiscal Year: 1999 $ - $ - 2000 - - 2001 10.00 - 2002 42.50 - 2003 68.75 - 2004 93.75 - 2005 25.00 64.00 2006 - 408.25 2007 - 127.75 --------- --------- $ 240.00 $ 600.00 ========= ========= The indentures governing the Senior Notes and Senior Subordinated Notes permit the Company and its Restricted Subsidiaries (which include all subsidiaries of the Company except Citizens Power and its subsidiaries) to incur additional indebtedness, including secured indebtedness, subject to certain limitations. In addition, among other customary restrictive covenants, the indentures prohibit the Company and its Restricted Subsidiaries from creating or otherwise causing any encumbrance or restriction on the ability of any Restricted Subsidiary that is not a Guarantor to pay dividends or to make certain other upstream payments to the Company or any of its Restricted Subsidiaries (subject to certain exceptions). The Revolving Credit Facility and related Term Loan Facility also contain certain restrictions and limitations including but not limited to financial covenants that will require the Company to maintain and achieve certain levels of financial performance and limit the payment of cash dividends and similar restricted payments. In addition, the Senior Credit Facilities prohibit the Company from allowing its Restricted Subsidiaries (which include all Guarantors) to create or otherwise cause any encumbrance or restriction on the ability of any such Restricted Subsidiary to pay any dividends or make certain other upstream payments subject to certain exceptions. The Company was in compliance with all of the restrictive covenants of its loan agreements as of December 31, 1998. (5) Business Combinations The acquisition by the Company was funded through borrowings by the Company pursuant to a $920.0 million senior secured term facility, the offerings of $400.0 million aggregate principal amount of Senior Notes and $500.0 million aggregate principal amount of Senior Subordinated Notes, an equity contribution to the Company by Lehman Merchant Banking of $400.0 million, and an equity contribution of $80.0 million from other parties, including Lehman Brothers Inc. Such amounts were used to pay $2,065.0 million for the equity of the Company, repay debt, increase cash balances and pay transaction fees and expenses incurred with the acquisition. The Company also entered into a $480.0 million senior revolving credit facility to provide for the Company's working capital requirements following the acquisition. The final purchase price is subject to adjustment to the extent that total assets less current liabilities and long-term debt as of March 31, 1998 differ from certain projected balances. This adjustment is not expected to be material to the purchase price and is still under review by the parties. The acquisition has been accounted for under the purchase method of accounting. Accordingly, the cost to acquire the Company has been allocated to the assets acquired and liabilities assumed according to their respective estimated fair values. The preliminary estimated fair values were determined based on management's estimates. The final purchase price allocation is dependent upon certain valuations that have not progressed to a stage where there is sufficient information to make a final allocation. With respect to several valuations, the Company is awaiting additional information that it has arranged to obtain in order to finalize its estimates. The Company intends to continue with its internal reviews regarding asset and liability valuations and also has arranged to obtain independent appraisals, as appropriate. In addition, the Company has requested actuarial valuations to support the final adjustments to its employee-related liabilities. The purchase accounting adjustments presented below are preliminary, subject to finalization of the purchase price, final management review and fair value determination. The Company expects to reflect its final purchase price allocation in its March 31, 1999 financial statements. Adjustments to the preliminary allocation would likely result in changes to amounts assigned to property, plant, equipment and mine development (including land and coal interests) and, accordingly, could impact depletion, depreciation and amortization charged to future periods. Although not expected to be material, the full impact of the final allocation is not known. Below are the Company's historical balance sheet at May 19, 1998, the preliminary purchase accounting adjustments and the preliminary opening balance sheet. The historical balance sheet has been adjusted to include the effects of the financing transactions described above. Historical Adjusted for Effects of Purchase Financing Accounting Preliminary May 19, 1998 Adjustments May 19, 1998 -------------- -------------- -------------- (In millions) ASSETS Total current assets $ 2,447.3 $ (11.5) $ 2,435.8 Property, plant, equipment and mine development, net 3,642.6 897.9 4,540.5 Investments and other assets 626.5 91.0 717.5 -------------- -------------- -------------- Total assets $ 6,716.4 $ 977.4 $ 7,693.8 ============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Total current liabilities $ 1,931.9 $ 20.0 $ 1,951.9 Long-term debt, less current maturities 2,360.8 34.9 2,395.7 Deferred income taxes 662.1 229.8 891.9 Other noncurrent liabilities 1,849.2 125.1 1,974.3 -------------- -------------- -------------- Total liabilities 6,804.0 409.8 7,213.8 Total stockholders' equity (87.6) 567.6 480.0 -------------- -------------- -------------- Total liabilities and stockholders' equity $ 6,716.4 $ 977.4 $ 7,693.8 ============== ============== ==============
Preliminary purchase accounting adjustments resulted in a net increase in total assets of $977.4 million. Adjustments to the preliminary allocation during the current quarter were not material. Various assets and liabilities were adjusted to reflect their estimated fair value. The majority of the excess purchase price is reflected as adjustments to the fair value assigned to various land and coal interests, and the Company does not anticipate recording any additional goodwill as a result of the acquisition. The impact of the preliminary adjustments results in an additional deferred income tax liability of $229.8 million. The preliminary purchase accounting adjustments include a $40.0 million liability for estimated costs associated with a restructuring plan resulting from the business combination. The estimate is comprised of costs associated with exiting certain activities and consolidating and restructuring certain management and administrative functions and includes costs resulting from a plan to involuntarily terminate or relocate employees. As of December 31, 1998, the Company has finalized its involuntary termination and employee relocation plan and continues to finalize the cost of exiting certain business activities. Costs associated with the exit and restructuring plans are being charged against the liability as incurred. The net cash outlays and non-cash costs charged against the liability through December 31, 1998 total approximately $23.0 million and $3.6 million, respectively. The Company expects the majority of the charges to have been incurred by the end of the fiscal year. If the ultimate amount of cost expended is less than the amount recorded as a liability, the excess will reduce the cost of the acquisition. Any amount of cost exceeding the amount recorded as a liability will be recorded as an additional element of the cost of the acquisition if determined within the allocation period and, thereafter, will be included as a charge to earnings in the period in which the adjustment is determined. The following unaudited pro forma results of operations for the quarter and periods ended December 31, 1998 and 1997 assume the acquisition had occurred at the beginning of each fiscal year. The pro forma results of the Company would be as follows (dollars in thousands): Nine Months Nine Months Ended Ended December 31, 1998 December 31, 1997 ----------------- ----------------- Total revenues $ 1,695,177 $ 1,696,529 Operating profit 91,587 166,768 Income (loss) before income taxes (45,881) 20,251 Net loss (37,779) (565) Guarantor Information In accordance with the indentures governing the Senior Notes and Senior Subordinated Notes, certain wholly owned U.S. subsidiaries of the Company have fully and unconditionally guaranteed the debt associated with the purchase on a joint and several basis. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to investors. The following condensed historical financial statement information is provided for such Guarantor/Non-guarantor Subsidiaries. P&L Coal Holdings Corporation Unaudited Supplemental Condensed Statements of Consolidated Operations For the Quarter Ended December 31, 1998 (In thousands) Parent Guarantor Non-guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------------- -------------- --------------- -------------- -------------- Total revenues $ - $ 536,674 $ 45,930 $ - $ 582,604 Costs and expenses: Operating costs and expenses - 431,694 28,348 - 460,042 Depreciation, depletion and amortization - 45,376 7,748 - 53,124 Selling and administrative expenses - 19,319 (966) - 18,353 Interest expense 47,437 (586) 518 - 47,369 Interest income (639) (3,431) (616) - (4,686) -------------- -------------- --------------- -------------- -------------- Income (loss) before income taxes (46,798) 44,302 10,898 - 8,402 Income tax provision (benefit) (8,673) 7,526 4,431 - 3,284 -------------- -------------- --------------- -------------- -------------- Net income (loss) $ (38,125) $ 36,776 $ 6,467 $ - $ 5,118 ============== ============== =============== ============== ==============
P&L Coal Holdings Corporation Unaudited Supplemental Condensed Statements of Consolidated Operations Period Ended December 31, 1998 (In thousands) Parent Guarantor Non-guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------------- -------------- --------------- -------------- -------------- Total revenues $ - $ 1,290,511 $ 112,258 $ - $ 1,402,769 Costs and expenses: Operating costs and expenses - 1,064,734 72,589 - 1,137,323 Depreciation, depletion and amortization - 111,715 18,883 - 130,598 Selling and administrative expenses - 44,424 (323) - 44,101 Interest expense 116,698 4,939 1,578 - 123,215 Interest income (2,475) (9,248) (716) - (12,439) -------------- -------------- --------------- -------------- -------------- Income (loss) before income taxes (114,223) 73,947 20,247 - (20,029) Income tax provision (benefit) (25,781) 12,476 8,117 - (5,188) -------------- -------------- --------------- -------------- -------------- Net income (loss) $ (88,442) $ 61,471 $ $ 12,130 $ - $ (14,841) ============== ============== =============== ============== ==============
P&L Coal Holdings Corporation Unaudited Supplemental Condensed Consolidated Balance Sheets December 31, 1998 (In thousands) Parent Guarantor Non-guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------------- -------------- --------------- -------------- -------------- ASSETS Current assets Cash and cash equivalents $ - $ 210,939 $ 56,167 $ - $ 267,106 Accounts receivable 1,590 234,284 199,767 - 435,641 Receivables from affiliates, net - - - - - Inventories - 198,083 41,801 - 239,884 Assets from power trading activities - - 770,793 - 770,793 Other current assets - 11,729 9,903 - 21,632 -------------- -------------- --------------- -------------- -------------- Total current assets 1,590 655,035 1,078,431 - 1,735,056 Property, plant, equipment and mine development - at cost - 5,675,209 600,192 - 6,275,401 Less accumulated depreciation, depletion and amortization - (1,463,890) (211,803) - (1,675,693) -------------- -------------- --------------- -------------- -------------- - 4,211,319 388,389 - 4,599,708 Investments and other assets 2,506,571 303,423 112,344 (2,391,453) 530,885 -------------- -------------- --------------- -------------- -------------- Total assets $ 2,508,161 $ 5,169,777 $ 1,579,164 $ (2,391,453) $ 6,865,649 ============== ============== =============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings and current maturities of long-term debt $ - $ 21,484 $ 36,790 $ - $ 58,274 Payable to affiliates, net 173,740 (174,209) 469 - - Income taxes payable 7,699 4,916 9,315 - 21,930 Liabilities from power trading activities - - 433,631 - 433,631 Accounts payable and accrued expenses 106,150 395,079 238,799 - 740,028 -------------- -------------- --------------- -------------- -------------- Total current liabilities 287,589 247,270 719,004 - 1,253,863 Long-term debt, less current maturities 1,756,824 191,161 357,629 - 2,305,614 Deferred income taxes - 811,485 55,480 - 866,965 Other noncurrent liabilities - 1,957,323 18,136 - 1,975,459 -------------- -------------- --------------- -------------- -------------- Total liabilities 2,044,413 3,207,239 1,150,249 - 6,401,901 Stockholders' equity 463,748 1,962,538 428,915 (2,391,453) 463,748 -------------- -------------- --------------- -------------- -------------- Total liabilities and stockholders' equity $ 2,508,161 $ 5,169,777 $ 1,579,164 $(2,391,453) $ 6,865,649 ============== ============== ================ ============= ==============
P&L Coal Holdings Corporation Unaudited Supplemental Condensed Statements of Consolidated Cash Flows Period Ended December 31, 1998 (In thousands) Parent Guarantor Non-guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated -------------- -------------- --------------- -------------- -------------- Net cash provided by (used in) operating Activities $ (129,339) $ 338,737 $ 9,453 $ - $ 218,851 -------------- -------------- --------------- -------------- -------------- Additions to property, plant, equipment and mine development - (80,369) (53,145) - (133,514) Acquisitions of P&L Coal Subsidiaries (1,994,635) - - - (1,994,635) Proceeds from contract restructuring - 3,889 - - 3,889 Proceeds from property and equipment disposals - 7,783 609 - 8,392 -------------- -------------- --------------- -------------- -------------- Net cash used in investing activities (1,994,635) (68,697) (52,536) - (2,115,868) Payments of long-term debt (158,583) (1,154) (38,172) - (197,909) Proceeds from short-term borrowings and long-term debt 1,817,390 - 65,779 - 1,883,169 Net capital contribution 398,000 - 82,000 - 480,000 Net change in due to/from affiliates 67,167 (57,947) (10,160) - (940) -------------- -------------- --------------- -------------- -------------- Net cash provided by (used in) financing activities 2,123,974 (59,101) 99,447 - 2,164,320 Effect of exchange rate changes on cash and cash equivalents - - (197) - (197) -------------- -------------- --------------- -------------- -------------- Net increase in cash and cash equivalents - 210,939 56,167 - 267,106 Cash and cash equivalents at beginning of period - - - - - -------------- -------------- --------------- -------------- -------------- Cash and cash equivalents at end of period $ - $ 210,939 $ 56,167 $ - $ 267,106 ============== ============== =============== ============== ==============
(6) Subsequent Event In February 1999, the Company signed definitive agreements to acquire an additional 38.3% interest in Black Beauty Coal Company (Black Beauty), raising its ownership interest to 81.7%. Black Beauty, which has eight mines in Indiana and three mines in southern Illinois, had revenues of $350 million and $315 million in 1998 and 1997, respectively. The transaction is subject to certain contingencies, including approval by both the Company's and Black Beauty's lenders. Management expects the closing to take place prior to the end of the Company's fiscal year. The Company previously accounted for its investment in Black Beauty on the equity method. Black Beauty will be included in the Company's consolidated results of operations as of the effective date of the acquisition. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The table presented below summarizes the results of operations and cash flows for the Company and the Predecessor Company (P&L Coal Group) for the periods presented. The discussion is based on a comparison of the results of the Company for the quarter and period ended December 31, 1998 versus the Predecessor Company results for the three and nine-month periods ended December 31, 1997. The results of operations and cash flows for the period ended December 31, 1998 may not be directly comparable to the other periods indicated as a result of the effects of restatement of assets and liabilities to their estimated fair market value in accordance with the application of purchase accounting pursuant to Accounting Principles Board Opinion No. 16. Predecessor Predecessor Company Company Company Company ---------------- ---------------- ---------------- -------------------------------- Three Months Nine Months Ended Period Ended For the Period Ended December 31, December 31, April 1, 1998 - December 31, 1998 1997 1998 May 19, 1998 1997 ---------------- ---------------- ---------------- --------------- --------------- Tons sold (In millions) 43.4 39.4 105.5 21.7 120.7 ================ ================ ================ =============== =============== (In thousands) Revenues: Sales $ 546,620 $ 509,942 $ 1,327,497 $ 278,930 $ 1,526,470 Other revenues 35,984 41,890 75,272 13,478 170,059 ---------------- ---------------- ---------------- --------------- --------------- Total revenues 582,604 551,832 1,402,769 292,408 1,696,529 Operating costs and expenses 531,519 497,959 1,312,022 285,036 1,503,377 ---------------- ---------------- ---------------- --------------- --------------- Operating profit $ 51,085 53,873 $ 90,747 $ 7,372 $ 193,152 ================ ================ ================ =============== =============== Net income (loss) $ 5,118 $ 23,003 $ (14,841) $ 476 $ 118,831 ================ ================ ================ =============== =============== Other Data: EBITDA (1) $ 104,209 $ 103,377 $ 221,345 $ 33,590 $ 348,542 Non-cash stock compensation 3,924 - - - - ---------------- ---------------- ---------------- --------------- -------------- EBITDA, excluding non-cash stock compensation $ 108,133 $ 103,377 $ 221,345 $ 33,590 $ 348,542 ================ ================ ================ =============== =============== Cash provided by (used in): Operating activities $ 218,851 $ (30,558) $ 52,625 Investing activities (2,115,868) (19,248) (102,088) Financing activities 2,164,320 23,636 15,074 ================ =============== ===============
(1) EBITDA is defined as income before deducting net interest expense, income taxes, and depreciation, depletion and amortization. EBITDA has been reduced by costs associated with reclamation, retiree health care and workers' compensation. EBITDA is not a substitute for operating income, net income and cash flow from operating activities as determined in accordance with generally accepted accounting principles as a measure of profitability or liquidity. EBITDA is presented as additional information because management believes it to be a useful indicator of the Company's ability to meet debt service and capital expenditure requirements. Because EBITDA is not calculated identically by all companies, the presentation herein may not be comparable to other similarly titled measures of other companies. The amounts presented include EBITDA for Citizens Power of ($0.7 million), $10.1 million, $1.0 million, ($1.3 million) and $11.4 million for the quarter ended December 31, 1998, the quarter ended December 31, 1997, the period ended December 31, 1998, the period from April 1 to May 19, 1998 and the nine months ended December 31, 1997, respectively. For purposes of the comparisons to prior year operating results, the results of operations and cash flows for the period ended December 31, 1998 reflect the results of the Company from April 1 to December 31, 1998 (the Company acquired the Predecessor Company on May 19, 1998 and prior to such date had no separate operations) and the results of the Predecessor Company for April 1 to May 19, 1998. Sales. For the third quarter ended December 31, 1998, the Company had sales of $546.6 million, an increase of $36.7 million, or 7.2%, compared to the third quarter ended December 31, 1997. This increase is due to a continued increase in brokered coal sales ($29.0 million higher in the third quarter versus the prior year), an increase of $10.2 million due to higher demand in the Powder River Basin from a continued customer shift toward low sulfur coal in order to comply with Phase II of the Clean Air Act, and $5.1 million higher revenues from improved production performance in the Southern Appalachian region versus the prior year. These increases were partially offset by a decrease in the Midwest of $12.4 million due to a temporary delay in shipments caused by a customer's unit outage for maintenance, and by a previous settlement reached with a customer that resulted in higher revenue in the prior year. In addition, the Company has experienced lower prices in the steam and metallurgical markets in the Northern and Southern Appalachia regions as a result of global oversupply conditions. For the period ended December 31, 1998, sales increased 5.2%, or $80.0 million, over the prior nine month period primarily due to an increase in brokered coal activity ($78.4 million) and an $18.0 million improvement in U.S. mining operations based upon the higher demand and operating efficiencies discussed above, partially offset by a $16.4 million decrease in revenues in Australia due to weaker demand and the effects of foreign currency translation. Other Revenues. Other revenues declined $5.9 million as compared to the third quarter ended December 31, 1997 due to $9.8 million in lower revenues at Citizens Power, partially offset by the monetization of a royalty stream in October 1998 that resulted in an increase in other revenues of $3.9 million. Other revenues decreased $81.3 million versus the prior nine month period, mainly due to the timing of contract restructurings and a decrease of $42.2 million in mining services revenues in Australia. Prior year other revenues included $38.7 million in revenues from contract restructurings, versus only $5.3 million for the nine month period ended December 31, 1998. Operating Profit. Operating profit was $51.1 million for the third quarter ended December 31, 1998, as compared to $53.9 million in the prior year. Operating profit in the U.S. mining operations increased $21.4 million primarily as a result of productivity improvements in nearly every operating region and volume increases at Powder River. However, Citizens Power experienced a decline of $11.6 million primarily due to the timing of asset restructurings. In addition, the prior year results included $12.9 million of actuarial gains associated with certain employee-related liabilities that are non-recurring. Other items affecting the current period results include: $3.9 million in compensation expense associated with the grant of 554,125 shares of Class B common stock to certain members of management in conjunction with the May 19, 1998 acquisition of the Company, $3.7 million in additional profit as a result of the successful resolution of billing disputes in Australia, changes in U.S. employee benefits that resulted in an accrual reduction of $3.3 million, a reduction in cost from a multiemployer benefit plan refund of $2.6 million, a reduction in reclamation accruals of $2.7 million due to improved equipment efficiencies and the royalty monetization and contract restructuring discussed above. For the nine-month period, operating profit declined $95.1 million to $98.1 million. Operating profit from the U.S. mining operations improved by $18.3 million during the period, mainly as a result of production efficiencies in the Appalachian regions and volume improvements at Powder River. However, Citizens Power experienced a $14.5 million decrease for the period due to reduced asset restructuring income, trading losses and increased overhead costs. Operating profit from Australia declined $8.5 million due to weak demand, lower mining services revenues and unfavorable exchange rates. The prior year results also included a $38.7 million gain in the prior year from a coal supply contract restructuring and $40.2 million of reductions to estimated liabilities. Current year results of operations include $8.8 million of additional depletion and amortization associated with purchase accounting adjustments to write-up the Company's net assets to fair value. Interest Expense. Interest expense increased $39.0 million for the third quarter and $100.8 million for the period ended December 31, 1998. This increase is the result of the borrowings necessary to fund the acquisition on May 19, 1998, and higher borrowings in Australia to fund the construction of a new mine. Income Taxes. The Company's effective tax rate for the quarter and period ended December 31, 1998 was 39.1% and 5.6%, respectively. The effective tax rate is primarily impacted by two factors - the percentage depletion tax deduction utilized by the Company and its U.S. subsidiaries that creates an alternative minimum tax situation, and the level of contribution by the Australian business to the consolidated results of operations, which is taxed at a higher rate than the U.S. Based upon these factors, the Company anticipates that adjustments to the effective tax rate will be necessary on a quarterly basis. Liquidity and Capital Resources Net cash provided by operating activities was $188.3 million, which is comprised mainly of a $135.9 million royalty prepayment that occurred during the second quarter of fiscal year 1999 and a non-cash addition for depreciation, depletion and amortization, partially offset by working capital changes. Net cash used in investing activities was $2,135.1 million, primarily consisting of $154.2 million of capital expenditures and $2,065.0 for the acquisition of the Predecessor Company. The Company had $87.0 million of committed capital expenditures (primarily related to coal reserves and mining machinery) at December 31, 1998. It is anticipated these capital expenditures will be funded through available cash and credit facilities. The Company is also seeking to identify investments that will provide future earnings growth. In that regard, the Company signed definitive agreements in February 1999 to acquire an additional 38.3% interest in Black Beauty Coal Company (Black Beauty), raising the Company's ownership percentage to 81.7%. The acquisition, which will be funded out of existing working capital, is subject to certain contingencies, including approval by both the Company's and Black Beauty's lenders. Net cash provided by financing activities was $2,188.0 million, reflecting a $480.0 million equity contribution and $1,817.4 million in borrowings to fund the acquisition. In addition, the Company has borrowed approximately $119.4 million to fund domestic capital expenditures, the construction of a new mine in Australia and working capital requirements. The Company repaid $217.3 million of long-term debt during the period, including $75.0 million in prepayments and $5.0 million in scheduled payments on acquisition debt. The Company has five qualified single employer defined benefit pension plans, which the Pension Benefit Guaranty Corporation ("PBGC") calculated as being underfunded using PBGC methodology. As a result, the Company has entered into an agreement with the PBGC to alleviate the underfunding of the Company's pension plans, pursuant to which the Company has agreed to: (i) accelerate minimum funding payments of $9.6 million that the Company would otherwise have been required to make during fiscal 1999, (ii) make certain contributions in excess of such minimum funding and (iii) provide a letter of credit to support a fraction of the pension plans' unfunded liabilities. The fair market value of the plans' assets was $468.7 million at March 31, 1998, the date of the last actuarial valuation determination. The pension funding assumptions included a 9.0% return on plan assets. Future funding and pension expense could be adversely impacted by changes in the rate of return on plan assets from those assumed in the actuarial valuation determination. As of December 31, 1998, the Company had total indebtedness of $2,363.9 million, consisting of the following: (In millions) 8.875% Senior Notes due 2008 ("Senior Notes") $ 398.8 9.625% Senior Subordinated Notes due 2008 ("Senior Subordinated Notes") 498.6 Term loans under Senior Credit Facilities 840.0 5.000% Subordinated Note 208.0 Non-Recourse Debt 297.7 Other 120.8 --------- $ 2,363.9 ========= The Senior Credit Facilities include a Revolving Credit Facility that provides for aggregate borrowings of up to $150.0 million and letters of credit of up to $330.0 million. As of December 31, 1998, the Company had no borrowings outstanding under the Revolving Credit Facility. Interest rates on the revolving loans under the Revolving Credit Facility are based on the Base Rate (as defined in the Senior Credit Facilities), or LIBOR (as defined in the Senior Credit Facilities) at the Company's option. On October 1, 1998, the Company entered into two interest rate swaps to fix the interest cost on $500 million of long-term debt outstanding under the Term Loan Facility. The Company will pay a fixed rate of approximately 7.0% on $300 million of such long-term debt for a period of three years, and on $200 million of such long-term debt for two years. The Revolving Credit Facility commitment matures in fiscal year 2005. The Company made an optional prepayment of $25 million on the Senior Credit Facilities in December 1998, which it applied against Term Loan A mandatory payments in order of maturity, and a mandatory payment of $2.5 million on Term Loan A. The Company also made a $50.0 million optional prepayment on the Senior Credit Facilities in August 1998, which it applied against Term Loan B mandatory payments in order of maturity. The following table sets forth the amortization schedule for the Senior Credit Facilities after giving effect to the payments: (In millions) Amortization Term Loan A Term Loan B ------------ ------------ ------------ Fiscal Year: 1999 $ - $ - 2000 - - 2001 10.00 - 2002 42.50 - 2003 68.75 - 2004 93.75 - 2005 25.00 64.00 2006 - 408.25 2007 - 127.75 --------- --------- $ 240.00 $ 600.00 ========= ========= The indentures governing the Senior Notes and Senior Subordinated Notes permit the Company and its Restricted Subsidiaries (which include all subsidiaries of the Company except Citizens Power and its subsidiaries) to incur additional indebtedness, including secured indebtedness, subject to certain limitations. In addition, among other customary restrictive covenants, the indentures prohibit the Company and its Restricted Subsidiaries from creating or otherwise causing any encumbrance or restriction on the ability of any Restricted Subsidiary that is not a Guarantor to pay dividends or to make certain other upstream payments to the Company or any of its Restricted Subsidiaries (subject to certain exceptions). The Revolving Credit Facility and related Term Loan Facility also contain certain restrictions and limitations including but not limited to financial covenants that will require the Company to maintain and achieve certain levels of financial performance and limit the payment of cash dividends and similar restricted payments. In addition, the Senior Credit Facilities prohibit the Company from allowing its Restricted Subsidiaries (which include all Guarantors) to create or otherwise cause any encumbrance or restriction on the ability of any such Restricted Subsidiary to pay any dividends or make certain other upstream payments subject to certain exceptions. The Company was in compliance with all of the restrictive covenants of its loan agreements as of December 31, 1998. Recent Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires the recognition of all derivatives as assets or liabilities within the balance sheet, and requires both the derivatives and the underlying exposure to be recorded at fair value. Any gain or loss resulting from changes in fair value will be recorded as part of the results of operations, or as a component of comprehensive income or loss, depending upon the intended use of the derivative. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999 (effective April 1, 2000 for the Company). The Company is evaluating the requirements of this Statement and has not yet determined the impact of adoption on the financial statements. Impact of Year 2000 Issue. The Company is preparing for the impact of the arrival of the Year 2000 on its business, as well as on the businesses of its customers, suppliers and business partners. The "Year 2000 Issue" is a term used to describe the problems created by systems that are unable to accurately interpret dates after December 31, 1999. These problems are derived predominantly from the fact that many software programs have historically categorized the "year" in a two-digit format. The Year 2000 Issue creates potential risks for the Company, including potential problems in the Company's products as well as in the Information Technology ("IT") and non-IT systems that the Company uses in its business operations. The Company may also be exposed to risks from third parties with whom the Company interacts who fail to adequately address their own Year 2000 Issues. The Company's State of Readiness - In 1998, the Company organized a company-wide Year 2000 compliance project, staffed with a diverse team of personnel representing all levels of the organization and also retained an outside consulting firm to assist in the assessment and assist in ensuring the proper project structure to address the Year 2000 issue. In addition, the Company completed an assessment and identified portions of its software which will have to be modified or replaced so that its computer systems will function properly with respect to dates in the Year 2000 and thereafter. With respect to IT systems, an assessment was completed and the Company is now in the remediation, testing and implementation phases of the project whereby it is updating or replacing existing applications. These phases of the project began in calendar 1998 and will continue in calendar 1999. Additionally, the Company is also conducting an assessment of its non-IT technology which consists primarily of embedded technology at the Company's mining facilities (e.g., security systems, mine monitoring systems, plant operating systems, coal loading and scale facilities, equipment, etc.). The Company is in the assessment and remediation phases and plans to have sites Year 2000 ready by October 1999. Software modifications are estimated to be 62% complete and the goal of management is to have all systems and equipment Year 2000 ready by October 1999. The Company believes that with modifications to existing software and conversion to new software, the Year 2000 issue will not present significant operational problems for its computer systems. Finally, the Company is conducting an assessment of Year 2000 exposures related to the Company's suppliers. The Company has identified its key suppliers and has sent out a request for information on their Year 2000 compliance status. The Company has dedicated resources to monitor these parties' progress as they address the Year 2000 issue. Additional requests will be sent, responses will be tracked and contingency plans will be developed as required to address potential failures of these parties to be prepared for the Year 2000. The Costs to Address the Company's Year 2000 Issues - The total cost of the project associated with the Year 2000 issue is estimated at approximately $9.1 million (29% of the IT budget for fiscal year 1999), which includes $1.9 million for the purchase of new software and hardware that will be capitalized and $7.2 million that will be expensed as incurred. To date, the Company has incurred approximately $2.4 million primarily for assessment of the Year 2000 issue, development of a modification plan, and fixing noncompliant programs. The Company believes that the total costs associated with modifying its current systems will not have a material adverse effect on its results of operations or financial position. The Risks of the Company's Year 2000 Issues - There can be no assurance that the Company will be completely successful in its efforts to address Year 2000 Issues. If some of the Company's systems are not Year 2000 compliant, the Company could suffer a disruption of operations (including delivery of coal pursuant to sales contracts) or other negative consequences, including, but not limited to, diversion of resources, damage to the Company's reputation and increased litigation, any of which could materially adversely affect the Company's results of operations or financial position. The Company is also dependent on third parties such as its customers, suppliers, service providers and other business partners. If these or other third parties with whom the Company conducts business fail to adequately address Year 2000 Issues, the Company could experience a negative impact on its results of operations or financial position. For example, the failure of carriers, power generators and/or telecommunications companies to have Year 2000 compliant internal systems could impact the Company's production and/or shipment of coal. The Company's Contingency Plans - The Company is in the process of developing a comprehensive contingency plan to address situations that may result if the company or any of the third parties upon which the Company is dependent is unable to achieve Year 2000 readiness. This effort is ongoing and will continue to be evaluated as new information becomes available. Year 2000 Cautionary Statement - Year 2000 issues are widespread and complex. The costs of the project and the date on which the Company believes it will complete the appropriate modifications to deal with the Year 2000 Issue are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no assurance that these estimates will be achieved. Forward Looking Statements. This quarterly report and certain press releases and statements the Company makes from time to time include statements of the Company's and management's expectations, intentions, plans and beliefs that constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. Forward looking statements involve risks and uncertainties, and a variety of factors could cause actual results to differ materially from the Company's current expectations, including but not limited to: coal and power market conditions and fluctuations in the demand for coal as an energy source, weather conditions, the continued availability of long-term coal supply contracts, railroad performance, foreign currency translation, changes in the government regulation of the mining industry, risks inherent to mining, changes in the Company's leverage position, the ability to successfully implement operating strategies, the impact of Year 2000 compliance by the Company or those entities with which the Company does business and other factors discussed in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to such forward looking statements that may be made to reflect events or circumstances after the date hereof, or thereof, as the case may be, or to reflect the occurrence of anticipated events. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Eastern Enterprises On November 1, 1993, Eastern Enterprises filed suit in the U.S. District Court for the District of Massachusetts against the Social Security Administration and the Combined Fund claiming that the Coal Act, as applied to Eastern Enterprises, violated the due process and taking clauses of the Fifth Amendment. In 1994, Eastern Enterprises filed a third party complaint against Peabody Holding Company, Eastern Associated and Eastern Associated's parent company, Coal Properties Corp., seeking indemnification or contribution with respect to any liability that Eastern Enterprises may have under the Coal Act. Eastern Enterprises claimed that the amount of its Coal Act liabilities was approximately $100 million. The District Court held in 1996 that the Coal Act was constitutional. Eastern Enterprises filed an appeal with the First Circuit Court of Appeals, which affirmed the district court's decision. The U.S. Supreme Court accepted Eastern Enterprises' petition for certiorari on the constitutional claims. In a plurality decision issued on June 26, 1998, the Supreme Court found that the Coal Act as applied to Eastern Enterprises violated the takings clause of the Fifth Amendment. The UMWA beneficiaries that were assigned to Eastern Enterprises will continue to receive retiree health care benefits from the Combined Fund. Peabody Holding Company has had discussions with Eastern Enterprises regarding the third-party complaint. Eastern Enterprises has advised Peabody Holding Company that it is unwilling to dismiss the third-party complaint and intends to seek reimbursement for its attorneys fees and prejudgment interest which could amount to approximately $5 million. The Company continues to believe that the matter will be resolved without a material adverse effect on its financial condition or results of operation. Public Service Company of Colorado In August 1996, Seneca Coal Company ("Seneca") filed a demand for arbitration in accordance with the terms of an Amended Revised Coal Supply Agreement dated December 1, 1971 (the "1971 Agreement") between Seneca and three electric utilities, Public Service Company of Colorado, Salt River Project Agricultural Improvement District and PacifiCorp (the "Hayden Participants"). The Hayden Participants own the Hayden Electric Generating Station at Hayden, Colorado. The arbitration demand requested the entry of an award for Seneca and against the Hayden Participants for amounts attributable to final reclamation, mine decommissioning and environmental monitoring of the Seneca mine and life insurance and post-retirement health care costs ("post-mine closure costs"). In September 1996, the Hayden Participants filed a complaint for declaratory judgment in the District Court for the City and County of Denver seeking a judicial declaration that they were not responsible for post-mine closure costs as a matter of law. The Hayden Participants also requested declaratory and other relief with respect to other claims against Seneca. The arbitration provision in the 1971 Agreement limits the jurisdiction of the arbitrators to resolution of disputed issues of fact but the arbitrators are to determine the arbitrability of any dispute in the first instance. Accordingly, Seneca filed a motion to stay the judicial proceedings with respect to the issue of responsibility under the 1971 Agreement for post-mine closure costs pending the outcome of the arbitration. The District Court granted the motion in January 1997. The arbitration hearing is scheduled to take place in March of 1999. A decision from the arbitrators is expected later in 1999. The District Court's application of legal principles to the facts as found by the arbitrators would take place thereafter. The Company continues to believe that the dispute will be resolved without a material adverse effect on its financial condition or results of operation. Macquarie Generation In September 1997, Peabody Resources filed a lawsuit against Macquarie Generation in the Supreme Court of New South Wales, Commercial Division, seeking damages for certain coal deliveries which were not paid by Macquarie Generation and for a declaratory judgment regarding the assignment to Macquarie Generation of two long-term CSAs for the Ravensworth and Narama mines. The contracts expire in 2001 and 2012, respectively. Macquarie Generation later agreed that the two contracts were properly assigned to it. Macquarie Generation subsequently filed a cross-claim against Peabody Resources alleging that Peabody Resources breached the labor escalation provisions in the CSAs, committed misrepresentations regarding the labor costs and violated the Australian trade practices and fair trading laws in relation to the Narama contract. Macquarie Generation sought to terminate or rescind the Narama CSA and has sought damages from Peabody Resources for alleged breaches of both contracts. Even though the Company continued to deliver coal, Macquarie Generation unilaterally reduced the price that it is paying for coal deliveries under the Narama contract. A trial regarding these issues began on September 7, 1998 and concluded on September 25, 1998. On September 22, 1998, Macquarie Generation withdrew its breach of contract claims. The Supreme Court of New South Wales issued a decision on November 19, 1998 rejecting Macquarie Generation's claims to terminate the coal supply agreement for the Narama mine. The Court also rejected Macquarie Generation's claim for damages. The Court ordered Macquarie Generation to pay Peabody Resources the portion of the price that it had unilaterally withheld with interest. Macquarie Generation has made that payment to Peabody Resources and is paying Peabody Resources for deliveries of coal at the contract prices. Macquarie Generation has filed an appeal of the decision. The Company continues to believe that the matter will be resolved without a material adverse effect on its financial condition or results of operation. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits See the Exhibit Index at page 21 of this report. (b) Reports on Form 8-K. None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. P&L COAL HOLDINGS CORPORATION Date: February 12, 1999 By: /s/ GEORGE J. HOLWAY --------------------------------------- George J. Holway Vice President and Chief Financial Officer (Principal Financial Officer) EXHIBIT INDEX The exhibits below are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. Exhibit No. Description of Exhibit ------- ---------------------- 3.1 Second Amended and Restated Certificate of Incorporation of P&L Coal Holdings Corporation. 3.2 By-Laws of P&L Coal Holdings Corporation (Incorporated by reference to Exhibit 3.2 of the Company's Form S-4 Registration Statement No. 333-59073). 10.10 1998 Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings Corporation. 27 Financial Data Schedule (filed electronically with the SEC only). EX-3 2 EXHIBIT 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF P&L COAL HOLDINGS CORPORATION P&L COAL HOLDINGS CORPORATION (the "Corporation"), a corporation organized and existing under the laws of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is P&L Coal Holdings Corporation. The date of the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was February 27, 1998 under the name of P&L Coal Holdings Corporation, and the date of the filing of its Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware was May 15, 1998 under the name of P&L Coal Holdings Corporation. 2. This Second Amended and Restated Certificate of Incorporation has been duly adopted in accordance with Sections 103, 242 and 245 of the General Corporation Law of the State of Delaware. The Corporation has received payment for its stock. 3. The Board of Directors of the Corporation, pursuant to a unanimous written action in lieu of a meeting pursuant to Section 141(f) of the General Corporation Law of the State of Delaware, adopted resolutions proposing and declaring advisable that the Corporation amend and restate its Amended and Restated Certificate of Incorporation to read in its entirety as follows: FIRST: The name of the Corporation is P&L Coal Holdings Corporation. SECOND: The registered office and registered agent of the Corporation is The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of stock that the Corporation shall have the authority to issue is 43,000,000 shares, consisting of 30,000,000 shares of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), 3,000,000 shares of Class B Common Stock, par value $0.01 per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"), and 10,000,000 shares of Non-Convertible, Exchangeable Preferred Stock, par value of $0.01 per share (the "Preferred Stock"). Set forth below with respect to each type of stock of the Corporation is a statement of the voting powers and the designations, preferences, rights, qualifications, limitations and restrictions thereof: A. Class A Common Stock. 1. Voting Rights. Except as may otherwise be required by law, each holder of Class A Common Stock (together with the holders of Class B Common Stock and the holders of Preferred Stock) shall have one vote in respect of each share of Class A Common Stock held on all matters voted upon by the stockholders of the Corporation. 2. Dividends. The holders of Class A Common Stock (together with the holders of Class B Common Stock and the holders of Preferred Stock) shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors of the Corporation ratably in proportion to the number of shares of Class A Common Stock (and Class B Common Stock and Preferred Stock) held by them. 3. Distributions. Subject to the limitations set forth in Section C.3 of this Article FOURTH, in the event of any Liquidation Event, following Payment in Full of the Preference Amount to the holders of Preferred Stock, the holders of Class A Common Stock shall be entitled to receive all of the remaining Available Assets ratably in proportion to the number of shares of Class A Common Stock held by them until they receive Payment in Full of the Preference Amount. If such remaining Available Assets shall be insufficient to distribute to the holders of shares of Class A Common Stock the Payment in Full of the Preference Amount to which they are entitled (after Payment in Full of the Preference Amount to the holders of shares of Preferred Stock), the holders of shares of Class A Common Stock shall share ratably in any distribution of Available Assets in proportion to the number of shares of Class A Common Stock held by them. After Payment in Full of the Preference Amount to the holders of shares of Preferred Stock pursuant to Section C.3, to the holders of shares of Class A Common Stock pursuant to this Section A.3 and to the holders of shares of Class B Common Stock pursuant to Section B.3, the holders of Class A Common Stock shall be entitled (together with the holders of Class B Common Stock and the holders of Preferred Stock) to receive any remaining Available Assets ratably in proportion to the number of shares of Class A Common Stock (and Class B Common Stock and Preferred Stock) held by them. B. Class B Common Stock. 1. Voting Rights. Except as may otherwise be required by law, each holder of Class B Common Stock (together with the holders of Class A Common Stock and the holders of Preferred Stock) shall have one vote in respect of each share of Class B Common Stock held on all matters voted upon by the stockholders of the Corporation. 2. Dividends. The holders of Class B Common Stock (together with the holders of the Class A Common Stock and the holders of Preferred Stock) shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors of the Corporation ratably in proportion to the number of shares of Class B Common Stock (and Class A Common Stock and Preferred Stock) held by them. 3. Distributions. Subject to the limitations set forth in Sections A.3 and C.3 of this Article FOURTH, in the event of any Liquidation Event, following Payment in Full of the Preference Amount to the holders of Preferred Stock and the holders of Class A Common Stock, the holders of Class B Common Stock shall be entitled to receive all of the remaining Available Assets ratably in proportion to the number of shares of Class B Common Stock held by them until they receive Payment in Full of the Preference Amount. If such remaining Available Assets shall be insufficient to distribute to the holders of shares of Class B Common Stock the Payment in Full of the Preference Amount to which they are entitled (after Payment in Full of the Preference Amount to the holders of shares of Class A Common Stock and the holders of Preferred Stock), the holders of shares of Class B Common Stock shall share ratably in any distribution of Available Assets in proportion to the number of shares of Class B Common Stock held by them. After Payment in Full of the Preference Amount to the holders of shares of Preferred Stock pursuant to Section C.3, to the holders of shares of Class A Common Stock pursuant to Section A.3 and to the holders of shares of Class B Common Stock pursuant to this Section B.3, the holders of Class B Common Stock shall be entitled (together with the holders of Class A Common Stock and the holders of Preferred Stock) to receive any remaining Available Assets ratably in proportion to the number of shares of Class B Common Stock (and Class A Common Stock and Preferred Stock) held by them. 4. Conversion. a. Immediately following the earliest of (i) the ninth anniversary of the initial issuance of shares of Class B Common Stock, (ii) the consummation of a Change of Control, an Initial Public Offering or a Recapitalization Event and (iii) the date of an election by the Board of Directors of the Corporation to convert the outstanding shares of Class B Common Stock into Class A Common Stock, all of the shares of Class B Common Stock shall be converted, without action on the part of any holder thereof, into the same number of shares of Class A Common Stock. b. Each conversion of shares of Class B Common Stock into the same number of shares of Class A Common Stock shall be completed by the surrender of the certificate or certificates representing the shares (the "Shares for Conversion") converted at the principal office of the Corporation (or such other office or agency of the Corporation as the Corporation may from time to time designate by notice in writing to the holders of Class B Common Stock) at any time during normal business hours. Such conversion shall be deemed to have been effected as of the open of business on the first business day immediately following the date of the event giving rise to the conversion pursuant to this Section B.4 (the "Class B Conversion Date"). From and after the Class B Conversion Date, (i) the rights of the holder of the Shares for Conversion in respect thereof will cease (other than the right to receive any dividend or other distribution that has been declared by the Board of Directors of the Corporation to be payable on or following the Class B Conversion Date to holders of record of the class of Common Stock of which the Shares for Conversion are a part on a date prior to the Class B Conversion Date), (ii) the person or persons in whose name or names the certificate or certificates for the shares to be issued (the "Converted Shares") upon such conversion of the Shares for Conversion shall be deemed to have become the holder or holders of record of the Converted Shares represented thereby and (iii) any certificate or certificates representing the Shares for Conversion shall thereafter, and without any action on the part of holder thereof, be deemed to represent the shares of Class A Common Stock into which they are convertible. c. Promptly after the Class B Conversion Date, the Corporation will issue and deliver in accordance with the surrendering holder's instructions the certificate or certificates for the Converted Shares issuable upon conversion. d. The Corporation will at all times reserve and keep available out of its authorized but unissued shares of Class A Common Stock, solely for the purpose of issuance upon the conversion of Class B Common Stock as provided herein, the maximum number of shares as shall then be issuable upon the conversion of all then outstanding shares of Class B Common Stock. e. If the Corporation in any manner subdivides or combines the outstanding shares of Class A Common Stock or Class B Common Stock, the outstanding shares of the other class will be proportionately subdivided or combined. f. The issuance of certificates representing Converted Shares will be made without charge to the holders of such shares for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and issuance; provided that the holder of such Converted Shares shall be responsible for any transfer taxes due in connection with the conversion thereof. The Corporation will not close its books against the transfer of its Common Stock in any manner which would interfere with the timely conversion of any class of Common Stock. C. Preferred Stock. Subject to the limitations and modifications set forth below, each share of Preferred Stock shall have the voting powers and the designations, preferences, rights, qualifications, limitations and restrictions of a share of Common Stock. 1. Voting Rights. Each holder of a share of Preferred Stock shall have the same voting rights as the holder of a share of Common Stock, and all holders of shares of Preferred Stock shall vote as a single class with all holders of shares of Common Stock, and not as a separate class, upon all matters in which the holders of the Common Stock are entitled to vote. 2. Dividends. The holders of the shares of Preferred Stock (together with the holders of any Common Stock) shall be entitled to receive such dividends as may be declared from time to time by the Board of Directors of the Corporation ratably in proportion to the number of shares of Preferred Stock (and Common Stock) held by them. 3. Distributions. In the event of any Liquidation Event, the holders of Preferred Stock shall be entitled to receive all of the Available Assets ratably in proportion to the number of shares of Preferred Stock held by them, in priority to any distribution to the holders of Common Stock, until such holders of Preferred Stock receive Payment in Full of the Preference Amount. If the Available Assets shall be insufficient to distribute to the holders of shares of Preferred Stock the Payment in Full of the Preference Amount to which they are entitled, the holders of shares of Preferred Stock shall share ratably in any distribution of Available Assets in proportion to the number of shares of Preferred Stock held by them. After Payment in Full of the Preference Amount to the holders of shares of Preferred Stock pursuant to the foregoing provisions and to the holders of shares of Class A Common Stock pursuant to Section A.3 and to the holders of shares of Class B Common Stock pursuant to Section B.3 of this Article FOURTH, the holders of Preferred Stock shall be entitled (together with the holders of Common Stock) to receive any remaining Available Assets ratably in proportion to the number of shares of Preferred Stock (and Common Stock) held by them. 4. Exchange. a. At any time and from time to time, the Corporation may exchange, at the option of the Corporation in its sole discretion, in whole or in part, the shares of Preferred Stock, share for share, into shares of Class A Common Stock. b. The Corporation may exercise the right to exchange shares of Preferred Stock into shares of Class A Common Stock by resolution of the Board of Directors to that effect (which may specify an event or events upon which such exercise and exchange will be effective). c. On the date for the exchange of the shares of Preferred Stock into shares of Class A Common Stock (the "Exchange Date"), such shares of Preferred Stock (the "Exchanged Shares") shall be exchanged, share for share, for shares of Class A Common Stock. As a condition of receipt of the certificate or certificates representing such Class A Common Stock, each holder of Exchanged Shares must surrender the certificate or certificates representing the Exchanged Shares to the Corporation. Each surrendered certificate shall be canceled and retired promptly after receipt by the Corporation and the capital stock evidenced thereby may be reissued by the Corporation. d. From and after the Exchange Date, (i) the rights of the holders of Exchanged Shares in respect thereof will cease (other than the right to receive any dividend or other distribution that has been declared by the Board of Directors of the Corporation to be payable on or following the Exchange Date to holders of record of Preferred Stock on a date prior to the Exchange Date), (ii) the person or persons in whose name or names the certificate or certificates for the Exchanged Shares were issued shall be deemed to have become the holder or holders of record of an equivalent number of shares of Class A Common Stock and (iii) any certificate or certificates representing Exchanged Shares shall thereafter, and without any action on the part of the holder thereof, be deemed to represent an equivalent number of shares of Class A Common Stock. e. If the Corporation in any manner subdivides or combines the outstanding shares of Class A Common Stock or Preferred Stock, the outstanding shares of the other class will be proportionately subdivided or combined. f. The Corporation shall at all times reserve and keep available out of its authorized and unissued Class A Common Stock, solely for the purpose of effecting the exchange of the Preferred Stock, such number of shares of Class A Common Stock as shall from time to time be sufficient to effect the exchange of all then outstanding shares of Preferred Stock. The Corporation shall from time to time, subject to and in accordance with the laws of Delaware, increase the authorized amount of Class A Common Stock if at any time the number of authorized shares of Class A Common Stock remaining unissued shall not be sufficient to permit the exchange at such time of all then outstanding shares of Preferred Stock. 5. Redemption. a. At any time during the six-month period immediately following the issuance of shares of Preferred Stock by the Corporation and from time to time during such period, the Corporation may redeem, at the option of the Corporation in its sole discretion, in whole or in part, the shares of Preferred Stock for a price of $20 per share without interest thereon (the "Redemption Price"). b. The Corporation may exercise the right to redeem shares of Preferred Stock by resolution of the Board of Directors to that effect (which may specify an event or events upon which such exercise and redemption will be effective). c. On the date for the redemption of the shares of Preferred Stock (the "Redemption Date"), the full Redemption Price shall become payable in cash for the shares of Preferred Stock being redeemed on such Redemption Date (the "Redeemed Shares"). As a condition of payment of the Redemption Price, each holder of Redeemed Shares must surrender the certificate or certificates representing the Redeemed Shares to the Corporation. Each surrendered certificate shall be canceled and retired promptly after receipt by the Corporation and the capital stock evidenced thereby may be reissued by the Corporation. d. On the Redemption Date, unless the Corporation defaults in the payment in full of the Redemption Price, all rights of holders of the Redeemed Shares shall terminate (other than the right to receive any dividend or other distribution that has been declared by the Board of Directors of the Corporation to be payable on or following the Redemption Date to holders of record of Preferred Stock on a date prior to the Redemption Date and the right to receive the Redemption Price). e. If the Corporation in any manner subdivides or combines the outstanding shares of Preferred Stock, the Redemption Price will be adjusted proportionately. D. Certain Definitions. For purposes of this Article FOURTH, the following terms shall have the following meanings: "Available Assets" means (i) in the case of a Business Combination, all cash, securities and other assets to be received by stockholders of the Corporation pursuant thereto and (ii) in the case of any other Liquidation Event, all assets of the Corporation, tangible and intangible, of whatever kind available for distribution to stockholders. "Business Combination" means any acquisition of the Corporation by means of merger or other form of corporate reorganization in which outstanding shares of the Corporation are exchanged for cash, securities or other consideration issued or given, or caused to be issued or given, by the acquiring corporation or its subsidiary (other than a mere reincorporation transaction). "Change of Control" shall mean an acquisition of all or substantially all of the direct and indirect assets of the Company and its subsidiaries (by merger, consolidation, stock or asset sale or otherwise), whereby immediately following any such transaction (i) the Lehman Fund and its affiliates own, in the aggregate less than 50% of the Corporation's outstanding voting securities that the Lehman Fund owned in the aggregate immediately following the consummation of the transactions pursuant to the Purchase Agreement, dated as of March 2, 1998, by and between the Corporation and The Energy Group PLC (excluding the anticipated sell down of approximately $75 million to occur subsequent to such consummation) or (ii) any Person individually owns more of the Corporation's then outstanding voting securities entitled to vote generally than is owned in the aggregate by the Lehman Fund and its affiliates. "Initial Public Offering" shall mean the initial sale of shares of any class of the Corporation's stock to the public pursuant to an effective registration statement (other than a registration statement on Form S-4 or S-8 or any similar or successor form) filed under the Securities Act of 1933, as amended, which results in an active trading market of the lesser of 25% of the outstanding shares of the Corporation's Common Stock and a $250 million float in the marketplace. There shall be deemed to be an "active trading market" if the Corporation's Common Stock is listed or quoted on a national exchange or the NASDAQ National Market. "Lehman Fund" means Lehman Brothers Merchant Banking Partners II L.P., Lehman Brothers Offshore Investment Partners II L.P., LB I Group Inc., Lehman Brothers Capital Partners III, L.P., Lehman Brothers Capital Partners IV, L.P. and Lehman Brothers MBG Partners 1998 (A) L.P., collectively. "Liquidation Event" means any of the following: (i) any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, (ii) any Business Combination, or (iii) a sale or disposition by the Corporation or any subsidiary of the Corporation, if any, of all or substantially all of the assets of the Corporation or such subsidiary (if, with respect to such subsidiary, the assets so sold would have constituted all or substantially all of the assets of the Corporation if the assets were held directly by the Corporation). "Payment in Full of the Preference Amount" is deemed to have been made at such time as the holders of the shares of Preferred Stock, Class A Common Stock or Class B Common Stock, as the case may be, shall have received in respect of each such share an aggregate amount of cash, or securities or other assets, or any combination thereof, with a fair market value equal to $20 in connection with a Liquidation Event (without giving effect to prior unrelated dividends or distributions), and in the event that the Corporation in any manner subdivides or combines the outstanding shares of Class A Common Stock or Preferred Stock, such Payment in Full of the Preference Amount shall be adjusted accordingly. "Person" means an individual, partnership, corporation, business trust, joint stock company, limited liability company, unincorporated association, joint venture or other entity of whatever nature. "Recapitalization Event" shall mean a recapitalization, reorganization, stock dividend or other special corporate restructuring which results in an extraordinary distribution to the stockholders of cash and/or securities through the use of leveraging or otherwise but which does not result in a Change of Control. FIFTH: The Board of Directors of the Corporation, acting by the affirmative vote of a majority of the directors then in office, may alter, amend or repeal the Bylaws of the Corporation. SIXTH: The number of directors of the Corporation shall be determined in the manner provided in the Bylaws of the Corporation. SEVENTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated by the Board of Directors or in the Bylaws of the Corporation. EIGHTH: Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of the directors of the Corporation need not be by written ballot. NINTH: Notwithstanding the provisions of Section 228 of the General Corporation Law of the State of Delaware, the stockholders of the Corporation may take action by written consent only if all of the stockholders entitled to vote on the matter sign such consent. This Article NINTH may not be amended without the unanimous consent of all stockholders entitled to vote on the matter. TENTH: To the fullest extent permitted by the laws of the State of Delaware: A. The Corporation shall indemnify any person (and such person's heirs, executors or administrators) who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (brought in the right of the Corporation or otherwise), whether civil, criminal, administrative or investigative, and whether formal or informal, including appeals, by reason of the fact that such person is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, limited liability company or other enterprise, for and against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person or such heirs, executors or administrators in connection with such action, suit or proceeding, including appeals. Notwithstanding the preceding sentence, the Corporation shall be required to indemnify a person described in such sentence in connection with any action, suit or proceeding (or part thereof) commenced by such person only if the commencement of such action, suit or proceeding (or part thereof) by such person was authorized by the Board of Directors of the Corporation. The Corporation may indemnify any person (and such person's heirs, executors or administrators) who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (brought in the right of the Corporation or otherwise), whether civil, criminal, administrative or investigative, and whether formal or informal, including appeals, by reason of the fact that such person is or was an employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, limited liability company or other enterprise, for and against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person or such heirs, executors or administrators in connection with such action, suit or proceeding, including appeals. B. The Corporation shall promptly pay expenses incurred by any person described in the first sentence of Section A. of this Article TENTH in defending any action, suit or proceeding in advance of the final disposition of such action, suit or proceeding, including appeals, upon presentation of appropriate documentation. C. The Corporation may purchase and maintain insurance on behalf of any person described in Section A. of this Article TENTH against any liability asserted against such person, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article TENTH or otherwise. D. The provisions of this Article TENTH shall be applicable to all actions, claims, suits or proceedings made or commenced after the adoption hereof, whether arising from acts or omissions to act occurring before or after its adoption. The provisions of this Article TENTH shall be deemed to be a contract between the Corporation and each director or officer who serves in such capacity at any time while this Article TENTH and the relevant provisions of the laws of the State of Delaware and other applicable law, if any, are in effect, and any repeal or modification hereof shall not affect any rights or obligations then existing with respect to any state of facts or any action, suit or proceeding then or theretofore existing, or any action, suit or proceeding thereafter brought or threatened based in whole or in part on any such state of facts. If any provision of this Article TENTH shall be found to be invalid or limited in application by reason of any law or regulation, it shall not affect the validity of the remaining provisions hereof. The rights of indemnification provided in this Article TENTH shall neither be exclusive of, nor be deemed in limitation of, any rights to which an officer, director, employee or agent may otherwise be entitled or permitted by contract, this Second Amended and Restated Certificate of Incorporation, vote of stockholders or directors or otherwise, or as a matter of law, both as to actions in such person's official capacity and actions in any other capacity while holding such office, it being the policy of the Corporation that indemnification of any person whom the Corporation is obligated to indemnify pursuant to the first sentence of Section A. of this Article TENTH shall be made to the fullest extent permitted by law. E. For purposes of this Article TENTH, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. ELEVENTH: A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. Any amendment, modification or repeal of the foregoing sentence shall not adversely affect any right or protection of a director of the Corporation hereunder in respect of any act or omission occurring prior to the time of such amendment, modification or repeal. 4. In Lieu of a meeting and vote of the stockholders, the stockholders have given written consent to such amendment and restatement of the Amended and Restated Certificate of Incorporation of the Corporation in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the undersigned has executed this Second Amended and Restated Certificate of Incorporation this 12th day of November 1998. P&L COAL HOLDINGS CORPORATION By: /s/ Irl F. Engelhardt ----------------------------- Name: Irl F. Engelhardt Title: Chairman and Chief Executive Officer EX-10 3 EXHIBIT 10.10 1998 STOCK PURCHASE AND OPTION PLAN FOR KEY EMPLOYEES OF P&L COAL HOLDINGS CORPORATION 1 Purpose of Plan The 1998 Stock Purchase and Option Plan for Key Employees of P&L Coal Holdings Corporation and Subsidiaries (the "Plan") is designed: (a) to promote the long term financial interests and growth of P&L Coal Holdings Corporation (the "Company") and its subsidiaries by attracting and retaining management personnel with the training, experience and ability to enable them to make a substantial contribution to the success of the Company's business; (b) to motivate management personnel by means of growth-related incentives to achieve long range goals; and (c) to further the alignment of interests of participants with those of the stockholders of the Company through opportunities for increased stock, or stock-based, ownership in the Company. 2 Definitions As used in the Plan, the following words shall have the following meanings: (a) "Active Trading Market" shall mean, as to the Company's Common Stock, that the Company's Common Stock is listed or quoted on a national exchange or the NASDAQ National Market. (b) "Board of Directors" shall mean the Board of Directors of the Company. (c) "Change of Control" shall mean an acquisition of all or substantially all of the direct and indirect assets of the Company and its Subsidiaries (by merger, consolidation, recapitalization event, stock or asset sale or otherwise), whereby immediately following any such transaction (i) the Lehman Fund owns, in the aggregate, less than 50 percent of the Company's outstanding voting securities that the Lehman Fund owned (excluding the sell down of approximately $75 million anticipated to occur after the Closing Date or (ii) any Person individually owns more of the Company's then outstanding voting securities entitled to vote generally than is owned in the aggregate by the Lehman Fund and its affiliates. (d) "Class B Stock" shall mean the $.01 par value Company stock which shall have voting rights and other attributes similar to Common Stock, except that Common Stock will have a liquidation preference. Class B Stock shall be converted to Common Stock upon a Change of Control, an IPO or a Recapitalization Event. (e) "Closing Date" shall mean May 19, 1998. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended. (g) "Committee" shall mean the Compensation Committee of the Board of Directors. (h) "Common Stock" shall mean the $.01 par value common stock of the Company which may be authorized but unissued, or issued and reacquired. (i) "Employee" shall mean a person, including an officer, in the regular full-time employment of the Company or one of its Subsidiaries who, in the opinion of the Committee, is, or is expected to be, involved with the management, growth or protection of some part or all of the business of the Company. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" shall mean (i) prior to a Public Offering, the fair market value of the equity of the Company, as determined by the Board of Directors in good faith, taking into account all relevant factors, including the Company's historic financial performance, its business prospects and recent sales or valuations of similar companies; (ii) after a Public Offering, the average of the closing prices of the shares of Common Stock for the 20 trading days immediately preceding the determination date; provided, however, at the time of the Public Offering, the offering price per share of Common Stock; and (iii) notwithstanding the foregoing, in the event of a Change in Control, the per share value of equity based on amounts paid in the Change of Control. (l) "Grant" shall mean an award made to a Participant under this Plan, including an award of Options and/or Purchase Stock, as such term is defined in paragraph 5(b) hereof. (m) "Grant Agreement" shall mean an agreement between the Company and a Participant that sets forth the terms, conditions and limitations applicable to Grants pursuant to the Plan. (n) "Lehman Fund" shall mean the initial purchasers listed on the signature pages to the Stockholders Agreement dated as of the Closing Date between the Participant and the Company and any other entity owned or controlled directly or indirectly by Lehman Brothers Holdings, Inc. (o) "Option" shall mean an option to purchase shares of the Common Stock which may be an "Incentive Stock Option" or a "Non-Qualified Stock Option", as such terms are defined in paragraph 5(a) hereof. (p) "Participant" shall mean an Employee, or other person having a relationship with the Company or one of its Subsidiaries, to whom one or more Grants have been made and such Grants have not all been forfeited or terminated under the Plan, or a person to whom such Grant was transferred pursuant to a trust provided for by the Grant Agreement; provided, however, that a non-employee director of the Company or one of its Subsidiaries may not be a Participant. (q) "Person" shall mean an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. (r) "Public Offering" shall mean the sale of shares of any class of the Company's stock to the public pursuant to an effective registration statement (other than a registration statement on Form S-4 or S-8 or any similar or successor form) filed under the Securities Act of 1933 which results in an Active Trading Market of the lesser of 25% of the outstanding shares of Common Stock and an aggregate value of outstanding securities that are registered equal to $250 million; provided, however, that the first such Public Offering shall be called an "IPO". (s) "Share" shall mean Common Stock or Class B Stock, as the case may be. (t) "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations, or group of commonly controlled corporations, other than the last corporation in the unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 3 Administration of Plan (a) The Plan shall be administered by the Committee; provided, however, that the members of the Committee shall qualify to administer the Plan for purposes of Rule 16b-3 (and any other applicable rule) promulgated under Section 16(b) of the Exchange Act to the extent that the Company is subject to such rule. The Committee may adopt its own rules of procedure, and action of a majority of the members of the Committee taken at a meeting, or action taken without a meeting by unanimous written consent, shall constitute action by the Committee. The Committee shall have the power and authority to administer, construe and interpret the Plan, to make rules for carrying it out and to make changes in such rules. Any such interpretations, rules and administration shall be consistent with the basic purposes of the Plan. (b) The Committee may delegate to the Chief Executive Officer and to other senior officers of the Company its duties under the Plan subject to such conditions and limitations as the Committee shall prescribe, except that only the Committee may designate and make Grants to Participants who are subject to Section 16 of the Exchange Act. (c) The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company, and the officers and directors of the Company shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or Grants, and all members of the Committee shall be fully protected by the Company with respect to any such action, determination or interpretation. 4 Eligibility The Committee may from time to time make Grants under the Plan to such Employees, or other persons having a relationship with the Company or any of its Subsidiaries, and in such form and having such terms, conditions and limitations as the Committee may determine consistent, however, with the terms of the Plan. Grants may be made singly, in combination or in tandem. The terms, conditions and limitations of each Grant under the Plan shall be set forth in a Grant Agreement, in a form approved by the Committee; provided, however, that such Grant Agreement shall contain provisions dealing with the treatment of Grants in the event of the termination, death or disability of a Participant, and may also include provisions concerning the treatment of Grants in the event of a Change of Control of the Company. 5 Grants (a) Stock Options - From time to time, the Committee, in its sole discretion, will determine the forms and amounts of Options to be granted to Participants. Such Options may take the following forms in the Committee's sole discretion: (i) Incentive Stock Options - These are Options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). In addition to other restrictions contained in the Plan, an Option granted under this Paragraph 5(a)(i), (A) may not be exercised more than 10 years after the date it is granted, (B) may not have an option price less than the Fair Market Value of Common Stock on the date the Option is granted, (C) must otherwise comply with Code Section 422, and (D) must be designated as an "Incentive Stock Option" by the Committee. The maximum aggregate Fair Market Value of Common Stock (determined at the time of grant) with respect to which Incentive Stock Options granted to any Participant under the Plan and incentive stock options granted to such Participant under any other plan maintained by the Company or a Subsidiary become first exercisable in any calendar year is $100,000. Payment of the Option price shall be made in cash or in Shares, or a combination thereof, in accordance with the terms of the Plan, the Grant Agreement, and of any applicable guidelines of the Committee in effect at the time. (ii) Non-Qualified Stock Options - These are Options which are not designated by the Committee as "Incentive Stock Options". At the time of the Grant the Committee shall determine, and shall include in the Grant Agreement or other Plan rules, the Option exercise period, the Option price, and such other conditions or restrictions on the Grant or exercise of the Option as the Committee deems appropriate. In addition to other restrictions contained in the Plan, an Option granted under this Paragraph 5(a)(ii), may not be exercised more than 10 years after the date it is granted. Payment of the Option price shall be made in cash or in Shares, or a combination thereof, in accordance with the terms of the Plan, the Grant Agreement and of any applicable guidelines of the Committee in effect at the time. Options may be granted prior to the effective date of the Plan (as determined pursuant to Paragraph 13 herein); provided, however, that no Option shall be exercisable prior to the date of the approval of the Plan by the stockholders of the Company; provided, further, that such approval will occur within 12 months of adoption of the Plan by the Board of Directors for the purpose of granting Incentive Stock Options. (b) Purchase Stock - The Committee, in its sole discretion, may grant a Participant the right to purchase Class B Stock ("Purchase Stock") at such price as is determined by the Committee. 6 Limitations and Conditions (a) Subject to adjustments under Paragraphs 8 and 9 hereof, the number of shares of authorized Common Stock available under this Plan shall be 4,027,800 shares as of the effective date of the Plan. The number of shares of authorized Class B Stock available under this Plan shall be 742,268 shares as of the effective date of the Plan. Unless restricted by applicable law, Shares related to Grants that are forfeited, terminated, cancelled or expire unexercised, shall immediately become available to be subject to Grants. (b) No Grants shall be made under the Plan beyond ten years after the effective date of the Plan, but the terms of Grants made on or before the expiration of the Plan may extend beyond such expiration. At the time a Grant is made or amended or the terms or conditions of a Grant are changed, the Committee may provide for limitations or conditions on such Grant. (c) Nothing contained herein shall affect the right of the Company to terminate any Participant's employment at any time or for any reason. (d) Other than as specifically provided in the forms of Subscription Agreement and Stockholders Agreement attached hereto as Exhibits A and B with regard to the death of a Participant, no benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Participant, be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the Participant. (e) Participants shall not be, and shall not have any of the rights or privileges of, stockholders of the Company in respect of any Shares purchasable in connection with any Grant unless and until certificates representing any such Shares have been issued by the Company to such Participants. (f) No election as to benefits or exercise of Options may be made during a Participant's lifetime by anyone other than the Participant except by a legal representative appointed for or by the Participant. (g) Absent express provisions to the contrary, any Grant under this Plan shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or its Subsidiaries and shall not affect any benefits under any other benefit plan of any kind now or subsequently in effect under which the availability or amount of benefits is related to level of compensation. This Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. (h) Unless the Committee determines otherwise, no benefit or promise under the Plan shall be secured by any specific assets of the Company or any of its Subsidiaries, nor shall any assets of the Company or any of its Subsidiaries be designated as attributable or allocated to the satisfaction of the Company's obligations under the Plan. 7 Transfers and Leaves of Absence For purposes of the Plan, unless the Committee determines otherwise: (a) a transfer of a Participant's employment without an intervening period of separation among the Company and any Subsidiary shall not be deemed a termination of employment, and (b) a Participant who is granted in writing a leave of absence shall be deemed to have remained in the employ of the Company or any Subsidiary during such leave of absence. 8 Adjustments In the event of any change in the outstanding Common Stock or Class B Stock by reason of a stock split, spin-off, stock dividend, stock combination or reclassification, recapitalization, consolidation or merger, Change of Control, or similar event, the Committee shall adjust appropriately the number of Shares subject to Grants under the Plan and make such other revisions as it deems are equitably required. 9 Change of Control Unless otherwise provided in the Grant Agreement, in its absolute discretion, and on such terms and conditions as it deems appropriate, coincident with or after any Grant, the Committee may provide that such Grant cannot be exercised after a Change of Control of the Company, and if the Committee so provides, it shall also provide, either by the terms of such Grant or by a resolution adopted prior to the occurrence of such Change of Control that such Grants will be cashed out at the Change of Control price or that such Grant shall be exercisable as to all Shares subject thereto prior to such Change of Control, notwithstanding anything to the contrary herein (but subject to the provisions of Paragraph 6(b)) and that, upon the occurrence of such event, such Grant shall terminate and be of no further force or effect; provided, however, that the Committee may also provide, in its absolute discretion, that even if the Grant shall remain exercisable after any such event, from and after such event, any such Grant shall be exercisable only for the kind and amount of securities and/or other property, or the cash equivalent thereof, receivable as a result of such event by the holder of a number of Shares for which such Grant could have been exercised immediately prior to such event. 10 Amendment and Termination The Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding Grants as are consistent with this Plan provided that, except for adjustments under Paragraph 8 or 9 hereof, no such action shall modify such Grant in a manner adverse to the Participant without the Participant's consent. The Board of Directors may amend, suspend or terminate the Plan except that no such action, other than an action under Paragraph 8 or 9 hereof, may be taken which would, without shareholder approval, increase the aggregate number of Shares subject to Grants under the Plan, decrease the exercise or purchase price of outstanding Grants, change the requirements relating to the Committee or extend the term of the Plan, but only to the extent such shareholder approval would be required by Rule 16b-3 at a time when the Company is subject to Section 16(b) of the Exchange Act. 11 Foreign Grants and Rights The Committee may make Grants to Employees or other persons having a relationship with the Company or one of its Subsidiaries who are subject to the laws of nations other than the United States, which Grants may have terms and conditions that differ from the terms thereof as provided elsewhere in the Plan for the purpose of complying with foreign laws. 12 Withholding Taxes The Company shall have the right to deduct from any cash payment made under the Plan any federal, state or local income or other taxes required by law to be withheld with respect to such payment. It shall be a condition to the obligation of the Company to deliver Shares upon the exercise of an Option or payment for Purchase Stock that the Participant pay to the Company such amount as may be requested by the Company for the purpose of satisfying any liability for such withholding taxes. Any Grant Agreement may provide that the Participant may elect, in accordance with any conditions set forth in such Grant Agreement, to pay a portion or all of such withholding taxes in Shares. 13 Effective Date and Termination Dates The Plan shall be effective on and as of the date of its approval by the stockholders of the Company and shall terminate ten years later, subject to earlier termination by the Board of Directors pursuant to Paragraph 10. EX-27 4
5 This schedule contains summary financial information extracted from the balance sheet and statement of operations as of December 31, 1998 and for the period then ended, and is qualified in its entirety by reference to such financial statements. 1000 9-MOS MAR-31-1999 OCT-01-1998 DEC-31-1998 267,106 0 435,734 93 239,884 1,735,056 6,275,401 1,675,693 6,865,649 1,253,863 2,305,614 0 50 165 463,533 6,865,649 1,327,497 1,402,769 1,267,921 1,267,921 0 0 123,215 (20,029) (5,188) (14,841) 0 0 0 (14,841) 0 0
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