| NATIONAL COAL CORP Item 1A Risk Factors |
| 2 0 ITEM 1A RISK FACTORS CAUTIONARY STATEMENTS AND RISK FACTORS Several of the matters discussed in this document contai n forward-looking statements that involve risks and uncertainties |
| Factor s associated with the forward-looking statements that could cause actual result s to differ materially from those projected or forecast are included in th e statements below |
| In addition to other information contained in this report , readers should carefully consider the following cautionary statements |
| RISKS RELATED TO OUR BUSINESS OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIA L CONDITION We have, and will continue to have substantial indebtedness |
| A t December 31, 2005, we had approximately dlra55dtta0 million principal value of tota l senior debt, and for the twelve months ended December 31, 2005 our ratio o f Adjusted EBITDA to interest expense was 2dtta1:1 and our ratio of total senior deb t to Adjusted EBITDA was 6dtta1:1 |
| Our indebtedness could be increased by a n additional dlra10dtta0 million under a future credit facility, which will hav e priority over senior debt with respect to security interests in the collateral |
| Our high level of indebtedness could have important consequences, including th e following: o reducing our ability to obtain additional financing; o reducing our cash flow; o placing us at a competitive disadvantage compared to ou r competitors that may have proportionately less debt or greate r financial resources; 20 o hindering our flexibility in dealing with changes in ou r business and the industry; and o making us more vulnerable to economic downturns and advers e developments |
| DESPITE EXISTING DEBT LEVELS, WE MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MOR E DEBT, WHICH WOULD INCREASE THE RISKS ASSOCIATED WITH OUR LEVERAGE We may be able to incur substantial amounts of additional debt in th e future, including debt under a future credit facility, which will have priorit y over senior debt with respect to security interests in the collateral, and deb t resulting from the issuance of additional notes |
| Although the terms of th e senior debt and any future credit facility may limit our ability to incu r additional debt, such terms do not and will not prohibit us from incurrin g substantial amounts of additional debt for specific purposes or under certai n circumstances |
| The incurrence of additional debt could adversely impact ou r ability to service payments on senior debt |
| If we do not generate sufficient cash flows to meet our deb t service and working capital requirements, we may need to seek additiona l financing |
| If we are unable to obtain financing on terms that are acceptable t o us, we could be forced to sell our assets or those of our subsidiaries to mak e up for any shortfall in our payment obligations under unfavorable circumstances |
| The indentures currently in place and any future credit facility will limit ou r ability to sell assets and also restrict use of the proceeds from any such sale |
| Therefore, even if forced to do so, we may not be able to sell assets quickl y enough or for sufficient amounts to enable us to meet our debt obligations |
| WE FACE NUMEROUS UNCERTAINTIES IN ESTIMATING OUR ECONOMICALLY RECOVERABLE COA L RESERVES, AND INACCURACIES IN OUR ESTIMATES COULD RESULT IN LOWER THAN EXPECTE D REVENUES, HIGHER THAN EXPECTED COSTS OR DECREASED PROFITABILITY We estimate that as of December 31, 2005, we control approximately 80 |
| 8 million tons of proven and probable in-place reserves, including approximatel y 38dtta5 million tons of reserves that are recoverable at this time |
| We base ou r reserves estimates on engineering, economic and geological data assembled an d analyzed by our staff, which includes various engineers and geologists, an d aspects of which have been reviewed by outside firms |
| Our estimates of ou r proven and probable reserves and our recoverable reserves, as well as the Btu o r sulfur content of our reserves, may be revised and updated to reflect th e resolution of uncertainties and assumptions, the production of coal from th e reserves and new drilling or other data received |
| In January 2006, we engaged Marshall Miller & Associates, Inc, a n independent mining engineering firm, to evaluate our reserves |
| Their evaluatio n efforts are ongoing and they have not yet submitted their final report |
| Futur e estimates of our reserves, including estimates prepared by Marshall Miller , could be materially different from current estimates |
| There are numerou s uncertainties inherent in estimating quantities and qualities of and costs t o mine recoverable reserves, including many factors beyond our control |
| Estimate s of economically recoverable coal reserves and net cash flows necessarily depen d upon a number of variable factors and assumptions, all of which may var y considerably from actual results such as: o geological and mining conditions which may not be full y identified by available exploration data or which may diffe r from experience in current operations; o historical production from the area compared with productio n from other similar producing areas; o the assumed effects of regulation and taxes by governmenta l agencies; and 21 o assumptions concerning coal prices, operating costs, minin g technology improvements, severance and excise tax, developmen t costs and reclamation costs |
| For these reasons, estimates of the economically recoverable quantitie s and qualities attributable to any particular group of properties , classifications of reserves based on risk of recovery and estimates of net cas h flows expected from particular reserves prepared by different engineers or b y the same engineers at different times may vary substantially |
| Actual coa l tonnage recovered from identified reserve areas or properties and revenues an d expenditures with respect to our reserves may vary materially from estimates |
| A s a result, the reserve estimates set forth in this report may differ materiall y from our actual reserves |
| Inaccuracies in our estimates related to our reserve s could result in lower than expected revenues, higher than expected costs, o r decreased profitability |
| OUR FUTURE SUCCESS DEPENDS UPON OUR ABILITY TO CONTINUE ACQUIRING AND DEVELOPIN G COAL RESERVES THAT ARE ECONOMICALLY RECOVERABLE AND TO RAISE THE CAPITA L NECESSARY TO FUND OUR EXPANSION Our recoverable reserves will decline as we produce coal |
| We have no t yet applied for the permits required or developed the mines necessary to use al l of the coal deposits under our mineral rights |
| Furthermore, we may not be abl e to mine all of our coal deposits as efficiently as we do at our curren t operations |
| Our future success depends upon our conducting successfu l exploration and development activities and acquiring properties containin g economically recoverable coal deposits |
| In addition, we must also generat e enough capital, either through our operations or through outside financing, t o mine these additional reserves |
| Our current strategy includes increasing ou r coal deposits base through acquisitions of other mineral rights, leases, o r producing properties and continuing to use our existing properties |
| Our abilit y to further expand our operations may be dependent on our ability to obtai n sufficient working capital, either through cash flows generated from operations , or financing activities, or both |
| Mining coal in Central Appalachia can presen t special difficulties |
| Characteristics of the land and permitting process i n Central Appalachia, where all of our mines are located, may adversely affect ou r mining operations, our costs and the ability of our customers to use the coa l that we mine |
| The geological characteristics of Central Appalachian coa l reserves, such as depth of overburden and coal seam thickness, make them comple x and costly to mine |
| As mines become depleted, replacement reserves may not b e available when required or, if available, may not be capable of being mined a t costs comparable to those characteristic of the depleting mines |
| In addition, a s compared to mines in the Powder River Basin, permitting, licensing and othe r environmental and regulatory requirements are more costly and time-consuming t o satisfy |
| These factors could materially adversely affect our mining operation s and costs, and our customers &apos abilities to use the coal we mine |
| OUR ABILITY TO IMPLEMENT OUR PLANNED DEVELOPMENT AND EXPLORATION PROJECTS I S DEPENDENT ON MANY FACTORS, INCLUDING THE ABILITY TO RECEIVE VARIOUS GOVERNMEN T PERMITS Our planned development and exploration projects and acquisitio n activities may not result in the acquisition of significant additional coa l deposits and we may not have continuing success developing additional mines |
| Fo r example, we may not be successful in acquiring contiguous properties that wil l leverage our existing facilities |
| In addition, in order to develop our coa l deposits, we must receive various governmental permits |
| For example, on Novembe r 10, 2005, two environmental groups filed a petition to halt the expansion o f surface mining activities on the New River Tract and surrounding areas |
| W e cannot predict whether we will continue to receive the permits necessary for u s to expand our operations |
| 22 DEFECTS IN TITLE OR LOSS OF ANY LEASEHOLD INTERESTS IN OUR PROPERTIES COUL D ADVERSELY AFFECT OUR ABILITY TO MINE THESE PROPERTIES We conduct, or plan to conduct, a significant part of our minin g operations on properties that we lease |
| A title defect or the loss of any leas e could adversely affect our ability to mine the associated reserves |
| Title t o most of our owned or leased properties and mineral rights is not usuall y verified until we make a commitment to develop a property, which may not occu r until after we have obtained necessary permits and completed exploration of th e property |
| In some cases, we rely on title information or representations an d warranties provided by our lessors or grantors |
| Our right to mine some of ou r reserves may be adversely affected if defects in title or boundaries exist or i f a lease expires |
| Any challenge to our title could delay the exploration an d development of the property and could ultimately result in the loss of some o r all of our interest in the property and could increase our costs |
| In addition , if we mine on property that we do not own or lease, we could incur liability fo r such mining |
| Some leases have minimum production requirements or require us t o commence mining in a specified term to retain the lease |
| Failure to meet thos e requirements could result in losses of prepaid royalties and, in some rar e cases, could result in a loss of the lease itself |
| DUE TO VARIABILITY IN COAL PRICES AND IN OUR COST OF PRODUCING COAL, AS WELL A S CERTAIN PROVISIONS IN OUR LONG TERM CONTRACTS, WE MAY BE UNABLE TO SELL COAL A T A PROFIT We typically sell our coal for a specified tonnage amount and at a negotiated price pursuant to short-term and long-term contracts |
| For the yea r ended December 31, 2005, 100prca of the coal we produced was sold under long-ter m contracts |
| Price adjustment, "e price reopener "e and other similar provisions i n long-term supply agreements may reduce the protection from short-term coal pric e volatility traditionally provided by such contracts |
| Two of our long-ter m contracts, representing 36prca of our sales in the year ended December 31, 2005 an d which expire at the end of 2007 and 2008, contain provisions allowing th e purchase price to be renegotiated or adjusted based on market prices at the tim e at periodic intervals |
| Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and lowe r our gross margins |
| Coal supply agreements also typically contain force majeur e provisions allowing temporary suspension of performance by us or our customer s during the duration of specified events beyond the control of the affecte d party |
| Most of our coal supply agreements contain provisions requiring us t o deliver coal meeting quality thresholds for certain characteristics such as Btu , sulfur content, ash content, hardness and ash fusion temperature |
| Failure t o meet these specifications could result in economic penalties, including pric e adjustments, the rejection of deliveries or, in the extreme, termination of th e contracts |
| Consequently, due to the risks mentioned above with respect t o long-term supply agreements, we may not achieve the revenue or profit we expec t to achieve from these sales commitments |
| In addition, we may not be able t o successfully convert these sales commitments into long-term supply agreements |
| The demand for coal products and, thus, the financia l condition and results of operations of companies in the coal industry, includin g us, are generally affected by macroeconomic fluctuations in the world econom y and the domestic and international demand for energy |
| In recent years, the pric e of coal has been at historically high levels, but these price levels may no t continue |
| Any material decrease in demand for coal could have a material advers e effect on our operations and profitability |
| WE DEPEND HEAVILY ON A SMALL NUMBER OF LARGE CUSTOMERS, THE LOSS OF ANY OF WHIC H WOULD ADVERSELY AFFECT OUR OPERATING RESULTS For the year ended December 31, 2005, we derived approximately 71prca o f our coal revenues from sales to our three largest customers |
| At December 31 , 2005, we had coal supply agreements with these customers that expire at variou s times through 2008 |
| When these agreements expire, we may not be 23 successful at renegotiating them and these customers may not continue t o purchase coal from us pursuant to long-term coal supply agreements |
| If a numbe r of these customers were to significantly reduce their purchases of coal from us , or if we were unable to sell coal to them on terms as favorable to us as th e terms under our current agreements, our financial condition and results o f operations could suffer materially |
| SIGNIFICANT COMPETITION FROM ENTITIES WITH GREATER RESOURCES COULD RESULT IN OU R FAILURE We operate in a highly competitive industry with national an d international energy resources companies |
| Some of our competitors have longe r operating histories and substantially greater financial and other resources tha n we do |
| Our competitors &apos use of their substantially greater resources coul d overwhelm our efforts to operate successfully and could cause our failure |
| THERE IS NO ASSURANCE THAT OUR LIMITED REVENUES WILL BE SUFFICIENT TO OPERAT E PROFITABLY, OR THAT WE WILL GENERATE GREATER REVENUES IN THE FUTURE We were formed to create a regional coal producer in Tennessee |
| We ha d no revenues from inception until the third quarter 2003 when we began minin g operations |
| We mus t be regarded as a risky venture with all of the unforeseen costs, expenses , problems, risks and difficulties to which such ventures are subject |
| Our coal sales for calendar 2005 were approximately dlra65dtta3 million |
| There is no assurance that we can achieve greater sales or generate profitabl e sales |
| We expect that many coal producers could produce and sell coal at cheape r prices per ton than our production cost rates, which could adversely affect ou r revenues and profits, if any |
| There is no assurance that we will ever operat e profitably |
| There is no assurance that we will generate continued revenues o r any profits, or that the market price of our common stock will be increase d thereby |
| IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUM E ADDITIONAL DEBT TO FINANCE FUTURE GROWTH, OUR SHAREHOLDERS &apos OWNERSHIP COULD B E DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED Our business strategy may include expansion through internal growth, o r by acquiring complementary businesses, or by establishing strategi c relationships with targeted customers |
| In order to do so or to fund our othe r activities, we may issue additional equity securities that could dilute ou r shareholders &apos stock percentage ownership |
| We may also assume additional debt an d incur impairment losses related to goodwill and other tangible assets if w e acquire another company and this could negatively impact our results o f operations |
| OUR INABILITY TO DIVERSIFY OUR OPERATIONS MAY SUBJECT US TO ECONOMI C FLUCTUATIONS WITHIN OUR INDUSTRY Our limited financial resources reduce the likelihood that we will b e able to diversify our operations |
| Our probable inability to diversify ou r activities into more than one business area will subject us to economi c fluctuations within a particular business or industry and therefore increase th e risks associated with our operations |
| CERTAIN PROVISIONS IN OUR SERIES A CONVERTIBLE PREFERRED STOCK MAY IMPACT OU R ABILITY TO OBTAIN ADDITIONAL FINANCING IN THE FUTURE In addition to cash flows generated from operations, we may need t o raise capital in the future through the issuance of securities |
| In order t o issue securities that rank senior to our Series A convertible preferred stock i n terms of liquidation preference, redemption rights or dividend rights, we mus t obtain the affirmative consent of holders of at least 75prca of the outstandin g shares of our Series A convertible 24 preferred stock |
| If we are unable to obtain the consent of these holders i n connection with future financings, we may be unable to raise additional capita l on acceptable terms, or at all |
| THE LOSS OF KEY MANAGEMENT PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS We are heavily dependent upon the skills, talents, and abilities of ou r executive officers and board of directors to implement our business plan |
| Give n the intense competition for qualified management personnel in our industry, th e loss of the services of any key management personnel may significantly an d detrimentally affect our business and prospects |
| We may not be able to retai n some or all of our key management personnel, and even if replaceable, it may b e time consuming and costly to recruit qualified replacement personnel |
| OUR DIRECTOR AND OFFICER INDEMNIFICATION POLICIES IN CONJUNCTION WITH TH E PROVISIONS OF FLORIDA LAW COULD RESULT IN SUBSTANTIAL UN-RECOUPABLE EXPENDITURE S AND REDUCED REMEDIES AGAINST DIRECTORS AND OFFICERS Florida Revised Statutes provide for the indemnification of ou r directors, officers, employees, and agents, under certain circumstances, agains t attorneyapstas fees and other expenses incurred by them in any litigation to whic h they become a party arising from their association with or activities on ou r behalf |
| We will also bear the expenses of such litigation for any of ou r directors, officers, employees, or agents, upon such personapstas promise to repa y us such amounts, if it is ultimately determined that such person was no t entitled to indemnification |
| This indemnification policy could result i n substantial expenditures by us that we will be unable to recoup |
| Florida Revised Statutes exclude personal liability of our directors t o us and our stockholders for monetary damages for breach of fiduciary duty excep t in certain specified circumstances |
| Accordingly, we will have a much mor e limited right of action against our directors than otherwise would be the case |
| This provision does not affect the liability of any director under federal o r applicable state securities laws |
| THERE IS NO ASSURANCE THAT WE WILL FIND PURCHASERS OF OUR PRODUCT AT PROFITABL E PRICES If we are unable to achieve supply contracts, or are unable to fin d buyers willing to purchase our coal at profitable prices, our revenues an d operating profits could suffer |
| THE COAL INDUSTRY IS INTENSELY COMPETITIVE, AND OUR FAILURE TO COMPET E EFFECTIVELY COULD REDUCE OUR REVENUE AND MARGINS, AND DELAY OR PREVENT OU R ABILITY TO SERVICE OUR DEBT We operate in a highly competitive industry with regional, national an d international energy resources companies |
| We compete based primarily on price , and we believe that the principal factors that determine the price for which ou r coal can be sold are: o competition from energy sources other than coal; o coal quality; o efficiency in extracting and transporting coal; and o proximity to customers |
| Some of our competitors have longer operating histories an d substantially greater financial and other resources than we do |
| Our failure t o compete effectively could reduce our revenues and margins, and delay or preven t our ability to make payments on our debt |
| 25 IF TRANSPORTATION FOR OUR COAL BECOMES UNAVAILABLE OR UNECONOMIC FOR OU R CUSTOMERS, OUR ABILITY TO SELL COAL COULD SUFFER Transportation costs represent a significant portion of the total cos t of delivered coal and, as a result, play a critical role in a customer &apos s purchasing decision |
| Increases in transportation costs could make our coal les s competitive as a source of energy or could make some of our operations les s competitive than other sources of coal |
| While US coal customer s typically arrange and pay for transportation of coal from the mine to the poin t of use, disruption of these transportation services because of weather-relate d problems, strikes, lock-outs or other events could temporarily impair ou r ability to supply coal to our customers and thus could adversely affect ou r results of operations |
| WE FACE RISKS INHERENT TO MINING WHICH COULD INCREASE THE COST OF OPERATING OU R BUSINESS Our mining operations are subject to conditions beyond our control tha t can delay coal deliveries or increase the cost of mining at particular mines fo r varying lengths of time |
| These conditions include weather and natural disasters , unexpected maintenance problems, key equipment failures, variations in coal sea m thickness, variations in the amount of rock and soil overlying the coal deposit , variations in rock and other natural materials and variations in geologi c conditions |
| A SHORTAGE OF SKILLED LABOR IN THE MINING INDUSTRY COULD POSE A RISK T O ACHIEVING OPTIMAL LABOR PRODUCTIVITY AND COMPETITIVE COSTS, WHICH COUL D ADVERSELY AFFECT OUR PROFITABILITY Efficient coal mining using modern techniques and equipment require s skilled laborers, preferably with at least a year of experience and proficienc y in multiple mining tasks |
| In order to support our planned expansio n opportunities, we intend to sponsor both in-house and vocational coal minin g programs at the local level in order to train additional skilled laborers |
| I n the event the shortage of experienced labor continues or worsens or we ar e unable to train the necessary amount of skilled laborers, there could be a n adverse impact on our labor productivity and costs and our ability to expan d production and therefore have a material adverse effect on our earnings |
| I n addition, we have supplemented our direct workforce through the use of contrac t miners |
| If our contract miners are unable to perform their duties as expected , we may experience temporary disruptions in our production |
| For example, i n October 2005, we terminated our agreement with one of our contract miners, an d as a result we were required to purchase coal to satisfy our sales requirements |
| We do not expect that this will have a material effect on our results o f operations for 2006 |
| However, if difficulties with our contract miners arise i n the future, there could be an adverse effect on our productivity and costs an d our ability to expand production and therefore have a material adverse effect o n our earnings |
| THE GOVERNMENT EXTENSIVELY REGULATES OUR MINING OPERATIONS, WHICH IMPOSE S SIGNIFICANT COSTS ON US, AND FUTURE REGULATIONS COULD INCREASE THOSE COSTS O R LIMIT OUR ABILITY TO PRODUCE COAL Federal, state and local authorities regulate the coal mining industr y with respect to matters such as employee health and safety, permitting an d licensing requirements, air quality standards, water pollution, plant an d wildlife protection, reclamation and restoration of mining properties afte r mining is completed, the discharge of materials into the environment, surfac e subsidence from underground mining and the effects that mining has o n groundwater quality and availability |
| In addition, legislation mandatin g specified benefits for retired coal miners affects our industry |
| Numerous governmental permits and approvals are required for minin g operations |
| We are required to prepare and present to federal, state or loca l authorities data pertaining to the effect or impact that any propose d exploration for or production of coal may have upon the environment |
| The costs , 26 liabilities and requirements associated with these regulations may be costly an d time-consuming and may delay commencement or continuation of exploration o r production operations |
| The possibility exists that new legislation and/o r regulations and orders may be adopted that may materially adversely affect ou r mining operations, our cost structure and/or our customers &apos ability to use coal |
| New legislation or administrative regulations (or judicial interpretations o f existing laws and regulations), including proposals related to the protection o f the environment that would further regulate and tax the coal industry, may als o require us or our customers to change operations significantly or incu r increased costs |
| The majority of our coal supply agreements contain provision s that allow a purchaser to terminate its contract if legislation is passed tha t either restricts the use or type of coal permissible at the purchaserapstas plant o r results in specified increases in the cost of coal or its use |
| These factors an d legislation, if enacted, could have a material adverse effect on our financia l condition and results of operations |
| In addition, the United States and over 16 0 other nations are signatories to the 1992 Framework Convention on Climate Chang e which is intended to limit emissions of greenhouse gases, such as carbo n dioxide |
| In December 1997, in Kyoto, Japan, the signatories to the conventio n established a binding set of emission targets for developed nations |
| Althoug h the specific emission targets vary from country to country, the United State s would be required to reduce emissions to by 5prca from 1990 levels over a five-yea r period from 2008 through 2012 |
| Although the United States has not ratified th e emission targets and no comprehensive regulations focusing on US greenhous e gas emissions are in place, these restrictions, whether through ratification o f the emission targets or other efforts to stabilize or reduce greenhouse ga s emissions, could adversely impact the price of and demand for coal |
| According t o the EIAapstas "e Emissions of Greenhouse Gases in the United States 2001, "e coa l accounts for approximately one-third of carbon dioxide emissions in the Unite d States, and efforts to control carbon dioxide emissions could result in reduce d use of coal if electricity generators switch to sources of fuel with lowe r carbon dioxide emissions |
| Further developments in connection with regulations o r other limits on carbon dioxide emissions could have a material adverse effect o n our financial condition or results of operations |
| IF THE COAL INDUSTRY EXPERIENCES OVERCAPACITY IN THE FUTURE, OUR PROFITABILIT Y COULD BE IMPAIRED During the mid-1970s and early 1980s, a growing coal market an d increased demand for coal attracted new investors to the coal industry, spurre d the development of new mines and resulted in added production capacit y throughout the industry, all of which led to increased competition and lowe r coal prices |
| Similarly, an increase in future coal prices could encourage th e development of expanded capacity by new or existing coal producers |
| An y overcapacity could reduce coal prices in the future |
| OUR OPERATIONS COULD BE ADVERSELY AFFECTED IF WE FAIL TO MAINTAIN REQUIRE D BONDS Federal and state laws require bonds or cash deposits to secure ou r obligations to reclaim lands used for mining, to pay federal and state workers &apos compensation, to secure coal lease obligations and to satisfy othe r miscellaneous obligations |
| At December 31, 2005, dlra257cmam500 was on deposit wit h OSM for reclamation bonds related to our Patterson Mountain mining operations |
| In addition, we have approximately dlra6dtta14 million of cash invested i n certificates of deposit, against which irrevocable bank letters of credit ar e written in favor of OSM and have posted a dlra700cmam000 letter of credit secured b y our executive office building in favor of OSM Reclamation bonds are typicall y renewable on a yearly basis if they are not posted with cash |
| Our failure t o maintain, or inability to acquire, bonds that are required by state and federa l law would have a material adverse effect on us |
| That failure could result from a variety of factors including the following: o lack of availability, higher expense or unfavorable marke t terms of new bonds; o restrictions on the availability of collateral for current an d future third-party bond issuers under the terms of ou r indenture or new credit facility; and o the exercise by third-party bond issuers of their right t o refuse to renew the bonds |
| 27 TERRORIST THREATS AND ENVIRONMENTAL ZEALOTRY MAY NEGATIVELY AFFECT OUR BUSINESS , FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our business is affected by general economic conditions, fluctuation s in consumer confidence and spending, and market liquidity, which can decline a s a result of numerous factors outside of our control, such as terrorist attack s and acts of war |
| Our business also may be affected by environmental activist s who engage in activities intended to disrupt our business operations |
| I n particular, environmental activists have conducted protests outside the homes o f certain of our executives, including our Chief Executive Officer |
| We have spen t approximately dlra600cmam000 during the year ended December 31, 2005 on securit y measures and related legal fees, largely as a result of the actions of som e environmental activists |
| Future terrorist attacks against US targets, rumor s or threats of war, actual conflicts involving the United States or its allies , or military or trade disruptions affecting our customers may materiall y adversely affect our operations |
| As a result, there could be delays or losses i n transportation and deliveries of coal to our customers, decreased sales of ou r coal and extension of time for payment of accounts receivable from ou r customers |
| Strategic targets such as energy-related assets may be at greate r risk of future terrorist attacks than other targets in the United States |
| I n addition, disruption or significant increases in energy prices could result i n government-imposed price controls |
| It is possible that any, or a combination, o f these occurrences could have a material adverse effect on our business , financial condition and results of operations |
| A SUBSTANTIAL OR EXTENDED DECLINE IN COAL PRICES COULD REDUCE OUR REVENUES AN D THE VALUE OF OUR COAL RESERVES The prices we charge for coal depend upon factors beyond our control , including: o the supply of, and demand for, domestic and foreign coal; o the demand for electricity; o the proximity to, capacity of, and cost of transportatio n facilities; o domestic and foreign governmental regulations and taxes; o air emission standards for coal-fired power plants; o regulatory, administrative and court decisions; o the price and availability of alternative fuels, including th e effects of technological developments; and o the effect of worldwide energy conservation measures |
| Our results of operations are dependent upon the prices we charge fo r our coal as well as our ability to improve productivity and control costs |
| Decreased demand would cause spot prices to decline and require us to increas e productivity and lower costs in order to maintain our margins |
| If we are no t able to maintain our margins, our operating results could be adversely affected |
| Therefore, price declines may adversely affect operating results for futur e periods and our ability to generate cash flows necessary to improve productivit y and invest in operations |
| OUR ABILITY TO COLLECT PAYMENTS FROM OUR CUSTOMERS COULD BE IMPAIRED DUE T O CREDIT ISSUES Our ability to receive payment for coal sold and delivered depends o n the continued creditworthiness of our customers |
| Our customer base may not b e highly creditworthy |
| If deterioration of the creditworthiness of customers o r trading counterparties occurs, our business could be adversely affected |
| 28 RISKS RELATED TO OUR COMMON STOCK A LIMITED PUBLIC MARKET EXISTS FOR OUR SECURITIES, WHICH MAY RESTRICT OU R SHAREHOLDERS &apos ABILITY TO TRADE IN OUR STOCK There is a limited public market for our common stock and no assuranc e can be given that a market will continue or that a shareholder will ever be abl e to liquidate his investment without considerable delay, if at all |
| Factors such as those discussed in this sectio n may have a significant impact upon the market price of our securities |
| Due t o the low price of our securities, many brokerage firms may not be willing t o effect transactions in our securities |
| Even if a purchaser finds a broke r willing to effect a transaction in our securities, the combination of brokerag e commissions, state transfer taxes, if any, and any other selling costs ma y exceed the selling price |
| Further, many lending institutions will not permit th e use of such securities as collateral for any loans |
| WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK Historically, we have not paid dividends on shares of our common stoc k and do not anticipate paying any cash dividends on shares of our common stock i n the foreseeable future |
| The terms of the indenture related to our 10dtta5prca Senio r Secured Notes due 2010 and any future credit facility will each restrict ou r ability to pay dividends on shares of our common stock |
| OUR ISSUANCE OF MORE SHARES OF COMMON STOCK MAY RESULT IN THE LOSS OF CONTROL B Y PRESENT MANAGEMENT AND SHAREHOLDERS We may issue further shares as consideration for cash, assets o r services out of our authorized but not issued common stock that could, upo n issuance, represent a majority of our voting power and equity |
| The result o f such an issuance would be that those new shareholders and management woul d control us, and unknown persons could replace our management at that time |
| Suc h an occurrence would result in a greatly reduced percentage of ownership of us b y our current shareholders |
| WE OPERATE IN AN INDUSTRY THAT IS SUBJECT TO SIGNIFICANT FLUCTUATIONS I N OPERATING RESULTS FROM QUARTER TO QUARTER THAT MAY RESULT IN UNEXPECTE D REDUCTIONS IN REVENUE AND STOCK PRICE VOLATILITY Factors that may influence our quarterly operating results include: o the worldwide demand for coal; o the price of coal; o the supply of coal and other competitive factors; o the costs to mine and transport coal; o the ability to obtain new mining permits; o the costs of reclamation of previously mined properties; and o industry competition |
| Due to these factors, it is possible that in some quarters ou r operating results may be below our shareholders &apos expectations and those o f public market analysts |
| If this occurs, the price of our common stock woul d likely be adversely affected |
| OUR STOCK PRICE MAY DECREASE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AN D CAUSE OUR SHAREHOLDERS TO SUFFER SIGNIFICANT LOSSES The following factors could cause the market price of our common stoc k to decrease, perhaps substantially: o the failure of our quarterly operating results to mee t expectations of investors or securities analysts; 29 o adverse developments in the financial markets, the coal an d energy industries and the worldwide or regional economies; o interest rates; o changes in accounting principles; o sales of common stock by existing security holders; o announcements of key developments by our competitors; and o the reaction of markets and securities analysts t o announcements and developments involving our Company |
| IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK OR ASSUM E ADDITIONAL DEBT TO FINANCE FUTURE GROWTH, OUR SHAREHOLDERS &apos OWNERSHIP COULD B E DILUTED OR OUR EARNINGS COULD BE ADVERSELY IMPACTED Our business strategy may include expansion through internal growth b y acquiring complementary businesses or by establishing strategic relationship s with targeted customers |
| In order to do so, or to fund our other activities, w e may issue additional equity securities that could dilute our shareholders &apos stoc k percentage ownership |
| We may also assume additional debt and incur impairmen t losses related to goodwill and other tangible assets if we acquire anothe r company which could negatively impact our results of operations |
| OFFICERS AND DIRECTORS OWN A SIGNIFICANT PORTION OF OUR COMMON STOCK, WHIC H COULD LIMIT OUR SHAREHOLDERS &apos ABILITY TO INFLUENCE THE OUTCOME OF KE Y TRANSACTIONS As of March 28, 2006, our officers and directors and their affiliate s owned approximately 42dtta8prca of our outstanding voting shares |
| As a result, ou r officers and directors are able to exert considerable influence over the outcom e of any matters submitted to a vote of the holders of our common stock, includin g the election of our Board of Directors |
| The voting power of these shareholder s could also discourage others from seeking to acquire control of us through th e purchase of our common stock which might depress the price of our common stock |