<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended
June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-60599
PEN HOLDINGS, INC.
----------------------
(Exact Name Of Registrant As Specified in Its Charter)
Tennessee 62-0852576
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5110 Maryland Way, Suite 300
Brentwood, Tennessee 37027
------------------------- -----
(Address Of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (615) 371-7300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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. Yes |_| No |_| N/A |X|
Indicate the number of shares of each of the registrant's
classes of common stock, as of the latest practicable
date: As of August 26, 1998: Class I Common Stock, $.01
par value per share, 4,290,000 shares and
Class II Common Stock, $.01 par value per share, 177,550 shares
<PAGE> 2
]
PEN HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheet - June 30, 1998 and December 31, 1997 ................................. 1
Consolidated Statement of Income - Three Months Ended
June 30, 1998 and 1997 and Six Months Ended June 30, 1998 and 1997........................... 2
Consolidated Statements of changes In Shareholders' Equity ....................................... 3
Consolidated Statements of Cash Flows - Six Months Ended June 30,
1998 and 1997................................................................................ 4
Notes to Condensed Consolidated Financial Statements.............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 17
Item 2. Changes in Securities and Use of Proceeds.................................................... 17
Item 3. Defaults Upon Senior Securities.............................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 17
Item 5. Other Information............................................................................ 17
Item 6. Exhibits and Reports on Form 8-K............................................................. 17
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 23,722 $ 6,151
Accounts receivable (net of allowance for doubtful accounts of
$456 and 415 respectively) ................................................. 15,292 17,497
Inventories ................................................................ 6,599 4,760
Deferred income taxes ...................................................... 1,160 1,160
Refundable income taxes .................................................... 259 --
Net assets to be disposed .................................................. 21 4
Other assets ............................................................... 1,487 2,315
-------- --------
Total current assets .................................................... 48,540 31,887
Investment in unconsolidated affiliated companies ............................ 4,787 5,393
Coal reserves and mine development costs, net ................................ 136,620 138,502
Property, plant and equipment, net ........................................... 35,058 34,013
Long-term investments ........................................................ 13,872 13,323
Net assets to be disposed .................................................... 566 566
Other assets ................................................................. 3,506 1,163
-------- --------
242,949 224,847
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................................... $ 100 $ 11,177
Current maturities of capital leases ....................................... 3,559 3,936
Accounts payable ........................................................... 7,385 7,704
Accrued expenses ........................................................... 4,144 5,090
Income taxes payable ....................................................... -- 1,047
-------- --------
Total current liabilities ............................................... 15,188 28,954
Long-term debt ............................................................... 103,281 68,440
Long-term capital leases ..................................................... 3,172 2,818
Deferred income taxes ........................................................ 59,518 59,891
Other liabilities ............................................................ 3,594 3,817
-------- --------
Total liabilities ....................................................... 184,753 163,920
-------- --------
Mandatorily redeemable preferred stock (Note 8) .............................. 17,958 17,097
Redeemable common stock warrants (Note 9) .................................... -- 2,344
Guaranties, commitments and contingencies (Note 11)
Shareholders' equity:
Class I common stock, $.01 par value; 7,800,000 shares authorized, 4,290,000
shares issued and outstanding ........................................... 43 43
Class II common stock, $.01 par value; 200,000 shares authorized, 177,550
shares issued and outstanding ........................................... 2 2
Additional paid-in capital ................................................. 19 19
Retained earnings .......................................................... 40,174 41,422
-------- --------
Total shareholders' equity .............................................. 40,238 41,486
-------- --------
$242,949 $224,847
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
-1-
<PAGE> 4
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ----------------------
1998 1997 1998 1997
----------- ----------- ------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues ....................................................... $ 38,293 $ 43,976 $ 78,841 $ 88,622
Operating expenses:
Cost of sales ................................................ 34,874 38,698 72,097 80,417
Selling, general and administrative .......................... 939 1,091 2,249 2,714
-------- -------- -------- --------
Operating income ............................................... 2,480 4,187 4,495 5,491
Other (income) expense:
Interest expense ............................................. 1,866 1,946 3,612 4,116
Interest income .............................................. (410) (288) (796) (579)
Other ........................................................ 208 (817) (521) (2,119)
-------- -------- -------- --------
Income from continuing operations before income taxes .......... 816 3,346 2,200 4,073
Provision for income taxes ..................................... 285 979 721 1,226
-------- -------- -------- --------
Income from continuing operations .............................. 531 2,367 1,479 2,847
Loss on disposal of discontinued operations (less applicable
income tax credits of $26 and $53 and minority interest of
$6 and $14 for the three months and six months ended
June 30, 1997, respectively .................................. -- (9) -- (27)
-------- -------- -------- --------
Income before Extraordinary item ............................... 531 2,358 1,479 2,820
Extraordinary item - loss related to early retirement of debt,
less applicable Income tax credits of $962 in the three months
and six months ended June 30, 1998 ........................... (1,866) (1,866)
-------- -------- -------- --------
Net income (loss) .............................................. $ (1,335) $ 2,358 $ (387) $ 2,820
======== ======== ======== ========
Income per share of common stock (Note 2):
Basic
Net income before extraordinary item ...................... $ .02 $ .43 $ .14 $ .44
Extraordinary item, net of taxes .......................... $ (.42) -- (.42) --
-------- -------- -------- --------
$ (.40) $ .43 $ (.28) $ .44
======== ======== ======== ========
Diluted
Net income before extraordinary item ...................... $ .02 $ .31 $ .14 $ .38
Extraordinary item, net of taxes .......................... $ (.42) -- (.42) --
-------- -------- -------- --------
$ (.40) $ .31 $ (.28) $ .38
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
-2-
<PAGE> 5
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
CLASS I CLASS II
COMMON STOCK COMMON STOCK ADDITIONAL
--------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNTS SHARES AMOUNTS CAPITAL EARNINGS TOTAL
------ ------- ------ ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997....................... 4,290,000 $ 43 177,550 $ 2 $ 19 $41,422 $41,486
Accretion of Preferred
Stock (unaudited) ......... (861) (861)
Net Income (loss)
(unaudited).............. (387) (387)
--------- ---- --------- --- ---- ------- -------
Balance at June 30, 1998
(unaudited).............. 4,290,000 $ 43 177,550 $ 2 $ 19 $40,174 $40,238
========= ==== ========= === ==== ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE> 6
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
----------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ (387) $ 2,820
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation, depletion and amortization................................... 7,208 7,661
Equity in net losses of affiliates......................................... (384) (71)
Deferred income taxes...................................................... (373) (755)
Gain on sale of equipment.................................................. (39) (1,530)
Interest income on long-term investments................................... (549) (524)
Extraordinary item, net of tax............................................. 1,866 -
------- -------
Cash generated from operations, before changes in assets and liabilities....... 7,342 7,601
Changes in assets and liabilities, net of effects from dispositions:
Accounts receivable......................................................... 2,205 3,655
Inventories................................................................. (1,839) (940)
Accounts payable and accrued expenses....................................... (1,609) 68
Other....................................................................... (2,844) 1,329
------- -------
Net cash provided by operating activities................................... 3,255 11,713
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................... (3,963) (1,747)
Proceeds from sale of equipment................................................ 73 2,664
Distributions from affiliated companies........................................ 880 201
------- -------
Net cash provided (used) by investing activities............................... (3,010) 1,118
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bonds................................................ 99,216 -
Buyout of stock warrants....................................................... (3,000) -
Accretion of stock warrants.................................................... 73 110
Amortization of original issue discount........................................ 227 265
Purchase of treasury stock..................................................... - (14)
Repayment of long-term debt.................................................... (77,053) (5,180)
Repayment of capital leases.................................................... (2,137) (1,891)
Net borrowings (payments) under line of credit agreements and current
notes payable.............................................................. - (5,185)
------- -------
Net cash provided (used) by financing activities............................... 17,326 (11,895)
------- -------
Net increase (decrease) in cash................................................ 17,571 936
Cash and cash equivalents at beginning of period............................... 6,151 1,885
------- -------
Cash and cash equivalents at end of period..................................... $23,722 $ 2,821
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.................................................................... $ 4,142 $ 3,396
Income Taxes................................................................ 1,445 1,254
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE> 7
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS:
DESCRIPTION OF THE BUSINESS
Pen Holdings, Inc. ("Pen Holdings") and its consolidated subsidiaries
(references to "the Company" refer to Pen Holdings and its consolidated
subsidiaries) is primarily engaged in the mining and sale of coal, selling
predominantly to utility companies. The Company also receives royalty income
from coal reserves leased to other companies. The Company's coal reserves and
mining operations are in Kentucky and West Virginia. The Company also processes,
warehouses, and sells cotton and cottonseed.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its majority and wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Investments in affiliated enterprises in which the Company owns less than a
controlling interest are presented under the equity basis of accounting
representing the Company's investment in affiliates, reduced by goodwill
amortization and increased (decreased) by the Company's proportionate equity in
the net income (losses) of the unconsolidated affiliates.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements have been prepared without
audit, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes that
the disclosures herein are adequate to make information presented not
misleading. These statements should be read in conjunction with the Company's
financial statements for the year ended December 31, 1997, which are included in
Pen Holdings registration statement on Form S-4 filed with the Securities and
Exchange Commission on August 4, 1998 (File No. 333-60599) (the "Form S-4"). The
results of operations for the three or six month periods are not necessarily
indicative of results for the full year.
In the opinion of management, the accompanying interim financial statements
contain all adjustments of a normal and recurring nature necessary for a fair
presentation of the Company's financial position as of June 30, 1998, its
results of operations for three and six months ended June 30, 1998 and 1997, and
its cash flows for the six months ended June 30, 1998 and 1997.
INVENTORIES
Inventories, consisting of coal and cottonseed, are stated at the lower of
cost or market with cost being determined on the first-in, first-out method.
LONG-TERM INVESTMENTS
Long-term investments are considered as held to maturity and are carried at
amortized cost.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash, accounts receivable, long-term
investments and other off-balance sheet financial instruments. The Company
maintains cash and cash equivalents mostly in large financial institutions.
Concentration of credit risk with respect to trade receivables is limited due to
the diversity of the Company's business and customer base. Long-term investments
principally consist of U.S. Government obligations.
The Company performs continuing credit evaluations of its customers and does
not generally require collateral. Historically, the Company has not experienced
significant losses related to individual customers in any particular industry or
geographic region.
-5-
<PAGE> 8
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable,
short-term notes payable, revolving credit loans and accounts payable
approximate fair value due to the short-term maturities of these assets and
liabilities. The carrying amount of long-term debt approximates fair value as
the interest rates on substantially all long-term debt are variable. The
carrying amount of mandatorily redeemable stock approximates fair value as the
dividend rate is the equivalent of a market rate for securities of that type.
DEBT ISSUANCE COSTS
Debt issuance costs are recorded as noncurrent assets and amortized over the
lives of related debt.
COAL RESERVES AND MINE DEVELOPMENT COSTS
Depletion of coal reserves and certain mine development costs are recognized
based on tons mined during the year as a percentage of total estimated
recoverable tons.
PROPERTY, PLANT AND EQUIPMENT
Equipment and other properties are recorded at cost and depreciated over the
estimated useful lives of the respective assets using the straight-line method.
Amortization of capitalized lease assets is included in depreciation expense and
accumulated depreciation. Depreciation expense was $6,881,000 and $7,336,000 in
the six months ended June 30, 1998 and 1997, respectively, and $3,423,000 and
$3,739,000 in the three months ended June 30, 1998 and 1997. Estimated useful
lives are as follows:
Barges........................................... 25 years
Building and improvements........................ 10-20 years
River terminals.................................. 10-20 years
Machinery and equipment.......................... 5-10 years
GOODWILL AND LONG-LIVED ASSETS
Goodwill related to the Company's investment in affiliated companies is
amortized using the straight-line method over 25 years. Goodwill is included in
investment in unconsolidated affiliated companies in the consolidated balance
sheet. The Company periodically reviews the recoverability of all long-lived
assets using a cash flow analysis. If impairment of value exists, a loss is
recognized. No adjustment for impairment was necessary at June 30, 1998.
RECLAMATION COSTS
The Company is subject to various laws and regulations which require the
restoration and reclamation of mined properties. The Company accrues the
reclamation costs for surface mine restoration as the mining operations occur.
Reclamation costs associated with site restoration for the Company's coal
preparation plant are accrued over the estimated useful life of the plant using
the units of production method.
INCOME TAXES
Provisions for federal and state income taxes are calculated on reported
financial statement pretax income based on current tax law. Deferred income
taxes are provided for the temporary differences between the financial reporting
basis and income tax basis of the Company's assets and liabilities. The
Company's temporary differences consist primarily of excess financial accounting
basis over tax basis of acquired coal reserves, depreciation, depletion and
timing of certain revenue and expense recognition.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
-6-
<PAGE> 9
INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS
128 requires companies with complex capital structures that have common stock or
common stock equivalents to present both basic and diluted earnings per share
("EPS") on the face of the income statement. The presentation of basic EPS
replaces the presentation of primary EPS previously required by Accounting
Principles Board Opinion No. 15 ("APB 15"). Basic EPS is calculated as income
available to common stockholders divided by the weighted average number of
shares outstanding during the period. Diluted EPS (previously referred to as
fully diluted EPS) is calculated using the "if converted" method for convertible
securities and the treasury stock method for options and warrants as prescribed
by APB 15. Weighted-average shares outstanding for computing income per share
are as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item......................... $ 531 $2,358
Less: Preferred stock
dividends.................... (431) (424)
------- ------
INCOME PER SHARE -- BASIC
Income available to common
Shareholders..............
Income available to
common Shareholders:
Income before
extraordinary Item..... 100 4,468 $ 0.02 1,934 4,468 $0.43
Extraordinary item..... (1,866) 4,468 (0.42)
------ -----
$(0.40) $0.43
====== =====
EFFECT OF DILUTIVE SECURITIES
Convertible preferred
stock.................... 424 2,950 0.14
Common stock warrants..... 55 326 0.17
INCOME PER SHARE - DILUTED
Income available to common
Shareholders plus assumed
conversions:
Income before
extraordinary item.... 100 4,468 $ 0.02 2,413 7,744 0.31
Extraordinary item..... (1,866) 4,468 (0.42) -
------- ----- ------ -----
$(1,766) $(0.40) $2,413 $0.31
======= ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item......................... $1,479 $2,820
Less: Preferred stock
dividends.................... (861) (848)
------ ----
INCOME PER SHARE -- BASIC
Income available to common
Shareholders:
Income before
extraordinary item....... 618 4,468 $ 0.14 1,972 4,479 $0.44
Extraordinary item....... (1,866) 4,468 (0.42)
----- -----
$(0.28) $0.44
====== =====
EFFECT OF DILUTIVE SECURITIES
Convertible preferred
stock.................... 848 2,950 0.29
Common stock warrants.... 110 326 0.34
INCOME PER SHARE - DILUTED
Income available to common
Shareholders plus assumed
conversions:
Income before
extraordinary item...... 618 4,468 $ 0.14 2,930 7,755 0.38
Extraordinary item...... (1,866) 4,468 (0.42)
------ ----- ------ -----
$(1,248) $(0.28) $2,930 $0.38
====== ====== ====== =====
</TABLE>
The mandatorily redeemable preferred stock (Note 8) and common stock
warrants (Note 9) were outstanding during the six months ended June 30, 1998,
but were not included in the computation of diluted income per share because
their inclusion would have been anti-dilutive. The effect on income per share
from discontinued operations in 1997 was insignificant.
-7-
<PAGE> 10
NOTE 3--INVENTORIES:
Inventories consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
Coal ........................ $ 6,167 $ 3,990
Cottonseed .................. 432 770
--------- ---------
$ 6,599 $ 4,760
========= =========
NOTE 4--COAL RESERVES AND MINE DEVELOPMENT COSTS:
Coal reserves and mine development costs consist of the following (in
thousands):
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
Coal reserves ............. $ 147,953 $ 147,953
Mine development costs .... 10,972 10,387
--------- ---------
158,925 158,340
Accumulated depletion ..... (22,305) (19,838)
--------- ---------
$ 136,620 $ 138,502
========= =========
NOTE 5--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
Machinery and equipment ... $ 49,406 $ 46,453
River terminals ........... 11,488 11,488
Buildings ................. 5,613 5,595
Coal preparation plant .... 6,298 6,351
Cotton gins and warehouses 1,349 1,349
Other ..................... 4,289 2,733
--------- ---------
78,443 73,969
Accumulated depreciation .. (43,385) (39,956)
--------- ---------
$ 35,058 $ 34,013
========= =========
NOTE 6--REVOLVING LINES OF CREDIT:
The Company has a revolving line of credit under its current credit
facilities with credit commitments from the Company's lenders in an aggregate
principal amount equal to $40,000,000. The credit facility expires in June 2003.
The borrowings under the credit facility are secured by certain of the Company's
and its subsidiaries' assets, certain contracts of the Company and its
subsidiaries, and the Company's and its subsidiaries' inventories and
receivables. Borrowings bear interest at a variable rate based on either LIBOR
(an effective rate of 7.41% at June 30, 1998) or the lender's prime lending rate
(an effective rate of 9.25% at June 30, 1998). These agreements contain minimum
operating and financial ratios and covenants as defined in the agreements.
-8-
<PAGE> 11
NOTE 7--LONG TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- ----------------
<S> <C> <C>
Senior 9-7/8% Notes (the "Senior Notes") due 2008 in the aggregate
principal amount of $100,000,000. On June 8, 1998, Pen Holdings issued
the Senior Notes which accrue interest at 9-7/8%, payable
semi-annually in June and December through the maturity date of June
15, 2008. The entire principal amount is due at the maturity date. The
Senior Notes were issued with an aggregate original issue discount of
$784,000, which is being amortized over the ten year term of the
Senior Notes. The Senior Notes are general unsecured obligations of
Pen Holdings ranking pari passu in right of payment with all existing
and future unsubordinated indebtedness of the Company. The Senior
Notes are unconditionally guaranteed (the "Guarantees") on a senior
unsecured basis, as to the payment of principal, premium, if any, and
interest, fully and unconditionally, joint and severally, by certain
of Pen Holdings' subsidiaries (the "Guarantors"). The Guarantees will
rank pari passu in right of payment with all existing and future
unsubordinated indebtedness of the Guarantors and senior in right of
payment to all existing and future indebtedness of the Guarantors. The
Senior Notes are redeemable at the option of Pen Holdings, in whole or
in part, at any time on or after June 15, 2003 at premiums to face
value identified in the Indenture by and among Pen Holdings, the
Guarantees, and The Bank of New York, as Trustee, dated June 8, 1998
(the "Indenture"), relating to the Senior Notes. $ 99,222
Notes payable secured by coal reserves, land, buildings, and equipment.
Monthly payments of $708,000 plus interest was due through August
2001, at which time any remaining balance was due. Additional annual
principal payments are required if the Company's cash flow exceeds
certain amounts defined in the loan agreement. The interest rate was
variable based on LIBOR. This indebtedness was repaid with proceeds
from the issuance of the Senior Notes in June 1998...................... $ 63,271
Notes payable secured by coal reserves. Payments of interest only at the
lender's prime lending rate (8.50% at March 31, 1998) were due
monthly through December 1999. Monthly principal payments of $42,000
plus interest were due beginning January 2000 and were to increase to
$125,000 per month in January 2001 through December 2007. This
indebtedness was repaid with proceeds from the issuance of the Senior
Notes in June 1998...................................................... - 11,000
Notes payable secured by a lien on an office building which serves as
the Company's headquarters, with a net book value of $3,106,000,
payable in monthly installments of $37,000 through 2016. Interest
included in the monthly installments is a fixed rate of 8.33%........... 4,159 4,205
Notes payable secured by liens on land, buildings and equipment of a
cotton gin and warehouses with a net book value of $2,296,000,
payable in monthly installments of $20,000 through 2000, including
interest at fixed rates of 8.20%. This indebtedness was repaid with
proceeds from the issuance of the Senior Notes in June 1998............. - 1,141
---------- ---------
Total long-term debt....................................................... 103,381 79,617
Current maturities of long-term debt....................................... (100) (11,177)
---------- ---------
$ 103,281 $ 68,440
========== =========
</TABLE>
The Indenture for the Senior Notes contains various covenants, the most
significant of which restrict the Company's ability to incur certain forms of
additional indebtedness, pay dividends or transfer or sell assets except in the
ordinary course of business. The proceeds from the issuance of the Senior Notes
were used to repay previously existing indebtedness, redeem warrants on the
Company's common stock and provide working capital for future development of
mining properties. Certain of the Company's other loan agreements contain
minimum operating and financial ratios and covenants as defined in the separate
agreements. The Company was in compliance with all covenants during the six
months ended June 30, 1998.
NOTE 8--MANDATORILY REDEEMABLE PREFERRED STOCK:
The Company issued 10,000 shares of convertible preferred stock with a face
value of $13,650,000 in January 1996. No dividends accrue from the date of
issuance through December 2000. Beginning in January 2001, dividends will accrue
at 25.25% for a five-year period. The aggregate amount of $17,233,000 in
dividends which will accrue from 2001 through 2006 is being recorded evenly from
the date of issuance in 1996 through the redemption date in 2006. The preferred
stock calls for mandatory redemption in 2006. The preferred stock will be
redeemed at that time by the issuance of a note payable which amortizes over the
ten years following the redemption. The preferred stock is convertible, at the
option of the holder, into 2,950,000 shares of Class I common stock. The
conversion feature is exercisable in January 2001 and expires in January 2002.
No dividends may be paid on any class of common stock prior to the full
redemption of the convertible preferred stock. The convertible preferred stock
does not contain any voting rights.
-9-
<PAGE> 12
NOTE 9--SHAREHOLDERS' EQUITY:
COMMON STOCK
No Shares Class I common stock may be issued until the mandatorily
redeemable preferred stock is redeemed in full. Each holder of Class I common
stock has the option to sell to the Company 100% of the stock held at a price of
$.01 per share. This option is exercisable beginning January 2005 and lapses
upon conversion of the convertible preferred stock to Class I common stock.
The 200,000 shares of authorized Class II common stock were issued in 1996
under the Pen Holdings, Inc. Stock Purchase Plan dated June 1, 1996 to various
officers of the Company. In 1997, 22,450 shares were repurchased for $13,650 by
the Company from one of the officers who resigned. The shares were concurrently
canceled.
STOCK WARRANTS
The Company issued warrants to purchase 326,772 shares of Class I common
stock in January 1996 to certain financial institutions with which the Company
had a borrowing relationship in connection with Pen Holdings' recapitalization
in 1995. The exercise price of the warrants equaled the fair value of the Class
I common stock at the date of issuance. The warrants were exercisable beginning
January 2001 at $.01 per share. The warrants were to expire January 2006. The
Company repurchased these warrants for $3,000,000 (minimum redemption value
identified in the warrant agreement) in connection with the issuance of the
Senior Notes on June 8, 1998. The Company recorded the present value of its
minimum obligation for repurchase of the warrants as redeemable common stock
warrants and a corresponding discount in the underlying debt. The discount was
being amortized as additional interest expense on a straight-line basis through
January 2001.
NOTE 10--EXTRAORDINARY ITEM:
The Company recorded an extraordinary charge which represents the after-tax
impact of (i) the write-off of unamortized loan costs and (ii) the write-off of
unamortized original issue discount and repurchase of redeemable common stock
warrants on the debt that was repaid with the proceeds from the issuance of the
Senior Notes.
NOTE 11--GUARANTIES, COMMITMENTS AND CONTINGENCIES:
The Coal Industry Retiree Health Benefits Act of 1992 ("CIRHBA") requires
companies currently operating in the coal mining industry to subsidize the
healthcare premiums of retired coal miners and their beneficiaries. The Social
Security Administration assigns miners and their beneficiaries to the coal
companies with which they were formerly employed or related. Until recently, the
Company believed that it fell within the scope of CIRHBA. Therefore, the Company
had established a reserve to satisfy the healthcare premiums of those miners and
their beneficiaries which have been assigned to the Company. However, on June
25, 1998, the U.S. Supreme Court held in Eastern Enterprises v. APFEL,
Commissioner of Social Security et al., that the assignment of miners under
CIRHBA to certain coal companies violated certain provisions of the U.S.
Constitution. The Company believes that it is in the class of coal companies to
which the Constitutional prohibitions to CIRHBA apply. Therefore, the Company is
no longer making contributions into its CIRHBA reserves. At the time of the
Eastern Enterprises decision, the Company believed that the reserves it had
established were sufficient to satisfy its obligations to the miners then
assigned to it and those which are reasonably foreseeable to be assigned to it
in the future. Because the Eastern Enterprises decision is very recent, the
Company is continuing to review its CIRHBA policies.
The Company has filed a petition in U.S. Tax Court challenging the Internal
Revenue Service deficiency notices related to disputes involving the Company's
federal income tax returns for the years 1982-1989. This matter is more fully
described in the Company's annual financial statements, which are contained in
the Form S-4.
There are legal proceedings pending against the Company arising from the
normal course of business. Management of the Company and its legal counsel
handling such matters do not expect any of these matters to have a material
effect on the Company's financial position or results of operations.
-10-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL POSITION
The statements contained in this Report that are not historical facts are
"forward looking statements" (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which statements can be identified by the use of
forward looking terminology such as "believes," "expects," "may," "will,"
"should," "intends" or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. Management cautions the reader that these forward
looking statements, are only predictions. No assurance can be given that future
results will be achieved; actual events or results may differ materially as a
result of risks facing the Company. Such risks include, but are not limited to,
the Company's current litigation in the U.S. Tax Court and the pending Internal
Revenue Service's examination of certain other tax returns of the Company, the
Company's reliance on long-term sales contracts, the Company's reliance on
long-term mineral leases, the competitive environment in which the Company
operates, the risks inherent to the mining industry, acquisitions, government
regulation, reclamation and mine closure accruals, the effects of Clean Air Act
Amendments on the coal industry, replacement and recoverability of coal
reserves, economic conditions in the coal industry generally and technological
developments. Such risks could cause actual results to vary materially from the
future results indicated, expressed or implied, in such forward looking
statements.
GENERAL
The Company is engaged in the mining, preparation, marketing and leasing of
primarily compliance and low-sulfur coal from mines located in the Central
Appalachian region of eastern Kentucky and southern West Virginia. Based on the
reserve information compiled by third-parties, the Company controls the mineral
rights to approximately 338 million tons of coal reserves, of which management
believes 90% is owned in fee. In the three months and six months ended June 30,
1998, the Company sold approximately 1.3 and 2.5 million tons of coal,
respectively, approximately 70.8 % and 70.5% of which were generated from
captive production, respectively, with the remainder purchased from other coal
mine operators. During the three and six months ended June 30, 1998,
approximately 74% and 75% of the tonnage were sold to seven long-term sales
contract customers, with most of the remainder sold to spot market customers.
The Company sells coal primarily to domestic public utilities, an international
government-owned utility and industrial customers. Coal sales under long-term
sales contracts (contracts with a term longer than one year) are the primary
source of revenues for the Company. The Company's contract with Taiwan Power
Company expires in 1999, and the Company expects that it will not be renewed or
extended due to the high transportation cost to Taiwan from the Gulf of Mexico,
as compared with other sources.
The Company also generates significant revenues by leasing portions of its
mineral rights to independent coal producers in exchange for revenue-based lease
royalties. Generally, the lease terms provide the Company with a royalty fee of
up to 10% of the sales price of the coal with a minimum of $1.75 to $2.50 per
ton. The length of such leases varies from five years to the life of the
reserves. A minimum advance annual royalty is required whether or not the
property is mined. Such minimum royalty can be recouped by the lessee as a
credit against royalties owed on production if such production is within a
specified period of time after a minimum advance royalty is paid.
The Company's cost of sales is primarily composed of expenses related to
coal operations, coal leasing and other operations such as cotton ginning and
warehousing. Cost of coal sales are principally related to (i) costs associated
with production, (ii) contract mining fees, (iii) coal purchases and (iv)
upriver loading charges.
The Company's costs associated with production include labor, haulage,
depreciation and depletion, coal preparation plant costs, coal fees and taxes,
supplies, and repairs and maintenance.
The Company's cost related to contract mining fees have historically varied
due to the level of contract mining production, the quantity and quality of
tonnage purchased and spot market coal prices. The Company's cost of sales
related to its lease operations consist primarily of depletion and
administrative costs.
-11-
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating and other data of the Company presented as a percent of revenues.
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ----------------------
1998 1997 1998 1997
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ................................................ 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales ....................................... 91.1 88.0 91.4 90.7
Selling, general and administrative ................. 2.5 2.5 2.9 3.1
----- ----- ----- -----
Operating income ........................................ 6.4 9.5 5.7 6.2
Interest expense .................................... 4.9 4.4 4.6 4.6
Interest income ..................................... (1.1) (0.7) (1.0) (0.7)
Other income (expense) .............................. 0.5 (1.8) (0.7) (2.3)
----- ----- ----- -----
Income from continuing operations before income taxes ... 2.1 7.6 2.8 4.6
Provision for income taxes .......................... 0.7 2.2 0.9 1.4
----- ----- ----- -----
Income from continuing operations ....................... 1.4 5.4 1.9 3.2
Loss on disposal of discontinued operations, net of taxes
and minority interest ............................... -- -- -- --
----- ----- ----- -----
Net income before extraordinary item ................ 1.4 5.4 1.9 3.2
Extraordinary item, net of taxes ........................ (4.9) -- (2.4) --
----- ----- ----- -----
Net income .............................................. (3.5%) 5.4% (0.5%) 3.2%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1997
REVENUES
Coal sales. Coal sales revenues were $35,771,000 for the three months
ended June 30, 1998 compared to $ 40,471,000 for the three months ended June 30,
1997, a decrease of 11.6%. The decrease is attributable to a decrease in the
volume of coal shipped. Coal sales volume was 1,209,000 tons for the three
months ended June 30, 1998 compared to 1,339,000 for the three months ended June
30, 1997, a decrease of 9.7%. The decreased volume is primarily attributable to
a scheduled outage at the plant of a long-term sales contract customer. This
outage caused this customer to require fewer tons of the Company's coal during
the three months ended June 30 1998. Management believes, based on information
from this customer, that this tonnage shortfall will be offset by additional
coal shipments during the remainder of 1998.
Coal leasing. Coal leasing revenues were $1,792,000 for the three
months ended June 30, 1998 compared to $2,153,000 for the three months ended
June 30, 1997, a decrease of 16.8%. Production from lessees' mining operations
was 628,000 tons for the three months ended June 30, 1998 compared to 743,000
for the three months ended June 30, 1997, a decrease of 15.5%. The Company
believes this decrease is primarily related to timing of lessees' mining on
Company owned property.
-12-
<PAGE> 15
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the three months ended June 30,
1998 and cotton ginning, cotton warehousing, sales of cottonseed, and barge
revenue for the three months ended June 30, 1997. Other revenues were $730,000
for the three months ended June 30, 1998 compared to $1,352,000 for the three
months ended June 30, 1997, a decrease of 46.0%. This decrease is primarily
attributed to $622,000 of barge lease revenues for the second quarter of 1997
which were not earned in the second quarter of 1998 due to the sale of the
Company's barge fleet in December of 1997.
COST OF SALES
Cost of sales - Coal sales. Cost of coal sales totaled $33,478,000 for
the three months ended June 30, 1998 compared to $37,158,000 for the three
months ended June 30, 1997, a decrease of 9.9%. This decrease resulted primarily
from decreased volume of coal shipped.
Cost of sales - Coal leasing. Cost of coal lease revenues totaled
$410,000 for the three months ended June 30, 1998 compared to $556,000 for the
three months ended June 30, 1997, a decrease of 26.3%. The decrease primarily
resulted from a decrease in the volume of coal mined by lessees.
Cost of Sales - Other. Cost of other revenues were $986,000 for the
three months ended June 30, 1998 compared to $984,000 for the three months ended
June 30, 1997, a decrease of 0.2%.
OTHER
Selling, general and administrative expenses totaled $939,000 for the
three months ended June 30, 1998 compared to $1,091,000 for the three months
ended June 30, 1997, a decrease of 13.9%. This decrease primarily resulted from
reductions in salaries and wages and legal fees. Selling, general, and
administrative expenses were 2.5% of revenues for both the three months ended
June 30, 1998 and 1997.
As a result of the above EBITDA ("EBITDA" as defined to mean operating
income plus depreciation, depletion and amortization; EBITDA is not intended to
represent cash flow from operations as defined by generally accepted accounting
principles and should not be used as an alternative to net income or as an
indicator of operating performance or to cash flows as a measure of liquidity)
totaled $6,106,000 for the three months ended June 30, 1998 compared to
$8,003,000 for the three months ended June 30, 1997, a decrease of 23.7%. This
decrease is primarily attributable to the reduced revenue as a result of the
sale of the Company's barge fleet and the reduced shipments of coal to a long
term sales contract customer because of the customer's plant outage. Excluding
the Company's barge fleet, EBITDA was $7,383,000 in the three months ended June
30, 1997.
Interest expense totaled $1,866,000 for the three months ended June 30,
1998 compared to $1,946,000, a decrease of 4.1%. This primarily resulted from
the repayment of debt secured by the barge fleet, partially offset by the
additional interest related to the issuance of $100,000,000 principal amount of
9-7/8% Senior Notes due 2008 (the "Senior Notes") on June 8, 1998.
Other income was a loss of $208,000 for the three months ended June 30,
1998 compared to gain of $817,000 for the three months ended June 30, 1997, a
decrease of 125.5%. Other income for the three months ended June 30, 1997 was
related primarily to a gain on the sale of mining equipment. The loss reflected
in other income for the three months ended June 30, 1998 was primarily due to
the Company's share of the loss from its one-third partnership interest in
International Marine Terminals ("IMT"), a loading facility for ocean-going bulk
cargo vessels located along the Mississippi River.
Income taxes were $285,000 for the three months ended June 30, 1998
compared to a $979,000 for the three months ended June 30, 1997, a decrease of
70.9%. The decrease is a result of lower income in the three months ended June
30, 1998 than in the three months ended June 30, 1997.
After the extraordinary item related to the extinguishment of debt, the
Company had net loss of $1,350,000 for the three months ended June 30, 1998
compared to net income of $2,358,000 for the three months ended June 30, 1997.
-13-
<PAGE> 16
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Coal sales. Coal sales revenues were $73,429,000 for the six months
ended June 30, 1998 compared to $79,830,000, a decrease of 8.2%. The decrease is
attributable to a decrease in the volume of coal shipped. Coal sales volume was
2,497,000 tons for the first six months of 1998 compared to 2,650,000 tons for
the first six months of 1997, a decrease of 5.8%. The decreased volume is
primarily attributable to a scheduled outage at the plant of a long-term sales
contract customer. This outage caused this customer to require fewer tons of the
Company's coal. Management believes, based on information from this customer,
that this tonnage shortfall will be offset by additional coal shipments during
the remainder 1998.
Coal leasing. Coal leasing revenues were $3,367,000 for the six months
ended June 30, 1998 compared to $4,357,000 for the six months ended June 30,
1997, a decrease of 22.7%. Production from the Company's lessees was 1,379,000
tons for the six months ended June 30, 1998 compared to 1,383,000 for the six
months ended June 30, 1997, a decrease of 0.3%. The reduction in revenue is
primarily a result of minimum royalties that were recognized in prior periods,
which are now being recouped by certain lessees as production starts from their
mines.
Other. Other revenues primarily includes revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the six months ended June 30,
1998 and cotton ginning, cotton warehousing, sales of cottonseed, and barge
fleet revenue for the six months ended June 30, 1997. Other revenues were
$2,045,000 for the six months ended June 30, 1998 compared to $4,435,000 for the
six months ended June 30, 1997 a decrease of 53.9%. This decrease is primarily
attributed to $1,254,000 of barge fleet lease revenues for the six months ended
June 30, 1997 which were not earned in the six months ended June 30, 1998 as a
result of the sale of the Company's barge fleet in December 1997. Additionally,
revenue from the sale of cotton and cottonseed for the six months ended June 30,
1998 was down $1,094,000 from the six months ended June 30, 1997, primarily as a
result of timing of the sale of the Company's cottonseed inventory, which was
sold earlier in the year in 1997, based upon signed contracts for the sale of
cottonseed. Management believes a portion of this revenue shortfall will be
offset by revenue generated during the remainder of 1998.
COST OF SALES
Cost of sales - Coal sales. Cost of coal sales totaled $68,635,000 for
the six months ended June 30, 1998 compared to $75,643,000 for the six months
ended June 30, 1997, a decrease of 9.3%. This decrease resulted primarily from
decreased volume of coal shipped.
Cost of sales - Leasing. Cost of coal lease revenues totaled $900,000
for the six months ended June 30, 1998 compared to $975,000 for the six months
ended June 30, 1997, a decrease of 7.7%.
Cost of Sales - other. Cost of other revenues were $2,562,000 for the
six months ended June 30, 1998 compared to $3,799,000 for the six months ended
June 30, 1997, a decrease of 32.6%. This decrease is primarily attributed to
$459,000 of barge fleet depreciation costs for the three months ended June 30,
1997 which were not earned in the three months ended June 30, 1998 as a result
of the sale of the Company's barge fleet in December 1997. Additionally, the
cost of sales related to cottonseed sales were affected by the revenue
decreases.
OTHER
Selling, general and administrative expenses totaled $2,249,000 for the
six months ended June 30, 1998 compared to $2,714,000 for the six months ended
June 30, 1997, a decrease of 17.1%. This decrease primarily resulted from
reductions in salaries and wages and legal fees. Selling, general, and
administrative expenses were 2.9% of revenues for the six months ended June 30,
1998 and 3.1% of revenues for the six months ended June 30, 1997.
As a result of the above, EBITDA totaled $11,703,000 for the six months
ended June 30, 1998 compared to $13,152,000 for the six months ended June 30,
1997, a decrease of 11.0%. This decrease is primarily attributable to reduced
revenue as a result of the sale of the Company's barge fleet. Excluding the
Company's barge fleet, EBITDA was $11,911,000 for the six months ended June 30,
1997.
Interest expense totaled $3,612,000 for the six months ended June 30,
1998 compared to $ 4,116,000 for the six months ended June 30, 1997, a decrease
of 12.2%. This is primarily a result of the repayment of debt secured by the
Company's barge fleet, partially offset by the additional interest related to
the issuance of the Senior Notes.
-14-
<PAGE> 17
Other income was $521,000 for the six months ended June 30, 1998
compared to $2,119,000 for the six months ended June 30, 1997, a decrease of
75.4%. Other income for the six months ended June 30, 1997 was related primarily
to a gain on the sale of mining equipment. The income for the six months ended
June 30, 1998 was primarily the Company's share of the income from its one-third
partnership interest in IMT.
Income taxes were $721,000 for the six months ended June 30, 1998
compared to a $1,226,000 for the six months ended June 30, 1998, a decrease of
41.2%. The decrease is a result of lower income in the six months ended June 30,
1998 than in the six months ended June 30, 1997.
After the extraordinary item related to the extinguishment of debt, the
Company had net loss of $387,000 for the six months ended June 30, 1998 compared
to net income of $2,820,000 for the six months ended June 30, 1997.
INFLATION
Inflation has not had a significant effect on the Company's business.
LIQUIDITY AND CAPITAL RESOURCES
On June 8, 1998, the Company issued the Senior Notes ("the Offering").
Interest on the Senior Notes is payable semiannually on June 15 and December 15
of each year, commencing December 15, 1998. As a result of the Offering, the
Company has significant indebtedness and debt service requirements. As a result
of the Offering at June 30, 1998, the Company has total indebtedness including
capital leases and current maturities of $110,112,000. The Indenture permits the
Company to incur additional indebtedness, subject to certain limitations. The
Indenture also includes certain covenants that, among other things: (i) limit
the incurrence by the Company of additional indebtedness; (ii) restrict the
ability of the Company to pay dividends or make certain other payments; (iii)
limit transactions by the Company with affiliates; (iv) limit the ability of the
Company to incur certain liens; (v) limit the ability of the Company to
consolidate or merge with or into, or to transfer all or substantially all of
its assets to, another person; and (vi) limit the ability of the Company to
engage in other lines of business.
In connection with the Offering, Pen Holdings refinanced its senior
secured indebtedness and entered into an Amended and Restated Credit Agreement,
dated June 8, 1998, among Pen Holdings, certain of its subsidiaries and the
lenders named therein (the "New Credit Facility"), which provides for aggregate
borrowings of up to $40,000,000. Interest rates on the revolving loans under the
New Credit Facility are based, at the Company's option, on a grid spread to
LIBOR (as defined therein) or the Prime Rate (as defined therein). The initial
grid spread will be 1.75% above LIBOR and 0.75% above Prime Rate. The New Credit
Facility matures, subject to extensions requested by the Company at the
discretion of the lenders, five years after the closing date which occurred
simultaneously with the closing of the Offering. The New Credit Facility
contains certain restrictions and limitations, including financial covenants,
that require the Company to maintain and achieve certain levels of financial
performance and limit the payment of cash dividends and similar payments.
The Company's principal liquidity requirements are for debt service
requirements under the Senior Notes, and other outstanding indebtedness, and for
working capital needs and capital expenditures. Historically, the Company has
funded its capital and operating requirements with a combination of cash on
hand, operating cash flow and borrowings under credit facilities and capital
leases. The Company has utilized these sources of funds to make acquisitions,
fund significant capital investments in its properties, fund operations and
service debt under credit facilities.
In 1997, the Company made capital expenditures of $7,969,000 (including
$4,098,000 financed through capital leases). The Company's budget for 1998
capital expenditures is approximately $22,000,000 (including $1,600,000 of
capitalized interest), of which $6,075,000 has been spent as of June 30, 1998.
In the budget for 1999, capital expenditures are approximately $40,000,000
(including $4,000,000 of capitalized interest). Of the $62,000,000 of
anticipated capital expenditures for 1998 and 1999 combined, approximately
$39,000,000 relates to the costs for a preparation plant, rail-loading facility,
shaft and slope access to an underground coal mine, certain mining equipment,
and other development of the Fork Creek property which was acquired in November
1997. The Company expects to fund its budgeted capital expenditures through a
combination of proceeds from the issuance of the Senior Notes, borrowings or
leases from equipment finance companies, borrowings under the New Credit
Facility and cash currently on hand or generated from operations.
The Company is continually engaged in evaluating potential
acquisitions. The Company expects that funding for future acquisitions may come
from a variety of sources, depending on the size and nature of any such
acquisitions. Potential sources of capital include cash on hand, cash generated
from operations, proceeds from the issuance of the Senior Notes, borrowings
under the New Credit Facility, additional external debt financing (including
seller-financing) or capital leases. There can be no assurance that such
additional capital sources will be available to the Company on terms which the
Company finds acceptable, or at all.
-15-
<PAGE> 18
Based upon its current level of operations and anticipated growth, the
Company believes that the cash available currently, along with cash flow from
operations and available borrowings under the New Credit Facility, will be
sufficient to meet its future liquidity needs. However, the Company currently
expects that it may make additional acquisitions and, in connection therewith,
expects to incur additional indebtedness. In the event that the Company incurs
such additional indebtedness, its ability to make principal and interest
payments on its indebtedness, including the Senior Notes, may be adversely
affected. There can be no assurance that the Company's business will generate
adequate cash flow from operations, that anticipated growth and operating
improvements will be realized or that future borrowings will be available under
the New Credit Facility or from any other source in an amount sufficient to
enable the Company to service its indebtedness, including the Senior Notes, or
to fund its other liquidity needs. The Company issued 10,000 shares of
Convertible Preferred Stock with an initial liquidation preference of
$13,650,000 in connection with the recapitalization of the company. An aggregate
amount of dividends on the Convertible Preferred Stock amounting to $17,233,000
plus the liquidation value of $13,650,000 will be due in January 2006, if not
reduced by certain tax-related reductions. The Convertible Preferred Stock will
be redeemed at that time by the issuance of a note payable which amortizes over
the 10 years following the redemption, unless converted to common stock in
accordance with its terms.
YEAR 2000
The Company has conducted a review of its computer systems to identify
the systems that could be affected by Year 2000 issues and is implementing its
plan to resolve the issue. Based upon the review of its systems, management
believes that Year 2000 issues will not pose significant operational problems
for the Company's computer systems, nor will the Company incur significant
expense that would not have otherwise been incurred to upgrade systems for
operational reasons. The potential impact on the Company of any Year 2000
problems of its suppliers and customers is not determinable at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-16-
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 8, 1998, Pen Holdings issued $100,000,000 principal amount at maturity
of 9-7/8 Senior Notes due 2008 (the "Senior Notes") to, CIBC Oppenheimer Corp.
as the initial purchaser of the Senior Notes (the "Offering"). The issuance was
not registered under the Securities Act of 1993, as amended (the "Securities
Act") in reliance upon Section 4(2) and regulation S of the Securities Act.
Sales of the Senior Notes by the initial purchaser were made in reliance upon
Rule 144A under the Securities Act. The Company received net proceeds for the
offering, after deducting the discount to the initial purchaser and offering
expenses, of approximately $96.2 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 5, 1998, Pen Holdings held its annual meeting of shareholders. The only
matter submitted to a vote of the shareholders was the election of William E.
Beckner as a director of the Pen Holdings. After the meeting Mr. Beckner, Mark
A. Oldham, Stephen G. Capelli and Joseph A. Davis continued to serve as
directors.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.01 Financial Data Schedule
(b) Reports on Form 8-K:
None
The Company has duly filed this report on August 28, 1998.
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S (I) CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 (UNAUDITED) AND
(II) CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1998
AND 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 23,722,000 23,722,000
<SECURITIES> 0 0
<RECEIVABLES> 15,292,000 15,292,000
<ALLOWANCES> 456,000 456,000
<INVENTORY> 1,160 1,160
<CURRENT-ASSETS> 48,540 48,540
<PP&E> 35,058 35,058
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 242,949 242,949
<CURRENT-LIABILITIES> 100,000 100,000
<BONDS> 103,281,000 103,281,000
17,958,000 17,958,000
0 0
<COMMON> 43,000 43,000
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 242,949,000 242,949,000
<SALES> 0 0
<TOTAL-REVENUES> 38,293,000 78,841,000
<CGS> 34,874,000 72,097,000
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 939,000 2,249,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,866,000 3,612,000
<INCOME-PRETAX> 816,000 2,200,000
<INCOME-TAX> 285,000 721,000
<INCOME-CONTINUING> 531,000 1,479,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> (1,866,000) (1,866,000)
<CHANGES> 0 0
<NET-INCOME> (1,335,000) (387,000)
<EPS-PRIMARY> .02 .14
<EPS-DILUTED> .02 .14
</TABLE>
