<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 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 |X|
Indicate the number of shares of each of the registrant's classes of
common stock, as of the latest practicable date: As of November 24, 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
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1998 and December 31, 1997 1
Consolidated Statement of Income - Three Months Ended
September 30, 1998 and 1997 and Nine Months Ended September 30, 1998 and 1997 2
Consolidated Statement of Changes In Shareholders' Equity For The Nine Months
Ended September 30, 1998 3
Consolidated Statement of Cash Flows - Nine Months Ended September 30,
1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Position 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
</TABLE>
-i-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 24,735 $ 6,151
Accounts receivable (net of allowance for doubtful accounts of $466 and 436
respectively)............................................................ 15,611 17,497
Inventories ................................................................ 6,239 4,760
Deferred income taxes ...................................................... 1,260 1,160
Other assets ............................................................... 2,228 2,319
-------- --------
Total current assets .................................................... 50,073 31,887
Investment in unconsolidated affiliated companies ............................ 4,741 5,393
Coal reserves and mine development costs, net ................................ 135,902 138,502
Property, plant and equipment, net ........................................... 36,416 34,013
Long-term investments ........................................................ 14,156 13,323
Net assets to be disposed .................................................... 487 566
Other assets ................................................................. 4,021 1,163
-------- --------
245,796 224,847
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................................... 102 11,177
Current maturities of capital leases ....................................... 2,970 3,936
Accounts payable ........................................................... 6,221 7,704
Accrued expenses ........................................................... 7,364 5,090
Income taxes payable ....................................................... 201 1,047
-------- --------
Total current liabilities ............................................... 16,858 28,954
Long-term debt ............................................................... 103,275 68,440
Long-term capital leases ..................................................... 2,737 2,818
Deferred income taxes ........................................................ 59,334 59,891
Other liabilities ............................................................ 3,908 3,817
-------- --------
Total liabilities ....................................................... 186,112 163,920
-------- --------
Mandatorily redeemable preferred stock ....................................... 18,389 17,097
Redeemable common stock warrants ............................................. 2,344
Guaranties, commitments and contingencies (Note 9)
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 .......................................................... 41,231 41,422
-------- --------
Total shareholders' equity .............................................. 41,295 41,486
-------- --------
$245,796 $224,847
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE> 4
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------------
1998 1997 1998 1997
-------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues .......................................................... $ 42,482 $ 44,404 $ 121,323 $ 133,026
Operating expenses:
Cost of sales ................................................... 38,178 40,035 110,275 120,452
Selling, general and administrative ............................. 1,206 1,436 3,455 4,150
-------- -------- --------- ---------
Operating income .................................................. 3,098 2,933 7,593 8,424
Other (income) expense:
Interest expense ................................................ 2,407 1,925 6,019 6,041
Interest income ................................................. (545) (297) (1,341) (876)
Other ........................................................... (706) 39 (1,227) (2,080)
-------- -------- --------- ---------
Income from continuing operations before income taxes ............. 1,942 1,266 4,142 5,339
Provision for income taxes ........................................ 453 220 1,174 1,446
-------- -------- --------- ---------
Income from continuing operations ................................. 1,489 1,046 2,968 3,893
Loss on disposal of discontinued operations (less applicable income
tax credits of $0 and $2 and minority interest of $0 and $15)
for the three months and nine months ended September 30, 1997.... (4) (31)
-------- -------- --------- ---------
Income before Extraordinary item .................................. 1,489 1,042 2,968 3,862
Extraordinary item - loss related to early retirement of debt, less
applicable income tax credits of $962 in the nine months ended
September 30, 1998............................................... (1,866)
-------- -------- --------- ---------
Net income ........................................................ 1,489 1,042 1,102 3,862
Accretion of preferred stock ...................................... 432 423 1,293 1,271
-------- -------- --------- ---------
Net income (loss) available to common shareholders ................ $ 1,057 $ 619 $ (191) $ 2,591
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
<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) ............... (1,293) (1,293)
Net Income (unaudited) ...... 1,102 1,102
---------- ------- ------- -- --- ------- -------
Balance at September 30, 1998
(unaudited) ............... 4,290,000 $ 43 177,550 $2 $19 $41,231 $41,295
========== ======= ======= == === ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 1,102 $ 3,862
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization ........................... 11,059 11,342
Equity in net (earnings) losses of affiliates ...................... (392) 63
Deferred income taxes .............................................. (657) (816)
Gain on sale of equipment .......................................... (584) (1,597)
Interest income on long-term investments ............................ (833) (795)
Extraordinary item, net of tax ...................................... 1,866
-------- --------
Cash generated from operations, before changes in assets and
liabilities ......................................................... 11,561 12,059
Changes in assets and liabilities, net of effects from dispositions:
Accounts receivable .................................................... 1,886 1,823
Inventories ............................................................ (1,479) 290
Accounts payable and accrued expenses .................................. 907 (2,023)
Other .................................................................. (155) 1,051
-------- --------
Net cash provided by operating activities .............................. 12,720 13,200
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................... (9,072) (3,148)
Proceeds from sale of equipment ........................................ 1,378 2,903
Redemption of escrowed funds ........................................... (199)
Distributions from affiliated companies ................................ 880 201
-------- --------
Net cash used by investing activities .................................. (6,814) (243)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bonds ........................................ 99,216
Buyout of stock warrants ............................................... (3,000)
Debt issuance costs .................................................... (3,581)
Accretion of stock warrants ............................................ 73 164
Amortization of original issue discount ................................ 227 398
Purchase of treasury stock ............................................. (14)
Proceeds from issuance of long-term debt ............................... 221
Repayment of long-term debt ............................................ (77,054) (7,824)
Repayment of capital leases ............................................ (3,203) (2,841)
Net payments under line of credit agreements and current notes payable (4,430)
-------- --------
Net cash provided (used) by financing activities ....................... 12,678 (14,326)
-------- --------
Net increase (decrease) in cash ........................................ 18,584 (1,369)
Cash and cash equivalents at beginning of period ....................... 6,151 1,885
-------- --------
Cash and cash equivalents at end of period ............................. $ 24,735 $ 516
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest ............................................................. $ 4,072 $ 6,253
Income taxes ......................................................... 1,675 2,767
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<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) are 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
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
the final prospectus dated November 4, 1998 (the "Prospectus") filed with the
Securities and Exchange Commission as part of the Company's registration
statement on Form S-4 (File No. 333-60599) (the "Form S-4"). The results of
operations for the nine month period 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 September 30,
1998, its results of operations and its cash flows for the three months and nine
months ended September 30, 1998 and 1997, respectively.
NOTE 3-INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Coal ................. $ 6,073 $ 3,990
Cottonseed ........... 166 770
--------- ---------
$ 6,239 $ 4,760
========= =========
</TABLE>
NOTE 4-COAL RESERVES AND MINE DEVELOPMENT COSTS:
Coal reserves and mine development costs consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Coal reserves ........ $ 147,953 $ 147,953
Mine development costs 11,302 10,387
--------- ---------
159,255 158,340
Accumulated depletion (23,353) (19,838)
--------- ---------
$ 135,902 $ 138,502
========= =========
</TABLE>
-5-
<PAGE> 8
NOTE 5-PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Machinery and equipment $ 49,722 $ 46,453
River terminals ...... 11,508 11,488
Buildings ............ 5,639 5,595
Coal preparation plant 6,563 6,351
Cotton gins and warehouses 1,349 1,349
Other ................ 4,452 2,733
--------- ---------
79,233 73,969
Accumulated depreciation (42,817) (39,956)
--------- ---------
$ 36,416 $ 34,013
========= =========
</TABLE>
NOTE 6-REVOLVING LINES OF CREDIT:
The Company has a revolving line of credit under its current credit facility
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
assets, certain contracts of the Company, and the Company's inventories and
receivables. Borrowings bear interest at a variable rate based on either LIBOR
(an effective rate of 7.31% at September 30, 1998) or the lender's prime lending
rate (an effective rate of 9.25% at September 30, 1998). There was no amount
outstanding at September 30, 1998 or December 31, 1997, respectively. These
agreements contain minimum operating and financial ratios and covenants as
defined in the agreements.
-6-
<PAGE> 9
NOTE 7-LONG TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- --------
(IN THOUSANDS) (IN THOUSANDS)
<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 generally the same in priority 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 generally
the same in priority 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 Guarantors, and The Bank of New York, as Trustee, dated
June 8, 1998 (the "Indenture"), relating to the Senior Notes ................ $ 99,242
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 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
Note payable secured by a lien on an office building which serves as the
Company's headquarters, with a net book value of $3,059,000 at September 30,
1998, payable in monthly installments of $37,000 through 2016. Interest
included in the monthly installments is a fixed rate of 8.33%................ 4,135 4,205
Notes payable secured by liens on land, buildings and equipment of a cotton gin
and warehouses, 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 ........................................................... 103,377 79,617
Current maturities of long-term debt ........................................... (102) (11,177)
--------- --------
$ 103,275 $ 68,440
========= ========
</TABLE>
The Indenture for the Senior Notes contains various covenants, the most
significant of which restricts 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 nine
months ended September 30, 1998.
NOTE 8-EXTRAORDINARY ITEM:
The Company recorded an extraordinary charge in the second quarter of
1998 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.
-7-
<PAGE> 10
NOTE 9-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. In November 1998, the Social Security
Administration determined that the Company is in the class of coal companies to
which the Constitutional prohibitions to CIRHBA apply and the Company was
refunded all monies previously paid under CIRHBA. The Company included this
refund of $743,000 in accounts receivable at September 30, 1998 and recognized a
gain of $1,200,000 (including elimination of the remaining liability balance of
$457,000) in other income for the three and nine months ended September 30,
1998.
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.
On September 22, 1998, a Floyd County, Kentucky Circuit Court jury
found in favor of Cheyenne Resources, Inc. and its wholly owned subsidiary, PC&H
Construction, Inc. (collectively "Cheyenne") in a suit brought against The Elk
Horn Coal Corporation ("Elk Horn"), a wholly owned subsidiary of the Company, on
a breach of contract and fraud case relating to a coal lease that was entered
into prior to the Company's purchase of Elk Horn (the "Cheyenne litigation").
Elk Horn has already appealed the verdict on liability. On September 24, 1998,
Cheyenne first elected its remedies and specified that as relief it sought over
$18 million in compensatory damages and punitive damages. On October 1, 1998,
the jury awarded damages in favor of Cheyenne of $4.5 million attributable to
the fraud claim and $5.0 million attributable to the breach of contract claim.
No punitive damages were awarded. Elk Horn's litigation counsel and management
believe that there are numerous meritorious grounds for reversal and/or
modification of these verdicts on appeal on the issue of liability as well as
the issue of damages. However, the Company cannot determine whether the
resolution of this matter will have a material adverse impact on the Company's
financial position or results of operations.
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.
-8-
<PAGE> 11
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 ultimate resolution of the Company's current litigation in the U.S. Tax
Court, the ultimate resolution of the Cheyenne litigation, 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 are described in more detail in the
Prospectus. 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 225 million tons of coal reserves, of which
management believes 89% is owned in fee. In addition, management believes that
the Company has approximately 119 million tons of coal deposits. In the three
months and nine months ended September 30, 1998, the Company sold approximately
1.3 and 3.9 million tons of coal, respectively, approximately 77% and 71% of
which were generated from captive production, respectively, with the remainder
purchased from other coal mine operators. During the three and nine months ended
September 30, 1998, respectively, approximately 85% and 78% of the tonnage was
sold to seven long-term sales contract customers, with 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
long-term sales 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 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 by the lessee.
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.
-9-
<PAGE> 12
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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenues ............................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales ........................ 89.9 90.2 90.9 90.5
Selling, general and administrative .. 2.8 3.2 2.8 3.1
------ ------ ------ ------
Operating income ....................... 7.3 6.6 6.3 6.4
Interest expense ..................... 5.7 4.3 5.0 4.5
Interest income ...................... (1.3) (0.7) (1.1) (0.7)
Other (income) expense ............... (1.7) 0.1 (1.0) (1.6)
------ ------ ------ ------
Income from continuing operations before
income taxes ......................... 4.6 2.9 3.4 4.0
Provision for income taxes ........... 1.1 0.6 1.0 1.1
------ ------ ------ ------
Income from continuing operations ...... 3.5 2.3 2.4 2.9
Loss on disposal of discontinued
operations, net of taxes and minority
interest ............................. 0.0 0.0 0.0 0.0
------ ------ ------ ------
Net income before extraordinary
item ............................... 3.5 2.3 2.4 2.9
Extraordinary item, net of taxes ....... 0.0 0.0 (1.5) 0.0
------ ------ ------ ------
Net income ............................. 3.5% 2.3% 0.9% 2.9%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES
Coal sales. Coal sales revenues were $39,582,000 for the three months
ended September 30, 1998 compared to $ 41,374,000 for the three months ended
September 30, 1997, a decrease of 4.3%. Although overall coal sales volume
increased to 1,369,000 for the three months ended September 30, 1998 from
1,347,000 for the three months ended September 30, 1997, the decreased revenue
is primarily attributable to timing on the shipments to an international
government owned foreign utility with which the Company has a long-term sales
contract. Sales prices on this contract are higher than domestic sales prices
because they include the additional cost of transportation and handling included
with international shipments. Management expects the 1998 sales volume to this
customer to be below the level shipped in 1997, primarily attributable to the
fact that the 1997 contract year included extra tonnage carried forward from the
previous year and also included 1998 contract tonnage which was shipped in 1997
at the request of the customer.
Coal leasing. Coal leasing revenues were $1,352,000 for the three
months ended September 30, 1998 compared to $2,036,000 for the three months
ended September 30, 1997, a decrease of 33.6%. Production from lessees' mining
operations was 892,000 tons for the three months ended September 30, 1998
compared to 759,000 for the three months ended September 30, 1997, an increase
of 17.5%. The reduction in revenue is primarily attributable to minimum
royalties which were recognized in prior periods, and are now being credited to
lessees as production begins from the lessee mines.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the three months ended September
30, 1998 and cotton ginning, cotton warehousing, sales of cottonseed, and barge
revenue for the three months ended September 30, 1997. Other revenues were
$1,548,000 for the three months ended September 30, 1998 compared to $994,000
for the three months ended September 30, 1997, an increase of 55.7%. This
increase is primarily attributed to the timing of the sale of the Company's
cotton and cottonseed inventory which was sold in an earlier quarter in 1997.
This increase was partially offset by $627,000 of barge lease revenues for the
third quarter of 1997, which were not earned in the third quarter of 1998 due to
the sale of the Company's barge fleet in December 1997.
-10-
<PAGE> 13
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $35,922,000 for
the three months ended September 30, 1998 compared to $38,589,000 for the three
months ended September 30, 1997, a decrease of 6.9%. This decrease resulted
primarily from reduced costs (on a per-ton basis) in the Company's production
due to efficiency gains in the mining operations and favorable mining conditions
and reduced shipping costs due to a lower volume of international shipments.
Cost of sales-Leasing. Cost of coal lease revenues totaled $583,000 for
the three months ended September 30, 1998 compared to $428,000 for the three
months ended September 30, 1997, an increase of 36.2%. The increase primarily
resulted from an increase in the volume of coal mined by lessees.
Cost of Sales-Other. Cost of other revenues were $1,673,000 for the
three months ended September 30, 1998 compared to $1,018,000 for the three
months ended September 30, 1997, an increase of 64.3%. This increase is
primarily related to increases in the sale of the Company's cotton and
cottonseed inventory due to timing discussed above.
OTHER
Selling, general and administrative expenses totaled $1,206,000 for the
three months ended September 30, 1998 compared to $1,436,000 for the three
months ended September 30, 1997, a decrease of 16.0%. This decrease primarily
resulted from reductions in legal fees. Selling, general and administrative
expenses were 2.8% and 3.2% of revenues for the three months ended September 30,
1998 and 1997, respectively.
As a result, 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
$6,949,000 for the three months ended September 30, 1998 compared to $6,614,000
for the three months ended September 30, 1997, an increase of 5.1%. This
increase is primarily attributable to reduced mining costs at the Company's
operations. Excluding the Company's barge fleet, EBITDA was $5,989,000 for the
three months ended September 30, 1997.
Interest expense totaled $2,407,000 for the three months ended
September 30, 1998 compared to $1,925,000 for the three months ended September
30, 1997, an increase of 25.0%. This primarily resulted from 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, which was partially
offset by reduced interest related to repayment of debt secured by the Company's
barge fleet, which was sold in December 1997.
Interest income totaled $545,000 for the three months ended September
30, 1998 compared to $297,000 for the three months ended September 30, 1997, an
increase of 83.5%. This primarily resulted from the additional cash temporarily
invested and earning interest due to proceeds received from the issuance of the
Senior Notes. The Company intends to use this cash to fund a portion of the
capital expenditures expected to be incurred at the Fork Creek operations, a new
development expected to begin production by the year 2000.
Other income was $706,000 for the three months ended September 30, 1998
compared to a loss of $39,000 for the three months ended September 30, 1997.
Other income for the three months ended September 30, 1998 was related primarily
to a gain resulting from the refund of amounts previously paid and the
elimination of amounts accrued for the Coal Industry Retiree Health Benefits Act
(CIRHBA) and a gain on the sale of certain mining equipment. These gains were
partially offset by additional expenses related to the closing of certain mine
areas. The loss reflected in other income for the three months ended September
30, 1997 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 $453,000 for the three months ended September 30,
1998 compared to $220,000 for the three months ended September 30, 1997, an
increase of 105.9%. The increase is a result of higher income in the three
months ended September 30, 1998 than in the three months ended September 30,
1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES
Coal sales. Coal sales revenues were $113,011,000 for the nine months
ended September 30, 1998 compared to $121,204,000 for the nine months ended
September 30, 1997, a decrease of 6.8%. The decrease is attributable to a
decrease in the volume of coal shipped. Coal sales volume was 3,866,000 tons for
the first nine months of 1998 compared to 3,998,000 tons for the first nine
months of 1997, a decrease of 3.3%. 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 second quarter. Management believes this shortfall
will be offset by additional coal shipments to this customer for the remainder
of 1998.
-11-
<PAGE> 14
Coal leasing. Coal leasing revenues were $4,719,000 for the nine months
ended September 30, 1998 compared to $6,393,000 for the nine months ended
September 30, 1997, a decrease of 26.2%. Production from the Company's lessees
was 2,271,000 tons for the nine months ended September 30, 1998 compared to
2,142,000 for the nine months ended September 30, 1997, an increase of 6.0%. The
reduction in revenue is primarily attributable to minimum royalties which were
recognized in prior periods, and are now being credited to lessees as production
begins from the lessee mines.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the nine months ended September
30, 1998 and cotton ginning, cotton warehousing, sales of cottonseed, and barge
fleet revenues for the nine months ended September 30, 1997. Other revenues were
$3,593,000 for the nine months ended September 30, 1998 compared to $5,429,000
for the nine months ended September 30, 1997 a decrease of 33.8%. This decrease
is primarily attributed to $1,881,000 of barge fleet lease revenues for the nine
months ended September 30, 1997 which were not generated in the nine months
ended September 30, 1998 as a result of the sale of the Company's barge fleet in
December 1997.
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $104,557,000 for
the nine months ended September 30, 1998 compared to $114,232,000 for the nine
months ended September 30, 1997, a decrease of 8.5%. This decrease resulted
primarily from decreased volume of coal shipped combined with reduced costs in
the Company's production due to efficiency gains in the mining operations and
favorable mining conditions.
Cost of sales-Leasing. Cost of coal lease revenues totaled $1,483,000
for the nine months ended September 30, 1998 compared to $1,403,000 for the nine
months ended September 30, 1997, an increase of 5.7%. This increase resulted
from an increase in coal mined by the Company's lessees.
Cost of sales-Other. Cost of other revenues were $4,236,000 for the
nine months ended September 30, 1998 compared to $4,817,000 for the nine months
ended September 30, 1997, a decrease of 12.1%. This decrease is primarily
attributed to $683,000 of barge fleet depreciation costs for the nine months
ended September 30, 1997 which were not recorded in the nine months ended
September 30, 1998 as a result of the sale of the Company's barge fleet in
December 1997.
OTHER
Selling, general and administrative expenses totaled $3,455,000 for the
nine months ended September 30, 1998 compared to $4,150,000 for the nine months
ended September 30, 1997, a decrease of 16.7%. This decrease primarily resulted
from reductions in salaries and wages and legal fees. Selling, general, and
administrative expenses were 2.8% of revenues for the nine months ended
September 30, 1998 and 3.1% of revenues for the nine months ended September 30,
1997.
As a result, EBITDA totaled $18,652,000 for the nine months ended
September 30, 1998 compared to $19,766,000 for the nine months ended September
30, 1997, a decrease of 5.6%. 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 $17,900,000 for the nine months ended
September 30, 1997.
Interest expense totaled $6,019,000 for the nine months ended September
30, 1998 compared to $6,041,000 for the nine months ended September 30, 1997, a
decrease of 0.4%. This is primarily a result of the repayment of debt secured by
the Company's barge fleet, which is offset by the additional interest related to
the issuance of the Senior Notes.
Interest income totaled $1,341,000 for the nine months ended September
30, 1998 compared to $876,000 for the nine months ended September 30, 1997, an
increase of 53.1%. This primarily resulted from the additional cash temporarily
invested and earning interest due to proceeds received from the issuance of the
Senior Notes. The Company intends to use this cash to fund a portion of the
capital expenditures expected to be incurred at the Fork Creek operations, a new
development expected to begin production by the year 2000.
Other income was $1,227,000 for the nine months ended September 30,
1998 compared to $2,080,000 for the nine months ended September 30, 1997, a
decrease of 41.0%. Other income for the nine months ended September 30, 1998 was
related primarily to a gain resulting from the refund of amounts previously paid
and the elimination of amounts accrued for the Coal Industry Retiree Health
Benefits Act (CIRHBA) and a gain on the sale of certain mining equipment. These
gains were partially offset by additional expenses related to the closing of
certain mine areas. The decrease is attributable to selling less equipment in
1998.
Income taxes were $1,174,000 for the nine months ended September 30,
1998 compared to $1,446,000 for the nine months ended September 30, 1997, a
decrease of 18.8%. The decrease is a result of lower net income.
INFLATION
Inflation has not had a significant effect on the Company's business.
-12-
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
On June 8, 1998, Pen Holdings 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. At September
30, 1998, the Company had total indebtedness including capital leases and
current maturities of $109,084,000. The Indenture for the Senior Notes 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 in principal. 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 is 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 $11,225,000 has been spent as of September 30,
1998 (including $2,156,000 financed through capital leases). 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 costs associated with
the 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.
Management periodically reviews the profitability of all of the
Company's assets, including those which are not a part of its core coal
operations. The Company's cotton ginning and warehousing operation in South
Carolina has continued to contribute positive cash flow to the Company, and
management has no immediate plans to dispose of the assets that comprise the
operations. If management determines that a sale of this operation would
generate cash in excess of the net present value of estimated future cash flows
from those assets, the Company may consider selling the operation.
Net cash generated by operating activities was $12,720,000 for the nine
months ended September 30, 1998 compared to $13,200,000 for the nine months
ended September 30, 1997. The $480,000 decrease in cash flow from operating
activities is primarily related to prepayment of certain property and casualty
insurance compared to the prior year when those premiums were paid ratably
throughout the year.
Net cash used by investing activities was $6,814,000 for the nine
months ended September 30, 1998 compared to $243,000 for the nine months ended
September 30, 1997. The $6,571,000 increase is primarily the result of increased
capital expenditures for the nine months ended September 30, 1998 of $5,924,000
primarily due to increased mine development costs for several new mines that
were opened during 1998 and capitalized costs for development of the Fork Creek
operation. Another contributing factor is the $1,525,000 decrease in proceeds
from the sale of mining equipment, which is attributable to having less
equipment to sell in 1998.
Net cash provided from financing activities of $12,678,000 for the nine
months ended September 30, 1998 reflects an increase of $27,004,000 over the
$14,326,000 used in the nine months ended September 30, 1997. The increase in
net cash provided resulted
-13-
<PAGE> 16
primarily from net borrowings of approximately $18,100,000 under the Senior
Notes which is to be used primarily for funding a portion of the development of
the Fork Creek property. Additionally, because of the non-amortizing nature of
the Senior Notes and stronger overall cash position for the nine months ended
September 30, 1998, revolving line of credit and long-term debt repayments were
decreased by $9,900,000.
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 may make
additional acquisitions and, in connection therewith, may 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.
On October 2, 1998, a jury verdict was rendered in the Cheyenne
litigation in the amount of $9.5 million against the Company's Elk Horn
subsidiary. Elk Horn Coal has appealed the verdict on liability. At present, Elk
Horn Coal's litigation counsel and management believe that there are numerous
meritorious grounds for reversal and/or modification of the Cheyenne litigation
verdicts on appeal. However, because the Cheyenne litigation is on appeal, its
ultimate resolution is not determinable at this time and as a result, the
Company cannot access whether an adverse resolution of this matter would have a
material adverse impact on the Company's cash flow and results of operations.
See "Part II - OTHER INFORMATION, Item 1. LEGAL PROCEEDINGS" and "NOTE 9 -
GUARANTIES, COMMITMENTS AND CONTINGENCIES" to the Notes to Consolidated
Financial Statements contained herein.
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 in 1995. 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
Year 2000 Overview
The year 2000 issue relates to the way computer systems and
technologies utilize fields containing date information and recognize and
process such information beyond December 31, 1999. The year portion of such date
information has traditionally been stored as two digits only. Any of the
Company's computers, computer programs, operational or administration equipment
or products that have date sensitive software or imbedded technologies may
interpret the year portion of the date "00" as the year 1900 rather than the
year 2000. System failures or miscalculations may occur as a result, thus
causing disruptions in operations and the ability to process transactions.
State of Readiness
The Company began addressing Year 2000 issues in 1989 with its purchase
of a Year 2000 capable accounting software system. In 1997, an internal
committee of the Company was formed to review the following areas that may be
impacted adversely by Year 2000 issues: Information Systems Infrastructure;
Financial and Administrative Systems; Process Control Systems; and Vendors and
Customers.
The Company has a program in place designed to achieve Year 2000
capability in time to test the Company's systems and minimize significant
effects on the Company's business operations and financial and administrative
transactions.
Information Systems Infrastructure. With respect to its Information
Systems Infrastructure, the Company believes that, with the exception of the
network operating system which provides file and print services to the Company's
network users, all hardware, software and operating systems are Year 2000
capable. The Company anticipates upgrading or replacing this system by the end
of the second quarter of 1999.
Financial and Administrative Systems. The Company's Financial and
Administrative Systems include various financial, office automation and
engineering software, as well as building and telecommunications systems. The
Company has purchased and is in the process of customizing a new coal inventory
costing system which is expected to be Year 2000 capable. Implementation is
scheduled for the third quarter of 1999. A significant module of the overall
accounting system is the Purchase Management System which integrates with the
accounts payable system. The software vendor has delivered a version of the
Purchase Management System which the vendor has represented to the Company as
Year 2000 compliant. It is expected that this version will be installed during
the first quarter of 1999. The Company believes that all other financial
software and the office automation and engineering software is Year 2000
capable. In the first quarter of 1999, the Company's headquarters office will
upgrade its HVAC and security systems to systems that are expected to be Year
2000 capable. A new phone system at the Company's headquarters office has also
been selected and will be installed in the first quarter of 1999. The vendor has
represented the phone system to be Year 2000 compliant.
-14-
<PAGE> 17
Process Central Systems. In its review of Year 2000 issues, the Company
has identified the following Process Control Systems as being production
critical: Coal Preparation Plant Control System; Truck Scale System; Barge
Loading System; Sampling Systems; and Heavy Equipment Control Systems. The
Company has received assurances from the vendors of the Coal Preparation Plant
Control System and Truck Scale System that their products are Year 2000
compliant. The Company is in the process of evaluating the other systems.
Vendors and Customers. The Company will survey its suppliers and
customers that have been identified as critical to business operations by the
end of the first quarter of 1999. Should responses to Year 2000 capability be
unsatisfactory, the Company intends to change suppliers, service providers or
contractors as needed.
Company's Costs
It is estimated that the costs of the Company's Year 2000 efforts will
be approximately $200,000, of which $20,000 has been spent to date. The Company
believes that these costs would have otherwise been incurred to upgrade systems
for operational reasons in the normal course of business. These costs are
associated with the replacement of computer systems and equipment, substantially
all of which will be capitalized. These estimates do not include the costs of
implementing contingency plans or internal costs associated with the continuing
review of Year 2000 issues.
Risks of the Company's Year 2000 Issues
Although the Company expects its critical systems to be compliant by
the end of the third quarter of 1999, there is no guarantee that these results
will be achieved. Specific factors that give rise to this uncertainty include
failure to identify vulnerable systems; possible loss of technical resources;
non-compliance by third parties whose systems and operations impact the Company;
and other similar uncertainties.
With regard to non-compliance by third parties, domestic electric
utilities are the Company's principal customers as well as critical to the
Company's operations. Utilities supply power for the Company's coal production,
preparation, and loading facilities. Therefore, the Company's most significant
risk with regard to the Year 2000 issues hinges on the success of the utilities
in meeting the challenges they are facing with these issues. A major
interruption of power would not only affect the Company's ability to produce
coal, but most likely curtail its ability to sell the coal to its utility
customers. If a sustained interruption of power does occur as a result of Year
2000 issues, it would have a material adverse affect on the Company's results of
operations, liquidity, and financial condition.
Contingency Plan
At this time, the Company has not developed a comprehensive contingency
plan. However, if the Company identifies significant risks related to its Year
2000 readiness or its progress deviates from its current plan, the Company will
develop contingency plans as management deems necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-15-
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 22, 1998, a Floyd County, Kentucky Circuit Court jury found in
favor of Cheyenne Resources, Inc. and its wholly owned subsidiary, PC&H
Construction, Inc. (collectively "Cheyenne") in a suit brought against The Elk
Horn Coal Corporation ("Elk Horn", a wholly owned subsidiary of the Company), on
a breach of contract and fraud case relating to a coal lease that was entered
into prior to the Company's purchase of Elk Horn. Elk Horn has appealed the
verdict on liability. On September 24, 1998, Cheyenne first elected its remedies
and specified that as relief it sought over $18 million in compensatory damages
and punitive damages. On October 1, 1998, the jury awarded damages in favor of
Cheyenne of $4.5 million attributable to the fraud claim and $5.0 million
attributable to the breach of contract claim. No punitive damages were awarded.
Elk Horn's litigation counsel and management believe that there are numerous
meritorious grounds for reversal and/or modification of these verdicts on appeal
on the issue of liability as well as the issue of damages. However, the Company
cannot determine whether the resolution of this matter will have a material
adverse impact on the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated November 24, 1998
PEN HOLDINGS, INC.
By: /s/William E. Beckner
------------------------------------
William E. Beckner
President and Chief Executive
Officer
By: /s/Mark A. Oldham
------------------------------------
Mark A. Oldham
Senior Vice President, Secretary,
Treasurer and Chief
Financial Officer
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S (1) CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 (UNAUDITED) AND
(II) CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 24,735,000 24,735,000
<SECURITIES> 0 0
<RECEIVABLES> 15,611,000<F1> 15,611,000<F1>
<ALLOWANCES> 0 0
<INVENTORY> 6,239,000 6,239,000
<CURRENT-ASSETS> 50,073,000 50,073,000
<PP&E> 172,318,000<F2> 172,318,000<F2>
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 245,796,000 245,796,000
<CURRENT-LIABILITIES> 16,858,000 16,858,000
<BONDS> 103,275,000 103,275,000
18,389,000 18,389,000
0 0
<COMMON> 45,000 45,000
<OTHER-SE> 41,250,000<F3> 41,250,000<F3>
<TOTAL-LIABILITY-AND-EQUITY> 245,796,000 245,796,000
<SALES> 42,482,000 121,323,000
<TOTAL-REVENUES> 42,482,000 121,323,000
<CGS> 38,178,000 110,275,000
<TOTAL-COSTS> 38,178,000 110,275,000
<OTHER-EXPENSES> 1,206,374 3,455,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,407,000 6,019,000
<INCOME-PRETAX> 1,942,000 4,142,000
<INCOME-TAX> 453,000 1,174,000
<INCOME-CONTINUING> 1,489,000 2,968,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (1,866,000)
<CHANGES> 0 0
<NET-INCOME> 1,489,000 1,102,000
<EPS-PRIMARY> 0<F4> 0<F4>
<EPS-DILUTED> 0<F4> 0<F4>
<FN>
<F1>Amount represents net accounts receivable.
<F2>Amount represents net property, plant, and equipment.
<F3>Amount represents additional paid in capital and retained earnings.
<F4>Only required for public equity offerings.
</FN>
</TABLE>
