<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
MARCH 31, 1999
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 |X| No | |
Indicate the number of shares of each of the registrant's classes of
common stock, as of the latest practicable date: As of May 12, 1999: 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 - March 31, 1999 and December 31, 1998 1
Consolidated Statement of Income - Three Months Ended March 31, 1999 and 1998 2
Consolidated Statement of Changes In Shareholders' Equity for the Three Months
Ended March 31, 1999 3
Consolidated Statement of Cash Flows - Three Months Ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
-i-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share information)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 18,339 $ 21,012
Accounts receivable (net of allowance for doubtful accounts of $568 and 558
respectively) ........................................................... 18,077 17,970
Inventories ................................................................ 6,932 3,620
Deferred income taxes ...................................................... 1,435 1,435
Net assets to be disposed .................................................. 15 25
Other assets ............................................................... 1,652 1,834
-------- --------
Total current assets ..................................................... 46,450 45,896
Investment in unconsolidated affiliated companies ............................. 4,505 4,559
Coal reserves and mine development costs, net ................................. 135,052 135,487
Property, plant and equipment, net ............................................ 41,142 38,832
Long-term investments ......................................................... 14,740 14,445
Net assets to be disposed ..................................................... 348 348
Other assets .................................................................. 4,161 4,260
-------- --------
$246,398 $243,827
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................................... $ 106 $ 104
Current maturities of capital leases ....................................... 1,904 2,354
Accounts payable ........................................................... 10,088 7,251
Accrued expenses ........................................................... 7,441 6,951
Income taxes payable ....................................................... 322 1,393
-------- --------
Total current liabilities ................................................ 19,861 18,053
Long-term debt ................................................................ 103,260 103,267
Long-term capital leases ...................................................... 1,913 2,278
Deferred income taxes ......................................................... 56,360 56,806
Other liabilities ............................................................. 3,596 3,485
-------- --------
Total liabilities ........................................................ 184,990 183,889
-------- --------
Mandatorily redeemable preferred stock ........................................ 14,437 14,115
Guaranties, commitments and contingencies (Note 8)
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 .......................................................... 46,907 45,759
-------- --------
Total shareholders' equity ............................................... 46,971 45,823
-------- --------
$246,398 $243,827
======== ========
</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
MARCH 31,
-----------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues ............................................... $ 39,426 $ 40,548
Operating expenses:
Cost of sales ....................................... 34,446 37,223
Selling, general and administrative ................. 1,231 1,146
-------- --------
Operating income ....................................... 3,749 2,179
Other (income) expense:
Interest expense .................................... 2,403 1,746
Interest income ..................................... (576) (386)
Other ............................................... 55 (565)
-------- --------
Income from continuing operations before income taxes .. 1,867 1,384
Provision for income taxes ............................. 397 436
-------- --------
Net income ............................................. 1,470 948
Accretion of mandatorily redeemable preferred stock .... 322 430
-------- --------
Net income available to common shareholders ............ $ 1,148 $ 518
======== ========
</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, 1998 4,290,000 $ 43 177,550 $ 2 $ 19 $45,759 $45,823
Accretion of mandatorily
redeemable preferred stock
(unaudited)............. (322) (322)
Net income (unaudited)...... 1,470 1,470
--------- ---- --------- --- ---- ------- -------
Balance at March 31, 1999
(unaudited)............... 4,290,000 $ 43 177,550 $ 2 $ 19 $46,907 $46,971
========= ==== ========= === ==== ======= =======
</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>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------- -------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 1,470 $ 948
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization.................................. 3,678 3,582
Amortization of bond discount............................................. 20
Equity in net (earnings) losses of affiliates............................. (521)
Deferred income taxes..................................................... (446) (202)
Gain on sale of equipment................................................. 4
Interest income on long-term investments.................................. (295) (281)
------- -------
Cash generated from operations, before changes in assets and
liabilities.................................................................. 4,431 3,526
Changes in assets and liabilities
Accounts receivable....................................................... (111) (1,453)
Inventories............................................................... (3,312) (701)
Accounts payable and accrued expenses..................................... 2,255 (1,315)
Other..................................................................... 303 (222)
------- -------
Net cash provided (used) by operating activities.......................... 3,566 (165)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (5,467) (1,231)
Proceeds from sale of equipment............................................... 68
Distributions from affiliated companies....................................... 630
------- -------
Net cash used by investing activities......................................... (5,399) (601)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt................................................... (25) (2,006)
Repayment of capital leases................................................... (815) (1,168)
Net borrowings under line of credit agreements and current notes payable...... 285
------- -------
Net cash used for financing activities........................................ (840) (2,889)
-------- -------
Net decrease in cash.......................................................... (2,673) (3,655)
Cash and cash equivalents at beginning of period.............................. 21,012 6,151
------- -------
Cash and cash equivalents at end of period.................................... $18,339 $ 2,496
======= =======
</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, 1998, which are included in
the Company's Form 10-K for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission on March 24, 1999. The results of operations
for the three 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 March 31,
1999, and its results of operations and its cash flows for the three months
ended March 31, 1999 and 1998, respectively.
NOTE 3-INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- -----------
<S> <C> <C>
Coal................................ $ 6,416 $ 3,003
Cottonseed.......................... 516 617
---------- ----------
$ 6,932 $ 3,620
========== ==========
</TABLE>
NOTE 4-COAL RESERVES AND MINE DEVELOPMENT COSTS:
Coal reserves and mine development costs consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Coal reserves....................... $ 147,953 $ 147,953
Fork Creek mine development costs... 1,884 1,173
Other mine development costs........ 11,125 11,014
---------- ----------
160,962 160,140
Accumulated depletion............... (25,910) (24,653)
---------- ----------
$ 135,052 $ 135,487
========== ==========
</TABLE>
-5-
<PAGE> 8
NOTE 5-PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Machinery and equipment............. $ 52,491 $ 52,045
River terminals..................... 11,508 11,508
Buildings........................... 5,569 5,533
Coal preparation plant.............. 6,617 6,563
Cotton gins and warehouses.......... 1,368 1,368
Fork Creek development costs........ 4,059 2,230
Other............................... 5,207 3,210
---------- ----------
86,819 82,457
Accumulated depreciation............ (45,677) (43,625)
---------- ----------
$ 41,142 $ 38,832
========== ==========
</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 6.43% at March 31, 1999) or the lender's prime lending
rate (an effective rate of 8.25% at March 31, 1999). There was no amount
outstanding at March 31, 1999 or December 31, 1998, 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>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
9-7/8% Senior 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, jointly 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.................................................................... $ 99,282 $ 99,262
Note payable secured by a lien on an office building which serves as the
Company's headquarters, with a net book value of $3,013,000 at March 31,
1999, payable in monthly installments of $37,000 through 2016. Interest
included in the monthly installments is a fixed rate of 8.33%................... 4,084 4,109
------------- -----------
Total long-term debt............................................................... 103,366 103,371
Current maturities of long-term debt............................................... (106) (104)
------------ -----------
$ 103,260 $ 103,267
============ ===========
</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 three
months ended March 31, 1999.
-7-
<PAGE> 10
NOTE 8-GUARANTIES, COMMITMENTS AND CONTINGENCIES:
In 1995, the Company filed a petition in U.S. Tax Court requesting
determination on the issues raised by the IRS in its examinations for years 1982
through 1989. In January 1999, the Company reached a settlement of this matter
with the IRS. In addition to settling the Tax Court case, the settlement also
includes the years 1990 to 1994 on one central issue that had been before the
Tax Court. The amount of settlement, including interest, had been previously
accrued by the Company, therefore there is no additional charge to earnings for
the settlement.
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. Currently, the case is in appeals in the Commonwealth of
Kentucky Court of Appeals. 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 FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Cheyenne litigation, 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 Company's Form 10-K
for the year ended December 31, 1998 as filed with the Securities and Exchange
Commission. 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 222 million tons of coal reserves. In the three
months ended March 31, 1999, the Company sold approximately 1.3 million tons of
coal, approximately 78% of which was generated from captive production, with the
remainder purchased from other coal mine operators. During the three months
ended March 31, 1999, approximately 88% of the tonnage was sold to eight
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
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
OPERATING DATA:
Revenues 100.0% 100.0%
Operating expenses:
Cost of sales 87.4 91.8
Selling, general and administrative 3.1 2.8
----- -----
Operating income 9.5 5.4
Interest expense 6.1 4.3
Interest income (1.4) (0.9)
Other (income) expense 0.1 (1.4)
----- ------
Income from continuing operations before
income taxes 4.7 3.4
Provision for income taxes 1.0 1.1
----- -----
Net income 3.7% 2.3%
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998
REVENUES
Coal sales. Coal sales revenues were $37,002,000 for the three months
ended March 31, 1999 compared to $37,659,000 for the three months ended March
31, 1998, a decrease of 1.7%. Although overall coal sales volume increased to
1,323,000 tons for the three months ended March 31, 1999 from 1,286,000 tons for
the three months ended March 31, 1998, 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 which
expires in 1999. 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 1999 tonnage
shipped to this customer to be below the level shipped in 1998, primarily
attributable to the fact that 174,000 tons were pre-shipped in 1998 at this
customer's request and the 1999 contract tonnage was reduced by 265,000 tons in
connection with the settlement of the 1999 price at the same price as 1998.
Coal leasing. Coal leasing revenues were $1,781,000 for the three
months ended March 31, 1999 compared to $1,575,000 for the three months ended
March 31, 1998, an increase of 13.1%. The increase in revenue is primarily
attributable to the increased production from the lessee mines which was 884,000
tons for the three months ended March 31, 1999 compared to 751,000 for the three
months ended March 31, 1998, an increase of 17.7%.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the three months ended March 31,
1999 and 1998. Other revenues were $643,000 for the three months ended March 31,
1999 compared to $1,314,000 for the three months ended March 31, 1998, a
decrease of 51.1%. This decrease is primarily attributed to a reduction in the
volume of the Company's cotton sales. Cotton sales are made as a service to the
customer (for little or no direct profit) and vary from year to year depending
on the demand for this service from the Company's customers.
-10-
<PAGE> 13
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $32,821,000 for
the three months ended March 31, 1999 compared to $35,159,000 for the three
months ended March 31, 1998, a decrease of 6.7%. 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 $993,000 for
the three months ended March 31, 1999 compared to $892,000 for the three months
ended March 31, 1998, an increase of 11.3%. The increase primarily resulted from
an increase in the volume of coal mined by lessees.
Cost of sales-Other. Cost of other revenues were $632,000 for the three
months ended March 31, 1999 compared to $1,172,000 for the three months ended
March 31, 1998, a decrease of 46.1%. This decrease is primarily related to
decreases in the sale of cotton as discussed above.
OTHER
Selling, general and administrative expenses totaled $1,231,000 for the
three months ended March 31, 1999 compared to $1,146,000 for the three months
ended March 31, 1998, an increase of $85,000. Selling, general and
administrative expenses were 3.1% and 2.8% of revenues for the three months
ended March 31, 1999 and 1998, 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
$7,336,000 for the three months ended March 31, 1999 compared to $5,740,000 for
the three months ended March 31, 1998, an increase of 27.8%. This increase is
primarily attributable to reduced mining costs at the Company's operations.
Interest expense totaled $2,403,000 for the three months ended March
31, 1999 compared to $1,746,000 for the three months ended March 31, 1998, an
increase of 37.6%. This primarily resulted from the additional interest related
to the issuance of $100,000,000 of 9 7/8% Senior Notes due on June 8, 1998 which
refinanced certain previously existing debt of the Company.
Interest income totaled $576,000 for the three months ended March 31,
1999 compared to $386,000 for the three months ended March 31, 1998, an increase
of 49.2%. 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 temporarily invested cash to fund a
portion of the capital expenditures expected to be incurred at the Fork Creek
operations, a new coal operation expected to begin production in 2000.
Other income was a loss of $55,000 for the three months ended March 31,
1999 compared to income of $565,000 for the three months ended March 31, 1998.
The income for the first quarter of 1998 was primarily related to the Company's
share of income from International Marine Terminals from its sale of certain
equipment.
Income taxes were $397,000 for the three months ended March 31, 1999
compared to $436,000 for the three months ended March 31, 1998, a decrease of
8.9%. The reduction in the effective rate from 32% in the first quarter of 1998
to 22% for the first quarter of 1999 results primarily from the favorable impact
of the permanent difference in tax over book depletion expense in relation to
the amount of pretax income.
INFLATION
Inflation has not had a significant effect on the Company's business.
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 March 31,
1999, the Company had total indebtedness including capital leases and current
maturities of $107,183,000. 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
-11-
<PAGE> 14
therein) or the Prime Rate (as defined therein). The current grid spread is
1.50% above LIBOR and 0.50% 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.
For the quarter ended March 31, 1999, the Company made capital
expenditures of $5,467,000 (including those attributable to the Fork Creek
development of $2,921,000, which includes capitalized interest of $501,000 and
capitalized general and administrative expenditures of $549,000). The Company's
budget for 1999 capital expenditures is approximately $66,000,000 (including
Fork Creek expenditures of $53,000,000, which includes capitalized interest of
$4,500,000 and capitalized general and administrative expenditures of
$2,000,000). Of the $93,000,000 of anticipated capital expenditures for 1999 and
2000 combined, approximately $29,000,000 relates to new mining equipment for the
Fork Creek mines and $42,000,000 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. 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 or sales of other assets, 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 $3,566,000 for the three
months ended March 31, 1999 compared to net cash used by operating activities of
$165,000 for the three months ended March 31, 1998. The $3,731,000 increase in
cash flow from operating activities is primarily related to operational
efficiencies at the Company's mining operations and improved cash flow related
to the change in interest payment terms from monthly under its previous debt
structure to semi-annually on the Senior Notes.
Net cash used by investing activities was $5,399,000 for the three
months ended March 31, 1999 compared to $601,000 for the three months ended
March 31, 1998. The $4,798,000 increase is primarily the result of increased
capital expenditures of $4,236,000 for the three months ended March 31, 1999
primarily due to capitalized costs for development of the Fork Creek operation.
Net cash used for financing activities of $840,000 for the three months
ended March 31, 1999 reflects a decrease of $2,049,000 over the $2,889,000 used
in the three months ended March 31, 1998. The decrease in net cash used for
financing activities resulted primarily from the non-amortizing nature of the
Senior Notes.
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 in the
Commonwealth of Kentucky Court of Appeals, 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 8 - GUARANTIES, COMMITMENTS AND
CONTINGENCIES" to the Notes to Consolidated Financial Statements contained
herein.
-12-
<PAGE> 15
The Company issued 10,000 shares of Convertible Preferred Stock in
connection with the recapitalization of the Company in 1995. The liquidation
value of $10,237,000 (which is net of a reduction in December 1998 for the
January 1999 settlement of the Company's 1982-1989 tax court matter) plus
accrued dividends of $12,925,000 will be due in January 2006, if not reduced by
additional 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 Class I 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 second 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 upgraded its
HVAC and security systems to systems that are Year 2000 capable. A new phone
system at the Company's headquarters was installed in the first quarter of 1999.
The vendor has represented the phone system to be Year 2000 compliant.
Process Control 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, the Truck Scale System, the Barge Loading System, and the
Sampling System that their products are Year 2000 compliant. The Company is in
the process of evaluating the heavy equipment control systems, but based upon
initial indications received, the Company does not anticipate any Year 2000
related issues relating to the heavy equipment control systems.
Vendors and Customers. The Company has surveyed its suppliers and
customers that have been identified as critical to business operations. The
Company is in the process of evaluating the results of these surveys. Should
those responses to Year 2000 capabilities be unsatisfactory, the Company intends
to change suppliers, service providers or contractors as needed.
-13-
<PAGE> 16
Company's Costs
It is estimated that the costs of the Company's Year 2000 efforts will
be approximately $200,000, of which $113,000 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
The Company currently has operational contingency plans in place,
however management is reviewing those plans and will expand or update them as
needed in relation to Year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-14-
<PAGE> 17
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. Currently, the case
is in appeals in the State of Kentucky Court of appeals. 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 May 12, 1999
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
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S (I) CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 (UNAUDITED) AND (II)
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 18,339,000
<SECURITIES> 0
<RECEIVABLES> 18,077,000<F1>
<ALLOWANCES> 0
<INVENTORY> 6,932,000
<CURRENT-ASSETS> 46,450,000
<PP&E> 176,194,000<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 246,398,000
<CURRENT-LIABILITIES> 19,860,000
<BONDS> 99,282,000
14,438,000
0
<COMMON> 45,000
<OTHER-SE> 46,926,000<F3>
<TOTAL-LIABILITY-AND-EQUITY> 246,398,000
<SALES> 39,426,000
<TOTAL-REVENUES> 39,426,000
<CGS> 34,446,000
<TOTAL-COSTS> 34,446,000
<OTHER-EXPENSES> 1,231,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,403,000
<INCOME-PRETAX> 1,867,000
<INCOME-TAX> 397,000
<INCOME-CONTINUING> 1,470,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,470,000
<EPS-PRIMARY> 0<F4>
<EPS-DILUTED> 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>
