<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, 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 November 15, 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 - September 30, 1999 and December 31, 1998 1
Consolidated Statement of Income - Three Months Ended September 30, 1999 and 1998
and Nine Months Ended September 30, 1999 and 1998 2
Consolidated Statement of Changes In Shareholders' Equity 3
Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
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 16
Signatures 17
</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,
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 2,297 $ 21,012
Accounts receivable (net of allowance for doubtful accounts of $589 and $558 21,840 17,970
respectively)
Inventories ................................................................ 4,620 3,620
Deferred income taxes ...................................................... 1,435 1,435
Other assets ............................................................... 1,785 1,859
-------- --------
Total current assets ...................................................... 31,977 45,896
Investment in unconsolidated affiliated companies .......................... 3,815 4,559
Coal reserves and mine development costs, net .............................. 133,179 135,487
Property, plant and equipment, net ......................................... 56,490 38,832
Long-term investments ...................................................... 15,349 14,445
Other assets ............................................................... 4,453 4,608
-------- --------
$245,263 $243,827
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................................... $ 111 $ 104
Current maturities of capital leases ....................................... 1,468 2,354
Accounts payable ........................................................... 7,768 7,251
Accrued expenses ........................................................... 8,431 6,951
Income taxes payable ....................................................... 1,267 1,393
-------- --------
Total current liabilities ................................................. 19,045 18,053
Long-term debt ............................................................. 103,242 103,267
Long-term capital leases ................................................... 1,266 2,278
Deferred income taxes ...................................................... 54,110 56,806
Other liabilities .......................................................... 3,798 3,485
-------- --------
Total liabilities ......................................................... 181,461 183,889
-------- --------
Mandatorily redeemable preferred stock ....................................... 12,489 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 .......................................................... 51,249 45,759
-------- --------
Total shareholders' equity ................................................ 51,313 45,823
-------- --------
$245,263 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues .......................................................... $ 46,101 $ 42,482 $ 130,635 $ 121,323
Operating expenses:
Cost of sales .................................................. 42,540 38,178 116,176 110,275
Selling, general and administrative ............................ 1,560 1,206 4,095 3,455
-------- -------- --------- ---------
Operating income .................................................. 2,001 3,098 10,364 7,593
Other (income) expense:
Interest expense ............................................... 2,876 2,407 7,488 6,019
Interest income ................................................ (467) (545) (1,554) (1,341)
Other .......................................................... 198 (706) 598 (1,227)
-------- -------- --------- ---------
Income (loss) from continuing operations before income taxes ...... (606) 1,942 3,832 4,142
Provision (benefit) for income taxes .............................. (935) 453 (32) 1,174
-------- -------- --------- ---------
Income before extraordinary item .................................. 329 1,489 3,864 2,968
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 ........................................................ 329 1,489 3,864 1,102
Accretion of mandatorily redeemable preferred stock ............... (511) 432 135 1,293
-------- -------- --------- ---------
Net income (loss) available to common shareholders ................ $ 840 $ 1,057 $ 3,729 ($ 191)
======== ======== ========= =========
</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 redeemable
preferred stock (unaudited) (135) (135)
Adjustment for tax settlement 1,761 1,761
Net income (unaudited) ...... 3,864 3,864
---------- ------- ------- -- --- ------- -------
Balance at September 30, 1999
(unaudited) ............... 4,290,000 $ 43 177,550 $2 $19 $51,249 $51,313
========== ======= ======= == === ======= =======
</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,
------------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 3,864 $ 1,102
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization ......................... 11,403 11,059
Equity in net loss (income) of affiliates ........................ 781 (392)
Deferred income taxes ............................................ (2,696) (657)
Gain on sale of equipment ........................................ (323) (584)
Interest income on long-term investments ......................... (904) (833)
Extraordinary item, net of tax ................................... -- 1,866
-------- --------
Cash generated from operations, before changes in assets and
liabilities ......................................................... 12,125 11,561
Changes in assets and liabilities:
Accounts receivable .............................................. (3,870) 1,886
Inventories ...................................................... (1,000) (1,479)
Accounts payable and accrued expenses ............................ 1,871 907
Other ............................................................ 37 (155)
-------- --------
Net cash provided by operating activities ...................... 9,163 12,720
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (26,383) (9,072)
Proceeds from sale of equipment ..................................... 480 1,378
Distributions from affiliated companies ............................. -- 880
-------- --------
Net cash used by investing activities ............................... (25,903) (6,814)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bonds ..................................... -- 99,216
Buyout of stock warrants ............................................ -- (3,000)
Accretion of stock warrants ......................................... -- 73
Amortization of original issue discount ............................. -- 227
Debt issuance costs ................................................. -- (3,581)
Repayment of long-term debt ......................................... (77) (77,054)
Repayment of capital leases ......................................... (1,898) (3,203)
-------- --------
Net cash provided (used) by financing activities .................... (1,975) 12,678
-------- --------
Net increase (decrease) in cash ..................................... (18,715) 18,584
Cash and cash equivalents at beginning of period .................... 21,012 6,151
-------- --------
Cash and cash equivalents at end of period .......................... $ 2,297 $ 24,735
======== ========
</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:
Pen Holdings, Inc. ("Pen Holdings") and its consolidated subsidiaries
(references to the "Company" are 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 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 or nine month periods are not necessarily indicative of results
for the full year.
In the opinion of management, the accompanying interim financial
statements contain all adjustments of a normal and recurring nature necessary
for a fair presentation of the Company's financial position as of September 30,
1999, its results of operations for three and nine months ended September 30,
1999 and 1998, and its cash flows for the nine months ended September 30, 1999
and 1998.
NOTE 3-INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Coal ............................ $ 4,614 $ 3,003
Cottonseed ...................... 6 617
--------- ---------
$ 4,620 $ 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Coal reserves ................... $ 147,563 $ 147,953
Fork Creek reserve holding costs 2,771 1,173
Mine development costs .......... 10,277 11,014
--------- ---------
160,611 160,140
Accumulated depletion ........... (27,432) (24,653)
--------- ---------
$ 133,179 $ 135,487
========= =========
</TABLE>
5
<PAGE> 8
NOTE 5-PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Machinery and equipment ......... $ 59,156 $ 52,045
River terminals ................. 11,508 11,508
Buildings ....................... 5,723 5,533
Coal preparation plant .......... 6,376 6,563
Cotton gins and warehouses ...... 1,368 1,368
Fork Creek mine development costs 16,470 2,230
Other ........................... 3,049 3,210
--------- --------
103,650 82,457
Accumulated depreciation ........ (47,160) (43,625)
--------- --------
$ 56,490 $ 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 6.90% at September 30, 1999) or the lender's prime lending
rate (an effective rate of 8.75% at September 30, 1999). These agreements
contain minimum operating and financial ratios and covenants as defined in the
agreements.
NOTE 7-LONG TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- --------
(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 ................... $99,321 $99,262
Notes payable secured by a lien on an office building which serves as the
Company's headquarters, with a net book value of $3,046,000 at September 30,
1999, payable in monthly installments of $37,000 through 2016. Interest
included in the monthly installments is a fixed rate of 8.33%................... 4,032 4,109
--------- --------
Total long-term debt............................................................... 103,353 103,371
Current maturities of long-term debt............................................... (111) (104)
--------- --------
$ 103,242 $ 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. 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, 1999.
6
<PAGE> 9
NOTE 8-GUARANTIES, COMMITMENTS AND CONTINGENCIES:
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 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 on appeal in the Commonwealth of
Kentucky Court of Appeals. Oral arguments in the case are currently scheduled
for January 12, 2000. 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 other 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.
7
<PAGE> 10
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, any future Internal
Revenue Service examinations of certain 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, technological
developments and the ultimate resolution of the October 1999 U.S. District Court
for the Southern District of West Virginia's injunction against the West
Virginia Department of Environmental Protection as it relates to certain
restrictions placed on mining activities in West Virginia. See "Part II - Item 5
- - Other Information - Recent Developments - Status of West Virginia Mining
Injunction". Such risks are described in more detail in Pen Holdings' annual
report on Form 10-K for the year ended December 31, 1998, filed with the U.S.
Securities and Exchange Commission on March 24, 1999. See "Item 1 -
Business-Risk Factors". 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 218 million tons of coal reserves, of which
management believes 90% is owned in fee. In the three months and nine months
ended September 30, 1999, the Company sold approximately 1,590,000 and 4,445,000
tons of coal, respectively, approximately 75.4% and 79.4% 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, 1999, approximately 67.6% and 73.3%, respectively, 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. This contract provided
revenue of $19,658,000 and a gross profit of $1,882,000 for the nine months
ended September 30, 1999. The Company expects that this contract 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 generates revenues by leasing portions of its mineral
rights to independent coal producers in exchange for revenue-based lease
royalties. Generally, the lease terms provide the Company with a royalty fee of
up to 10% of the sales price of the coal with a minimum of $1.75 to $2.50 per
ton. The length of such leases varies from five years to the life of the
reserves. A minimum advance annual royalty is required whether or not the
property is mined. Such minimum royalty can be recouped by the lessee as a
credit against royalties owed on production if such production is within a
specified period of time after a minimum advance royalty is paid.
The Company also has a cotton ginning and warehousing business in South
Carolina. The operation generates revenues by charging a fee for its services
for ginning and warehousing of cotton. The Company also earns revenues by
selling cottonseed and baled cotton which is purchased from its ginning
customers.
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 costs related to contract mining fees and coal purchases
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.
8
<PAGE> 11
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,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ...................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales .............................. 92.3 89.9 88.9 90.9
Selling, general and administrative ........ 3.4 2.8 3.1 2.8
------ ------ ------ ------
Operating income .............................. 4.3 7.3 7.9 6.3
Interest expense ........................... 6.2 5.7 5.7 5.0
Interest income ............................ (1.0) (1.3) (1.2) (1.1)
Other (income) expense ..................... 0.4 (1.7) 0.5 (1.0)
------ ------ ------ ------
Income (loss) from continuing operations before
income taxes ............................. (1.3) 4.6 2.9 3.4
Provision (benefit) for income taxes ....... (2.0) 1.1 (0.1) 1.0
------ ------ ------ ------
Income before extraordinary
item ..................................... 0.7 3.5 3.0 2.4
Extraordinary item, net of taxes .............. 0.0 0.0 0.0 (1.5)
------ ------ ------ ------
Net income .................................... 0.7% 3.5% 3.0% 0.9%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES
Coal sales. Coal sales revenues were $43,655,000 for the three months
ended September 30, 1999 compared to $39,582,000 for the three months ended
September 30, 1998, an increase of 10.3%. The increase is primarily attributable
to an increase in the volume of coal shipped. Coal sales volume increased to
1,590,000 tons for the three months ended September 30, 1999 from 1,369,000 tons
for the three months ended September 30, 1998, an increase of 16.1%. The
increase is primarily attributable to the commencement of shipments in January
1999 on two new contracts that were signed in the fourth quarter of 1998 and
increased domestic spot coal shipments. Revenue (on a per ton basis) decreased
for the three months ended September 30, 1999 from the three months ended
September 30, 1998. This decrease is primarily attributable to shipping reduced
volume on higher priced long-term contracts as a result of scheduled plant
outages by two of the Company's domestic customers. The reduced volume was made
up with sales to new long-term contract customers and spot sales, but those
sales resulted in lower revenues per ton.
Coal leasing. Coal leasing revenues were $2,072,000 for the three
months ended September 30, 1999 compared to $1,352,000 for the three months
ended September 30, 1998, an increase of 53.3%. The increase is primarily
attributable to an increase in the volume of production from lessees. Production
from lessees' mining operations was 1,073,000 tons for the three months ended
September 30, 1999 compared to 892,000 for the three months ended September 30,
1998, an increase of 20.3%.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the three months ended September
30, 1999 and for the three months ended September 30, 1998. Other revenues were
$374,000 for the three months ended September 30, 1999 compared to $1,548,000
for the three months ended September 30, 1998, a decrease of 75.8%. This
decrease is primarily attributable to a reduction in volume of cotton sales.
Cotton sales are offered as a service to accommodate the Company's ginning
customers and vary from year to year, depending on the demand for this service.
9
<PAGE> 12
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $41,088,000 for
the three months ended September 30, 1999 compared to $35,923,000 for the three
months ended September 30, 1998, an increase of 14.4%. This increase resulted
primarily from an increase of 16.1% in tons sold.
Cost of sales-Leasing. Cost of coal lease revenues totaled $1,082,000
for the three months ended September 30, 1999 compared to $997,000 for the three
months ended September 30, 1998, an increase of 8.5%. The increase primarily
resulted from an increase in depletion due to the increase in the volume of coal
mined by lessees.
Cost of Sales-Other. Cost of other revenues was $370,000 for the three
months ended September 30, 1999 compared to $1,258,000 for the three months
ended September 30, 1998, a decrease of 70.6%. This decrease is primarily
related to decreases in the sale of cotton as discussed under "Revenue - Other".
OTHER
Selling, general and administrative expenses totaled $1,560,000 for the
three months ended September 30, 1999 compared to $1,206,000 for the three
months ended September 30, 1998, an increase of 29.4%. The increase primarily
resulted from increased payroll costs, payroll benefit costs and consulting
fees. Payroll costs increased as a result of opening a coal field office in
Charleston, West Virginia, as part of the staff in the office had previously
been charged to cost of sales. Payroll benefits increased primarily as a result
of higher medical claims on the Company's self insured medical plan. Consulting
costs increased as a result of the Company's decision to outsource more of its
information technology needs. Selling, general and administrative expenses were
3.4% and 2.8% of revenues for the three months ended September 30, 1999 and
1998, respectively.
As a result, EBITDA ("EBITDA" as defined to mean operating income plus
depreciation, depletion, amortization, and other non-cash items reducing
operating income; 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 $5,933,000 for the three months
ended September 30, 1999 compared to $6,949,000 for the three months ended
September 30, 1998, a decrease of 14.6%.
Interest expense totaled $2,876,000 for the three months ended
September 30, 1999 compared to $2,407,000 for the three months ended September
30, 1998, an increase of 19.5%. This increase is primarily attributable to
interest payable to the Internal Revenue Service relating to the settlement of
the Company's 1990 through 1993 audit. See "Part II - Item 5 - Other Information
- - Recent Development Settlement of Current IRS Audit". This was partially offset
by increased capitalized interest related to the Fork Creek development.
Interest income totaled $467,000 for the three months ended September
30, 1999 compared to $545,000 for the three months ended September 30, 1998, a
decrease of 14.3%. This primarily resulted from having less temporarily-invested
cash due to the Company's continued use of cash to fund of the capital
expenditures being incurred at the Fork Creek operations. The Fork Creek
development is expected to begin production by the second quarter of the year
2000. See "Item 2 - Liquidity and Capital Resources".
Other expense was $198,000 for the three months ended September 30,
1999 compared to income of $706,000 for the three months ended September 30,
1998. Other expense for the three months ended September 30, 1999 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. Other income for the
three months ended September 30, 1998 was primarily related to a gain on the
sale of certain mining equipment and income that results from a U.S. Supreme
Court ruling relating to the Coal Industry Retiree Health Benefit Act (CIRHBA)
which was favorable to the Company.
The provision for income taxes for the three months ended September 30,
1999 was a benefit of $935,000 compared to an expense of $453,000 for the three
months ended September 30, 1998, a decrease of $1,388,000. The decrease in
income tax expense is a result of (1) a decrease in income from continuing
operations before income taxes and (2) an adjustment to the amount of taxes
previously accrued by the Company relating to the IRS exam for the years 1990
through 1993. The amount of the settlement was less than the amount previously
estimated and accrued. See "Part II - Item 5 - Other Information - Recent
Development - Settlement of Current IRS Audit".
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES
Coal sales. Coal sales revenues were $123,199,000 for the nine months
ended September 30, 1999 compared to $113,011,000 for the nine months ended
September 30, 1998, an increase of 9.0%. This increase is primarily attributable
to an increase in the volume of coal shipped. Coal sales volume was 4,445,000
tons for the first nine months of 1999 compared to 3,866,000 tons for the first
nine months of 1998, an increase of 15.0%. The increased volume is primarily
attributable to the commencement of shipments on two new contracts that were
signed in the fourth quarter of 1998.
10
<PAGE> 13
Coal leasing. Coal leasing revenues were $5,777,000 for the nine months
ended September 30, 1999 compared to $4,719,000 for the nine months ended
September 30, 1998, an increase of 22.4%. The increase is primarily attributable
to an increase in the volume of production from lessees. Production from the
Company's lessees was 2,807,000 tons for the nine months ended September 30,
1999 compared to 2,271,000 for the nine months ended September 30, 1998, an
increase of 23.6%.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing, and sales of cottonseed for the nine months ended September
30, 1999 and for the nine months ended September 30, 1998. Other revenues were
$1,659,000 for the nine months ended September 30, 1999 compared to $3,593,000
for the nine months ended September 30, 1998, a decrease of 53.8%. The decrease
is primarily attributable to a reduction in revenue from cotton sales. Cotton
sales are offered as a service to accommodate the Company's ginning customers
and vary from year to year depending on the demand for this service from the
Company's customers.
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $111,551,000 for
the nine months ended September 30, 1999 compared to $104,558,000 for the nine
months ended September 30, 1998, an increase of 6.7%. This increase resulted
primarily from an increase of 15.0% in tons sold, partially offset by reduced
costs (on a per ton basis) in the Company's production due to efficiency gains
and favorable mining conditions in the mining operations.
Cost of sales-Leasing. Cost of coal lease revenues totaled $3,170,000
for the nine months ended September 30, 1999 compared to $2,674,000 for the nine
months ended September 30, 1998, an increase of 18.5%. This increase resulted
from an increase in depletion due to the increase in the volume of coal mined by
the Company's lessees.
Cost of sales-Other. Cost of other revenues was $1,455,000 for the nine
months ended September 30, 1999 compared to $3,043,000 for the nine months ended
September 30, 1998, a decrease of 52.2%. The decrease is primarily attributable
to a decreased volume of cottonseed and cotton sales as discussed above.
OTHER
Selling, general and administrative expenses totaled $4,095,000 for the
nine months ended September 30, 1999 compared to $3,455,000 for the nine months
ended September 30, 1998, an increase of 18.5%. The increase primarily resulted
from increased payroll costs, payroll benefit costs, consulting fees, and bank
fees. Payroll costs increased as a result of opening a coal field office in
Charleston, West Virginia, as part of the staff in the office had previously
been charged to cost of sales. Payroll benefits increased primarily as a result
of higher medical claims on the Company's self insured medical plan. Consulting
costs increased as a result of the Company's decision to outsource more of its
information technology needs. Bank fees increased as a result of increased line
of credit non-utilization fees. In conjunction with the issuance of the Senior
Notes in June of 1998, the Company's line of credit was increased from $12
million to $40 million. Selling, general, and administrative expenses were 3.1%
of revenues for the nine months ended September 30, 1999 and 2.8% of revenues
for the nine months ended September 30, 1998.
As a result, EBITDA totaled $21,496,000 for the nine months ended
September 30, 1999 compared to $18,652,000 for the nine months ended September
30, 1998, an increase of 15.2%. This increase is primarily attributable to
increased coal shipments and reduced mining costs (on a per ton basis) at the
Company's operations.
Interest expense totaled $7,488,000 for the nine months ended September
30, 1999 compared to $6,019,000 for the nine months ended September 30, 1998, an
increase of 24.4%. This primarily resulted from the additional interest related
to the issuance of the Senior Notes issued in June 1998 and due 2008 and
interest expense related to the settlement of the 1990 through 1993 Internal
Revenue Service audit. See "Part II - Item 5 - Other Information - Recent
Developments - Settlement of Current IRS Audit".
Interest income totaled $1,554,000 for the nine months ended September
30, 1999 compared to $1,341,000 for the nine months ended September 30, 1998, an
increase of 15.9%. 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 is using this cash to fund capital expenditures being
incurred at the Fork Creek operations.
Other expense was $598,000 for the nine months ended September 30, 1999
compared to income of $1,227,000 for the nine months ended September 30, 1998.
Other expense for the nine months ended September 30, 1999 was related primarily
to the Company's share of the loss of its one-third partnership interest in
International Marine Terminals (IMT). Other income for the nine months ended
September 30, 1998 was primarily attributed to a gain on the sale of certain
mining equipment and income that resulted from a U.S. Supreme Court ruling
relating to the Coal Industry Retiree Health Benefit Act (CIRHBA) which was
favorable to the Company.
The provision for income taxes for the nine months ended September 30,
1999 was a benefit of $32,000 compared to an expense of $1,174,000 for the nine
months ended September 30, 1998, a decrease of $1,206,000. This decrease is
primarily a result of an adjustment to the amount of taxes previously accrued by
the Company relating to the IRS exam for the years 1990 through 1993. The amount
of the settlement was less than the amount previously estimated and accrued..
See "Part II - Item 5 - Other Information - Recent Developments Settlement of
Current IRS Audit".
11
<PAGE> 14
INFLATION
Inflation has not had a significant effect on the Company's business.
LIQUIDITY AND CAPITAL RESOURCES
On June 8, 1998, Pen Holdings, the Company's parent holding company,
issued the $100,000,000 aggregate principal amount of 9 7/8% senior notes due
2008 (the "Offering"). On December 4, 1998, the Company exchanged all of these
privately placed senior notes for the senior notes which are substantially
identical to the privately placed notes in all material respects. 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, 1999,
the Company had total indebtedness of $106,087,000, including capital leases and
current maturities of long-term debt. 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)
restrict the ability of the Company to pay dividends or make certain other
payments; (ii) limit transactions by the Company with affiliates; (iii) limit
the ability of the Company to incur certain liens; (iv) 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 (v) 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 "Credit Facility"), which provides for aggregate
borrowings of up to $40,000,000 in principal. Interest rates on the revolving
loans under the 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
current grid spread is 1.50% above LIBOR and .5% above Prime Rate. The 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 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 nine months ended September 30, 1999, the Company made capital
expenditures of $26,383,000 (including those attributable to the Fork Creek
development of $15,375,000, which includes capitalized interest of $1,840,000).
The Company is projecting capital expenditures for the fourth quarter of 1999
through the year 2000 of approximately $71,877,000 (including Fork Creek
expenditures of $56,853,000, which includes capitalized interest of $3,852,000).
During the third quarter of 1999, the Company terminated its contract
with the general contractor engaged by the Company to construct the preparation
plant at the Fork Creek development. The Company has signed Letters of Intent
with several contractors to complete the preparation plant construction. Due to
delays caused by terminating the former contractor and due to time spent
searching for new contractors, the expected completion date of the preparation
plant which had been scheduled for the first quarter of 2000 is now expected to
be completed by the second quarter of 2000. Additionally, the Company currently
anticipates costs for the development to increase by approximately $3,600,000.
These additional costs are the result of unexpected soil conditions which
required the Company to perform additional excavation on the haul road and
preparation plant site.
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 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, 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 $9,163,000 for the nine
months ended September 30, 1999 compared to $12,720,000 for the nine months
ended September 30, 1998. The $3,557,000 decrease in cash flow from operating
activities is primarily related to increased accounts receivable resulting from
increased sales volume.
12
<PAGE> 15
Net cash used by investing activities was $25,903,000 for the nine
months ended September 30, 1999 compared to $6,814,000 for the three months
ended September 30, 1998. The $19,089,000 increase is primarily the result of
increased capital expenditures, $13,578,000 of which was related to construction
costs for development of the Fork Creek property. Additionally, to date, the
Company has spent approximately $4,000,000 to purchase high wall mining
equipment and support equipment for its Kiah Creek operations. This equipment
was put into production in the last week of June, 1999.
Net cash used for financing activities of $1,975,000 for the nine
months ended September 30, 1999 reflects a decrease of $14,653,000 over the
$12,678,000 provided from financing activities in the nine months ended
September 30, 1998. The net cash provided in 1998 resulted from net borrowings
of approximately $18,100,000 under the Senior Notes which is being used
primarily for funding a portion of the development of the Fork Creek property.
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 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. Additionally, the
financial position and results of operations of the Company could be materially
adversely affected if the U.S. Court of Appeals for the Fourth Circuit upholds
the recent decision by the U.S. District Court for the Southern District of West
Virginia relating to that court's issuance of a permanent injunction against the
West Virginia Department of Environmental Protection. See "Part II - Item 5 -
Other Information - Recent Developments - Status of West Virginia Mining
Injunction". 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 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 1, 1998, a jury awarded damages in the amount of $9.5
million against the Company's Elk Horn subsidiary in the Cheyenne litigation.
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. Currently, the case is on appeal in the Commonwealth of Kentucky Court
of Appeals and a January 12, 2000 date has been tentatively set by the Court to
hear oral arguments in the case. The ultimate resolution is not determinable at
this time and as a result, the Company cannot determine whether an adverse
resolution of this matter would have a material adverse impact on the Company's
financial position 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.
On August 23, 1999, the Company reached a settlement with the Internal
Revenue Service of its examination of the Company's federal income tax returns
for the years 1990 through 1993. The amount of the settlement, including
interest, had been previously accrued by the Company; therefore, there is no
additional charge to earnings for the settlement. See "Part II - Item 5 - Other
Information - Recent Developments - Settlement of Current IRS Audit".
The Company issued 10,000 shares of Convertible Preferred Stock in
connection with the recapitalization of the Company in 1995. The liquidation
value of $8,476,000 (which is net of a reduction in December 1998 for the
January 1999 settlement of the Company's 1982-1989 tax court matter and a
reduction in September 1999 for the October 1999 settlement of the Company's
1990 through 1993 Internal Revenue Service audit) plus accrued dividends of
$10,701,000 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 of the Company's Internal Systems
The Company began addressing Year 2000 issues in 1989 with its purchase
of a Year 2000 compliant 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.
13
<PAGE> 16
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
compliant. The Company anticipates upgrading or replacing this network operating
system by the end of November 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 compliant. Programming is
substantially complete on the coal inventory costing system and implementation
is scheduled for November 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. This version was installed in July 1999. The Company
believes that all other financial software and the office automation and
engineering software are Year 2000 compliant. In the first quarter of 1999, the
Company's headquarters upgraded its HVAC and security systems to systems that
are expected to be Year 2000 compliant. 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. The Company's phone
systems at its other locations are currently 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 has
received assurances regarding the principal items of equipment used in its
surface and underground mining operations. The Company is in the process of
obtaining assurances with respect to auxiliary items of equipment used in its
mining operations.
Vendors and Customers. The Company has surveyed its suppliers and
customers who have been identified as critical to business operations during the
first quarter of 1999. The Company received responses from all of its long term
sales customers and 99% of its vendors that were surveyed. The Company is no
longer pursuing responses from those that have not yet responded, as, in all
cases, the Company has alternate vendors. The Company is not the source of
information regarding the Year 2000 compliance of software, hardware and
embedded systems provided to the Company by third parties ("Third Party
Information"). Such Third Party Information is based on information supplied by
the Company's third party vendors of such hardware, software and embedded
systems.
Company's Costs
The Company currently estimates that its Year 2000 efforts will be
approximately $300,000, of which $220,000 has been spent to date. The Company
believes that the majority of the costs associated with our Year 2000 efforts
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 Year 2000
compliant by November 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. The Company has also developed written
contingency plans to assure continued operations in the event of mission
critical system failures or unforeseen supply chain interruptions.
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 on appeal in the Commonwealth of Kentucky Court of Appeals. Oral arguments in
the case are currently scheduled to begin on January 12, 2000. 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
RECENT DEVELOPMENTS
Potential Sale of The Elk Horn Coal Corporation
On August 4, 1999, the Company received a signed non-binding letter of
intent for the purchase of the outstanding stock of its subsidiary, The Elk Horn
Coal Corporation. The original Letter of Intent has since expired, and, although
no new agreement has been reached, and there can be no assurance that such an
agreement can or will ever be reached, negotiations are continuing with the
potential Buyer.
Management intends to use the proceeds from this potential sale to fund
a portion of the cost for the Fork Creek development.
Settlement of Current IRS Audit
On August 23, 1999, the Company reached a settlement with the Internal
Revenue Service of its examination of the Company's federal income tax returns
for the years 1990 through 1993. The amount of the settlement, including
interest, had been previously accrued by the Company; therefore, there is no
additional charge to earnings for the settlement.
Status of West Virginia Mining Injunction
On October 20, 1999, the U.S. District Court for the Southern District
of West Virginia issued a permanent injunction against the West Virginia
Department of Environmental Protection in a mountaintop mining lawsuit. As
interpreted by the Director of the Department of Environmental Protection, the
injunction prohibits the Department from approving any new permits that would
authorize the placement of excess spoil in intermittent and perennial streams
for the primary purpose of waste disposal. The Department also interpreted the
injunction to affect certain existing coal refuse ponds, sediment ponds and
mountaintop mining operations.
The Department of Environmental Protection has filed an appeal of the
decision with the Fourth Circuit Court of Appeals. On October 29, 1999, the
District Court issued a stay of its decision pending a resolution of the appeal.
The Company does not believe this court order will have any immediate effect on
its West Virginia mines. The Company is analyzing the potential long-term impact
on its mines and coal reserves.
15
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
16
<PAGE> 19
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 15, 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
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S (I) CONSOLIDATED BALANCE SHEET AT SEPT. 30, 1999 (UNAUDITED) AND (II)
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPT. 30, 1999 AND
1998 AND THE NINE MONTHS ENDED SEPT. 30, 1999 AND 1998 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,297,000
<SECURITIES> 0
<RECEIVABLES> 21,840,000<F1>
<ALLOWANCES> 0
<INVENTORY> 4,620,000
<CURRENT-ASSETS> 31,977,000
<PP&E> 189,669,000<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 245,263,000
<CURRENT-LIABILITIES> 19,045,000
<BONDS> 99,321,000
12,489,000
0
<COMMON> 45,000
<OTHER-SE> 51,268,000<F3>
<TOTAL-LIABILITY-AND-EQUITY> 245,263,000
<SALES> 130,635,000
<TOTAL-REVENUES> 130,635,000
<CGS> 116,176,000
<TOTAL-COSTS> 116,176,000
<OTHER-EXPENSES> 4,095,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,488,000
<INCOME-PRETAX> 3,832,000
<INCOME-TAX> (32,000)
<INCOME-CONTINUING> 3,864,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,864,000
<EPS-BASIC> 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>
