<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
JUNE 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 August 13, 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
This Amendment No. 1 on Form 10-Q/A amends and restates in its
entirety Pen Holdings, Inc.'s Form 10-Q for the quarter ended June 30, 1999
originally filed with the Securities and Exchange Commission ("SEC") on August
13, 1999 (the "Original 10-Q") for the sole purpose of correcting two formatting
errors contained in the EDGAR version of the Original 10-Q. These formatting
errors were caused by the third-party filing agent who filed the Original 10-Q
with the SEC. The two formatting errors were as follows:
(1) On page 3 of the Original 10-Q, in the "Consolidated Statement Of
Changes In Shareholders' Equity" table, in the line items "Accretion
of redeemable preferred stock (unaudited)" and "Net income (loss)
(unaudited)" under the columns under the heading "CLASS I COMMON
STOCK," which are labeled "Shares" and "Amounts" the numbers "(646)"
and "3,535", respectively, were erroneously inserted. There are no
reportable numbers for these line items in the columns for "CLASS I
COMMON STOCK -- Shares" and "CLASS I COMMON STOCK -- Amounts." The
Form 10-Q/A correctly reflects that those numbers (i.e., the "(646)"
and the "3,535") should correctly be inserted in both of these line
items under the headings "RETAINED EARNINGS" and "TOTAL", which are
the last two columns on the far right of that table; and
(2) On page 9 of the Original 10-Q, in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the "Results of Operations" table, in the line item
"Extraordinary item, net of taxes," under the "SIX MONTHS ENDED JUNE
30, 1999" the Original 10-Q reported "(2.4)" and the "SIX MONTHS ENDED
JUNE 30, 1998" reported "0.0". Those two numbers were erroneously
transposed, and the 10-Q/A correctly reflects that there was no
"Extraordinary item, net of taxes" for the "SIX MONTHS ENDED JUNE 30,
1999" and that "Extraordinary item, net of taxes" for the "SIX MONTHS
ENDED JUNE 30, 1998" was "(2.4)."
The above referenced formatting changes are the only changes that have been made
in the Form 10-Q/A.
This Form 10-Q/A is being filed in accordance with Rule 12b-15 promulgated
under the Securities Exchange Act of 1934, as amended and Pen Holdings, Inc. is
relying on Rule 103 of Regulation S-T in making this amended filing.
<PAGE> 3
PEN HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1999 and December 31, 1998 1
Consolidated Statement of Income - Three Months Ended June 30, 1999 and 1998
and Six Months Ended June 30, 1999 and 1998 2
Consolidated Statement of Changes In Shareholders' Equity 3
Consolidated Statement of Cash Flows - Six Months Ended June 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 15
Signatures 16
</TABLE>
I
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 10,021 $ 21,012
Accounts receivable (net of allowance for doubtful accounts of
$573 and $558 respectively)............................................... 20,450 17,970
Inventories ................................................................ 5,230 3,620
Deferred income taxes ...................................................... 1,436 1,435
Other assets ............................................................... 1,539 1,859
-------- --------
Total current assets ...................................................... 38,676 45,896
Investment in unconsolidated affiliated companies .......................... 4,072 4,559
Coal reserves and mine development costs, net .............................. 133,972 135,487
Property, plant and equipment, net ......................................... 47,774 38,832
Long-term investments ...................................................... 15,042 14,445
Other assets ............................................................... 3,852 4,608
-------- --------
$243,388 $243,827
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................................... $ 108 $ 104
Current maturities of capital leases ....................................... 1,604 2,354
Accounts payable ........................................................... 8,161 7,251
Accrued expenses ........................................................... 5,176 6,951
Income taxes payable ....................................................... 568 1,393
-------- --------
Total current liabilities ................................................. 15,617 18,053
Long-term debt ............................................................. 103,251 103,267
Long-term capital leases ................................................... 1,599 2,278
Deferred income taxes ...................................................... 55,744 56,806
Other liabilities .......................................................... 3,704 3,485
-------- --------
Total liabilities ......................................................... 179,915 183,889
-------- --------
Mandatorily redeemable preferred stock ....................................... 14,761 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 .......................................................... 48,648 45,759
-------- --------
Total shareholders' equity ................................................ 48,712 45,823
-------- --------
$243,388 $243,827
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 5
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues .......................................................... $ 45,108 $ 38,293 $ 84,534 $ 78,841
Operating expenses:
Cost of sales .................................................. 39,190 34,874 73,636 72,097
Selling, general and administrative ............................ 1,304 1,103 2,535 2,249
-------- -------- -------- --------
Operating income .................................................. 4,614 2,316 8,363 4,495
Other (income) expense:
Interest expense ............................................... 2,209 1,866 4,612 3,612
Interest income ................................................ (511) (410) (1,087) (796)
Other .......................................................... 345 44 400 (521)
-------- -------- -------- --------
Income from continuing operations before income taxes ............. 2,571 816 4,438 2,200
Provision for income taxes ........................................ 506 285 903 721
-------- -------- -------- --------
Income before extraordinary item .................................. 2,065 531 3,535 1,479
Extraordinary item - loss related to early retirement of debt, less
applicable income tax credits of $962 in the three months
and six months ended June 30, 1998 .......................... -- (1,866) -- (1,866)
-------- -------- -------- --------
Net income (loss) ................................................. 2,065 (1,335) 3,535 (387)
Accretion of mandatorily redeemable preferred stock ............... 324 431 646 862
-------- -------- -------- --------
Net income (loss) available to common shareholders ................ $ 1,741 ($ 1,766) $ 2,889 ($ 1,249)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 6
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) (646) (646)
Net income (loss) (unaudited) 3,535 3,535
---------- ------- ------- ----- ---- ------- -------
Balance at June 30, 1999
(unaudited) ............... 4,290,000 $ 43 177,550 $ 2 $ 19 $48,648 $48,712
========== ======= ======= ===== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 7
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 3,535 $ (387)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization ......................... 7,381 7,208
Equity in net loss (income) of affiliates ........................ 579 (384)
Deferred income taxes ............................................ (1,063) (373)
Gain on sale of equipment ........................................ (257) (39)
Interest income on long-term investments ......................... (597) (549)
Extraordinary item, net of tax ................................... -- 1,866
-------- --------
Cash generated from operations, before changes in assets and
liabilities ......................................................... 9,578 7,342
Changes in assets and liabilities:
Accounts receivable .............................................. (2,484) 2,205
Inventories ...................................................... (1,610) (1,839)
Accounts payable and accrued expenses ............................ (1,690) (1,609)
Other ............................................................ 901 (2,844)
-------- --------
Net cash provided by operating activities ...................... 4,695 3,255
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (14,620) (3,963)
Proceeds from sale of equipment ..................................... 414 73
Distributions from affiliated companies ............................. -- 880
-------- --------
Net cash used by investing activities ............................... (14,206) (3,010)
-------- --------
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
Repayment of long-term debt ......................................... (51) (77,053)
Repayment of capital leases ......................................... (1,429) (2,137)
-------- --------
Net cash provided (used) by financing activities .................... (1,480) 17,326
-------- --------
Net increase (decrease) in cash ..................................... (10,991) 17,571
Cash and cash equivalents at beginning of period .................... 21,012 6,151
-------- --------
Cash and cash equivalents at end of period .......................... $ 10,021 $ 23,722
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 8
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 six month periods are not necessarily indicative of results for
the full year.
In the opinion of management, the accompanying interim financial
statements contain all adjustments of a normal and recurring nature necessary
for a fair presentation of the Company's financial position as of June 30, 1999,
its results of operations for three and six months ended June 30, 1999 and 1998,
and its cash flows for the six months ended June 30, 1999 and 1998.
NOTE 3-INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Coal ........................... $ 4,805 $ 3,003
Cottonseed ..................... 425 617
--------- ---------
$ 5,230 $ 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>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Coal reserves .................. $ 147,663 $ 147,953
Fork Creek reserve holding costs 2,320 1,173
Mine development costs ......... 10,857 11,014
--------- ---------
160,840 160,140
Accumulated depletion .......... (26,868) (24,653)
--------- ---------
$ 133,972 $ 135,487
========= =========
</TABLE>
5
<PAGE> 9
NOTE 5-PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
Machinery and equipment ........ $ 55,791 $ 52,045
River terminals ................ 11,508 11,508
Buildings ...................... 5,606 5,533
Coal preparation plant ......... 6,617 6,563
Cotton gins and warehouses ..... 1,368 1,368
Fork Creek mine development costs 9,507 2,230
Other .......................... 3,674 3,210
--------- ---------
94,071 82,457
Accumulated depreciation ....... (46,297) (43,625)
--------- ---------
$ 47,774 $ 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 6.72% at June 30, 1999) or the lender's prime lending rate
(an effective rate of 8.25% at June 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>
JUNE 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......................... 99,300 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 $2,991,000 at June 30, 1999,
payable in monthly installments of $37,000 through 2016. Interest included in
the monthly installments is a fixed rate of 8.33% ................................... 4,059 4,109
--------- ---------
Total long-term debt ................................................................... 103,359 103,371
Current maturities of long-term debt ................................................... (108) (104)
--------- ---------
$ 103,251 $ 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
six months ended June 30, 1999.
6
<PAGE> 10
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 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.
7
<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 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 220 million tons of coal reserves, of which
management believes 90% is owned in fee. In the three months and six months
ended June 30, 1999, the Company sold approximately 1,532,000 and 2,855,000 tons
of coal, respectively, approximately 84.5% and 81.6% of which were generated
from captive production, respectively, with the remainder purchased from other
coal mine operators. During the three and six months ended June 30, 1999,
approximately 78.3% and 70.1% of the tonnage was sold to eight long-term sales
contract customers, with most of the remainder sold to spot market customers.
The Company sells coal primarily to domestic public utilities, an international
government-owned utility and industrial customers. Coal sales under long-term
sales contracts (contracts with a term longer than one year) are the primary
source of revenues for the Company. The Company's long-term sales contract with
Taiwan Power Company expires in 1999. This contract provided revenue of
$12,763,000 and a gross profit of $1,273,000 for the six months ended June,
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 also 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'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 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> 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues ............................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales ........................ 86.9 91.1 87.1 91.4
Selling, general and administrative .. 2.9 2.9 3.0 2.9
------ ------ ------ ------
Operating income ....................... 10.2 6.0 9.9 5.7
Interest expense ..................... 4.9 4.9 5.5 4.6
Interest income ...................... (1.1) (1.1) (1.3) (1.0)
Other (income) expense ............... 0.7 0.1 0.5 (0.7)
------ ------ ------ ------
Income from continuing operations before
income taxes ......................... 5.7 2.1 5.2 2.8
Provision for income taxes ........... 1.1 0.7 1.0 0.9
------ ------ ------ ------
Income before extraordinary
item ................................. 4.6 1.4 4.2 1.9
Extraordinary item, net of taxes ....... 0.0 (4.9) 0.0 (2.4)
------ ------ ------ ------
Net income ............................. 4.6% (3.5)% 4.2% (0.5%)
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
REVENUES
Coal sales. Coal sales revenues were $42,542,000 for the three months
ended June 30, 1999 compared to $35,771,000 for the three months ended June 30,
1998, an increase of 18.9%. The increase is primarily attributable to an
increase in the volume of coal shipped. Coal sales volume increased to 1,532,000
tons for the three months ended June 30, 1999 from 1,211,000 tons for the three
months ended June 30, 1998, an increase of 26.5%. The increase is primarily
attributable to the commencement of shipments on two new contracts that were
signed in the fourth quarter of 1998.
Coal leasing. Coal leasing revenues were $1,991,000 for the three
months ended June 30, 1999 compared to $1,792,000 for the three months ended
June 30, 1998, an increase of 11.1%. The increase is primarily attributable to
an increase in the volume of production from lessees. Production from lessees'
mining operations was 884,000 tons for the three months ended June 30, 1999
compared to 628,000 for the three months ended June 30, 1998, an increase of
40.9%.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the three months ended June 30,
1999 and for the three months ended June 30, 1998. Other revenues were $575,000
for the three months ended June 30, 1999 compared to $730,000 for the three
months ended June 30, 1998, a decrease of 21.3%. This decrease is primarily
attributable to a reduction in revenue from cotton sales. Cotton sales are
offered as a service to the Company's ginning customers and vary from year to
year, depending on the demand for this service from the Company's customers.
9
<PAGE> 13
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $37,641,000 for
the three months ended June 30, 1999 compared to $33,476,000 for the three
months ended June 30, 1998, an increase of 12.4%. This increase resulted
primarily from an increase of 26.5% in tons sold, partially offset by reduced
costs (on a per-ton basis) in the Company's production due primarily to
efficiency gains in the mining operations and favorable mining conditions.
Cost of sales-Leasing. Cost of coal lease revenues totaled $1,096,000
for the three months ended June 30, 1999 compared to $785,000 for the three
months ended June 30, 1998, an increase of 39.6%. The increase primarily
resulted from an increase in the volume of coal mined by lessees.
Cost of Sales-Other. Cost of other revenues were $453,000 for the three
months ended June 30, 1999 compared to $613,000 for the three months ended June
30, 1998, a decrease of 26.1%. This decrease is primarily related to decreases
in the sale of the Company's cotton as discussed above.
OTHER
Selling, general and administrative expenses totaled $1,304,000 for the
three months ended June 30, 1999 compared to $1,103,000 for the three months
ended June 30, 1998, an increase of 18.2%. Selling, general and administrative
expenses were 2.9% of revenues for the three months ended June 30, 1999 and
1998.
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
$8,409,000 for the three months ended June 30, 1999 compared to $5,956,000 for
the three months ended June 30, 1998, an increase of 41.2%. This increase is
primarily attributable to increased coal shipments and reduced mining costs at
the Company's operations.
Interest expense totaled $2,209,000 for the three months ended June 30,
1999 compared to $1,866,000 for the three months ended June 30, 1998, an
increase of 18.4%. This primarily resulted from the additional interest related
to the issuance of $100,000,000 in principal amount of 9-7/8% Senior Notes due
2008 (the "Senior Notes") on June 8, 1998.
Interest income totaled $511,000 for the three months ended June 30,
1999 compared to $410,000 for the three months ended June 30, 1998, an increase
of 24.6%. 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 a portion of the capital
expenditures being incurred at the Fork Creek operations, the new development
expected to begin production by the first quarter of the year 2000.
Other expense was $345,000 for the three months ended June 30, 1999
compared to $44,000 for the three months ended June 30, 1998. Other expense for
the three months ended June 30, 1999 and June 30, 1998 was primarily due to the
Company's share of the loss from its one-third partnership interest in
International Marine Terminals ("IMT"), a loading facility for ocean-going bulk
cargo vessels located along the Mississippi River. The loss at IMT for the three
months ended June 30, 1999 was greater than the loss for the same period in
1998, primarily due to business interruption expenses resulting from a collision
of a third party vessel into the IMT facility. The first five days of
interrupted service is part of the facility's deductible on its business
interruption insurance and is an uninsured expense that must be claimed against
the vessel owner.
Income taxes were $506,000 for the three months ended June 30, 1999
compared to $285,000 for the three months ended June 30, 1998, an increase of
77.5%. The increase is a result of higher income in the three months ended June
30, 1999 than in the three months ended June 30, 1998. The reduction in the
effective tax rate from 34.9% for the three months ended June 30, 1998 to 19.7%
for the three months ended June 30, 1999 results primarily from the favorable
impact of the amount of the tax over book depletion expense in relation to the
amount of pre-tax income.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Coal sales. Coal sales revenues were $79,544,000 for the six months
ended June 30, 1999 compared to $73,430,000 for the six months ended June 30,
1998, an increase of 8.3%. This increase is primarily attributable to an
increase in the volume of coal shipped. Coal sales volume was 2,855,000 tons for
the first six months of 1999 compared to 2,497,000 tons for the first six months
of 1998, an increase of 14.3%. The increased volume is primarily attributable to
the commencement of shipments on two new contracts that were signed in the
fourth quarter of 1998.
Coal leasing. Coal leasing revenues were $3,704,000 for the six months
ended June 30, 1999 compared to $3,367,000 for the six months ended June 30,
1998, an increase of 10.0%. The increase is primarily attributable to an
increase in the volume of production from lessees. Production from the Company's
lessees was 1,734,000 tons for the six months ended June 30, 1999 compared to
1,379,000 for the six months ended June 30, 1998, an increase of 25.8%.
10
<PAGE> 14
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing, and sales of cottonseed for the six months ended June 30,
1999 and for the six months ended June 30, 1998. Other revenues were $1,286,000
for the six months ended June 30, 1999 compared to $2,044,000 for the six months
ended June 30, 1998, a decrease of 37.1%. The decrease is primarily attributable
to a reduction in revenue from cotton sales. Cotton sales are offered as a
service to 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 $70,462,000 for
the six months ended June 30, 1999 compared to $68,634,000 for the six months
ended June 30, 1998, an increase of 2.7%. This increase resulted primarily from
an increase of 14.3% in tons sold, partially offset by reduced costs (on a per
ton basis) in the Company's production due to efficiency gains in the mining
operations and favorable mining conditions.
Cost of sales-Leasing. Cost of coal lease revenues totaled $2,088,000
for the six months ended June 30, 1999 compared to $1,677,000 for the six months
ended June 30, 1998, an increase of 24.5%. This increase resulted from an
increase in coal mined by the Company's lessees.
Cost of sales-Other. Cost of other revenues were $1,086,000 for the six
months ended June 30, 1999 compared to $1,786,000 for the six months ended June
30, 1998, a decrease of 39.2%. The decrease is primarily attributable to a
decreased volume of cotton and cottonseed sales.
OTHER
Selling, general and administrative expenses totaled $2,535,000 for the
six months ended June 30, 1999 compared to $2,249,000 for the six months ended
June 30, 1998, an increase of 12.7%. Selling, general, and administrative
expenses were 3.0% of revenues for the six months ended June 30, 1999 and 2.9%
of revenues for the six months ended June 30, 1998.
As a result, EBITDA totaled $15,745,000 for the six months ended June
30, 1999 compared to $11,696,000 for the six months ended June 30, 1998, an
increase of 34.6%. This increase is primarily attributable to increased coal
shipments and reduced mining costs at the Company's operations.
Interest expense totaled $4,612,000 for the six months ended June 30,
1999 compared to $3,612,000 for the six months ended June 30, 1998, an increase
of 27.7%. This primarily resulted from the additional interest related to the
issuance of the Senior Notes due 2008.
Interest income totaled $1,087,000 for the six months ended June 30,
1999 compared to $796,000 for the six months ended June 30, 1998, an increase of
36.6%. 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 a portion of the capital expenditures
being incurred at the Fork Creek operations, the new development expected to
begin production by the first quarter of the year 2000.
Other income (expense) was $400,000 of expense for the six months ended
June 30, 1999 compared to $521,000 of income for the six months ended June 30,
1998. Other expense for the six months ended June 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 six months ended June
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
coal producers like the Company.
Income taxes were $903,000 for the six months ended June 30, 1999
compared to $721,000 for the six months ended June 30, 1998, an increase of
25.2%. The increase is a result of higher net income in the six months ended
June 30, 1999. The reduction in the effective tax rate from 32.7% for the six
months ended June 30, 1998 to 20.3% for the six months ended June 30, 1999
results primarily from the favorable impact of the amount of the tax over book
depletion expense in relation to the amount of pre-tax income.
INFLATION
Inflation has not had a significant effect on the Company's business.
11
<PAGE> 15
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 June 30, 1999, the
Company had total indebtedness of $106,562,000, including capital leases and
current maturities. 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 "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 six months ended June 30, 1999, the Company made capital
expenditures of $14,620,000 (including those attributable to the Fork Creek
development of $8,092,000, which includes capitalized interest of $1,093,000).
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). 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 Credit Facility and cash currently on hand or
generated from operations.
The Company is continually engaged in evaluating potential
acquisitions. The Company expects that funding for future acquisitions may come
from a variety of sources, depending on the size and nature of any such
acquisitions. Potential sources of capital include cash on hand, cash generated
from operations, proceeds from the issuance of the Senior Notes, borrowings
under the New Credit Facility, additional external debt financing (including
seller-financing) or capital leases. There can be no assurance that such
additional capital sources will be available to the Company on terms which the
Company finds acceptable, or at all.
Management periodically reviews the profitability of all of the
Company's assets, including those which are not a part of its core coal
operations. The Company's cotton ginning and warehousing operation in South
Carolina has continued to contribute positive cash flow to the Company, and
management has no immediate plans to dispose of the assets that comprise the
operations. If management determines that a sale of this operation would
generate cash in excess of the net present value of estimated future cash flows
from those assets, the Company may consider selling the operation.
Net cash generated by operating activities was $4,695,000 for the six
months ended June 30, 1999 compared to $3,255,000 for the six months ended June
30, 1998. The $1,440,000 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 $14,206,000 for the six
months ended June 30, 1999 compared to $3,010,000 for the three months ended
June 30, 1998. The $11,196,000 increase is primarily the result of increased
capital expenditures, $7,233,000 of which was related to construction costs for
development of the Fork Creek operation. Additionally, to date, the Company
spent $1,654,000 to purchase high wall mining equipment. This equipment was put
into production in the last week of June.
Net cash used for financing activities of $1,480,000 for the six months
ended June 30, 1999 reflects a decrease of $18,806,000 over the $17,326,000
provided from financing activities in the six months ended June 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.
12
<PAGE> 16
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 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 in appeals in the Commonwealth of Kentucky Court
of Appeals. However, its 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.
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 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.
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 the third 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 compliant. Implementation is
scheduled for October 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 or are scheduled for remediation in
the third quarter of 1999.
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
13
<PAGE> 17
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 auxilliary 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 88% of those surveyed
(including its long-term sales contract customers). Favorable responses as to
Year 2000 compliance were received from all of the respondents. The Company is
pursuing the 12% who have not yet responded. Should responses to Year 2000
compliance be unsatisfactory, the Company will take such action as it
deems appropriate, including using alternative vendors who have responded
favorably. 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 $193,000 has been spent to date. The Company
believes that the majority of 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 Year 2000
compliant by October 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> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 22, 1998, a Floyd County, Kentucky Circuit Court jury
found in favor of Cheyenne Resources, Inc. and its wholly owned subsidiary, PC&H
Construction, Inc. (collectively "Cheyenne") in a suit brought against The Elk
Horn Coal Corporation ("Elk Horn", a wholly owned subsidiary of the Company), on
a breach of contract and fraud case relating to a coal lease that was entered
into prior to the Company's purchase of Elk Horn. Elk Horn has appealed the
verdict on liability. On September 24, 1998, Cheyenne first elected its remedies
and specified that as relief it sought over $18 million in compensatory damages
and punitive damages. On October 1, 1998, the jury awarded damages in favor of
Cheyenne of $4.5 million attributable to the fraud claim and $5.0 million
attributable to the breach of contract claim. No punitive damages were awarded.
Elk Horn's litigation counsel and management believe that there are numerous
meritorious grounds for reversal and/or modification of these verdicts on appeal
on the issue of liability as well as the issue of damages. 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.
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 DEVELOPMENT
On August 4, 1999, the Company received a signed letter of intent for
the purchase of the outstanding stock of its subsidiary, The Elk Horn Coal
Corporation, for $52,500,000. The letter of intent is a non-binding expression
of the parties intent and is subject to numerous conditions, including the
following: (i) the completion by buyer of due diligence to its satisfaction, in
its sole discretion, (ii) approval of the Boards of Directors of the buyer and
the Company, (iii) the Hart-Scott-Radino Antitrust Improvements Act, (iv)
approvals and/or consents of third parties, including the Company's lenders and
bondholders, (v) the buyer securing necessary financing for the transaction, and
(vi) the execution of a mutually acceptable definitive purchase agreement. If
these conditions are met, it is anticipated that the transaction could close on
or about November 4, 1999.
Management intends to use the proceeds from this potential sale to fund
a portion of the cost for the Fork Creek development.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
15
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this Amendment No. 1 to this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Dated September 10, 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
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S (1) CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 (UNAUDITED) AND (II)
CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
CONTAINED IN THE FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,021,000
<SECURITIES> 0
<RECEIVABLES> 20,450,000<F1>
<ALLOWANCES> 0
<INVENTORY> 5,230,000
<CURRENT-ASSETS> 38,676,000
<PP&E> 181,746,000<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 243,388,000
<CURRENT-LIABILITIES> 15,617,000
<BONDS> 99,300,000
14,761,000
0
<COMMON> 45,000
<OTHER-SE> 48,667,000<F3>
<TOTAL-LIABILITY-AND-EQUITY> 243,388,000
<SALES> 84,534,000
<TOTAL-REVENUES> 84,534,000
<CGS> 73,636,000
<TOTAL-COSTS> 73,636,000
<OTHER-EXPENSES> 2,535,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,612,000
<INCOME-PRETAX> 4,438,000
<INCOME-TAX> 903,000
<INCOME-CONTINUING> 3,535,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,535,000
<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>
