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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED
DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-60599
PEN HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0852576
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5110 MARYLAND WAY, SUITE 300
BRENTWOOD, TENNESSEE 37027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 371-7300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a specified
date within 60 days prior to the date of filing: None
Indicate the number of shares of each of the registrant's classes of
common stock as of the latest practical date: As of March 27, 2000: 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.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
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PEN HOLDINGS, INC.
INDEX
TABLE OF CONTENTS
<TABLE>
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PAGE
NUMBER
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PART I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K E-1
Glossary of Certain Terms G-1
Kentucky-West Virginia Operations Map M-1
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PART 1.
ITEM 1. BUSINESS.
Pen Holdings, Inc. and its consolidated subsidiaries (the "Company" or
"Pen") are principally engaged in the mining, preparation, marketing and leasing
of primarily compliance coal and low-sulfur coal from mines located in the
Central Appalachian region of eastern Kentucky and southern West Virginia.
Compliance coal is coal which when burned emits less than 1.2 pounds of sulfur
dioxide per million Btu (0.72% for 12,000 Btu). This coal exceeds the sulfur
dioxide emission requirements for air quality of Phase I of the federal Clean
Air Act Amendments (as defined below) and meets the proposed sulfur dioxide
emission requirements for air quality of Phase II of such legislation without
the need for flue gas desulfurization. Throughout this report reference is made
to coal reserves. Management has used, in part, coal reserve data supplied by
independent consultants as the basis for the estimates of coal reserve data
contained herein. These reserve estimates account for mining completed on the
property or other changes in the reserve since the date of the referenced
reserve study. The basis for the Company's recoverable coal reserve estimates
(other than the Company's Fork Creek and Bear Branch reserves) were derived from
a report dated May 1998, in which Marshall Miller & Associates ("Marshall
Miller") had audited the Company's recoverable coal reserves as of such date
(the "Marshall Miller Report"). The estimates of the Company's recoverable Fork
Creek reserves as of September 1997 have been reviewed by Stagg Engineering
Services, Inc. ("Stagg Engineering") as of such date (the "Stagg Engineering
Report"). The estimates of the Company's reserves for Bear Branch are based upon
Management's estimates and representations made by the former owners of those
reserves. As used herein, "reserves" means Proven Reserves or Probable Reserves
(as defined in the Glossary) which could be economically extracted or produced
at the time of the reserve determination. Reserve estimates for all of the
Company's coal properties (except for Bear Branch) are based on the Marshall
Miller Report and the Stagg Engineering Report, which are collectively referred
to herein as the "Reserve Studies". All references to "tons" are to short tons
unless otherwise indicated. For definition of certain coal-related terms, see
Glossary of Certain Terms attached to this Form 10-K.
Based in part on the Reserve Studies, the Company estimates that it
controls the mineral rights to approximately 220 million tons of coal reserves,
of which management believes 193 million tons are owned in fee. In 1999, the
Company sold approximately 5.8 million tons of coal, approximately 81% of which
was generated from captive production with the remainder purchased from other
coal mine operators. In 1999, approximately 73% of the tonnage was sold to seven
long-term sales contract customers, with most of the remainder sold to 24 spot
market customers. The Company sells primarily to domestic public utilities and
industrial customers. In addition to its coal sales, the Company leases the
mineral rights on approximately 52 million tons of its reserves to 24 operators
who mined approximately 4 million tons in 1999. The Company received an average
leasing revenue per ton of coal from its lessees of approximately $2.11 per ton
in 1999. The Company's coal leases typically have a term of five years, although
some leases are for the life of the respective reserves. For the year ended
December 31, 1999, the Company generated revenues, net income and EBITDA (EBITDA
represents operating income plus depreciation, depletion and amortization, and
other non-cash items) all as adjusted to represent only business units currently
in operation, of $173.5 million, $3.6 million and $25.2 million, respectively.
EBITDA may not be comparable to other similarly titled measures of other
companies. However, the Company's management believes EBITDA is a meaningful
measure of performance as substantially all of the Company's financing
arrangements contain covenants based on formulations of EBITDA. Cash provided
(used) by operating activities, investing activities and financing activities
for the year ended December 31, 1999, adjusted to represent only business units
currently in operation was $16.8 million, ($51.5) million and $15.1 million,
respectively.
The Company has demonstrated a long-term record of selectively
increasing its reserves through acquisitions and consistently increasing its
production through the development of its reserves. Since 1992, reserves have
increased more than 300%, and captive production has increased at a compound
annual rate of 13% to 4.7 million tons in 1999. Beginning in 1987, Pen commenced
surface coal mining production with the purchase of approximately 49 million
tons of compliance and low-sulfur coal reserves located in southern West
Virginia ("Kiah Creek"). Prior to the purchase of Kiah Creek, the Company
fulfilled its contractual obligations through coal purchases and limited
contract mining. Approximately 79% of the Company's 1999 coal production was
from Kiah Creek, where four mines (three underground and one surface, including
a highwall miner) were operating.
In 1994, the Company acquired approximately 108 million tons of
primarily compliance and low-sulfur coal reserves located in eastern Kentucky
("Elk Horn"). The Company is currently in negotiations for the sale of its Elk
Horn reserves. Should this sale not be consummated, the company would revert to
its previous strategy for Elk Horn, which was (i) to lease a significant portion
of the reserves to other mining operators under long-term agreements and (ii) to
produce coal for Company sales from contract mining operations. Annual lease
payments including minimum royalties paid to the Company from Elk Horn leases
have averaged $8.8 million per year since 1994.
In November 1997, the Company acquired approximately 80 million tons of
primarily compliance, low-sulfur, and metallurgical coal reserves located in
southern West Virginia ("Fork Creek"). The Company has obtained all necessary
permits that are necessary to begin coal production at the Fork Creek
preparation plant, with the exception of the refuse disposal area permit.
Management expects that the refuse disposal area permit will be granted by
mid-year 2000, which is when the construction on the preparation plant
facilities is expected to be completed. However, given recent developments in
the regulation of the mining industry in West Virginia, no assurance can be
given that this permit will be obtained before completion of the plant
construction. The Company expects to begin mining operations upon the completion
of the preparation plant and receipt of approval on the refuse disposal area
permit. Management anticipates that the Fork Creek operations will produce up to
4.0 million tons annually by 2002 with the majority of this coal being shipped
via CSX rail.
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In December 1999, Pen Holdings purchased an estimated 4,500,000 tons of
coal reserves, a preparation plant, equipment, and several coal sales contracts
located in eastern Kentucky (the "Bear Branch Operations" or "Bear Branch").
There are currently two underground mines (including one contract mine and one
Company-operated mine) producing coal at Bear Branch. The Company expects Bear
Branch to produce approximately 1,000,000 tons of coal annually over the life of
the reserves. The Company will attempt to acquire, by purchase or lease,
additional reserves for its Bear Branch Operations. This coal is transported by
truck i) directly to the customer's plant or ii) to the Company's barge loading
facility along the Big Sandy River, which is a navigable tributary of the Ohio
River. The Bear Branch Operations, along with the contract mines on the Elk Horn
reserves, make up the Company's Levisa Fork operation division.
The Company's strategy has been to secure sales contracts with
customers accessible from its own loading terminals in advance of planned
increases in production. In each of the last five years, the Company's
production has been fully committed under long-term sales contracts. Management
believes that the strategy of being heavily contracted has provided the Company
with greater flexibility in managing mine development, production levels and
reserve life. In the year 2000, management anticipates that, with the expiration
of the Company's long-term sales contract with Taiwan Power Company (the "TPC
contract") in 1999 and the additional production from Fork Creek, more of its
production will be sold on the spot market until commitments can be obtained for
the coal. Although production at Fork Creek is not scheduled to commence until
late in the second quarter of 2000, the Company has already committed to supply
from Fork Creek approximately 800,000 tons in 2000, increasing to approximately
1,300,000 tons annually for 2001. If production is delayed, any contract tonnage
which the Company is unable to ship in 2000 will, at the customer's discretion,
be forfeited or deferred until 2001. The Company's current shipments on sales
contracts and spot market agreements are primarily with domestic public
utilities and industrial customers located in the upper Ohio River Valley and
accessible by river barge transportation from the Company's terminal on the Big
Sandy River. The Company shipped only 2% of its tonnage sold in 1999 by rail,
but it anticipates shipping approximately 50% by rail once Fork Creek is fully
developed.
The Company has an integrated production, preparation and loading
operation which management believes enhances control over product quality and
consistency, storage capability and delivery scheduling for its customers. In
1990, the Company built a modern, heavy media preparation plant at Kiah Creek to
clean and size its underground coal production, which the Company believes: (i)
improved its reputation with customers by increasing the quality and quantity of
marketable compliance and low-sulfur coal production and (ii) positioned the
Company to be able to bid for more favorably priced sales contracts and spot
market agreements. The Company acquired a second preparation plant in December
1999 when it purchased the Bear Branch Operations. The Company is still in the
construction stage on its third preparation plant, which is located on the Fork
Creek Reserves, and has begun to lay the track for its first rail loadout
located at Fork Creek, which is expected to extend product control over new
production at Fork Creek and provide the Company an opportunity to supply new
customers in the Northeast and upper Midwest which are primarily accessible by
rail.
The Company utilizes room and pillar mining in its underground mines
and contour, point removal and highwall mining at its surface mines, which the
Company believes are the most cost-efficient methods for extracting its reserves
given their geological composition. Although a majority of the Company's
production has shifted toward underground mining, which generally can be more
costly due to preparation costs, the Company's cash production costs at the mine
site have declined from $18.81 per ton in 1993 to $17.37 per ton in 1999.
Management believes that this decline resulted from the Company's ability to
improve productivity from its mines and recovery rates at its preparation plant
through better planning, improvements to its Kiah Creek preparation plant and
more efficient use of capital equipment.
In addition to the Company's coal operations, the Company also has a
cotton ginning and warehousing business in South Carolina which accounted for
approximately 3.6% of the Company's 1999 revenues. In 1996, the Company sold Pen
Cotton Tennessee, its Tennessee cotton operations, and closed Pen Cotton Company
of Alabama, Inc., its Alabama cotton merchandising activity. Approximately
18,000 bales of cotton were ginned in 1999, compared with approximately 19,000
bales in 1998. The Company receives fees for its services for ginning and
warehousing. The Company also typically purchases cottonseed from the farmer at
the time of ginning. The seed is then sold to a local oil mill who produces
cottonseed oil or, more commonly, is sold into the dairy cattle market where the
seed is used as feed. In 1999, revenues from this operation were $6.3 million.
The South Carolina cotton operation revenues as a percentage of the Company's
total revenues and EBITDA as a percentage of the Company's total EBITDA for the
period from 1995 through 1999 were 7.2%, 8.1%, 5.6%, 5.0% and 3.6%, respectively
and 0.6%, 2.7%, 1.6%, 1.8%, and 0.1% respectively. Consistent with the Company's
strategy to focus on its core business, the Company may, given the right market
conditions, choose to sell its remaining cotton operations.
Pen Holdings, Inc. ("Pen Holdings") was incorporated under the laws of
Tennessee in 1971. The Company's headquarters are located at Center Court
Building, Suite 300, 5110 Maryland Way, Brentwood, TN 37027, and its telephone
number is (615) 371-7300. As of December 31, 1999, the Company had 347 full time
employees.
RISK FACTORS
Investing in Pen Holdings' Notes (as defined below) involves a high
degree of risk. Investors should carefully consider the risks and uncertainties
described below before investing in the Notes. If any of the following risks
actually occur, Pen Holding's business, financial condition, or results of
operations may be materially adversely affected.
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LEVERAGE; ABILITY TO SERVICE DEBT
The Company has, and will continue to have, substantial leverage. At
December 31, 1999, the Company had approximately $123.1 million of indebtedness,
representing approximately 66.0% of the Company's total capitalization.
Furthermore, subject to certain restrictions in the indenture (the "Indenture")
relating to Pen Holding's 9 7/8% Senior Notes due 2008 (the "Notes"), the
Company may incur additional indebtedness from time to time to finance
acquisitions, to provide for working capital or capital expenditures or for
other purposes.
The level of the Company's indebtedness could have important
consequences to holders of the Notes, including, but not limited to, the
following: (i) the ability of the Company to obtain additional financing for
acquisitions, working capital, capital expenditures (including Fork Creek) or
other purposes, if necessary, may be impaired or such financing may not be on
terms favorable to the Company; (ii) the Company will have significant cash
requirements for debt service; (iii) financial and other covenants and operating
restrictions imposed by the terms of the Indenture and by its Amended and
Restated Credit Facility by and among Pen Holdings, certain of its subsidiaries,
Mellon Bank, N.A., Canadian Imperial Bank of Commerce and First American Bank,
N.A. (the "Credit Facility") will limit, among other things, its ability to
borrow additional funds or to dispose of assets; (iv) a downturn in the
Company's businesses will have a more significant impact on its results of
operations; and (v) the Company may, subject to its covenants, increase
indebtedness senior to the Notes immediately following the issuance of the
Notes.
The ability of Pen Holdings to satisfy its obligations will be
primarily dependent upon the future financial and operating performance of its
subsidiaries and upon its ability to renew or refinance borrowings or to raise
additional equity capital. Each of these alternatives is dependent upon
financial, business and other general economic factors affecting Pen Holdings
and its subsidiaries in particular, many of which are beyond the control of Pen
Holdings and its subsidiaries. If Pen Holdings and its subsidiaries are unable
to generate sufficient cash flow to meet their debt service obligations, they
will have to pursue one or more alternatives, such as reducing or delaying
capital expenditures, refinancing debt, including the Notes, selling assets or
raising equity capital. There can be no assurance that any such alternatives
could be accomplished or could be accomplished on satisfactory terms or that
such actions would yield sufficient funds to retire the Notes and any secured
indebtedness.
HOLDING COMPANY STRUCTURE
Pen Holdings is a holding company that conducts substantially all of
its operations through its subsidiaries. Pen Holdings' only significant assets
are (i) the capital stock of its subsidiaries, all of which are wholly owned
(ii) the building which houses the Company's headquarters and (iii) certain
office furniture and computer equipment. As a holding company, Pen Holdings is
dependent on dividends or other distributions of funds from its subsidiaries to
meet its debt service and other obligations, including its obligations under the
Notes.
EFFECTIVE SUBORDINATION OF THE NOTES AND GUARANTEES; RESTRICTIVE DEBT COVENANTS
The Notes are senior unsecured obligations of Pen Holdings and will
rank generally the same in priority of payment with all existing and future
unsubordinated obligations of Pen Holdings and senior in right of payment to all
existing and future subordinated indebtedness of Pen Holdings. Borrowings under
the Credit Facility are secured by certain of Pen Holdings' and certain of its
subsidiaries' assets, including the stock of Pen Coal Corporation ("Pen Coal")
and The Elk Horn Coal Corporation ("Elk Horn Coal") and substantially all of the
assets of Pen Holdings' active subsidiaries (defined to include Pen Coal, Elk
Horn Coal, River Marine Terminals, Inc., Marine Terminals Incorporated and Pen
Cotton Company of South Carolina). Accordingly, while the Notes will rank
generally the same in priority of payment with borrowings under the Credit
Facility, the Notes will be effectively subordinated to the obligations
outstanding under the Credit Facility to the extent of the value of the assets
securing such borrowings. The active subsidiaries also guarantee obligations
under the Credit Facility. The guarantees of the guarantors will rank generally
the same in priority of payment with all obligations of the respective
guarantors that are not by their terms expressly subordinated to the guarantees.
In the event of a default under the Credit Facility or other secured
indebtedness (whether as a result of the failure to comply with a payment or any
covenant, a cross-default or otherwise), the lenders thereunder will have a
secured claim foreclosure right on their collateral, and, if exercised, the
Company's financial condition and the value of the Notes will be materially
adversely affected. In the event of certain asset sales, the Credit Facility
provides that net proceeds thereof not reinvested as provided therein must be
applied to the repayment of borrowings under the Credit Facility.
The Credit Facility and the Indenture contain covenants that, among
other things, limit the Company's ability to incur additional indebtedness,
prepay subordinated indebtedness, dispose of certain assets, incur liens, make
capital expenditures, make certain investments or acquisitions and otherwise
restrict corporate activities. The Credit Facility also requires the Company to
comply with certain financial ratios and tests, under which the Company is
required to achieve certain financial and operating results. The ability of the
Company to comply with such provisions may be affected by events beyond its
control. A breach of any of these covenants would result in a default under the
Credit Facility. In the event of any such default, depending on the actions
taken by the lenders under the Credit Facility, the Company could be prohibited
from making any payments on the Notes. In addition, such lenders could elect to
declare all amounts borrowed under the Credit Facility, together with accrued
interest thereon, to be due and payable, which would be an event of default
under the Indenture. As a result of the priority and/or security afforded the
Credit Facility, there can be no assurance that the Company would have
sufficient assets to pay indebtedness then outstanding under the Credit Facility
and the Indenture. Any future refinancing of the Credit Facility is likely to
contain similar restrictive covenants.
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RELIANCE ON LONG-TERM SALES CONTRACTS, DEPENDENCE ON SIGNIFICANT CUSTOMERS AND
RISKS ASSOCIATED WITH PRICE ADJUSTMENT PROVISIONS
A substantial portion of the Company's coal is sold pursuant to
long-term sales contracts which are significant to the stability and
profitability of the Company's operations. In 1999, approximately 70% of the
Company's revenues from coal sales were made under long-term sales contracts
with seven customers. The Company's long-term sales contracts provided for coal
to be sold at a price which exceeds the price at which such coal could be sold
in the spot market.
The TPC contract accounted for 36%, 23%, 25%, 23% and 13% of the
Company's coal sales revenues from 1995 through 1999, respectively. The TPC
contract expired in 1999, and was not renewed or extended due to the high
transportation cost to Taiwan from the Gulf of Mexico, as compared with other
sources. The Company's long-term sales contract with Dayton Power & Light, which
expires in 2000, excluding option periods, accounted for 23%, 21%, 24%, 23% and
18% of the Company's coal sales revenues from 1995 through 1999, respectively.
The Company's long-term sales contract with American Electric Power-Mountaineer,
which expires at the end of 2000, accounted for 15%, 18%, 17%, 17% and 16% of
the Company's coal sales revenues from 1995 through 1999. The Company
continually bids on new contracts to replace existing contracts in order to
align supply requirements with its anticipated production levels. There can be
no assurance, however, that the Company will be able to secure additional
contracts to replace any expiring contract or to replace such contract on terms
favorable to the Company. As a result, the loss of these or other of its sales
contracts could have a material adverse effect on the Company's financial
condition and results of operations.
Virtually all of the Company's long-term sales contracts are subject to
price adjustment provisions which permit an increase or decrease in the contract
price at specified times during the contract term to reflect changes in certain
price or other economic indices, taxes and other governmental charges. Long-term
sales contracts also typically contain force majeure provisions allowing
suspension of performance by the Company or the customer to the extent necessary
during the duration of certain events beyond the control of the affected party,
including labor disputes and changes in government regulations. There can be no
assurance that the Company's currently existing contracts will remain in force
for the duration of their current terms.
The operating profit margins realized by the Company under its
long-term sales contracts depend on a variety of factors, including production
costs, transportation costs, delivered coal qualities and quantities and various
general macro-economic indices, many of which are beyond the Company's control.
In addition, price adjustment, price re-opener and other provisions may reduce
the insulation from short-term coal price volatility provided by such contracts
and may adversely impact the Company's operating profit margins. If any of the
Company's long-term sales contracts were modified or terminated, the Company
could be adversely affected to the extent that it is unable to find alternate
customers at the same level of profitability. (See ITEM 7-"Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
RELIANCE ON LONG-TERM MINERAL LEASES
A portion of the Company's revenues is derived from the leasing of its
coal reserves pursuant to long-term (longer than one year) mineral lease
agreements. Although under such leases the lessees are required to pay certain
minimum royalties upon entering into the lease by a lessee, they will generally
be obligated to pay the Company royalties based on the level of its production
from the leased reserve. In 1999, approximately 21.9% of the Company's gross
profits were derived from the leasing of its mineral reserves. See "Selected
Consolidated Financial Data." As of December 31, 1999, the Company had 31
mineral leases with a weighted average remaining life of approximately 6.65
years.
The amount of gross profit the Company derives from long-term mineral
leases is subject to the production of its lessees. The Company evaluates each
prospective lessee to determine its ability to efficiently and productively mine
the leased reserves based in large part upon past performance of the particular
prospective lessee. Beyond this evaluation, however, the ability of the lessee
to generate royalties for the Company is beyond the Company's control. Lessees
and potential lessees participate in the same highly competitive industry as the
Company. There can be no assurance that the companies which lease the Company's
mineral reserves will continue to have production levels from the Company's
reserves at the same levels they have been in the past.
The revenues generated by the Company's leases depends upon a variety
of other factors, including the long-term viability of the lessees and the
Company's ability to renew these leases as they approach termination or find
other willing and suitable lessees. If a number of the leases are terminated due
to the lessee ceasing operations, or the leases are not renewed upon expiration
of their term, the Company's results of operations could be adversely affected
to the extent that it is not able to find suitable alternate lessees.
HIGHLY COMPETITIVE INDUSTRY
The U.S. coal industry is highly competitive, with numerous producers
in all coal producing regions. The Company competes with other large producers
and hundreds of small producers in the United States and abroad. Many of the
Company's customers also purchase coal from its competitors. The markets in
which the Company sells its coal are highly competitive and affected by factors
beyond the Company's control. Demand for coal and the prices that the Company
will be able to obtain for its coal are closely linked to coal consumption
patterns of the domestic electric utility industry, which accounted for
approximately 87.4% of domestic coal consumption in 1999. These coal consumption
patterns are influenced by the demand for electricity, coal transportation
costs, environmental and other governmental regulation, technological
developments and the location, availability and price of competing
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sources of coal, alternative fuels such as natural gas, oil and nuclear, and
alternative energy sources such as hydroelectric power. In addition, during the
mid-1970's and early 1980's, a growing coal market and increased demand
attracted new investors to the coal industry and spurred the development of new
mines and added production capacity throughout the industry. As a result of the
increased development of large surface mining operations, particularly in the
western United States, and more efficient mining equipment and techniques, the
industry has developed excess coal production capacity in the United States.
Competition resulting from excess capacity encourages producers to reduce prices
and to pass productivity gains through to customers. Moreover, because of
greater competition in the domestic electric utility industry and increased
pressure from customers and regulators to lower electricity prices, public
utilities are lowering fuel costs by buying higher percentages of spot coal
through a competitive bidding process and by only buying the amount of coal
necessary under existing contracts to meet their contractual requirements. There
can be no assurance that the Company will continue to be able to obtain
long-term sales contracts with reliable customers as its reserves expand and as
existing contracts expire. If a lower percentage of its revenues are generated
pursuant to long-term sales contracts, the Company will be increasingly affected
by changes in prices for coal in the spot market.
RISKS INHERENT TO MINING
The Company's mining operations are subject to conditions beyond the
Company's control which can negatively affect the cost of mining at particular
mines for varying lengths of time. These conditions include weather and natural
disasters such as heavy rains and flooding, unexpected maintenance problems of
mine access structures, such as shafts and slopes, variations in coal seam
thickness, variations in the amount of rock and soil overlying the coal deposit,
variations in rock and other natural materials and variations in other
geological and other conditions. (See "ITEM 7-Management's Discussion and
Analysis of Financial Condition and Results of Operations.")
IMPORTANCE OF ACQUISITIONS AND RELATED RISKS
The Company has grown, in part, through the acquisition of coal
companies, coal properties, coal leases and related assets, and management
believes such acquisitions will continue to be important to the Company.
Acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention,
failure to retain key acquired personnel, risks associated with unanticipated
events or liabilities and difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies, some or all of
which could have a material adverse effect on the Company's financial condition
and results of operations. There can be no assurance that the Company will be
successful in the development of such acquisitions or that the acquired
companies or other businesses acquired in the future will achieve anticipated
revenues and earnings. (See "ITEM 7-Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources.")
GOVERNMENT REGULATION OF THE MINING INDUSTRY
The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, permitting and
licensing requirements, air quality standards, water pollution, plant and
wildlife protection, reclamation and restoration of mining properties after
mining is completed, the discharge of materials into the environment, surface
subsidence from underground mining and the effects that mining has on
groundwater quality and availability. Numerous governmental permits and
approvals are required for mining operations. The Company believes all material
permits required to conduct its present mining operations have been obtained.
The Company has applied for the refuse disposal area permit at its Fork Creek
Development. The issuance of that permit is pending. (See "ITEM 2 - Properties -
Fork Creek.") The Company may be required to prepare and present to federal,
state or local authorities data pertaining to the effect or impact that any
proposed exploration for or production of coal may have upon the environment.
All requirements imposed by any such authority may be costly and time-consuming
and may delay commencement or continuation of exploration or production
operations. The possibility exists that new legislation and/or regulations and
orders may be adopted which may materially adversely affect the Company's mining
operations, its cost structure and/or its customers' ability to use coal. New
legislation, including proposals related to the protection of the environment
which would further regulate and tax the coal industry, may also require the
Company or its customers to change their operations significantly or incur
increased costs. Such factors and legislation (if enacted) could have a material
adverse effect on the Company's financial condition and results of operations.
Recently, a legal challenge to the issuance of mountaintop mining
permits in West Virginia created uncertainty relating to the regulation of the
coal mining industry in West Virginia. In July 1998, a West Virginia property
owner and environmental group instituted a challenge to state and federal
permits granted in West Virginia for mountaintop removal coal mining in Bragg v.
Robertson, et al. On February 17, 2000, a settlement was reached in Bragg, et
al. Management understands that the settlement provides that the West Virginia
Department of Environmental Protection ("WVDEP") will be required to regulate
mountain top removal operations with a higher level of scrutiny than before, and
that permits for removal operations will not be granted unless concrete
development plans are submitted for post-mining landuses. New regulations to
implement these guidelines are being proposed by the WVDEP. This settlement
resolved all remaining issues in this case except one issue relating to buffer
zones and valley fills. That issue is on appeal to the U.S. Court of Appeals for
the Fourth Circuit. Management believes that although Bragg has delayed the
issuance of certain mining permits, the settlement of the case provides more
guidance to mining companies and operators relating to regulation concerning
West Virginia operations. However, no assurances can be given that other legal
actions or the remaining issue in Bragg, if adversely decided, could have a
material adverse impact on the Company's financial condition and results of
operations.
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<PAGE> 8
RECLAMATION AND MINE CLOSURE ACCRUALS
The federal Surface Mining Control and Reclamation Act of 1977
("SMCRA") and similar state statutes require that mine property be restored in
accordance with specified standards and an approved reclamation plan. The
Company accrues for the costs of final mine closure over the estimated useful
mining life of the property. These costs relate to reclaiming the pit and
support acreage at surface mines and sealing portals and contour reclamation at
underground mines, scrap removal, and contour reclamation at its preparation
plants. Other costs common to both types of mining are related to reclaiming
refuse and slurry ponds. The Company accrues for current mine disturbance which
will be reclaimed prior to final mine closure. The establishment of the final
mine closure reclamation liability and the current disturbance is based upon
permit requirements and requires various estimates and assumptions, principally
associated with costs and production levels. Although the Company's management
believes it is making adequate provisions for all expected reclamation and other
costs associated with mine closures, the Company's financial condition and its
future operating results would be adversely affected if such accruals were later
determined to be insufficient.
IMPACT OF CLEAN AIR ACT AMENDMENTS ON COAL CONSUMPTION
The federal Clean Air Act, as amended ("Clean Air Act") and amendments
to the Clean Air Act ("Clean Air Act Amendments"), and corresponding state laws
which regulate the emissions of materials into the air, affect coal mining
operations both directly and indirectly. Coal mining and processing operations
may be directly affected by state and federal air emissions permitting
requirements and/or emissions control requirements relating to particulate
matter (e.g., "fugitive dust"). Coal mining and processing may also be impacted
by future regulation of fine particulate matter measuring 2.5 micrometers in
diameter or smaller. The Clean Air Act indirectly affects coal mining operations
by extensively regulating the air emissions of coal-fueled utility power plants.
Such regulations directly impact a coal producer's ability to sell coal to its
customers. Regulations relating to fugitive dust and coal combustion emissions
may restrict the Company's ability to develop new mines or could require the
Company to modify its existing operations and products. Title IV of the 1990
Clean Air Act Amendments places limits on sulfur dioxide emissions from electric
power generation plants. Implementing these rules sets baseline emission
standards for such facilities. Reductions in such emissions will occur in two
phases: the first began in 1995 ("Phase I") and applies only to certain
identified facilities; and the second begins in 2000 ("Phase II") and will apply
to most remaining facilities, as well as those subject to the 1995 restrictions.
The affected utilities have been and may be able to meet these requirements by,
among other ways, switching to lower sulfur fuels, installing pollution control
devices such as scrubbers, reducing electricity generating levels or purchasing
or trading "pollution credits." Specific emission sources will receive these
credits which utilities and industrial concerns can trade or sell to allow other
units to emit higher levels of sulfur dioxide. In addition, the Clean Air Act
Amendments require a study of utility power plant emission of certain toxic
substances and their eventual regulation, if warranted.
The effect of the Clean Air Act Amendments on the Company cannot be
completely ascertained at this time. The Company believes that implementation of
Phase II will likely exert a downward pressure on the price of higher sulfur
coal, as additional coal-burning utility power plants become subject to the
restrictions of Title IV. This price effect is expected to result after the
large surplus of pollution credits which has accumulated in connection with
Phase I has been reduced and before utilities electing to comply with Phase II
by installing scrubber sulfur-reduction technologies are able to implement such
a compliance strategy. If the price of compliance coal rises as Phase II is
implemented, scrubber compliance strategies may become more attractive to
utility customers, thereby lessening the downward pressure on the price of high
sulfur coal which could adversely affect the Company's prices for its compliance
and low-sulfur coal. Currently, approximately 74% of the Company's coal reserves
are estimated to be composed of compliance or low-sulfur coal and 26% of the
Company's reserves are estimated to be composed of medium-sulfur coal.
The Clean Air Act Amendments also require that utilities that currently
are major sources of nitrogen oxides in moderate or higher ozone non-attainment
areas install reasonably available control technology ("RACT") for nitrogen
oxides, which are precursors of ozone. In addition, stricter ozone standards are
expected to be implemented by the U.S. Environmental Protection Agency (the
"EPA") by 2003. The Ozone Transport Assessment Group ("OTAG"), formed to make
recommendations to the EPA for addressing ozone problems in the eastern United
States, submitted its final recommendations to the EPA in June 1997. Based on
the OTAG's recommendations, the EPA recently announced a proposal (the "SIP
call") that would require 22 eastern states, including states in which the
Company's customers are located, to make substantial reductions in nitrous oxide
emissions. The EPA expects that states will achieve these reductions by
requiring power plants to reduce their nitrous oxide emissions by an average of
85%. Installation of RACT and additional control measures required under the SIP
call will make it more costly to operate coal-fired utility power plants and,
depending on the requirements of individual state attainment plans and the
development of revised new source performance standards, could make coal a less
attractive fuel alternative in the planning and building of utility power plants
in the future. Any reduction in coal's share of the capacity for power
generation could have a material adverse effect on the Company's financial
condition and results of operations. The effect such legislation or regulation,
or other legislation that may be enacted in the future, could have on the coal
industry in general and on the Company in particular cannot be predicted with
certainty. Although a large portion of the Company's coal reserves are comprised
of compliance and low-sulfur coal, there can be no assurance that the
implementation of the Clean Air Act Amendments or any future regulatory
provisions will not materially adversely affect the Company.
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<PAGE> 9
POTENTIAL IMPACT OF KYOTO PROTOCOL
On December 11, 1997, U.S. government representatives at the climate
change negotiations in Kyoto, Japan, agreed to reduce the emissions of
greenhouse gas (including carbon dioxide and other gas emissions that are
believed to be trapping heat in the atmosphere and warming the Earth's climate)
in the United States. The adoption of the requirements of the Kyoto protocol by
the United States are subject to conditions which may not occur, and are also
subject to the protocol's ratification by the U.S. Senate. The U.S. Senate has
indicated that it will not ratify an agreement unless certain conditions, not
currently provided for in the Kyoto protocol, are met. At present, it is not
possible to predict whether the Kyoto protocol will attain the force of law in
the United States or what its impact would be on the Company. Further
developments in connection with the Kyoto process could adversely affect the
Company's financial condition and results of operations.
REPLACEMENT AND RECOVERABILITY OF RESERVES
The Company's future success depends, in part, upon its ability to
find, develop or acquire additional coal reserves. The reserves of the Company
will generally be depleted as mining operations are conducted, except to the
extent that the Company conducts successful exploration and development
activities or acquires properties containing reserves. To increase reserves and
production, the Company must continue its development, exploration and
acquisition activities or undertake other replacement activities. The Company's
current strategy includes increasing its reserve base through acquisitions of
producing properties and by continuing to exploit its existing properties. There
can be no assurance, however, that the Company's planned development and
exploration projects and acquisition activities will result in significant
additional reserves or that the Company will have continuing success developing
additional mines. Most of the Company's mining operations are conducted on
properties owned or leased by the Company. Because title to most of the
Company's leased properties and mineral rights is not thoroughly verified until
a permit is obtained to mine the property, the Company's right to mine certain
of its reserves may be adversely affected if defects in title or boundaries
exist. In addition, there is no assurance that the Company can successfully
negotiate new leases or mining contracts for properties containing additional
reserves or maintain its leasehold interest in properties on which mining
operations are not commenced during the term of the lease. (See "ITEM
2-Properties.")
PRICE FLUCTUATIONS AND MARKETS
The Company's results of operations are highly dependent upon the
prices received for the Company's coal. Any significant decline in prices for
coal could have a material adverse effect on the Company's financial condition,
results of operation and quantities of reserves recoverable on an economic
basis. Should the industry experience significant price declines from current
levels or other adverse market conditions, the Company may not be able to
generate sufficient cash flow from operations to meet its obligations and make
planned capital expenditures. (See "ITEM 7-Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources.")
To the extent the Company is unable to sell its coal under long-term
sales contracts, it would be forced to cease production or to sell its
production into the spot market. The prices for spot coal sales are typically
below the price received under long-term sales contracts. The Company estimates
that, on average, spot sales for coal shipped through the Big Sandy River
district in 1999 averaged approximately $4-5 less per ton (for comparable
quality coal) than the amount received by the Company under long-term sales
contracts.
Another factor that may impact the sale of coal in the future is the
development of coal commodity trading. The New York Mercantile Exchange
initiated electricity commodity trading a few years ago and has been developing
standards for coal contracts. The Exchange has announced its intention to
initiate coal contract trading based on a Huntington, West Virginia barge
loading hub. However, to date, the Exchange has not initiated such trading. The
development of standards to determine pricing has been difficult because of the
non-homogeneous character of coal and diversity in commodity trading, some
brokerage and marketing firms have entered the coal markets and devised
transactions that mimic commodity activity. Today, over-the-counter trading is
being conducted to a limited extent on both firm forward transactions as well as
put, call and other options. The trend to more commodity type transactions could
mark a significant change in how coal is sold. It is too early to determine
whether this trend will have a material effect on the Company and its operating
results.
Several years ago, the Internal Revenue Service added Section 29 to
its code. This section is entitled "credit for producing fuel from a
non-conventional source." This credit was intended to encourage the production
of alternative fuels that are otherwise more expensive than their equivalent in
oil. For instance a 12,500 BTU coal synthetic fuel product will generate a tax
credit of $26.40 per ton for the synthetic fuel plant owner. In the coal based
synthetic fuel plants, the plant starts with coal fines as the feedstock and
adds a petroleum based emulsion binder to the coal to create a synthetic product
that qualifies for the tax credit. This coal-based product is sold into the
utility market and can be sold at a discount because of the tax credits afforded
to the plant owner. In order to qualify for the credit the synthetic fuel plants
had to be in production by July of 1998. However, it was not until 1999 that the
impact from these plants was felt on the market. While a limited number of
plants became qualified under the code requirements, the synthetic fuel from
these plants were having an effect on the coal market.
RELIANCE ON ESTIMATES OF RECOVERABLE RESERVES
There are numerous uncertainties inherent in estimating quantities of
reserves, including many factors beyond the control of the Company. The coal
reserve data set forth in this report are based on the Reserve Studies.
Estimates of coal reserves and future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as historical production from
the area compared with
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<PAGE> 10
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future coal prices, future
operating costs, severance and excise taxes, development costs and reclamation
costs, all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of coal
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of future net cash flows
expected therefrom prepared by different engineers or by the same engineers at
different times may vary substantially. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances will likely be material. As a result, potential
investors should not place undue reliance on the coal reserve data included
herein. (See "ITEM 2-Properties.")
DEPENDENCE ON KEY MANAGEMENT AND CONTROL BY PRINCIPAL SHAREHOLDER
The Company's business is managed by a number of key personnel, the
loss of any of whom could have a material adverse effect on the Company. In
addition, as the Company's business develops and expands, the Company believes
that its future success will depend greatly on its continued ability to attract
and retain highly skilled and qualified personnel. (See "ITEM 10-Directors and
Executive Officers of the Registrant.")
William E. Beckner beneficially owns 90.4% of the outstanding voting
securities of the Company. Accordingly, Mr. Beckner is able to control the
election of the Company's directors and to determine the corporate and
management policies of the Company, including decisions relating to any mergers
or acquisitions by the Company, sales of all or substantially all of the
Company's assets and other significant corporate transactions, which
transactions may result in a Change of Control under the Indenture and Credit
Facility. (See "ITEM 12-Security Ownership of Certain Beneficial Owners and
Management.")
TRANSPORTATION
The U.S. coal industry depends on rail, trucking and river barge
transportation to deliver shipments of coal to customers. Disruption of these
transportation services could temporarily impair the Company's ability to supply
coal to its customers and thus adversely affect the Company's financial
condition and operating results. Transportation costs are a significant
component of the total cost of supplying coal to customers and can affect
significantly the Company's competitive position and profitability. Increases in
the Company's transportation costs, or changes in such costs relative to
transportation costs incurred by providers of competing coal or of other fuels,
could have an adverse effect on the Company's financial condition and operating
results. Although the Company currently has fixed-price transportation contracts
with its transportation providers, the significant increase in diesel fuel and
gasoline prices could adversely affect the Company's ability to renew these
contracts at current levels. In addition, the Company may be adversely affected
by labor or other disruptions throughout the transportation industry as a whole.
In the past, the Company has experienced delays in transporting coal
from its mine sites near the Kentucky-West Virginia border due to temporary
cessations of operations at its Big Sandy River loading terminals. In the past,
the Big Sandy River has flooded or water levels have risen after sustained
periods of adverse weather conditions, forcing the terminals to cease loading
barges. These terminals were unable to load barges 45 days during the five year
period ending December 31, 1999. Delays in transporting its coal to customers
increases the Company's cost of production and decreases customer satisfaction
and, if prolonged, could have a material adverse effect on the Company. It is
anticipated that coal production from Fork Creek will be shipped on rail via CSX
and, as a result, the Company will be dependent upon CSX to transport this coal.
UNIONIZATION OF LABOR FORCE
The Company is not currently a party to any collective bargaining
agreement and considers its relations with its employees to be good. If some or
all of the Company's currently non-union operations were to become unionized,
the Company could incur higher labor costs and an increased risk of work
stoppages. There can be no assurance that the Company's workforce will not
unionize in the future. In addition, even if the Company remains non-unionized,
its operations may still be adversely affected by work stoppages at unrelated
unionized companies.
NEW TECHNOLOGY
The coal mining industry is increasingly affected by advances in
technology. The ability of the Company to compete successfully may depend on the
extent to which it is able to implement and exploit such technological changes.
The failure of the Company to develop, anticipate or respond to such changes
could have a material adverse effect on the Company. The development of new and
better technologies by the Company's competitors could have a material adverse
effect on the Company's financial condition and results of operations.
FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if a court were to find that, among
other things, at the time Pen Holdings incurred the indebtedness evidenced by
the Notes or a guarantor executed its guaranty, Pen Holdings or the guarantor,
as the case may be: (i) (a) was or is insolvent or rendered insolvent by reason
of such occurrence, (b) was or is engaged in a business or transaction for which
the assets remaining with Pen Holdings or such guarantor
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<PAGE> 11
constituted unreasonably small capital, or (c) intended or intends to incur, or
believed or believes that it would incur, debts beyond its ability to pay such
debts as they mature; and (ii) received or receives less than reasonably
equivalent value or fair consideration for the incurrence of such indebtedness,
then the Notes or guarantee, as the case may be, could be voided, or claims in
respect of the Notes or guarantees could be subordinated to all other debts of
Pen Holdings, as the case may be. In addition, the payment of interest and
principal by Pen Holdings pursuant to the Notes could be voided and required to
be returned to the person making such payment, or to a fund for the benefit of
the creditors of Pen Holdings.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, Pen Holdings or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the salable value of all of its assets at a fair valuation or if
the present fair salable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
On the basis of historical financial information, recent operating
history and other factors, the Company believes that, as a result of the
indebtedness incurred in connection with the Notes and the establishment of the
Credit Facility, it was not rendered insolvent, did not have unreasonably small
capital for the business in which it is engaged and did not incur debts beyond
its ability to pay such debts as they mature. There can be no assurance,
however, as to what standard a court would apply in making such determinations
or that a court would agree with the Company's conclusions in this regard.
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a change of control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of repurchase. However, there
can be no assurance that sufficient funds will be available at the time of any
change of control to make any required repurchases of Notes tendered or that
restrictions in the Credit Facility will allow the Company to make such required
repurchases.
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<PAGE> 12
ITEM 2. PROPERTIES.
Mining Operations
For reference, the Company has included on page M-1, a small scale map
illustrating the Company's coal operation. See "Page M-1-Kentucky-West Virginia
Operation".
Captive Coal Production - Summary. The Company currently conducts
mining operations in various locations by two operating divisions (Kiah Creek
and Levisa Fork), and plans to begin mining operations at a third operating
division (Fork Creek) in 2000. Approximately 55% of the Company's 1999
production originated from its underground mines, and approximately 45%
originated from its surface mines. Coal seam thickness, location and the amount
of overburden required to be removed, among other conditions, are factors
utilized by the Company to determine the appropriate mining method. The Company
has shifted a greater percentage of its production to underground mines to
maximize its reserve utilization. In 1993, 37% of the Company's production was
from underground mines, compared to 55% in 1999. Contract miners, under the
terms of contract mining agreements with the Company, operated in seven
underground mines and three surface mines on the Company's Elk Horn reserves
during 1999. Contract mining has represented 21%, 17%, 22%, 16% and 21% of the
Company's coal production in the periods 1995 through 1999, respectively.
The following table presents the Company's total captive coal
production for the previous five years for its regions:
<TABLE>
<CAPTION>
REGION 1995 1996 1997 1998 1999
------ ---- ---- ---- ---- ----
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C>
Kiah Creek (West Virginia) 2,161 2,746 2,947 3,244 3,659
Levisa Fork (Kentucky) (1) 896 552 557 707 991
----- ----- ----- ----- ------
Total 3,057 3,298 3,504 3,951 4,650
===== ===== ===== ===== =====
</TABLE>
(1) Includes the production of a Company operated mine in Kentucky known as
Big River Mining which produced 255,000 tons in 1995. Includes
production for 1999 by the Bear Branch operation, which the Company
acquired in December 1999. Production from Bear Branch was 18,000 tons
for 1999.
Kiah Creek. The Company's major mining operations are located at Kiah
Creek. These reserves were purchased by the Company in 1987 for $16.5 million,
and mining operations commenced shortly thereafter with surface mining and,
later, underground mining. This property consists of approximately 45,000 acres
of surface area located in Wayne, Lincoln and Mingo counties in southern West
Virginia. In 1995 and 1996, the Company acquired by lease approximately 26
million tons of reserves which are contiguous to Kiah Creek. Management
estimates that the Company currently owns in fee approximately 25 million tons
of reserves and currently controls, primarily through leases, an additional
approximately 23 million tons of reserves on this property. Management estimates
that the quality of its production at Kiah Creek has averaged 10 to 15% ash, and
11,500 to 12,500 Btu per pound, and that its remaining reserves at Kiah Creek
are 45% compliance coal, 28% low-sulfur and 27% medium sulfur.
At Kiah Creek, three underground mining units in three underground
mines are currently operating. The Company operates one underground mining unit
in its Mine #3 in the Coalburg seam, one underground mining unit in its Mine #4
in the 5-Block seam and one underground mining unit in its Mine #5 in the
5-Block seam. In addition, for the first half of 1998, a contract mining company
had operated one underground mining unit at the Company's Mine #2 in the
Coalburg seam. Mining is now complete at Mine #2. Approximately 1.0, 1.5, 1.9,
2.0 and 2.0 million tons of coal were produced from the Company's Kiah Creek
underground mines in the years from 1995 through 1999, respectively.
The Company also operates one surface mine in the 5-Block seam at Kiah
Creek. The Company utilizes contour and point removal and area mining techniques
in its surface mining operations. Late in the second quarter of 1999, the
Company added a highwall miner to its Kiah Creek surface mine to supplement the
production from that mine. Approximately 1.2, 1.3, 1.1, 1.2 and 1.7 million tons
of coal were produced from the Company's Kiah Creek surface mines in the years
from 1995 through 1999, respectively.
The Company owns and operates a computer-controlled, 600 tons-per-hour
heavy media preparation plant on the Kiah Creek property where the coal from all
of its underground mines on this property and a small percentage of its surface
mined coal is processed. The preparation plant sizes the raw product, then
directs the sized product to one of three circuits: heavy media vessel, heavy
media cyclones or spirals. Each of these circuits utilizes gravity separation to
separate coal from rock and other impurities. This preparation plant is also
capable of producing stoker coal. The preparation plant has a storage capacity
of approximately 50,000 tons of raw and washed coal and a processing capacity of
approximately four million raw tons per year. This plant processed 1.0, 1.5,
1.9, 2.0 and 2.2 million tons of clean coal in the years from 1995 through 1999,
respectively, and has averaged recovery rates of 42%, 54%, 51%, 53% and 54% in
the years 1995 through 1999, respectively. The preparation plant currently
operates 24 hours per day, seven days a week.
The coal from the Kiah Creek surface mine and from the Kiah Creek
preparation plant is sent by truck via Company roads and state highways
approximately 50 miles to the Company's Wayne County River Terminal located in
West Virginia along the Big Sandy River, a navigable tributary of the Ohio
River. The Company built its Wayne County facility in 1988 at an initial cost of
approximately $3.5 million and has made additional capital expenditures on this
facility of $3.9 million. This river terminal, which is approximately 15 miles
from Huntington, West Virginia, has blending capabilities and a loading capacity
of approximately six million tons annually.
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<PAGE> 13
Currently, the Company's coal is delivered by barge to its domestic
customers along the Ohio River and Mississippi Rivers. Either an independent
barge operator or the Company's customers transport the coal after it has been
loaded into the river barges. In April 1998, the Company ceased operations at
its smaller river terminal in Kentucky located along the Big Sandy River. This
termination occurred because management believes the Company's barge loading
needs can be more efficiently met at the Company's Wayne County River Terminal.
The Kentucky dock facility is currently being marketed for sale.
The Company shipped 4.1, 4.4, 4.5, 4.7 and 5.0 million tons from its
terminals on the Big Sandy River from 1995 through 1999, respectively. According
to the Big Sandy River Committee, an organization of shipping facilities on the
Big Sandy River, including 10 coal-loading facilities, the Company shipped more
tonnage than any other operator on this river in 1996, 1997, 1998 and 1999.
Generally, the Company undertakes and controls all permitting and
permit maintenance under the SMCRA requirements and similar state requirements
in West Virginia for its captive production. The Company provides surety bonds
for these SMCRA permits.
Levisa Fork. Captive production for the Company on the Elk Horn
reserves (see description of the Elk Horn reserves under Elk Horn Coal Leasing)
is performed by contract miners as a part of the Levisa Fork division. Levisa
Fork's current contract mines include seven underground mines and two surface
mines. Because of the reserve's geological composition, Levisa Fork's contract
underground miners currently utilize conventional mining techniques which
generally result in less volume and productivity per man hour versus utilizing
continuous mining units. However, conventional mining tends to produce coal with
less ash content which reduces the requirement to wash the coal at a preparation
plant. As a result, the Company does not maintain a preparation plant on the Elk
Horn reserve.
Under these contract mining arrangements, the Company contracts with
independent mining companies to extract coal in exchange for a predetermined
per-ton fee. Contract mining fees at the Elk Horn operations have averaged
approximately $14.99 per ton from 1995 through 1999. Contract mining fees
typically exclude taxes and royalties. The relationships between the Company and
its contract miners are generally governed by the Company's standard contract
mining agreement (the "Contract Mining Agreement"). The Contract Mining
Agreement is for a term of one year which is automatically renewed from
year-to-year, although either party may elect not to renew upon 60 days' notice.
Several of the Contract Mining Agreements allow either party to terminate upon
30 days' notice for virtually any reason. Each Contract Mining Agreement
provides that the independent contractor meet certain minimum daily and monthly
production requirements and minimum coal quality standards. Contractors are
given premiums or charged penalties based on delivered coal quality. The
Contract Mining Agreement is not assignable by the contractor without the
express permission of the Company nor is a significant change in ownership of
the contractor permitted. The Contract Mining Agreement requires the contractor
to provide all of the equipment, manpower and other resources necessary to mine
the coal. The contractor must provide all required insurance coverage to its
employees and liability insurance for its operation. The Contract Mining
Agreement provides that the contractor will hold the Company harmless from any
environmental or health and safety liability incurred by the contractor as a
result of its mining. The Company in conjunction with the contractor, determines
the most efficient mining plan for the coal reserve in order to maximize the use
of the resources.
The Company generally undertakes and controls all permitting and permit
maintenance under SMCRA requirements and similar state requirements in Kentucky
(including providing the surety bonds for the SMCRA permits for these contract
mine sites). Each contract miner fulfills the site maintenance requirements for
the SMCRA permits as part of its contract with the Company. All federal Mine
Safety Health Act requirements are also the sole responsibility of the contract
miner.
From 1995 through 1999, contract mining at the Company's Levisa Fork
operations on the Elk Horn reserves produced 282,000, 641,000, 552,000, 557,000,
707,000 and 971,000 tons, respectively. The average raw coal quality produced by
these contract mining operations has consistently exceeded the Company's sales
contract requirements.
In December 1999, the Company purchased the Bear Branch Operations in
Martin and Lawrence counties in eastern Kentucky which are estimated to include
approximately 4,500,000 tons of coal reserves, a preparation plant, equipment
and several coal sales contracts. There are currently two underground mines
(including one contract mine and one Company-operated mine) producing coal. The
Company expects the Bear Branch operation to produce approximately 1,000,000
tons of coal annually over the life of its reserves. Consistent with its
historical strategy, the Company will attempt to acquire, by purchase or lease,
additional reserves for its Bear Branch Operations. The Bear Branch Operations,
along with the contract mines on the Elk Horn reserves, make up the Company's
Levisa Fork operating division.
The coal produced for the Company by the Levisa Fork division is
transported by truck either directly to customers or to the Company's Wayne
County River Terminal on the Big Sandy River for delivery to customers along the
Ohio River and Mississippi River systems and to the Gulf of Mexico.
Fork Creek. In November 1997, the Company acquired a 28,000-acre
contiguous tract located in Kanawha, Boone and Lincoln counties in West
Virginia. Based on the Reserve Studies, Fork Creek contains approximately 80
million tons of coal reserves. The Fork Creek acquisition is consistent with the
Company's strategy to focus its operations on large contiguous properties
located in the Central Appalachia region. The purchase price for this property
was $16 million.
The Fork Creek reserves are a large contiguous tract of mineral
reserves analogous in size to the Kiah Creek reserves. Unlike Kiah Creek,
however, the geological conditions of the Fork Creek reserves have led the
Company to plan primarily underground mining
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<PAGE> 14
operations to extract the mineral. The Company intends to develop Fork Creek for
its own production while selectively contracting with other miners where such
contracts are commercially attractive. Based upon data received from core-hole
drilling done on the property, management estimates that the quality of the
reserves at Fork Creek will generally be between 5% to 13% ash and 12,150 to
13,250 Btu per pound and the reserves are 25% compliance coal, 41% low-sulfur
and 34% medium sulfur.
The Company expects to invest approximately $72 million (excluding
mobile mining equipment) of which $44 million has been invested through December
31, 1999, to develop this property, including the construction of an upgradable
900 tons per hour coal preparation plant and a 150 car, four hour, batch weigh,
fast feed rail loadout adjacent to a CSX rail line and an access road to the
heart of the property. This expected investment for development of Fork Creek is
larger than the investment previously planned because management believes the
income from the property can be significantly increased with a larger
preparation plant and other infrastructures. The Company anticipates that the
construction of the preparation plant and the rail loadout will be complete by
mid-2000 (See "ITEM 1-Business"). A portion of the proceeds from the Notes have
been used to fund a portion of the Fork Creek development, and in particular to
fund the construction of the preparation plant and rail loadout. In addition to
rail transportation, management believes that coal from this property may also
be cost-effectively transported by truck to river terminals located on the
nearby Kanawha River and loaded into river barges for shipment along the Ohio
River and Mississippi River systems. The Fork Creek reserves are accessible by
truck via a state highway and an access road which is now complete. The Company
believes that flexibility in transporting coal by rail or river barge will
provide it with a competitive advantage in increasing the number of potential
customers for coal from this property.
Leasing Operations
Elk Horn Coal Leasing. In 1994, the Company acquired the Elk Horn
properties through its purchase of all of the outstanding capital stock of The
Elk Horn Coal Corporation for $71 million in cash. This acquisition made the
Company one of the largest private owners of coal reserves in Central
Appalachia. The Company produces coal through the use of contract mining
companies and leases to other coal companies the mineral rights to a portion of
the coal from its Elk Horn reserves. The Company's Elk Horn reserves include
approximately 142,000 non-contiguous surface acres of coal bearing lands located
in Floyd, Johnson, Knott, Letcher, Magoffin, Martin and Pike counties in eastern
Kentucky, all of which is owned in fee. Based on the Reserve Studies, the Elk
Horn reserves are estimated to contain more than 92 million tons of coal.
The Company believes that due to the location and geological
composition of its Elk Horn reserves, it is more economically attractive to
either contract with other mining companies or lease to other coal companies
than for the Company to mine. However, the Company continually reevaluates its
reserves and production to determine whether the Company can cost-effectively
extract coal through its own mining operations. Therefore, given the appropriate
economic and geological factors, the Company could determine to mine the
reserves at Elk Horn itself.
The primary use of the Company's Elk Horn property has involved the
leasing of its mineral rights to independent coal producers in exchange for
revenue-based lease royalties. The Company's strategy has been to lease
attractive coal reserves to reliable coal producers under financially sound
leases. The Elk Horn coal reserves are strategically located in eastern
Kentucky, with access to major markets on the CSX rail system, and by barge via
the Big Sandy and Ohio Rivers. Much of these reserves are adjacent to numerous
mining companies' operations. As a result, it often is cost-effective for such
mining companies to continue mining in such areas, including on reserves leased
from the Company for a fee, rather than to cease mining operations at such
locations and redeploy equipment to other locations or idle or dispose of
equipment. All of these factors make the Company's Elk Horn reserves attractive
lease property to independent producers and coal operators.
During the year ended December 31, 1999, the Company had 20 operators
who were actively mining on leased coal reserves, including MC Mining, Inc.,
Bull Creek Coal Corporation, Locust Grove, Inc., Johns Creek Coal Company, Maple
Ridge Inc., Industrial Fuels Minerals Company, Kris-Coal Mining, Inc., Turner
Elkhorn Mining Company, Pike-Letcher Land Company, and Mineral Resources, Inc.
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 generally varies from three to five years with five years
being the most common term. The Company has a limited number of longer term
leases which have terms of 35 years to the exhaustion of the reserve. Under
these longer term leases the royalties range from 4% to 7% of the coal sales
price. A minimum royalty is required whether the property is mined or not. If
sufficient coal is not mined such that the property does not meet the minimum,
the lessee pays the deficiency. Such deficiency (or minimum royalty) can be
recouped by the lessee as a credit against royalties owed on mined coal if there
is production within a period of time after a deficiency is paid. This system
motivates the lessee to maximize production of the property during the term of
the lease. The Company's credit experience with its lessees has historically
been favorable, with minimal bad debt write-offs for the period from 1995
through 1999 of $27,000, $3,000, $111,000, $0 and $40,767, respectively. The
Company has subsequently recovered $86,000 of the $111,000 written off in 1997.
In the period from 1995 through 1999, independent coal producers mined
approximately 3.7, 3.4, 3.0, 3.3 and 4.0 million tons, respectively, of coal
under leases. Management believes that the amount of leased coal mined in 1999
increased from 1998 levels due to several new lessees' mines starting production
in late 1998 and during 1999. Leasing contributed an average of $8.6 million per
year in revenues since 1995 and management believes leasing will continue to
generate significant revenues based on existing leases and indications of future
mining activity by these operators.
In recent years, Elk Horn's internal engineering and mapping group has
identified and prioritized the coal reserves which are favorable for
development. Management has proactively sought lessees for these identified
areas. The Company has also leased in response to inquiries about mining
opportunities in specific seams, areas, or boundaries. The Company is still in
negotiation with a
12
<PAGE> 15
potential buyer for the sale of the outstanding stock of the Elk Horn Coal
Corporation. Management anticipates substantial cash will be generated from the
sale of this subsidiary. The Company's strategy, if the sale is not consummated,
would likely be to retain the Company and revert to its historical objective,
which is to acquire by purchase or lease properties contiguous to its Elk Horn
properties in order to offer additional lease tracts to coal operators.
Transportation Operations
Wayne County River Terminal. The Company's coal is currently
transported to its customers primarily by barges loaded at this river terminal
on the Big Sandy River and, to a much lesser extent, by truck and rail. The
Company generally pays truck charges to deliver coal from its preparation plant
or mine site to its Wayne County River Terminal and incurs costs to load it onto
a barge. Customers typically pay the transportation costs from the barge to the
customer's ultimate destination of delivery. The average annual per ton cost
incurred by the Company for transporting its coal from the preparation plant or
mine site to its river terminals during the period from 1995 through 1999 was
$3.78.
The Company currently contracts with four independent trucking
companies to haul its coal from the mine site or preparation plant to the Wayne
County River Terminal. These hauling arrangements typically consist of a term of
three years and are based on a fixed fee per ton. The Company believes it can
replace, if necessary, any of its independent trucking relationships with other
independent trucking companies upon relatively short notice.
International Marine Terminals. The Company has a one-third partnership
interest in International Marine Terminals ("IMT"). IMT owns and operates an
ocean marine loading facility located in Louisiana south of New Orleans along
the Mississippi River. IMT (i) transloads coal from river barges into gulf
barges or ocean going vessels to Gulf Coast coal customers and international
markets; (ii) transloads petroleum coke for domestic producers (or their sales
brokers); and (iii) provides transloading services for the U.S. steel industry
with imported iron ore and other ferro alloys. During 1999, IMT transloaded a
total of 5.6 million tons of cargo, 0.6 million tons of which related to the
Company's TPC contract, which expired in 1999.
Cotton Operations
Pen Cotton Company of South Carolina. The Company has a cotton ginning
and warehousing business in South Carolina which accounted for approximately
3.6% of the Company's 1999 revenues. In 1996, the Company sold Pen Cotton
Tennessee, its Tennessee cotton operations, and closed Pen Cotton Company of
Alabama, Inc., its Alabama cotton merchandising activity. Approximately 18,000
bales of cotton were ginned in 1999, compared with approximately 19,000 bales in
1998. The Company receives fees for its services for ginning and warehousing.
The Company also typically purchases cottonseed from the farmer at the time of
ginning. The seed is then sold to a local oil mill who produces cottonseed oil
or, more commonly, is sold into the dairy cattle market where the seed is used
as feed. In 1999, revenues from this operation were $6.3 million. The South
Carolina cotton operation revenues as a percentage of total revenues and EBITDA
as a percentage of total EBITDA for the period from 1995 through 1999 were 7.2%,
8.1%, 5.6%, 5.0% and 3.6%, respectively and 0.6%, 2.7%, 1.6%, 1.8% and 0.1%,
respectively. Consistent with the Company's strategy to focus on its core
business, the Company may, given the right market conditions, choose to sell its
remaining cotton operations.
Administrative Offices
The Company maintains administrative offices in Brentwood (located near
Nashville), Tennessee; Kenova, Dunlow, Charleston, and Alum Creek, West
Virginia; and Prestonsburg and Richardson, Kentucky.
13
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS.
On February 25, 2000, in a two-to-one split decision, the Commonwealth
of Kentucky Court of Appeals upheld the September 1998 Floyd County Kentucky
Circuit Court jury verdict in favor of Cheyenne Resources, Inc. and its
wholly-owned subsidiary, PC&H Construction, Inc. (collectively, "Cheyenne"). The
Floyd County Kentucky Circuit Court jury verdict awarded Cheyenne damages of
approximately $9.5 million (plus pre-judgment interest). This lawsuit was
brought against The Elk Horn Coal Corporation ("Elk Horn", a wholly-owned
subsidiary of Pen Holdings, Inc.) on a case relating to a coal lease that was
entered into by Elk Horn prior to the Company's purchase of Elk Horn.
Elk Horn intends to file a petition for re-hearing with the
Commonwealth of Kentucky Court of Appeals. Pending the outcome of that motion,
the Commonwealth of Kentucky Court of Appeals' decision is reviewable by the
Supreme Court of Kentucky. The Supreme Court of Kentucky has complete discretion
to determine whether to accept Elk Horn's request for review of the Commonwealth
of Kentucky Court of Appeals' decision. Notwithstanding the recent decision of
the Commonwealth of Kentucky Court of Appeals, Elk Horn's litigation counsel and
the Company's management believe that there are meritorious grounds for reversal
and/or modification of this verdict on appeal on the issue of liability and
damages. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders of the
Company through the solicitation of proxies or otherwise during 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company does not have a class of equity securities which are
registered under the Securities Exchange Act of 1934. No equity securities were
sold by the Company during the year ended December 31, 1999.
14
<PAGE> 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for each
of the five years ended December 31, 1999 have been derived from the
consolidated financial statements of the Company which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The information presented
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements of the Company and
related notes included elsewhere in this document. For purposes of this
presentation, depreciation, depletion, and amortization have been reclassified
into a separate component of operating expenses from cost of sales and selling,
general and administrative. The balance sheet items as of December 31, 1995,
1996 and 1997 and the statement of operations data and other data for the years
ended December 31, 1995 and 1996 have been derived from audited consolidated
financial statements not included herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER TON AND FOOTNOTE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Coal sales $ 147,169 $ 154,205 $ 161,462 $ 154,908 $ 158,856
Leased coal 10,738 9,348 8,235 6,121 8,386
Other 28,136 18,916 12,592 8,522 6,256
--------- --------- --------- --------- ---------
Total revenues 186,043 182,469 182,289 169,551 173,498
Cost of sales:
Coal sales 127,890 134,267 138,948 130,516 135,055
Leased coal 1,355 1,179 1,171 1,706 1,688
Other 24,443 15,370 9,906 8,206 6,236
--------- --------- --------- --------- ---------
Total cost of sales 153,688 150,816 150,025 140,428 142,979
Gross profit:
Coal sales 19,279 19,938 22,514 24,392 23,801
Leased coal 9,383 8,169 7,064 4,415 6,698
Other 3,693 3,546 2,686 316 20
--------- --------- --------- --------- ---------
Total gross profit 32,355 31,653 32,264 29,123 30,519
Selling, general and administrative 5,540 5,013 5,445 4,407 5,274
Depreciation, depletion, and amortization(1) 13,975 14,742 15,290 15,270 14,861
--------- --------- --------- --------- ---------
Operating income 12,840 11,898 11,529 9,446 10,384
Interest expense(2) 10,340 9,186 7,906 9,682 9,315
Other income 1,698 2,884 6,090 3,244 1,198
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes 4,198 5,596 9,713 3,008 2,267
Income taxes 1,137 1,463 2,246 (213) (1,300)
--------- --------- --------- --------- ---------
Income before discontinued operations 3,061 4,133 7,467 3,221 3,567
Income (loss) from discontinued operations (3) 70 (1,448) -- -- 0
--------- --------- --------- --------- ---------
Net income before extraordinary item $ 3,131 $ 2,685 $ 7,467 $ 3,221 $ 3,567
========= ========= ========= ========= =========
OPERATING DATA:
Coal sold (in thousands of tons) 4,734 5,051 5,317 5,340 5,757
Coal production (in thousands of tons)(4) 3,057 3,298 3,504 3,951 4,638
Leased coal production (in thousands of tons) 3,739 3,406 2,952 3,300 3,979
Average sales price per ton of coal(5) $ 31.09 $ 30.53 $ 30.37 $ 29.01 $ 27.59
Average cash cost per ton of coal shipped (FOB barge)(6) 25.46 23.05 23.22 22.58 21.92
Average leasing revenue per ton of coal(7) 2.87 2.74 2.79 1.85 2.11
STATEMENT OF CASH FLOW DATA:
Net cash provided by operating activities $ 23,176 $ 18,974 $ 17,502 $ 16,883 $ 16,754
Net cash provided (used) by investing activities (801) 2,440 14,900 (12,940) (51,485)
Net cash provided (used) by financing activities (19,409) (27,689) (28,136) 10,918 15,052
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET ITEMS:
Cash and cash equivalents 8,160 1,885 6,151 21,012 1,333
Working capital(8) 4,412 12,953 11,895 9,289 6,684
Total assets 257,628 231,753 224,847 243,827 259,308
Total debt 109,374 96,873 86,371 108,003 123,133
Mandatorily redeemable preferred stock(9) 13,650 15,344 17,097 14,115 13,018
Total shareholders' equity 34,793 35,786 41,486 45,823 50,487
OTHER DATA:
EBITDA(10) 26,815 26,640 26,819 24,487 25,245
Capital Expenditures(11) 5,902 9,542 7,969 17,098 49,495
</TABLE>
- ----------
(1) Excludes $62,000 and $116,000 of finance cost amortization for the twelve
months ended December 31, 1998 and 1997, respectively. For the year ended
December 31, 1999, depreciation, depletion, and amortization excludes
$441,000 of finance cost amortization and $151,000 of capitalized
depreciation related inventory at December 31, 1999.
(2) Excludes capitalized interest expense of $97 for the year ended December
31, 1997, $1,417,000 for the year ended December 31, 1998, and $2,801,000
for the year ended December 31, 1999. There was no capitalized interest
expense in any prior periods.
(3) Represents the earnings (loss) of Pen Cotton Alabama, Pen Hardwood and
Pen California (collectively, the "Discontinued Operations"), which were
discontinued or disposed of in 1996 and 1995.
(4) Coal production includes contract mining production of 641,000, 552,000,
770,000, 844,000, and 989,000 tons for the years ended December 31, 1995,
1996, 1997, 1998 and 1999, respectively.
(5) In the five years ended December 31, 1999, the average sales price per
ton of coal includes per-ton costs of approximately $2.71, $1.97, $1.98,
$1.54, and $.82 respectively, for the shipment of coal sold to Taiwan
Power Company from the Company's loading facility on the Big Sandy River
until loaded into a vessel at a transloading facility along the
Mississippi River near the Gulf of Mexico.
(6) Average cash cost per ton of coal shipped includes all cash costs of coal
production, transportation of the coal to the loading facility, loading
of the coal into barges, and selling expenses.
(7) Represents average leasing revenue per ton of coal for coal produced by
lessees subsequent to the Company's acquisition of Elk Horn.
(8) Equal to current assets (excluding cash and cash equivalents) less
current liabilities (excluding current portion of long-term debt, current
maturities of capital leases and revolving credit loans).
(9) The Company's outstanding Convertible Preferred Stock was issued in
connection with the Company's Recapitalization in December 1995. The
convertible preferred stock which had an original liquidation preference
of $13,650,000 does not pay cash dividends and no dividends accrue from
the date of issuance through December 2000; beginning in January 2001,
dividends will accrue on the then liquidation preference at an annual
rate of 25.25% for a five-year period. The aggregate amount of dividends
which will accumulate from 2001 to 2006 is being recorded evenly from the
date of issuance in 1996 through the redemption date in 2006. The
Convertible Preferred Stock is mandatorily redeemable in January 2006 and
is redeemable with the issuance of a note equal to the liquidation
preference which equally amortizes over the 10 years following the
redemption at an interest rate 2.25% above the rate on five-year U.S.
Treasury obligations. Accumulated dividends will be payable on the same
terms over the same period. The liquidation preference of the Convertible
Preferred Stock, as well as the amounts owed upon redemption of the
Convertible Preferred Stock, are to be reduced by any tax deficiencies or
settlements (including interest and penalties) paid or payable for all
tax periods beginning prior to December 29, 1995. The liquidation
preference of the Convertible Preferred Stock was reduced to $10,238,000
in December 1998 for the January 1999 settlement of the Company's
1982-1989 tax court matters and further reduced to $8,650,000 for the
settlement of the 1990-1993 IRS audit examination. The Convertible
Preferred Stock is convertible, at the option of the holder, into
2,950,000 shares of Class I Common Stock. The conversion feature is
exercisable from January 2001 until January 2002, and immediately prior
to certain fundamental transactions.
(10) EBITDA represents operating income plus depreciation, depletion and
amortization. EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principals 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.
EBITDA may not be comparable to other similarly titled measures of
other companies. However, the Company's management believes EBITDA is a
meaningful measure of performance as substantially all of the Company's
financing arrangements contain covenants based on formulations of
EBITDA.
(11) Includes capital additions financed through capital lease transactions
amounting to $1,287,000, $7,221,000, $4,098,000, $2,156,000 and $0 for
the years ended December 31, 1995 through 1999. Capital expenditures
for 1999 include $10,255,000 related to the purchase of the Bear Branch
reserves and related assets.
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION 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 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 "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.
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>
YEAR ENDED
DECEMBER 31,
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING DATA:
Revenues 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales 90.6 91.5 90.3
Selling, general and administrative 3.4 3.0 3.3
------ ----- ------
Operating income 6.0 5.5 6.4
Interest expense 5.4 5.7 4.3
Other income .7 2.0 3.3
------ ----- ------
Income from continuing operations before income taxes 1.3 1.8 5.4
Provision (benefit) for income taxes (0.7) (0.1) 1.3
------ ----- ------
Income before extraordinary item 2.0 1.9 4.1
Extraordinary item, net of taxes -- (1.1) --
------ ----- ------
Net income 2.0% 0.8% 4.1%
====== ===== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
REVENUES
Coal sales. Coal sales revenues were $158,856,000 for the year ended
December 31, 1999 compared to $154,908,000 for the year ended December 31, 1998,
an increase of 2.5%. The increase primarily resulted from increased volume
shipped. Coal sales volume was 5.8 million tons for the year ended December 31,
1999 compared to 5.3 million tons for the year ended December 31, 1998, an
increase of 7.8%. During the fourth quarter of 1999, the Company made its final
shipment on the TPC Contract. (See "ITEM 1 - Reliance on Long Term Sales
Contracts, Dependence on Significant Customers and Risk Associated With Price
Adjustment Provisions.")
Coal leasing. Coal leasing revenues were $8,386,000 for the year ended
December 31, 1999 compared to $6,121,000 for the year ended December 31, 1998,
an increase of 37.0%. The increased revenue primarily resulted from increased
production from lessees' mining operations which was 4.0 million tons for the
year ended December 31, 1999 compared to 3.3 million tons for the year ended
December 31, 1998, an increase of 20.6%.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the years ended December 31, 1999
and December 31, 1998. Other revenues were $6,256,000 for the year ended
December 31, 1999 compared to $8,522,000 for the year ended December 31, 1998, a
decrease of 26.6%. The decrease is primarily attributable to a reduction of
$1,730,000 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.
17
<PAGE> 20
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $147,021,000 for
the year ended December 31, 1999 compared to $142,642,000 for the year ended
December 31, 1998, an increase of 3.1%. This increase resulted primarily from
increased volume of coal shipped. Cost of coal sold decreased from $26.78 per
ton in 1998 to $25.53 per ton in 1999, due primarily to favorable weather
conditions and improved operating efficiencies at the Kiah Creek operation.
Cost of sales-Leasing. Cost of coal lease revenues totaled $4,336,000
for the year ended December 31, 1999 compared to $3,980,000 for the year ended
December 31, 1998, an increase of 8.9%. The increase primarily resulted from an
increase in the volume of coal mined by lessees.
Cost of Sales-Other. Cost of other revenues were $5,868,000 for the
year ended December 31, 1999 compared to $8,480,000 for the year ended December
31, 1998, a decrease of 30.8%. This decrease is primarily related to decreases
in cotton sales as discussed above. See "Revenues-Other."
OTHER
Selling, general and administrative expenses totaled $5,889,000 for the
year ended December 31, 1999 compared to $5,003,000 for the year ended December
31, 1998, an increase of 17.7%. This 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 3.4% and 3.0% of
revenues for the years ended December 31, 1999 and 1998, respectively.
As a result, EBITDA ("EBITDA" as defined to mean operating income plus
depreciation, depletion and amortization, and other non-cash items; 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 $25,245,000 for the year ended December 31, 1999 compared
to $24,487,000 for the year ended December 31, 1998, an increase of 3.1%. This
increase is primarily attributable to the increased coal sales.
Interest expense totaled $9,315,000 for the year ended December 31,
1999 compared to $9,682,000 for the year ended December 31, 1998, a decrease of
3.8%. This decrease is primarily attributable to interest payable to the
Internal Revenue Service relating to settlement of the Company's 1982-1989 tax
court matter, which was recorded in the fourth quarter of 1998.
Interest income totaled $1,926,000 for the year ended December 31, 1999
compared to $2,213,000 for the year ended December 31, 1998, a decrease of
13.0%. This primarily resulted from the Company's use of cash (which was
previously earning interest) to develop the Fork Creek operations.
Other expense was $728,000 for the year ended December 31, 1999
compared to income of $1,031,000 for the year ended December 31, 1998. Other
expense for 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 1998 results primarily from gain on the sale of certain mining
equipment and income that resulted from a U.S. Supreme Court ruling relating to
the Coal Industry Retirees Health Benefit Act (CIRHBA) which was favorable to
the Company.
Income taxes were a benefit of $1,300,000 for the year ended December
31, 1999 compared to a benefit of $213,000 for the year ended December 31, 1998,
a decrease in tax expense of $1,087,000. The decrease is a result of lower
pre-tax income by $741,000 in the year ended December 31, 1999 than in the year
ended December 31, 1998 and the impact of the reduction in the effective tax
rate. The reduction in the effective tax rate from (7.1%) in 1998 to (57.3%) in
1999 results principally from (i) the favorable impact of the amount of the tax
over book depletion expense in relation to the amount of pretax income and (ii)
the reduction of taxes previously accrued for the settlement of the 1990-1993
IRS examination.
The Company had net income of $3,567,000 for the year ended December
31, 1999 compared to $1,355,000 for the year ended December 31, 1998. The
increase resulted primarily from the extraordinary loss on retirement of debt in
1998.
18
<PAGE> 21
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUES
Coal sales. Coal sales revenues were $154,908,000 for the year ended
December 31, 1998 compared to $161,462,000 for the year ended December 31, 1997,
a decrease of 4.1%. Although overall coal sales volume remained consistent
between 1997 and 1998, the decreased revenue is primarily attributable to a
reduction of 112,000 tons in shipments to an international government owned
foreign utility with which the Company had a long-term sales contract. Sales
prices on this contract are higher than domestic sales prices because they
include the additional cost of transportation and handling included with
international shipments. The reduced tonnage to this customer is the result of a
concession made with the customer during annual price renegotiations.
Coal leasing. Coal leasing revenues were $6,121,000 for the year ended
December 31, 1998 compared to $8,235,000 for the year ended December 31, 1997, a
decrease of 25.7%. Production from lessees' mining operations was 3.3 million
tons for the year ended December 31, 1998 compared to 3.0 million tons for the
year ended December 31, 1997, an increase of 11.8%. The reduction in revenue is
primarily attributable to minimum royalties which were recognized in prior
periods, and are now being credited to lessees as production is generated from
the lessee mines.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the year ended December 31, 1998
and cotton ginning, cotton warehousing, sales of cottonseed, and barge revenue
for the year ended December 31, 1997. Other revenues were $8,522,000 for the
year ended December 31, 1998 compared to $12,592,000 for the year ended December
31, 1997, a decrease of 32.3%. This decrease is primarily attributed to
$2,300,000 of barge lease revenues for 1997, which were not earned in 1998 due
to the sale of the Company's barge fleet in December 1997. The decrease is also
attributable to a reduction of $1,473,000 in revenue from cotton sales. Cotton
sales are offered as a service to the Company's ginning customers and varies
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 $142,642,000 for
the year ended December 31, 1998 compared to $150,076,000 for the year ended
December 31, 1997, a decrease of 5.0%. This decrease resulted primarily from
reduced costs in the Company's production due to efficiency gains in the mining
operations and favorable mining conditions and reduced shipping costs due to a
lower volume of international shipments.
Cost of sales-Leasing. Cost of coal lease revenues totaled $3,980,000
for the year ended December 31, 1998 compared to $3,410,000 for the year ended
December 31, 1997, an increase of 16.7%. The increase primarily resulted from an
increase in the volume of coal mined by lessees and increased legal costs of
$385,000 primarily to litigate the Cheyenne lawsuit (see discussion in Part I,
ITEM 3 - Legal Proceedings).
Cost of Sales-Other. Cost of other revenues were $8,480,000 for the
year ended December 31, 1998 compared to $11,184,000 for the year ended December
31, 1997, a decrease of 24.2%. This decrease is primarily related to decreases
in barge costs for the company's barge fleet and cotton sales as discussed
above. See "Revenues-Other".
OTHER
Selling, general and administrative expenses totaled $5,003,000 for the
year ended December 31, 1998 compared to $6,090,000 for the year ended December
31, 1997, a decrease of 17.8%. This decrease primarily resulted from reductions
in salaries and legal fees. Selling, general and administrative expenses were
3.0% and 3.3% of revenues for the year ended December 31, 1998 and 1997,
respectively.
As a result, EBITDA totaled $24,487,000 for the year ended December 31,
1998 compared to $26,819,000 for the year ended December 31, 1997, a decrease of
8.7%. This decrease is primarily attributable to the reduced revenue in 1998
from the sale of the Company's barge fleet in December 1997. Excluding the
Company's barge fleet, EBITDA was $24,553,000 for the year ended December 31,
1997.
Interest expense totaled $9,682,000 for the year ended December 31,
1998 compared to $7,906,000 for the year ended December 31, 1997, an increase of
22.5%. This increase is primarily attributable to interest payable to the
Internal Revenue Service relating to settlement of the Company's 1982-1989 tax
court matter.
Interest income totaled $2,213,000 for the year ended December 31, 1998
compared to $1,224,000 for the year ended December 31, 1997, an increase of
80.8%. This primarily resulted from the additional cash temporarily invested and
earning interest on the proceeds from the Senior Notes.
Other income was $1,031,000 for the year ended December 31, 1998
compared to $4,866,000 for the year ended December 31, 1997. The decrease
primarily resulted from the sale and resulting gains of $3,574,000 on the
Company's barge fleet which impacted the 1997 results. Exclusive of the barge
sale, Other Income for both periods results primarily from gain on the sale of
certain mining equipment. During 1998 the gain of the sale of mining equipment
totaled $712,000 compared to $1,326,000 in 1997.
19
<PAGE> 22
Income taxes were a benefit of $213,000 for the year ended December 31,
1998 compared to a provision of $2,246,000 for the year ended December 31, 1997,
a decrease of $2,459,000. The decrease is a result of lower income in the year
ended December 31, 1998 than in the year ended December 31, 1997. The reduction
in the effective tax rate from 23.1% in 1997 to (7.1%) in 1998 results primarily
from the favorable impact of the amount of the tax over book depletion expense
in relation to the amount of pretax income.
After the extraordinary item related to the extinguishment of debt of
$1,866,000 (net of tax), the Company had net income of $1,355,000 for the year
ended December 31, 1998 compared to $7,467,000 for the year ended December 31,
1997. The decrease resulted primarily from the extraordinary item in 1998 and
the gain of the sale of the company's barge fleet in 1997.
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 Notes is payable semiannually on June 15 and December 15 of each year,
commencing December 15, 1999. As a result of the Offering, the Company has
significant indebtedness and debt service requirements. At December 31, 1999,
the Company had total indebtedness of $123,133,000, including capital leases and
current maturities. The Indenture for the 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 1.75% above LIBOR and 0.75% above Prime Rate. At December
31, 1999, the credit facility had a borrowing of $17,505,000 and a standby
letter of credit commitment of $4,360,000. Borrowings bear interest at a
variable rate, based on either LIBOR (an effective rate of 7.56% at December 31,
1999), or the Prime Rate (an effective rate of 9.0% at December 31, 1999). 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 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 year ended December 31, 1999, the Company made capital
expenditures of $49,495,000 (including those attributable to the Fork Creek
development of $26,956,000, which includes capitalized interest of $2,801,000).
The Company is projecting capital expenditures for 2000 of approximately
$55,099,000 (including Fork Creek expenditures of $43,652,000, which includes
capitalized interest of $3,037,000).
As previously disclosed, the Company made a decision to increase the
planned production from Fork Creek and as a result, capital expenditures with
respect to that development have increased substantially from those originally
projected. The Company's original plans called for a 400 ton per hour (1.7
million annual tons) preparation plant at this site and four mining units. The
Company's revised plan calls for a 900 ton per hour (four million annual tons)
preparation plant and six mining units. As a result, capital expenditures for
the project increased from approximately $45 million to $72 million. In
addition, due to the increase in the number of mining units, mining equipment
costs increased from approximately $12 million to approximately $19 million.
Management believes that the increase in revenues and EBITDA from this larger
project will, on a proportionate basis, exceed these increased costs.
Management believes that construction of Fork Creek will be complete
and all necessary permits will be issued by the end of the second quarter of
2000 and that mining operations will commence and coal shipments will begin by
the end of the second quarter of 2000. Originally, it was anticipated that coal
deliveries from Fork Creek would begin in early 2000. The delay was caused
primarily by delays in the permitting process.
Management believes that it will have sufficient sources of liquidity
to fund the completion of Fork Creek, other capital expenditures and its working
capital needs from borrowings under the Credit Agreement, operating cash flow,
and from negotiating and entering into borrowings or leases with equipment
finance companies or other borrowings up to amounts permitted by the Credit
20
<PAGE> 23
Agreement and Indenture. In addition, the Company's liquidity will be adversely
impacted in the event that Elk Horn's appeals are denied and it is required to
pay its current judgment to Cheyenne. (See ITEM 3, "Legal Proceedings," of this
Form 10-K and the discussion of this litigation below.) The Company's liquidity
will be positively impacted to the extent it is able to effect asset sales,
including its previously announced sale of Elk Horn. There can be no assurance,
however, that the Company will be able to consummate any such asset sales or
financings on terms acceptable to it.
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. 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 $16,754,000 for the year
ended December 31, 1999 compared to $16,883,000 for the year ended December 31,
1998, a decrease of $129,000.
Net cash used by investing activities was $51,485,000 for the year
ended December 31, 1999 compared to net cash used by investing activities of
$12,940,000 for the year ended December 31, 1998. The $38,545,000 increase in
net cash used by investing activities is primarily attributed to the increased
capital expenditures for the year ended December 31, 1999 of $37,063,000,
primarily due to increased mine development costs for Fork Creek and the
purchase of the Bear Branch operation during 1999.
Net cash provided from financing activities of $15,052,000 for the year
ended December 31, 1999 reflects an increase of $4,134,000 over the $10,918,000
provided by financing activities for the year ended December 31, 1998. The
increase in net cash provided resulted primarily from advances on the Company's
revolving credit facility.
On February 25, 2000, in a two-to-one split decision, the Commonwealth
of Kentucky Court of Appeals upheld the September 1998 Floyd County Kentucky
Circuit Court jury verdict in favor of Cheyenne. The Floyd County Kentucky
Circuit Court verdict awarded Cheyenne damages of approximately $9.5 million
(plus pre-judgment interest). The Company has filed a petition for re-hearing
with the Commonwealth of Kentucky Court of Appeals. Pending the outcome of that
petition, the Commonwealth of Kentucky Court of Appeals' decision is reviewable
by the Supreme Court of Kentucky. The Supreme Court of Kentucky has complete
discretion to determine whether to accept Elk Horn's request for review of the
Commonwealth of Kentucky Court of Appeal's decision. Notwithstanding the recent
decision of the Commonwealth of Kentucky Court of Appeals, Elk Horn's litigation
counsel and the Company's management believe that there are meritorious grounds
for reversal and/or modification of this verdict on appeal on the issue of
liability and damages. 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. (See "ITEM 3-Legal Proceedings" and "NOTE 16
- -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 the Convertible Preferred Stock of $8,649,000 (which is net of a
$3,413,000 reduction and a $1,588,000 reduction for settlement of the Company's
tax matters in 1998 and 1999, respectively) plus accrued dividends of
$10,920,000 will be due in January 2006. The Convertible Preferred Stock will be
redeemed at that time by the issuance of a note payable which amortizes over the
10 years following the redemption, unless converted to common stock in
accordance with its terms.
YEAR 2000
The 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.
The Company has not experienced any significant impact on its systems
or operations as a result of the Year 2000 Issue. The Company spent $272,000 on
its Year 2000 efforts. 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 were
capitalized. These costs do not include the costs of implementing contingency
plans or internal costs associated with the review of Year 2000 issues.
In addition, the Company has not encountered any significant problems
with third parties such as its customers, suppliers, or other business partners.
However, if these or other third parties with whom the Company conducts business
experience develop Year 2000 Issues, the Company could experience a material
adverse impact on the Company's operations.
The Company has developed written contingency plans to assure continued
operations in the event mission critical system failures or unforeseen supply
chain interruptions should occur.
21
<PAGE> 24
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements which have not been adopted by
the Company and which are expected to have a material effect on the Company's
financial statements.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
22
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PEN HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants 24
Consolidated Balance Sheet as of December 31, 1999 and 1998 25
Consolidated Statement of Income for the Years Ended December 31,
1999, 1998 and 1997 26
Consolidated Statement of Changes in Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 27
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 30
</TABLE>
23
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors
of Pen Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of changes in shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Pen Holdings, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Nashville, Tennessee
February 25, 2000
24
<PAGE> 27
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,333 $ 21,012
Accounts receivable (net of allowance for doubtful accounts of $605 and $558 in 1999 and
1998, respectively) 17,837 17,970
Inventories 2,960 3,620
Deferred income taxes -- 1,435
Refundable income taxes 682 --
Other assets 2,290 1,859
-------- --------
Total current assets 25,102 45,896
Investment in an unconsolidated affiliated company 3,692 4,559
Coal reserves and mine development costs, net 140,329 135,487
Property, plant and equipment, net 68,519 38,832
Long-term investments 15,663 14,445
Other assets 6,003 4,608
-------- --------
$259,308 $243,827
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 113 $ 104
Current maturities of capital leases 1,252 2,354
Accounts payable 9,744 7,251
Accrued liabilities 7,129 6,951
Income taxes payable -- 1,393
Deferred income taxes 212 --
-------- --------
Total current liabilities 18,450 18,053
Revolving credit loans 17,505 --
Long-term debt 103,233 103,267
Long-term capital leases 1,030 2,278
Deferred income taxes 51,900 56,806
Other liabilities 3,685 3,485
-------- --------
Total liabilities 195,803 183,889
-------- --------
Guaranties, commitments and contingencies (Notes 15 and 16)
Mandatorily redeemable preferred stock (Note 10) 13,018 14,115
Redeemable common stock warrants (Note 11)
Shareholders' equity:
Class I common stock, $.01 par value; 7,800,000 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 50,423 45,759
-------- --------
Total shareholders' equity 50,487 45,823
-------- --------
$259,308 $243,827
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 28
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 173,498 $ 169,551 $ 182,289
Operating expenses
Cost of sales 157,225 155,102 164,670
Selling, general and administrative 5,889 5,003 6,090
--------- --------- ---------
Operating income 10,384 9,446 11,529
Other (income) expense
Interest expense 9,315 9,682 7,906
Interest income (1,926) (2,213) (1,224)
Other (income) expense 728 (1,031) (4,866)
--------- --------- ---------
Income before income taxes 2,267 3,008 9,713
Provision (benefit) for income taxes (1,300) (213) 2,246
--------- --------- ---------
Income before extraordinary item 3,567 3,221 7,467
Extraordinary item - loss related to early retirement of debt (less
applicable income tax credits of $962 in 1998) -- (1,866) --
--------- --------- ---------
Net income 3,567 1,355 7,467
Accretion of preferred stock 491 431 1,753
--------- --------- ---------
Net income available to common shareholders $ 3,076 $ 924 $ 5,714
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 29
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollar amounts in thousands)
<TABLE>
<CAPTION>
CLASS I CLASS II
COMMON STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------ ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,290,000 $43 200,000 $2 $19 $ 35,722 $ 35,786
Purchase of Treasury Stock and
concurrent cancellation (22,450) (14) (14)
Accretion of Preferred Stock (1,753) (1,753)
Net Income 7,467 7,467
--------- --- ------- -- --- -------- ---------
Balance at December 31, 1997 4,290,000 43 177,550 2 19 41,422 41,486
Adjustment for tax settlement (Note 10) 3,413 3,413
Accretion of Preferred Stock (431) (431)
Net Income 1,355 1,355
--------- --- ------- --- --- -------- ---------
Balance at December 31, 1998 4,290,000 43 177,550 2 19 45,759 45,823
Accretion of Preferred Stock (491) (491)
Adjustment for tax settlement (Note 10) 1,588 1,588
Net Income 3,567 3,567
--------- --- ------- -- --- -------- ---------
Balance at December 31, 1999 4,290,000 $43 177,550 $2 $19 $ 50,423 $ 50,487
========= === ======= == === ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 30
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,567 $ 1,355 $ 7,467
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 15,453 15,332 15,406
Equity in net (earnings) losses of affiliates 850 (249) 167
Deferred income taxes (3,259) (3,360) (1,027)
Gain on sale of equipment (283) (525) (6,339)
Minority interest proportionate share
of earnings (10) -- (27)
Interest income on long-term investments (1,218) (1,122) (1,070)
Extraordinary loss on debt refinancing, net of tax -- 1,866 --
-------- -------- --------
Cash generated from operations, before
changes in assets and liabilities 15,100 13,297 14,577
Changes in assets and liabilities, net of
effects from acquisition of Bear Branch:
Accounts receivable 486 (473) 3,236
Inventories 680 1,140 4,079
Accounts payable and accrued expenses 433 1,861 (3,579)
Other 55 1,058 (811)
-------- -------- --------
Net cash provided by operating activities 16,754 16,883 17,502
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (39,240) (14,942) (3,871)
Purchase of coal reserves (Note 13) -- -- (5,000)
Payment for purchase of Bear Branch assets (Note 13) (12,765) -- --
Proceeds from sale of barges and equipment 520 1,009 23,494
Distributions from affiliated companies -- 993 277
-------- -------- --------
Net cash provided (used) by investing
activities (51,485) (12,940) 14,900
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Buyout of stock warrants -- (3,000) --
Proceeds from issuance of long-term debt -- 99,216 221
Repayment of long-term debt (103) (77,065) (19,360)
Repayment of capital leases (2,350) (4,278) (3,798)
Net borrowings (payments) under line of
credit agreements and current notes
payable 17,505 -- (5,185)
Debt issuance cost -- (3,955) --
Purchase of treasury stock -- -- (14)
-------- -------- --------
Net cash provided (used) by financing activities 15,052 10,918 (28,136)
-------- -------- --------
Net increase (decrease) in cash (19,679) 14,861 4,266
Cash and cash equivalents at beginning
of year 21,012 6,151 1,885
-------- -------- --------
Cash and cash equivalents at end of year $ 1,333 $ 21,012 $ 6,151
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 31
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $13,608 $9,315 $8,096
Income taxes 3,432 1,675 3,414
</TABLE>
SUPPLEMENTAL INFORMATION ON NON-CASH TRANSACTIONS:
In 1998 and 1997, the Company leased certain machinery and equipment under
capital leases as more fully described in Note 9.
The Company purchased property containing coal reserves in November 1997 for
consideration of $16,000,000 comprised of $5,000,000 paid at closing and an
$11,000,000 note payable. This note was subsequently paid off from the proceeds
of the issuance of the Senior Notes in 1998.
The Company sold the assets of its lumber operations in August 1998 for
consideration of $400,000 comprised of $25,000 paid at closing and a note
receivable of $375,000. This note was subsequently paid off by the issuer in
1999.
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 32
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS:
DESCRIPTION OF THE BUSINESS
Pen Holdings, Inc. and its consolidated subsidiaries (the Company) is
primarily engaged in the mining and sale of coal, selling predominantly to
utility companies. The Company also receives royalty income from coal reserves
leased to other companies. The Company's coal reserves and mining operations are
in Kentucky and West Virginia. The Company also processes, warehouses, and sells
cotton and cottonseed.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its majority and wholly-owned subsidiaries. Financial statements of
the subsidiaries are not material for separate presentation. All significant
intercompany balances and transactions have been eliminated in consolidation.
The investment in an affiliated enterprise in which the Company owns
less than a controlling interest is presented under the equity basis of
accounting representing the Company's investment in affiliate, reduced by
goodwill amortization and increased (decreased) by the Company's proportionate
equity in the net income (losses) of the unconsolidated affiliate.
RECOGNITION OF REVENUE
Revenue from sale of coal and cottonseed is recognized when title
passes to the customer. Royalty income is recognized when coal is mined by
lessees. Revenue from cotton ginning and barge rental (1997 only) is recognized
when services are performed.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid interest-bearing instruments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES
Inventories, consisting of coal and cottonseed, are stated at the lower
of cost or market with cost being determined on the first-in, first-out method.
LONG-TERM INVESTMENTS
Long-term investments are considered as held to maturity and are
carried at amortized cost.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash, accounts receivable,
long-term investments and other off-balance sheet financial instruments. The
Company maintains cash and cash equivalents mostly in large financial
institutions. Concentration of credit risk with respect to trade receivables is
limited due to the diversity of the Company's business and customer base.
Long-term investments principally consist of U.S. Government obligations.
The Company performs continuing credit evaluations of its customers and
does not generally require collateral. Historically, the Company has not
experienced significant losses related to individual customers in any particular
industry or geographic region.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable,
short-term notes payable, revolving credit loans and accounts payable
approximate fair value due to the short-term maturities of these assets and
liabilities. The fair value of the Senior Notes at December 31, 1999 was
$94,500,000 based on quoted market prices. The carrying value of $99,340,000 was
based on amortized cost. The carrying amount of all other long-term debt
approximates fair value. The carrying amount of mandatorily redeemable stock
approximates fair value as the dividend rate is the equivalent of a market rate
for securities of that type. The market value of long-term investments in U.S.
Government obligations was $16,329,000 and $16,649,000 at December 31, 1999 and
1998, respectively, based on market quotes with a carrying amount of $15,645,000
and $14,427,000, respectively, based on amortized costs.
30
<PAGE> 33
DEBT ISSUANCE COSTS
Debt issuance costs are recorded as assets and amortized over the lives
of related debt.
COAL RESERVES AND MINE DEVELOPMENT COSTS
Depletion of coal reserves and certain mine development costs are
recognized based on tons mined during the year as a percentage of total
estimated recoverable tons. Estimated recoverable reserves include only proven
and probable reserves. The Company capitalizes all development costs for
construction in new areas being developed (including employee costs for
employees directly involved in development; site preparation costs; and interest
related to the assets being employed). Once the assets are placed in service,
the Company amortizes these costs over their expected lives. Exploration costs
are expensed as incurred until discovery of proven and probable reserves. Such
expenditures approximated $102,000, $160,000 and $241,000 in 1999, 1998, and
1997, respectively. Mine development costs include $2,801,000, $1,417,000 and
$97,000 of capitalized interest cost for the years ended December 31, 1999, 1998
and 1997, respectively.
PROPERTY, PLANT AND EQUIPMENT
Equipment and other properties are recorded at cost and depreciated
over the estimated useful lives of the respective assets using the straight-line
method. Amortization of capitalized lease assets is included in depreciation
expense and accumulated depreciation. Depreciation expense was $9,713,000 in
1999, $9,267,000 in 1998 and $10,100,000 in 1997. Estimated useful lives are as
follows:
Barges (1997 only) 25 years
Building and improvements 10-20 years
River terminals 10-20 years
Machinery and equipment 5-10 years
GOODWILL AND LONG-LIVED ASSETS
Goodwill related to the Company's investment in affiliated companies is
amortized using the straight-line method over 25 years. Amortization expense of
$219,000 was recognized in each of the years 1999, 1998, and 1997. Goodwill is
included in investment in unconsolidated affiliated companies in the
consolidated balance sheet. The Company periodically reviews the recoverability
of all long-lived assets using a cash flow analysis. If impairment of value
exists, a loss is recognized. No adjustment for impairment was necessary at
December 31, 1999 or 1998.
RECLAMATION COSTS
The Company is subject to various laws and regulations which require
the restoration and reclamation of mined properties. The Company accrues the
reclamation costs for surface mine restoration as the mining operations occur.
Reclamation costs associated with site restoration for the Company's coal
preparation plant are accrued over the estimated useful life of the plant using
the units of production method. The accrued reclamation costs, amounting to
$4,497,000 and $3,864,000 at December 31, 1999 and 1998, are included primarily
in other noncurrent liabilities, net of a current portion based on management's
estimate of funds to be disbursed within the following year.
COST OF SALES AND GENERAL AND ADMINISTRATIVE EXPENSES
Cost of sales includes direct and indirect cost of production,
processing and transportation. Selling, general and administrative expenses
include selling costs and general corporate expenses of the Company.
INCOME TAXES
Provisions for federal and state income taxes are calculated on
reported financial statement pretax income based on current tax law. Deferred
income taxes are provided for the temporary differences between the financial
reporting basis and income tax basis of the Company's assets and liabilities.
The Company's temporary differences consist primarily of excess financial
accounting basis over tax basis of acquired coal reserves, depreciation,
depletion and timing of certain revenue and expense recognition.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
31
<PAGE> 34
NOTE 3--INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Coal $2,556 $3,003
Cottonseed 404 617
------ ------
$2,960 $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>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Coal reserves $ 153,883 $ 147,953
Mine development costs 15,063 12,187
---------- --------
168,946 160,140
Accumulated depletion (28,617) (24,653)
---------- --------
$ 140,329 $ 135,487
========== =======
</TABLE>
Depletion expense was $5,020,000, $5,133,000, and $4,554,000 in 1999,
1998, and 1997, respectively. Mine development costs include $3,234,000, and
$1,173,000 at December 31, 1999 and 1998 respectively, of capitalized interest
on the Fork Creek reserves.
NOTE 5--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Machinery and equipment $ 61,362 $ 52,045
River terminals 11,625 11,508
Buildings 5,772 5,533
Coal preparation plants 8,114 6,563
Cotton gins and warehouses 1,386 1,368
Fork Creek development 27,526 2,230
Other 3,237 3,210
----------- ----------
119,022 82,457
Accumulated depreciation (50,503) (43,625)
----------- ----------
$ 68,519 $ 38,832
=========== ==========
</TABLE>
Machinery and equipment includes assets under capital leases with
aggregate cost of $6,255,000 and $15,305,000 at December 31, 1999 and 1998,
respectively. Accumulated amortization related to these capitalized leased
assets was $4,066,000 and $9,121,000 at December 31, 1999 and 1998,
respectively. Amortization expense was $1,615,000 in 1999, $3,215,000 in 1998
and $3,379,000 in 1997.
Buildings include an office building and related improvements that
serves as the Company's headquarters. The carrying value of the building was
$3,002,000 and $3,030,000 at December 31, 1999 and 1998, respectively.
Depreciation expense recognized on the building was $218,000, $215,000 and
$236,000 in 1999, 1998, and 1997, respectively.
Fork Creek development costs include $1,081,000 and $342,000 at
December 31, 1999 and 1998 respectively of capitalized interest on the
construction of the Fork Creek Facilities.
NOTE 6--LONG-TERM INVESTMENTS:
Long-term investments include zero coupon U.S. Treasury bonds held in
escrow in connection with the Company's purchase of Marine Terminals, Inc. (Note
20) having maturity dates as follows (in thousands at December 31, 1999):
32
<PAGE> 35
<TABLE>
<CAPTION>
CARRYING MARKET
VALUE VALUE
--------- ----------
<S> <C> <C>
2000 $ 7,250 $ 7,429
2006 8,395 8,900
-------- ----------
15,645 16,329
Other 18 18
-------- ----------
$ 15,663 $ 16,347
======== ==========
</TABLE>
NOTE 7--REVOLVING LINES OF CREDIT:
The Company has available revolving line of credit facilities totaling
$40,000,000, expiring May 2003, which are secured by assets of the Company other
than mobile equipment. Borrowings bear interest at a variable rate based on
either LIBOR (an effective rate of 7.56% at December 31, 1999) or the bank's
prime lending rate (an effective rate of 9.25% at December 31, 1999). The
revolving lines of credit had an outstanding cash balance of $17,505,000 and
$4,360,000 of outstanding standby letters of credit at December 31, 1999. There
was no outstanding balance at December 31, 1998. These agreements contain
minimum operating and financial ratios and covenants as defined in the
agreements. The Company was not in compliance with the annual capital
expenditure covenant, but has received a waiver from the lending institution.
The Company was in compliance with all other restrictions at December 31, 1999.
NOTE 8--LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<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. $ 99,340 $ 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 $3,002,000, payable in
monthly installments of $37,000 through 2016. Interest included in the
monthly installments is a fixed rate of 8.33%. 4,006 4,109
-------- ---------
Total long-term debt 103,346 103,371
Current maturities of long-term debt (113) (104)
-------- ---------
$103,233 $ 103,267
======== =========
</TABLE>
The Indenture for the Senior Notes contains various covenants, the most
significant of which restricts the Company's ability to incur certain forms of
additional indebtedness, pay dividends or transfer or sell assets except in the
ordinary course of business. The proceeds from the issuance of the Senior Notes
were used to repay previously existing indebtedness, redeem warrants on the
Company's common stock and provide working capital for future development of
mining properties. Certain of the Company's other loan agreements contain
minimum operating and financial ratios and covenants as defined in the separate
agreements. The Company was in compliance with all covenants during the year
ended December 31, 1999.
33
<PAGE> 36
Scheduled principal payments on these obligations as of December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
2000 $ 113
2001 123
2002 133
2003 145
2004 157
Thereafter 103,334
--------
104,005
Less: Unamortized bond discount (659)
--------
$103,346
========
</TABLE>
NOTE 9--LEASES:
CAPITAL LEASES
Property, plant and equipment (Note 5) includes assets under capital leases
with a total cost of $6,255,000 and accumulated depreciation of $4,066,000.
Future minimum payments in the aggregate under these leases consist of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
2000 $ 1,360
2001 765
2002 299
2003 15
-------
Total lease payments 2,439
Amount representing interest (157)
-------
Total long-term capital leases 2,282
Current maturities of long-term capital leases (1,252)
-------
$ 1,030
=======
</TABLE>
Certain of these lease agreements contain minimum operating and
financial ratios and covenants which are consistent with the covenants for the
revolving line of credit. The Company was in compliance with all covenants in
1999.
OPERATING LEASES
The Company utilizes certain vehicles and equipment under
noncancellable operating lease agreements, with minimum payments as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
2000 $ 1,647
2001 1,449
2002 927
2003 316
2004 72
Thereafter 984
-----------
$ 5,395
===========
</TABLE>
Total rent expense under these leases aggregated $1,710,000 in 1999,
$1,326,000 in 1998, and $636,000 in 1997.
The Company leases its mining rights in certain coal reserves to other
coal companies. Amounts due to the Company under these leases are based on the
greater of fixed amounts per ton or a percentage of the selling price the lessee
receives for the coal when it is sold. The leases also provide for annual
minimum payments. Revenue recognized from leasing of mining rights was
$8,386,000 in 1999, $6,121,000 in 1998 and $8,235,000 in 1997.
The Company also leases office space to various commercial tenants in
the office building that serves as the Company's headquarters under five year
noncancellable operating leases, including renewal options ranging up to ten
years. Rental income was $863,000 in 1999, $737,000 in 1998, and $678,000 in
1997.
34
<PAGE> 37
Future minimum lease payments to be received are as follows (in
thousands):
<TABLE>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
2000 $ 3,434
2001 3,423
2002 3,210
2003 2,938
2004 2,621
Thereafter 11,819
-----------
$ 27,445
===========
</TABLE>
NOTE 10--MANDATORILY REDEEMABLE PREFERRED STOCK:
The Company issued 10,000 shares of convertible preferred stock with a
face value of $13,650,000 in January 1996. The face value of the preferred stock
may be reduced by any amounts incurred related to settlement of tax issues
existing at the issuance date. The Company reduced the value of the preferred
stock by $1,588,000 and $3,413,000 for such settlements in 1999 and 1998,
respectively (Note 15).
No dividends accrue from the date of issuance through December 2000.
Beginning in January 2001, dividends will accrue at 25.25% for a five-year
period. The original aggregate amount of $17,233,000 in dividends which was to
accrue from 2001 through 2006 was being recorded evenly from the date of
issuance in 1996 through the redemption date in 2006. In 1999, accretion of the
preferred stock was increased by $255,000 and decreased in 1998 by $861,000 to
adjust the accumulated accrued dividends based on the adjusted face value of the
preferred stock. The remaining aggregate amount of $6,552,000 in dividends will
be recorded evenly from 2000 through the redemption date in 2006.
The preferred stock calls for mandatory redemption in 2006. The
preferred stock will be redeemed at that time by the issuance of a note payable
which amortizes over the ten years following the redemption. The preferred stock
is convertible, at the option of the holder, into 2,950,000 shares of Class I
common stock. The conversion feature is exercisable in January 2001 and expires
in January 2002. No dividends may be paid on any class of common stock prior to
the full redemption of the convertible preferred stock. The convertible
preferred stock does not contain any voting rights.
NOTE 11--SHAREHOLDERS' EQUITY:
COMMON STOCK
The Company has reserved 560,000 shares of Class I common stock for
issuance pursuant to option, warrant or other rights granted or which may be
granted to financial institutions with which the Company has a borrowing
relationship. As of December 31, 1999, no Class I common stock has been issued
with regard to these options. No other Class I common shares may be issued until
the convertible preferred stock is redeemed in full.
Each holder of Class I common stock has the option to sell to the
Company 100% of the stock held at a price of $.01 per share. This option is
exercisable beginning January 2005 and lapses upon redemption or conversion of
the convertible preferred stock to Class I common stock.
The 200,000 shares of authorized Class II common stock were issued in
1996 under the Pen Holdings, Inc. Stock Purchase Plan dated June 1, 1996 to
various officers of the Company. In 1997, 22,450 shares were repurchased for
$13,650 by the Company from one of the officers who resigned. The shares were
concurrently canceled.
STOCK WARRANTS
The Company issued warrants to purchase 326,722 shares of Class I
common stock in January 1996 to its primary lenders in connection with a
recapitalization in 1995. The exercise price of the warrants equaled the fair
value of the Class I common stock at the date of issuance. The warrants were
exercisable beginning January 2001 at $.01 per share. The warrants were to
expire January 2006. The Company repurchased these warrants for $3,000,000
(minimum redemption value identified in the warrant agreement) in connection
with the issuance of the Senior Notes on June 8, 1998. The Company recorded the
present value of its minimum obligation for repurchase of the warrants as
redeemable common stock warrants and a corresponding discount in the underlying
debt. The discount was being amortized as additional interest expense on a
straight-line basis through January 2001.
NOTE 12--EXTRAORDINARY ITEM:
In 1998, the Company recorded an extraordinary charge which represents
the after-tax impact of (i) the write-off of unamortized loan costs and (ii) the
write-off of unamortized original issue discount and repurchase of redeemable
common stock warrants on the debt that was repaid with the proceeds from the
issuance of the Senior Notes.
35
<PAGE> 38
NOTE 13--OTHER MATTERS:
The Company sold its fleet of 98 barges on December 1, 1997,
recognizing a gain of $3,574,000, which is included in other income. Loans
secured by the barges were retired with proceeds from the sale. Revenue
recognized from rental of the barge fleet totaled $2,300,000 in 1997.
In December 1999, the Company purchased the Bear Branch operations
which is property containing coal reserves for consideration of $12,765,000 cash
at closing. Included in the purchase was $353,000 of accounts receivable,
$20,000 of inventory, $474,000 of prepaid royalties, $2,477,000 of equipment,
$7,778,000 of coal reserves and mine development, $2,508,000 of other assets,
and $845,000 of reclamation and other liabilities.
NOTE 14--EMPLOYEE BENEFIT PLANS:
The Company maintains a contributory, defined contribution 401(k)
salary deferral plan to provide retirement and other benefits for its employees.
All employees become eligible after attaining the age of 21, completing one year
of service and working 1,000 hours during the preceding 12 months. The Company
contributes by matching a percentage of employee voluntary contributions.
Company contributions aggregated $471,000 in 1999, $402,000 in 1998, and
$431,000 in 1997.
NOTE 15--INCOME TAX (BENEFIT) EXPENSE:
Income tax (benefit) expense for continuing operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ 2,010 $ 2,815 $ 3,571
State (31) 320 161
------- -------- --------
1,979 3,135 3,732
------- -------- --------
Deferred
Federal (3,248) (3,348) (1,486)
State (31) -- --
------- -------- --------
(3,279) (3,348) (1,486)
------- -------- --------
$(1,300) $ (213) $ 2,246
======= ======== ========
</TABLE>
The income tax (benefit) expense effective rates of (57.3%), (7.1%),
and 23.1% for 1999, 1998 and 1997, respectively, reconcile with the federal
statutory tax rate of 34% as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $ 771 34.0% $ 1,013 34.0% $ 3,314 34.0%
State income taxes (net of
federal income tax benefit) (38) (1.7) 211 7.1 106 1.1
Statutory depletion in excess
of cost depletion (1,361) (60.0) (1,019) (34.2) (1,259) (12.9)
Adjustment of prior years' tax (805) (35.5) (441) (14.8) -- --
Goodwill amortization 75 3.3 75 2.5 75 0.8
Other 58 2.8 (52) (1.7) 10 0.1
-------- ---- ------- ------ -------- ------
$ (1,300) (57.3)% $ (213) (7.1)% $ 2,246 23.1%
======== ===== ======= ===== ======== ======
</TABLE>
36
<PAGE> 39
The deferred tax liabilities (assets) in the accompanying balance sheet
includes the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Depletion of coal reserves $ 45,223 $ 44,128
Accelerated depreciation 6,976 9,195
Mine development costs 4,408 4,195
Other 3,174 1,350
---------- ---------
Gross deferred tax liabilities 59,781 58,868
---------- ---------
AMT credit carryforwards (5,352) (2,062)
Other (2,317) (1,435)
---------- ---------
Gross deferred tax assets (7,669) (3,497)
---------- ---------
$ 52,112 $ 55,371
========== =========
</TABLE>
Deferred taxes primarily result from differences between the financial
accounting and tax basis of acquired coal reserves and differences between the
methods used for computing depreciation and depletion and in the timing of
certain revenue and expense recognition for financial reporting and income tax
purposes. At December 31, 1999, the Company has alternative minimum tax credit
carryforwards of $5,352,000 available to offset future regular tax liabilities,
which can be carried forward indefinitely.
During January 1999, the Company reached a settlement with the IRS of
its pending U.S. Tax Court matter relating to certain issues raised by the IRS
in its examinations of the Company's federal income tax returns for the years
1982 through 1989. Also during 1999, the IRS completed its examination of the
Company's federal income tax returns for the years 1990 through 1993. The
Company recorded a tax benefit by reducing the taxes previously accrued by
$441,000 in 1998 and $805,000 in 1999 as a result of finalizing these tax
matters. Currently, none of the Company's tax returns are under examination.
NOTE 16--GUARANTIES, COMMITMENTS AND CONTINGENCIES:
The Company is a guarantor of $7,667,000 of International Marine
Terminals' debt (IMT, a partnership in which the Company has a 1/3 interest-Note
20). The debt is current. The Company intends to make a capital infusion to IMT
to repay one-third ($21,000,000) of the partnership's debt, which includes the
$7,667,000 described above) at its scheduled maturity. The Company has escrowed
an amount sufficient to fund this infusion (Note 6).
On February 25, 2000, in a two-to-one split decision, the Commonwealth
of Kentucky Court of Appeals upheld the September 1998 Floyd County Kentucky
Circuit Court jury verdict in favor of Cheyenne Resources, Inc. and its
wholly-owned subsidiary, PC&H Construction, Inc. (collectively, "Cheyenne"). The
Floyd County Kentucky Circuit Court jury verdict awarded Cheyenne damages of
approximately $9.5 million (plus pre-judgment interest). This lawsuit was
brought against The Elk Horn Coal Corporation ("Elk Horn", a wholly-owned
subsidiary of Pen Holdings, Inc.) on a case relating to a coal lease that was
entered into by Elk Horn prior to the Company's purchase of Elk Horn. Elk Horn
intends to file a petition for re-hearing with the Commonwealth of Kentucky
Court of Appeals. Pending the outcome of that motion, the Commonwealth of
Kentucky Court of Appeals' decision is reviewable by the Supreme Court of
Kentucky. The Supreme Court of Kentucky has complete discretion to determine
whether to accept Elk Horn's request for review of the Commonwealth of Kentucky
Court of Appeals' decision. Notwithstanding the recent decision of the
Commonwealth of Kentucky Court of Appeals, Elk Horn's litigation counsel and the
Company's management believe that there are meritorious grounds for reversal
and/or modification of this verdict on appeal on the issue of liability and
damages. 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.
NOTE 17--OTHER RELATED PARTY TRANSACTIONS:
Related party transactions not otherwise disclosed in the financial
statements include fees paid to International Marine Terminals (Note 20) for
coal loading of $1,255,000 in 1999, $1,758,000 in 1998, and $1,988,000 in 1997.
At December 31, 1999 and 1998, $10,000 and $19,000, respectively, was included
in accounts payable and accrued expenses relating to coal loading fees described
above.
37
<PAGE> 40
NOTE 18--LONG-TERM COAL SUPPLY CONTRACTS:
The Company is committed under several long-term coal supply contracts.
The contracts require the Company to supply specified tonnages and quality of
coal during the term of the agreements. The contracts stipulate the base prices
at inception, which are subject to periodic escalation based on specified
indices. One of the contracts is subject to adjustment to an agreed-upon market
price annually.
The Company has the capacity to fulfill all contract requirements with
existing proven coal reserves. Approximately 70% of revenues in 1999, 80% in
1998, and 73% in 1997 were derived from seven customers supplied under long-term
contracts. The Company had sales to significant customers as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
PERCENTAGE PERCENTAGE PERCENTAGE
DOLLAR OF TOTAL DOLLAR OF TOTAL DOLLAR OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Customer A $ 21,849 13% $ 34,991 21% $ 40,131 22%
Customer B 30,731 18 35,120 21 38,740 21
Customer C 35,093 20 26,082 15 27,209 15
-------- -- --------- -- -------- --
$ 87,673 51% $ 96,193 57% $106,080 58%
======== == ========= == ======== ==
</TABLE>
In 1999, 4,188,000 tons were shipped on long-term coal supply
contracts. Future minimum tonnage commitments under long-term coal supply
contracts are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR SHORT TONS
---- ----------
<S> <C>
2000 4,085,000
2001 3,194,000
2002 1,620,000
</TABLE>
38
<PAGE> 41
NOTE 19--BUSINESS SEGMENT INFORMATION:
The Company's operations, exclusive of discontinued operations, have
been classified into two business segments: coal and cotton. The coal segment
involves the mining, sale, transportation and leasing of coal. The cotton
segment involves the ginning and warehousing of cotton. There were no
intersegment sales or transfers during the three years ended December 31, 1999.
Operating income by business segment excludes interest income, interest expense
and other nonoperating income. Summarized financial information by business
segment is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
Coal $ 167,242 $ 161,106 $ 171,996
Cotton 6,256 8,445 10,293
---------- ----------- ----------
$ 173,498 $ 169,551 $ 182,289
========== =========== ==========
OPERATING INCOME
Coal $ 10,663 $ 9,581 $ 11,482
Cotton (279) (135) 47
---------- ----------- ---------
$ 10,384 $ 9,446 $ 11,529
========== =========== ==========
TOTAL ASSETS (AT PERIOD END):
Coal $ 254,668 $ 240,140 $ 219,162
Cotton 4,640 3,687 5,685
---------- ----------- ----------
$ 259,308 $ 243,827 $ 224,847
========== =========== ==========
DEPRECIATION, DEPLETION,
AND AMORTIZATION
Coal $ 15,154 $ 14,936 $ 14,948
Cotton 299 396 342
---------- ----------- ---------
$ 15,453 $ 15,332 $ 15,290
========== =========== =========
CAPITAL EXPENDITURES
Coal $ 49,462 $ 14,847 $ 3,632
Cotton 33 95 239
---------- ----------- ---------
$ 49,495 $ 14,942 $ 3,871
========== =========== =========
</TABLE>
During 1997 through 1999, the Company sold coal to both domestic and
foreign customers. Export sales by country are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
PERCENTAGE PERCENTAGE PERCENTAGE
DOLLAR OF TOTAL DOLLAR OF TOTAL DOLLAR OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Taiwan $ 21,849 13% $ 34,991 21% $ 40,131 22%
Other -- -- -- -- 2,667 1%
--------- ---- -------- ---- -------- ----
Total export sales $ 21,849 13% $ 34,991 21% $ 42,798 23%
========= ==== ======== ==== ======== ====
</TABLE>
39
<PAGE> 42
NOTE 20--INVESTMENT IN AFFILIATED COMPANY:
The Company's investment in an affiliated company is a one-third general
partnership interest in International Marine Terminals (IMT), an ocean marine
loading facility located in Louisiana Note 16). Components of the investment in
affiliated company and equity in net earnings (losses) of affiliated company are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INVESTMENT IN AFFILIATED COMPANY:
Equity in partnership interest at
time of purchase $ 5,977 $ 5,977 $ 5,977
Earnings (loss) since acquisition (172) 476 98
Net distributions since acquisition (4,507) (4,507) (3,514)
--------- --------- ------
1,298 1,946 2,561
Goodwill, less accumulated amortization
of $3,086, $2,867 and $2,648 at December 31,
1999, 1998, and 1997, respectively 2,394 2,613 2,832
--------- --------- --------
$ 3,692 $ 4,559 $ 5,393
========= ========= ========
EQUITY IN NET EARNINGS (LOSSES) OF
AFFILIATED COMPANY:
Company's share of affiliate
earnings (losses) $ (648) $ 378 $ (167)
Amortization of goodwill (219) (219) (219)
--------- --------- --------
$ (867) $ 159 $ (386)
========= ========= ========
</TABLE>
The above net earnings (losses) are reported as a component of other
income in the statement of income. All earnings (losses) of IMT are shared by
each partner on a pro rata basis, with the exception of interest expense, a
portion of which is allocated to the partners based on their individual credit
ratings. Condensed financial information for the affiliated company, IMT, is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BALANCE SHEET
Current assets $ 3,734 $ 3,165 $ 2,908
Noncurrent assets 66,974 68,622 70,472
--------- --------- ----------
Total assets $ 70,708 $ 71,787 $ 73,380
========= ========= ==========
Current liabilities 3,714 2,927 2,646
Noncurrent liabilities 63,000 63,000 63,045
--------- --------- ----------
Total liabilities 66,714 65,927 65,691
Equity 3,994 5,860 7,689
--------- --------- ----------
Total liabilities and equity $ 70,708 $ 71,787 $ 73,380
========= ========= ==========
STATEMENT OF INCOME
Revenues $ 17,525 $ 19,133 $ 21,968
========= ========= ==========
Operating income $ 1,245 $ 2,707 $ 2,406
========= ========= ==========
Earnings (loss) $ (1,865) $ 1,235 $ (444)
========= ========= ==========
</TABLE>
40
<PAGE> 43
NOTE 21--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for 1999 and 1998 is summarized below:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPT 30 DEC 31
-------- ------- ------- ------
<S> <C> <C> <C> <C>
1999:
Revenues $ 39,426 $ 45,108 $ 46,101 $ 42,863
Operating Income 3,749 4,614 2,001 20
Net Income (loss) 1,470 2,065 329 (297)
1998:
Revenues 40,548 38,293 42,482 48,228
Operating Income 2,179 2,316 3,098 1,853
Income before extraordinary items 948 531 1,489 253
Net Income (loss) 948 (1,335) 1,489 253
</TABLE>
41
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following information is furnished with respect to the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH PEN HOLDINGS
---- --- --------------------------
<S> <C> <C>
William E. Beckner 48 Chairman of the Board of Directors, President and Chief
Executive Officer
Stephen G. Capelli 49 Senior Vice President of Operations; Director
Joseph A. Davis, Jr. 52 Senior Vice President of Sales and Marketing; Director
Mark A. Oldham 42 Senior Vice President, Secretary and Treasurer/Chief
Financial Officer
</TABLE>
William E. Beckner has been the President and Chief Executive Officer
of the Company since 1993, and Chairman of the Board of Directors since 1996.
Mr. Beckner also served as Executive Vice President and Chief Operating Officer
of Pen Holdings from 1986 to 1993 and as Vice President of Finance from 1982 to
1986. Mr. Beckner, who has 18 years of experience in the coal industry and has
been with the Company for 15 years, holds a controlling interest in Pen
Holdings. Mr. Beckner received an M.B.A. degree from the University of Tennessee
(Nashville) in 1979 and received a B.S. degree in Business from the University
of Evansville in 1973.
Stephen G. Capelli has been the Senior Vice President of the Company's
coal operations and a director of Pen Holdings since 1996, having previously
served as Vice President of Operations since 1994. Mr. Capelli has 26 years of
experience in the coal industry. Prior to joining the Company, Mr. Capelli was
Vice President of Mining and Development of Amvest Minerals, Inc., a coal
company, from 1991 to 1994. Mr. Capelli serves on the Board of Directors of the
West Virginia Mining and Reclamation Association and the West Virginia State
Mine Board, to which he was appointed by the governor of West Virginia. In 1973,
Mr. Capelli received a B.S. degree in Mining Engineering from Virginia Tech.
Joseph A. Davis, Jr., has been Senior Vice President of Sales and
Marketing of the Company's coal operations and a director of Pen Holdings since
1996. Prior to that time, Mr. Davis was Vice President of Sales and Marketing
from 1987. Mr. Davis has 22 years of experience in the coal industry. Before
joining the Company, he was Vice President of Sales for Benford-Nightengale Coal
Company from 1977 to 1984, and was Sales Manager of Kentucky Pioneer Coal
Company from 1975 to 1977. Mr. Davis received a B.A. degree from Western
Kentucky University in 1976.
Mark A. Oldham has been Senior Vice President, Secretary and
Treasurer/Chief Financial Officer of the Company since 1996. Prior to that time,
Mr. Oldham served as Vice President from 1993 to 1996 and Controller from 1985
to 1993. Mr. Oldham has 14 years experience in the coal industry. Mr. Oldham is
a Certified Public Accountant (CPA) and has been a member of the American
Institute of Certified Public Accountants and the Tennessee Society of CPA's
since 1982. From 1979 to 1984, Mr. Oldham was employed in public accounting. Mr.
Oldham received a B.S. degree in Business Administration from Tennessee
Technological University in 1979.
BOARD COMPENSATION
All current directors are employees of the Company. No additional
remuneration beyond their compensation as employees is currently given to
directors for their services.
42
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for the years ended December 31, 1999, 1998 and 1997 for (i) chief
executive officer of the Company, and (ii) each of the three other most highly
compensated executive officers of the Company who received in excess of
$100,000, determined as of December 31, 1999 (collectively, the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Compensation Annual Annual Other All Other
Name and Principal Position Year Salary Bonus Compensation(3) Compensation(1)
- --------------------------- ------------ ------ ------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
William E. Beckner 1999 $ 418,000 $ 516,000(2) -- $ 4,800
President and Chief Executive Officer 1998 403,325 293,000 -- 4,800
1997 383,575 360,000 -- 4,800
Stephen G. Capelli 1999 165,000 53,332 $ 35,849 4,800
Senior Vice President of Operations 1998 157,000 67,150 13,618 4,800
1997 148,000 66,000 75,045 4,800
Joseph A. Davis, Jr. 1999 151,000 33,810 35,849 4,800
Senior Vice President of 1998 147,000 56,785 13,618 4,800
Sales/Marketing 1997 141,000 52,875 75,045 4,800
Mark A. Oldham 1999 135,000 24,104 35,849 4,784
Senior Vice President, Secretary 1998 131,000 46,200 13,618 4,800
and Treasurer/Chief Financial Officer 1997 125,000 37,500 75,045 4,285
</TABLE>
(1) Represents annual contribution made by the Company under its 401(k)
plan.
(2) Historically, Pen Holdings has paid its executive officers bonuses
earned for any year in March of the year following the year the bonus
was earned. In 1999, Pen Holdings changed this policy as it relates to
Mr. Beckner. Mr. Beckner's bonus compensation for both 1998 and 1999
was paid to Mr. Beckner in 1999. This effectively accelerated the
timing of the payment of Mr. Beckner's bonus for 1999 by three months.
In subsequent years it is expected that Mr. Beckner's bonus, if any,
will be paid in December of the year the bonus was earned rather than
in March of the year following the year the bonus was earned. Pen
Holdings' policy as it relates to other executive officers and
employees has not changed, as all other executive officers and
employees that earn bonus compensation will be paid in March of the
year following the year the bonus was earned. The bonus compensation
listed-above for Mr. Beckner represents $256,000 paid in 1999 as a
bonus earned for the year ended December 31, 1998 and $260,000 paid in
1999 as a bonus for the year ended December 1999.
(3) Represents incremental increases in the value of the officer's account
under the Pen Holdings, Inc. Stock Purchase Plan (the "Stock Purchase
Plan"). The Stock Purchase Plan provides generally that stock issued
to the officer will be repurchased by the Company upon the termination
of the officer's employment with the Company. The repurchase price
for this stock is equal to $0.01 plus the aggregate net income per
common share, determined over the period beginning with the close of
the 1995 fiscal year and ending with the close of the Company's last
fiscal year ending prior to the officer's date of termination. The
amount included does not include amounts credited to the account of
the officer prior to 1999.
43
<PAGE> 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1999, certain
information concerning ownership of the Class I and Class II Common Stock of the
Company by each director, each named executive officer, each person who is known
to the Company to be the beneficial owner of more than 5% of the Class I and
Class II Common Stock and all directors and executive officers of the Company as
a group. Each stockholder listed below has sole voting and dispositive power
with respect to the shares listed next to such stockholder's name except as
noted below. Except as noted, the address of each stockholder listed below is:
c/o Pen Holdings, Inc., Center Court Building, 3rd Floor, Brentwood, Tennessee
37027.
<TABLE>
<CAPTION>
Class I Common Stock(1) Class II Common Stock(1)
------------------------ ------------------------ Percentage of
Number of Percentage Number of Percentage Class I and
Shares of Class Shares of Class Class II
Name and Address Beneficially Beneficially Beneficially Beneficially Beneficially
of Beneficial Owner Owned Owned Owned(2) Owned Owned
------------------- ----- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C>
William E. Beckner 4,040,000 94.2% 90.4%
Stephen G. Capelli 44,900 25.3% 1.0%
Joseph A. Davis, Jr. 44,900 25.3% 1.0%
Mark A. Oldham 44,900 25.3% 1.0%
Grace Pen 250,000(3) 5.8% 5.6%
c/o Bass, Berry & Sims
2700 First American Center
Nashville, Tennessee 37238
Directors and Executive Officers
as a group (4 persons) 4,040,000 94.2% 134,700 75.9% 93.4%
</TABLE>
- -------------------
(1) The Company's Class I and Class II Common Stock currently have the same
rights. Prior to the Company's recapitalization in 1995, the class of
stock had different rights, however, the difference in rights no longer
exists.
(2) All shares are subject to repurchase upon termination of employment with
the Company under the Stock Purchase Plan.
(3) Includes 187,500 shares held by a trust of which Ms. Pen is one of the
trustees.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS AND GUARANTEES
The Company is a guarantor of $7,667,000 of International Marine
Terminals' debt (IMT, a partnership in which the Company has a 1/3 interest).
The debt is current. The Company intends to make a capital infusion to IMT to
repay one-third ($21,000,000) of the partnership's debt, which includes the
$7,667,000 described above) at its scheduled maturity. The Company has escrowed
an amount sufficient to fund this infusion.
The Company is also a guarantor of a bank loan in the amount of
$136,000 to Forests, Inc., the Company's partner in Camden Hardwood Company, for
the partner's capital contribution.
ARRANGEMENTS INVOLVING AFFILIATES
During the term of the TPC Contract, the Company used the IMT facility
to load coal for export. Fees paid to IMT for coal loading in 1999 were
approximately $1,255,000. These fees are comparable to the fees paid by third
parties resulting from arms length transactions.
44
<PAGE> 47
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
PEN HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants 24
Consolidated Balance Sheet as of December 31, 1999 and 1998 25
Consolidated Statement of Income for the Years Ended December 31,
1999, 1998 and 1997 26
Consolidated Statement of Changes in Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 27
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 30
</TABLE>
(2) The schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(3) Exhibits filed as part of this Report are as follows:
E-1
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------
<S> <C>
3.1* Form of Restated Charter of Pen Holdings, as amended (Exhibit 3.1)
3.2* Form of Amended and Restated Bylaws of Pen Holdings, as amended (Exhibit 3.2)
4.1* Indenture, dated as of June 8, 1998, by and among Pen Holdings,
the Guarantors and The Bank of New York
4.2* Form of 9 7/8% Senior Note due 2008
4.3* Registration Rights Agreement, dated as of June 8, 1998, by and
among Pen Holdings, the Guarantors and CIBC Oppenheimer Corp.
10.1* Amended and Restated Credit Agreement, dated as of June 3, 1998,
by and among Pen Holdings, Mellon Bank, N.A., CIBC, Inc. and other
banks later made a party to such Agreement
10.2* Coal Supply Agreement, dated as of June 15, 1989 by and between
Taiwan Power Company and Pen Coal Corporation, as amended
10.3* Coal Supply Agreement between Pen Coal Corporation and Dayton Power and
Light Company, dated effective July 1, 1992, as amended
10.4* Pen Holdings, Inc. Stock Purchase Plan
10.5** Pen Holdings, Inc. Executive Bonus Plan
10.6** Amendment 7 dated December 21, 1998 of the Coal Supply Agreement,
dated as of June 15, 1989 by and between Taiwan Company and Pen
Coal Corporation
21* Subsidiaries of the Registrant
27.1*** Financial Data Schedule
</TABLE>
- ------------
* Incorporated by reference from the Company's Registration Statement on Form
S-4 as amended (Registration No. 333-60599) originally filed with the Securities
and Exchange Commission on August 4, 1998.
** Incorporated by reference from the Company's annual Form 10-K (registration
No. 33-60599) filed with the Securities and Exchange Commission on March 24,
1999.
*** Included with this report.
(b) Reports on Form 8-K.
E-2
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Pen Holdings, Inc.
By: /s/ William E. Beckner
------------------------------------------
Name: William E. Beckner
Title: President & Chief Executive Officer
Dated: March 27, 2000
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 27, 2000.
PEN HOLDINGS, INC.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ William E. Beckner Chairman of the Board, President, Chief March 27, 2000
- ---------------------------------- Executive Officer (Principal Executive
WILLIAM E. BECKNER Officer) and Director
/s/ Mark A. Oldham Senior Vice President, Secretary/Treasurer March 27, 2000
- ---------------------------------- and Chief Financial Officer (Principal
MARK A. OLDHAM Financial Officer)
/s/ Stephen G. Capelli Director March 27, 2000
- ----------------------------------
STEPHEN G. CAPELLI
/s/ Joseph A. Davis, Jr. Assistant Secretary and Director March 27, 2000
- ----------------------------------
JOSEPH A. DAVIS, JR.
</TABLE>
S-1
<PAGE> 50
GLOSSARY OF
CERTAIN TERMS
ASH. Non-combustible solid matter consisting of silicia, iron, alumina and other
material similar to ordinary sand, silt, rock or clay.
BTU (BRITISH THERMAL UNIT). A measure of heat required to raise the temperature
of one pound of water one degree Fahrenheit under controlled conditions. The
gross heating value of coal is commonly reported as "Btu per pound."
CAPTIVE PRODUCTION. Coal produced or contracted to be produced from Company
controlled reserves.
CENTRAL APPALACHIA. A region consisting of southern West Virginia, eastern
Kentucky and Virginia which contains substantial bituminous coal deposits. The
reserves in this region generally contain coal that is low in sulfur (typically
0.7%=1.5%) and high in Btu content (typically 12,000-13,500 Btu). A large
portion of the coal reserves in this region exceed the requirements of Phase I
of the Clean Air Act Amendments and meet the requirements of Phase II of the
Clean Air Act Amendments.
COAL DEPOSIT. A coal bearing body which has been appropriately sampled and
assayed in trenches, outcrops, drilling, and underground workings to support
sufficient tonnage and grade to warrant further exploration-development work. A
coal deposit does not qualify as a commercially viable coal reserve as
prescribed by Commission standards until a final comprehensive evaluation based
upon unit cost per ton, recoverability and other material factors conclude legal
and economic feasibility.
COAL SEAM. A layer of coal deposit below the earth's surface. Each seam is
identified by a name or number based on its geographical location.
COMPLIANCE COAL. Coal which, when burned, emits less than 1.2 pounds of sulfur
dioxide per million Btu (0.72% for 12,000 Btu). This coal exceeds the sulfur
dioxide emission requirements for air quality of Phase I of the Clean Air Act
Amendments and meets the proposed sulfur dioxide emission requirements for air
quality of Phase II of such legislation without the need for flue gas
desulfurization.
CONTINUOUS MINING. An underground mining method that utilizes a continuous
mining machine which cuts or rips coal from the face and loads it into shuttle
cars or conveyors in one operation. A continuous mining machine typically has a
turning "drum" with sharp bits that cut and dig out the coal for 20 to 40 feet
before mining stops so that the mined area can be supported with roof bolts.
CONTRACT MINING. The contractual engagement of a third-party mining company by
the mineral rights holder to mine coal. Contract mining companies are typically
paid on a set price per ton of coal mined. Under most contract mining
arrangements the mineral rights holder is responsible for the permitting of the
mine site. The contract miner is generally responsible for providing all
equipment, financing for its operation, internal mine capital needs, employee
benefits and all other requirements associated with an independent business.
CONVENTIONAL MINING. An underground mining method that utilizes a cutting
machine to cut beneath a coal seam. Such undercuts allow explosive charges to be
set in the coal seam to separate the coal from surrounding materials. Once
separated, the coal is loaded into shuttle cars and removed from the mine.
EXTRACTION. The process of removing coal from a seam for commercial use.
HEAVY MEDIA. High density material such as magnetite used in the gravity
separation process to clean coal.
HIGHWALL MINING. A surface mining method which extracts coal by inserting a
continuous miner attached to a continuous haulage system into a highwall left
exposed by a contour surface mine. Penetration of up to 800 feet can be obtained
by this method, which negates the need for people or additional machinery used
for roof support underground.
LOW-SULFUR COAL. Coal which, when burned, emits less than 1.6 pounds of sulfur
dioxide per million Btu (0.96% for 12,000 Btu). This coal exceeds the sulfur
dioxide emission requirements for air quality of Phase I of the Clean Air Act
Amendments without the need for flue gas desulfurization.
MEDIUM-SULFUR COAL. Coal which contains more than 1 percent but less than 3
percent sulfur by weight; 0.61 to 1.67 pounds of sulfur per million Btu.
METALLURGICAL COAL. The various grades of coal suitable for carbonization to
make coke for the manufacture of steel. Also know as "met" coal, it possesses
four important qualities: volatility, which affects coke yield; the level of
impurities, which affects coke quality; composition, which affects coke
strength; and basic characteristics, which affect coke oven safety.
OVERBURDEN. Layers of earth and rock covering a coal seam. In surface mining
operations, overburden is removed prior to coal extraction.
G-1
<PAGE> 51
POINT REMOVAL MINING. A mining method used in contour mining when the overburden
ratio makes it economically feasible to mine using the mountaintop removal
method.
PREPARATION PLANT. A facility that crushes, sizes and washes coal to prepare it
for commercial use. The washing process separates ash from the coal and may have
the added benefit of removing a portion of the coal's sulfur content. Most of
the coal washed in a preparation plant is extracted from underground mines.
RESERVE. That part of a mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination.
PROBABLE (INDICATED) RESERVES. Reserves for which quantity and grade and/or
quality are computed from information similar to that used for proven (measured)
reserves, but the sites for inspection, sampling, and measurement are farther
apart or are otherwise less adequately spaced. The degree of assurance, although
lower than that for proven (measured) reserves, is high enough to assume
continuity between points of observation.
PROVEN (MEASURED) RESERVES. Reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or
quality are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well-established.
RECLAMATION. The restoration of land and environment at a mining site after the
coal is extracted. Reclamation operations are usually underway in locations
where the coal has already been extracted from a mine, even as mining operations
are continuing elsewhere at the site. The process commonly includes
"recontouring" or reshaping the land to its approximate original appearance,
restoring topsoil and planting native grass and ground covers. Reclamation is
closely regulated by both state and federal law.
RECOVERY RATES. The amount of clean coal produced by weight from the amount of
raw coal processed expressed as a percentage of the coal available for
extraction.
ROOM AND PILLAR MINING. A mining method used in underground mining which uses
either continuous or conventional mining that cuts out a block of coal in 18- to
20-foot wide passages as high as the coal seam. Roof bolters, by installing
conventional or resin grouted rods, stabilize the mine roof prior to mine
advancement. Pillars (typically 50 feet by 50 feet) are left to provide
additional primary roof support.
SPOT MARKET. Sales of coal pursuant to an agreement or purchase order for
shipments for a period of less than one year. Spot market sales are generally
obtained via a competitive bidding process.
SPREAD. The amount and type of equipment necessary to extract the coal from a
localized reserve area in a surface mine.
SURFACE MINE. A mine in which the coal lies near the surface and can be
extracted by removing the covering layer of soil. See "Overburden."
TON. A "short" or net ton is equal to 2,000 pounds. A "long" or British ton is
2,240 pounds. A "metric" ton is approximately 2,205 pounds. The short ton is the
unit of measure referred to in this document.
UNDERGROUND MINE. A mine which is typically located several hundred feet below
the earth's surface.
G-2
<PAGE> 52
A small scale map of the Company's coal operations appears in this
space. The map depicts portions of Kentucky and West Virginia. It shows the
Company's operation as shaded portion and also includes major rivers,
cities, roadways, and the demarcation of the county and state borders. The
map reflects a scale whereby one inch equals 10 miles.
M-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND CONSOLIDATED
STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED IN
THE FORM 10-K.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,333,000
<SECURITIES> 0
<RECEIVABLES> 17,837,000<F1>
<ALLOWANCES> 0
<INVENTORY> 2,960,000
<CURRENT-ASSETS> 25,102,000
<PP&E> 208,848,000<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 259,308,000
<CURRENT-LIABILITIES> 35,955,000
<BONDS> 99,340,000
13,018,000
0
<COMMON> 45,000
<OTHER-SE> 50,442,000<F3>
<TOTAL-LIABILITY-AND-EQUITY> 259,308,000
<SALES> 173,498,000
<TOTAL-REVENUES> 173,498,000
<CGS> 157,225,000
<TOTAL-COSTS> 157,225,000
<OTHER-EXPENSES> 5,889,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,315,000
<INCOME-PRETAX> 2,267,000
<INCOME-TAX> (1,300,000)
<INCOME-CONTINUING> 3,567,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,567,000
<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>
