<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-60599
PEN HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-0852576
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5110 MARYLAND WAY, SUITE 300
BRENTWOOD, TENNESSEE 37027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 371-7300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of each of the registrant's classes of common
stock, as of the latest practicable date: As of November 14, 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.
<PAGE> 2
PEN HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 2000 and December 31, 1999 1
Consolidated Statement of Income - Three Months Ended September 30, 2000 and 1999
and Nine Months Ended September 30, 2000 and 1999 2
Consolidated Statement of Changes In Shareholders' Equity 3
Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
RESTATED
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 85 $ 599
Accounts receivable (net of allowance for doubtful accounts) 13,530 16,863
Inventories ................................................ 4,847 2,556
Refundable income taxes .................................... 505 686
Other assets ............................................... 2,310 2,257
-------- --------
Total current assets ...................................... 21,277 22,961
Investment in unconsolidated affiliated companies .......... 3,296 5,773
Coal reserves and mine development costs, net .............. 138,714 140,329
Property, plant and equipment, net ......................... 94,477 66,667
Long-term investments ...................................... 16,573 15,663
Other assets ............................................... 6,449 6,003
-------- --------
$280,786 $257,396
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................... $ 120 $ 113
Current maturities of capital leases ....................... 4,065 1,252
Accounts payable ........................................... 8,851 8,345
Accrued liabilities ........................................ 10,830 6,777
Deferred income taxes ...................................... 207 212
-------- --------
Total current liabilities ................................. 24,073 16,699
Revolving credit loans ..................................... 23,275 17,505
Long-term debt ............................................. 103,201 103,233
Long-term capital leases ................................... 10,176 1,030
Deferred income taxes ...................................... 51,839 51,739
Other liabilities .......................................... 4,278 3,685
-------- --------
Total liabilities ......................................... 216,842 193,891
-------- --------
Mandatorily redeemable preferred stock ....................... 13,837 13,018
Shareholders' equity:
Class I common stock ...................................... 43 43
Class II common stock ..................................... 2 2
Additional paid-in capital ................................. 19 19
Retained earnings .......................................... 50,043 50,423
-------- --------
Total shareholders' equity ................................ 50,107 50,487
-------- --------
$280,786 $257,396
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
RESTATED RESTATED
2000 1999 2000 1999
-------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues .................................................... $ 35,691 $ 45,732 $ 113,198 $ 128,981
Operating expenses:
Cost of sales ............................................ 31,199 41,920 103,659 114,158
Selling, general and administrative ...................... 1,416 1,560 4,455 4,095
-------- -------- --------- ---------
Operating income ............................................ 3,076 2,252 5,084 10,728
Other (income) expense:
Interest expense ......................................... 2,684 2,865 6,858 7,413
Interest income .......................................... (423) (465) (1,459) (1,543)
Other expense ............................................ 121 193 713 596
-------- -------- --------- ---------
Income (loss) from continuing operations before income taxes 694 (341) (1,028) 4,262
Provision (benefit) for income taxes ........................ 418 (416) (459) 114
-------- -------- --------- ---------
Net income (loss) before income from discontinued operations 276 75 (569) 4,148
Loss from discontinued operations (Note 1) .................. -- (238) (18) (284)
-------- -------- --------- ---------
Net income (loss) before change in accounting principle
(Note 2) .................................................. 276 (163) (587) 3,864
Change in accounting principle, net of tax .................. -- -- 1,026 --
-------- -------- --------- ---------
Net income (loss) ........................................... 276 (163) 439 3,864
Accretion of mandatorily redeemable preferred stock ......... 273 (189) 819 135
-------- -------- --------- ---------
Net income (loss) available to common shareholders .......... $ 3 $ 26 $ (380) $ 3,729
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
CLASS I CLASS II
COMMON STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------- PAID-IN RETAINED
SHARES AMOUNTS SHARES AMOUNTS CAPITAL EARNINGS TOTAL
---------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 4,290,000 $ 43 177,550 $2 $19 $50,423 $50,487
Accretion of preferred stock (819) (819)
Net income .................. 439 439
---------- ----- ------- -- --- ------- -------
Balance at September 30, 2000
(unaudited) ............... 4,290,000 $ 43 177,550 $2 $19 $50,043 $50,107
========== ===== ======= == === ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
RESTATED
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 439 $ 3,864
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization ..................................... 11,805 11,291
Amortization of bond discount ................................................ 59 59
Equity in net losses of affiliates ........................................... 1,031 1,762
Deferred income taxes ........................................................ 100 (2,696)
(Gain) on sale of investment ................................................. (856) --
(Gain)/loss on sale of equipment ............................................. (59) (325)
Interest income on long-term investments ..................................... (910) (904)
-------- --------
Cash generated from operations, before changes in assets and liabilities ..... 11,609 13,051
Changes in assets and liabilities, net of effects from dispositions:
Accounts receivable .......................................................... 3,332 (3,978)
Inventories .................................................................. (2,291) (1,611)
Accounts payable and accrued expenses ........................................ 4,560 2,840
Other ........................................................................ (241) 310
-------- --------
Net cash provided by operating activities .................................... 16,969 10,612
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................ (23,423) (26,372)
Proceeds from sale of investment ................................................ 2,900 --
Proceeds from sale of equipment ................................................. 244 480
Investments in affiliated companies ............................................. (800) (1,000)
-------- --------
Net cash used by investing activities ........................................... (21,079) (26,892)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ..................................................... (84) (77)
Repayment of capital leases ..................................................... (2,090) (1,898)
Net borrowings under line of credit agreements and current notes payable ........ 5,770 --
-------- --------
Net cash (used for) provided by financing activities ............................ 3,596 (1,975)
-------- --------
Net decrease in cash ............................................................ (514) (18,255)
Cash and cash equivalents at beginning of period ................................ 599 20,186
-------- --------
Cash and cash equivalents at end of period ...................................... $ 85 $ 1,931
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS:
Pen Holdings, Inc. ("Pen Holdings") and its consolidated subsidiaries
(references to the "Company" are to Pen Holdings and its consolidated
subsidiaries) are primarily engaged in the mining and sale of coal, selling
predominantly to utility companies. The Company also receives royalty income
from coal reserves leased to other companies. The Company's coal reserves and
mining operations are in Kentucky and West Virginia.
DISPOSAL OF A BUSINESS SEGMENT - DISCONTINUED OPERATIONS
In June 2000, the Company sold the stock of Pen Cotton Company of South
Carolina, a wholly-owned subsidiary engaged in cotton ginning and warehousing in
South Carolina. The selling price was $2,900,000 paid in cash at closing. Pen
Holdings is a guarantor of the debt that the buyer incurred to purchase the
business. The gain resulting from the sale of approximately $847,000 is included
in other income. As a result of this sale the Company has discontinued its
cotton operations. The Company's balance sheet at December 31, 1999 and the
statements of income and cash flows for the nine months ended September 30, 1999
have been restated to reflect the Company's discontinuation of cotton
operations.
Loss from discontinued operations for the nine months ended September
30, 2000 is $27,000 (less applicable tax benefit of $9,000). Loss from
discontinued operations for the three months and nine months ended September 30,
1999 is $361,000 (less applicable tax benefit of $123,000) and $430,000 (less
applicable tax benefit of $146,000), respectively.
NOTE 2-SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Investments in affiliated enterprises in which the Company owns less
than a controlling interest are presented under the equity basis of accounting
representing the Company's investment in affiliates, reduced by goodwill
amortization and increased (decreased) by the Company's proportionate equity in
net income (losses) of the unconsolidated affiliates.
CHANGE IN ACCOUNTING PRINCIPLE
During the six months ended June 30, 2000, the Company changed its
method of accounting for supply parts inventory from expensing upon purchase to
capitalization upon purchase and expensing upon usage. In prior years, the
Company has had a relatively even mix of operations in underground mining and
surface mining. However, the Company started two new underground mines in 2000.
The underground mining process requires a large amount of mining supplies and
supply parts inventory. The anticipated tons to be produced from underground
mining is projected to increase to over 75% of the Company's production in the
next few years. Accordingly, the Company believes that the capitalization of
supply parts inventory will result in a better measurement of operating results
by matching revenues with related expenses. The $1,137,000 cumulative effect of
the change on prior years (after reduction for income taxes of $586,000) is
included in income of the nine months ended September 30, 2000. The supplies
inventory balance at December 31, 1999 was $1,723,000. The pro forma effect of
the adoption for periods prior to January 1, 2000 could not be determined as the
Company did not separately track inventory supplies for such prior periods.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements have been prepared
without audit, and certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes that the disclosures herein are adequate to make information presented
not misleading. These statements should be read in conjunction with the
Company's financial statements for the year ended December 31, 1999, which are
included in the Company's Form 10-K for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission on March 27, 2000. The results
of operations for the three or nine month periods are not necessarily indicative
of results for the full year.
In the opinion of management, the accompanying interim financial
statements contain all adjustments of a normal and recurring nature necessary
for a fair presentation of the Company's financial position as of September 30,
2000, its results of operations for three and nine months ended September 30,
2000 and 1999, and its cash flows for the nine months ended September 30, 2000
and 1999.
5
<PAGE> 8
NOTE 3-INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Coal ............................ $ 3,461 $ 2,556
Supplies ........................ 1,386 0
--------- ---------
$ 4,847 $ 2,556
========= =========
</TABLE>
NOTE 4-COAL RESERVES AND MINE DEVELOPMENT COSTS:
Coal reserves and mine development costs consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Coal reserves ................... $ 153,883 $ 153,883
Other mine development costs .... 17,219 15,063
--------- ---------
171,102 168,946
Accumulated depletion ........... (32,388) (28,617)
--------- ---------
$ 138,714 $ 140,329
========= =========
</TABLE>
NOTE 5-PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Machinery and equipment ......... $ 64,805 $ 58,763
River terminals ................. 11,625 11,625
Buildings ....................... 6,044 5,772
Coal preparation plant .......... 8,151 8,114
Fork Creek mine development costs 54,220 27,526
Other ........................... 3,539 3,125
--------- ---------
148,384 114,925
Accumulated depreciation ........ (53,907) (48,258)
--------- ---------
$ 94,477 $ 66,667
========= =========
</TABLE>
NOTE 6-REVOLVING LINES OF CREDIT:
The Company has a revolving line of credit under its current credit facility
with credit commitments from the Company's lenders in an aggregate principal
amount equal to $40,000,000. The credit facility expires in June 2003. The
borrowings under the credit facility are secured by certain of the Company's
assets, certain contracts of the Company, and the Company's inventories and
receivables. Borrowings bear interest at a variable rate based on either LIBOR
(an effective rate of 9.37% at September 30, 2000) or the lender's prime lending
rate (an effective rate of 11.25% at September 30, 2000). These agreements
contain minimum operating and financial ratios and covenants as defined in the
agreements. At September 30, 2000, the Company was not in compliance with
certain financial covenants, but has received a waiver for such non-compliance.
6
<PAGE> 9
NOTE 7-LONG TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Senior 9-7/8% Notes (the "Senior Notes") due 2008 in the aggregate
principal amount of $100,000,000. On June 8, 1998, Pen Holdings issued the
Senior Notes which accrue interest at 9-7/8%, payable semi-annually in June and
December through the maturity date of June 15, 2008. The entire principal amount
is due at the maturity date. The Senior Notes were issued with an aggregate
original issue discount of $784,000, which is being amortized over the ten year
term of the Senior Notes. The Senior Notes are general unsecured obligations of
Pen Holdings ranking generally the same in priority of payment with all existing
and future unsubordinated indebtedness of the Company. The Senior Notes are
unconditionally guaranteed (the "Guarantees") on a senior unsecured basis, as to
the payment of principal, premium, if any, and interest, fully and
unconditionally, joint and severally, by certain of Pen Holdings' subsidiaries
(the "Guarantors"). The Guarantees will rank generally the same in priority of
payment with all existing and future unsubordinated indebtedness of the
Guarantors and senior in right of payment to all existing and future
indebtedness of the Guarantors. The Senior Notes are redeemable at the option of
Pen Holdings, in whole or in part, at any time on or after June 15, 2003 at
premiums to face value identified in the Indenture by and among Pen Holdings,
the Guarantors, and The Bank of New York, as Trustee, dated June 8, 1998 (the
"Indenture"), relating to the Senior Notes ..................................... $ 99,399 $ 99,340
Notes payable secured by a lien on an office building which serves as
the Company's headquarters, with a net book value of $2,854,000 at September 30,
2000, payable in monthly installments of $37,000 through 2016. Interest included
in the monthly installments is a fixed rate of 8.33% ........................... 3,922 4,006
--------- ---------
Total long-term debt ........................................................... 103,321 103,346
Current maturities of long-term debt ........................................... (120) (113)
--------- ---------
$ 103,201 $ 103,233
========= =========
</TABLE>
The Indenture for the Senior Notes contains various covenants, the most
significant of which restricts the Company's ability to incur certain forms of
additional indebtedness, pay dividends or transfer or sell assets except in the
ordinary course of business. Certain of the Company's other loan agreements
contain minimum operating and financial ratios and covenants as defined in the
separate agreements.
NOTE 8-GUARANTIES, COMMITMENTS AND CONTINGENCIES:
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 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 filed a petition for re-hearing with the Commonwealth of
Kentucky Court of Appeals, which was denied. 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.
The Company is awaiting a response from the Kentucky Supreme Court on
whether it will review the lower court decision. In the meantime, the Company
has filed suit against Tredegar Industries for any judgment the Company may have
to pay with regard to the Cheyenne litigation. Tredegar Industries was the owner
of The Elk Horn Coal Corporation when part of the events that gave rise to the
action occurred. The case against Tredegar Industries has been stayed pending
the outcome of the Company's appeal to the Kentucky Supreme Court.
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.
The Company is a guarantor of $2,600,000 of debt that the purchaser of
its Pen Cotton of South Carolina operation incurred to purchase the business.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report that are not historical facts
are "forward looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which statements can be identified by
the use of forward looking terminology such as "believes," "expects," "may,"
"will," "should," "intends", "anticipates", or "forecasts" 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 Pen Holdings' annual report on Form 10-K
for the year ended December 31, 1999, filed with the U.S. Securities and
Exchange Commission on March 27, 2000. See "ITEM 1. BUSINESS-RISK FACTORS". Such
risks could cause actual results to vary materially from the future results
indicated, expressed or implied, in such forward looking statements.
GENERAL
The Company is engaged in the mining, preparation, marketing and
leasing of primarily compliance and low-sulfur coal from mines located in the
Central Appalachian region of eastern Kentucky and southern West Virginia. Based
on the reserve information compiled by third parties, the Company controls the
mineral rights to approximately 214 million tons of coal reserves, of which
management believes 89% is owned in fee. In the three and nine months ended
September 30, 2000, the Company sold approximately 1,174,000 and 3,905,000 tons
of coal, respectively, approximately 93.4% and 90.0% of which were generated
from captive production, respectively, with the remainder purchased from other
coal mine operators. During the three and nine months ended September 30, 2000,
approximately 69.8% and 66.8% respectively of the tonnage was sold to nine
long-term sales contract customers, with most of the remainder sold to spot
market customers. The Company sells coal primarily to domestic public utilities
and industrial customers. Coal sales under long-term sales contracts (contracts
with a term longer than one year) are the primary source of revenues for the
Company.
The Company also generates revenues by leasing portions of its mineral
rights to independent coal producers in exchange for revenue-based lease
royalties. Generally, the lease terms provide the Company with a royalty fee of
up to 10% of the sales price of the coal with a minimum of $1.75 to $2.50 per
ton. The length of such leases varies from five years to the life of the
reserves. A minimum advance annual royalty is required whether or not the
property is mined. Such minimum royalty can be recouped by the lessee as a
credit against royalties owed on production if such production is within a
specified period of time after a minimum advance royalty is paid.
The Company's cost of sales is primarily composed of expenses related
to coal operations and coal leasing. Cost of coal sales are principally related
to (i) costs associated with production, (ii) contract mining fees, (iii) coal
purchases and (iv) barge loading charges.
The Company's costs associated with production include labor, haulage,
depreciation and depletion, coal preparation plant costs, coal fees and taxes,
supplies, and repairs and maintenance.
The Company's costs related to contract mining fees have historically
varied due to the level of contract mining production, the quantity and quality
of tonnage purchased and spot market coal prices. The Company's cost of sales
related to its lease operations consist primarily of depletion and
administrative costs.
8
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating and other data of the Company presented as a percent of revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales 87.4% 91.7% 91.6% 88.5%
Selling, general and administrative 4.0% 3.4% 3.9% 3.2%
------ ------ ------ ------
Operating income 8.6% 4.9% 4.5% 8.3%
Other (income) expense:
Interest expense 7.5% 6.3% 6.1% 5.7%
Interest income (1.2)% (1.0)% (1.3)% (1.2)%
Other (income) expense 0.3% 0.4% 0.6% 0.5%
------ ------ ------ ------
Income from continuing operations before income taxes 2.0% (0.8)% (0.9)% 3.3%
Provision (benefit) for income taxes 1.2% (0.9)% (0.4)% 0.1%
------ ------ ------ ------
Income before income from discontinued operations 0.8% 0.1% (0.5)% 3.2%
Income (loss) from discontinued operations, net of tax 0.0% (0.5)% 0.0% (0.2)%
------ ------ ------ ------
Income before change in accounting principle 0.8% (0.4)% (0.5)% 3.0%
Change in accounting principle, net of tax 0.0% 0.0% 0.9% 0.0%
------ ------ ------ ------
Net income 0.8% (0.4)% 0.4% 3.0%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Coal sales. Coal sales revenues were $31,179,000 for the three months
ended September 30, 2000 compared to $43,655,000 for the three months ended
September 30, 1999, a decrease of 28.6%. The decrease is primarily attributable
to a decrease in the volume of coal shipped. Coal sales volume decreased to
1,174,000 tons for the three months ended September 30, 2000 from 1,590,000 tons
for the three months ended September 30, 1999, a decrease of 26.2%. The decrease
is primarily attributable to a more limited supply of coal available for
purchase. Purchased coal has been used historically to supplement the company's
production. The Company believes that this limited supply is due primarily to a
decline of production in the region combined with increased demand from
coal-based synthetic fuel producers who can pay a premium price for purchased
coal because of the tax benefits given to those producers. See a discussion of
synthetic fuel producers and their effect on the market in the Pen Holdings'
annual report on Form 10-K for the year ended December 31, 1999, filed with the
U.S. Securities and Exchange Commission on March 27, 2000. See "ITEM 1.
BUSINESS-RISK FACTORS-PRICE FLUCTUATIONS AND MARKETS". The decrease in coal
sales revenues is also attributable to the expiration of a coal sales agreement
with an international government-owned foreign utility in 1999.
Coal leasing. Coal leasing revenues were $1,779,000 for the three
months ended September 30, 2000 compared to $2,077,000 for the three months
ended September 30, 1999, a decrease of 14.3%. The decrease is primarily
attributable to a decrease in the volume of production from lessees. Production
from lessees' mining operations was 901,000 tons for the three months ended
September 30, 2000 compared to 1,073,000 for the three months ended September
30, 1999, a decrease of 16.0%.
Other. Other revenues were $2,733,000 for the three months ended
September 30, 2000. Other revenue for the three months ended September 30, 2000
was generated from a timber sale on a large tract of timber overlying the
Company's Fork Creek coal reserves. There were no other revenues in the three
months ended September 30, 1999.
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $30,209,000 for
the three months ended September 30, 2000 compared to $40,838,000 for the three
months ended September 30, 1999, a decrease of 26.0% related to the decrease in
coal sales volume of 26.2% discussed in COAL SALES-REVENUES above.
9
<PAGE> 12
Cost of sales-Leasing. Cost of coal lease revenues totaled $990,000 for
the three months ended September 30, 2000 compared to $1,082,000 for the three
months ended September 30, 1999, a decrease of 8.5%. The decrease primarily
resulted from a decrease in the volume of coal mined by lessees.
OTHER
Selling, general and administrative expenses totaled $1,416,000 for the
three months ended September 30, 2000 compared to $1,560,000 for the three
months ended September 30, 1999, a decrease of 9.2%. Selling, general and
administrative expenses were 4.0% and 3.4% of revenues for the three months
ended September 30, 2000 and 1999 respectively. The decrease primarily results
from decreased legal costs as a result of the 1990-1993 Internal Revenue Service
examination being completed in the third quarter of 1999.
As a result, EBITDA ("EBITDA" as defined to mean operating income plus
depreciation, depletion and amortization; EBITDA is not intended to represent
cash flow from operations as defined by generally accepted accounting principles
and should not be used as an alternative to net income or as an indicator of
operating performance or to cash flows as a measure of liquidity) totaled
$6,882,000 for the three months ended September 30, 2000 compared to $6,221,000
for the three months ended September 30, 1999, an increase of 10.6%. This
increase is primarily attributable to EBITDA generated from the sale of timber
from Fork Creek as described above in Revenues - Other.
Interest expense totaled $2,684,000 for the three months ended
September 30, 2000 compared to $2,865,000 for the three months ended September
30, 1999, a decrease of 6.3%. This decrease primarily resulted from additional
capitalization of interest related to the Fork Creek development. Capitalized
Interest for the three months ended September 30, 2000 was $1,397,000 compared
to $747,000 for the three months ended September 30, 1999.
Interest income totaled $423,000 for the three months ended September
30, 2000 compared to $465,000 for the three months ended September 30, 1999, a
decrease of 9.0%. Interest income decreased due to lower levels of cash
temporarily invested as a result of expenditures related to the Fork Creek
development.
Other expense was $121,000 for the three months ended September 30,
2000 compared to $193,000 for the three months ended September 30, 1999. Other
expense for the three months ended September 30, 2000 and September 30, 1999 was
primarily due to the Company's share of the loss from its one-third partnership
interest in International Marine Terminals ("IMT"), a loading facility for
ocean-going bulk cargo vessels located along the Mississippi River.
Income tax expense was $418,000 for the three months ended September
30, 2000 compared to a benefit of $416,000 for the three months ended September
30, 1999, an increase of $834,000. The increase is a result of higher income in
the three months ended September 30, 2000 than in the three months ended
September 30, 1999. The decrease in the effective tax rate from 121.9% for the
three months ended September 30, 1999 to 60.2% for the three months ended
September 30, 2000 results primarily from the favorable impact of the amount of
the tax over book depletion expense in relation to the amount of pre-tax income.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES
Coal sales. Coal sales revenues were $103,923,000 for the nine months
ended September 30, 2000 compared to $123,199,000 for the nine months ended
September 30, 1999, a decrease of 15.7%. This decrease is primarily attributable
to a decrease in the volume of coal shipped. Coal sales volume was 3,905,000
tons for the first nine months of 2000 compared to 4,445,000 tons for the first
nine months of 1999, a decrease of 12.1%. The decreased volume is primarily
attributable to the expiration of a contract with an international
government-owned foreign utility and a limited supply of coal available to
purchase. The Company has historically used purchased coal to supplement its own
production.
Coal leasing. Coal leasing revenues were $5,652,000 for the nine months
ended September 30, 2000 compared to $5,444,000 for the nine months ended
September 30, 1999, an increase of 3.8%. The increase is primarily attributable
to an increase in the volume of production from lessees. Production from the
Company's lessees was 2,846,000 tons for the nine months ended September 30,
2000 compared to 2,807,000 for the three months ended September 30, 1999, an
increase of 1.4%. The increase in coal leasing revenues was also partially
attributable to a reduction in the amount of advanced minimum lease payments
being recouped by lessees.
Other. Other revenues primarily includes revenues from timber sales on
the Company's coal reserves for the nine months ended September 30, 2000 and for
the nine months ended September 30, 1999. Other revenues were $3,623,000 for the
nine months ended September 30, 2000 compared to $338,000 for the nine months
ended September 30, 1999. The increase is related to the sale of a large tract
of timber overlying the Company's Fork Creek reserves.
10
<PAGE> 13
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $100,547,000 for
the nine months ended September 30, 2000 compared to $110,988,000 for the nine
months ended September 30, 1999, a decrease of 9.4%, while tons sold decreased
12.1%. During the nine months ended September 30, 2000, production costs at the
Kiah Creek operation were higher than the prior period due to i) lower than
expected coal thickness at one of the Company's underground mines, and ii)
increased cost in the Kiah Creek surface operation as a result of higher
overburden ratios and increased diesel fuel costs. Management has recently made
changes in the Kiah Creek surface operation in an attempt to improve
productivity at the operation. The changes include idling several
less-productive pieces of machinery and eliminating the related labor to reduce
costs and increase productivity.
Cost of sales-Leasing. Cost of coal lease revenues totaled $3,112,000
for the nine months ended September 30, 2000 compared to $3,170,000 for the nine
months ended September 30, 1999, an increase of 1.8%. The increase primarily
resulted from an increase in the volume of coal mined by lessees, while
administration costs have decreased primarily related to reduced staff.
OTHER
Selling, general and administrative expenses totaled $4,455,000 for the
nine months ended September 30, 2000 compared to $4,095,000 for the nine months
ended September 30, 1999, an increase of 8.8%. Selling, general, and
administrative expenses were 3.9% of revenues for the nine months ended
September 30, 2000 and 3.2% of revenues for the nine months ended September 30,
1999. The increase primarily results from increased payroll benefit costs and
occupancy costs as a result of opening a coal field office in Charleston, West
Virginia.
As a result, EBITDA totaled $16,676,000 for the nine months ended
September 30, 2000 compared to $21,896,000 for the nine months ended September
30, 1999, a decrease of 23.8%. This decrease is primarily attributable to
decreased coal shipments and increased mining costs at the Company's operations.
Interest expense totaled $6,858,000 for the nine months ended September
30, 2000 compared to $7,413,000 for the nine months ended September 30, 1999, a
decrease of 7.5%. This decrease primarily resulted from additional
capitalization of interest related to the Fork Creek development. Capitalized
interest for the nine months ended September 30, 2000 was $3,996,000 compared to
$1,840,000 for the nine months ended September 30, 1999.
Interest income totaled $1,459,000 for the nine months ended September
30, 2000 compared to $1,543,000 for the nine months ended September 30, 1999, a
decrease of 5.4%. This primarily resulted from lower levels of cash temporarily
invested as a result of expenditures related to the Fork Creek development.
Other expense was $713,000 for the nine months ended September 30, 2000
compared to $596,000 for the nine months ended September 30, 1999. Other expense
for the nine months ended September 30, 2000 and September 30, 1999 was
primarily due to the Company's share of the loss from its one-third partnership
interest in IMT.
Income taxes were a benefit of $459,000 for the nine months ended
September 30, 2000 compared to expense of $114,000 for the nine months ended
September 30, 1999, a decrease of $573,000. The decrease is a result of lower
net income in the nine months ended September 30, 2000. The increase in the
effective tax rate from 2.7% for the nine months ended September 30, 1999 to
44.6% for the nine months ended September 30, 2000 results primarily from the
favorable impact in 1999 of an adjustment to the amount of taxes previously
accrued by the Company relating to the IRS exam for the years 1990 through 1993
as the amount of settlement was less than the amount previously accrued.
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 $100,000,000 aggregate principal amount of 9 7/8% senior notes due 2008
(the "Offering"). Interest on the Senior Notes is payable semiannually on June
15 and December 15 of each year. As a result of the Offering, the Company has
significant indebtedness and debt service requirements. At September 30, 2000,
the Company had total indebtedness, including capital leases, revolving credit
loans, and current maturities, of $140,837,000. The Indenture for the Senior
Notes permits the Company to incur additional indebtedness, subject to certain
limitations. The Indenture also includes certain covenants that, among other
things: (i) limit the incurrence by the Company of additional indebtedness; (ii)
restrict the ability of the Company to pay dividends or make certain other
payments; (iii) limit transactions by the Company with affiliates; (iv) limit
the ability of the Company to incur certain liens; (v) limit the ability of the
Company to consolidate or merge with or into, or to transfer all or
substantially all of its assets to, another person; and (vi) limit the ability
of the Company to engage in other lines of business.
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<PAGE> 14
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 2.75% above LIBOR and 1.75% above Prime Rate. The Credit
Facility matures, subject to extensions requested by the Company at the
discretion of the lenders, five years after the closing date which occurred
simultaneously with the closing of the Offering. The Credit Facility contains
certain restrictions and limitations, including financial covenants that require
the Company to maintain and achieve certain levels of financial performance and
limit the payment of cash dividends and similar payments.
The Company's principal liquidity requirements are for debt service
requirements under the Senior Notes, and other outstanding indebtedness, and for
working capital needs and capital expenditures. Historically, the Company has
funded its capital and operating requirements with a combination of cash on
hand, operating cash flow, operating leases and borrowings under credit
facilities and capital leases. The Company has utilized these sources of funds
to make acquisitions, fund significant capital investments in its properties,
fund operations and service debt under credit facilities.
For the nine months ended September 30, 2000, the Company made capital
expenditures of $37,472,000 (including those attributable to the Fork Creek
development of $31,647,000, which includes capitalized interest of $3,996,000).
The capital expenditure balance includes capital lease proceeds of $14,049,000,
which are netted out of capital expenditures on the Consolidated Statement of
Cash Flows. The Company's budget for 2000 capital items is approximately
$39,205,000 (including Fork Creek expenditures of $32,724,000, which includes
capitalized interest of $3,195,000). The Company expects to fund its remaining
budgeted capital items through a combination of borrowings or leases from
equipment finance companies, borrowings under the Credit Facility and cash
generated from operations. The following schedule depicts the method of funding
capital items during the first nine months of 2000 and the expected method of
funding for the remaining three months of 2000:
2000 FORECASTED CAPITAL ITEMS
<TABLE>
<CAPTION>
Fork Creek Other Total
----------- ----------- -----------
<S> <C> <C> <C>
Amount expected to finance through operating
leases in 2000 $13,672,000 $ 4,804,000 $18,476,000
Amount expected to finance with cash from
operations and/or debt in 2000 32,724,000 6,969,000 39,693,000
----------- ----------- -----------
Total 2000 forecasted capital items 46,396,000 11,773,000 58,169,000
Less:
Amount financed through operating leases (1/1/00
- 9/30/00) 6,585,000 4,094,000 10,679,000
Amount financed with cash from operations and/or
debt (1/1/00 - 9/30/00) 31,647,000 5,825,000 37,472,000
----------- ----------- -----------
Remaining forecasted capital items (10/1/00 -
12/31/00)* $ 8,164,000 $ 1,854,000 $10,018,000
=========== =========== ===========
Amount expected to finance through operating
leases (10/1/00 - 12/31/00) $ 7,087,000 $ 710,000 $ 7,797,000
=========== =========== ===========
Amount expected to finance with cash from
operations and/or debt (10/1/00 - 12/31/00) $ 1,077,000 $ 1,144,000 $ 2,221,000
=========== =========== ===========
</TABLE>
*Some of these items may be deferred into 2001.
All necessary permits for operations at Fork Creek have been obtained.
Mining began in May 2000. Shipments began in September 2000.
Management believes that it will have sufficient sources of liquidity
to fund the remaining 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 permitted by the Credit Agreement and Indenture. However, 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 PART II, ITEM 1, "Legal Proceedings," of this Form 10-Q and the discussion
of this litigation below.) The Company sold the remainder of its cotton
operations in June 2000, this transaction generated $2,900,000 before income
tax. The Company sold timber rights at Fork Creek which generated cash of
approximately $2,700,000. There can be no assurance that the Company's business
will generate adequate cash flow from operations, that anticipated growth and
operating improvements will be realized or that future borrowings will be
available under the Credit Facility or from any other source in an amount
sufficient to enable the Company to service its indebtedness, including the
Senior Notes, or to fund its other liquidity needs.
12
<PAGE> 15
Net cash generated by operating activities was $16,969,000 for the nine
months ended September 30, 2000 compared to $10,612,000 for the nine months
ended September 30, 1999. The $6,375,000 increase in cash flow from operating
activities is primarily due to improved collections on the Company's accounts
receivable.
Net cash used by investing activities was $21,079,000 for the nine
months ended September 30, 2000 compared to $26,892,000 for the nine months
ended September 30, 1999. Net cash used by investing activities decreased by
$5,813,000, primarily as a result of the Company utilizing capital and operating
leases to finance its mining equipment purchases in 2000. Actual capital
expenditures increased to $37,472,000 for the nine months ended September 30,
2000 from $26,372,000 in the nine months ended September 30,1999 primarily as a
result of increased spending on the Fork Creek development.
Net cash provided by financing activities of $3,596,000 for the nine
months ended September 30, 2000 reflects an increase of $5,571,000 over the
$1,975,000 used for financing activities in the nine months ended September 30,
1999. The net cash provided in 2000 resulted from the Company's use of its line
of credit to fund a portion of its capital expenditures in 2000. In 1999,
capital expenditures were financed primarily with cash.
The Company issued 10,000 shares of Convertible Preferred Stock in
connection with the recapitalization of the Company in 1995. The liquidation
value of $8,649,000 (which is net of a $5,001,000 reduction for subsequent
settlement of the Company's tax matters), plus accrued dividends of $10,920,000
will be due in January 2006, if not reduced by additional tax related
reductions. The Convertible Preferred Stock will be redeemed at that time by the
issuance of a note payable which amortizes over the 10 years following the
redemption, unless converted to Class I common stock in accordance with its
terms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. 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 filed a petition for re-hearing with the Commonwealth of
Kentucky Court of Appeals, which has since been denied. 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.
The Company is awaiting a response from the Kentucky Supreme Court on whether it
will review the lower court decision. In the meantime, the Company has filed
suit against Tredegar Industries for any judgment the Company may have to pay
with regard to the Cheyenne litigation. Tredegar Industries was the owner of The
Elk Horn Coal Corporation when part of the events that gave rise to the action
occurred. The case against Tredegar Industries has been stayed pending the
outcome of the Company's appeal to the Kentucky Supreme Court.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.01 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated November 14, 2000
PEN HOLDINGS, INC.
By: /s/ WILLIAM E. BECKNER
----------------------------------------
William E. Beckner
President and Chief Executive Officer
By: /s/ MARK A. OLDHAM
----------------------------------------
Mark A. Oldham
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
15
