<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
JUNE 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 August 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 - June 30, 2000 and December 31, 1999 1
Consolidated Statement of Income - Three Months Ended June 30, 2000 and 1999
and Six Months Ended June 30, 2000 and 1999 2
Consolidated Statement of Changes In Shareholders' Equity 3
Consolidated Statement of Cash Flows - Six Months Ended June 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
JUNE 30, DECEMBER 31,
2000 1999
-------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 92 $ 599
Accounts receivable (net of allowance for doubtful accounts) 17,504 16,863
Inventories ................................................ 3,766 2,556
Refundable income taxes .................................... 661 686
Other assets ............................................... 2,017 2,257
-------- --------
Total current assets ...................................... 24,040 22,961
Investment in unconsolidated affiliated companies .......... 3,407 5,773
Coal reserves and mine development costs, net .............. 139,597 140,329
Property, plant and equipment, net ......................... 86,360 66,667
Long-term investments ...................................... 16,310 15,663
Other assets ............................................... 6,676 6,003
-------- --------
$276,390 $257,396
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................... $ 118 $ 113
Current maturities of capital leases ....................... 4,204 1,252
Accounts payable ........................................... 8,504 8,345
Accrued liabilities ........................................ 7,365 6,777
Deferred income taxes ...................................... 207 212
-------- --------
Total current liabilities ................................. 20,398 16,699
Revolving credit loans ..................................... 22,750 17,505
Long-term debt ............................................. 103,212 103,233
Long-term capital leases ................................... 11,136 1,030
Deferred income taxes ...................................... 51,578 51,739
Other liabilities .......................................... 3,648 3,685
-------- --------
Total liabilities ......................................... 212,722 193,891
-------- --------
Mandatorily redeemable preferred stock ....................... 13,564 13,018
Shareholders' equity:
Class I common stock ...................................... 43 43
Class II common stock ..................................... 2 2
Additional paid-in capital ................................. 19 19
Retained earnings .......................................... 50,040 50,423
-------- --------
Total shareholders' equity ................................ 50,104 50,487
-------- --------
$276,390 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
1999 1999
2000 RESTATED 2000 RESTATED
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues .................................................... $ 37,750 $ 44,534 $ 77,507 $ 83,249
Operating expenses:
Cost of sales ............................................ 35,070 38,574 72,460 72,238
Selling, general and administrative ...................... 1,598 1,304 3,039 2,535
-------- -------- -------- --------
Operating income ............................................ 1,082 4,656 2,008 8,476
Other (income) expense:
Interest expense ......................................... 2,079 2,176 4,174 4,548
Interest income .......................................... (683) (509) (1,036) (1,078)
Other expense ............................................ 211 348 592 403
-------- -------- -------- --------
Income (loss) from continuing operations before income taxes (525) 2,641 (1,722) 4,603
Provision for income taxes .................................. (421) 530 (877) 959
-------- -------- -------- --------
Net income (loss) before income from discontinued operations (104) 2,111 (845) 3,644
Income (loss) from discontinued operations .................. 3 (46) (18) (109)
-------- -------- -------- --------
Net income before change in accounting principle ............ (101) 2,065 (863) 3,535
Change in accounting principle, net of tax .................. 1,026 -- 1,026 --
-------- -------- -------- --------
Net income .................................................. 925 2,065 163 3,535
Accretion of mandatorily redeemable preferred stock ......... 278 324 546 646
-------- -------- -------- --------
Net income (loss) available to common shareholders .......... $ 647 $ 1,741 $ (383) $ 2,889
======== ======== ======== ========
</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 redeemable
preferred stock .......... (546) (546)
Net income ................. 163 163
---------- ----- ------- ---- --- ------- -------
Balance at June 30, 2000
(unaudited) .............. 4,290,000 $ 43 177,550 $ 2 $19 $50,040 $50,104
========== ===== ======= ==== === ======= =======
</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>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999
2000 RESTATED
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................ $ 163 $ 3,535
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization ....................................... 7,929 7,342
Amortization of bond discount .................................................. 39 39
Equity in net losses of affiliates ............................................. 775 1,292
Deferred income taxes .......................................................... (161) (993)
(Gain) on sale of investment ................................................... (856) --
(Gain)/loss on sale of equipment ............................................... 72 (259)
Interest income on long-term investments ....................................... (647) (597)
-------- --------
Cash generated from operations, before changes in assets and liabilities ....... 7,314 10,359
Changes in assets and liabilities, net of effects from dispositions:
Accounts receivable ............................................................ (641) (2,616)
Inventories .................................................................... (1,210) (1,802)
Accounts payable and accrued expenses .......................................... 747 (689)
Other .......................................................................... (778) 1,121
-------- --------
Net cash provided by operating activities ...................................... 5,432 6,373
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................................. (12,484) (14,601)
Proceeds from sale of investment .................................................. 2,900 --
Proceeds from sale of equipment ................................................... 46 375
(Investments in) Distributions from affiliated companies .......................... (600) (1,000)
-------- --------
Net cash (used) by investing activities ........................................... (10,138) (15,226)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ....................................................... (55) (52)
Repayment of capital leases ....................................................... (991) (1,429)
Net borrowings (payments) under line of credit agreements and current notes payable 5,245 --
-------- --------
Net cash provided (used) by financing activities .................................. 4,199 (1,481)
-------- --------
Net (decrease) in cash ............................................................ (507) (10,334)
Cash and cash equivalents at beginning of period .................................. 599 20,186
-------- --------
Cash and cash equivalents at end of period ........................................ $ 92 $ 9,852
======== ========
</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, Inc. 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 three months and six months ended
June 30, 1999 have been restated to reflect the Company's discontinuation of
cotton operations.
Income from discontinued operations for the three months and six months
ended June 30, 2000 is income of $5,000 (less applicable taxes of $2,000) and a
loss of $27,000 (less applicable tax credits of $9,000), respectively. Loss from
discontinued operations for the three months and six months ended June 30, 1999
is $70,000 (less applicable tax credits of $23,000) and $165,000 (less
applicable tax credits of $56,000), 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 three 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 fairly even mix of operations in underground mining and
surface mining. However, the Company recently started two new underground mines
in 2000. The underground mining process requires a large amount of supply parts
inventory and the anticipated tons to be produced from underground mining is
projected to increase to over 75% of the Company's output 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 six months ended June 30, 2000. The $1,723,000 reflects the
supplies inventory balance at December 31, 1999. The effect of the change on the
three months ended June 30, 2000 was to decrease net income $133,000; the effect
of the change on the six months ended June 30, 2000 was to decrease net income
$112,000. The pro forma amounts reflect the effect of retroactive application on
supplies inventory expense and related income taxes that would have been made in
2000 had the new method been in effect at January 1, 2000. The effect of the
change on the three months ended March 31, 2000 was to decrease net loss from
$762,000 to $740,000. 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 six month periods are not necessarily indicative
of results for the full year.
In the opinion of management, the accompanying interim financial
statements contain all adjustments of a normal and recurring nature necessary
for a fair presentation of the Company's financial position as of June 30, 2000,
its results of operations for three and six months ended June 30, 2000 and 1999,
and its cash flows for the six months ended June 30, 2000 and 1999.
5
<PAGE> 8
NOTE 3-INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Coal ............................ $ 2,212 $ 2,556
Supplies ........................ 1,554 0
--------- ---------
$ 3,766 $ 2,556
========= =========
</TABLE>
See Note 2 for change in accounting principle related to supplies
inventory.
NOTE 4-COAL RESERVES AND MINE DEVELOPMENT COSTS:
Coal reserves and mine development costs consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Coal reserves ................... $ 153,883 $ 153,883
Other mine development costs .... 16,823 15,063
--------- ---------
170,706 168,946
Accumulated depletion ........... (31,109) (28,617)
--------- ---------
$ 139,597 $ 140,329
========= =========
</TABLE>
NOTE 5-PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Machinery and equipment ......... $ 64,204 $ 58,763
River terminals ................. 11,625 11,625
Buildings ....................... 6,028 5,772
Coal preparation plant .......... 8,151 8,114
Fork Creek mine development costs 45,293 27,526
Other ........................... 3,905 3,125
--------- ---------
139,206 114,925
Accumulated depreciation ........ (52,846) (48,258)
--------- ---------
$ 86,360 $ 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 8.67% at June 30, 2000) or the lender's prime lending rate
(an effective rate of 10.50% at June 30, 2000). These agreements contain minimum
operating and financial ratios and covenants as defined in the agreements. At
June 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>
JUNE 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...................................... $ 99,380 $ 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 $2,991,000 at June 30,
1999, payable in monthly installments of $37,000 through 2016. Interest included
in the monthly installments is a fixed rate of 8.33%........................... 3,950 4,006
--------- ---------
Total long-term debt............................................................ 103,330 103,346
Current maturities of long-term debt............................................ (118) (113)
--------- ---------
$ 103,212 $ 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, 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 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
previous owner of The Elk Horn Coal Corporation, the subsidiary of the Company
against which the judgment was rendered.
There are legal proceedings pending against the Company arising from
the normal course of business. Management of the Company and its legal counsel
handling such matters do not expect any of these matters to have a material
effect on the Company's financial position or results of operations.
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" 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 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 216 million tons of coal reserves, of which
management believes 89% is owned in fee. In the three and six months ended June
30, 2000, the Company sold approximately 1,364,000 and 2,731,000 tons of coal,
respectively, approximately 92.8% and 88.6% of which were generated from captive
production, respectively, with the remainder purchased from other coal mine
operators. During the three and six months ended June 30, 2000, approximately
65.6% and 66.8% respectively of the tonnage was sold to seven 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues ............................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales ...................................... 92.9% 86.6% 93.5% 86.8%
Selling, general and administrative ................ 4.2% 2.9% 3.9% 3.0%
------ ------ ------ ------
Operating income ..................................... 2.9% 10.5% 2.6% 10.2%
Other (income) expense:
Interest expense ................................... 5.5% 4.9% 5.4% 5.5%
Interest income .................................... (1.8%) (1.1%) (1.3%) (1.3%)
Other (income) expense ............................. 0.6% 0.8% 0.8% 0.5%
------ ------ ------ ------
Income from continuing operations before income taxes (1.4%) 5.9% (2.3%) 5.5%
Provision for income taxes ........................... (1.1%) 1.2% (1.1%) 1.2%
------ ------ ------ ------
Income before income from discontinued operations .... (0.3%) 4.7% (1.2%) 4.4%
Income (loss) from discontinued operations, net of tax 0.0% (0.1%) (0.0%) (0.1%)
------ ------ ------ ------
Income before change in accounting principle ......... (0.3%) 4.6% (1.2%) 4.3%
Change in accounting principle, net of tax ........... 2.7% 0.0% 1.3% 0.0%
------ ------ ------ ------
Net income ........................................... 2.4% 4.6% 0.1% 4.3%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
REVENUES
Coal sales. Coal sales revenues were $35,096,000 for the three months
ended June 30, 2000 compared to $42,543,000 for the three months ended June 30,
1999, a decrease of 17.5%. The decrease is primarily attributable to a decrease
in the volume of coal shipped. Coal sales volume decreased to 1,364,000 tons for
the three months ended June 30, 2000 from 1,532,000 tons for the three months
ended June 30, 1999, a decrease of 11.0%. The decrease is primarily attributable
to the expiration of a contract with an international government owned foreign
utility with which the company had a long term contract. The sales price per ton
for this contract was higher than equivalent domestic utility sales price due to
the fact that the shipping point for the exported coal was F.O.B. Gulf of Mexico
and domestic coal is typically shipped F.O.B. barge near West Virginia.
Coal leasing. Coal leasing revenues were $2,047,000 for the three
months ended June 30, 2000 compared to $1,654,000 for the three months ended
June 30, 1999, an increase of 23.8%. The increase is primarily attributable to
an increase in the volume of production from lessees and a reduction in the
amount of advanced minimum being recouped by lessees. Production from lessees'
mining operations was 985,000 tons for the three months ended June 30, 2000
compared to 884,000 for the three months ended June 30, 1999, an increase of
11.4%.
Other. Other revenues were $607,000 for the three months ended June 30,
2000 compared to $337,000 for the three months ended June 30, 1999, a increase
of 80.1%. Other revenues primarily includes revenues from timber sales on the
Company's coal reserves for the three months ended June 30, 2000 and for the
three months ended June 30, 1999.
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $33,919,000 for
the three months ended June 30, 2000 compared to $37,478,000 for the three
months ended June 30, 1999, a decrease of 9.5% during a period in which tons
sold decreased 11.0%. During the second quarter of 2000, the Company recorded a
receivable for Black Lung Excise Tax payments on export shipments for the
periods 1995 through 1999. This tax has been declared unconstitutional by the
United States Supreme Court and the Internal Revenue Service is preparing to
process refund claims. The refund totals $1,504,000 and was credited to cost of
sales in the second quarter of 2000. Cost of sales increased approximately $1.50
per ton (exclusive of the effects of the Black Lung Excise Tax refund). This
increase is primarily related to adverse mining conditions at the Company's Kiah
Creek Surface mine.
9
<PAGE> 12
Cost of sales-Leasing. Cost of coal lease revenues totaled $1,151,000
for the three months ended June 30, 2000 compared to $1,096,000 for the three
months ended June 30, 1999, an increase of 5.0%. The increase primarily resulted
from an increase in the volume of coal mined by lessees, while administration
costs expenses have decreased primarily related to reduced staff.
OTHER
Selling, general and administrative expenses totaled $1,598,000 for the
three months ended June 30, 2000 compared to $1,304,000 for the three months
ended June 30, 1999, an increase of 22.5%. Selling, general and administrative
expenses were 4.2% and 2.9% of revenues for the three months ended June 30, 2000
and 1999 respectively. The increase is primarily the results from increased
payroll costs and payroll benefit costs as a result of opening a coal field
office in Charleston, West Virginia and increased professional fees.
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
$5,027,000 for the three months ended June 30, 2000 compared to $8,268,000 for
the three months ended June 30, 1999, a decrease of 39.2%. This decrease is
primarily attributable to decreased coal shipments and increased mining costs at
the Company's operations.
Interest expense totaled $2,079,000 for the three months ended June 30,
2000 compared to $2,176,000 for the three months ended June 30, 1999, a decrease
of 4.5%. This decrease primarily resulted from additional capitalization of
interest related to the Fork Creek development. Capitalized Interest for the
three months ended June 30, 2000 was $1,420,000 compared to $592,000 for the
three months ended June 30, 1999.
Interest income totaled $683,000 for the three months ended June 30,
2000 compared to $509,000 for the three months ended June 30, 1999, an increase
of 34.2%. Interest income decreased due to lower levels of cash invested as a
result of expenditures related to the Fork Creek development. The decrease was
more than offset, however, by the $317,000 of interest income related to the
Black Lung Excise tax refund discussed above in Cost of Sales - Coal Sales.
Other expense was $211,000 for the three months ended June 30, 2000
compared to $348,000 for the three months ended June 30, 1999. Other expense for
the three months ended June 30, 2000 and June 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. During the three months ended
June 30, 2000, the Company recorded a gain of $847,000 for the sale of its
cotton facility in South Carolina and the Company also incurred $626,000 in bad
debt expense.
Income taxes were a benefit of $421,000 for the three months ended June
30, 2000 compared to expense of $530,000 for the three months ended June 30,
1998, a decrease of 179.4%. The decrease is a result of lower income in the
three months ended June 30, 2000 than in the three months ended June 30, 1999.
The increase in the effective tax rate from 20.1% for the three months ended
June 30, 1999 to 80.2% for the three months ended June 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Coal sales. Coal sales revenues were $72,137,000 for the six months
ended June 30, 2000 compared to $79,544,000 for the six months ended June 30,
1999, a decrease of 9.3%. This decrease is primarily attributable to an decrease
in the volume of coal shipped. Coal sales volume was 2,731,000 tons for the
first six months of 2000 compared to 2,855,000 tons for the first six months of
1999, a decrease of 4.3%. The decreased volume is primarily attributable to the
expiration of a contract with an international government owned foreign utility.
Coal leasing. Coal leasing revenues were $3,873,000 for the six months
ended June 30, 2000 compared to $3,367,000 for the six months ended June 30,
1999, an increase of 15.0%. The increase is primarily attributable to an
increase in the volume of production from lessees. Production from the Company's
lessees was 1,946,000 tons for the six months ended June 30, 2000 compared to
1,734,000 for the six months ended June 30, 1999, an increase of 12.2%.
Other. Other revenues primarily includes revenues from timber sales on
the Company's coal reserves for the six months ended June 30, 2000 and for the
six months ended June 30, 1999. Other revenues were $1,497,000 for the six
months ended June 30, 2000 compared to $338,000 for the six months ended June
30, 1999, an increase of 342.9%.
10
<PAGE> 13
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $70,338,000 for
the six months ended June 30, 2000 compared to $70,150,000 for the six months
ended June 30, 1999, an increase of 0.3%, while tons sold decreased 4.3%. This
increase resulted primarily from increased cost in the Kiah Creek Surface
operation to move into and develop a new reserve area and unfavorable mining
conditions in the Kiah Creek underground operation.
Cost of sales-Leasing. Cost of coal lease revenues totaled $2,122,000
for the six months ended June 30, 2000 compared to $2,088,000 for the six months
ended June 30, 1999, an increase of 1.6%. The increase primarily resulted from
an increase in the volume of coal mined by lessees, while administration costs
expenses have decreased primarily related to reduced staff.
OTHER
Selling, general and administrative expenses totaled $3,039,000 for the
six months ended June 30, 2000 compared to $2,535,000 for the six months ended
June 30, 1999, an increase of 19.9%. Selling, general, and administrative
expenses were 3.9% of revenues for the six months ended June 30, 2000 and 3.0%
of revenues for the six months ended June 30, 1999. The increase primarily
results from increased payroll costs and payroll benefit costs as a result of
opening a coal field office in Charleston, West Virginia and increased
professional fees.
As a result, EBITDA totaled $9,794,000 for the six months ended June
30, 2000 compared to $15,675,000 for the six months ended June 30, 1999, a
decrease of 37.5%. This decrease is primarily attributable to decreased coal
shipments and increased mining costs at the Company's operations.
Interest expense totaled $4,174,000 for the six months ended June 30,
2000 compared to $4,548,000 for the six months ended June 30, 1999, a decrease
of 8.2%. This decrease primarily resulted from additional capitalization of
interest related to the Fork Creek development. Capitalized interest for the six
months ended June 30, 2000 was $2,598,000 compared to $1,093,000 for the six
months ended June 30, 1999.
Interest income totaled $1,036,000 for the six months ended June 30,
2000 compared to $1,078,000 for the six months ended June 30, 1999, a decrease
of 3.9%. This primarily resulted from lower levels of cash invested as a result
of expenditures related to the Fork Creek development offset by $317,000 of
interest related to the Black Lung Excise tax refund discussed in Cost of Sales
- Coal Sales above.
Other income (expense) was $592,000 of expense for the six months ended
June 30, 2000 compared to $403,000 of income for the six months ended June 30,
1999. Other expense for the six months ended June 30, 2000 and June 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. During the
six months ended June 30, 2000, the Company recorded a gain of $847,000 on the
sale of its cotton facility in South Carolina and incurred $626,000 in bad debt
expense.
Income taxes were a benefit of $877,000 for the six months ended June
30, 2000 compared to expense of $959,000 for the six months ended June 30, 1999,
a decrease of 191.4%. The decrease is a result of lower net income in the six
months ended June 30, 2000. The increase in the effective tax rate from 20.8%
for the six months ended June 30, 1999 to 50.9% for the six months ended June
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.
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"). Interest on the Senior Notes is payable semiannually on
June 15 and December 15 of each year, commencing December 15, 1998. As a result
of the Offering, the Company has significant indebtedness and debt service
requirements. At June 30, 2000, the Company had total indebtedness, including
capital leases, revolving credit loans, and current maturities, of $141,420,000.
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% above LIBOR and 1% 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 six months ended June 30, 2000, the Company made capital
expenditures of $ 26,533,000 (including those attributable to the Fork Creek
development of $21,937,000, which includes capitalized interest of $2,599,000).
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 $29,838,000, which includes
capitalized interest of $3,195,000). The Company expects to fund its budgeted
capital items through a combination of proceeds from the issuance of the Senior
Notes, borrowings or leases from equipment finance companies, borrowings under
the Credit Facility and cash currently on hand or generated from operations. The
following schedule depicts the method of funding capital items during the first
six months of 2000 and the expected method of funding for the remaining six
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 $ 12,352,000 $ 2,836,000 $ 15,188,000
Amount expected to finance with cash from
operations and/or debt in 2000 34,044,000 5,161,000 39,205,000
------------- ----------- ------------
Total 2000 forecasted capital items 46,396,000 7,997,000 54,393,000
Less:
Amount financed through operating leases (1/1/00
- 6/30/00) 1,973,000 1,946,000 3,919,000
Amount financed with cash from operations and/or
debt (1/1/00 - 6/30/00) 21,938,000 4,595,000 26,533,000
------------- ----------- ------------
Remaining forecasted capital items (7/1/00 -
12/31/00) $ 22,485,000 $ 1,456,000 $ 23,941,000
============= =========== ============
Amount expected to finance through operating
leases (7/1/00 - 12/31/00) $ 10,379,000 $ 890,000 $ 11,270,000
============= =========== ============
Amount expected to finance with cash from
operations and/or debt (7/1/00 - 12/31/00) $ 12,103,000 $ 565,000 $ 12,671,000
============= =========== ============
</TABLE>
All necessary permits for commencing operations at Fork Creek have been
obtained. Mining began in May 2000. Management believes that construction of the
Fork Creek preparation plant and other related facilities will be complete and
shipments will begin in August 2000.
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 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, which transaction generated
$2,900,000 before income tax. The Company has entered into an agreement to sell
timber rights at Fork Creek and expects such sale to generate cash of
approximately $2,700,000. Management of the Company had considered selling its
Elk Horn leasing operations and/or a portion of its mineral rights at Fork
Creek, but has since decided not to pursue such sales at this time. 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 $5,432,000 for the six
months ended June 30, 2000 compared to $6,373,000 for the six months ended June
30, 1999. The $941,000 decrease in cash flow from operating activities is
primarily related to higher production costs at the Company's mines due to
mining conditions and development costs.
Net cash used by investing activities was $10,138,000 for the six
months ended June 30, 2000 compared to $15,226,000 for the six months ended June
30, 1999. Net cash used by investing activities decreased by $5,088,000,
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 $26,533,000 for the six months ended June 30, 2000 from $14,601,000
in the six months ended June 30,1999 primarily as a result of increased spending
on the Fork Creek development.
Net cash provided by financing activities of $4,199,000 for the six
months ended June 30, 2000 reflects an increase of $5,680,000 over the
$1,481,000 used for financing activities in the six months ended June 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 $1,588,000 reduction and a $3,413,000
reduction for settlement of the Company's tax matters in 1999 and 1998,
respectively) 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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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 previous
owner of The Elk Horn Coal Corporation, the subsidiary of the Company against
which the judgment was rendered.
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
Company press release dated June 30, 2000, filed hereto as exhibit 99.01.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
18.1 Letter from accountants regarding change in accounting principle.
27.1 Financial Data Schedule
99.1 Press Release dated June 30, 2000, regarding the sale of Elk Horn Coal
Corporation.
(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 August 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
