<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
MARCH 31, 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 May 15, 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 - March 31, 2000 and December 31, 1999 1
Consolidated Statement of Income - Three Months Ended March 31, 2000 and 1999 2
Consolidated Statement of Changes In Shareholders' Equity for the Three Months
Ended March 31, 2000 3
Consolidated Statement of Cash Flows - Three Months Ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
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 14
</TABLE>
-i-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share information)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 276 $ 1,333
Accounts receivable (net of allowance for doubtful accounts of $615 and $605
respectively)............................................................. 20,899 17,837
Inventories ................................................................ 4,465 2,960
Refundable income taxes .................................................... 678 682
Other assets ............................................................... 2,221 2,290
-------- --------
Total current assets ..................................................... 28,539 25,102
Investment in unconsolidated affiliated company ............................... 3,320 3,692
Coal reserves and mine development costs, net ................................. 139,537 140,329
Property, plant and equipment, net ............................................ 78,844 68,519
Long-term investments ......................................................... 15,983 15,663
Other assets .................................................................. 5,779 6,003
-------- --------
$272,002 $259,308
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................................... $ 115 $ 113
Current maturities of capital leases ....................................... 1,702 1,252
Accounts payable ........................................................... 10,947 9,744
Accrued liabilities ........................................................ 8,729 7,129
Deferred income taxes ...................................................... 212 212
-------- --------
Total current liabilities ................................................ 21,705 18,450
Revolving credit loans ........................................................ 26,731 17,505
Long-term debt ................................................................ 103,223 103,233
Long-term capital leases ...................................................... 2,259 1,030
Deferred income taxes ......................................................... 51,647 51,900
Other liabilities ............................................................. 3,694 3,685
-------- --------
Total liabilities ........................................................ 209,259 195,803
-------- --------
Mandatorily redeemable preferred stock ........................................ 13,286 13,018
Contingencies (Note 8)
Shareholders' equity:
Class I common stock, $.01 par value; 7,800,000 shares authorized, 4,290,000
shares issued and outstanding ............................................ 43 43
Class II common stock, $.01 par value; 200,000 shares authorized, 177,550
shares issued and outstanding ............................................ 2 2
Additional paid-in capital ................................................. 19 19
Retained earnings .......................................................... 49,393 50,423
-------- --------
Total shareholders' equity ............................................... 49,457 50,487
-------- --------
$272,002 $259,308
======== ========
</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
MARCH 31,
----------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues ................................................... $ 40,280 $ 39,426
Operating expenses:
Cost of sales ........................................... 37,951 34,446
Selling, general and administrative ..................... 1,441 1,231
-------- --------
Operating income ........................................... 888 3,749
Other (income) expense:
Interest expense ........................................ 2,096 2,403
Interest income ......................................... (355) (576)
Other ................................................... 376 55
-------- --------
Income (loss) from continuing operations before income taxes (1,229) 1,867
Provision (benefit) for income taxes ....................... (467) 397
-------- --------
Net income (loss) .......................................... (762) 1,470
Accretion of mandatorily redeemable preferred stock ........ 268 322
-------- --------
Net income (loss) available to common shareholders ......... $ (1,030) $ 1,148
======== ========
</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 mandatorily
redeemable preferred stock
(unaudited) ............. (268) (268)
Net loss (unaudited) ....... (762) (762)
---------- ----- ------- -- --- ------- -------
Balance at March 31, 2000
(unaudited) ............. 4,290,000 $ 43 177,550 $2 $19 $49,393 $49,457
========== ===== ======= == === ======= =======
</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>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................... $ (762) $ 1,470
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization ................................ 3,913 3,678
Amortization of bond discount ........................................... 20 20
Equity in net losses of affiliates ...................................... 417 --
Deferred income taxes ................................................... (253) (446)
(Gain) loss on sale of equipment ........................................ (21) 4
Interest income on long-term investments ................................ (320) (295)
-------- --------
Cash generated from operations, before changes in assets and
liabilities ................................................................ 2,994 4,431
Changes in assets and liabilities
Accounts receivable ..................................................... (3,062) (111)
Inventories ............................................................. (1,505) (3,312)
Accounts payable and accrued expenses ................................... 2,803 2,255
Other ................................................................... 123 303
-------- --------
Net cash provided by operating activities ............................... 1,353 3,566
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................ (11,172) (5,467)
Proceeds from sale of equipment ............................................. 34 68
Investments in affiliated companies ......................................... (100) --
-------- --------
Net cash used by investing activities ....................................... (11,238) (5,399)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................................................. (28) (25)
Repayment of capital leases ................................................. (370) (815)
Net borrowings under line of credit agreements and current notes payable .... 9,226 --
-------- --------
Net cash provided by (used for) financing activities ....................... 8,828 (840)
-------- --------
Net decrease in cash ........................................................ (1,057) (2,673)
Cash and cash equivalents at beginning of period ............................ 1,333 21,012
-------- --------
Cash and cash equivalents at end of period .................................. $ 276 $ 18,339
======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest ................................................................ $ 660 $ 2,018
Income taxes ............................................................ -- 1,299
Supplemental disclosure of non-cash transactions:
In March 2000, the Company financed through capital lease transactions the
purchase of $2,049,000 of equipment
</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:
DESCRIPTION OF THE BUSINESS
Pen Holdings, Inc. ("Pen Holdings") and its consolidated subsidiaries
(references to the "Company" refer to Pen Holdings and its consolidated
subsidiaries) are primarily engaged in the mining and sale of coal, selling
predominantly to utility companies. The Company also receives royalty income
from coal reserves leased to other companies. The Company's coal reserves and
mining operations are in Kentucky and West Virginia. The Company also processes,
warehouses, and sells cotton and cottonseed.
NOTE 2-SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its majority and wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Investments in affiliated enterprises in which the Company owns less than
a controlling interest are presented under the equity basis of accounting
representing the Company's investment in affiliates, reduced by goodwill
amortization and increased (decreased) by the Company's proportionate equity in
net income (losses) of the unconsolidated affiliates.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements have been prepared without
audit, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes that
the disclosures herein are adequate to make information presented not
misleading. These statements should be read in conjunction with the Company's
financial statements for the year ended December 31, 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 month period are not necessarily indicative of results for the
full year. Certain prior year amounts have been reclassified for comparative
purposes.
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 March 31,
2000, and its results of operations and its cash flows for the three months
ended March 31, 2000 and 1999, respectively.
NOTE 3-INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Coal ....................... $ 4,190 $ 2,556
Cottonseed ................. 275 404
--------- ---------
$ 4,465 $ 2,960
========= =========
</TABLE>
NOTE 4-COAL RESERVES AND MINE DEVELOPMENT COSTS:
Coal reserves and mine development costs consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Coal reserves .............. $ 153,883 $ 153,883
Other mine development costs 15,669 15,063
--------- ---------
169,552 168,946
Accumulated depletion ...... (30,015) (28,617)
--------- ---------
$ 139,537 $ 140,329
========= =========
</TABLE>
Mine development costs include $3,691,000 and $3,234,000 at March 31,
2000 and December 31, 1999, respectively, of capitalized interest on the Fork
Creek reserves.
-5-
<PAGE> 8
NOTE 5-PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Machinery and equipment .... $ 63,289 $ 61,362
River terminals ............ 11,625 11,625
Buildings .................. 6,060 5,772
Coal preparation plant ..... 8,132 8,114
Cotton gins and warehouses . 1,386 1,386
Fork Creek development costs 37,207 27,526
Other ...................... 3,774 3,237
--------- ---------
131,473 119,022
Accumulated depreciation ... (52,629) (50,503)
--------- ---------
$ 78,844 $ 68,519
========= =========
</TABLE>
Fork Creek development costs include $1,802,000 and $1,081,000 at March
31, 2000 and December 31, 1999, respectively, of capitalized interest on the
construction of the Fork Creek facilities.
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 7.66% at March 31, 2000) or the lender's prime lending
rate (an effective rate of 9.75% at March 31, 2000). The revolving line of
credit had an outstanding cash balance of $26,731,000 and $17,505,000 at March
31, 2000 and December 31, 1999, respectively. Additionally, $4,360,000 was
committed for outstanding standby letter of credit at March 31, 2000 and
December 31, 1999. These agreements contain minimum operating and financial
ratios and covenants as defined in the agreements. The Company was in compliance
with those covenants at March 31, 2000.
-6-
<PAGE> 9
NOTE 7-LONG TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
9-7/8% Senior 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, jointly 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................. $ 99,360 $ 99,340
Note payable secured by a lien on an office building which serves as the
Company's headquarters, with a net book value of $3,013,000 at March 31,
2000, payable in monthly installments of $37,000 through 2016. Interest
included in the monthly installments is a fixed rate
of 8.33% .................................................................... 3,978 4,006
--------- ---------
Total long-term debt ........................................................... 103,338 103,346
Current maturities of long-term debt ........................................... (115) (113)
--------- ---------
$ 103,223 $ 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. The proceeds from the issuance of the Senior Notes
were used to repay previously existing indebtedness, redeem warrants on the
Company's common stock and provide working capital for future development of
mining properties. Certain of the Company's other loan agreements contain
minimum operating and financial ratios and covenants as defined in the separate
agreements. The Company was in compliance with all covenants during the three
months ended March 31, 2000 and the year ended December 31, 1999.
-7-
<PAGE> 10
NOTE 8-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 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.
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.
-8-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report that are not historical facts
are "forward looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which statements can be identified by
the use of forward looking terminology such as "believes," "expects," "may,"
"will," "should," "intends" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. Management cautions the reader that these
forward looking statements are only predictions. No assurance can be given that
future results will be achieved; actual events or results may differ materially
as a result of risks facing the Company. Such risks include, but are not limited
to, the ultimate resolution of the Cheyenne litigation, the 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 the Company's Form 10-K for the year ended
December 31, 1999 as filed with the Securities and Exchange Commission. Such
risks could cause actual results to vary materially from the future results
indicated, expressed or implied, in such forward looking statements.
GENERAL
The Company is engaged in the mining, preparation, marketing and
leasing of primarily compliance and low-sulfur coal from mines located in the
Central Appalachian region of eastern Kentucky and southern West Virginia. Based
on the reserve information compiled by third-parties, the Company controls the
mineral rights to approximately 218 million tons of coal reserves. In the three
months ended March 31, 2000, the Company sold approximately 1.4 million tons of
coal, approximately 84% of which was generated from captive production, with the
remainder purchased from other coal mine operators. During the three months
ended March 31, 2000, approximately 68% of the tonnage was sold to seven
long-term sales contract customers, with 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 has successfully re-negotiated a price re-opener on its long term
contract with Dayton Power and Light (DP&L), a domestic utility. The 1,500,000
annual contract tonnage has been replaced by two new contracts which total
1,500,000 tons annually. One contract calls for 500,000 tons per year to be
shipped to DP&L's Killen plant for a four year period with a four year
re-opener. The other contract is for 1,000,000 tons per year to DP&L's Stuart
plant for a three year period with a three year re-opener. Both contracts begin
shipping on January 1, 2001. A bridge agreement for 750,000 tons is in place for
the period between the expiration of the present contract on June 30, 1999 and
the effective date of the new contracts.
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 term of such leases varies from five years to the life of the reserves.
A minimum advance 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 by the lessee.
The Company's cost of sales is primarily composed of expenses related
to coal operations, coal leasing and other operations such as cotton ginning and
warehousing. Cost of coal sales are principally related to (i) costs associated
with production, (ii) contract mining fees, (iii) coal purchases and (iv)
upriver loading charges.
The Company's costs associated with production include labor, haulage,
depreciation and depletion, coal preparation plant costs, coal fees and taxes,
supplies, and repairs and maintenance.
The Company's cost 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.
-9-
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating and other data of the Company presented as a percent of revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------ ------
<S> <C> <C>
OPERATING DATA:
Revenues 100.0% 100.0%
Operating expenses:
Cost of sales 94.2 87.4
Selling, general and administrative 3.6 3.1
------ ------
Operating income 2.2 9.5
Interest expense 5.2 6.1
Interest income (0.9) (1.4)
Other expense 1.0 0.1
------ ------
Income (loss) from continuing operations before
income taxes (3.1) 4.7
Provision (benefit) for income taxes (1.2) 1.0
------ ------
Net income (loss) (1.9)% 3.7%
====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
REVENUES
Coal sales. Coal sales revenues were $37,041,000 for the three months
ended March 31, 2000 compared to $37,002,000 for the three months ended March
31, 1999, an increase of 0.1%. Coal sales volume increased to 1,367,000 tons for
the three months ended March 31, 2000 from 1,323,000 tons for the three months
ended March 31, 1999.
Coal leasing. Coal leasing revenues were $1,826,000 for the three
months ended March 31, 2000 compared to $1,713,000 for the three months ended
March 31, 1999, an increase of 6.6%. Production from the lessee mines which was
961,000 tons for the three months ended March 31, 2000 compared to 850,000 for
the three months ended March 31, 1999, an increase of 13.1%.
Other. Other revenues primarily include revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the three months ended March 31,
2000 and 1999. Other revenues were $1,413,000 for the three months ended March
31, 2000 compared to $711,000 for the three months ended March 31, 1999, an
increase of 98.7%. The increase in revenue is primarily attributable to revenue
from timber sales on the Company's Fork Creek reserves.
-10-
<PAGE> 13
COST OF SALES
Cost of sales-Coal sales. Cost of coal sales totaled $36,415,000 for
the three months ended March 31, 2000 compared to $32,666,000 for the three
months ended March 31, 1999, an increase of 11.5% on increased coal sales volume
of 0.1%. The increased cost resulted primarily from costs related to mining
additional highwall to obtain access into a new permit area at the Kiah Creek
surface mines during the first quarter of 2000 which caused the ratio of
overburden moved to tons recovered to be unusually high. Additionally, due to
unfavorable mining conditions in the first quarter of 2000, the Kiah Creek
underground mines had lower recovery of clean coal from the preparation plant.
Cost of sales-Leasing. Cost of coal lease revenues totaled $971,000 for
the three months ended March 31, 2000 compared to $993,000 for the three months
ended March 31, 1999, a decrease of 2.2%. The decrease primarily resulted from a
decrease in leasing administration costs, particularly personnel related cost.
Cost of sales-Other. Cost of other revenues were $565,000 for the three
months ended March 31, 2000 compared to $787,000 for the three months ended
March 31, 1999, a decrease of 28.2%. This decrease is primarily related to
decreases in the sale of cotton as discussed above.
OTHER
Selling, general and administrative expenses totaled $1,441,000 for the
three months ended March 31, 2000 compared to $1,231,000 for the three months
ended March 31, 1999, an increase of $210,000. Selling, general and
administrative expenses were 3.6% and 3.1% of revenues for the three months
ended March 31, 2000 and 1999, respectively. The increase primarily resulted
from increased payroll costs and payroll benefit costs as a result of opening a
coal field office in Charleston, West Virginia.
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
$4,729,000 for the three months ended March 31, 2000 compared to $7,336,000 for
the three months ended March 31, 1999, a decrease of 35.5%. This decrease is
primarily attributable to increased mining costs.
Interest expense totaled $2,096,000 for the three months ended March
31, 2000 compared to $2,403,000 for the three months ended March 31, 1999, a
decrease of 12.8%. This decrease primarily resulted from additional
capitalization of interest related to the Fork Creek development. Capitalized
interest for the first quarter of 2000 was $1,178,000 compared to $501,000 for
the first quarter of 1999.
Interest income totaled $355,000 for the three months ended March 31,
2000 compared to $576,000 for the three months ended March 31, 1999, a decrease
of 38.4% due to lower temporarily-invested cash balances as a result of the
application of the net proceeds of the issuance of the Senior Notes to fund the
Fork Creek development.
Other income (loss) of $376,000 for the three months ended March 31,
2000 compared to a loss of $55,000 for the three months ended March 31, 1999.
The loss for the first quarter of 2000 was primarily related to the Company's
share of the loss of its one-third partnership interest in International Marine
Terminals (IMT).
Income taxes were a benefit of $467,000 for the three months ended
March 31, 2000 compared to a provision of $397,000 for the three months ended
March 31, 1999, a decrease of $864,000. The increase in the effective rate from
21% in the first quarter of 1999 to 38% for the first quarter of 2000 results
primarily from a decrease in the depletion for the first quarter of 2000.
The Company had a net loss of $762,000 for the three months ended March
31, 2000 compared to net income of $1,470,000 for the three months ended March
31, 1999. The decrease resulted primarily from increased costs of production in
coal sales.
INFLATION
Inflation has not had a significant effect on the Company's business.
LIQUIDITY AND CAPITAL RESOURCES
On June 8, 1998, Pen Holdings issued the Senior Notes (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 March 31,
2000, the Company had total indebtedness including capital leases, revolving
credit loans, and current maturities of $134,030,000. 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.
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
-11-
<PAGE> 14
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). At March 31, 2000, the
Company's grid spread was 1.75% above LIBOR and 0.75% above Prime Rate. At March
31, 2000, the Credit Facility had a borrowing of $26,731,000 and a standby
letter of credit commitment of $4,360,000. Borrowings bear interest at a
variable rate based on either LIBOR (an effective rate of 7.66% at March 31,
2000), or the Prime Rate (an effective rate of 9.75% at March 31, 2000). The
Credit Facility matures, subject to extensions requested by the Company at the
discretion of the lenders, five years after the closing date which occurred
simultaneously with the closing of the Offering. The Credit Facility contains
certain restrictions and limitations, including financial covenants, that
require the Company to maintain and achieve certain levels of financial
performance and limit the payment of cash dividends and similar payments.
The Company's principal liquidity requirements are for debt service
requirements under the Senior Notes, and other outstanding indebtedness, and for
working capital needs and capital expenditures. Historically, the Company has
funded its capital and operating requirements with a combination of cash on
hand, operating cash flow and borrowings under credit facilities and capital
leases. The Company has utilized these sources of funds to make acquisitions,
fund significant capital investments in its properties, fund operations and
service debt under credit facilities.
For the quarter ended March 31, 2000, the Company made capital
expenditures of $13,221,000 (which includes capital additions financed through
capital lease transactions of $2,049,000). Capital expenditures primarily
include Fork Creek development capital of $10,485,000 (which includes capital
additions financed through capital lease transactions of $944,000 and
capitalized interest of $1,178,000).
All necessary permits for commencing operations at Fork Creek have been
obtained. Mining began in April 2000. When the preparation plant is complete,
shipments of coal from Fork Creek will begin. Management believes that
construction of the Fork Creek preparation plant and other related facilities
will be complete by the end of the second quarter of 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. For example, $12,000,000 in proceeds from long-term capital leases
was received in May 2000 to replenish cash spent in previous periods for mobile
mining equipment. 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's liquidity
will be positively impacted to the extent it is able to effect asset sales,
including its previously announced sale of Elk Horn. While the Company is
continuing to negotiate with the original potential buyer of Elk Horn, another
potential buyer has approached the Company and indicated an interest in
purchasing Elk Horn. Additionally, management is considering the sale of some of
its other coal reserves. If the coal reserves sold include reserves the Company
intends to mine, the Company will simultaneously enter into a lease for these
reserves. Bids are due by mid June. There can be no assurance, however, that the
Company will be able to consummate any such asset sales or financings on terms
acceptable to it.
Management periodically reviews the profitability of all of the
Company's assets, including those which are not a part of its core coal
operations. The Company is negotiating a possible sale of its cotton operation
which is expected to close early in the third quarter of 2000. This sale is
expected to generate approximately $3,000,000 of net proceeds (before tax).
Net cash generated by operating activities was $1,353,000 for the three
months ended March 31, 2000 compared to net cash generated by operating
activities of $3,566,000 for the three months ended March 31, 1999. The
$2,213,000 decrease in cash flow from operating activities is primarily related
to increased mining costs at the Company's mining operations for the first
quarter of 2000.
Net cash used by investing activities was $11,238,000 for the three
months ended March 31, 2000 compared to $5,399,000 for the three months ended
March 31, 1999. The $5,839,000 increase is primarily the result of increased
capital expenditures of $5,705,000 for the three months ended March 31, 2000
primarily due to capitalized costs for development of the Fork Creek operation.
Net cash provided by financing activities of $8,828,000 for the three
months ended March 31, 2000 reflects an increase of $9,668,000 over $840,000
used in the three months ended March 31, 1999. The increase in net cash provided
by financing activities resulted primarily from net borrowings under the
Company's line of credit.
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.
-12-
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-13-
<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.
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.
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 May 15, 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
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S (I) CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 (UNAUDITED) AND (II)
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED
IN THE FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 276,000
<SECURITIES> 0
<RECEIVABLES> 20,899,000<F1>
<ALLOWANCES> 0
<INVENTORY> 4,465,000
<CURRENT-ASSETS> 28,539,000
<PP&E> 218,381,000<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 272,002,000
<CURRENT-LIABILITIES> 21,705,000
<BONDS> 99,360,000
13,286,000
0
<COMMON> 45,000
<OTHER-SE> 49,412,000<F3>
<TOTAL-LIABILITY-AND-EQUITY> 272,002,000
<SALES> 40,280,000
<TOTAL-REVENUES> 40,280,000
<CGS> 37,951,000
<TOTAL-COSTS> 37,951,000
<OTHER-EXPENSES> 1,441,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,096,000
<INCOME-PRETAX> (1,229,000)
<INCOME-TAX> (467,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (762,000)
<EPS-BASIC> 0<F4>
<EPS-DILUTED> 0<F4>
<FN>
<F1>Amount represents net accounts receivable.
<F2>Amount represents net property, plant, and equipment.
<F3>Amount represents additional paid in capital and retained earnings.
<F4>Only required for public equity offerings.
</FN>
</TABLE>
