<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1998
REGISTRATION NO. 333-60599
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PEN HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
TENNESSEE 6719 62-0852576
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
CO-REGISTRANTS AND GUARANTORS
<TABLE>
<CAPTION>
(EXACT NAME OF REGISTRANT AS (STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
SPECIFIED IN ITS CHARTER) INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------- ------------------------------ --------------------------- ----------------------
<S> <C> <C> <C>
THE ELK HORN COAL CORPORATION WEST VIRGINIA 6519 55-0163764
PEN COAL CORPORATION TENNESSEE 5052 62-1281044
MARINE TERMINALS INCORPORATED MISSOURI 6719 43-1100331
RIVER MARINE TERMINALS, INC. WEST VIRGINIA 6512 62-1338883
PEN COTTON COMPANY OF SOUTH CAROLINA SOUTH CAROLINA 0724 62-1533101
PEN HARDWOOD COMPANY TENNESSEE 6719 62-1496108
PEN COTTON COMPANY TENNESSEE 0724 62-1167340
</TABLE>
5110 MARYLAND WAY, SUITE 300
BRENTWOOD, TN 37027
(615) 371-7300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM E. BECKNER
CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE OFFICER
PEN HOLDINGS, INC.
5110 MARYLAND WAY, SUITE 300
BRENTWOOD, TN 37027
(615) 371-7300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
With a Copy to:
RONALD BASSO, ESQ.
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
20TH FLOOR, 301 GRANT STREET
PITTSBURGH, PA 15219
(412) 562-8800
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, PROSPECTUS DATED NOVEMBER 4, 1998
OFFER TO EXCHANGE
9 7/8% SERIES B SENIOR NOTES DUE 2008
FOR ANY AND ALL OUTSTANDING 9 7/8% SENIOR NOTES DUE 2008
OF
PEN HOLDINGS, INC.
(ALL NOTES GUARANTEED BY THE GUARANTORS)
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.
(NEW YORK CITY TIME), ON DECEMBER 3, 1998, UNLESS EXTENDED
Pen Holdings, Inc., a Tennessee corporation ("Pen Holdings") (references to the
"Company" or "Pen" refer to Pen Holdings and its consolidated subsidiaries)
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal") (which together constitute the "Exchange Offer"), to exchange
$1,000 principal amount of 9 7/8% Series B Senior Notes of the Company (the
"Series B Senior Notes") for each $1,000 principal amount of the issued and
outstanding 9 7/8% Senior Notes due 2008 (the "Senior Notes") (the Senior Notes,
collectively with the Series B Senior Notes, being the "Notes"). As of the date
of this Prospectus, $100,000,000 aggregate principal amount at maturity of the
Senior Notes is outstanding. The terms of the Series B Senior Notes and the
Senior Notes are substantially identical in all material respects, except for
certain transfer restrictions and registration rights; and except that holders
of Senior Notes are entitled to receive additional interest if: (i) a
registration statement with respect to a registered offer to exchange the Senior
Notes for the Series B Senior Notes (the "Exchange Offer Registration
Statement") or a shelf registration statement covering resales of the Senior
Notes (the "Shelf Registration Statement") has not been filed with the
Securities and Exchange Commission (the "Commission") within 75 days after the
Issue Date (as defined in Description of Notes -- Certain Definitions); (ii) the
Exchange Offer Registration Statement or Shelf Registration Statement is not
declared effective within 150 days after the Issue Date; or (iii) the Exchange
Offer is not consummated within 30 days after the Exchange Offer Registration
Statement is declared effective (each such event referred to in clauses (i)
through (iii) above is a "Registration Default"), the sole remedy available to
holders of the Senior Notes would be the immediate assessment of additional
interest ("Additional Interest") as follows: the per annum interest rate on the
Senior Notes would increase by .5%, and the per annum interest rate would
increase by an additional .25% for each subsequent 90-day period during which
the Registration Default remains uncured, up to a maximum additional interest
rate of 2.0% per year in excess of the interest rate set forth above. All
Additional Interest would be payable to holders of the Senior Notes in cash on
each June 15 and December 15, commencing with the first such date occurring
after any such Additional Interest commences to accrue, and continuing until
such Registration Default is cured. After the date on which such Registration
Default is cured, the interest rate on the Senior Notes will revert to the
interest rate originally borne by the Senior Notes. See "Registration Rights
Agreement."
The Exchange Offer is being made to satisfy certain obligations of Pen Holdings
and certain of its wholly-owned subsidiaries that have unconditionally
guaranteed the Notes on a senior unsecured basis, as to the payment of
principal, premium, if any, and interest (the "Guarantors") under the
Registration Rights Agreement, dated as of June 8, 1998, between the Company and
CIBC Oppenheimer Corp. (the "Initial Purchaser"). Upon consummation of the
Exchange Offer, holders of Senior Notes that were not prohibited from
participating in the Exchange Offer and did not tender their Senior Notes will
not have any registration rights under the Registration Rights Agreement with
respect to such non-tendered Senior Notes and, accordingly, such Senior Notes
will continue to be subject to the restrictions on transfer contained in the
legend thereon.
Based on interpretations by the staff of the Commission with respect to similar
transactions, the Company believes that the Series B Senior Notes issued
pursuant to the Exchange Offer in exchange for Senior Notes may be offered for
resale, resold and otherwise transferred by any holder of such Senior Notes
(other than any such holder which is an "affiliate" of Pen within the meaning of
Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"))
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Series B Senior Notes are acquired in the
ordinary course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such Series
B Senior Notes and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the Series B Senior Notes. Each
broker-dealer
(cover continued on following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 4, 1998.
<PAGE> 3
that receives, as a result of market making or other trading activities, Series
B Senior Notes for its own account in exchange for Senior Notes must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of its Series B Senior Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the Series B Senior Notes received in exchange for the Senior
Notes acquired by the broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale for a period of 180 days after the consummation of the Exchange Offer or,
if earlier, until all participating broker-dealers have so resold. See "Plan of
Distribution."
The Series B Senior Notes will evidence the same debt as the Senior Notes and
will be entitled to the benefits of the Indenture dated as of June 8, 1998 (the
"Indenture") between the Company and The Bank of New York, as trustees (the
"Trustee"). For a more complete description of the terms of the Series B Senior
Notes, see "Description of Notes." There will be no cash proceeds to the Company
from the Exchange Offer. The Series B Senior Notes will be general unsecured
obligations of Pen Holdings ranking generally the same in priority of payment
with all existing and future unsubordinated indebtedness of Pen Holdings and
senior in right of payment to all existing and future subordinated indebtedness
of Pen Holdings. The Series B Senior Notes will be effectively subordinated to
all future secured indebtedness of Pen Holdings, if any, to the extent of the
value of the assets securing such secured indebtedness. Borrowings under the New
Credit Facility will be secured by certain of Pen Holdings' and certain of its
Subsidiaries' assets, including the stock of Pen Coal Corporation ("Pen Coal")
and The Elk Horn Coal Corporation ("Elk Horn Coal") and substantially all of the
assets of Pen Holdings' active subsidiaries (defined to include Pen Coal, Elk
Horn Coal, River Marine Terminals, Inc., Marine Terminals Incorporated and Pen
Cotton Company of South Carolina). Accordingly, while the Notes will rank
generally the same in priority of payment with borrowings under the New Credit
Facility, the Notes will be effectively subordinated to the obligations
outstanding under the New Credit Facility to the extent of the value of the
assets securing such borrowings. As of June 30, 1998 and as of September 15,
1998 the total indebtedness of the Company was $110,087,019 and $109,131,343,
respectively. Secured indebtedness consisted of $10,864,486 and $9,895,743 as of
June 30, 1998 and September 15, 1998, respectively. Such secured indebtedness
ranks senior in the right of payment to the Senior Notes. The balance of the
total indebtedness as of such dates was attributable to the Senior Notes. While
as of these dates no amounts were outstanding under an Amended and Restated
Credit Facility (the "New Credit Facility"), the total indebtedness under the
Notes is effectively subordinated to any amounts outstanding under the New
Credit Facility.
The Series B Senior Notes will be unconditionally guaranteed, on a senior
unsecured basis, as to the payment of principal, premium, if any, and interest,
fully and unconditionally, jointly and severally (the "Guarantees"), by 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 subordinated indebtedness
of the Guarantors. See "Description of Notes--Guarantees."
The Senior Notes were originally issued and sold on June 8, 1998 in a
transaction exempt from registration under the Securities Act in reliance upon
the exemptions provided by Rule 144A, Section 4(2) and Regulation S of the
Securities Act. Accordingly, the Senior Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an exemption from the registration requirements of the
Securities Act and applicable state securities laws is available.
The Company has not entered into any arrangement or understanding with any
person to distribute the Series B Senior Notes to be received in the Exchange
Offer and to the best of the Company's information and belief, each person
participating in the Exchange Offer is acquiring the Series B Senior Notes in
its ordinary course of business and has no arrangement or understanding with any
person to participate in the distribution of the Series B Senior Notes to be
received in the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m. (New York City time), on December 3, 1998, unless extended
(as it may be so extended, the "Expiration Date"). The date of acceptance for
exchange of the Senior Notes for the Series B Senior Notes (the "Exchange Date")
will be the first business day following the
2
<PAGE> 4
Expiration Date. The Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date; otherwise such tenders are
irrevocable.
Prior to this Exchange Offer, there has been no public market for the Senior
Notes. The Senior Notes have traded on the PORTAL Market. If a market for the
Series B Senior Notes should develop, the Series B Senior Notes could trade at a
discount from their initial offering price. The Company does not intend to apply
for listing of the Series B Senior Notes on any securities exchange or in any
automated quotation system. There can be no assurance that an active trading
market for the Series B Senior Notes will develop.
The Series B Senior Notes will be available initially only in book-entry form.
The Company expects that the Series B Senior Notes issued pursuant to this
Exchange Offer will be issued in the form of an Exchange Global Note (as defined
in "Description of Notes--Book-Entry, Delivery and Form" ), which will be
deposited with, or on behalf of, The Depository Trust Company (the "Depository")
and registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the Exchange Global Note representing the Series B Senior Notes
will be shown on, and transfers thereof will be effected through, records
maintained by the Depository and its participants. After the initial issuance of
the Exchange Global Note, Series B Senior Notes in certificated form will be
issued in exchange for interests in the Exchange Global Note only on the terms
set forth in the Indenture. See "Description of Notes--Book-Entry, Delivery and
Form."
Neither Pen Holdings nor any of its subsidiaries will receive any cash proceeds
from the issuance of the Series B Senior Notes offered hereby. No dealer-manager
is being used in connection with this Exchange Offer. See "Use of Proceeds" and
"Plan of Distribution."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL PEN ACCEPT SURRENDERS FOR
EXCHANGE FROM, HOLDERS OF SENIOR NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE
OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES
LAWS OF SUCH JURISDICTION.
3
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-4 under the Securities Act with respect to the
Exchange Offer. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the Exchange Offer, reference is made to such Registration
Statement and the exhibits and schedules filed as part thereof. The Registration
Statement and the exhibits and schedules thereto filed with the Commission may
be inspected without charge at the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
will also be available for inspection and copying at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and the Citicorp Center, 500 West Madison Street Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement may
be obtained from the Public Reference Section of the Commission upon payment of
certain prescribed fees. Electronic registration statements made through the
Electronic Data Gathering, Analysis, and Retrieval System are publicly available
through the Commission's Website (http://www.sec.gov), which is maintained by
the Commission and which reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The Company is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Pursuant to the Indenture, the Company has agreed that,
until such time as the Company shall become subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, (a) the Company shall
provide to the Trustee and holders of Senior Notes such annual reports and such
information, documents and other reports as are specified in Sections 13 and
15(d) of the Exchange Act and applicable to a United States of America
corporation subject to such Sections, such information, documents and other
reports to be so provided at the times specified in the Indenture. Thereafter,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, to the extent permitted
by the Exchange Act, the Company shall file with the Commission and provide the
Trustee and holders of Notes with such annual reports and such information,
documents and other reports as are specified in such Sections and applicable to
a United States of America corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the
times specified for the filing of such information, documents and reports under
such Sections; provided, however, that the Company shall not be required to file
any report, document or other information with the Commission if the Commission
does not permit such filing. In addition, for so long as any of the Senior Notes
remain outstanding, the Company has agreed to make available to any prospective
purchaser of the Senior Notes or beneficial owner of the Senior Notes in
connection with any sale thereof the information required by Rule 144A(d)(4)
under the Securities Act.
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
contained elsewhere herein. Unless the context indicates otherwise, references
herein to the "Company" or "Pen" include Pen Holdings, Inc. ("Pen Holdings") and
its consolidated subsidiaries. The estimates of the Company's recoverable coal
reserves as of May 1998 (other than the Company's Fork Creek reserves) set forth
herein have been audited by Marshall Miller & Associates ("Marshall Miller") as
of such date (the "Marshall Miller Report"). The estimates of the Company's
recoverable Fork Creek coal reserves as of September 1997 set forth herein have
been reviewed by Stagg Engineering Services, Inc. ("Stagg Engineering") as of
such date (the "Stagg Engineering Report"). As used herein, "reserves" means
Proven Reserves or Probable Reserves (both as defined in the Glossary) which
could be economically extracted or produced at the time of the reserve
determination. Reserve estimates for all of the Company's coal properties are
based on the Marshall Miller Report and the Stagg Engineering Report, which are
collectively referred to herein as the "Reserve Studies." All references to
"tons" are to short tons unless otherwise indicated. For definitions of certain
coal-related terms, see "Certain Definitions" attached to this Prospectus as
Annex A. As used in this Prospectus, any references to any year are to the
calendar years ended December 31. Certain information included or incorporated
by reference in this Prospectus, including but not limited to the statements
under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business" is
forward-looking, such as information relating to the Company or any of the
transactions described herein, including the timing, financing, strategies and
the effects of such transactions. Such forward-looking information involves
important risks and uncertainties that could significantly affect expected
results in the future from those expressed in any forward-looking statements
made by, or on behalf of, the Company. These risks and uncertainties include,
but are not limited to, uncertainties relating to: the Company's current
litigation in the U.S. Tax Court and the pending Internal Revenue Services'
examination of certain other tax returns of the Company, the Company's reliance
on long-term sales contracts, the Company's reliance on long-term mineral
leases, the competitive environment in which the Company operates, the risks
inherent to the mining industry, acquisitions, government regulation,
reclamation and mine closure accruals, the effects of Clean Air Act Amendments
on the coal industry, replacement and recoverability of coal reserves, economic
conditions in the coal industry generally and technological developments.
Persons participating in this Exchange Offer are cautioned that such statements
are only predictions and that actual events or results may differ materially. In
evaluating such statements, persons participating in this Exchange Offer should
specifically consider the various factors which would cause actual events or
results to differ materially from those indicated by such forward looking
statements. Persons participating in this Exchange Offer should carefully
consider the factors set forth herein under the caption "Risk Factors."
THE COMPANY
OVERVIEW
The Company is engaged in the mining, preparation, marketing and leasing of
primarily compliance coal (coal which, when burned emits less than 1.2 pounds of
sulfur dioxide per million Btu (0.72% for 12,000 Btu); this coal exceeds the
sulfur dioxide emission requirements for air quality of Phase I of the Clean Air
Act Amendments and meets the proposed sulfur dioxide emission requirements for
air quality of Phase II of such legislation without the need for flue gas
desulfurization) and low-sulfur coal from mines located in the Central
Appalachian region of eastern Kentucky and southern West Virginia. Based on the
Reserve Studies, the Company controls the mineral rights to approximately 228
million tons of coal reserves, of which management believes million tons are
owned in fee. In 1997, the Company sold approximately 5.3 million tons of coal,
approximately 66% of which was generated from captive production with the
remainder purchased from other coal mine operators. In 1997, approximately 83%
of the tonnage was sold to seven long-term sales contract customers, with most
of the remainder sold to 14 spot market customers. The Company sells primarily
to domestic public utilities, an international government-owned utility and
industrial customers. In addition to its coal sales, the Company leases the
mineral rights on approximately 56 million tons of its reserves to 22 operators
who mined approximately 3.0 million tons in 1997. The Company received an
average leasing revenue per ton of coal from its lessees of approximately $2.79
per ton in 1997. The Company's coal leases typically have a term of five years,
5
<PAGE> 7
although some leases are for the life of the respective reserves. For the twelve
months ended June 30, 1998, the Company generated revenues, net income and
EBITDA (EBITDA represents operating income plus depreciation, depletion and
amortization) all as adjusted to represent only business units currently in
operation, of $171.5 million, $1.7 million and $24.4 million, respectively.
EBITDA may not be comparable to other similarly titled measures of other
companies. However, the Company's management believes EBITDA is a meaningful
measure of performance as substantially all of the Company's financing
arrangements contain covenants based on formulations of EBITDA. Cash provided
(used) by operating activities, investing activities and financing activities
for the twelve months ended June 30, 1998, adjusted to represent only business
units currently operating was $9.7 million, ($9.8) million and $10.8 million,
respectively.
The Company has demonstrated a long-term record of selectively increasing
its reserves through acquisitions and consistently increasing its production
through the development of its reserves. Since 1992, reserves have increased
more than 300%, and captive production has increased at a compound annual rate
of 12.0% to 3.5 million tons in 1997. Beginning in 1987, Pen commenced surface
coal mining production with the purchase of approximately 49 million tons of
compliance and low-sulfur coal reserves located in southern West Virginia ("Kiah
Creek"). Prior to the purchase of Kiah Creek, the Company fulfilled its
contractual obligations through coal purchases and limited contract mining.
Approximately 84% of the Company's 1997 coal production was from Kiah Creek,
where three underground and two surface mines were operating. In 1994, the
Company acquired approximately 108 million tons of primarily compliance and
low-sulfur coal reserves located in eastern Kentucky ("Elk Horn"). The Company's
strategy for Elk Horn is (i) to lease a significant portion of the reserves to
other mining operators under long-term agreements and (ii) to produce coal for
Company sales from contract mining operations. Annual lease payments including
minimum royalties paid to the Company from Elk Horn leases have averaged $9.4
million per year since 1994. In November 1997, the Company acquired
approximately 80 million tons of primarily compliance, low-sulfur, and
metallurgical coal reserves located in southern West Virginia ("Fork Creek").
The Company expects to have obtained the necessary permits and completed the
infrastructure at Fork Creek to commence mining operations and to begin coal
deliveries by early 2000. The Fork Creek operations are planned to produce
approximately 1.7 million tons annually by 2001. See "Capital Development
Program."
The Company's strategy has been to secure sales contracts with customers
accessible from its own loading terminals in advance of planned increases in
production. In each of the last five years, the Company's production has been
fully committed under long-term sales contracts. Management believes that this
strategy provided the Company with greater flexibility in managing mine
development, production levels and reserve life at Kiah Creek and, to a lesser
extent, at Elk Horn. Although production is not scheduled to commence until
early 2000, the Company has already committed to supply from Fork Creek
approximately 500,000 tons in 2000, increasing to approximately 720,000 tons
annually by 2002. The Company's sales contracts and spot market agreements are
primarily with domestic public utilities and industrial customers located in the
upper Ohio River Valley and accessible by river barge transportation from the
Company's terminal on the Big Sandy River, a navigable tributary of the Ohio
River. The Company shipped less than 1% of its tonnage sold in 1997 by rail.
The Company has an integrated production, preparation and loading operation
which management believes enhances control over product quality and consistency,
storage capability and delivery scheduling for its customers. In 1990, the
Company built a modern, heavy media preparation plant at Kiah Creek to clean and
size its underground coal production, which the Company believes: (i) improved
its reputation with customers by increasing the quality and quantity of
marketable compliance and low-sulfur coal production and (ii) positioned the
Company to be able to bid for more favorably priced sales contracts and spot
market agreements. In addition to production and preparation, all of the coal
loaded at the Company's river terminal is mechanically sampled twice to assure
that the Company's coal meets customer specifications: first upon arrival of
loaded trucks and second as it is loaded into outgoing barges. The Company's
development plans for Fork Creek include construction of an additional
preparation plant and a rail loadout which is expected to extend product control
over new production at Fork Creek and provide the Company an opportunity to
supply new customers in the Northeast and upper Midwest which are primarily
accessible by rail.
The Company utilizes room and pillar mining in its underground mines and
contour and point removal mining at its surface mines, which the Company
believes are the most cost-efficient methods for extracting its
6
<PAGE> 8
reserves given their geological composition. Although a majority of the
Company's production has shifted toward underground mining, which generally can
be more costly due to preparation costs, the Company's cash production costs at
the mine site have declined from $18.81 per ton in 1993 to $18.31 per ton in
1997. Management believes that this decline resulted from the Company's ability
to improve productivity from its mines and recovery rates at its preparation
plant through better planning, improvements to its preparation plant and more
efficient use of capital equipment.
The Company believes its compliance and low-sulfur coal reserves, cost
effective production and access to efficient transportation position it to take
advantage of the anticipated growth in the demand for coal. According to data
compiled by the Energy Information Administration of the United States
Department of Energy (the "EIA"), total domestic coal consumption exceeded 1.0
billion tons in 1997 and has grown at a compound annual rate of 1.8% since 1987.
The steady growth in coal usage is attributable to similar growth in the
electric generation industry, which accounts for more than 89.5% of domestic
coal consumption. In 1997, coal-fired facilities generated approximately 50.6%
of the nation's electricity, which is almost three times the level generated by
the second largest fuel alternative, nuclear energy. Coal is both cost efficient
and domestically abundant, and management believes that these factors are
favorable to the growth in domestic consumption and production of coal.
The changing regulatory environment is an additional factor which
management believes will enhance demand for low-sulfur, high Btu coal, such as
the Company's coal reserves. Examples of this changing regulatory environment
are the Phase I and upcoming Phase II air quality requirements under the Clean
Air Act Amendments and deregulation of the electricity transmission systems.
Compliance coal exceeds the current sulfur dioxide emissions requirements for
air quality of Phase I and meets the sulfur dioxide emissions requirements for
air quality of Phase II without the need for flue gas desulfurization. Users of
such coal currently can either earn sulfur emission credits, which can be sold
to other coal consumers, or blend the coal with higher sulfur coal to lower the
overall sulfur emissions without having to install expensive sulfur reduction
technology (i.e., scrubbers). The Company believes that its customers are
generally low cost producers of electricity and, due to their geographic
proximity to supplies of compliance coal, are well positioned to compete as the
electric utility industry deregulates under the rules providing for open access
to electricity transmission systems promulgated by the Federal Energy Regulatory
Commission ("FERC") in April 1996.
The Company's headquarters are located at Center Court Building, Suite 300,
5110 Maryland Way, Brentwood, TN 37027, and its telephone number is (615)
371-7300.
7
<PAGE> 9
THE EXCHANGE OFFER
Securities Offered................. Up to $100,000,000 aggregate principal
amount of 9 7/8% Senior Notes due 2008 of
the Company. The terms of the Series B
Senior Notes and the Senior Notes are
substantially identical in all material
respects, except for certain transfer
restrictions, registration rights and
Additional Interest for Registration
Defaults relating to the Senior Notes
which will not apply to the Series B
Senior Notes. See "Description of Notes."
The Exchange Offer................. Pen Holdings is offering to exchange
$1,000 principal amount of Series B
Senior Notes for each $1,000 principal
amount of Senior Notes. See "The Exchange
Offer" for a description of the
procedures for tendering Senior Notes.
The Exchange Offer satisfies the
registration obligations of Pen Holdings
under the Registration Rights Agreement.
Upon consummation of the Exchange Offer,
holders of Senior Notes that were not
prohibited from participating in the
Exchange Offer and did not tender their
Senior Notes will not have any
registration rights under the
Registration Rights Agreement with
respect to such nontendered Senior Notes
and, accordingly, such Senior Notes will
continue to be subject to the
restrictions on transfer contained in the
legend thereon.
Tenders, Expiration Date;
Withdrawal......................... The Exchange Offer will expire at 5:00
p.m. (New York City time) on December 3,
1998, or such later date and time to
which it is extended, provided that the
Exchange Offer. Tender of Senior Notes
pursuant to the Exchange Offer may be
withdrawn and retendered at any time
prior to the Expiration Date. Any Senior
Notes not accepted for exchange for any
reason will be returned without expense
to the tendering holder as promptly as
practicable after the expiration or
termination of the Exchange Offer.
Federal Income Tax
Considerations..................... The Exchange Offer will not result in any
income, gain or loss to the holders of
Senior Notes or the Company for U.S.
federal income tax purposes. See "Certain
Federal Income Tax Considerations."
Use of Proceeds.................... There will be no proceeds to the Company
from the exchange of Series B Senior
Notes for the Senior Notes pursuant to
the Exchange Offer. See "Use of
Proceeds."
Exchange Agent..................... The Bank of New York, the Trustee under
the Indenture, is serving as exchange
agent (the "Exchange Agent") in
connection with the Exchange Offer.
8
<PAGE> 10
CONSEQUENCES OF EXCHANGING OR FAILURE TO EXCHANGE SENIOR NOTES
PURSUANT TO THE EXCHANGE OFFER
Generally, holders of Senior Notes (other than any holder who is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who exchange their Senior Notes for Series B Senior Notes pursuant to the
Exchange Offer may offer their Series B Senior Notes for resale, resell their
Series B Senior Notes, and otherwise transfer their Series B Senior Notes
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided such Series B Senior Notes are acquired in the
ordinary course of the holder's business, such holders have no arrangement with
any person to participate in a distribution of such Series B Senior Notes and
neither the holder nor any other person is engaging in or intends to engage in a
distribution of the Series B Senior Notes in the Exchange Offer. Each
broker-dealer that receives, as a result of market making or other trading
activities, Series B Senior Notes for its own account in exchange for Senior
Notes must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of its Series B
Senior Notes. See "Plan of Distribution." To comply with the securities laws of
certain jurisdictions, it may be necessary to qualify for sale or register the
Series B Senior Notes prior to offering or selling such Series B Senior Notes.
The Company is required, under the Registration Rights Agreement, to register
the Series B Senior Notes in any jurisdiction requested by the holders, subject
to certain limitations. Upon consummation of the Exchange Offer, holders that
were not prohibited from participating in the Exchange Offer and did not tender
their Senior Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Senior Notes, and accordingly,
such Senior Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, Senior Notes may not be offered or
sold, unless registered under the Securities Act and applicable state securities
laws. See "The Exchange Offer--Consequences of Failure to Exchange."
9
<PAGE> 11
SUMMARY OF THE TERMS OF THE SERIES B SENIOR NOTES
Issuer............................. Pen Holdings, Inc.
Securities Offered................. $100,000,000 principal amount of 9 7/8%
Series B Senior Notes due 2008 (the
"Series B Senior Notes"). The terms of
the Series B Senior Notes and the Senior
Notes are substantially identical in all
material respects, except for certain
transfer restrictions, registration
rights and Additional Interest for
Registration Defaults relating to the
Senior Notes which will not apply to the
Series B Senior Notes. See "Description
of Notes."
Maturity Date...................... June 15, 2008.
Interest Payment Dates............. Interest will accrue on the Notes from
the date of original issuance (the "Issue
Date") and will be payable semiannually
on each June 15 and December 15,
commencing on December 15, 1998.
Ranking............................ The Series B Senior Notes will be general
unsecured obligations of Pen Holdings
ranking generally the same in priority of
payment with all existing and future
unsubordinated indebtedness of Pen
Holdings and senior in right of payment
to all existing and future subordinated
indebtedness of Pen Holdings. The Series
B Senior Notes will be effectively
subordinated to all future secured
indebtedness of Pen Holdings, if any, to
the extent of the value of the assets
securing such secured indebtedness.
Guarantees by Subsidiaries......... The Series B Senior Notes will be
unconditionally guaranteed, on a senior
unsecured basis, as to the payment of
principal, premium, if any, and interest,
fully and unconditionally, jointly and
severally (the "Guarantees"), by certain
of the Restricted Subsidiaries (as
defined in "Description of Notes--Certain
Definitions"). 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 subordinated
indebtedness of the Guarantors. See
"Description of Notes--Guarantees."
Optional Redemption................ The Series B Senior Notes will be
redeemable at the option of the Company,
in whole or in part, at any time on or
after June 15, 2003, at the redemption
prices set forth herein, plus accrued and
unpaid interest, if any, to the date of
redemption. In addition, the Company, at
its option, may redeem in the aggregate
up to 35% of the original principal
amount of the Notes at any time and from
time to time prior to June 15, 2001 at a
redemption price equal to 109.875% of the
aggregate principal amount thereof, plus
accrued and unpaid interest thereon to
the redemption date, with the net
proceeds of one or more Public Equity
Offerings (as defined in "Description of
Notes--Certain Definitions") of the
Company, provided that at least $65.0
million of the principal amount of the
Notes originally issued remains outstand-
10
<PAGE> 12
ing immediately after the occurrence of
any such redemption and that any such
redemption occurs within 90 days
following the closing of any such Public
Equity Offering. See "Description of
Notes--Optional Redemption."
Change of Control.................. In the event of a Change of Control (as
defined in "Description of Notes--Certain
Definitions"), the Company will be
required to make an offer to repurchase
all outstanding Notes at a price in cash
equal to 101% of the principal amount
thereof, plus accrued and unpaid
interest, if any, to the purchase date.
See "Description of Notes--Change of
Control Offer."
Asset Sale Proceeds................ The Company will be obligated in certain
instances to make an offer to purchase
the Notes at a purchase price in cash
equal to 100% of the principal amount
thereof, plus accrued and unpaid
interest, if any, to the date of purchase
with the net cash proceeds of certain
asset sales. See "Description of
Notes--Certain Covenants--Limitation on
Certain Asset Sales."
Certain Covenants.................. The Indenture contains covenants for the
benefit of the holders of the Notes that,
among other things, restrict the ability
of the Company and its Restricted
Subsidiaries to: (i) incur additional
Indebtedness; (ii) pay dividends and make
distributions; (iii) issue stock of
Subsidiaries (as defined in "Description
of Notes--Certain Definitions") of the
Company to third parties; (iv) make
certain investments; (v) repurchase
stock; (vi) create liens; (vii) create
any Subsidiaries of the Company; (viii)
enter into transactions with affiliates;
(ix) enter into sale and leaseback
transactions; (x) merge or consolidate
the Company or any Guarantors; and (xi)
transfer and sell assets. These covenants
are subject to a number of important
exceptions. See "Description of
Notes--Certain Covenants."
RISK FACTORS
For a discussion of certain factors that should be considered by holders of
the Senior Notes and by prospective investors in connection with an investment
in the Series B Senior Notes, see "Risk Factors."
11
<PAGE> 13
SUMMARY CONSOLIDATED CONDENSED HISTORICAL FINANCIAL DATA
The following table sets forth summary consolidated historical financial
data of the Company at the dates and for the periods indicated. Historical data
for the five years ended December 31, 1997 have been derived from consolidated
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants. Historical data for the six months ended June 30, 1998 and for the
six months ended June 30, 1997 have been derived from unaudited interim
consolidated financial statements of the Company which, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information. Historical
data for the six months ended June 30, 1998 do not purport to be indicative of
results expected for the full year.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues................................ $169,754 $185,680 $186,043 $182,469 $ 182,289 $ 88,622 $ 78,841
Cost of sales........................... 142,997 154,441 153,688 150,816 150,025 73,151 65,273
-------- -------- -------- -------- --------- -------- --------
Gross profit............................ 26,757 31,239 32,355 31,653 32,264 15,471 13,568
Selling, general and administrative..... 5,784 5,573 5,540 5,013 5,445 2,394 1,909
Depreciation, depletion and
amortization.......................... 7,771 11,397 13,975 14,742 15,290 7,586 7,164
-------- -------- -------- -------- --------- -------- --------
Operating income........................ $ 13,202 $ 14,269 $ 12,840 $ 11,898 $ 11,529 $ 5,491 $ 4,495
======== ======== ======== ======== ========= ======== ========
STATEMENT OF CASH FLOW DATA:
Net cash provided (used) by operating
activities............................ $ 22,638 $ (4,851) $ 23,176 $ 18,974 $ 17,502 $ 11,713 $ 3,255
Net cash provided (used) by investing
activities............................ (8,329) (67,158) (801) 2,440 14,900 1,118 (3,010)
Net cash provided (used) by financing
activities............................ (6,845) 67,032 (19,409) (27,689) (28,136) (11,895) 17,326
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 23,722
Working capital(2).......................................... 13,289
Total assets................................................ 242,949
Total debt.................................................. 110,112
Mandatorily redeemable preferred stock(3)................... 17,958
Total shareholders' equity.................................. 40,238
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(4)............................... $ 20,973 $ 25,666 $ 26,815 $ 26,640 $ 26,819 $ 13,077 $ 11,659
Capital expenditures(5)................. 18,469 7,181 5,902 9,542 7,969 4,972 6,075
Ratio of earnings to fixed charges
(6)................................... 3.67x 2.43x 1.38x 1.61x 2.05x 1.73x 1.41x
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTHS ENDED
JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
OTHER DATA:
EBITDA(4)................................................... $21,046
Interest expense............................................ 10,787
Ratio of EBITDA to interest expense......................... 1.95x
Ratio of net debt to EBITDA................................. 4.22x
</TABLE>
- ---------------
(1) Included in the summary consolidated operating results are the Barge Fleet
and Pen Cotton Tennessee. The Company disposed of its Barge Fleet in
December 1997 and sold the assets of Pen Cotton Tennessee in September 1996.
The Barge Fleet and Pen Cotton Tennessee were not definable segments for
which treatment as discontinued operations would be appropriate. Operating
results for these business units disposed or sold were as follows:
12
<PAGE> 14
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ --------------
1993 1994 1995 1996 1997(C) 1997 1998
------- ------- ------- ------- -------- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(d):
Barge Fleet.................................. $ 8,715 $ 8,434 $ 2,122 $ 2,321 $ 2,300 $1,254 --
Pen Cotton Tennessee......................... 3,658 7,395 12,579 1,775 -- -- --
------- ------- ------- ------- -------- ------ ----
Subtotal..................................... 12,373 15,829 14,701 4,096 2,300 1,254 --
Cost of sales:
Barge Fleet(a)............................... 6,870 7,139 -- -- 3 14 --
Pen Cotton Tennessee......................... 3,054 7,273 11,655 1,353 -- 2 --
------- ------- ------- ------- -------- ------ ----
Subtotal..................................... 9,924 14,412 11,655 1,353 3 16 --
Gross profit:
Barge Fleet.................................. 1,845 1,295 2,122 2,321 2,297 1,240 --
Pen Cotton Tennessee......................... 604 122 924 422 -- (2) --
------- ------- ------- ------- -------- ------ ----
Subtotal..................................... 2,449 1,417 3,046 2,743 2,297 1,238 --
Selling, general and administrative(b):
Barge Fleet.................................. -- -- -- -- -- -- --
Pen Cotton Tennessee......................... -- -- -- -- -- 2 --
------- ------- ------- ------- -------- ------ ----
Subtotal..................................... -- -- -- -- -- 2 --
Depreciation depletion and amortization:
Barge Fleet.................................. 927 927 927 918 957 458 --
Pen Cotton Tennessee......................... 316 407 417 85 -- -- --
------- ------- ------- ------- -------- ------ ----
Subtotal..................................... 1,243 1,334 1,344 1,003 957 458 --
Operating income(d):
Barge Fleet.................................. 918 368 1,195 1,403 1,343 782 --
Pen Cotton Tennessee......................... 288 (285) 507 337 (34) (4) --
------- ------- ------- ------- -------- ------ ----
Subtotal..................................... $ 1,206 $ 83 $ 1,702 $ 1,740 $ 1,309 $ 778 --
======= ======= ======= ======= ======== ====== ====
STATEMENT OF CASH FLOW DATA:
Net cash provided (used) by operating
activities
Barge Fleet.................................. $ 486 $ 212 $ 873 $ 1,057 $ (63) $ 619 $ --
Pen Cotton Tennessee......................... 885 74 1,004 179 (4) (4) (8)
------- ------- ------- ------- -------- ------ ----
$ 1,371 $ 286 $ 1,877 $ 1,236 $ (67) $ 615 $ (8)
======= ======= ======= ======= ======== ====== ====
Net cash provided (used) by investing
activities
Barge Fleet.................................. $ -- $ -- $ -- $ -- $ 20,580 $ -- $ --
Pen Cotton Tennessee......................... (1,363) (521) 19 1,879 -- -- --
------- ------- ------- ------- -------- ------ ----
$(1,363) $ (521) $ 19 $ 1,879 $ 20,580 $ -- $ --
======= ======= ======= ======= ======== ====== ====
Net cash provided (used) by financing
activities
Barge Fleet.................................. $(1,221) $(1,221) $(1,221) $(1,324) $(10,316) $ (605) $ --
Pen Cotton Tennessee......................... 556 1,657 (1,802) (2,559) -- -- --
------- ------- ------- ------- -------- ------ ----
$ (665) $ 436 $(3,023) $(3,883) $(10,316) $ (605) $ --
======= ======= ======= ======= ======== ====== ====
OTHER DATA:
EBITDA(d)(4)
Barge Fleet.................................. $ 1,845 $ 1,295 $ 2,122 $ 2,321 $ 2,300 $1,240 --
Pen Cotton Tennessee......................... 604 122 924 422 (34) (4) --
------- ------- ------- ------- -------- ------ ----
Subtotal..................................... $ 2,449 $ 1,417 $ 3,046 $ 2,743 $ 2,266 $1,236 --
======= ======= ======= ======= ======== ====== ====
</TABLE>
- ---------------
(a) The Company outsourced the management of its Barge Fleet at the beginning
of 1995 to a third party operator, who paid the Company an administrative
rental fee per barge day for the use of the vessels. The Company recorded
this administrative rental fee as revenue within the coal business
segment. The Company, therefore, incurred no cost of sales in the years
1995 through 1997.
(b) Due to the nature of expenses incurred by the Barge Fleet and Pen Cotton
Tennessee, the Company has appropriately classified all expenses, except
depreciation, within cost of sales.
(c) Interest expense, other income and income tax expense for the Barge Fleet
and Pen Cotton Tennessee, in aggregate, amounted to $962, $3,715 and
$1,377, respectively, in the year ended December 31, 1997.
(d) The Company's consolidated revenues, adjusted to exclude the operations of
the Barge Fleet and Pen Cotton Tennessee for all periods presented, were
$157,381, $169,851, $171,342, $178,373, $179,989, $87,368 and $78,841 in
the years ended December 31, 1993 through 1997 and for the six months
ended June 30, 1997 and 1998, respectively. Operating income, on the same
adjusted basis, was $11,996, $14,186, $11,138, $10,158, $10,220, $4,713
and $4,495 in the years ended December 31, 1993 through 1997 and for the
six months ended June 30, 1997 and 1998, respectively. EBITDA, on the same
adjusted basis, was $18,524, $24,249, $23,769, $23,897, $24,553, $11,841
and $11,659 in the years ended December 31, 1993 through 1997 and for the
six months ended June 30, 1997 and 1998, respectively.
13
<PAGE> 15
(2) Equal to current assets (excluding cash and cash equivalents) less current
liabilities (excluding current portion of long-term debt, current maturities
of capital leases and revolving credit loans).
(3) The Company's outstanding mandatorily redeemable preferred stock (the
"Convertible Preferred Stock") was issued in connection with the
Recapitalization. The Convertible Preferred Stock had a liquidation
preference of $13,650 at June 30, 1998, does not pay cash dividends and no
dividends accrue from the date of issuance through December 2000; beginning
in January 2001, dividends will accrue on the then liquidation preference at
an annual rate of 25.25% for a five-year period. The aggregate amount of
dividends which will accumulate from 2001 to 2006 is being recorded evenly
from the date of issuance in 1996 through the redemption date in 2006. The
Indenture will not prohibit such mandatory redemption in 2006. See
"Description of Notes--Certain Covenants--Limitation on Restricted
Payments." The Convertible Preferred Stock is mandatorily redeemable in
January 2006 and is redeemable with the issuance of a note equal to the
liquidation preference which equally amortizes over the ten years following
the redemption at an interest rate 2.25% above the rate on five-year U.S.
Treasury obligations. Accumulated dividends will be payable on the same
terms over the same period. The liquidation preference of the Convertible
Preferred Stock, as well as the amounts owed upon redemption of the
Convertible Preferred Stock, are to be reduced by any tax deficiencies or
settlements (including interest and penalties) paid or payable for all tax
periods beginning prior to December 29, 1995. See "Business--Legal
Proceedings--IRS Proceedings." The Convertible Preferred Stock is
convertible, at the option of the holder, into 2,950,000 shares of Class I
Common Stock. The conversion feature is exercisable from January 2001 until
January 2002, and immediately prior to certain fundamental transactions. See
"Description of Capital Stock-Convertible Preferred Stock."
(4) EBITDA represents operating income plus depreciation, depletion and
amortization. EBITDA is not intended to represent cash flow from operations
as defined by generally accepted accounting 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. EBITDA may not be
comparable to other similarly titled measures of other companies. However,
the Company's management believes EBITDA is a meaningful measure of
performance as substantially all of the Company's financing arrangements
contain covenants based on formulations of EBITDA.
(5) Includes capital additions financed through capital lease transactions
amounting to $8,246, $155, $1,287, $7,221, $4,098, $3,229 and $2,081 for the
years ended December 31, 1993 through 1997, and for the six months ended
June 30, 1997 and 1998, respectively.
(6) For the purpose of this calculation, earnings are defined as income (loss)
from continuing operations before income taxes plus fixed charges. Fixed
charges consist of interest expensed or capitalized, amortization of
deferred financing costs and discount, the component of operating lease
expense which management believes represents an appropriate interest factor
and preferred stock dividends.
14
<PAGE> 16
RISK FACTORS
In addition to the other information in this Prospectus the following risk
factors should be carefully considered in evaluating the Company and its
business in connection with the Exchange Offer.
CONSEQUENCES OF THE FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Senior Notes that were
not prohibited from participating in the Exchange Offer and did not tender their
Senior Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Senior Notes and, accordingly, such
Senior Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Senior Notes may not be offered
or sold, unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The Company
does not intend to register the Senior Notes under the Securities Act. Based on
interpretations by the staff of the Commission with respect to similar
transactions, the Company believes that the Series B Senior Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by any holder of such Series B Senior Notes (other than any such
holder which is an "affiliate" of the Registrants within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such Series
B Senior Notes are acquired in the ordinary course of such holder's business,
such holder has no arrangement or understanding with any person to participate
in the distribution of such Series B Senior Notes and neither the holder nor any
other person is engaging in or intends to engage in distribution of the Series B
Senior Notes. Each broker-dealer that receives Series B Senior Notes for its own
account in exchange for Senior Notes must acknowledge that it will deliver a
prospectus in connection with any resale of its Series B Senior Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of the Series B Senior Notes received in exchange for
the Senior Notes acquired by the broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale for a period of 180 days after the Exchange Date or, if earlier,
until all participating broker-dealers have so resold. See "Plan of
Distribution." The Series B Senior Notes may not be offered or sold unless they
have been registered or qualified for sale under applicable state securities
laws or an exemption from registration or qualification is available and is
complied with.
LEVERAGE; ABILITY TO SERVICE DEBT
As a result of the Offering and New Credit Facility, the Company has, and
will continue to have, substantial leverage. At June 30, 1998, the Company had
approximately $110.1 million of indebtedness, representing approximately 65% of
the Company's total capitalization. See "Capitalization." Furthermore, subject
to certain restrictions in the Indenture, the Company may incur additional
indebtedness from time to time to finance acquisitions, to provide for working
capital or capital expenditures or for other purposes.
The level of the Company's indebtedness could have important consequences
to holders of the Notes, including, but not limited to, the following: (i) the
ability of the Company to obtain additional financing for acquisitions, working
capital, capital expenditures or other purposes, if necessary, may be impaired
or such financing may not be on terms favorable to the Company; (ii) the Company
will have significant cash requirements for debt service; (iii) financial and
other covenants and operating restrictions imposed by the terms of the Indenture
and by the New Credit Facility will limit, among other things, its ability to
borrow additional funds or to dispose of assets; (iv) a downturn in the
Company's businesses will have a more significant impact on its results of
operations; and (v) the Company may increase indebtedness senior to the Notes
immediately following the issuance of the Notes.
The ability of Pen Holdings to satisfy its obligations will be primarily
dependent upon the future financial and operating performance of its
subsidiaries and upon its ability to renew or refinance borrowings or to raise
additional equity capital. Each of these alternatives is dependent upon
financial, business and other general
15
<PAGE> 17
economic factors affecting Pen Holdings and its subsidiaries in particular, many
of which are beyond the control of Pen Holdings and its subsidiaries. If Pen
Holdings and its subsidiaries are unable to generate sufficient cash flow to
meet their debt service obligations, they will have to pursue one or more
alternatives, such as reducing or delaying capital expenditures, refinancing
debt, including the Notes, selling assets or raising equity capital. There can
be no assurance that any such alternatives could be accomplished or could be
accomplished on satisfactory terms or that such actions would yield sufficient
funds to retire the Notes and any secured indebtedness. While management
believes that cash flow from operations will provide an adequate source of
long-term liquidity, a significant drop in operating cash flows resulting from
economic conditions, competition or other uncertainties beyond the Company's
control would increase the need for alternative sources of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE
Pen Holdings is a holding company that conducts substantially all of its
operations through its subsidiaries. The Company's only significant assets are
(i) the capital stock of its subsidiaries, all of which are wholly owned (ii)
the building which houses the Company's headquarters and (iii) certain computer
equipment. As a holding company, Pen Holdings is dependent on dividends or other
distributions of funds from its subsidiaries to meet its debt service and other
obligations, including its obligations under the Notes.
EFFECTIVE SUBORDINATION OF THE NOTES AND GUARANTEES; RESTRICTIVE DEBT COVENANTS
The Notes are senior unsecured obligations of the Company and will rank
generally the same in priority of payment with all existing and future
unsubordinated obligations of the Company and senior in right of payment to all
existing and future subordinated indebtedness of the Company. Borrowings under
the New Credit Facility will be secured by certain of Pen Holdings' and certain
of its Subsidiaries' assets, including the stock of Pen Coal Corporation ("Pen
Coal") and The Elk Horn Coal Corporation ("Elk Horn Coal") and substantially all
of the assets of Pen Holdings' active subsidiaries (defined to include Pen Coal,
Elk Horn Coal, River Marine Terminals, Inc., Marine Terminals Incorporated and
Pen Cotton Company of South Carolina). Accordingly, while the Notes will rank
generally the same in priority of payment with borrowings under the New Credit
Facility, the Notes will be effectively subordinated to the obligations
outstanding under the New Credit Facility to the extent of the value of the
assets securing such borrowings. Similarly, the Guarantees of the Guarantors
will rank generally the same in priority of payment with all obligations of the
respective Guarantors that are not by their terms expressly subordinated to the
Guarantees. In the event of a default under the New Credit Facility or other
secured indebtedness (whether as a result of the failure to comply with a
payment or any covenant, a cross-default or otherwise), the lenders thereunder
will have a secured claim foreclosure right on their collateral, and, if
exercised, the Company's financial condition and the value of the Notes will be
materially adversely affected. In the event of certain asset sales, the New
Credit Facility will provide that net proceeds thereof not reinvested as
provided therein must be applied to the repayment of borrowings under the New
Credit Facility.
The New Credit Facility and the Indenture contain covenants that, among
other things, limit the Company's ability to incur additional indebtedness,
prepay subordinated indebtedness, dispose of certain assets, incur liens, make
capital expenditures, make certain investments or acquisitions and otherwise
restrict corporate activities. The New Credit Facility also requires the Company
to comply with certain financial ratios and tests, under which the Company is
required to achieve certain financial and operating results. The ability of the
Company to comply with such provisions may be affected by events beyond its
control. A breach of any of these covenants would result in a default under the
New Credit Facility. In the event of any such default, depending on the actions
taken by the lenders under the New Credit Facility, the Company could be
prohibited from making any payments on the Notes. In addition, such lenders
could elect to declare all amounts borrowed under the New Credit Facility,
together with accrued interest thereon, to be due and payable, which would be an
event of default under the Indenture. As a result of the priority and/or
security afforded the New Credit Facility, there can be no assurance that the
Company would have sufficient assets to pay indebtedness then outstanding under
the New Credit Facility and the Indenture. Any future refinancing of the New
Credit Facility is likely to contain similar restrictive covenants. See
"Description of Notes--Certain Covenants" and "Description of New Credit
Facility."
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POTENTIAL TAX LIABILITY
The Company is engaged in litigation in the U.S. Tax Court challenging
certain deficiencies determined by the Internal Revenue Service ("IRS") for the
years 1982 through 1989. After significant reductions resulting from pretrial
discussions between the Company's counsel and the IRS trial attorney, the
remaining disputes relate to approximately $15 million in taxes and $2 million
in penalties (exclusive of interest). The Company's counsel and the IRS counsel
continue to discuss the remaining issues in dispute. However, in the event that
the Company and the IRS fail to reach a pretrial resolution, the dispute would
be tried in the U.S. Tax Court probably in late 1999. While it is impossible to
predict the final disposition of the litigation, management believes, that the
Company should prevail. However, there can be no assurance that the Company will
prevail in the Tax Court litigation and, if issues were decided substantially in
favor of the IRS positions, the required payments of taxes and penalties could
have a material adverse effect on the Company's operating results and financial
condition. See "Business--Legal Proceedings."
The IRS also is currently examining the Company's federal tax returns for
the years 1990 through 1993. The Company has received various preliminary
notices of proposed adjustments from the IRS proposing substantial adjustments
to taxable income reported on the Company's income tax returns for these years.
As the IRS has not yet concluded its examination or issued its examination
report, management does not yet know what issues the IRS will pursue and is
unable to estimate the likely outcome of the audits for these years. The Company
is continuing to meet with the IRS to discuss the preliminary proposed
adjustments in an attempt to resolve these issues. Although management believes
that most of the preliminary proposed adjustments from the IRS are likely to be
eliminated or substantially reduced prior to any necessary litigation, there can
be no assurance as to the ultimate outcome of the ongoing examination by the
IRS. Given the stage of this examination, and the number and complexity of the
administrative and judicial proceedings involved in reaching a resolution,
management believes it is unlikely that ultimate resolution of the Company's tax
audits for the years 1990 through 1993 will occur for several years. If, after
exhaustion of all administrative and judicial remedies and appeals, issues
currently raised in the preliminary proposed adjustment were decided
substantially in favor of the IRS positions, the result could have a material
adverse effect on the Company's financial condition. See "Business--Legal
Proceedings."
RELIANCE ON LONG-TERM SALES CONTRACTS, DEPENDENCE ON SIGNIFICANT CUSTOMERS AND
RISKS ASSOCIATED WITH PRICE ADJUSTMENT PROVISIONS
A substantial portion of the Company's coal is sold pursuant to long-term
sales contracts which are significant to the stability and profitability of the
Company's operations. In 1997, approximately 83% of the Company's revenues from
coal sales were made under long-term sales contracts. As of June 30, 1998, the
Company had seven long-term sales contracts with a weighted average term of
approximately 3.0 years (excluding option periods). As of June 30, 1998, the
Company's long-term sales contracts provided for coal to be sold at a price
which exceeds the price at which such coal could be sold in the spot market.
The Company's long-term sales contract with Taiwan Power Company accounted
for 56%, 58%, 36%, 23% and 25% of the Company's coal sales revenues from 1993
through 1997, respectively. The contract with Taiwan Power expires in 1999, and
the Company expects that it will not be renewed or extended due to the high
transportation cost to Taiwan from the Gulf of Mexico, as compared with other
sources. The Company's long-term sales contract with Dayton Power & Light
accounted for 15%, 15%, 23%, 21% and 24% of the Company's coal sales revenues
from 1993 through 1997, respectively. The Company's long-term sales contract
with American Electric Power-Mountaineer accounted for 8%, 9%, 15%, 18% and 17%
of the Company's coal sales revenues from 1993 through 1997. The Company
continually bids on new contracts to replace existing contracts in order to
align supply requirements with its anticipated production levels. There can be
no assurance, however, that the Company will be able to secure additional
contracts to replace any expiring contract or to replace such contract on terms
favorable to the Company. As a result, the loss of these or other of its sales
contracts could have a material adverse effect on the Company's financial
condition and results of operations.
Virtually all of the Company's long-term sales contracts are subject to
price adjustment provisions which permit an increase or decrease in the contract
price at specified times during the contract term to reflect changes
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in certain price or other economic indices, taxes and other governmental
charges. Long-term sales contracts also typically contain force majeure
provisions allowing suspension of performance by the Company or the customer to
the extent necessary during the duration of certain events beyond the control of
the affected party, including labor disputes and changes in government
regulations. See "Business--Long-Term Coal Sales Contracts." There can be no
assurance that the Company's currently existing contracts will remain in force
for the duration of their current terms.
In addition, the Taiwan Power Company contract contains an annual price
reopener provision which provides for the contract price to be adjusted upward
or downward on the basis of certain market factors. If the parties fail to agree
on a price for a given year, each party has the right to require that the price
be determined by binding arbitration. Pending determination of the annual price,
coal sales are made at the prior year's price. Upon establishment of the price,
any change is adjusted retroactively to January 1 of the subject year, and
interest is owed on any amount due. The Company and Taiwan Power Company have
not yet reached an agreement on price for 1998. As a result, currently coal is
being shipped to Taiwan Power Company at the price agreed to by the parties for
1997. In the event that the price for 1998 is determined to be less than the
1997 price at which 1998 deliveries are being made, the Company would be
required to adjust the 1998 price downward on a retroactive basis (to January 1,
1998), with interest to be charged on the difference. At present, the Company is
not able to determine whether there will be a decrease in the price and/or a
decrease in tonnage under the Taiwan Power Company contract from the price paid
and/or tonnage delivered in 1997. In the event that the price and/or tonnage
were to decrease significantly, this could have a material adverse affect on the
Company's EBITDA for 1998. In addition, the price for 1999 has not yet been
determined. The foregoing, therefore, may also apply to 1999.
The operating profit margins realized by the Company under its long-term
sales contracts depend on a variety of factors, including production costs,
transportation costs, delivered coal qualities and quantities and various
general macro-economic indices, many of which are beyond the Company's control.
In addition, price adjustment, price reopener and other provisions may reduce
the insulation from short-term coal price volatility provided by such contracts
and may adversely impact the Company's operating profit margins. If any of the
Company's long-term sales contracts were modified or terminated, the Company
could be adversely affected to the extent that it is unable to find alternate
customers at the same level of profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RELIANCE ON LONG-TERM MINERAL LEASES
A portion of the Company's revenues is derived from the leasing of its coal
reserves pursuant to long-term (longer than one year) mineral lease agreements.
Although under such leases the lessees are required to pay certain minimum
royalties, a lessee will generally be obligated to pay the Company royalties
based on the level of the lessee's production from the leased reserve. In 1997,
approximately 25.5% of the Company's gross profits were derived from the leasing
of its mineral reserves. See "Selected Consolidated Financial Data." As of June
30, 1998, the Company had 34 mineral leases with a weighted average remaining
life of approximately 16.3 years.
The amount of gross profit the Company derives from long-term mineral
leases is subject to the production of its lessees. The Company evaluates each
prospective lessee to determine its ability to efficiently and productively mine
the leased reserves based in large part upon past performance of the particular
prospective lessee. Beyond this evaluation, however, the ability of the lessee
to generate royalties for the Company is beyond the Company's control. There can
be no assurance that the companies which lease the Company's mineral reserves
will continue to have production levels from the Company's reserves at the same
levels they have been in the past.
The revenues generated by the Company's leases depends upon a variety of
other factors, including the long-term viability of the lessees and the
Company's ability to renew these leases as they approach termination or find
other willing and suitable lessees. If a number of the leases are terminated due
to the lessee ceasing operations, or the leases are not renewed upon expiration
of their term, the Company's results of operations could be adversely affected
to the extent that it is not able to find suitable alternate lessees.
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HIGHLY COMPETITIVE INDUSTRY
The U.S. coal industry is highly competitive, with numerous producers in
all coal producing regions. The Company competes with other large producers and
hundreds of small producers in the United States and abroad. Many of the
Company's customers also purchase coal from its competitors. The markets in
which the Company sells its coal are highly competitive and affected by factors
beyond the Company's control. Demand for coal and the prices that the Company
will be able to obtain for its coal are closely linked to coal consumption
patterns of the domestic electric utility industry, which accounted for
approximately 89.5% of domestic coal consumption in 1997. These coal consumption
patterns are influenced by the demand for electricity, coal transportation
costs, environmental and other governmental regulation, technological
developments and the location, availability and price of competing sources of
coal, alternative fuels such as natural gas, oil and nuclear, and alternative
energy sources such as hydroelectric power. In addition, during the mid-1970's
and early 1980's, a growing coal market and increased demand attracted new
investors to the coal industry and spurred the development of new mines and
added production capacity throughout the industry. As a result of the increased
development of large surface mining operations, particularly in the western
United States, and more efficient mining equipment and techniques, the industry
has developed excess coal production capacity in the United States. Competition
resulting from excess capacity encourages producers to reduce prices and to pass
productivity gains through to customers. Moreover, because of greater
competition in the domestic electric utility industry and increased pressure
from customers and regulators to lower electricity prices, public utilities are
lowering fuel costs by buying higher percentages of spot coal through a
competitive bidding process and by only buying the amount of coal necessary
under existing contracts to meet their contractual requirements. There can be no
assurance that the Company will continue to be able to obtain long-term sales
contracts with reliable customers as its reserves expand and as existing
contracts expire. If a lower percentage of its revenues are generated pursuant
to long-term sales contracts, the Company will be increasingly affected by
changes in prices for coal in the spot market.
RISKS INHERENT TO MINING
The Company's mining operations are subject to conditions beyond the
Company's control which can negatively or positively affect the cost of mining
at particular mines for varying lengths of time. These conditions include
weather and natural disasters such as heavy rains and flooding, unexpected
maintenance problems, variations in coal seam thickness, variations in the
amount of rock and soil overlying the coal deposit, variations in rock and other
natural materials and variations in other geological and other conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IMPORTANCE OF ACQUISITIONS AND RELATED RISKS
The Company has grown, in part, through the acquisition of coal companies,
coal properties, coal leases and related assets, and management believes that
such acquisitions will continue to be important to the Company. Acquisitions
involve a number of special risks, including possible adverse effects on the
Company's operating results, diversion of management's attention, failure to
retain key acquired personnel, risks associated with unanticipated events or
liabilities and difficulties in the assimilation of the operations,
technologies, services and products of the acquired companies, some or all of
which could have a material adverse effect on the Company's financial condition
and results of operations. There can be no assurance that the Company will be
successful in the development of such acquisitions or joint ventures or that the
acquired companies or other businesses acquired in the future will achieve
anticipated revenues and earnings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
GOVERNMENT REGULATION OF THE MINING INDUSTRY
The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as employee health and safety, permitting and
licensing requirements, air quality standards, water pollution, plant and
wildlife protection, reclamation and restoration of mining properties after
mining is completed, the discharge of materials into the environment, surface
subsidence from underground mining and the effects that mining has on
groundwater quality and availability. Numerous governmental permits and
approvals are required for mining operations. The Company believes all material
permits required to conduct its present mining operations have
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been obtained. The Company may be required to prepare and present to federal,
state or local authorities data pertaining to the effect or impact that any
proposed exploration for or production of coal may have upon the environment,
including the development of Fork Creek. All requirements imposed by any such
authority may be costly and time-consuming and may delay commencement or
continuation of exploration or production operations. The possibility exists
that new legislation and/or regulations and orders may be adopted which may
materially adversely affect the Company's mining operations, its cost structure
and/or its customers' ability to use coal. New legislation, including proposals
related to the protection of the environment which would further regulate and
tax the coal industry, may also require the Company or its customers to change
their operations significantly or incur increased costs. Such factors and
legislation (if enacted) could have a material adverse effect on the Company's
financial condition and results of operations. See "Business--Government
Regulation."
RECLAMATION AND MINE CLOSURE ACCRUALS
The federal Surface Mining Control and Reclamation Act of 1977 ("SMCRA")
and similar state statutes require that mine property be restored in accordance
with specified standards and an approved reclamation plan. The Company accrues
for the costs of final mine closure over the estimated useful mining life of the
property. These costs relate to reclaiming the pit and support acreage at
surface mines and sealing portals and contour reclamation at underground mines,
scrap removal, and contour reclamation at the preparation plant. Other costs
common to both types of mining are related to reclaiming refuse and slurry
ponds. The Company accrues for current mine disturbance which will be reclaimed
prior to final mine closure. The establishment of the final mine closure
reclamation liability and the current disturbance is based upon permit
requirements and requires various estimates and assumptions, principally
associated with costs and production levels. Although the Company's management
believes it is making adequate provisions for all expected reclamation and other
costs associated with mine closures, the Company's financial condition and its
future operating results would be adversely affected if such accruals were later
determined to be insufficient.
IMPACT OF CLEAN AIR ACT AMENDMENTS ON COAL CONSUMPTION
The federal Clean Air Act ("Clean Air Act") and amendments to the Clean Air
Act ("Clean Air Act Amendments"), and corresponding state laws which regulate
the emissions of materials into the air, affect coal mining operations both
directly and indirectly. Coal mining and processing operations may be directly
affected by Clean Air Act permitting requirements and/or emissions control
requirements relating to particulate matter (e.g., "fugitive dust"). Coal mining
and processing may also be impacted by future regulation of fine particulate
matter measuring 2.5 micrometers in diameter or smaller. Regulations relating to
fugitive dust and coal combustion emissions may restrict the Company's ability
to develop new mines or could require the Company to modify its existing
operations. The Clean Air Act indirectly affects coal mining operations by
extensively regulating the air emissions of coal-fueled utility power plants.
Such regulations directly impact a coal producer's ability to sell coal to its
customers. Title IV of the Clean Air Act Amendments places limits on sulfur
dioxide emissions from electric power generation plants. These limits set
baseline emission standards for such facilities. Reductions in such emissions
will occur in two phases: the first began in 1995 ("Phase I") and applies only
to certain identified facilities; and the second is currently scheduled to begin
in 2000 ("Phase II") and will apply to most remaining facilities, including
those subject to the 1995 restrictions. The affected utilities have been and may
be able to meet these requirements by, among other ways, switching to lower
sulfur fuels, installing pollution control devices such as scrubbers, reducing
electricity generating levels or purchasing or trading "pollution credits."
Specific emission sources will receive these credits which utilities and
industrial concerns can trade or sell to allow other units to emit higher levels
of sulfur dioxide. In addition, the Clean Air Act Amendments require a study of
utility power plant emission of certain toxic substances and their eventual
regulation, if warranted.
The effect of the Clean Air Act Amendments on the Company cannot be
completely ascertained at this time. The Company believes that implementation of
Phase II will likely exert a downward pressure on the price of higher sulfur
coal, as additional coal-burning utility power plants become subject to the
restrictions of Title IV. This price effect is expected to result after the
large surplus of pollution credits which has accumulated in connection with
Phase I has been reduced and before utilities electing to comply with Phase II
by installing
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scrubber sulfur-reduction technologies are able to implement such a compliance
strategy. If the price of compliance coal rises as Phase II is implemented,
scrubber compliance strategies may become more attractive to utility customers,
thereby lessening the downward pressure on the price of high sulfur coal which
could adversely affect the Company's sales for its compliance and low-sulfur
coal. Currently, approximately 74% of the Company's coal reserves are estimated
to be composed of compliance or low-sulfur coal and 26% of the Company's
reserves are estimated to be composed of medium-sulfur coal. See "--Reliance on
Long-Term Sales Contracts," "Business--Long-Term Coal Sales Contracts" and
"Business--Government Regulation."
The Clean Air Act Amendments also require that utilities that currently are
major sources of nitrogen oxides in moderate or higher ozone non-attainment
areas install reasonably available control technology ("RACT") for nitrogen
oxides, which are precursors of ozone. In addition, stricter ozone standards are
expected to be implemented by the U.S. Environmental Protection Agency (the
"EPA") by 2003. The Ozone Transport Assessment Group ("OTAG"), formed to make
recommendations to the EPA for addressing ozone problems in the eastern United
States, submitted its final recommendations to the EPA in June 1997. Based on
the OTAG's recommendations, the EPA recently announced a proposal (the "SIP
call") that would require 22 eastern states, including states in which the
Company's customers are located, to make substantial reductions in nitrous oxide
emissions. The EPA expects that states will achieve these reductions by
requiring power plants to reduce their nitrous oxide emissions by an average of
85%. Installation of RACT and additional control measures required under the SIP
call will make it more costly to operate coal-fired utility power plants and,
depending on the requirements of individual state attainment plans and the
development of revised new source performance standards, could make coal a less
attractive fuel alternative in the planning and building of utility power plants
in the future. Any reduction in coal's share of the capacity for power
generation could have a material adverse effect on the Company's financial
condition and results of operations. The effect such legislation or regulation,
or other legislation that may be enacted in the future, could have on the coal
industry in general and on the Company in particular cannot be predicted with
certainty. Although a large portion of the Company's coal reserves are comprised
of compliance and low-sulfur coal, there can be no assurance that the
implementation of the Clean Air Act Amendments or any future regulatory
provisions will not materially adversely affect the Company.
POTENTIAL IMPACT OF KYOTO PROTOCOL
On December 11, 1997, U.S. government representatives at the climate change
negotiations in Kyoto, Japan, agreed to reduce the emissions of greenhouse gas
(including carbon dioxide and other gas emissions that are believed to be
trapping heat in the atmosphere and warming the Earth's climate) in the United
States. The adoption of the requirements of the Kyoto protocol by the United
States are subject to conditions which may not occur, and are also subject to
the protocol's ratification by the U.S. Senate. The U.S. Senate has indicated
that it will not ratify an agreement unless certain conditions, not currently
provided for in the Kyoto protocol, are met. At present, it is not possible to
predict whether the Kyoto protocol will attain the force of law in the United
States or what its impact would be on the Company. Further developments in
connection with the Kyoto process could adversely affect the Company's financial
condition and results of operations.
REPLACEMENT AND RECOVERABILITY OF RESERVES
The Company's future success depends, in part, upon its ability to find,
develop or acquire additional coal reserves. The reserves of the Company will
generally be depleted as mining operations are conducted, except to the extent
that the Company conducts successful exploration and development activities or
acquires properties containing reserves. To increase reserves and production,
the Company must continue its development, exploration and acquisition
activities or undertake other replacement activities. The Company's current
strategy includes increasing its reserve base through acquisitions of producing
properties and by continuing to exploit its existing properties. There can be no
assurance, however, that the Company's planned development and exploration
projects and acquisition activities will result in significant additional
reserves or that the Company will have continuing success developing additional
mines. For a discussion of the Company's reserves, see "Business--Coal
Reserves." Most of the Company's mining operations are conducted on properties
owned or leased by the Company. Because title to most of the Company's leased
properties and mineral rights is not thoroughly verified until a permit is
obtained to mine the property, the Company's right to mine certain of its
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reserves may be adversely affected if defects in title or boundaries exist. In
addition, there is no assurance that the Company can successfully negotiate new
leases or mining contracts for properties containing additional reserves or
maintain its leasehold interest in properties on which mining operations are not
commenced during the term of the lease. See "Business--Coal Reserves."
PRICE FLUCTUATIONS AND MARKETS
The Company's results of operations are highly dependent upon the prices
received for the Company's coal. Any significant decline in prices for coal
could have a material adverse effect on the Company's financial condition,
results of operation and quantities of reserves recoverable on an economic
basis. Should the industry experience significant price declines from current
levels or other adverse market conditions, the Company may not be able to
generate sufficient cash flow from operations to meet its obligations and make
planned capital expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
To the extent the Company is unable to sell its coal under long-term sales
contracts, it would be forced to cease production or to sell its production into
the spot market. The prices for spot coal sales are typically below the price
received under long-term sales contracts. The Company estimates that, on
average, spot sales for coal shipped through the Big Sandy River district in
1997 averaged approximately $2.50 less per ton (for comparable quality coal)
than the amount received by the Company under long-term sales contracts.
RELIANCE ON ESTIMATES OF RECOVERABLE RESERVES
There are numerous uncertainties inherent in estimating quantities of
reserves, including many factors beyond the control of the Company. The coal
reserve data set forth in this Prospectus are based on the Reserve Studies.
Estimates of coal reserves and future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as historical production from
the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions concerning
future coal prices, future operating costs, severance and excise taxes,
development costs and reclamation costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of coal attributable to any particular group
of properties, classifications of such reserves based on risk of recovery and
estimates of future net cash flows expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially.
Actual production, revenues and expenditures with respect to the Company's
reserves will likely vary from estimates, and such variances will likely be
material. As a result, potential investors should not place undue reliance on
the coal reserve data included herein. See "Business--Coal Reserves."
DEPENDENCE ON KEY MANAGEMENT AND CONTROL BY PRINCIPAL SHAREHOLDER
The Company's business is managed by a number of key personnel, the loss of
any of whom could have a material adverse effect on the Company. In addition, as
the Company's business develops and expands, the Company believes that its
future success will depend greatly on its continued ability to attract and
retain highly skilled and qualified personnel. See "Management."
William E. Beckner beneficially owns 90.4% of the outstanding voting
securities of the Company. Accordingly, Mr. Beckner is able to control the
election of the Company's directors and to determine the corporate and
management policies of the Company, including decisions relating to any mergers
or acquisitions by the Company, sales of all or substantially all of the
Company's assets and other significant corporate transactions, which
transactions may result in a Change of Control under the Indenture. See
"Security Ownership of Principal Stockholders and Management."
TRANSPORTATION
The United States coal industry depends on rail, trucking and river barge
transportation to deliver shipments of coal to customers. Disruption of these
transportation services could temporarily impair the Company's ability to supply
coal to its customers and thus adversely affect the Company's financial
condition and operating results.
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Transportation costs are a significant component of the total cost of supplying
coal to customers and can affect significantly the Company's competitive
position and profitability. Increases in the Company's transportation costs, or
changes in such costs relative to transportation costs incurred by providers of
competing coal or of other fuels, could have an adverse effect on the Company's
financial condition and operating results. In addition, the Company may be
adversely affected by labor or other disruptions throughout the transportation
industry as a whole.
In the past, the Company has experienced delays in transporting coal from
its mine sites near the Kentucky-West Virginia border due to temporary
cessations of operations at its Big Sandy River loading terminals. In the past,
the Big Sandy River has flooded or water levels have risen after sustained
periods of adverse weather conditions, forcing the terminals to cease loading
barges. These terminals were unable to load barges 61 days during the five year
period ending December 31, 1997. Delays in transporting its coal to customers
increases the Company's cost of production and decreases customer satisfaction
and, if prolonged, could have a material adverse effect on the Company. It is
anticipated that coal production from Fork Creek will be shipped on rail via CSX
and, as a result, the Company will be dependent upon CSX to transport this coal.
UNIONIZATION OF LABOR FORCE
The Company is not currently a party to any collective bargaining agreement
and considers its relations with its employees to be good. If some or all of the
Company's currently non-union operations were to become unionized, the Company
could incur higher labor costs and an increased risk of work stoppages. There
can be no assurance that the Company's workforce will not unionize in the
future. In addition, even if the Company remains non-unionized, its operations
may still be adversely affected by work stoppages at unionized companies.
NEW TECHNOLOGY
The coal mining industry is increasingly affected by advances in
technology. The ability of the Company to compete successfully may depend on the
extent to which it is able to implement and exploit such technological changes.
The failure of the Company to develop, anticipate or respond to such changes
could have a material adverse effect on the Company. The development of new and
better technologies by the Company's competitors could have a material adverse
effect on the Company's financial condition and results of operations.
ADEQUACY OF COAL INDUSTRY RETIREE HEALTH BENEFITS RESERVES
The Coal Industry Retiree Health Benefits Act of 1992 ("CIRHBA") requires
companies currently operating in the coal mining industry to subsidize the
healthcare premiums of retired coal miners and their beneficiaries. The Social
Security Administration assigns miners and their beneficiaries to the coal
companies with which they were formerly employed or related. Until recently, the
Company believed that it fell within the scope of CIRHBA. Therefore, the Company
had established a reserve to satisfy the healthcare premiums of those miners and
their beneficiaries which have been assigned to the Company. However, on June
25, 1998, the U.S. Supreme Court held in Eastern Enterprises v. APFEL,
Commissioner of Social Security et al., that the assignment of miners under
CIRHBA to certain coal companies violated certain provisions of the U.S.
Constitution. The Company believes that it is in the class of coal companies to
which the Constitutional prohibitions to CIRHBA apply. Therefore, the Company is
no longer making contributions into its CIRHBA reserves. At the time of the
Eastern Enterprises decision, the Company believed that the reserves it had
established were sufficient to satisfy its obligations to the miners then
assigned to it and those which are reasonably foreseeable to be assigned to it
in the future. Because the Eastern Enterprises decision is very recent, the
Company is continuing to review its CIRHBA policies.
If, however, the Eastern Enterprises decision was found inapplicable to the
Company, the possibility exists that the Company could be assigned a greater
number of miners than could be reasonably foreseen. Such a situation could
exhaust the Company's reserves and have an adverse effect on the Company's
financial condition and operating results.
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FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if a court were to find that, among
other things, at the time Pen Holdings incurred the indebtedness evidenced by
the Notes or a Guarantor executed its Guaranty, Pen Holdings or the Guarantor,
as the case may be: (i) (a) was or is insolvent or rendered insolvent by reason
of such occurrence, (b) was or is engaged in a business or transaction for which
the assets remaining with Pen Holdings or such Guarantor constituted
unreasonably small capital, or (c) intended or intends to incur, or believed or
believes that it would incur, debts beyond its ability to pay such debts as they
mature; and (ii) received or receives less than reasonably equivalent value or
fair consideration for the incurrence of such indebtedness, then the Notes or
Guarantee, as the case may be, could be voided, or claims in respect of the
Notes or Guarantees could be subordinated to all other debts of Pen Holdings, as
the case may be. In addition, the payment of interest and principal by Pen
Holdings pursuant to the Notes could be voided and required to be returned to
the person making such payment, or to a fund for the benefit of the creditors of
Pen Holdings.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, Pen Holdings or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the salable value of all of its assets at a fair valuation or if
the present fair salable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and mature or (ii) it could not
pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company believes that, as a result of the indebtedness
incurred in connection with the Offering and the establishment of the New Credit
Facility, it was not rendered insolvent, did not have unreasonably small capital
for the business in which it is engaged and did not incur debts beyond its
ability to pay such debts as they mature. There can be no assurance, however, as
to what standard a court would apply in making such determinations or that a
court would agree with the Company's conclusions in this regard.
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest and Additional Interest, if any, to the date of
repurchase. However, there can be no assurance that sufficient funds will be
available at the time of any Change of Control to make any required repurchases
of Notes tendered or that restrictions in the New Credit Facility will allow the
Company to make such required repurchases. See "Description of Notes--Change of
Control Offer."
ABSENCE OF A PUBLIC MARKET FOR NOTES; POSSIBLE VOLATILITY OF NOTE PRICE
Prior to the Exchange Offer, the Senior Notes have not been registered
under the Securities Act or any state securities laws and, unless so registered,
may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
and applicable state securities laws. Although the Initial Purchaser has
informed the Company that it currently intends to make a market in the Series B
Senior Notes, it is not obligated to do so and any such market making may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Series B Senior Notes.
The Series B Senior Notes are expected to be eligible for trading in the PORTAL
market. The Company does not intend to apply for listing of the Notes on any
securities exchange or for quotation through the NASDAQ National Market. If a
market for the Series B Senior Notes were to develop, the Series B Senior Notes
could trade at prices that may be higher or lower than the Senior Notes initial
offering price depending upon many factors, including prevailing interest rates,
the Company's operating results and the markets for similar securities.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Notes. There can be no assurance that, if a market for the Series
B Senior Notes were to develop, such a market will not be subject to similar
disruptions.
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FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward looking statements," 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 Company's current litigation in the U.S. Tax Court and the pending Internal
Revenue Service's examination of certain other tax returns of the Company, the
Company's reliance on long-term sales contracts, the Company's reliance on
long-term mineral leases, the competitive environment in which the Company
operates, the risks inherent to the mining industry, acquisitions, government
regulation, reclamation and mine closure accruals, the effects of Clean Air Act
Amendments on the coal industry, replacement and recoverability of coal
reserves, economic conditions in the coal industry generally and technological
developments. Such risks could cause actual results to vary materially from the
future results indicated, expressed or implied, in such forward looking
statements.
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<PAGE> 27
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On June 8, 1998, the Company issued $100,000,000 aggregate principal amount
at maturity of Senior Notes to CIBC Oppenheimer Corp., the Initial Purchaser.
The issuance was not registered under the Securities Act in reliance upon the
exemption under Rule 144A, Section 4(2) and Regulation S of the Securities Act.
In connection with the issuance and sale of the Senior Notes, the Company
entered into a registration rights agreement with the Initial Purchaser dated as
of June 8, 1998 (the "Registration Rights Agreement"), which requires the
Company to cause the Senior Notes to be registered under the Securities Act or
to file with the Commission a registration statement under the Securities Act
with respect to an issue of new notes of the Company identical in all material
respects to the Senior Notes, and use its best efforts to cause such
registration statement to become effective under the Securities Act and, upon
the effectiveness of that registration statement, to offer to the holders of the
Senior Notes the opportunity to exchange their Senior Notes for a like principal
amount of Series B Senior Notes, which will be issued without a restrictive
legend and may be reoffered and resold by the holder without restrictions or
limitations under the Securities Act. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Exchange Offer is being made pursuant to the
Registration Rights Agreement to satisfy the Company's obligations thereunder.
Based on no-action letters issued by the staff of the Commission to
third-parties, the Company believes that the Series B Senior Notes issued
pursuant to the Exchange Offer in exchange for Senior Notes may be offered for
resale, resold and otherwise transferred by any holder of such Series B Senior
Notes (other than any such holder which is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Series B Senior Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement or understanding with any
person to participate in the distribution of such Series B Senior Notes and
neither the holder nor any other person is engaging in or intends to engage in a
distribution of the Series B Senior Notes. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the Series
B Senior Notes cannot rely on such interpretation by the staff of the Commission
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each broker dealer
that receives Series B Senior Notes for its own account in exchange for Senior
Notes, where such Senior Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Series B Senior Notes. See "Plan of
Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept any and all Senior Notes validly
tendered and not withdrawn prior to 5:00 p.m. (New York City time) on the
Expiration Date. The Company will issue a principal amount of Series B Senior
Notes in exchange for an equal principal amount of outstanding Senior Notes
tendered and accepted in the Exchange Offer. Holders may tender some or all of
their Senior Notes pursuant to the Exchange Offer. The date of acceptance for
exchange of the Senior Notes for the Series B Senior Notes (the "Exchange Date")
will be the first business day following the Expiration Date.
The terms of the Series B Senior Notes and the Senior Notes are
substantially identical in all material respects, except for certain transfer
restrictions, registration rights and Additional Interest for Registration
Defaults relating to the Senior Notes which will not apply to the Series B
Senior Notes. See "Description of Notes." The Series B Senior Notes will
evidence the same debt as the Senior Notes. The Series B Senior Notes will be
issued under and entitled to the benefits of the Indenture pursuant to which the
Senior Notes were issued.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
at maturity of the Senior Notes are outstanding. This Prospectus, together with
the Letter of Transmittal, is being sent to all registered holders.
Holders of Senior Notes do not have any appraisal or dissenters' rights
under Tennessee law or the Indenture in connection with the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with
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<PAGE> 28
the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Senior Notes which are not tendered and were not
prohibited from being tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and to be subject to transfer
restrictions, but will not be entitled to any rights or benefits under the
Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Senior Notes
properly tendered and will issue the Series B Senior Notes promptly after
acceptance of the Senior Notes. For purposes of the Exchange Offer, the Company
shall be deemed to have accepted properly tendered Senior Notes for exchange
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purposes of receiving the Series B Senior Notes from the Company.
In all cases, issuance of Series B Senior Notes for Senior Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of such Senior Notes, a properly completed
and duly executed Letter of Transmittal and all other required documents;
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Senior Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Senior Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Senior Notes or substitute Senior Notes evidencing the unaccepted
portion, as appropriate, will be returned without expense to the tendering
holder thereof as promptly as practicable after the expiration or termination of
the Exchange Offer.
Holders who tender Senior Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Senior
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m. (New York City time), on
December 3, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, prior to 9:00 a.m. (New York City
time), on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Senior Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions" shall
not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of Senior
Notes of such amendment.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
INTEREST ON THE SERIES B SENIOR NOTES
The Series B Senior Notes will bear interest at the rate of 9 7/8% per
annum, payable semi-annually, in cash, on June 15 and December 15, of each year,
commencing December 15, 1998.
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<PAGE> 29
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to exchange any Series B Senior Notes for any Senior Notes, and may
terminate or amend the Exchange Offer before the acceptance of any Senior Notes
for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange
Offer which seeks to restrain or prohibit the Exchange Offer or, in
the Company's judgment, would materially impair the ability of the
Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule, order or regulation is
interpreted by any government or governmental authority which, in
the Company's judgment, would materially impair the ability of the
Company to proceed with the Exchange Offer; or
(c) the Exchange Offer or the consummation thereof would otherwise
violate or be prohibited by applicable law.
If the Company determines in its sole discretion that any of these
conditions is not satisfied, the Company may (i) refuse to accept any Senior
Notes and return all tendered Senior Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Senior Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders who tendered
such Senior Notes to withdraw their tendered Senior Notes, or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Senior Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the significance
of the waiver and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. Any determination by the Company concerning
the events described above shall be final and binding on all parties.
PROCEDURES FOR TENDERING
The tender of Senior Notes by a holder as set forth below and the
acceptance thereof by the Company will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth in this Prospectus and in the Letter of Transmittal.
Only a holder of Senior Notes may tender such Senior Notes in the Exchange
Offer. To tender in the Exchange Offer, a holder must (i) complete, sign and
date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Senior Notes (unless such tender is being effected pursuant to the procedure
for book-entry transfer described below) and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date, or (ii) comply with the guaranteed delivery procedures described below.
Delivery of all documents must be made to the Exchange Agent at its address set
forth herein.
THE METHOD OF DELIVERY OF SENIOR NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE
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THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SENIOR NOTES SHOULD BE SENT TO
THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Senior Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Senior Notes, either make appropriate arrangements to register ownership
of the Senior Notes in such owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17ad-15 under the Exchange Act (an "Eligible Institution") unless the Senior
Notes tendered pursuant thereto are tendered (i) by a registered holder who has
not completed the box entitled "Special Payment Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a Letter of Transmittal
or a notice of withdrawal, as the case may be, are required to be guaranteed,
such guarantee must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Senior Notes listed therein, such Senior Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Senior Notes
with the signature thereon guaranteed by an Eligible Institution. If the Letter
of Transmittal or any Senior Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
Any financial institution that is a participant in the book-entry transfer
facility for the Senior Notes (The Depository Trust Company system ("DTC")), may
make book-entry delivery of Senior Notes by causing DTC to transfer such Senior
Notes into the Exchange Agent's account with respect to the Senior Notes in
accordance with DTC's procedures for such transfer. Although delivery of Senior
Notes may be effected through book-entry transfer into the Exchange Agent's
account at DTC, an appropriate Letter of Transmittal with any required signature
guarantee and all other required documents must in each case be transmitted to
and received and confirmed by the Exchange Agent at its address set forth below
on or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Senior Notes and withdrawal of tendered Senior
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Senior Notes not properly tendered or any Senior Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Senior Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Senior Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Senior Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Senior Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Senior Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or
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<PAGE> 31
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Senior Notes that remain outstanding subsequent
to the Expiration Date or, as set forth below under "Conditions," to terminate
the Exchange Offer and, to the extent permitted by applicable law, purchase
Senior Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will also represent to the Company, (i) that the
Series B Senior Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such Series B Senior
Notes, whether or not such person is the holder, (ii) that neither the holder
nor any such person has an arrangement or understanding with any person to
participate in the distribution of such Series B Senior Notes and (iii) that
neither the holder nor any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of the Company, or that if it is an
"affiliate," it will comply with the registration and prospective delivery
requirements of the Securities Act to the extent applicable.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Senior Notes and (i) whose Senior Notes
are not immediately available, (ii) who cannot deliver their Senior Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, or (iii) who cannot complete the procedures for
book-entry transfer of Senior Notes to the Exchange Agent's account with DTC
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice
of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the
certificate number(s) of such Senior Notes (if possible) and the
principal amount of Senior Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three business trading
days after the Expiration Date, (i) the Letter of Transmittal (or
facsimile thereof) together with the certificate(s) representing the
Senior Notes and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, or (ii) that book-entry transfer of such Senior Notes
into the Exchange Agent's account at DTC will be effected and
confirmation of such book-entry transfer will be delivered to the
Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Senior Notes in proper form for transfer and all other
documents required by the Letter of Transmittal, or confirmation of
book-entry transfer of the Senior Notes into the Exchange Agent's
account at DTC, are received by the Exchange Agent within three
business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Senior Notes according to the
guaranteed delivery procedures set forth above.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The holder tendering Senior Notes exchanges, assigns and transfers the
Senior Notes to the Company and irrevocably constitutes and appoints the
Exchange Agent as the holder's agent and attorney-in-fact to cause the Senior
Notes to be assigned, transferred and exchanged. The holder represents and
warrants to the Company and the Exchange Agent that (i) it has full power and
authority to tender, exchange, assign and transfer the Senior Notes and to
acquire the Series B Senior Notes in exchange for the Senior Notes, (ii) when
the Senior Notes are accepted for exchange, the Company will acquire good and
unencumbered title to the Senior Notes, free and clear
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of all liens, restrictions, charges and encumbrances and not subject to any
adverse claim, (iii) it will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Senior Notes and (iv) acceptance
of any tendered Senior Notes by the Company and the issuance of Series B Senior
Notes in exchange therefor will constitute performance in full by the Company of
its obligations under the Registration Rights Agreement and the Company will
have no further obligations or liabilities thereunder to such holders (except
with respect to accrued and unpaid Additional Interest, if any). All authority
conferred by the holder will survive the death or incapacity of the holder and
every obligation of the holder will be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of the
holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or that, if it
is an "affiliate," it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable, (ii) is acquiring
the Series B Senior Notes offered in the ordinary course of its business and
(iii) has no arrangement with any person to participate in the distribution of
the Series B Senior Notes.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Senior Notes may be
withdrawn at any time prior to 5:00 p.m. (New York City time) on the Expiration
Date.
To withdraw a tender of Senior Notes in the Exchange Offer, a telegram,
telex, facsimile transmission or letter indicating notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m. (New York City time), on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having tendered the Senior Notes to be
withdrawn (the "Depositor"), (ii) identify the Senior Notes to be withdrawn
(including the certificate number or numbers and principal amount of such Senior
Notes), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Senior Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Senior Notes
register the transfer of such Senior Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Senior Notes
are to be registered, if different from that of the Depositor. If Senior Notes
have been tendered pursuant to the procedure for book-entry transfer, any notice
of withdrawal must specify the name and number of the account at DTC to be
credited with the withdrawn Senior Notes or otherwise comply with DTC's
procedures. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Senior Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Series B Senior Notes will be issued with respect thereto
unless the Senior Notes so withdrawn are validly retendered. Any Senior Notes
which have been tendered but which are not accepted for payment will be returned
to the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Senior Notes may be retendered by following one of the procedures
described above under "Procedures for Tendering" at any time prior to the
Expiration Date.
UNTENDERED SENIOR NOTES
Holders of Senior Notes whose Senior Notes are not tendered or are tendered
but not accepted in the Exchange Offer will continue to hold such Senior Notes
and will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Senior Notes will continue to be subject to
the existing restrictions upon transfer thereof and the Company will have no
further obligations to such holders, other than the Initial Purchaser, to
provide for the registration under the Securities Act of the Senior Notes held
by them. To the extent that Senior Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Senior Notes could be adversely affected.
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EXCHANGE AGENT
The Bank of New York, the Trustee under the Indenture, has been appointed
as Exchange Agent of the Exchange Offer. Questions and requests for assistance,
requests for additional copies of this Prospectus or of the Letter of
Transmittal and requests for Notices of Guaranteed Delivery should be directed
to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail,
by Overnight Courier By Facsimile:
The Bank of New York The Bank of New York
101 Barclay Street Attention: Martha James,
Floor 7 East Reorganization Department
New York, NY 10286 (212) 815-6339
Attention: Martha James, Reorganization Department Confirm by Telephone:
(212) 815-6335
By hand delivery,
The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground Level
Attention: Martha James, Reorganization Department
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith and will
pay the reasonable fees and expenses of holders in delivering their Senior Notes
to the Exchange Agent.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Senior Notes pursuant to the Exchange Offer. If, however, certificates
representing Series B Senior Notes or Senior Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued in
the name of, any person other than the registered holder of the Senior Notes
tendered, or if tendered Senior Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Senior Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Senior Notes that were
not prohibited from participating in the Exchange Offer and did not tender their
Senior Notes will not have any registration rights
32
<PAGE> 34
under the Registration Rights Agreement with respect to such non-tendered Senior
Notes and, accordingly, such Senior Notes will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Senior
Notes may not be offered or sold, unless registered under the Securities Act and
applicable state securities laws, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not intend to register the Senior Notes under the
Securities Act. Based on interpretations by the staff of the Commission with
respect to similar transactions, the Company believes that the Series B Senior
Notes issued pursuant to the Exchange Offer in exchange for Senior Notes may be
offered for resale, resold and otherwise transferred by any holder of such
Series B Senior Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Series B Senior Notes are acquired in the
ordinary course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such Series
B Senior Notes and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the Series B Senior Notes. If any holder
has any arrangement or understanding with respect to the distribution of the
Series B Senior Notes to be acquired pursuant to the Exchange Offer, the holder
(i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives, as a result of market making or other trading
activities, Series B Senior Notes for its own account in exchange for Senior
Notes must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of its Series B
Senior Notes. See "Plan of Distribution." The Series B Senior Notes may not be
offered or sold unless they have been registered or qualified for sale under
applicable state securities laws or an exemption from registration or
qualification is available and is complied with. The Company is required, under
the Registration Rights Agreement, to register the Series B Senior Notes in any
jurisdiction requested by the holders, subject to certain limitations.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Senior Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of the Senior Notes that
were not prohibited from participating in the Exchange Offer and did not tender
their Senior Notes will not have any registration rights under the Registration
Rights Agreement with respect to such non-tendered Senior Notes and,
accordingly, such Senior Notes will continue to be subject to the restrictions
on transfer contained in the legend thereon.
The Company has not entered into any arrangement or understanding with any
person to distribute the Series B Senior Notes to be received in the Exchange
Offer and to the best of the Company's information and belief, each person
participating in the Exchange Offer is acquiring the Series B Senior Notes in
its ordinary course of business and has no arrangement or understanding with any
person to participate in the distribution of the Series B Senior Notes to be
received in the Exchange Offer. In this regard, the Company will make each
person participating in the Exchange Offer aware (through this Prospectus or
otherwise) that if the Exchange Offer is being registered for the purpose of
secondary resale, any holder using the Exchange Offer to participate in a
distribution of Series B Senior Notes to be acquired in the registered Exchange
Offer (i) may not rely on the staff position enunciated in Morgan Stanley and
Co. Inc. (avail. June 5, 1991) and Exxon Capital Holding Corp. (avail. May 13,
1988) or similar letters and (ii) must comply with registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
ACCOUNTING TREATMENT
The Series B Senior Notes will be recorded at the same carrying value as
the Senior Notes as reflected in the Company's accounting records on the
Exchange Date. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the terms of the Series B Senior Notes.
33
<PAGE> 35
USE OF PROCEEDS
The Company will receive no proceeds from the issuance of the Series B
Senior Notes. Net proceeds to the Company, after deducting the discount to the
Initial Purchaser and offering expenses, of $96.2 million from the original
private placement (the "Offering") were used as follows:
<TABLE>
<CAPTION>
INTEREST RATE
APPLICABLE TO
ANY DEBT REPAYMENT
AMOUNT OF PROCEEDS FROM PROCEEDS
(IN MILLIONS OF DOLLARS) APPLICATION OF PROCEEDS AS OF JUNE 8, 1998
- ------------------------ ----------------------- ------------------
<C> <S> <C>
$57.9 Repayment of indebtedness under the Credit 9.00%
Agreement, dated as of August 16, 1994, by and
between Pen Holdings and certain of its Subsidiaries
and Mellon Bank, N.A., as agent, and the lenders
named therein, as amended (the "Original Credit
Facility")
$11.0 Repayment of the note issued to the seller as 8.50%
partial consideration in the Company's acquisition
of Fork Creek (the "Fork Creek Note")
$1.3 Repayment of $1.3 million of certain other 8.20-8.25%
indebtedness of the Company
$3.0 Redemption of $3.0 million outstanding warrants to --
purchase the Company's common stock issued to the
lenders in connection with an amendment to the
Original Credit Facility
</TABLE>
The Company intends to use the remaining net proceeds from the Offering for
working capital, including, to fund a portion of the development of the Fork
Creek property, preparation plant and rail loadout terminal (see "Capital
Development Program"). As of June 30, 1998, the Company had used approximately
$0.25 million of the remaining net proceeds from the Offering to fund the
development of the Fork Creek property. The New Credit Facility represents a
$40.0 million senior secured credit facility commitment providing for revolving
borrowings for working capital purposes, including acquisitions, and to fund
future development projects. See "Description of New Credit Facility."
34
<PAGE> 36
CAPITALIZATION
The following table sets forth the historical cash and cash equivalents and
capitalization of the Company (i) as of June 30, 1998.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
----------------------
<S> <C>
(DOLLARS IN THOUSANDS)
Cash and cash equivalents........................ $ 23,722
========
Notes offered hereby, net of discount............ $ 99,222
Other debt(1).................................... 10,890
--------
Total debt.................................. 110,112
Mandatorily redeemable preferred stock(2)........ 17,958
Shareholders' equity............................. 40,238
--------
Total capitalization........................ $168,308
========
</TABLE>
- ---------------
(1) Other debt consists of $6.7 million of capital leases and a $4.2 million
mortgage on the Company's headquarters building.
(2) The Convertible Preferred Stock was issued in connection with the
Recapitalization. The Convertible Preferred Stock had a liquidation
preference of $13,650 at June 30, 1998, does not pay cash dividends and no
dividends accrue from the date of issuance through December 2000; beginning
in January 2001, dividends will accrue on the then liquidation preference at
an annual rate of 25.25% for a five-year period. The aggregate amount of
dividends which will accumulate from 2001 to 2006 is being recorded evenly
from the date of issuance in 1996 through the redemption date in 2006. The
Indenture will not prohibit such mandatory redemption in 2006. See
"Description of Notes--Certain Covenants--Limitation on Restricted
Payments." The Convertible Preferred Stock is mandatorily redeemable in
January 2006 and is redeemable with the issuance of a note equal to the
liquidation preference which equally amortizes over the ten years following
the redemption at an interest rate 2.25% above the rate on five-year U.S.
Treasury obligations. Accumulated dividends will be payable on the same
terms over the same period. The liquidation preference of the Convertible
Preferred Stock, as well as the amounts owed upon redemption of the
Convertible Preferred Stock, are to be reduced by any tax deficiencies or
settlements (including interest and penalties) paid or payable for all tax
periods beginning prior to December 29, 1995. See "Business--Legal
Proceedings--IRS Proceedings." The Convertible Preferred Stock is
convertible, at the option of the holder, into 2,950,000 shares of Class I
Common Stock. The conversion feature is exercisable from January 2001 until
January 2002, and immediately prior to certain fundamental transactions. See
"Description of Capital Stock--Convertible Preferred Stock."
35
<PAGE> 37
CAPITAL DEVELOPMENT PROGRAM
In November 1997, the Company acquired in fee the coal reserves comprising
Fork Creek for an aggregate purchase price of $16.0 million. Fork Creek contains
approximately 80 million tons of compliance, low-sulfur and metallurgical coal
reserves located in southern West Virginia. The Company expects to have obtained
the necessary permits and completed the infrastructure at Fork Creek to commence
mining operations and to make coal deliveries in early 2000. Management believes
the Fork Creek operations should increase the Company's total coal production by
approximately 50% from current levels by the year 2001. Prior to June 30, 1998,
the Company expended approximately $16.3 million for the acquisition, initial
testing, planning and permitting of the Fork Creek property.
The Company's Fork Creek capital development program anticipates
expenditures totaling approximately $44.8 million over the next three years,
including the following: approximately $12.1 million for the initial preparation
and development of the properties (i.e., permitting, mapping, core drilling,
mine offices, haulroads, general site preparation, etc.); approximately $14.6
million for the purchase or lease of underground mining equipment and
endloaders; approximately $12.3 million for the construction of a coal
preparation plant and the purchase of related equipment; and approximately $5.8
million for the construction of a rail loadout facility. All material permits
for road access, the preparation plant, the loadout and the underground facility
are expected to be submitted by January 31, 1999.
The following table details the capital expenditures related to the
development of the Fork Creek property incurred by the Company prior to June 30,
1998 and approximates the Company's anticipated capital expenditures for the six
months ending December 31, 1998 and years 1999 and 2000.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDING
PRIOR TO ENDING DECEMBER 31,
JUNE 30, DECEMBER 31, ----------------
1998 1998 1999 2000
-------- ------------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Acquisition of Fork Creek(1).......................... $16,000 -- -- --
Initial Mine Preparation and Development Costs........ 336 $4,600 $ 7,500 --
Equipment:
Area #1............................................. -- -- 3,000 $ 900
Area #2............................................. -- -- 2,600 1,000
Area #3............................................. -- -- -- 3,600
Area #4............................................. -- -- 2,600 900
------- ------ ------- ------
Total Equipment.................................. -- -- 8,200 6,400
Preparation Plant..................................... -- 1,600 10,700 --
Rail Loadout Terminal................................. -- 1,800 4,000 --
------- ------ ------- ------
Total............................................ $16,336 $8,000 $30,400 $6,400
======= ====== ======= ======
</TABLE>
- ---------------
(1) Includes $5.0 million cash payment and the Fork Creek Note. See "Use of
Proceeds."
In addition to the Fork Creek development, the Company anticipates that it
will continue to replace equipment in its other mines and selectively acquire
additional reserves in the ordinary course of operations. Equipment replacement
generally occurs every three to five years based on mine development plans.
Equipment is either purchased or financed through capital or operating leases
depending on the relative economics. The Company estimates minimal equipment
replacement expenditures through 2000 for the Fork Creek development. The
Company estimates average annual equipment replacement expenditures of
approximately $8.0 million for the Company's other properties through 2000.
Selective reserves may also be acquired to extend or enhance a particular
property.
36
<PAGE> 38
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Statements of Operations and
Other Data for the year ended December 31, 1997 and the six months ended June
30, 1998 (the "Condensed Combined Financial Statements") of the Company are
based on the consolidated financial statements included elsewhere herein, as
adjusted to give effect to the disposition of the Barge Fleet and Pen Cotton
Tennessee (the "Asset Dispositions"), the estimated effects of the Offering and
the application of proceeds therefrom. The unaudited pro forma adjustments are
based upon available information and certain assumptions that the Company
believes are reasonable. The Unaudited Pro Forma Condensed Combined Financial
Statements and accompanying notes should be read in conjunction with the
historical financial statements and other financial information of the Company
appearing elsewhere herein.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1997 gives effect to the Asset Dispositions, the
Offering and the application of the estimated net proceeds therefrom as if such
transactions had occurred on January 1, 1997. The Unaudited Pro Forma Combined
Statement of Operations for the six months ended June 30, 1998 gives effect to
the Offering and the application of the estimated net proceeds therefrom as if
such transaction had occurred on January 1, 1998.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
purport to be indicative of what the Company's financial position or results of
operations actually would have been had the Offering been completed on such date
or at the beginning of the periods indicated or to project the Company's results
of operations for any future period.
37
<PAGE> 39
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
AND OTHER DATA
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------
ASSET DISPOSITIONS
---------------------
BARGE PEN COTTON OFFERING
ACTUAL FLEET TENNESSEE ADJUSTMENTS PRO FORMA
-------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................... $182,289 $ (2,300) $ -- $ -- $179,989
Cost of sales......................... 150,025 (3) -- -- 150,022
Selling, general and administrative... 5,445 -- (31) -- 5,414
Depreciation, depletion and
amortization........................ 15,290 (957) -- -- 14,333
-------- -------- ------ ------- --------
Operating income...................... 11,529 (1,340) 31 -- 10,220
Interest expense...................... 7,906 (962) -- 4,510(2) 11,454
Other income.......................... 6,125 (3,685) (30) -- 2,410
-------- -------- ------ ------- --------
Income from continuing operations
before income taxes................. 9,748 (4,063) 1 (4,510) 1,176
Income taxes (benefit)................ 2,246 (1,381) 4 (1,533)(3) (664)
-------- -------- ------ ------- --------
Income from continuing operations..... $ 7,502 $ (2,682) $ (3) $(2,977) $ 1,840
======== ======== ====== ======= ========
STATEMENT OF CASH FLOW DATA:
Net cash provided (used) by operating
activities.......................... $ 17,502 $ 63 $ (4) $(2,977) $ 14,584
Net cash provided (used) by investing
activities.......................... 14,900 (20,580) -- -- (5,680)
Net cash provided (used) by financing
activities.......................... (28,136) 10,316 -- -- (17,820)
OTHER DATA:
EBITDA(1)............................. $ 26,819 $ (2,297) $ 31 -- $ 24,553
Capital expenditures.................. 7,969 -- -- -- 7,969
</TABLE>
- ---------------
(1) Represents operating income plus depreciation, depletion and amortization.
EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principals and should not be used as an
alternative to net income or as an indicator of operating performance or to
cash flows as a measure of liquidity.
(2) Represents the incremental interest expense on the Notes, net of the
elimination of actual interest expense on debt refinanced out of the net
proceeds of the Offering, calculated as follows:
<TABLE>
<S> <C>
Interest on Senior Notes.............................. $ 9,875
Amortization of Original Issue Discount............... 78
-------
9,953
Less:
Interest on Original Credit Facility................ (5,220)
Interest on Fork Creek Note......................... (78)
Other............................................... (145)
-------
$ 4,510
=======
</TABLE>
(3) Represents the tax effect of the offering adjustments based on an effective
rate of 34%.
38
<PAGE> 40
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
AND OTHER DATA
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
-----------------------------------
OFFERING
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................................... $78,841 -- $78,841
Cost of sales.............................................. 65,273 -- 65,273
Selling, general and administrative........................ 1,909 -- 1,909
Depreciation, depletion and amortization................... 7,164 -- 7,164
------- ------- -------
Operating income........................................... 4,495 -- 4,495
Interest expense........................................... 3,612 $ 2,074(2) 5,686
Other income............................................... 1,317 -- 1,317
------- ------- -------
Income before income taxes................................. 2,200 (2,074) 126
Income taxes (benefit)..................................... 721 (705) 16
------- ------- -------
Income from continuing operations.......................... $ 1,479 $(1,369) $ 110
======= ======= =======
STATEMENT OF CASH FLOW DATA:
Net cash provided (used) by operating activities........... $ 3,255 $(1,369) $ 1,886
Net cash provided (used) by investing activities........... (3,010) -- (3,010)
Net cash provided (used) by financing activities........... 17,326 -- 17,326
OTHER DATA:
EBITDA(1).................................................. $11,659 -- $11,659
Capital expenditures....................................... 6,075 -- 6,075
</TABLE>
- ---------------
(1) Represents operating income plus depreciation, depletion and amortization.
EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principals and should not be used as an
alternative to net income or as an indicator of operating performance or to
cash flows as a measure of liquidity.
(2) Represents the incremental interest expense on the Notes, net of the
elimination of actual interest expense on debt refinanced out of the net
proceeds of the Offering.
39
<PAGE> 41
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for each of
the five years ended December 31, 1997 have been derived from the consolidated
financial statements of the Company which have been audited by
PricewaterhouseCoopers LLP, independent accountants. Historical data for the six
months ended June 30, 1998 and for the six months ended June 30, 1997 have been
derived from unaudited interim consolidated financial statements of the Company,
which, in the opinion of management, have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the information. The information presented below is qualified in its entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements of the Company and related notes included
elsewhere in this Prospectus. For purposes of this presentation, depreciation,
depletion, and amortization have been reclassified into a separate component of
operating expenses from cost of sales and selling, general and administrative.
The balance sheet items as of December 31, 1993, 1994 and 1995 and the statement
of operations data and other data for the years ended December 31, 1993 and 1994
have been derived from audited consolidated financial statements not included
herein.
Data for the six months ended June 30, 1998 do not purport to be indicative
of results to be expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER-TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Coal sales............................. $154,513 $161,744 $147,169 $154,205 $161,462 $ 79,831 $ 73,430
Leased coal............................ -- 4,198 10,738 9,348 8,235 4,357 3,367
Other.................................. 15,241 19,738 28,136 18,916 12,592 4,434 2,044
-------- -------- -------- -------- -------- -------- --------
Total revenues....................... 169,754 185,680 186,043 182,469 182,289 88,622 78,841
Cost of sales:
Coal sales............................. 130,872 137,217 129,185 135,347 140,107 70,015 63,169
Leased coal............................ -- 54 60 99 12 72 --
Other.................................. 12,125 17,170 24,443 15,370 9,906 3,064 2,104
-------- -------- -------- -------- -------- -------- --------
Total cost of sales.................. 142,997 154,441 153,688 150,816 150,025 73,151 65,273
Gross profit:
Coal sales............................. 23,641 24,527 17,984 18,858 21,355 9,816 10,261
Leased coal............................ -- 4,144 10,678 9,249 8,223 4,285 3,367
Other.................................. 3,116 2,568 3,693 3,546 2,686 1,370 (60)
-------- -------- -------- -------- -------- -------- --------
Total gross profit................... 26,757 31,239 32,355 31,653 32,264 15,471 13,568
Selling, general and administrative...... 5,784 5,573 5,540 5,013 5,445 2,394 1,909
Depreciation, depletion and
amortization........................... 7,771 11,397 13,975 14,742 15,290 7,586 7,164
-------- -------- -------- -------- -------- -------- --------
Operating income......................... 13,202 14,269 12,840 11,898 11,529 5,491 4,495
Interest expense(1)...................... 4,395 6,173 10,340 9,186 7,906 4,116 3,612
Other income............................. 4,418 1,725 1,698 2,884 6,125 2,698 1,317
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations before
income taxes........................... 13,225 9,821 4,198 5,596 9,748 4,073 2,200
Income taxes............................. 2,603 2,497 1,137 1,463 2,246 1,226 721
-------- -------- -------- -------- -------- -------- --------
Net income before discontinued
operations............................. 10,622 7,324 3,061 4,133 7,502 2,847 1,479
Income (loss) from discontinued
operations(2).......................... 122 152 70 (1,448) (35) (27) --
-------- -------- -------- -------- -------- -------- --------
Net income............................. $ 10,744 $ 7,476 $ 3,131 $ 2,685 $ 7,467 $ 2,820 $ 1,479
======== ======== ======== ======== ======== ======== ========
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER-TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Coal sold (in thousands of tons)......... 4,459 5,010 4,734 5,051 5,317 2,650 2,497
Coal production (in thousands of
tons)(3)............................... 2,224 2,680 3,057 3,298 3,504 1,757 1,801
Leased coal production (in thousands of
tons)(4)............................... 3,273 3,988 3,739 3,406 2,952 1,383 1,379
Average sales price per ton of coal(5)... $ 34.65 $ 32.28 $ 31.09 $ 30.53 $ 30.37 $ 30.12 $ 29.41
Average cash costs per ton of coal
shipped (FOB barge)(6)................. 23.96 24.07 25.46 23.05 23.22 23.28 23.37
Average leasing revenue per ton of
coal(7)................................ -- 2.53 2.87 2.74 2.79 3.15 2.44
STATEMENT OF CASH FLOW DATA:
Net cash provided (used) by operating
activities............................. $ 22,638 $ (4,851) $ 23,176 $ 18,974 $ 17,502 $ 11,713 $ 3,255
Net cash provided (used) by investing
activities............................. (8,329) (67,158) (801) 2,440 14,900 1,118 (3,010)
Net cash provided (used) by financing
activities............................. (6,845) 67,032 (19,409) (27,689) (28,136) (11,895) 17,326
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET ITEMS:
Cash and cash equivalents................ $ 10,171 $ 5,194 $ 8,160 $ 1,885 $ 6,151 $ 2,821 $ 23,722
Working capital(8)....................... 14,505 30,751 4,412 12,953 11,895 10,596 13,289
Total assets............................. 153,046 284,845 257,628 231,753 224,847 226,504 242,949
Total debt............................... 57,065 129,217 109,374 96,873 86,371 91,903 110,112
Mandatorily redeemable preferred
stock(9)............................... -- -- 13,650 15,344 17,097 16,191 17,958
Total shareholders' equity............... 53,796 61,272 34,793 35,786 41,486 37,772 40,238
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER-TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(10)............................... $ 20,973 $ 25,666 $ 26,815 $ 26,640 $ 26,819 $ 13,077 $ 11,659
Capital expenditures(11)................. 18,469 7,181 5,902 9,542 7,969 4,972 6,075
Ratio of earnings to fixed charges(12)... 3.67x 2.43x 1.38x 1.61x 2.05x 1.73x 1.41x
</TABLE>
- ---------------
(1) Excludes capitalized interest expense of $97 for the year ended December
31, 1997 and $523 for the six months ended June 30, 1998. There was no
capitalized interest expense for any prior periods.
(2) Represents the earnings (loss) of Pen Cotton Alabama, Pen Hardwood and Pen
California (collectively, the "Discontinued Operations"), which were
discontinued or disposed of in 1996, 1996 and 1995, respectively.
(3) Coal production includes contract mining production of 601, 282, 641, 552,
770, 294 and 292 tons (in thousands) for the years ended December 31, 1993,
1994, 1995, 1996 and 1997 and for the six months ended June 30, 1997 and
1998, respectively.
(4) The Company acquired its Elk Horn coal operations in August 1994. Data for
1993 and 1994 prior to the acquisition was obtained from the previous owner
of these properties and the Company makes no representation as to the
accuracy of such data. Included in such data are 3,273 and 2,330 tons (in
thousands), respectively, produced by lessees in 1993 and in 1994 prior to
the Company's acquisition of Elk Horn.
(5) In the five years ended December 31, 1997, the average sales price per ton
of coal includes per ton costs of approximately $5.88, $5.41, $2.71, $1.97,
$1.98, $1.83 and $1.22, respectively, for the shipment of coal sold to
Taiwan Power Company from the Company's loading facility on the Big Sandy
River until loaded into a vessel at a transloading facility along the
Mississippi River near the Gulf of Mexico.
(6) Average cash cost per ton of coal shipped includes all cash costs of coal
production, transportation of the coal to the loading facility, loading of
the coal into barges, and selling expenses.
(7) Represents average leasing revenue per ton of coal for coal produced by
lessees subsequent to the Company's acquisition of Elk Horn.
(8) Equal to current assets (excluding cash and cash equivalents) less current
liabilities (excluding current portion of long-term debt, current
maturities of capital leases and revolving credit loans).
(9) The Company's outstanding Convertible Preferred Stock was issued in
connection with the Recapitalization. The Convertible Preferred Stock had a
liquidation preference of $13,650 at June 30, 1998, does not pay cash
dividends and no dividends accrue from the date of issuance through
December 2000; beginning in January 2001, dividends will accrue on the then
liquidation preference at an annual rate of 25.25% for a five-year period.
The aggregate amount of dividends which will accumulate from 2001 to 2006
is being recorded evenly from the date of issuance in 1996 through the
redemption date in 2006. The Indenture will not prohibit such mandatory
redemption in 2006. See "Description of Notes--Certain
Covenants--Limitation on Restricted Payments." The Convertible Preferred
Stock is mandatorily redeemable in January 2006 and is redeemable with the
issuance of a note equal to the liquidation preference which equally
amortizes over the 10 years following the redemption at an interest rate
2.25% above the rate on five-year U.S. Treasury obligations. Accumulated
dividends will be payable on the same terms over the same period. The
liquidation preference of the Convertible Preferred Stock, as well as the
amounts owed upon redemption of the Convertible Preferred Stock, are to be
reduced by any tax deficiencies or settlements (including interest and
penalties) paid or payable for all tax periods beginning prior to December
29, 1995. See "Business--Legal Proceedings--IRS Proceedings." The
Convertible Preferred Stock is convertible, at the option of the holder,
into 2,950,000 shares
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<PAGE> 43
of Class I Common Stock. The conversion feature is exercisable from January
2001 until January 2002, and immediately prior to certain fundamental
transactions. See "Description of Capital Stock--Convertible Preferred
Stock."
(10) EBITDA represents operating income plus depreciation, depletion and
amortization. EBITDA is not intended to represent cash flow from operations
as defined by generally accepted accounting principals and should not be
used as an alternative to net income or as an indicator of operating
performance or to cash flows as a measure of liquidity. EBITDA may not be
comparable to other similarly titled measures of other companies. However,
the Company's management believes EBITDA is a meaningful measure of
performance as substantially all of the Company's financing arrangements
contain covenants based on formulations of EBITDA.
(11) Includes capital additions financed through capital lease transactions
amounting to $8,246, $155, $1,287, $7,221, $4,098, $3,229 and $2,081 for
the years ended December 31, 1993 through 1997, and for the six months
ended June 30, 1997 and 1998, respectively.
(12) For the purpose of this calculation, earnings are defined as income (loss)
from continuing operations before income taxes plus fixed charges. Fixed
charges consist of interest expensed or capitalized, amortization of
deferred financing costs and discount, the component of operating lease
expense which management believes represents an appropriate interest factor
and preferred stock dividends.
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<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
Financial Statements included elsewhere herein.
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 Studies, the Company controls the mineral rights to approximately 228
million tons of coal reserves, of which management believes 202 million tons are
owned in fee. In 1997, the Company sold approximately 5.3 million tons of coal,
approximately 66% of which was generated from captive production with the
remainder purchased from other coal mine operators. Approximately 83% of the
tonnage was sold to seven long-term sales contract customers, with most of the
remainder sold to 14 spot market customers. The Company sells primarily to
domestic public utilities, an international government-owned utility and
industrial customers. In addition to its coal sales, the Company leases the
mineral rights on approximately 56 million tons of its reserves to 22 operators
who mined approximately 3.0 million tons in 1997.
Coal sales under long-term sales contracts (contracts with a term longer
than one year) are the primary source of revenues for the Company, accounting
for 81%, 81%, 68%, 64% and 73% of total revenues in the years 1993 through 1997,
respectively. Tonnage under long-term sales contracts was 3.9, 4.4, 4.1, 3.9 and
4.4 million tons in the years 1993 through 1997, respectively. The Company's
strategy has been to secure sales contracts in advance of its planned future
production to enhance the predictability of its sales revenues. Management
believes coal sales prices under long-term sales contracts are typically higher
than spot market prices. Hence, revenues should be greater with a higher
proportion of long-term sales contracts than with spot market sales. Long-term
sales contracts typically have certain provisions for adjustment (usually
quarterly) of coal sales price based on various indexes compiled by U.S.
government agencies. The Company's objective in negotiating contract provisions
is to include in these "escalation clauses" indices which are reflective of the
Company's production costs in order to stabilize profit margins over the life of
the contract. See "Risk Factors--Reliance on Long-Term Sales Contracts." During
the period from 1993 to 1997, contracts for coal shipments of approximately 2.3
million tons per year came up for renewal. New contracts (or contract
extensions) were signed which replaced these expiring contracts for the same
tonnage. In addition, over the same period, the Company entered into a new
long-term sales contract for 0.3 million tons per year (the coal expected to be
delivered under this contract escalates to 0.7 million tons annually by 2002).
The Company's sales contracts are primarily with electric utilities
including Dayton Power & Light, American Electric Power, Taiwan Power Company,
East Kentucky Power Cooperative and others. The Company has had continuous
supply relationships with these customers from four to 18 years. Sales contracts
had a weighted average remaining life of approximately 3.0 years excluding
option periods and approximately 9.3 years including option periods as of June
30, 1998. The contract with Taiwan Power Company expires in 1999, and the
Company expects that it will not be renewed or extended due to the high
transportation cost to Taiwan from the Gulf of Mexico, as compared with other
sources. The Company historically has focused on securing contracts with public
electric utilities and has not pursued contracts with independent power
producers. While the terms of sales contracts with public utilities generally
are shorter than sales contracts with independent power producers, the Company
believes that contracts with public electric utilities are more desirable
because they are less reliant on individual project performance. In the period
from 1993 through 1997, the Company had no bad debt expense from its coal
customers.
Revenues from spot market coal sales (sales agreements with terms of one
year or less) accounted for 10%, 6%, 11%, 20% and 15% of total revenues from the
period of 1993 through 1997, respectively. Revenues for tonnage sold under spot
market agreements were $17,423,000, $11,540,000, $20,591,000, $36,795,000 and
$27,519,000 for the years 1993 through 1997, respectively. Customers in the spot
market include companies with which the Company has maintained long-term sales
contracts, as well as other domestic utilities and industrial consumers of coal
such as Appalachian Power (Rockport and Sporn plants), Alley Cassetty Coal
Company,
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<PAGE> 45
Quincy Soybean, Monsanto Company, Cyprus Coal, Campbell Fuels, Incorporated, Big
Rivers Electric, Cinergy, Dixon Cement, Anheuser Busch, Alabama Electric,
Beelman Truck Co. and Unionvale. The Company has maintained a continuous supply
relationship of over three years with eight of its 14 spot market customers
(exclusive of long-term sales contract customers) in 1997. Spot market sales
agreements typically cover periods from one to three months with tonnages
ranging from 10,000 to 20,000 tons per month.
The Company also generates significant revenues by leasing portions of its
mineral rights to independent coal producers in exchange for revenue-based lease
royalties. During the six month period ended June 30, 1998, the Company had 15
operators who were actively mining on leased coal reserves, including MC Mining,
Inc., Bull Creek Coal Corporation, Locust Grove, Inc., Johns Creek Coal Company,
Maple Ridge Inc., Industrial Fuels Minerals Company, Richardson Fuel, Inc.,
Kris-Coal Mining, Inc., Turner Elkhorn Mining Company, Pike-Letcher Land
Company, Mineral Resources, Inc., and Knott/Floyd Land Company, Inc. Generally,
the lease terms provide the Company with a royalty fee of up to 10% of the sales
price of the coal with a minimum of $1.75 to $2.50 per ton. The length of such
leases 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. Management believes that the structure of these
agreements motivates the lessee to maximize production of the property during
the term of the lease. The Company's credit experience with its lessees has
historically been favorable, with bad debt write-offs for the period from 1995
through 1997 of $27,000, $3,000 and $111,000, respectively. In the period from
1995 through 1997, independent coal producers mined approximately 3.7, 3.4 and
3.0 million tons, respectively, of coal under leases. Leasing contributed an
average of $9.4 million per year in revenues since 1994, and management believes
leasing will continue to generate significant revenues based on existing leases
and indications of future mining activity by these operators.
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. In 1997, costs associated with production, contract
mining fees, coal purchases and upriver loading represented 51%, 7%, 30% and 3%,
respectively, of total cost of coal sales.
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 believes its cost of
production is impacted by the type of mining operations (underground or
surface), overburden ratios at its surface mines, in-seam and out-of-seam
dilution levels at its underground mines, productivity and infrastructure
utilization. Mining operations at Kiah Creek, the Company's principal mining
source, have shifted towards a greater percentage of underground production
since 1993 due to the geology of its reserves. While underground production is
generally more expensive than surface mining due to preparation plant costs,
management believes the quality of coal produced after processing can generally
support a higher price per ton and offset the higher production costs.
In managing production costs, the Company constantly monitors overburden
ratios and in-seam and out-of-seam dilution levels which will impact washed coal
recovery rates at its preparation plant. From 1993 through 1997, the Company
averaged a 13:1 overburden ratio at its surface mines and a 48% washed coal
recovery rate at its preparation plant, with 1996 and 1997 results more
favorable than historical averages. Another important factor is haulage and
transportation costs. Kiah Creek is one large contiguous property which allows
management to plan and build a centralized haulage and reclamation
infrastructure which increases utilization and leverages capital investment.
Truck haulage costs have consistently averaged approximately $3.86 per ton of
coal produced since 1992. Mining productivity as measured by tons mined per
man-hour increased 11.2% and 24.4% at Company-operated surface and underground
mines, respectively, since 1992. Management believes such improvement is due to
increased operating efficiencies and productivity rates through the addition of
underground mining units, increasing preparation plant capacity, long-term
planning and more efficient use of capital equipment. As a result of the
foregoing, the Company's average cash cost per ton of coal shipped (FOB barge)
has declined from $23.96 per ton in 1993 to $23.22 per ton in 1997.
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Expenses related to contract mining fees and coal purchases have
historically varied due to the level of contract mining production, the quantity
and quality of tonnage purchased and spot market coal prices. Contract mining,
as a percentage of total captive production, has averaged approximately 20%
since 1992 and is expected to continue to contribute a significant percentage of
captive production as the Company seeks to enhance its reserve utilization in
mines where seam thickness or location are less attractive for the Company to
mine with its own employees and equipment. Contract mining operations at the
Company's Elk Horn underground mines utilize conventional mining techniques
which results in less production volume and less ash content, eliminating the
need to wash the coal and incur preparation costs. Contract mining fees at all
of the Company's operations have averaged approximately $14.92 per ton from 1993
through 1997. Contract mining fees typically exclude taxes, royalties and
transportation.
Coal purchases accounted for 2.2, 2.3, 1.7, 1.8 and 1.8 million tons in the
periods 1993 through 1997, respectively. The Company utilizes coal purchases
along with its captive production to meet its supply requirements. In general,
the cost of coal purchases follows spot market prices, which have generally
declined since 1993. The Company expects that with the development of Fork Creek
and an associated increase in captive production, the amount of coal purchases
will likely decline in the future.
The Company's cost of sales related to its lease operations consist
primarily of depletion and administrative costs. In 1996 and 1997, the Company
increased the amount of its administrative costs to expand exploration and
testing levels of its Elk Horn coal reserves to refine the geological conditions
and improve target marketing opportunities for securing new leases or expanding
existing leases. Since 1995, the Company has signed 13 new leases covering
approximately 33 million tons of reserves.
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. See
"Consolidated Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- -----------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 89.8 90.4 90.3 90.7 91.4
Selling, general and administrative........... 3.3 3.1 3.4 3.1 2.9
----- ----- ----- ----- -----
Operating income.............................. 6.9 6.5 6.3 6.2 5.7
Interest expense.............................. 5.5 5.0 4.3 4.6 4.6
Other income (expense)........................ 0.9 1.6 3.4 3.0 1.7
----- ----- ----- ----- -----
Income from continuing operations before
income tax provision........................ 2.3 3.1 5.4 4.6 2.8
Income tax provision (benefit)................ 0.6 0.8 1.3 1.4 0.9
----- ----- ----- ----- -----
Net income from continuing operations......... 1.7 2.3 4.1 3.2 1.9
Income (loss) from discontinued operations.... 0.0 (0.8) (0.0) -- --
Extraordinary items, net of taxes............. -- -- -- -- (2.4)
----- ----- ----- ----- -----
Net income.................................... 1.7% 1.5% 4.1% 3.2% (0.5)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Coal sales. Coal sales revenues were $73,430,000 for the six months ended
June 30, 1998 compared to $79,831,000, a decrease of 8.0%. The decrease is
attributable to a decrease in the volume of coal shipped. Coal sales volume was
2,497,000 tons for the first six months of 1998 compared to 2,650,000 tons for
the first six months of 1997, a decrease of 5.8%. The decreased volume is
primarily attributable to a scheduled outage at the
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<PAGE> 47
plant of a long-term sales contract customer. This outage caused this customer
to require fewer tons of the Company's coal. Management believes, based on
information from this customer, that this tonnage shortfall will be offset by
additional coal shipments during the remainder 1998.
Coal Leasing. Coal leasing revenues were $3,367,000 for the six months
ended June 30, 1998 compared to $4,357,000 for the six months ended June 30,
1997, a decrease of 22.7%. Production from the Company's lessees was 1,379,000
tons for the six months ended June 30, 1998 compared to 1,383,000 for the six
months ended June 30, 1997, a decrease of 0.3%. The reduction in revenue is
primarily a result of minimum royalties that were recognized in prior periods,
which are now being recouped by certain lessees as production starts from their
mines.
Other. Other revenues primarily includes revenues from cotton ginning,
cotton warehousing and sales of cottonseed for the six months ended June 30,
1998 and cotton ginning, cotton warehousing, sales of cottonseed, and barge
fleet revenue for the six months ended June 30, 1997. Other revenues were
$2,044,000 for the six months ended June 30, 1998 compared to $4,434,000 for the
six months ended June 30, 1997 a decrease of 53.9%. This decrease is primarily
attributed to $1,254,000 of barge fleet lease revenues for the six months ended
June 30, 1997 which were not earned in the six months ended June 30, 1998 as a
result of the sale of the Company's barge fleet in December 1997. Additionally,
revenue from the sale of cotton and cottonseed for the six months ended June 30,
1998 was down $1,094,000 from the six months ended June 30, 1997, primarily as a
result of timing of the sale of the Company's cottonseed inventory, which was
sold earlier in the year in 1997, based upon signed contracts for the sale of
cottonseed. Management believes a portion of this revenue shortfall will be
offset by revenue generated during the remainder of 1998.
COST OF SALES
Cost of Sales--Coal Sales. Cost of coal sales totaled $68,635,000 for the
six months ended June 30, 1998 compared to $75,643,000 for the six months ended
June 30, 1997, a decrease of 9.3%. This decrease resulted primarily from
decreased volume of coal shipped.
Cost of Sales--Leasing. Cost of coal lease revenues totaled $900,000 for
the six months ended June 30, 1998 compared to $975,000 for the six months ended
June 30, 1997, a decrease of 7.7%.
Cost of Sales--Other. Cost of other revenues were $2,562,000 for the six
months ended June 30, 1998 compared to $3,799,000 for the six months ended June
30, 1997, a decrease of 32.6%. This decrease is primarily attributed to $459,000
of barge fleet depreciation costs for the three months ended June 30, 1997 which
were not earned in the three months ended June 30, 1998 as a result of the sale
of the Company's barge fleet in December 1997. Additionally, the cost of sales
related to cottonseed sales were affected by the revenue decreases.
OTHER
Selling, general and administrative expenses totaled $2,249,000 for the six
months ended June 30, 1998 compared to $2,714,000 for the six months ended June
30, 1997, a decrease of 17.1%. This decrease primarily resulted from reductions
in salaries and wages and legal fees. Selling, general, and administrative
expenses were 2.9% of revenues for the six months ended June 30, 1998 and 3.1%
of revenues for the six months ended June 30, 1997.
As a result of the above, EBITDA totaled $11,703,000 for the six months
ended June 30, 1998 compared to $13,152,000 for the six months ended June 30,
1997, a decrease of 11.0%. This decrease is primarily attributable to reduced
revenue as a result of the sale of the Company's barge fleet. Excluding the
Company's barge fleet, EBITDA was $11,911,000 for the six months ended June 30,
1997.
Interest expense totaled $3,612,000 for the six months ended June 30, 1998
compared to $ 4,116,000 for the six months ended June 30, 1997, a decrease of
12.2%. This is primarily a result of the repayment of debt secured by the
Company's barge fleet, partially offset by the additional interest related to
the issuance of the Senior Notes.
Other income was $521,000 for the six months ended June 30, 1998 compared
to $2,119,000 for the six months ended June 30, 1997, a decrease of 75.4%. Other
income for the six months ended June 30, 1997 was
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<PAGE> 48
related primarily to a gain on the sale of mining equipment. The income for the
six months ended June 30, 1998 was primarily the Company's share of the income
from its one-third partnership interest in IMT.
Income taxes were $721,000 for the six months ended June 30, 1998 compared
to $1,226,000 for the six months ended June 30, 1998, a decrease of 41.2%. The
decrease is a result of lower income in the six months ended June 30, 1998 than
in the six months ended June 30, 1997.
After the extraordinary item related to the extinguishment of debt, the
Company had net loss of $387,000 for the six months ended June 30, 1998 compared
to net income of $2,820,000 for the six months ended June 30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Coal sales. Coal sales revenues were $161,462,000 for the year ended
December 31, 1997 compared to $154,205,000 for the year ended December 31, 1996,
an increase of 4.7%. The increase primarily resulted from increased volume of
coal shipped. Coal sales volume was 5.3 million tons for the year ended December
31, 1997 compared to 5.1 million tons for the year ended December 31, 1996, an
increase of 3.9%. Tons sold under long-term contracts increased from 4.0 million
tons in 1996 to 4.4 million tons in 1997, while revenue on long-term contracts
increased from $30.05 per ton in 1996 to $30.32 per ton in 1997.
Coal leases. Coal lease revenues were $8,235,000 for the year ended
December 31, 1997 compared to $9,348,000 for the year ended December 31, 1996, a
decrease of 11.9%. The decrease primarily resulted from a reduction of 453,000
tons of coal mined by lessees, resulting in lower revenues. While the Company
does not control its lessees' decisions regarding mining coal, management's
experience is that fluctuations in its coal lease revenues is primarily
attributable to factors such as: (i) lower market prices reducing general
production from the area; (ii) permitting delays; (iii) geological
interruptions; and (iv) the changing of ownership of certain leases.
Other. Other revenues, which includes primarily revenues from cotton
ginning and warehousing and sales of cottonseed, were $12,592,000 for the year
ended December 31, 1997 compared to $18,916,000 for the year ended December 31,
1996, a decrease of 33.4%. The decrease primarily resulted from a reduction in
volume due to an excellent cotton crop in 1996 compared to a poor crop in 1997
due to weather. In addition, revenues from Pen Cotton Tennessee contributed some
revenues in 1996 and no revenues in 1997, since the operation was sold in
September 1996.
COST OF SALES
Cost of Sales--Coal sales. Cost of coal sales totaled $150,076,000 for the
year ended December 31, 1997 compared to $144,213,000 for the year ended
December 31, 1996, an increase of 4.1%. The increase primarily resulted from
increased volume of coal shipped. Costs of coal sold decreased from $28.67 per
ton in 1996 to $28.37 per ton in 1997, a decrease of $0.30 per ton, due
primarily to cost reductions from improved operating efficiencies at the Kiah
Creek operation.
Cost of Sales--Coal leases. Cost of coal lease revenues totaled $1,940,000
for the year ended December 31, 1997 compared to $2,313,000 for the year ended
December 31, 1996, a decrease of 16.1%. The decrease primarily resulted from the
reduction in depletion expense due to lower volume of coal mined by lessees.
Cost of Sales--Other. Cost of other revenues totaled $12,654,000 for the
year ended December 31, 1997 compared to $18,437,000 for the year ended December
31, 1996, a decrease of 31.4%. The decrease primarily resulted from the
reduction in volume of cotton ginned due to weather, as well as the sale of Pen
Cotton Tennessee in September 1996.
OTHER
Selling, general and administrative expenses totaled $6,090,000 for the
year ended December 31, 1997 compared to $5,608,000 for the year ended December
31, 1996, an increase of 8.6%. The increase primarily resulted from increased
legal expenses in connection with the case pending in U.S. Tax Court. The
petition filed
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<PAGE> 49
with the U.S. Tax Court by the Company challenges deficiency notices of the IRS
for the years 1982 through 1989. See "Business--Legal Proceedings--IRS
Proceedings."
As a result of the above, EBITDA totaled $26,819,000 for the year ended
December 31, 1997 compared to $26,640,000 for the year ended December 31, 1996,
an increase of 0.7%.
Interest expense totaled $7,906,000 for the year ended December 31, 1997
compared to $9,186,000 for the year ended December 31, 1996, a decrease of
13.9%. The decrease primarily resulted from reduction of the Company's term
debt.
Other income totaled $6,125,000 for the year ended December 31, 1997
compared to $2,884,000 for the year ended December 31, 1996, an increase of
112.4%. The increase primarily resulted from the sale and resulting gains on the
Barge Fleet and excess surface mining equipment.
Income taxes were $2,246,000 for the year ended December 31, 1997 compared
to $1,463,000 for the year ended December 31, 1996, an increase of 53.5%. The
increase is primarily a result of higher earnings in 1997 than 1996.
Loss from discontinued operations totaled $35,000 for the year ended
December 31, 1997 compared to losses of $1,448,000 for the year ended December
31, 1996, a decrease of 97.6%. The decreased loss primarily resulted because
only a small amount of additional loss was accrued in 1997 on operations
discontinued in 1996.
Net income was $7,467,000 for the year ended December 31, 1997 compared to
$2,685,000 for the year ended December 31, 1996, an increase of 178.1%. The
increase primarily resulted from the gain on the sale of the Barge Fleet and
excess surface mining equipment.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Coal sales. Coal sales revenues were $154,205,000 for the year ended
December 31, 1996 compared to $147,169,000 for the year ended December 31, 1995,
an increase of 4.8%. The increase primarily resulted from increased volume of
coal shipped. Coal sales volume was 5.1 million tons for the year ended December
31, 1996 compared to 4.7 million tons for the year ended December 31, 1995, an
increase of 8.5%. Tons sold under long-term contracts remained approximately the
same in 1996 as in 1995. Revenue on long-term contracts decreased from $31.04
per ton in 1995 to $30.05 per ton in 1996, due primarily to the completion in
1995 of a favorable contract and a reduction in price of another contract which
was subject to an annual market price adjustment.
Coal leases. Coal lease revenues were $9,348,000 for the year ended
December 31, 1996 compared to $10,738,000 for the year ended December 31, 1995,
a decrease of 12.9%. The decrease resulted from a reduction of 333,000 tons of
coal mined by lessees, resulting in lower lease revenues. In addition,
recoupment of advance minimum royalties was greater in 1996 than 1995, also
resulting in lowering revenues. While the Company does not control its lessees
decisions regarding mining coal, management's experience is that fluctuations in
its coal lease revenues is primarily attributable to factors such as: (i) lower
market prices reducing general production from the area; (ii) permitting delays;
(iii) geological interruptions; and (iv) the changing of ownership of certain
leases.
Other. Other revenues, which includes primarily revenues from cotton
ginning and warehousing and sales of cottonseed, were $18,916,000 for the year
ended December 31, 1996 compared to $28,136,000 for the year ended December 31,
1995, a decrease of 32.8%. The decrease primarily resulted from the sale of Pen
Cotton Tennessee in September 1996, immediately before the harvest season when
substantially all revenues are typically generated.
COST OF SALES
Cost of Sales--Coal sales. Cost of coal sales totaled $144,213,000 for the
year ended December 31, 1996 compared to $138,104,000 for the year ended
December 31, 1995, an increase of 4.4%. The increase primarily resulted from
increased volume of coal shipped. Costs of coal sold decreased from $29.17 per
ton in 1995 to
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<PAGE> 50
$28.55 per ton in 1996, a decrease of $0.62 per ton, due primarily to cost
reductions from improved operating efficiencies at the Kiah Creek operation.
Cost of Sales--Coal leases. Cost of coal lease revenues totaled $2,313,000
for the year ended December 31, 1996 compared to $2,499,000 for the year ended
December 31, 1995, a decrease of 7.4%. The decrease primarily resulted from the
reduction in depletion expense due to lower volume of coal mined by lessees.
Cost of Sales--Other. Cost of other revenues totaled $18,437,000 for the
year ended December 31, 1996 compared to $26,508,000 for the year ended December
31, 1995, a decrease of 30.4%. The decrease primarily resulted from the sale of
Pen Cotton Tennessee in September 1996, immediately before the harvest season
when substantially all costs are typically generated.
OTHER
Selling, general and administrative expenses totaled $5,608,000 for the
year ended December 31, 1996 compared to $6,092,000 for the year ended December
31, 1995, a decrease of 7.9%. The decrease primarily resulted from downsizing in
the corporate headquarters in connection with discontinuing non-coal businesses
and increased efficiencies in managing the coal business.
As a result of the above, EBITDA totaled $26,640,000 for the year ended
December 31, 1996 compared to $26,815,000 the year ended December 31, 1995, a
decrease of 0.7%.
Interest expense totaled $9,186,000 for the year ended December 31, 1996
compared to $10,340,000 for the year ended December 31, 1995, a decrease of
11.2%. The decrease primarily resulted from reduction of the Company's term
debt.
Other income totaled $2,884,000 for the year ended December 31, 1996
compared to $1,698,000 for the year ended December 31, 1995, an increase of
69.8%. Other income in 1996 was primarily a gain on the sale of Pen Cotton
Tennessee and a reduction of an over-accrual of self-insured employee health
benefits net of a reduction in interest income.
Income taxes were $1,463,000 for the year ended December 31, 1996 compared
to $1,137,000 for the year ended December 31, 1995, an increase of 28.8%. The
increase is primarily a result of higher earnings in 1996 than 1995.
Loss from discontinued operations totaled $1,448,000 for the year ended
December 31, 1996 compared to income of $70,000 for the year ended December 31,
1995, a difference of $1,518,000. The increased loss primarily resulted from the
recognition of future expected operating losses and losses on disposal of Pen
Cotton Alabama and Pen Hardwood.
Net income was $2,685,000 for the year ended December 31, 1996 compared to
$3,131,000 for the year ended December 31, 1995, a decrease of 14.2%. The
decrease primarily resulted from losses recognized on the discontinued
operations which exceeded the increase in net income before discontinued
operations.
INFLATION
Inflation in the United States has not had a significant effect on the
Company's business or operations during recent periods.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Offering, the Company has significant indebtedness and
debt service requirements. As a result of the Offering, the Company has a total
indebtedness including current maturities of $110,087,019 as of June 30, 1998.
Of this amount, $99,222,533 was attributable to the Senior Notes, $4,158,868 was
attributable to the mortgage on the office building which houses the Company's
headquarters and the balance was attributable to leases and purchases of
equipment. The Indenture permits the Company to incur additional indebtedness,
subject to certain limitations. Such limitations will include 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
49
<PAGE> 51
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
addition, the New Credit Facility requires the Company to maintain specified
financial ratios and satisfy certain tests relating to its financial condition.
See "Use of Proceeds," "Capitalization," "Description of Notes--Certain
Covenants" and "Description of New Credit Facility." As of June 30, 1998, the
Company had earnings sufficient to cover fixed charges.
In connection with the Offering, the Company entered into the New Credit
Facility, which provides for aggregate borrowings of up to $40,000,000. Interest
rates on the revolving loans under the New 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 initial grid spread will be 1.75% above LIBOR and
0.75% above Prime Rate. The New 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
New Credit Facility contains certain restrictions and limitations, including
financial covenants that requires the Company to maintain and achieve certain
levels of financial performance and limit the payment of cash dividends and
similar payments. See "Description of New Credit Facility."
The Company's principal liquidity requirements are for debt service
requirements under the Notes, the New Credit Facility 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.
In 1997, the Company made capital expenditures of $7,969,000 (including
$4,098,000 financed through capital leases). The Company's budget for 1998
capital expenditures is approximately $22,000,000 (including $1,600,000 of
capitalized interest), of which $3,963,000 has been spent as of June 30, 1998.
In the budget for 1999, capital expenditures are approximately $40,000,000
(including $4,000,000 of capitalized interest). Of the $62,000,000 of
anticipated capital expenditures for 1998 and 1999 combined, approximately
$39,000,000 relates to the costs for a preparation plant, rail-loading facility,
shaft and slope access to an underground coal mine, certain mining equipment,
and other development of the Fork Creek property which was acquired in November
1997. See "Capital Development Program." The Company expects to fund its
budgeted capital expenditures through a combination of proceeds from the
issuance of the Senior Notes, borrowings or leases from equipment finance
companies, borrowings under the New Credit Facility and cash currently on hand
or generated from operations.
The Company is continually engaged in evaluating potential acquisitions.
The Company expects that funding for future acquisitions may come from a variety
of sources, depending on the size and nature of any such acquisitions. Potential
sources of capital include cash on hand, cash generated from operations,
proceeds from the issuance of the Senior Notes, borrowings under the New Credit
Facility, additional external debt financing (including seller-financing) or
capital leases. There can be no assurance that such additional capital sources
will be available to the Company on terms which the Company finds acceptable, or
at all.
Management periodically reviews the profitability of all of the Company's
assets, including those which are not a part of its core coal operations. The
Company's cotton ginning and warehousing operation in South Carolina has
continued to contribute positive cash flow to the Company, and management
currently has no immediate plans to dispose of the assets that comprise the
operations. If management determines that a sale of this operation would
generate cash in excess of the net present value of estimated future cash flows
from those assets, the Company may consider selling the operation.
Net cash generated by operating activities was $17,502,000 in 1997 compared
to $18,974,000 in 1996. The $1,472,000 decrease in cash flow from operating
activities reflects increased net income offset by gains on sale of certain
equipment and changes in accounts receivable and inventory. The net cash
generated by operating activities of $18,974,000 in 1996 represents a $4,202,000
decrease from the cash generated by operating activities
50
<PAGE> 52
in 1995 of $23,176,000. This decrease in cash flow from operating activities is
attributable to changes in accounts receivable and inventories.
Net cash provided from investing activities was $14,900,000 in 1997
compared to $2,440,000 in 1996. The $12,460,000 decrease is primarily the result
of increased capital expenditures in 1997 of $1,550,000 as well as the purchase
of coal reserves of $5,000,000 offset by increased proceeds from the sale of
barges and equipment of $18,356,000. The net cash provided from investing
activities of $2,440,000 in 1996 was an increase of $3,241,000 over the cash
used in investing activities of $801,000 in 1995. The decrease is primarily the
result of decreased proceeds from the sale of barges and equipment of $4,264,000
and increased capital expenditures of $2,291,000 offset by decreased escrowed
funds of $2,825,000.
Net cash used in financing activities of $28,136,000 in 1997 reflects a
slight increase of $447,000 over $27,689,000 used in 1996. This increase
reflects a decrease in payments to minority shareholders of $12,500,000 offset
by increased net payments on debt and capital leases of $12,931,000. The net
cash used for financing activities of $27,689,000 in 1996 was an $8,280,000
increase over the $19,409,000 used in 1995. This change reflects an increased
net payment on debt and capital leases.
Based upon its current level of operations and anticipated growth, the
Company believes that the cash available currently, along with cash flow from
operations and available borrowings under the New Credit Facility, will be
sufficient to meet its future liquidity needs. However, the Company currently
expects that it may make additional acquisitions and, in connection therewith,
expects to incur additional indebtedness. In the event that the Company incurs
such additional indebtedness, its ability to make principal and interest
payments on its indebtedness, including the Notes, may be adversely affected.
There can be no assurance that the Company's business will generate adequate
cash flow from operations, that anticipated growth and operating improvements
will be realized or that future borrowings will be available under the New
Credit Facility or from any other source in an amount sufficient to enable the
Company to service its indebtedness, including the Notes, or to fund its other
liquidity needs. The Company issued 10,000 shares of Convertible Preferred Stock
with an initial liquidation preference of $13,650,000 in connection with the
Recapitalization. An aggregate amount of dividends on the Convertible Preferred
Stock amounting to $17,233,000 plus the liquidation value of $13,650,000 will be
due in January 2006, if not reduced by certain 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 Common Stock (as defined in "Description of Capital Stock") in
accordance with its terms. See "Description of Capital Stock--Convertible
Preferred Stock."
YEAR 2000
The Company has conducted a review of its computer systems to identify the
systems that could be affected by Year 2000 issues and is implementing its plan
to resolve the issue. Based upon the review of its systems, management believes
that Year 2000 issues will not pose significant operational problems for the
Company's computer systems, nor will the Company incur significant expense that
would not have otherwise been incurred to upgrade systems for operational
reasons. The potential impact on the Company of any Year 2000 problems of its
suppliers and customers is not determinable at this time.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no accounting pronouncements which have not been adopted by the
Company and which are expected to have a material effect on the Company's
financial statements.
51
<PAGE> 53
THE COAL INDUSTRY
OVERVIEW
According to data compiled by the United States Department of Energy
Information Administration ("EIA"), United States coal production in 1997
totaled 1.09 billion tons, a 2.3% increase from the 1.06 billion tons produced
in 1996 and a record high. The increase in 1997 coal production levels was
driven by an increase in coal consumption for electricity generation due to
increased natural gas prices, a significant decline in nuclear-powered
generation, and strong economic growth. Total U.S. coal consumption exceeded 1.0
billion tons in 1997, a 2.1% increase from 1996, and export shipments totaled
approximately 83.5 million tons. Approximately 89.5% of the coal consumed in the
United States is used for the generation of electricity, and coal continues to
be the principal energy source for U.S. electricity generation, with its share
of total electricity generation rising from 50.4% in 1996 to 50.6% in 1997, as
compared with 17.8% from nuclear, 9.5% from hydroelectric and 8.0% from
gas-fired facilities in 1997. In the last three years, coal prices under
long-term sales contracts have generally remained steady; however, spot market
coal prices have experienced greater fluctuation due to seasonal variations in
supply and demand caused by weather. Despite the increased consumption and the
many inefficient mines that have closed in the last 10 years, coal mining
companies with improving productivity have filled the increasing demand without
price increases. Increased competition in the generation of electricity is
forcing utility buyers to purchase coal more selectively. This heightened fiscal
responsibility has led to lower stockpiles, increased spot market activity and
shorter contract terms, which may create greater price volatility than has been
experienced in the past.
Productivity gains and environmental legislation have worked together to
exert pressures on the coal industry. According to statistics compiled by the
Mine Safety and Health Administration ("MSHA"), the number of operating mines
has declined 47.3% from 1987 through 1997, even though production during that
same time has increased 21.1%. During this period, work practice and
technological improvements have allowed overall production per man to increase
by 104.5% while industry employment declined by 40.8%. These productivity gains
and the resulting excess productive capacity in most segments of the industry
have contributed to the stability of coal prices in recent years at levels lower
than in the 1970's and early 1980's. Clean air concerns and legislation have
increased consumption of low-sulfur products mined in Appalachia and the western
United States. Although recently there has been some consolidation of coal
producers in the United States, according to RDI the 10 largest coal producers
in 1997 accounted for only 54% of total domestic coal production, and no company
held a domestic market share of more than 14% in 1997.
According to a recent report by Hill & Associates, the demand for steam
coal and the demand for coal by electric utilities in the United States
generally is expected to increase steadily over the next 13 years. The following
chart highlights the increases projected by Hill & Associates:
U.S. STEAM COAL DEMAND AND ELECTRIC UTILITY COAL DEMAND
(MILLIONS OF TONS)
<TABLE>
<CAPTION>
TOTAL ELECTRIC
MEASUREMENT PERIOD UTILITY COAL TOTAL STEAM
(FISCAL YEAR COVERED) DEMAND COAL DEMAND
<S> <C> <C>
1996 865.3 972.5
1997 893.3 1000.4
1998 922.4 1033.4
1999 961.0 1072.6
2000 1003.5 1121.6
2001 1044.4 1159.5
2006 1142.8 1265.8
2011 1190.7 1314.9
2016 1206.7 1331.6
2021 1223.6 1348.6
</TABLE>
52
<PAGE> 54
COAL TYPES
In general, steam coal is classified by Btu content and sulfur content. In
ascending order of heat values, the four basic types of coal are lignite,
sub-bituminous, bituminous and anthracite.
Lignite coal is a brownish-black coal with a Btu content that generally
ranges from approximately 6,500 to 8,300 Btu per pound. Major lignite operations
are located in Texas, North Dakota, Montana and Louisiana. Lignite coal is used
almost exclusively in power plants located adjacent to such mines because any
transportation costs, coupled with the mining costs, would exceed the price a
customer would pay for such low-Btu coal.
Sub-bituminous coal is a black coal with a Btu content that generally
ranges from approximately 7,800 to 9,500 Btu per pound. Most sub-bituminous
reserves are located in Montana, Wyoming, Colorado, New Mexico, Washington and
Alaska. Sub-bituminous coal is used almost exclusively by electric utilities and
some industrial consumers.
Bituminous coal is a "soft" black coal with a Btu content that generally
ranges from approximately 10,500 to 14,000 Btu per pound. This coal is located
primarily in Appalachia, the Midwest, Colorado and Utah, and is the type most
commonly used for electric power generation in the United States. Bituminous
coal is used for utility and industrial steam purposes, and as a feedstock for
coke, which is used in steel production. All of the Company's reserves are
bituminous coal.
Anthracite coal is a "hard" coal with a Btu content that can be as high as
15,000 Btu per pound. Anthracite deposits are located primarily in the
Appalachian region of Pennsylvania, and are used primarily for industrial and
home heating purposes.
COAL QUALITIES
The primary factors considered in determining the value and marketability
of coal are the Btu content, the sulfur content and the percentage of ash (small
particles of inert material), moisture and volatile matter. The Btu content
provides the basis for satisfying the heating requirements of boilers. Coal
having a lower Btu content frequently must be blended with coal having a higher
Btu content to allow the consumer to utilize the coal efficiently in its
operations. Due to the restrictive environmental regulations regarding sulfur
dioxide emissions, coal is commonly described with reference to its sulfur
content. Coal that emits no more than 1.6 pounds of sulfur dioxide per million
Btu when burned is called low-sulfur coal. Coal that emits no more than 1.2
pounds of sulfur dioxide per million Btu is called compliance coal. Compliance
coal exceeds the current requirements of Phase I of the Clean Air Act Amendments
and meets the prospective requirements of Phase II of the Clean Air Act
Amendments. Since compliance coal exceeds the Phase I requirements, customers
using such coal can either earn sulfur emission credits, which can be sold to
other coal customers, or blend the coal with higher sulfur coal to lower the
overall sulfur emissions without having to install expensive sulfur-reduction
technology (i.e., scrubbers). Very low-sulfur coal (0.8 pounds or less of sulfur
dioxide per million Btu), such as the coal from the Central Appalachian region,
is desirable because utilities can blend it with higher sulfur coal or burn it
by itself to earn sulfur emission credits even under Phase II of the Clean Air
Act Amendments.
The inert nature of ash diminishes the heating value of the coal (i.e., the
higher the percentage of ash, the lower the heating value). For electric
utilities, the percentage of ash is important not only for its effect on heating
value, but also because it affects the amount of combustion by-products.
Electric utilities typically require coal with an ash content ranging from 6% to
15%, depending on individual power plant specifications. The percentage of
moisture is important because the higher the moisture, the lower the heating
value or Btu per pound. In addition, if the percentage of moisture is too high,
customers may experience handling problems with the coal. Moisture concerns are
principally related to coal from the Powder River Basin where the Company does
not operate. Volatility is the percentage of matter which is vaporized in the
combustion process, and is important for electric utilities because power plant
boilers are designed to burn coal having a particular volatility. Most utility
power plants are designed to burn medium- to high-volatility coal.
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<PAGE> 55
COAL REGIONS
The majority of United States coal production is generated from six
regions: Central Appalachia, Southern Appalachia, Northern Appalachia, Illinois
Basin, Rocky Mountain, and Powder River Basin. With the exception of the coal
from the Northern Appalachia region, which generally serves only the
northeastern United States market, coal from each region competes in a national
market. The geographic areas that comprise the six regions and characteristics
of the coal in those regions are as follows:
Central Appalachia consists of southern West Virginia, eastern Kentucky and
Virginia. All of the Company's coal reserves are in this region. The coal in
this region is generally quite low in sulfur (0.7%-1.5% for 12,000 Btu) and high
in Btu content (12,000-13,500 Btu per pound of coal). The majority of this coal
complies with Phase I of the Clean Air Act Amendments and, after the
implementation of Phase II of the Clean Air Act Amendments, this coal is
expected to be in high demand. Central Appalachia sources provide most of the
United States' overseas export coal. According to Hill & Associates, this region
has considerable excess production capacity.
Southern Appalachia, consists of southeastern Kentucky, Tennessee and
Alabama. Coal from this region also has a low sulfur content (0.7%-1.5% for
12,000 Btu), which is generally acceptable for Phase I of the Clean Air Act
Amendments, and a high Btu content (12,000-13,000 Btu per pound of coal). While
productivity is impaired by the region's thin seams, readily accessible
waterways and proximity to southern utility plants help to reduce delivery costs
of coal from this region to utility customers.
Northern Appalachia consists of northern West Virginia, Pennsylvania and
Ohio. The Btu content of this coal is generally high (12,000-13,000 Btu per
pound of coal), with the exception of coal from Ohio. However, the sulfur
content in this coal (1.5%-2.5% for 12,000 Btu) generally does not meet the
Phase I standards of the Clean Air Act Amendments.
The Illinois Basin consists of western Kentucky, Illinois and Indiana. Coal
from this region generally has a moderately low Btu content (10,000-12,000 Btu
per pound of coal) and a high sulfur content (2.5%-3.5% for 12,000 Btu).
Although there are exceptions, generally no unwashed Illinois Basin coal
satisfies the Phase I or Phase II standards of the Clean Air Act Amendments.
Therefore, Illinois Basin coal is primarily blended with low-sulfur coal or
burned in plants equipped with scrubbers.
The Rocky Mountain region consists of Utah and Colorado. The coal in this
region is low in sulfur content (0.4%-0.5% for 12,000 Btu) and has a moderately
high Btu content (10,500-12,300 Btu per pound of coal). This coal complies with
Phase I and Phase II of the Clean Air Act Amendments.
The Powder River Basin consists mainly of Wyoming and parts of Montana.
This coal is very low in sulfur content (0.25% to 0.65% for 12,000 Btu), but
also is low in Btu content (8,000-8,800 Btu per pound of coal) and very high in
moisture content (20%-35%). All of this coal complies with Phase I and Phase II
of the Clean Air Act Amendments, but most utilities cannot burn it without
derating their plants, unless it is blended with higher Btu coal.
MINING METHODS
Coal is mined using either surface or underground methods. The method
utilized depends upon several factors, including the proximity of the target
coal seam to the earth's surface, and the geology of the surrounding area.
Surface techniques generally are employed when a coal seam is within 200 feet of
the earth's surface, and underground techniques are used for deeper seams. In
1997, surface mining accounted for approximately 61.6% of total United States
coal production, with underground mining accounting for the balance of
production. Surface mining generally is less expensive and has a higher
extraction percentage than underground mining, with surface mining typically
resulting in an extraction percentage of 80% to 90%, and underground mining
resulting in an extraction percentage of 50% to 60%, of the total coal from a
particular deposit.
Mountaintop Removal Mining is a surface mining method in which all material
above the coal seam is removed prior to removal of the coal, leaving a level
plateau in place of the hilltop after mining. A more complete
54
<PAGE> 56
recovery of the coal is accomplished through this method; however, its
feasibility depends on the amount of overlying material in relation to the coal
to be removed.
Highwall Mining is a mining system that bores into the face of a coal seam
using a continuous miner and transports coal to the mine opening using cascading
conveyor belts with wheels on a series of cars connected to the continuous
miner. Trench, box, open-pit or contour cuts allow the highwall mining equipment
to be utilized as the primary production machine for projects requiring large
volumes of coal production.
Contour Mining is a surface mining method conducted on coal seams where
mountaintop removal is not feasible because the coal seam is overlain by too
much of the hill to mine economically by mountaintop removal. Mining proceeds
laterally around a hillside, at essentially the same elevation (assuming the
seam is fairly flat), allowing extraction of the exposed coal. The contour cut
in a coal seam also provides a flat surface that can be used to facilitate
highwall mining (discussed above) or the less efficient auger mining (discussed
below). This is a common surface mining method in the steeper slopes of the
Appalachian bituminous coal fields.
Conventional Mining is an underground mining method that utilizes a cutting
machine to cut beneath a coal seam. Such undercuts allow explosive charges to be
set in the coal seam to separate the coal from surrounding materials. Once
separated, the coal is loaded into shuttle cars and removed from the mine.
Surface Mining is essentially a large-scale earth moving operation, with
the overburden being "stripped" away by means of large earth-moving machines.
The coal exposed by stripping is fractured by blasting and is loaded onto haul
trucks or overland conveyors for transportation to processing and loading
facilities. The site is then backfilled with the overburden and otherwise
restored to its approximate original contour and vegetated condition.
Auger Mining is a surface mining method in which miners remain outside of
the mine and a large, corkscrew-like machine (an "auger") bores into the side of
a hill and extracts coal by "twisting" it out. Auger mining generally permits
the extraction of coal to depths of only 300 feet or less.
Room and Pillar Mining is a mining method used in underground mining which
uses either continuous or conventional mining that cuts out a block of coal in
18- to 20-foot wide passages as high as the coal seam. Roof bolters, by
installing conventional or resin grouted rods, stabilize the mine roof prior to
mine advancement. Pillars (typically 50 feet by 50 feet) are left to provide
additional primary roof support.
Longwall Mining is an underground mining method that uses hydraulic jacks,
varying from five feet to 12 feet in height, to support the roof of the mine
while cutting shears extract the coal. Chain belts then move the coal to a
standard underground mine belt system for delivery to the surface. The longwall
machine generally cuts blocks of coal, referred to as longwall panels, that have
a width of approximately 900 feet and a length ranging from 9,000 to 11,000
feet. Longwall machines that cut panels of coal up to 1,200 feet wide and 18,000
feet long are being tested for future use. Longwall mining is a low-cost,
high-output method of underground mining that results in the recovery of
approximately 60% of coal reserves. In addition, longwall mining is a more
productive method of mining coal than room and pillar mining. However, longwall
mining is more capital intensive and requires minimum seam thickness of at least
48 inches and more consistent and larger blocks of coal than room and pillar
mining to be cost effective.
Point Removal Mining is a mining method used in contour mining when the
overburden ratio makes it economically feasible to mine using the mountaintop
removal method.
COAL PREPARATION
Depending on coal quality and customer requirements, it is sometimes
possible to ship raw coal directly from the mine to the customer. Generally, raw
coal from mountaintop removal, contour and point removal surface mines can be
shipped in this manner. If coal is not shipped raw directly to the customer, it
is processed in a preparation plant. Most coal mined by underground mining
methods and some coal mined by surface mining methods must be processed in a
preparation plant. The preparation plant crushes coal, washes it in a liquid
solution, separates it by size, and removes non-coal materials. Processing the
coal in a preparation plant upgrades the quality and heating value of the coal
by removing or reducing sulfur, rock, clay and other ash-producing
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<PAGE> 57
materials, but entails significant expense and results in some loss of coal.
Coal blending or mixing is often performed at a preparation plant or loading
facility to meet the specific combustion and environmental needs of customers.
CUSTOMERS
Over the last 10 years, coal consumption in the United States has generally
experienced steady annual growth, reaching a record level exceeding 1.0 billion
tons in 1997. This steady growth in coal consumption is attributable to similar
growth in the demand for electricity over the same period, as the electricity
generation industry accounts for more than 89% of domestic coal consumption. In
1997, coal-fired electricity generation facilities generated approximately 50.6%
of the nation's electricity, followed by nuclear (17.8%), hydroelectric (9.5%)
and gas-fired (8.0%) utilities. According to Hill & Associates, over the next
several years, electricity usage is expected to increase at an average annual
rate of 2.1%. As demonstrated by the following graph prepared by Hill &
Associates, for the past 47 years coal-fired utilities have generated an
increasing percentage of all electricity generated in the United States and this
trend is expected to continue:
Electricity Generation by Fuel Type
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Coal Gas/Oil Nuclear Hydro
<S> <C> <C> <C> <C>
12/1950 155 79 0 96
185 86 0 100
195 98 0 105
219 118 0 105
239 126 0 107
12/1955 301 132 0 113
339 140 0 122
346 154 0 130
344 160 0 140
378 194 0 138
12/1960 403 206 1 146
422 218 2 152
450 233 2 169
494 254 3 166
526 277 3 177
12/1965 571 287 4 194
613 330 6 195
630 354 8 222
685 408 13 222
706 471 14 250
12/1970 704 557 22 248
713 594 38 266
771 650 54 273
848 655 83 272
828 621 114 301
12/1975 853 589 173 300
944 615 191 284
985 664 251 220
976 670 276 280
1075 633 255 280
12/1980 1162 592 251 276
1203 552 273 261
1192 452 283 309
1259 418 294 332
1342 417 328 321
12/1985 1402 392 384 281
1386 386 414 291
1464 391 455 250
1541 402 527 223
1554 425 529 265
12/1990 1560 381 577 283
1551 375 613 280
1576 353 619 244
1639 359 610 269
1635 382 640 247
12/1995 1653 368 673 296
1736 331 675 332
1876 357 703 304
1925 365 703 304
2000 380 704 304
12/2000 2075 420 704 304
2160 455 704 304
2229 482 705 304
2280 512 705 304
2310 548 704 304
12/2005 2350 570 704 304
2375 590 703 304
2392 615 702 304
2410 635 702 304
2430 655 702 304
12/2010 2450 680 701 304
</TABLE>
Electricity can be generated less expensively using coal than using gas,
oil or geothermal energy. The delivered cost of coal for utilities averaged
$1.20 per million Btu in 1996 compared to $2.57 per million Btu for gas and
$3.00 per million Btu for oil. Although nuclear and hydro energy are less
expensive than coal, no new nuclear plant permits have been issued since 1978,
and many existing plants are near the end of their useful life. Additionally,
the availability of hydro electricity is limited.
Because coal is one of the least expensive and most abundant resources for
the production of electricity, and imports of coal historically have not
exceeded 1% of domestic coal consumption, domestically produced coal is expected
to continue to play a significant role in the production of electricity in the
future. The Company believes that it is well positioned to benefit from
favorable trends in the coal and electric utility industries because
approximately 64.9% of the Company's 1997 shipments were to domestic public
electric utilities.
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<PAGE> 58
The following table (derived from publications of the EIA) presents
five-year domestic coal production by region, and consumption by sector:
<TABLE>
<CAPTION>
FIVE-YEAR COAL PRODUCTION AND CONSUMPTION
-------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN MILLIONS OF TONS)
<S> <C> <C> <C> <C> <C>
Production by Region
Appalachian................................ 409.7 445.4 434.9 451.9 464.7
Interior................................... 167.2 179.9 168.5 172.8 172.3
Western.................................... 368.5 408.3 429.6 439.2 451.6
----- ------- ------- ------- -------
Total................................... 945.4 1,033.6 1,033.0 1,063.9 1,088.6
Consumption by Sector
Utilities.................................. 813.5 817.3 829.0 874.7 898.5
Independent Power Producers................ 17.8 21.3 21.2 22.2 23.5
Coke Plants................................ 31.3 31.7 33.0 31.8 29.4
Other Industrial Plants.................... 74.9 75.2 73.0 70.9 70.4
Residential/Commercial Users............... 6.2 6.0 5.8 6.0 6.0
----- ------- ------- ------- -------
Total................................... 943.7 951.5 962.0 1,005.6 1,027.8
===== ======= ======= ======= =======
</TABLE>
UTILITY DEREGULATION
Since 1935, domestic electric utilities have operated in a regulated
environment, with prices and return on investment being determined by state
utility and power commissions. In April 1996, the FERC established rules
providing for open access to electricity transmission systems, thereby
initiating consumer choice in electricity purchasing and encouraging competition
in the generation of electricity. It is anticipated that the FERC rules will
create a national market for the sale of wholesale electricity where competition
will primarily focus on price. Within the electric utility industry, the
low-cost producers of electricity, located primarily in Kentucky, Tennessee,
Indiana and Ohio, should benefit most due to the increased focus on price.
Competition will likely benefit the coal industry generally because coal is a
relatively low-cost source of electricity generation. Within the coal industry,
companies with customers that are low-cost producers are likely to see the
greatest increase in coal demand. The Company's primary domestic customers are
low-cost electricity producers, located in Kentucky, Ohio, West Virginia and
Indiana.
CLEAN AIR ACT AMENDMENTS
The Clean Air Act Amendments have had, and will continue to have, a
significant effect on the domestic coal industry. Phase I of the Clean Air Act
Amendments, which became effective in 1995, regulates the level of emissions of
sulfur dioxide from power plants and targets the highest sulfur dioxide
emitters. Phase II, which is scheduled to be implemented in 2000, will extend
the restrictions of the Clean Air Act Amendments to most remaining power plants.
The Clean Air Act Amendments do not define allowable emission levels on a per
plant basis, but instead allocate emission allowances to the affected plants and
allow the emission allowances to be traded so that market participants can
fashion more efficient and flexible compliance strategies. The emission
allowance allocations for Phase I were based on 2.5 pounds of sulfur dioxide per
million Btu, and Phase II allocations will be based on 1.2 pounds of sulfur
dioxide per million Btu. See "Business--Government Regulation."
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BUSINESS
OVERVIEW
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 Studies, the Company controls the mineral rights to approximately 228
million tons of coal reserves, of which management believes 202 million tons are
owned in fee. In 1997, the Company sold approximately 5.3 million tons of coal,
approximately 66% of which was generated from captive production with the
remainder purchased from other coal mine operators. In 1997, approximately 83%
of the tonnage was sold to seven long-term sales contract customers, with most
of the remainder sold to 14 spot market customers. The Company sells primarily
to domestic public utilities, an international government-owned utility and
industrial customers. In addition to its coal sales, the Company leases the
mineral rights on approximately 56 million tons of its reserves to 22 operators
who mined approximately 3.0 million tons in 1997. The Company received an
average leasing revenue per ton of coal from its lessees of approximately $2.79
per ton of mined coal in 1997. The Company's coal leases typically have a term
of five years, although some leases are for the life of the respective reserves.
For the twelve months ended June 30, 1998, the Company generated revenues, net
income and EBITDA, both adjusted to represent only business units currently in
operation, of $171.5 million, $4.9 million and $24.4 million, respectively. Cash
provided (used) by operating activities, investing activities and financing
activities for the twelve months ended June 30, 1998, adjusted to represent only
business units currently operating, was $9.7 million, ($9.8) million, and $10.8
million, respectively.
The Company has demonstrated a long-term record of selectively increasing
its reserves through acquisitions and consistently increasing its production
through the development of its reserves. Since 1992, reserves have increased
more than 300%, and captive production has increased at a compound annual rate
of 12.0% to 3.5 million tons in 1997. Beginning in 1987, Pen commenced surface
coal mining production with the purchase of approximately 49 million tons of
compliance and low-sulfur coal reserves located at Kiah Creek. Prior to the
purchase of Kiah Creek, the Company fulfilled its contractual obligations
through coal purchases and limited contract mining. Approximately 84% of the
Company's 1997 coal production was from Kiah Creek, where three underground and
two surface mines were operating. In 1994, the Company acquired approximately
108 million tons of primarily compliance and low-sulfur coal reserves located at
Elk Horn. The Company's strategy for Elk Horn is (i) to lease a significant
portion of the reserves to other mining operators under long-term agreements and
(ii) to produce coal for Company sales from contract mining operations. Annual
lease payments including minimum royalties paid to the Company from Elk Horn
leases have averaged $9.4 million per year since 1994. In November 1997, the
Company acquired approximately 80 million tons of primarily compliance,
low-sulfur, and metallurgical coal reserves located at Fork Creek. The Company
expects to have obtained the necessary permits and completed the infrastructure
at Fork Creek to commence mining operations and to begin coal deliveries by
early 2000. The Fork Creek operations are planned to produce approximately 1.7
million tons annually by 2001. See "Capital Development Program."
The Company's strategy has been to secure sales contracts with customers
accessible from its own loading terminals in advance of planned increases in
production. In each of the last five years, the Company's production has been
fully committed under long-term sales contracts. Management believes that this
strategy provided the Company with greater flexibility in managing mine
development, production levels and reserve life at Kiah Creek and, to a lesser
extent, at Elk Horn. Although production is not scheduled to commence until
early 2000, the Company has already committed to supply from Fork Creek
approximately 500,000 tons in 2000, increasing to approximately 720,000 tons
annually by 2002. The Company's sales contracts and spot market agreements are
primarily with domestic public utilities and industrial customers located in the
upper Ohio River Valley and accessible by river barge transportation from the
Company's terminal on the Big Sandy River, a navigable tributary of the Ohio
River. The Company shipped less than 1% of its tonnage sold in 1997 by rail.
The Company has an integrated production, preparation and loading operation
which management believes enhances control over product quality and consistency,
storage capability and delivery scheduling for its customers. In 1990, the
Company built a modern, heavy media preparation plant at Kiah Creek to clean and
size its underground coal production, which the Company believes: (i) improved
its reputation with customers by increasing the quality and quantity of
marketable compliance and low-sulfur coal production and (ii) positioned
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the Company to be able to bid for more favorably priced sales contracts and spot
market agreements. In addition to production and preparation, all of the coal
loaded at the Company's river terminal is mechanically sampled twice to assure
that the Company's coal meets customer specifications: first upon arrival of
loaded trucks and second as it is loaded into outgoing barges. The Company's
development plans for Fork Creek include construction of an additional
preparation plant and a rail loadout which is expected to extend product control
over new production at Fork Creek and provide the Company an opportunity to
supply new customers in the Northeast and upper Midwest which are primarily
accessible by rail.
The Company utilizes room and pillar mining in its underground mines and
contour and point removal mining at its surface mines, which the Company
believes are the most cost-efficient methods for extracting its reserves given
their geological composition. Although a majority of the Company's production
has shifted toward underground mining, which generally can be more costly due to
preparation costs, the Company's cash production costs at the mine site have
declined from $18.81 per ton in 1993 to $18.31 per ton in 1997. Management
believes that this decline resulted from the Company's ability to improve
productivity from its mines and recovery rates at its preparation plant through
better planning, improvements to its preparation plant and more efficient use of
capital equipment.
Pen Holdings was incorporated under the laws of Tennessee in 1971. Pen
Holdings serves as a holding company for its five active subsidiaries and nine
inactive subsidiaries. The subsidiaries of Pen Holdings, Inc., both direct and
indirect, include: Pen Coal Corporation (coal mining, processing, loading and
sales); The Elk Horn Coal Corporation (coal leasing); Marine Terminals
Incorporated (one-third partner in International Marine Terminals, an ocean
going vessel loading terminal); River Marine Terminals, Inc. (owns the Wayne
County River Terminal); Pen Cotton Company of South Carolina (cotton ginning and
warehousing); Pen Hardwood Company (inactive); Pen Cotton Company (inactive);
Pen Cotton Company of Alabama, Inc. (inactive); Pen Sales Company, Inc.
(inactive); Big River Mining Company (inactive); Pen Trading Company (inactive);
The Elk Horn Corporation (inactive); Buck Coal, Inc. (inactive); and Ram
Processing, Inc. (inactive).
The Company has been in the coal business since 1980, and since December,
1995, following the death of the founder in 1993, the majority of the common
stock has been owned by William E. Beckner, as described below. Mr. Beckner has
been employed by the Company since December 1982. Members of the senior
management team currently own approximately 93.4% of the common stock.
The Company completed the Recapitalization on December 29, 1995. The estate
of the former owner received the following in the Recapitalization: (i)
$12,500,000 in cash, (ii) 100% of the Company's investment in Pen Development of
California, Inc., a real estate development company located in California with a
book value of $3,339,000, and (iii) 10,000 shares of Convertible Preferred Stock
with a redemption value of $13,650,000. The estate of the former owner retained
250,000 shares of the Company's Class I Common Stock (5.6% of the outstanding
common stock at December 31, 1997.) The Recapitalization was accounted for as a
treasury stock transaction and resulted in a carryover of the historical basis
of the Company's assets and liabilities existing prior to the Recapitalization.
Concurrent with the Recapitalization, William E. Beckner acquired 4,040,000
shares of common stock (90.4% of the outstanding common stock at December 31,
1997) from the Company.
Prior to 1983, when the Company entered into its first contract mining
agreement, the Company met sales contract obligations with coal purchased from
other mining operators. At times since its inception, the Company has also
engaged in several agricultural businesses, timber production, operation of a
river barge fleet and real estate development. As of the date hereof, all of
those operations, except for a single cotton ginning and warehousing operation,
have either been sold by the Company or discontinued. Since its inception, the
Company has made three significant acquisitions of coal reserves. In 1987, 1994
and 1997, respectively, the Company acquired the Kiah Creek, Elk Horn and the
Fork Creek reserves. The Company is currently engaged in the mining,
preparation, marketing and leasing of primarily compliance and low-sulfur coal
from mines located in the Central Appalachian region.
The Company's headquarters are located at Center Court Building, Suite 300,
5110 Maryland Way, Brentwood, TN 37027, and its telephone number is (615)
371-7300.
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COMPETITIVE STRENGTHS
From 1993 through 1997, the Company has increased production, total tonnage
sold and total tonnage sold under sales contracts by compound annual rates of
12.0%, 4.5% and 2.9%, respectively, through the acquisition and development of
new and existing operations, the addition of new customers and an increase in
contractual requirements to existing customers. The Company currently operates
two surface mines and three underground mines and contracts production of
certain of its reserves to other operators in one surface mine and six
underground mines. The Company believes that it has been able to achieve these
consistent results due to the following competitive strengths:
Ownership of High Quality Reserves. Based on the Reserve Studies, the
Company's reserve life index (defined as total reserves divided by 1997 total
captive and leased coal production) was in excess of 50 years. Of the Company's
approximately 228 million tons of reserves, management estimates that
approximately 44% are compliance coal, 30% are low-sulfur and 26% are medium
sulfur coal. Management believes that unlike many other coal producers of
similar size, the Company owns in fee a substantial portion (202 tons) of its
reserves, and, as a result, the Company does not pay significant mineral
royalties ($1.6 million in 1997). Ownership in fee of its reserves allows the
Company to significantly improve its operating results and reserve utilization
and provides the flexibility to selectively lease a portion of its reserves to
other operators.
Geographic Concentration of Large Contiguous Reserves. The Company has
completed three significant acquisitions of reserves since 1986, two of which
have consisted of large contiguous tracts concentrated in Central Appalachia, a
region known for high quality, low-sulfur, high Btu coal and cost efficient
river and rail transportation. According to RDI, energy industry economists,
delivered tonnage to domestic electric utilities from the Central Appalachian
region has increased at a compound annual rate of 3.6% since 1991, which has
outpaced the growth in total United States tonnage delivery to domestic electric
utilities during the same period. As a result of its geographic concentration
and large contiguous tracts, the Company has realized economies of scale
including greater utilization of its facilities, manpower and equipment and
enhanced management oversight of its properties.
Strong Reputation as a High Quality Provider of Coal. Management believes
it is recognized as a high quality supplier by its customers as evidenced by (i)
a consistent increase in tonnage under contract; (ii) the extension, renewal or
expansion of existing sales contracts; (iii) the addition of new sales contracts
and spot market agreements with new customers; (iv) consistent compliance with
its contractual obligations for quality and quantity; and (v) timely supply
deliveries. The Company has maintained an average continuous supply relationship
with its current long-term sales contract customers in excess of 8.7 years. As
of June 30, 1998, the Company had six long-term sales contracts with
highly-rated public or government owned utilities, such as The Dayton Power and
Light Company, American Electric Power--Mountaineer Plant, American Electric
Power--Tanner's Creek Plant, Electric Fuels Corporation (a subsidiary of Florida
Progress), East Kentucky Power and Taiwan Power Company. As of June 30, 1998,
the Company also had a long-term sales contract with Vanderbilt University. The
weighted average remaining life of long-term sales contracts was approximately
3.0 years (excluding option periods) and approximately 9.3 years (including
option periods) as of June 30, 1998. For eight of the Company's 14 spot market
customers (exclusive of long-term sales contract customers) in 1997, the Company
has maintained a continuous supply relationship of more than three years.
Significant Recurring Lease Revenue. The acquisition of Elk Horn provided
the Company with a substantial amount of recurring revenue from outstanding
leases with other coal companies. Terms typically include expiration at the
earlier of five years or the remaining life of the reserves, minimum tonnage
requirements per year and payment based on tonnage mined. The Company believes
the location and geological composition of its Elk Horn reserves coupled with
their proximity to the operations of other coal producers make it more
economically attractive to lease such reserves to other coal companies than for
the Company to mine them. Leasing contributed an average of $9.4 million per
year in revenues since 1994, and management believes leasing will continue to
generate significant revenues based on existing leases and indications of future
mining activity by these operators.
Stable Operating Results from Coal Operations. Since 1993, adjusted EBITDA
(adjusted to give effect to the disposition of the Barge Fleet and Pen Cotton
Tennessee) has averaged approximately $24.1 million per year,
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<PAGE> 62
with fluctuations of no greater than 1.8% annually. Such consistency has been
primarily due to the Company's (i) declining cash production costs, (ii) stable
tonnage under sales contracts, (iii) significant recurring revenue from royalty
payments under lease agreements and (iv) tight control of general and
administrative expenses, all of which have generally offset declining revenues
per ton. Over the past five years, the Company's average cash cost per ton of
coal shipped (FOB barge) has declined approximately 3.1% from $23.96 per ton in
1993 to $23.22 per ton in 1997, despite shifting a greater percentage of total
production from surface mines to more costly underground mines. In an attempt to
continually re-evaluate the Company's cash production costs, the Company
annually updates its five year plan including mine and resource development,
equipment replacement requirements, contract production levels and coal
purchases, to manage production and maximize operating results.
Experienced Management with Significant Ownership. The Company has an
experienced senior management team, including William E. Beckner (Chairman,
President and Chief Executive Officer), who has 18 years of experience in the
coal industry and has worked at the Company for the past 15 years; Joseph A.
Davis, Jr. (Senior Vice President of Sales and Marketing), who has 22 years of
experience in the coal industry and has worked at the Company for the past 14
years; Stephen G. Capelli (Senior Vice President of Operations), who has 26
years of experience in the coal industry and has worked at the Company for the
past four years; and Mark A. Oldham (Senior Vice President, Chief Financial
Officer, Treasurer and Secretary), who has 14 years of experience in the coal
industry and at the Company. The management team has a proven record of
developing low-cost operations, maintaining strong customer relationships and
making strategic, opportunistic acquisitions. Mr. Beckner and the other members
of senior management currently own approximately 93.4% of the Company's
outstanding common stock.
BUSINESS STRATEGY
Following the death of the founder in 1993, the Company completed the
Recapitalization in December 1995 whereby William E. Beckner acquired
approximately 94.2% of common stock of the Company. Following the
Recapitalization, senior management adopted a business strategy of focusing on
its coal businesses. As a result, the Company sold most of its cotton businesses
and discontinued its lumber operations in 1996 and sold its barge fleet in 1997.
Proceeds from the sales of these assets were used in part to acquire the Fork
Creek reserves. The Company's strategy is to focus on its coal business,
steadily increase coal reserves and production and improve revenues, operating
results and cash flow by continuing to pursue its existing strategies including:
Acquiring Additional High Quality Reserves and Operations. The Company has
selectively increased its reserves by acquiring high quality coal reserves
primarily located on large contiguous tracts in the Central Appalachian region
and expects to continue increasing its reserves or adding operations through
strategic and opportunistic acquisitions. Historically, ownership of coal
reserves in Central Appalachia has been highly fragmented; hence management
believes there are opportunities to increase its reserves in proximity to
existing properties and selectively increase leasing and production by acquiring
other existing operations. Management believes reserves acquired adjacent to
existing properties can enhance infrastructure utilization and reduce cash
production costs and capital investment requirements.
Increasing Tonnage Under Contract and Expanding the Customer Base. The
Company's strategy is to continually secure sales contracts approximately equal
to or greater than its captive production. Management believes that electric
utilities in general are shifting their contracts toward shorter term periods,
generally three to five years, to limit the impact of price inflation indexes
and more closely align supply with market prices. As a result of this industry
trend toward shorter-term contracts, the number of future bidding opportunities
is expected to increase. Annual production from Kiah Creek is effectively
designated for existing sales contracts. The Company believes, however, that the
development of its Fork Creek reserves and its associated preparation plant and
rail terminal will enhance the Company's ability to secure additional sales
contracts by (i) increasing access to public utilities in the Northeast and
upper Midwest which are primarily served by rail transport; (ii) increasing
access to existing customers; (iii) developing industrial customer prospects for
metallurgical coal sales; and (iv) providing the flexibility of alternatively
shipping by rail or barge from the Company's loading terminals. The Company
plans to produce from Fork Creek approximately 1.7 million tons annually by
2001. The Company is already committed to supply from Fork Creek approximately
500,000 tons in the year 2000, increasing to approximately 720,000 tons annually
by 2002, and continues to bid for additional sales contracts.
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Maximizing Reserve Utilization and Mining Productivity. The Company's
strategy is to apply its extensive planning process to its existing reserves,
including the development of Fork Creek, as well as reserves acquired in the
future to maximize reserve utilization and mining productivity. The Company
utilizes an extensive core sampling and testing program to create its mine
development plans years in advance of actual production. As a result of this
planning process, the Company forecasts anticipated equipment, preparation plant
capacity, permit and regulatory requirements, the level of contract mining and
coal purchases. The Company utilizes continuous mining equipment in underground
mines and contour and point removal methods in surface mines where coal seam
thickness or overburden ratios allow extraction rates to meet profitability
thresholds. Mining productivity, as measured by tons mined per man-hour,
increased 11.2% and 24.4% at Company-operated surface and underground mines,
respectively, since 1992. Management believes such improvement is due to
increased operating efficiencies and productivity rates through the addition of
underground mining units, increased preparation plant capacity, long-term
planning and more efficient use of capital equipment. When seam thickness or
overburden ratios exceed management's thresholds for efficient mining, the
Company will selectively contract production with other mining companies at set
prices per ton on specified reserves to improve reserve utilization. Management
believes that the Company's enhanced reserve utilization and mining productivity
is a result of its extensive planning process, its site-specific mining
techniques and its contract mining production.
RECENT ACQUISITION
In November 1997, the Company completed the Fork Creek acquisition. As a
result of this acquisition, the Company acquired in fee approximately 80 million
tons of compliance, low-sulfur and metallurgical coal reserves located on one
large contiguous property in southern West Virginia. The Company expects to have
obtained the necessary permits and completed the infrastructure at Fork Creek to
commence mining operations and to make coal deliveries in early 2000. A portion
of the net proceeds of the Offering will be utilized to repay indebtedness
incurred in connection with the Fork Creek acquisition and to partially fund
development of this property. See "Use of Proceeds" and "Capital Development
Program."
COAL RESERVES
Existing Reserves. Based on the Reserve Studies, the Company controls the
mineral rights to approximately 228 million tons of coal reserves, of which
management believes 202 million are owned in fee. All of the Company's reserves
are bituminous coal. Of the Company's 228 million tons of reserves, management
estimates that approximately 44% are compliance coal, 30% are low-sulfur coal
and 26% are medium sulfur coal. The Company believes this high percentage of
compliance and low-sulfur coal gives it a competitive advantage in the sale of
coal as more stringent air quality requirements under Phase II of the Clean Air
Act Amendments are implemented.
Reserve estimates are prepared by the Company's engineers and geologists
and are reviewed periodically to reflect data received and developments
affecting the reserves. Accordingly, reserve estimates will change from time to
time in reflection of mining activities, analysis of new engineering and
geological data, acquisition or divestiture of reserve holdings, fluctuations in
coal market prices, modification of mining plans or mining methods and other
factors. The Company engaged Marshall Miller, independent mining and geological
consultants, to audit the Company's estimates of its coal reserves at Kiah Creek
and Elk Horn as of May 1998 and the Company has a reserve study prepared by
Stagg Engineering as of September 1997 for its Fork Creek reserves. The Reserve
Studies include a review of the procedures used by the Company to prepare its
internal reserve estimates for Kiah Creek and Elk Horn and geological assessment
based on data from record searches and from previously recorded resource studies
for Fork Creek, verifying the accuracy of selected property reserve estimates
and retabulating reserve groups according to standard classifications of
reliability. The following table
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summarizes the Company's coal reserves and is based on the information contained
in the indicated Reserve Studies. See Annex B--the Marshall Miller Report and
Annex C--the Stagg Engineering Report.
<TABLE>
<CAPTION>
UNDERGROUND (UG)
REGION OR SURFACE(S) RESERVES(1) ASSIGNED(2) UNASSIGNED(3)
------ ------------- ----------- ----------- -------------
(MILLIONS OF TONS)
<S> <C> <C> <C> <C>
Kiah Creek (West Virginia).... UG 27.7 19.7 8.0
S 26.2 18.1 8.1
Elk Horn (Kentucky)........... UG 86.2 42.2 44.0
S 7.8 5.2 2.6
Fork Creek (West Virginia).... UG 72.9 -- 72.9
S 7.1 -- 7.1
----- ----- -----
227.9 85.2 142.7
===== ===== =====
</TABLE>
- ---------------
(1) Losses for extraction recovery have been factored into reserves. With the
exception of 19.4 million tons of reserves at Kiah Creek which are in the
underground category, losses for wash recovery have not been factored into
reserves.
(2) Assigned reserves represent coal which has been committed by the Company to
operating mine shafts, mining equipment, plant facilities, and all coal
which has been leased by the Company to others.
(3) Unassigned reserves represent coal which has not been committed and which
would require new mine shafts, mining equipment, or plant facilities before
operations could begin in the property.
In addition to the coal reserves listed above, management believes that the
Company has approximately 119 million tons of coal deposits. A "coal deposit" is
a coal bearing body which has been appropriately sampled and assayed in
trenches, outcrops, drilling, and underground workings to support sufficient
tonnage and grade to warrant further exploration-development work. This coal
deposit does not qualify as a commercially viable coal reserve as prescribed by
Commission standards until a final comprehensive evaluation based upon unit cost
per ton, recoverability and other material factors conclude legal and economic
feasibility.
Potential investors should be aware that the Reserve Studies are estimates
based on an evaluation of available data, and actual reserves may vary
substantially from the estimates. Estimated minimum reserves are comprised of
coal that is considered to be merchantable and economically recoverable by using
mining practices and techniques prevalent in the coal industry at the time of
the reserve study and based upon then-current prevailing market prices for coal.
Although the reserves shown in the table above include a variety of qualities of
coal, the Company presently blends coal of different qualities to meet contract
specifications.
Of the Company's total reserves, management believes approximately 202
million tons are owned in fee by the Company (i.e., not leased from a third
party and therefore not subject to a royalty payment). The Company believes that
this high percentage of owned reserves gives it a competitive advantage over
competitors who lease coal reserves from others by reducing the all-in operating
costs to produce coal. The Company leases from third parties mineral rights on
terms of between 10 and 15 years and generally has the right to renew the lease
for a stated period or to maintain the lease in force until the exhaustion of
minable and merchantable coal. These leases provide for royalties to be paid to
the lessor either as a fixed amount per ton or as a percentage of the sales
price, with a bonus or minimum royalties, payable either at the time of the
execution of the lease or in periodic installments. In the period from 1993
through 1997, the Company paid $0.2, $1.5, $1.0, $0.7 and $1.6 million,
respectively, in lease payments to third party mineral and surface owners.
Title examinations are performed by qualified title examiners on properties
owned by the Company. As to properties the Company leases, a limited title
investigation and, to the extent possible, a determination of the precise
boundaries of a property is made in most cases only as a part of the process of
securing a mining permit before commencement of mining operations. Title to
property is verified prior to the time the Company begins mining operations. If
defects in title or boundaries of undeveloped reserves arise in the future, the
Company's control, and right to mine, such reserves could be materially
adversely affected. Most of the Company's leases describe the leased property in
general terms, and these descriptions are usually not based on actual surveys or
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boundaries which are otherwise precisely identified. Because of the short-term
nature of its leases and the expense involved, the Company does not have all
titles to the leases reviewed by qualified title examiners. The Company believes
that its practices of investigating title and determining boundaries to the
properties it owns, leases or otherwise controls are consistent with customary
industry practices and that such practices are adequate to enable it to acquire
the right to mine such properties. Both Kiah Creek and Fork Creek are large
contiguous tracts of land that were owned and primarily undeveloped by the
previous owners. Therefore management believes that the integrity of the title
searches and examinations are less likely to be challenged. Although Elk Horn is
not a contiguous block of reserves, the Company's predecessor, The Elk Horn Coal
Corporation, maintained extensive title records dating to the early 1900's.
Management also believes that this recordation provides some safeguard to its
rights to the mineral from the property.
The extent to which the Company's coal reserves will be mined will depend
upon certain factors over which it has no control, such as future economic
conditions, the price and demand for coal of the quality and type controlled by
the Company, the price and supply of alternative fuels and future mining
practices and regulations.
Acquisition of Additional Reserves. Although the Company does not need to
acquire additional reserves to meet the terms of its existing contracts, the
Company generally attempts to replace the coal reserves that it depletes. The
Company has a current reserve life in excess of 35 years and seeks to maintain
sufficient reserves available to fulfill its contract requirements. The
Company's Kiah Creek and Fork Creek developments represent large contiguous
properties which allow the Company the flexibility to manage long-term mine
development and reclamation with a centralized preparation plant and transport
facilities. The Company's preference is to acquire in fee or lease additional
reserves adjacent to its existing properties to realize greater economies of
scale including greater utilization of its facilities, manpower and equipment
and enhanced management oversight of its properties. In 1995 and 1996, the
Company acquired by lease an aggregate of approximately 25 million tons of
additional reserves contiguous to its then existing Kiah Creek property. To
date, the Company has not experienced any material difficulty in acquiring
sufficient reserves to meet its goals. Since 1987, the Company's total reserves
have increased from approximately 49 million tons to approximately 228 million
currently.
The Company intends to continue expanding its coal reserves by acquiring
reserves that will allow it to: (i) minimize production and delivery costs; (ii)
continue to exploit the Company's experience in and synergies arising from
operating in the Central Appalachian region; and (iii) satisfy the quality
requirements of its existing coal sales contracts. The Company expects that it
will continue to add to its compliance and low-sulfur coal reserves because it
believes these reserves are more likely to yield a premium as environmental
regulations become more stringent.
MINING OPERATIONS
Captive Coal Production. The Company currently conducts mining operations
at four underground mines and two surface mines at its Kiah Creek reserves
located in Wayne, Lincoln and Mingo counties in southern West Virginia and six
underground mines and one surface mine at its Elk Horn reserves located in
Floyd, Johnson, Knott, Letcher, Magoffin, Martin and Pike counties in eastern
Kentucky. Approximately 69% of the Company's 1997 production originated from its
underground mines, and approximately 31% originated from its surface mines. Coal
seam thickness, location and the amount of overburden required to be removed,
among other conditions, are factors utilized by the Company to determine the
appropriate mining method. Over the last five years, the Company has shifted a
greater percentage of its production to underground mines to maximize its
reserve utilization. In 1993, 37% of the Company's production was from
underground mines, compared to 69% in 1997. Contract miners, under the terms of
contract mining agreements with the Company, operate in seven of the underground
mines on the Company's Kiah Creek and Elk Horn reserves. Contract mining has
represented 27%, 11%, 21%, 17% and 22% of the Company's coal production in the
periods 1993 through 1997, respectively.
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The following table presents the Company's total captive coal production
for the previous five years for its regions:
<TABLE>
<CAPTION>
REGION 1993 1994 1995 1996 1997
------ ---- ---- ---- ---- ----
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C>
Kiah Creek (West Virginia.................. 2,224 2,068 2,161 2,746 2,947
Elk Horn (Kentucky)(1)..................... -- 612 896 552 557
----- ----- ----- ----- -----
Total.................................... 2,224 2,680 3,057 3,298 3,504
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes the production of a Company operated mine in Kentucky known as Big
River Mining which produced 330,000 tons and 255,000 tons in 1994 and 1995,
respectively. Excludes production by The Elk Horn Coal Corporation, which
the Company acquired in August 1994. Prior to the Company's purchase of the
Elk Horn reserves, production from Elk Horn was (exclusive of leased
production) 466,000 tons during 1994 and 764,000 tons in 1993.
Kiah Creek. The Company's major mining operations are located at Kiah
Creek. These reserves were purchased by the Company in 1987 for $16.5 million,
and mining operations commenced shortly thereafter with surface mining and,
later, underground mining. This property consists of approximately 45,000 acres
of surface area. In 1995 and 1996, the Company acquired by lease approximately
26 million tons of reserves which are contiguous to Kiah Creek. Management
estimates that the Company owns in fee approximately 29 million tons of reserves
and controls, primarily through leases, an additional approximately 25 million
tons of reserves on this property. Management estimates that the quality of its
production at Kiah Creek has averaged 10 to 14% ash, and 11,500 to 12,500 Btu
per pound, and that its remaining reserves at Kiah Creek are 73% compliance
coal, 17% low-sulfur and 10% medium sulfur.
At Kiah Creek, five underground mining units in four underground mines are
currently operating. The Company operates two underground mining units in its
Mine #3 in the Coalburg seam, one underground mining unit in its Mine #4 in the
5-Block seam and one underground mining unit in its Mine #5 in the 5-Block seam.
In addition, a contract mining company operates one underground mining unit at
the Company's Mine #2 in the Coalburg seam. Each of the Company's underground
mining units generally consists of a remote-controlled continuous mining machine
which removes the coal from the seam, shuttle cars to transport the coal to a
conveyer belt which transports the coal to the surface, a roof bolting machine
which secures the mine roof in an area that has been mined and other related
equipment. Each unit generally employs from 10 underground miners per shift. The
Company generally operates two production shifts and one maintenance shift per
day in its underground mines, which utilize the room and pillar method of
underground mining. Approximately 0.8, 0.9, 1.0, 1.5 and 1.9 million tons of
coal were produced from the Company's Kiah Creek underground mines in the years
from 1993 through 1997, respectively.
The Company also operates one surface mine in the 5-Block seam and one
surface mine in the Coalburg seam at Kiah Creek. The Company expects that it
will be operating from a third surface mine in the 5-Block seam at Kiah Creek
within the next 60 days. The Company utilizes contour and point removal and
mountaintop mining techniques in its surface mining operations. The Company
generally employs 15 persons per shift at each surface mining operation and
currently operates two production shifts per day. A typical surface mine spread
includes two bulldozers, a wheel loader, several trucks and other related
equipment. Approximately 1.4, 1.2, 1.2, 1.3 and 1.1 million tons of coal were
produced from the Company's Kiah Creek surface mines in the years from 1993
through 1997, respectively.
The Company owns and operates a computer-controlled, 600 tons-per-hour
heavy media preparation plant on the Kiah Creek property where the coal from all
of its underground mines on this property and a small percentage of its surface
mined coal is processed. The preparation plant sizes the raw product, then
directs the sized product to one of three circuits: heavy media vessel, heavy
media cyclones or spirals. Each of these circuits utilizes gravity separation to
separate coal from rock and other impurities. This preparation plant also has
the ability to produce stoker coal. The preparation plant has a storage capacity
of approximately 50,000 tons of raw and washed coal and a processing capacity of
approximately four million raw tons per year. This plant processed
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0.8, 0.9, 1.0, 1.5 and 1.9 million tons of clean coal in the years from 1993
through 1997, respectively, and has averaged recovery rates of 46%, 47%, 42%,
54% and 51% in the years 1993 through 1997, respectively. The preparation plant
currently operates 24 hours per day, seven days a week. Management believes that
it could increase the capacity of this preparation plant to 1,000 tons per hour,
if necessary, for $4.8 million, although it has no current plans to do so.
The coal from the Kiah Creek surface mines and from the Kiah Creek
preparation plant is sent by truck via Company roads and state highways
approximately 50 miles to the Company's Wayne County River Terminal located in
West Virginia on the Big Sandy River, a navigable tributary of the Ohio River.
The Company built its Wayne County facility in 1988 at an initial cost of
approximately $3.5 million and has made additional capital expenditures on this
facility of $3.8 million. This river terminal, which is approximately 15 miles
from Huntington, West Virginia, has blending capabilities and a loading capacity
of approximately 6 million tons annually. This terminal provides the Company
with a strategic advantage over competitors who do not own and operate a river
loading facility as it provides the Company with greater control over product
quality and consistency, storage capacity and delivery scheduling. While most
other terminals on the Big Sandy River load coal for third parties, the Company
handles only its own coal and does not provide any third-party loading at this
facility.
The Company delivers coal by barge to its domestic customers along the Ohio
River and Mississippi River, and to its international and Gulf of Mexico
customers through International Marine Terminals, an ocean vessel loading
facility south of New Orleans on the Mississippi River which is one-third owned
by the Company. Either an independent barge operator or the Company's customers
transport the coal after it has been loaded into the river barges. The Company
recently ceased operations at its smaller river terminal in Kentucky located
along the Big Sandy River since all of the Company's barge loading needs can be
more efficiently met at the Company's Wayne County River Terminal.
The Company shipped 3.9, 3.8, 4.1, 4.4 and 4.5 million tons from its
terminals on the Big Sandy River in 1993 through 1997, respectively. According
to the Big Sandy River Committee, an organization of shipping facilities on the
Big Sandy River, including 10 coal loading facilities, the Company shipped more
tonnage than any other operator on this river in 1996 and 1997.
Generally, the Company undertakes and controls all permitting and permit
maintenance under the SMCRA requirements and similar state requirements in West
Virginia for its captive production. The Company's only contract mine site in
West Virginia is underground. The contract miner fulfills the site maintenance
requirements for the SMCRA permits as part of its contract with the Company. The
Company provides surety bonds for these SMCRA permits.
Elk Horn. In 1994, the Company acquired the Elk Horn properties through
its purchase of all of the outstanding capital stock of The Elk Horn Coal
Corporation for $71 million in cash. This acquisition made the Company one of
the largest private owners of coal reserves in Central Appalachia. The Company
produces coal through the use of contract mining companies and leases to other
coal companies the mineral rights to a portion of the coal from its Elk Horn
reserves. See "Business--Coal Leasing." The Company's Elk Horn reserves include
approximately 142,000 non-contiguous surface acres of coal bearing lands in
eastern Kentucky, all of which is owned in fee. Based on the Reserve Studies,
the Elk Horn reserves are estimated to contain more than 94 million tons of
coal.
The Company believes that due to the location and geological composition of
its Elk Horn reserves, it is more economically attractive to either contract
with other mining companies or lease to other coal companies than for the
Company to mine. See "Business--Coal Leases." However, the Company continually
reevaluates its reserves and production to determine whether the Company can
cost-effectively extract coal through its own mining operations. Therefore,
given the appropriate economic and geological factors, the Company could
determine to mine the reserves at Elk Horn itself.
Elk Horn's contract mines include both underground and surface mines.
Because of the reserve's geological composition, Elk Horn's contract underground
miners currently utilize conventional mining techniques which generally result
in less volume and productivity per man hour versus utilizing continuous mining
units. However,
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conventional mining tends to produce coal with less ash content which reduces
the requirement to wash the coal at a preparation plant. As a result, the
Company does not maintain a preparation plant on the Elk Horn reserve.
Under these contract miner arrangements, the Company contracts with
independent mining companies to extract coal in exchange for a predetermined
per-ton fee. Contract mining fees at the Elk Horn operations have averaged
approximately $15.19 per ton from 1995 through 1997. Contract mining fees
typically exclude taxes and royalties. The relationships between the Company and
its contract miners are generally governed by the Company's standard contract
mining agreement (the "Contract Miner Agreement"). The Contract Mining Agreement
is for a term of one year which is automatically renewed from year to year,
although either party may elect not to renew upon 60 days' notice. Several of
the Contract Miner Agreements allow either party to terminate upon 30 days'
notice for virtually any reason. Each Contract Miner Agreement provides that the
independent contractor meet certain minimum daily and monthly production
requirements and minimum coal quality standards. Contractors are given premiums
or charged penalties based on delivered coal quality. The Contract Miner
Agreement is not assignable by the contractor without the express permission of
the Company nor is a significant change in ownership of the contractor
permitted. The Contract Miner Agreement requires the contractor to provide all
of the equipment, manpower and other resources necessary to mine the coal. The
contractor must provide all required insurance coverage to its employees and
liability insurance for its operation. The Contract Miner Agreement provides
that the contractor will hold the Company harmless from any environmental or
health and safety liability incurred by the contractor as a result of its
mining. The Company in conjunction with the contractor, determines the most
efficient mining plan for the coal reserve in order to maximize the use of the
resources.
Similar to its contract mine in West Virginia, the Company generally
undertakes and controls all permitting and permit maintenance under SMCRA
requirements and similar state requirements in Kentucky (including providing the
surety bonds for the SMCRA permits for these contract mine sites). Each contract
miner fulfills the site maintenance requirements for the SMCRA permits as part
of its contract with the Company. All federal Mine Safety Health Act
requirements are also the sole responsibility of the contract miner.
The coal produced for the Company from Elk Horn is transported to the
Company's Wayne County River Terminal on the Big Sandy River for delivery to
customers on the Ohio River and Mississippi River systems and to the Gulf of
Mexico. The Elk Horn reserves are accessible by truck by a four-lane state
highway.
From the date of acquisition in August 1994 through 1997, contract mining
operations at Elk Horn produced 282,000, 641,000, 552,000 and 557,000 tons,
respectively. The average raw coal quality produced by these contract mining
operations has consistently exceeded the Company's sales contract requirements.
In January 1998, a new contract surface mine commenced mining operations which
is expected to increase current contract production.
Fork Creek. In November 1997, the Company acquired a 28,000-acre
contiguous tract located in Kanawha, Boone and Lincoln counties in West
Virginia. Based on the Reserve Studies, Fork Creek contains approximately 80
million tons of coal reserves. The Fork Creek acquisition is consistent with the
Company's strategy to focus its operations on large contiguous properties
located in the Central Appalachia region. The purchase price for this property
was $16 million with $5 million paid in cash at closing and the Fork Creek Note.
The Fork Creek Note will be repaid in full with proceeds from the Offering. See
"Use of Proceeds."
The Fork Creek reserves are a large contiguous tract of mineral reserves
analogous in size to the Kiah Creek reserves. Unlike Kiah Creek, however, the
geological conditions of the Fork Creek reserves have led the Company to plan
primarily underground mining operations to extract the mineral. The Company
intends to develop Fork Creek for its own production while selectively
contracting with other miners where such contracts are commercially attractive.
The Company expects to invest approximately $45 million over the next
several years to develop this property, including the construction of an
upgradable 400 tons per hour coal preparation plant and a 150 car, four hour,
batch weigh, fast feed rail loadout adjacent to a CSX rail line. The Company
anticipates that the construction of the preparation plant and the rail loadout
would take approximately twelve months to complete. A portion of the proceeds of
the Offering is intended to be used to fund a portion of the Fork Creek
development,
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and in particular to fund the construction of the preparation plant and rail
loadout. See "Use of Proceeds" and "Capital Development Program." In addition to
rail transportation, coal from this property may also be cost-effectively
transported by truck to river terminals located on the nearby Kanawha River and
loaded into river barges for shipment along the Ohio River and Mississippi River
systems. The Fork Creek reserves are accessible by truck via a major four-lane
state highway. The Company believes that flexibility in transporting coal by
rail or river barge will provide it with a competitive advantage in increasing
the number of potential customers for coal from this property. All material
permits for road access, the preparation plant, the loadout and the underground
facility are expected to be submitted by January 31, 1999.
Reclamation and Safety. The Company is required under various federal and
state laws to reclaim its mineral properties to their approximate original
contour and vegetation. The Company's reclamation has been recognized with
several awards, including: in 1994 the Governor's Environmental Excellence
award, the highest honor bestowed by the Governor of Kentucky for the best
overall reclamation achieved by a mining operation within Kentucky for that
year, and in both 1994 and 1997 awards presented by the West Virginia Mining and
Reclamation Association in West Virginia. Because the Company's properties are
large contiguous tracts, the Company has the ability to plan and schedule
reclamation over an extended period while continuing to mine the property at
various sites.
The Company is required under various federal and state laws to comply with
certain safety standards. The Company has been consistently recognized for mine
safety. It won the Mountaineer Guardian Award in 1994, 1995 and 1996, which is
based on tonnage mined without a fatality. The Company also received the Holmes
Safety Association Small Surface Mine Award for its Kiah Creek Surface Mine,
which is presented to a surface mine with less than 50 employees for achieving
safety benchmarks. The Company's Wayne County River Terminal also received the
Joseph A. Holmes Safety Award for 1995, 1996 and 1997, which is based on man
hours worked without a fatality.
Coal Leasing. The primary use of the Company's Elk Horn property has
involved the leasing of its mineral rights to independent coal producers in
exchange for revenue-based lease royalties. The Company's strategy has been to
lease attractive coal reserves to reliable coal producers under financially
sound leases. As noted earlier, the Company owns the mineral rights on
approximately 142,000 acres in eastern Kentucky and has approximately 94 million
tons of reserves, which are generally characterized as high-volatility
bituminous with low-sulfur content. The Elk Horn coal reserves are strategically
located in eastern Kentucky, with access to major markets on the CSX rail
system, and by barge via the Big Sandy and Ohio Rivers. Much of these reserves
are adjacent to numerous mining companies' operations. As a result, it often is
cost-effective for such mining companies to continue mining in such areas,
including on reserves leased from the Company for a fee, rather than to cease
mining operations at such locations and redeploy equipment to other locations or
idle or dispose of equipment. All of these factors make the Company's Elk Horn
reserves attractive lease property to independent producers and coal operators.
During the six-month period ended June 30, 1998, the Company had 15
operators who were actively mining on leased coal reserves, including MC Mining,
Inc., Bull Creek Coal Corporation, Locust Grove, Inc., Johns Creek Coal Company,
Maple Ridge Inc., Industrial Fuels Minerals Company, Richardson Fuel, Inc.,
Kris-Coal Mining, Inc., Turner Elkhorn Mining Company, Pike-Letcher Land
Company, Mineral Resources, Inc., and Knott/Floyd Land Company, Inc. Generally,
the lease terms provide the Company with a royalty fee of up to 10% of the sales
price of the coal with a minimum of $1.75 to $2.50 per ton. The length of such
leases generally varies from three to five years with five years being the most
common term. The Company has a limited number of longer term leases which have
terms of 35 years to the exhaustion of the reserve. Under these longer term
leases the royalties range from 4% to 7% of the coal sales price. A minimum
royalty per year is required whether the property is mined or not. Such minimum
royalty can be recouped by the lessee as a credit against royalties owed on
mined coal if there is production within a period of time after the minimum
royalty is paid. This system motivates the lessee to maximize production of the
property during the term of the lease. The Company's credit experience with its
lessees has historically been favorable, with minimal bad debt write-offs for
the period from 1995 through 1997 of $27,000, $3,000 and $111,000, respectively.
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In the period from 1993 through 1997, independent coal producers mined
approximately 3.1, 4.0, 3.7, 3.4 and 3.0 million tons, respectively, of coal
under leases (the information provided prior to the Company's acquisition of the
Elk Horn reserves has been derived from amounts reported by Elk Horn's previous
owner). Management believes that the amount of leased coal mined in 1997
decreased from 1995 and 1996 levels due to (i) lower market prices reducing
general production from the area; (ii) permitting delays; (iii) geological
interruptions; and (iv) the changing of ownership of certain lessees. Leased
coal production for the six months ended June 30, 1998 was 1.4 million tons.
Leasing contributed an average of $9.4 million per year in revenues since 1994
and management believes leasing will continue to generate significant revenues
based on existing leases and indications of future mining activity by these
operators.
The leasing business operates from Prestonsburg, Kentucky with nine
employees. The main activities include new lease development, cubication for
lessee extraction verification, continuing reserve analysis and mapping,
acquisitions and dispositions of properties, lease compliance, environmental
oversight on unleased properties, and related matters.
In recent years, Elk Horn's internal engineering and mapping group has
identified and prioritized the coal reserves which are favorable for
development. Management has proactively sought lessees for these identified
areas. The Company has also leased in response to inquiries about mining
opportunities in specific seams, areas, or boundaries. The Company's objective
is to acquire by purchase or lease properties contiguous to its Elk Horn
properties in order to offer additional lease tracts to coal operators.
COAL TRANSPORTATION
The Company's coal is transported to its customers primarily by barges
loaded at the Company's river terminal on the Big Sandy River and, to a much
lesser extent, by truck and rail. The Company shipped less than 1% of its
tonnage sold by rail in 1997, although the Company intends to construct a rail
loadout facility at Fork Creek. See "Use of Proceeds" and "Capital Development
Program."
Depending on the proximity of the customer and the transportation available
for delivering coal to that customer, the customer's transportation costs can
significantly increase the total delivered cost. According to information from
RDI, the transportation costs incurred by all other producers of coal who ship
to the Company's long-term domestic sales contract customers range from 22% to
50% of the total cost of the customer's coal. The Company generally pays truck
charges to deliver coal from its preparation plant or mine site to its Wayne
County River Terminal and incurs costs to load it onto a barge. Customers
typically pay the transportation costs from the barge to the customer's ultimate
destination of delivery. The average annual per ton cost incurred by the Company
for transporting its coal from the preparation plant or mine site to its river
terminals during the period from 1993 through 1997 was $3.86. For the Company's
export customers, the Company incurs additional charges related to the
transloading from river barges to ocean-going vessels. The availability and cost
of transportation constitute important factors for the marketability of coal.
The Company currently contracts with 12 non-union independent trucking
companies to haul its coal from the mine site or preparation plant to the Wayne
County River Terminal. These hauling arrangements typically consist of a term of
three years and are based on a fixed fee per ton. The Company believes it can
replace, if necessary, any of its independent trucking relationships with other
independent trucking companies upon relatively short notice.
COAL MARKETING AND SALES
The Company employs eight people in its sales and marketing department.
Such personnel's responsibilities include the development of new sales
agreements, the preparation of bids for new and renewal agreements, maintaining
relationships with existing and potential customers, monitoring compliance and
administration of existing sales agreements, including the quality of the coal
delivered, coal purchases and coordinating and assisting with the transportation
requirements needed for coal delivery. The Company anticipates hiring an
additional sales person to assist with the sales and marketing of the Fork Creek
reserves. The Company's marketing personnel have extensive experience and good
customer relations in the coal industry. These strengths allow the Company to
make long-term sales commitments which are consistent with the Company's
strategy of selling its coal well in advance of production.
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LONG-TERM COAL SALES CONTRACTS
Long-term coal sales contracts are for terms of more than one year. The
Company's long-term sales contracts are primarily with electric utilities, with
a weighted average remaining life of approximately 3.3 years excluding option
periods and approximately 9.6 years including option periods as of December 31,
1997. The Company historically has focused on securing contracts with public
electric utilities and has not pursued contracts with independent power
producers. While the terms of sales contracts with public utilities generally
are shorter than sales contracts with independent power producers, the Company
believes that contracts with public electric utilities are more desirable
because they are less reliant on individual project performance. In the period
from 1993 through 1997, the Company had no bad debt expense from its coal
customers.
The Company's long-term sales contracts have accounted for an average of
approximately 85% of the Company's coal sales revenues for the period 1993
through 1997. Over the same period, approximately 2.3 million tons of annual
coal shipments covered by sales contracts were up for renewal, and sales
contracts for all of this coal were rolled over into new sales contracts upon
their expiration. In addition, over the same period, the Company entered into a
new long-term sales contract for 0.3 million tons per year (the coal delivered
under this contract escalates to 0.7 million tons of annually by the year 2002).
The Company believes that customers enter into such long-term sales contracts
principally to secure a reliable source of coal at predictable prices. The
Company enters into such contracts to obtain the stable sources of revenues
required to support the large expenditures needed to open, expand and maintain
the mines servicing such contracts.
The Company's long-term contract with Taiwan Power Company accounted for
56%, 58%, 36%, 23% and 25% of the Company's coal sales revenues from 1993
through 1997, respectively. The contract with Taiwan Power expires in 1999, and
the Company expects that it will not be renewed or extended due to the high
transportation cost to Taiwan from the Gulf of Mexico, as compared with other
sources. The Company's long-term sales contract with Dayton Power & Light
accounted for 15%, 15%, 23%, 21% and 24% of the Company's coal sales revenues
from 1993 through 1997, respectively. The Company's long-term sales contract
with American Electric Power-Mountaineer accounted for 8%, 9%, 15%, 18% and 17%
of the Company's coal sales revenues from 1993 through 1997. No other contract
accounted for more than 10% of 1997 coal sales revenues. The Company continually
bids on new contracts to replace existing contracts in order to align supply
requirements with its anticipated production levels. There can be no assurance,
however, that the Company will be able to secure additional contracts to replace
any expiring contract or to replace such contract on terms favorable to the
Company. As a result, the loss of these or other of its sales contracts could
have a material adverse effect on the Company's financial condition and results
of operations.
The following table sets forth information regarding the remaining contract
tonnage, the contract expiration date, the estimated future average base price
per ton and the estimated future revenue of the Company's existing sales
contracts:
<TABLE>
<CAPTION>
CONTRACT TOTAL REMAINING ESTIMATED FUTURE
EXPIRATION DATE CONTRACT TONNAGE(1) AVERAGE BASE PRICE(2)
------------------- ------------------- ---------------------
YEARS OF MINIMUM MAXIMUM
CONTINUOUS WITHOUT WITH WITH WITH WITHOUT WITH
CUSTOMER(3) SERVICE OPTIONS OPTIONS 1997 TONNAGE OPTIONS OPTIONS OPTIONS OPTIONS
----------- ------- ------- ------- ------------ ------- ------- ------- -------
(IN THOUSANDS) ($ PER TON FOB BARGE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AEP-Mountaineer........ 9 12/31/00 12/31/03 854 5,112 6,840 $33.00 $30.00
AEP-Tanners Creek(4)... 2 12/31/02 12/31/07 -- 4,500 7,440 28.85 28.66
EFC-Florida Power...... 8 07/31/01 07/31/04 431 2,336 2,894 29.00 29.00
East Kentucky Power.... 9 12/31/98 12/31/02 127 1,500 2,100 28.50 28.50
Dayton Power & Light... 7 06/30/00 06/30/10 1,502 16,975 20,625 25.91 27.00
Taiwan Power Company... 18 12/31/99 12/31/99 1,144 2,183 2,668 25.50 25.50
Vanderbilt
University........... 8 06/30/99 06/30/99 70 55 80 34.00 34.00
</TABLE>
- ---------------
(1) Remaining contract tonnage amounts have been calculated assuming exercise by
customers of all possible options to extend the applicable contracts to
their maximum possible terms. "Minimum" and "Maximum" refer to tonnages that
could be shipped pursuant to such fully-extended contracts.
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(2) Estimated future average base price is the average of the base price of the
contract over its remaining life with options, assuming that coal will be
delivered in accordance with the contract terms and utilizing assumed market
prices for option periods. Base price is the stated contract price for the
quality of coal specified in the contract after adjustments, if any, for
fixed and determinable contract price increases. The majority of the
Company's contracts provide for limited adjustments based on unforeseen
changes of law, including tax and environmental and safety legislation. The
actual price received for coal shipped will vary from the estimated future
average base price due to variances in these other adjustments and
adjustments to the base price for the quality of coal actually shipped.
Assumptions as to future market prices, while presented with numerical
specificity and considered reasonable by the Company as of the date hereof,
are inherently subject to significant business, economic, competitive and
regulatory uncertainties and contingencies, many of which are beyond the
control of the Company. See "Risk Factors--Reliance on Long-Term Sales
Contracts."
(3) A contract with Kentucky Utilities expired on March 31, 1998. The Company
submitted a bid in May 1998 for a new contract with Kentucky Utilities. In
1997 the Company shipped 289,000 tons of coal under that contract. At time
of the expiration of the contract, the Company had a continuous supply
relationship with Kentucky Utilities of approximately 8 years.
(4) Shipment of coal to this customer under a sales contract commenced in
January 1998. Prior to shipment under this contract, the Company had
continually served this customer for two years, with spot shipments.
BENEFITS OF SALES CONTRACTS TO CUSTOMERS
The Company's long-term coal sales contracts specify Btu, sulfur, ash,
moisture, volatility and other qualities. The Company believes that customers
generally enter into long-term sales contracts to assure themselves of a supply
of coal at a predetermined price, thereby obtaining some protection from market
price fluctuation and establishing a dependable supply source. Typical contracts
between the Company and its customers contain provisions that (i) give the
customer various options to increase or decrease quantities of coal to be
delivered under the contract, within stated limitations, (ii) advance or delay
the delivery schedules to a specified extent, (iii) modify or terminate
contracts under certain circumstances, and (iv) call for adjustments in the
purchase price of coal based, in most cases, upon industry-wide or
macro-economic factors (although changes in these may not reflect actual changes
in the Company's costs), and in some cases, as to certain cost components, upon
specific costs incurred by the Company.
The contracts also provide that the customers have a right to terminate
their purchase obligations if applicable environmental standards would prohibit
the burning of the coal to be purchased. In addition, the contracts provide for
suspension of deliveries upon the occurrence of certain force majeure events
(i.e., events outside the control of the parties) as defined in the contracts.
Moreover, certain of the contracts require that the coal to be delivered be
mined and shipped only from approved sites or specific seams, which approval has
been secured with respect to areas mined to date. If the coal supplied is not
timely delivered or fails to meet the contract's specifications, the contract
may allow the customer to suspend its acceptance of deliveries until the Company
furnishes reasonable assurances that the deficiency will be corrected. If
corrections are not made within a specified period, the customer may terminate
its contract. The Company has been able to meet its contractual obligations
under its coal sales contracts in all material respects. The discussion of the
coal sales contracts is qualified in its entirety by reference to the actual
coal sales contracts.
The terms of long-term sales contracts result from applicable bidding
procedures and extensive negotiations with customers. Consequently, the terms of
such contracts typically vary significantly in many respects, including price
adjustment features, price reopener terms, coal quality requirements, quantity
parameters, flexibility and adjustment mechanics, permitted sources of supply,
treatment of environmental constraints, options to extend, and force majeure,
termination and assignment provisions. Management believes electric utilities in
general are shifting their contracts towards shorter term periods, generally
three to five years, to avoid price inflation indexes and more closely align
supply with market prices, and are increasing their spot market purchases to
meet variable electricity generation as they prepare for greater competition in
a deregulated environment.
Virtually all of the Company's sales contracts are subject to price
adjustment provisions which permit an increase or decrease at specified times in
the contract price to reflect changes in certain price indices or other economic
indices, taxes and other governmental charges. Currently, only the Taiwan Power
sales contract
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contains an annual price reopener provision which provides for the contract
price to be adjusted upward or downward on the basis of certain market factors.
Contract prices are generally higher than the price at which a customer could
acquire and take delivery of coal of similar quality in the spot market.
The Company has not had any material contract disputes with its long-term
sales contract customers in the last five years. The Company may in the future
be involved in contract disputes relating to, among other things, coal quality,
pricing and quantity. While material customer disputes, if unresolved, could
result in the termination or cancellation of the applicable contract, the
Company believes that curative and/or dispute resolution measures decrease the
likelihood of termination or cancellation. In addition, the Company's
development of long-term business relationships with many of its customers has
generally permitted it to resolve business disputes in a mutually acceptable
manner. Nevertheless, the Company may, from time to time, be involved in
arbitration or other legal proceedings regarding its sales contracts, and there
can be no assurance that any such future disputes will be resolved in a mutually
satisfactory manner.
Operating profit margins realized by the Company under its sales contracts
vary from contract to contract and depend upon a variety of factors, including,
without limitation, price adjustment provisions and the Company's production and
transportation costs. Termination or suspension of deliveries under a
high-priced contract could have a material adverse effect on earnings and
operating cash flow disproportionate to the percentage of production represented
by the tonnage delivered under contract.
OTHER
International Marine Terminals. The Company has a one-third partnership
interest in International Marine Terminals ("IMT"). IMT owns and operates an
ocean marine loading facility located in Louisiana south of New Orleans along
the Mississippi River. IMT (i) transloads coal from river barges into gulf
barges or ocean going vessels to Gulf Coast coal customers and international
markets; (ii) transloads pet coke for domestic producers (or their sales
brokers); and (iii) provides transloading services for the U.S. steel industry
with imported iron ore and other ferro alloys. The Company believes that IMT
handles approximately 40% to 50% of the export coal trade through the port of
New Orleans, or 4,000,000 to 5,000,000 tons per year.
IMT is dependent on U.S. coal producers' ability to compete in the world
coal market and the strength of the U.S. steel industry. The freight rates of
the carriers who serve IMT (barge and ocean), along with the railroad rates to
the east coast and Gulf Coast ports, are completely independent of IMT; the
relative level of these different freight rates can have a substantial impact on
IMT's annual volume.
Due to the excess coal transfer capacity in the Gulf of Mexico region,
prices over the last five years have been competitive. IMT currently receives
approximately $2.10 per ton for ground storage coal. IMT averages approximately
$1.85 per ton of coal moved, both directly to the vessel from a barge and out of
ground storage. IMT receipts averaged approximately $1.30 per ton for iron ore
and other bulk commodity transfers. During the period from 1993 through 1997,
the Company's share of net income (loss) earned from IMT was ($272,000),
($201,000), $150,000, ($111,000) and ($167,000), respectively, and the Company's
share of cash distributions received from IMT was $1,500,000, $1,200,000,
$600,000, $200,000 and $300,000, respectively.
Long-term investments on the Company's balance sheet at December 31, 1997
include zero coupon U.S. Treasury bonds with a book value totaling $13.3 million
held in escrow in connection with the Company's purchase of its interest in IMT.
Such bonds will accrete to satisfy the Company's portion of IMT's debt
(approximately $7.7 million) due 2000 and bonds (approximately $13.3 million)
due 2006. The Company also has agreed to fund its portion of IMT's expenses.
Cotton. The Company has one cotton ginning and warehousing business in
South Carolina which accounted for approximately 6% of the Company's 1997
revenues. In 1996, the Company sold Pen Cotton Tennessee, its Tennessee cotton
operations, and closed Pen Cotton Company of Alabama, Inc., its Alabama cotton
merchandising activity. Approximately 23,000 bales of cotton were ginned in
1997, compared with approximately 30,000 bales in 1996. The Company receives
fees for its services for ginning and warehousing. In 1997, revenues from this
operation were $10.3 million. The South Carolina cotton operation revenues as a
percentage of total revenues and EBITDA as a percentage of total EBITDA as
reflected in the Supplemental Historical Unaudited and Pro Forma Adjusted
Financial Data for the period from 1993 through 1997 were 1.4%, 4.7%, 7.8%, 8.3%
and 5.7%, respectively and (0.4%), 1.0%, 0.7%, 3.0% and 1.7%, respectively. The
Company
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<PAGE> 74
also typically purchases cottonseed from the farmer at the time of ginning. The
seed is then sold to a local oil mill who produces cottonseed oil or, more
commonly, is sold into the dairy cattle market where the seed is used as a feed.
Consistent with the Company's strategy to focus on its core business, the
Company, may, given the right market conditions, choose to sell its remaining
cotton operations.
ADMINISTRATIVE OFFICES AND EQUIPMENT
The Company maintains administrative offices in Brentwood (located near
Nashville), Tennessee, Kenova Dunlow, and Alum, West Virginia and Prestonsburg,
Kentucky. In addition, the Company currently leases some of the equipment used
in its mining operations, such as bulldozers, graders, rock trucks, loaders,
continuous miners, and shuttle cars. In the Company's opinion, its offices and
equipment are adequate and suitable for its current operations.
LEGAL PROCEEDINGS
IRS Proceedings. In 1995, following years of discussions and proceedings
with the Internal Revenue Service ("IRS"), the Company received deficiency
notices from the IRS seeking additional taxes of approximately $30 million
(exclusive of interest) and penalties of approximately $6 million for the years
1982 through 1989. In 1995, the Company filed petitions in the U.S. Tax Court
(the "Tax Court") challenging the IRS deficiency notices in litigation, which is
ongoing. After pretrial discussions between the Company's counsel and the IRS
trial attorney, the Company and the IRS have resolved most of the issues. As a
result, the Company paid additional tax of approximately $140,000 (exclusive of
interest), and the IRS conceded tax of approximately $14,860,000 and penalties
of approximately $4,000,000. Accordingly, the remaining asserted tax deficiency
is approximately $15 million and the remaining asserted penalties are
approximately $2 million. The primary remaining issue in dispute is the
deductibility of an aggregate of approximately $36 million in payments made by
the Company as commissions in connection with certain expired coal contracts
with Taiwan Power Company. The IRS has advanced three theories for disallowing
the deductions for these payments: (i) the payments were not ordinary and
necessary business expenses and the amount of the payments was unreasonable;
(ii) some or all of the payments were foreign lobbying expenses; and (iii) some
or all of the payments were illegal payments to foreign officials. The IRS
recently conceded that the payments were not unreasonable in amount and also
informed the Company that the IRS would not pursue its claim that the payments
were illegal payments to foreign officials. Management believes that all of
these payments were properly deducted in the years in question. Accordingly, the
Company intends to defend vigorously its position including, if necessary,
continuing to litigate the issue. The Company's counsel and the IRS counsel
continue to discuss the commissions issue. However, in the event that the
Company and the IRS fail to reach a pretrial resolution of the commissions
issue, the Tax Court trial would occur, at the earliest, in late 1999, and
management believes that the Tax Court would likely not render a decision before
2000. While it is impossible to predict the final disposition of the Tax Court
litigation, management believes that the Company should prevail. However, there
can be no assurance that the Company will prevail in the Tax Court litigation.
The IRS also is currently examining the Company's federal tax returns for
the years 1990 through 1993. The Company has received various preliminary
notices of proposed adjustments from the IRS proposing substantial adjustments
to taxable income reported on the Company's income tax returns for these years.
These preliminary notices have not been finalized, and management believes it is
likely that certain of these proposed adjustments will be eliminated or
substantially reduced prior to the completion of the examination and the
issuance of the revenue agent's examination report. The IRS has raised a variety
of issues including the deductibility in these years of the commissions relating
to the coal contracts referenced above, the Company's substantiation for certain
deductions taken during this period, and unrecognized income and gain from
certain transactions during this period. The Company is continuing to meet with
the IRS to discuss these issues in an attempt to resolve them. Given the early
stage of this examination, and the number and complexity of the administrative
and judicial proceedings involved in reaching a resolution, management believes
it is unlikely that the ultimate outcome will be determined for several years.
Additionally, since the IRS has not yet issued its examination report,
management does not know what issues the IRS will pursue and is unable to
estimate the likely outcome for these years.
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<PAGE> 75
Management believes that the Company has provided sufficient reserves with
respect to the amounts at issue. In addition, the terms of the Convertible
Preferred Stock provide that the amount of liquidation preference and any
accumulated but unpaid dividends shall be reduced by any tax deficiencies or
settlements (including penalties and interest) paid or payable for all periods
beginning prior to December 29, 1995. Accordingly, management believes that the
likely outcome of these matters should not have a material adverse effect on the
Company's financial condition or results of operations. However, there can be no
assurance that the Company will prevail in these matters. If the Company were
required to pay a significant portion of the deficiencies determined for 1982
through 1989 with related interest and penalties and any amounts that may be
assessed for 1990 through 1993, any such payment could have a material adverse
effect on the Company's financial condition.
Cheyenne Litigation. On July 31, 1997, Cheyenne Resources Inc. and its
wholly owned subsidiary, PC&H Construction, Inc., (collectively, "Cheyenne")
brought suit against Elk Horn Coal in Circuit Court for Floyd County Kentucky
(the "Floyd Circuit Court"). Cheyenne's complaint alleged breach of contract and
fraud relating to a coal lease originally entered into in 1990, prior to the
Company's purchase of Elk Horn Coal (the "Cheyenne Lease").
On September 22, 1998, a Floyd Circuit Court jury found in favor of
Cheyenne on the breach of contract and fraud in the inducement claims. Elk Horn
has already appealed the verdict on liability. On September 24, 1998, Cheyenne
first elected its remedies and specified that as relief it sought over $18
million in compensatory damages and punitive damages. On October 1, 1998, the
jury awarded damages in favor of Cheyenne of $4.5 million attributable to the
fraud claim and $5.0 million attributable to the breach of contract claim. No
punitive damages were awarded.
A judgment has been entered that is final and appealable and Elk Horn Coal
is required to post a supersedeas bond in order to pursue its appeal. Elk Horn
Coal's litigation counsel and management believe that there are numerous
meritorious grounds for reversal and/or modification of these verdicts on appeal
on the issue of liability as well as the issue of damages.
Reliance Surety Company has agreed to issue the supersedeas bond for Elk
Horn Coal in the amount of $12,000,000. In order for Reliance to issue the
supersedeas bond, Elk Horn Coal was required to provide a $4,000,000 stand-by
letter of credit as collateral.
The Company cannot determine at this time whether the resolution of this
matter will have a material adverse impact on the Company's financial position
or its results of operations.
Other. Additionally, in the ordinary course of its business, the Company
is also involved in certain other pending or threatened legal proceedings. The
Company believes that none of such proceedings of which it currently is aware
will have a material adverse effect on the financial position or results of
operations of the Company.
GOVERNMENT REGULATION
The Company is subject to regulation pursuant to a variety of
environmental, health and safety laws, including SMCRA, the Federal Coal Mine
Health and Safety Act, the Black Lung Benefits Revenue Act, the Coal Industry
Retiree Health Benefit Act, the Resource Conservation and Recovery Act, the
Clean Air Act, the Clean Air Act Amendments and the Federal Water Pollution
Control Act which govern, among other things, air emissions, discharges to
surface and ground water, waste storage, treatment and disposal, and remediation
of releases of hazardous materials. These laws require governmental approval of
many aspects of coal mining operations, including reclamation of mined areas.
The Company believes that it has all material permits required to conduct its
present mining operations and that it is in material compliance with them as
well as other applicable environmental, health and safety requirements.
As of December 31, 1997, the Company had accrued approximately $3.28
million for estimated reclamation liabilities. Except for the reclamation costs,
amounts spent by the Company in 1997 for environmental matters were not material
and are not expected to be material in 1998 or 1999. However, there can be no
assurance that new information, new laws and regulations or increased
enforcement of existing requirements will not require significant additional
expenditures, or that compliance with any such laws and regulations will not
have a material adverse effect on the Company's financial condition and or
operations.
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<PAGE> 76
The remainder of the "Government Regulation" Section provides a brief
description of the material terms of several of the laws discussed above. These
descriptions do not address every material aspect or possible impact of the
applicable law or regulation.
Federal Coal Mine Safety and Health Act. The federal Coal Mine Health and
Safety Act was adopted in 1969. The federal Safety and Health Act of 1977
brought significant expansion to the enforcement of health and safety standards.
The federal Mine Safety and Health Administration monitors compliance with the
law's comprehensive regulation of mining operations, including training of mine
personnel, mining procedures, blasting and mining equipment, as well as other
matters. The states in which the Company operates have programs for mine safety
and health regulation and enforcement. Together with the federal requirements,
these programs provide extensive and comprehensive requirements for the
protection of employee safety and health.
The Black Lung Benefits Revenue Act of 1977 The Black Lung Benefits
Revenue Act of 1977 requires each coal mine operator to secure payment of
federal and state black lung benefits to its employees through insurance, bonds,
qualified self-insurance or contributions to a state-controlled fund. This Act
also establishes a trust fund for the payment of benefits and medical expenses
to employees who cannot receive these benefits from their employer. The trust
fund is financed by a tax on coal sales. The Company utilizes insurance to
underwrite the risks associated with any potential liability from the Black Lung
Benefits Revenue Act of 1977.
Coal Industry Retiree Health Benefits Act of 1992. The Coal Industry
Retiree Health Benefits Act of 1992 ("CIRHBA") requires companies currently
operating in the coal mining industry to subsidize the healthcare premiums of
retired coal miners and their beneficiaries. The Social Security Administration
assigns miners and their beneficiaries to the coal companies with which they
were formerly employed or related. Until recently, the Company believed that it
fell within the scope of CIRHBA. Therefore, the Company had established a
reserve to satisfy the healthcare premiums of those miners and their
beneficiaries which have been assigned to the Company. However, on June 25,
1998, the U.S. Supreme Court held in Eastern Enterprises v. APFEL, Commissioner
of Social Security et al., that the assignment of miners under CIRHBA to certain
coal companies violated certain provisions of the U.S. Constitution. The Company
believes that it is in the class of coal companies to which the Constitutional
prohibitions to CIRHBA apply. Therefore, the Company is no longer making
contributions into its CIRHBA reserves. At the time of the Eastern Enterprises
decision, the Company believed that the reserves it had established were
sufficient to satisfy its obligations to the miners then assigned to it and
those which are reasonably foreseeable to be assigned to it in the future.
Because the Eastern Enterprises decision is very recent, the Company is
continuing to review its CIRHBA policies.
Resource Conservation Recovery Act. The federal Resource Conservation and
Recovery Act ("RCRA"), and corresponding state statutes, affects coal mining
operations by imposing requirements for the treatment, storage and disposal of
hazardous mining wastes. Although many mining wastes (e.g., overburden and other
large-volume, low hazardous wastes) are excluded from the regulatory definition
of hazardous waste, and coal mining operations covered by SMCRA permits are
exempted from regulation under RCRA by statute, the EPA is studying the
possibility of expanding regulation of mining wastes under RCRA.
Federal Water Pollution Control Act. The Federal Water Pollution Control
Act ("Clean Water Act") (i) sets standards for water quality and (ii) requires
mining operators to obtain permits for the discharge of regulated wastes. The
Clean Water Act requires mine operators to comply with federal, and in some
cases state standards, for obtaining permits for discharging substances
controlled by these regulations. The Company undertakes as part of its regular
permitting process an analysis of issues raised by the Clean Water Act, as well
as the measures required to comply with the Clean Water Act's standards.
EMPLOYEES
At June 30, 1997, the Company employed 320 people. None of the Company's
employees are represented by a labor union, and management believes that its
relations with its employees are good. The Company maintains an open
communications management style along with a strong commitment to the safety and
welfare of its employees. The one previous effort to unionize the Company's
employees in 1988 was unsuccessful. The Company cannot predict whether there
will be any unionization activities in the future.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following information is furnished with respect to the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
William E. Beckner........................ 46 Chairman of the Board of Directors, President and
Chief Executive Officer
Stephen G. Capelli........................ 47 Senior Vice President of Operations; Director
Joseph A. Davis, Jr....................... 51 Senior Vice President of Sales and Marketing;
Director
Mark A. Oldham............................ 41 Senior Vice President, Secretary and Treasurer/
Chief Financial Officer
</TABLE>
William E. Beckner has been the President and Chief Executive Officer of
the Company since 1993, and Chairman of the Board of Directors since 1996. Mr.
Beckner also served as Executive Vice President and Chief Operating Officer of
Pen Holdings from 1986 to 1993 and as Vice President of Finance from 1982 to
1986. Mr. Beckner, who has 18 years of experience in the coal industry and has
been with the Company for 15 years, holds a controlling interest in Pen
Holdings. Mr. Beckner received an M.B.A. degree from the University of Tennessee
(Nashville) in 1979 and received a B.S. degree in Business from the University
of Evansville in 1973.
Stephen G. Capelli has been the Senior Vice President of the Company's coal
operations and a director of Pen Holdings since 1996, having previously served
as Vice President of Operations since 1994. Mr. Capelli has 26 years of
experience in the coal industry. Prior to joining the Company, Mr. Capelli was
Vice President of Mining and Development of Amvest Minerals, Inc., a coal
company, from 1991 to 1994. Mr. Capelli serves on the Board of Directors of the
West Virginia Mining and Reclamation Association. Mr. Capelli received a B.S.
degree in Mining Engineering from Virginia Tech University in 1973.
Joseph A. Davis, Jr., has been Senior Vice President of Sales & Marketing
of the Company's coal operations and a director of Pen Holdings since 1996.
Prior to that time, Mr. Davis was Vice President of Sales and Marketing from
1987. Mr. Davis has 22 years of experience in the coal industry. Before joining
the Company, he was Vice President of Sales for Benford-Nightengale Coal Company
from 1977 to 1984, and was Sales Manager of Kentucky Pioneer Coal Company from
1975 to 1977. Mr. Davis received a B.A. degree from Western Kentucky University
in 1976.
Mark A. Oldham has been Senior Vice President, Secretary and
Treasurer/Chief Financial Officer of the Company since 1996. Prior to that time,
Mr. Oldham served as Vice President from 1993 to 1996 and Controller from 1985
to 1993. Mr. Oldham has 14 years experience in the coal industry. Mr. Oldham is
a Certified Public Accountant (CPA) and has been a member of the American
Institute of Certified Public Accountants and the Tennessee Society of CPA's
since 1982. From 1979 to 1984, Mr. Oldham was employed in public accounting. Mr.
Oldham received a B.S. degree in Business Administration from Tennessee
Technological University in 1979.
BOARD COMPENSATION
All current directors are employees of the Company. No additional
remuneration beyond their compensation as employees is currently given to
directors for their services.
EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities for the year ended December 31, 1997, for (i) the chief executive
officer of the Company, and (ii) each of the three other most highly compensated
executive officers of the Company who received in excess of $100,000, determined
as of December 31, 1997 (collectively, the "Named Executive Officers").
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<PAGE> 78
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(1)
--------------------------- ---- ------ ----- ------------ ---------------
<S> <C> <C> <C> <C> <C>
William E. Beckner.................... 1997 $383,575 $ 360,000 -- $4,800
President and Chief Executive
Officer
Stephen G. Capelli.................... 1997 148,000 66,000 $75,045(2) 4,800
Senior Vice President of Operations
Joseph A. Davis, Jr................... 1997 141,000 52,875 75,045(2) 4,800
Senior Vice President of
Sales/Marketing
Mark A. Oldham........................ 1997 125,000 37,500 75,045(2) 4,285
Senior Vice President, Secretary,
Treasurer/Chief Financial Officer
</TABLE>
- ---------------
(1) Represents annual contribution made by the Company under its 401(k) plan.
(2) Represents incremental increase in the value of the officer's account under
the Pen Holdings, Inc. Stock Purchase Plan (the "Stock Purchase Plan"). The
Stock Purchase Plan provides generally that stock issued to the officer will
be repurchased by the Company upon the termination of the officer's
employment with the Company. The repurchase price for this stock is equal to
$0.01 plus the aggregate net income per common share, determined over the
period beginning with the close of the 1995 fiscal year and ending with the
close of the Company's last fiscal year ending prior to the officer's date
of termination. The amount included does not include amounts credited to the
account of the officer prior to 1997.
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<PAGE> 79
CERTAIN RELATED PARTY TRANSACTIONS
LOANS AND GUARANTEES
The Company owns a one-third interest in the general partnership IMT, an
ocean marine loading facility located in Louisiana. The Company is a guarantor
of $7,667,000 of IMT debt. The Company intends to make a capital infusion to IMT
to repay one-third of the partnership's debt ($21,000,000, which includes the
$7,667,000 described above) at its scheduled maturity. The Company has escrowed
U.S. government obligations that will accrete to an amount sufficient to fund
this infusion.
The Company is also a guarantor of a bank loan in the amount of $186,000 to
Forests, Inc., the Company's partner in Camden Hardwood Company, for the
partner's capital contribution.
The Company extended a loan to the previous Chairman of the Board of
Directors in the amount of $500,000 in 1994. Repayment was made in installments
of $2,083 plus interest through December 1997, with a balloon payment of
$425,000 due in December 1997. The loan was paid in full in July 1997.
ARRANGEMENTS INVOLVING AFFILIATES
The Company uses the IMT facility to load coal for export. Fees paid to IMT
for coal loading in 1997, 1996 and 1995 were approximately $1,988,000,
$1,864,000 and $2,115,000, respectively. These fees are comparable to the fees
paid by third parties resulting from arms length transactions.
RECAPITALIZATION
The Company completed the Recapitalization in December 1995 whereby
4,250,000 shares of the Company's outstanding common stock held by the former
majority shareholder were converted into 4,250,000 shares of Class I Common
Stock (as defined in "Description of Capital Stock") and 10,000 shares of
Convertible Preferred Stock with a redemption value of $13.65 million. The
Company then reacquired 4.0 million shares of Class I Common Stock in exchange
for cash of $12.50 million, 100% of the Company's investment in the common stock
of Pen Development of California, Inc., which had a book value of approximately
$3.34 million, and Company assets with a book value of $63,000.
Concurrent with the Recapitalization, 4.04 million shares of Class I Common
Stock were issued to the Company's current Chief Executive Officer for $0.01 per
share.
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<PAGE> 80
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Tennessee law and to
the provisions of the Company's Restated Charter, as amended.
The authorized capital stock of the Company consists of (i) 10,000 shares
of Convertible Preferred Stock, without par value (the "Convertible Preferred
Stock"), (ii) 7,800,000 shares of Class I common stock, par value $0.001 per
share (the "Class I Common Stock") and (iii) 200,000 shares of Class II common
stock, par value $0.001 per share (the "Class II Common Stock" and collectively
with the Class I Common Stock, the "Common Stock"). As of December 31, 1997, (i)
10,000 of the authorized shares of Convertible Preferred Stock, (ii) 4,290,000
of the authorized shares of Class I Common Stock and (iii) 177,550 of the
authorized shares of Class II Common Stock were issued and outstanding.
COMMON STOCK
Class I Common Stock and Class II Common Stock vote together as a single
class on matters coming before the Company's shareholders.
Class II Common Stock may only be issued to those officers designated
eligible under the Pen Holdings, Inc. Stock Purchase Plan. The Stock Purchase
Plan provides that the Class II Common Stock is to be repurchased by Pen
Holdings upon the officer's termination of employment with Pen Holdings.
The declaration and payment of dividends are restricted by certain
covenants in the Indenture and in the New Credit Facility. In the event of a
liquidation, dissolution or winding-up of the Company, the holders of Class I
and Class II Common Stock are entitled to share equally and ratably in the
assets of the Company, if any, remaining after the payment of all debts and
liabilities of the Company (including the Notes) and payments to the holders of
Convertible Preferred Stock. There is no established public trading market for
the Common Stock.
The Company has reserved 560,000 shares of Class I Common Stock for
issuance pursuant to options, warrants or other rights granted or which may be
granted to financial institutions with which the Company has a borrowing
relationship. As of December 31, 1997, no Class I Common Stock had been issued
with regard to these options, warrants or rights; however, warrants to purchase
326,772 shares of Class I Common Stock were outstanding. The warrants are
exercisable beginning January 2001 at $.01 per share and may be put to the
Company at the fair value of the Class I Common Stock at that time, subject to a
minimum value of $3.0 million. Such warrants will be redeemed using a portion of
the net proceeds of the Offering. See "Use of Proceeds." No other Class I Common
Stock may be issued until the Convertible Preferred Stock is redeemed in full.
Each holder of Class I Common Stock has the option to sell to the Company
100% of the stock held at a price of $.01 per share. This option is exercisable
beginning January 2005 and lapses upon conversion of the Convertible Preferred
Stock to Class I Common Stock.
CONVERTIBLE PREFERRED STOCK
All, but not less than all, of the Convertible Preferred Stock is
convertible at the option of the holder into an aggregate of 2,950,000 shares of
Class I Common Stock. The conversion feature is exercisable at the earlier of
(i) the period beginning January 2001 and ending January 2002 or (ii)
immediately prior to a merger, consolidation or share exchange involving the
Company or a sale of all or substantially all of the assets of the Company. No
dividends accrue on the Convertible Preferred Stock until January 2001.
Beginning on January 3, 2001 dividends on the Convertible Preferred Stock accrue
at an annual rate of 25.25% of the then liquidation preference. Dividends not
paid will accumulate without interest until the Convertible Preferred Stock
becomes mandatorily redeemable. The Convertible Preferred Stock is mandatorily
redeemable in 2006. The Indenture will not prohibit such mandatory redemption in
2006. See "Description of Notes--Certain Covenants--Limitations on Restricted
Payments." The Convertible Preferred Stock will be redeemed at that time by
issuance of one or more promissory note(s) from the Company equal to the
liquidation preference of the Convertible Preferred Stock payable in 40
quarterly installments at an interest rate of 2.25% above the rate payable on
five-year U.S. Treasury obligations on the date of redemption (the "Redemption
Interest Rate"). The liquidation preference of the Convertible Preferred Stock
was $13,650,000 at June 30, 1998 and is subject to reduction to the extent of
any tax
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<PAGE> 81
deficiencies or settlements (including interest and penalties paid or payable
for all periods beginning prior to December 29, 1995. See "Business--Legal
Proceedings--IRS Proceedings." At redemption, accrued but unpaid dividends bear
interest at the Redemption Interest Rate and are payable on the same terms as
the liquidation preference. No dividends may be paid on the Common Stock prior
to the full redemption of the Convertible Preferred Stock. Except as provided in
the Company's charter or as otherwise required by law, the Convertible Preferred
Stock does not have any voting rights.
The liquidation preference of the Convertible Preferred Stock, as well as
the amounts owed upon redemption of the Convertible Preferred Stock, are to be
reduced by all amounts owed by the Company with respect to tax periods beginning
prior to December 29, 1995. See "Business--Legal Proceedings--IRS Proceedings."
SECURITY OWNERSHIP
OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information concerning ownership of
the Class I and Class II Common Stock of the Company by each director, each
person who is known to the Company to be the beneficial owner of more than 5% of
the Class I and Class II Common Stock and all directors and officers of the
Company as a group. Each stockholder listed below has sole voting and
dispositive power with respect to the shares listed next to such stockholder's
name except as noted below. Except as noted, the address of each stockholder
listed below is: c/o Pen Holdings, Inc., Center Court Building, 3rd Floor, 5100
Maryland Way, Brentwood, Tennessee 37027.
<TABLE>
<CAPTION>
CLASS I COMMON STOCK(1) CLASS II COMMON STOCK(1)
--------------------------- --------------------------- PERCENTAGE OF
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE CLASS I AND
SHARES OF CLASS SHARES OF CLASS CLASS II
NAME AND ADDRESS BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
OF BENEFICIAL OWNER OWNED OWNED OWNED(2) OWNED OWNED
------------------- ----- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C>
William E. Beckner.................... 4,040,000 94.2% 90.4%
Stephen G. Capelli.................... 44,900 25.3% 1.0
Joseph A. Davis, Jr................... 44,900 25.3% 1.0
Mark A. Oldham........................ 44,900 25.3% 1.0
Grace Pen............................. 250,000(3) 5.8% 5.6%
c/o Bass, Berry & Simms
2700 First American Center
Nashville, Tennessee 37238
Directors and Executive Officers as a
group (4 persons)................... 4,040,000 94.2% 134,700 75.9% 93.4%
</TABLE>
- ---------------
(1) The Company's Class I and Class II Common Stock currently have the same
rights. Prior to the Recapitalization the classes of stock had different
rights, however, the difference in rights no longer exists.
(2) Includes shares subject to repurchase upon termination of employment with
the Company under the Stock Purchase Plan.
(3) Includes 187,500 shares held by a trust of which Ms. Pen is one of the
trustees.
REPORTS TO NOTEHOLDERS
The Company intends to furnish the holders of the Notes with annual reports
containing audited financial statements after the end of each calendar year and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
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<PAGE> 82
DESCRIPTION OF NEW CREDIT FACILITY
GENERAL
Upon the consummation of the Offering on June 8, 1998 (the "Closing Date"),
the Company amended and restated its then existing credit facility (the
"Original Credit Facility") with an Amended and Restated Credit Facility (the
"New Credit Facility"). Mellon Bank, N.A. is the Administrative and Collateral
Agent and Canadian Imperial Bank of Commerce is the Syndication Agent under the
New Credit Facility. The New Credit Facility provides the Company with a $40.0
million committed revolving credit facility guaranteed by certain of the
Company's subsidiaries (the "Bank Guarantors"). The New Credit Facility includes
a $5.0 million sub-limit for the issuance of letters of credit. This information
relating to the New Credit Facility is qualified in its entirety by reference to
the complete text of the documents entered into in connection therewith (the New
Credit Facility has been filed as an exhibit to the registration statement of
which this Prospectus is forms a part). The following is a description of the
general terms of the New Credit Facility.
SECURITY
Indebtedness of the Company under the New Credit Facility is secured by a
first priority perfected security interest in all of the capital stock of each
of the active subsidiaries (direct or indirect) of the Company. The Collateral
Agent (on behalf of the lenders) has or will receive a first priority perfected
security interest in substantially all other present and future assets and
properties of the Company and certain of its subsidiaries (including, without
limitation, accounts receivable, inventory, real property, leasehold interests,
machinery, equipment, contracts, trademarks, copyrights, patents, license
agreements and general intangibles, but excluding rolling stock (mobile mining
equipment)).
INTEREST RATE AND COMMITMENT FEE
Indebtedness under the New Credit Facility bears interest at a rate, for
the period from the June 8, 1998, through November 1, 1998, at LIBOR plus 1.75%
or Prime plus 0.75%, at the option of the Company. Thereafter, the interest rate
will be subject to change based on the ratio of (i) total indebtedness minus the
amount of cash and permitted investments of the Company and the Restricted
Subsidiaries to (ii) EBITDA (the "net leverage ratio") of the Company, in a
range of LIBOR plus 1.00% to 2.50% or Prime to Prime plus 1.50%, the type of
borrowing to be determined at the option of the Company.
For the period from the June 8, 1998 through November 1, 1998, the Company
will pay a commitment fee at a rate equal to 0.375% per annum on the undrawn
portion of the commitments in respect of the New Credit Facility, which began to
accrue on the June 8, 1998, payable quarterly in arrears. Thereafter, the
Company will pay a commitment fee based on the net leverage ratio of the Company
in a range equal to 0.25% to 0.50% per annum on the undrawn portion of the
commitments in respect of the New Credit Facility, payable quarterly in arrears.
MATURITY
The New Credit Facility terminates and all amounts outstanding thereunder
will be due and payable on May 31, 2003, subject to one year extensions upon the
request of the Company subject to approval of the lenders.
GUARANTEES
The New Credit Facility is guaranteed by the Bank Guarantors. Such
guarantees are secured by a first priority perfected security interest in
substantially all other present and future assets and properties of the Bank
Guarantors (including, without limitation, accounts receivable, inventory, real
property, leasehold interests, machinery, equipment, contracts, trademarks,
copyrights, patents, license agreements and general intangibles, but excluding
rolling stock (mobile mining equipment)).
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PURPOSE
The proceeds of the New Credit Facility may be used for working capital,
including developing the Fork Creek property, and general corporate purposes
including qualifying acquisitions in any one year of up to $5.0 million.
COVENANTS
The New Credit Agreement contains customary affirmative covenants of the
Company and the Guarantors, including, without limitation, (i) delivery of
financial statements and other information, (ii) payment of obligations, (iii)
continuation of business, (iv) maintenance of existence, (iv) compliance with
laws and material contractual obligations, and (v) maintenance of property and
insurance and books and records. The New Credit Agreement also contains
customary negative covenants of the Company and the Guarantors, including,
without limitation, restrictions on (i) indebtedness and liens, (ii) guarantee
obligations, (iii) consolidations, liquidations and distributions, (iv) sales of
assets, leases, (v) investments and dividends, (vi) loans and advances, and
(vii) capital expenditures. The New Credit Agreement also contains various
financial covenants, including covenants requiring the maintenance of maximum
net funded debt to EBITDA and fixed charge coverage ratios and minimum net
worth.
EVENTS OF DEFAULT
The New Credit Agreement contains customary events of default under the New
Credit Facility, including, without limitation (i) the non-payment of principal,
interest, fees or other amounts when due under the New Credit Facility or,
subject to applicable grace periods in certain circumstances, upon the
non-fulfillment of the covenants described above, (ii) certain changes in
control of the ownership of the Company, (iii) cross-defaults to certain other
indebtedness, (iv) certain events of bankruptcy and insolvency, and (v) certain
judgment defaults.
INDEMNIFICATION
Under the New Credit Agreement, the Company is required to indemnify the
lenders (and their respective directors, officers, employees and agents) from
and against any loss, liability, claim or expense relating to the financing, the
Company's use or proposed use of loan proceeds, provided that the Company will
not be liable for any such loss, liability, claim or expense resulting from such
indemnified party's own gross negligence or willful misconduct.
OPTIONAL AND MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS
The Company may prepay the New Credit Facility and reduce in whole or in
part at any time without penalty, subject to reimbursement of the Lenders'
breakage and redeployment costs in the case of prepayment of LIBOR borrowings.
The New Credit Facility may be reduced, at the lenders' option, by the net
proceeds of certain sales of assets or securities.
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DESCRIPTION OF NOTES
The Senior Notes were and the Series B Senior Notes will be issued under an
Indenture, dated as of June 8, 1998 (the "Indenture"), by and among the Issuer,
the Guarantors and The Bank of New York, as trustee (the "Trustee"). The terms
of the Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"), as in effect on the date of the Indenture. The Notes are subject to all
such terms, and holders of the Notes are referred to the Indenture and the TIA
for a statement of them. The following is a summary of the material terms and
provisions of the Notes. This summary does not purport to be a complete
description of the Notes and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the Notes and the Indenture
(including the definitions contained therein). Definitions relating to certain
capitalized terms are set forth under "--Certain Definitions." Capitalized terms
that are used but not otherwise defined herein have the meanings ascribed to
them in the Indenture and such definitions are incorporated herein by reference.
For purposes of this section, references to the "Issuer" include only Pen
Holdings and not its Subsidiaries.
GENERAL
The Notes are limited in aggregate principal amount to $100,000,000. The
Notes are general unsecured obligations of the Issuer, ranking pari passu (or
generally the same in rank in priority of payment), in right of payment with all
existing and future unsubordinated obligations of the Issuer and senior in right
of payment to all existing and future subordinated obligations of the Issuer.
The Notes are unconditionally guaranteed, on a senior unsecured basis, as
to the payment of principal, premium, if any, and interest, jointly and
severally, by the Guarantors (together with each other Restricted Subsidiary of
the Issuer which guarantees payment of the Notes pursuant to the covenant
described under "--Certain Covenants--Limitation on Creation of Subsidiaries").
MATURITY, INTEREST AND PRINCIPAL
The Notes mature on June 15, 2008. The Notes bear interest at a rate of
9 7/8% per annum from the Issue Date until maturity. Interest is payable
semi-annually in arrears on each June 15 and December 15, commencing on December
15, 1998, to holders of record of the Notes at the close of business on the
immediately preceding June 1 and December 1, respectively. The interest rate on
the Senior Notes is subject to increase, and such Additional Interest will be
payable on the payment dates set forth above, in certain circumstances, if the
Notes (or other securities substantially similar to the Senior Notes) are not
registered with the Commission within the prescribed time periods. See
"Registration Rights Agreement."
OPTIONAL REDEMPTION
The Notes are redeemable at the option of the Issuer, in whole at any time
or in part from time to time on or after June 15, 2003 at the following
redemption prices (expressed as percentages of the principal amount thereof),
together, in each case, with accrued and unpaid interest, if any, to the
redemption date, if redeemed during the twelve-month period beginning on June 15
of each year listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003................................................. 104.938%
2004................................................. 103.292%
2005................................................. 101.646%
2006 and thereafter.................................. 100.000%
</TABLE>
Notwithstanding the foregoing, the Issuer may (but shall have no obligation
to) redeem in the aggregate up to 35% of the original principal amount of Notes
at any time and from time to time out of the net cash proceeds of one or more
Public Equity Offerings prior to June 15, 2001 at a redemption price equal to
109.875% of the aggregate principal amount so redeemed, plus accrued and unpaid
interest, if any, to the redemption date; provided that at least $65.0 million
of the principal amount of Notes originally issued remains outstanding
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immediately after the occurrence of any such redemption and that any such
redemption occurs within 90 days following the closing of any such Public Equity
Offering.
In the event of a redemption of fewer than all of the Notes, the Trustee
shall select the Notes to be redeemed in compliance with the requirements of the
principal national securities exchange, if any, on which such Notes are listed,
or if such Notes are not then listed on a national securities exchange, on a pro
rata basis, by lot or in such other manner as the Trustee shall deem fair and
equitable. The Notes are redeemable in whole or in part upon not less than 30
nor more than 60 days' prior written notice, mailed by first class mail to a
holder's last address as it shall appear on the register maintained by the
Registrar of the Notes. On and after any redemption date, interest will cease to
accrue on the Notes or portions thereof called for redemption unless the Issuer
shall fail to redeem any such Note.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Additional Indebtedness
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, incur (as defined in "Description of
Notes--Certain Definitions") any Indebtedness (including, without limitation,
any Acquired Indebtedness); provided that if no Default or Event of Default
shall have occurred and be continuing at the time or as a consequence of the
incurrence of such Indebtedness, the Issuer may incur Indebtedness (including
any Acquired Indebtedness) if the Issuer's Consolidated Fixed Charge Coverage
Ratio is greater than 2.0 to 1.
Notwithstanding the foregoing, the Issuer and its Restricted Subsidiaries
may incur Permitted Indebtedness.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness described in clauses (i) through (xii) of
the definition of Permitted Indebtedness or is entitled to be incurred pursuant
to the first paragraph hereof, the Issuer may, in its sole discretion, classify
such item of Indebtedness in any manner that complies with this covenant and
such item of Indebtedness will be treated as having been incurred pursuant to
only one of such clauses or pursuant to the first paragraph hereof.
Limitation on Restricted Payments
The Issuer will not make, and will not cause or permit any of its
Restricted Subsidiaries to make, directly or indirectly, any Restricted Payment,
unless:
(a) no default or Event of Default shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
(b) immediately after giving pro forma effect to such Restricted
Payment, the Issuer could incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) under the "--Limitation on
Additional Indebtedness" covenant above; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made after
the Issue Date does not exceed the greater of (i) $5 million or (ii)
the sum (without duplication) of (A) 50% of the Issuer's cumulative
Consolidated Net Income (or if cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss) earned (or accrued, as the
case may be) during the period beginning on the first day of the
Issuer's fiscal quarter commencing prior to the Issue Date and
ending on the last day of the fiscal quarter for which financial
statements are available immediately preceding the date of such
proposed Restricted Payment (treating such period as a single
accounting period); (B) 100% of the aggregate net cash proceeds
received by the Issuer from the issuance or sale after the Issue
Date (other than to a Subsidiary) of (1) Capital Stock (other than
Disqualified Capital Stock) of the Issuer or (2) any Indebtedness or
other securities of the Issuer that are convertible into or
exercisable or exchangea-
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ble for Capital Stock (other than Disqualified Capital Stock) of the
Issuer, which have been so converted, exercised or exchanged, as the
case may be; excluding, in the case of clause (c)(ii)(B), any net
cash proceeds from a Public Equity Offering to the extent used to
redeem the Notes in accordance with the second paragraph of
"--Optional Redemption" above; (C) without duplication of any
amounts included in clause (A) above, so long as the Designation
thereof was treated as a Restricted Payment made after the Issue
Date, with respect to any Unrestricted Subsidiary that has been
redesignated as a Restricted Subsidiary after the Issue Date in
accordance with the definition of "Restricted Subsidiary," the
Issuer's proportionate interest in an amount equal to the Fair
Market Value of the Issuer's interest in such Subsidiary; provided
that such amount shall not in any case exceed the Designation Amount
with respect to such Restricted Subsidiary at the time of its
Designation; and (D) in the case of the disposition or repayment of
any Investment constituting a Restricted Payment made after the
Issue Date, an amount equal to the lesser of the return of capital
with respect to such Investment and the initial amount of such
Investment which was treated as a Restricted Payment, in either
case, less the cost of the disposition of such Investment and net of
taxes. For purposes of determining the amount expended for
Restricted Payments under this clause (c), property other than cash
shall be valued at its Fair Market Value.
Provided no default or Event of Default has occurred and is continuing, the
provisions of this covenant shall not prevent (i) the payment of any dividend or
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture, (ii) the repurchase, redemption or other acquisition or retirement of
any shares of Capital Stock of the Issuer or Indebtedness subordinated to the
Notes by conversion into, or by or in exchange for, shares of Capital Stock of
the Issuer (other than Disqualified Capital Stock), or out of the net cash
proceeds of the substantially concurrent sale (other than to a Subsidiary of the
Issuer) of other shares of Capital Stock of the Issuer (other than Disqualified
Capital Stock); provided that any such net cash proceeds and the value of any
Capital Stock issued in exchange for such retired Capital Stock or Indebtedness
are excluded from clause (c)(ii)(B) of the immediately preceding paragraph for
the purposes of this calculation (and were not included therein at any time) and
are not used to redeem the Notes pursuant to "--Optional Redemption" above,
(iii) the redemption, repayment or retirement of Indebtedness of the Issuer
subordinated to the Notes in exchange for, by conversion into, or out of the net
cash proceeds of, (x) a substantially concurrent sale or incurrence of
Indebtedness of the Issuer (other than any Indebtedness owed to a Subsidiary)
that is contractually subordinated in right of payment to the Notes to at least
the same extent as the Indebtedness being redeemed, repaid or retired or (y) a
substantially concurrent sale (other than to a Subsidiary of the Issuer) of
shares of Capital Stock of the Issuer; provided that any such net cash proceeds
and the fair value of any Capital Stock issued in exchange for such retired
Disqualified Capital Stock are excluded from clause (c)(ii)(B) of the
immediately preceding paragraph (and were not included therein at any time) and
are not used to redeem the Notes pursuant to "--Optional Redemption" above, (iv)
the retirement of any shares of Disqualified Capital Stock of the Issuer by
conversion into, or by exchange for, shares of Capital Stock of the Issuer, or
out of the net cash proceeds of the substantially concurrent sale (other than to
a Subsidiary of the Issuer) of other shares of Capital Stock of the Issuer;
provided that any such net cash proceeds and the Fair Market Value of any
Capital Stock issued in exchange for such retired Disqualified Capital Stock are
excluded from clause (c)(ii)(B) of the immediately preceding paragraph (and were
not included therein at any time) and are not used to redeem the Notes pursuant
to "--Optional Redemption" above, (v) the purchase, redemption or other
acquisition for value of shares of Capital Stock of the Issuer (other than
Disqualified Capital Stock) or options on such shares held by officers or
employees or former officers or employees (or their estates or beneficiaries
under their estates) upon the death, disability, retirement or termination of
employment of such current or former officers or employees pursuant to the terms
of an employee benefit plan or any other agreement pursuant to which such shares
of capital stock or options were issued or pursuant to a severance, buy-sell or
right of first refusal agreement with such current or former officer or
employee; provided that the aggregate cash consideration paid, or distributions
made, pursuant to this clause (v) do not exceed $3.0 million, (vi) the making of
Investments in Unrestricted Subsidiaries, joint ventures and other entities in
an amount not to exceed $2.0 million in the aggregate at any one time
outstanding and (vii) the redemption of the Convertible Preferred Stock in
conjunction with any Tax Settlement or in conjunction with Indebtedness
permitted under the Indenture (provided however, that the Issuer shall not be
prevented from redeeming the Convertible Preferred Stock on or after January 3,
2006 by reason of
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any default or Event of Default). In calculating the aggregate amount of
Restricted Payments made subsequent to the Issue Date for purposes of clause (c)
of the immediately preceding paragraph, amounts expended pursuant to clauses
(i), (vi) and (vii) shall be included in such calculation and (ii), (iii), (iv)
and (v) shall not be included in such calculation.
Not later than the date of making any Restricted Payment, the Issuer shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant described above were computed, which calculations may
be based upon the Issuer's latest available financial statements, and that no
Default or Event of Default has occurred and is continuing and no Default or
Event of Default will occur immediately after giving effect to any such
Restricted Payments.
Limitation on Liens
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, create, incur or otherwise cause or suffer to exist or become
effective any Liens of any kind (other than Permitted Liens) upon any property
or asset of the Issuer or any of its Restricted Subsidiaries, unless (i) if such
Lien secures Indebtedness which is ranked pari passu (or generally the same in
rank in priority of payment), with the Notes or any Guarantee, then the Notes or
such Guarantee, as the case may be, are secured on an equal and ratable basis
with the obligations so secured until such time as such obligations are no
longer secured by a Lien or (ii) if such Lien secures Indebtedness which is
subordinated to the Notes or any Guarantee, then the Notes or such Guarantee, as
the case may be, are secured and the Lien securing such other Indebtedness shall
be subordinated to the Lien granted to the holders of the Notes or such
Guarantee, as the case may be, at least to the same extent as such Indebtedness
is subordinated to the Notes or such Guarantee, as the case may be.
Limitation on Transactions with Affiliates
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with any
Affiliate (each an "Affiliate Transaction") or extend, renew, waive or otherwise
modify the terms of any Affiliate Transaction entered into prior to the Issue
Date unless (i) such Affiliate Transaction is between or among the Issuer and
its Wholly-Owned Subsidiaries; or (ii) the terms of such Affiliate Transaction
are fair to the Issuer or such Restricted Subsidiary, as the case may be, and
are at least as favorable as the terms which could be obtained by the Issuer or
such Restricted Subsidiary, as the case may be, in a comparable transaction made
on an arm's-length basis between unaffiliated parties. In any Affiliate
Transaction (or any series of related Affiliate Transactions) involving an
amount or having a Fair Market Value in excess of $3.0 million which is not
permitted under clause (i) of the immediately preceding sentence, the Issuer
must obtain a resolution of the Board of Directors of the Issuer certifying in
good faith that it has approved such Affiliate Transaction and determined that
such Affiliate Transaction complies with clause (ii) of the immediately
preceding sentence. In addition, in any Affiliate Transaction (or any series of
related Affiliate Transactions) involving an amount or having a Fair Market
Value in excess of $10.0 million which is not permitted under clause (i) of the
second preceding sentence, the Issuer must obtain a written opinion from an
Independent Financial Advisor that such transaction or transactions are fair to
the Issuer or such Restricted Subsidiary, as the case may be, from a financial
point of view; provided that the provisions of this sentence shall not apply to
(i) the sale of inventory in the ordinary course of business or (ii) payments
made to International Marine Terminals, on an arm's-length basis in the ordinary
course of business, relating to the loading of coal onto ships or in accordance
with the Issuer's financial obligations, if any, pursuant to the Issuer's
contractual partnership obligations existing on the Issue Date with respect to
International Marine Terminals.
The foregoing provisions will not apply to (i) any Restricted Payment made
in compliance with the provisions described under "--Limitation on Restricted
Payments" above, (ii) reasonable fees and compensation paid to and indemnity
provided on behalf of officers, directors or employees of the Issuer or any
Restricted Subsidiary of the Issuer as determined in good faith by the Issuer's
Board of Directors or senior management or (iii) any written agreement in
existence on the Issue Date which has been disclosed in this Prospectus in
respect
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of the Notes and any such extension, renewal or substitution that does not
materially alter the financial and economic risks and obligations of the Issuer
thereto from those existing on the Issue Date.
Limitation on Creation of Subsidiaries
The Issuer will not create or acquire, nor permit any of its Restricted
Subsidiaries to create or acquire, any Subsidiary other than (i) a Restricted
Subsidiary existing as of the date of the Indenture, (ii) a Restricted
Subsidiary conducting a business similar or reasonably related to the coal
mining and marketing businesses of the Company and its Subsidiaries on the Issue
Date, or (iii) an Unrestricted Subsidiary; provided, however, that each
Restricted Subsidiary acquired or created pursuant to clause (ii) shall, at the
time it has either assets or shareholders' equity in excess of $25,000 have
evidenced its guarantee with such documentation, satisfactory in form and
substance to the Trustee relating thereto as the Trustee shall require,
including, without limitation a supplement or amendment to the Indenture and
opinions of counsel as to the enforceability of such guarantee, pursuant to
which such Restricted Subsidiary shall become a Guarantor. See "Description of
Notes--General."
Limitation on Certain Asset Sales
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Issuer or such
applicable Restricted Subsidiary, as the case may be, receives consideration at
the time of such sale or other disposition at least equal to the Fair Market
Value of the assets sold or otherwise disposed of; (ii) not less than 75% of the
consideration received by the Issuer or such applicable Restricted Subsidiary,
as the case may be, is in the form of cash or Cash Equivalents (provided, that
the amount of any Indebtedness (other than subordinated Indebtedness) of the
Issuer or any Guarantor that is actually assumed by the transferee in such Asset
Sale and from which the Issuer and the Guarantors are fully and unconditionally
released shall be deemed to be cash for purposes of clause (i) above; and (iii)
the Asset Sale Proceeds received by the Issuer or such Restricted Subsidiary, as
the case may be, are applied (or, at the Issuer's election, are deemed to have
been applied to an event described under clauses (iii)(a) or (iii)(b) occurring
within 45 days prior to the receipt of such Asset Sale Proceeds, provided, that
the Issuer's intent to apply Asset Sale Proceeds to such an event must have been
announced by letter to the Trustee prior to the occurrence of the event), at the
Issuer's option, (a) to prepay, repay or purchase indebtedness under the Credit
Facility or any other secured Indebtedness of the Issuer or such Restricted
Subsidiary; provided that any such repayment shall result in or the Issuer shall
effect a permanent reduction of the commitments thereunder in an amount equal to
the principal amount so repaid; or (b) to make an Investment in properties and
assets that are used or useful in the business of the Issuer or its Restricted
Subsidiaries or in businesses similar to or ancillary to the business of the
Issuer or its Restricted Subsidiaries as conducted at the time of such Asset
Sale (and, pending such use, may be used to temporarily reduce indebtedness
under the Credit Facility or may invest such Asset Sale Proceeds in any manner
not prohibited by the Indenture); provided that, (c) if on the 360th day
following the receipt of the Asset Sale Proceeds, the Available Asset Sale
Proceeds exceed $5.0 million, the Issuer shall apply an amount equal to the
Available Asset Sale Proceeds to an offer to repurchase the Notes, at a purchase
price in cash equal to 100% of the principal amount thereof plus accrued and
unpaid interest, if any, to the purchase date (an "Excess Proceeds Offer"). If
an Excess Proceeds Offer is not fully subscribed, the Issuer may retain and use
for general corporate purposes the portion (any such portion, a "Deficiency") of
the Available Asset Sale Proceeds not required to repurchase Notes. Upon
completion of any Excess Proceeds Offer, the amount of Available Asset Sale
Proceeds shall be reset to zero.
If the Issuer is required to make an Excess Proceeds Offer, the Issuer
shall mail, within 30 days following the date specified in clause (iii)(c)
above, a notice to the holders stating, among other things: (1) that such
holders have the right to require the Issuer to apply the Available Asset Sale
Proceeds to repurchase such Notes at a purchase price in cash equal to 100% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
purchase date; (2) the purchase date, which shall be no earlier than 30 days and
not later than 60 days from the date such notice is mailed; (3) the instructions
that each holder must follow in order to have such Notes purchased; and (4) the
calculations used in determining the amount of Available Asset Sale Proceeds to
be applied to the purchase of such Notes.
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In the event of the transfer of substantially all (but not all) of the
property and assets of the Issuer and its Restricted Subsidiaries as an entirety
to a Person (other than a Guarantor) in a transaction permitted under "--Merger,
Consolidation or Sale of Assets" below, the successor Person shall be deemed to
have sold the properties and assets of the Issuer and its Restricted
Subsidiaries not so transferred for purposes of this covenant, and shall comply
with the provisions of this covenant with respect to such deemed sale as if it
were an Asset Sale.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and other securities laws and regulations thereunder to the extent
such laws and regulations are applicable in connection with the repurchase of
Notes pursuant to an Excess Proceeds Offer. To the extent that the provisions of
any securities laws or regulations conflict with the "Asset Sale" provisions of
the Indenture, the Issuer shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
"Asset Sale" provisions of the Indenture by virtue thereof.
Limitation on Capital Stock of Restricted Subsidiaries
The Issuer will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary of the Issuer (other
than under the Credit Facilities) or (ii) permit any of its Restricted
Subsidiaries to issue any Capital Stock, other than to the Issuer or a
Restricted Subsidiary of the Issuer. The foregoing restrictions shall not apply
to an Asset Sale consisting of 100% of the Capital Stock of a Restricted
Subsidiary owned by the Issuer made in compliance with "--Limitation on Certain
Asset Sales" above.
Limitation on Sale and Lease-Back Transactions
The Issuer will not, and will not cause or permit any of its Restricted
Subsidiaries to, enter into any Sale and Lease-Back Transaction unless (i) the
consideration received in such Sale and Lease-Back Transaction is at least equal
to the Fair Market Value of the property sold, as determined by a board
resolution of the Issuer, and (ii) immediately prior to and after giving effect
to the Attributable Indebtedness in respect of such Sale and Lease-Back
Transaction, the Company could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the covenant described
under "Limitation on Additional Indebtedness."
Limitation on Conduct of Business
The Issuer and its Restricted Subsidiaries will not engage in any
businesses which are not the same as, similar or related to the businesses in
which the Issuer and its Restricted Subsidiaries are engaged in on the Issue
Date.
Payments for Consent
The Issuer will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes which so consent, waive or agree
to amend in the time frame set forth in solicitation documents relating to such
consent, waiver or agreement.
CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, the Issuer shall be obligated
to make an offer to purchase (the "Change of Control Offer") all outstanding
Notes at a purchase price (the "Change of Control Purchase Price") equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
Change of Control Payment Date (as defined below) in accordance with the
procedures set forth below.
Within 30 days of the occurrence of a Change of Control, the Issuer shall
(i) cause a notice of the Change of Control Offer to be sent at least once to
the Dow Jones News Service or similar business news service in the United States
and (ii) send by first-class mail, postage prepaid, to the Trustee and to each
holder of the Notes, at the address appearing in the register maintained by the
Registrar of the Notes, a notice stating:
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(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 30 days nor later than 60
days from the date such notice is mailed (the "Change of Control
Payment Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Issuer defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to
the Change of Control Offer shall cease to accrue interest after the
Change of Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender
the Notes to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day preceding the
Change of Control Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the
third Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the
name of the holder, the principal amount of the Notes delivered for
purchase, and a statement that such holder is withdrawing his
election to have such Notes purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered; provided that each Note purchased
and each such new Note issued shall be in an original principal
amount in denominations of $1,000 and integral multiples thereof;
(8) any other procedures that a holder must follow to accept a Change of
Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Issuer shall, to the extent
lawful, (i) accept for payment Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent
money sufficient to pay the purchase price of all Notes or portions thereof so
tendered and (iii) deliver or cause to be delivered to the Trustee Notes so
accepted together with an Officers' Certificate stating the Notes or portions
thereof tendered to the Issuer. The Paying Agent shall promptly mail to each
holder of Notes so accepted payment in an amount equal to the purchase price for
such Notes, and the Issuer shall execute and issue, and the Trustee shall
promptly authenticate and mail to such holder, a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered; provided that each
such new Note shall be issued in an original principal amount in denominations
of $1,000 and integral multiples thereof.
The Indenture further provides that (A) if the Issuer or any Restricted
Subsidiary thereof has issued any outstanding (i) indebtedness that is
subordinated in right of payment to the Notes or (ii) Preferred stock, and the
Issuer or such Restricted Subsidiary is required to make a Change of Control
Offer or to make a distribution with respect to such subordinated indebtedness
or Preferred Stock in the event of a change of control, the Issuer shall not
consummate any such offer or distribution with respect to such subordinated
indebtedness or Preferred Stock until such time as the Issuer shall have paid
the Change of Control Purchase Price in full to the holders of Notes that have
accepted the Issuer's Change of Control Offer and shall otherwise have
consummated the Change of Control Offer made to holders of the Notes and (B) the
Issuer will not issue Indebtedness that is subordinated in right of payment to
the Notes or Preferred Stock with change of control provisions requiring the
payment of such Indebtedness or Preferred Stock prior to the payment of the
Notes in the event of a Change in Control under the Indenture.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
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repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Issuer shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Merger, Consolidation or Sale of Assets
The Issuer will not consolidate with, amalgamate with, merge with or into,
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Issuer (determined on a consolidated
basis for the Issuer and its Restricted Subsidiaries) as an entirety or
substantially as an entirety in one transaction or a series of related
transactions, to any Person unless: (i) the Issuer shall be the continuing
Person, or the Person (if other than the Issuer) formed by such consolidation or
amalgamation or into which the Issuer is merged or to which the properties and
assets of the Issuer are sold, assigned, transferred, leased, conveyed or
otherwise disposed of shall be a corporation organized and existing under the
laws of the United States or any State thereof or the District of Columbia and
shall expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all of the obligations of the
Issuer under the Indenture and the Notes and the obligations thereunder shall
remain in full force and effect; (ii) immediately before and immediately after
giving effect to such transaction (including, without limitation, giving effect
to any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred and any Lien granted in connection with or in respect of the
transaction), no default or Event of Default shall have occurred and be
continuing; and (iii) immediately after giving effect to such transaction on a
pro forma basis the Issuer or such Person (A) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Issuer
immediately prior to such transaction and (B) could incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under "--Certain
Covenants--Limitation on Additional Indebtedness" above; provided that a Person
that is a Restricted Subsidiary may consolidate with, amalgamate with, merge
with, or sell, assign, transfer, lease, convey to or otherwise dispose of all or
substantially all of its assets to the Issuer or another Restricted Subsidiary
without complying with this clause (iii).
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Issuer shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Issuer, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Issuer, shall be deemed to
be the transfer of all or substantially all of the properties and assets of the
Issuer.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "--Certain
Covenants--Limitation on Certain Assets Sales") will not, and the Issuer will
not cause or permit any Guarantor to, consolidate with or merge with or into or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets to any Person (other than a merger of the Issuer
with any Guarantor or a merger of Guarantors or a sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the assets
of a Guarantor to the Issuer or to any other Guarantor) unless: (i) the entity
formed by or surviving any such consolidation or merger (if other than the
Guarantor) or to which such sale, lease, conveyance or other disposition shall
have been made is a corporation organized and validly existing under the laws of
the United States or any state thereof or the District of Columbia; (ii) such
entity assumes by supplemental indenture all of the obligations of such
Guarantor under such Guarantee; and (iii) immediately before and immediately
after giving effect to such transaction, no default or Event of Default shall
have occurred or be continuing.
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GUARANTEES
The Senior Notes are and the Series B Senior Notes will be fully and
unconditionally guaranteed, on a senior unsecured basis, jointly and severally,
by each of the Guarantors. The Guarantors guaranteed all of the obligations of
the Issuer under the Indenture, including its obligation to pay principal,
premium, if any, and interest with respect to the Notes.
The obligations of each Guarantor are limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to its contribution obligations under
the Indenture, result in the obligations of such Guarantor under the Guarantee
not constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in a pro rata
amount based on the net assets of each Guarantor, determined in accordance with
GAAP.
A Guarantor shall be released from all of its obligations under its
Guarantee if all of its assets or Capital Stock is sold, in each case in a
transaction in compliance with "--Certain Covenants--Limitation on Certain Asset
Sales" above, or the Guarantor merges with or into or consolidates with, or
transfers all or substantially all of its assets in compliance with "Merger,
Consolidation or Sale of Assets" above, or the Guarantor is designated an
Unrestricted Subsidiary in compliance with the other terms of the Indenture, and
such Guarantor has delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent herein provided
for relating to such transaction have been complied with.
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to the
Issuer's obligations under the Notes and the Indenture, and the aggregate net
assets, earnings and equity of the Guarantors and the Issuer are substantially
equivalent to the net assets, earnings and equity of the Issuer on a
consolidated basis.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(a) default in payment of any principal of, or premium, if any, on the
Notes when due (whether at maturity, upon redemption or otherwise);
(b) default in the payment of any interest on any Note when due, which
default continues for 45 days or more;
(c) default by the Issuer or any Restricted Subsidiary in the observance
or performance of any other covenant in the Notes or the Indenture
for 30 days after written notice from the Trustee or the holders of
not less than 25% in aggregate principal amount of the Notes then
outstanding (except in the case of a default with respect to the
"Change of Control" or "Merger, Consolidation or Sale of Assets"
covenants, which shall constitute an Event of Default with such
notice requirement but without such passage of time requirement);
(d) failure to pay at final maturity (giving effect to any applicable
grace periods and any extensions thereof) the principal amount of
any indebtedness of the Issuer or any Restricted Subsidiary of the
Issuer, or the acceleration of the final stated maturity of such
indebtedness, if, in either case, the aggregate principal amount of
such indebtedness, together with the principal amount of any such
indebtedness in default or failure to pay principal at final
maturity or which has been accelerated, aggregates $5.0 million or
more at any time and such indebtedness has not been discharged in
full or such acceleration has not been rescinded or annulled within
30 days of such final maturity or acceleration;
(e) any final judgment or judgments which can no longer be appealed for
the payment of money in excess of $5.0 million (net of amounts
covered by insurance) shall be rendered against the Issuer or
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any Restricted Subsidiary thereof, and shall not be discharged for
any period of 60 consecutive days during which a stay of enforcement
shall not be in effect;
(f) certain events involving bankruptcy, insolvency or reorganization of
the Issuer or any Restricted Subsidiary thereof; and
(g) any of the Guarantees of a Material Subsidiary are determined in a
judicial proceeding (i) to be not in full force and effect, (ii) to
be null and void and unenforceable, or (iii) to be invalid; or any
of the Guarantors denies its liability under its Guarantee (other
than by reason of release of a Guarantor in accordance with the
terms of the Indenture).
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal or premium, if any,
or interest on the Notes or a default in the observance or performance of the
"Merger, Consolidation or Sale of Assets" covenant) if the Trustee considers it
to be in the best interest of the holders of the Notes to do so.
The Indenture provides that if an Event of Default (other than an Event of
Default described in clause (f) above) shall have occurred and be continuing,
then the Trustee or the holders of not less than 25% in aggregate principal
amount of the Notes then outstanding by written notice to the Issuer and the
Trustee may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus accrued interest to the date of
acceleration and the same shall become immediately due and payable; provided
that after such acceleration but before a judgment or decree based on
acceleration is obtained by the Trustee, the holders of a majority in aggregate
principal amount of outstanding Notes may, under certain circumstances, rescind
and annul such acceleration if (i) all Events of Default, other than nonpayment
of principal, premium, if any, or interest that has become due solely because of
the acceleration, have been cured or waived as provided in the Indenture, (ii)
to the extent the payment of such interest is lawful, interest on overdue
installments of interest and overdue principal, which has become due otherwise
than by such declaration of acceleration, has been paid, (iii) if the Issuer has
paid the Trustee its reasonable compensation and reimbursed the Trustee for its
expenses, disbursements and advances and (iv) in the event of the cure or waiver
of an Event of Default of the type described in clause (f) of the above Events
of Default, the Trustee shall have received an Officers' Certificate and an
opinion of counsel that such Event of Default has been cured or waived. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto. In case an Event of Default resulting from certain events of
bankruptcy, insolvency or reorganization shall occur, the principal, premium and
interest amount with respect to all of the Notes shall be due and payable
immediately without any declaration or other act on the part of the Trustee or
the holders of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture or the Notes and to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, subject to
certain limitations provided for in the Indenture and under the TIA.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the holders of at least 25% in aggregate principal amount of
the outstanding Notes shall have made written request and offered reasonable
indemnity to the Trustee to institute such proceeding as Trustee, and unless the
Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
Notwithstanding the foregoing, such limitations do not apply to a suit
instituted on such Note on or after the respective due dates expressed in such
Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Issuer may elect either (a) to defease and
be discharged from any and all of its and any Guarantor's obligations with
respect to the Notes (except for the obligations to register the transfer or
exchange of such Notes, to replace temporary or mutilated, destroyed, lost or
stolen Notes, to maintain an office or agency in respect of the Notes and to
hold monies for payment in trust) ("defeasance") or (b) to be released
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from its obligations with respect to the Notes under certain covenants contained
in the Indenture ("covenant defeasance") upon the deposit with the Trustee (or
other qualifying trustee), in trust for such purpose, of money and/or
non-callable U.S. government obligations which through the payment of principal
and interest in accordance with their terms will provide money, in an amount
sufficient to pay the principal of, premium, if any, and interest on the Notes,
on the scheduled due dates therefor or on a selected date of redemption in
accordance with the terms of the Indenture. Such a trust may only be established
if, among other things, (i) the Issuer has delivered to the Trustee an opinion
of counsel (as specified in the Indenture) describing either a private ruling
concerning the Notes or a published ruling of the Internal Revenue Service, to
the effect that holders of the Notes or persons in their positions will not
recognize income, gain or loss for United States Federal income tax purposes as
a result of such deposit, defeasance and discharge and will be subject to United
States Federal income tax on the same amount and in the same manner and at the
same times, as would have been the case if such deposit, defeasance and
discharge had not occurred, (ii) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as Events of
Default from bankruptcy, insolvency or reorganization events are concerned, at
any time in the period ending on the 91st day after the date of deposit; (iii)
such defeasance or covenant defeasance shall not result in a breach or violation
of, or constitute a default under the Indenture or any other material agreement
or instrument to which the Issuer or any of its Subsidiaries is a party or by
which the Issuer or any or its Subsidiaries is bound; (iv) the Issuer shall have
delivered to the Trustee an Officers' Certificate stating that the deposit was
not made by the Issuer with the intent of preferring the holders of the Notes
over any other creditors of the Issuer or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Issuer or others;
(v) the Issuer shall have delivered to the Trustee an Officers' Certificate and
an opinion of counsel, each stating that all conditions precedent provided for
or relating to the defeasance or the covenant defeasance have been complied
with; (vi) the Issuer shall have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and (vii)
certain other customary conditions precedent are satisfied.
MODIFICATION OF INDENTURE
From time to time, the Issuer, the Guarantors and the Trustee may, without
the consent of holders of the Notes, amend or supplement the Indenture for
certain specified purposes, including providing for uncertificated Notes in
addition to certificated Notes, and curing any ambiguity, defect or
inconsistency, or making any other change that does not, in the opinion of the
Trustee, adversely affect the rights of any holder in any material respect. The
Indenture contains provisions permitting the Issuer, the Guarantors and the
Trustee, with the consent of holders of at least a majority in principal amount
of the outstanding Notes, to modify or supplement the Indenture, except that no
such modification shall, without the consent of each holder affected thereby,
(i) reduce the amount of Notes whose holders must consent to an amendment,
supplement, or waiver to the Indenture, (ii) reduce the rate of or change the
time for payment of interest, including defaulted interest, on any Note, (iii)
reduce the principal of or premium on or change the stated maturity of any Note
or change the date on which any Notes may be subject to redemption or repurchase
or reduce the redemption or repurchase price therefor, (iv) make any Note
payable in money other than that stated in the Note or change the place of
payment from New York, New York, (v) waive a default on the payment of the
principal of, interest on, or redemption payment with respect to any Note, (vi)
make any change in provisions of the Indenture protecting the right of each
holder of Notes to receive payment of principal of and interest on such Note on
or after the due date thereof or to bring suit to enforce such payment, or
permitting holders of a majority in principal amount of Notes to waive Defaults
or Events of Default, (vii) amend, change or modify in any material respect the
obligation of the Issuer to make and consummate a Change of Control Offer in the
event of a Change of Control or make and consummate an Asset Sale Offer with
respect to any Asset Sale that has been consummated or modify any of the
provisions or definitions with respect thereto, (viii) modify or change any
provision of the Indenture or the related definitions affecting the ranking of
the Notes or any Guarantee in a manner which adversely affects the holders of
Notes or (ix) release any Guarantor from any of its obligations under its
Guarantee or the Indenture otherwise than in accordance with the terms of the
Indenture.
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REPORTS TO HOLDERS
So long as the Issuers are subject to the periodic reporting requirements
of the Exchange Act, they will continue to furnish the information required
thereby to the Commission and to the holders of the Notes. The Indenture
provides that even if the Issuers are entitled under the Exchange Act not to
furnish such information to the Commission or to the holders of the Notes, they
will nonetheless continue to furnish such information to the Commission and
holders of the Notes.
COMPLIANCE CERTIFICATE
The Issuer will deliver to the Trustee on or before 90 days after the end
of the Issuer's fiscal year and on or before 45 days after the end of each the
first, second and third fiscal quarters in each year an Officers' Certificate
stating whether or not the signers know of any default or Event of Default that
has occurred. If they do, the certificate will describe the default or Event of
Default, its status and the intended method of cure, if any.
THE TRUSTEE
The Trustee under the Indenture is the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or Series B Senior Notes in accordance
with the Indenture. The Registrar under such Indenture may require a holder,
among other things, to furnish appropriate endorsements and transfer documents,
and to pay any taxes and fees required by law or permitted by the Indenture. The
Registrar is not required to transfer or exchange any Note selected for
redemption and, further, is not required to transfer or exchange any Note for a
period of 15 days before selection of the Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
GOVERNING LAW
The Indenture provides that the Indenture and the Notes will be governed by
and construed in accordance with the internal laws of the State of New York,
without giving effect to the principles of conflicts of laws to the extent the
application of the laws of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or is merged into or consolidated with the Issuer or a Restricted
Subsidiary or which is assumed in connection with the acquisition of assets from
such Person and, in each case, not incurred by such Person in connection with,
or in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary or such merger, consolidation or acquisition.
"Affiliate" means, with respect to any specific Person, any other Person
(including, without limitation, such Person's issue, siblings and spouse) that
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person; provided
that for purposes of the Indenture, the term "Affiliate" shall not include CIBC
Oppenheimer Corp. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling," "controlled by," and "under
common control with"), as used with respect to any Person, means the possession,
directly or indirectly, of the power to
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direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that, for purposes of the covenant described under "--Certain
Covenants--Limitation on Transactions with Affiliates," beneficial ownership of
at least 10% of the voting securities of a Person, either directly or
indirectly, shall be deemed to be control.
"Asset Acquisition" means (a) an Investment by the Issuer or any Restricted
Subsidiary of the Issuer in any other Person pursuant to which such Person
becomes a Restricted Subsidiary of the Issuer, or shall be merged with or into
the Issuer or any Restricted Subsidiary of the Issuer or (b) the acquisition by
the Issuer or any Restricted Subsidiary of the Issuer of the assets of any
Person (other than a Restricted Subsidiary of the Issuer) which constitute all
or substantially all of the assets of such Person or comprise any division or
line of business of such Person or any other properties or assets of such Person
other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
assignment, transfer, lease or other disposition (including any Sale and
Lease-Back Transaction), other than to the Issuer or any of its Wholly-Owned
Subsidiaries, in any single transaction or series of related transactions of (a)
any Capital Stock of any Restricted Subsidiary of the Issuer or (b) any other
property or assets of the Issuer or of any Restricted Subsidiary thereof outside
of the ordinary course of business; provided that Asset Sales shall not include
(i) a transaction or series of related transactions for which the Issuer or its
Restricted Subsidiaries receive aggregate consideration of less than $1.0
million (provided that the Issuer or such Restricted Subsidiary received
consideration equal to the Fair Market Value of any such property or assets so
sold, conveyed, assigned, transferred, leased or otherwise disposed of), (ii)
the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Issuer as permitted under "--Merger,
Consolidation or Sale of Assets," (iii) sales of property or equipment that has
become worn out, obsolete or damaged or otherwise unsuitable for use or no
longer useful or productive in connection with the business of the Issuer or any
Restricted Subsidiary, as the case may be, (iv) the sale of inventory in the
ordinary course of business, (v) any transaction consummated in compliance with
"--Certain Covenants--Limitation on Restricted Payments," (vi) the sale of the
Issuer's Big Sandy River Terminal located in Kentucky, and (vii) the sale of the
stock, partnership interests or assets of Pen Cotton Company of South Carolina,
Pen Cotton Company, Pen Cotton Company of Alabama, Inc., Pen Hardwood Company
(including its 78% partnership interest in Camden Hardwood Company), and Marine
Terminals Inc. (including its one-third partnership interest in International
Marine Terminals).
"Asset Sale Proceeds" means, with respect to any Asset Sale, cash or Cash
Equivalents received by the Issuer or any Restricted Subsidiary of the Issuer
from such Asset Sale, after (a) provision for all income or other taxes
resulting from such Asset Sale, (b) payment of all brokerage commissions and
other fees and expenses, including, without limitation, legal, accounting and
appraisal fees, related to such Asset Sale, (c) provision for minority interest
holders in any Restricted Subsidiary of the Issuer as a result of such Asset
Sale, (d) repayment of Indebtedness that is required to be repaid in connection
with such Asset Sale and (e) deduction of appropriate amounts to be provided by
the Issuer or a Restricted Subsidiary of the Issuer as a reserve, in accordance
with GAAP, against any liabilities associated with the assets sold or disposed
of in such Asset Sale and retained by the Issuer or a Restricted Subsidiary
after such Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities and liabilities related to environmental matters
or against any indemnification obligations associated with the assets sold or
disposed of in such Asset Sale.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination the present value (discounted according
to GAAP at the cost of indebtedness implied in the Sale and Lease-Back
Transaction) of the total obligations of the lessee for rental payments during
the remaining term of the lease included in such Sale and Lease-Back Transaction
(including any period for which such lease has been extended).
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied or
that have not been deemed to have been applied in accordance with clause (iii),
and which have not yet been the basis for an Excess Proceeds Offer in accordance
with clause (iii)(c), in each case, of the first paragraph of "--Certain
Covenants--Limitation on Certain Asset Sales."
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"Bank Warrants" means the warrants to initially purchase an aggregate of
three hundred twenty-six thousand, seven hundred seventy-two shares of the
common stock of the Issuer issued to the lenders in connection with the
establishment of the Issuer's Original Credit Facility.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated and whether
or not voting) of corporate stock, partnership interests or any other
participation, right or other interest in the nature of an equity interest in
such Person including, without limitation, Common Stock and Preferred Stock of
such Person, or any option, warrant or other security convertible into any of
the foregoing.
"Capitalized Lease Obligations" means with respect to any Person,
Indebtedness represented by obligations under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such Indebtedness shall be the capitalized amount of such obligations
determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof; (ii) marketable
direct obligations issued by any state of the United States of America or any
political subdivision of any such state, as the case may be, or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state, as the case may be, thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date of
acquisition thereof combined capital and surplus of not less than $250,000,000;
(v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (iv) above; and
(vi) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (i) through (v) above.
A "Change of Control" of the Issuer will be deemed to have occurred at such
time as (i) any Person (including a Person's Affiliates), other than a Permitted
Holder, becomes the beneficial owner (as defined under Rule 13d-3 or any
successor rule or regulation promulgated under the Exchange Act) of 50% or more
of the total voting power of the Issuer or otherwise becomes able to exercise
the right to give directions with respect to the operating and financial
policies of the Issuer or (ii) there shall be consummated any consolidation or
merger of the Issuer in which the Issuer is not the continuing or surviving
corporation or pursuant to which the Common Stock of the Issuer would be
converted into cash, securities or other property, other than a merger or
consolidation of the Issuer in which the holders of the Common Stock of the
Issuer outstanding immediately prior to the consolidation or merger hold,
directly or indirectly, at least a majority of the Common Stock of the surviving
corporation immediately after such consolidation or merger.
"Commission" means the Securities and Exchange Commission.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of EBITDA of such Person for the four most recent consecutive
fiscal quarters for which financial statements are available (the "Four Quarter
Period") ending on or prior to the date of determination to Consolidated Fixed
Charges of such Person for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis to (i) the incurrence of any Indebtedness of such Person or any of
its Restricted Subsidiaries (and the
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application of the proceeds thereof) giving rise to the need to make such
calculation, (ii), any incurrence of other Indebtedness (and the application of
the proceeds thereof), in each case set forth in clauses (i) and (ii), occurring
on or after the first day of the Four Quarter Period and on or prior to the date
of determination, as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and (iii) any Asset Sales or Asset Acquisitions (including the
increase or decrease, as the case may be, in the EBITDA directly attributable to
such Asset Sale or Asset Acquisition, as the case may be) occurring on or after
the first day of the Four Quarter Period and on or prior to the date of
determination, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period.
"Consolidated Fixed Charges" means, with respect to any Person, for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments (to any Person other
than the Issuer or a Restricted Subsidiary) on any series of Disqualified
Capital Stock of such Person (other than dividends paid in Capital Stock (other
than Disqualified Capital Stock)) paid, accrued or scheduled to be paid or
accrued during such period times (y) a fraction, the numerator of which is one
and the denominator of which is one minus the then current effective
consolidated federal, state and local tax rate of such Person, expressed as a
decimal.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, without duplication, (i) the aggregate amount of interest charges,
whether expensed or capitalized, incurred or accrued by such Person and its
Restricted Subsidiaries, determined on a consolidated basis in accordance with
GAAP for such period (including non-cash interest payments), plus (ii) to the
extent not included in clause (i) above, an amount equal to the sum of: (A)
imputed interest included in Capitalized Lease Obligations, (B) all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (C) the net costs associated with Interest Rate
Agreements and other hedging obligations, (D) amortization of deferred financing
costs and expenses, (E) the interest portion of any deferred payment
obligations, (F) amortization of discount or premium on Indebtedness, if any,
(G) all capitalized interest and all accrued interest, (H) all non-cash interest
expense and (I) all interest incurred or paid under any guarantee of
Indebtedness (including a guarantee of principal, interest or any combination
thereof) of any Person minus to the extent included in clauses (i) or (ii)
above, fees and expenses (cash or non-cash) incurred in connection with the
Offering, the termination of the Original Credit Facility, including the
redemption of the Bank Warrants, and the establishment of the New Credit
Facility). For purposes of calculating Consolidated Interest Expense on a pro
forma basis, the interest on Indebtedness bearing a floating rate of interest
shall be the interest rate in effect at the time of determination, taking into
account on a pro forma basis any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term at the date of
determination of at least 12 months.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (a) the Net Income of any Person, other than a
Restricted Subsidiary of the referent Person, shall be excluded, except to the
extent of the amount of cash dividends or distributions actually received by the
referent Person, (b) the Net Income of any Restricted Subsidiary of the Person
in question that is subject to any restriction or limitation on the payment of
dividends or the making of other distributions (other than pursuant to the Notes
or the Indenture or the New Credit Facility) shall be excluded to the extent of
such restriction or limitation, (c)(i) the Net Income of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded and (ii) any net gain (but not loss) resulting
from an Asset Sale by the Person in question or any of its Restricted
Subsidiaries other than in the ordinary course of business shall be excluded,
(d) extraordinary gains and losses and any foreign exchange gains and losses
shall be excluded, (e) income or loss attributable to discontinued operations
(including, without limitation, operations disposed of during such period
whether or not such operations were classified as discontinued) shall be
excluded, (f) the cumulative effect of a change in accounting principles after
the Issue Date shall be excluded, (g) any restoration to income or any
contingency reserve of an extraordinary, non-recurring or unusual nature shall
be excluded, except to the extent that provision for such reserve was made out
of Consolidated Net Income accrued at any time subsequent to the Issue Date and
(h) in the case of a successor to the referent Person by consolidation
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or merger or as a transferee of the referent Person's assets, any earnings of
the successor corporation prior to such consolidation, merger or transfer of
assets shall be excluded.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person and its Restricted Subsidiaries determined on a
consolidated basis in accordance with GAAP, less (to the extent included)
amounts attributable to Disqualified Capital Stock of such Person.
"Convertible Preferred Stock" means the convertible preferred stock of the
issuer with a face value of $13,650,000, convertible to common stock of the
Issuer at the holder's option between January 2001 and January 2002. If not
earlier converted to common stock of the Issuer, the Convertible Preferred Stock
will be mandatorily redeemable in 2006, along with accrued dividends thereon,
such amounts to be paid in 40 quarterly payments over ten years at a rate of
2.25% above the rate payable on five-year U.S. Treasury obligations.
"Credit Facilities" means the Credit Agreement dated as of June 8, 1998,
among the Issuer, the guarantors named therein, the lenders party thereto in
their capacities as lenders thereunder and Mellon Bank, N.A. and Canadian
Imperial Bank of Commerce, as co-agents, together with the related documents
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by "--Certain Covenants--Limitation on Additional Indebtedness"
covenant) or adding Subsidiaries of the Issuer as additional borrowers or
guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Issuer or any Restricted Subsidiary of the Issuer against fluctuations in
currency values.
"Designation" shall have the meaning set forth in the definition of
"Restricted Payment."
"Disqualified Capital Stock" means any Capital Stock of a Person or a
Restricted Subsidiary thereof which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof (except, in each case, in
accordance with a change of control provision, which provision has substantially
the same effect as the provisions of the Indenture described under "Change of
Control Offer"), in whole or in part, or is exchangeable into Indebtedness on or
prior to the final maturity date of the Notes.
"EBITDA" means, with respect to any Person and its Restricted Subsidiaries,
for any period, an amount equal to (a) the sum of (i) Consolidated Net Income
for such period, plus (ii) the provision for taxes for such period based on
income or profits to the extent such income or profits were included in
computing Consolidated Net Income and any provision for taxes utilized in
computing net loss under clause (i) hereof, plus (iii) Consolidated Interest
Expense for such period, plus (iv) depreciation and depletion for such period on
a consolidated basis, plus (v) amortization of intangibles for such period on a
consolidated basis, plus (vi) any other non-cash items reducing Consolidated Net
Income for such period, plus (vii) charges resulting from fees and expenses
(cash or non-cash) incurred in connection with the Offering of the Notes, the
termination of the Original Credit Facility, including the redemption of the
Bank Warrants, and the establishment of the New Credit Facility, and charges
resulting from prepayment penalties incurred in connection with the early
retirement of Indebtedness out of the net proceeds from the Offering of the
Notes minus (b) all non-cash items increasing Consolidated Net Income for such
period, minus (c) to the extend not included above, interest income accruing on
restricted cash and Cash Equivalents that the Issuer has deposited in escrow to
fund guarantees of indebtedness of International Marine Terminals, minus (d) all
cash payments during such period relating to non-cash charges that were added
back in determining EBITDA in any prior period, all for such Person and its
Restricted Subsidiaries determined on a consolidated basis in accordance with
GAAP.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair Market Value
shall be determined by the Board of Directors of the Issuer acting reasonably
and in good faith and, in the case of determination involving assets or property
in excess of $500,000 shall be evidenced by a resolution of the Board of
Directors of the Issuer delivered to the Trustee.
"Foreign Restricted Subsidiary" means a Restricted Subsidiary whose
jurisdiction of incorporation or formation is other than the United States, any
state thereof or the District of Columbia or Canada or any province or territory
thereof.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States on the Issue Date.
"Guarantors" means (i) each Subsidiary of the Issuer existing on the Issue
Date with assets or shareholders' equity in excess of $25,000 on the Issue Date
and (ii) each other Restricted Subsidiary of the Issuer formed, created or
acquired after the Issue Date.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"incurrence," "incurred," "incurable," and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that existed prior to such time becoming Indebtedness
shall not be deemed an incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the ordinary
course of business) if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, and shall also include, to the extent not otherwise included (i) any
Capitalized Lease Obligations of such Person (but excluding any obligations
under operating leases), (ii) obligations of others secured by a lien to which
any property or assets owned or held by such Person are subject, whether or not
the obligation or obligations secured thereby shall have been assumed, provided
that, for the purposes of determining the amount of Indebtedness described in
this clause, if recourse with respect to such Indebtedness is limited to such
asset, the amount of such Indebtedness shall be limited to the Fair Market Value
for such asset, (iii) guarantees of items of other Persons which would be
included within this definition for such other Persons (whether or not such
items would appear upon the balance sheet of the guarantor), provided that
guarantees of indebtedness of International Marine Terminals shall be included
only to the extent that such guarantees exceed the amount of restricted cash and
Cash Equivalents that the Issuer has deposited in escrow to fund such
guarantees, (iv) all obligations for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction, (v) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed repurchase
price (for the purposes hereof "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were repurchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture), (vi)
obligations of any such Person under any Currency Agreement or any Interest Rate
Agreement applicable to any of the foregoing (if and to the extent such Currency
Agreement or Interest Rate Agreement obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP) and (vii)
Attributable Indebtedness. The
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amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided that (i)
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the accreted value of such Indebtedness at such time as
determined in conformity with GAAP and (ii) Indebtedness shall not include any
liability for federal, state, local or other taxes. Notwithstanding any other
provision of the foregoing definition, any trade payable arising from the
purchase of goods or materials or for services obtained in the ordinary course
of business shall not be deemed to be "Indebtedness" of the Issuer or any of its
Restricted Subsidiaries for purposes of this definition. Furthermore, guarantees
of (or obligations with respect to letters of credit supporting) Indebtedness
otherwise included in the determination of such amount shall not also be
included.
"Independent Financial Advisor" means an investment banking firm of
national reputation in the United States (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Issuer or any of its Affiliates; provided,
that notwithstanding the foregoing, CIBC Oppenheimer Corp. shall be deemed to be
an Independent Financial Advisor and (ii) which, in the judgment of the Board of
Directors of the Issuer, is otherwise independent and qualified to perform the
task for which it is to be engaged.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement designed to protect the party indicated therein
against fluctuations in interest rates.
"Investments" means, with respect to any Person, directly or indirectly,
any advance, account receivable (other than an account receivable arising in the
ordinary course of business of such Person), loan or capital contribution to (by
means of transfers of property to others, payments for property or services for
the account or use of others or otherwise), the purchase of any Capital Stock,
bonds, notes, debentures, partnership or joint venture interests or other
securities of, the acquisition, by purchase or otherwise, of all or
substantially all of the stock or other evidence of beneficial ownership of, any
Person or the making of any investment in any Person. Investments shall exclude
(i) extensions of trade credit on commercially reasonable terms in accordance
with normal trade practices of such Person and (ii) the repurchase of securities
of any Person by such Person. For the purposes of the "Limitation on Restricted
Payments" covenant, the amount of any Investment shall be the original cost of
such Investment plus the cost of all additional Investments by the Issuer or any
of its Restricted Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received in respect of such
Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income. In determining the amount of any
Investment involving the transfer of any property or assets other than cash,
such property shall be valued at its Fair Market Value at the time of such
transfer, as determined in good faith by the Board of Directors of the Person
making such transfer.
"Issue Date" means the date the Senior Notes were first issued by the
Issuer and authenticated by the Trustee under the Indenture.
"Lien" means, with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"Material Subsidiary" means, at any date of determination, (a) any
Restricted Subsidiary that, together with its Subsidiaries that constitute
Restricted Subsidiaries (i) for the most recent fiscal year of the Issuer
accounted for more than 5.0% of the consolidated revenues of the Issuer and the
Restricted Subsidiaries or (ii) as of the end of such fiscal year, owned more
than 5.0% of the consolidated assets of the Issuer and the Restricted
Subsidiaries, all as set forth on the consolidated financial statements of the
Issuer and the Restricted Subsidiaries for such year
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prepared in conformity with GAAP, and (b) any Restricted Subsidiary which, when
aggregated with all other Restricted Subsidiaries that are not otherwise
Material Restricted Subsidiaries and as to which any event described in clause
(g) of "Events of Default" above has occurred, would constitute a Material
Restricted Subsidiary under clause (a) of this definition.
"Net Income" means, with respect to any Person, for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the President or any Vice President and
the Chief Financial Officer or any Treasurer of such Person that shall comply
with applicable provisions of the Indenture.
"Original Credit Facility" means the Issuer's senior secured credit
facility pursuant to the Credit Agreement, dated as of August 16, 1994, by and
among the Issuer, Pen Coal Corporation, River Marine Terminals, Inc., The Elk
Horn Coal Corporation, and Mellon Bank, N.A., as agent and a lender, and the
lenders named therein, as amended.
"Permitted Holders" means William E. Beckner or any Affiliate of William E.
Beckner including any trust established and controlled by William E. Beckner for
the principal benefit of himself or his family members.
"Permitted Indebtedness" means:
(i) Indebtedness, including letters of credit, arising under or in
connection with the Credit Facility in an aggregate principal amount not to
exceed $40.0 million outstanding at any time and less any mandatory
prepayments actually made thereunder (to the extent, in the case of
payments of revolving credit borrowings, that the corresponding commitments
have been permanently reduced) or scheduled payments actually made
thereunder;
(ii) Indebtedness under the Notes and the Guarantees;
(iii) Indebtedness which is outstanding on the Issue Date;
(iv) Indebtedness of the Issuer owed to and held by any Wholly-Owned
Subsidiary which is unsecured and subordinated in right of payment to the
payment and performance of the Issuer's obligations under the Indenture and
the Notes and Indebtedness of any Subsidiary owed to and held by the Issuer
or another Wholly-Owned Subsidiary; provided that (a) any sale or other
disposition of any Indebtedness of the Issuer or any Restricted Subsidiary
referred to in this clause (iv) to a Person (other than the Issuer or a
Wholly-Owned Subsidiary), (b) any sale or other disposition of Capital
Stock of any Restricted Subsidiary which holds Indebtedness of the Issuer
or another Restricted Subsidiary such that such Restricted Subsidiary
ceases to be a Subsidiary of the Issuer and (c) the Designation of a
Restricted Subsidiary that holds Indebtedness of the Issuer or any other
Restricted Subsidiary as an Unrestricted Subsidiary shall be deemed to be
an incurrence of Indebtedness not constituting Permitted Indebtedness by
the Issuer;
(v) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire, lease, construct or improve property used in the
business or other Indebtedness secured by Liens on Property constituting
Rolling Stock which Purchase Money Indebtedness, Capitalized Lease
Obligations and other Indebtedness referenced above do not in the aggregate
exceed, at any one time outstanding, the sum of $10 million plus the amount
of borrowings permitted under clause (i) hereof minus the amount of
outstanding borrowings under clause (i) hereof;
(vi) Interest Rate Agreements relating to Indebtedness of the Issuer
(which Indebtedness (a) bears interest at fluctuating interest rates and
(b) is otherwise permitted to be incurred under "--Certain
Covenants--Limitation on Additional Indebtedness"; provided that (a) such
Interest Rate Agreements have been entered into for bona fide business
purposes and not for speculation and (b) the notional principal amount of
such Interest Rate Agreements, at the time of the incurrence thereof, does
not exceed the principal amount of the Indebtedness to which such Interest
Rate Agreements relate;
(vii) Indebtedness Under Currency Agreements; provided that in the
case of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the principal amount of
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Indebtedness of the Issuer and its Restricted Subsidiaries outstanding
other than as a result of fluctuations in foreign currency exchange rates
or by reason of fees, indemnities or compensation payable thereunder;
(viii) Refinancing Indebtedness;
(ix) Indebtedness resulting from the redemption of the Convertible
Preferred Stock and payment of accumulated dividends thereon, in each case
after January 1, 2006 and in accordance with the Articles of Amendment to
the Restated Charter of the Issuer in effect on the Issue Date; provided,
however, that Indebtedness incurred pursuant to this clause (ix) that could
not be incurred pursuant to the "Limitation on Additional Indebtedness"
covenant shall reduce the aggregate sum of the amounts otherwise available
under clauses (i) and (v) hereof;
(x) Indebtedness incurred in respect of performance, surety, and
similar bonds and the completion guarantees provided by the Issuer or any
Restricted Subsidiary in the ordinary course of business;
(xi) Indebtedness represented by the guarantee by the Issuer or any of
the Guarantors of Indebtedness of the Company or a Guarantor that was
permitted to be incurred under the Indenture;
(xii) additional Indebtedness of the Issuer and its Restricted
Subsidiaries not to exceed $7.0 million at any one time outstanding.
"Permitted Investments" means Investments made on or after the Issue Date
consisting of
(i) Investments by the Issuer, or by a Restricted Subsidiary thereof,
in the Issuer or a Wholly-Owned Subsidiary;
(ii) Investments by the Issuer, or by a Restricted Subsidiary thereof,
in a Person, if as a result of such Investment (a) such Person becomes a
Restricted Subsidiary of the Issuer or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Issuer or a
Wholly-Owned Subsidiary thereof;
(iii) Investments in Cash Equivalents;
(iv) reasonable and customary loans and advances made to employees in
connection with their relocation not to exceed $1.0 million in the
aggregate at any one time outstanding;
(v) an Investment that is made by the Issuer or a Restricted
Subsidiary thereof in the form of any Capital Stock, bonds, notes,
debentures or other securities that are issued by a third party to the
Issuer or such Restricted Subsidiary solely as partial consideration for
the consummation of an Asset Sale that is permitted under "--Certain
Covenants--Limitation on Certain Asset Sales" above;
(vi) Investments paid for solely in Capital Stock (other than
Disqualified Capital Stock) of the Issuer;
(vii) Interest Rate Agreements and Currency Agreements entered into in
the ordinary course of the Issuer's or its Restricted Subsidiaries'
business;
(viii) Investments in International Marine Terminals (a) to repay
indebtedness to Mellon Bank, N.A. of approximately $7.7 million due in 2000
and to repay approximately $13.3 million of bonds due 2006 issued by
International Marine Terminals, provided, however, that such Investments
shall only be Permitted Investments to the extent they are derived from
Investments that the Issuer had deposited in escrow as of the Issue Date to
fund such obligations of International Marine Terminals and (b) in
accordance with the Issuer's partnership obligations existing on the Issue
Date with respect to International Marine Terminals.
(ix) Investments in existence on the Issue Date; and
(x) other Investments that do not exceed $3.0 million in the aggregate
at any one time outstanding.
"Permitted Liens" means (i) Liens on Property or assets of, or any Capital
Stock of, any corporation existing at the time such assets are acquired by the
Issuer or any of its Subsidiaries, whether by merger, amalgamation,
consolidation, purchase of assets or otherwise; provided that such Liens (x) are
not created, incurred or assumed in connection with, or in contemplation of,
such assets being acquired by the Issuer or its Subsidiaries and (y) that
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any such Lien does not extend to or cover any property, Capital Stock or
Indebtedness other than the property, assets, Capital Stock or Indebtedness of
such corporation or a Subsidiary of such corporation, (ii) Liens securing
Refinancing Indebtedness; provided that any such Lien does not extend to or
cover any Property, Capital Stock or Indebtedness other than the Property,
Capital Stock or Indebtedness securing the Indebtedness so refunded, refinanced
or extended, (iii) Liens in favor of the Issuer or any of its Restricted
Subsidiaries, (iv) Liens to secure Purchase Money Indebtedness that is otherwise
permitted under the Indenture; provided that (a) any such Lien is created solely
for the purpose of securing Indebtedness representing, or incurred to finance,
refinance or refund, the cost (including sales and excise taxes, installation
and delivery charges and other direct costs of, and other direct expenses paid
or charged in connection with, such purchase or construction) of such Property,
(b) the principal amount of the Indebtedness secured by such Lien does not
exceed 100% of such costs, and (c) such Lien does not extend to or cover any
Property other than such item of Property and any improvements on such item, (v)
statutory liens or landlords', carriers', warehousemen's, unemployment
insurance, surety or appeal bonds, mechanics', suppliers', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business with
respect to amounts not yet delinquent or being contested in good faith by
appropriate proceedings, if a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made therefor, (vi)
Liens existing on the Issue Date, (vii) Liens securing only the Notes or the
Guarantees,(viii) easements, reservation of rights of way, restrictions
(including, but not limited to, zoning and building restrictions) and other
similar easements, licenses, restrictions on the use of properties, or minor
imperfections of title that in the aggregate are not material in amount and do
not in any case materially detract from the properties subject thereto or
interfere with the ordinary conduct of the business of the Issuer and its
Restricted Subsidiaries, (ix) Liens for taxes, assessments or governmental
charges that are being contested in good faith by appropriate proceedings;
provided that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor, (x) Liens securing
Capitalized Lease Obligations otherwise permitted under the Indenture; provided
that such Lien does not extend to any property other than that subject to the
underlying lease, (xi) Liens under the Credit Facilities and obligations under
Interest Rate Agreements, Currency Agreements and commodity agreements, securing
such Credit Facilities and obligations in an amount not to exceed $75 million in
the aggregate and permitted to be incurred under the Indenture, (xii) Liens
created or deposits made to secure the performance of tenders, bids, leases,
statutory obligations, government contracts, performance bonds and other
obligations of a like nature incurred in the ordinary course of business, (xiii)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods,
(xiv) Liens arising pursuant to Sale and Leaseback transactions entered into in
compliance with the Indenture, (xv) Liens incurred in the ordinary course of
business of the Issuer or any of its Subsidiaries with respect to $5 million at
any one time outstanding and that (a) are not incurred in connection with the
borrowing of money or the obtaining of advances or credit (other than trade
credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of property or materially impair the use
thereof in the operation of business by the Company or such Subsidiary and (xvi)
Liens on Property constituting Rolling Stock of any Person securing Indebtedness
otherwise permitted under the Indenture, provided that such Liens do not extend
to or cover any other Property and (xvii) any extension, renewal or replacement,
in whole or in part, of any Lien described in the foregoing clauses (i) through
(xvii); provided that any such extension, renewal or replacement shall be no
more restrictive in any material respect than the Lien so extended, renewed or
replaced and shall not extend to any other Property of the Issuer or its
Subsidiaries other than such item of Property originally covered by such Lien or
by improvement thereon or additions or accessions thereto.
"Person" means any individual, corporation, partnership, limited liability
Company, joint venture, association, joint-stock Company, trust, unincorporated
organization or government (including any agency or political subdivision
thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
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"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"Public Equity Offering" means a public offering by the Company or any
parent of shares of its Common Stock (however designated and whether voting or
non-voting) and any and all rights, warrants or options to acquire such Common
Stock.
"Purchase Money Indebtedness" means any Indebtedness incurred by a Person
to finance the cost (including the cost of construction, installation or
improvement) of an item of property used in the business, the principal amount
of which Indebtedness does not exceed the sum of (i) the lesser of (A) the Fair
Market Value of such property or (B) 100% of such cost and (ii) reasonable fees
and expenses of such Person incurred in connection therewith.
"Refinancing Indebtedness" means Indebtedness that replaces, refunds,
renews, refinances or extends any Indebtedness of the Issuer or a Restricted
Subsidiary outstanding on the Issue Date or other Indebtedness permitted to be
incurred by the Issuer or its Restricted Subsidiaries pursuant to the terms of
the Indenture, but only to the extent that (i) the Refinancing Indebtedness is
subordinated to the Notes to at least the same extent as the Indebtedness being
replaced, refunded, renewed, refinanced or extended, if at all, (ii) the
Refinancing Indebtedness is scheduled to mature either (a) no earlier than the
Indebtedness being replaced, refunded, renewed, refinanced or extended, or (b)
after the maturity date of the Notes, (iii) the portion, if any, of the
Refinancing Indebtedness that is scheduled to mature on or prior to the maturity
date of the Notes has a weighted average life to maturity at the time such
Refinancing Indebtedness is incurred that is equal to or greater than the
weighted average life to maturity of the portion of the Indebtedness being
replaced, refunded, renewed, refinanced or extended that is scheduled to mature
on or prior to the maturity date of the Notes, (iv) such Refinancing
Indebtedness is in an aggregate principal amount that is equal to or less than
the sum of (a) the aggregate principal amount then outstanding under the
Indebtedness being replaced, refunded, renewed, refinanced or extended, (b) the
amount of accrued and unpaid interest, if any, and premiums owed, if any, not in
excess of preexisting prepayment provisions on such Indebtedness being replaced,
refunded, renewed, refinanced or extended and (c) the amount of customary fees,
expenses and costs related to the incurrence of such Refinancing Indebtedness,
and (v) such Refinancing Indebtedness is incurred by the same Person that
initially incurred the Indebtedness being replaced, refunded, renewed,
refinanced or extended, except that the Issuer may incur Refinancing
Indebtedness to refund, refinance or extend Indebtedness of any Wholly-Owned
Subsidiary of the Issuer.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock of
the Issuer or any Restricted Subsidiary of the Issuer or any payment made to the
direct or indirect holders (in their capacities as such) of Capital Stock of the
Issuer or any Restricted Subsidiary of the Issuer (other than (x) dividends or
distributions payable solely in Capital Stock (other than Disqualified Capital
Stock) or in options, warrants or other rights to purchase such Capital Stock
(other than Disqualified Capital Stock), and (y) in the case of Restricted
Subsidiaries of the Issuer, dividends or distributions payable to the Issuer or
to a Wholly-Owned Subsidiary of the Issuer), (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock of the Issuer or
any of its Restricted Subsidiaries (other than Capital Stock of a Restricted
Subsidiary owned by the Issuer or a Wholly-Owned Subsidiary of the Issuer) or
any options, warrants or other rights to purchase such Capital Stock) or any
options, warrants or other rights to purchase such Capital Stock, (iii) the
making of any principal payment on, or the purchase, defeasance, repurchase,
redemption or other acquisition or retirement for value, prior to any scheduled
maturity, scheduled repayment or scheduled sinking fund payment, of any
Indebtedness which is subordinated in right of payment to the Notes (other than
Indebtedness of a Restricted Subsidiary held by the Issuer or a Wholly-Owned
Subsidiary), (iv) the making of any Investment or guarantee of any Investment in
any Person other than a Permitted Investment, (v) the designation of any
Subsidiary of the Issuer as an Unrestricted Subsidiary (a "Designation");
provided that the Designation of a Subsidiary of the Issuer as an Unrestricted
Subsidiary shall be deemed to include the Designation of all of the Subsidiaries
of such Subsidiary and (vi) the forgiveness of any Indebtedness of an Affiliate
of the Issuer (other than a Wholly-Owned Subsidiary of the Issuer) owed to the
Issuer or a Restricted Subsidiary of the Issuer. In determining the amount of
any Restricted Payment made under clause
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(v) above, the amount of such Restricted Payment (the "Designation Amount")
shall be equal to the greater of (i) the book value or (ii) the Fair Market
Value of the Issuer's proportionate interest in such Subsidiary on such date.
"Restricted Subsidiary" means a Subsidiary of the Issuer other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Issuer
existing on the Issue Date. The Board of Directors of the Issuer may designate
any Unrestricted Subsidiary or any Person that is to become a Subsidiary as a
Restricted Subsidiary if immediately after giving effect to such action (and
treating any Acquired Indebtedness as having been incurred at the time of such
action), (i) the Issuer could have incurred at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to "--Certain
Covenants--Limitation on Additional Indebtedness" above and (ii) no Default or
Event of Default shall have occurred and be continuing.
"Rolling Stock" means mobile mining equipment.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Issuer or any Restricted Subsidiary of the
Issuer of any real or tangible personal property, which property has been or is
to be sold or transferred by the Issuer or such Restricted Subsidiary to such
Person in contemplation of such leasing.
"Securities Act" means the Securities Act of 1933, as amended and the rules
and regulations of the Commission promulgated thereunder.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, limited liability company, association or other business entity,
whether now existing or hereafter organized or acquired, (i) in the case of a
corporation, of which more than 50% of the total voting power of the Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, officers or trustees thereof is held by such
first-named Person or any of its Subsidiaries; or (ii) in the case of a
partnership, joint venture, limited liability company, association or other
business entity, with respect to which such first-named Person or any of its
Subsidiaries has the power to direct or cause the direction of the management
and policies of such entity by contract or otherwise or if in accordance with
GAAP such entity is consolidated with the first-named Person for financial
statement purposes.
"Taxes" means any present or future tax, duty, levy, impost, assessment or
other government charge (including penalties, interest and any other liabilities
related thereto) imposed or levied by or on behalf of a Taxing Authority.
"Taxing Authority" means any government or any political subdivision or
territory or possession of any government or any authority or agency therein or
thereof having power to tax.
"Tax Settlement" means a settlement between the Issuer and applicable
Taxing Authorities of disputed tax and penalty amounts for all periods up to and
including December 31, 1995.
"Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the Issuer which is classified after the
Issue Date as an Unrestricted Subsidiary by a resolution adopted by the Board of
Directors of the Issuer; provided that a Subsidiary may be so classified as an
Unrestricted Subsidiary only if such classification is in compliance with
"--Certain Covenants--Limitation on Restricted Payments" above. The Trustee
shall be given prompt notice by the Issuer of each resolution adopted by the
Board of Directors of the Issuer under this provision, together with a copy of
each such resolution adopted.
"Wholly-Owned Subsidiary" means any Restricted Subsidiary, all of the
outstanding voting securities (other than directors' qualifying shares or
similar requirements of law) of which are owned, directly or indirectly, by the
Issuer.
BOOK-ENTRY, DELIVERY AND FORM
The Series B Senior Notes will initially be issued in the form of one or
more registered notes in global form (the "Exchange Global Note," and together
with the global notes representing the Senior Notes, the "Global
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Note") or in certificated form. The Exchange Global Note will be deposited on
the Exchange Date with, or on behalf of, the Depository and registered in the
name of the Global Note Holder. See "The Exchange Offer."
DTC has advised the Company that DTC is a limited-purpose trust company
that was created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The Participants
include securities brokers and dealers (including the Initial Purchaser), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests and transfer of ownership
interests of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of the Global Note, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the principal
amount of the Global Note and (ii) ownership of such interests in the Global
Notes will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Notes). Holder are advised that the laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Note to such persons will be limited to such
extent. Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Note to pledge such interests to persons
or entities that do not participate in the DTC system, or otherwise take actions
in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
Payments in respect of the principal of and premium and Additional
Interest, if any, and interest on a Global Note registered in the name of DTC or
its nominee will be payable by the Trustee to DTC in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payments and for any and all other purposes whatsoever.
Consequently, neither the Company, the Trustee nor any agent of the Company or
the Trustee has or will have any responsibility or liability for (i) any aspect
of DTC's records or any Participant's or Indirect Participant's records relating
to or payments made on account of beneficial ownership interests in the Global
Notes, or for maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Notes or (ii) any other matter relating to the
actions and practices of DTC or any of its Participants or Indirect
Participants. DTC has advised the Company that its current practice, upon
receipt of any payment in respect of securities such as the Notes (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in the principal amount of beneficial interests in the
relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the Notes, and the Company and the
Trustees may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (a) notifies the Company that it is unwilling or
unable to continue as Depository for the Global Note and the Company thereupon
fails to appoint a successor Depository or (b) has ceased to be a clearing
agency registered under the Exchange
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Act, (ii) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Notes in certificated form or (iii) there
shall have occurred and be continuing an Event of Default or any event which
after notice or lapse of time or both would be an Event of Default with respect
to the Notes. In addition, beneficial interests in a Global Note may be
exchanged for certificated Notes upon request but only upon at least 20 days
prior written notice given to the Trustee by or on behalf of DTC in accordance
with its customary procedures. In all cases, certificated Notes delivered in
exchange for any Global Note or beneficial interests therein will be registered
in the names, and issued in any approved denominations, requested by or on
behalf of the Depository (in accordance with its customary procedures) and will
bear the applicable restrictive legend unless the Company determines otherwise
in compliance with applicable law.
EXCHANGE OF CERTIFICATED NOTES FOR BOOK ENTRY NOTES
Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the Trustee
a written certificate (in the form provided in the Indenture) to the effect that
such transfer will comply with the appropriate transfer restrictions applicable
to such Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depository in identifying the beneficial owners of
Notes, and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depository for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, and interest) be made by
wire transfer of immediately available same day funds to the accounts specified
by the Global Note Holder. With respect to Certificated Securities, the Company
will make all payments of principal, premium, if any, and interest by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof or, if no such account is specified, by mailing a check to each such
Holder's registered address. Secondary trading in long-term notes and debentures
of corporate issuers is generally settled in clearing-house or next-day funds.
In contract, the Notes represented by the Global Note are expected to be
eligible to trade in the PORTAL Market and to trade in the Depository's Same-Day
Funds Settlement System, and any permitted secondary market trading activity in
such Notes will, therefore, be required by the Depository to be settled in
immediately available funds. The Company expects that secondary trading in the
Certificated Securities will also be settled in immediately available funds.
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REGISTRATION RIGHTS AGREEMENT
In connection with the Offering of the Senior Notes, the Company and the
Guarantors entered into the Exchange Offer Registration Rights Agreement dated
June 8, 1998, pursuant to which they have agreed, for the benefit of the holders
of the Senior Notes, that they will, at their cost, (i) within 75 days after the
Issue Date, file the Exchange Offer Registration Statement with the Commission
with respect to a registered offer to exchange the Senior Notes for the Series B
Senior Notes, which will have terms substantially identical in all material
respects to the Senior Notes (except that the Series B Senior Notes will not
contain terms with respect to transfer restrictions), and (ii) within 150 days
after the Issue Date, use their reasonable best efforts to cause the Exchange
Offer Registration Statement to be declared effective under the Act. Upon the
Exchange Offer Registration Statement being declared effective, the Company will
offer the Series B Senior Notes in exchange for surrender of the Senior Notes.
The Company will keep the Exchange Offer open for not less than 30 days (or
longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to the holders of the Senior Notes. For each Senior Note
surrendered to the Company pursuant to the Exchange Offer, the holder of such
Senior Note will receive an Series B Senior Note having a principal amount at
maturity equal to that of the surrendered Senior Note. Interest on the Series B
Senior Notes will accrue from (A) the later of (i) the last interest payment
date on which interest was paid on the Senior Notes surrendered in exchange
therefor or (ii) if the Senior Notes are surrendered for exchange on a date in a
period which includes the record date for an interest payment date to occur on
or after the date of such exchange and as to which interest will be paid, the
date of such interest payment date or (B) if no interest has been paid on the
Senior Notes from the Issue Date.
Under existing Commission interpretations, the Series B Senior Notes would
in general be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided that, in the case of
broker-dealers, a prospectus meeting the requirements of the Securities Act be
delivered as required. The Company and the Guarantors have agreed for a period
of 180 days after consummation of the Exchange Offer to make available a
prospectus meeting the requirements of the Securities Act to any broker-dealer
for use in connection with any resale of any such Series B Senior Notes acquired
as described below. A broker-dealer which delivers such a prospectus to
purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act, and will be bound by the
provisions of the Exchange Offer Registration Rights Agreement (including a
certain indemnification rights and obligations).
Each holder of Senior Notes that wishes to exchange such Senior Notes for
Series B Senior Notes in the Exchange Offer will be required to make certain
representations including representations that (i) any Series B Senior Notes to
be received by it will be acquired in the ordinary course of its business, (ii)
it has no arrangement with any person to participate in the distribution of the
Series B Senior Notes and (iii) it is not an "affiliate," as defined in Rule 405
of the Securities Act, of the Company or any of the Guarantors, or if it is an
affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the holder is
not a broker-dealer, it will be required to represent that it is not engaged in,
and does not intend to engage in, the distribution of the Series B Senior Notes.
If the holder is a broker-dealer that will receive Series B Senior Notes for its
own account in exchange for Senior Notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Series B Senior Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 180 days of the Issue Date
or, under certain circumstances, if the Initial Purchaser shall so request, the
Company and the Guarantors will, at their own expense, (a) as promptly as
practicable, file the Shelf Registration Statement, (b) use their respective
best efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act and (c) use their respective best efforts to keep
effective the Shelf Registration Statement until the earlier of the disposition
of the Senior Notes covered by the Shelf Registration Statement or two years
after the Issue Date (or such earlier time when the Senior Notes are eligible
for resale pursuant to Rule 144(k) under the Securities Act). The Company will,
in the event of the Shelf Registration Statement, provide to each holder of the
Senior Notes copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
Senior Notes has become effective and take certain other actions as are required
to permit unrestricted resales of the Senior Notes. A holder of the Senior Notes
that sells such Senior
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Notes pursuant to the Shelf Registration Statement generally would be required
to be named as a selling security holder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Exchange Offer Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification rights and obligations).
If the Company and the Guarantors fail to comply with the above provisions
or if any such registration statement fails to become effective, then, as
liquidated damages, additional interest shall become payable in respect of the
Senior Notes as follows:
If (i) (A) the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 75 days after the Issue Date or (B)
notwithstanding that the Company has consummated or will consummate an Exchange
Offer, the Company is required to file a Shelf Registration Statement and such
Shelf Registration Statement is not filed on or prior to the date required by
the Exchange Offer Registration Rights Agreement;
(ii) (A) an Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within 150 days after the Issue Date or (B)
notwithstanding that the Company has consummated or will consummate an Exchange
Offer, the Company is required to file a Shelf Registration Statement and such
Shelf Registration Statement is not declared effective by the Commission on or
prior to the 90th day following the date such Shelf Registration Statement was
filed; or
(iii) either (A) the Company has not exchanged the Series B Senior Notes
for all Senior Notes validly tendered in accordance with the terms of the
Exchange Offer on or prior to 30 days after the date on which the Exchange Offer
Registration Statement was declared effective or (B) the Exchange Offer
Registration Statement ceases to be effective at any time prior to the time that
the Exchange Offer is consummated or (C) if applicable, the Shelf Registration
Statement has been declared effective and such Shelf Registration Statement
ceases to be effective at any time prior to the second anniversary of the Issue
Date;
(each such events referred to in clauses (i) through (iii) above is a
"Registration Default"), the sole remedy available to holders of the Senior
Notes will be the immediate assessment of additional interest ("Additional
Interest") as follows: the per annum interest rate on the Notes will increase by
.50%, and the per annum interest rate will increase by an additional .25% for
each subsequent 90-day period during which the Registration Default remains
uncured, up to a maximum additional interest rate of 2.0% per annum in excess of
the interest rate on the cover of the Prospectus. All Additional Interest will
be payable to holders of the Senior Notes in cash on each interest payment date,
commencing with the first such date occurring after any such Additional Interest
commences to accrue, until such Registration Default is cured. After the date on
which such Registration Default is cured, the interest rate on the Senior Notes
will revert to the interest rate originally borne by the Senior Notes (as shown
on the cover of the Prospectus).
The summary herein of certain provisions of the Exchange Offer Registration
Rights Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Exchange
Offer Registration Rights Agreement, a copy of which will be available upon
request to the Company.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material federal income tax
considerations relevant to the exchange of the Senior Notes for the Series B
Senior Notes, but does not purport to be a complete analysis of all potential
tax effects. The discussion is based upon the United States Internal Revenue
Code of 1986, as amended, (the "Code"), Treasury Regulations, Internal Revenue
Service ("IRS") rulings and pronouncements and judicial decisions now in effect,
all of which are subject to change at any time by legislative, judicial or
administrative action. Any such changes may be applied retroactively in a manner
that could adversely affect a holder of the Series B Senior Notes. The following
discussion assumes that holders hold the Senior Notes and the Series B Senior
Notes as capital assets within the meaning of Section 1221 of the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to the positions of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning
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the tax consequences of the exchange of the Senior Notes for the Series B Senior
Notes or that any such position would not be sustained.
The tax treatment of a holder may vary depending on his or its particular
situation or status. This summary does not address the tax consequences to
taxpayers who are subject to special rules such as insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
entities and individuals, persons holding Senior Notes or Series B Senior Notes
as a part of a hedging or conversion transaction or a straddle and holders whose
"functional currency" is not the U.S. dollar, or aspects of federal income
taxation that may be relevant to a prospective investor based upon such
investor's particular tax situation. In addition, the description does not
consider the effect of any applicable foreign, state, local or other tax laws.
EACH HOLDER SHOULD CONSULT HIS OR ITS OWN TAX ADVISER AS TO THE PARTICULAR
TAX CONSEQUENCES TO HIM OR HER OR IT OF EXCHANGING SENIOR NOTES FOR SERIES B
SENIOR NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS.
EXCHANGE
The exchange of the Series B Senior Notes for Senior Notes should not
constitute a recognition event for federal income tax purposes. Consequently, no
gain or loss should be recognized by holders upon receipt of the Series B Senior
Notes. For purposes of determining gain or loss upon the subsequent exchange of
Series B Senior Notes, a holder's basis in the Series B Senior Notes should be
the same as a holder's basis in the Senior Notes exchanged therefor. Holders
should be considered to have held the Series B Senior Notes from the time of
their original acquisition of the Senior Notes. As used herein, the term "Senior
Note" refers to both a Senior Note and a Series B Senior Note received in
exchange therefor.
INTEREST ON THE SERIES B SENIOR NOTES
A holder of a Series B Senior Note will be required to report as income for
federal income tax purposes interest earned on a Series B Senior Note in
accordance with the holder's method of tax accounting. A holder of a Series B
Senior Note using the accrual method of accounting for tax purposes is, as a
general rule, required to include interest in ordinary income as such interest
accrues. A cash basis holder must include interest in income when cash payments
are received by (or made available to) such holder.
MARKET DISCOUNT
If a holder acquired a Senior Note at a market discount (i.e., at a price
less than the stated redemption price at maturity of the Senior Note), the
Senior Note is subject to the market discount rules of the Code unless the
market discount is de minimis. Market discount is de minimis if it is less than
one quarter of one percent of the principal amount of the Senior Note multiplied
by the number of complete years to maturity after the holder acquired the Senior
Note. If the holder exchanges an Senior Note that has more than de minimis
market discount for a Series B Senior Note, the Series B Senior Note also will
be subject to the market discount rules of the Code. Series B Senior Notes
purchased by a subsequent purchaser also will be subject to the market discount
rules if the Series B Senior Notes are purchased with more than a de minimis
amount of market discount. Notes that have more than de minimis market discount
are herein referred to as "Market Discount Notes."
Any gain recognized on the maturity or disposition of a Market Discount
Note will be treated as ordinary income to the extent that such gain does not
exceed the accrued market discount on the Market Discount Note. Alternatively, a
holder may elect to include market discount in income currently over the life of
the Market Discount Note. Such an election shall apply to all debt instruments
with market discount acquired by the holder on or after the first day of the
first taxable year to which the election applies. This election may not be
revoked without the consent of the IRS.
Market discount will accrue on a straight-line basis unless the holder
elects to accrue market discount on a constant yield to maturity basis. Such an
election shall apply only to the Market Discount Note with respect to which it
is made and may not be revoked without the consent of the IRS. A holder who does
not elect to include
110
<PAGE> 112
market discount in income currently generally will be required to defer
deductions for interest on borrowings allocable to a Market Discount Note in an
amount not exceeding the accrued market discount on the Market Discount Note
until the maturity or disposition of the Market Discount Note.
AMORTIZABLE BOND PREMIUM
A holder that purchased a Senior Note for an amount in excess of its
principal amount may elect to treat such excess as "amortizable bond premium,"
in which case the amount required to be included in the holder's income each
year with respect to interest on the Senior Note will be reduced by the amount
of amortizable bond premium allocable (based on the yield to maturity of the
Senior Note) to such year. If a holder made an election to amortize bond premium
with respect to a Senior Note and exchanges the Senior Note for a Series B
Senior Note pursuant to the Exchange Offer, the election will apply to the
Series B Senior Note. A holder who exchanges a Senior Note for which an election
has not been made for a Series B Senior Note, and a subsequent purchaser of a
Series B Senior Note, may also elect to amortize bond premium if the holder
acquired the Note for an amount in excess of its principal amount. Any election
to amortize bond premium shall apply to all bonds (other than bonds the interest
on which is excludable from gross income) held by the holder at the beginning of
the first taxable year to which the election applies or thereafter acquired by
the holder, and is irrevocable without the consent of the IRS.
DISPOSITION OF THE SERIES B SENIOR NOTES
Subject to the market discount rules discussed above, a holder of Series B
Senior Notes will recognize gain or loss upon the sale. redemption, retirement
or other disposition of such securities equal to the difference between (i) the
amount of cash and the fair market value of the property received (except to the
extent attributable to the payment of accrued interest) and (ii) the holder's
adjusted tax basis in the securities. Gain or loss recognized will be capital
gain or loss provided the Series B Senior Notes are held as capital assets by
the holder, and will be long-term capital gain or loss if the holder has held
such securities (or is treated as having held such securities) for more than one
year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Holders of the Series B Senior Notes may be subject to backup withholding
at a rate of 31% with respect to interest paid on the Notes unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the requirements of the backup
withholding rules.
The Company will report to the holders of the Notes and the IRS the amount
of any "reportable payment" for each calendar year and amount of tax withheld.
if any, with respect to payments on the Series B Senior Notes.
EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO IT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE NOTES
(INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX
LAWS).
PLAN OF DISTRIBUTION
Each broker-dealer that receives, as a result of market making or other
trading activities, Series B Senior Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of the Series B
Senior Notes. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of Series B
Senior Notes received in exchange for Senior Notes acquired as a result of
market-making activities or other trading activities. The Company has agreed
that it will make this Prospectus available to any broker-dealer for use in
connection with any such resale for a period of 180 days after the consummation
of the Exchange Offer or, if earlier, or until all participating broker-dealers
have so resold.
111
<PAGE> 113
The Company will not receive any proceeds from any sale of Series B Senior
Notes by broker-dealers for their own account pursuant to the Exchange Offer may
be sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the Series
B Senior Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concession from any such broker-dealer and/or the purchasers of
any Series B Senior Notes. Any broker-dealer that resells Series B Senior Notes
that were received by it for its own account pursuant to the Exchange Offer and
any broker-dealer that participates in a distribution of Series B Senior Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any resale of Series B Senior Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The Company has not entered into any arrangement or understanding with any
person to distribute the Series B Senior Notes to be received in the Exchange
Offer and to the best of the Company's information and belief, each person
participating in the Exchange Offer is acquiring the Series B Senior Notes in
its ordinary course of business and has no arrangement or understanding with any
person to participate in the distribution of the Series B Senior Notes to be
received in the Exchange Offer.
The Canadian Imperial Bank of Commerce ("CIBC"), an affiliate of CIBC
Oppenheimer Corp., the Initial Purchaser of the Senior Notes, is an agent and a
lender under the Exchange Credit Facility. In such capacities, CIBC will receive
customary fees and expenses and its proportionate share of any repayments of
borrowings under the Exchange Credit Facility. Pursuant to the Offering, CIBC
has received its proportionate share of repayment under the Original Credit
Facility and its proportionate share of proceeds from redemption of the Bank
Warrants.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company and the
Guarantors by Buchanan Ingersoll Professional Corporation, Pittsburgh,
Pennsylvania.
EXPERTS
The Company's consolidated financial statements as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, given on the authority of said firm as experts in
auditing and accounting.
The information appearing in this Prospectus concerning estimates of the
Company's reserves (other than the Company's Fork Creek reserves) has been
audited by Marshall Miller and has been included herein upon the authority of
that firm as experts. The information appearing in this Prospectus concerning
estimates of the Company's Fork Creek reserves has been audited by Stagg
Engineering and has been included herein upon the authority of that firm as
experts.
112
<PAGE> 114
PEN HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants...................... F-2
Consolidated Balance Sheet as of December 31, 1997 and
1996.................................................. F-3
Consolidated Statement of Income for the Years Ended
December 31, 1997, 1996 and 1995...................... F-4
Consolidated Statement of Changes in Shareholders'
Equity for the Years Ended December 31, 1997, 1996 and
1995.................................................. F-5
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995................ F-6
Notes to Consolidated Financial Statements............. F-8
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of June 30, 1998
(Unaudited)........................................... F-23
Consolidated Statement of Income for the Six Months
Ended June 30, 1998 and 1997 (Unaudited).............. F-24
Consolidated Statement of Changes in Shareholders'
Equity for the Six Months Ended June 30, 1998
(Unaudited)........................................... F-25
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Unaudited).............. F-26
Notes to Consolidated Financial Statements
(Unaudited)........................................... F-27
</TABLE>
F-1
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors
of Pen Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Pen Holdings, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Nashville, Tennessee
February 20, 1998, except
as to the third paragraph
of Note 17 which is as of
October 1, 1998
F-2
<PAGE> 116
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,151 $ 1,885
Accounts receivable (net of allowance for doubtful
accounts of $436 and $412 in 1997 and 1996,
respectively)........................................... 17,497 17,823
Inventories............................................... 4,760 7,134
Deferred income taxes..................................... 1,160 1,365
Net assets to be disposed (Note 7)........................ 4 851
Other assets.............................................. 2,315 1,321
-------- --------
Total current assets.................................... 31,887 30,379
Investment in unconsolidated affiliated companies........... 5,393 6,055
Coal reserves and mine development costs, net............... 138,502 126,329
Property, plant and equipment, net.......................... 34,013 53,781
Long-term investments....................................... 13,323 12,815
Net assets to be disposed (Note 7).......................... 566 716
Other assets................................................ 1,163 1,678
-------- --------
$224,847 $231,753
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit loans.................................... $ -- $ 3,378
Current maturities of long-term debt...................... 11,177 9,509
Current maturities of capital leases...................... 3,936 2,954
Accounts payable.......................................... 7,704 6,761
Accrued expenses.......................................... 5,090 7,837
Income taxes payable...................................... 1,047 943
-------- --------
Total current liabilities............................... 28,954 31,382
Long-term debt.............................................. 68,440 77,532
Long-term capital leases.................................... 2,818 3,500
Deferred income taxes....................................... 59,891 62,243
Other liabilities........................................... 3,817 3,841
-------- --------
Total liabilities....................................... 163,920 178,498
-------- --------
Guaranties, commitments and contingencies (Notes 16 and 17)
Mandatorily redeemable preferred stock (Note 11)............ 17,097 15,344
Redeemable common stock warrants (Note 12).................. 2,344 2,125
-------- --------
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 (200,000 shares in 1996)
issued and outstanding.................................. 2 2
Additional paid-in capital................................ 19 19
Retained earnings......................................... 41,422 35,722
-------- --------
Total shareholders' equity.............................. 41,486 35,786
-------- --------
$224,847 $231,753
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 117
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................. $182,289 $182,469 $186,043
Operating expenses
Cost of sales.......................................... 164,670 164,963 167,111
Selling, general and administrative.................... 6,090 5,608 6,092
-------- -------- --------
Operating income......................................... 11,529 11,898 12,840
Other (income) expense
Interest expense....................................... 7,906 9,186 10,340
Interest income........................................ (1,224) (1,087) (1,572)
Other income........................................... (4,901) (1,797) (126)
-------- -------- --------
Income from continuing operations before income taxes.... 9,748 5,596 4,198
Provision for income taxes............................... 2,246 1,463 1,137
-------- -------- --------
Net income from continuing operations.................... 7,502 4,133 3,061
Discontinued operations:
Income (loss) from discontinued operations (less
applicable income tax credits of $393 in 1996 and $4 in
1995, and minority interest of $187 (loss) in 1996 and
$2 (income) in 1995.).................................. -- (750) 70
Loss on disposal of discontinued operations, including
provision of $502 for operating losses during phase-out
period (less applicable income tax credits of $105 in
1997 and $367 in 1996, and minority interest of $27 in
1997 and $125 loss in 1996.)........................... (35) (698) --
-------- -------- --------
Net income............................................... 7,467 2,685 3,131
Accretion of preferred stock............................. 1,753 1,694 --
-------- -------- --------
Net income available to common shareholders.............. $ 5,714 $ 991 $ 3,131
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 118
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<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, 1994.... 4,250,000 $42 $19 $ 61,252 $ 61,313
Dividends....................... (100) (100)
Recapitalization, issuance of
Class I Common Stock and
reissuance of treasury stock
(Note 13)..................... 40,000 1 (29,552) (29.551)
Net Income...................... 3,131 3,131
---------- --- -------- --- --- -------- --------
Balance at December 31, 1995.... 4,290,000 43 19 34,731 34,793
Issuance of Class II Common
Stock......................... 200,000 2 2
Accretion of Preferred Stock.... (1,694) (1,694)
Net Income...................... 2,685 2,685
---------- --- -------- --- --- -------- --------
Balance at December 31, 1996.... 4,290,000 43 200,000 2 19 35,722 35,786
Purchase of Treasury Stock and
concurrent cancellation....... (22,450) (14) (14)
Accretion of Preferred Stock.... (1,753) (1,753)
Net Income...................... 7,467 7,467
---------- --- -------- --- --- -------- --------
Balance at December 31, 1997.... 4,290,000 $43 177,550 $ 2 $19 $ 41,422 $ 41,486
========== === ======== === === ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 119
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 7,467 $ 2,685 $ 3,131
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization................ 15,406 14,921 14,188
Equity in net losses of affiliates...................... 167 111 (149)
Deferred income taxes................................... (1,027) (404) (741)
Gain on sale of equipment............................... (6,339) (731) (153)
Minority interest proportionate share of earnings....... (27) (312) 3
Interest income on long-term investments................ (1,070) (980) (970)
-------- -------- --------
Cash generated from operations, before changes in assets
and liabilities...................................... 14,577 15,290 15,309
Changes in assets and liabilities, net of effects from
dispositions:
Accounts receivable..................................... 3,236 (482) 2,400
Inventories............................................. 4,079 6,327 9,053
Accounts payable and accrued expenses................... (3,579) (3,897) (4,712)
Other................................................... (811) 1,736 1,126
-------- -------- --------
Net cash provided by operating activities............... 17,502 18,974 23,176
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit of escrowed funds............................... -- (499) 2,326
Capital expenditures.................................... (3,871) (2,321) (4,615)
Purchase of coal reserves (Note 14)..................... (5,000) -- --
Proceeds from sale of barges and equipment.............. 23,494 5,138 874
Distributions from affiliated companies................. 277 122 614
-------- -------- --------
Net cash provided (used) by investing activities........ 14,900 2,440 (801)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................ -- 2 42
Payment to minority shareholder for common stock........ -- (12,500) --
Dividend paid........................................... -- -- (100)
Proceeds from issuance of long-term debt................ 221 4,300 --
Repayment of long-term debt............................. (19,360) (14,187) (5,400)
Repayment of capital leases............................. (3,798) (5,486) (5,567)
Net borrowings (payments) under line of credit
agreements and current notes payable................. (5,185) 182 (7,702)
Distribution to minority partner........................ -- -- (682)
Purchase of treasury stock.............................. (14) -- --
-------- -------- --------
Net cash used for financing activities.................. (28,136) (27,689) (19,409)
-------- -------- --------
Net increase (decrease) in cash......................... 4,266 (6,275) 2,966
Cash and cash equivalents at beginning of year.......... 1,885 8,160 5,194
-------- -------- --------
Cash and cash equivalents at end of year................ $ 6,151 $ 1,885 $ 8,160
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 120
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest............................................... $8,096 $10,793 $9,333
Income taxes........................................... 3,414 197 3,099
</TABLE>
SUPPLEMENTAL INFORMATION ON NON-CASH TRANSACTIONS:
The Company leased certain machinery and equipment under capital leases as
more fully described in Note 10.
The Company purchased property containing coal reserves in December 1997
for consideration of $16,000,000 comprised of $5,000,000 paid at closing and an
$11,000,000 note payable.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 121
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS:
DESCRIPTION OF THE BUSINESS
Pen Holdings, Inc. and its consolidated subsidiaries (the Company) is
primarily engaged in the mining and sale of coal, selling predominantly to
utility companies. The Company also receives royalty income from coal reserves
leased to other companies. The Company's coal reserves and mining operations are
in Kentucky and West Virginia. The Company also processes, warehouses, and sells
cotton and cottonseed.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its majority and wholly-owned subsidiaries. Financial statements of the
subsidiaries are not material for separate presentation. All significant
intercompany balances and transactions have been eliminated in consolidation.
The investment in an affiliated enterprise in which the Company owns less
than a controlling interest is presented under the equity basis of accounting
representing the Company's investment in affiliate, reduced by goodwill
amortization and increased (decreased) by the Company's proportionate equity in
the net income (losses) of the unconsolidated affiliate.
RECOGNITION OF REVENUE
Revenue from sale of coal and cottonseed is recognized when title passes to
the customer. Royalty income is recognized when coal is mined by lessees.
Revenue from cotton ginning and barge rental is recognized when services are
preformed.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid interest-bearing instruments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES
Inventories, consisting of coal and cottonseed, are stated at the lower of
cost or market with cost being determined on the first-in, first-out method.
LONG-TERM INVESTMENTS
Long-term investments are considered as held to maturity and are carried at
amortized cost.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash, accounts receivable, long-term
investments and other off-balance sheet financial instruments. The Company
maintains cash and cash equivalents mostly in large financial institutions.
Concentration of credit risk with respect to trade receivables is limited due to
the diversity of the Company's business and customer base. Long-term investments
principally consist of U.S. Government obligations.
The Company performs continuing credit evaluations of its customers and
does not generally require collateral. Historically, the Company has not
experienced significant losses related to individual customers in any particular
industry or geographic region.
F-8
<PAGE> 122
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable,
short-term notes payable, revolving credit loans and accounts payable
approximate fair value due to the short-term maturities of these assets and
liabilities. The carrying amount of long-term debt approximates fair value as
the interest rates on substantially all long-term debt are variable. The
carrying amount of mandatorily redeemable stock approximates fair value as the
dividend rate is the equivalent of a market rate for securities of that type.
The market value of long-term investments in U.S. Government obligations was
$15,550,000 and $14,156,000 at December 31, 1997 and 1996, respectively, based
on market quotes with a carrying amount of $13,305,000 and $12,815,000,
respectively.
DEBT ISSUANCE COSTS
Debt issuance costs are recorded as assets and amortized over the lives of
related debt.
COAL RESERVES AND MINE DEVELOPMENT COSTS
Depletion of coal reserves and certain mine development costs are
recognized based on tons mined during the year as a percentage of total
estimated recoverable tons. Estimated recoverable reserves include only proven
and probable reserves. The Company capitalizes all development costs for
construction in new areas being developed (including employee costs for
employees directly involved in development; site preparation costs; and interest
related to the assets being employed). Once the assets are placed in service,
the Company amortizes these costs over their expected lives. Exploration costs
are expensed as incurred until discovery of proven and probable reserves. Such
expenditures approximated $241,000, $436,000 and $210,000 in 1997, 1996 and
1995, respectively.
PROPERTY, PLANT AND EQUIPMENT
Equipment and other properties are recorded at cost and depreciated over
the estimated useful lives of the respective assets using the straight-line
method. Amortization of capitalized lease assets is included in depreciation
expense and accumulated depreciation. Depreciation expense was $8,599,000 in
1997, $8,897,000 in 1996 and $8,695,000 in 1995. Estimated useful lives are as
follows:
<TABLE>
<S> <C>
Barges............................................ 25 years
Building and improvements......................... 10-20 years
River terminals................................... 10-20 years
Machinery and equipment........................... 5-10 years
</TABLE>
GOODWILL AND LONG-LIVED ASSETS
Goodwill related to the Company's investment in affiliated companies is
amortized using the straight-line method over 25 years. Amortization expense of
$219,000 was recognized in each of the years 1997, 1996, and 1995. Goodwill is
included in investment in unconsolidated affiliated companies in the
consolidated balance sheet. The Company periodically reviews the recoverability
of all long-lived assets using a cash flow analysis. If impairment of value
exists, a loss is recognized. No adjustment for impairment was necessary at
December 31, 1997 or 1996.
RECLAMATION COSTS
The Company is subject to various laws and regulations which require the
restoration and reclamation of mined properties. The Company accrues the
reclamation costs for surface mine restoration as the mining operations occur.
Reclamation costs associated with site restoration for the Company's coal
preparation plant are
F-9
<PAGE> 123
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
accrued over the estimated useful life of the plant using the units of
production method. The accrued reclamation costs, amounting to $3,278,000 and
$3,084,000 at December 31, 1997 and 1996, are substantially included in other
noncurrent liabilities, net of a current portion based on management's estimate
of funds to be disbursed within the following year.
COST OF SALES AND GENERAL AND ADMINISTRATIVE EXPENSES
Cost of sales includes direct and indirect cost of production, processing
and transportation. Selling, general and administrative expenses include selling
costs and general corporate expenses of the Company.
INCOME TAXES
Provisions for federal and state income taxes are calculated on reported
financial statement pretax income based on current tax law. Deferred income
taxes are provided for the temporary differences between the financial reporting
basis and income tax basis of the Company's assets and liabilities. The
Company's temporary differences consist primarily of excess financial accounting
basis over tax basis of acquired coal reserves, depreciation, depletion and
timing of certain revenue and expense recognition.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
NOTE 3--INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Coal......................................... $3,990 $6,444
Cottonseed................................... 770 690
------ ------
$4,760 $7,134
====== ======
</TABLE>
NOTE 4--COAL RESERVES AND MINE DEVELOPMENT COSTS:
Coal reserves and mine development costs consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Coal reserves............................ $147,953 $131,798
Mine development costs................... 10,387 9,843
-------- --------
158,340 141,641
Accumulated depletion.................... (19,838) (15,312)
-------- --------
$138,502 $126,329
======== ========
</TABLE>
Depletion expense was $6,055,000, $5,337,000, and $4,840,000 in 1997, 1996,
and 1995, respectively.
F-10
<PAGE> 124
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 5--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Machinery and equipment.................. $ 46,453 $ 48,067
Barges................................... -- 22,623
River terminals.......................... 11,488 11,201
Buildings................................ 5,595 5,731
Coal preparation plant................... 6,351 6,389
Cotton gins and warehouses............... 1,349 1,322
Other.................................... 2,733 2,134
-------- --------
73,969 97,467
Accumulated depreciation................. (39,956) (43,686)
-------- --------
$ 34,013 $ 53,781
======== ========
</TABLE>
Machinery and equipment includes assets under capital leases with aggregate
cost of $14,856,000 and $23,918,000 at December 31, 1997 and 1996, respectively.
Accumulated amortization related to these capitalized leased assets was
$7,463,000 and $14,130,000 at December 31, 1997 and 1996, respectively.
Amortization expense was $3,379,000 in 1997, $4,470,000 in 1996 and $3,307,000
in 1995.
Buildings include an office building that serves as the Company's
headquarters. The carrying value of the building was $3,078,000 and $3,249,000
at December 31, 1997 and 1996, respectively. Depreciation expense recognized on
the building was $171,000, $157,000 and $145,000 in 1997, 1996 and 1995,
respectively.
NOTE 6--LONG-TERM INVESTMENTS:
Long-term investments include zero coupon U.S. Treasury bonds held in
escrow in connection with the Company's purchase of Marine Terminals, Inc.
having maturity dates as follows (in thousands at December 31, 1997):
<TABLE>
<CAPTION>
CARRYING MARKET
VALUE VALUE
-------- -------
<S> <C> <C>
2000....................................... $ 6,176 $ 6,895
2006....................................... 7,129 8,655
------- -------
$13,305 $15,550
======= =======
</TABLE>
NOTE 7--NET ASSETS TO BE DISPOSED:
The Company is exiting the business segments unrelated to its core coal
operations. In line with this strategy, the following transactions occurred in
1996:
DISPOSAL OF OPERATING UNIT
In September 1996, the Company sold substantially all of the assets of Pen
Cotton Company, a wholly-owned subsidiary engaged in cotton ginning and
warehousing in west Tennessee. The selling price was $5,000,000, paid by
$4,500,000 cash at closing and the issuance of a $500,000 note receivable with a
five-year term. The Company continues to own and operate its cotton ginning
operations in South Carolina, therefore the disposition of assets in west
Tennessee is treated as a sale of assets. The gain of approximately $975,000
resulting from the sale is included in other income in 1996.
F-11
<PAGE> 125
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7--NET ASSETS TO BE DISPOSED: (CONTINUED)
DISPOSAL OF BUSINESS SEGMENTS--DISCONTINUED OPERATIONS
In August 1996, the Company elected to dispose of its cotton merchandising
business conducted by a wholly-owned subsidiary, Pen Cotton Company of Alabama.
The Company ceased trading activities at that time and maintained operations
until its existing purchase and sales commitments expired in September 1997. The
Company recorded an initial provision for losses on disposal of the cotton
merchandising operations of $408,000 (net of income tax credits of $213,000) in
August 1996. At December 31, 1996, a liability of $199,000 was included in net
assets to be disposed to provide for future losses on disposal of Pen Cotton
Company of Alabama. In 1997, the Company recorded income of $45,000 (net of
income tax credits of $75,000) from final disposal of this division. The Company
had no continuing cotton merchandising operations and no amounts were accrued
for future losses at December 31, 1997.
In October 1996, the Company made a decision to dispose of the hardwood
lumber operations of Pen Hardwood Company (a wholly-owned subsidiary which owns
a 78% interest in the general partnership Camden Hardwood Company). The Company
recorded an initial provision for losses on disposal of its hardwood lumber
operations of $290,000 (net of income tax credits of $150,000 and minority
interest of $125,000). At December 31, 1996, a liability of $255,000 was
included in net assets to be disposed to provide for future losses on disposal
of Pen Hardwood Company. The operations were terminated in 1997 and the Company
recorded an additional provision for losses on disposal of $80,000 (net of
income tax credits of $30,000 and minority interest of $27,000). A liability of
$142,000 was included in net assets to be disposed at December 31, 1997 to
provide for future losses on disposal of the hardwood lumber operations. The
Company had no continuing hardwood lumber operations at December 31, 1997. All
remaining inventory and fixed assets were sold in August 1998 in exchange for
$25,000 cash and a note receivable in the amount of $375,000 resulting in an
additional loss of $13,000.
Net assets to be disposed are comprised of the following included in the
balance sheet (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
PEN COTTON PEN COTTON CO. PEN HARDWOOD
COMPANY OF ALABAMA COMPANY TOTAL
----- ------ ------ ------
<S> <C> <C> <C> <C>
Accounts receivable....................... $ 128 $ 128
Inventories............................... 11 $ 2 13
Other assets.............................. 35 715 750
Loans..................................... (415) (415)
Accounts payable and accrued expenses..... (149) $ (3) (318) (470)
Minority interest......................... (2) (2)
----- ------ ------ ------
Net assets of discontinued operations--
current portion......................... $ 25 $ (3) $ (18) $ 4
===== ====== ====== ======
Net assets of discontinued operations--
non-current portion..................... $ 566 $ 566
===== ======
</TABLE>
F-12
<PAGE> 126
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 7--NET ASSETS TO BE DISPOSED: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------
PEN COTTON PEN COTTON CO. PEN HARDWOOD
COMPANY OF ALABAMA COMPANY TOTAL
----- ------ ------ ------
<S> <C> <C> <C> <C>
Accounts receivable....................... $ 157 $ 2,454 $ 276 $ 2,887
Inventories............................... 1,192 515 1,707
Other assets.............................. 49 86 1,005 1,140
Loans..................................... (957) (1,450) (2,407)
Accounts payable and accrued expenses..... (208) (1,636) (603) (2,447)
Minority interest......................... (29) (29)
----- ------- ------- -------
Net assets of discontinued
operations--current portion............. $ (2) $ 1,139 $ (286) $ 851
===== ======= ======= =======
Investments............................... $ 330 $ 330
Long term accounts receivable............. 386 386
----- ------
Net assets of discontinued operations--
non-current portion..................... $ 716 $ 716
===== ======
</TABLE>
NOTE 8--REVOLVING LINES OF CREDIT:
The Company has available revolving line of credit facilities totaling
$13,500,000, expiring August 1999, which are secured by inventories and
receivables. Borrowings bear interest at a variable rate based on either LIBOR
(an effective rate of 8.25% at December 31, 1997) or the bank's prime lending
rate (an effective rate of 8.50% at December 31, 1997). The revolving lines of
credit had no outstanding balance at December 31, 1997. There was a balance
outstanding of $3,378,000 at December 31, 1996. These agreements contain minimum
operating and financial ratios and covenants as defined in the agreements.
F-13
<PAGE> 127
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 9--LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- -------
<S> <C> <C>
Notes payable secured by coal reserves, land, buildings, and
equipment. Monthly payments of $708,000 plus interest are
due through August 2001, at which time any remaining
balance is due. Additional annual principal payments are
required if the Company's cash flow exceeds certain
amounts defined in the loan agreement. The interest rate
is variable based on LIBOR (an effective rate of 8.25% at
December 31, 1997)........................................ $ 63,271 $71,240
Notes payable secured by coal reserves. Payments of interest
only at the bank's prime lending rate (8.50% at 12/31/97)
are due monthly through December 1999. Monthly principal
payments of $42,000 plus interest are due beginning
January 2000 and increase to $125,000 per month in January
2001 through December 2007................................ 11,000 --
Notes payable secured by a lien on an office building which
serves as the Company's headquarters, with a net book
value of $3,219,000, payable in monthly installments of
$37,000 through 2016. Interest included in the monthly
installments is a fixed rate of 8.33%..................... 4,205 4,293
Notes payable secured by liens on land, buildings and
equipment of a cotton gin and warehouses with a net book
value of $2,296,000, payable in monthly installments of
$20,000 through 2000, including interest at fixed rates of
8.20%..................................................... 1,141 1,192
Notes payable retired in 1997............................... -- 10,316
-------- -------
Total long-term debt........................................ 79,617 87,041
Current maturities of long-term debt........................ (11,177) (9,509)
-------- -------
$ 68,440 $77,532
======== =======
</TABLE>
Certain of these loan agreements contain minimum operating and financial
ratios and covenants as defined in the separate agreements. The Company was in
compliance with all covenants in 1997.
Scheduled principal payments on these obligations as of December 31, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1998................................................ $11,177
1999................................................ 8,319
2000................................................ 8,797
2001................................................ 38,286
2002................................................ 1,803
Thereafter.......................................... 11,235
-------
$79,617
=======
</TABLE>
F-14
<PAGE> 128
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 10--LEASES:
CAPITAL LEASES
Property, plant and equipment (Note 5) includes assets under capital leases
with a total cost of $14,856,000 and accumulated depreciation of $7,463,000.
Future minimum payments in the aggregate under these leases consist of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1998................................................ $ 4,302
1999................................................ 2,011
2000................................................ 711
2001................................................ 188
2002................................................ 56
-------
Total lease payments................................ 7,268
Amount representing interest........................ (514)
-------
Total long-term capital leases...................... 6,754
Current maturities of long-term capital leases...... (3,936)
-------
$ 2,818
=======
</TABLE>
Certain of these lease agreements contain minimum operating and financial
ratios and covenants as defined in the separate agreements. The Company was in
compliance with all covenants in 1997.
OPERATING LEASES
The Company utilizes certain vehicles and equipment under noncancellable
operating lease agreements, with minimum payments as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1998................................................. $ 778
1999................................................. 769
2000................................................. 640
2001................................................. 527
2002................................................. 187
------
$2,901
======
</TABLE>
Total rent expense under these leases aggregated $636,000 in 1997, $284,000
in 1996 and $1,183,000 in 1995.
The Company leases its mining rights in certain coal reserves to other coal
companies. Amounts due to the Company under these leases are based on the
greater of fixed amounts per ton or a percentage of the selling price the lessee
receives for the coal when it is sold. The leases also provide for annual
minimum payments. Revenue recognized from leasing of mining rights was
$8,235,000 in 1997, $9,348,000 in 1996 and $10,738,000 in 1995.
The Company also leases office space to various commercial tenants in the
office building that serves as the Company's headquarters under five year
noncancellable operating leases, including renewal options ranging up to ten
years. Rental income was $678,000 in 1997, $598,000 in 1996 and $561,000 in
1995.
F-15
<PAGE> 129
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 10--LEASES: (CONTINUED)
Future minimum lease payments to be received are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1998................................................ $ 4,500
1999................................................ 3,783
2000................................................ 3,381
2001................................................ 3,139
2002................................................ 2,929
Thereafter.......................................... 15,141
-------
$32,873
=======
</TABLE>
NOTE 11--MANDATORILY REDEEMABLE PREFERRED STOCK:
The Company issued 10,000 shares of convertible preferred stock with a face
value of $13,650,000 in January 1996. No dividends accrue from the date of
issuance through December 2000. Beginning in January 2001, dividends will accrue
at 25.25% for a five-year period. The aggregate amount of $17,233,000 in
dividends which will accrue from 2001 through 2006 is being recorded evenly from
the date of issuance in 1996 through the redemption date in 2006. The preferred
stock calls for mandatory redemption in 2006. The preferred stock will be
redeemed at that time by the issuance of a note payable which amortizes over the
ten years following the redemption. The preferred stock is convertible, at the
option of the holder, into 2,950,000 shares of Class I common stock. The
conversion feature is exercisable in January 2001 and expires in January 2002.
No dividends may be paid on any class of common stock prior to the full
redemption of the convertible preferred stock. The convertible preferred stock
does not contain any voting rights.
NOTE 12--SHAREHOLDERS' EQUITY:
COMMON STOCK
The Company has authorized 7,800,000 shares of Class I common stock and
200,000 shares of Class II common stock, both of which have a par value of $.01
per share. Additional paid-in capital of each class is included with the par
value of the common stock. The total shares issued and outstanding of Class I
and Class II common stock are 4,290,000 and 177,550, respectively, at December
31, 1997.
The Company has reserved 560,000 shares of Class I common stock for
issuance pursuant to option, warrant or other rights granted or which may be
granted to financial institutions with which the Company has a borrowing
relationship. As of December 31, 1997, no Class I common stock has been issued
with regard to these options. No other Class I common shares may be issued until
the convertible preferred stock is redeemed in full.
Each holder of Class I common stock has the option to sell to the Company
100% of the stock held at a price of $.01 per share. This option is exercisable
beginning January 2005 and lapses upon conversion of the convertible preferred
stock to Class I common stock.
The 200,000 shares of authorized Class II common stock were issued in 1996
under the Pen Holdings, Inc. Stock Purchase Plan dated June 1, 1996 to various
officers of the Company. In 1997, 22,450 shares were repurchased for $13,650 by
the Company from one of the officers who resigned. The shares were concurrently
canceled.
F-16
<PAGE> 130
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 12--SHAREHOLDERS' EQUITY: (CONTINUED)
STOCK WARRANTS
The Company issued warrants to purchase 326,772 shares of Class I common
stock in January 1996 to its primary lenders in connection with the
recapitalization in 1995. The exercise price of the warrants equaled the fair
value of the Class I common stock at the date of issuance. The warrants are
exercisable beginning January 2001 at $.01 per share. The warrants expire
January 2006. The Company may, at its option, repurchase the warrants at any
time after January 3, 1997 at the fair value of the Class I common stock
existing on the date the Company exercises this option, subject to a minimum
value of $3,000,000.
The warrants may be put to the Company, at the option of the holder,
beginning January 2001, at the fair value of the Class I common stock existing
on the date this option is exercised, subject to a minimum value of $3,000,000.
The number of shares under warrant and the exercise price are subject to
adjustment in the event of issuance of new shares of the Company's Class I
common stock or a decline in its fair value. The Company has recorded the
present value of its minimum obligation for repurchase of the warrants as
redeemable common stock warrants and a corresponding discount in the underlying
debt. The discount is being amortized as additional interest expense on a
straight-line basis through January 2001.
NOTE 13--RECAPITALIZATION:
The Company completed a recapitalization on December 29, 1995 whereby
4,250,000 shares of the Company's outstanding common stock held by the former
majority shareholder were converted into 4,250,000 shares of Class I common
stock and 10,000 shares of convertible preferred stock with a redemption value
of $13,650,000 (Note 11). The Company then reacquired 4,000,000 shares of Class
I common stock in exchange for cash of $12,500,000, 100% of the Company's
investment in the common stock of Pen Development of California, Inc., which had
a book value of $3,339,000, and company assets with a book value of $63,000. The
recapitalization was accounted for as a treasury stock transaction and resulted
in carryover of the historical basis of the Company's assets and liabilities
existing prior to the recapitalization.
Concurrent with the recapitalization, 4,040,000 shares of Class I common
stock were issued to the Company's Chief Executive Officer for $.01 per share,
representing the fair value of the Class I common stock after the
recapitalization. The fair value of the Class I common stock was based upon an
independent appraisal prepared for the former majority shareholder.
Consequently, the sale of such shares to the Company's Chief Executive Officer
did not result in the recognition of compensation expense.
NOTE 14--SIGNIFICANT TRANSACTIONS:
The Company sold its fleet of 98 barges on December 1, 1997, recognizing a
gain of $3,574,000, which is included in other income. Loans secured by the
barges were retired with proceeds from the sale. Revenue recognized from rental
of the barge fleet totaled $2,300,000 in 1997, $2,321,000 in 1996 and $2,122,000
in 1995.
The Company purchased property containing coal reserves in November 1997
for consideration of $16,000,000 comprised of $5,000,000 paid at closing and an
$11,000,000 note payable (Note 9).
NOTE 15--EMPLOYEE BENEFIT PLANS:
The Company maintains a contributory, defined contribution 401(k) salary
deferral plan to provide retirement and other benefits for its employees. All
employees become eligible after attaining the age of 21, completing one year of
service and working 1,000 hours during the preceding 12 months. The Company
contributes by matching a percentage of employee voluntary contributions.
Company contributions aggregated $431,000 in 1997, $397,000 in 1996 and $322,000
in 1995.
F-17
<PAGE> 131
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 16--INCOME TAXES:
Income tax expense for continuing operations consists of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Current
Federal............................................ $ 3,571 $1,727 $1,909
State.............................................. 161 18 (19)
------- ------ ------
$ 3,732 $1,745 $1,890
------- ------ ------
Deferred
Federal............................................ $(1,486) $ (282) $ (753)
State.............................................. -- -- --
------- ------ ------
$(1,486) $ (282) $ (753)
------- ------ ------
$ 2,246 $1,463 $1,137
======= ====== ======
</TABLE>
Deferred tax benefits of $105,000 and $98,000 have been recognized in the
1997 and 1996 discontinued operations, respectively.
The income tax expense effective rates of 23.1% and 26.1% for 1997 and
1996, respectively, reconcile with the federal statutory tax rate of 34% as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate................... $ 3,314 34.0% $1,903 34.0% $1,427 34.0%
State income taxes (net of federal
income tax benefit)................... 106 1.1 12 0.2 57 1.3
Statutory depletion in excess of cost
depletion............................. (1,259) (12.9) (492) (8.8) (413) (9.8)
Goodwill amortization................... 75 0.8 75 1.3 75 1.8
Other................................... 10 0.1 (35) (0.6) (9) (0.3)
------- ----- ------ ---- ------ ----
$ 2,246 23.1% $1,463 26.1% $1,137 27.0%
======= ===== ====== ==== ====== ====
</TABLE>
The net, noncurrent deferred tax liability in the accompanying balance
sheet includes the following amounts of deferred tax assets and liabilities (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax liability:
Depletion of coal reserves............... $45,165 $46,092
Accelerated depreciation................. 10,178 14,871
Mine development costs................... 3,877 3,368
Other.................................... 3,473 4,433
------- -------
$62,693 $68,764
Deferred tax asset......................... (2,802) (6,521)
------- -------
Net deferred tax liability................. $59,891 $62,243
======= =======
</TABLE>
At December 31, 1997, the Company has alternative minimum tax credit
carryforwards of $2,638,000 available to offset future regular tax liabilities.
F-18
<PAGE> 132
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 16--INCOME TAXES: (CONTINUED)
Deferred taxes primarily result from differences between the financial
accounting and tax basis of acquired coal reserves and differences between the
methods used for computing depreciation and depletion and in the timing of
certain revenue and expense recognition for financial reporting and income tax
purposes. At December 31, 1997, the Company has alternative minimum tax credit
carryforwards of $2,638,000 available to offset future regular tax liabilities.
The IRS, in its examination of the Company's federal income tax returns for
the years 1982 through 1989, proposed adjustments aggregating substantially more
than the Company recognized as income tax expense for the years examined.
Certain of these issues could also be raised with respect to the Company's
federal income tax returns for the years 1990 through 1993, which are currently
under audit.
In 1995, the Company filed a petition in U.S. Tax Court requesting a
determination on the issues raised by the IRS in its examinations for the years
1982 through 1989. In 1997, the IRS conceded to the Company's position on
certain previously asserted claims. If necessary, it is anticipated that a trial
date will be set in 1998. Management believes the Company will prevail on all
substantive issues raised by the IRS and has made provision for any additional
taxes that may ultimately be due upon final resolution of this matter for all
years through December 31, 1997.
NOTE 17--GUARANTIES, COMMITMENTS AND CONTINGENCIES:
The Company is a guarantor of $7,667,000 of International Marine Terminals'
debt (IMT, a partnership in which the Company has a 1/3 interest). The debt is
current. The Company intends to make a capital infusion to IMT to repay
one-third of the partnership's debt ($21,000,000, which includes the $7,667,000
described above) at its scheduled maturity. The Company has escrowed an amount
sufficient to fund this infusion (Note 6).
The Company has been assigned responsibility for specific beneficiaries
under the Coal Industry Retiree Health Benefit Act of 1992 (the "Act"). These
beneficiaries are former employees of The Elk Horn Coal Corporation, acquired by
the Company in 1994. An estimate of total costs for those individuals and
qualifying dependents covered by the Act is recorded as a liability on the
balance sheet of the Company. It is possible that additional individuals will be
assigned to the Company; however, management believes the likelihood that
significant additional liability under the Act will be incurred is remote. The
Company is a guarantor of a loan in the amount of $186,000 to the Company's
partner in Camden Hardwood Company for the partner's capital contribution. The
loan is current.
On September 22, 1998, a Floyd Circuit Court jury found in favor of
Cheyenne Resources, Inc. and its wholly owned subsidiary, PC&H Construction,
Inc. (collectively "Cheyenne") in a suit brought against Elk Horn Coal (a wholly
owned subsidiary of the Company), on a breach of contract and fraud case
relating to a coal lease that was entered into prior to the Company purchasing
Elk Horn Coal. Elk Horn Coal has already appealed the verdict on liability. On
September 24, 1998, Cheyenne first elected its remedies and specified that as
relief it sought over $18 million in compensatory damages and punitive damages.
On October 1, 1998, the jury awarded damages in favor of Cheyenne of $4.5
million attributable to the fraud claim and $5.0 million attributable to the
breach of contract claim. No punitive damages were awarded. Elk Horn Coal's
litigation counsel and management believe that there are numerous meritorious
grounds for reversal and/or modification of these verdicts on appeal on the
issue of liability as well as the issue of damages. However the Company cannot
determine whether the resolution of this matter will have a material adverse
impact on the Company's financial position or results of operations.
There are other legal proceedings pending against the Company arising from
the normal course of business. Management of the Company and its legal counsel
handling such matters do not expect any of these matters to have a material
effect on the Company's financial position or results of operations.
F-19
<PAGE> 133
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 18--OTHER RELATED PARTY TRANSACTIONS:
Related party transactions not otherwise disclosed in the financial
statements include fees paid to International Marine Terminals for coal loading
of $1,988,000 in 1997, $1,864,000 in 1996 and $2,115,000 in 1995. At December
31, 1997 and 1996, $134,000 and $75,000, respectively, was included in accounts
payable and accrued expenses relating to coal loading fees described above.
NOTE 19--LONG-TERM COAL SUPPLY CONTRACTS:
The Company is committed under several long-term coal supply contracts. The
contracts require the Company to supply specified tonnages and quality of coal
during the term of the agreements which extend three to nine years. The
contracts stipulate the base prices at inception, which are subject to periodic
escalation based on specified indices. One of the contracts is subject to
adjustment to an agreed-upon market price annually. The Company has the capacity
to fulfill all contract requirements with existing proven coal reserves.
Approximately 73% of revenues in 1997, 66% in 1996, and 68% in 1995 were derived
from seven customers supplied under long-term contracts. The Company had sales
to significant customers as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------- ---------------------
PERCENTAGE PERCENTAGE PERCENTAGE
DOLLAR OF TOTAL DOLLAR OF TOTAL DOLLAR OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
-------- ---------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer A................... $ 40,131 22% $35,041 19% $ 52,628 28%
Customer B................... 38,740 21 32,579 18 34,398 18
Customer C................... 27,209 15 27,366 15 21,636 12
-------- -- ------- -- -------- --
$106,080 58% $94,986 52% $108,662 58%
======== == ======= == ======== ==
</TABLE>
In 1997, 4,347,000 tons were shipped on long-term coal supply contracts.
Future minimum tonnage commitments under long-term coal supply contracts are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR SHORT TONS
---- ----------
<S> <C>
1998................................................. 3,982
1999................................................. 3,773
2000................................................. 2,862
2001................................................. 2,190
2002................................................. 2,040
</TABLE>
F-20
<PAGE> 134
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 20--BUSINESS SEGMENT INFORMATION:
The Company's operations, exclusive of discontinued operations, have been
classified into two business segments: coal and cotton. The coal segment
involves the mining, sale, transportation and leasing of coal. The cotton
segment involves the ginning and warehousing of cotton. There were no
intersegment sales or transfers during the three years ended December 31, 1997.
Operating income by business segment excludes interest income, interest expense
and other nonoperating income. Summarized financial information by business
segment is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Coal..................................................... $171,996 $165,873 $160,029
Cotton................................................... 10,293 16,596 26,014
-------- -------- --------
$182,289 $182,469 $186,043
======== ======== ========
OPERATING INCOME
Coal..................................................... $ 11,482 $ 11,112 $ 12,109
Cotton................................................... 47 786 731
-------- -------- --------
$ 11,529 $ 11,898 $ 12,840
======== ======== ========
TOTAL ASSETS (AT PERIOD END):
Coal..................................................... $219,162 $225,065 $236,538
Cotton................................................... 5,685 6,688 12,400
-------- -------- --------
$224,847 $231,753 $248,938
======== ======== ========
DEPRECIATION, DEPLETION, AND AMORTIZATION
Coal..................................................... $ 14,948 $ 14,302 $ 13,210
Cotton................................................... 342 440 765
-------- -------- --------
$ 15,290 $ 14,742 $ 13,975
======== ======== ========
CAPITAL EXPENDITURES
Coal..................................................... $ 3,632 $ 2,235 $ 4,311
Cotton................................................... 239 86 304
-------- -------- --------
$ 3,871 $ 2,321 $ 4,615
======== ======== ========
</TABLE>
The Company sells coal to both domestic and foreign customers. Export sales
by country are a follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
PERCENTAGE PERCENTAGE PERCENTAGE
DOLLAR OF TOTAL DOLLAR OF TOTAL DOLLAR OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Taiwan.......................... $40,131 22% $35,041 19% $52,628 28%
Other........................... 2,667 1% 7,547 4% 729 1%
------- -- ------- -- ------- --
Total export sales.............. $42,798 23% $42,588 23% $53,357 29%
======= == ======= == ======= ==
</TABLE>
F-21
<PAGE> 135
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 21--INVESTMENT IN AFFILIATED COMPANY:
The Company's investment in an affiliated company is the one-third interest
in the general partnership International Marine Terminals (IMT), an ocean marine
loading facility located in Louisiana. Components of the investment in
affiliated company and equity in net earnings (losses) of affiliated company are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
INVESTMENT IN AFFILIATED COMPANY:
Equity in partnership interest at time of purchase........ $ 5,977 $ 5,977 $ 5,977
Earnings since acquisition................................ 98 265 376
Net distributions since acquisition....................... (3,514) (3,238) (3,065)
------- ------- -------
2,561 3,004 3,288
Goodwill less accumulated amortization of $2,648 and
$2,429 at December 31, 1997 and 1996, respectively..... 2,832 3,051 3,271
------- ------- -------
$ 5,393 $ 6,055 $ 6,559
======= ======= =======
EQUITY IN NET EARNINGS (LOSSES) OF AFFILIATED COMPANY:
Company's share of affiliate earnings (losses)............ $ (167) $ (111) $ 150
Amortization of goodwill.................................. (219) (219) (219)
------- ------- -------
$ (386) $ (330) $ (69)
======= ======= =======
</TABLE>
The above net losses are reported as a component of other income in the
statement of income. All earnings (losses) of IMT are shared by each partner on
a pro rata basis with the exception of interest expense which is allocated to
the partners based on their individual credit ratings. Condensed financial
information for the affiliated company, IMT, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
BALANCE SHEET
Current assets............................................ $ 2,908 $ 2,981 $ 2,860
Noncurrent assets......................................... 70,472 72,300 72,976
------- ------- -------
Total assets.............................................. $73,380 $75,281 $75,836
======= ======= =======
Current liabilities....................................... $ 2,646 $ 3,223 $ 2,920
Noncurrent liabilities.................................... 63,045 63,046 63,046
------- ------- -------
Total liabilities...................................... 65,691 66,269 65,966
------- ------- -------
Equity.................................................... 7,689 9,012 9,870
------- ------- -------
Total liabilities and equity........................... $73,380 $75,281 $75,836
======= ======= =======
STATEMENT OF INCOME
Revenues.................................................. $21,968 $21,307 $20,036
======= ======= =======
Earnings (loss)........................................... $ (444) $ (258) $ 536
======= ======= =======
</TABLE>
F-22
<PAGE> 136
PEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET--UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,722
Accounts receivable (net of allowance for doubtful
accounts of $456)...................................... 15,292
Inventories............................................... 6,599
Deferred income taxes..................................... 1,160
Refundable income taxes................................... 259
Net assets to be disposed................................. 21
Other assets.............................................. 1,487
--------
Total current assets................................... 48,540
Investment in unconsolidated affiliated companies........... 4,787
Coal reserves and mine development costs, net............... 136,620
Property, plant and equipment, net.......................... 35,058
Long-term investments....................................... 13,872
Net assets to be disposed................................... 566
Other assets................................................ 3,506
--------
$242,949
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 100
Current maturities of capital leases...................... 3,559
Accounts payable.......................................... 7,385
Accrued liabilities....................................... 4,144
--------
Total current liabilities.............................. 15,188
Long-term debt.............................................. 103,281
Long-term capital leases.................................... 3,172
Deferred income taxes....................................... 59,518
Other liabilities........................................... 3,594
--------
Total liabilities...................................... 184,753
--------
Guaranties, commitments and contingencies (Note 7)
Mandatorily redeemable preferred stock...................... 17,958
--------
Shareholders' equity:
Class I common stock, $.01 par value; 7,800,000 shares
authorized, 4,290,000 shares issued and outstanding.... 43
Class II common stock, $.01 par value; 200,000 shares
authorized, 177,550 shares issued and outstanding...... 2
Additional paid-in capital................................ 19
Retained earnings......................................... 40,174
--------
Total shareholders' equity............................. 40,238
--------
$242,949
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 137
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME--UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $78,841 $88,622
Operating expenses:
Cost of sales............................................. 72,097 80,417
Selling, general and administrative....................... 2,249 2,714
------- -------
Operating income............................................ 4,495 5,491
Other (income) expense:
Interest expense.......................................... 3,612 4,116
Interest income........................................... (796) (579)
Other income.............................................. (521) (2,119)
------- -------
Income from continuing operations before income taxes....... 2,200 4,073
Provision for income taxes.................................. 721 1,226
------- -------
Income from continuing operations........................... 1,479 2,847
Loss on disposal of discontinued operations (less applicable
income tax credits of $53 and minority interest of $14 for
the six months ended June 30, 1997)....................... (27)
------- -------
Income before extraordinary item............................ 1,479 2,820
Extraordinary item--loss related to early retirement of debt
(less applicable income tax credits of $962 for the six
months ended June 30, 1998)............................... (1,866) --
------- -------
Net income (loss)......................................... (387) 2,820
Accretion of preferred stock................................ 861 848
------- -------
Net income (loss) available to common shareholders.......... $(1,248) $ 1,972
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 138
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY--UNAUDITED
(in thousands)
<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, 1997... 4,290,000 $43 177,550 $ 2 $19 $41,422 $41,486
Accretion of Preferred Stock
(unaudited).................. (861) (861)
Net Loss (unaudited)........... (387) (387)
---------- --- -------- --- --- ------- -------
Balance at June 30, 1998
(unaudited).................. 4,290,000 $43 177,550 $ 2 $19 $40,174 $40,238
========== === ======== === === ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 139
PEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS--UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
--------- -------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (387) $ 2,820
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization.................. 7,208 7,661
Equity in net losses of affiliates........................ (384) (71)
Deferred income taxes..................................... (373) (755)
Gain on sale of equipment................................. (39) (1,530)
Interest income on long-term investments.................. (549) (524)
Extraordinary item, net of tax............................ 1,866 --
--------- -------
Cash generated from operations, before changes in assets
and liabilities........................................ 7,342 7,601
Changes in assets and liabilities, net of effects from
dispositions:
Accounts receivable....................................... 2,205 3,655
Inventories............................................... (1,839) (940)
Accounts payable and accrued expenses..................... (1,609) 68
Other..................................................... (2,844) 1,329
--------- -------
Net cash provided (used) by operating activities.......... 3,255 11,713
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (3,963) (1,747)
Proceeds from sale of equipment........................... 73 2,664
Distributions from affiliated companies................... 880 201
--------- -------
Net cash provided (used) by investing activities.......... (3,010) 1,118
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bonds........................... 99,216 --
Buyout of stock warrants.................................. (3,000) --
Accretion of stock warrants............................... 73 110
Amortization of original issue discount................... 227 265
Purchase of treasury stock................................ -- (14)
Repayment of long-term debt............................... (77,053) (5,180)
Repayment of capital leases............................... (2,137) (1,891)
Net borrowings (payments) under line of credit agreements
and current notes payable.............................. -- (5,185)
--------- -------
Net cash provided (used) for financing activities......... 17,326 (11,895)
--------- -------
Net increase (decrease) in cash........................... 17,571 936
Cash and cash equivalents at beginning of period.......... 6,151 1,885
--------- -------
Cash and cash equivalents at end of period................ $ 23,722 $ 2,821
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest............................................... $ 4,142 $ 3,396
Income taxes........................................... 1,445 1,254
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 140
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--INTERIM FINANCIAL INFORMATION:
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, 1997. The results of
operations for the six month period is 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, 1998, its
results of operations and its cash flows for the six months ended June 30, 1998
and 1997.
NOTE 2--INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Coal................................................... $ 6,167
Cottonseed............................................. 432
--------
$ 6,599
========
</TABLE>
NOTE 3--REVOLVING LINES OF CREDIT:
The Company has a revolving line of credit under its current credit
facilities 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 inventory and
receivables. Borrowings bear interest at a variable rate based on either LIBOR
(an effective rate of 7.41% at June 30, 1998) or the bank's prime lending rate
(an effective rate of 9.25% at June 30, 1998). The revolving lines of credit had
no outstanding balance at June 30, 1998. These agreements contain minimum
operating and financial ratios and covenants as defined in the agreements.
F-27
<PAGE> 141
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4--LONG TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1998
---------
<S> <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 pari
passu in right 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
pari passu in right 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 Guarantees, and The Bank of New York, as
Trustee, dated June 8, 1998 (the "Indenture"), relating to
the Senior Notes.......................................... $ 99,222
Notes payable secured by a lien on an office building which
serves as the Company's headquarters, with a net book
value of $3,105,000, payable in monthly installments of
$37,000 through 2016. Interest included in the monthly
installments is a fixed rate of 8.33%..................... 4,159
---------
Total long-term debt........................................ 103,381
Current maturities of long-term debt........................ (100)
---------
$ 103,281
=========
</TABLE>
The Indenture for the Senior Notes contains various covenants, the most
significant of which restrict 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 six
months ended June 30, 1998.
NOTE 5--SHAREHOLDERS' EQUITY:
COMMON STOCK
The Company has reserved 560,000 shares of Class I common stock for
issuance pursuant to option, warrant or other rights granted or which may be
granted to financial institutions with which the Company has a borrowing
relationship. As of June 30, 1998, no Class I common stock has been issued with
regard to these options. No other Class I common shares may be issued until the
mandatorily redeemable preferred stock is redeemed in full.
Each holder of Class I common stock has the option to sell to the Company
100% of the stock held at a price of $.01 per share. This option is exercisable
beginning January 2005 and lapses upon conversion of the convertible preferred
stock to Class I common stock.
The 200,000 shares of authorized Class II common stock were issued in 1996
under the Pen Holdings, Inc. Stock Purchase Plan dated June 1, 1996 to various
officers of the Company. In 1997, 22,450 shares were
F-28
<PAGE> 142
PEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 5--SHAREHOLDERS' EQUITY: (CONTINUED)
repurchased for $13,650 by the Company from one of the officers who resigned.
The shares were concurrently canceled.
STOCK WARRANTS
The Company issued warrants to purchase 326,772 shares of Class I common
stock in January 1996 to its primary lenders in connection with the
recapitalization in 1995. The exercise price of the warrants equaled the fair
value of the Class I common stock at the date of issuance. The warrants are
exercisable beginning January 2001 at $.01 per share. The warrants were to
expire January 2006. The Company repurchased these warrants for $3,000,000
(minimum redemption value identified in the warrant agreement) in connection
with the issuance of the Senior Notes on June 8, 1998. The Company recorded the
present value of its minimum obligation for repurchase of the warrants as
redeemable common stock warrants and a corresponding discount in the underlying
debt. The discount was being amortized as additional interest expense on a
straight-line basis through January 2001.
NOTE 6--EXTRAORDINARY ITEM:
The Company recorded an extraordinary charge which represents the after-tax
impact of (i) the write-off of unamortized loan costs and (ii) the write-off of
unamortized original issue discount and repurchase of redeemable common stock
warrants on the debt that was repaid with the proceeds from the issuance of the
Senior Notes.
NOTE 7--GUARANTIES, COMMITMENTS AND CONTINGENCIES:
The Company has been assigned responsibility for specific beneficiaries
under the Coal Industry Retiree Health Benefit Act of 1992 (the "Act"). These
beneficiaries are former employees of The Elk Horn Coal Corporation, acquired by
the Company in 1994. An estimate of total costs for those individuals and
qualifying dependents covered by the Act is recorded as a liability on the
balance sheet of the Company. It is possible that additional individuals will be
assigned to the Company. Such costs will be accrued and expensed as they become
known; however, management believes the likelihood that significant additional
liability under the Act will be incurred is remote.
The Company has filed a petition in U.S. Tax Court challenging the Internal
Revenue Service deficiency notices related to disputes involving the Company's
federal income tax returns for the years 1982-1989. This matter is more fully
described in the Company's annual financial statements included herein.
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 and certain of its wholly-owned subsidiaries are full,
unconditional, joint and several guarantors of the Senior Notes. Management has
determined that presentation of separate financial statements for each guarantor
subsidiary would not be relevant for investors.
F-29
<PAGE> 143
ANNEX A
CERTAIN DEFINITIONS
ASH. Non-combustible solid matter consisting of silica, iron, alumina and
other material similar to ordinary sand, silt, rock or clay.
BITUMINOUS COAL. A rank or classification of coal which yields, when
heated, a considerable amount of volatile bituminous (gaseous hydrocarbons)
matter. Bituminous coal generally has a Btu content that ranges from
approximately 10,500 to 14,000 Btu per pound.
BTU (BRITISH THERMAL UNIT.) A measure of heat required to raise the
temperature of one pound of water one degree Fahrenheit under controlled
conditions. The gross heating value of coal is commonly reported as "Btu per
pound."
CAPTIVE PRODUCTION. Coal produced or contracted to be produced from Company
controlled reserves.
CENTRAL APPALACHIA. A region consisting of southern West Virginia, eastern
Kentucky and Virginia which contains substantial bituminous coal deposits. The
reserves in this region generally contain coal that is low in sulfur (typically
0.7%-1.5%) and high in Btu content (typically 12,000-13,500 Btu). A large
portion of the coal reserves in this region exceed the requirements of Phase I
of the Clean Air Act Amendments and meet the requirements of Phase II of the
Clean Air Act Amendments.
COAL DEPOSIT. A coal bearing body which has been appropriately sampled and
assayed in trenches, outcrops, drilling, and underground workings to support
sufficient tonnage and grade to warrant further exploration-development work.
This coal deposit does not qualify as a commercially viable coal reserve as
prescribed by Commission standards until a final comprehensive evaluation based
upon unit cost per ton, recoverability and other material factors conclude legal
and economic feasibility.
COAL SEAM. A layer of coal deposit below the earth's surface. Each seam is
identified by a name or number based on its geographical location.
COMPLIANCE COAL. Coal which, when burned, emits less than 1.2 pounds of
sulfur dioxide per million Btu (0.72% for 12,000 Btu). This coal exceeds the
sulfur dioxide emission requirements for air quality of Phase I of the Clean Air
Act Amendments and meets the proposed sulfur dioxide emission requirements for
air quality of Phase II of such legislation without the need for flue gas
desulfurization.
CONTINUOUS MINING. An underground mining method that utilizes a continuous
mining machine which cuts or rips coal from the face and loads it into shuttle
cars or conveyors in one operation. A continuous mining machine typically has a
turning "drum" with sharp bits that cut and dig out the coal for 20 to 40 feet
before mining stops so that the mined area can be supported with roof bolts.
CONTRACT MINING. The contractual engagement of a third-party mining company
by the mineral rights holder to mine coal. Contract mining companies are
typically paid on a set price per ton of coal mined. Under most contract mining
arrangements the mineral rights holder is responsible for the permitting of the
mine site. The contract miner is generally responsible for providing all
equipment, financing for its operation, internal mine capital needs, employee
benefits and all other requirements associated with an independent business.
CONTOUR MINING. A surface mining method in which coal is mined by side-hill
cuts to expose and extract coal. The mining follows the contour of the hillside.
CONVENTIONAL MINING. An underground mining method that utilizes a cutting
machine to cut beneath a coal seam. Such undercuts allow explosive charges to be
set in the coal seam to separate the coal from surrounding materials. Once
separated, the coal is loaded into shuttle cars and removed from the mine.
EXTRACTION. The process of removing coal from a seam for commercial use.
HEAVY MEDIA. High density material such as magnetite used in the gravity
separation process to clean coal.
LOW-SULFUR COAL. Coal which, when burned, emits less than 1.6 pounds of
sulfur dioxide per million Btu (0.96% for 12,000 Btu). This coal exceeds the
sulfur dioxide emission requirements for air quality of Phase I of the Clean Air
Act Amendments without the need for flue gas desulfurization.
MEDIUM-SULFUR COAL. Coal which contains more than 1 percent but less than 3
percent sulfur by weight; 0.61 to 1.67 pounds of sulfur per million Btu.
A-1
<PAGE> 144
METALLURGICAL COAL. The various grades of coal suitable for carbonization
to make coke for the manufacture of steel. Also known as "met" coal, it
possesses four important qualities: volatility, which affects coke yield; the
level of impurities, which affects coke quality; composition, which affects coke
strength; and basic characteristics, which affect coke oven safety.
OVERBURDEN. Layers of earth and rock covering a coal seam. In surface
mining operations, overburden is removed prior to coal extraction.
OVERBURDEN RATIO. The amount of overburden that must be removed to extract
a given quantity of coal. The ratio is commonly expressed as the number of cubic
yards of overburden to be removed to yield one ton of coal.
OWNERSHIP IN FEE. The holder of the mineral rights has outright absolute
ownership of the mineral (as opposed to leasing the mineral rights from the
mineral owner).
POINT REMOVAL MINING. A mining method used in contour mining when the
overburden ratio makes it economically feasible to mine using the mountaintop
removal method.
PREPARATION PLANT. A facility that crushes, sizes and washes coal to
prepare it for commercial use. The washing process separates ash from the coal
and may have the added benefit of removing a portion of the coal's sulfur
content. Most of the coal washed in a preparation plant is extracted from
underground mines.
RESERVE. That part of a mineral deposit which could be economically and
legally extracted or produced at the time of the reserve determination.
PROBABLE (INDICATED) RESERVES. Reserves for which quantity and grade and/or
quality are computed from information similar to that used for proven (measured)
reserves, but the sites for inspection, sampling, and measurement are farther
apart or are otherwise less adequately spaced. The degree of assurance, although
lower than that for proven (measured) reserves, is high enough to assume
continuity between points of observation.
PROVEN (MEASURED) RESERVES. Reserves for which (a) quantity is computed
from dimensions revealed in outcrops, trenches, workings or drill holes; grade
and/or quality are computed from the results of detailed sampling and (b) the
sites for inspection, sampling and measurement are spaced so closely and the
geologic character is so well defined that size, shape, depth and mineral
content of reserves are well-established.
RECLAMATION. The restoration of land and environment at a mining site after
the coal is extracted. Reclamation operations are usually underway in locations
where the coal has already been extracted from a mine, even as mining operations
are continuing elsewhere at the site. The process commonly includes
"recontouring" or reshaping the land to its approximate original appearance,
restoring topsoil and planting native grass and ground covers. Reclamation is
closely regulated by both state and federal law.
RECOVERY RATES. The amount of clean coal produced by weight from the amount
of raw coal processed expressed as a percentage of the coal available for
extraction.
ROOM AND PILLAR MINING. A mining method used in underground mining which
uses either continuous or conventional mining that cuts out a block of coal in
18- to 20-foot wide passages as high as the coal seam. Roof bolters, by
installing conventional or resin grouted rods, stabilize the mine roof prior to
mine advancement. Pillars (typically 50 feet by 50 feet) are left to provide
additional primary roof support.
SPOT MARKET. Sales of coal pursuant to an agreement or purchase order for
shipments for a period of less than one year. Spot market sales are generally
obtained via a competitive bidding process.
SPREAD. The amount and type of equipment necessary to extract the coal from
a localized reserve area in a surface mine.
STEAM COAL. Coal used by power plant and industrial steam boilers to
produce electricity or steam.
SURFACE MINE. A mine in which the coal lies near the surface and can be
extracted by removing the covering layer of soil. See "--Overburden."
TON. A "short" or net ton is equal to 2,000 pounds. A "long" or British ton
is 2,240 pounds. A "metric" ton is approximately 2,205 pounds. The short ton is
the unit of measure referred to in the Offering Memorandum.
UNDERGROUND MINE. A mine which is typically located several hundred feet
below the earth's surface.
UNIT TRAIN. A train of 70 to 150 cars carrying coal designated to one
particular location. A typical unit train can carry 7,000 to 15,000 tons of coal
in a single shipment.
A-2
<PAGE> 145
ANNEX B
AUDIT OF DEMONSTRATED RESERVES
CONTROLLED BY
PEN HOLDINGS, INC.
May 1998
Prepared for:
PEN HOLDINGS, INC.
5110 Maryland Way, 3rd Floor
Brentwood, TN 37027
Prepared by:
MARSHALL MILLER & ASSOCIATES
P.O. Box 848
Bluefield, VA 24605
B-1
<PAGE> 146
May 7, 1998
Board of Directors
PEN HOLDINGS, INC.
5110 Maryland Way, 3rd Floor
Brentwood, TN 37027
Ladies and Gentlemen of the Board:
Enclosed is an Executive Summary of the report, "Audit of Demonstrated
Reserves Controlled by Pen Holdings, Inc. - "May 1998." This independent audit
is based on an update of previous reports by MARSHALL MILLER & ASSOCIATES
(MM&A), which encompassed significant portions of the PEN HOLDINGS, INC. (PEN)
reserve base. For those portions of the reserve base not previously evaluated by
MM&A, an audit was conducted based on current maps and information supplied by
Pen. The enclosed Executive Summary report briefly conveys the conclusions,
reserve criteria, definitions, methodology, and qualifications pertinent to the
Pen reserve audit.
This audit has confirmed that Pen controls total demonstrated reserves
estimated at approximately 147.9 million recoverable product tons of coal. Of
this total, 85.2 million recoverable product tons are assigned to Pen operators
and contractors or leased to various other coal mining companies, and 62.6
million recoverable tons are unassigned reserves.
It has been a pleasure to be of service to Pen Holdings, Inc. in this
matter. If you have any further questions or requirements, please do not
hesitate to contact us at any time.
Sincerely,
MARSHALL MILLER & ASSOCIATES
/s/ RONALD H. MULLENNEX
- ------------------------------------------
Ronald M. Mullennex, C.P.G., C.G.W.P.
Senior Vice President
/s/ WARREN A. EVENSON
- ------------------------------------------
Warren A. Evenson, C.P.G.
Senior Geologist
/s/ STEVEN B. STANSFIELD
- ------------------------------------------
Steven B. Stansfield, P.G.
Project Geologist
/s/ K. SCOTT KEIM
- ------------------------------------------
K. Scott Keim, C.P.G.
Senior Vice President
/s/ J. SCOTT NELSON
- ------------------------------------------
J. Scott Nelson, C.P.G.
Vice President
/s/ MARK S. SMITH
- ------------------------------------------
Mark S. Smith, P.G.
Project Geologist
/s/ ROBERT J. HALE
-------------------------------------------------------------------
Robert J. Hale
Project Geologist
B-2
<PAGE> 147
EXECUTIVE SUMMARY
INTRODUCTION
PEN HOLDINGS, INC. (PEN) controls reserves in Kentucky and West Virginia
through its two wholly owned subsidiaries, THE ELK HORN COAL CORPORATION (EHCC)
and PEN COAL CORPORATION (PCC), respectively. MARSHALL MILLER & ASSOCIATES
(MM&A) has completed an audit of the EHCC and PCC reserves as presented in the
two subsequent sections of this report. This section of the report provides a
summary of the findings, definitions, methodology, and qualifications.
This audit has confirmed that Pen controls total demonstrated reserves
estimated at approximately 147.9 million tons of recoverable coal. Of this
total, 94.0 million recoverable product tons are controlled through Pen's EHCC
subsidiary; and 53.9 million recoverable product tons are controlled through
Pen's PCC subsidiary.
The reserves have been further defined by two reserve status categories:
those assigned to Pen operators and contractors or leased to various other coal
mining companies, and those unassigned (or unleased) to any operator. Of the
total demonstrated reserves, 85.2 million recoverable product tons are assigned
to Pen's operators and contractors or leased to various other coal mining
companies and 62.6 million recoverable product tons are unassigned. The
following table summarizes the subject reserve base with additional details
provided in the two subsequent report sections.
PEN HOLDINGS, INC.
SUMMARY OF RESERVES
<TABLE>
<CAPTION>
DEMONSTRATED RESERVES
(RECOVERABLE TONS)
--------------------------------------
STATUS TOTAL MEASURED INDICATED
------ ----- -------- ---------
<S> <C> <C> <C>
ASSIGNED RESERVES
Deep Mineable........................................ 61,922,000 47,577,000 14,345,000
Surface Mineable..................................... 23,323,000 19,882,000 3,441,000
----------- ----------- ----------
Total Assigned: .................................. 85,245,000 67,459,000 17,786,000
UNASSIGNED RESERVES
Deep Mineable........................................ 52,000,000 33,919,000 18,081,000
Surface Mineable..................................... 10,647,000 8,726,000 1,921,000
----------- ----------- ----------
Total Unassigned: ................................ 62,647,000 42,645,000 20,002,000
TOTAL RESERVES
Deep Mineable........................................ 113,922,000 81,496,000 32,426,000
Surface Mineable..................................... 33,970,000 28,608,000 5,362,000
----------- ----------- ----------
Grand Total: ..................................... 147,892,000 110,104,000 37,788,000
=========== =========== ==========
</TABLE>
B-3
<PAGE> 148
DEFINITIONS
Definitions(1) of key terms and criteria applied in our audit are as
follows:
- ASSIGNED RESERVES--Assigned reserves, as defined and used herein,
represent coal which has been committed by the coal company to operating
mine shafts, mining equipment, plant facilities, and all coal which has
been leased by the coal company to others.
- RESERVE--Reserve is defined as virgin and/or accessed parts of a coal
reserve base that could be economically extracted or produced at the time
of determination considering environmental, legal, and technological
constraints. DEMONSTRATED RESERVES are the sum of coal reserves
classified as measured and indicated as explained below.
- RESERVE RELIABILITY CATEGORIES--The reliability categories are related to
the level of geologic assurance for the existence of a quantity of
resources. Assurance is based on the distance from points where coal is
measured or sampled and on the abundance and quality of geologic data as
related to thickness of overburden, rank, quality, thickness of coal,
areal extent, geologic history, structure, and correlation of coal beds
and enclosing rocks. The degree of assurance increases as the proximity
to points of control, abundance, and quality of geologic data increase.
The reserve reliability categories include:
- MEASURED COAL--Reserve estimates in this category have the
highest degree of geologic assurance. Measured coal lies within
1/4 mile of a valid point of measurement or point of
observation (such as previously mined areas) supporting such
measurements. The sites for thickness measurement are so
closely spaced, and the geologic character is so well defined,
that the average thickness, areal extent, size, shape, and
depth of coal beds are well established.
- INDICATED COAL--Reserve estimates in this category have a
moderate degree of geologic assurance. There are no sample and
measurement sites in areas of indicated coal. However, a single
measurement can be used to classify coal lying beyond measured
as indicated. Indicated coal lies more than 1/4 mile, but less
than 3/4 mile, from a point of thickness measurement. Further
exploration is necessary to place indicated coal into the
measured category.
- UNASSIGNED RESERVES--Unassigned reserves, as defined and used herein,
represent coal which has not been committed and which would require new
mine shafts, mining equipment, or plant facilities before operations
could begin on the property.
METHODOLOGY AND QUALIFICATIONS
Our audit of the Pen reserve base was planned and performed to obtain
reasonable assurance on the subject coal properties. The audit included
examination by certified professional geologists and engineers of all supplied
reserve maps and supporting data using industry-accepted standards. Although the
audit methodology is inherently not as exhaustive as a detailed reserve
evaluation, in our opinion the audit was conducted in sufficient detail and with
independent verification on a test basis of the underlying supporting evidence
to provide reasonable assurance for the subject estimate. The reserve audit did
not include independent verification of property ownership; we have relied on
property information supplied by Pen and have considered this information to be
accurate.
- ---------------
1Source: U.S. Geological Survey Circular 891, "Coal Resource Classification
of the U.S. Geological Survey," 1983.
B-4
<PAGE> 149
ANNEX C
[LOGO OF STAGG ENGINEERING SERVICES, INC.]
(304) 776-6660
Fax: (304) 776-7867
E-mail: SESI
[email protected]
SENT VIA UPS OVERNIGHT DELIVERY
May 7, 1998
Board of Directors
Pen Holdings, Inc.
3rd Floor
5110 Maryland Way
Brentwood, TN 37027
Project: Estimation of Reserves
Fork Creek Property
Boone, Kanawha, and Lincoln Counties, West Virginia
Job No. E372-148-103A
Gentlemen:
Enclosed is a copy of the Executive Summary from a report titled Summary Report,
Underground Reserves and Resources, Drummond Coal Company Properties, Boone,
Kanawha, and Lincoln Counties, West Virginia.
If you have any questions or require additional copies of the Executive Summary,
please call.
Sincerely,
STAGG ENGINEERING SERVICES, INC.
/s/ GREGORY C. SMITH
- ------------------------------------------
Gregory C. Smith, R.P.G.
Vice President, Geology
Eastern Region
STAGG ENGINEERING SERVICES, INC.
5457 Big Tyler Road - P.O. Box 7028 - Cross Lanes, West Virginia 25356
C-1
<PAGE> 150
EXECUTIVE SUMMARY
Pen Coal Corporation ("Pen Coal") authorized Stagg Engineering Services,
Inc. ("SESI") to conduct a geologic assessment and to prepare tonnage estimates
("the Study") of the reserves present in the underground category of mining on
the Drummond Company, Inc. properties ("Drummond"). The Property is located in
Boone, Lincoln, and Kanawha Counties, West Virginia, some 20 miles south
southwest of Charleston, West Virginia.
Based on data obtained from record searches and from previous reserve
studies of the Property, SESI has estimated the Property contains approximately
72.9 million tons of recoverable, shippable coal reserves in the underground
category of mining. This tonnage on a shippable basis, is presented in the table
below by coal bed.
SUMMARY OF DEMONSTRATED UNDERGROUND RESERVES BY COAL BED
DRUMMOND COMPANY, INC. PROPERTIES
BOONE, KANAWHA, AND LINCOLN COUNTIES, WEST VIRGINIA
(000'S SHORT TONS)
<TABLE>
<CAPTION>
% OF
RESERVES TOTAL
-------- -----
<S> <C> <C>
No. 5 Block................................................. 8,375 11
Stockton.................................................... 23,627 32
Cedar Grove................................................. 4,878 7
No. 2 Gas................................................... 36,022 49
------
TOTAL....................................................... 72,903
</TABLE>
In work conducted previously, SESI conducted a geologic assessment of and
prepared tonnage estimates for certain surface mineable areas located in the
southern portion of the Property. Based on this earlier work, SESI has estimated
the Property contains on the order of 7.1 million tons of demonstrated shippable
reserves in the mountaintop and point removal categories of mining.
All of the tonnage estimates prepared were for coal in the classification
of demonstrated, the combination of measured and indicated, which reflects
varying degrees of geologic assurance as to the presence, quantity, and quality
of the beds estimated.
Detailed summaries, by coal bed, of the reserves estimated for the Property
are contained in the respective coal bed discussions presented in Section VI-IX.
Tonnage estimates are presented in detail in Appendices A-1 through A-4.
Coal from the Property is classified as high-volatile A or B bituminous in
rank, with there being considerable variation in sulfur and ash content on an
as-received basis. Analyses from sink-float testing of drill cores from the
Property indicate that the major portion of the tonnage present will yield a
low- to medium-ash, low- to medium-sulfur product when washed.
Sulfur content varies considerably on a bed-by-bed basis across the
Property, although some of the variation observed is due to the presence or
absence of certain individual coal benches within a mining unit. This is
particularly true for coal from the Stockton and No. 2 Gas coal zones, in which
the presence or absence of an upper coal bench appears to determine overall
sulfur content.
Ash content varies considerably across the Property on a bed-by bed basis
with several of the coal beds exhibiting high ash content on a raw basis. This
is particularly true for coal from the No. 5 Block and Stockton zones, which are
comprised of multiple-benched coal beds which sometimes contain significant
in-bed parting material.
CSX Transportation Systems' ("CSX") Big Coal River branch line parallels
the Big Coal River adjacent to the northern portion of the Property. CSX's
Little Coal River branch line parallels the Little Coal River, which passes
through the west-central portion of the Property.
At the time of the Study, mining was not being conducted on the Property.
C-2
<PAGE> 151
WHILE THE ESTIMATES OF THE COAL RESERVES AND RESOURCES CONTAINED IN THIS
REPORT HAVE BEEN DONE IN ACCORDANCE WITH SOUND PROFESSIONAL PRACTICES CURRENTLY
ACCEPTED FOR USE IN ESTIMATING COAL RESOURCES, THIS IN NO WAY ASSURES THAT THE
TONNAGES OF COAL LISTED HEREIN ARE ACTUALLY PRESENT OR CAN BE ECONOMICALLY
EXTRACTED.
The estimation of tonnage conducted by SESI was focused on certain
underground mine blocks identified by Pen Coal and which met certain criteria.
Additional tonnage is likely present in the underground category of mining in
beds which did not meet Pen Coal's minimum bed thickness criteria. Additional
tonnage is also likely present in the contour strip, auger, and highwall miner
categories of mining, but the assessment of this tonnage was beyond the scope of
the Study.
STAGG ENGINEERING SERVICES, INC.
/s/ GREGORY C. SMITH
- ------------------------------------------
Gregory C. Smith, R.P.G.
Vice President, Geology
Eastern Region
/s/ ALAN K. STAGG
- ------------------------------------------
Alan K. Stagg, R.P.G.
President
September 1997
C-3
<PAGE> 152
- ---------------------------------------------------------
- ---------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PEN SINCE THE DATE
HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL
CONSTITUTES AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................... 4
Prospectus Summary........................ 5
Risk Factors.............................. 15
The Exchange Offer........................ 26
Use of Proceeds........................... 34
Capitalization............................ 35
Capital Development Program............... 36
Unaudited Pro Forma Condensed Combined
Financial Statements.................... 37
Selected Consolidated Financial Data...... 40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 43
The Coal Industry......................... 52
Business.................................. 58
Management................................ 76
Certain Related Party Transactions........ 78
Description of Capital Stock.............. 79
Security Ownership of Principal
Stockholders and Management............. 80
Description of New Credit Facility........ 81
Description of Notes...................... 83
Registration Rights Agreement............. 108
Material Federal Income Tax
Considerations.......................... 109
Plan of Distribution...................... 111
Legal Matters............................. 112
Experts................................... 112
Index to Financials....................... F-1
Annex A................................... A-1
Annex B................................... B-1
Annex C................................... C-1
</TABLE>
UNTIL JUNE 2, 1999, ALL DEALERS EFFECTING TRANSACTIONS IN SERIES B SENIOR
NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD
ALLOTMENTS ON SUBSCRIPTION
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
LOGO
PEN HOLDINGS, INC.
$100,000,000 OF 9 7/8%
SENIOR SERIES B NOTES DUE 2008
----------------
PROSPECTUS
----------------
NOVEMBER 4, 1998
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 153
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) Pen Holdings, Inc. ("Pen"), Pen Coal Corporation ("Pen Coal"), Pen
Cotton Company ("Pen Cotton") and Pen Hardwood Company ("Pen Hardwood") (each a
Tennessee Corporation).
The Tennessee Business Corporation Act (the "TBCA") grants corporations the
power to indemnify an individual made a party to a proceeding because he or she
is or was a director against liability incurred in the proceeding if: (i) the
director conducted himself in good faith, (ii) he or she reasonably believed (a)
in the case of conduct in official capacity, the conduct was in the best
interests of the corporation and (b) in all other cases, that the conduct was at
the least not opposed to the best interests of the corporation, and (iii) in the
case of any criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful. A corporation may not indemnify a director (i) if the
director was adjudged liable to the corporation or (ii) if the director was
adjudged liable on the basis that personal benefit was improperly received. The
TBCA mandates that unless limited by its charter, a corporation must indemnify a
director who was wholly successful, on the merits or otherwise, in the defense
of any proceeding to which he or she was a party because he or she is or was a
director of the corporation against reasonable expenses incurred by the director
in connection with the proceeding. The TBCA generally provides that a
corporation indemnify an officer to the same extent as a director.
The Restated Charters of Pen, as amended (the "Pen Holdings Charter"), Pen
Coal (the "Pen Coal Charter"), Pen Cotton (the "Pen Cotton Charter") and Pen
Hardwood (the "Pen Hardwood Charter", and together with the Pen Holdings
Charter, the Pen Coal Charter and the Pen Cotton Charter, the "Charters")
provide that to the fullest extent permitted by the TBCA, a director of these
corporations shall not be liable to the corporation or its shareholders for
monetary damages for breach of duty as a director. If the TBCA is amended after
approval by the shareholders of this provision to authorize corporate action,
further eliminating or limiting the personal liability of directors, then the
liability of a director of the company shall be eliminated or limited to the
fullest extent permitted by the TBCA as so amended from time to time. The
Charters also provide that Pen shall, to the maximum extent permitted by the
TBCA, have power to indemnify each of such corporation's agents (as defined
below) against expenses, judgments, fines settlements and other amounts actually
and reasonably incurred in connection with any proceeding arising by reason of
the fact that any such person is or was an agent of such corporation and shall
have the power to advance to each such agent expenses incurred in defending any
such proceeding to the maximum extent permitted by that law. For the purposes of
this provision of the Charters an "agent" of such corporation includes any
person who is or was a director, officer, employee or other agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or was a director, officer, employee or
agent of a corporation which was a predecessor corporation of such corporation
or of another enterprise serving at the request of such predecessor corporation.
The Bylaws of Pen, Pen Coal, Pen Cotton and Pen Hardwood do not contain any
indemnification provisions.
The TBCA also permits a corporation to purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee or agent of
the corporation, or who, while a director, officer, employee or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee, or agent,
whether or not the corporation would have the power to indemnify him against the
same under the other provisions of the TBCA.
(b) The Elk Horn Coal Corporation ("Elk Horn") and River Marine Terminals,
Inc. ("River Marine Terminals") (each a West Virginia Corporation).
Sections 31-1-9(a) and (b) of the West Virginia Corporation Act ("WVCA")
provide that a corporation may indemnify any person who is or was a party or is
threatened to be made a party to any threatened, pending or
II-1
<PAGE> 154
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
that, in the case of an action or suit by or in the right of the corporation,
the corporation may not indemnify such persons against judgments and fines and
no person shall be indemnified as to any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation, unless and only to the extent that
the court in which the action or suit was brought determines upon application
that such person is fairly and reasonably entitled to indemnity for proper
expenses. Section 31-1-9(c) of the WVCA provides that, to the extent that a
director, officer, employee or agent of the corporation has been successful in
the defense of any such action, suit or proceeding or any claim, issue or matter
therein, he shall be indemnified against expenses, including attorneys' fees,
actually and reasonably incurred in connection with such action, suit or
proceeding.
The WVCA also provides that a corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a director officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would
otherwise have the power to indemnify him against such liability under the
provisions of the WVCA.
The Elk Horn Articles of Incorporation, as amended, effectively provide
that Elk Horn shall indemnify its directors, officers, employees or agents to
the full extent permitted by the WVCA.
River Marine Terminals. Neither the Articles of Incorporation nor the
Bylaws of River Marine Terminals contain any indemnification or limitation of
liability provisions.
(c) Pen Cotton Company of South Carolina (a South Carolina corporation)
("Pen Cotton South Carolina").
Chapter 8, Article 5 of Title 33 of the South Carolina Business Corporation
Act (the "SCBCA") grants corporations the power to indemnify an individual made
a party to a proceeding because he or she is or was a director against liability
incurred in the proceeding if: (i) the director conducted himself in good faith,
(ii) he or she reasonably believed (a) in the case of conduct in official
capacity, the conduct was in the best interests of the corporation and (b) in
all other cases, that the conduct was at the least not opposed to the best
interests of the corporation, and (iii) in the case of any criminal proceeding,
he had no reasonable cause to believe his conduct was unlawful. A corporation
may not indemnify a director (i) if the director was adjudged liable to the
corporation or (ii) if the director was adjudged liable on the basis that
personal benefit was improperly received. The SCBCA mandates that unless limited
by its articles of incorporation, a corporation must indemnify a director who
was wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he or she was a party because he or she is or was a director
of the corporation against reasonable expenses incurred by the director in
connection with the proceeding. The SCBCA generally provides that a corporation
indemnify an officer to the same extent as a director.
Neither the Articles of Incorporation nor the Bylaws of Pen Cotton South
Carolina contain any indemnification or limitation of liability provisions.
The SCBCA also permits a corporation to purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee or agent of
the corporation, or who, while a director, officer, employee or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee, or agent,
whether or not the corporation would have the power to indemnify him against the
same under the other provisions of the SCBCA.
II-2
<PAGE> 155
(d) Marine Terminals Incorporated (a Missouri corporation) ("Marine
Terminals").
Sections 351.355(1) and (2) of The General and Business Law of the State of
Missouri (the "MGBCL") provide that a corporation may indemnify any person who
was a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
that, in the case of an action or suit by or in the right of the corporation,
the corporation may not indemnify such persons against judgments and fines and
no person shall be indemnified as to any claim, issue or matter as to which such
person shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation, unless and only to the extent that
the court in which the action or suit was brought determines upon application
that such person is fairly and reasonably entitled to indemnity for proper
expenses. Section 351.355(3) of the MGBCL provides that, to the extent that a
director, officer, employee or agent of the corporation has been successful in
the defense of any such action, suit or proceeding or any claim, issue or matter
therein, he shall be indemnified against expenses, including attorneys' fees,
actually and reasonably incurred in connection with such action, suit or
proceeding. Section 351.355(7) of the MGBCL provides that a corporation may
provide additional indemnification to any person indemnifiable under subsection
(1) or (2), provided such additional indemnification is authorized by the
corporation's articles of incorporation or an amendment thereto or by a
shareholder-approved bylaw or agreement, and provided further that no person
shall thereby be indemnified against conduct which was finally adjudged to have
been knowingly fraudulent, deliberately dishonest or willful misconduct.
The Marine Terminals Articles of Incorporation, as amended, effectively
provide that Marine Terminals shall indemnify its directors, officers, employees
or agents to the full extent permitted by the MGBCL.
The MGBCL provides that a Missouri corporation may include any provision in
its articles of incorporation that is not inconsistent with the law, but does
not specifically prohibit or allow a provision limiting the liability of
directors in the articles of incorporation or bylaws of a Missouri corporation.
Other than in regard to the indemnification of directors, the Marine Terminals
Articles and Bylaws do not contain a provision regarding the liability of
directors.
A Missouri corporation also has the power to purchase and maintain
insurance on behalf of any person against any liability asserted against such a
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of the MGBCL.
The Marine Terminals Bylaws provide that it may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
Marine Terminals, or is or was serving at the request of Marine Terminals as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not Marine Terminals would have the power to indemnify him against
such liability under its Bylaws.
(e) In addition, pursuant to a directors' and officers' liability insurance
policy, Pen Holdings' and each of the Guarantor's directors and officers are
insured, subject to the limits, retention, exceptions and other terms and
conditions of such policy, against liability for, among other things, any actual
or alleged misrepresentation, act or omission, or neglect or breach of duty by
the directors or officers of Pen Holdings' and each of the Guarantors,
individually or collectively, or any matter claimed against them solely by
reason of their being directors or officers of Pen Holdings' and each of the
Guarantors.
II-3
<PAGE> 156
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1* Purchase Agreement, dated as of June 3, 1998, by and among
Pen Holdings, the Guarantors and CIBC Oppenheimer Corp.
3.1* Form of Restated Charter of Pen Holdings, as amended
3.2* Form of Amended and Restated Bylaws of Pen Holdings, as
amended
3.3* Form of Restated Charter of Pen Coal Corporation
3.4* Amended and Restated Bylaws of Pen Coal Corporation
3.5* Form of Restated Charter of Pen Cotton Company, as amended
3.6* Bylaws of Pen Cotton Company
3.7* Form of Charter of Pen Hardwood Company, as amended
3.8* Bylaws of Pen Hardwood Company
3.9* Form of Amended and Restated Certificate of Incorporation of
The Elk Horn Coal Corporation
3.10* Form of Bylaws of The Elk Horn Coal Corporation
3.11* Form of Certificate of Incorporation of River Marine
Terminals, Inc., as amended
3.12* Bylaws of River Marine Terminals, Inc.
3.13* Form of Articles of Incorporation of Pen Cotton Company of
South Carolina, as amended
3.14* Bylaws of Pen Cotton Company of South Carolina
3.15* Form of Articles of Incorporation of Marine Terminals
Incorporated
3.16* Bylaws of Marine Terminals Incorporated
4.1* Indenture, dated as of June 8, 1998, by and among Pen
Holdings, the Guarantors and The Bank of New York
4.2* Form of Note
4.3* Registration Rights Agreement, dated as of June 8, 1998, by
and among Pen Holdings, the Guarantors and CIBC Oppenheimer
Corp.
5* Opinion of Counsel
10.1* Amended and Restated Credit Agreement, dated as of June 3,
1998, by and among Pen Holdings, Mellon Bank, N.A., CIBC,
Inc. and other banks later made a party to such Agreement
10.2* Coal Supply Agreement, dated as of June 15, 1989 by and
between Taiwan Power Company and Pen Coal Corporation, as
amended
10.3* Coal Supply Agreement between Pen Coal Corporation and
Dayton Power and Light Company, dated effective July 1,
1992, as amended
10.4* Pen Holdings, Inc. Stock Purchase Plan
10.5* Pen Holdings, Inc. Executive Bonus Plan
12* Calculation of Ratio of Earnings to Fixed Charges
21* Subsidiaries of the Registrant
23.1 Consent of Counsel (contained within Exhibit 5)
23.2** Consent of PricewaterhouseCoopers LLP
23.3* Consent of Stagg Engineering Services, Inc.
23.4* Consent of Marshall Miller & Associates
23.5* Consent of Hill & Associates, Inc.
23.6* Consent of Resource Data International, Inc.
24* Power of Attorney (appearing on Signature Pages)
25* Form T-1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
27.2* Financial Data Schedule
27.3* Financial Data Schedule
27.4* Financial Data Schedule
27.5* Financial Data Schedule
99* Form of Letter of Transmittal
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules.
II-4
<PAGE> 157
SCHEDULE II
PEN HOLDINGS, INC.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING DEDUCTIONS
YEARS ENDED DECEMBER 31, OF PERIOD ADDITIONS (1) (2)
------------------------ ---------- -------------- ----------
<S> <C> <C> <C>
1995.................................... $327,000 $14,000 $ --
1996.................................... $341,000 $71,000 $ --
1997.................................... $412,000 $24,000 $ --
</TABLE>
- ---------------
(1) Additions represent amounts charged to expense during the respective
periods.
(2) Deductions represent actual writeoffs recorded by the Company during the
respective periods.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Item 4, 10(b),
11, or 13 of this form, within one business day of receipt of such request, and
to send the incorporated documents by first-class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed part of the Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at such time shall be deemed to be
the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-5
<PAGE> 158
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (3)(i) and (3)(ii) above do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement.
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(6) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 159
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on the 2nd day of November, 1998.
PEN HOLDINGS, INC.
By: /s/ WILLIAM E. BECKNER
------------------------------------
William E. Beckner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
PEN HOLDINGS, INC.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. BECKNER Chairman of the Board, President, Chief November 2, 1998
- ------------------------------------ Executive Officer (Principal Executive
WILLIAM E. BECKNER Officer) and Director
/s/ MARK A. OLDHAM Senior Vice President, Treasurer and November 2, 1998
- ------------------------------------ Chief Financial Officer (Principal
MARK A. OLDHAM Financial Officer)
* Director , 1998
- ------------------------------------
STEPHEN G. CAPELLI
* Director , 1998
- ------------------------------------
JOSEPH A. DAVIS, JR.
* /s/ WILLIAM E. BECKNER
- -------------------------------------
WILLIAM E. BECKNER, ATTORNEY-IN-FACT November 2, 1998
</TABLE>
II-7
<PAGE> 160
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on the 2nd day of November, 1998.
THE ELK HORN COAL CORPORATION
By: /s/ WILLIAM E. BECKNER
------------------------------------
William E. Beckner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
THE ELK HORN COAL CORPORATION
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. BECKNER President and Chief Executive Officer November 2, 1998
- ------------------------------------ (Principal Executive Officer) and
WILLIAM E. BECKNER Director
/s/ MARK A. OLDHAM Senior Vice President, Treasurer November 2, 1998
- ------------------------------------ (Principal Financial Officer) and
MARK A. OLDHAM Director
* Director , 1998
- ------------------------------------
STEPHEN G. CAPELLI
* /s/ WILLIAM E. BECKNER
- -------------------------------------
WILLIAM E. BECKNER, ATTORNEY-IN-FACT November 2, 1998
</TABLE>
II-8
<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on the 2nd day of November, 1998.
PEN COAL CORPORATION
By: /s/ WILLIAM E. BECKNER
------------------------------------
William E. Beckner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
PEN COAL CORPORATION
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. BECKNER Chairman of the Board, President, Chief November 2, 1998
- ------------------------------------ Executive Officer (Principal Executive
WILLIAM E. BECKNER Officer) and Director
/s/ MARK A. OLDHAM Senior Vice President and Treasurer November 2, 1998
- ------------------------------------ (Principal Financial Officer)
MARK A. OLDHAM
* Director , 1998
- ------------------------------------
STEPHEN G. CAPELLI
* Director , 1998
- ------------------------------------
JOSEPH A. DAVIS, JR.
* /s/ WILLIAM E. BECKNER
- -------------------------------------
WILLIAM E. BECKNER, ATTORNEY-IN-FACT November 2, 1998
</TABLE>
II-9
<PAGE> 162
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on the 2nd day of November, 1998.
MARINE TERMINALS INCORPORATED
By: /s/ WILLIAM E. BECKNER
------------------------------------
William E. Beckner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
MARINE TERMINALS INCORPORATED
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. BECKNER Chairman of the Board, President, Chief November 2, 1998
- ------------------------------------ Executive Officer (Principal Executive
WILLIAM E. BECKNER Officer) and Director
/s/ MARK A. OLDHAM Senior Vice President, Treasurer November 2, 1998
- ------------------------------------ (Principal Financial Officer) and
MARK A. OLDHAM Director
* Director , 1998
- ------------------------------------
JOSEPH A. DAVIS, JR.
* /s/ WILLIAM E. BECKNER
- -------------------------------------
WILLIAM E. BECKNER, ATTORNEY-IN-FACT November 2, 1998
</TABLE>
II-10
<PAGE> 163
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on the 2nd day of November, 1998.
RIVER MARINE TERMINALS, INC.
By: /s/ WILLIAM E. BECKNER
------------------------------------
William E. Beckner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
RIVER MARINE TERMINALS INC.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. BECKNER President and Chief Executive Officer November 2, 1998
- ------------------------------------ (Principal Executive Officer)
WILLIAM E. BECKNER
/s/ MARK A. OLDHAM Senior Vice President, Treasurer November 2, 1998
- ------------------------------------ (Principal Financial Officer) and
MARK A. OLDHAM Director
* Director , 1998
- ------------------------------------
STEPHEN G. CAPELLI
* Director , 1998
- ------------------------------------
JOSEPH A. DAVIS, JR.
* /s/ WILLIAM E. BECKNER
- -------------------------------------
WILLIAM E. BECKNER, ATTORNEY-IN-FACT November 2, 1998
</TABLE>
II-11
<PAGE> 164
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on the 2nd day of November, 1998.
PEN COTTON COMPANY OF SOUTH CAROLINA
By: /s/ WILLIAM E. BECKNER
---------------------------------------
William E. Beckner
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
PEN COTTON COMPANY OF SOUTH CAROLINA
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. BECKNER Chairman of the Board, President, Chief November 2, 1998
- ------------------------------------ Executive Officer (Principal Executive
WILLIAM E. BECKNER Officer) and Director
/s/ MARK A. OLDHAM Senior Vice President, Treasurer November 2, 1998
- ------------------------------------ (Principal Financial Officer) and
MARK A. OLDHAM Director
* Director , 1998
- ------------------------------------
W. SHERROD RHODES
* /s/ WILLIAM E. BECKNER
- -------------------------------------
WILLIAM E. BECKNER, ATTORNEY-IN-FACT November 2, 1998
</TABLE>
II-12
<PAGE> 165
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on the 2nd day of November, 1998.
PEN HARDWOOD COMPANY
By: /s/ WILLIAM E. BECKNER
------------------------------------
William E. Beckner
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
PEN HARDWOOD COMPANY
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. BECKNER Chairman of the Board, President November 2, 1998
- ------------------------------------ (Principal Executive Officer) and
WILLIAM E. BECKNER Director
/s/ MARK A. OLDHAM Senior Vice President, Treasurer November 2, 1998
- ------------------------------------ (Principal Financial Officer) and
MARK A. OLDHAM Director
* Director , 1998
- ------------------------------------
W. SHERROD RHODES
* /s/ WILLIAM E. BECKNER
- -------------------------------------
WILLIAM E. BECKNER, ATTORNEY-IN-FACT November 2, 1998
</TABLE>
II-13
<PAGE> 166
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Brentwood, State of Tennessee, on the 2nd day of November, 1998.
PEN COTTON COMPANY
By: /s/ WILLIAM E. BECKNER
------------------------------------
William E. Beckner
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
PEN COTTON COMPANY
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. BECKNER Chairman of the Board, President, Chief November 2, 1998
- ------------------------------------ Operating Officer (Principal Executive
WILLIAM E. BECKNER Officer) and Director
/s/ MARK A. OLDHAM Senior Vice President, Treasurer November 2, 1998
- ------------------------------------ (Principal Financial Officer) and
MARK A. OLDHAM Director
* Director , 1998
- ------------------------------------
W. SHERROD RHODES
* /s/ WILLIAM E. BECKNER
- -------------------------------------
WILLIAM E. BECKNER, ATTORNEY-IN-FACT November 2, 1998
</TABLE>
II-14
<PAGE> 167
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<C> <S> <C>
1* Purchase Agreement, dated as of June 3, 1998, by and among
Pen Holdings, the Guarantors and CIBC Oppenheimer Corp.
3.1* Form of Restated Charter of Pen Holdings, as amended
3.2* Form of Amended and Restated Bylaws of Pen Holdings, as
amended
3.3* Form of Restated Charter of Pen Coal Corporation
3.4* Amended and Restated Bylaws of Pen Coal Corporation
3.5* Form of Restated Charter of Pen Cotton Company, as amended
3.6* Bylaws of Pen Cotton Company
3.7* Form of Charter of Pen Hardwood Company, as amended
3.8* Bylaws of Pen Hardwood Company
3.9* Form of Amended and Restated Certificate of Incorporation of
The Elk Horn Coal Corporation
3.10* Form of Bylaws of The Elk Horn Coal Corporation
3.11* Form of Certificate of Incorporation of River Marine
Terminals, Inc., as amended
3.12* Bylaws of River Marine Terminals, Inc.
3.13* Form of Articles of Incorporation of Pen Cotton Company of
South Carolina, as amended
3.14* Bylaws of Pen Cotton Company of South Carolina
3.15* Articles of Certificate of Incorporation of Marine Terminals
Incorporated
3.16* Bylaws of Marine Terminals Incorporated
4.1* Indenture, dated as of June 8, 1998, by and among Pen
Holdings, the Guarantors and The Bank of New York
4.2* Form of Note
4.3* Registration Rights Agreement, dated as of June 8, 1998, by
and among Pen Holdings, the Guarantors and CIBC Oppenheimer
Corp.
5* Opinion of Counsel
10.1* Amended and Restated Credit Agreement, dated as of June 3,
1998, by and among Pen Holdings, Mellon Bank, N.A., CIBC,
Inc. and other banks later made a party to such Agreement
10.2* Coal Supply Agreement, dated as of June 15, 1989 by and
between Taiwan Power Company and Pen Coal Corporation, as
amended
10.3* Coal Supply Agreement between Pen Coal Corporation and
Dayton Power and Light Company, dated effective July 1,
1992, as amended.
10.4* Pen Holdings, Inc. Stock Purchase Plan
10.5* Pen Holdings, Inc. Executive Bonus Plan
12* Calculation of Ratio of Earnings to Fixed Charges
21* Subsidiaries of the Registrant
23.1 Consent of Counsel (contained within Exhibit 5)
23.2** Consent of PriceWaterhouseCoopers LLP
23.3* Consent of Stagg Engineering Services, Inc.
23.4* Consent of Marshall Miller & Associates
23.5* Consent of Hill & Associates, Inc.
23.6* Consent of Resource Data International, Inc.
24* Power of Attorney (appearing on Signature Pages)
25* Form T-1 Statement of Eligibility of Trustee
27.1* Financial Data Schedule
27.2* Financial Data Schedule
27.3* Financial Data Schedule
27.4* Financial Data Schedule
27.5* Financial Data Schedule
99* Form of Letter of Transmittal
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Pen Holdings, Inc. of our report dated
February 20, 1998, except as to the third paragraph of Note 17 which is as of
October 1, 1998, relating to the financial statements of Pen Holdings, Inc.
which appears in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Consolidated Financial Data" in such
Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has not
prepared or certified such "Selected Consolidated Financial Data."
PricewaterhouseCoopers LLP
Nashville, Tennessee
November 3, 1998
