##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended
September 30, 2001

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 333-60599

PEN HOLDINGS, INC.
(Exact Name Of Registrant As Specified in Its Charter)

|                                                                         |  |                                                
|------------------------------------------------------------------------ |  | -----------------------------------------------
|Tennessee
(State or other jurisdiction of
incorporation or organization) |  | 62-0852576
(I.R.S. Employer Identification No.)

5110 Maryland Way, Suite 300
Brentwood, Tennessee 37027
(Address Of Principal Executive Offices) (Zip Code)

Registrants telephone number, including area code: (615) 371-7300

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes EMPTY BOX
 No EMPTY BOX  N/A

Indicate the number of shares of each of the registrants classes of common
stock, as of the latest practicable date: As of
November 29, 2001 : Class I Common Stock, $.01 par value per share, 4,290,000
shares and Class II Common Stock, $.01 par value per share, 177,550 shares.



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TABLE OF CONTENTS



|                                       |                                                                                               |                                                           |  |  |  |  |  | 
|-------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION         
|                                       | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                       |                                                                                               | CONSOLIDATED BALANCE SHEETS                              
|                                       |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                    
|                                       |                                                                                               | CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
|                                       |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                    
|                                       |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS               
|                                       | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                       | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II  OTHER INFORMATION           
|                                       | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                       | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                       | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                                       | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                       | ITEM 5. OTHER INFORMATION                                                                    
|                                       | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|                                       | SIGNATURES                                                                                   
|FIRST AMENDMENT TO FINANCING AGREEMENT



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##### Table of Contents



PEN HOLDINGS, INC.

INDEX

|                                                                                              |                                                                                                                                          |  |        |   | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | - | 
|                                                                                              |                                                                                                                                          |  | Page  
|                                                                                              |                                                                                                                                          |  | Number
|                                                                                              |                                                                                                                                          |  |       
|PART I  FINANCIAL INFORMATION                                                                |                                                                                                                                          |  |        |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 1.
Financial Statements (UNAUDITED)                                                      |                                                                                                                                          |  |        |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Consolidated Balance Sheets  September 30, 2001 and December 31, 2000                                                                   |  |        | 1 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Consolidated Statements of Operations  Three Months Ended September 30, 2001 and 2000 and Nine Months Ended September 30, 2001 and 2000 |  |        | 2 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Consolidated Statement of Changes In Shareholders Equity                                                                                |  |        | 3 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2001 and 2000                                                    |  |        | 4 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Notes to Consolidated Financial Statements                                                                                               |  |        | 5 | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                                          |  | 11     |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                                                          |  | 17     |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|PART II  OTHER INFORMATION                                                                   |                                                                                                                                          |  |        |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 1. Legal Proceedings                                                                     |                                                                                                                                          |  | 18     |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                                                          |  | 18     |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 3. Defaults Upon Senior Securities                                                       |                                                                                                                                          |  | 18     |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                                          |  | 18     |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 5. Other Information                                                                     |                                                                                                                                          |  | 18     |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                                          |  | 18     |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Signatures                                                                                    |                                                                                                                                          |  | 19     |  



i



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

PEN HOLDINGS, INC.




CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)

|                                       |                                                                                             |                            |                                      |         |               |   |              |         |         |  | 
|-------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------- | ------------- | - | ------------ | ------- | ------- |  | 
|                                       |                                                                                             |                            |                                      |         | September 30, |   | December 31,
|                                       |                                                                                             |                            |                                      |         | 2001          |   | 2000        
|                                       |                                                                                             |                            |                                      |         |               |   |             
|                                       |                                                                                             |                            | ASSETS                               |         |               |   |              |         |         |  | 
|                                      
|                                      
|                                      
|                                      
|Current assets:                        |                                                                                             |                            |                                      |         |               |   |              |        
|                                      
|                                      
|                                      
|                                      
|                                       | Cash and cash equivalents                                                                   |                            | $                                    | 267     |               |   | $            | 178     |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts receivable (net of allowance for doubtful accounts of $664 and $605, respectively) |                            |                                      | 18,063  |               |   |              | 14,253  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Inventories                                                                                 |                            |                                      | 3,320   |               |   |              | 3,004   |        
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred income taxes                                                                       |                            |                                      | 4,739   |               |   |              | 4,739   |        
|                                      
|                                      
|                                      
|                                      
|                                       | Refundable income taxes                                                                     |                            |                                      |        |               |   |              | 3,015   |        
|                                      
|                                      
|                                      
|                                      
|                                       | Other assets                                                                                |                            |                                      | 2,983   |               |   |              | 2,886   |        
|                                       |                                                                                             |                            |                                      |         |               |   |              |        
|                                       |                                                                                             | Total current assets       |                                      |         | 29,372        |   |              |         | 28,075  | 
|                                      
|                                      
|                                      
|                                      
|                                       | Investment in unconsolidated affiliated companies                                           |                            |                                      |        |               |   |              | 3,046   |        
|                                      
|                                      
|                                      
|                                      
|                                       | Coal reserves and mine development costs, net                                               |                            |                                      | 131,195 |               |   |              | 151,845 |        
|                                      
|                                      
|                                      
|                                      
|                                       | Property, plant and equipment, net                                                          |                            |                                      | 79,518  |               |   |              | 85,771  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Long-term investments                                                                       |                            |                                      | 10,023  |               |   |              | 16,960  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Other assets                                                                                |                            |                                      | 10,810  |               |   |              | 6,281   |        
|                                       |                                                                                             |                            |                                      |         |               |   |              |        
|                                       |                                                                                             | $                          | 260,918                              |         |               | $ | 291,978      |        
|                                       |                                                                                             |                            |                                      |         |               |   |              |        
|                                       |                                                                                             |                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |               |   |              |         |         |  | 
|                                      
|                                      
|                                      
|                                      
|Current liabilities:                   |                                                                                             |                            |                                      |         |               |   |              |        
|                                      
|                                      
|                                      
|                                      
|                                       | Revolving credit loans                                                                      |                            | $                                    | 1,958   |               |   | $            | 31,936  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Current maturities of long-term debt                                                        |                            |                                      | 29,630  |               |   |              | 103,312 |        
|                                      
|                                      
|                                      
|                                      
|                                       | Current maturities of capital leases                                                        |                            |                                      | 4,978   |               |   |              | 13,717  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts payable                                                                            |                            |                                      | 14,622  |               |   |              | 12,224  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued liabilities                                                                         |                            |                                      | 10,438  |               |   |              | 20,985  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred gain                                                                               |                            |                                      | 259     |               |   |              |        |        
|                                       |                                                                                             |                            |                                      |         |               |   |              |        
|                                       |                                                                                             | Total current liabilities  |                                      |         | 61,885        |   |              |         | 182,174 | 
|                                      
|                                      
|                                      
|                                      
|                                       | Long-term debt                                                                              |                            |                                      | 103,149 |               |   |              |        |        
|                                      
|                                      
|                                      
|                                      
|                                       | Long-term capital leases                                                                    |                            |                                      | 5,534   |               |   |              |        |        
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred income taxes                                                                       |                            |                                      | 40,420  |               |   |              | 51,780  |        
|                                      
|                                      
|                                      
|                                      
|                                       | Long-term deferred gain                                                                     |                            |                                      | 12,724  |               |   |              |        |        
|                                      
|                                      
|                                      
|                                      
|                                       | Other liabilities                                                                           |                            |                                      | 7,298   |               |   |              | 5,404   |        
|                                       |                                                                                             |                            |                                      |         |               |   |              |        
|                                       |                                                                                             | Total liabilities          |                                      |         | 231,010       |   |              |         | 239,358 | 
|                                       |                                                                                             |                            |                                      |         |               |   |              |        
|Mandatorily redeemable preferred stock |                                                                                             |                            | 14,929                               |         |               |   | 14,110       |        
|                                      
|                                      
|                                      
|                                      
|Shareholders equity:                  |                                                                                             |                            |                                      |         |               |   |              |        
|                                      
|                                      
|                                      
|                                      
|                                       | Class I common stock                                                                        |                            |                                      | 43      |               |   |              | 43      |        
|                                      
|                                      
|                                      
|                                      
|                                       | Class II common stock                                                                       |                            |                                      | 2       |               |   |              | 2       |        
|                                      
|                                      
|                                      
|                                      
|                                       | Additional paid-in capital                                                                  |                            |                                      | 19      |               |   |              | 19      |        
|                                      
|                                      
|                                      
|                                      
|                                       | Retained earnings                                                                           |                            |                                      | 14,915  |               |   |              | 38,446  |        
|                                       |                                                                                             |                            |                                      |         |               |   |              |        
|                                       |                                                                                             | Total shareholders equity |                                      |         | 14,979        |   |              |         | 38,510  | 
|                                       |                                                                                             |                            |                                      |         |               |   |              |        
|                                       |                                                                                             | $                          | 260,918                              |         |               | $ | 291,978      |        
|                                       |                                                                                             |                            |                                      |         |               |   |              |        

The accompanying notes are an integral part of these financial statements.

1



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##### Table of Contents



PEN HOLDINGS, INC.




CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)

|                                                                            |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |         |  
|--------------------------------------------------------------------------- | ----------------------------------- | - | ------------------ | ------ | ----------------- | - | ------ | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                            |                                     |   | Three Months Ended |        | Nine Months Ended
|                                                                            |                                     |   | September 30,      |        | September 30,    
|                                                                            |                                     |   |                    |        |                  
|                                                                            |                                     |   | 2001               |        | 2000              |   | 2001   |        | 2000
|                                                                            |                                     |   |                    |        |                   |   |        |        |     
|                                                                            |                                     |   |                    |        |                  
|Revenues                                                                    |                                     | $ | 40,909             |        |                   | $ | 35,691 |        |      | $ | 119,687 |         |   | $ | 113,198 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Expenses (income):                                                          |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Cost of sales                       |   |                    | 45,424 |                   |   |        | 31,199 |      |   |         | 124,509 |   |   |         | 103,659 |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Selling, general and administrative |   |                    | 815    |                   |   |        | 1,416  |      |   |         | 4,757   |   |   |         | 4,455   |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Interest expense                    |   |                    | 5,038  |                   |   |        | 2,615  |      |   |         | 12,753  |   |   |         | 6,651   |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Interest income                     |   |                    | (33    | )                 |   |        | (43    | )    |   |         | (99     | ) |   |         | (431    | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Litigation settlement               |   |                    |       |                   |   |        |       |      |   |         | 814     |   |   |         |        |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Impairment loss                     |   |                    | 11,444 |                   |   |        |       |      |   |         | 11,444  |   |   |         |        |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Other (income) expense              |   |                    | 59     |                   |   |        | (164   | )    |   |         | (563    | ) |   |         | 766     |  
|                                                                            |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |        
|Income (loss) from continuing operations before income taxes                |                                     |   | (21,838            | )      |                   |   | 668    |        |      |   | (33,928 | )       |   |   | (1,902  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Provision (benefit) for income taxes                                        |                                     |   | (7,015             | )      |                   |   | 418    |        |      |   | (11,327 | )       |   |   | (747    | )      
|                                                                            |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |        
|Income (loss) from continuing operations                                    |                                     |   | (14,823            | )      |                   |   | 250    |        |      |   | (22,601 | )       |   |   | (1,155  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Income from discontinued operations                                         |                                     |   |                   |        |                   |   | 26     |        |      |   |        |         |   |   | 568     |        
|                                                                            |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |        
|Income
(loss) before extraordinary items and change in accounting
principle |                                     |   | (14,823            | )      |                   |   | 276    |        |      |   | (22,601 | )       |   |   | (587    | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Extraordinary loss, net of tax                                              |                                     |   |                   |        |                   |   |       |        |      |   | (111    | )       |   |   |        |        
|                                                                            |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |        
|Income (loss) before change in accounting principle                         |                                     |   | (14,823            | )      |                   |   | 276    |        |      |   | (22,712 | )       |   |   | (587    | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Change in accounting principle, net of tax                                  |                                     |   |                   |        |                   |   |       |        |      |   |        |         |   |   | 1,026   |        
|                                                                            |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |        
|Net income (loss)                                                           |                                     |   | (14,823            | )      |                   |   | 276    |        |      |   | (22,712 | )       |   |   | 439     |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Accretion of mandatorily redeemable preferred stock                         |                                     |   | 273                |        |                   |   | 273    |        |      |   | 819     |         |   |   | 819     |        
|                                                                            |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |        
|Net income (loss) available to common shareholders                          |                                     | $ | (15,096            | )      |                   | $ | 3      |        |      | $ | (23,531 | )       |   | $ | (380    | )      
|                                                                            |                                     |   |                    |        |                   |   |        |        |      |   |         |         |   |   |         |        

The accompanying notes are an integral part of these financial statements.

2



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##### Table of Contents



PEN HOLDINGS, INC.




CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(in thousands, except shares)
(Unaudited)

|                              |  |              |           |              |  |            |    |          |  |         |         |          |  |       |   |  |  |   |    |  |  |   |         |   |  |   |         |  
|----------------------------- |  | ------------ | --------- | ------------ |  | ---------- | -- | -------- |  | ------- | ------- | -------- |  | ----- | - |  |  | - | -- |  |  | - | ------- | - |  | - | ------- | -
|                              |  | Class I      |           | Class II     |  |            |    |          |  |         |         |          |  |       |   | 
|                              |  | Common Stock |           | Common Stock |  | Additional |    |          |  |         |         |          |  |      
|                              |  |              |           |              |  | Paid-in    |    | Retained |  |         |         |         
|                              |  | Shares       |           | Amounts      |  | Shares     |    | Amounts  |  | Capital |         | Earnings |  | Total
|                              |  |              |           |              |  |            |    |          |  |         |         |          |  |      
|Balance at December 31, 2000  |  |              | 4,290,000 |              |  | $          | 43 |          |  |         | 177,550 |          |  | $     | 2 |  |  | $ | 19 |  |  | $ | 38,446  |   |  | $ | 38,510  |  
|                             
|                             
|                             
|                             
|Accretion of preferred stock  |  |              |           |              |  |            |    |          |  |         |         |          |  |       |   |  |  |   |    |  |  |   | (819    | ) |  |   | (819    | )
|                             
|                             
|                             
|                             
|Net loss                      |  |              |           |              |  |            |    |          |  |         |         |          |  |       |   |  |  |   |    |  |  |   | (22,712 | ) |  |   | (22,712 | )
|                              |  |              |           |              |  |            |    |          |  |         |         |          |  |       |   |  |  |   |    |  |  |   |         |   |  |   |         |  
|Balance at September 30, 2001 |  |              | 4,290,000 |              |  | $          | 43 |          |  |         | 177,550 |          |  | $     | 2 |  |  | $ | 19 |  |  | $ | 14,915  |   |  | $ | 14,979  |  
|                              |  |              |           |              |  |            |    |          |  |         |         |          |  |       |   |  |  |   |    |  |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these financial statements.

3



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##### Table of Contents



PEN HOLDINGS, INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |         |   |        |  
|-------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------- | ----------------- | ------- | ---- | ------- | - | ------ | -
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         | Nine Months Ended
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         | September 30,    
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                  
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         | 2001              |         | 2000
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |     
|Cash flows from operating activities:                                |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Net income (loss)                                                                                  |                                                                                                                                                                                 | $                                                                                  | (22,712 | )                 |         | $    | 439     |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |         |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Depreciation, depletion and amortization                                           |         |                   | 15,454  |      |         |   | 11,864 |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Cumulative effect of change in accounting principle, net of tax                    |         |                   |        |      |         |   | (1,026 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Equity in net losses of affiliates                                                 |         |                   | 454     |      |         |   | 1,031  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Deferred income taxes                                                              |         |                   | (11,360 | )    |         |   | 100    |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Gain on sale of investment                                                         |         |                   |        |      |         |   | (856   | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | (Gain)/loss on sale of property and equipment                                      |         |                   | 735     |      |         |   | (59    | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Impairment loss                                                                    |         |                   | 11,444  |      |         |   |       |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Extraordinary loss on debt refinancing, net of tax                                 |         |                   | 111     |      |         |   |       |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Amortization of deferred gain                                                      |         |                   | (75     | )    |         |   |       |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Interest income on long-term investments                                           |         |                   | (610    | )    |         |   | (910   | )
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Cash generated from (used in) operations, before changes in assets and liabilities |         |                   | (6,559  | )    |         |   | 10,583 |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Changes in assets and liabilities, net of effects from dispositions: |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Accounts receivable                                                                |         |                   | (3,810  | )    |         |   | 3,332  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Inventories                                                                        |         |                   | (316    | )    |         |   | (1,265 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Accounts payable and accrued expenses                                              |         |                   | (7,758  | )    |         |   | 4,560  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Other                                                                              |         |                   | (3,545  | )    |         |   | (241   | )
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Net cash provided by (used in) operating activities                                |         |                   | (21,988 | )    |         |   | 16,969 |  
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|Cash flows from investing activities:                                |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Capital expenditures                                                                               |                                                                                                                                                                                 |                                                                                    | (10,692 | )                 |         |      | (23,423 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Proceeds from sale of investment                                                                   |                                                                                                                                                                                 |                                                                                    |        |                   |         |      | 2,900   |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Proceeds
from sale of property and equipment                                                       |                                                                                                                                                                                 |                                                                                    | 3,357   |                   |         |      | 244     |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Proceeds from sale of coal reserves                                                                |                                                                                                                                                                                 |                                                                                    | 33,000  |                   |         |      |        |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Investments in affiliated companies                                                                |                                                                                                                                                                                 |                                                                                    | (7,117  | )                 |         |      | (800    | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Escrowed funds                                                                                     |                                                                                                                                                                                 |                                                                                    | 7,547   |                   |         |      |        |  
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                     | Net cash provided by (used in) investing activities                                                |                                                                                                                                                                                 |                                                                                    | 26,095  |                   |         |      | (21,079 | )
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|Cash flows from financing activities:                                |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Proceeds from issuance of debt                                                                     |                                                                                                                                                                                 |                                                                                    | 29,500  |                   |         |      |        |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Repayment of long-term debt                                                                        |                                                                                                                                                                                 |                                                                                    | (91     | )                 |         |      | (84     | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Repayment of capital leases                                                                        |                                                                                                                                                                                 |                                                                                    | (3,449  | )                 |         |      | (2,090  | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Net borrowings (payments) under line of credit agreements and current notes payable                |                                                                                                                                                                                 |                                                                                    | (29,978 | )                 |         |      | 5,770   |  
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                     | Net cash provided by (used in) financing activities                                                |                                                                                                                                                                                 |                                                                                    | (4,018  | )                 |         |      | 3,596   |  
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                     | Net increase (decrease) in cash                                                                    |                                                                                                                                                                                 |                                                                                    | 89      |                   |         |      | (514    | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Cash and cash equivalents at beginning of period                                                   |                                                                                                                                                                                 |                                                                                    | 178     |                   |         |      | 599     |  
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                     | Cash and cash equivalents at end of period                                                         |                                                                                                                                                                                 | $                                                                                  | 267     |                   |         | $    | 85      |  
|                                                                     |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|Supplemental disclosures of cash flow information:                   |                                                                                                    |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |        
|                                                                     | Cash
paid for:                                                                                     |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |         |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Interest                                                                           |         | $                 | 9,494   |      |         | $ | 7,764  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    |                                                                                                                                                                                 | Income taxes                                                                       |         |                   |        |      |         |   |       |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Supplemental disclosure of non-cash transactions:                                                  |                                                                                                                                                                                 |                                                                                    |         |                   |         |      |         |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                    | In the nine months ended September 30, 2001 and September 30, 2000, the
Company financed through capital lease transactions $244,000 and $14,049,000
of equipment, respectively |                                                                                    |         |                   |         |      |         |   |       

The accompanying notes are an integral part of these financial statements.

4



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##### Table of Contents



PEN HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




NOTE 1  DESCRIPTION OF BUSINESS:

Pen Holdings, Inc. (Pen Holdings) and its consolidated subsidiaries
(references to the Company are to Pen Holdings and its consolidated
subsidiaries) are primarily engaged in the mining and sale of coal, selling
predominantly to utility companies. The Company also receives royalty income
from coal reserves leased to other companies. The Companys coal reserves and
mining operations are in Kentucky and West Virginia.

On June 4, 2001, The Elk Horn Coal Corporation, a wholly owned subsidiary
of Pen Holdings (Elk Horn) sold the coal and related real estate interests,
rights and other assets commonly referred to as the Fork Creek Properties, to
an unrelated party for an aggregate sales price of $33,000,000 in cash. The
Company has acquired the right to mine the property subject to one of Pen
Holdings subsidiaries paying specified royalties which will be paid on each
ton of Fork Creek coal mined and sold. The gain of $13,058,000 on this sale
was recorded as deferred gain on the balance sheet and will be recognized as
other income based on the tons mined as a percentage of total estimated
recoverable tons from the property.

The Company entered into the Second Amended and Restated Credit Agreement,
dated as of May 31, 2001 (the Amended Credit Agreement), by and among Pen
Holdings and certain financial institutions party thereto (the Lenders). By
its original terms, the Amended Credit Agreement provided for (a) revolving
loans, the aggregate outstanding principal amount of which would not exceed
$15,000,000 at any one time, and (b) term loans in an aggregate principal
amount of up to $32,000,000 of which as of September 30, 2001, $29,500,000 had
been advanced. The Lenders are the successors to the former lenders under the
Amended Credit Agreement. The Lenders have taken assignment to, and the
assumption of, all of the rights and obligations of the prior lenders under the
Amended Credit Agreement and the assignment to the agents, for the ratable
benefit of the Lenders, of all rights of the prior agent under the Amended
Credit Agreement and related loan documents in the collateral securing the
indebtedness. As a result of entering into the Amended Credit Agreement, the
outstanding indebtedness was converted into revolving loans and term loans
under and subject to the terms and conditions of the Amended Credit Agreement.
The Lenders have guarantees from each of the subsidiaries of Pen Holdings and
have security interests and mortgages on substantially all of Pen Holdings and
its subsidiaries properties to secure obligations under the Amended Credit
Agreement. The Company realized an extraordinary loss, net of tax, of $111,000
in relation to the early extinguishment of debt related to the Amended Credit
Agreement.

As of November 28, 2001, Pen Holdings entered into the First Amendment to
the Amended Credit Agreement (First Amendment) with the Lenders under the
Amended Credit Agreement (the First Amendment). The First Amendment was
entered into as a result of the occurrence of certain potential defaults or
events of default occurring under the Amended Credit Agreement. Under the
First Amendment, Pen Holdings has agreed to further amend the Amended Credit
Agreement such that (i) the maturity of the obligations under the Amended
Credit Agreement is now January 28, 2002, except as extended under certain
circumstances to April 12, 2002, as described in the First Amendment, (ii) it
permits Pen Holdings to utilize the proceeds from certain asset dispositions
for working capital and capital expenditures; (iii) it reduces the availability
under the revolving loan commitment under the Amended Credit Agreement to
$8,357,000; (iv) it extinguishes any further term loan commitments under the
Amended Credit Agreement and (v) it resets certain financial covenants
contained in the Amended Credit Agreement. The First Amendment also confirms
that since August 31, 2001 and so long as events of defaults exist, the default
interest rate (an effective rate of 12% per annum at September 30, 2001) would
be charged under the Amended Credit Agreement. Additionally, under the First
Amendment, the Lenders and Pen Holdings entered into Bridge Term Loan (the
Bridge Note), whereby in exchange for amending the Amended Credit Agreement,
the Lenders received additional fees (in the form of the Bridge Note) up to a
maximum of $3,000,000. Such Bridge Note requires no principal payment until
maturity and accrues interest at the default interest rate (13.75% per annum as
of September 30, 2001), as adjusted under the Amended Credit Agreement. Pen
Holdings has also paid certain other fees and expenses to the Lenders in
connection with negotiating the First Amendment.

At December 31, 2000, prior to the Fork Creek Properties reserve sale and
Amended Credit Agreement, all of the Companys indebtedness had been classified
as current due to potential events of defaults or defaults that existed at the
balance sheet date under the Companys then operative credit agreement. Since
such defaults at December 31, 2000 have been cured, the
Companys indebtedness as
of September 30, 2001 has been re-classified. However, the
indebtedness related
to the Amended Credit Agreement continues to be classified as current in
accordance with the renegotiated terms.

Impairment Loss

In conjunction with the proposed disposition of its one-third interest in
International Marine Terminals (IMT), the Company has determined that the
carrying value of this investment has been impaired. During the three months
ended September 30, 2001, the Company is recognizing an impairment loss of
$11,444,000 before related tax benefits on its one-third interest in IMT.

The Company has received a non-binding letter of intent from a potential
purchaser of its partnership interest in IMT. The parties expect to close the
transaction before December 31, 2001. If this
transaction is consummated, the Company expects to obtain access to additional
cash of approximately $9,000,000 to be applied in accordance with the
provisions of the First Amendment and to use for working capital,

5



---



##### Table of Contents



including the December 2001 payment of interest on
its Senior Notes. However,
the Company cannot provide any assurance that it will consummate the proposed
transaction on the terms set forth in the letter of intent or at all. If this
transaction or any other transaction does not close, the Company would retain
its partnership interest, as well as its contingent obligation as described in
Note 8. Additional impairment losses could result from the Companys retention
of its partnership interest in IMT.

Disposal of a Business Segment  Discontinued Operations

In June 2000, the Company sold the stock of Pen Cotton Company of South
Carolina, a wholly owned subsidiary engaged in cotton ginning and warehousing
in South Carolina. The sales price was $2,900,000 paid in cash at closing.
Pen Holdings is a guarantor of the debt that the buyer incurred to purchase the
business. The gain resulting from the sale of approximately $848,000 (less
applicable taxes of $288,000) is included in Income from discontinued
operations. As a result of this sale the Company has discontinued its cotton
operations.

The statements of operations for the three and nine months ended September
30, 2000, have
been reclassified to reflect these discontinued operations.

NOTE 2-SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Investments in affiliated enterprises in which the Company owns less than
a controlling interest are presented under the equity basis of accounting
representing the Companys investment in affiliates, reduced by goodwill
amortization and increased (decreased) by the Companys proportionate equity in
net income (losses) of the unconsolidated affiliates.

Change in Accounting Principle

During the nine months ended September 30, 2000, the Company changed its
method of accounting for supply parts inventory from expensing upon purchase to
capitalization upon purchase and expensing upon usage. In prior years, the
Company has had a relatively even mix of operations in underground mining and
surface mining. However, the Company started two new underground mines in
2000. The underground mining process requires a large amount of mining supplies
and supply parts inventory. The anticipated tons to be produced from
underground mining is projected to increase to over 75% of the Companys
production in the next few years. Accordingly, the Company believes that the
capitalization of supply parts inventory will result in a better measurement of
operating results by matching revenues with related expenses. The $1,026,000
cumulative effect of the change on prior years (after reduction for income
taxes of $616,000) is included in income of the nine months ended September 30,
2000. The supplies inventory balance at December 31, 1999 was $1,723,000. The
pro forma effect of the adoption for periods prior to January 1, 2000 could not
be determined as the Company did not separately track inventory supplies for
such prior periods.

Interim Financial Information

The accompanying interim financial statements have been prepared without
audit, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes that
the disclosures herein are adequate to make information presented not
misleading. These statements should be read in conjunction with the Companys
financial statements for the year ended December 31, 2000, which are included
in the Companys Form 10-K for the year ended December 31, 2000, as filed with
the Securities and Exchange Commission on April 30, 2001. The results of
operations for the three or nine month periods are not necessarily indicative
of results for the full year. Certain prior year amounts have been
re-classified for comparative purposes.

In the opinion of management, the accompanying interim financial statements
contain all adjustments of a normal and recurring nature necessary for a fair
presentation of the Companys financial position as of September 30, 2001, its
results of operations for three and nine months ended September 30, 2001 and
2000, and its cash flows for the nine months ended September 30, 2001 and 2000.
The accompanying interim financial statements have been prepared assuming the
Company will continue as a going concern.

6



---



##### Table of Contents



NOTE 3-INVENTORIES:

Inventories consist of the following (in thousands):

|         |  |               |       |              |  |   |       | 
|-------- |  | ------------- | ----- | ------------ |  | - | ----- | 
|         |  | September 30, |       | December 31,
|         |  | 2001          |       | 2000        
|         |  |               |       |             
|Coal     |  | $             | 2,061 |              |  | $ | 1,604 | 
|        
|        
|        
|        
|Supplies |  |               | 1,259 |              |  |   | 1,400 | 
|         |  |               |       |              |  |   |       | 
|         |  | $             | 3,320 |              |  | $ | 3,004 | 
|         |  |               |       |              |  |   |       | 

NOTE 4-COAL RESERVES AND MINE DEVELOPMENT COSTS:

Coal reserves and mine development costs consist of the following (in
thousands):

|                             |  |               |         |              |  |   |         |  
|---------------------------- |  | ------------- | ------- | ------------ |  | - | ------- | -
|                             |  | September 30, |         | December 31,
|                             |  | 2001          |         | 2000        
|                             |  |               |         |             
|Coal reserves                |  | $             | 134,970 |              |  | $ | 153,967 |  
|                            
|                            
|                            
|                            
|Other mine development costs |  |               | 34,207  |              |  |   | 31,625  |  
|                             |  |               |         |              |  |   |         |  
|                             |  |               | 169,177 |              |  |   | 185,592 |  
|                            
|                            
|                            
|                            
|Accumulated depletion        |  |               | (37,982 | )            |  |   | (33,747 | )
|                             |  |               |         |              |  |   |         |  
|                             |  | $             | 131,195 |              |  | $ | 151,845 |  
|                             |  |               |         |              |  |   |         |  

NOTE 5-PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following (in thousands):

|                         |  |               |         |              |  |   |         |  
|------------------------ |  | ------------- | ------- | ------------ |  | - | ------- | -
|                         |  | September 30, |         | December 31,
|                         |  | 2001          |         | 2000        
|                         |  |               |         |             
|Machinery and equipment  |  | $             | 100,297 |              |  | $ | 99,160  |  
|                        
|                        
|                        
|                        
|River terminals          |  |               | 11,683  |              |  |   | 11,633  |  
|                        
|                        
|                        
|                        
|Buildings                |  |               | 8,680   |              |  |   | 8,135   |  
|                        
|                        
|                        
|                        
|Coal preparation plant   |  |               | 19,830  |              |  |   | 20,042  |  
|                        
|                        
|                        
|                        
|Other                    |  |               | 2,495   |              |  |   | 3,713   |  
|                         |  |               |         |              |  |   |         |  
|                         |  |               | 142,985 |              |  |   | 142,683 |  
|                        
|                        
|                        
|                        
|Accumulated depreciation |  |               | (63,467 | )            |  |   | (56,912 | )
|                         |  |               |         |              |  |   |         |  
|                         |  | $             | 79,518  |              |  | $ | 85,771  |  
|                         |  |               |         |              |  |   |         |  

NOTE 6-REVOLVING LINES OF CREDIT:

Effective May 31, 2001 the Company entered into the Amended Credit
Agreement. Under the original credit facility, the Company had a principal
borrowing limit of $40,000,000. The Amended Credit Agreement originally
provided up to $32,000,000 in term loans and a maximum revolving line of credit
of $15,000,000. Such availability has been reduced by the First Amendment.
The Amended Credit Agreement originally expired in June 2003. The expiration
date of the Amended Credit Agreement has been changed to January 28, 2002 by
the First Amendment. The original availability under the revolving line of
credit in the Amended Credit Agreement was based on a formula of eligible
accounts receivable and eligible inventory not to exceed $15,000,000. See Note
1 and Item 2 Managements Discussion And Analysis of Financial Condition and
Results of OperationsLiquidity and Capital Resources. Borrowings bear
interest at a variable rate based upon a stated reference rate (an effective
rate of 12.00% at September 30, 2001). This is the current default rate of
interest under the Amended Credit Agreement. The revolving line of credit had
an amount outstanding of $1,958,000 and $31,936,000 at September 30, 2001 and
December 31, 2000, respectively. Additionally, $4,360,000 was committed for
outstanding letters of credit at December 31, 2000. The Amended Credit
Agreement contains financial and operational covenants which have been amended
by the First Amendment.

As of November 28, 2001, Pen Holdings entered into the First Amendment to
the Amended Credit Agreement (First Amendment). Under the First Amendment,
Pen Holdings has agreed to further amend the Amended Credit Agreement such that
(i) the maturity of the obligations under the Amended Credit Agreement is now
January 28, 2002, except as extended under certain circumstances to April 12,
2002, as described in the First Amendment, (ii) it permits Pen Holdings to
utilize the proceeds from certain asset dispositions for working capital and
capital expenditures; (iii) it reduces the availability under the revolving
loan commitment under the Amended Credit Agreement to $8,357,000; (iv) it
extinguishes any further term loan commitments under the Amended Credit

7



---



##### Table of Contents



Agreement and (v) it resets certain financial covenants contained in the
Amended Credit Agreement. The First Amendment also
confirms that since August 31, 2001 and so long as events of defaults exist,
the default interest rate (an effective rate of 12% per annum at September 30,
2001) would be charged under the Amended Credit Agreement. Additionally, under
the First Amendment, the Lenders and Pen Holdings entered in the Bridge Note,
whereby in exchange for amending the Amended Credit Agreement, the Lenders
received additional fees (in the form of the Bridge Note) up to a maximum of
$3,000,000. Such Bridge Note requires no principal payment until maturity and
accrues interest at the default interest rate (13.75% per annum as of September
30, 2001), as adjusted under the Amended Credit Agreement. Pen Holdings has
also paid certain other fees and expenses to the Lenders in connection with
negotiating the First Amendment.

8



---



##### Table of Contents



NOTE 7-LONG TERM DEBT:

Long-term debt consists of the following:

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                |         |                |  |   |          |  
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | -------------- |  | - | -------- | -
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | September 30,  |         | December 31,  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 2001           |         | 2000          
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                |         |               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | (in thousands) |         | (in thousands)
| |  | Senior 9-7/8% Notes (the Senior Notes) due 2008 in the aggregate
principal amount of $100,000,000. On June 8, 1998, Pen Holdings issued
the Senior Notes which accrue interest at 9-7/8%, payable semi-annually
in June and December through the maturity date of June 15, 2008. The
entire principal amount is due at the maturity date. The Senior Notes
were issued with an aggregate original issue discount of $784,000,
which is being amortized over the ten year term of the Senior Notes.
The Senior Notes are general unsecured obligations of Pen Holdings
ranking generally the same in priority of payment with all existing and
future unsubordinated indebtedness of the Company. The Senior Notes are
unconditionally guaranteed (the Guarantees) on a senior unsecured
basis, as to the payment of principal, premium, if any, and interest,
fully and unconditionally, jointly and severally, by certain of Pen
Holdings subsidiaries (the Guarantors). The Guarantees will rank
generally the same in priority of payment with all existing and future
unsubordinated indebtedness of the Guarantors and senior in right of
payment to all existing and future indebtedness of the Guarantors. The
Senior Notes are redeemable at the option of Pen Holdings, in whole or
in part, at any time on or after June 15, 2003 at premiums to face
value identified in the Indenture by and among Pen Holdings, the
Guarantors, and The Bank of New York, as Trustee, dated June 8, 1998
(the Indenture), relating to the Senior Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | $              | 99,477  |                |  | $ | 99,419   |  
|
|
|
|
| |  | Term debt collateralized by certain of the Companys assets with a net
book value of $178,040,000 at September 30, 2001. Effective May 31,
2001, the Company entered into the Amended Credit Agreement, which
provided for term loans, of which $29,500,000 has been advanced as of
September 30, 2001. The Amended Credit Agreement provided for monthly
interest payments based upon a stated reference plus the applicable
margin (13.75% as of September 30, 2001) and principle reductions of
$500,000 in February and May of 2002 and $1,000,000 in August and
November 2002 and in February 2003 with the balance due by May 31, 2003.
As of November 28, 2001, Pen Holdings entered into the First Amendment.
Under the First Amendment, Pen Holdings has agreed to further amend the
Amended Credit Agreement such that (i) the maturity of the obligations
under the Amended Credit Agreement is now January 28, 2002, except as
extended under certain circumstances to April 12, 2002, as described in
the First Amendment, (ii) it permits Pen Holdings to utilize the
proceeds from certain asset dispositions for working capital and
capital expenditures; (iii) it reduces the availability under the
revolving loan commitment under the Amended Credit Agreement to
$8,357,000; (iv) it extinguishes any further term loan commitments
under the Amended Credit Agreement and (v) it resets certain financial
covenants contained in the Amended Credit Agreement. The First
Amendment also confirms that since August 31, 2001 and so long as
events of defaults exist, the default interest rate (or an effective
rate of 13.75% per annum at September 30, 2001) would be charged under
the Amended Credit Agreement. Additionally, under the First Amendment,
the Lenders and Pen Holdings entered into the Bridge Note, whereby in
exchange for amending the Amended Credit Agreement, the Lenders
received additional fees (in the form of the Bridge Note) up to a
maximum of $3,000,000. Such Bridge Note requires no principal payment
until maturity and accrues interest at the default interest rate
(13.75% per annum as of September 30, 2001), as adjusted under the
Amended Credit Agreement. Pen Holdings has also paid certain other fees
and expenses to the Lenders in connection with negotiating the First
Amendment |  |                | 29,500  |                |  |   |          |  
|
|
|
|
| |  | Notes payable collateralized by an office building which serves as the
Companys headquarters, with a net book value of $2,688,000 at
September 30, 2001, payable in monthly installments of $37,000 through
2016. Interest included in the monthly installments is a fixed rate of
8.33%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                | 3,802   |                |  |   | 3,893    |  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                |         |                |  |   |          |  
| |  | Total long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                | 132,779 |                |  |   | 103,312  |  
|
|
|
|
| |  | Current maturities of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                | (29,630 | )              |  |   | (103,312 | )
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                |         |                |  |   |          |  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | $              | 103,149 |                |  | $ |         |  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                |         |                |  |   |          |  

The Indenture for the Senior Notes contains various covenants, the most
significant of which restricts the Companys ability to incur certain forms of
additional indebtedness, pay dividends or transfer or sell assets except in the
ordinary course of business. Certain of the Companys other loan agreements
contain minimum operating and financial ratios and covenants as defined in the
separate agreements.

NOTE 8-CONTINGENCIES:

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 or cash
flows.

9



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##### Table of Contents



Pen Holdings is a guarantor of $2,429,000 of debt that the purchaser of
Pen Cotton of South Carolina, Inc. incurred in connection with the purchase
transaction. Pen Holdings is a guarantor of $81,000 of debt that its partner
in Camden Hardwood Company used for its investment. This partnership is
reflected as part of the discontinued operations. Both of the loans for which
Pen Holdings is a guarantor are performing according to their terms. In
addition, through its ownership of a partnership interest in IMT, the Company
is contingently liable for approximately $13,300,000 of IMTs long-term debt.
The Company has placed in escrow zero-coupon bonds with an amortized cost of
$10,023,000 which mature concurrently with the maturity of IMTs long-term debt
in 2006. At their maturity, the bonds face value will approximate the
Companys portion of IMTs long-term debt.

NOTE 9-RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

In June 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, (SFAS No. 142) effective for fiscal years beginning after December
15, 2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets
will continue to be amortized over their useful lives.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. During 2002,
the Company will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.

In August and October 2001, the FASB issued Statements of Financial
Accounting Standards No. 143, Accounting for Obligations Associated with the
Retirement of Long-Lived Assets and No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, respectively. No. 143 will be effective for
the Company in the first quarter of 2003. No. 144 will be effective for the
Company in the first quarter of 2002. The Company is in the process of
ascertaining the impact these new standards will have on its financial
statements.

NOTE 10  LIQUIDITY:

As a result of the Company encountering unfavorable mining conditions
during much of 2001, the Company, as of August 31, 2001 was not in compliance
with the covenants in the Amended Credit Agreement. Due to this covenant
non-compliance, the Company has entered into the First Amendment. See Note 1.
The terms of the First Amendment have placed severe limitations on the
Companys ability to obtain sufficient sources of liquidity to fund its capital
expenditures and its working capital needs.

Due to its lack of liquidity, the Company currently has no available
source of funds to pay the interest payment that is due on the Senior Notes on
December 15, 2001 or to pay the total amount due under the Amended Credit
Agreement. If the Company is unable to make its December 15, 2001 interest
payment on the Senior Notes, such failure could have a material adverse effect
on the Companys liquidity and financial position.

Under the First Amendment, the maturities of the obligations under the
Amended Credit Agreement and Bridge Notes expire, if they are not extended, on
January 28, 2002. If the maturity of the obligations is not extended or
refinanced, the Company would lack the funds to repay the Lenders that would in
turn cause defaults under the other agreements of the Company including the
Indenture and Senior Notes. The Lenders hold liens on substantially all of the
Companys assets and could seek to enforce those liens upon the maturity of the
indebtedness owing under the Amended Credit Agreement. If the Companys
obligations under the Amended Credit Agreement mature, such events would have a
material adverse effect on the Companys liquidity and financial position.

The Company has engaged financial advisors and legal counsel to assist
reviewing its strategic and restructuring alternatives. The Company is (i)
engaged in discussions with lenders seeking alternative sources of financing
that may be able to replace the credit that has been extended by the Lenders,
(ii) taking steps to improve operational results, and (iii) exploring the
disposition of certain of its assets and other transactions which may give rise
to liquidity for the Company to both extend the maturity of the Amended Credit
Agreement and to pay the December 15, 2001 interest payment on the Senior
Notes. There can be no assurance that the Companys efforts will be
successful.

Additionally, given the Companys current liquidity position, management
cannot anticipate how the Companys customers, other creditors, service
providers or vendors may react to its current financial position. There can be
no assurance that the Company will be able to continue to enter into
transactions and receive supplies and services required for its business from
its vendors and suppliers. The inability of the Company to engage vendors and
suppliers on customary terms, or at all, would have a materially adverse effect
on the Companys financial position and liquidity.

10



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##### Table of Contents






|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Report that are not historical facts are
forward looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which statements can be identified by the use
of forward looking terminology such as believes, expects, may, will,
should, intends, anticipates, or forecasts or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Management cautions the reader
that these forward looking statements are only predictions. No assurance can
be given that future results will be achieved; actual events or results may
differ materially as a result of risks facing the Company. Such risks include,
but are not limited to the Companys ability to make the December 15, 2001
interest payment on the Senior Notes, its ability to obtain replacement
financing for the Amended Credit Agreement which, without extension by the
Lenders, expires on January 28, 2002, 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. Some of these risks
are described in more detail in Pen Holdings Annual Report on Form 10-K for
the year ended December 31, 2000, filed with the U.S. Securities and Exchange
Commission on April 30, 2001. See ITEM 1. BUSINESS-RISK FACTORS. Such risks
could cause actual results to vary materially from the future results
indicated, expressed or implied, in such forward looking statements.

General

The Company is engaged in the mining, preparation, marketing and leasing
of primarily compliance and low-sulfur coal from mines located in the Central
Appalachian region of eastern Kentucky and southern West Virginia. Based on
the reserve information compiled by third parties, the Company controls the
mineral rights to approximately 199 million tons of coal reserves, of which
management believes 50% is owned in fee. In the three and nine months ended
September 30, 2001, the Company sold approximately 1,332,000 and 4,206,000 tons
of coal, respectively, approximately 92.9% and 96.9% of which were generated
from captive production, respectively, with the remainder purchased from other
coal mine operators. During the three and nine months ended September 30,
2001, approximately 73.8% and 70.8% respectively of the tonnage was sold to
nine long-term sales contract customers. The Company sells coal primarily to
domestic public utilities and industrial customers. Coal sales under long-term
sales contracts (contracts with a term longer than one year) are the primary
source of revenues for the Company.

The Company also generates revenues by leasing portions of its mineral
rights to independent coal producers in exchange for revenue-based lease
royalties. Generally, the lease terms provide the Company with a royalty fee
of up to 10% of the sales price of the coal with a minimum of $1.75 to $2.50
per ton. The terms of such leases vary 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 by the lessee.

The Companys cost of sales is primarily composed of expenses related to
coal operations and coal leasing. Cost of coal sales are principally related
to (i) costs associated with production, (ii) contract mining fees, (iii) coal
purchases, (iv) royalties, and (v) upriver loading charges. The Companys costs
associated with production include labor, haulage, depreciation and depletion,
coal preparation plant costs, coal fees and taxes, supplies, and repairs and
maintenance. The Companys other costs of sales vary due to the level of
contract mining production, the quantity and quality of tonnage purchased, tons
mined on leased land, and spot market coal prices. The Companys costs of
sales related to its lease operations consist primarily of depletion and
administrative costs.

11



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##### Table of Contents



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
(numbers may not add due to rounding).

|                                                                                |                                     |  |                    |       |                   |  |       |      |      |  |       |       |   |  |       |      |  
|------------------------------------------------------------------------------- | ----------------------------------- |  | ------------------ | ----- | ----------------- |  | ----- | ---- | ---- |  | ----- | ----- | - |  | ----- | ---- | -
|                                                                                |                                     |  | Three Months Ended |       | Nine Months Ended
|                                                                                |                                     |  | September 30,      |       | September 30,    
|                                                                                |                                     |  |                    |       |                  
|                                                                                |                                     |  | 2001               |       | 2000              |  | 2001  |      | 2000
|                                                                                |                                     |  |                    |       |                   |  |       |      |     
|Revenues                                                                        |                                     |  | 100.0              | %     |                   |  | 100.0 | %    |      |  | 100.0 | %     |   |  | 100.0 | %   
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Expenses (income):                                                              |                                     |  |                    |       |                   |  |       |      |      |  |       |       |   |  |       |     
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Cost of sales                       |  |                    | 111.0 |                   |  |       | 87.4 |      |  |       | 104.0 |   |  |       | 91.6 |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Selling, general and administrative |  |                    | 2.0   |                   |  |       | 4.0  |      |  |       | 4.0   |   |  |       | 3.9  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest expense                    |  |                    | 12.3  |                   |  |       | 7.3  |      |  |       | 10.7  |   |  |       | 5.9  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest income                     |  |                    | (0.1  | )                 |  |       | (0.1 | )    |  |       | (0.1  | ) |  |       | (0.4 | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Litigation settlement               |  |                    | 0.0   |                   |  |       | 0.0  |      |  |       | 0.7   |   |  |       | 0.0  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Impairment loss                     |  |                    | 28.0  |                   |  |       | 0.0  |      |  |       | 9.6   |   |  |       | 0.0  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Other (income) expense              |  |                    | 0.1   |                   |  |       | (0.5 | )    |  |       | (0.5  | ) |  |       | 0.7  |  
|                                                                                |                                     |  |                    |       |                   |  |       |      |      |  |       |       |   |  |       |     
|Income (loss) from continuing operations before income taxes                    |                                     |  | (53.4              | )     |                   |  | 1.9   |      |      |  | (28.3 | )     |   |  | (1.7  | )   
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Provision (benefit) for income taxes                                            |                                     |  | (17.1              | )     |                   |  | 1.2   |      |      |  | (9.5  | )     |   |  | (0.7  | )   
|                                                                                |                                     |  |                    |       |                   |  |       |      |      |  |       |       |   |  |       |     
|Income (loss) from continuing operations                                        |                                     |  | (36.2              | )     |                   |  | 0.7   |      |      |  | (18.9 | )     |   |  | (1.0  | )   
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Income from discontinued operations, net of tax                                 |                                     |  | 0.0                |       |                   |  | 0.1   |      |      |  | 0.0   |       |   |  | 0.5   |     
|                                                                                |                                     |  |                    |       |                   |  |       |      |      |  |       |       |   |  |       |     
|Net income (loss) before extraordinary items and change in
accounting principle |                                     |  | (36.2              | )     |                   |  | 0.8   |      |      |  | (18.9 | )     |   |  | (0.5  | )   
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Extraordinary loss, net of tax                                                  |                                     |  | 0.0                |       |                   |  | 0.0   |      |      |  | (0.1  | )     |   |  | 0.0   |     
|                                                                                |                                     |  |                    |       |                   |  |       |      |      |  |       |       |   |  |       |     
|Income (loss) before change in accounting principle                             |                                     |  | (36.2              | )     |                   |  | 0.8   |      |      |  | (19.0 | )     |   |  | (0.5  | )   
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Change in accounting principle, net of tax                                      |                                     |  | 0.0                |       |                   |  | 0.0   |      |      |  | 0.0   |       |   |  | 0.9   |     
|                                                                                |                                     |  |                    |       |                   |  |       |      |      |  |       |       |   |  |       |     
|Net income (loss)                                                               |                                     |  | (36.2              | )%    |                   |  | 0.8   | %    |      |  | (19.0 | )%    |   |  | 0.4   | %   
|                                                                                |                                     |  |                    |       |                   |  |       |      |      |  |       |       |   |  |       |     

Three Months Ended September 30, 2001 Compared to the Three Months Ended September 30, 2000

Revenues

Coal sales. Coal sales revenues were $38,830,000 for the three months
ended September 30, 2001 compared to $31,786,000 for the three months ended
September 30, 2000, an increase of 22.2%. The increase is primarily
attributable to an increase in the volume of coal shipped. Coal sales volume
increased to 1,332,000 tons for the three months ended September 30, 2001 from
1,174,000 tons for the three months ended September 30, 2000, an increase of
13.5%. The increase is primarily attributable to an increase in production at
the Fork Creek mines, which began coal shipments in September 2000.

Coal leasing. Coal leasing revenues were $2,079,000 for the three months
ended September 30, 2001 compared to $1,779,000 for the three months ended
September 30, 2000, an increase of 16.9%. The increase is primarily
attributable to an increase in royalties resulting from increased coal sales
price realized by the Companys lessees. Production from lessees mining
operations was 796,000 tons for the three months ended September 30, 2001
compared to 901,000 for the three months ended September 30, 2000, a decrease
of 11.7%.

Other.The Company had no other revenues for the three months ended
September 30, 2001 compared to $2,126,000 for the three months ended September
30, 2000. Other revenues for the three months ended September 30, 2000 were
generated from a timber sale from a large tract of timber overlying the
Companys Fork Creek Properties.

Cost of Sales

Cost of sales-Coal sales. Cost of coal sales totaled $44,598,000 for the
three months ended September 30, 2001 compared to $30,209,000 for the three
months ended September 30, 2000, an increase of 47.6% during a period in which
tons sold increased by 13.5%. The increase resulted primarily from higher than
expected costs at the Companys Fork Creek mines, which are due primarily to
continued adverse mining conditions that have caused lower than expected
production and plant recovery at the Companys Fork Creek mines. Additionally,
the Company has continued to experience development delays which were created
because of a highly competitive

12



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##### Table of Contents



labor market and the inability to fund planned capital expenditures. These
development delays and adverse mining conditions have caused coal production to
remain below 50% of capacity from the Fork Creek property.

Cost of sales-Leasing.Cost of coal lease revenues totaled $826,000 for
the three months ended September 30, 2001 compared to $990,000 for the three
months ended September 30, 2000, a decrease of 16.6%. The decrease primarily
resulted from a decrease in the volume of coal mined by the Companys lessees.

Other

Selling, general and administrative expenses totaled $815,000 for the
three months ended September 30, 2001 compared to $1,416,000 for the three
months ended September 30, 2000, a decrease of 42.4%. Selling, general and
administrative expenses were 2.0% and 4.0% of revenues for the three months
ended September 30, 2001 and 2000, respectively. This decrease primarily
resulted from a reduction of previously accrued but unpaid incentive
compensation.

As a result, EBITDA (EBITDA as defined to mean operating income (revenue
less cost of sales and selling, general and administrative expenses) plus
depreciation, depletion and amortization; EBITDA is not intended to represent
cash flow from operations as defined by generally accepted accounting
principles and should not be used as an alternative to net income or as an
indicator of operating performance or to cash flows as a measure of liquidity)
totaled ($745,000) for the three months ended September 30, 2001 compared to
$6,882,000 for the three months ended September 30, 2000, a decrease of 110.8%.
This decrease is primarily attributable to increased mining costs at the
Companys operations.

Interest expense totaled $5,038,000 for the three months ended September
30, 2001 compared to $2,615,000 for the three months ended September 30, 2000,
an increase of 92.7%. This increase primarily resulted from higher interest
rates charged on line of credit and term loan borrowings. In addition,
interest related to the Fork Creek development for the three months ended
September 30, 2000 was capitalized during that period.

Interest income totaled $33,000 for the three months ended September 30,
2001 compared to $43,000 for the three months ended September 30, 2000, a
decrease of 23.3%.

The Impairment loss of $11,444,000 for the three months ended September
30, 2001 relates to the Companys recognition of a loss on its investment in
IMT. See Note 1  Description of Business.

Other expense was $59,000 for the three months ended September 30, 2001
compared to income of $164,000 for the three months ended September 30, 2000.
Other expense for the three months ended September 30, 2001 and September 30,
2000 was primarily due to the Companys share of the loss from its one-third
partnership interest in International Marine Terminals (IMT), a loading
facility for ocean-going bulk cargo vessels located along the Mississippi
River.

Income taxes were a benefit of $7,015,000 for the three months ended
September 30, 2001 compared to an expense of $418,000 for the three months
ended September 30, 2000, a decrease of $7,433,000. The decrease is a result
of the loss from continuing operations before income taxes in the three months
ended September 30, 2001. The decrease in the effective tax rate from 62.6%
for the three months ended September 30, 2000 to 32.1% for the three months
ended September 30, 2001 results primarily from the favorable impact of the
amount of the tax over book depletion expense on the effective tax rate.

Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September 30, 2000

Revenues

Coal sales. Coal sales revenues were $114,033,000 for the nine months
ended September 30, 2001 compared to $103,923,000 for the nine months ended
September 30, 2000, an increase of 9.7%. This increase is primarily
attributable to an increase in the volume of coal shipped. Coal sales volume
was 4,206,000 tons for the first nine months of 2001 compared to 3,905,000 tons
for the first nine months of 2000, an increase of 7.7%. The increase is
primarily attributable to an increase in production at the Companys Fork Creek
mines.

Coal leasing. Coal leasing revenues were $5,654,000 for the nine months
ended September 30, 2001 compared to $5,652,000 for the nine months ended
September 30, 2000. The increase is primarily attributable to an increase in
royalties resulting from increased coal sales prices realized by the Companys
lessees. Production from the Companys lessees was 2,150,000 tons for the nine
months ended September 30, 2001 compared to 2,846,000 for the three months
ended September 30, 2000, a decrease of 24.5%.

Other.The Company had no other revenues for the nine months ended
September 30, 2001 compared to $3,623,000 for the nine months ended September
30, 2000. Other revenues for the nine months ended September 30, 2000 were
primarily generated from a timber sale from a large tract of timber overlying
the Companys Fork Creek properties.

13



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##### Table of Contents



Cost of Sales

Cost of sales-Coal sales.Cost of coal sales totaled $121,603,000 for the
nine months ended September 30, 2001 compared to $100,547,000 for the nine
months ended September 30, 2000, an increase of 20.9%, while tons sold
increased 7.7%. The increase resulted primarily from higher than expected
costs at the Companys Fork Creek mines, which are due primarily to adverse
initial mining conditions and development issues at the Companys Fork Creek
mines. The development issues were created because of a highly competitive
labor market and the inability to fund planned capital expenditures due to a
lack of liquidity.

Cost of sales-Leasing.Cost of coal lease revenues totaled $2,906,000 for
the nine months ended September 30, 2001 compared to $3,112,000 for the nine
months ended September 30, 2000, a decrease of 6.6%. The decrease primarily
resulted from a decrease in the volume of coal mined by lessees.

Other

Selling, general and administrative expenses totaled $4,757,000 for the
nine months ended September 30, 2001 compared to $4,455,000 for the nine months
ended September 30, 2000, an increase of 6.8%. Selling, general, and
administrative expenses were 4.0% of revenues for the nine months ended
September 30, 2001 and 3.9% of revenues for the nine months ended September 30,
2000. This increase resulted primarily from increased legal costs associated
with loan administration issues during the first six months of 2001.

As a result, EBITDA totaled $4,425,000 for the nine months ended September
30, 2001 compared to $16,676,000 for the nine months ended September 30, 2000,
a decrease of 73.5%. This decrease is primarily attributable to increased
mining costs at the Companys operations.

Interest expense totaled $12,753,000 for the nine months ended September
30, 2001 compared to $6,651,000 for the nine months ended September 30, 2000,
an increase of 91.7%. This increase primarily resulted from higher interest
rates charged on line of credit and term loan borrowings. In addition,
interest related to the Fork Creek development for the nine months ended
September 30, 2000 was capitalized.

Interest income totaled $99,000 for the nine months ended September 30,
2001 compared to $431,000 for the nine months ended September 30, 2000, a
decrease of 77.0%. Interest income for the nine months ended September 30,
2000 primarily related to Black Lung Excise Tax refunds recognized in that
period.

The Litigation settlement expense of $814,000 for the nine months ended
September 30, 2001 relates to interest accrued on the Cheyenne Litigation. The
amounts owed by Elk Horn as a result of this litigation were paid in full on
June 4, 2001.

The Impairment loss of $11,444,000 for the nine months ended September 30,
2001 relates to the Companys recognition of a loss on its investment in IMT.
See Note 1  Description of Business.

Other (income) expense was other income of $563,000 for the nine months
ended September 30, 2001 compared to other expense of $766,000 for the nine
months ended September 30, 2000. Other income for the nine months ended
September 30, 2001 was primarily due to a net gain on sales of coal reserves
and mineral rights. Other expense for the nine months ended September 30, 2000
was primarily due to the Companys share of the loss from its one-third
partnership interest in IMT.

Income taxes were a benefit of $11,327,000 for the nine months ended
September 30, 2001 compared to a benefit of $747,000 for the nine months ended
September 30, 2000, an increase of $10,580,000. The increase is a result of a
larger loss in the nine months ended September 30, 2001. The decrease in the
effective tax rate from 39.3% for the nine months ended September 30, 2000 to
33.4% for the nine months ended September 30, 2001 results primarily from the
reduced favorable impact of the amount of the tax over book depletion expense
on the effective tax rate.

Inflation

Inflation has not had a significant effect on the Companys business;
however, the Companys revenues and costs have been and are expected to
continue to be affected by fluctuations in the coal market prices and diesel
fuel costs.

Liquidity and Capital Resources

At September 30, 2001, the Company had total indebtedness including
capital leases, revolving credit loans, and current maturities of $145,249,000.
On June 8, 1998, Pen Holdings issued the Senior Notes (the Offering).
Interest on the Senior Notes is payable semiannually on June 15 and December 15
of each year, commencing December 15, 1998. As a result of the Offering, the
Company has significant indebtedness and debt service requirements. The
Indenture for the Senior Notes permits the Company to incur additional
indebtedness, subject to certain limitations. The Indenture also includes
certain covenants that, among other things: (i) limit the incurrence by the
Company of additional indebtedness; (ii) restrict the ability of the Company to
pay dividends or make certain other payments; (iii) limit transactions by the
Company with affiliates; (iv) limit the ability of the Company to incur certain
liens; (v) limit the ability of the Company to consolidate or merge with or
into, or to transfer all or substantially all of its assets to, another person;
and (vi) limit the ability of the Company to engage in other lines of business.

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In connection with the Offering, Pen Holdings refinanced its senior
secured indebtedness and entered into an Amended and Restated Credit Agreement,
dated June 8, 1998, among Pen Holdings, certain of its subsidiaries and the
lenders named therein, which provided for aggregate borrowings of up to
$40,000,000 in principal. On May 31, 2001, the Company entered into the
Amended Credit Agreement by and among Pen Holdings and certain financial
institutions party thereto (the Lenders). The Amended Credit Agreement
provided for (a) revolving loans the aggregate outstanding principal amount of
which would not exceed $15,000,000 at any one time, and (b) term loans in an
aggregate principal amount of up to $32,000,000 of which $29,500,000 had been
advanced. The Lenders are the successor to the former lenders under the
Amended Credit Agreement. The Lenders have taken assignment to, and the
assumption of, all of the rights and obligations of the prior lenders under the
Amended Credit Agreement and the assignment to the agents, for the ratable
benefit of the Lenders, of all rights of the prior agent under the former
Amended Credit Agreement and related loan documents in the collateral securing
the indebtedness. As a result of entering into the Amended Credit Agreement,
the outstanding indebtedness obtained was converted into revolving loans and
term loans under and subject to the terms and conditions of the Amended Credit
Agreement. The Lenders have guarantees from each of the subsidiaries of Pen
Holdings and have security interests and mortgages on substantially all of Pen
Holdings and its subsidiaries properties to secure obligations under the
Amended Credit Agreement. Borrowings bear interest at a variable rate equal to
the Reference Rate (as defined therein) plus a margin which increases in
accordance with a schedule described in the Credit Agreement. At September 30,
2001 the margins were 2.0% and 3.75% on the outstanding balances on the line of
credit and term loan respectively. The Credit Agreement contains certain
restrictions and limitations, including financial and operational covenants
that require the Company to maintain and achieve certain levels of financial
performance and limit the payment of cash dividends and similar payments.

As of November 28, 2001, Pen Holdings entered into the First Amendment.
Under the First Amendment, Pen Holdings has agreed to further amend the Amended
Credit Agreement such that (i) the maturity of the obligations under the
Amended Credit Agreement is now January 28, 2002, except as extended under
certain circumstances to April 12, 2002, as described in the First Amendment,
(ii) it permits Pen Holdings to utilize the proceeds from certain asset
dispositions for working capital and capital expenditures; (iii) it reduces the
availability under the revolving loan commitment under the Amended Credit
Agreement to $8,357,000; (iv) it extinguishes any further term loan commitments
under the Amended Credit Agreement and (v) it resets certain financial
covenants contained in the Amended Credit Agreement. The First Amendment also
confirms that since August 31, 2001 and so long as events of defaults exist,
the default interest rate (an effective rate of 12.0% per annum at September
30, 2001) would be charged under the Amended Credit Agreement. Additionally,
under the First Amendment, the Lenders and Pen Holdings entered into the Bridge
Note, whereby in exchange for amending the Amended Credit Agreement, the
Lenders received additional fees (in the form of the Bridge Note) up to a
maximum of $3,000,000. Such Bridge Note requires no principal payment until
maturity and accrues interest at the default interest rate (13.75% per annum as
of September 30, 2001) as adjusted under the Amended Credit Agreement. Pen
Holdings has also paid certain other fees and expenses to the Lenders in
connection with negotiating the First Amendment.

The Companys principal liquidity requirements are for debt service
requirements under the Senior Notes, and other outstanding indebtedness, and
for working capital needs and capital expenditures. Historically, the Company
has funded its capital and operating requirements with a combination of cash on
hand, operating cash flow and borrowings under credit facilities and operating
leases. The Company has utilized these sources of funds to make acquisitions,
fund significant capital investments in its properties, fund operations and
service debt under credit facilities.

For the three months ended September 30, 2001, the Company made capital
expenditures of $2,456,000. Capital expenditures were primarily related to
continued expansion of the Fork Creek development. The Fork Creek
infrastructure was substantially completed in September 2000 and the Company
began shipping coal from that location at that time. Given the Companys
current availability of borrowings under the Amended Credit Agreement,
management cannot provide any assurances that it can provide sufficient capital
expenditures to the Fork Creek development to either increase or maintain the
current production. Currently, Fork Creek is producing on average
approximately 120,000 tons of coal per month.

Net cash used by operating activities was $21,988,000 for the nine months
ended September 30, 2001 compared to $16,969,000 net cash generated by
operating activities for the nine months ended September 30, 2000. The
$38,957,000 increase in net cash used by operating activities is related to
increased mining costs at the Companys mining operations and a significant
reduction in the Companys level of accounts payable and accrued expenses.
These accounts payable and accrued expenses were reduced as a result of paying
the Companys semi-annual bond payment, satisfying the judgment held by an
affiliate of Travelers Casualty and Surety Company of America issued in
connection with Elk Horns litigation with Cheyenne Resources, Inc. and making
payments to its vendors after closing on the Amended Credit Agreement.

Net cash provided by investing activities was $26,095,000 for the nine
months ended September 30, 2001 compared to $21,079,000 net cash used by
investing activities for the nine months ended September 30, 2000. The
$47,174,000 increase in net cash provided by investing activities is primarily
the result of reduced capital expenditures and proceeds from the Companys sale
of its Fork Creek reserves.

Net cash used for financing activities of $4,018,000 for the nine months
ended September 30, 2001 compared to $3,596,000 provided by financing
activities in the nine months ended September 30, 2000. The increase of
$7,614,000 in cash used for financing activities is a result of the Company
using part of the proceeds from its sale of the Fork Creek reserves to pay down
debt.

As a result of the Company encountering unfavorable mining conditions
during much of 2001, the Company, as of August 31, 2001 was not in compliance
with the covenants in the Amended Credit Agreement. Due to this covenant
non-compliance, the Company

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has entered into the First Amendment. Under the First Amendment, Pen Holdings
has agreed to further amend the Amended Credit Agreement such that (i) the
maturity of the obligations under the Amended Credit Agreement is now January
28, 2002, except as extended under certain circumstances to April 12, 2002, as
described in the First Amendment, (ii) it permits Pen Holdings to utilize the
proceeds from certain asset dispositions for working capital and capital
expenditures; (iii) it reduces the availability under the revolving loan
commitment under the Amended Credit Agreement to $8,357,000; (iv) it
extinguishes any further term loan commitments under the Amended Credit
Agreement and (v) it resets certain financial covenants contained in the
Amended Credit Agreement. The First Amendment also confirms that since August
31, 2001 and so long as events of defaults exist, the interest rate (an
effective rate of 12% per annum at September 30, 2001) would be charged under
the Amended Credit Agreement. Additionally, under the First Amendment, the
Lenders and Pen Holdings entered into Bridge Term Loan (the Bridge Note),
whereby in exchange for amending the Amended Credit Agreement, the Lenders
received additional fees (in the form of the Bridge Note) up to a maximum of
$3,000,000. Such Bridge Note requires no principal payment until maturity and
accrues interest at the default interest rate (13.75% per annum as of September
30, 2001) as adjusted under the Amended Credit Agreement. Pen Holdings has
also paid certain other fees and expenses to the Lenders in connection with
negotiating the First Amendment. The terms of the First Amendment have placed
severe limitations on the Companys ability to obtain sufficient sources of
liquidity to fund its capital expenditures and its working capital needs.

Due to its lack of liquidity, the Company currently has no available
source of funds to pay the interest payment that is due on the Senior Notes on
December 15, 2001 or to pay the total amount due under the Amended Credit
Agreement.

If the Company is unable to make its December 15, 2001 interest payment on
the Senior Notes, such failure could have a material adverse effect on the
Companys liquidity and financial position. Management cannot provide any
assurance that it will be able to find the sources of liquidity necessary to
make such interest payment.

Under the First Amendment, the obligations under the Amended Credit
Agreement and Bridge Notes expire, if they are not extended, on January 28,
2002. If the maturity of the obligations is not extended or refinanced, the
Company would lack the funds to repay the Lenders that would in turn cause
defaults under the other agreements of the Company including the Indenture and
Senior Notes. The Lenders hold liens on substantially all of the Companys
assets and could seek to enforce those liens upon the maturity of the
indebtedness owing under the Amended Credit Agreement.

If the Companys obligations under the Amended Credit Agreement mature,
such events would have a material adverse effect on the Companys liquidity and
financial position. Furthermore, if such obligations mature, in whole or in
part, management cannot currently provide any assurance that it would be
successful in identifying or consummating financing necessary to satisfy such
obligations.

The Company has engaged financial advisors and legal counsel to assist
reviewing its strategic and restructuring alternatives. The Company is (i)
engaged in discussions with lenders seeking alternative sources of financing
that may be able to replace the credit that has been extended by the Lenders,
(ii) taking steps to improve operational results, and (iii) is exploring the
disposition of certain of its assets and other transactions which may give rise
to liquidity for the Company to both extend the maturity of the Amended Credit
Agreement and to pay the December 15, 2001 interest payment on the Senior
Notes. There can be no assurance that the Companys efforts will be
successful.

Additionally, given the Companys current liquidity position, management
cannot anticipate how the Companys customers, other creditors, service
providers or vendors may react to its current financial position. There can be
no assurance that the Company will be able to continue to enter into
transactions and receive supplies and services required for its business from
its vendors and suppliers. The inability of the Company to engage vendors and
suppliers on customary terms, or at all, would have a materially adverse effect
on the Companys financial position and liquidity.

The Company has issued 10,000 shares of Convertible Preferred Stock in
connection with the recapitalization of the Company in 1995. The liquidation
value of $8,649,000 (which is net of a $1,588,000 reduction and a $3,413,000
reduction for settlement of the Companys tax matters in 1999 and 1998,
respectively) plus accrued dividends of $10,920,000 will be due in January
2006. The Convertible Preferred Stock will be redeemed at that time by the
issuance of a note payable which amortizes over the 10 years following the
redemption, unless converted to Class I common stock in accordance with its
terms.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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PART II  OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

Not Applicable.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not Applicable.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of August 31, 2001, Pen Holdings was not in compliance with certain
financial covenants contained in the Amended Credit Agreement relating to tons
of coal required to be shipped and the maintenance of certain EDITDA (as
defined in the Amended Credit Agreement) related covenants. See Note
1-Description of Business and Item 2-Managements Discussion And Analysis Of
Financial Condition And Results Of Operations, Liquidity And Capital
Resources.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.




ITEM 5. OTHER INFORMATION

Not Applicable.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

Exhibit 10.1.

First Amendment to Financing Agreement, dated as of
November 28, 2001, to the
Second Amended And Restated Credit Agreement, dated as of May 31, 2001 by and
among the Registrant, the financial institutions from time to time party
hereto, Ableco Finance LLC, as collateral agent for the Lenders and Foothill
Capital Corporation, as funding agent for the Lenders

(b)  Reports on Form 8-K:

None.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated November 29, 2001

| |  |                    |  |                                                                                                           
| |  | ------------------ |  | ----------------------------------------------------------------------------------------------------------
| |  | PEN HOLDINGS, INC.
|
| |  |                    |  |                                                                                                           
|
| |  | By:                |  | /s/  WILLIAM E. BECKNER
William E. Beckner
President and Chief Executive Officer                          
|
| |  |                    |  |                                                                                                           
|
| |  | By:                |  | /s/  MARK A. OLDHAM
Mark A. Oldham
Senior Vice President, Secretary, Treasurer and Chief
Financial Officer

19