FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-12058
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KENAN TRANSPORT COMPANY
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(Exact name of registrant as specified in its charter)
North Carolina 56-0516485
------------------------------- ---------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
University Square - West, 143 W. Franklin Street
Chapel Hill, North Carolina, 27516-3910
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(Address of principal executive offices, including Zip Code)
(919) 967-8221
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(Registrant's telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1998
-------------------------- --------------------------------
Common stock, no par value 2,421,562
<PAGE>
<PAGE>
KENAN TRANSPORT COMPANY
INDEX
Page
------
Part I - Financial Information
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 1
Consolidated Statements of Income for the three
and nine months ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4 - 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
Part II - Other Information
Item 4 - Submission of Matters to a Vote of
Security Holders 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
Index to Exhibits 12
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<PAGE>
PART I - FINANCIAL INFORMATION
KENAN TRANSPORT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1998 1997
ASSETS (Unaudited) (Note 1)
- ---------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 5,268 $ 3,422
Accounts receivable 10,144 8,020
Operating supplies and parts 628 521
Prepayments -
Tires 1,673 1,471
Insurance, licenses and other 1,539 886
Deferred income taxes 2,413 1,747
- ---------------------------------------------------------------------
Total Current Assets 21,665 16,067
Operating Property
Land 3,464 3,464
Buildings and leasehold improvements 11,399 10,968
Revenue equipment 71,630 65,974
Other equipment 6,075 4,755
- ---------------------------------------------------------------------
92,568 85,161
Accumulated depreciation (35,414) (32,922)
- ---------------------------------------------------------------------
Net Operating Property 57,154 52,239
Intangible Assets 11,088 7,559
Other Assets 1,574 1,250
- ---------------------------------------------------------------------
$91,481 $77,115
=====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------
Current Liabilities
Current maturities of long-term debt $ -- $ 500
Capital lease obligations 1,152 995
Accounts payable 3,887 2,517
Wages and employee benefits payable 8,145 6,641
Claims payable 3,993 3,553
Income taxes payable -- 108
- ---------------------------------------------------------------------
Total Current Liabilities 17,177 14,314
Long-term Debt 10,000 2,000
Capital Lease Obligations 631 2,075
Deferred Income Taxes 10,967 9,358
Stockholders' Equity
Common stock; no par; 20,000,000 shares
authorized; 2,421,562 and 2,394,780
shares issued and outstanding 4,400 3,096
Retained earnings 49,323 46,272
Deferred compensation (1,017) --
- ---------------------------------------------------------------------
52,706 49,368
- ---------------------------------------------------------------------
$91,481 $77,115
=====================================================================
The Notes to Consolidated Financial Statements are an integral part of
these balance sheets.
Page 1<PAGE>
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KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and dollars in thousands except per share amounts)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenue $34,104 $17,450 $96,692 $52,429
Operating Expenses
Wages and employee benefits 17,787 8,857 49,516 26,613
Fuel and other operating expenses 6,849 3,678 20,164 11,106
Depreciation and amortization 2,649 1,714 7,764 5,016
Taxes and licenses 1,838 1,063 5,313 3,219
Claims and insurance 1,350 689 3,662 1,996
Equipment rents 1,418 135 3,851 394
- ----------------------------------------------------------------------------------------
31,891 16,136 90,270 48,344
- ----------------------------------------------------------------------------------------
Operating Income 2,213 1,314 6,422 4,085
Interest expense (191) (4) (558) (14)
Interest income and other expenses, net 74 55 138 182
- ----------------------------------------------------------------------------------------
Income before Provision for Income Taxes 2,096 1,365 6,002 4,253
Provision for income taxes 855 531 2,432 1,633
- ----------------------------------------------------------------------------------------
Net Income $ 1,241 $ 834 $ 3,570 $ 2,620
========================================================================================
Basic and diluted earnings per share .51 $ .35 $ 1.48 $ 1.09
Operating ratio 93.5% 92.5% 93.4% 92.2%
Dividends paid per share $ .0725 $ .0700 $ .2125 $ .2050
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
Page 2
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KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited and dollars in thousands)
1998 1997
- ----------------------------------------------------------------------
Cash Provided by (Applied to):
Operations $11,265 $ 7,855
Purchases of operating property, net (6,858) (5,941)
Business acquisition (7,880) --
Debt and capital lease obligations, net 5,838 --
Short-term investments, net -- (500)
Dividends (519) (497)
- ----------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 1,846 917
Beginning Cash and Cash Equivalents 3,422 11,181
- ----------------------------------------------------------------------
Ending Cash and Cash Equivalents $ 5,268 $12,098
======================================================================
The Notes to Consolidated Financial Statements are an integral part of
these statements.
Page 3
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KENAN TRANSPORT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
- --------------------------
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles and include the
accounts of Kenan Transport Company and its wholly-owned subsidiary,
Petro-Chemical Transport, Inc. All significant intercompany accounts and
transactions have been eliminated.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary
for a fair statement of results for the interim periods.
The balance sheet at December 31, 1997 has been taken from the
audited financial statements at that date.
The results of operations for the three and nine months ended
September 30, 1998 and 1997 are not necessarily indicative of the results
to be expected for the full year.
2. Recent Accounting Pronouncements
- -------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting For Derivative Instruments and Hedging Activities
(the "Statement"). The Statement requires that upon adoption, all
derivative instruments be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless
specific hedging criteria are met. Changes in the values of derivatives
that meet these hedging criteria will ultimately offset related earnings
effects of the hedged items; effects of certain changes in fair value are
recorded in other comprehensive income pending recognition in earnings.
The Company will not adopt the Statement until required to do so on
January 1, 2000.
3. Business Acquisitions
- --------------------------
On December 1, 1997, the Company purchased the majority of the
transportation assets of Transport South, Inc. for cash and entered into
a long-term contract to provide transportation services to its parent,
RaceTrac Petroleum, Inc. in the southeastern United States and Texas.
Page 4<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
On February 28, 1998, the Company acquired 100% of the outstanding
stock of Petro-Chemical Transport, Inc., a wholly owned subsidiary of
CITGO Petroleum Corporation. Petro-Chemical Transport, Inc. is a tank
truck carrier serving the petroleum industry in the Southeast, Midwest
and on the West Coast. The acquisition, net of cash acquired, required a
cash investment totaling $7,880,000. The Company financed the acquisition
through its line of credit facility.
The acquisitions have been accounted for using the purchase method of
accounting. The accompanying consolidated statements of income include
the results of operations of Transport South, Inc. for the nine months
ended September 30, 1998 and the results of operations of Petro-Chemical
Transport, Inc. for the seven months ended September 30, 1998. The
purchased assets and liabilities assumed have been recorded in the
Company's financial statements at their estimated fair market values. The
excess of the purchase cost over the fair value of net assets acquired in
the acquisitions (goodwill) is included in intangible assets in the
accompanying consolidated balance sheets and is being amortized over 20
years on a straight-line basis.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the acquisitions had occurred
as of January 1, 1998 and 1997. The pro forma information does not
purport to be indicative of what would have occurred had the acquisitions
been made as of those dates or of results that may occur in the future
(dollars in thousands except per share amounts).
Pro-Forma Information (unaudited)
-------------------------------------------------------------------
1998 1997
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Three Months Ended September 30,
--------------------------------
Revenue $34,104 $34,136
Net income 1,241 1,353
Basic and diluted earnings per share .51 .56
Nine Months Ended September 30,
-------------------------------
Revenue $103,499 $102,487
Net income 3,726 4,178
Basic and diluted earnings per share 1.54 1.74
Page 5 <PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
4. Long-Term Debt
- -------------------
On February 13, 1998, the Company negotiated an unsecured $20,000,000
Reducing Line of Credit Facility with a bank. The agreement replaces the
Company's previous $7,000,000 line of credit. Funds available under the
line reduces $500,000 per quarter beginning July 1, 1998 to a minimum
line of $10,000,000. The agreement matures in March 2003. Interest under
the agreement is at variable rates based on LIBOR plus an applicable
margin. At September 30, 1998, the Company had $10,000,000 outstanding
under the new credit facility. There was no outstanding debt at September
30, 1997.
On February 27, 1998, the Company entered into a simple interest rate
swap agreement to manage interest costs and risks associated with
changing interest rates. The Company does not hold or issue financial
instruments for trading purposes. The agreement effectively changes a
portion of the Company's interest rate exposure on the line of credit
from a floating rate to a fixed rate. The agreement matures in March
2003. At September 30, 1998, the notional principal amount of this
agreement totalled $7,000,000. The differentials paid or received under
the agreement are recorded as adjustments to interest expense.
5. Long-Term Incentive Plan
- ----------------------------
On May 4, 1998, shareholders approved the Company's 1998 Long-Term
Incentive Plan (the "Plan"). The Plan provides for grant awards,
including stock options and restricted stock, of up to 450,000 shares of
Common Stock.
During the first quarter of 1998, 328,900 nonqualified stock options
and 21,100 shares of restricted stock were awarded to key employees under
the Plan. The stock options have an exercise price equal to or above the
fair value of the shares at the date of the grant and have a ten-year
term with vesting periods of one to five years from the date of the
grant. No options were vested as of September 30, 1998. Restricted stock
awards become free of restrictions ratably over a five-year period.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", in accounting for its stock
option and restricted stock awards. Compensation expense under the Plan
totaled $54,000 for the third quarter of 1998.
Page 6 <PAGE>
<PAGE>
KENAN TRANSPORT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial position
and operating results during the periods included in the accompanying
financial statements.
Results of Operations
- ---------------------
Revenue for the third quarter of 1998 was $34,104,000 compared to
$17,450,000 in 1997. Net income was $1,241,000 compared to $834,000 in
1997. Earnings per share were $.51 compared to $.35 during the same
period last year. Miles operated increased 73% from the third quarter of
1997.
Revenue for the first nine months of 1998 was $96,692,000 compared to
$52,429,000 in 1997. Net income was $3,570,000 compared to $2,620,000 in
1997. Earnings per share were $1.48 compared to $1.09 during the same
period last year. Miles operated increased 69% from the first nine months
of 1997.
Third quarter revenue increased 95% as a result of purchasing the
transportation assets of Transport South, Inc. in December 1997 and the
stock of Petro-Chemical Transport, Inc. in February 1998. Both
acquisitions were cash transactions. Revenue attributable to the business
acquisitions was approximately $16,000,000 in the third quarter.
Operating expenses for the third quarter of 1998 totaled $31,891,000
compared to $16,136,000 in 1997. The increase in operating expenses was
primarily the result of increased volume from the Company's two
acquisitions. Lower fuel prices in 1998 were offset by increases in
driver pay, outside maintenance costs and equipment rents. The Company's
operating ratio for the quarter was 93.5% compared to 92.5% in 1997.
Operating expenses for the first nine months of 1998 totaled
$90,270,000 compared to $48,344,000 in 1997. The operating ratio
increased to 93.4% from 92.2% in 1997.
The average balance of outstanding debt and capital lease obligations
during the third quarter of 1998 was approximately $11,980,000. There was
no outstanding debt during the third quarter of 1997. Interest expense
was $191,000 for the third quarter of 1998 compared to $4,000 in 1997.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, cash and cash equivalents totaled $5,268,000,
an increase of $1,846,000 from the end of 1997. Working capital of
$4,488,000 was up $2,735,000 from year-end 1997, and the current ratios
were 1.26 and 1.12, respectively. At September 30, 1998, the Company had
outstanding debt and capital lease obligations totaling $11,783,000
compared to $5,570,000 at December 31, 1997.
Page 7<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- continued -
Cash and cash equivalents decreased $6,830,000 from September 30,
1997 as a result of purchasing the transportation assets of Transport
South, Inc. during the fourth quarter of 1997 and stock of Petro-Chemical
Transport, Inc. during the first quarter of 1998.
The Company has fourth quarter cash commitments of approximately
$2,600,000 for tractor and trailer replacements. Management believes that
cash flows from operations and the Company's bank line of credit will be
sufficient to fund these planned expenditures as well as 1998 working
capital requirements, expansion opportunities and other corporate needs.
The Company's operations require the storage of fuel for use in its
tractors in both underground and aboveground tanks. The Company has a
program to maintain its fuel storage facilities in compliance with
environmental regulation. Under the program, the Company incurs costs to
replace tanks, remediate soil contamination resulting from overfills,
spills and leaks and monitor facilities on an ongoing basis. These costs
are recorded when it is probable that a liability has been incurred and
the related amount can be reasonably estimated. Such costs have not been
and are not expected to be material to the Company's operations or
liquidity.
Year 2000 Issues
- ----------------
The Company has reviewed its Year 2000 issues and has completed its
initial assessment (Phase I) of internal information technology systems
and embedded technology systems. The Company is currently correcting
those systems that it found to have date related deficiencies (Phase II)
and testing the implementation of those solutions prior to any
anticipated impact on our systems (Phase III). Full compliance is
expected in the second quarter of 1999.
The Company's application software programs consist of both
internally developed programs and purchased software. The Company has
verified that substantially all of its internally developed programs are
Year 2000 compliant. All noncompliant purchased software has been
identified and is being upgraded.
The total hours and costs for remediation of internal information
technology and embedded technology is estimated to be 3,600 and $246,000,
respectively. To date, the Company has incurred and expensed
approximately $51,000 related to Year 2000 readiness. Overall, management
believes that the cost will not be material and the Year 2000 will not
pose significant operational problems for the Company's internal systems.
Page 8<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- continued -
As part of its Year 2000 initiative, the Company is surveying
selected third parties (vendors and customers) with whom it has material
relationships to determine the status of their Year 2000 compliance
programs. The goal is to ensure that no interruptions of service will
occur as a result of Year 2000 issues at those companies on which the
Company's business is materially dependent. At present, the Company is
unable to determine the effect on its operations, liquidity, and
financial condition in the event material vendors and customers are not
Year 2000 compliant. The Company will continue to monitor the progress of
those third parties and formulate a contingency plan at the time that it
believes a material vendor or customer will not become compliant.
Forward-Looking Statements
- --------------------------
Statements contained in and preceding management's discussion and
analysis, that are not purely historical, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995, including statements regarding the Company's expectations, hopes,
beliefs and intentions on strategies regarding the future. Disclosures
concerning Year 2000 issues also contain forward-looking statements that
include assessments, timetables and cost estimates. It is important to
note that the Company's actual future results could differ materially
from those projected in such forward-looking statements because of a
number of factors, including but not limited to, inflation, adverse
changes in demand for trucking services, availability of drivers and fuel
prices and other unforeseeable circumstances.
Page 9<PAGE>
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- ------- ---------------------------------
(a) The Exhibits to this Form 10-Q are listed on the accompanying
Index to Exhibits.
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1998
Page 10<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KENAN TRANSPORT COMPANY
(Registrant)
DATE: November 12, 1998 BY: /s/ William L. Boone
----------------------------
Vice President-Finance and
Chief Financial Officer
Page 11
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<PAGE>
INDEX TO EXHIBITS
Exhibits filed as part of Part I of this report are listed below:
Exhibit
Number Description
- --------- ----------------------------------------------------------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule for the 3rd Quarter 10-Q
Page 12
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EXHIBIT 11
KENAN TRANSPORT COMPANY
Statement Re Computation of Per Share Earnings
(In thousands, except per share data)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $1,241 $ 834 $3,570 $2,620
============================================
Shares:
Beginning shares outstanding 2,422 2,395 2,395 2,389
Shares issued under executive incentive plan -- -- 16 6
--------------------------------------------
Basic shares outstanding 2,422 2,395 2,411 2,395
Dilutive effect of outstanding options -- -- 1 --
--------------------------------------------
Diluted shares outstanding 2,422 2,395 2,412 2,395
============================================
Basic and diluted earnings per share $ .51 $ .35 $ 1.48 $ 1.09
============================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000745379
<NAME> KENAN TRANSPORT COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,268
<SECURITIES> 0
<RECEIVABLES> 10,144
<ALLOWANCES> 0
<INVENTORY> 628
<CURRENT-ASSETS> 21,665
<PP&E> 92,568
<DEPRECIATION> 35,414
<TOTAL-ASSETS> 91,481
<CURRENT-LIABILITIES> 17,177
<BONDS> 0
0
0
<COMMON> 4,400
<OTHER-SE> 48,306
<TOTAL-LIABILITY-AND-EQUITY> 91,481
<SALES> 0
<TOTAL-REVENUES> 96,692
<CGS> 0
<TOTAL-COSTS> 90,270
<OTHER-EXPENSES> (138)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 558
<INCOME-PRETAX> 6,002
<INCOME-TAX> 2,432
<INCOME-CONTINUING> 3,570
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,570
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.48
</TABLE>
