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 March 31, 1999
-------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-12058
-------
KENAN TRANSPORT COMPANY
------------------------------------------------------
(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
-----------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(919) 967-8221
-----------------------------------------------------------
(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
------- -------
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 April 30, 1999
-------------------------- -----------------------------
Common stock, no par value 2,421,562
<PAGE>
KENAN TRANSPORT COMPANY
INDEX
Page
----
Part I - Financial Information
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 1
Consolidated Statements of Income for the three months
ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4 - 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 9
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
Index to Exhibits 12
<PAGE>
PART I - FINANCIAL INFORMATION
KENAN TRANSPORT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1999 1998
ASSETS (Unaudited) (Note 1)
- -------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 9,696 $ 8,023
Accounts receivable, net 9,379 10,441
Operating supplies and parts 572 572
Prepayments
Tires 1,889 1,851
Insurance, licenses and other 1,517 1,353
Deferred income taxes 2,164 2,164
------------------------
Total Current Assets 25,217 24,404
Operating Property
Land 3,464 3,464
Buildings and leasehold improvements 11,453 11,412
Revenue equipment 73,755 72,703
Other equipment 6,651 6,490
------------------------
95,323 94,069
Accumulated depreciation (38,015) (36,444)
------------------------
Net Operating Property 57,308 57,625
Intangible Assets, Net 10,800 10,944
Other Assets 1,670 1,671
------------------------
$94,995 $94,644
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------
Current Liabilities
Capital lease obligations $ 1,052 $ 1,108
Accounts payable 2,604 2,784
Wages and employee benefits payable 5,833 9,331
Claims payable 4,228 3,942
Income taxes payable 744 --
------------------------
Total Current Liabilities 14,461 17,165
Long-Term Debt 10,000 10,000
Capital Lease Obligations 3,924 2,056
Deferred Income Taxes 11,243 11,243
Stockholders' Equity
Common stock; no par; 20,000,000 shares
authorized; 2,421,562 and 2,400,462
shares issued and outstanding 4,400 4,400
Deferred incentive compensation (898) (956)
Retained earnings 51,865 50,736
------------------------
55,367 54,180
------------------------
$94,995 $94,644
========================
The Notes to Consolidated Financial Statements are an integral part of
these balance sheets.
Page 1
<PAGE>
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
(Unaudited and in thousands except per share amounts)
1999 1998
- ------------------------------------------------------------------------
Operating Revenue $33,961 $28,481
Operating Expenses
Wages and employee benefits 17,550 14,277
Fuel and other operating expenses 7,055 6,079
Depreciation and amortization 2,669 2,507
Taxes and licenses 1,874 1,653
Claims and insurance 1,378 1,011
Equipment rents 1,405 923
------------------------
31,931 26,450
------------------------
Operating Income 2,030 2,031
Interest Expense (201) (138)
Interest Income and Other Expenses, Net 310 33
------------------------
Income before Provision for Income Taxes 2,139 1,926
Provision for Income Taxes 834 751
------------------------
Net Income $ 1,305 $ 1,175
========================
Weighted average number of shares
outstanding 2,422 2,400
Basic and diluted earnings per share $ .54 $ .49
Operating ratio 94.0% 92.9%
Dividends paid per share $ .0725 $ .0700
The Notes to Consolidated Financial Statements are an integral part of
these statements.
Page 2
<PAGE>
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
(Unaudited and dollars in thousands)
1999 1998
- ------------------------------------------------------------------------
Cash Provided by (Applied to):
Operations $ 2,354 $ 2,990
Purchases of operating property, net (29) (1,009)
Business acquisition -- (7,863)
Debt and lease obligations, net (476) 7,232
Dividends (176) (168)
------------------------
Net Increase in Cash and Cash Equivalents 1,673 1,182
Beginning Cash and Cash Equivalents 8,023 3,422
------------------------
Ending Cash and Cash Equivalents $ 9,696 $ 4,604
========================
The Notes to Consolidated Financial Statements are an integral part of
these statements.
Page 3
<PAGE>
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, 1998 has been taken from the
audited financial statements at that date.
The results of operations for the three months ended March 31, 1999
and 1998 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 February 28, 1998, the Company acquired 100% of the outstanding
stock of Petro-Chemical Transport, Inc. (PCT), a wholly owned subsidiary
of CITGO Petroleum Corporation. PCT 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 acquisition has been accounted for using the purchase method of
accounting. The accompanying consolidated statements of income include
results of operations of PCT beginning March 1, 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 acquisition
(goodwill) is included in intangible assets in the accompanying
consolidated balance sheets and is being amortized over 20 years on a
straight-line basis.
Page 4
<PAGE>
KENAN TRANSPORT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following unaudited pro forma summary presents the consolidated
results of operations of the Company for the first quarter of 1999 and
1998, as if the acquisition had occurred as of January 1, 1998. The pro
forma information does not purport to be indicative of what would have
occurred had the acquisition been made as of January 1, 1998 or of results
that may occur in the future (dollars in thousands except per share
amounts).
Pro-Forma Information (unaudited)
--------------------------------------------------------------------
1999 1998
----------------------
Revenue $33,961 $34,180
Net income 1,305 1,324
Basic and diluted earnings per share .54 .55
4. Long-Term Debt
- --------------------
The Company has 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 March 31, 1999
and 1998, the Company had $10,000,000 outstanding under the new credit
facility. At March 31, 1998, the Company had $375,000 payable under a
short-term note obligation assumed in the acquisition of Petro-Chemical
Transport, Inc. The short-term note was paid in April of 1998.
The Company has entered into a simple interest rate swap agreement to
manage interest costs and risks associated with changing interest rates.
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 March 31, 1999, the notional principal
amount of this agreement totaled $7,000,000. The Company does not hold or
issue derivative instruments for trading purposes.
The Company agrees to exchange at specific intervals, the difference
between fixed-rate and variable-rate interest amounts calculated by
reference to the notional amount with any differential recorded as an
adjustment to interest expense.
Page 5
<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 first quarter of 1999 was $33,961,000 compared to
$28,481,000 for the first quarter of 1998. Net income was $1,305,000
compared to $1,175,000 in 1998. Earnings per share were $.54 compared to
$.49 during the same period last year.
First quarter revenue increased $5,480,000 (19%) over the first
quarter of 1998. The revenue growth was driven by the Company's
acquisition of the stock of Petro-Chemical Transport, Inc. (PCT) on
February 28, 1998. First quarter revenue attributable to PCT was
$10,595,000 in 1999 compared to $3,381,000 in 1998. Demand for gasoline
and chemicals was flat during the first quarter. In addition, the mild
winter weather affected demand for propane gas and other heating fuels in
the quarter. Miles operated increased 10% from the first quarter of 1998.
Operating expenses for the first quarter of 1999 increased
$5,481,000 (21%) over 1998 levels. The increase in operating expenses
was primarily attributable to the inclusion of PCT's operation for the
full quarter in 1999 and the resulting increase in miles operated. As a
percentage of revenue, wages and employee benefits expense increased to
51.7% from 50.1% due to increased driver wages and higher benefit costs.
Insurance and claims expensed increased to 4.1% from 3.5% due to higher
claims experience in 1999. As a percentage of revenue, an increase in
equipment rents was offset by lower relative depreciation costs. The
Company's operating ratio for the quarter was 94.0% compared to 92.9% in
1998.
The average balance of outstanding debt and capital lease
obligations during the first quarter of 1999 and 1998 were approximately
$13,668,000 and $9,208,000, respectively. Interest expense was $201,000
for the first quarter of 1999 compared to $138,000 in 1998.
The $277,000 increase in interest income and other expenses was
primarily attributable to the Company's sale of older trailer equipment.
Liquidity and Capital Resources
At March 31, 1999, cash and cash equivalents totaled $9,696,000, an
increase of $1,673,000 from the end of 1998. Working capital of
$10,756,000 was up $3,517,000 from year-end 1998, and the current ratios
were 1.74 and 1.42, respectively. At March 31, 1999, the Company had
outstanding debt and capital lease obligations totaling $14,976,000
compared to $13,164,000 at December 31, 1998.
Page 6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
Cash and cash equivalents have increased $5,092,000 from March 31,
1998. The Company has second quarter cash commitments of approximately
$2,500,000 for tractor 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 1999 working capital
requirements, expansion opportunities and other corporate needs.
Environmental Matters
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
The "Year 2000" issue results from computer systems that store and
process data using two-digit fields to represent the year rather than
four-digit fields. Consequently, some computer systems may not process
dates beyond 1999. Businesses are at risk of computer system failures that
may cause disruptions in their operations. Computer systems termed Year
2000 compliant have been tested and certified to correctly process dates
beyond the year 2000.
Kenan's information technology ("IT") systems include financial and
operational software and hardware. The Company has completed an assessment
of its critical IT systems and the majority are Year 2000 compliant. The
Company is in the process of correcting all remaining critical IT systems
with implementation of solutions expected by June 30, 1999. All non-
critical IT systems, such as desktop hardware and software, are scheduled
to be made Year 2000 compliant by September 30, 1999.
The Company's non-IT systems consist primarily of embedded technology
in tractors, telephone equipment and office equipment. All testing and
remediation is scheduled to be completed by June 30, 1999.
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
The total cost for remediation of IT and embedded technology systems is
estimated to be $258,000. As of March 31, 1999, the Company has incurred
and expensed approximately $124,000 related to Year 2000 readiness. These
cost estimates include internal and external labor for remediation and
testing of the Company's systems. 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.
The Company is also continuing its assessment of the Year 2000
readiness of selected third parties (key suppliers and customers) with
whom it has material relationships. 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.
The Company will continue to monitor the progress of those third parties
and formulate contingency plans where necessary if significant exposures
are identified. While the Company's investigations and assessments have
not revealed a material third party that is not expecting to be Year 2000
compliant, a failure of the Company's key suppliers, customers or other
third party to adequately address their Year 2000 readiness could
adversely affect the Company's business.
The most likely worst case scenario for Kenan Transport is that the
Company would be unable to operate for a number of days due to general
public infrastructure failures, utilities and telecommunication failures,
internal equipment failures, or failure at external loading racks or
retail store outlets. The inability of the Company to operate would result
in a loss of revenues, partially mitigated by reduced cost.
We believe that we have an effective plan in place to resolve the Year
2000 issue in a timely manner. However, due to the unusual nature of the
Year 2000 issue, it is difficult to predict with certainty what will
happen after December 31, 1999.
Market Risk
Market risk is the potential loss arising from adverse changes in
market rates and prices, such as foreign currency rates, and other
relevant market rates or price changes. In the ordinary course of
business, Kenan is exposed to interest rate risks and the Company
regularly evaluates its exposure to this risk. The Company does not hold
or issue derivative instruments for trading purposes.
Page
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
The fair value of the interest rate swap agreement represents the
estimated receipts or payments that would be made to terminate the
agreement. At March 31, 1999, the Company would have paid approximately
$154,000 to terminate the agreement. Assuming a 100 basis point reduction
in the LIBOR interest rate curve, the fair value of the interest rate swap
agreement would decrease by approximately $238,000.
Forward-Looking Statements
Statements in this document that are not historical facts are hereby
identified as forward-looking statements for the purpose of the safe
harbor provided by Section 21E of the Securities Act of 1934 and Section
27A of the Securities Act of 1933. The Company cautions readers that such
forward-looking statements, including without limitation, those relating
to the Company's future business prospects, revenues, working capital,
liquidity, capital needs, interest costs and income, wherever they occur
in this document or in other statements attributable to the Company are
estimates reflecting the best judgement of the Company's senior management
and involve a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the forward-looking
statements.
Disclosures concerning Year 2000 issues also contain forward-looking
statements that include assessments, timetables and cost estimates. The
incremental costs of the Year 2000 project and the time by which the
Company believes it will complete the Year 2000 modifications, as well as
new system initiatives that are Year 2000 compliant and third party
compliance, are based upon management's best estimates. There exists the
possibility that factors outside of management's control may have a
material impact on the Company operations.
Page 9
<PAGE>
PART II - OTHER INFORMATION
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) The following reports on Form 8-K have been filed during the
quarter ended March 31, 1999:
None
Page 10
<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: May 12, 1999 BY:/s/ William L. Boone
----------------------------
Vice President-Finance and
Chief Financial Officer
Page 11
<PAGE>
INDEX TO EXHIBITS
The exhibits filed as part of this report are listed below:
Exhibit
Number Description
--------- --------------------------------------------------------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule for the quarter ending March 31,
1999.
Page 12
<PAGE>
EXHIBIT 11
KENAN TRANSPORT COMPANY
Statement Re Computation of Per Share Earnings
(In thousands, except per share data)
Three Months Ended
March 31,
--------------------
1999
--------------------
Net income $1,305 $1,175
====================
Shares:
Beginning shares outstanding 2,422 2,400
Shares issued under executive incentive plan -- --
--------------------
Basic shares outstanding 2,422 2,400
Dilutive effect of outstanding options -- --
---------------------
Diluted shares outstanding 2,422 2,400
=====================
Basic and diluted earnings per share $ .54 $ .49
=====================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,696
<SECURITIES> 0
<RECEIVABLES> 9,379
<ALLOWANCES> 0
<INVENTORY> 572
<CURRENT-ASSETS> 25,217
<PP&E> 95,323
<DEPRECIATION> 38,015
<TOTAL-ASSETS> 94,995
<CURRENT-LIABILITIES> 14,461
<BONDS> 0
0
0
<COMMON> 4,400
<OTHER-SE> 50,967
<TOTAL-LIABILITY-AND-EQUITY> 94,995
<SALES> 0
<TOTAL-REVENUES> 33,961
<CGS> 0
<TOTAL-COSTS> 31,931
<OTHER-EXPENSES> (310)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201
<INCOME-PRETAX> 2,139
<INCOME-TAX> 834
<INCOME-CONTINUING> 1,305
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,305
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
