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, 2000
-----------------
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
------------------------------------------------------------
(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
----- -----
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, 2000
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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, 2000 and
December 31, 1999 1
Consolidated Statements of Income for the three
months ended March 31, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4 - 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 8
Part II - Other Information
Item 4 - Submission of Matters to a Vote of
Security Holders 9
Item 5 - Exhibits and Reports on Form 8-K 9
Signatures 10
Index to Exhibits 11
<PAGE>
PART I - FINANCIAL INFORMATION
KENAN TRANSPORT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2000 1999
ASSETS (Unaudited) (Note 1)
- -------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 2,925 $ 7,466
Accounts receivable, net 10,962 10,966
Operating supplies and parts 577 676
Prepayments
Tires 2,458 2,257
Insurance, licenses and other 1,406 1,484
Deferred income taxes 1,861 1,861
................................
Total Current Assets 20,189 24,710
................................
Operating Property
Land 3,464 3,464
Buildings and leasehold improvements 11,544 11,496
Revenue equipment 84,273 79,888
Other equipment 6,981 6,859
................................
106,262 101,707
Accumulated depreciation (41,461) (40,625)
................................
Net Operating Property 64,801 61,082
................................
Intangible Assets, Net 10,224 10,368
................................
Other Assets 2,310 2,131
................................
$ 97,524 $ 98,291
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current Liabilities
Capital lease obligations $ 880 $ 867
Accounts payable 6,184 4,214
Wages and employee benefits payable 6,310 9,008
Claims payable 3,319 4,156
................................
Total Current Liabilities 16,693 18,245
................................
Long-Term Debt 6,000 6,000
................................
Capital Lease Obligations 3,030 3,261
................................
Deferred Income Taxes 12,630 12,434
................................
Stockholders' Equity
Common stock; no par; 20,000,000 shares
authorized; 2,421,562 shares issued
and outstanding 4,400 4,400
Retained earnings 55,441 54,678
Deferred incentive compensation (670) (727)
...............................
59,171 58,351
...............................
$ 97,524 $ 98,291
===============================
The Notes to Condensed Consolidated Financial Statements are an integral part of
these balance sheets.
Page 1
<PAGE>
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands except per share amounts)
Three Months Ended
March 31,
--------------------
2000 1999
- --------------------------------------------------------------------------
Operating Revenue $ 38,279 $ 33,961
-----------------------------
Operating Expenses
Wages and employee benefits 20,108 17,550
Fuel and other operating expenses 8,947 7,055
Depreciation and amortization 2,871 2,669
Taxes and licenses 1,994 1,874
Claims and insurance 1,371 1,378
Equipment rents 1,382 1,405
- -------------------------------------------------------------------------
36,673 31,931
- -------------------------------------------------------------------------
Operating Income 1,606 2,030
Interest Expense (171) (201)
Interest Income and Other Expenses, Net 125 310
- -------------------------------------------------------------------------
Income before Provision for Income Taxes 1,560 2,139
Provision for Income Taxes 616 834
- -------------------------------------------------------------------------
Net Income $ 944 $ 1,305
=========================================================================
Basic and diluted earnings per share $ .39 $ .54
Operating ratio 95.8% 94.0%
Dividends paid per share $ .0750 $ .0725
The Notes to Condensed Consolidated Financial Statements are an integral part of
these statements.
Page 2
<PAGE>
KENAN TRANSPORT COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(Unaudited and dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Provided by (Used for):
Operations $ 2,305 $ 2,354
Purchases of operating property, net (6,446) (29)
Debt and capital lease obligations, net (218) (476)
Dividends (182) (176)
- ----------------------------------------------------------------------------------------------
Net (Decrease)Increase in Cash and Cash Equivalents (4,541) 1,673
Beginning Cash and Cash Equivalents 7,466 8,023
- ----------------------------------------------------------------------------------------------
Ending Cash and Cash Equivalents $ 2,925 $ 9,696
==============================================================================================
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these statements.
Page 3
<PAGE>
KENAN TRANSPORT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
- ------------------------------
The accompanying condensed 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 condensed consolidated financial statements included herein have
been prepared by Kenan Transport Company (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Consolidated Balance Sheet as of December 31, 1999 has been taken from the
audited financial statements as of that date. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's latest annual report on Form 10-K for the year ended December 31,
1999.
The condensed consolidated financial statements included herein reflect
all adjustments (none of which are other than normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of the
information included.
The results of operations for the three months ended March 31, 2000 and
1999 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," which
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. SFAS
No. 137 subsequently deferred the effective date of SFAS No. 133 for the Company
to January 1, 2001. The Company will adopt SFAS No. 133 at that time. The
application of Statement 133 is not expected to have a significant impact on the
Company's financial position or results of operations.
Page 4
<PAGE>
KENAN TRANSPORT COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Earnings Per Share
- --------------------------
A reconciliation of net income and the weighted average number of shares
outstanding used in calculating basic and diluted earnings per share is
presented in the table below (in thousands, except per share amounts):
Three Months Ended
March 31
----------------------
2000 1999
----------------------
Net Income $ 944 $ 1,305
=========================
Weighted Average Shares:
Basic shares 2,422 2,422
Dilutive effect of
stock options -- --
-------------------------
Diluted shares 2,422 2,422
=========================
Basic and diluted
earnings per share $ .39 $ .54
4. Line-of-Credit
- --------------------
On February 13, 1998, the Company negotiated an unsecured $20,000,000 Reducing
Line-of-Credit Facility (the facility) with a bank. Funds available under the
line reduce $500,000 per quarter beginning July 1, 1998 to a minimum line of
$10,000,000. The facility matures in March 2003. Interest under the facility is
variable based on LIBOR plus an applicable margin. The Company had $6,000,000
outstanding under the credit facility at March 31, 2000 and December 31, 1999.
As of March 31, 2000, the Company had $10,500,000 available to it under the
facility. The credit agreement contains the following financial covenants: (1)
Funds from Operations to Funded Debt Ratio, and (2) Funded Debt to
Capitalization. The Company was in compliance with the covenants as of March 31,
2000 and December 31, 1999.
The Company has entered into a simple interest rate swap agreement to manage
costs and risks associated with changing interest rates. Under the agreement,
the Company exchanges at specific intervals the difference between the fixed and
variable rate interest amounts calculated by reference to the notional amount
with any differential recorded as an adjustment to interest expense. 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. At March 31, 2000,
the notional principal amount of this agreement totaled $5,000,000. The
agreement matures in March 2003. The average variable rates during the first
quarter of 2000 and 1999 were 6.1% and 5.2%, respectively, compared to a fixed
rate of 6.5% for these periods.
The Company does not hold or issue derivative instruments for trading purposes.
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 2000 was $38,279,000 compared to
$33,961,000 for the first quarter of 1999. Net income was $944,000 compared to
$1,305,000 in 1999. Earnings per share were $.39 compared to $.54 during the
same period last year. Miles operated increased 8% from the first quarter of
1999.
The increase in miles operated for the quarter compared to last year was
primarily due to our adding new customers and growth within our existing,
targeted customer base. The increase in revenue for the quarter compared to last
year was due to the increase in business volume, price increases to cover the
higher costs of our driver pay and benefits programs, and fuel surcharge
programs that adjust our pricing as fuel prices rise.
Operating expenses for the first quarter of 2000 increased $4,742,000
(15%) over the first quarter of 1999. The increase in operating expenses was
primarily due to increases in miles operated, higher fuel prices, and increases
in driver pay rates and benefit costs. As a percentage of revenue, fuel expense
increased to 8.1% from 4.0% for the quarter compared to last year due to fuel
prices, which increased 108% from the first quarter of 1999. Wages and employee
benefits increased as a percentage of revenue to 52.5% from 51.7% due to the
Company increasing driver wages and enhancing their benefits in order to
continue attracting and retaining professional drivers in a very competitive
labor market. The Company's operating ratio for the quarter was 95.8% compared
to 94.0% in 1999.
Interest expense was $171,000 for the first quarter of 2000 compared to
$201,000 in 1999. The average balances of outstanding debt and capital lease
obligations during the first quarter of 2000 and 1999 were approximately
$10,019,000 and $13,668,000, respectively.
The $185,000 decrease in interest income and other expenses for the
quarter compared to 1999 was primarily due to gains on the sale of equipment in
1999.
Liquidity and Capital Resources
At March 31, 2000, cash and cash equivalents totaled $2,925,000, a
decrease of $4,541,000 from December 31, 1999. The decrease in cash and cash
equivalents was primarily due to the Company purchasing 59 tractors and 45
trailers during the quarter under its replacement program designed to maintain
an efficient, highly productive fleet. Working capital of $3,496,000 was down
$2,969,000 from year-end 1999. At March 31, 2000, the Company had outstanding
debt and capital lease obligations totaling $9,910,000 compared to $10,128,000
at December 31, 1999.
The Company has second quarter cash commitments of approximately
$7,105,000 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 2000 working capital
requirements, expansion opportunities and other corporate needs.
Page 6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
Inflation
The Company's condensed consolidated financial statements are prepared
based on historical dollars and are not intended to show the impact of inflation
or changing prices. With the exception of driver wages and fuel prices,
inflation and changing prices have not had a material effect on the Company's
financial position and results of operations.
Environmental Matters
The Company stores fuel in underground and aboveground tanks for use in
certain of its terminal facilities. The Company has a program to maintain its
fuel storage facilities in compliance with environmental regulations. 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 Company's Year 2000 program successfully prepared its critical
internal systems for Y2K. In addition, the Y2K preparation programs of the
Company's major customers and suppliers appear to have been successful as the
Company has not experienced any significant disruption in its operations as of
the date of this report.
The total cost incurred during 1999 to remediate the Year 2000 issue was
approximately $250,000. The Company did not incur in the first quarter of 2000
nor does it expect to incur any further significant expenditure related to Year
2000.
Market Risk
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as currency exchange 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.
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, 2000, the Company would have received approximately $122,000 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 $131,000.
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 Exchange 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,
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
The Company's future operating results may be affected by a number of
factors that include but are not limited to: general economic conditions such as
inflation and interest rates; competitive conditions within the Company's
markets, including adverse changes in demand for trucking services, pricing
pressure, availability of drivers and fuel prices; the Company's ability to sell
its services profitably, increase market share and manage expenses relative to
revenue growth; changes in governmental regulation; changes in the trucking
transportation and logistic industries; and changes in the Company's labor
relations or other unforeseeable circumstances.
Page 8
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 5. 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, 2000:
None
Page 9
<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, 2000 BY: /s/ William L. Boone
----------------------------
Vice President-Finance and
Chief Financial Officer
Page 10
<PAGE>
INDEX TO EXHIBITS
The exhibit filed as part of this report are listed below:
Exhibit
Number Description
- -------- -------------------------------------------------------
27 Financial Data Schedule for the quarter ending
March 31, 2000.
Page 11
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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, 2000, 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-31-2000
<CASH> 2,925
<SECURITIES> 0
<RECEIVABLES> 10,962
<ALLOWANCES> 0
<INVENTORY> 577
<CURRENT-ASSETS> 20,189
<PP&E> 106,262
<DEPRECIATION> 41,461
<TOTAL-ASSETS> 97,524
<CURRENT-LIABILITIES> 16,693
<BONDS> 0
0
0
<COMMON> 4,400
<OTHER-SE> 54,771
<TOTAL-LIABILITY-AND-EQUITY> 97,524
<SALES> 0
<TOTAL-REVENUES> 38,279
<CGS> 0
<TOTAL-COSTS> 36,673
<OTHER-EXPENSES> (171)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> 1,560
<INCOME-TAX> 616
<INCOME-CONTINUING> 944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 944
<EPS-BASIC> .39
<EPS-DILUTED> .39
</TABLE
</TABLE>
