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, 2000
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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
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(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
----- -----
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, 2000
--------------------------- --------------------------------
Common stock, no par value 2,421,562
<PAGE>
KENAN TRANSPORT COMPANY
INDEX
Page
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Part I - Financial Information
Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999 1
Consolidated Statements of Income for the Three
and Nine Months ended September 30, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for
the Nine Months ended September 30, 2000 and 1999 3
Notes to Condensed 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 5 - 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)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
ASSETS (Unaudited) (Note 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 3,977 $ 7,466
Accounts receivable, net 9,997 10,966
Operating supplies and parts 767 676
Prepayments:
Tires 2,614 2,257
Insurance, licenses and other 1,902 1,484
Deferred income taxes 1,964 1,861
-----------------------------------
Total Current Assets 21,221 24,710
-----------------------------------
Operating Property
Land 3,464 3,464
Buildings and leasehold improvements 11,555 11,496
Revenue equipment 87,879 79,888
Other equipment 7,427 6,859
-----------------------------------
110,325 101,707
Accumulated depreciation (42,578) (40,625)
-----------------------------------
Net Operating Property 67,747 61,082
-----------------------------------
Intangible Assets, net 9,936 10,368
-----------------------------------
Other Assets 2,548 2,131
-----------------------------------
$ 101,452 $ 98,291
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current Liabilities
Capital lease obligations $ 779 $ 867
Accounts payable 4,701 4,214
Wages and employee benefits payable 9,068 9,008
Claims payable 3,457 4,156
-----------------------------------
Total Current Liabilities 18,005 18,245
-----------------------------------
Long-Term Debt 6,000 6,000
-----------------------------------
Capital Lease Obligations 2,647 3,261
-----------------------------------
Deferred Income Taxes 13,078 12,434
-----------------------------------
Shareholders' Equity
Common stock; no par; 20,000,000 shares
authorized; 2,421,562 shares issued
and outstanding 4,400 4,400
Retained earnings 57,878 54,678
Deferred incentive compensation (556) (727)
-----------------------------------
Total Shareholders' Equity 61,722 58,351
-----------------------------------
$ 101,452 $ 98,291
===================================
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Operating Revenue $ 39,598 $ 35,547 $ 117,204 $ 103,524
Operating Expenses
Wages and employee benefits 20,309 18,526 60,492 53,852
Fuel and other operating expenses 9,051 7,776 26,864 21,967
Depreciation and amortization 3,162 2,660 9,119 8,007
Taxes and licenses 1,983 1,813 5,911 5,522
Claims and insurance 1,446 1,396 4,286 4,178
Equipment rents 1,432 1,321 4,276 4,085
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37,383 33,492 110,948 97,611
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Operating Income 2,215 2,055 6,256 5,913
Interest Expense (166) (221) (499) (663)
Interest Income and Other Expenses, Net 271 227 455 708
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Income before Provision for Income Taxes 2,320 2,061 6,212 5,958
Provision for Income Taxes 919 812 2,455 2,338
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Net Income $ 1,401 $ 1,249 $ 3,757 $ 3,620
======================================================================================================================
Basic and diluted earnings per share $ .58 $ .51 $ 1.55 $ 1.49
Operating ratio 94.4% 94.2% 94.7% 94.3%
Dividends declared per share $ .0775 $ .0750 $ .2275 $ .2200
</TABLE>
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 Nine Months Ended September 30, 2000 and 1999
(Unaudited and dollars in thousands)
2000 1999
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Cash Provided by (Used in):
Operations $ 13,121 $ 14,346
Purchases of operating property, net (15,351) (7,824)
Debt and capital lease obligations, net (702) (3,051)
Dividends (557) (539)
--------------------------------------------------------------------------------
Net (Decrease) Increase in Cash
and Cash Equivalents (3,489) 2,932
Beginning Cash and Cash Equivalents 7,466 8,023
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Ending Cash and Cash Equivalents $ 3,977 $ 10,955
================================================================================
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 accounting principles generally accepted in the
United States (GAAP) 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 GAAP 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) that
are, in the opinion of management, necessary for a fair presentation of the
information included.
The results of operations for the three and nine months ended September
30, 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 Statement
of Financial Accounting Standards (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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2000 1999 2000 1999
----------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 1,401 $ 1,249 $ 3,757 $ 3,620
====================================================
Weighted Average Shares Outstanding:
Basic shares 2,422 2,422 2,422 2,422
Dilutive effect of
stock options 1 -- -- --
----------------------------------------------------
Diluted shares 2,423 2,422 2,422 2,422
====================================================
Basic and diluted
earnings per share $ 0.58 $ 0.51 $ 1.55 $ 1.49
Weighted Average Stock
Options Outstanding
(in thousands) 429 329 384 329
</TABLE>
4. Long-Term Debt
----------------------
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 on borrowings under
the facility is variable based on LIBOR plus an applicable margin. The Company
had $6,000,000 outstanding under the facility at September 30, 2000 and December
31, 1999. As of September 30, 2000, the Company had an unused line of $9,500,000
available 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 Ratio. The Company was in compliance with the
covenants as of September 30, 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 September 30,
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
nine months of 2000 and 1999 were 6.7% and 5.5%, 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Nonqualified Stock Options
----------------------------------
On May 1, 2000, 100,000 nonqualified stock options were awarded to key employees
under the Company's 1998 Long-Term Incentive Plan. The options have an exercise
price of $21.00, which is equal to the fair value of a share of the Company's
stock at the date of grant. The options have a ten-year term with vesting
periods of one to three years from the date of grant.
The Company applies Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees," in accounting for stock option
awards. In accordance with APB No. 25, the Company properly did not record
compensation expense for the 100,000 stock options granted on May 1, 2000.
Page 6
<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
For the third quarter of 2000, revenue was $39,598,000 compared to
$35,547,000 for the third quarter of 1999, an 11% increase from year to year.
Net income was $1,401,000 compared to $1,249,000 in 1999. Earnings per share
were $.58 compared to $.51 during the periods for each year.
Miles operated increased 6% from the third quarter of 1999.The increase in
miles operated was due to adding new customers and growth within the existing,
targeted customer base. Price adjustments to offset the increased costs of
higher fuel prices and driver pay and benefits contributed to a 5% increase in
revenue for the third quarter of 2000 compared to 1999.
Operating expenses for the third quarter of 2000 increased $3,891,000
(12%) over the third 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. Fuel expense increased $1,229,000 due to
56% higher fuel prices and the increase in miles operated. Wages and employee
benefits increased $1,783,000 primarily due to the increase in volume and the
Company increasing driver wages and providing higher benefits in order to
continue attracting and retaining professional drivers. The Company's third
quarter operating ratio was 94.4% compared to 94.2% in 1999.
Interest expense was $166,000 for the third quarter of 2000 compared to
$222,000 in 1999. The average balances of outstanding debt and capital lease
obligations during the third quarter of 2000 and 1999 were approximately
$9,500,000 and $13,600,000, respectively.
For the first nine months of 2000, revenue was $117,204,000 compared to
$103,524,000 for 1999, a 13% increase from year to year. Net income was
$3,757,000 compared to $3,620,000 in 1999. Earnings per share were $1.55
compared to $1.49 during the same period last year.
Miles operated increased 8% from the first nine months of 1999. Operating
expenses for the first nine months of 2000 totaled $110,948,000, an increase of
$13,337,000 (14%) due primarily to the higher volume and increases in wages and
employee benefits and fuel costs. Wages and employee benefits expense increased
$6,640,000 (12%), and fuel expense increased $4,364,000 (89%). In addition,
depreciation expense for tractors and trailers increased $1,129,000 primarily
due to replacing older equipment and operating leases acquired in the
acquisitions of Transport South and Petro-Chemical Transport with new owned
equipment. Price adjustments to offset the increased costs of higher fuel prices
and driver pay and benefits contributed to a 5% increase in revenue for the
first nine months of 2000 compared to 1999.
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Financial
CONDITION AND RESULTS OF OPERATIONS
(continued)
Liquidity and Capital Resources
At September 30, 2000, cash and cash equivalents totaled $3,977,000, a
decrease of $3,489,000 from December 31, 1999. The decrease in cash and cash
equivalents was primarily due to the purchase of tractors and trailers during
the first nine months under the Company's replacement program designed to
maintain an efficient, highly productive fleet. In addition, 25 tractors that
were operated under operating leases were replaced with owned equipment. The
additional cash used to pay for the new tractors and trailers was generated from
cash provided by operations. Working capital of $3,216,000 was down $3,249,000
from year-end 1999. At September 30, 2000, the Company had outstanding debt and
capital lease obligations totaling $9,426,000 compared to $10,128,000 at
December 31, 1999.
The Company has fourth quarter net cash commitments of approximately
$1,300,000 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.
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.
Page 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Financial
CONDITION AND RESULTS OF OPERATIONS
(continued)
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, the Company 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 estimated fair value of the interest rate swap agreement represents
the estimated receipts or payments that would be made to terminate the
agreement. At September 30, 2000, the Company would have received approximately
$43,000 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 have decreased by approximately $112,000.
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,
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 9
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
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None.
Item 5. Exhibits and Reports on Form 8-K
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(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 September 30, 2000:
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: November 10, 2000 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
-------- -------------------------------------------------------
27 Financial Data Schedule for the nine months ending
September 30, 2000.
Page 12
