FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 Identification No.)
incorporation or organization)
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)
Registrant's telephone number, including Area Code: (919) 967-8221
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Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Based on the closing sales price of March 6, 1998, the aggregate market
value of the voting stock held by persons other than those who may be
deemed affiliates of the registrant was $33,128,021.
------------
The number of shares outstanding of the registrant's common stock was
2,394,780 at March 6, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
- --------------------------- -------------------------------------
Part III
Items 10, 11, 12 and 13 Portions of the Company's Proxy
Statement dated March 30, 1998 in
connection with its Annual Meeting to
be held on May 4, 1998.
Page 2
PART I
Item 1. Business
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Kenan Transport Company (the Company), a North Carolina
corporation, was incorporated in 1949. The Company is engaged in the
transportation of bulk commodities in intrastate and interstate commerce.
The Company primarily serves the petroleum, propane gas and chemical
industries.
Two recent business acquisitions by the Company have had a
significant impact on the geographic scope and size of its business
operations. On December 1, 1997, Kenan purchased the majority of
transportation assets of Transport South, Inc. ("TSI"), an affiliate of
RaceTrac Petroleum. On February 28, 1998, the Company acquired from CITGO
Petroleum Corporation, 100% of the outstanding stock of its wholly owned
subsidiary, Petro-Chemical Transport, Inc. ("PCT"). The following
disclosures reflect the Company as it existed in 1997.
During 1997, the Company's operations were concentrated in the
Southeast in seven states; Alabama, Florida, Georgia, North Carolina,
South Carolina, Tennessee and Virginia. The purchase of TSI expands the
Company's customer base within its existing markets and adds Kentucky,
Louisiana and Texas to its core service area. The Company provides
intrastate transportation services to customers within these states and
interstate transportation services from these states to points throughout
the United States. One customer accounted for 11% of the Company's
revenue in 1997.
At December 31, 1997, the Company operated a network of terminals
and a fleet of 630 tractors and 910 specialized trailers. The Company's
terminals are strategically located near the major pipeline terminals,
chemical production centers and major ports. The Company's terminals
operate as "profit centers" staffed with experienced terminal managers,
trained dispatchers, maintenance personnel and professional drivers. At
December 31, 1997, the Company had 1,240 employees. Approximately 350
employees were added as a result of the Company's acquisition of TSI.
With the acquisition of PCT in 1998, the Company's operations
expanded to include Arizona, California, Colorado, Illinois, Indiana,
Maryland, Massachusetts, Missouri, Nevada, Oklahoma, Pennsylvania, Utah
and Wisconsin. In addition, through its purchase of PCT, the Company will
operate an inventory control and logistics management system that enables
it to manage gasoline inventories at retail locations for current and
prospective customers. The acquisition of PCT places Kenan Transport
Company among the ten largest tank truck carriers in the country.
The Company has a large number of competitors with no single
competitor being dominant in the industry. The Company competes with the
trucking operations of the major oil and chemical companies as well as
with independent carriers. Competition is primarily based on price and
customer service. The Company considers its business to be somewhat
seasonal with the winter heating season providing the highest demand
levels.
Page 3
The Company operations include storage of fuel in underground
storage tanks for use in its operations. Management is committed to the
protection of the environment and has procedures in place to ensure
compliance with federal and state regulations and to provide appropriate
response to spills and leaks that occur. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company is involved in various claims and legal actions arising
in the normal course of business. It is the opinion of management that
these matters will have no significant impact on the financial statements
of the Company.
Item 2. Properties
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The Company owns twenty-one real properties located in five states;
Florida, Georgia, North Carolina, South Carolina and Virginia. At
December 31, 1997, these properties had a net book value of $12,186,000.
Additionally, the Company leases sixteen real properties located in the
Southeast and Texas, under lease terms from one to five years. The
properties are used for offices, terminals and vehicle maintenance
facilities in the operations of the Company.
The Company transports freight using over-the-road tractors and
trailers. At December 31, 1997, the net book value of the Company's owned
revenue equipment, consisting of 490 tractors and 850 trailers, was
$37,614,000. The balance of the Company's fleet, 140 tractors and 60
trailers, consists of leased equipment with lease terms of one to three
years.
The assets acquired from TSI on December 1, 1997 included 130 tractors
and 210 tank trailers. The tractors and 40 trailers are leased.
With the acquisition of Petro-Chemical Transport, Inc. on February 28,
1998, the Company added 125 tractors and 175 tank trailers to its fleet.
This equipment consists of leased tractors and owned trailers. PCT also
leases its central administrative offices that are located in Dallas,
Texas.
Page 4
Item 3. Legal Proceedings
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There are no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted during the fourth quarter of 1997 to a
vote of security holders, through the solicitation of proxies or
otherwise.
Item 4(a). Executive Officers of the Registrant
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Information concerning the executive officers of the Company
follows:
Name Age Position
- -------------------- ---- ---------------------------------------
Lee P. Shaffer 59 Director, Chief Executive Officer of
the Company beginning in 1996;
President of the Company since 1975;
Chief Operating Officer of the Company
(1975-1996).
William L. Boone 58 Vice President-Finance and Secretary of
the Company since 1974. Treasurer of
the Company beginning in 1996;
Assistant Treasurer of the Company
(1981-1996).
L. Avery Corning 40 Vice President-Operations and Sales
beginning in 1994; President (1990-
1994), Redwing Carriers, Inc., Tampa,
Florida.
Gary J. Knutson 47 Vice President-Marketing of the Company
beginning in 1994. Vice President-Sales
of the Company (1990-1993).
John E. Krovic 42 Vice President-Human Resources and
Safety of the Company since 1993.
Lee P. Shaffer, III (1) 38 Vice President-Operations Services of
the Company beginning in 1994. Director
of Operations Services of the Company
(1992-1993). Director of Operations of
the Company (1988-1992).
(1) Lee P. Shaffer, III is the son of Lee P. Shaffer, President and
Chief Executive Officer of the Company.
Page 5
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
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On October 21, 1986, the Registrant's stock began trading on the
Nasdaq stock market under the symbol KTCO. The Company had approximately
453 shareholders, including holders whose shares are held in street
names, on December 31, 1997.
The high and low sale prices and the cash dividends paid per share
for each quarter in the last two fiscal years are shown below:
1997 1996
--------------------------- ---------------------------
Quarter High Low Dividend High Low Dividend
- -------- -------- ------- -------- -------- ------- --------
First $20.5 $18.5 $.0675 $22 $19 $.065
Second 21 19 .0675 21 18.75 .065
Third 22.75 19.75 .07 21.5 20 .0675
Fourth 41 22.25 .07 21.5 19 .0675
Page 6
Item 6. Selected Financial Data
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Selected financial data for the past five years is presented below:
1997 1996 1995 1994 1993
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Operations (in thousands)
- ---------------------------------
Operating revenue $73,308 $68,795 $61,717 $59,100 $57,063
Operating income 6,462 6,244 5,124 5,787 5,421
Net income (1) 4,090 3,805 3,323 3,682 3,435
Per Share Data
- ---------------------------------
Basic and Diluted Earnings (1)(2) $ 1.71 $ 1.59 $ 1.39 $ 1.55 $ 1.45
Dividends declared .2775 .2675 .2575 .2475 .2375
Book value 20.61 19.19 17.86 16.72 15.76
Market value 36.63 19.00 20.75 17.50 17.38
Financial Position (in thousands)
- ---------------------------------
Cash, cash equivalents and
short-term investments $ 3,422 $11,181 $10,106 $13,759 $11,996
Working capital 1,753 10,034 9,568 12,260 10,766
Net operating property 52,239 44,133 41,265 35,015 32,747
Total assets 77,115 65,044 61,188 57,625 54,727
Total debt, including
capital lease obligations 5,570 -- -- -- --
Stockholders' equity 49,368 45,843 42,677 39,771 37,363
Ratios and Statistics
- ---------------------------------
Operating ratio 91.2% 90.9% 91.7% 90.2% 90.5%
Return on equity (1) 9% 9% 8% 9% 10%
Current ratio 1.12 2.00 1.98 2.24 2.07
Debt equity ratio .11 -- -- -- --
Shares outstanding (in thousands) 2,395 2,389 2,389 2,378 2,370
<FN>
<F1>
(1) Before the effect of an extraordinary charge in 1994 of
$823,000 ($.35 per share).
(2) All periods restated in accordance with SFAS No. 128.
</FN>
Page 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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Results of Operations - 1997 Compared to 1996
- ---------------------------------------------
Revenue increased 7% in 1997 to $73,308,000. The $4,513,000 increase
in revenue was generated by approximately $2,300,000 of additional
business resulting from the Transport South, Inc. acquisition on December
1, 1997 and approximately $2,213,000 due to growth in demand for
transportation services. Miles operated increased 7% to 47,252,000 in
1997.
Operating expenses increased 7% in 1997 to $66,846,000. The
$4,295,000 increase was due in large part to the 7% increase in miles
operated, an increase in driver wage expense, higher claims experience in
1997 and a 6% increase in depreciation and amortization expense. Wages
and employee benefits decreased to 50.2% of revenue from 50.3% in 1996. A
10% increase in driver wages was offset by lower workers' compensation
premiums and claims. Fuel, parts, tires and other operating expenses
increased to 19.6% from 19.1% of revenue in 1996. Although fuel prices
decreased 6% in 1997, equipment maintenance and other operating expenses
increased 18%. Accident claims and insurance costs increased to 3.7% of
revenue in 1997 from 3.6%. Communications, utilities and rent expense
remained flat at 2.1% of revenue. Depreciation and amortization expense
decreased slightly to 9.5% of revenue in 1997 compared to 9.6% in 1996.
Net interest income and other expenses increased $144,000 in 1997.
Higher average cash balances and interest rates in 1997 contributed to
the increase.
Results of Operations - 1996 Compared to 1995
- ---------------------------------------------
Revenue increased 11% from 1995 to $68,795,000. The $7,078,000
increase in revenue reflects growth in demand for transportation services
and the effect of higher prices to our customers to cover increased
operating costs. The addition of transportation services to Cary Oil
Company, Inc. in July of 1995 and the expansion into Alabama and
Tennessee markets in 1995 also contributed to revenue growth for the
year. Miles operated increased 8% to 44,177,000 in 1996.
Operating expenses increased 11% in 1996 to $62,551,000. The
$5,958,000 increase was due in large part to the 8% increase in miles
operated, a 23% increase in diesel fuel prices and an 18% increase in
depreciation and amortization expense. Wages and employee benefits
decreased to 50.3% of revenue from 50.9% in 1995. Fuel, parts, tires and
other operating expenses increased from 18.7% to 19.1% of revenue in 1996
due primarily to fuel price increases that were substantially offset by
fuel surcharges that are included in revenue. Accident claims and
insurance costs fell to 3.6% of revenue in 1996 from 4.2% due to lower
insurance premiums and claims cost control. Recently completed terminal
facilities in Atlanta and Fort Lauderdale resulted in lower
communications, utilities and rent expense which decreased to 2.1% of
revenue from 2.5% in 1995. The depreciation and amortization expense
increase to 9.6% of revenue compared to 9.0% in 1995 reflects the impact
of new equipment purchased for the Alabama and Tennessee expansion
markets, and new terminal facilities in Atlanta and Fort Lauderdale
placed in service in 1996.
Page 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Continued
- -------------------------------------------------------------------------
Net interest income and other expenses decreased $413,000 from 1995.
The reduction stems from lower interest rates and invested cash balances
in 1996 from 1995 levels as well as losses recorded from the early
retirement of high-mileage tractors.
Liquidity and Capital Resources
- ---------------------------------------------
At the end of 1997, cash and cash equivalents totaled $3,422,000, a
decrease of $7,759,000 from the end of 1996. Working capital of
$1,753,000 was down $8,281,000 from year-end 1996 and the current ratios
were 1.12 and 2.00, respectively. The decline in cash and working capital
balances during 1997 was due to the Company's purchase of the majority of
the transportation assets of Transport South, Inc. on December 1, 1997.
This investment required a total cash outlay of $11,446,000 and the
assumption of net current liabilities of $944,000 which reduced working
capital by $12,390,000 in 1997.
Outstanding debt under the Company's line of credit agreement was
$2,500,000 at the end of 1997, of which $500,000 was classified as
current. On February 13, 1998, the Company entered into a new unsecured
credit agreement that provides a $20,000,000 line of credit. The new
agreement replaces the Company's existing line of credit. Amounts
borrowed in excess of $10,000,000 are subject to certain repayment
provisions. The agreement matures March 2003.
Capital lease obligations, assumed in the Transport South
acquisition, totaled $3,070,000 at December 31, 1997. At the end of 1997,
$995,000 was classified as current. The outstanding balance is payable
over the next four years.
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, for $7,500,000. The Company financed the
acquisition through its new line of credit.
Net capital expenditures for replacement of tractors and tank
trailers are projected to be $8,300,000 in 1998. Management believes cash
flows from operations and the Company's new 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 has evaluated its Year 2000 issues and has implemented a
plan to address and correct all significant issues that involve the Year
2000. These issues are not expected to be material to the Company's
business operations or financial condition.
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.
Page 9
Item 8. Financial Statements and Supplementary Data
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Kenan Transport Company:
We have audited the accompanying consolidated balance sheets of Kenan
Transport Company (a North Carolina corporation) and subsidiary as of
December 31, 1997 and 1996, and the related consolidated statements of
income and retained earnings and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kenan
Transport Company and subsidiary as of December 31, 1997 and 1996, and
the results of their operations and cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Raleigh, North Carolina,
February 19, 1998.
Page 10
KENAN TRANSPORT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
-------------------------
1997 1996
- -------------------------------------------------------------------------
ASSETS
- ---------------------------------------------
Current Assets
Cash and cash equivalents $ 3,422 $11,181
Accounts receivable, net 8,020 4,988
Operating supplies and parts 521 413
Prepaid tires 1,471 1,033
Prepaid insurance, licenses and other 886 698
Deferred income taxes 1,747 1,741
-----------------------
Total Current Assets 16,067 20,054
Operating Property
Land 3,464 3,531
Buildings and leasehold improvements 10,968 9,279
Revenue equipment 65,974 56,015
Other equipment 4,755 3,923
-----------------------
85,161 72,748
Accumulated depreciation and amortization (32,922) (28,615)
-----------------------
Net Operating Property 52,239 44,133
Intangible Assets 7,559 --
Other Assets 1,250 857
-----------------------
$77,115 $65,044
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------
Current Liabilities
Current maturities of long-term debt $ 500 $ --
Capital lease obligations 995 --
Accounts payable 2,517 1,423
Wages and employee benefits payable 6,641 5,136
Claims payable 3,553 3,409
Income taxes currently payable 108 52
-----------------------
Total Current Liabilities 14,314 10,020
Long-term Debt 2,000 --
Capital Lease Obligations 2,075 --
Deferred Income Taxes 9,358 9,181
Stockholders' Equity
Common stock; no par; 20,000,000 shares
authorized; 2,394,780 and 2,389,497
shares issued and outstanding 3,096 2,996
Retained earnings 46,272 42,847
-----------------------
49,368 45,843
-----------------------
$77,115 $65,044
=======================
The Notes to Consolidated Financial Statements are an integral part of
these balance sheets.
Page 11
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Dollars in thousands except per share amounts)
Years Ended December 31
---------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------
Operating Revenue $73,308 $68,795 $61,717
Operating Expenses
Wages and employee benefits 36,804 34,580 31,412
Fuel, parts, tires and other 14,344 13,138 11,566
Taxes and licenses 4,482 4,261 3,926
Claims and insurance 2,692 2,502 2,567
Communications, utilities and rent 1,562 1,472 1,544
Depreciation and amortization 6,962 6,598 5,578
---------------------------------
66,846 62,551 56,593
---------------------------------
Operating Income 6,462 6,244 5,124
Interest expense (40) (20) (28)
Interest income and other expenses, net 174 30 443
---------------------------------
Income before Provision for Income Taxes 6,596 6,254 5,539
Provision for income taxes 2,506 2,449 2,216
---------------------------------
Net Income 4,090 3,805 3,323
Retained earnings, beginning of the year 42,847 39,681 36,973
Cash dividends (665) (639) (615)
---------------------------------
Retained earnings, end of the year $46,272 $42,847 $39,681
=================================
Basic and Diluted Earnings Per Share $ 1.71 $ 1.59 $ 1.39
=================================
The Notes to Consolidated Financial Statements are an integral part of
these statements.
Page 12
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31
---------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 4,090 $ 3,805 $ 3,323
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,962 6,598 5,578
Deferred income taxes 171 551 574
Common stock issued under incentive plan 100 -- 198
Other, net (393) (246) (140)
Changes in operating assets and liabilities
net of effects from business acquisition:
Accounts receivable (3,032) (43) (696)
Operating supplies and parts (108) 93 68
Prepayments (152) 146 20
Accounts payable 796 288 (275)
Wages and employee benefits payable 1,380 988 (455)
Claims payable 144 (744) 287
Income taxes currently payable 56 (256) 308
---------------------------------
Net cash provided by operating activities 10,014 11,180 8,790
Cash Flows from Investing Activities:
Purchases of operating property, net (8,037) (9,466) (11,828)
Business acquisition (11,446) -- --
Sales (purchases) of short-term investments, net -- 6,886 (5,886)
---------------------------------
Net cash used by investing activities (19,483) (2,580) (17,714)
Cash Flows from Financing Activities:
Borrowings under line of credit agreement 2,500 -- --
Principal payments on capital lease obligations (125) -- --
Dividends (665) (639) (615)
---------------------------------
Net cash provided by (used for) financing
activities 1,710 (639) (615)
---------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents (7,759) 7,961 (9,539)
Cash and Cash Equivalents at Beginning of Year 11,181 3,220 12,759
---------------------------------
Cash and Cash Equivalents at End of Year $ 3,422 $11,181 $ 3,220
=================================
Noncash Investing and Financing Activities:
Liabilities assumed in business acquisition $ 3,619 -- --
Supplemental Cash Flow Disclosures:
Interest paid $ 38 $ 21 $ 18
Income taxes paid $ 2,279 $ 2,154 $ 1,334
The Notes to Consolidated Financial Statements are an integral part of these statements.
Page 13
KENAN TRANSPORT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
- ---------------------------------------------------------------
Preparation of Financial Statements
The 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 which was
merged into Kenan Transport Company effective December 31, 1996. All
significant intercompany accounts and transactions have been
eliminated.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Cash Equivalents and Short-Term Investments
The Company classifies investments maturing within three months from
the date of purchase as cash equivalents. All investments at December
31, 1997 and 1996 were cash equivalents.
Tires
The cost of replacement tires is included in operating supplies and
parts in the accompanying Consolidated Balance Sheets. When installed
on revenue equipment, tire costs are included in prepayments and
amortized over their useful life based on mileage.
Operating Property
Operating property, including operating property under capital
leases, is recorded at cost, net of tires and is depreciated or
amortized over the estimated useful life of the related assets.
Maintenance and repairs are charged to operating expenses as
incurred; renewals and improvements are capitalized. Depreciation is
computed on the straight-line method using lives of 3 to 15 years for
revenue equipment, 15 to 40 years for buildings, remaining life of
leases for leasehold improvements, and 2 to 10 years for other
equipment.
Claims Payable
Claims payable represents the estimated cost of open claims that is
retained and paid by the Company under its insurance programs for
workers' compensation, group medical, bodily injury and property
damage. These estimates are based on historical information along
with certain assumptions about future cash flows. Changes in
assumptions for such things as medical costs, environmental hazards,
and legal actions, as well as changes in actual experience could
cause these estimates to change. In the accompanying Consolidated
Statements of Income and Retained Earnings, workers' compensation
costs are included in wages and employee benefits expenses, and other
claims costs are included in claims and insurance expenses.
Page 14
Environmental Expenditures
The Company's operations require the storage of fuel for use in its
tractors in both underground and aboveground tanks. 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.
Income Taxes
The provision for income taxes includes federal and state income
taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets
and liabilities.
Note 2 - Earnings Per Share
- ---------------------------------------------------------------
In 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share" which requires all prior
years presented to be restated. A reconciliation of net income and the
weighted average number of shares outstanding used in calculating basic
and diluted earnings per share for the years ended December 31, 1997,
1996 and 1995 is summarized in the table below (dollars and shares in
thousands except per share amounts):
1997 1996 1995
--------------------------------
Net income $4,090 $3,805 $3,323
================================
Beginning shares outstanding 2,389 2,389 2,378
Shares issued under executive
incentive plan 6 -- 11
------ ------ ------
Basic shares outstanding 2,395 2,389 2,389
Shares earned under executive
incentive plan 1 1 --
------ ------ ------
Diluted shares outstanding 2,396 2,390 2,389
================================
Basic and diluted earnings per share $ 1.71 $ 1.59 $ 1.39
================================
Note 3 - Purchase of Assets
- ---------------------------------------------------------------
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.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the accompanying consolidated statements of
income include results of operations from December 1, 1997. The purchased
assets and liabilities assumed have been recorded in the Company's
Page 15
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. Amortization expense in 1997 was $32,000
and accumulated amortization at December 31, 1997 was $32,000.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company for 1997 and 1996, as if the
acquisition had occurred as of January 1, 1996. The pro forma information
does not purport to be indicative of what would have occurred had the
acquisition been made as of those dates or of results which may occur in
the future (dollars in thousands except per share amounts).
Pro-Forma Information (unaudited)
--------------------------------------------------------------------
1997 1996
----------------------
Revenue $101,308 $96,795
Operating income 7,802 7,178
Net income 4,631 4,332
Basic and diluted earnings per share 1.93 1.81
Note 4 - Subsequent Events
- ---------------------------------------------------------------
On February 18, 1998, the Company entered into a definitive agreement
to acquire 100% of the outstanding stock of Petro-Chemical Transport,
Inc., a wholly owned subsidiary of CITGO Petroleum Corporation for
$7,500,000. Petro-Chemical Transport is a tank truck carrier serving the
petroleum industry in the Southeast, Midwest and on the West Coast. The
Company will finance the acquisition through its new line of credit
facility (see Note 5). The closing is expected during the first quarter
of 1998.
Note 5 - Bank Line of Credit
- ---------------------------------------------------------------
At December 31, 1997, the Company's borrowings under a Bank Credit
Agreement totaled $2,500,000 of which $500,000 was classified as
currently payable based on management's intent to pay down such amount in
1998. The fair value of debt approximates carrying value at December 31,
1997.
On February 13, 1998, the Company negotiated a new unsecured
$20,000,000 Reducing Line of Credit Facility with the bank. The agreement
replaces the Company's previous $7,000,000 line of credit. The line
reduces $500,000 per quarter beginning July 1, 1998 and matures in March
2003. Interest under the agreement is at variable rates based, at the
Company's option, on the Bank's Prime Rate or LIBOR. The credit agreement
contains various covenants, none of which negatively impact the Company's
liquidity or capital resources at this time.
Page 16
Note 6 - Income Taxes
- ---------------------------------------------------------------
Deferred income taxes reflect the net tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effects of temporary differences that give rise to
significant portions of the deferred tax liabilities and assets at
December 31, 1997 and 1996 were as follows (dollars in thousands):
1997 1996
---------------------
Liabilities
Depreciation $10,012 $8,715
Prepaid tires 558 392
Other 429 525
---------------------
Deferred tax liabilities 10,999 9,632
Assets
Claims payable 1,349 1,294
Capital lease obligations 1,165 --
Employee benefits 701 610
Other 173 288
---------------------
Deferred tax assets 3,388 2,192
---------------------
Net deferred tax liability $ 7,611 $7,440
=====================
The provisions for income taxes consist of the following (dollars in
thousands):
1997 1996 1995
--------------------------------
Currently payable
Federal $1,949 $1,568 $1,387
State 386 330 255
--------------------------------
2,335 1,898 1,642
Deferred 171 551 574
--------------------------------
$2,506 $2,449 $2,216
================================
The statutory federal income tax rates differ from the effective
income tax rates as follows:
1997 1996 1995
-------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase in tax rate resulting from:
State income taxes, net of federal
tax benefit 4.1 4.0 4.0
Other items, net (.1) 1.2 2.0
-------------------------------
Effective income tax rate 38.0% 39.2% 40.0%
===============================
Page 17
Note 7 - Lease and Other Commitments
- ---------------------------------------------------------------
Certain terminal facilities, office space and equipment, and revenue
equipment are rented under operating leases expiring at various dates
through 2002. Rent expense charged against income for years ended
December 31, 1997, 1996 and 1995 was $439,000, $440,000 and $604,000,
respectively. At December 31, 1997, total future minimum rental payments
required under leases having initial or remaining noncancellable lease
terms in excess of one year are (dollars in thousands):
1998 $1,246
1999 1,010
2000 177
2001 47
2002 16
The Company acquired capital leases in connection with its purchase
of Transport South, Inc. on December 1, 1997. Capital leases included in
operating property at December 31, 1997 were $2,576,000. Future minimum
lease payments for capitalized lease obligations at December 31, 1997 are
as follows (dollars in thousands):
1998 $1,162
1999 1,514
2000 360
2001 318
------
Total minimum lease payments 3,354
Less amount representing interest at
5% to 7% and taxes 284
------
Present value of net minimum lease payments 3,070
Less current portion 995
------
Long-term obligations $2,075
======
A bank letter of credit of $2,666,000 is outstanding on the Company's
behalf in connection with its insurance program.
The Company is involved in various claims and legal actions arising
in the normal course of business. It is the opinion of management that
these matters will have no significant impact on the financial statements
of the Company.
Note 8 - Retirement Plans
- ---------------------------------------------------------------
The Company has a Profit-Sharing Retirement Plan covering all
employees. Contributions are determined annually by the Board of
Directors. The Plan is funded currently and contributions expensed were
$1,349,000 (1997), $1,173,000 (1996) and $980,000 (1995).
Page 18
The Company has a Supplemental Executive Retirement Plan (SERP) to
replace retirement benefits lost by certain officers under the Tax Reform
Act of 1986. The SERP is an unfunded deferred compensation plan with
benefits payable upon retirement, death or other termination of
employment under provisions similar to those of the Profit-Sharing
Retirement Plan. Net amounts expensed under the SERP were $143,000
(1997), $127,000 (1996) and $109,000 (1995).
Note 9 - Incentive Plans
- ---------------------------------------------------------------
The Company has a stock incentive plan for key employees that became
effective January 1, 1994. The Plan enables the Company to provide
long-term incentives for key employees while encouraging optimum growth
in Company profits. Over a ten-year period, up to 56,600 shares of common
stock may be earned if targeted increases in net income are attained.
Employees may elect to receive up to half of the value of their incentive
bonuses in cash. No shares were earned in 1995. There were 5,283 shares
of stock earned in 1996 and issued in March of 1997 increasing common
stock by $100,000 in 1997. Approximately 5,400 shares of stock were
earned in 1997 that will be issued in 1998. The actual number of shares
will be based upon the market value of a share on the day preceding
issuance. There would be no impact on reported net income from applying
the disclosure requirements of SFAS 123 "Accounting for Stock-Based
Compensation." Compensation expense related to the Plan is recognized in
the year earned.
Note 10 - Nature of Business
- ---------------------------------------------------------------
The Company transports commodities in bulk for the petroleum and
chemical industries in the southeastern United States and Texas, and its
customers include international corporations in these industries. One
customer accounted for 11% of the Company's revenue in 1997 and 1996, and
12% in 1995. Concentration of credit risks to the Company consists
primarily of trade receivables from petroleum and chemical companies. The
Company maintains an allowance for doubtful accounts which totaled
$313,000 and $290,000 at December 31, 1997 and 1996, respectively, to
cover estimated credit losses.
Page 19
Note 11 - Summary of Quarterly Financial Information (Unaudited)
- ---------------------------------------------------------------
(Dollars in thousands)
--------------------------------- Diluted
Operating Operating Net Earnings
Quarter Revenue Income Income Per Share
- -------------------------------------------------------------------------
1997
First $17,746 $1,541 $ 976 $.41
Second 17,233 1,230 810 .34
Third 17,450 1,314 834 .35
Fourth 20,879 2,377 1,470 .61
1996
First $17,587 $1,648 $1,040 $.44
Second 16,637 1,221 763 .32
Third 16,638 1,271 716 .30
Fourth 17,933 2,104 1,286 .54
Page 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
- -------------------------------------------------------------------------
None
Page 21
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------------------------------------------------------------------------
Information with respect to directors required by Item 401 of
Regulation S-K, appearing under the heading "Election of Directors" in
the Registrant's proxy statement dated March 30, 1998 for the Annual
Meeting of Shareholders to be held May 4, 1998, is incorporated herein by
reference. Information with respect to executive officers required by
Item 401 of Regulation S-K is included as Item 4(a) in Part I.
Information with respect to directors and executive officers required
by Item 405 of Regulation S-K, appearing under the heading "Section 16(a)
Beneficial Ownership Compliance" in the Registrant's proxy statement
dated March 30, 1998 for the Annual Meeting of Shareholders to be held
May 4, 1998, is incorporated herein by reference.
Item 11. Executive Compensation
- -------------------------------------------------------------------------
Information with respect to executive compensation required by Item
402 of Regulation S-K, appearing under the heading "Compensation and
Related Matters" in the Registrant's proxy statement dated March 30, 1998
for the Annual Meeting of Shareholders to be held May 4, 1998, is
incorporated herein by reference.
Item 12. Securities Ownership of Certain Beneficial Owners and
Management
- -------------------------------------------------------------------------
Information with respect to securities ownership of certain
beneficial owners and management required by Item 403 of Regulation S-K,
appearing under the headings "Principal Shareholders" and "Security
Ownership of Management" in the Registrant's proxy statement dated March
30, 1998 for the Annual Meeting of Shareholders to be held May 4, 1998,
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------------------------
Information with respect to certain relationships and related
transactions required by Item 404 of Regulation S-K, appearing under the
heading "Compensation Committee Interlocks and Insider Participation" in
the Registrant's proxy statement dated March 30, 1998 for the Annual
Meeting of Shareholders to be held May 4, 1998, is incorporated herein by
reference.
Page 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on
Consolidated Form 10-K.
(2) Schedules
---------
None
(3) Exhibits
--------
Exhibits to this report are listed in the accompanying Index to
Exhibits.
(b) Reports on Form 8-K
-------------------
A Current Report on Form 8-K was filed on December 12, 1997,
announcing the Registrant's purchase of the majority of
transportation assets of Transport South, Inc. The financial
statement schedules and pro forma financial information
relating to the purchase was filed on Form 8-K/A, February 13,
1998.
Page 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Lee P. Shaffer
------------------------------------------------------
Lee P. Shaffer, President and Chief Executive Officer
Date: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
- ------------------------ --------------------------- --------------
Principal Financial Officer:
/s/ William L. Boone Vice President-Finance; March 16, 1998
- ------------------------ Secretary; Treasurer
William L. Boone
Controller or Principal
Accounting Officer:
/s/ J. Earl Cowan Controller March 16, 1998
- ------------------------
J. Earl Cowan
Page 24
Signature Title Date
- ------------------------ -------------------------- ---------------
Directors:
/S/ Thomas S. Kenan, III Chairman of the Board March 16, 1998
- ------------------------ of Directors
Thomas S. Kenan, III
/S/ Owen G. Kenan Vice Chairman of the March 16, 1998
- ------------------------ Board of Directors
Owen G. Kenan
/S/ William O. McCoy Director March 16, 1998
- ------------------------
William O. McCoy
/S/ Paul J. Rizzo Director March 16, 1998
- ------------------------
Paul J. Rizzo
/S/ William C. Friday Director March 16, 1998
- ------------------------
William C. Friday
/S/ Braxton Schell Director March 16, 1998
- ------------------------
Braxton Schell
/S/ Kenneth G. Younger Director March 16, 1998
- ------------------------
Kenneth G. Younger
Page 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Financial Statements in Form 10-K
- --------------------------------------------------------- ------------
Report of Independent Public Accountants relating to the
Consolidated Financial Statements and Notes thereto 10
Consolidated Balance Sheets - December 31, 1997 and 1996 11
Consolidated Statements of Income and Retained Earnings -
For the Years Ended December 31, 1997, 1996 and 1995 12
Consolidated Statements of Cash Flows - For the Years
Ended December 31, 1997, 1996 and 1995 13
Notes to Consolidated Financial Statements 14-20
Page 26
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- ---------------------------------------------------------
2(a) Asset Purchase Agreement between Transport South, Inc.
and the Registrant, dated October 31, 1997, filed as
Exhibit 2 to the Registrant's Form 10-Q Quarterly Report
for the quarter ended September 30, 1997, which is
incorporated herein by reference to such Form 10-Q.
2(b) Amendment to Asset Purchase Agreement between Transport
South, Inc. and the Registrant, dated December 1, 1997,
filed as Exhibit 2.A to the Registrant's Current Report
on Form 8-K, filed December 12, 1997, which is
incorporated herein by reference to such Form 8-K.
2(c) Stock Purchase and Sale Agreement between CITGO Petroleum
Corporation, Petro-Chemical Transport, Inc. and the
Registrant, dated February 18, 1998, filed as Exhibit 2
to the Registrant's Current Report on Form 8-K, filed
March 13, 1998, which is incorporated herein by reference
to such Form 8-K.
3(a) Charter Documents filed as Exhibit 3(a) to the
Registrant's Form 10 Registration of Securities, filed
April 27, 1984, which is incorporated herein by reference
to such Form 10.
3(b) Articles of Amendment dated May 1987, filed as Exhibit
4(b) to the Registrant's Form 10-Q Quarterly Report for
the quarter ended June 30, 1987, which is incorporated
herein by reference to such Form 10-Q.
3(c) Articles of Amendment dated May 1988, filed as Exhibit
4(f) to the Registrant's Form 10-Q Quarterly Report for
the quarter ended June 30, 1988, which is incorporated
herein by reference to such Form 10-Q.
3(d) Bylaws filed as Exhibit 3(b) to the Registrant's Form 10
Registration of Securities, filed April 27, 1984, which
is incorporated herein by reference to such Form 10.
3(e) Amendments to the Bylaws of the Registrant adopted March
15, 1985, March 2, 1987 and March 1, 1990, filed as
Exhibit 4(e) to the Registrant's Form 10-K for the year
ended December 31, 1989, which is incorporated herein by
reference to such Form 10-K.
3(f) Amended and Restated Bylaws of the Registrant adopted
September 26, 1990, filed as Exhibit 4(d) to the
Registrant's Form 10-Q Quarterly Report for the quarter
ended June 30, 1991, which is incorporated herein by
reference to such Form 10-Q.
Page 27
INDEX TO EXHIBITS - continued
Exhibit No. Description
- ----------- ---------------------------------------------------------
3(g) Amendment to the Bylaws of the Registrant adopted May 6,
1991, filed as Exhibit 4(e) to the Registrant's Form 10-Q
Quarterly Report for the quarter ended June 30, 1991,
which is incorporated herein by reference to such Form
10-Q.
3(h) Amendment to the Bylaws of the Registrant adopted October
7, 1991, filed as Exhibit 4(f) to the Registrant's Form
10-Q Quarterly Report for the quarter ended September 30,
1991, which is incorporated herein by reference to such
Form 10-Q.
3(i) Amendment to the Bylaws of the Registrant as adopted
October 21, 1996 by the Registrant's Board of Directors.
4(a) Specimen Stock Certificate filed as Exhibit 4(a) to the
Registrant's Form 10 Registration of Securities, filed
April 27, 1984, which is incorporated herein by reference
to such Form 10.
Management contracts or compensatory plans or arrangements
Exhibits 10(a) - 10(f)
10(a) Employee Stock Bonus Plan effective January 1, 1985,
filed as Exhibit 10(c) to the Registrant's Form 10-K for
the year ended December 31, 1984, which is incorporated
herein by reference to such Form 10-K.
10(b) Amendment to Employee Stock Bonus Plan dated January 6,
1987, filed as Exhibit 10(d) to the Registrant's Form
10-K for the year ended December 31, 1986, which is
incorporated herein by reference to such Form 10-K.
10(c) Supplemental Executive Retirement Plan, effective January
1, 1990, filed as Exhibit 10(e) to the Registrant's Form
10-K for the year ended December 31, 1990, which is
incorporated herein by reference to such Form 10-K.
10(d) 1994 Stock Bonus Plan effective January 1, 1994, filed as
Exhibit 10(b) to the Registrant's Form 10-Q Quarterly
Report for the quarter ended June 30, 1994, which is
incorporated herein by reference to such Form 10-Q.
10(e) Senior Managers' Life Insurance Plan, effective April 1,
1996, filed as Exhibit 10.A to the Registrant's Form 10-Q
Quarterly Report for the quarter ended June 30, 1997,
which is incorporated herein by reference to such Form
10-Q.
Page 28
INDEX TO EXHIBITS - continued
Exhibit No. Description
- ----------- ---------------------------------------------------------
10(f) Senior Management Severance Plan, effective May 5, 1997,
filed as Exhibit 10.A to the Registrant's Form 10-Q
Quarterly Report for the quarter ended June 30, 1997,
which is incorporated herein by reference to such Form
10-Q.
Material contracts Exhibits 10(g) - 10(i)
10(g) Credit Agreement between First Union National Bank and
the Registrant dated May 22, 1984, filed as Exhibit 4(b)
to the Registrant's Form 10-Q Quarterly Report for the
quarter ended June 30, 1984, which is incorporated herein
by reference to such Form 10-Q.
10(h) Loan Agreement between First Union National Bank and the
Registrant dated February 13, 1998.
10(i) Promissory Note between First Union National Bank and the
Registrant dated February 13, 1998.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule for the year ended December 31,
1997.
Page 29