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 June 30, 1998
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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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
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Common stock, no par value 2,421,562
KENAN TRANSPORT COMPANY
INDEX
Page
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Part I - Financial Information
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 1
Consolidated Statements of Income for the three
and six months ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4 - 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 7
Part II - Other Information
Item 4 - Submission of Matters to a Vote of
Security Holders 8
Item 5 - Other Information 8
Item 6 - Exhibits and Reports on Form 8-K 8
Signatures 9
Index to Exhibits 10
PART I - FINANCIAL INFORMATION
KENAN TRANSPORT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1998 1997
ASSETS (Unaudited) (Note 1)
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Current Assets
Cash and cash equivalents $ 2,375 $ 3,422
Accounts receivable 10,448 8,020
Operating supplies and parts 570 521
Prepayments -
Tires 1,580 1,471
Insurance, licenses and other 1,736 886
Deferred income taxes 2,396 1,747
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Total Current Assets 19,105 16,067
Operating Property
Land 3,464 3,464
Buildings and leasehold improvements 11,286 10,968
Revenue equipment 71,538 65,974
Other equipment 6,052 4,755
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92,340 85,161
Accumulated depreciation (34,438) (32,922)
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Net Operating Property 57,902 52,239
Intangible Assets 11,231 7,559
Other Assets 1,470 1,250
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$89,708 $77,115
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities
Current maturities of long-term debt $ -- $ 500
Capital lease obligations 1,165 995
Accounts payable 3,416 2,517
Wages and employee benefits payable 8,003 6,641
Claims payable 3,791 3,553
Income taxes payable -- 108
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Total Current Liabilities 16,375 14,314
Long-term Debt 10,000 2,000
Capital Lease Obligations 1,011 2,075
Deferred Income Taxes 10,734 9,358
Stockholders' Equity
Common stock; no par; 20,000,000 shares
authorized; 2,421,562 and 2,394,780
shares issued and outstanding 4,400 3,096
Retained earnings 48,258 46,272
Deferred compensation (1,070) --
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51,588 49,368
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$89,708 $77,115
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The Notes to Consolidated Financial Statements are an integral part of
these balance sheets.
Page 1
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
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1998 1997 1998 1997
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Operating Revenue $34,107 $17,233 $62,588 $34,979
Operating Expenses
Wages and employee benefits 17,452 8,806 31,729 17,756
Fuel and other operating expenses 7,236 3,696 13,315 7,428
Depreciation 2,608 1,647 5,115 3,302
Taxes and licenses 1,822 1,062 3,475 2,156
Claims and insurance 1,301 663 2,312 1,307
Equipment rents 1,510 129 2,433 259
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31,929 16,003 58,379 32,208
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Operating Income 2,178 1,230 4,209 2,771
Interest expense (229) (5) (367) (10)
Interest income and other expenses, net 31 76 64 127
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Income before Provision for Income Taxes 1,980 1,301 3,906 2,888
Provision for income taxes 826 491 1,577 1,102
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Net Income $ 1,154 $ 810 $ 2,329 $ 1,786
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Basic and diluted earnings per share .48 $ .34 $ .97 $ .75
Operating ratio 93.6% 92.9% 93.3% 92.1%
Dividends paid per share $ .0700 $ .0675 $ .1400 $ .1350
The Notes to Consolidated Financial Statements are an integral part of these statements.
Page 2
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
(Unaudited and dollars in thousands)
1998 1997
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Cash Provided by (Applied to):
Operations $ 6,045 $ 4,523
Purchases of operating property, net (5,101) (4,190)
Business acquisition (7,879) --
Debt and capital lease obligations, net 6,231 --
Dividends (343) (329)
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Net Increase (Decrease) in Cash
and Cash Equivalents (1,047) 4
Beginning Cash and Cash Equivalents 3,422 11,181
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Ending Cash and Cash Equivalents $ 2,375 $11,185
======================================================================
The Notes to Consolidated Financial Statements are an integral part of
these statements.
Page 3
KENAN TRANSPORT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
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The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles and include the
accounts of Kenan Transport Company and its wholly-owned subsidiary,
Petro-Chemical Transport, Inc. All significant intercompany accounts and
transactions have been eliminated.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary
for a fair statement of results for the interim periods.
The balance sheet at December 31, 1997 has been taken from the
audited financial statements at that date.
The results of operations for the three and six months ended June 30,
1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
2. Business Acquisitions
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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.
On February 28, 1998, the Company acquired 100% of the outstanding
stock of Petro-Chemical Transport, Inc., a wholly owned subsidiary of
CITGO Petroleum Corporation. Petro-Chemical Transport, Inc. is a tank
truck carrier serving the petroleum industry in the Southeast, Midwest
and on the West Coast. The acquisition, net of cash acquired, required a
cash investment totaling $7,879,000. The Company financed the acquisition
through its line of credit facility.
The acquisitions have been accounted for using the purchase method of
accounting. The accompanying consolidated statements of income include
the results of operations of Transport South, Inc. for the six months
ended June 30, 1998 and the results of operations of Petro-Chemical
Transport, Inc. for the four months ended June 30, 1998. The purchased
assets and liabilities assumed have been recorded in the Company's
financial statements at their estimated fair market values. The excess of
the purchase cost over the fair value of net assets acquired in the
acquisitions (goodwill) is included in intangible assets in the
accompanying consolidated balance sheets and is being amortized over 20
years on a straight-line basis.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the acquisitions had occurred
as of January 1, 1998 and 1997. The pro forma information does not
purport to be indicative of what would have occurred had the acquisitions
been made as of those dates or of results that may occur in the future
(dollars in thousands except per share amounts).
Page 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Pro-Forma Information (unaudited)
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1998 1997
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Three Months Ended June 30,
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Revenue $34,107 $33,919
Net income 1,154 1,329
Basic and diluted earnings per share .48 .56
Six Months Ended June 30,
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Revenue $69,267 $68,351
Net income 2,535 2,825
Basic and diluted earnings per share 1.05 1.18
3. Long-Term Debt
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On February 13, 1998, the Company negotiated an unsecured $20,000,000
Reducing Line of Credit Facility with a bank. The agreement replaces the
Company's previous $7,000,000 line of credit. The line reduces $500,000
per quarter beginning July 1, 1998 to a minimum line of $10,000,000. The
agreement matures in March 2003. Interest under the agreement is at
variable rates based, at the Company's option, on the Bank's Prime Rate
or LIBOR. At June 30, 1998, the Company was in compliance with the
agreement's financial and nonfinancial covenants.
During the first quarter, the Company borrowed $7,500,000 to finance
its acquisition of Petro-Chemical Transport, Inc. At June 30, 1998, the
Company had $10,000,000 outstanding under the new credit facility. There
was no outstanding debt at June 30, 1997.
4. Long-Term Incentive Plan
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On May 4, 1998, shareholders approved the Company's 1998 Long-Term
Incentive Plan (the "Plan"). The Plan provides for grant Awards,
including stock options and restricted stock, of up to 450,000 shares of
Common Stock.
During the first quarter of 1998, 328,900 nonqualified stock options
and 21,100 shares of restricted stock were awarded to key employees under
the Plan. The stock options have an exercise price equal to or above the
fair value of the shares at the date of the grant and have a ten-year
term with vesting periods of one to five years from the date of the
grant. Restricted stock awards become free of restrictions ratably over a
five year period.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", in accounting for its stock
option and restricted stock awards. Compensation expense under the Plan
totaled $37,000 for the second quarter of 1998.
Page 5
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
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Revenue for the second quarter of 1998 was $34,107,000 compared to
$17,233,000 for the second quarter of 1997. Net income was $1,154,000
compared to $810,000 in 1997. Earnings per share were $.48 compared to
$.34 during the same period last year. Miles operated increased 77% from
the second quarter of 1997.
Revenue for the first half of 1998 was $62,588,000 compared to
$34,979,000 for 1997. Net income was $2,329,000 compared to $1,786,000 in
1997. Earnings per share were $.97 compared to $.75 during the same
period last year. Miles operated increased 66% from the first half of
1997.
Revenue for the quarter increased 98% as a result of the impact of
two recent acquisitions. On December 1, 1997, the Company purchased the
majority of the transportation assets of Transport South, Inc. of Smyrna,
Georgia in a cash transaction. On February 28, 1998, the Company
purchased the stock of Petro-Chemical Transport, Inc., the trucking
subsidiary of CITGO Petroleum Corporation in a cash transaction. Revenue
attributed to the business acquisitions was approximately $17,000,000 in
the second quarter. Integration of the acquired companies into Kenan
Transport Company is progressing satisfactorily.
Operating expenses for the second quarter of 1998 totaled $31,929,000
an increase of $15,926,000 and 100% over 1997 levels. The increase in
operating expenses was primarily the result of the Company's two recent
acquisitions. Lower fuel prices in 1998 were offset by increases in
driver pay, outside maintenance costs and equipment rents. The Company's
operating ratio for the quarter was 93.6% compared to 92.9% in 1997.
Operating expenses for the first half of 1998 totaled $58,379,000, an
increase of $26,171,000 and 81% over the first six months of 1997. The
operating ratio increased to 93.3% from 92.1% in 1997.
The average balance of outstanding debt and capital lease obligations
during the second quarter of 1998 was approximately $12,700,000. There
was no outstanding debt during the second quarter of 1997. Interest
expense was $229,000 for the second quarter of 1998 compared to $5,000 in
1997.
Page 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- continued -
Liquidity and Capital Resources
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At June 30, 1998, cash and cash equivalents totaled $2,375,000, a
decrease of $1,047,000 from the end of 1997. Working capital of
$2,730,000 was up $977,000 from year-end 1997, and the current ratios
were 1.17 and 1.12, respectively. At June 30, 1998, the Company had
outstanding debt and capital lease obligations totaling $12,176,000
compared to $5,570,000 at December 31, 1997.
Cash and cash equivalents decreased $8,810,000 from the June 30, 1997
balance as a result of the Company's acquisition of the assets of
Transport South, Inc. during the fourth quarter of 1997 and the stock of
Petro-Chemical Transport, Inc. during the first quarter of 1998.
The Company has third quarter cash commitments of approximately
$2,750,000 for tractor and trailer replacements. Management believes that
cash flows from operations and the Company's bank line of credit will be
sufficient to fund these planned expenditures as well as 1998 working
capital requirements, expansion opportunities and other corporate needs.
The Company's operations require the storage of fuel for use in its
tractors in both underground and aboveground tanks. The Company has a
program to maintain its fuel storage facilities in compliance with
environmental regulation. Under the program, the Company incurs costs to
replace tanks, remediate soil contamination resulting from overfills,
spills and leaks and monitor facilities on an ongoing basis. These costs
are recorded when it is probable that a liability has been incurred and
the related amount can be reasonably estimated. Such costs have not been
and are not expected to be material to the Company's operations or
liquidity.
Forward-Looking Statements
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Statements contained in and preceding management's discussion and
analysis, that are not purely historical, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995, including statements regarding the Company's expectations, hopes,
beliefs and intentions on strategies regarding the future. It is
important to note that the Company's actual future results could differ
materially from those projected in such forward-looking statements
because of a number of factors, including but not limited to, inflation,
adverse changes in demand for trucking services, availability of drivers
and fuel prices.
Page 7
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
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The Registrant's Annual Meeting of Stockholders was held on
May 4, 1998 for the purpose of electing a board of directors,
considering approval of the Company's 1998 Long-Term Incentive
Plan and conducting such other business that properly came before
the meeting. Proxies for the meeting were solicited pursuant to
Section 14(a) of the Securities Act of 1934 and there was no
solicitation in opposition to management's solicitations. The
proposals voted upon and the results of voting were as follows:
(1) Nominees for directors as listed in the proxy statement
were elected for a one year term with the following vote:
Votes Votes
For Withheld
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Thomas S. Kenan, III 1,868,363 27,325
Owen G. Kenan 1,868,163 27,525
Lee P. Shaffer 1,868,363 27,325
William C. Friday 1,868,263 27,425
William O. McCoy 1,868,363 27,325
Paul J. Rizzo 1,868,163 27,525
Braxton Schell 1,868,263 27,425
Kenneth G. Younger 1,868,263 27,425
(2) The proposal to approve the Company's 1998 Long-Term
Incentive Plan as described in the proxy statement was
approved with the following vote:
Shares voted for: 1,673,268
Shares voted against: 104,354
Shares abstaining: 4,110
Shares not voted: 113,956
Item 5. Other Information
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Unless notice of a matter to be presented by a shareholder
of the Company at the next Annual Meeting of Shareholders is
received at the Company's principal executive offices on or before
February 13, 1999, management's proxies for the meeting conferring
discretionary authority may be voted with respect to the matter
without indicating in the proxy statement how management intends
to exercise its discretion.
Item 6. 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 June 30, 1998:
Financial statement schedules and pro forma financial information
relating to the Registrant's acquisition of Petro-Chemical, Inc.
was filed on Form 8K/A, May 13, 1998.
Page 8
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: August 14, 1998 BY: /s/ William L. Boone
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Vice President-Finance and
Chief Financial Officer
Page 9
INDEX TO EXHIBITS
Exhibits filed as part of Part I of this report are listed below:
Exhibit
Number Description
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11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule for the 2nd Quarter 10-Q
Exhibits filed as part of Part II of this report are listed below:
Exhibit
Number Description
- --------- ----------------------------------------------------------
10 The 1998 Long-Term Incentive Plan, adopted by the
Registrant's Board of Directors on February 13, 1998 and
approved by shareholders on May 4, 1998 at the Annual
Meeting.
Page 10