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, 1998
-----------------
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
-------
KENAN TRANSPORT COMPANY
------------------------------------------------------
(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
------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including Area Code: (919) 967-8221
--------------
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. [X]
Based on the closing sales price of March 1, 1999, the aggregate market
value of the voting stock held by persons other than those who may be
deemed affiliates of the registrant was $31,493,948.
------------
The number of shares outstanding of the registrant's common stock was
2,421,562 at March 1, 1999.
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, 1999 in
connection with its Annual Meeting
to be held on May 3, 1999.
Page 2
PART I
Item 1. Business
-------------------------------------------------------------------------
(a) General Development of Business
Kenan Transport Company ("Kenan") and its wholly-owned subsidiary,
Petro-Chemical Transport, Inc. ("PCT")(together referred to as the
"Company" or the "Registrant") are engaged in the transportation of bulk
commodities in intrastate and interstate commerce. Kenan was incorporated
under the laws of the State of North Carolina on April 8, 1949.
Over the years, Kenan has grown to become one of the nation's
leading transporters of petroleum, propane gas and chemicals in the
country. Kenan entered 1998 with operations concentrated in the Southeast
and as one of the nation's 20 largest tank truck carriers in the country.
On February 28, 1998, Kenan acquired from Citgo Petroleum Corporation,
100% of the outstanding stock of PCT. PCT has significantly expanded the
Company's national presence and geographic service area. PCT operates a
nationwide inventory control and logistics management system from its
headquarters, located in Dallas, Texas. The system enables PCT to manage
gasoline inventories at retail locations for current and prospective
customers electronically and facilitates delivery of gasoline on an as-
needed basis to those locations. Kenan Transport Company is among the ten
largest tank truck carriers in the country. PCT accounted for 26% of the
Company's 1998 consolidated revenue.
(b) Financial Information About Industry Segments
For financial information reporting purposes, the Company is deemed
to engage in one industry segment, the transportation of petroleum,
propane gas and chemicals in the tank truck industry. The Company has no
geographic presence outside the United States.
(c) Narrative Description of Business
At December 31, 1998, the Company operated a network of terminals
and a fleet of 742 tractors and 1,047 specialized trailers. The Company
had 1,670 employees at year-end. One customer accounted for 19% of the
Company's revenue in 1998.
The Company's business involves transportation of petroleum,
propane gas and chemical products throughout the United States. Petroleum
and propane gas products are typically transported from bulk storage
facilities to local retail outlets. Chemical products are generally
transported longer distances to manufacturing locations.
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
-------------------------------------------------------------------------
The Company owns twenty real properties located in five states;
Florida, Georgia, North Carolina, South Carolina and Virginia. At
December 31, 1998, these properties had a net book value of $12,296,000.
Additionally, the Company leases twenty-two real properties located in
the Southeast and Texas, under terms of one to five years. The properties
are used for offices, terminals and vehicle maintenance facilities
supporting the operations of the Company.
The Company transports liquid products using over-the-road tractors
and tank trailers. At December 31, 1998, the net book value of the
Company's owned revenue equipment, consisting of 499 tractors and 986
trailers, was $39,042,000. Also in the Company's fleet were 64 tractors
and 40 trailers under capital lease agreements with a net book value of
$2,938,000. The balance of the Company's fleet, 179 tractors and 21
trailers, consists of equipment rented under operating lease agreements
with terms of one to six years and tractor capacity through independent
contractors who provide a tractor and bear all associated operating and
financing expenses.
Item 3. Legal Proceedings
-------------------------------------------------------------------------
There are no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------------------
No matters were submitted during the fourth quarter of 1998 to a
vote of security holders, through the solicitation of proxies or
otherwise.
Page 4
Item 4(a). Executive Officers of the Registrant
----------------------------------------------------------------------
Information concerning the executive officers of the Company
follows:
Name Age Position
-------------------- ---- ------------------------------------
Lee P. Shaffer 60 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 59 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 41 Vice President-Operations of the
Company beginning in 1999. Vice
President-Operations and Sales of
the Company (1994-1998); President
(1990-1994), Redwing Carriers, Inc.,
Tampa, Florida.
Gary J. Knutson 48 Vice President-Pricing and Business
Analysis of the Company beginning
in 1999. Vice President-Marketing
of the Company (1994-1998). Vice
President-Sales of the Company
(1990-1993).
John E. Krovic 43 Vice President-Human Resources and
Safety of the Company since 1993.
William P. Prevost 43 Vice President-Marketing beginning
in 1999. Vice President of the
Company (1998). President and Chief
Operating Officer (1986-1997),
Transport South, Inc., Smyrna,
Georgia.
James H. Reid 51 Vice President of the Company
beginning in 1998. President of
Petro-Chemical Transport, Inc.
beginning in 1997. President (1993-
1998), Citgo Pipeline & Products,
Tulsa, Oklahoma.
Page 5
Item 4(a). Executive Officers of the Registrant -continued-
----------------------------------------------------------------------
Name Age Position
-------------------- ---- ------------------------------------
Lee P. Shaffer, III (1) 39 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.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
-------------------------------------------------------------------------
The Registrant's stock trades on the Nasdaq stock market under the
symbol KTCO. The Company had approximately 623 shareholders, including
holders whose shares are held in street names, on December 31, 1998.
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:
1998 1997
--------------------------- ---------------------------
Quarter High Low Dividend High Low Dividend
-------- -------- ------- -------- -------- ------- --------
First $39.75 $28.5 $.07 $20.5 $18.5 $.0675
Second 35.38 32 .07 21 19 .0675
Third 34 29.5 .0725 22.75 19.75 .07
Fourth 33.25 29 .0725 41 22.25 .07
Page 6
Item 6. Selected Financial Data
- -------------------------------------------------------------------------
Selected financial data for the past five years is presented below:
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
Operations (in thousands)
- ---------------------------------
Operating revenue $130,046 $73,308 $68,795 $61,717 $59,100
Operating income 9,130 6,462 6,244 5,124 5,787
Net income (1) 5,159 4,090 3,805 3,323 3,682
Per Share Data
- ---------------------------------
Basic and diluted earnings (1)(2) $ 2.14 $ 1.71 $ 1.59 $ 1.39 $ 1.55
Dividends declared .2875 .2775 .2675 .2575 .2475
Book value 22.37 20.61 19.19 17.86 16.72
Market value 32.00 36.63 19.00 20.75 17.50
Financial Position (in thousands)
- ---------------------------------
Cash, cash equivalents and
short-term investments $ 8,023 $ 3,422 $11,181 $10,106 $13,759
Working capital 7,239 1,753 10,034 9,568 12,260
Net operating property 57,625 52,239 44,133 41,265 35,015
Total assets 94,644 77,115 65,044 61,188 57,625
Total debt, including
capital lease obligations 13,164 5,570 -- -- --
Shareholders' equity 54,180 49,368 45,843 42,677 39,771
Ratios and Statistics
- ---------------------------------
Operating ratio 93.0% 91.2% 90.9% 91.7% 90.2%
Return on equity (1) 10% 9% 9% 8% 9%
Current ratio 1.42 1.12 2.00 1.98 2.24
Debt equity ratio .24 .11 -- -- --
Shares outstanding (in thousands) 2,422 2,395 2,389 2,389 2,378
<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
-------------------------------------------------------------------------
General
The following table sets forth the percentage relationship of expense
items to operating revenue for the periods indicated.
Percentage of Operating Revenue
-------------------------------
Years Ended December 31 1998 1997 1996
-----------------------------------------------------------------------
Operating revenue 100.0% 100.0% 100.0%
Operating expenses
Wages and employee benefits 50.6 50.2 50.3
Fuel and other operating expenses 21.0 20.8 20.4
Depreciation and amortization 8.0 9.5 9.6
Taxes and licenses 5.4 6.1 6.2
Insurance and claims 3.9 3.7 3.6
Equipment rents 4.1 .9 .8
-------------------------------
Total operating expenses 93.0 91.2 90.9
-------------------------------
Operating income 7.0 8.8 9.1
Interest expense (.5) -- --
Other income and expenses, net .2 .2 --
Income tax expense (2.7) (3.4) (3.6)
-------------------------------
Net income 4.0 5.6 5.5
===============================
Results of Operations - 1998 Compared to 1997
---------------------------------------------
Operating revenue increased $56,738,000 (77%) in 1998 to $130,046,000
primarily as a result of Kenan's acquisitions of Transport South, Inc.
("TSI") on December 1, 1997 and Petro-Chemical Transport, Inc. ("PCT") on
February 28, 1998. Operating revenues attributable to the TSI and PCT
acquisitions were approximately $22,093,000 and $34,193,000, respectively
in 1998. Revenue from TSI was $2,300,000 in 1997. The average revenue per
mile increased to $1.71 from $1.55 in 1997. Miles operated increased 61%
to 76,232,000 in 1998.
Operating expenses increased $54,070,000 (81%) in 1998 to
$120,916,000. The increase was due in large part to the acquisitions of
TSI and PCT and the 61% increase in miles operated. Disproportional
increases occurred in driver wages, outside vendor maintenance and
equipment rents in 1998. The operating ratio, which represents operating
expenses as a percentage of operating revenues, increased from 91.2% in
1997 to 93.0% for the year ended December 31, 1998.
Page 8
Wages and employee benefits increased $29,041,000 (79%) in 1998 to
$65,845,000. As a percentage of revenue, wages and employee benefits
increased to 50.6% of revenue from 50.2% in 1997. Driver wages, the
Company's largest operating expense item, was impacted by volume and the
higher cost of driver wage programs associated with the PCT operation.
Driver wages and benefits increased 88% over the prior year.
Fuel and other operating expenses increased $12,038,000 (79%) in 1998
to $27,286,000. As a percentage of revenue, fuel and other operating
expenses increased slightly to 21.0% in 1998 compared to 20.8% in 1997.
Outside maintenance accounted for a $4,485,000 increase in operating
expenses. Maintenance of PCT tractors and trailers is generally
outsourced to support their widespread national operations. While fuel
costs were up $1,427,000 over 1997 levels due to the 61% increase in
miles operated, a 26% reduction in average fuel prices during the year
allowed fuel, as a percentage of revenue, to decrease to 4.6% of revenue
in 1998 from 6.2% in 1997. Communications expense was up $817,000 to
support PCT's on-board computer systems installed on its trucks.
Depreciation and amortization expenses increased $3,440,000 (49%) in
1998 to $10,402,000. As a percentage of revenue, depreciation and
amortization expense decreased to 8.0% in 1998 compared to 9.5% in 1997.
The relative decrease in depreciation, expressed as a percentage of
revenue, is due to the increase in leased equipment during 1998. The
majority of PCT tractors are operated under lease agreements.
Consequently, equipment rents increased $4,611,000 in 1998 to $5,269,000;
4.1% of revenue in 1998 from .9% in 1997.
Taxes and licenses increased $2,557,000 (57%) in 1998 to $7,039,000.
As a percentage of revenue, taxes and licenses decreased to 5.4% from
6.1% in 1997. The cost increase was primarily attributable to the
increase in fleet size. The reduction in costs as a percentage of revenue
is attributed to improved utilization and the favorable impact of leasing
as rent expense includes the cost of taxes and licenses on the leased
equipment.
Insurance and claims costs increased $2,383,000 (89%) in 1998 to
$5,075,000. As a percentage of revenue, insurance and claims expense
increased slightly to 3.9% of revenue in 1998 from 3.7% in 1997 which was
due in large part to increases in insurance premiums.
Interest expense was $762,000 in 1998 compared to $40,000 in 1997.
The average monthly balance of outstanding debt and capital lease
obligations was $10,124,000 in 1998 compared to $352,000 in 1997.
The Company's effective tax rate was 40.5% in 1998 compared to 38.0%
in 1997. The increase was primarily attributable to nondeductible
amortization expense related to intangible assets.
Page 9
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 $2,300,000 of additional business resulting
from the TSI acquisition on December 1, 1997, and $2,213,000 due to
growth in demand for transportation services. The average revenue per
mile decreased to $1.55 from $1.56 in 1996. 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,
and a 6% increase in depreciation and amortization expense. The operating
ratio increased from 90.9% to 91.2% for the year ended December 31, 1997.
Wages and employee benefits increased $2,224,000 (6%) in 1997 to
$36,804,000. Wages and employee benefits as a percentage of revenue were
50.2% compared to 50.3% in 1996. A 10% increase in driver wages was
offset by lower workers' compensation premiums and claims.
Fuel and other operating expenses increased $1,224,000 (9%) in 1997
to $15,248,000. As a percentage of revenue, fuel and other operating
expenses increased to 20.8% in 1997 from 20.4% in 1996. Although fuel
prices decreased 6% in 1997, equipment maintenance and other operating
expenses increased 18%.
Insurance and claims costs, taxes and licenses, depreciation and
amortization and equipment rents were unchanged as a percentage of
revenue in 1997 compared to 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.
The Company's effective tax rate was 38.0% in 1997 compared to 39.2%
in 1996. The decrease was primarily attributable to the Company's
investments in tax exempt securities in 1997.
Liquidity and Capital Resources
---------------------------------------------
At the end of 1998, cash and cash equivalents totaled $8,023,000, an
increase of $4,601,000 from the end of 1997. Working capital of
$7,239,000 increased $5,486,000 from year-end 1997, and the current ratio
was 1.42 compared to 1.12 in 1997. Working capital needs have generally
been met with cash flows from operations.
The continued growth of the Company's business has and will continue
to require significant investments in new revenue equipment. The Company
has financed revenue equipment purchases with cash flows from operations
and through capital lease agreements. Capital lease obligations totaled
$3,164,000 at December 31, 1998, of which $1,108,000 was classified as
current.
Page 10
On December 22, 1998, the Company entered into a lease commitment
(the "Lease Commitment") to facilitate the financing of tractors having
an expected acquisition cost of $3,921,000. The Lease Commitment expires
March 31, 1999 and provides repayment periods of 36, 48 and 60 months.
The interest rate is based on two-year Treasury Notes and the one-year
LIBOR rate as published by the Wall Street Journal on the funding date.
Net capital expenditures planned for 1999, including equipment to be
acquired under the Lease Commitment, will be approximately $17,000,000.
At December 31, 1998, the Company was committed to spend $7,400,000 for
revenue equipment in 1999. Management believes that cash flows from
operations, the Company's line of credit, and purchases through capital
leases will be sufficient to fund these planned expenditures as well as
1999 working capital requirements, expansion opportunities and other
corporate needs.
The Company's long-term debt, including current portion, increased to
$10,000,000 at December 31, 1998 from $2,500,000 at December 31, 1997.
The increase was attributable to the Company's acquisition of PCT on
February 28, 1998. The investment required a cash outlay of $7,880,000
and assumption of liabilities totaling $4,048,000. To finance the
acquisition, the Company borrowed $7,500,000 under its $20,000,000
unsecured line of credit agreement. The credit agreement matures March
2003, and stipulates that amounts borrowed in excess of $10,000,000 are
subject to certain repayment provisions.
Environmental Matters
The Company's operations require the storage of fuel for use in its
tractors in both underground and aboveground tanks. The Company has a
program to maintain its fuel storage facilities in compliance with
environmental regulation. Under the program, the Company incurs costs to
replace tanks, remediate soil contamination resulting from overfills,
spills and leaks and monitor facilities on an ongoing basis. These costs
are recorded when it is probable that a liability has been incurred and
the related amount can be reasonably estimated. Such costs have not been
and are not expected to be material to the Company's operations or
liquidity.
Year 2000
The Year 2000 issue is the result of computerized systems being
programmed to store and process data using a two digit field to represent
the year rather than a four digit field. As a result of the century
change, businesses are at risk for possible miscalculations or system
failures causing potentially causing disruptions in their operations.
Page 11
The Company has reviewed its Year 2000 issues and has completed an
assessment of its internal information technology systems and embedded
technology systems. The Company is currently upgrading those systems that
it found to have date related deficiencies and testing the implementation
of those solutions prior to any anticipated impact on its systems. Full
compliance is expected in the second quarter of 1999.
The Company's application software programs consist of both
internally developed programs and purchased software. The Company has
verified that substantially all of its internally developed programs are
Year 2000 compliant. All noncompliant purchased software has been
identified and is being upgraded. Most of these upgrades were covered by
the Company's existing maintenance with its vendors and did not result in
any incremental expense as a result of the Year 2000 issue.
The total hours and cost for remediation of internal information and
embedded technology systems are estimated to be 3,800 and $258,000,
respectively. As of December 31, 1998, the Company has incurred and
expensed approximately $103,000 related to Year 2000 readiness. These
cost estimates include internal and external labor for remediation and
testing of the Company's systems. Overall, management believes that the
cost will not be material and the Year 2000 will not pose significant
operational problems for the Company's internal systems.
As part of its Year 2000 initiative, the Company is surveying
selected third parties (vendors and customers) with whom it has material
relationships to determine the status of their Year 2000 compliance
programs. The goal is to ensure that no interruptions of service will
occur as a result of Year 2000 issues at those companies on which the
Company's business is materially dependent. To date, the Company's
investigations and assessments have not revealed a material third party
that is not expecting to be Year 2000 compliant. However, the costs and
timing of third party compliance is not within the Company's control. The
Company is presently unable to determine the potential effect on its
operations, liquidity and financial condition in the event material
vendors and customers are not Year 2000 compliant. The Company will
continue to monitor the progress of those third parties and formulate
contingency plans at the time that it believes a material vendor or
customer will not become Year 2000 compliant. While there can be no
assurance the Company will not be adversely affected by the Year 2000
issue, it is committed to ensuring that it is fully compliant.
Market Risk
Market risk is the potential loss arising from adverse changes in
market rates and prices, such as foreign currency rates, and other
relevant market rates or price changes. In the ordinary course of
business, Kenan is exposed to interest rate risks and the Company
regularly evaluates its exposure to this risk. The Company does not hold
or issue derivative instruments for trading purposes.
Page 12
At December 31, 1998, the Company has debt totaling $10 million and
an interest rate swap with a notional value of $7 million. The interest
rate swap effectively converts $7 million of the Company's outstanding
floating rate debt to fixed interest rate debt. For fixed rate debt,
interest rate changes affect the fair market value but do not impact
earnings or cash flows. For floating rate debt, interest rate changes
generally do not affect fair market values but do impact future earnings
and cash flows, assuming other factors are held constant.
The fair value of the interest rate swap agreement represents the
estimated receipts or payments that would be made to terminate the
agreement. At December 31, 1998, the Company would have paid
approximately $260,000 to terminate the agreement. Assuming a 100 basis
point reduction in the LIBOR interest rate curve, the fair value of the
interest rate swap agreement would decrease by approximately $268,000.
Forward-Looking Statements
Statements in this document that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the safe
harbor provided by Section 21E of the Securities Act of 1934 and Section
27A of the Securities Act of 1933. The Company cautions readers that such
"forward-looking statements," including without limitation, those
relating to the Company's future business prospects, revenues, working
capital, liquidity, capital needs, interest costs and income, wherever
they occur in this document or in other statements attributable to the
Company are estimates reflecting the best judgement of the Company's
senior management and involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by
the "forward-looking statements".
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, successfully increase
market share and effectively manage expense growth relative to revenue in
anticipation of pressure on gross margins; changes in governmental
regulation; changes in the trucking transportation and logistic
industries; and changes in the Company's labor relations or other
unforeseeable circumstances.
Disclosures concerning Year 2000 issues also contain forward-looking
statements that include assessments, timetables and cost estimates. The
incremental costs of the Year 2000 project and the time by which the
Company believes it will complete the Year 2000 modifications, as well as
new system initiatives that are Year 2000 compliant and third party
compliance, are based upon management's best estimates. There exists the
possibility that factors outside of management's control may have a
material impact on the Company operations.
Page 13
Item 8. Financial Statements and Supplementary Data
-------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders 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, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1998. 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, 1998 and 1997, and
the results of their operations and cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Raleigh, North Carolina,
February 19, 1999.
Page 14
KENAN TRANSPORT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
-------------------------
1998 1997
-------------------------------------------------------------------------
ASSETS
---------------------------------------------
Current Assets
Cash and cash equivalents $ 8,023 $ 3,422
Accounts receivable, net 10,441 8,020
Operating supplies and parts 572 521
Prepaid tires 1,851 1,471
Prepaid insurance, licenses and other 1,353 886
Deferred income taxes 2,164 1,747
-----------------------
Total Current Assets 24,404 16,067
Operating Property
Land 3,464 3,464
Buildings and leasehold improvements 11,412 10,968
Revenue equipment 72,703 65,974
Other equipment 6,490 4,755
-----------------------
94,069 85,161
Accumulated depreciation and amortization (36,444) (32,922)
-----------------------
Net Operating Property 57,625 52,239
Intangible Assets, net 10,944 7,559
Other Assets 1,671 1,250
-----------------------
$94,644 $77,115
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------
Current Liabilities
Current maturities of long-term debt $ -- $ 500
Capital lease obligations 1,108 995
Accounts payable 2,784 2,517
Wages and employee benefits payable 9,331 6,641
Claims payable 3,942 3,553
Income taxes currently payable -- 108
-----------------------
Total Current Liabilities 17,165 14,314
Long-term Debt 10,000 2,000
Capital Lease Obligations 2,056 2,075
Deferred Income Taxes 11,243 9,358
Shareholders' 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
Deferred incentive compensation (956) --
Retained earnings 50,736 46,272
-----------------------
54,180 49,368
-----------------------
$94,644 $77,115
=======================
The Notes to Consolidated Financial Statements are an integral part of
these balance sheets.
Page 15
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
Years Ended December 31
---------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
Operating Revenue $130,046 $73,308 $68,795
Operating Expenses
Wages and employee benefits 65,845 36,804 34,580
Fuel and other operating expenses 27,286 15,248 14,024
Depreciation and amortization 10,402 6,962 6,598
Taxes and licenses 7,039 4,482 4,261
Insurance and claims 5,075 2,692 2,502
Equipment rents 5,269 658 586
---------------------------------
120,916 66,846 62,551
---------------------------------
Operating Income 9,130 6,462 6,244
Interest expense (762) (40) (20)
Interest income and other expenses, net 301 174 30
---------------------------------
Income before Provision for Income Taxes 8,669 6,596 6,254
Provision for income taxes 3,510 2,506 2,449
---------------------------------
Net Income $ 5,159 $ 4,090 $ 3,805
=================================
Basic and Diluted Earnings per Share $ 2.14 $ 1.71 $ 1.59
=================================
The Notes to Consolidated Financial Statements are an integral part of
these statements.
Page 16
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Total
---------------- Retained Deferred Shareholders'
Shares Amount Earnings Compensation Equity
--------------------------------------------------------
Balance, December 31, 1995 2,389 $2,996 $39,681 $ -- $42,677
Dividends (639) (639)
Net income 3,805 3,805
--------------------------------------------------------
Balance, December 31, 1996 2,389 2,996 42,847 -- 45,843
Dividends (665) (665)
Stock bonus award 6 100 100
Net income 4,090 4,090
--------------------------------------------------------
Balance, December 31, 1997 2,395 3,096 46,272 -- 49,368
Dividends (695) (695)
Stock bonus award 6 197 197
Issuance of restricted stock 21 696 (696) --
Nonqualified stock option
award 411 (411) --
Recognition of deferred
compensation 151 151
Net income 5,159 5,159
--------------------------------------------------------
Balance, December 31, 1998 2,422 $4,400 $50,736 $(956) $54,180
========================================================
The Notes to Consolidated Financial Statements are an integral part of
these statements.
Page 17
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31
---------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 5,159 $ 4,090 $ 3,805
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,402 6,962 6,598
Deferred income taxes 390 171 551
Common stock issued under incentive plan 197 100 --
Amortization of deferred compensation 151 -- --
Other, net (401) (393) (246)
Changes in operating assets and liabilities
net of effects from business acquisitions:
Accounts receivable (478) (3,032) (43)
Operating supplies and parts (51) (108) 93
Prepayments (259) (152) 146
Accounts payable (784) 796 288
Wages and employee benefits payable 1,225 1,380 988
Claims payable 389 144 (744)
Income taxes currently payable (83) 56 (256)
--------------------------------
Net cash provided by operating activities 15,857 10,014 11,180
Cash Flows from Investing Activities:
Purchases of operating property, net (8,267) (8,037) (9,466)
Business acquisitions (7,880) (11,446) --
Sales of short-term investments, net -- -- 6,886
--------------------------------
Net cash used in investing activities (16,147) (19,483) (2,580)
Cash Flows from Financing Activities:
Borrowings under line of credit agreement 7,500 2,500 --
Payments on note obligations (375) -- --
Principal payments on capital lease obligations (1,539) (125) --
Dividends (695) (665) (639)
--------------------------------
Net cash provided by (used in) financing activities 4,891 1,710 (639)
--------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 4,601 (7,759) 7,961
Cash and Cash Equivalents at Beginning of Year 3,422 11,181 3,220
--------------------------------
Cash and Cash Equivalents at End of Year $ 8,023 $ 3,422 $11,181
================================
Noncash Investing and Financing Activities:
Liabilities assumed in business acquisitions $ 4,048 $ 3,619 $ --
Equipment acquired through capital leases 1,633 -- --
Supplemental Cash Flow Disclosures:
Interest paid $ 597 $ 38 $ 21
Income taxes paid 3,228 2,279 2,154
The Notes to Consolidated Financial Statements are an integral part of these statements.
Page 18
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 ("Kenan")
and its wholly-owned subsidiary, Petro-Chemical Transport,
Inc.("PCT")(together referred to as the "Company.") 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.
Certain reclassifications have been made to the 1997 and 1996 previously
reported consolidated financial statements.
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, 1998 and 1997 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 retained and paid by the Company under its insurance programs for
workers' compensation, group medical, bodily injury and property damage.
This estimate is 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 this estimate to change. In
the accompanying consolidated statements of income, workers' compensation
costs are included in wages and employee benefits expenses, and other
claims costs are included in claims and insurance expenses.
Page 19
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.
Recently Issued Accounting Standards - In June 1998, the Financial
Accounting Standards Board issued Statement No. 133, "Accounting for
Derivatives and for Hedging Activities." Statement No. 133 requires that
upon adoption, all derivative instruments be recognized in the balance
sheet at fair value, and that the changes in such fair values be
recognized in earnings unless specific hedging criteria are met. The
Company will adopt Statement No. 133 on January 1, 2000. The application
of Statement No. 133 is not expected to have a significant impact on the
Company's financial position or results of operations.
Note 2 - Earnings Per Share
---------------------------------------------------------------
In 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share" that 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, 1998,
1997 and 1996 is summarized in the table below (in thousands except per
share amounts):
1998 1997 1996
-------------------------------
Net income $5,159 $4,090 $3,805
===============================
Beginning shares outstanding 2,395 2,389 2,389
Shares issued under executive
incentive plans 19 6 --
-------------------------------
Basic shares outstanding 2,414 2,395 2,389
Shares earned under executive
incentive plan -- 1 1
Dilutive effect of stock options 1 -- --
-------------------------------
Diluted shares outstanding 2,415 2,396 2,390
===============================
Basic and diluted earnings per share $ 2.14 $ 1.71 $ 1.59
===============================
Page 20
Note 3 - Business Acquisitions
---------------------------------------------------------------
On December 1, 1997, Kenan purchased the majority of the
transportation assets of Transport South, Inc. ("TSI") for $11,446,000 in
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, Kenan acquired 100% of the outstanding stock of
Petro-Chemical Transport, Inc. ("PCT"), a wholly-owned subsidiary of
CITGO Petroleum Corporation. PCT is a tank truck carrier serving the
petroleum industry in the Southeast, Midwest and on the West Coast. The
acquisition, net of cash acquired, required a cash investment totaling
$7,880,000. The Company financed the acquisition through its line of
credit facility.
The acquisitions have been accounted for using the purchase method of
accounting. The accompanying consolidated statements of income include
the results of operations of TSI from December 1, 1997 and the results
of operations of PCT from February 28, 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) totaled $11,519,000 and is included in intangible
assets in the accompanying consolidated balance sheets and is being
amortized over an average of 20 years on a straight-line basis.
Goodwill at December 31, 1998 and 1997 was $11,519,000 and
$7,591,000, respectively. Amortization expense was $543,000 in 1998 and
$32,000 in 1997. Accumulated amortization at December 31, 1998 and 1997
was $575,000 and $32,000, respectively. The carrying amount of goodwill
is reviewed annually using estimated undiscounted cash flows for the
businesses acquired over the remaining amortization periods.
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
(in thousands except per share amounts).
Pro-Forma Information (unaudited)
-------------------------------------------------------------------
Years Ended December 31
-----------------------
1998 1997
-----------------------
Revenue $136,884 $137,719
Net income 5,338 6,124
Basic and diluted earnings per share 2.21 2.56
Page 21
Note 4 - Long-term Debt
---------------------------------------------------------------
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.
On February 13, 1998, the Company negotiated an unsecured $20,000,000
Reducing Line of Credit Facility with a bank. The agreement replaced the
Company's previous $7,000,000 line of credit. Funds available under the
line reduce $500,000 per quarter beginning July 1, 1998 to a minimum line
of $10,000,000. The agreement matures in March 2003. Interest under the
agreement is at variable rates based on LIBOR plus an applicable margin.
At December 31, 1998, the Company had $10,000,000 outstanding under the
new credit facility. The credit agreement contains various financial
covenants which the Company was in compliance with at December 31, 1998.
On February 27, 1998, the Company entered into a simple interest rate
swap agreement to manage interest costs and risks associated with
changing interest rates. The agreement effectively changes a portion of
the Company's interest rate exposure on the line of credit from a
floating rate to a fixed rate. The agreement matures in March 2003. At
December 31, 1998, the notional principal amount of this agreement
totaled $7,000,000. The Company does not hold or issue derivative
instruments for trading purposes.
The Company agrees to exchange at specific intervals, the difference
between fixed-rate and variable-rate interest amounts calculated by
reference to the notional amount with any differential recorded as an
adjustment to interest expense. The average variable-rate during 1998 was
5.6% compared to a fixed-rate of 6.5%
Note 5 - Fair Value of Financial Instruments
---------------------------------------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents, trade receivables, short-term borrowings
and current portion of capital lease obligations: The carrying
amounts approximate fair value.
Long-Term Debt: The fair values approximate carrying value based on
quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining
maturities.
Interest rate swaps: The fair value of the Company's interest rate
swap agreement was based on the contract value obtained from the
financial institution, the counterparty to the agreement. The fair
market value of the Company's interest rate swap agreement represents
the estimated receipts or payments that would be made to terminate
the agreement. At December 31, 1998, the Company would have paid
approximately $260,000 to
Page 22
terminate the agreement. The Company uses an interest rate swap
agreement to manage exposure to interest rate fluctuations.
Letters of credit: The Company utilizes third party letters of credit
to guarantee certain casualty insurance activities. The letters
reflect fair value as a condition of their underlying purpose and are
subject to fees competitively determined in the marketplace. The
contract/fair value of the letters of credit at December 31, 1998 and
1997 were $3,554,000 and $2,666,000, respectively.
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, 1998 and 1997 were as follows (in thousands):
1998 1997
--------------------
Liabilities
Depreciation $11,944 $10,012
Prepaid tires 703 558
Other 557 429
--------------------
Deferred tax liabilities 13,204 10,999
Assets
Claims payable 1,497 1,349
Capital lease obligations 1,201 1,165
Employee benefits 1,101 701
Other 326 173
--------------------
Deferred tax assets 4,125 3,388
--------------------
Net deferred tax liability $ 9,079 $ 7,611
====================
The provision for income taxes consist of the following (in
thousands):
1998 1997 1996
-------------------------------
Currently payable
Federal $2,650 $1,949 $1,568
State 470 386 330
-------------------------------
3,120 2,335 1,898
Deferred 390 171 551
-------------------------------
$3,510 $2,506 $2,449
===============================
Page 23
The statutory federal income tax rates differ from the effective
income tax rates as follows:
1998 1997 1996
-------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) in tax rate
resulting from:
State income taxes, net of federal
tax benefit 4.2 4.1 4.0
Other items, net 2.3 (.1) 1.2
-------------------------------
Effective income tax rate 40.5% 38.0% 39.2%
===============================
Note 7 - Leases, Other Commitments and Contingencies
---------------------------------------------------------------
Certain terminal facilities, office space and equipment, and revenue
equipment are rented under operating leases expiring at various dates
through 2006. Rent expense charged against income for years ended
December 31, 1998, 1997 and 1996 was $5,269,000, $658,000 and $586,000,
respectively.
Revenue equipment financed by capital leases is included in operating
property as follows (in thousands):
December 31
-------------------
1998 1997
-------------------
Revenue equipment $3,396 $2,576
Less accumulated amortization 458 67
-------------------
Net capital lease assets $2,938 $2,509
===================
The following is a schedule by year of future minimum lease payments
at December 31, 1998 (in thousands):
Capital Operating
Leases Leases
-------------------
1999 $1,275 $1,776
2000 643 525
2001 600 393
2002 402 53
2003 700 29
Thereafter -- 66
-------------------
Total minimum lease payments 3,620 $2,842
Less amount representing ========
interest at 5% to 7% and taxes 456
--------
Present value of net minimum
lease payments 3,164
Less current portion 1,108
--------
Long-term obligations $2,056
========
Page 24
On December 22, 1998, the Company entered into a lease commitment
(the "Lease Commitment") to facilitate the financing of tractors having
an expected acquisition cost of $3,921,000. The Lease Commitment expires
March 31, 1999 and provides repayment periods of 36, 48 and 60 months.
The interest rate is based on two-year Treasury Notes and the one-year
LIBOR rate as published by the Wall Street Journal on the funding date.
At December 31, 1998, the Company had $2,300,000 remaining under the
commitment.
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 Compensation
Committe of the Board of Directors. The Plan is funded currently and
contributions expensed were $2,004,000 (1998), $1,349,000 (1997) and
$1,173,000 (1996).
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 $179,000
(1998), $143,000 (1997) and $127,000 (1996).
Note 9 - Incentive Plans
---------------------------------------------------------------
1994 Stock Bonus Plan
---------------------
In 1994, the Company implemented the 1994 Stock Bonus Plan (the
"1994 Plan") that provided key employees with an opportunity to earn up
to 56,600 shares of common stock over a ten-year period if targeted
increases in net income were attained. On August 3, 1998, the 1994 Plan
was terminated. Under the 1994 Plan, 5,283 shares of stock were earned in
1996 and issued in March of 1997 increasing common stock by $100,000 in
1997. There were 5,682 shares of stock earned in 1997 and issued in 1998
increasing common stock by $197,000. A total of 22,123 shares was issued
under the 1994 Plan. 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 1994 Plan was
recognized in the year earned.
Page 25
1998 Long-Term Incentive Plan
-----------------------------
On May 4, 1998, shareholders approved the Company's 1998 Long-Term
Incentive Plan (the "1998 Plan"), which is intended to provide long-term
incentives for key employees while encouraging optimum growth in Company
profits. The 1998 Plan provides for grant awards in the form of stock
options, stock appreciation rights, restricted stock and performance
shares of up to 450,000 shares of common stock.
Stock Options
-------------
Under the 1998 Plan, options to purchase shares of common stock may
be granted at not less than 100% of the fair market value at the date of
grant, or 110% of fair market value in the case of any employee who holds
more than 10% of the combined voting power of the Company's common stock
as of the date of grant if the option is designated as an incentive
option. Options have a ten-year term with vesting periods of one to five
years from the date of the grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees."
During the first quarter of 1998, 328,900 nonqualified stock options
were awarded to key employees. Between the date of the grant and approval
of the 1998 Plan at the May 4, 1998, Annual Meeting of Shareholders, the
price of the Company's stock increased $1.25 per share. Under APB Opnion
No. 25, the Company recognizes compensation expense for any difference
between fair market value and exercise price at the date of grant over
the five-year vesting period. The unearned compensation is shown as a
reduction of shareholders' equity in the accompanying consolidated
balance sheets. Compensation expense relating to the stock options
totaled $55,000 in 1998.
A summary of the Company's stock option activity and related
information for the year ended December 31, 1998 is as follows:
1998
---------------------------
Options Weighted-Average
(000's) Exercise Price
---------------------------
Outstanding, beginning of year 0
Granted 329 $32
Exercised 0
Forfeited 0
---------------------------
Outstanding, end of year 329 $32
===========================
Page 26
The following is a summary of options outstanding as of December 31,
1998:
Outstanding Options Exercisable Options
-------------------------------- -------------------
Weighted-Average
----------------------- Weighted
Remaining Average
Exercise Number Contractual Exercise Number Exercise
Price Range (000's) Life Price (000's) Price
----------------------------------------------------------------------
$31.75 - $32.00 329 10 years $32 0 --
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123 and has been determined as if the
Company had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated
at the date of the grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: volatility factor of 23.9%;
weighted-average expected life of options of 3.5 years; risk-free
interest rate of 5.42% - 5.63%; dividend yield of 1%. Using these
assumptions, the fair value of stock options granted in 1998 is
$2,706,000, or $8.23 per share that would be amortized as compensation
over the five-year vesting period. Had compensation cost relating to
options awarded under the Plan been determined based upon the fair market
value at the grant date consistent with the method described in SFAS 123,
the Company's pro forma net income and earnings per share would have been
as follows:
1998
---------------------------------------------------------------
Pro forma net income (in thousands) $4,698
Pro forma basic and diluted earnings per share $ 1.95
The option valuation models require the input of highly subjective
assumptions. In management's opinion, the models do not necessarily
provide a reliable single measure of the fair value of stock options.
Restricted Stock
----------------
During the first quarter of 1998, the Company awarded 21,100 shares
of restricted stock to executive officers under the 1998 Plan. Plan
participants are entitled to cash dividends and to vote their respective
shares. The sale or transfer of the shares is limited during the
restricted period. The value of such stock was established by the market
price on the date of grant. Restrictions on the shares expire ratably
over a five-year vesting period.
Page 27
Unearned compensation was charged for the market value of the
restricted shares as these shares were issued. The unearned compensation
is shown as a reduction of shareholders' equity in the accompanying
consolidated balance sheets and is being amortized ratably over the
restricted period. During 1998, $96,000 was charged to expense relating
to the restricted stock awards.
Note 10 - Nature of Business and Concentration of Credit Risk
---------------------------------------------------------------
The Company transports commodities in bulk for the petroleum and
chemical industries throughout the United States, and its customers
include international corporations in these industries. A single customer
accounted for 19% of the Company's revenue in 1998. In 1997 and 1996, a
single customer accounted for 11% of the Company's revenue. 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 $425,000 and $313,000 at December
31, 1998 and 1997, respectively, to cover estimated credit losses.
The Company operates in one industry segment: the transportation of
petroleum, propane gas and chemicals in the tank truck industry.
Note 11 - Summary of Quarterly Financial Information (Unaudited)
---------------------------------------------------------------
(In thousands) Basic and
--------------------------------- Diluted
Operating Operating Net Earnings
Quarter Revenue Income Income Per Share
-------------------------------------------------------------------------
1998
First $28,481 $2,031 $1,175 $.49
Second 34,107 2,178 1,154 .48
Third 34,104 2,213 1,241 .51
Fourth 33,354 2,708 1,589 .66
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
Page 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
-------------------------------------------------------------------------
None
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, 1999 for the Annual
Meeting of Shareholders to be held May 3, 1999, 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, 1999 for the Annual Meeting of Shareholders to be held
May 3, 1999, 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, 1999
for the Annual Meeting of Shareholders to be held May 3, 1999, 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, 1999 for the Annual Meeting of Shareholders to be held May 3, 1999,
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, 1999 for the Annual
Meeting of Shareholders to be held May 3, 1999, is incorporated herein by
reference.
Page 28
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
Consolidated 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
-------------------
No reports on Form 8-K have been filed by the Registrant
during the last quarter of the period covered by this report.
Page 30
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 22, 1999
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 22, 1999
------------------------ Secretary; Treasurer
William L. Boone
Controller or Principal
Accounting Officer:
/s/ J. Earl Cowan Controller March 22, 1999
------------------------
J. Earl Cowan
Page 31
Signature Title Date
------------------------ -------------------------- ---------------
Directors:
/S/ Thomas S. Kenan, III Chairman of the Board March 22, 1999
------------------------ of Directors
Thomas S. Kenan, III
/S/ Owen G. Kenan Vice Chairman of the March 22, 1999
------------------------ Board of Directors
Owen G. Kenan
/S/ William O. McCoy Director March 22, 1999
------------------------
William O. McCoy
/S/ Paul J. Rizzo Director March 22, 1999
------------------------
Paul J. Rizzo
/S/ William C. Friday Director March 22, 1999
------------------------
William C. Friday
/S/ Braxton Schell Director March 22, 1999
------------------------
Braxton Schell
/S/ Kenneth G. Younger Director March 22, 1999
------------------------
Kenneth G. Younger
Page 32
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 14
Consolidated Balance Sheets - December 31, 1998 and 1997 15
Consolidated Statements of Income -
For the Years Ended December 31, 1998, 1997 and 1996 16
Consolidated Statements of Shareholders' Equity -
For the Years Ended December 31, 1998, 1997 and 1996 17
Consolidated Statements of Cash Flows -
For the Years Ended December 31, 1998, 1997 and 1996 18
Notes to Consolidated Financial Statements 19-28
Page 33
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.
Page 34
INDEX TO EXHIBITS - continued -
Exhibit No. Description
----------- ---------------------------------------------------------
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.
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(h)
10(a) 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(b) 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(c) 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 35
INDEX TO EXHIBITS - continued -
Exhibit No. Description
----------- ---------------------------------------------------------
10(d) 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.
10(e) 1998 Long-Term Incentive Plan, effective January 29,
1998, filed as Exhibit 10 to the Registrant's Form 10-Q
Quarterly Report for the quarter ended June 30, 1998,
which is incorporated herein by reference to such Form
10-Q.
10(f) Amendment to the 1998 Long-Term Incentive Plan, effective
January 1, 1999.
10(g) Amendment to the Senior Managers' Life Insurance Plan,
effective January 1, 1999.
10(h) Executive Bonus Award Plan, effective January 1, 1999.
Material Contracts Exhibits 10(i) - 10(k)
10(i) 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(j) Loan Agreement between First Union National Bank and the
Registrant dated February 13, 1998, filed as Exhibit
10(h) to the Registrant's Form 10-K for the year ended
December 31, 1997, which is incorporated herein by
reference to such Form 10-K.
10(k) Promissory Note between First Union National Bank and the
Registrant dated February 13, 1998, filed as Exhibit
10(i) to the Registrant's Form 10-K for the year ended
December 31, 1997, which is incorporated herein by
reference to such Form 10-K.
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants.
27 Financial Data Schedule for the year ended December 31,
1998.
Page 36