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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-5083
KANEB SERVICES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 74-1191271
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------- -----------------------
Common Stock, Without Par Value New York Stock Exchange
8 3/4% Convertible Subordinated New York Stock Exchange
Debentures due 2008
Securities registered pursuant to Section 12(g) of the Act: None
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 (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of 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 ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant: $178,939,194. This figure is estimated as of March 23, 2001, at
which date the closing price of the Registrant's Common Stock on the New York
Stock Exchange was $6.00 per share, and assumes that only the Registrant's
officers and directors were affiliates of the Registrant.
Number of shares of Common Stock, without par value, of the Registrant
outstanding at March 23, 2001: 31,143,777.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is incorporated by reference from portions of the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year covered by this Report.
PART I
Item 1. Business
GENERAL
Kaneb Services, Inc. ("Kaneb" or the "Company") conducts its principal
businesses in two industry segments, specialized technical services and
information technology services. The technical services and information
technology services segments operate through wholly-owned subsidiaries of
Furmanite Worldwide, Inc. and Kaneb Information Services, Inc., respectively.
Furmanite Worldwide, Inc., and its domestic and international subsidiaries and
affiliates (collectively, "Furmanite"), provide specialized technical services,
including leak sealing under pressure, on-site machining, valve testing and
repair and other engineering products and services, primarily to electric power
generating plants, petroleum refineries and other process industries in the
United Kingdom, Continental Europe, North America, Latin America and
Asia-Pacific. See - "Technical Services." Kaneb Information Services, Inc. is
engaged in the information management services industry through its wholly-owned
subsidiaries, which offer products and services that, among other functions,
provide consulting services and computer hardware to federal and state
governmental agencies and private sector customers, provide consulting services
to hospitals and hospital networks implementing telemedicine systems and enable
financial institutions to monitor the insurance coverage of their loan
collateral. See "Information Technology Services."
In addition to the above operations, the Company also has (i) pipeline
and terminaling and (ii) product marketing segments the Company plans to
distribute to its shareholders through a distribution of interests in a newly
formed limited liability company, Kaneb Services LLC ("KSL"). The pipeline and
terminaling and product marketing segments operate and manage refined petroleum
products pipeline transportation systems and petroleum products and specialty
liquids terminal storage facilities and provide wholesale motor fuel marketing
services throughout the Great Lakes and Rocky Mountain regions and in
California. KSL operations have been classified as "Discontinued Operations -
Businesses to be Distributed to Common Shareholders" in the accompanying
consolidated financial statements.
Kaneb was incorporated in Delaware on January 23, 1953. The Company's
principal operating office is located at 2435 North Central Expressway,
Richardson, Texas 75080 and its telephone number is (972) 699-4000.
OPERATING SEGMENTS
Financial information regarding the Company's operating segments and
foreign operations is presented under the caption "Business Segment Data" in
Note 9 to the Company's consolidated financial statements. Such information is
hereby incorporated by reference into this Item 1.
TECHNICAL SERVICES
The Furmanite group of companies offers specialized technical services
to an international base of clients. Founded in Virginia Beach, Virginia in the
1920s as a manufacturer of leak sealing kits, Furmanite Worldwide, Inc. has
evolved into an international service company that provides technical and
technology solutions. In the 1960s, Furmanite expanded within the United
Kingdom, primarily through its leak sealing products and services, and, during
the 1970's and 1980's, grew through geographic expansion and the addition of new
techniques, processes and services to become one of the largest leak sealing and
on-site machining companies in the world. The Company acquired Furmanite in 1991
to diversify the Company's operations and pursue international growth
opportunities. For the year ended December 31, 2000, Furmanite's revenues and
operating income were approximately $92.1 million and $6.3 million,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Products and Services
Furmanite provides on-line repairs of leaks ("leak sealing") in valves,
pipes and other components of piping systems and related equipment typically
used in flow-process industries. See "Customers and Markets." Other services
provided by Furmanite include on-site machining, bolting and valve testing and
repair on such systems and equipment. These services tend to complement
Furmanite's leak sealing service, since these "turnaround services" are usually
performed while a plant or piping system is off-line. In addition, Furmanite
provides hot tapping, fugitive emissions monitoring, passive fire protection,
concrete repair and heat exchanger repair. Furmanite also performs diagnostic
services on valves and motors by, among other methods, utilizing its patented
Trevitest(R) system and employing proprietary diagnostic equipment under license
from Framatome Technologies. In performing these services, Furmanite technicians
generally work at the customer's location, frequently responding on an emergency
basis. Over its history, Furmanite has established a reputation for delivering
quality service and helping its customers avoid or delay costly plant or
equipment shutdowns. For each of the years ended December 31, 2000, 1999, and
1998, under pressure services represented approximately 42%, 40% and 38%,
respectively, of Furmanite's revenues, while turnaround services accounted for
approximately 48%, 45% and 46%, respectively, and product sales and other
industrial services represented approximately 10%, 15% and 16%, respectively, of
Furmanite's revenues for each of such years.
Furmanite's on-line, leak sealing under pressure services are performed
on a variety of flow-process industry machinery, often in difficult situations.
Many of Furmanite's techniques and materials are proprietary and/or patented
and, the Company believes, provide Furmanite with a competitive advantage over
other organizations that provide similar services. Furmanite holds approximately
200 patents and trademarks for its techniques, products and materials. These
patents, which are registered in jurisdictions around the world, expire on dates
ranging from October 2001 to December 2012. Furmanite's skilled technicians work
with equipment in a manner designed to enhance safety and efficiency in
temperature environments ranging from cryogenic to 1,400 degrees Fahrenheit and
pressure environments ranging from vacuum to 5,000 pounds per square inch. In
many circumstances, Furmanite personnel are called upon to custom-design tools,
equipment or other materials to effect the necessary repairs. These efforts are
supported by an internal quality control group that works with the on-site
technicians in crafting these materials.
Customers and Markets
Furmanite's customer base includes petroleum refineries, chemical
plants, offshore energy production platforms, steel mills, nuclear power
stations, conventional power stations, pulp and paper mills, food and beverage
processing plants and other flow-process facilities in more than 25 countries.
Over 80% of Furmanite's revenues are derived from fossil and nuclear fuel power
generation companies, petroleum refiners and chemical producers, while other
significant markets include offshore oil producers and steel manufacturers. As
the worldwide industrial infrastructure continues to age, additional repair and
maintenance expenditures are expected to be required for the specialized
services provided by Furmanite and similarly situated organizations. Other
factors that may influence the markets served by Furmanite include regulations
governing construction of industrial plants, and safety and environmental
compliance requirements. No single customer accounted for more than 10% of this
segment's consolidated revenue during any of the past three fiscal years.
Furmanite believes that it is the most recognized brand in its
industry. With its 65-year history, Furmanite's customer relationships are
long-term and worldwide. Furmanite serves its customers from its Houston, Texas
worldwide headquarters and maintains a substantial presence in the United
Kingdom, Continental Europe and the Asia-Pacific. Furmanite currently operates
North American offices in the United States in Baton Rouge, Beaumont, Charlotte,
Chicago, Houston, Merrillville and Salt Lake City. Furmanite's worldwide
operations are further supported by offices currently located in Australia (6
locations), Belgium, China, France, Germany, Hong Kong, Malaysia, the
Netherlands, New Zealand, Norway, Singapore and the United Kingdom (6 locations)
and by licensee, agency and/or minority ownership interest arrangements in
Argentina, Brazil, Chile, Croatia, Cyprus, Czech Republic, Egypt, Finland,
Hungary, India, Indonesia, Italy, Japan, Kuwait, Macedonia, Poland, Portugal,
Puerto Rico, Saudi Arabia, Slovak Republic, Korea, Sweden, Thailand, Trinidad,
Ukraine, the United Arab Emirates and Venezuela. Sales by major geographic
region for 2000 were 34% for the United States, 55% for Europe and 11% for
Asia-Pacific. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 9 to the Company's consolidated financial
statements.
Furmanite's leak sealing under pressure and other specialty field
services are marketed primarily through direct sales calls on customers by
salesmen and technicians based at Furmanite's various operating locations, which
are situated to facilitate timely customer response, 24 hours a day, seven days
a week. Customers are usually billed on a time and materials basis for services
typically performed pursuant to either job quotation sheets or purchase orders
issued under written customer agreements. Customer agreements are generally
short-term in duration and specify the range of and rates for the services to be
performed. Furmanite typically provides various limited warranties, depending
upon the services furnished, and has had no material warranty claims during the
three years ended December 31, 2000. Furmanite competes on the basis of service,
product performance and price, generally on a localized basis with smaller
companies and the in-house maintenance departments of its customers or potential
customers. In addition to staff reductions and the trend toward outsourcing,
Furmanite believes it currently has an advantage over in-house maintenance
departments because of the ability of its multi-disciplined technicians to use
Furmanite's proprietary and patented techniques to perform quality repairs on a
timely basis while customer equipment remains in service.
Safety, Environmental and Other Regulatory Matters
Many aspects of Furmanite's operations are subject to governmental
regulation. National, state and local authorities of the U.S. and various
foreign countries have each adopted safety, environmental and other regulations
relating to the use of certain methods, practices and materials in connection
with the performance of Furmanite's services and which otherwise affect its
operations. Further, because of its international operations, Furmanite is
subject to a number of political and economic risks, including taxation
policies, labor practices, currency exchange rate fluctuations, foreign exchange
restrictions, local political conditions, import and export limitations and
expropriation of equipment. Except in certain developing countries, where
payment in a specified currency is required by contract, Furmanite's services
are paid, and its operations are typically funded, in the currency of the
particular country in which its business activities are conducted. Furmanite's
operating results were impacted by foreign currency devaluations during the year
ended December 31, 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Leak sealing under pressure and other Furmanite services are often
performed in emergency situations under circumstances involving exposure to high
temperatures and pressures, potential contact with caustic or toxic materials,
fire and explosion hazards and environmental contamination, any of which can
cause serious personal injury or property damage. Furmanite manages its
operating risks by providing its technicians with extensive on-going classroom
and field training and supervision, maintaining a technical support system
through its staff of specialists, establishing and enforcing strict safety and
competency requirements, standardizing procedures and evaluating new materials
and techniques for use in connection with its lines of service. Furmanite also
maintains insurance coverage for certain risks, although there is no assurance
that insurance coverage will continue to be available at rates considered
reasonable or that the insurance will be adequate to protect the Company against
liability and loss of revenues resulting from the consequences of a significant
accident.
INFORMATION TECHNOLOGY SERVICES
Kaneb Information Services, Inc., together with its wholly owned
subsidiaries (collectively, "KIS"), provides a suite of information technology
services and related products to the U.S. Government and commercial sectors. The
segment's primary business is information technology services - consulting,
design, development, integration and maintenance - for database management,
web-based, wireless and telemedicine applications. KIS also provides these
services in voice and data networks, and network security systems. For the year
ended December 31, 2000 the information services segment's revenues and
operating income were $35.5 million and $4.1 million, respectively. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations". A substantial portion of the revenues of this business segment are
attributable to contracts with agencies of the U.S. Government. KIS manages its
businesses from its headquarters in Richardson, Texas, and maintains offices in
Bryan, Texas, Chantilly, Manassas and McLean, Virginia, and Frederick, Maryland.
Products and Services
Database Management Services
KIS provides comprehensive database management services to the
financial industry and to the U.S. Government sector. These services include
consulting, design, development and integration of database management
applications, as well as database monitoring and customized reporting.
KIS developed and licenses a database management application for
financial institutions, primarily community banks. The application supports
internal accounting; tracking, monitoring, analyzing and managing loans and
deposits; and other banking functions. KIS also developed and licenses a
professional lending system to loan companies, and an automated contingency
planning system for disaster recovery to commercial banks. These applications
are licensed on a per-user basis annually. KIS has recently expanded its market
for similar data management applications and services to the equipment leasing
industry.
In addition to its software applications, KIS provides a full suite of
services to the financial industry, including consultation on database
requirements, development of applications and systems, as well as ongoing
maintenance, reporting and support. KIS charges monthly fees to its customers
for these services. As part of its services offering, KIS monitors, on behalf of
its customers, the status of insurance coverage on automobiles pledged as loan
collateral and flood insurance on homes. It coordinates communications among
financial institutions, insurance companies and borrowers regarding the status
of insurance coverage protecting the financial institution's loan collateral.
KIS uses its own software to cross-collate databases and generate reports for
lenders and insurance companies, charging monthly fees to its customers. Some
customers also pay fees to KIS in instances where KIS's services result in the
issuance of an insurance policy to replace lapsed coverage. KIS believes that
the market for these services is fragmented among a number of small competitors,
and that competition in this market is primarily based upon the quality of the
service provided.
In the U.S. Government sector, KIS provides database management
applications and services for the Head Start program of the Department of Health
and Human Services. KIS contracts for these services on renewable annual
contracts, with pricing based principally on its General Services Administration
Schedule ("GSA Schedule").
Web-related Services
KIS provides a full suite of web-related services to its customers,
including web site design, development and maintenance, e-commerce applications,
network engineering, and other web-enabled application development. Web-enabled
applications developed by KIS include field research and program analysis tools,
shared statistical analysis tools, and logistics coordination tools.
KIS' web-related services are provided through renewable annual
contracts, with pricing based on KIS' GSA Schedule, primarily to the U.S.
Department of Health and Human Services and the U.S. Department of Commerce. In
marketing these services, KIS competes with a number of other government
contractors. KIS competes on the basis of its expertise and its knowledge of
customers' needs.
The Company believes that the capabilities KIS offers in web-related
services with large database components offer opportunities for further
expanding its market. For example, during 2000, the company secured annual
contracts with governmental agencies in five states that provide information to
the U.S. Department of Health and Human Services. These contracts resulted from
KIS' reputation for performance with the Department of Health and Human
Services, as well as the significant efficiencies gained by states' use of the
same web-enabled platform as the Federal agency to which data is delivered.
Telemedicine Services
KIS provides consulting services supporting purchase and implementation
by medical facilities of digital imaging systems, known as Picture Archival and
Communication Systems ("PACS"). PACS are used in connection with digitally
recorded images, such as magnetic resonance imaging, computer tomography scans,
ultrasounds and digital x-rays, among others. KIS provides technical support at
every stage of the implementation of a PACS by a medical facility, including
planning and feasibility studies, workflow design, specification development,
procurement assistance, on-site technical supervision of PACS installers,
quality assurance and acceptance testing. KIS also assists the medical
facilities with warranty and service issues that may arise with the manufacturer
of the PACS components. KIS personnel who perform the consulting services are
highly trained electrical, biomedical, and clinical engineers.
KIS telemedicine services also extend to the design, development and
implementation of technology solutions for its customers. KIS developed a
wireless Local Area Network device, the LAN2GoTM, which was developed initially
for a military application but has been successfully deployed in the first
wireless clinical teleradiology solution, implemented in November 2000 for the
radiology department of Texas Tech University in El Paso, Texas. This system
delivers wireless connectivity between a hospital emergency department and
radiology workstations located elsewhere in the hospital and off-site at the
academic facility. The solution provides high-speed, highly secure encryption
and wireless transmission of diagnostic quality images, allowing radiologists in
separate facilities to read images and provide diagnoses. KIS believes this
solution has market potential beyond the medical industry that could extend to
education, training and other applications.
KIS also performs work for PACS providers, such as General Electric and
Phillips, in connection with the sale and installation of PACS, and for end
users of the systems. KIS' principal customer in the PACS consulting field has
been the Department of Defense, with whom KIS contracted to provide consulting
services for eleven hospitals, with Brooke Army Medical Center, San Antonio,
Texas, as the hub. The contract with the Department of Defense is a one year
contract, with four annual renewal option years (KIS is currently providing
services under the first renewal option year). KIS also provides these services
to other military hospitals and to major teaching hospitals. KIS is also
marketing wearable digitized medical records on Personal Information Carriers,
which are the size of "dog tags," for the military and other government and
private sector applications. KIS is exploring the potential for expanding its
services in this area to teledermatology, telecardiology and home monitoring
applications.
Voice and Data Network Services
KIS provides an end-to-end network services solution for voice and
data, both wireline and wireless, that includes consulting services, specially
configured computers, system security and related networking equipment. Its
principal network services customers are agencies of the U.S. Department of
Justice, which it serves through teaming agreements on a contract basis. The
contract is renewable annually by the Department of Justice. Under this
contract, KIS also provides installation and replacement services, training,
software and hardware security systems to the agencies. Hardware components
provided under this contract are fully compatible and interchangeable,
permitting routine upgrades and swaps.
Double Eagle Acquisition
In November 2000, KIS acquired Double Eagle Communications and Cabling,
Inc. ("Double Eagle"), a full service provider of voice and data cabling and
network support services based in Manassas, Virginia. Through Double Eagle, KIS
provides fiber and copper cable network installation for voice and data, system
design, maintenance, training and equipment sales. Specific services are
supplied on annual contracts with customers, and include survey and site
evaluations, system planning, installation of cabling and equipment, software
installation and testing, and system programming. Customers are commercial
enterprises, predominantly in the high tech industry and in the medical
industry. KIS was a customer of Double Eagle's prior to its acquisition. Through
this multi-year relationship, KIS had experience with Double Eagle's
capabilities as a successful outsource partner that supplied cabling,
maintenance and training services for Department of Justice contracts. KIS
believes that this acquisition extends its ability to deliver end-to-end network
services, as well as providing access to commercial customers for potential
sales of KIS product and service offerings.
DISCONTINUED OPERATIONS - BUSINESSES TO BE DISTRIBUTED
TO COMMON SHAREHOLDERS
The pipeline, terminaling and products marketing business segments are
classified as "Discontinued Operations - Businesses to be Distributed to Common
Shareholders" in light of the proposed distribution of those business segments
to the Company's shareholders in the form of interest in the newly formed
limited liability company, KSL. It is anticipated that the distribution will be
completed in the second quarter of 2001.
KSL, through a wholly-owned subsidiary, Kaneb Pipe Line Company ("KPL")
manages and operates its refined petroleum products pipeline transportation
system and petroleum products and specialty liquids terminal storage business,
for the benefit of Kaneb Pipe Line Partners, L.P. ("KPP"), which owns such
systems and facilities through its subsidiaries. The pipeline business consists
primarily of the transportation, as a common carrier, of refined petroleum
products in Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota and
Wyoming, as well as related terminaling activities. The terminaling business,
which is the third largest independent liquids terminaling company in the United
States, is conducted by KPP under the tradenames of "ST Services" and
"StanTrans, Inc.," among others (collectively, "ST"). KPL operates ST's 42
terminal storage facilities in 24 states, the District of Columbia and six
facilities in the United Kingdom, with total storage capacity of approximately
38.3 million barrels. For a more detailed discussion of the business, activities
and results of operations of KPP, reference is made to its Annual Report on Form
10-K for the year ended December 31, 2000, and other publicly filed documents of
KPP (NYSE: KPP). In March 1998, KPL acquired a products marketing business
engaged in the business of acquiring quantities of motor fuels and reselling
them in smaller lots at truck racks located in terminal storage facilities along
pipelines primarily located throughout California, Colorado, Illinois, Indiana,
Ohio, Wisconsin and Wyoming.
Additional information regarding KSL may be found in the Form 10 filed
by KSL on March 23, 2001 with the Securities and Exchange Commission.
ENVIRONMENTAL CONTROLS
Many of the Company's operations are subject to national, state and
local laws and regulations relating to protection of the environment. Although
the Company believes that its operations are in general compliance with
applicable environmental regulation, risks of additional costs and liabilities
are inherent in its operations, and there can be no assurance that significant
costs and liabilities will not be incurred by the Company. Moreover, it is
possible that other developments, such as increasingly stringent environmental
laws, regulations, enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations of the Company could result in
substantial costs and liabilities.
EMPLOYEES
At December 31, 2000, the continuing operations of the Company and its
subsidiaries employed 1,131 persons. The Furmanite group of companies employed a
total of 872 persons, and 240 persons were employed by the KIS group of
companies. As of December 31, 2000, approximately 252 of the persons employed by
Furmanite were subject to representation by unions or other similar associations
for collective bargaining or other similar purposes; however, there were no
significant collective bargaining or other similar contracts covering the
Furmanite employees in effect at that date.
Item 2. Properties
The properties owned or utilized by the Company and its subsidiaries
are generally described in Item 1 of this Report. Additional information
concerning the obligations of the Company and its subsidiaries for lease and
rental commitments is presented under the caption "Commitments and
Contingencies" in Notes 8 and 10 to the Company's consolidated financial
statements. Such descriptions and information are hereby incorporated by
reference into this Item 2.
The Company's corporate headquarters is located in an office building
in Richardson, Texas, pursuant to a lease agreement that expires in 2002,
subject to a five-year renewal option. The facilities used in the operations of
the Company's subsidiaries are generally held under lease agreements having
various expiration dates, rental rates and other terms, except for three
Furmanite properties located in the United Kingdom, which are owned in fee. For
additional information regarding the properties utilized in the operations of
KPP, reference is made to the Annual Report on Form 10-K of KPP.
Item 3. Legal Proceedings
The Company is a Plaintiff in a legal proceeding involving malpractice
issues with a professional service provider previously used by the Company. This
action is in the advanced stages of discovery, and trial proceedings are
scheduled for summer of 2001. At this time the Company is unable to reasonably
estimate potential recoveries, if any, under this action.
A subsidiary of the Company, classified as discontinued operations, was
notified in 1989 that it is a "potentially responsible party" in connection with
a governmental investigation relating to a waste disposal facility which has
been subject to remedial action as a location listed on the Environmental
Protection Agency's ("EPA") Superfund Federal Priority List ("Superfund").
Proceedings arising under Superfund typically involve numerous waste generators
and other waste transportation and disposal companies for each identified
facility and seek to allocate or recover costs associated with site
investigation and cleanup, which costs could be substantial. This proceeding
involves actions allegedly taken by a former operating subsidiary of the Company
at a time prior to the acquisition of such subsidiary by the Company. The
Company's subsidiary has been included within a de minimis group of waste
generators that are involved in this proceeding, who have been negotiating a
collective settlement of their liabilities with the EPA. However, the Company
has joined with others within this de minimis group who are each contesting
their respective liability. Proceedings in this matter are ongoing. The Company
has reviewed its potential exposure, if any, in connection with this matter,
giving consideration to the nature, accuracy and strength of evidence relating
to the Company's alleged relationship to the location, the amount and nature of
waste taken to the location, and the number, relationship and financial ability
of other named and unnamed "potentially responsible parties" at the location.
While the Company does not anticipate that the amount of expenditures from its
involvement in the above matter will have a material adverse effect on the
Company's operations or financial condition, the possibility remains that
technological, regulatory, enforcement or legal developments, the results of
environmental studies or other factors could materially alter this expectation
at any time.
Certain subsidiaries of KPP, which have been included in discontinued
operations, were sued in a Texas state court in 1997 by Grace Energy Corporation
("Grace"), the entity from which KPP acquired ST Services in 1993. The lawsuit
involves environmental response and remediation allegedly resulting from jet
fuel leaks in the early 1970's from a pipeline. The pipeline, which connected a
former Grace terminal with Otis Air Force Base in Massachusetts, was abandoned
in 1976, when the connecting terminal was sold to an unrelated entity.
Grace alleged that subsidiaries of KPP acquired the abandoned pipeline,
as part of the acquisition of ST Services in 1993, and assumed responsibility
for environmental damages allegedly caused by the jet fuel leaks. Grace sought a
ruling that these subsidiaries are responsible for all present and future
remediation expenses for these leaks and that Grace has no obligation to
indemnify these subsidiaries for these expenses.
In the lawsuit, Grace also sought indemnification for expenses that it
has incurred since 1996 of approximately $3.5 million for response and
remediation required by the State of Massachusetts and for additional expenses
that it expects to incur in the future. The consistent position of KPP's
subsidiaries is that they did not acquire the abandoned pipeline as part of the
1993 ST transaction, and therefore did not assume any responsibility for the
environmental damage nor any liability to Grace for the pipeline.
At the end of the trial on May 19, 2000, the jury returned a verdict
including findings that Grace had breached a provision of the 1993 acquisition
agreement and that the pipeline was abandoned prior to 1978. On July 17, 2000,
the Judge entered final judgment in the case, which is now on appeal to the
Dallas Court of Appeals, that Grace take nothing from the subsidiaries on its
claims, including claims for future expenses. Although KPP's subsidiaries have
not incurred any expenses in connection with the remediation, the court also
ruled, in effect, that the subsidiaries would not be entitled to an
indemnification from Grace if any such expenses were incurred in the future.
However, the Judge let stand a prior summary judgment ruling that the pipeline
was an asset of the company acquired as part of the 1993 ST transaction. The
Judge also awarded attorney fees to Grace.
While the judgment means that the subsidiaries have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred, as required
by the State of Massachusetts, KPP's subsidiaries have filed an appeal of the
judgment finding that the Otis Pipeline was transferred to them and the award of
attorney fees.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation ("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The MMR
Site contains nine groundwater contamination plumes, two of which are allegedly
associated with the pipeline, and various other waste management areas of
concern, such as landfills. The United States Department of Defense and the
United States Coast Guard, pursuant to a Federal Facilities Agreement, have been
responding to the Government remediation demand for most of the contamination
problems at the MMR Site. Grace and others have also received and responded to
formal inquiries from the United States Government in connection with the
environmental damages allegedly resulting from the jet fuel leaks. KPP's
subsidiaries have voluntarily responded to an invitation from the Government to
provide information indicating that they do not own the pipeline. In connection
with a court-ordered mediation between Grace and the subsidiaries, the
Government advised the parties in April 1999 that it has identified the two
spill areas that it believes to be related to the pipeline that is the subject
of the Grace suit. The Government advised the parties that it believes it has
incurred costs of approximately $34 million, and expects in the future to incur
costs of approximately $55 million, for remediation of one of the spill areas.
This amount was not intended to be a final accounting of costs or to include all
categories of costs. The Government also advised the parties that it could not
at that time allocate its costs attributable to the second spill area. KPP
believes that the ultimate cost of the remediation, while substantial, will be
considerably less than the Government has indicated.
The Government has made no claims against KPP or any other person on
account of this matter. KPP believes that if any such claims were made, its
subsidiaries would have substantial defenses to such claims. Under Massachusetts
law, the party responsible for remediation of a facility is the last owner
before the abandonment, which was a Grace company. KPP does not believe that
either the Grace litigation or any claims that may be made by the Government
will adversely affect its ability to make cash distributions to its unitholders,
but there can be no assurances in that regard.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business. Management
believes, based on the advice of counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the financial
position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not hold a meeting of stockholders or otherwise submit
any matter to a vote of stockholders in the fourth quarter of 2000.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Shares of the Company Common Stock are listed and traded principally on
the New York Stock Exchange, under the symbol KAB. At March 23, 2001, there were
approximately 4,500 holders of Common Stock of record. The following table sets
forth, for the fiscal periods indicated, the quoted high and low sales prices of
the shares on the New York Stock Exchange.
Quoted Stock Prices
------------------------------
Calendar Year High Low
---------------- ------- ------
1999:
First Quarter 4 5/8 3 7/8
Second Quarter 4 9/16 3 7/8
Third Quarter 5 1/8 4 1/8
Fourth Quarter 5 4 3/16
2000:
First Quarter 5 7/8 4 5/16
Second Quarter 6 3/4 4
Third Quarter 4 7/8 4
Fourth Quarter 6 4 7/16
The Company currently intends to retain future earnings for the
development of its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. The Company's dividend policy is
reviewed periodically and determined by its Board of Directors on the basis of
various factors, including, but not limited to, its results of operations,
financial condition, capital requirements and investment opportunities.
Additionally, the credit facilities for the working capital of Furmanite contain
restrictions on the respective subsidiary's ability to pay dividends or
distributions to the Company, if an event of default exists.
Item 6. Summary Historical Financial Data
The following selected financial data (in thousands, except per share
amounts) is derived from the Company's consolidated financial statements and
should be read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this report. As a result of the
planned distribution (See Note 1 to the Consolidated Financial Statements), the
Company's pipeline, terminaling and product marketing businesses have been
reclassified as "discontinued operations - businesses to be distributed to
common shareholders" for all periods presented. The Company has not declared a
dividend on its Common Stock for any of the periods presented.
Year Ended December 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- ---------- ---------- ----------
Income Statement Data:
Revenues............................ $ 127,641 $ 135,433 $ 135,825 $ 115,780 $ 111,307
========== ========= ========== ========== ==========
Operating income (loss)............. $ 4,102 $ (4,566) $ 3,335 $ 3,361 $ 682
========== ========= ========== ========== ==========
Income (loss) from continuing
operations before benefit of
recognizing tax loss carryforwards
(change in valuation allowance).. $ 503 $ (6,674) $ (1,264) $ (2,725) $ (5,030)
Benefit of recognizing tax loss
carryforwards (change in
valuation allowance)............. 6,280 37,124 - - -
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations....................... 6,783 30,450 (1,264) (2,725) (5,030)
Income from discontinued operations -
businesses to be distributed
to common shareholders........... 10,386 28,459 14,840 13,368 12,054
---------- --------- ---------- ---------- ----------
Net income.......................... $ 17,169 $ 58,909 $ 13,576 $ 10,643 $ 7,024
========== ========= ========== ========== ==========
Per Share Data:
Earnings (loss) per common share:
Basic:
Continuing operations.......... $ .20 $ .95 $ (.06) $ (.10) $ (.17)
Discontinued operations........ .33 .91 .47 .41 .36
---------- --------- ---------- ---------- ----------
Total....................... $ .53 $ 1.86 $ .41 $ .31 $ .19
========== ========= ========== ========== ==========
Diluted:
Continuing operations.......... $ .19 $ .92 $ (.06) $ (.10) $ (.17)
Discontinued operations........ .31 .87 .47 .41 .36
---------- --------- ---------- ---------- ----------
Total....................... $ .50 $ 1.79 $ .41 $ .31 $ .19
========== ========= ========== ========== ==========
Balance Sheet Data:
Cash and cash equivalents........... $ 20,517 $ 14,516 $ 7,264 $ 15,626 $ 15,360
Working capital..................... 81,185 42,191 18,709 24,796 18,359
Total assets........................ 226,643 219,540 158,796 151,866 151,747
Long-term debt...................... 39,593 44,223 43,958 48,934 47,091
Stockholders' equity (a)............ 166,039 144,803 87,445 78,447 75,366
(a) See Note 6 to the Company's Consolidated Financial Statements for a
discussion of the Company's Series A Preferred Stock.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion should be read in conjunction with the consolidated
financial statements of the Company and notes thereto included elsewhere in this
report.
General
The Company's continuing operations are conducted through two business
segments, specialized technical services and information technology services. As
a result of the planned distribution (See Note 1 to the Consolidated Financial
Statements), the Company's pipeline, terminaling and product marketing
businesses have been reclassified as "discontinued operations - businesses to be
distributed to common shareholders" for all periods presented.
Consolidated Results of Operations
(in millions)
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues.................................................. $ 127.6 $ 135.4 $ 135.8
=========== =========== ===========
Operating income.......................................... $ 4.1 $ (4.6) $ 3.3
=========== =========== ===========
Income from continuing operations before benefit
of recognizing tax loss carryforwards (change in
valuation allowance)................................... $ 0.5 $ (6.7) $ (1.3)
=========== =========== ===========
Net income:
Continuing operations.................................. $ 6.8 $ 30.4 $ (1.2)
Discontinued operations - businesses to be
distributed to common shareholders................... 10.4 28.5 14.8
----------- ----------- -----------
Net income ........................................ $ 17.2 $ 58.9 $ 13.6
=========== =========== ===========
Capital expenditures from continuing operations,
excluding acquisitions................................. $ 2.7 $ 2.7 $ 2.9
=========== =========== ===========
For the year ended December 31, 2000, revenues decreased $7.8 million,
or 6%, when compared to 1999, due to a $6.0 million decrease in revenues from
the technical services business and a $1.9 million decrease in revenues from the
information technology services business. Operating income increased by $8.7
million in 2000, compared to 1999, due to an increase in technical services
operating income of $6.5 million, partially offset by a $1.4 million decrease in
information technology operating income. In addition, general and administrative
expenses decreased by $3.5 million in 2000, compared to 1999, due to lower
non-cash corporate general and administrative expenses resulting from the
estimated redemption value of the Company's Series F Preferred stock. In
connection with the planned distribution, the Board of Directors has authorized
the exchange, in a non-cash transaction, of common stock of the Company for all
Series F Preferred shares outstanding. The exchange is expected to be completed
in the first half of 2001.
Income from continuing operations before the benefit of recognizing tax
loss carryforwards (change in valuation allowance) increased $7.2 million for
the year ended December 31, 2000, compared to 1999. Consolidated net income for
2000 includes $6.3 million in expected benefits from prior years' tax losses
(change in valuation allowance) that are available to offset future taxable
income (See "Income Taxes"). Income from continuing operations, including this
item, was $6.8 million for the year ended December 31, 2000. Income from
discontinued operations - businesses to be distributed to common shareholders
decreased by $18.1 million for the year ended December 31, 2000, compared to
1999, which includes a gain on sale of units by KPP of $10.4 million, net of
deferred income taxes.
For the year ended December 31, 1999, revenues were essentially the
same as 1998, with a $16.7 million increase in revenues generated by the
information technology business, offset by a $17.0 million decrease from the
technical services business. Operating income in 1999 decreased by $7.9 million,
due largely to a $5.0 million decrease in technical services operating income
and a non-cash general and administrative charge of $4.9 million for increases
in the estimated redemption value of the Series F Preferred stock, partially
offset by a $1.8 million increase in information technology services operating
income.
Income (loss) from continuing operations before the benefit of
recognizing tax loss carryforwards (change in valuation allowance) was ($6.7)
million for the year ended December 1999, compared to ($1.3) million in 1998.
The decrease was primarily due to the non-cash general and administrative charge
of $4.9 million for the estimated redemption value of its Series F Preferred
stock. Consolidated 1999 income from continuing operations includes $37.1
million in expected benefits from prior years' tax losses (changes in valuation
allowance) that are available to offset future taxable income (See "Income
Taxes"). 1999 Income from continuing operations including this item, was $30.4
million for the year ended December 31, 1999. Income from discontinued
operations - businesses to be distributed to common shareholders increased $13.7
million, for the year ended December 31, 1999, compared to 1998, due primarily
to a gain on the sale of units by KPP of $10.4 million, net of deferred income
taxes.
Technical Services
The Company's technical services business is conducted through its
Furmanite group of wholly-owned subsidiaries. Furmanite provides specialized
services, including leak sealing under pressure, on-site machining, safety and
relief valve testing and repair, passive fire protection and fugitive emissions
inspections to the process, power and heavy industries worldwide.
(in millions)
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
United States........................................ $ 31.7 $ 29.8 $ 35.5
Europe............................................... 50.4 57.3 68.1
Asia-Pacific......................................... 10.0 11.0 11.5
----------- ----------- -----------
$ 92.1 $ 98.1 $ 115.1
=========== =========== ===========
Operating income:
United States........................................ $ 1.6 $ 1.0 $ 1.7
Europe............................................... 7.0 3.3 5.5
Asia-Pacific......................................... 0.9 0.5 1.0
Headquarters......................................... (3.2) (3.3) (3.5)
----------- ----------- -----------
Operating income before severance and other costs.... 6.3 1.5 4.7
Severance and other costs............................ - (1.8) -
----------- ----------- -----------
$ 6.3 $ (0.3) $ 4.7
=========== =========== ===========
Capital expenditures, excluding acquisitions............ $ 2.2 $ 2.3 $ 2.6
=========== =========== ===========
For the year ended December 31, 2000, Furmanite's revenues decreased by
$6.0 million, or 6%, when compared to 1999, primarily due to devaluations in
foreign currencies and an overall weak market for technical services worldwide.
In the United States, revenues increased by $1.9 million, or 6%, due to an
increased level of turnaround services. In Europe, revenues decreased by $6.9
million, or 12%, due primarily to the devaluations of foreign currencies and
decreases in demand for turnaround and other technical services in Continental
Europe, which more than offset increased business levels in the United Kingdom.
The 2000 decrease of $1.0 million, or 9%, in Asia-Pacific revenues is primarily
due to devaluations in foreign currencies and, to a lesser extent, decreases in
turnaround and other services provided.
For the year ended December 31, 1999, Furmanite's revenues decreased by
$17.0 million, or 15%, when compared to 1998, due to extremely weak industry
market conditions in the United States and Europe. In the United States,
revenues decreased by $5.7 million, or 16%, due to declines in turnaround and
other services resulting from the weak market conditions. In Europe, revenues
decreased by $10.8 million, or 16%, due to lower turnaround and other process
plant services, primarily in the United Kingdom and Germany, as a result of weak
market conditions in these regions. The 1999 decrease in Asia-Pacific revenues
is primarily due to declines in under pressure and turnaround services.
Overall, Furmanite's operating income, before severance and other
costs, increased by $4.8 million, or 320%, in 2000, compared to 1999, due to
improved general market conditions in the United States and overall operation
efficiencies realized as a result of streamlining the segment's workforce in
1999 to match the market conditions in each of the operating regions. These
improvements were partially offset by devaluations in foreign currencies.
Furmanite's 1999 operating income, before severance and other costs, decreased
by $3.2 million, or 67%, compared to 1998, due to the extremely weak industry
market conditions in the United States and Europe. Severance and other costs
incurred and paid in 1999 were a result of the streamlining effort.
Capital expenditures from continuing operations are primarily related
to technical services equipment and capital costs related to the implementation
of new services. Capital expenditures for 2001 are currently estimated to be $2
million to $4 million, depending on the economic environment and the needs of
the business.
Information Technology Services
The Company's information technology services business is conducted
through wholly-owned subsidiaries. The information services group provides
network design and installation services, database management and processing
services, specialized medical technology services, insurance tracking services,
hardware distribution and other related information technology services. The
medical services division provides systems integration and open
architecture-based telemedicine solutions, including assessment and planning,
installation assistance, clinical systems integration, acceptance testing, and
systems maintenance and management of telemedicine applications.
(in millions)
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues................................................ $ 35.5 $ 37.4 $ 20.7
=========== =========== ===========
Operating income........................................ $ 4.1 $ 5.5 $ 3.7
=========== =========== ===========
Capital expenditures, excluding acquisitions............ $ 0.5 $ 0.4 $ 0.3
=========== =========== ===========
In November 2000, the Company, through a wholly-owned subsidiary,
acquired Double Eagle Communications and Cabling, Inc. ("Double Eagle"). Double
Eagle is a full service provider of voice and data cabling and network support
services. On March 23, 1999, the Company, through a wholly-owned subsidiary,
acquired the capital stock of Ellsworth Associates, Inc. ("Ellsworth").
Ellsworth provides information technology services, including network, database
and systems design, and application programming, primarily to government
agencies.
For the year ended December 31, 2000, revenues decreased $1.9 million,
or 5% and operating income decreased $1.4 million, or 25%, when compared to
1999. Increases in services revenues were more than offset by declines in
equipment sales. Revenues from equipment sales, furnished at the request of
selected customers, declined in 2000, compared to 1999, due to fluctuations in
customer needs. For the year ended December 31, 1999, revenues increased $16.7
million, or 81% and operating income increased $1.8 million, or 49% when
compared to 1998, primarily due to the Ellsworth acquisition and increased
consulting services and computer hardware sales provided to various national
government agencies and the private sector.
Discontinued Operations - Businesses to be Distributed to Common Shareholders
(in millions)
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
Pipeline and terminaling services.................... $ 156.2 $ 158.0 $ 125.8
Product marketing services........................... 381.2 212.3 114.2
----------- ----------- -----------
$ 537.4 $ 370.3 $ 240.0
=========== =========== ===========
Operating income:
Pipeline and terminaling services.................... $ 58.1 $ 64.3 $ 55.1
Product marketing services........................... 2.5 1.5 0.9
----------- ----------- -----------
$ 60.6 $ 65.8 $ 56.0
=========== =========== ===========
The pipeline and terminaling segment includes the operations of KPP.
KPP provides transportation services of refined petroleum products through a
pipeline system that extends throughout the Midwestern states and provides
terminaling and storage services for petroleum products, specialty chemicals and
other liquids. The Company operates, manages and controls the pipeline and
terminaling operations of KPP through its 2% general partner interest and a 28%
limited partner interest in the Partnership. The products marketing business
segment provides wholesale motor fuel marketing services throughout the Great
Lakes and Rocky Mountain regions, as well as California. On March 25, 1998, a
wholly-owned subsidiary of the Company acquired the petroleum products marketing
business for $1.5 million, plus the cost of inventories. The Company's product
marketing services segment consists of the operations of that business since the
acquisition date.
For the year ended December 31, 2000, pipeline and terminaling revenues
decreased by $1.8 million, or 1%, compared to 1999, due to a $4.9 million
decrease in terminaling revenues and a $3.1 million increase in pipeline
revenues. For the year ended December 31, 1999, pipeline and terminaling
revenues increased by $32.2 million, or 26%, compared to 1998, due to a $28.0
million increase in terminaling revenues and a $4.2 million increase in pipeline
revenues. Terminaling revenue increases in 2000 resulting from the United
Kingdom and other 1999 terminal acquisitions were more than offset by decreases
in tank utilization due to unfavorable domestic market conditions resulting from
declines in forward product pricing. The 1999 increase in terminaling revenues
is due to terminal acquisitions and increased utilization of existing terminals
due to favorable market conditions, partially offset by a decrease in the
overall average price realized for storage. Average annual tankage utilized for
the years ended December 31, 2000, 1999 and 1998 aggregated 21.0 million
barrels, 22.6 million barrels and 15.2 million barrels, respectively. The 2000
decrease in average annual tankage utilized resulted from the unfavorable
domestic market conditions. The 1999 increase resulted from the acquisitions and
increased storage at KPP's largest petroleum storage facility. Average revenues
per barrel of tankage utilized for the years ended December 31, 2000, 1999 and
1998 was $4.12, $4.00 and $4.11, respectively. The increase in 2000 average
annual revenues per barrel of tankage utilized, when compared to 1999, was due
to the storage of a larger proportionate volume of specialty chemicals, which
are historically at higher per barrel rates than petroleum products. The
unusually low 1999 average revenues per barrel of tankage utilized was due to
the 1999 temporary increase in storage at KPP's largest petroleum storage
facility. The increase in pipeline revenues for 2000 is due to an increase in
terminaling charges. The 1999 increase in pipeline revenues, when compared to
1998, is due to overall increases in total volumes shipped, primarily on the
East Pipeline. Barrel miles totaled 17.8 billion, 18.4 billion and 17.0 billion
for the years ended December 31, 2000, 1999 and 1998, respectively.
Pipeline and terminaling operating income decreased by $6.2 million, or
10% in 2000, compared to 1999, due to a $6.3 million decrease in terminaling
operating income and a $0.1 million increase in pipeline operating income. The
decline in 2000 terminaling operating income is due to the unfavorable market
conditions resulting from declines in forward product pricing. For the year
ended December 31, 1999, pipeline and terminaling operating income increased by
$9.2 million, or 17%, compared to 1998, due to a $7.0 million increase in
terminaling operating income and a $2.2 million increase in pipeline operating
income. The increase in 1999 terminaling operating income is the result of the
acquisitions and the increase in tank utilization. The 1999 improvement in
pipeline operating income is due to overall increases in volumes shipped.
The interest of outside non-controlling partners in KPP's net income
was $32.7 million, $33.5 million and $29.2 million in 2000, 1999 and 1998,
respectively. Distributions paid to the outside non-controlling unitholders of
KPP aggregated approximately $37.0 million, $35.4 million and $28.5 million in
2000, 1999 and 1998, respectively.
For the years ended December 31, 2000 and 1999, product marketing
revenues increased by $168.9 million and $98.1 million, respectively due to an
increase in both sales volumes and sales price. Total gallons sold for the years
ended December 31, 2000, 1999 and 1998 aggregated 408 million, 349 million and
222 million, respectively. The volume increases are due to a combination of
increasing the number of terminals through which products are sold and
increasing the sales volumes at existing locations. The average price realized
per gallon of product sold for the years ended December 31, 2000, 1999 and 1998
was $0.94, $0.61 and $0.52, respectively, due to significant increases in
overall market prices, especially in 2000. For the years ended December 31, 2000
and 1999, product marketing operating income increased $1.0 million and $0.6
million, respectively, due to the increase in both the volumes sold and the
sales price received.
On January 3, 2001, KPP acquired Shore Terminals LLC ("Shore") for $107
million in cash and 1,975,090 KPP units. Financing for the cash portion of the
purchase price was supplied under a new $275 million unsecured revolving credit
agreement with a group of banks. See "Liquidity and Capital Resources". Shore
owns seven terminals, located in four states, with a total tankage capacity of
7.8 million barrels. All of the terminals handle petroleum products and, with
the exception of one, have deep water access.
On February 1, 1999, KPP acquired six terminals in the United Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million)
plus transaction costs and the assumption of certain liabilities. The
acquisition of the six locations, which have an aggregate tankage capacity of
5.4 million barrels, was initially financed by term loans from a bank. $13.3
million of the term loans were repaid in July 1999 with the proceeds from KPP's
public offering. (See "Liquidity and Capital Resources") Three of the terminals,
handling petroleum products, chemicals and molten sulfur, respectively, operate
in England. The remaining three facilities, two in Scotland and one in Northern
Ireland, are primarily petroleum terminals. All six terminals are served by
deepwater marine docks.
On October 30, 1998, KPP entered into acquisition and joint venture
agreements with Northville Industries Corp. ("Northville") to acquire and manage
the former Northville terminal located in Linden, New Jersey. Under the
agreements, KPP acquired a 50% interest in the newly-formed ST Linden Terminal
LLC for $20.5 million plus transaction costs. The petroleum storage facility,
which has capacity of 3.9 million barrels in 22 tanks, was funded with bank
financing which was paid off using a portion of the proceeds from KPP's public
unit offering in July 1999. (See "Liquidity and Capital Resources")
Income Taxes
The Company recognized expected benefits from prior years' tax losses
(change in valuation allowance) that are available to offset future taxable
income of $6.3 million and $37.1 million for 2000 and 1999, respectively. The
Company reduced the valuation allowance as a result of its reevaluation of the
realizability of income tax benefits from future operations. The Company
considered positive evidence, including the effect of the distribution, recent
historical levels of taxable income, the scheduled reversal of deferred tax
liabilities, tax planning strategies, revised estimates of future taxable income
growth, and expiration periods of NOLs among other things, in making this
evaluation and concluding that it is more likely than not that the Company will
realize the benefit of its net deferred tax assets. Ultimate realization of the
deferred tax asset is dependent upon, among other factors, the Company's ability
to generate sufficient taxable income within the carryforward periods, including
the effect of the distribution, and is subject to change depending on the tax
laws in effect in the years in which the carryforwards are used. As a result of
the 1999 recognition of expected future income tax benefits, the results of
operations for the year ended December 31, 2000 reflects a full effective tax
rate provision, before change in valuation allowance.
Additionally, the Company's income tax expense for the years ended
December 31, 2000 and 1999 includes benefits of $1.1 million and $1.6 million
related to favorable developments pertaining to certain state and foreign income
tax issues.
Liquidity and Capital Resources
Continuing Operations
Cash provided by (used in) operating activities was $8.8 million, ($4.9
million) and $3.0 million during the years 2000, 1999 and 1998, respectively.
The increase in 2000, compared to 1999, was due primarily to improvements in the
technical services business and normal fluctuations in working capital accounts.
The decline in 1999, compared to 1998, was due primarily to decreases in the
technical services revenues, and costs incurred in 1999 as a result of the
segment's streamlining effort.
At December 31, 2000, $14.1 million was outstanding under a credit
facility, as amended, that was originally obtained by a wholly-owned subsidiary
in conjunction with the acquisition of Furmanite. The credit facility, which is
without recourse to the parent company, is due in June 2002, bears interest at
the option of the borrower at variable rates (7.94% at December 31, 2000) based
on either the LIBOR rate or the prime rate plus a differential of up to 150
basis points and contains certain financial and operational covenants with
respect to the technical services group of companies. The Company is in the
process of negotiating a new credit agreement which, among other matters, is
expected to extend the debt's due date past June 2002.
In December 1995, the Company entered into an agreement with an
international bank that, as amended, provides for a $15 million revolving credit
facility through June 2001 that bears interest at a variable rate at the
Company's option based on the LIBOR rate plus 100 basis points or at the prime
rate in effect from time to time with a commitment fee of 0.5% per annum of the
unused credit facility. No amounts were drawn under the credit facility at
December 31, 2000, 1999 or 1998.
Consolidated capital expenditures for 2001 have been budgeted at $2
million to $4 million, depending on the economic environment and the needs of
the business. Consolidated debt maturities, including capital leases, are $0.6
million; $19.1 million; $2.3 million; $2.1 million; and $2.1 million,
respectively, for each of the five years ending December 31, 2005. Capital
expenditures (excluding acquisitions) in 2001 are expected to be funded from
existing cash and anticipated cash flows from operations.
Discontinued Operations - Business to be Distributed to Common Shareholders
In December 2000, KPP entered into a credit agreement with a group of
banks that provides for a $275 million unsecured revolving credit facility
through December 2003. No amounts were drawn on the facility at December 31,
2000. The credit facility, which is without recourse to the parent company,
bears interest at variable rates, has a variable commitment fee on unutilized
amounts and contains certain financial and operational covenants. In January
2001, proceeds from the facility were used to repay in full KPP's $128 million
of mortgage notes and $15 million outstanding under its $25 million revolving
credit facility. An additional $107 million was used to finance the cash portion
of the Shore acquisition. Under the provisions of the mortgage notes, KPP
incurred $6.3 million in prepayment penalties, which will be recognized by KPP
as an extraordinary expense in the first quarter of 2001. At January 3, 2001,
$257.5 million was drawn on the facility, at an interest rate of 6.31%, which is
due in December of 2003.
In January 1999, KPP entered into a credit agreement with a bank that
provided for the issuance of $39.2 million of term loans in connection with the
United Kingdom terminal acquisition and $5.0 million for general partnership
purposes. $18.3 million of the term loans were repaid in July 1999 with a
portion of the proceeds from KPP's public unit offering. The remaining portion
($23.9 million), with a fixed rate of 7.14%, is due in January 2002. The term
loans under the credit agreement, as amended, are unsecured and are pari passu
with the $275 million revolving credit facility. The term loans, which are
without recourse to the parent company, contain certain financial and
operational covenants.
In July 1999, KPP issued 2.25 million limited partnership units in a
public offering at $30.75 per unit, generating approximately $65.6 million in
net proceeds. A portion of the proceeds was used to repay in full KPP's $15.0
million promissory note, KPP's $25.0 million revolving credit facility and $18.3
million of KPP's term loans (including $13.3 million in term loans resulting
from the United Kingdom terminal acquisition). As a result of KPP issuing
additional units to unrelated parties, the Company's pro-rata share of the net
assets of KPP increased by $16.8 million. Accordingly, the Company recognized a
$16.8 million gain, before deferred income taxes of $6.4 million, in 1999.
In March 1998, a wholly-owned subsidiary of the Company entered into a
credit agreement with a bank that, as amended, provides for a $20 million
revolving credit facility through March 2002. The credit facility bears interest
at variable rates (8.69% at December 31, 2000), has a commitment fee of 0.25%
per annum on unutilized amounts and contains certain financial and operational
covenants. The credit facility, which is without recourse to the parent company,
is secured by essentially all of the tangible and intangible assets of the
products marketing business and by 500,000 KPP limited partnership units held by
a wholly-owned subsidiary of the Company. At December 31, 2000, $17.2 million
was drawn on the facility.
In connection with the planned distribution, the Board of Directors has
authorized the redemption of its Series A Preferred Stock for cash on March 30,
2001, at the stated redemption price of $10.67 per share, plus accrued and
unpaid dividends, for a total cost of approximately $6.1 million. Additionally,
the Board of Directors has authorized the exchange, in non-cash transactions, of
1,356,777 shares of the Company's common stock for all Series C Preferred and
Series F Preferred shares outstanding. The exchanges are expected to be
completed in the first half of 2001.
Pursuant to the proposed distribution, Kaneb Services LLC ("KSL")
intends to enter into an agreement with the Company to pay all of the expenses
incurred by KSL and pay the Company an amount equal to expenses incurred by the
Company in connection with the distribution. These expenses include
approximately $6.1 million in expenses that the Company has incurred in
connection with its redemption of its Series A Preferred Stock and approximately
$1.4 million in legal and professional and other expenses that will be incurred
in connection with the distribution. The distribution of common shares will be
taxable to the Company which will recognize income to the extent of the excess
of the value of KSL's common shares distributed over the tax basis of KSL's
assets in the hands of the Company. The Company will use certain net operating
losses to reduce that income, but the total amount of income is likely to exceed
such offsetting losses, and the distribution agreement obligates KSL to pay the
Company amounts calculated based on whatever tax is due on the net amount of
income. The Company cannot predict exactly what this amount will be and what the
tax will be, but estimates that the tax may range from approximately $10 million
to $20 million, assuming that KSL's common shares (based on the planned
distribution of one KSL common share for each three shares of the Company's
common stock) have a value on the distribution date ranging from $13.50 per
common share to $16.50 per common share. The amount of income tax liability
incurred by the Company could vary dramatically if the KSL common shares have a
value on the distribution date outside of the estimated range or if the Internal
Revenue Service were to successfully disallow any of the offsetting losses.
Additionally, in connection with the planned distribution, the Company
and KSL intend to enter into an agreement, whereby KSL will pay the Company an
amount of money calculated based on any tax liability of the Company that (i) is
attributable to increases in tax from past years arising out of adjustments
required by Federal and state tax authorities, to the extent that such increases
are properly allocable, in the judgement of the Company, to the businesses that
become part of KSL, or (ii) is attributable to the distribution of KSL's common
shares and to the operations of KSL's businesses in the current year and the
preceding years. In the event of an examination of the Company by Federal or
state tax authorities, the Company will have unfettered control over the
examination, administrative appeal, settlement or litigation that may be
involved, notwithstanding that KSL has agreed to pay any additional tax.
Recent Accounting Pronouncements
The Company has assessed the reporting and disclosure requirements of
SFAS No. 133, "Accounting and Derivative Instruments and Hedging Activities",
which establishes the accounting and reporting standards for such activities.
Under SFAS No. 133, companies must recognize all derivative instruments on the
balance sheet at fair value. Changes in the value of derivative instruments
which are considered hedges, will either be offset against the change in fair
value of the hedged item through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings, depending on the nature
of the hedge. The Company will adopt SFAS No. 133, as amended, in the first
quarter of 2001. The Company does not have any derivative contracts, and does
not anticipate that adoption will have a material effect on the Company's
results of operations or financial position.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the
adverse changes in market rates and prices) to which the Company is exposed are
interest rates on the Company's debt and investment portfolios. The Company
centrally manages its debt and investment portfolios considering investment
opportunities and risks, tax consequences and overall financing strategies. The
Company's investment portfolio consists of cash equivalents; accordingly, the
carrying amounts approximate fair value. The Company's investments are not
material to the financial position or performance of the Company. Assuming
variable rate debt of $17.6 million at December 31, 2000, a one percent increase
in interest rates would increase interest expense by approximately $176,000.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data of the
Company begins on page F-1 of this report. Such information is hereby
incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
The information required by Part III (Items 10, 11, 12 and 13) of Form
10-K is incorporated by reference from portions of the Registrant's definitive
proxy statement to be filed with the Securities and Exchange Commission not
later than 120 days after the close of the fiscal year covered by this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Beginning
(a)(1) Financial Statements Page
Set forth below are financial statements appearing in this report.
Independent Auditors' Report................................ F - 1
Financial Statements of Kaneb Services, Inc., and Subsidiaries:
Consolidated Statements of Income - Years Ended
December 31, 2000, 1999 and 1998....................... F - 2
Consolidated Balance Sheets - December 31, 2000 and 1999.. F - 3
Consolidated Statements of Cash Flows - Years Ended
December 31, 2000, 1999 and 1998....................... F - 4
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended December 31, 2000, 1999 and 1998.. F - 5
Notes to Consolidated Financial Statements................ F - 6
(a)(2) Financial Statement Schedules
Set forth are the financial statement schedules
appearing in this report.
Schedule I - Kaneb Services, Inc. (Parent Company)
Condensed Financial Statements:
Statements of Income - Years Ended December 31, 2000,
1999 and 1998.......................................... F - 27
Balance Sheets - December 31, 2000 and 1999.............. F - 28
Statements of Cash Flows - Years Ended
December 31, 2000, 1999 and 1998....................... F - 29
Schedule II - Kaneb Services, Inc. Valuation and
Qualifying Accounts - Years Ended December
31, 2000, 1999 and 1998................................ F - 30
Schedules, other than those listed above, have been omitted because of
the absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements or
related notes thereto.
(a)(3) List of Exhibits
3.1 Restated Certificate of Incorporation of the Registrant, dated
September 26, 1979, filed as Exhibit 3.1 of the exhibits to the
Registrant's Registration Statement on Form S-16, which exhibit is
hereby incorporated by reference.
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated April 30, 1981, filed as Exhibit 3.2 of the
exhibits to the Registrant's Annual Report on Form 10-K ("Form 10-K")
for the year ended December 31, 1981, which exhibit is hereby
incorporated by reference.
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated May 28, 19875, filed as Exhibit 4.1 of the
exhibits to the Registrant's Quarterly Report on Form 10-Q ("Form
10-Q") for the quarter ended June 30, 1985, which exhibit is hereby
incorporated by reference.
3.4 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated September 17, 1985, filed as Exhibit 4.1 of
the exhibits to the Registrant's Form 10-Q for the quarter ended
September 30, 1985, which exhibit is hereby incorporated by reference.
3.5 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated July 10, 1990, filed as Exhibit 3.5 of the
exhibits to the Registrant's Form 10-K for the year ended December 31,
1990, which exhibit is hereby incorporated by reference.
3.6 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated September 21, 1990, filed as Exhibit 3.5 of
the exhibits to the Registrant's Form 10-Q for the quarter ended
September 30, 1990, which exhibit is hereby incorporated by reference.
3.7 By-laws of the Registrant, filed as exhibit 3.7 to Registrant's Form
10-K for the year ended December 31, 1998, which exhibit is hereby
incorporated by reference.
4.1 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, filed as Exhibit 4 of the exhibits
to the Registrant's Form 10-Q for the quarter ended September 30, 1983,
which exhibit is hereby incorporated by reference.
4.2 Certificate of Designation, Preferences and Rights related to the
Registrant's Series B Junior Participating Preferred Stock, filed as
Exhibit 4.2 to the Registrant's 10-K for the year ended December 31,
1998, which exhibit is incorporated herein by reference.
4.3 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, Series C, dated April 23, 1991,
filed as Exhibit 4.4 of the exhibits to Registrant's Form 10-K for the
year ended December 31, 1991, which exhibit is hereby incorporated by
reference.
4.4 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, Series F, dated June 12, 1997,
filed as Exhibit 4.4 of the Exhibits to Registrant's Form 10-K for the
year ended December 31, 1997, which exhibit is hereby incorporated by
reference.
4.5 Indenture between Moran Energy Inc. ("Moran") and First City National
Bank of Houston ("First City"), dated January 15, 1984, under which
Moran issued the 8 3/4% Convertible Subordinated Debentures due 2008,
filed as Exhibit 4.1 to Moran's Registration Statement on Form S-3 (SEC
File No. 2-81227), which exhibit is hereby incorporated by reference.
4.6 First Supplemental Indenture between the Registrant and First City,
dated as of March 20, 1984, under which the Registrant assumed
obligations under the Indenture listed as Exhibit 4.5 above, filed as
Exhibit 4.7 of the Registrant's Form 10-K for the year ended December
31, 1983, which exhibit is hereby incorporated by reference.
10.1 Kaneb Services, Inc. Savings Investment Plan, as amended, filed as
Exhibit 4.10 of the exhibits to the Registrant's Registration Statement
on Form S-8 ("Form S-8") (S.E.C. File No. 33-41295) and as Exhibit 4.1
to the exhibits of Registrant's Form S-8 (S.E.C. File No. 333-14067),
which exhibits are hereby incorporated by reference.
10.2* Kaneb Services, Inc. 1994 Stock Incentive Plan, filed as Exhibit 4.12
to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
33-54027), which exhibit is hereby incorporated by reference.
10.3* Kaneb Services, Inc. Deferred Stock Unit Plan, as amended, filed as
Exhibit 4.1 to the exhibits of the Registrant's Form S-8 (S.E.C. File
No. 333-08725) and as Exhibit 10.1 to the Exhibits of the Registrant's
Current Report on Form 8-K ("Form 8-K"), which exhibits are hereby
incorporated by reference.
10.4* Kaneb Services, Inc. 1996 Supplemental Deferred Compensation Plan,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-08727), and as Exhibit 10.2 to the Exhibits of the
Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.5* Kaneb Services, Inc. $1.63 Director Stock Options, filed as Exhibit 4.1
to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
33-58981), which exhibit is hereby incorporated by reference.
10.6* Kaneb Services, Inc. Directors Stock Options I, filed as Exhibit 4.1 to
the exhibits of the Registrant's Form S-8 (S.E.C. File No. 333-14069),
which exhibit is hereby incorporated by reference.
10.7* Kaneb Services, Inc. 1996 Directors Stock Incentive Plan, as amended,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-14071) and as Exhibit 4.1 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-22109), and as supplemented,
filed as Exhibit 4.2 to the Exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-60195), and as Exhibit 10.1 to the Exhibits of the
Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.8* Kaneb Services, Inc. Non-Employee Directors Deferred Stock Unit Plan,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-08723), and as Exhibit 10.3 to the Exhibits of the
Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.9* Form of Termination Agreement, filed as Exhibit 10.10 to the exhibits
of the Registrant's Form 10-K for the year ended December 31, 1996,
which exhibit is hereby incorporated by reference.
10.10* Form of Indemnification Agreement, filed as Exhibit 10.11 to the
Registrant's Form 10-K for the year ended December 31, 1999, which
exhibit is hereby incorporated by reference.
10.11 Amended and Restated Loan Agreement between Furmanite PLC, Bank of
Scotland and certain other Lenders, dated May 1, 1991, as amended, (the
"Furmanite Loan Agreement"), filed as Exhibit 10.8 of the exhibits to
the Registrant's Form 10-K for the year ended December 31, 1994;
Exhibit 10.12 of the exhibits to the Registrant's Form 10-K for the
year ended December 31, 1996; Exhibit 10.12 of the Registrant's Form
10-K for the year ended December 31, 1997; and, Exhibit 10.13 of the
Registrant's Form 10-K for the year ended December 31, 1999, which
exhibits are hereby incorporated by reference.
10.12 Amendment to the Furmanite Loan Agreement, filed herewith.
10.13 Loan Agreement between the Registrant, KPL and Bank of Scotland, (the
"KSI Loan Agreement") dated as of December 1, 1995, filed as Exhibit
10.10 of the exhibits to the Registrant's Form 10-K for the year ended
December 31, 1995, which exhibit is hereby incorporated by reference.
10.14 Amendment to the KSI Loan Agreement, filed herewith.
21 List of subsidiaries of the Registrant, filed herewith.
23 Consent of KPMG LLP, filed herewith.
Certain instruments respecting long-term debt of the Registrant have
been omitted pursuant to instructions as to Exhibits. The Registrant
agrees to furnish copies of any of such instruments to the Commission
upon request.
* Denotes management contracts.
(b) Reports on Form 8-K
Current Report on Form 8-K regarding the decision of Registrant's Board
of Directors to distribute its pipeline, terminaling and product
marketing business to stockholders in the form of a new limited
liability company, dated November 29, 2000.
Current Report on Form 8-K regarding Kaneb Pipe Line Partners L.P.'s
Acquisition of Shore Terminals LLC, located in California, Washington,
Oregon and Nevada, dated January 3, 2001.
Current Report on Form 8-K/A updating Kaneb Pipe Line Partners L.P.'s
Acquisition of Shore Terminals LLC, located in California, Washington,
Oregon and Nevada, dated March 19, 2001.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Kaneb Services, Inc.
We have audited the consolidated financial statements of Kaneb Services, Inc.
and its subsidiaries as listed in the index appearing under Item 14(a)(1). In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the index appearing
under Item 14(a)(2). These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
March 2, 2001
F - 1
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
-------------- -------------- ---------------
Revenues:
Services............................................... $ 110,440,000 $ 113,476,000 $ 124,413,000
Products............................................... 17,201,000 21,957,000 11,412,000
-------------- -------------- ---------------
Total revenues....................................... 127,641,000 135,433,000 135,825,000
-------------- -------------- ---------------
Costs and expenses:
Operating costs........................................ 96,341,000 105,078,000 112,161,000
Cost of products sold.................................. 15,749,000 19,218,000 9,272,000
Depreciation and amortization.......................... 5,097,000 5,896,000 5,966,000
General and administrative............................. 6,352,000 9,807,000 5,091,000
-------------- -------------- ---------------
Total costs and expenses............................. 123,539,000 139,999,000 132,490,000
-------------- -------------- ---------------
Operating income (loss).................................... 4,102,000 (4,566,000) 3,335,000
Interest income............................................ 909,000 534,000 -
Other income (expense)..................................... (239,000) (208,000) (26,000)
Interest expense........................................... (3,883,000) (3,817,000) (4,100,000)
-------------- -------------- ---------------
Income (loss) from continuing operations before
income taxes........................................... 889,000 (8,057,000) (791,000)
Income tax benefit (expense)............................... 5,894,000 38,507,000 (473,000)
-------------- -------------- ---------------
Income (loss) from continuing operations................... 6,783,000 30,450,000 (1,264,000)
Income from discontinued operations - businesses to be
distributed to common shareholders, net of
income taxes........................................... 10,386,000 28,459,000 14,840,000
-------------- -------------- ---------------
Net income........................................... 17,169,000 58,909,000 13,576,000
Dividends applicable to preferred stock.................... 479,000 487,000 508,000
-------------- -------------- ---------------
Net income applicable to common stock...................... $ 16,690,000 $ 58,422,000 $ 13,068,000
============== ============== ===============
Earnings (loss) per common share:
Basic:
Continuing operations................................ $ 0.20 $ 0.95 $ (0.06)
Discontinued operations.............................. 0.33 0.91 0.47
-------------- -------------- ---------------
$ 0.53 $ 1.86 $ 0.41
============== ============== ===============
Diluted:
Continuing operations................................ $ 0.19 $ 0.92 $ (0.06)
Discontinued operations.............................. 0.31 0.87 0.47
-------------- -------------- ---------------
$ 0.50 $ 1.79 $ 0.41
============== ============== ===============
See notes to consolidated financial statements.
F - 2
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
2000 1999
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 20,517,000 $ 14,516,000
Accounts receivable, trade (net of allowance for doubtful
accounts of $605,000 in 2000 and $999,000 in 1999)........... 29,198,000 33,334,000
Inventories.................................................... 7,641,000 8,587,000
Prepaid expenses and other current assets...................... 6,749,000 4,423,000
Current deferred tax asset..................................... 36,489,000 5,250,000
-------------- --------------
Total current assets......................................... 100,594,000 66,110,000
-------------- --------------
Property and equipment............................................ 30,585,000 30,717,000
Less accumulated depreciation and amortization.................... 20,043,000 19,529,000
-------------- --------------
Net property and equipment..................................... 10,542,000 11,188,000
-------------- --------------
Excess of cost over fair value of net assets of acquired businesses 62,470,000 61,222,000
Deferred income taxes and other assets............................ 11,215,000 37,656,000
Net assets of discontinued operations - businesses to be distributed
to common shareholders......................................... 41,822,000 43,364,000
-------------- --------------
$ 226,643,000 $ 219,540,000
============== ==============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt - technical services......... $ 595,000 $ 2,471,000
Accounts payable............................................... 5,081,000 6,831,000
Accrued expenses............................................... 13,733,000 14,617,000
-------------- --------------
Total current liabilities.................................... 19,409,000 23,919,000
-------------- --------------
Long-term debt, less current portion:
Technical services............................................. 18,197,000 20,557,000
Parent company................................................. 21,396,000 23,666,000
-------------- --------------
Total long-term debt, less current portion................... 39,593,000 44,223,000
-------------- --------------
Other liabilities................................................. 1,602,000 6,595,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value............................. 5,792,000 5,792,000
Common stock, without par value. Authorized
60,000,000 shares; issued 36,641,121 shares in 2000 and
36,638,069 shares in 1999.................................... 4,250,000 4,249,000
Additional paid-in capital..................................... 203,989,000 197,313,000
Treasury stock, at cost........................................ (31,440,000) (30,278,000)
Accumulated deficit............................................ (13,311,000) (30,001,000)
Accumulated other comprehensive income (loss) -
foreign currency translation adjustment...................... (3,241,000) (2,272,000)
-------------- --------------
Total stockholders' equity................................... 166,039,000 144,803,000
-------------- --------------
$ 226,643,000 $ 219,540,000
============== ==============
See notes to consolidated financial statements.
F - 3
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- ---------------
Operating activities:
Income (loss) from continuing operations............... $ 6,783,000 $ 30,450,000 $ (1,264,000)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Depreciation and amortization...................... 5,097,000 5,896,000 5,966,000
Increase in the estimated redemption value of
Series F preferred stock......................... 1,387,000 4,863,000 -
Deferred income taxes.............................. (6,150,000) (37,197,000) (35,000)
Other.............................................. 410,000 553,000 -
Changes in current assets and liabilities:
Accounts receivable.............................. 5,857,000 (5,216,000) (2,077,000)
Inventories...................................... 1,359,000 1,078,000 (2,586,000)
Prepaid expenses and other current assets........ (2,346,000) (2,236,000) (480,000)
Accounts payable and accrued expenses............ (3,589,000) (3,044,000) 3,486,000
------------- ------------- --------------
Operating activities of continuing operations........ 8,808,000 (4,853,000) 3,010,000
Operating activities of discontinued operations...... 53,407,000 54,937,000 51,196,000
------------- ------------- --------------
Net cash provided by operating activities............ 62,215,000 50,084,000 54,206,000
------------- ------------- --------------
Investing activities:
Capital expenditures................................... (2,690,000) (2,719,000) (2,855,000)
Acquisitions........................................... (4,804,000) (4,049,000) -
Other, net............................................. (418,000) 28,000 1,465,000
Investing activities of discontinued operations........ (20,067,000) (66,922,000) (53,292,000)
------------- ------------- --------------
Net cash used in investing activities................ (27,979,000) (73,662,000) (54,682,000)
------------- ------------- --------------
Financing activities:
Issuance of debt ...................................... 924,000 2,810,000 2,865,000
Payments on debt and capital leases ................... (7,429,000) (2,515,000) (8,459,000)
Preferred stock dividends paid......................... (479,000) (487,000) (508,000)
Common stock issued.................................... 255,000 253,000 194,000
Purchase of treasury stock............................. (1,530,000) (555,000) (4,868,000)
Financing activities of discontinued operations........ (19,976,000) 31,324,000 2,890,000
------------- ------------- --------------
Net cash provided by (used in) financing activities.. (28,235,000) 30,830,000 (7,886,000)
------------- ------------- --------------
Increase (decrease) in cash and cash equivalents.......... 6,001,000 7,252,000 (8,362,000)
Cash and cash equivalents at beginning of year............ 14,516,000 7,264,000 15,626,000
------------- ------------- --------------
Cash and cash equivalents at end of year.................. $ 20,517,000 $ 14,516,000 $ 7,264,000
============= ============= ==============
See notes to consolidated financial statements.
F - 4
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PART 1 OF 2
Preferred Common Additional Treasury
Stock Stock Paid-In Capital Stock
------------- ------------- --------------- -------------
Balance at January 1, 1998 $ 5,792,000 $ 4,234,000 $ 197,242,000 $ (25,216,000)
Net income for the year....... - - - -
Common stock issued........... - 5,000 (120,000) 309,000
Purchase of treasury stock ... - - - (4,868,000)
Preferred stock dividends
declared..................... - - - -
Foreign currency translation
adjustment................... - - - -
------------- ------------ ------------- -------------
Comprehensive income
for the year.................
Balance at December 31, 1998 5,792,000 4,239,000 197,122,000 (29,775,000)
Net income for the year...... - - - -
Common stock issued.......... - 10,000 191,000 52,000
Purchase of treasury stock .. - - - (555,000)
Preferred stock dividends
declared.................... - - - -
Foreign currency translation
adjustment.................. - - - -
------------- ------------- ------------- -------------
Comprehensive income
for the year................
Balance at December 31, 1999 5,792,000 4,249,000 197,313,000 (30,278,000)
Net income for the year...... - - - -
Common stock issued.......... - 1,000 (114,000) 368,000
Deferred stock units, vested. - - 540,000 -
Series F Preferred stock to
be exchanged for common
stock....................... - - 6,250,000 -
Purchase of treasury stock... - - - (1,530,000)
Preferred stock dividends
declared.................... - - - -
Foreign currency translation
adjustment.................. - - - -
------------- ------------- ------------- -------------
Comprehensive income
for the year................
Balance at December 31, 1999 $ 5,792,000 $ 4,250,000 $ 203,989,000 $ (31,440,000)
============= ============= ============= =============
See notes to consolidated financial statements.
F - 5
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PART 2 OF 2
Accumulated Other
Accumulated Comprehensive Comprehensive
Deficit Income (Loss) Income
------------- ------------------ --------------
Balance at January 1, 1998 $(101,491,000) $ (2,114,000) $ -
Net income for the year....... 13,576,000 - 13,576,000
Common stock issued........... - - -
Purchase of treasury stock ... - - -
Preferred stock dividends
declared..................... (508,000) - -
Foreign currency translation
adjustment................... - 604,000 604,000
------------- ------------ -------------
Comprehensive income
for the year................. $ 14,180,000
=============
Balance at December 31, 1998 (88,423,000) (1,510,000) -
Net income for the year...... 59,909,000 - 58,909,000
Common stock issued.......... - - -
Purchase of treasury stock .. - - -
Preferred stock dividends
declared.................... (487,000) - -
Foreign currency translation
adjustment.................. - (762,000) (762,000)
------------- ------------ -------------
Comprehensive income
for the year................ $ 58,147,000
=============
Balance at December 31, 1999 (30,001,000) (2,272,000) -
Net income for the year...... 17,169,000 - 17,169,000
Common stock issued.......... - - -
Deferred stock units, vested. - - -
Series F Preferred stock to
be exchanged for common
stock....................... - - -
Purchase of treasury stock... - - -
Preferred stock dividends
declared.................... (479,000) - -
Foreign currency translation
adjustment.................. - (969,000) (969,000)
------------- ------------ -------------
Comprehensive income
for the year................ $ 16,200,000
=============
Balance at December 31, 2000 $ (13,311,000) $ (3,241,000)
============= ============
See notes to consolidated financial statements.
F - 5
KANEB SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by Kaneb
Services, Inc. (the "Company") and its subsidiaries in the preparation of its
consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. On November 27, 2000, the Board of Directors of the
Company authorized the distribution of its pipeline and terminaling and product
marketing business (the "Distribution") to its shareholders in the form of a new
limited liability company, Kaneb Services LLC ("KSL"). This new entity will own
the 2% general partner interest and 28% limited partner interest in Kaneb Pipe
Line Partners, L.P. ("KPP") and the Company's wholly-owned petroleum marketing
subsidiary. As a result, the accompanying financial statements reflect the
operations of KSL as "discontinued operations - businesses to be distributed to
common shareholders" (See Note 10). All significant intercompany transactions
and balances are eliminated in consolidation.
Cash and Cash Equivalents
The Company's policy is to invest cash in highly liquid investments with
original maturities of three months or less. Accordingly, uninvested cash
balances are kept at minimum levels. Such investments are valued at cost, which
approximates market, and are classified as cash equivalents. The Company does
not have any derivative financial instruments.
Inventories
Inventories consist primarily of materials and supplies of the technical
services business and are valued at the lower of cost or market. Cost is
determined using the weighted average cost method.
Property and Equipment
Property and equipment are carried at historical cost. Certain leases
have been capitalized and the leased assets have been included in property and
equipment. Additions of new equipment and major renewals and replacements of
existing equipment are capitalized. Repairs and minor replacements that do not
materially increase values or extend useful lives are expensed. Depreciation of
property and equipment is provided on the straight-line basis at rates based
upon the expected useful lives of the various classes of assets.
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of assets.
Revenue Recognition
Revenues are recognized when services to customers have been rendered or
when products have been delivered.
Earnings Per Share
The amount of earnings for the period applicable to each share of common
stock outstanding during the period ("Basic" earnings per share) and the amount
of earnings for the period applicable to each share of common stock outstanding
during the period and to each share that would have been outstanding assuming
the issuance of common shares for dilutive potential common shares outstanding
during the period ("Diluted" earnings per share) have been presented in the
consolidated statements of income.
Foreign Currency Translation
The Company translates the balance sheets of its foreign subsidiaries
using year-end exchange rates and translates income statement amounts using the
average exchange rates in effect during the year. The gains and losses resulting
from the change in exchange rates from year to year have been reported
separately as a component of accumulated other comprehensive income (loss) in
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in the statements of income.
Excess of Cost Over Fair Value of Net Assets of Acquired Businesses
The excess of the cost over the fair value of net assets of acquired
businesses is being amortized on a straight-line basis over periods ranging from
15 to 40 years. Accumulated amortization was $18.4 million and $16.2 million at
December 31, 2000 and 1999, respectively.
The Company periodically evaluates the propriety of the carrying amount
of the excess of cost over fair value of net assets of acquired businesses, as
well as the amortization period, to determine whether current events or
circumstances warrant adjustments to the carrying value and/or revised estimates
of useful lives. The Company assesses the recoverability of the amounts by
determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows. The assessment of
recoverability will be impacted if estimated future cash flows are not achieved.
The Company believes that no such impairment has occurred and that no reduction
in estimated useful lives is warranted.
Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncement
The Company has assessed the reporting and disclosure requirements of
SFAS No. 133, "Accounting and Derivative Instruments and Hedging Activities",
which establishes the accounting and reporting standards for such activities.
Under SFAS No. 133, companies must recognize all derivative instruments on the
balance sheet at fair value. Changes in the value of derivative instruments
which are considered hedges, will either be offset against the change in fair
value of the hedged item through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings, depending on the nature
of the hedge. The Company will adopt SFAS No. 133, as amended, in the first
quarter of 2001. The Company does not have any derivative contracts, and does
not anticipate that adoption will have a material effect on the Company's
results of operations or financial position.
2. INCOME TAXES
Income (loss) from continuing operations before income tax expense is
comprised of the following components:
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998
-------------- ------------- -------------
Domestic operations......................... $ (2,371,000) $ (7,004,000) $ 272,000
Foreign operations.......................... 3,260,000 (1,053,000) (1,063,000)
-------------- ------------- ------------
Income (loss) before income taxes........... $ 889,000 $ (8,057,000) $ (791,000)
============== ============= ============
Income tax expense (benefit) is comprised of the following components:
Year Ended
December 31, Federal Foreign State Total
--------------- ------------- ------------ ------------ -------------
2000:
Current............... $ 47,000 $ 1,031,000 $ (822,000) $ 256,000
Deferred.............. (5,699,000) (278,000) (173,000) (6,150,000)
------------- ------------ ------------ -------------
$ (5,652,000) $ 753,000 $ (995,000) $ (5,894,000)
============= ============ ============ =============
1999:
Current................. $ 81,000 $ (735,000) $ (656,000) $ (1,310,000)
Deferred................ (37,451,000) 8,000 246,000 (37,197,000)
------------- ------------ ------------ -------------
$ (37,370,000) $ (727,000) $ (410,000) $ (38,507,000)
============= ============ ============ =============
1998:
Current................. $ 188,000 $ 320,000 $ - $ 508,000
Deferred................ (32,000) - (3,000) (35,000)
------------- ------------ ------------ -------------
$ 156,000 $ 320,000 $ (3,000) $ 473,000
============= ============ ============ =============
The reasons for the differences between the amount of tax expense
provided and the amount of tax expense computed by applying the statutory
Federal income tax rate to income (loss) from continuing operations before
income taxes for the years 2000, 1999 and 1998 are as follows:
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998
----------------- ------------------ -----------------
Expected tax at
statutory rates................ $ 311,000 $ (2,820,000) $ (277,000)
Increase (decrease) in taxes
resulting from:
Change in valuation allowance.. (6,280,000) (37,124,000) (1,905,000)
State income taxes, net........ (647,000) (267,000) (2,000)
Foreign losses not benefited and
foreign income taxes......... (388,000) (13,000) 2,098,000
Non-deductible charges related
to Series F Preferred stock.. 485,000 1,702,000 -
Goodwill amortization ......... 598,000 649,000 683,000
Resolution of foreign tax
issues and other............. 27,000 (634,000) (124,000)
----------------- ------------------ -----------------
$ (5,894,000) $ (38,507,000) $ 473,000
================= ================== =================
At December 31, 2000, the Company had available domestic tax net
operating loss carryforwards ("NOLs"), which will expire, if unused, as follows:
$33,641,000 in 2002, $30,761,000 in 2003, $16,866,000 in 2005, $17,508,000 in
2006 and $3,033,000 in 2007. The utilization of these carryforwards could be
subject to significant limitation in the event of a "change in ownership", as
defined in the tax laws, which might be caused by purchases or sales of the
Company's securities by persons or groups now or in the future having 5% or
greater ownership of the Company's common stock.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are as follows:
December 31,
-------------------------------------
2000 1999
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards......................... $ 35,633,000 $ 41,119,000
Investment tax credit carryforwards...................... - 1,786,000
Alternative minimum tax credit carryforwards............. 4,393,000 3,996,000
Accrued liabilities...................................... 1,198,000 1,308,000
Other.................................................... 2,570,000 1,479,000
-------------- --------------
Total gross deferred tax assets.......................... 43,794,000 49,688,000
Less valuation allowance................................. - (7,204,000)
-------------- --------------
Net deferred tax assets.................................. 43,794,000 42,484,000
-------------- --------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation........................................ (136,000) (770,000)
Foreign deferred tax liabilities......................... (21,000) (341,000)
-------------- --------------
Total gross deferred tax liabilities..................... (157,000) (1,111,000)
-------------- --------------
Net deferred tax asset................................... $ 43,637,000 $ 41,373,000
============== ==============
The Company maintains a valuation allowance to adjust the total deferred
tax assets to net realizable value in accordance with SFAS No. 109. In 2000 and
1999, the Company reduced the valuation allowance by $6.3 million and $37.1
million, respectively, as a result of its reevaluation of the realizability of
income tax benefits from future operations. The Company considered positive
evidence, including the effect of the Distribution, recent historical levels of
taxable income, the scheduled reversal of deferred tax liabilities, tax planning
strategies, revised estimates of future taxable income growth, and expiration
periods of NOLs, among other things, in making this evaluation and concluding
that it is more likely than not that the Company will realize the benefit of its
net deferred tax assets. Ultimate realization of the deferred tax asset is
dependent upon, among other factors, the Company's ability to generate
sufficient taxable income within the carryforward periods, including the effect
of the Distribution, and is subject to change depending on the tax laws in
effect in the years in which the carryforwards are used.
3. RETIREMENT PLANS
The Company has a defined contribution plan which covers substantially
all domestic employees and provides for varying levels of employer matching.
Contributions from continuing operations to this plan were $0.7 million, $0.6
million and $0.5 million for 2000, 1999 and 1998, respectively.
One of the Company's foreign subsidiaries has a defined benefit pension
plan covering substantially all of its United Kingdom employees (the "U.K.
Plan"). The benefit is based on the average of the employee's salary for the
last three years of employment. Generally, the employee contributes 5% and the
employer contributes up to 12% of pay. Plan assets are primarily invested in
unitized pension funds managed by United Kingdom registered funds managers. The
most recent valuation of the U.K. Plan was performed as of October 31, 2000.
Net pension cost for the U.K. Plan included the following components:
Year Ended December 31,
---------------------------------------------------
2000 1999 1998
-------------- ------------- -------------
Net periodic benefit cost:
Service cost................................ $ 623,000 $ 1,164,000 $ 1,352,000
Interest cost............................... 2,269,000 2,151,000 2,311,000
Expected return on plan assets.............. (2,805,000) (4,443,000) (2,527,000)
Amortization of prior service cost.......... 15,000 27,000 27,000
Recognized net (gain) loss.................. (222,000) 1,859,000 (508,000)
-------------- ------------- -------------
Net periodic pension cost (income)............ $ (120,000) $ 758,000 $ 655,000
============== ============= =============
Actuarial assumptions used in the accounting for the U.K. Plan were a
weighted average discount rate of 6.5% for 2000 and 1999 and 6.25% for 1998, an
expected long-term rate of return on assets of 7.5% for 2000, 1999 and 1998 and
a rate of increase in compensation levels of 3.0% for 2000, 1999 and 1998. The
funded status of the U.K. Plan is as follows:
December 31,
--------------------------------
2000 1999
-------------- --------------
Projected benefit obligation:
Beginning of year.......................................... $ 37,098,000 $ 35,438,000
Service cost............................................... 623,000 1,164,000
Interest cost.............................................. 2,269,000 2,151,000
Contributions.............................................. 596,000 786,000
Benefits paid.............................................. (910,000) (636,000)
Other...................................................... (3,128,000) (1,805,000)
------------- -------------
End of year................................................ 36,548,000 37,098,000
------------- -------------
Fair value of plan assets:
Beginning of year.......................................... 41,905,000 36,266,000
Actual return on plan assets............................... 2,940,000 6,364,000
Contributions.............................................. 596,000 786,000
Benefits paid.............................................. (910,000) (636,000)
Other...................................................... 1,976,000 (875,000)
------------- -------------
End of year................................................ 46,507,000 41,905,000
------------- -------------
Excess fair value over projected obligation.................. 9,959,000 4,807,000
Unrecognized net actuarial gain.............................. (9,234,000) (4,811,000)
Unamortized prior service cost............................... 141,000 168,000
------------- -------------
Net pension prepaid asset.................................... $ 866,000 $ 164,000
============= =============
4. PROPERTY AND EQUIPMENT
The cost of property and equipment from continuing operations is as
follows:
December 31,
--------------------------------
2000 1999
-------------- --------------
Technical services..................................... $ 22,614,000 $ 23,226,000
Information technology services........................ 4,123,000 3,643,000
General corporate...................................... 3,848,000 3,848,000
-------------- --------------
Total property and equipment........................... 30,585,000 30,717,000
Less accumulated depreciation and amortization......... 20,043,000 19,529,000
-------------- --------------
Net property and equipment............................. $ 10,542,000 $ 11,188,000
============== ==============
Equipment under capital leases are included in the cost of property and
equipment is as follows:
December 31,
--------------------------------
2000 1999
-------------- --------------
Technical services equipment........................... $ 2,255,000 $ 2,144,000
Accumulated depreciation............................... (1,122,000) (1,222,000)
-------------- --------------
Net equipment acquired under capital leases............ $ 1,133,000 $ 922,000
============== ==============
5. LONG-TERM DEBT
Long-term debt from continuing operations is summarized as follows:
December 31,
--------------------------------
2000 1999
-------------- --------------
Technical services credit facility due in
June 2002............................................ $ 14,120,000 $ 17,945,000
Various notes of Technical services foreign
subsidiaries, with interest ranging from 6.75% to
8.0%, due through 2012............................... 3,473,000 4,097,000
Capital leases......................................... 1,199,000 986,000
Parent company 8.75% convertible subordinated
debentures due through 2008.......................... 21,396,000 23,666,000
Parent company revolving credit facility............... - -
-------------- --------------
Total long-term debt................................... 40,188,000 46,694,000
Less current portion................................... 595,000 2,471,000
-------------- --------------
Total long-term debt, less current portion............. $ 39,593,000 $ 44,223,000
============== ==============
At December 31, 2000, $14.1 million was outstanding under a credit
facility, as amended, that was obtained by a wholly-owned subsidiary in
conjunction with the acquisition of Furmanite. The credit facility, which is
without recourse to the Company, is due in June 2002, bears interest at the
option of the borrower at variable rates (7.94% at December 31, 2000) based on
either the LIBOR rate or the prime rate plus a differential of up to 150 basis
points, has a commitment fee equal to one-half of one percent per annum on
unutilized amounts, contains certain financial and operational covenants with
respect to the technical services group of companies, and restricts the
subsidiary from paying dividends to the Company under certain circumstances.
This credit facility is secured by substantially all of the tangible assets of
the technical services group.
The 8.75% subordinated debentures are convertible into shares of the
Company's common stock at a conversion price of $17.54 per share. Under the
terms of the debentures, the conversion rate will be adjusted following the
Distribution. The Company has satisfied its sinking fund requirements on these
subordinated debentures through 2001.
In December 1995, the Company entered into an agreement with an
international bank that, as amended, provides for a $15 million revolving credit
facility through June 2001, that bears interest at a variable rate at the
Company's option based on the LIBOR rate plus 100 basis points or at the prime
rate in effect from time to time with a commitment fee of 0.5% per annum of the
unused credit facility. The credit facility is secured by one million of the
Company's limited partnership units in KPP. No amounts were drawn under the
credit facility at December 31, 2000 or 1999. In connection with the
Distribution, the Company expects to enter into a new credit agreement to
replace this agreement.
Annual sinking fund requirements and debt maturities on consolidated
debt, including capital leases, are: $0.6 million; $19.1 million; $2.3 million;
$2.1 million and $2.1 million, respectively, for each of the five years ending
December 31, 2005.
6. CAPITAL STOCK
The changes in the number of issued and outstanding shares of the
Company's preferred and common stock are summarized as follows:
Common Stock
--------------------------------------------------
Preferred Held in
Stock Issued Issued Treasury Outstanding
------------- -------------- -------------- -----------------
Balance at January 1, 1998................. 568,450 36,527,283 4,346,976 32,180,307
Common shares issued or purchased.......... - 26,923 797,608 (770,685)
------------- -------------- -------------- -----------------
Balance at December 31, 1998............... 568,450 36,554,206 5,144,584 31,409,622
Common shares issued or purchased.......... - 83,863 116,383 (32,520)
------------- -------------- -------------- ----------------
Balance at December 31, 1999............... 568,450 36,638,069 5,260,967 31,377,102
Common shares issued or purchased.......... - 3,052 238,452 (235,400)
------------- -------------- -------------- ----------------
Balance at December 31, 2000............... 568,450 36,641,121 5,499,419 31,141,702
============= ============== ============== ================
Series A Preferred Stock
The Company has 567,950 shares of Cumulative Class A Adjustable Rate
Preferred Stock, Series A ("Series A Preferred") with a stated value of $10 per
share outstanding at December 31, 2000. Dividends accrue quarterly at the
applicable U.S. Treasury rate plus 2.00 percentage points (200 basis points)
("Applicable Rate"), but will in no event be less than 7.5% per annum or greater
than 14% per annum. If dividends are in arrears for two or more quarters,
additional dividends accrue on all dividends in arrears at a rate equal to the
Applicable Rate plus 25 basis points for each quarter dividends are in arrears
(but not more than the lesser of 14% per annum or 300 basis points more than the
Applicable Rate). If unpaid accrued dividends exist with respect to eight or
more quarters, the holders of the Series A Preferred may elect individually to
require the Company to redeem their shares at a price of $12 per share plus
dividends in arrears. No such arrearages existed as of December 31, 2000, 1999
and 1998. The Company, at its option, may redeem shares at any time at a price
of $12 per share (reduced ratably to $10 over 15 years unless unpaid accrued
dividends exist with respect to eight or more quarters) plus accrued and unpaid
dividends thereon. In connection with the planned distribution, the Board of
Directors has authorized the redemption of the Series A Preferred for cash on
March 30, 2001, at the stated redemption price of $10.67 per share, plus accrued
and unpaid dividends, for a total cost of approximately $6.1 million.
Series B Preferred Stock
On April 9, 1998, the Board of Directors of the Company declared a
dividend distribution of one stock purchase right ("Right") for each outstanding
share of common stock to stockholders of record on April 19, 1998. These Rights
are substantially similar to, and were issued in replacement of, rights that
expired on April 19, 1998, pursuant to the Company's Stockholders Rights Plan.
Pursuant to the replacement plan, each Right entitles the holder, upon the
occurrence of certain events, to purchase from the Company one one-hundredth of
a share of Series B Junior Participating Preferred Stock, no par value, at a
price of $15, subject to adjustment. The Rights will not separate from the
common stock or become exercisable until a person or group either acquires
beneficial ownership of 15% or more of the Company's common stock or commences a
tender or exchange offer that would result in ownership of 20% or more,
whichever occurs earlier. The Rights, which expire on April 19, 2008, are
redeemable in whole, but not in part, at the Company's option at any time for a
price of $0.01 per Right. At December 31, 2000 and 1999 there were no Series B
Preferred shares outstanding.
Stock Compensation Plans
Series C Preferred Stock - In April 1991, the Company authorized 1,000
shares of Adjustable Rate Cumulative Class A Preferred Stock, Series C ("Series
C Preferred") which have a preference value of $1.00 per share and are only
entitled to a dividend if the value of the Company's common stock increases. The
Series C Preferred, as an entire class, is entitled to an annual dividend
commencing January 1, 1992, equal to 1/2 of 1% (proportionately reduced for
authorized but unissued shares in the class) of the increase in the average per
share market value of the Company's common stock during the year preceding
payment of the dividend, over $4.79 (the average per share market value of the
Company's common stock during 1990) multiplied by the average number of shares
of common stock outstanding. The Series C Preferred has mandatory redemption
requirements in the event of certain types of corporate reorganizations and may
be redeemed at the option of the Company during the first 60 days of each year
commencing 1994. The redemption price is the sum of (i) one divided by the
average annual yield of all issues of preferred stock listed on the New York
Stock Exchange during the calendar year preceding the date of the redemption
period times the average dividend for the two most recent years plus (ii) a pro
rata portion of the prior year's dividend based upon the number of elapsed days
in the year of redemption plus (iii) any accrued and unpaid dividends. The
Company may also repurchase the shares of a holder at such redemption price
during the first 60 days following the year in which the holder first ceases to
be an employee of the Company. A holder of the Series C Preferred may, at his
option, require the Company to redeem his shares at 120% of such redemption
price if the Company elects, within 10 days after the most recent dividend
payment date, not to pay the accrued dividend. Upon liquidation, holders of the
Series C Preferred are entitled to receive $1.00 per share plus accrued and
unpaid dividends. As of December 31, 2000, there were 500 shares of Series C
Preferred issued and outstanding to certain officers of the Company. The
estimated redemption value of the Series C Preferred Stock was not material for
any of the periods presented. In connection with the planned Distribution, the
Board of Directors has authorized the exchange, in a non-cash transaction, of
5,426 shares of the Company's common stock for all Series C Preferred shares
outstanding. The exchange is expected to be completed in the first half of 2001.
Series F Preferred Stock - In June 1997, the Company authorized and
issued 1,000 shares of Adjustable Rate Cumulative Class A Preferred Stock,
Series F ("Series F Preferred"), with a stated value of $1.00 per share to an
officer of the Company. The annual dividend for the entire class of Series F
Preferred, which accrues on January 1 of each year and is payable on April 1 of
each year, is calculated by multiplying (i) 1% of the annual improvement (but
not including amounts related to any gains or losses on the sale of any KPP
units nor any amounts related to any other gains or losses in excess of $1
million on the sale of other capital assets) in the Company's diluted earnings
per share of common stock ("Common EPS"), by (ii) the amount of issued and
outstanding shares of the Company's common stock on January 1, 1997. The
calculation of the annual dividend for 2000 and 1999 excludes the gain on the
issuance of units by KPP ($10.4 million net of deferred taxes in 1999) as well
as the benefit of recognizing tax loss carryforwards ($6.3 million and $37.1
million, reduction in the valuation allowance in 2000 and 1999, respectively)
and calculations of the annual dividend for subsequent periods will be adjusted
for any tax provision required as a result of recognizing the benefit of the tax
loss carryforwards.
If the Common EPS increase for the five-year period ending December 31,
2001 has not exceeded 20% compounded annually, the series will be redeemed for
$1.00 per share on April 1, 2002. Otherwise, the series will be redeemed on
April 1, 2002 at a "Redemption Price" for the entire class of the series equal
to the average percentage increase in excess of 20% in Common EPS for such
period multiplied by (i) seventy-five hundredths of 1% of the cumulative Common
EPS for each calendar year ended for which the series is outstanding, and (ii)
the amount of issued and outstanding shares of the Company's common stock on
January 1, 1997.
Redemption of the series may be deferred at the Company's option until no
later than April 1, 2003 if the Common EPS increase for the 2001 calendar year
is less than 15%. The Series F Preferred may be redeemed at the option of the
holder at 120% of the Redemption Price if the Company fails to pay an annual
dividend within 10 days of the due date or in the event of a change of control,
or at the Redemption Price in the event of certain corporate reorganizations or
the authorization of a class of preferred stock ranking higher in priority to
the Series F Preferred. Upon liquidation, holders of the Series F Preferred are
entitled to receive $1.00 per share plus accrued and unpaid dividends. General
and administrative expense in the accompanying consolidated statements of income
includes a non-cash charge of $1.4 million and $4.9 million for the years ended
December 31, 2000 and 1999, respectively, for the estimated value of the Series
F Preferred. In connection with the planned Distribution, the Board of Directors
has authorized the exchange, in a non-cash transaction, of 1,351,351 shares of
the Company's common stock for all Series F Preferred shares outstanding. The
exchange is expected to be completed in the first half of 2001.
Stock Option Plans - The Company has stock option plans and agreements
for officers, directors and key employees. The options granted under these plans
and agreements generally expire ten years from date of grant. All options were
granted at prices greater than or equal to the market price at the date of grant
or repricing. At December 31, 2000, options on 2,198,283 shares at prices
ranging from $1.63 to $6.00 were outstanding, of which 1,007,319 were
exercisable at prices ranging from $1.63 to $5.63.
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company applies APB Opinion 25 and
related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS 123. The Black-Scholes
option pricing model has been used to estimate the value of stock options issued
and the assumptions in the calculations under such model include stock price
variance or volatility ranging from 10.20% to 10.63% based on weekly average
variances of the stock for the five year period preceding issuance, a risk-free
rate of return ranging from 4.99% to 6.63% based on the 30-year U.S. treasury
bill rate for the five-year expected life of the options, and no dividend yield.
Using estimates calculated by such option pricing model, pro forma net income,
basic earnings per share and diluted earnings per share would have been
$16,544,000, $0.50 and $0.48, respectively for the year ended December 31, 2000,
as compared to the reported amounts of $17,169,000, $0.53 and $0.50,
respectively. For the year ended December 31, 1999 pro forma net income, basic
earning per share and diluted earnings per share would have been $58,292,000,
$1.84 and $1.77, respectively, as compared to the reported amounts of
$58,909,000, $1.86 and $1.79, respectively. For the year ended December 31,
1998, pro forma net income, basic earnings per share and diluted earnings per
share would have been $13,020,000, $0.39 and $0.39, respectively, as compared to
the reported amounts of $13,576,000, $0.41 and $0.41, respectively.
The changes in stock options outstanding for the Company's plans for
2000, 1999 and 1998 were as follows:
Average Price
Shares per Share
----------- -------------
Outstanding at January 1, 1998......................... 1,578,515 $ 2.70
Granted................................................ 617,347 $ 4.98
Exercised.............................................. (59,910) $ 2.51
Forfeited.............................................. (44,600) $ 3.75
----------
Outstanding at December 31, 1998....................... 2,091,352 $ 3.36
Granted................................................ 210,191 $ 4.29
Exercised.............................................. (80,121) $ 2.64
Forfeited.............................................. (154,622) $ 4.14
----------
Outstanding at December 31, 1999....................... 2,066,800 $ 3.42
Granted................................................ 207,840 $ 5.18
Exercised.............................................. (17,494) $ 4.99
Forfeited.............................................. (58,863) $ 4.65
----------
Outstanding at December 31, 2000....................... 2,198,283 $ 3.54
==========
In connection with the Distribution, the exercise price for each option
to purchase shares of the Company's common stock will be reduced to an amount
equal to the result of (1) the fair market value of a share of the Company's
common stock on the ex-dividend date multiplied by (2) a fraction, the numerator
of which is the original exercise price for the option and the denominator of
which is the fair market value of a share of the Company's common stock on the
last trading date prior to the ex-dividend date. The number of shares subject to
the Company's stock options will not be changed as a result of the Distribution.
Additionally, KSL will agree to issue to the Company's option holders an option
to purchase KSL shares. The exercise price applicable to a given KSL option will
be that price that creates the same ratio of exercise price to market price as
in the adjusted exercise price applicable to the holder's Company option. The
number of common shares subject to a KSL option will be such number as is
necessary to produce an intrinsic value (determined as of the ex-dividend date)
that, when added to the intrinsic value of the adjusted Company option
(determined as of the ex-dividend date), equals the pre-distribution intrinsic
value of the Company's option, if any, (determined as of the last trading date
prior to the ex-dividend date). However, an option to purchase a fraction of a
KSL common share will not be granted. The fair market values of shares of the
Company's common stock and KSL common shares will be based upon the average of
the high and low sales prices of the shares on the relevant date. Further,
excluding the Company's corporate staff, the Company intends to remove
restrictions on exercise or "vest" all Company options which are not yet
exercisable prior to the Distribution.
Deferred Stock Unit Plan
In 1996, the Company initiated a Deferred Stock Unit Plan (the "DSU
Plan"), pursuant to which key employees of the Company have, from time to time,
been given the opportunity to defer a portion of their compensation, for a
specified period toward the purchase of deferred stock units ("DSUs"), an
instrument designed to track the Company's common stock. Under the plan, as
amended in 1998, DSUs are purchased at a value equal to the closing price of the
Company's common stock on the day by which the employee must elect (if they so
desire) to participate in the DSU Plan; which date is established by the
Compensation Committee, from time to time (the "Election Date"). During a
vesting period of one to three years following the Election Date, a
participant's DSUs vest only in an amount equal to the lesser of the
compensation actually deferred to date or the value (based upon the then-current
closing price of the Company's common stock) of the pro-rata portion (as of such
date) of the number of DSUs acquired. After the expiration of the vesting
period, which is typically the same length as the deferral period, the DSUs
become fully vested, but may only be distributed through the issuance of a like
number of shares of the Company's common stock on a pre-selected date, which is
irrevocably selected by the participant on the Election Date and which is
typically no earlier than the expiration of the vesting period and no later than
ten years after the Election Date. DSU accounts are unfunded by the Company and
do not bear interest. Each person that elects to participate in the DSU Plan is
awarded, under the Company's 1994 Stock Incentive Plan, an option to purchase a
number of shares of the Company's common stock ranging from one-half to one and
one-half times (depending on the length of deferral) the number of DSUs
purchased by such person at 100% of the closing price of the Company's common
stock on the Election Date, which options become exercisable over a specified
period after the grant, according to a schedule determined by the Compensation
Committee. At December 31, 2000, vested DSUs aggregating $540,000 were included
in stockholders' equity as additional paid-in capital.
In connection with the Distribution, KSL will agree to issue to all DSU
holders the number of DSUs equivalent in price to KSL shares issuable in the
Distribution. All other terms are expected to remain the same. Similarly, the
Company will agree to issue to employees of KSL who hold DSUs, the number of
shares of the Company's common stock subject to the DSUs held by those
employees. The Company cannot currently determine the number of shares that will
be issuable under this arrangement.
7. EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings (loss)
per share from continuing operations:
Weighted
Average
Net Common Per-Share
Income Shares Amount
--------------- ------------ ---------------
Year Ended December 31, 2000
Income from continuing operations......... $ 6,783,000
Dividend applicable to preferred stock.... (479,000)
---------------
Basic EPS -
Income applicable to common stock...... 6,304,000 31,767,000 $ 0.20
==============
Effect of dilutive securities -
Common stock options, Series F
Preferred Stock and DSUs............. - 1,319,000
--------------- --------------
Diluted EPS -
Income applicable to common stock,
Series F Preferred stock, DSUs
and assumed options exercised........ $ 6,304,000 33,086,000 $ 0.19
=============== ============== ==============
Year Ended December 31, 1999
Income from continuing operations......... $ 30,450,000
Dividend applicable to preferred stock.... (487,000)
---------------
Basic EPS -
Income applicable to common stock...... 29,963,000 31,453,000 $ 0.95
==============
Effect of dilutive securities -
Common stock options, Series F
Preferred Stock and DSUs............. - 1,237,000
--------------- --------------
Diluted EPS -
Income applicable to common stock,
Series F Preferred stock, DSUs
and assumed options exercised........ $ 29,963,000 32,690,000 $ 0.92
=============== ============== ==============
Year Ended December 31, 1998
Loss from continuing operations........... $ (1,264,000)
Dividend applicable to preferred stock.... (508,000)
----------------
Basic EPS -
Loss applicable to common stock........ (1,772,000) 31,740,000 $ (0.06)
==============
Effect of dilutive securities -
Common stock options and DSUs.......... - -
--------------- --------------
Diluted EPS -
Loss applicable to common stock, DSUs
and assumed options exercised........ $ (1,772,000) 31,740,000 $ (0.06)
=============== ============== ===============
Options to purchase 284,597, 605,600 and 2,091,352 shares of common stock
at weighted average prices of $5.40, $4.90 and $3.36, were outstanding at
December 31, 2000, 1999 and 1998, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common stock (or in the case of 1998, all
options are anti-dilutive because of the loss from continuing operations.)
Additionally, the Company's 8.75% convertible subordinated debentures were
excluded from the computation of diluted EPS because the effect of assumed
conversion is anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
The Company leases vehicles, office space, office equipment and other
items of personal property under leases expiring at various dates. Management
expects that, in the normal course of business, leases that expire will be
renewed or replaced by other leases. Total rent expense incurred under operating
leases attributable to continuing operations was $3.2 million for 2000, $3.6
million for 1999 and $2.7 million for 1998.
At December 31, 2000, future minimum rental commitments attributable to
continuing operations under all capital leases and operating leases are as
follows:
Capital Operating
Leases Leases
-------------- --------------
2001..................................................... $ 594,000 $ 2,768,000
2002..................................................... 415,000 1,835,000
2003..................................................... 283,000 1,245,000
2004 .................................................... 47,000 989,000
2005..................................................... 12,000 553,000
Thereafter............................................... - 2,093,000
-------------- --------------
Total minimum lease payments............................. 1,351,000 $ 9,483,000
==============
Less amounts representing interest....................... (152,000)
--------------
Present value of net minimum lease payments.............. $ 1,199,000
==============
The Company has contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business. Management
believes, based on the advice of counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the financial
position or results of operations of the Company.
9. BUSINESS SEGMENT DATA
The Company provides technical services to an international client base
that includes refineries, chemical plants, pipelines, offshore drilling and
production platforms, steel mills, food and drink processing facilities, power
generation, and other process industries. Additionally, the Company's
information technology services segment provides consulting services, hardware
sales and other related information management and processing services to
governmental, insurance and financial institutions. General corporate includes
compensation and benefits paid to officers and employees of the Company,
insurance premiums, general and administrative costs, tax and financial
reporting costs, legal and audit fees not reasonably allocable to specific
business segments. General corporate assets include cash, deferred taxes and
other assets not related to its segments.
The Company measures segment profit as operating income. Total assets are
those assets, including excess of cost over fair value of net assets of acquired
businesses, controlled by each reportable segment.
Year Ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
Business segment revenues:
Technical services.......................... $ 92,142,000 $ 98,075,000 $ 115,116,000
Information technology services............. 35,499,000 37,358,000 20,709,000
--------------- -------------- --------------
$ 127,641,000 $ 135,433,000 $ 135,825,000
=============== ============== ==============
Technical services segment revenues:
Under pressure services..................... $ 38,652,000 $ 38,873,000 $ 43,208,000
Turnaround services......................... 44,283,000 43,859,000 52,924,000
Other services.............................. 9,207,000 15,343,000 18,984,000
--------------- -------------- --------------
$ 92,142,000 $ 98,075,000 $ 115,116,000
=============== ============== ==============
Business segment profit:
Technical services ......................... $ 6,320,000 $ (255,000) $ 4,736,000
Information technology services............. 4,134,000 5,496,000 3,690,000
General corporate........................... (6,352,000) (9,807,000) (5,091,000)
--------------- -------------- --------------
Operating income (loss) from continuing
operations............................. 4,102,000 (4,566,000) 3,335,000
Interest expense............................ (3,883,000) (3,817,000) (4,100,000)
Other income (expense)...................... 670,000 326,000 (26,000)
--------------- -------------- --------------
Income (loss) from continuing operations
before income taxes....................... $ 889,000 $ (8,057,000) $ (791,000)
=============== ============== ==============
Year Ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
Business segment assets:
Depreciation and amortization:
Technical services........................ $ 4,585,000 $ 5,485,000 $ 5,774,000
Information technology services........... 512,000 411,000 192,000
--------------- -------------- --------------
$ 5,097,000 $ 5,896,000 $ 5,966,000
=============== ============== ==============
Capital expenditures (excluding acquisitions):
Technical services........................ $ 2,160,000 $ 2,328,000 $ 2,574,000
Information technology services........... 530,000 391,000 281,000
--------------- -------------- --------------
$ 2,690,000 $ 2,719,000 $ 2,855,000
=============== ============== ==============
December 31,
---------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
Total assets:
Technical services........................ $ 103,817,000 $ 108,094,000 $ 110,603,000
Information technology services........... 20,086,000 17,911,000 11,082,000
General corporate......................... 60,918,000 50,171,000 14,318,000
Discontinued operations, net.............. 41,822,000 43,364,000 22,793,000
--------------- -------------- --------------
$ 226,643,000 $ 219,540,000 $ 158,796,000
=============== ============== ==============
The following geographical area data includes revenues based on location
of the operating segment and net property and equipment based on physical
location:
Year Ended December 31,
---------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
Geographical area revenues:
United States............................ $ 67,242,000 $ 67,145,000 $ 56,304,000
Europe................................... 50,446,000 57,258,000 68,050,000
Asia-Pacific............................. 9,953,000 11,030,000 11,471,000
--------------- -------------- --------------
$ 127,641,000 $ 135,433,000 $ 135,825,000
=============== ============== ==============
Geographical area operating income (loss):
United States............................ $ (3,757,000) $ (7,164,000) $ (3,119,000)
Europe................................... 6,997,000 2,041,000 5,456,000
Asia-Pacific............................. 862,000 557,000 998,000
--------------- -------------- --------------
$ 4,102,000 $ (4,566,000) $ 3,335,000
=============== ============== ==============
December 31,
---------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
Geographical area net property and equipment:
United States............................ $ 3,099,000 $ 3,536,000 $ 2,558,000
Europe................................... 6,506,000 6,288,000 7,781,000
Asia-Pacific............................. 937,000 1,364,000 1,517,000
--------------- -------------- --------------
$ 10,542,000 $ 11,188,000 $ 11,856,000
=============== ============== ==============
10. DISCONTINUED OPERATIONS - BUSINESSES TO BE DISTRIBUTED
TO COMMON SHAREHOLDERS
The results of operations for the pipeline, terminaling and product
marketing businesses are reflected in the accompanying consolidated statements
of income as "discontinued operations - businesses to be distributed to common
shareholders" (See Note 1). A summary of operating results of discontinued
operations for the years ended December 31, 2000, 1999 and 1998 is presented
below:
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998
-------------- ------------- -------------
Revenues:
Pipeline and terminaling.................. $ 156,232,000 $ 158,028,000 $ 125,812,000
Product marketing business................ 381,186,000 212,298,000 114,220,000
-------------- ------------- -------------
$ 537,418,000 $ 370,326,000 $ 240,032,000
============== ============= =============
Operating profit:
Pipeline and terminaling.................. $ 58,104,000 $ 64,311,000 $ 55,117,000
Product marketing business................ 2,472,000 1,495,000 940,000
-------------- ------------- -------------
$ 60,576,000 $ 65,806,000 $ 56,057,000
============== ============= =============
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998
-------------- ------------- -------------
Income before gain on issuance of units by
KPP, income taxes and interest of outside
partners in KPP's net income.............. $ 48,688,000 $ 52,337,000 $ 45,309,000
Gain on issuance of units by KPP............ - 16,764,000 -
Income taxes................................ (5,609,000) (7,163,000) (1,295,000)
Interest of outside non-controlling partners
in KPP's net income....................... (32,693,000) (33,479,000) (29,174,000)
-------------- ------------- ------------
Income from discontinued operations,
net of income taxes....................... $ 10,386,000 $ 28,459,000 $ 14,840,000
============== ============= =============
A summary balance sheet of the discontinued operations as of December
31, 2000 and 1999 is presented below:
December 31,
---------------------------------
2000 1999
------------- -------------
Current assets............................................... $ 66,330,000 $ 54,667,000
Property and equipment, net.................................. 321,448,000 316,956,000
Investment in affiliates..................................... 22,568,000 21,978,000
Other assets................................................. 1,607,000 1,435,000
------------- -------------
Total assets............................................... 411,953,000 395,036,000
Current liabilities.......................................... (41,796,000) (39,868,000)
Long-term debt............................................... (184,052,000) (167,028,000)
Deferred taxes and other liabilities......................... (24,302,000) (19,956,000)
Interest of outside non-controlling partners in KPP.......... (119,981,000) (124,820,000)
------------- -------------
Net assets of discontinued operations - businesses to be
distributed to common shareholders......................... $ 41,822,000 $ 43,364,000
============= =============
Public Offering of KPP Units
In July 1999, KPP issued 2.25 million limited partnership units in a
public offering at $30.75 per unit, generating approximately $65.6 million in
net proceeds. A portion of the proceeds was used to repay in full KPP's term
loans (including $13.3 million in term loans resulting from the United Kingdom
terminal acquisition referred to below). As a result of KPP issuing additional
units to unrelated parties, the Company's pro-rata share of the net assets of
KPP increased by $16.8 million. Accordingly, the Company recognized a $16.8
million gain, before deferred income taxes of $6.4 million, in 1999.
Acquisitions
On January 3, 2001, KPP acquired Shore Terminals LLC ("Shore") for $107
million in cash and 1,975,090 KPP limited partnership units. Financing for the
cash portion of the purchase price was supplied under a new $275 million
unsecured revolving credit agreement with a group of banks. The acquisition will
be accounted for by KPP, beginning in January 2001 using the purchase method of
accounting.
On February 1, 1999, KPP acquired six terminals in the United Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million)
plus transaction costs and the assumption of certain liabilities. The
acquisition, which was initially financed with term loans from a bank, has been
accounted for using the purchase method of accounting. $13.3 million of the term
loans were repaid in July 1999 with the proceeds from KPP's public unit
offering.
On October 30, 1998, KPP entered into acquisition and joint venture
agreements with Northville Industries Corp. ("Northville") to acquire and manage
the former Northville terminal located in Linden, New Jersey. Under the
agreements, KPP acquired a 50% interest in the newly-formed ST Linden Terminal
LLC for $20.5 million plus transaction costs. The investment is being accounted
for by the equity method of accounting, with the excess cost over net book value
of the equity investment being amortized over the life of the underlying assets.
During 1998, KPP acquired other terminals and pipelines for aggregate
consideration of $23.9 million.
On March 25, 1998, a wholly-owned subsidiary of the Company acquired a
products marketing business for $1.5 million, plus the cost of product
inventories. The products marketing business provides wholesale motor fuel
marketing services throughout the Great Lakes and Rocky Mountain regions, as
well as California. The asset purchase agreement includes a provision for an
earn-out based on annual operating results of the acquired business for a
five-year period ending in March 2003. In 2000, $211,000 was paid under the
earn-out provision. No amounts were payable under the earn-out provision in 1999
and 1998. The acquisition was accounted for using the purchase method of
accounting.
Long-term Debt
In December 2000, KPP entered into a credit agreement with a group of
banks that provides for a $275 million unsecured revolving credit facility
through December 2003. No amounts were drawn on the facility at December 31,
2000. The credit facility, which is without recourse to the Company, bears
interest at variable interest rates, has a variable commitment fee on unutilized
amounts and contains certain operational and financial covenants. In January of
2001, proceeds from the facility were used to repay in full KPP's $128 million
of mortgage notes and $15 million outstanding under its $25 million revolving
credit facility. An additional $107 million was used to finance the cash portion
of the January 2001 Shore acquisition. Under the provisions of the mortgage
notes, KPP incurred $6.3 million in prepayment penalties which will be
recognized by KPP as an extraordinary expense in the first quarter of 2001. At
January 3, 2001 $257.5 million was drawn on the facility at an interest rate of
6.31%, which is due in December of 2003.
In January 1999, KPP, through two wholly-owned subsidiaries, entered into
a credit agreement with a bank that provided for the issuance of $39.2 million
of term loans in connection with the United Kingdom terminal acquisition and
$5.0 million for general partnership purposes. $18.3 million of the terms loans
were repaid in July 1999 with the proceeds from a public offering of KPP units.
The remaining portion ($23.9 million), with a fixed rate of 7.14%, is due in
January 2002. The term loans under the credit agreement, as amended, are
unsecured and are pari passu with the $275 million revolving credit facility.
The term loans, which are without recourse to the Company, contain certain
financial and operational covenants.
In March 1998, a wholly-owned subsidiary of the Company entered into a
credit agreement with a bank that, as amended, provides for a $20 million
revolving credit facility through March 2002. The credit facility bears interest
at variable rates (8.69% at December 31, 2000), has a commitment fee of 0.25%
per annum on unutilized amounts and contains certain financial and operational
covenants. The credit facility, which is without recourse to the Company, is
secured by essentially all of the tangible and intangible assets of the products
marketing business and by 500,000 KPP limited partnership units held by a
wholly-owned subsidiary of the Company. At December 31, 2000, $17.2 million was
drawn on the facility.
The $128 million of first mortgage notes outstanding at December 31,
2000 and 1999, which were due in varying amounts from 2001 to 2016, were repaid
in full in January of 2001 with the proceeds from the new $275 million revolving
credit facility.
Commitments and Contingencies
KPP makes quarterly distributions of 100% of its Available Cash (as
defined in the Partnership Agreement) to holders of limited partnership units
and the general partner. Available Cash consists generally of all the cash
receipts of the Partnership less all of its cash disbursements and reserves. The
assets of KPP, other than Available Cash, cannot be distributed without a
majority vote of the non-affiliated unitholders.
The operations of KPP are subject to Federal, state and local laws and
regulations relating to protection of the environment. Although KPP believes
that its operations are in general compliance with applicable environmental
regulation, risks of additional costs and liabilities are inherent in its
operations, and there can be no assurance that significant costs and liabilities
will not be incurred by KPP. Moreover, it is possible that other developments,
such as increasingly stringent environmental laws, regulations, enforcement
policies thereunder, and claims for damages to property or persons resulting
from the operations of KPP, could result in substantial costs and liabilities to
KPP. KPP has recorded an undiscounted reserve for environmental claims of $8.0
million, including $7.3 million related to acquisitions of pipelines and
terminals. During 2000 and 1999, respectively, KPP incurred $2.3 million and
$0.9 million of costs related to such acquisition reserves and reduced the
liability accordingly.
On April 7, 2000, a fuel oil pipeline in Maryland owned by Potomac
Electric Power Company ("PEPCO") ruptured. The pipeline was operated by a
partnership of which a subsidiary of KPP is general partner. PEPCO has reported
that, through December 2000, it incurred approximately $66 million in clean-up
costs and expects to incur total cleanup costs of $70 million to $75 million.
Since May 2000, KPP's subsidiary has participated provisionally in a minority
share of the cleanup expense, which has been funded by KPP's insurance carriers.
KPP cannot predict the amount, if any, that ultimately may be determined to be
KPP's share of the remediation expense, but it believes that such amount will be
covered by insurance and will not materially affect KPP's financial condition.
As a result of the rupture, purported class actions have been filed in
federal and state court in Maryland by property and/or business owners alleging
damages in unspecified amounts against PEPCO and KPP's subsidiary under various
theories, including the federal Oil Pollution Act. The court has ordered a
consolidated complaint to be filed in this action. KPP's insurance carriers have
assumed the defense of these actions. While KPP cannot predict the amount, if
any, of any liability it may have in these suits, it believes that such amounts
will be covered by insurance and that these actions will not have a material
adverse effect on its financial condition.
PEPCO and KPP's subsidiary have agreed with the State of Maryland to
pay costs of assessing natural resource damages under the federal Oil Pollution
Act, but they cannot predict at this time the amount of any damages that may be
claimed by Maryland. KPP believes that both the assessment costs and such
damages are covered by insurance and will not materially affect KPP's financial
condition.
The U.S. Department of Transportation has issued a Notice of Proposed
Violation to PEPCO and KPP's subsidiary alleging violations over several years
of pipeline safety regulations and proposing a civil penalty of $674,000. KPP's
subsidiary and PEPCO intend to contest the allegations of violations and the
proposed penalty. The ultimate amount of any penalty attributable to KPP cannot
be determined at this time, but KPP believes that this matter will not have a
material effect on KPP's financial condition.
Certain subsidiaries of KPP were sued in a Texas state court in 1997 by
Grace Energy Corporation ("Grace"), the entity from which KPP acquired ST
Services in 1993. The lawsuit involves environmental response and remediation
allegedly resulting from jet fuel leaks in the early 1970's from a pipeline. The
pipeline, which connected a former Grace terminal with Otis Air Force Base in
Massachusetts, was abandoned in 1976, when the connecting terminal was sold to
an unrelated entity.
Grace alleged that subsidiaries of KPP acquired the abandoned pipeline,
as part of the acquisition of ST Services in 1993, and assumed responsibility
for environmental damages allegedly caused by the jet fuel leaks. Grace sought a
ruling that these subsidiaries are responsible for all present and future
remediation expenses for these leaks and that Grace has no obligation to
indemnify these subsidiaries for these expenses.
In the lawsuit, Grace also sought indemnification for expenses that it
has incurred since 1996 of approximately $3.5 million for response and
remediation required by the State of Massachusetts and for additional expenses
that it expects to incur in the future. The consistent position of KPP's
subsidiaries is that they did not acquire the abandoned pipeline as part of the
1993 ST transaction, and therefore did not assume any responsibility for the
environmental damage nor any liability to Grace for the pipeline.
At the end of the trial on May 19, 2000, the jury returned a verdict
including findings that Grace had breached a provision of the 1993 acquisition
agreement and that the pipeline was abandoned prior to 1978. On July 17, 2000,
the Judge entered final judgment in the case, which is now on appeal to the
Dallas Court of Appeals, that Grace take nothing from the subsidiaries on its
claims, including claims for future expenses. Although KPP's subsidiaries have
not incurred any expenses in connection with the remediation, the court also
ruled, in effect, that the subsidiaries would not be entitled to an
indemnification from Grace if any such expenses were incurred in the future.
However, the Judge let stand a prior summary judgment ruling that the pipeline
was an asset of the company acquired as part of the 1993 ST transaction. The
Judge also awarded attorney fees to Grace.
While the judgment means that the subsidiaries have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred, as required
by the State of Massachusetts, KPP's subsidiaries have filed an appeal of the
judgment finding that the Otis Pipeline was transferred to them and the award of
attorney fees.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation ("MMR"), which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The MMR
Site contains nine groundwater contamination plumes, two of which are allegedly
associated with the pipeline, and various other waste management areas of
concern, such as landfills. The United States Department of Defense and the
United States Coast Guard, pursuant to a Federal Facilities Agreement, have been
responding to the Government remediation demand for most of the contamination
problems at the MMR Site. Grace and others have also received and responded to
formal inquiries from the United States Government in connection with the
environmental damages allegedly resulting from the jet fuel leaks. KPP's
subsidiaries have voluntarily responded to an invitation from the Government to
provide information indicating that they do not own the pipeline. In connection
with a court-ordered mediation between Grace and the subsidiaries, the
Government advised the parties in April 1999 that it has identified the two
spill areas that it believes to be related to the pipeline that is the subject
of the Grace suit. The Government advised the parties that it believes it has
incurred costs of approximately $34 million, and expects in the future to incur
costs of approximately $55 million, for remediation of one of the spill areas.
This amount was not intended to be a final accounting of costs or to include all
categories of costs. The Government also advised the parties that it could not
at that time allocate its costs attributable to the second spill area. KPP
believes that the ultimate cost of the remediation, while substantial, will be
considerably less than the Government has indicated.
The Government has made no claims against KPP or any other person on
account of this matter. KPP believes that if any such claims were made, its
subsidiaries would have substantial defenses to such claims. Under Massachusetts
law, the party responsible for remediation of a facility is the last owner
before the abandonment, which was a Grace company. KPP does not believe that
either the Grace litigation or any claims that may be made by the Government
will adversely affect its ability to make cash distributions to its unitholders,
but there can be no assurances in that regard.
11. ACCRUED EXPENSES
Accrued expenses from continuing operations are comprised of the
following components at December 31, 2000 and 1999:
December 31,
---------------------------------
2000 1999
---------------- --------------
Accrued income taxes.......................................... $ 2,024,000 $ 449,000
Accrued taxes other than income............................... 403,000 828,000
Accrued interest.............................................. 882,000 972,000
Accrued compensation and benefits............................. 2,366,000 2,775,000
Other accrued expenses........................................ 8,058,000 9,593,000
-------------- --------------
$ 13,733,000 $ 14,617,000
============== ==============
12. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on cash paid from continuing operations for:
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
-------------- --------------- ------------
Interest...................................... $ 3,755,000 $ 3,719,000 $ 3,957,000
============== =============== ============
Income taxes.................................. $ 1,716,000 $ 1,030,000 $ 1,757,000
============== =============== ============
13. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash equivalents, accounts receivable and
accounts payable approximate their carrying amounts due to the relatively short
period to maturity of these instruments. The estimated fair value of all debt
from continuing operations (excluding capital leases) as of December 31, 2000
and 1999 was approximately $36 million and $44 million as compared to the
carrying value of $39 million and $46 million, respectively. These fair values
were estimated using discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements,
when quoted market prices were not available. The Company has not determined the
fair value of its capital leases as it is not practicable. The estimates
presented above are not necessarily indicative of the amounts that would be
realized in a current market exchange. The Company has no derivative financial
instruments.
The technical services segment provides services to an international
client base that includes petroleum refineries, chemical plants, offshore energy
production platforms, steel mills, nuclear power stations, conventional power
stations, pulp and paper mills, food and beverage processing plants and other
flow-process facilities. The information technology services segment provides
services and related products to the U. S. Government and commercial sectors. A
substantial portion of the revenues of the information technology segment are
attributable to contracts with agencies of the U. S. Government. The Company
does not believe that it has a significant concentration of credit risk at
December 31, 2000, as the Company's accounts receivable are generated from these
distinct business segments with customers located throughout the United States,
Europe and Asia-Pacific.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 2000 and 1999 are summarized as follows:
Quarter Ended
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------------- -------------- -------------- ---------------
2000:
Revenues......................... $ 31,294,000 $ 33,380,000 $ 33,763,000 $ 29,204,000
=============== ============== ============== ===============
Operating income (loss).......... $ 1,092,000 $ 2,115,000 $ 2,544,000 $ (1,649,000)
=============== ============== ============== ===============
Net income (loss):
Continuing operations.......... $ (235,000) $ 587,000 $ 1,190,000 $ 5,241,000(a)
Discontinued operations........ 2,160,000 2,948,000 3,268,000 2,010,000
--------------- -------------- -------------- ---------------
Total........................ $ 1,925,000 $ 3,535,000 $ 4,458,000 $ 7,251,000
=============== ============== ============== ===============
Earnings (loss) per common share:
Basic:
Continuing operations........ $ (.01) $ .02 $ .04 $ .17
Discontinued operations...... .07 .09 .10 .06
--------------- -------------- -------------- ---------------
Total..................... $ .06 $ .11 $ .14 $ .23
=============== ============== ============== ===============
Diluted:
Continuing operations........ $ (.01) $ .02 $ .04 $ .16
Discontinued operations...... .07 .09 .10 .06
--------------- -------------- -------------- ---------------
Total..................... $ .06 $ .11 $ .14 $ .22
=============== ============== ============== ===============
1999:
Revenues......................... $ 31,144,000 $ 32,607,000 $ 32,931,000 $ 38,751,000
=============== ============== ============== ===============
Operating income (loss).......... $ (77,000) $ 150,000 $ 1,263,000 $ (5,902,000)
=============== ============== ============== ===============
Net income (loss):
Continuing operations.......... $ (1,468,000) $ (268,000) $ 417,000 $ 31,769,000(a)
Discontinued operations........ 3,781,000 4,276,000 15,130,000(b) 5,272,000
--------------- -------------- -------------- ---------------
Total........................ $ 2,313,000 $ 4,008,000 $ 15,547,000 $ 37,041,000
=============== ============== ============== ===============
Earnings (loss) per common share:
Basic:
Continuing operations........ $ (.05) $ (.01) $ .01 $ 1.01
Discontinued operations...... .12 .14 .48 .17
--------------- -------------- -------------- ---------------
Total..................... $ .07 $ .13 $ .49 $ 1.18
=============== ============== ============== ===============
Diluted:
Continuing operations........ $ (.05) $ (.01) $ .01 $ .96
Discontinued operations...... .12 .13 .46 .16
--------------- -------------- -------------- ---------------
Total..................... $ .07 $ .12 $ .47 $ 1.12
=============== ============== ============== ===============
(a) See Note 2 regarding reduction in valuation allowance for deferred
tax assets.
(b) See Note 10 regarding gain on issuance of units by KPP.
Schedule I
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- --------------
General and administrative expenses..................... $ (6,352,000) $ (9,807,000) $ (5,091,000)
Interest expense........................................ (2,242,000) (2,218,000) (2,212,000)
Intercompany fees and expenses.......................... 2,915,000 3,189,000 3,022,000
Interest and other income............................... 804,000 1,677,000 1,638,000
Equity in income (loss) of subsidiaries................. 9,648,000 (1,553,000) 1,379,000
------------- ------------- --------------
Income (loss) from continuing operations
before income taxes.................................. 4,773,000 (8,712,000) (1,264,000)
Income tax benefit...................................... 2,010,000 39,162,000 -
------------- ------------- --------------
Income (loss) from continuing operations................ 6,783,000 30,450,000 (1,264,000)
Income from discontinued operations - businesses to be
distributed to common shareholders, net of
income taxes......................................... 10,386,000 28,459,000 14,840,000
------------- ------------- --------------
Net income.............................................. 17,169,000 58,909,000 13,576,000
Dividends applicable to preferred stock................. 479,000 487,000 508,000
------------- ------------- --------------
Net income applicable to common stock.................. $ 16,690,000 $ 58,422,000 $ 13,068,000
============= ============= ==============
Earnings (loss) per common share:
Basic:
Continuing operations............................. $ 0.20 $ 0.95 $ (0.06)
Discontinued operations........................... 0.33 0.91 0.47
------------- ------------- -------------
$ 0.53 $ 1.86 $ 0.41
============= ============= =============
Diluted:
Continuing operations............................. $ 0.19 $ 0.92 $ (0.06)
Discontinued operations........................... 0.31 0.87 0.47
------------- ------------- -------------
$ 0.50 $ 1.79 $ 0.41
============= ============= =============
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
F - 27
Schedule I
(Continued)
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31,
--------------------------------------
2000 1999
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 13,953,000 $ 9,740,000
Prepaid expenses and other current assets............................ 2,928,000 1,234,000
-
Current deferred tax asset........................................... 36,489,000 5,250,000
--------------- ---------------
Total current assets.................................................... 53,370,000 16,224,000
--------------- ---------------
Property and equipment.................................................. 3,848,000 3,848,000
Less accumulated depreciation........................................... 3,848,000 3,848,000
--------------- ---------------
Net property and equipment......................................... - -
--------------- ---------------
Investments in, advances to and notes receivable
from subsidiaries..................................................... 96,450,000 89,457,000
Net assets of discontinued operations - businesses to be distributed
to common shareholders............................................... 41,822,000 43,364,000
Deferred tax and other assets........................................... 6,910,000 33,649,000
--------------- ---------------
$ 198,552,000 $ 182,694,000
=============== ===============
LIABILITIES AND EQUITY
Current liabilities - accounts payable and accrued expenses............. $ 5,741,000 $ 5,600,000
Long-term debt.......................................................... 21,396,000 23,666,000
Deferred income taxes and other liabilities............................. 5,376,000 8,625,000
Stockholders' equity:
Preferred stock, without par value................................... 5,792,000 5,792,000
Common stock, without par value...................................... 4,250,000 4,249,000
Additional paid-in capital........................................... 203,989,000 197,313,000
Treasury stock, at cost.............................................. (31,440,000) (30,278,000)
Accumulated deficit.................................................. (13,311,000) (30,001,000)
Accumulated comprehensive income (loss) -
foreign currency translation adjustment............................ (3,241,000) (2,272,000)
--------------- ---------------
Total stockholders' equity....................................... 166,039,000 144,803,000
--------------- ---------------
$ 198,552,000 $ 182,694,000
=============== ===============
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
F - 28
Schedule I
(Continued)
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------------
2000 1999 1998
----------------- ---------------- ------------------
Operating activities:
Income (loss) from continuing operations.......... $ 6,783,000 $ 30,450,000 $ (1,264,000)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by (used in) operating activities:
Equity in net income of subsidiaries.......... (9,648,000) 1,553,000 (1,379,000)
Deferred income taxes......................... (1,223,000) (36,918,000) -
Increase in the estimated redemption value of
Series F Preferred stock.................... 1,387,000 4,863,000 -
Changes in current assets and liabilities:
Prepaid expenses and other current assets... (1,694,000) (1,057,000) (177,000)
Accounts payable and accrued expenses ...... 141,000 (1,767,000) 3,380,000
----------------- ---------------- ------------------
Net cash provided by (used in)
operating activities...................... (4,254,000) (2,876,000) 560,000
----------------- ---------------- ------------------
Investing activities:
Change in other assets, net....................... (2,092,000) (3,450,000) 1,195,000
----------------- ---------------- ------------------
Net cash provided by (used in)
investing activities...................... (2,092,000) (3,450,000) 1,195,000
----------------- ---------------- ------------------
Financing activities:
Preferred stock dividends paid.................... (479,000) (487,000) (508,000)
Payments on debt.................................. (2,270,000) - -
Change in investments in, advances to and notes
receivable from subsidiaries.................... 2,655,000 8,092,000 (11,319,000)
Common stock issued............................... 255,000 253,000 194,000
Purchase of treasury stock........................ (1,530,000) (555,000) (4,868,000)
Change in net assets of discontinued operations... 11,928,000 7,888,000 7,578,000
----------------- ---------------- ------------------
Net cash provided by (used in) financing
activities.................................. 10,559,000 15,191,000 (8,923,000)
----------------- ---------------- ------------------
Increase (decrease) in cash and cash equivalents..... 4,213,000 8,865,000 (7,168,000)
Cash and cash equivalents at beginning of year....... 9,740,000 875,000 8,043,000
----------------- ---------------- ------------------
Cash and cash equivalents at end of year............. $ 13,953,000 $ 9,740,000 $ 875,000
================= ================ ==================
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
F - 29
Schedule II
KANEB SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Descriptions Period Expenses Accounts Deductions Period
- ------------------------------------ ------------- ------------ ------------ -------------- --------------
ALLOWANCE DEDUCTED FROM
ASSETS TO WHICH THEY APPLY
Year Ended December 31, 2000:
For doubtful receivables
classified as current assets... $ 999 $ 92 $ (10)(a) $ (476)(b) $ 605
============= =========== ============= ============ ==============
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 7,204 $ - $ - $ (7,204) $ -
============= =========== ============= ============ ==============
Year Ended December 31, 1999:
For doubtful receivables
classified as current assets... $ 727 $ 664 $ (119)(a) $ (273)(b) $ 999
============= =========== ============= ============ ==============
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 52,797 $ - $ - $ (45,593) $ 7,204
============= =========== ============= ============ ==============
Year Ended December 31, 1998:
For doubtful receivables
classified as current assets... $ 488 $ 259 $ 99(a) $ (119)(b) $ 727
============= ========== ============= ============ ==============
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 55,584 $ - $ - $ (2,787) $ 52,797
============= =========== ============= ============ ==============
Notes:
(a) Foreign currency translation adjustments.
(b) Receivable write-offs and reclassifications, net of recoveries.
F - 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Kaneb Services, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
KANEB SERVICES, INC.
By: JOHN R. BARNES
President and Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
Kaneb Services, Inc. and in the capacities and on the date indicated.
Signature Title Date
- ---------------------------------- -------------------------- --------------
Principal Executive Officer
JOHN R. BARNES President, Chief Executive March 30, 2001
Officer and Director
Principal Accounting Officer
MICHAEL R. BAKKE Controller March 30, 2001
Directors
SANGWOO AHN Director March 30, 2001
JOHN R. BARNES Director March 30, 2001
FRANK M. BURKE, JR. Director March 30, 2001
CHARLES R. COX Director March 30, 2001
HANS KESSLER Director March 30, 2001
JAMES R. WHATLEY Director March 30, 2001
EXHIBIT INDEX
Exh. No. Description
- -------- -----------------------------------------------------------------------
10.12 Amendment to the Furmanite Loan Agreement.
10.14 Amendment to the KSI Loan Agreement.
21 List of subsidiaries of the Registrant.
23 Consent of KPMG LLP.