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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number 001-05083
XANSER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-1191271
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices, including zip code)
(972) 699-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ---------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at July 31, 2003
- --------------------- ----------------------------
No par value 31,568,740 shares
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XANSER CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
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Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations - Three and
Six Months Ended June 30, 2003 and 2002 1
Condensed Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2003 and 2002 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Item 4. Controls and Procedures 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands - Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
Revenues:
Services $ 29,980 $ 28,454 $ 58,841 $ 55,327
Products 3,253 3,959 6,616 5,254
------------- ------------- ------------- --------------
Total revenues 33,233 32,413 65,457 60,581
------------- ------------- ------------- --------------
Costs and expenses:
Operating costs 27,836 27,773 55,226 54,277
Cost of products sold 2,886 3,833 5,593 5,064
Depreciation and amortization 1,005 1,019 2,099 1,903
General and administrative 817 943 1,624 1,888
------------- ------------- ------------- --------------
Total costs and expenses 32,544 33,568 64,542 63,132
------------- ------------- ------------- --------------
Operating income (loss) 689 (1,155) 915 (2,551)
Interest and other income, net 40 112 130 249
Interest expense (391) (408) (750) (918)
------------- ------------- ------------- --------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 338 (1,451) 295 (3,220)
Income tax benefit 82 878 268 1,733
------------- ------------- ------------- --------------
Income (loss) before cumulative effect
of change in accounting principle 420 (573) 563 (1,487)
Cumulative effect of change in accounting
principle - adoption of new accounting
standard for goodwill, net of income taxes - - - (45,269)
------------- ------------- ------------- --------------
Net income (loss) $ 420 $ (573) $ 563 $ (46,756)
============= ============= ============= ==============
Earnings (loss) per common share - Basic and diluted:
Before cumulative effect of change
in accounting principle $ .01 $ (.02) $ .02 $ (.04)
Cumulative effect of change in
accounting principle - - - (1.36)
------------- ------------ ------------- --------------
$ .01 $ (.02) $ .02 $ (1.40)
============= ============ ============= ==============
See notes to consolidated financial statements.
1
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
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June 30, December 31,
2003 2002
--------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,981 $ 25,624
Accounts receivable, trade 33,032 36,208
Receivable from businesses distributed to common
shareholders 7,501 7,412
Inventories 8,376 8,424
Prepaid expenses and other 3,711 5,264
-------------- -------------
Total current assets 74,601 82,932
-------------- -------------
Property and equipment 41,725 38,830
Less accumulated depreciation and amortization 27,377 24,875
-------------- -------------
Net property and equipment 14,348 13,955
-------------- -------------
Excess of cost over fair value of net assets of
acquired businesses 13,802 13,802
Deferred income taxes and other assets 18,708 16,958
-------------- -------------
$ 121,459 $ 127,647
============== =============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 777 $ 747
Accounts payable 4,083 3,919
Accrued expenses 18,730 21,419
Accrued income taxes 10,656 9,792
-------------- -------------
Total current liabilities 34,246 35,877
-------------- -------------
Long-term debt, less current portion:
Technical services 17,063 18,479
Parent company 5,000 9,930
-------------- -------------
Total long-term debt, less current portion 22,063 28,409
-------------- -------------
Other liabilities 2,077 1,812
Commitments and contingencies
Stockholders' equity:
Common stock, without par value 4,333 4,333
Additional paid-in capital 126,605 126,675
Treasury stock, at cost (26,322) (26,390)
Accumulated deficit (35,027) (35,590)
Accumulated other comprehensive income (loss) (6,516) (7,479)
-------------- -------------
Total stockholders' equity 63,073 61,549
-------------- -------------
$ 121,459 $ 127,647
============== =============
See notes to consolidated financial statements.
2
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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Six Months Ended
June 30,
---------------------------------
2003 2002
------------- --------------
Operating activities:
Net income (loss) $ 563 $ (46,756)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,099 1,903
Deferred income taxes (1,589) (1,696)
Cumulative effect of change in accounting principle - 45,269
Other 279 384
Changes in working capital components 2,863 2,737
------------- --------------
Net cash provided by operating activities 4,215 1,841
------------- --------------
Investing activities:
Capital expenditures (2,232) (2,181)
Other 748 346
------------- --------------
Net cash used in investing activities (1,484) (1,835)
------------- --------------
Financing activities:
Issuance of debt and capital leases 273 2,238
Payments on debt and capital leases (6,542) (12,606)
Common stock issued and other (16) 479
Purchase of treasury stock - (1,452)
Decrease (increase) in receivable from businesses
distributed to common shareholders (89) 10,336
------------- --------------
Net cash used in financing activities (6,374) (1,005)
------------- --------------
Decrease in cash and cash equivalents (3,643) (999)
Cash and cash equivalents at beginning of period 25,624 29,545
------------- --------------
Cash and cash equivalents at end of period $ 21,981 $ 28,546
============= ==============
Supplemental cash flow information:
Cash paid for interest $ 964 $ 1,460
============= ==============
Cash paid for income taxes $ 214 $ 616
============= ==============
See notes to consolidated financial statements.
3
XANSER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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1. SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of
Xanser Corporation (the "Company") and its subsidiaries. All significant
intercompany transactions and balances are eliminated in consolidation. The
unaudited condensed consolidated financial statements of the Company for
the three and six month periods ended June 30, 2003 and 2002, have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Significant accounting policies followed by the
Company are disclosed in the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. In the opinion of the Company's management, the
accompanying condensed consolidated financial statements contain all of the
adjustments, consisting of normal recurring accruals, necessary to present
fairly the consolidated financial position of the Company and its
consolidated subsidiaries at June 30, 2003 and the consolidated results of
their operations and cash flows for the periods ended June 30, 2003 and
2002. Operating results for the six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
In December of 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which
amends SFAS No. 123, provides for alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation and requires additional disclosures in
annual and interim financial statements regarding the method of accounting
for stock-based employee compensation and the effect of the method used on
financial results. In accordance with the provisions of SFAS No. 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 the
grant date as prescribed by SFAS 123. The Black-Scholes option pricing
model has been used to estimate the value of stock options issued.
The following illustrates the effect on net income (loss) and basic and
diluted earnings (loss) per share if the fair value based method had been
applied:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
(in thousands - except per share amounts)
Reported net income (loss) $ 420 $ (573) $ 563 $ (46,756)
Stock-based employee compensation
expense determined under the fair
value based method, net of income
taxes (38) (130) (59) (229)
------------- ------------- ------------- --------------
Pro forma net income (loss) $ 382 $ (703) $ 504 $ (46,985)
============= ============= ============= ==============
Earnings (loss) per share:
As Reported:
Basic $ .01 $ (.02) $ .02 $ (1.40)
============= ============= ============= ==============
Diluted $ .01 $ (.02) $ .02 $ (1.40)
============= ============= ============= ==============
Pro forma:
Basic $ .01 $ (.02) $ .02 $ (1.41)
============= ============= ============= ==============
Diluted $ .01 $ (.02) $ .02 $ (1.41)
============= ============= ============= ==============
2. COMPREHENSIVE INCOME
Comprehensive income for the three and six month periods ended June 30,
2003 and 2002 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
(in thousands)
Net income (loss) $ 420 $ (573) $ 563 $ (46,756)
Foreign currency translation
adjustment 987 1,272 963 891
------------- ------------- ------------- --------------
Comprehensive income (loss) $ 1,407 $ 699 $ 1,526 $ (45,865)
============= ============= ============= ==============
At June 30, 2003 and December 31, 2002, accumulated other comprehensive
loss consisted of cumulative foreign currency translation adjustments of
$0.3 million and $1.3 million, respectively, and minimum pension liability
adjustments for subsidiaries of $6.2 million and $6.2 million,
respectively.
3. EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings (loss) per
share before cumulative effect of change in accounting principle (in
thousands, except for per share amounts):
Weighted
Average
Common Per-Share
Income (loss) Shares Amount
--------------- --------------- ------------
Three Months Ended June 30, 2003
--------------------------------
Basic earnings per share -
Income before cumulative
effect of change in accounting
principle $ 420 31,998 $ .01
============
Effect of dilutive securities - 810
--------------- ---------------
Diluted earnings per share -
Income before cumulative
effect of change in accounting
principle $ 420 32,808 $ .01
=============== =============== ============
Three Months Ended June 30, 2002
--------------------------------
Basic earnings per share -
Income (loss) before cumulative
effect of change in accounting
principle $ (573) 33,379 $ (.02)
============
Effect of dilutive securities - -
--------------- ---------------
Diluted earnings per share -
Income (loss) before cumulative
effect of change in accounting
principle $ (573) 33,379 $ (.02)
=============== =============== ============
Weighted
Average
Common Per-Share
Income (loss) Shares Amount
--------------- --------------- ------------
Six Months Ended June 30, 2003
------------------------------
Basic earnings per share -
Income before cumulative
effect of change in accounting
principle $ 563 31,998 $ .02
============
Effect of dilutive securities - 722
--------------- ---------------
Diluted earnings per share -
Income before cumulative
effect of change in accounting
principle $ 563 32,720 $ .02
=============== =============== ============
Six Months Ended June 30, 2002
------------------------------
Basic earnings per share - Income
(loss) before cumulative effect
of change in accounting principle $ (1,487) 33,343 $ (.04)
============
Effect of dilutive securities - -
--------------- ---------------
Diluted earnings per share -
Income (loss) before cumulative
effect of change in accounting
principle $ (1,487) 33,343 $ (.04)
=============== =============== ============
The Company's 8.75% convertible subordinated debentures were excluded from
the computation of diluted earnings (loss) per share for the three and six
month periods ended June 30, 2003 and 2002, because the effects of assumed
conversion would be anti-dilutive. Options to purchase 1,406,661 and
1,468,728 shares of common stock at weighted average prices of $2.45 and
$2.43, respectively, were outstanding for the three and six month periods
ended June 30, 2003, but were not included in the computation of diluted
earnings (loss) per share because the options' exercise prices were greater
than the average market prices of the common stock. As a result of the
losses applicable to common stock for the three and six month periods ended
June 30, 2002, all stock options were excluded from the computation of
diluted earnings (loss) per share because the effects would be
anti-dilutive.
4. CONTINGENCIES
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.
5. BUSINESS SEGMENT DATA
The Company's technical services segment provides 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, healthcare,
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 the Company's segments.
The Company measures segment profit as operating income. Total assets are
those assets, including excess of cost over fair value of acquired
businesses, controlled by each reportable segment. Business segment data is
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
(in thousands)
Business segment revenues:
Technical services $ 25,111 $ 22,171 $ 48,119 $ 42,640
Information technology services 8,122 10,242 17,338 17,941
------------- ------------- ------------- --------------
$ 33,233 $ 32,413 $ 65,457 $ 60,581
============= ============= ============= ==============
Technical services segment revenues:
Underpressure services $ 10,463 $ 10,018 $ 21,278 $ 19,982
Turnaround services 12,280 10,398 22,220 18,994
Other services 2,368 1,755 4,621 3,664
------------- ------------- ------------- --------------
$ 25,111 $ 22,171 $ 48,119 $ 42,640
============= ============= ============= ==============
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
(in thousands)
Business segment profit:
Technical services $ 1,957 $ 974 $ 3,298 $ 1,187
Information technology services (451) (1,186) (759) (1,850)
General corporate (817) (943) (1,624) (1,888)
------------- ------------- ------------- --------------
Operating income (loss) 689 (1,155) 915 (2,551)
Interest and other income, net 40 112 130 249
Interest expense (391) (408) (750) (918)
------------- ------------- ------------- --------------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle $ 338 $ (1,451) $ 295 $ (3,220)
============= ============= ============= ==============
June 30, December 31,
2003 2002
------------- --------------
(in thousands)
Total assets:
Technical services $ 63,284 $ 63,319
Information technology services 19,713 26,956
General corporate 38,462 37,372
------------- --------------
$ 121,459 $ 127,647
============= ==============
6. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF ACQUIRED BUSINESSES
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets", which eliminates the amortization for goodwill
(excess of cost over fair value of net assets of acquired businesses) and
other intangible assets with indefinite lives. Under SFAS No. 142,
intangible assets with lives restricted by contractual, legal, or other
means will continue to be amortized over their useful lives. As of June 30,
2003, the Company had no intangible assets subject to amortization under
SFAS No. 142. Goodwill and other intangible assets not subject to
amortization are tested for impairment annually or more frequently if
events or changes in circumstances indicate that the assets might be
impaired. SFAS No. 142 requires a two-step process for testing impairment.
First, the fair value of each reporting unit is compared to its carrying
value to determine whether an indication of impairment exists. If an
impairment is indicated, then second, the implied fair value of the
reporting unit's goodwill is determined by allocating the unit's fair value
to its assets and liabilities (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business
combination. The amount of impairment for goodwill and other intangible
assets is measured as the excess of its carrying value over its implied
fair value. Based on valuations and analysis performed by independent
valuation consultants and the Company in the first quarter of 2002, the
Company determined that the carrying value of its goodwill exceeded implied
fair value, and therefore, the Company recorded a non-cash charge, after
income taxes, of $45.3 million as the cumulative effect of a change in
accounting principle. No impairment charge was appropriate under the
previous goodwill impairment standard (SFAS No. 121), which was based on
undiscounted cash flows. Based on valuations and analysis performed by the
Company at December 31, 2002 (the annual evaluation date), no additional
impairment charge was required.
The changes in the carrying amount of excess of cost over fair value of net
assets of acquired businesses is as follows (in thousands):
Excess of cost over fair value of net assets of acquired
businesses at December 31, 2001 $ 61,054
Cumulative effect of change in accounting principle
recorded in the first quarter of 2002 (47,252)
-------------
Excess of cost over fair value of net assets of acquired
businesses at June 30, 2003 and December 31, 2002 $ 13,802
=============
7. ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
Asset Retirement Obligations", which establishes requirements for the
removal-type costs associated with asset retirements. The initial adoption
of SFAS No. 143 had no effect on the consolidated financial statements of
the Company.
Effective January 1, 2003, the Company adopted SFAS No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities", which requires that all
restructurings initiated after December 31, 2002 be recorded when they are
incurred and can be measured at fair value. The initial adoption of SFAS
No. 146 had no effect on the consolidated financial statements of the
Company.
The Company has adopted the provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements of Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an interpretation
of FASB Statements No. 5, 57, and 107, and a rescission of FASB
Interpretation No. 34." This interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under guarantees issued. The interpretation also
clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
initial application of this interpretation had no effect on the
consolidated financial statements of the Company.
The Company has adopted the provisions of FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51." This interpretation addressed the consolidation by business
enterprises of variable interest entities as defined in the interpretation.
The interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. The
interpretation requires certain disclosures in financial statements issued
after January 31, 2003. The initial application of this interpretation had
no effect on the consolidated financial statements of the Company.
XANSER CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
This discussion should be read in conjunction with the condensed
consolidated financial statements of Xanser Corporation (the "Company") and
notes thereto included elsewhere in this report.
Operating Results:
Technical Services
The technical services segment, Furmanite, provides specialized services,
including leak sealing underpressure, on-site machining, safety and relief
valve testing and repair, passive fire protection and fugitive emissions
inspections to the process and power industries worldwide.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
2003 2002 2003 2002
----------- ----------- ------------- --------------
(in thousands)
Revenues:
United States $ 5,841 $ 6,190 $ 11,954 $ 13,442
Europe 15,627 13,480 29,495 24,117
Asia-Pacific 3,643 2,501 6,670 5,081
----------- ----------- ------------- --------------
Total Revenues $ 25,111 $ 22,171 $ 48,119 $ 42,640
=========== =========== ============= ==============
Operating income:
United States $ (513) $ (456) $ (383) $ (591)
Europe 2,152 1,740 3,727 2,406
Asia-Pacific 491 100 837 223
Headquarters (173) (410) (883) (851)
----------- ----------- ------------- --------------
Total operating income $ 1,957 $ 974 $ 3,298 $ 1,187
=========== =========== ============= ==============
Capital expenditures,
excluding acquisitions $ 550 $ 221 $ 1,159 $ 852
=========== =========== ============= ==============
For the three months ended June 30, 2003, revenues for the technical
services business increased by $2.9 million, or 13%, when compared to the
same 2002 period. In the United States, second quarter revenues decreased
by $0.3 million, or 6%, compared to the same period in 2002, due primarily
to decreases in underpressure services, partially offset by increases in
turnaround services. In Europe, revenues increased by $2.1 million, or 16%,
when compared to the second quarter of 2002, due to increases in
underpressure services, product sales and foreign currency exchange
differences, partially offset by decreases in other process plant services.
In Asia-Pacific, revenues increased by $1.1 million, or 46%, when compared
to the second quarter of 2002, due to increases in turnaround services and
foreign currency exchange differences.
For the six months ended June 30, 2003, technical services revenues
increased by $5.5 million, or 13%, when compared to the same period in
2002. Revenues in the United States decreased by $1.5 million, or 11%, when
compared to 2002, due primarily to decreases in underpressure services
resulting from decisions to exit non-performing contracts which did not
meet current requirements for generating favorable returns. In Europe,
revenues increased by $5.4 million, or 22%, when compared to 2002, due to
increases in underpressure and turnaround services and foreign currency
exchange differences, partially offset by decreases in other process plant
services. Asia-Pacific revenues increased by $1.6 million, or 31%, when
compared to 2002, due to increases in turnaround services, product sales
and foreign currency exchange differences.
Technical services operating income increased by $1.0 million, or 101%, for
the three months ended June 30, 2003, when compared to the same 2002
period. In the United States, operating income decreased by $0.1 million,
or 13%, compared to the same period in 2002, due to decreases in revenues,
which was partially offset by higher operating margins. In Europe and Asia,
operating income increased by $0.4 million, or 24%, and $0.4 million, or
391%, respectively, when compared to the same 2002 period due to overall
higher revenue levels.
For the six months ended June 30, 2003, technical services operating income
increased by $2.1 million, or 178%, when compared to the same 2002 period.
In the United States, operating income increased by $0.2 million, or 35%,
compared to the same period in 2002, due to higher operating margins and
lower general and administrative costs, which more than offset lower
revenue levels. In Europe and Asia, operating income increased by $1.3
million, or 55%, and $0.6 million, or 275%, respectively, when compared to
the same 2002 period, due to overall higher revenue levels.
Information Technology Services
The information technology services segment, Xtria, offers products and
services that include application software, computer hardware, web hosted
data processing, networking, consulting, and support services to the
healthcare, financial, and insurance industries, and to governmental
agencies. The healthcare group provides integration and consulting services
to healthcare organizations implementing digital radiology imaging systems
and software solutions to assist healthcare organizations with compliance
with the Health Insurance Portability and Accountability Act and other
accreditation and training requirements.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
2003 2002 2003 2002
----------- ----------- ------------- --------------
(in thousands)
Revenues $ 8,122 $ 10,242 $ 17,338 $ 17,941
=========== =========== ============== ==============
Operating income (loss) $ (451) $ (1,186) $ (759) $ (1,850)
=========== =========== ============== ==============
Capital expenditures,
excluding acquisitions $ 454 $ 636 $ 1,073 $ 1,329
=========== =========== ============== ==============
For the three and six month periods ended June 30, 2003, information
technology services revenues decreased by $2.1 million, or 21%, and $0.6
million, or 3%, respectively, when compared to the same 2002 periods.
Service revenues decreased in the second quarter and first half of 2003,
compared to the same 2002 periods, due primarily to the group's decision to
shed lower margin business and focus on selectively increasing revenue for
higher margin business. Revenues from equipment sales, furnished at the
request of selected customers, decreased in the second quarter and
increased in the first half of 2003, compared to the same 2002 periods, due
to normal fluctuations in customer needs.
Information technology services operating loss decreased by $0.7 million
and $1.1 million for the three and six month periods ended June 30, 2003,
respectively, compared to the same 2002 periods, due primarily to the
segment's strategic focus on higher margin business. Additionally,
operating income (loss) for the three and six months ended June 30, 2003
includes income of $0.4 million relating to favorable developments
pertaining to a contingent liability.
Interest Expense
Interest expense decreased by $0.2 million during the six months ended June
30, 2003, compared to the same 2002 period, due to reductions in parent
company debt (see "Liquidity and Capital Resources") and lower interest
rates on variable rate borrowings.
Income Taxes
Income tax benefit for the periods presented differs from the expected tax
at statutory rates due primarily to different tax rates in the various
state and foreign jurisdictions.
At June 30, 2003, the Company had a significant amount of net deferred tax
assets, which consisted principally of net operating loss and alternative
minimum tax credit carryforwards and temporary differences resulting from
differences in the tax and book basis of certain assets and liabilities.
The net operating loss carryforwards expire, if unused, in varying amounts
and dates from 2006 to 2023 and the alternative minimum tax credit
carryforwards have no expiration date. Under Statement of Financial
Accounting Standards No. 109, the Company periodically evaluates the
realizability of its deferred tax assets from future operations. Such
evaluations must consider various factors, including estimates of future
taxable income growth and the expiration periods of net operating loss
carryforwards, and conclude that it is more likely than not that the
Company will realize the benefit of its net deferred tax assets.
Additionally, the utilization of net operating loss carryforwards could be
subject to limitation in the event of a change in ownership, as defined in
the tax laws. To the extent that factors or conditions change, it is
possible that a valuation allowance against the net deferred tax asset
might be required, which could have a material effect on the results of
operations of the Company.
Liquidity and Capital Resources
Cash provided by operating activities was $4.2 million and $1.8 million for
the six months ended June 30, 2003 and 2002, respectively. The increase was
due to the overall higher revenues and operating income. During the six
months ended June 30, 2003, the Company's working capital requirements for
operations and capital expenditures were funded through the use of
internally generated funds.
Capital expenditures were $2.2 million for both six month periods ended
June 30, 2003 and 2002. Consolidated capital expenditures for the year 2003
have been budgeted at $4 million to $6 million, depending on the economic
environment and the needs of the business. The Company expects to fund
maintenance capital expenditures with existing cash and anticipated cash
flows from operations.
At June 30, 2003, $15.3 million was outstanding under a $25 million bank
loan agreement that provides working capital for the technical services
segment and is without recourse to the Company. Borrowings under the loan
agreement bear interest at the option of the borrower at variable rates
(3.29% at June 30, 2003), based on either the LIBOR rate or prime rate,
have a commitment fee on the unused portion of the facility and contain
certain financial and operational covenants with respect to the technical
services segment. At June 30, 2003, the Company was in compliance with all
covenants. The loan agreement which matures in January 2009, is secured by
substantially all of the tangible assets of the technical services segment.
The Company's 8.75% subordinated debentures ($5.0 million outstanding at
June 30, 2003) are convertible into shares of the Company's common stock at
the conversion price, of $5.26 per share. On March 1, 2002, the Company
purchased $10.0 million of subordinated debentures at par value, plus
accrued interest, which satisfies all its sinking fund requirements on
these subordinated debentures until their maturity in 2008. On June 30,
2003, the Company purchased an additional $4.9 million of subordinated
debentures at par value, plus accrued interest.
Additional information related to the sources and uses of cash is presented
in the condensed consolidated financial statements included in this report.
Information regarding the Company's Critical Accounting Policies is
included in Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
Recent Accounting Pronouncements
In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which requires certain financial instruments, which were previously
accounted for as equity, to be classified as liabilities. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective for interim periods beginning on or after
June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to
have a material effect on the consolidated financial statements of the
Company.
In November of 2002, the FASB's Emerging Issues Task Force reached a
consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables". EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services, and/or rights to use assets. The Company is currently evaluating
the impact of EITF Issue No. 00-21, which must be adopted for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
XANSER CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks pursuant to this Item (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 and
fluctuations in foreign currency.
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 $16.0 million at June 30, 2003, a one
percent increase in interest rates would increase interest expense by
approximately $0.2 million.
A significant portion of the technical services business is exposed to
fluctuations in foreign currency exchange rates. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Operating
Results - Technical Services."
Item 4. Controls and Procedures.
In its Release No. 34-46427, effective August 29, 2002, the Securities and
Exchange Commission adopted rules requiring reporting companies to maintain
disclosure controls and procedures to provide reasonable assurance that a
registrant is able to record, process, summarize and report the information
required in the registrant's quarterly and annual reports under the Securities
Exchange Act of 1934 (the "Exchange Act"). Management believes that the
Company's existing disclosure controls and procedures have been effective to
accomplish these objectives.
The Company's principal executive officer and principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2003,
have concluded that, as of such date, the Company's disclosure controls and
procedures are adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities.
There have been no changes in the Company's internal controls or in other
factors known to management that could significantly affect those internal
controls subsequent to the date of the evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
XANSER CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1*Xanser Corporation Stock Incentive Plan, amended and restated
effective July 31, 2003, filed herewith.
31.1 Certification of Chief Executive Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated as of August 14, 2003,
filed herewith.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated as of August 14, 2003,
filed herewith.
32.1 Certification of Chief Executive Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of August 14,
2003, filed herewith.
32.2 Certification of Chief Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of August 14,
2003, filed herewith.
* Denotes management contract.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed May 12, 2003
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XANSER CORPORATION
(Registrant)
Date: August 14, 2003 //s//
---------------------------------------
Michael R. Bakke
Controller
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, John R. Barnes, Chief Executive Officer of Xanser Corporation certify that:
1. I have reviewed this report on Form 10-Q of Xanser Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003
//s//
----------------------------------------
John R. Barnes
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Howard C. Wadsworth, Chief Financial Officer of Xanser Corporation certify
that:
1. I have reviewed this report on Form 10-Q of Xanser Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003
//s//
-----------------------------------------
Howard C. Wadsworth
Chief Financial Officer
Exhibit 32.1
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002
The undersigned, being the Chief Executive Officer of Xanser Corporation (the
"Company"), hereby certifies that the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2003, filed with the United States
Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that information contained in such Quarterly Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
Date: August 14, 2003
//s//
----------------------------------------
John R. Barnes
Chief Executive Officer
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Xanser Corporation and will be
retained by Xanser Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
CERTIFICATE OF CHIEF FINANCIAL OFFICER
Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002
The undersigned, being the Chief Financial Officer of Xanser Corporation (the
"Company"), hereby certifies that the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2003, filed with the United States
Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that information contained in such Quarterly Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
Date: August 14, 2003
//s//
-----------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Xanser Corporation and will be
retained by Xanser Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.