- --------------------------------------------------------------------------------
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 September 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
------- ------
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 October 31, 2003
- --------------------- -------------------------------
No par value 31,578,869 shares
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XANSER CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
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Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations - Three and
Nine Months Ended September 30, 2003 and 2002 1
Condensed Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 2
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
Revenues:
Services $ 30,683 $ 27,921 $ 89,524 $ 83,248
Products 7,059 3,963 13,675 9,217
------------- ------------- ------------- --------------
Total revenues 37,742 31,884 103,199 92,465
------------- ------------- ------------- --------------
Costs and expenses:
Operating costs 28,776 27,444 84,002 81,721
Cost of products sold 6,831 3,918 12,424 8,982
Depreciation and amortization 1,019 804 3,118 2,707
General and administrative 878 962 2,502 2,850
------------- ------------- ------------- --------------
Total costs and expenses 37,504 33,128 102,046 96,260
------------- ------------- ------------- --------------
Operating income (loss) 238 (1,244) 1,153 (3,795)
Interest and other income, net 58 103 188 352
Interest expense (263) (435) (1,013) (1,353)
------------- ------------- ------------- --------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 33 (1,576) 328 (4,796)
Income tax benefit 334 1,145 602 2,878
------------- ------------- ------------- --------------
Income (loss) before cumulative effect
of change in accounting principle 367 (431) 930 (1,918)
Cumulative effect of change in accounting
principle - adoption of new accounting
standard for goodwill, net of income taxes - - - (45,269)
------------- ------------- ------------- --------------
Net income (loss) $ 367 $ (431) $ 930 $ (47,187)
============= ============= ============= ==============
Earnings (loss) per common share - Basic and diluted:
Before cumulative effect of change
in accounting principle $ .01 $ (.01) $ .03 $ (.06)
Cumulative effect of change in
accounting principle - - - (1.37)
------------- ------------ ------------- --------------
$ .01 $ (.01) $ .03 $ (1.43)
============= ============ ============= ==============
See notes to consolidated financial statements.
1
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
--------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,878 $ 25,624
Accounts receivable, trade 37,239 36,208
Receivable from businesses distributed to common
shareholders 7,699 7,412
Inventories 8,266 8,424
Prepaid expenses and other 3,009 5,264
-------------- -------------
Total current assets 76,091 82,932
-------------- -------------
Property and equipment 42,368 38,830
Less accumulated depreciation and amortization 28,458 24,875
-------------- -------------
Net property and equipment 13,910 13,955
-------------- -------------
Excess of cost over fair value of net assets of
acquired businesses 13,802 13,802
Deferred income taxes and other assets 20,278 16,958
-------------- -------------
$ 124,081 $ 127,647
============== =============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 771 $ 747
Accounts payable 3,877 3,919
Accrued expenses 20,191 21,419
Accrued income taxes 11,592 9,792
-------------- -------------
Total current liabilities 36,431 35,877
-------------- -------------
Long-term debt, less current portion:
Technical services 16,765 18,479
Parent company 5,000 9,930
-------------- -------------
Total long-term debt, less current portion 21,765 28,409
-------------- -------------
Other liabilities 2,212 1,812
Commitments and contingencies
Stockholders' equity:
Common stock, without par value 4,333 4,333
Additional paid-in capital 126,561 126,675
Treasury stock, at cost (26,275) (26,390)
Accumulated deficit (34,660) (35,590)
Accumulated other comprehensive income (loss) (6,286) (7,479)
-------------- -------------
Total stockholders' equity 63,673 61,549
-------------- -------------
$ 124,081 $ 127,647
============== =============
See notes to consolidated financial statements.
2
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------------------
2003 2002
------------- --------------
Operating activities:
Net income (loss) $ 930 $ (47,187)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,118 2,707
Deferred income taxes (2,684) (2,827)
Cumulative effect of change in accounting principle - 45,269
Other 414 564
Changes in working capital components 1,141 5,545
------------- --------------
Net cash provided by operating activities 2,919 4,071
------------- --------------
Investing activities:
Capital expenditures (2,770) (3,555)
Other 995 347
------------- --------------
Net cash used in investing activities (1,775) (3,208)
------------- --------------
Financing activities:
Issuance of debt and capital leases 302 2,303
Payments on debt and capital leases (6,892) (12,829)
Purchase of treasury stock - (3,007)
Decrease (increase) in receivable from businesses
distributed to common shareholders (287) 10,179
Common stock issued and other (13) 540
------------- --------------
Net cash used in financing activities (6,890) (2,814)
------------- --------------
Decrease in cash and cash equivalents (5,746) (1,951)
Cash and cash equivalents at beginning of period 25,624 29,545
------------- --------------
Cash and cash equivalents at end of period $ 19,878 $ 27,594
============= ==============
Supplemental cash flow information:
Cash paid for interest $ 1,362 $ 2,091
============= ==============
Cash paid for income taxes $ 924 $ 693
============= ==============
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 nine month periods ended September 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 September 30, 2003 and the consolidated
results of their operations and cash flows for the periods ended September
30, 2003 and 2002. Operating results for the nine months ended September
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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
(in thousands - except per share amounts)
Reported net income (loss) $ 367 $ (431) $ 930 $ (47,187)
Stock-based employee compensation
expense determined under the fair
value based method, net of income
taxes (47) (66) (106) (295)
------------- ------------- ------------- --------------
Pro forma net income (loss) $ 320 $ (497) $ 824 $ (47,482)
============= ============= ============= ==============
Earnings (loss) per share:
As Reported:
Basic $ .01 $ (.01) $ .03 $ (1.43)
============= ============= ============= ==============
Diluted $ .01 $ (.01) $ .03 $ (1.43)
============= ============= ============= ==============
Pro forma:
Basic $ .01 $ (.02) $ .03 $ (1.44)
============= ============= ============= ==============
Diluted $ .01 $ (.02) $ .03 $ (1.44)
============= ============= ============= ==============
2. COMPREHENSIVE INCOME
Comprehensive income for the three and nine month periods ended September
30, 2003 and 2002 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
(in thousands)
Net income (loss) $ 367 $ (431) $ 930 $ (47,187)
Foreign currency translation
adjustment 230 129 1,193 1,020
------------- ------------- ------------- --------------
Comprehensive income (loss) $ 597 $ (302) $ 2,123 $ (46,167)
============= ============= ============= ==============
At September 30, 2003 and December 31, 2002, accumulated other
comprehensive loss consisted of cumulative foreign currency translation
adjustments of $0.1 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 September 30, 2003
-------------------------------------
Basic earnings per share -
Income before cumulative
effect of change in accounting
principle $ 367 31,992 $ .01
============
Effect of dilutive securities - 1,027
--------------- ---------------
Diluted earnings per share -
Income before cumulative
effect of change in accounting
principle $ 367 33,019 $ .01
=============== =============== ============
Three Months Ended September 30, 2002
-------------------------------------
Basic earnings per share -
Income (loss) before cumulative
effect of change in accounting
principle $ (431) 32,249 $ (.01)
============
Effect of dilutive securities - -
--------------- ---------------
Diluted earnings per share -
Income (loss) before cumulative
effect of change in accounting
principle $ (431) 32,249 $ (.01)
=============== =============== ============
Weighted
Average
Common Per-Share
Income (loss) Shares Amount
--------------- --------------- ----------------
Nine Months Ended September 30, 2003
------------------------------------
Basic earnings per share -
Income before cumulative
effect of change in accounting
principle $ 930 31,990 $ .03
============
Effect of dilutive securities - 843
--------------- ---------------
Diluted earnings per share -
Income before cumulative
effect of change in accounting
principle $ 930 32,833 $ .03
=============== =============== ============
Nine Months Ended September 30, 2002
------------------------------------
Basic earnings per share -
Income (loss) before cumulative
effect of change in accounting
principle $ (1,918) 32,976 $ (.06)
============
Effect of dilutive securities - -
--------------- ---------------
Diluted earnings per share -
Income (loss) before cumulative
effect of change in accounting
principle $ (1,918) 32,976 $ (.06)
=============== =============== ============
The Company's 8.75% convertible subordinated debentures were excluded from
the computation of diluted earnings (loss) per share for the three and nine
month periods ended September 30, 2003 and 2002, because the effects of
assumed conversion would be anti-dilutive. Options to purchase 619,000 and
1,406,751 shares of common stock at weighted average prices of $2.66 and
$2.45, respectively, were outstanding for the three and nine month periods
ended September 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 nine month periods
ended September 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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
(in thousands)
Business segment revenues:
Technical services $ 25,763 $ 22,576 $ 73,882 $ 65,216
Information technology 11,979 9,308 29,317 27,249
------------- ------------- ------------- --------------
$ 37,742 $ 31,884 $ 103,199 $ 92,465
============= ============= ============= ==============
Technical services segment revenues:
Underpressure services $ 10,204 $ 10,254 $ 31,482 $ 30,236
Turnaround services 13,366 10,662 35,586 29,656
Other services 2,193 1,660 6,814 5,324
------------- ------------- ------------- --------------
$ 25,763 $ 22,576 $ 73,882 $ 65,216
============= ============= ============= ==============
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
(in thousands)
Business segment profit:
Technical services $ 1,835 $ 1,062 $ 5,133 $ 2,249
Information technology services (719) (1,344) (1,478) (3,194)
General corporate (878) (962) (2,502) (2,850)
------------- ------------- ------------- --------------
Operating income (loss) 238 (1,244) 1,153 (3,795)
Interest and other income, net 58 103 188 352
Interest expense (263) (435) (1,013) (1,353)
------------- -------------- ------------- --------------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle $ 33 $ (1,576) $ 328 $ (4,796)
============= ============= ============= ==============
September 30, December 31,
2003 2002
------------- --------------
(in thousands)
Total assets:
Technical services $ 64,115 $ 63,319
Information technology services 22,531 26,956
General corporate 37,435 37,372
------------- --------------
$ 124,081 $ 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
September 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 September 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 addresses 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.
The Company has adopted 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. The adoption of SFAS No. 150
had no effect on the consolidated financial statements of the Company.
The Company has adopted the provisions of 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 adoption of EITF Issue No. 00-21, which applies to revenue arrangements
entered into in fiscal periods beginning after September 15, 2003, did not
have a material effect on the 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 Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
2003 2002 2003 2002
----------- ----------- ------------- --------------
(in thousands)
Revenues:
United States $ 5,275 $ 5,333 $ 17,229 $ 18,775
Europe 16,375 14,332 45,870 38,449
Asia-Pacific 4,113 2,911 10,783 7,992
----------- ----------- ------------- --------------
Total Revenues $ 25,763 $ 22,576 $ 73,882 $ 65,216
=========== =========== ============= ==============
Operating income:
United States $ (569) $ (755) $ (952) $ (1,346)
Europe 2,297 1,885 6,024 4,291
Asia-Pacific 780 377 1,617 600
Headquarters (673) (445) (1,556) (1,296)
----------- ----------- ------------- --------------
Total operating income $ 1,835 $ 1,062 $ 5,133 $ 2,249
=========== =========== ============= ==============
Capital expenditures $ 440 $ 584 $ 1,599 $ 1,436
=========== =========== ============= ==============
For the three months ended September 30, 2003, revenues for the technical
services business increased by $3.2 million, or 14%, when compared to the
same 2002 period. In Europe, revenues increased by $2.0 million, or 14%,
when compared to the third quarter of 2002, due to increases in turnaround
services, product sales and foreign currency exchange differences,
partially offset by decreases in underpressure services. In Asia-Pacific,
revenues increased by $1.2 million, or 41%, when compared to the third
quarter of 2002, due to increases in turnaround services and foreign
currency exchange differences. In the United States, third quarter revenues
decreased slightly compared to the same period in 2002.
For the nine months ended September 30, 2003, technical services revenues
increased by $8.7 million, or 13%, when compared to the same period in
2002. Revenues in the United States decreased by $1.5 million, or 8%, when
compared to 2002, due primarily to decreases in underpressure services
resulting from unfavorable market conditions and decisions to exit
non-performing contracts which did not meet current requirements for
generating favorable returns. In Europe, revenues increased by $7.4
million, or 19%, when compared to 2002, due to increases in underpressure
and turnaround services, product sales and foreign currency exchange
differences, partially offset by decreases in other process plant services.
Asia-Pacific revenues increased by $2.8 million, or 35%, when compared to
2002, due to increases in turnaround services and foreign currency exchange
differences.
For the three months ended September 30, 2003, technical services operating
income increased by $0.8 million, or 73%, when compared to the same 2002
period. In the United States, the operating loss decreased by $0.2 million,
or 25%, compared to the same period in 2002, due to higher operating
margins and lower general and administrative costs. In Europe and Asia,
operating income increased by $0.4 million, or 22%, and $0.4 million, or
107%, respectively, when compared to the same 2002 period, due to the
overall higher revenue levels.
For the nine months ended September 30, 2003, technical services operating
income increased by $2.9 million, or 128%, when compared to the same 2002
period. In the United States, the operating loss decreased by $0.4 million,
or 29%, 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
$1.7 million, or 40%, and $1.0 million, or 170%, respectively, when
compared to the same 2002 period, due to the 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 Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
2003 2002 2003 2002
----------- ----------- ------------- --------------
(in thousands)
Revenues $ 11,979 $ 9,308 $ 29,317 $ 27,249
=========== =========== ============ ==============
Operating income (loss) $ (719) $ (1,344) $ (1,478) $ (3,194)
=========== =========== ============ ==============
Capital expenditures $ 98 $ 790 $ 1,171 $ 2,119
=========== =========== ============ ==============
For the three and nine month periods ended September 30, 2003, information
technology revenues increased by $2.7 million, or 29%, and $2.1 million, or
8%, respectively, when compared to the same 2002 periods. Service revenues
decreased in the third quarter and first nine months 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, increased in the third quarter and first nine months of
2003, compared to the same 2002 periods, due to normal fluctuations in
customer needs.
Information technology services operating loss decreased by $0.6 million
and $1.7 million for the three and nine month periods ended September 30,
2003, respectively, compared to the same 2002 periods, due primarily to the
segment's strategic focus on higher margin service business. Additionally,
operating income (loss) for the nine months ended September 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 and $0.3 million during the
three and nine months ended September 30, 2003, respectively, compared to
the same 2002 periods, 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 September 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 $2.9 million and $4.1 million for
the nine months ended September 30, 2003 and 2002, respectively. The
decrease was due to normal changes in working capital components resulting
from the timing of cash receipts and disbursements, partially offset by
increases in revenues and operating income. During the nine months ended
September 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 $2.8 million and $3.6 million for the nine month
periods ended September 30, 2003 and 2002, respectively. 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 September 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 (2.875% at September 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 September 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 Parent Company's 8.75% subordinated debentures ($5.0 million
outstanding at September 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 September 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.
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 $15.8 million at September 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.
The Company's principal executive officer and principal financial officer, after
evaluating as of September 30, 2003, the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934), 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.
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, 1985, 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 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated August 8, 2001, filed as
Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed
on August 22, 2001, which exhibit is hereby incorporated by
reference.
3.8 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.
31.1 Certification of Chief Executive Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated as of November 13, 2003.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated as of November 13, 2003.
32.1 Certification of Chief Executive Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of November
13, 2003.
32.2 Certification of Chief Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of November
13, 2003.
(b) Reports on Form 8-K
Current Report on Form 8-K, filed August 1, 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: November 13, 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: November 13, 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: November 13, 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 September 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: November 13, 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 September 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: November 13, 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.