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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5083
XANSER CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 74-1191271
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- ------------------------------------------
Common Stock, Without Par Value New York Stock Exchange
8 3/4% Convertible Subordinated New York Stock Exchange
Debentures due 2008
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. 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
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $63,483,662. This figure is estimated as of June 30, 2003, at which
date the closing price of the registrant's Common Stock on the New York Stock
Exchange was $2.10 per share, and assumes that only the Registrant's officers
and directors were affiliates of the registrant.
Number of shares of Common Stock, without par value, of the Registrant
outstanding at March 22, 2004: 31,609,141.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12, 13 and 14) of Form
10-K is incorporated by reference from portions of the Registrant's definitive
proxy statement to be filed with the Securities and Exchange Commission not
later than 120 days after the close of the fiscal year covered by this Report.
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PART I
Item 1. Business
GENERAL
Xanser Corporation ("Xanser" or the "Company") conducts its principal
businesses in two industry segments, technical services and information
technology services. The technical services and information technology services
segments operate through subsidiaries of Furmanite Worldwide, Inc. and Xtria
LLC, respectively. Furmanite Worldwide, Inc., and its domestic and international
subsidiaries and affiliates (collectively, "Furmanite"), provide specialized
technical services, including leak sealing under pressure, on-site machining,
valve testing and repair and other engineering products and services, primarily
to electric power generating plants, petroleum refineries and other process
industries in the United Kingdom, Continental Europe, North America, Latin
America and Asia-Pacific. For additional information see "Technical Services."
Xtria LLC ("Xtria") is engaged in the information technology services industry
and offers products and services that include hardware design and
implementation, web hosted data processing, networking, consulting and other
support services to the healthcare, finance and insurance industries, and to
agencies of the state and federal governments. Xtria also provides claims
administration support and automated documentation control. For additional
information see "Information Technology Services."
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline, terminaling and product marketing businesses (the
"Distribution") to its stockholders in the form of a new limited liability
company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was
completed, with each shareholder of the Company receiving one common share of
KSL for each three shares of the Company's common stock held on June 20, 2001,
the record date for the Distribution, resulting in the distribution of 10.85
million KSL common shares. As a result, the accompanying consolidated financial
statements reflect the results of operations of KSL prior to the Distribution as
"Discontinued operations - businesses distributed to common shareholders".
Xanser was incorporated in Delaware on January 23, 1953. The Company's
principal operating office is located at 2435 North Central Expressway, Suite
700, Richardson, Texas 75080 and its telephone number is (972) 699-4000.
OPERATING SEGMENTS
Financial information regarding the Company's operating segments and
foreign operations is presented under the caption "Business Segment Data" in
Note 9 to the Company's consolidated financial statements. Such information is
hereby incorporated by reference into this Item 1.
TECHNICAL SERVICES
The Furmanite group of companies offers specialized technical services to
an international base of clients. Founded in Virginia Beach, Virginia in the
1920s as a manufacturer of leak sealing kits, Furmanite Worldwide, Inc. has
evolved into an international service company that provides technical and
technology solutions. In the 1960s, Furmanite expanded within the United
Kingdom, primarily through its leak sealing products and services, and, during
the 1970s and 1980s, grew through geographic expansion and the addition of new
techniques, processes and services to become one of the largest leak sealing and
on-site machining companies in the world. The Company acquired Furmanite in 1991
to diversify the Company's operations and pursue international growth
opportunities. For the year ended December 31, 2003, Furmanite's revenues and
operating income were approximately $101.0 million and $6.3 million,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Products and Services
Furmanite provides on-line repairs of leaks ("leak sealing") in valves,
pipes and other components of piping systems and related equipment typically
used in flow-process industries. See "Customers and Markets." Other services
provided by Furmanite include on-site machining, bolting and valve testing and
repair on such systems and equipment. These services tend to complement
Furmanite's leak sealing service, since these "turnaround services" are usually
performed while a plant or piping system is off-line. In addition, Furmanite
provides hot tapping, fugitive emissions monitoring, passive fire protection,
concrete repair and heat exchanger repair. Furmanite also performs diagnostic
services on valves and motors by, among other methods, utilizing its patented
Trevitest(R) system. In performing these services, Furmanite technicians
generally work at the customer's location, frequently responding on an emergency
basis. Over its history, Furmanite has established a reputation for delivering
quality service and helping its customers avoid or delay costly plant or
equipment shutdowns. For each of the years ended December 31, 2003, 2002 and
2001, under pressure services represented approximately 42%, 46% and 42%,
respectively, of Furmanite's revenues, while turnaround services accounted for
approximately 48%, 46% and 50%, respectively, and product sales and other
industrial services represented approximately 10%, 8% and 8%, respectively, of
Furmanite's revenues for each of such years.
Furmanite's on-line, leak sealing under pressure services are performed on
a variety of flow-process industry machinery, often in difficult situations.
Many of Furmanite's techniques and materials are proprietary and some are
patented and, the Company believes, they provide Furmanite with a competitive
advantage over other organizations that provide similar services. Furmanite
holds approximately 200 patents and trademarks for its techniques, products and
materials. These patents, which are registered in jurisdictions around the
world, expire on dates ranging from April 2004 to December 2012. Furmanite's
skilled technicians work with equipment in a manner designed to enhance safety
and efficiency in temperature environments ranging from cryogenic to 1,400
degrees Fahrenheit and pressure environments ranging from vacuum to 5,000 pounds
per square inch. In many circumstances, Furmanite personnel are called upon to
custom-design tools, equipment or other materials to effect the necessary
repairs. These efforts are supported by an internal quality control group that
works with the on-site technicians in crafting these materials.
Customers and Markets
Furmanite's customer base includes petroleum refineries, chemical plants,
offshore energy production platforms, steel mills, nuclear power stations,
conventional power stations, pulp and paper mills, food and beverage processing
plants and other flow-process facilities in more than 25 countries. Over 80% of
Furmanite's revenues are derived from fossil and nuclear fuel power generation
companies, petroleum refiners and chemical producers, while other significant
markets include offshore oil producers and steel manufacturers. As the worldwide
industrial infrastructure continues to age, additional repair and maintenance
expenditures are expected to be required for the specialized services provided
by Furmanite. Other factors that may influence the markets served by Furmanite
include regulations governing construction of industrial plants, and safety and
environmental compliance requirements. No single customer accounted for more
than 10% of this segment's consolidated revenue during any of the past three
fiscal years.
Furmanite believes that it is the most recognized brand in its industry.
With its 75-year history, Furmanite's customer relationships are long-term and
worldwide. Furmanite serves its customers from its Richardson, Texas worldwide
headquarters and maintains a substantial presence in the United Kingdom,
Continental Europe and Asia-Pacific. Furmanite currently operates North American
offices in the United States in Baton Rouge, Louisiana; Beaumont, Texas;
Charlotte, North Carolina; Houston, Texas; Los Angeles, California;
Merrillville, Indiana and Salt Lake City, Utah. Furmanite's worldwide operations
are further supported by offices currently located in Australia, Belgium,
France, Germany, Hong Kong, Malaysia, the Netherlands, New Zealand, Norway,
Singapore and the United Kingdom and by licensee, agency and/or minority
ownership interest arrangements in Argentina, Brazil, Chile, Croatia, Cyprus,
Czech Republic, Egypt, Finland, Hungary, India, Indonesia, Italy, Japan, Kuwait,
Macedonia, Poland, Portugal, Puerto Rico, Saudi Arabia, Slovak Republic, South
Korea, Sweden, Thailand, Trinidad, Ukraine, the United Arab Emirates and
Venezuela. Sales by major geographic region for 2003 were 23% for the United
States, 62% for Europe and 15% for Asia-Pacific. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 9 to the
Company's consolidated financial statements.
Furmanite's leak sealing under pressure and other specialty field services
are marketed primarily through direct sales calls on customers by salesmen and
technicians based at Furmanite's various operating locations, which are situated
to facilitate timely customer response, 24 hours a day, seven days a week.
Customers are usually billed on a time and materials basis for services
typically performed pursuant to either job quotation sheets or purchase orders
issued under written customer agreements. Customer agreements are generally
short-term in duration and specify the range of and rates for the services to be
performed. Furmanite typically provides various limited warranties, depending
upon the services furnished, and has had no material warranty claims during the
three years ended December 31, 2003. Furmanite competes on the basis of service,
product performance and price, generally on a localized basis with smaller
companies and the in-house maintenance departments of its customers or potential
customers. In addition to staff reductions and the trend toward outsourcing,
Furmanite believes it currently has an advantage over in-house maintenance
departments because of the ability of its multi-disciplined technicians to use
Furmanite's proprietary and patented techniques to perform quality repairs on a
timely basis while customer equipment remains in service.
Safety, Environmental and Other Regulatory Matters
Many aspects of Furmanite's operations are subject to governmental
regulation. Federal, state and local authorities of the U.S. and various foreign
countries have each adopted safety, environmental and other regulations relating
to the use of certain methods, practices and materials in connection with the
performance of Furmanite's services and which otherwise affect its operations.
Further, because of its international operations, Furmanite is subject to a
number of political and economic risks, including taxation policies, labor
practices, currency exchange rate fluctuations, foreign exchange restrictions,
local political conditions, import and export limitations and expropriation of
equipment. Except in certain developing countries, where payment in a specified
currency is required by contract, Furmanite's services are paid, and its
operations are typically funded, in the currency of the particular country in
which its business activities are conducted. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Leak sealing under pressure and other Furmanite services are often
performed in emergency situations under circumstances involving exposure to high
temperatures and pressures, potential contact with caustic or toxic materials,
fire and explosion hazards and environmental contamination, any of which can
cause serious personal injury or property damage. Furmanite manages its
operating risks by providing its technicians with extensive on-going classroom
and field training and supervision, maintaining a technical support system
through its staff of specialists, establishing and enforcing strict safety and
competency requirements, standardizing procedures and evaluating new materials
and techniques for use in connection with its lines of service. Furmanite also
maintains insurance coverage for certain risks, although there is no assurance
that insurance coverage will continue to be available at rates considered
reasonable or that the insurance will be adequate to protect the Company against
liability and loss of revenues resulting from the consequences of a significant
accident.
INFORMATION TECHNOLOGY SERVICES
Xtria, the Company's information technology services business, provides
information technology services to the healthcare industry, the financial and
insurance industries and to various governmental agencies. The segment's primary
business includes hardware design and implementation, web hosted data
processing, networking, consulting and other support services. For the year
ended December 31, 2003, the information services segment's revenues and
operating losses were $34.7 million and $6.5 million, respectively. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations". Xtria is headquartered in Richardson, Texas, and maintains offices
in Bryan, Texas; McLean, Virginia; and Frederick, Maryland.
Healthcare Services
Xtria facilitates healthcare organizations conversion from diagnostic film
images to digital radiology imaging systems, known as Picture Archival and
Communication Systems ("PACS"). PACS are used in connection with digitally
recorded diagnostic images, such as magnetic resonance imaging, computer
tomography scans, ultrasounds and digital x-rays, among others. The integrated
PACS communication network enables physicians to share studies and results
electronically while the digital imaging technologies are expected to increase
the throughput of imaging studies. The system also allows information to be
shared between facilities, including international locations, through secure
web-based and dedicated wide area connections. Beyond the benefits to patients
and medical staff, the system reduces the costs associated with traditional,
film-based radiology imaging, which requires processing, storing and
distributing images in film libraries.
Xtria's PACS implementation service provides evaluation of the healthcare
organization's PACS readiness, including a technology assessment, workflow
analysis, cost analysis and information systems integration plan, development of
a Request For Proposal tailored to the specific needs of the organization,
evaluation of vendor submissions and recommendations on technical compliance and
pricing, analysis of the top vendors, participation in on-site vendor
presentations, and negotiation of final vendor contracts. Upon completion of the
installation, Xtria's PACS implementation system continues to provide assistance
by development of a comprehensive transition plan incorporating the digital
imaging goals, project timelines and specific milestones necessary to ensure a
smooth transition to a digital environment for the healthcare organization.
Xtria also provides support and testing of the system after it has been
installed, by engineers, physicists, and RTs ensure the system is ready for
clinical use and meets the design specifications; and, on-going operational
management to ensure peak performance of the PACS.
Financial and Insurance Services
Xtria's financial and insurance group provides risk management information
solutions and services for financial services and insurance companies. Xtria
helps clients mitigate risk and increase profitability through improved decision
support and active risk management. The Company's risk management solutions
include lien tracking and notification services, automated document control, and
federal and state delinquent payer compliance reporting. As part of its
services, Xtria monitors, on behalf of its customers, the status of insurance
coverage on automobiles and homes pledged as loan collateral. Xtria believes
that the market for these applications is fragmented among a number of small
competitors and that competition in this market is primarily based upon the
quality of the services provided.
Xtria also provides claims administration services, utilizing their
industry expertise, technical infrastructure, and process management
capabilities to meet the client's claims administration needs by tracking
damaged collateral, issuing settlement checks directly to the insured lender,
obtaining salvage bids, processing title transfers and providing loss reports.
Xtria utilizes the Tickler(TM) Tracking System to automate document control and
manage risk exposure from missing, expired or improper loan documentation.
Sensitive documents, such as UCC-1s, hazard insurance, title insurance, tax
receipts, financial statements, cash flow reports, letters of credit, stock
values and CDs can be regularly reviewed and tracked by the Tickler(TM) Tracking
System.
Government Services
Xtria provides comprehensive information technology services, including
web-enabled software applications, consulting and web development services under
various state and federal government contracts. The web-enabled software
applications developed by Xtria include early childhood research studies, field
research and program analysis tools, shared statistical analysis tools, grant
review services, conference management and logistics coordination tools. The
Company believes that the capabilities Xtria offers in web-related services with
large database components offer opportunities for further expanding its market.
ENVIRONMENTAL MATTERS
Many of the Company's operations are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Company believes that its operations generally are in compliance with applicable
environmental regulation, risks of additional costs and liabilities are inherent
in its operations, and there can be no assurance that significant costs and
liabilities will not be incurred by the Company. Moreover, it is possible that
other developments, such as increasingly stringent environmental laws,
regulations, enforcement policies thereunder, and claims for damages to property
or persons resulting from the operations of the Company could result in
substantial costs and liabilities. See "Technical Services - Safety,
Environmental and Other Regulatory Matters."
EMPLOYEES
At December 31, 2003, the Company and its subsidiaries employed 1,034
persons. The Furmanite group of companies employed a total of 873 persons and
142 persons were employed by the Xtria group of companies. As of December 31,
2003, approximately 410 of the persons employed by Furmanite were subject to
representation by unions or other similar associations for collective bargaining
or other similar purposes, including 106 of Furmanite's employees in the United
Kingdom who are subject to a collective bargaining contract. The Company
considers relations with its employees to be good.
AVAILABLE INFORMATION
The Company files annual, quarterly, and other reports and other
information with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "Exchange Act"). These reports and other
information that the Company files with the SEC may be read and copied at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Additional information about the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site (http://www.sec.gov) that contains reports, proxy information statements
and other information regarding issuers that file electronically with the SEC.
The Company also makes available free of charge on or through its Internet
site (www.xanser.com) the Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and other information statements and, if
applicable, amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act as soon as reasonably practicable after the reports
are electronically filed with, or furnished to, the SEC.
Item 2. Properties
The properties owned or utilized by the Company and its subsidiaries are
generally described in Item 1 of this Report. Additional information concerning
the obligations of the Company and its subsidiaries for lease and rental
commitments is presented under the caption "Commitments and Contingencies" in
Note 8 to the Company's consolidated financial statements. Such descriptions and
information are hereby incorporated by reference into this Item 2.
The Company's corporate headquarters is located in an office building in
Richardson, Texas, pursuant to a lease agreement that expires in 2007. The
facilities used in the operations of the Company's subsidiaries are generally
held under lease agreements having various expiration dates, rental rates and
other terms, except for two Furmanite properties located in the United Kingdom,
which are owned by the Company.
Item 3. Legal Proceedings
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, either individually or in the aggregate, will not have a
materially adverse effect on the financial position, results of operations or
liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders in the fourth quarter of 2003.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Shares of the Company's Common Stock are listed and traded on the New York
Stock Exchange ("NYSE") under the symbol XNR. Prior to the Distribution of KSL
on June 29, 2001, the Company's Common Stock was traded on the NYSE under the
symbol KAB. At March 22, 2004, there were approximately 4,000 holders of Common
Stock of record. The following table sets forth, for the fiscal periods
indicated, the quoted high and low sales prices of the shares on the New York
Stock Exchange.
Quoted Stock Prices
for XNR
-------------------------
Calendar Year High Low
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2002:
First Quarter $ 2.76 $ 1.87
Second Quarter 3.45 1.80
Third Quarter 2.01 1.25
Fourth Quarter 1.98 1.25
2003:
First Quarter 1.90 1.33
Second Quarter 2.50 1.65
Third Quarter 2.78 2.05
Fourth Quarter 2.75 2.18
2004:
First Quarter 2.65 2.25
(through March 22, 2004)
The Company currently intends to retain future earnings for the development
of its business and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The Company's dividend policy is reviewed
periodically and determined by its Board of Directors on the basis of various
factors, including, but not limited to, its results of operations, financial
condition, capital requirements and investment opportunities. Additionally, the
credit facilities for the working capital of Furmanite contain restrictions on
the respective subsidiary's ability to pay dividends or distributions to the
Company, if an event of default exists.
Item 6. Summary Historical Financial Data
The following selected financial data (in thousands, except per share
amounts) is derived from the Company's Consolidated Financial Statements and
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included elsewhere in this report. As a result of the June
2001 Distribution of KSL (See Note 1 to the Consolidated Financial Statements),
the Company's pipeline, terminaling and product marketing businesses have been
reclassified as "Discontinued operations - businesses distributed to common
shareholders" for all periods presented. The Company has not declared a dividend
on its Common Stock for any of the periods presented.
Year Ended December 31,
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2003 2002 2001 2000 1999
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Income Statement Data:
Revenues............................ $ 135,720 $ 131,436 $ 144,704 $ 127,641 $ 135,433
========== ========= ========== ========== ==========
Operating income (loss)............. $ (3,367) $ (4,207) $ 5,429 $ 4,102 $ (4,566)
========== ========= ========== ========== ==========
Income (loss) from continuing
operations before income taxes
and cumulative effect of change
in accounting principle.......... $ (4,380) $ (5,511) $ 9,349 $ 889 $ (8,057)
Income tax benefit (expense)........ (8,725)(a) 3,269 13,039(b) 5,894(c) 38,507(d)
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations before cumulative
effect of change in accounting
principle........................ (13,105) (2,242) 22,388 6,783 30,450
Cumulative effect of change in
accounting principle-adoption
of new accounting standard for
goodwill, net of income taxes.... - (45,269) - - -
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations....................... (13,105) (47,511) 22,388 6,783 30,450
Income from discontinued operations
- businesses distributed to common
shareholders - - 3,337 10,386 28,459
---------- --------- ---------- ---------- ----------
Net income (loss)................... $ (13,105) $ (47,511) $ 25,725 $ 17,169 $ 58,909
========== ========= ========== ========== ==========
(a) Includes a $12.1 million non-cash deferred income tax expense resulting
from a change in the valuation allowance for deferred tax assets arising
from prior year tax losses that are available to offset future taxable
income (see Note 2 to Consolidated Financial Statements).
(b) Includes $18.1 million in tax benefits resulting from recapitalization of a
foreign subsidiary (see Note 2 to Consolidated Financial Statements).
(c) Includes the recognition of $6.3 million in expected benefits from prior'
years tax losses available to offset future taxable income.
(d) Includes the recognition of $37.1 million in expected benefits from prior'
years tax losses available to offset future taxable income.
Year Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- --------- ---------- ---------- ----------
Per Share Data:
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of
change in accounting
principle.................. $ (0.41) $ (0.07) $ 0.68 $ 0.20 $ 0.95
Cumulative effect of change
in accounting principle.... - (1.38) - - -
--------- -------- ---------- ---------- ---------
(0.41) (1.45) 0.68 0.20 0.95
Discontinued operations........ - - 0.10 0.33 0.91
--------- -------- ---------- ---------- ---------
$ (0.41) $ (1.45) $ 0.78 $ 0.53 $ 1.86
========= ======== ========== ========== =========
Diluted:
Continuing operations:
Before cumulative effect of
change in accounting
principle.................. $ (0.41) $ (0.07) $ 0.64 $ 0.19 $ 0.92
Cumulative effect of change
in accounting principle.... - (1.38) - - -
--------- -------- ---------- ---------- ---------
(0.41) (1.45) 0.64 0.19 0.92
Discontinued operations........ - - 0.10 0.31 0.87
--------- -------- ---------- ---------- ---------
$ (0.41) $ (1.45) $ 0.74 $ 0.50 $ 1.79
========= ======== ========== ========== =========
December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- --------- ---------- ---------- ----------
Balance Sheet Data:
Cash and cash equivalents........... $ 21,240 $ 25,624 $ 29,545 $ 20,517 $ 14,516
Working capital..................... 44,103 47,055 71,789 81,185 42,191
Total assets........................ 104,790 127,647 186,219 226,643 219,540
Long-term debt...................... 20,457 28,409 37,801 39,593 44,223
Stockholders' equity................ 52,452 61,549 115,506 166,039 144,803
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto included elsewhere in this
report.
GENERAL
The Company, formed in 1953, conducts its principal businesses in two
industry segments, technical services and information technology services.
The Company's technical services business, which is conducted through its
Furmanite group of subsidiaries, offers specialized technical services to an
international base of clients located in the United States, Europe and Asia
Pacific regions. The technical services business provides on-line repairs of
leaks in valves, pipes and other components of piping systems and related
equipment, typically in the flow-process industries. Other services provided
include on-site machining, bolting and valve testing and repair on such systems
and equipment. In addition, the division provides hot tapping, fugitive
emissions monitoring, passive fire protection, concrete repair and heat
exchanger repair.
The Company's information technology services business, Xtria, provides
services and related products to the healthcare industry, the financial and
insurance industries, and various governmental agencies. The segment's primary
business is information technology services, including application software,
hardware, web hosted data processing, networking, consulting and support
services.
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline, terminaling and product marketing businesses (the
"Distribution") to its stockholders in the form of a new limited liability
company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was
completed, with each shareholder of the Company receiving one common share of
KSL for each three shares of the Company's common stock held on June 20, 2001,
the record date for the Distribution, resulting in the distribution of 10.85
million KSL common shares. As a result of the Distribution, the Company's
pipeline, terminaling and product marketing businesses have been reclassified as
"Discontinued operations - businesses distributed to common shareholders" for
all periods presented.
OVERVIEW
In 2003, the Company directed its efforts to position Xanser for future
growth and profitability.
The Company's technical service business, Furmanite, delivered outstanding
performance in 2003 as it continued to focus its operations on its true core
competency - maximizing the uptime of its customers' critical assets so that
they are on line and performing profitably. Furmanite has fine-tuned its core
services in order to achieve effective and efficient delivery, at the same time
adding new services and technologies that open new markets, add new customers
and extend value to its existing customers.
Xanser's information technology services business, Xtria, was formed from a
collection of IT businesses that were added over time. Some of these businesses
were performing very well while others were struggling. Those struggling
businesses were taking a great deal of time and resources and were substantially
reducing Xtria's profitability. Those operations did not have the potential
growth and margins that are necessary to build Xtria over the long term and were
closed in the fourth quarter of 2003. Xtria is now focused on its strong
operations in healthcare, financial and insurance, and government that deliver
solid margins and have large market potential. In each of these areas Xtria has
an established reputation, long-term customers, and proven solutions.
Xanser has a strong balance sheet with substantial working capital and
equity and a small amount of debt and will continue to maximize its
opportunities for growth in the future.
CONSOLIDATED RESULTS OF OPERATIONS
Year Ended December 31,
----------------------------------------------------
2003 2002 2001
------------- ------------- ---------------
(in thousands, except per share amounts)
Revenues from continuing operations....................... $ 135,720 $ 131,436 $ 144,704
============= ============= ===============
Operating income (loss) from continuing operations........ $ (3,367) $ (4,207) $ 5,429
============= ============= ===============
Income (loss) from continuing operations before income
taxes and cumulative effect of change in accounting
principle.............................................. $ (4,380) $ (5,511) $ 9,349
============= ============= ==============
Net income (loss):
Continuing operations.................................. $ (13,105) $ (47,511) $ 22,388
Discontinued operations - businesses
distributed to common shareholders................... - - 3,337
------------- ------------- --------------
Net income (loss)................................... $ (13,105) $ (47,511) $ 25,725
============= ============= ==============
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of change in
accounting principle............................. $ (0.41) $ (0.07) $ 0.68
Cumulative effect of change in
accounting principle............................. - (1.38) -
-------------- ------------- --------------
(0.41) (1.45) 0.68
Discontinued operations.............................. - - 0.10
-------------- -------------- --------------
$ (0.41) $ (1.45) $ 0.78
============= ============= ==============
Diluted:
Continuing operations:
Before cumulative effect of change in
accounting principle............................. $ (0.41) $ (0.07) $ 0.64
Cumulative effect of change in
accounting principle............................. - (1.38) -
-------------- ------------- --------------
(0.41) (1.45) 0.64
Discontinued operations.............................. - - 0.10
-------------- -------------- --------------
$ (0.41) $ (1.45) $ 0.74
============= ============= ==============
Capital expenditures from continuing operations,
excluding acquisitions................................. $ 3,311 $ 5,504 $ 4,625
============= ============= ==============
For the year ended December 31, 2003, consolidated revenues from continuing
operations increased by $4.3 million, or 3%, when compared to 2002, due to a
$10.3 million increase in revenues from the technical services business (see
"Technical Services" below), partially offset by a $6.0 million decrease in
revenues from the information technology services business. The information
technology services business closed its non-performing operations in late 2003
(see "Information Technology Services" below). The consolidated operating loss
decreased by $0.8 million in 2003, when compared to 2002, due to a $2.8 million
increase in operating income from the technical services business and a $0.8
million decrease in general and administrative expenses, partially offset by a
$2.7 million increase in operating loss from the information technology services
business. Loss from continuing operations before income taxes and cumulative
effect of change in accounting principle decreased by $1.1 million, compared to
2002, due to the overall decrease in operating loss and a decrease in interest
expense (see "Interest Expense" below). Income (loss) from continuing operations
was ($13.1) million for the year ended December 31, 2003 and includes a non-cash
accounting adjustment in the fourth quarter of 2003 related to deferred taxes of
$12.1 million (see "Income Taxes" below).
For the year ended December 31, 2002, revenues decreased by $13.3 million,
or 9%, when compared to 2001, due to a $7.7 million decrease in revenues from
the information technology services business and a $5.6 million decrease in
revenues from the technical services business. Operating income decreased by
$9.6 million in 2002, when compared to 2001, due primarily to a $7.4 million
decrease in operating income from the information technology services business
and a $2.0 million decrease in operating income from the technical services
business. Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principle decreased by $14.9 million,
compared to 2001, due to the decrease in operating income and the 2001
recognition of $6.0 million of other income, net of expenses, from a legal
proceeding, partially offset by a decrease in interest expense. Income (loss)
from continuing operations was ($47.5) million for the year ended December 31,
2002, and includes a charge (net of income taxes) of $45.3 million for the
cumulative effect of a change in accounting principle-adoption of new accounting
standard for goodwill (see "Critical Accounting Policies and Estimates" below).
TECHNICAL SERVICES
Year Ended December 31,
---------------------------------------
2003 2002 2001
--------- --------- -------
(in thousands)
Revenues:
United States........................................ $ 23,285 $ 26,199 $ 35,788
Europe............................................... 62,995 53,186 48,554
Asia-Pacific......................................... 14,738 11,362 11,979
--------- --------- --------
$ 101,018 $ 90,747 $ 96,321
========= ========= ========
Operating income (loss):
United States........................................ $ (1,688) $ (1,562) $ 1,306
Europe............................................... 7,756 5,990 7,011
Asia-Pacific......................................... 2,147 1,007 879
Headquarters......................................... (1,878) (1,855) (3,615)
--------- --------- --------
$ 6,337 $ 3,580 $ 5,581
========= ========= ========
Capital expenditures.................................... $ 1,897 $ 2,912 $ 3,331
========= ========= ========
For the year ended December 31, 2003, technical services revenues increased
by $10.3 million, or 11%, when compared to 2002, due to increased demand for
services in Europe and Asia and favorable foreign currency exchange rates,
partially offset by lower revenues in the United States. In the United States,
revenues decreased by $2.9 million, or 11%, when compared to 2002, due to
decreases in turnaround and 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 $9.8 million, or 18%, when compared to 2002, due to increases in
turnaround and underpressure services, product sales and favorable foreign
currency exchange rates. Asia-Pacific revenues increased $3.4 million, or 30%,
when compared to 2002, due to increases in turnaround services and favorable
foreign exchange rates. Overall, 2003 technical services operating income
increased by $2.8 million, or 77%, when compared to 2002. In the United States,
operating income decreased by $0.1 million, compared to 2002, due to lower
levels of business. In Europe and Asia, operating income increased by $1.8
million, or 29%, and $1.1 million, or 113%, respectively, due to overall higher
revenue levels.
For the year ended December 31, 2002, technical services revenues decreased
by $5.6 million, or 6%, when compared to 2001, primarily due to the impact of
the economic downturn on its customers' business, particularly in the United
States. In the United States, revenues decreased by $9.6 million, or 27%,
compared to 2001, due to decreases in turnaround and underpressure services. In
Europe, revenues increased $4.6 million, or 10%, compared to 2001, due to
increases in underpressure services and favorable foreign currency exchange
rates, partially offset by decreases in turnaround and other process services.
Asia-Pacific revenues decreased $0.6 million, or 5%, compared to 2001, due to
decreases in turnaround services and product sales, partially offset by
favorable foreign exchange rates. Overall, 2002 technical services operating
income decreased by $2.0 million, or 36%, compared to 2001. In the United
States, operating income decreased by $2.9 million, compared to 2001, due to the
lower levels of business. In Europe, operating income decreased by $1.0 million,
compared to 2001, as favorable pension cost adjustments recorded in 2001 were
not totally offset by the margins resulting from increased revenues in 2002. In
Asia-Pacific, operating income increased $0.1 million, compared to 2001, due to
increases in operating margins, which more than offset the lower revenues.
Headquarters costs for 2001 includes $1.9 million of amortization related
to excess of cost over fair value of net assets of acquired businesses. In the
first quarter of 2002, the Company adopted Statement of Financial Accounting
Standards "(SFAS") No. 142 "Goodwill and Other Intangible Assets", which
eliminates the amortization of goodwill and other intangible assets with
indefinite lives (see "Critical Accounting Policies and Estimates" below).
INFORMATION TECHNOLOGY SERVICES
Year Ended December 31,
---------------------------------------
2003 2002 2001
--------- --------- --------
(in thousands)
Revenues................................................ $ 34,702 $ 40,689 $ 48,383
========= ========= ========
Operating income (loss)................................. $ (6,518) $ (3,796) $ 3,651
========= ========= ========
Capital expenditures.................................... $ 1,309 $ 2,592 $ 1,294
========= ========= ========
For the year ended December 31, 2003, information technology services
revenues decreased by $6.0 million, or 15%, when compared to 2002, due to
decreases in both communications-related installation revenues and government
services equipment sales revenues, partially offset by increases in healthcare
sector revenues. The communications-related installation services operations and
low-margin government services equipment sales operations, as well as certain
other non-profitable operations, were closed in the fourth quarter of 2003.
Included in operating income in 2003 is a fourth quarter charge of $3.5 million
pertaining to the write-down of inventory and software costs, and employee and
other termination expenses resulting from the closing of such operations. Unpaid
termination costs at December 31, 2003 were not material. Overall, the 2003
operating loss for the information technology services operations increased by
$2.7 million in 2003, compared to 2002, primarily due to losses from the
non-profitable operations which were exited in late 2003.
For the year ended December 31, 2002, revenues decreased by $7.7 million,
or 16%, when compared to 2001, due to decreases in both service revenues and
equipment sales. The decrease in service revenues is due primarily to lower
communication-related installation revenues from a large customer as a result of
the economic downturn in the technology industry. Revenues from equipment sales,
furnished at the request of selected customers, decreased slightly due to normal
fluctuations in customer needs. Overall, 2002 operating income decreased by $7.4
million, when compared to 2001, due to the lower revenues and planned
investments in management, marketing and product development costs.
Information technology services operating income for 2001 includes $0.4
million of amortization related to excess of cost over fair value of net assets
of acquired businesses. In the first quarter of 2002, the Company adopted SFAS
No. 142, which eliminates the amortization of goodwill and other intangible
assets with indefinite lives (see "Critical Accounting Policies and Estimates"
below).
GENERAL AND ADMINISTRATIVE EXPENSE
For the year ended December 31, 2003, general and administrative expense
was approximately $3.2 million, a decrease of $0.8 million from the prior year.
For the year ended December 31, 2002, general and administrative expense was
approximately $4.0 million, an increase of $0.2 million over the year ended
December 31, 2001. The decrease in 2003 general and administrative expense was
the result of overall decreases in personnel-related and consulting costs
related primarily to corporate governance consulting costs, when compared to
2002 levels. The increase in 2002, when compared to 2001, was due to the
corporate governance consulting costs incurred in 2002.
OTHER INCOME
The Company was the plaintiff in a legal proceeding involving malpractice
issues with a professional service provider previously used by the Company. This
matter was settled in December 2001 with a payment to the Company which, net of
expenses, totaled $6.0 million and is included in other income for the year
ended December 31, 2001.
INTEREST EXPENSE
For the years ended December 31, 2003 and 2002, interest expense decreased
by $0.5 million and $1.7 million, respectively, when compared to the respective
prior year period, due primarily to reductions in debt (see "Liquidity and
Capital Resources") and lower interest rates on variable rate borrowings.
INCOME TAXES
During the fourth quarter of 2003, the Company, pursuant to an evaluation
performed in accordance with the provisions of SFAS No. 109 "Accounting for
Income Taxes", recorded a $12.1 million non-cash deferred income tax expense
resulting from a change in the valuation allowance for deferred tax assets
arising from prior years' tax losses (net operating loss carryforwards) that are
available to offset future taxable income. The net operating loss carryforwards
expire as follows: $1.2 million in 2006; $3.0 million in 2007; $13.4 in 2022;
and $9.6 million in 2023.
For the year ended December 31, 2001, income from continuing operations
includes $18.1 million in income tax benefits resulting from the
recapitalization of a foreign subsidiary. Additionally, income taxes for the
year ended December 31, 2001 includes benefits of $0.6 million related to
favorable developments pertaining to certain state and foreign income tax
issues.
Income tax benefit differs from the expected tax at statutory rates due
primarily to the 2003 change in valuation allowance for deferred tax assets and
different tax rates in the various state and foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations was $4.9
million, $3.5 million and $3.1 million during the years 2003, 2002 and 2001,
respectively. The increase in 2003, compared to 2002, was due to overall
increases in technical services revenues and operating income, partially offset
by normal changes in working capital requirements resulting from the timing of
cash receipts and disbursements. The increase in 2002, compared to 2001, was due
primarily to normal changes in working capital requirements resulting from the
timing of cash receipts and disbursements, partially offset by overall decreases
in revenues and operating income.
Capital expenditures for continuing operations were $3.3 million, $5.5
million and $4.6 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Consolidated capital expenditures for 2004 have been budgeted at
$3 million to $4 million, depending on the economic environment and the needs of
the businesses. Such expenditures, however, will depend on many factors beyond
the Company's control, including, without limitation, demand for services in the
technical services and information services businesses, local, state and federal
government regulations. No assurance can be given that required capital
expenditures will not exceed anticipated amounts during 2004 or thereafter.
Capital expenditures (excluding acquisitions) in 2004 are expected to be funded
from existing cash and anticipated cash flows from operations.
In connection with a stock repurchase plan authorized by the Company's
Board of Directors, the Company purchased in 2002 approximately 1,744,000 shares
of the Company's common stock, at a cost of $3.3 million. The stock purchases
were funded with cash on hand.
At December 31, 2003, $14.3 million was outstanding under a $25 million
Amended and Restated Bank Loan Agreement ("Loan Agreement") that provides
working capital for the technical services group and is without recourse to the
Company. Borrowings under the Loan Agreement bear interest at the option of the
borrower at variable rates (2.88% at December 31, 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 group, including percentage of tangible assets and
revenues related to certain geographical areas, ratios of debt to cash flow, as
defined in the Loan Agreement, and cash flow to fixed charges and capital
expenditures. At December 31, 2003, the Company was in compliance with all
covenants. The Loan Agreement matures in January 2009 and is secured by
substantially all of the tangible assets of the technical services group.
The Company's 8.75% subordinated debentures ($5.0 million outstanding at
December 31, 2003) are convertible into shares of the Company's common stock at
the conversion price, adjusted in 2001 for the Distribution of KSL, of $5.26 per
share. On March 1, 2002, the Company purchased $10.0 million of subordinated
debentures at par value, which satisfies its sinking fund requirements on these
subordinated debentures until their final maturity in 2008. On September 30,
2003, the Company purchased an additional $4.9 million of subordinated
debentures at par value, plus accrued interest.
On March 30, 2001, the Company's Series A Preferred Stock was redeemed for
cash at the stated redemption price of $10.67 per share, plus accrued and unpaid
dividends, for a total cost of approximately $6.1 million. The redemption cost
included a $0.4 million redemption premium, which was recognized as dividends
and redemption premium applicable to preferred stock in 2001. Additionally, on
June 12, 2001, the Company exchanged, in non-cash transactions, 1,356,777 shares
of the Company's common stock for all Series C Preferred and Series F Preferred
shares outstanding.
Pursuant to the Distribution, the Company entered into an agreement (the
"Distribution Agreement") with KSL, whereby KSL is obligated to pay the Company
amounts equal to certain expenses and tax liabilities incurred by the Company in
connection with the Distribution. In January of 2002, KSL paid the Company $10.0
million for tax liabilities due under the terms of the Distribution Agreement.
The Distribution Agreement also requires KSL to pay the Company an amount
calculated based on any income tax liability of the Company that, in the sole
judgement of the Company, (i) is attributable to increases in income tax from
past years arising out of adjustments required by federal and state tax
authorities, to the extent that such increases are properly allocable to the
businesses that became part of KSL, or (ii) is attributable to the distribution
of KSL's common shares and the operations of KSL's businesses prior to the
Distribution date. In the event of an examination of the Company by federal or
state tax authorities, the Company will have unfettered control over the
examination, administrative appeal, settlement or litigation that may be
involved, notwithstanding that KSL has agreed to pay any additional tax.
The following is a schedule by period of the Company's debt repayment
obligations and material contractual commitments at December 31, 2003:
Less than After
Total 1 year 1-3 years 4-5 years 5 years
---------- --------- ---------- ---------- ----------
(in thousands)
Debt:
Technical services credit facility $ 14,296 $ 12 $ - $ - $ 14,284
Parent company convertible
subordinated debentures........ 5,000 - - 5,000 -
Other............................. 301 100 201 - -
---------- --------- ---------- ---------- ----------
19,597 112 201 5,000 14,284
Capital leases.................... 1,598 626 722 250 -
---------- --------- ---------- ---------- ----------
Debt subtotal.................. 21,195 738 923 5,250 14,284
---------- --------- ---------- ---------- ----------
Other contractual commitments:
Operating leases.................. 10,477 3,326 4,311 1,367 1,473
---------- --------- ---------- ---------- ----------
Total.......................... $ 31,672 $ 4,064 $ 5,234 $ 6,617 $ 15,757
========== ========= ========== ========== ==========
A foreign subsidiary of the Company has certain future funding requirements
regarding a defined benefits pension plan (see Note 3 to the Company's
Consolidated Financial Statements).
OFF-BALANCE SHEET TRANSACTIONS
The Company was not a party to any off-balance sheet transactions during
any of the three years ended December 31, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant policies are presented in the Notes to the
Consolidated Financial Statements.
Critical accounting policies are those that are most important to the
portrayal of our financial position and results of operations. These policies
require management's most difficult, subjective or complex judgments, often
employing the use of estimates about the effect of matters that are inherently
uncertain. Our most critical accounting policies pertain to revenue recognition,
the impairment of excess of cost over fair value of net assets of acquired
businesses and income taxes.
The Company's information technology services segment includes revenue
recognized under multiple element arrangements with its customers, which
requires the use of significant judgments and estimates by management. The
accounting policies for revenue recognition in the information technology
services segment comply with AICPA Statement of Position No. 97-2 "Software
Revenue Recognition". SOP No. 97-2 requires revenue to be recognized only after
software is delivered, all significant obligations of the Company are fulfilled,
and all significant uncertainties regarding customer acceptance have expired.
SOP No. 97-2 also requires the unbundling of multiple elements and the
allocation of pricing to each element based upon vendor specific objective
evidence of fair value. In addition, the information technology services
segment's revenues under long-term service contracts are accounted for using a
proportional performance method or on a straight-line basis in accordance with
the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No.
101 "Revenue Recognition in Financial Statements", as amended by SAB No. 104.
Effective January 1, 2002, the Company adopted SFAS No. 142, 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 December 31, 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, 2003, no
additional impairment charge was required. Future evaluations of the fair value
of goodwill and other intangible assets are dependent on many factors, several
of which are out of the Company's control, including the demand for services
provided. To the extent that such factors or conditions change, it is possible
that future impairments could occur, which could have a material effect on the
results of operations of the Company.
At December 31, 2003, the Company had a significant amount of net deferred
tax assets, which consisted principally of net operating loss carryforwards,
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, as follows: $1.2 million
in 2006; $3.0 million in 2007; $13.4 million in 2022; and $9.6 million in 2023.
The alternative minimum tax credit carryforwards have no expiration date. Based
on evaluations performed by the Company pursuant to SFAS No. 109 in the fourth
quarter of 2003, a non-cash valuation allowance of $12.1 million was provided
with respect to the Company's federal and state net deferred tax assets (see
Note 2 to the Company's Consolidated Financial Statements). 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 (Revised December 2003), "Consolidation of Variable
Interest Entities ("FIN 46R"), primarily to clarify the required accounting for
interests in variable interest entities ("VIEs"). This standard replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, that was
issued in January 2003 to address certain situations in which a company should
include in its financial statements the assets, liabilities and activities of
another entity. For the Company, application of FIN 46R is required for
interests in certain VIEs that are commonly referred to as special-purpose
entities, or SPEs, as of December 31, 2003 and for interests in all other types
of VIEs as of March 31, 2004. The application of FIN 46R has not and is not
expected to have a material impact on the consolidated financial statements of
the Company.
In December of 2003, SFAS No. 132 (revised), "Employers' Disclosures about
Pensions and Other Postretirement Benefits", was issued. SFAS No. 132 (revised)
prescribes employers' disclosures about pension plans and other postretirement
benefit plans, but does not change the measurement or recognition of those
plans. SFAS No. 132 (revised) retains and revises the disclosure requirements
contained in the original SFAS No. 132 and requires additional disclosures about
the assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans. SFAS No 132
(revised), which applies to a defined benefits pension plan of a foreign
subsidiary of the Company, must be adopted by the Company in the fiscal year
ending December 31, 2004.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and investment portfolios 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 $14.6 million at December 31,
2003, a one percent increase in interest rates would increase annual interest
expense by approximately $0.1 million.
A significant portion of the technical services business is exposed to
fluctuations in foreign currency exchange rates. (See Item 7 "Technical
Services".)
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data of the Company
begin on page F-1 of this report. Such information is hereby incorporated by
reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures.
Xanser Corporation's principal executive officer and principal financial
officer, after evaluating as of December 31, 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.
During the fourth quarter of 2003, there have been no changes in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, those internal controls
subsequent to the date of the evaluation. As a result, no corrective actions
were required or undertaken.
PART III
The information required by Items 10, 11, 12, 13 and 14 of Form 10-K are
hereby incorporated by reference to the Company's Definitive Proxy Statement to
be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
within 120 days after December 31, 2003.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Beginning
(a) (1) Financial Statements Page
Set forth below are financial statements appearing in this report.
Xanser Corporation and Subsidiaries Financial Statements:
Independent Auditors' Report........................................................ F - 1
Consolidated Statements of Income - Three Years Ended
December 31, 2003, 2002 and 2001.................................................. F - 2
Consolidated Balance Sheets - December 31, 2003 and 2002............................ F - 4
Consolidated Statements of Cash Flows - Three Years Ended
December 31, 2003, 2002 and 2001.................................................. F - 5
Consolidated Statements of Changes in Stockholders'
Equity - Three Years Ended December 31, 2003, 2002 and 2001....................... F - 6
Notes to Consolidated Financial Statements.......................................... F - 7
(a) (2) Financial Statement Schedules
Set forth are the financial statement schedules appearing in this report.
Schedule I - Xanser Corporation (Parent Company) Condensed Financial Statements:
Statements of Income - Three Years Ended December 31, 2003, 2002 and 2001........... F - 26
Balance Sheets - December 31, 2003 and 2002......................................... F - 27
Statements of Cash Flows - Three Years Ended
December 31, 2003, 2002 and 2001.................................................. F - 28
Schedule II - Xanser Corporation Valuation and Qualifying Accounts -
Three Years Ended December 31, 2003, 2002 and 2001.................................. F - 29
Schedules, other than those listed above, have been omitted because of the
absence of the conditions under which they are required or because the required
information is included in the consolidated financial statements or related
notes thereto.
(a) (3) List of Exhibits
3.1 Restated Certificate of Incorporation of the Registrant, dated
September 26, 1979, filed as Exhibit 3.1 of the exhibits to the
Registrant's Registration Statement on Form S-16, which exhibit is
hereby incorporated by reference.
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated April 30, 1981, filed as Exhibit 3.2 of the
exhibits to the Registrant's Annual Report on Form 10-K ("Form 10-K")
for the year ended December 31, 1981, which exhibit is hereby
incorporated by reference.
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated May 28, 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, 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.
4.2 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.
4.3 First Supplemental Indenture between the Registrant and First City,
dated as of March 20, 1984, under which the Registrant assumed
obligations under the Indenture listed as Exhibit 4.5 above, filed as
Exhibit 4.7 of the Registrant's Form 10-K for the year ended December
31, 1983, which exhibit is hereby incorporated by reference.
10.1* Xanser Corporation (formerly Kaneb Services, Inc.) Savings Investment
Plan, as amended, filed as Exhibit 4.10 of the exhibits to the
Registrant's Registration Statement on Form S-8 ("Form S-8") (S.E.C.
File No. 33-41295) as Exhibit 4.1 to the exhibits of the Registrant's
Form S-8 (S.E.C. File No. 333-14067), and as Exhibit 4.9 to the
exhibits of the Registrant's Form S-8 (S.E.C. File No. 333-83968),
which exhibits are hereby incorporated by reference.
10.2* Xanser Corporation (formerly Kaneb Services, Inc.) 1994 Stock
Incentive Plan, filed as Exhibit 4.12 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 33-54027), as Exhibit 10.1 to
the Registrant's Current Report on Form 8-K filed on August 22, 2001,
and as Exhibit 10.1 to the exhibits of the Registrant's Form 10-Q for
the period ended June 30, 2003, which exhibits are hereby incorporated
by reference.
10.3* Xanser Corporation (formerly Kaneb Services, Inc.) Deferred Stock
Unit Plan, as amended, filed as Exhibit 4.1 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-08725) as Exhibit 10.1 to
the exhibits of the Registrant's Current Report on Form 8-K ("Form
8-K"), and as Exhibits 4.9 and 4.10 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-83970), which exhibits are
hereby incorporated by reference.
10.4* Kaneb Services, Inc. 1996 Supplemental Deferred Compensation Plan,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-08727), and as Exhibit 10.2 to the Exhibits of
the Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.5* Kaneb Services, Inc. $1.63 Director Stock Options, filed as Exhibit
4.1 to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
33-58981), which exhibit is hereby incorporated by reference.
10.6* Kaneb Services, Inc. Directors Stock Options I, filed as Exhibit 4.1
to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
333-14069), which exhibit is hereby incorporated by reference.
10.7* Kaneb Services, Inc. 1996 Directors Stock Incentive Plan, as amended,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-14071) and as Exhibit 4.1 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-22109), and as
supplemented, filed as Exhibit 4.2 to the Exhibits of the Registrant's
Form S-8 (S.E.C. File No. 333-60195), and as Exhibit 10.1 to the
Exhibits of the Registrant's Form 8-K, which exhibits are hereby
incorporated by reference.
10.8* Kaneb Services, Inc. Non-Employee Directors Deferred Stock Unit Plan,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-08723), and as Exhibit 10.3 to the Exhibits of
the Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.9* Kaneb Services, Inc. 1994 Stock Option Agreements, filed as Exhibits
10.1, 10.2, 10.3 and 10.4 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-34489), which exhibits are hereby incorporated by
reference.
10.10* Form of Termination Agreement, filed as Exhibit 10.10 to the
exhibits of the Registrant's Form 10-K for the year ended December 31,
1996, which exhibit is hereby incorporated by reference.
10.11* Form of Indemnification Agreement, filed as Exhibit 10.11 to the
Registrant's Form 10-K for the year ended December 31, 1999, which
exhibit is hereby incorporated by reference.
10.12 Amended and Restated Loan Agreement between Furmanite PLC, Bank of
Scotland and certain other Lenders, dated May 1, 1991, as amended,
(the "Furmanite Loan Agreement"), filed as Exhibit 10.8 of the
exhibits to the Registrant's Form 10-K for the year ended December 31,
1994; Exhibit 10.12 of the exhibits to the Registrant's Form 10-K for
the year ended December 31, 1996; Exhibit 10.12 of the Registrant's
Form 10-K for the year ended December 31, 1997; and, Exhibit 10.13 of
the Registrant's Form 10-K for the year ended December 31, 1999, which
exhibits are hereby incorporated by reference.
21 List of subsidiaries of the Registrant, filed herewith.
23 Consent of KPMG LLP, filed herewith.
31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated as of March 25, 2004.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated as of March 25, 2004.
32.1 Certification of Chief Executive Officer, Pursuant to Section 906(a)
of the Sarbanes-Oxley Act of 2002, dated as of March 25, 2004.
32.2 Certification of Chief Financial Officer, Pursuant to Section 906(a)
of the Sarbanes-Oxley Act of 2002, dated as of March 25, 2004.
* Denotes management contracts.
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the SEC on October 30, 2003.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Xanser Corporation:
We have audited the consolidated financial statements of Xanser Corporation and
its subsidiaries as listed in the index appearing under Item 15(a)(1). In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the index appearing
under Item 15(a)(2). These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" in
2002.
KPMG LLP
Dallas, Texas
February 25, 2004
F - 1
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
Revenues:
Services............................................... $ 120,790,000 $ 114,659,000 $ 127,421,000
Products............................................... 14,930,000 16,777,000 17,283,000
-------------- -------------- ---------------
Total revenues....................................... 135,720,000 131,436,000 144,704,000
-------------- -------------- ---------------
Costs and expenses:
Operating costs........................................ 116,503,000 112,159,000 114,735,000
Cost of products sold.................................. 13,538,000 15,828,000 15,529,000
Depreciation and amortization.......................... 5,860,000 3,665,000 5,208,000
General and administrative............................. 3,186,000 3,991,000 3,803,000
-------------- -------------- ---------------
Total costs and expenses............................. 139,087,000 135,643,000 139,275,000
-------------- -------------- ---------------
Operating income (loss).................................... (3,367,000) (4,207,000) 5,429,000
Interest income............................................ 260,000 460,000 665,000
Other income............................................... - - 6,741,000
Interest expense........................................... (1,273,000) (1,764,000) (3,486,000)
-------------- -------------- ---------------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle................................... (4,380,000) (5,511,000) 9,349,000
Income tax benefit (expense)............................... (8,725,000) 3,269,000 13,039,000
--------------- -------------- ---------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle............... (13,105,000) (2,242,000) 22,388,000
Cumulative effect of change in accounting principle -
adoption of new accounting standard for goodwill,
net of income taxes.................................... - (45,269,000) -
-------------- -------------- ---------------
Income (loss) from continuing operations................... (13,105,000) (47,511,000) 22,388,000
Income from discontinued operations - businesses
distributed to common shareholders, net of
income taxes........................................... - - 3,337,000
-------------- -------------- ---------------
Net income (loss).................................... (13,105,000) (47,511,000) 25,725,000
Dividends and redemption premium applicable to
preferred stock........................................ - - 493,000
-------------- -------------- ---------------
Net income (loss) applicable to common stock............... $ (13,105,000) $ (47,511,000) $ 25,232,000
============== ============== ===============
See notes to consolidated financial statements.
F - 2
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
Year Ended December 31,
----------------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of change in
accounting principle............................. $ (0.41) $ (0.07) $ 0.68
Cumulative effect of change in
accounting principle............................. - (1.38) -
------------- ------------- ---------------
(0.41) (1.45) 0.68
Discontinued operations.............................. - - 0.10
------------- ------------- ---------------
$ (0.41) $ (1.45) $ 0.78
============= ============= ===============
Diluted:
Continuing operations:
Before cumulative effect of change in
accounting principle............................. $ (0.41) $ (0.07) $ 0.64
Cumulative effect of change in
accounting principle............................. - (1.38) -
------------- ------------- ---------------
(0.41) (1.45) 0.64
Discontinued operations.............................. - - 0.10
------------- ------------- ---------------
$ (0.41) $ (1.45) $ 0.74
============= ============= ===============
See notes to consolidated financial statements.
F - 3
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
2003 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 21,240,000 $ 25,624,000
Accounts receivable, trade (net of allowance for doubtful
accounts of $1,183,000 in 2003 and $1,500,000 in 2002)....... 31,902,000 36,208,000
Receivable from businesses distributed to common shareholders.. 7,564,000 7,412,000
Inventories.................................................... 8,697,000 8,424,000
Prepaid expenses and other..................................... 4,182,000 5,264,000
-------------- --------------
Total current assets......................................... 73,585,000 82,932,000
-------------- --------------
Property and equipment............................................ 42,152,000 38,830,000
Less accumulated depreciation and amortization.................... 29,879,000 24,875,000
-------------- --------------
Net property and equipment..................................... 12,273,000 13,955,000
-------------- --------------
Excess of cost over fair value of net assets of acquired businesses 13,802,000 13,802,000
Deferred income taxes and other assets............................ 5,130,000 16,958,000
-------------- --------------
$ 104,790,000 $ 127,647,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................. $ 738,000 $ 747,000
Accounts payable............................................... 3,098,000 3,919,000
Accrued expenses............................................... 18,255,000 21,419,000
Accrued income taxes........................................... 7,391,000 9,792,000
-------------- --------------
Total current liabilities.................................... 29,482,000 35,877,000
-------------- --------------
Long-term debt, less current portion:
Technical services............................................. 15,457,000 18,479,000
Parent company................................................. 5,000,000 9,930,000
-------------- --------------
Total long-term debt, less current portion................... 20,457,000 28,409,000
-------------- --------------
Other liabilities................................................. 2,399,000 1,812,000
Commitments and contingencies
Stockholders' equity:
Common stock, without par value. Authorized, 60,000,000 shares;
issued, 37,336,176 shares in 2003 and 2002 4,333,000 4,333,000
Additional paid-in capital..................................... 126,561,000 126,675,000
Treasury stock, at cost........................................ (26,267,000) (26,390,000)
Retained earnings (accumulated deficit)........................ (48,695,000) (35,590,000)
Accumulated other comprehensive income (loss).................. (3,480,000) (7,479,000)
-------------- --------------
Total stockholders' equity................................... 52,452,000 61,549,000
-------------- --------------
$ 104,790,000 $ 127,647,000
============== ==============
See notes to consolidated financial statements.
F - 4
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------------------
2003 2002 2001
-------------- ------------- ---------------
Operating activities:
Income (loss) from continuing operations............... $ (13,105,000) $ (47,511,000) $ 22,388,000
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization...................... 5,860,000 3,665,000 5,208,000
Deferred income taxes.............................. 7,863,000 (1,266,000) (15,436,000)
Cumulative effect of change in accounting principle - 45,269,000 -
Other, net......................................... 587,000 736,000 296,000
Changes in current assets and liabilities:
Accounts receivable, net......................... 4,306,000 978,000 (7,866,000)
Inventories...................................... (273,000) 518,000 (1,301,000)
Prepaid expenses and other....................... 1,579,000 2,370,000 (3,102,000)
Accounts payable and accrued expenses............ (1,928,000) (1,239,000) 2,939,000
-------------- ------------- --------------
Operating activities of continuing operations........ 4,889,000 3,520,000 3,126,000
Operating activities of discontinued operations...... - - 59,753,000
-------------- ------------- --------------
Net cash provided by operating activities............ 4,889,000 3,520,000 62,879,000
-------------- ------------- --------------
Investing activities:
Capital expenditures................................... (3,311,000) (5,504,000) (4,625,000)
Acquisitions........................................... - - (811,000)
Other, net............................................. 1,363,000 1,298,000 605,000
Investing activities of discontinued operations........ - - (128,258,000)
-------------- ------------- --------------
Net cash used in investing activities................ (1,948,000) (4,206,000) (133,089,000)
-------------- ------------- --------------
Financing activities:
Issuance of debt and capital leases.................... 330,000 4,750,000 4,441,000
Payments on debt and capital leases ................... (8,278,000) (15,641,000) (4,655,000)
Preferred stock dividends and redemption premium paid.. - - (493,000)
Common stock issued and other.......................... 9,000 450,000 545,000
Purchase of treasury stock............................. - (3,286,000) -
Redemption of preferred stock.......................... - - (5,676,000)
(Increase) decrease in receivable from businesses
distributed to common shareholders................... (152,000) 10,492,000 14,076,000
Financing activities of discontinued operations........ - - 71,000,000
-------------- ------------- --------------
Net cash provided by (used in) financing activities.. (8,091,000) (3,235,000) 79,238,000
-------------- ------------- --------------
Effect of exchange rate changes on cash................... 766,000 - -
-------------- ------------- --------------
Increase (decrease) in cash and cash equivalents.......... (4,384,000) (3,921,000) 9,028,000
Cash and cash equivalents at beginning of year............ 25,624,000 29,545,000 20,517,000
-------------- ------------- --------------
Cash and cash equivalents at end of year.................. $ 21,240,000 $ 25,624,000 $ 29,545,000
============== ============= ==============
Supplemental cash flow information from continuing
operations:
Cash paid for interest............................... $ 1,534,000 $ 2,244,000 $ 3,383,000
============== ============= ==============
Cash paid for income taxes........................... $ 1,899,000 $ 926,000 $ 1,270,000
============== ============= ==============
See notes to consolidated financial statements.
F - 5
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PART 1 OF 2
Preferred Common Additional Treasury
Stock Stock Paid-In Capital Stock
------------- ------------- --------------- -------------
Balance at January 1, 2001 $ 5,792,000 $ 4,250,000 $ 203,989,000 $ (31,440,000)
Net income........................ - - - -
Common stock issued............... - 20,000 380,000 257,000
Deferred stock units, vested...... - - 651,000 -
Redemption of Series A Preferred
stock........................... (5,680,000) - - -
Repurchase of Series C and F
Preferred stock................. (112,000) - (7,725,000) 7,760,000
Dividends and redemption premium
applicable to preferred stock... - - - -
Distribution of KSL............... - - (74,664,000) -
Gain on issuance of units by KPP.. - - 6,113,000 -
Minimum pension liability
adjustment for subsidiary....... - - - -
Foreign currency translation
adjustment...................... - - - -
------------- ------------- ------------- -------------
Comprehensive income..............
Balance at December 31, 2001 - 4,270,000 128,744,000 (23,423,000)
Net income (loss)................. - - - -
Common stock issued............... - 63,000 68,000 319,000
Deferred stock units, vested...... - - 171,000 -
Purchase of treasury stock........ - - - (3,286,000)
Minimum pension liability
adjustment for subsidiary....... - - - -
Foreign currency translation
adjustment...................... - - - -
Taxes associated with the
Distribution of KSL and other... - - (2,308,000) -
------------- ------------- ------------- -------------
Comprehensive income (loss).......
Balance at December 31, 2002 - 4,333,000 126,675,000 (26,390,000)
Net income (loss)................. - - - -
Common stock issued............... - - (153,000) 123,000
Deferred stock units, vested...... - - 39,000 -
Minimum pension liability
adjustment for subsidiary....... - - - -
Foreign currency translation
adjustment ..................... - - - -
------------- ------------- ------------- -------------
Comprehensive income (loss).......
Balance at December 31, 2003 $ - $ 4,333,000 $ 126,561,000 $ (26,267,000)
============= ============= ============= =============
See notes to consolidated financial statements.
F - 6
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PART 2 OF 2
Retained
Earnings Accumulated Other
(Accumulated Comprehensive Comprehensive
Deficit) Income (Loss) Income (Loss)
------------- ------------------ --------------
Balance at January 1, 2001 $ (13,311,000) $ (3,241,000)
Net income........................ 25,725,000 - $ 25,725,000
Common stock issued............... - - -
Deferred stock units, vested...... - - -
Redemption of Series A Preferred
stock........................... - - -
Repurchase of Series C and F
Preferred stock................. - - -
Dividends and redemption premium
applicable to preferred stock... (493,000) - -
Distribution of KSL............... - 640,000 -
Gain on issuance of units by KPP.. - - -
Minimum pension liability
adjustment for subsidiary....... - (2,773,000) (2,773,000)
Foreign currency translation
adjustment...................... - (632,000) (632,000)
------------- ------------- --------------
Comprehensive income.............. $ 22,320,000
==============
Balance at December 31, 2001 11,921,000 (6,006,000)
Net income (loss)................. (47,511,000) - $ (47,511,000)
Common stock issued............... - - -
Deferred stock units, vested...... - - -
Purchase of treasury stock........ - - -
Minimum pension liability
adjustment for subsidiary....... - (3,374,000) (3,374,000)
Foreign currency translation
adjustment...................... - 1,901,000 1,901,000
Taxes associated with the
Distribution of KSL and other... - - -
------------- ------------- --------------
Comprehensive income (loss)....... $ (48,984,000)
==============
Balance at December 31, 2002 (35,590,000) (7,479,000)
Net income (loss)................. (13,105,000) - $ (13,105,000)
Common stock issued............... - - -
Deferred stock units, vested...... - - -
Minimum pension liability
adjustment for subsidiary....... - 1,147,000 1,147,000
Foreign currency translation
adjustment ..................... - 2,852,000 2,852,000
------------- ------------- --------------
Comprehensive income (loss)....... $ (9,106,000)
==============
Balance at December 31, 2003 $ (48,695,000) $ (3,480,000)
============= =============
See notes to consolidated financial statements.
F - 6
XANSER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The consolidated financial statements include the accounts of Xanser
Corporation (the "Company" or "Parent") and its wholly-owned subsidiaries.
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline and terminaling and product marketing business (the
"Distribution") to its stockholders in the form of a new limited liability
company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was
completed, with each shareholder of the Company receiving one common share of
KSL for each three shares of the Company's common stock held on June 20, 2001,
the record date for the Distribution, resulting in the distribution of 10.85
million KSL common shares. As a result, the accompanying financial statements
reflect the operations of KSL prior to the Distribution as "Discontinued
operations - businesses distributed to common shareholders" (See Note 10).
Pursuant to the Distribution, the Company entered into an agreement (the
"Distribution Agreement") with KSL, whereby, KSL is obligated to pay the Company
amounts equal to certain expenses and tax liabilities incurred by the Company in
connection with the Distribution. In January of 2002, KSL paid the Company $10.0
million for tax liabilities due under the terms of the Distribution Agreement.
The Distribution Agreement also requires KSL to pay the Company an amount
calculated based on any income tax liability of the Company that, in the sole
judgement of the Company, (i) is attributable to increases in income tax from
past years arising out of adjustments required by federal and state tax
authorities, to the extent that such increases are properly allocable to the
businesses that became part of KSL, or (ii) is attributable to the distribution
of KSL's common shares and the operations of KSL's businesses prior to the
distribution date. In the event of an examination of the Company by federal or
state tax authorities, the Company will have unfettered control over the
examination, administrative appeal, settlement or litigation that may be
involved, notwithstanding that KSL has agreed to pay any additional tax.
The following significant accounting policies are followed by the Company
and its subsidiaries in the preparation of its consolidated financial
statements. All significant intercompany transactions and balances are
eliminated in consolidation.
Cash and Cash Equivalents
The Company's policy is to invest cash in highly liquid investments with
original maturities of three months or less. Accordingly, uninvested cash
balances are kept at minimum levels. Such investments are valued at cost, which
approximates market, and are classified as cash equivalents. The Company does
not have any derivative financial instruments.
Inventories
Inventories consist primarily of materials and supplies and are valued at
the lower of cost or market. Cost is determined using the weighted average cost
method.
Property and Equipment
Property and equipment are carried at historical cost. Certain leases have
been capitalized and the leased assets have been included in property and
equipment. Additions of new equipment and major renewals and replacements of
existing equipment are capitalized. Repairs and minor replacements that do not
materially increase values or extend useful lives are expensed. Depreciation of
property and equipment is provided on the straight-line basis at rates based
upon the expected useful lives of the various classes of assets.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The adoption of
SFAS No. 144 did not have a material impact on the consolidated financial
statements of the Company. Under SFAS No. 144, the carrying value of property
and equipment is periodically evaluated using undiscounted future cash flows as
the basis for determining if impairment exists. To the extent impairment is
indicated to exist, an impairment loss will be recognized based on fair value.
Capitalized Software
Costs incurred to purchase or develop computer software to be sold or
leased is capitalized in accordance with SFAS No. 86 "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed". Under SFAS No.
86, amortization expense is based on current and projected revenues for each
capitalized product, with an annual minimum equal to the straight-line method of
amortization over the product's remaining estimated economic life. At December
31, 2002, unamortized software costs capitalized under SFAS No. 86 aggregated
$1.3 million. The Company had no unamortized software costs capitalized at
December 31, 2003. For the years ended December 31, 2003 and 2002, amortization
expense totaled $2.0 million and $0.1 million, respectively. No amortization
expense was incurred in 2001.
Revenue Recognition
Revenues are recognized when services to customers have been rendered or
when products have been delivered.
The information technology services segment's revenues under long-term
service contracts are accounted for using a proportional performance method or
on a straight-line basis in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements", as amended by SAB No. 104. The accounting policies for
revenue recognition in the information technology services segment comply with
AICPA Statement of Position No. 97-2 "Software Revenue Recognition". SOP No.
97-2 requires revenue to be recognized only after software is delivered, all
significant obligations of the Company are fulfilled, and all significant
uncertainties regarding customer acceptance have expired. SOP No. 97-2 also
requires the unbundling of multiple elements and the allocation of pricing to
each element based upon vendor specific objective evidence of fair value.
Earnings Per Share
The amount of earnings for the period applicable to each weighted average
share of common stock outstanding during the period ("Basic" earnings per share)
and the amount of earnings for the period applicable to each weighted average
share of common stock outstanding during the period and to each share that would
have been outstanding assuming the issuance of common shares for dilutive
potential common shares outstanding during the period ("Diluted" earnings per
share) have been presented in the consolidated statements of income.
Foreign Currency Translation
The Company translates the balance sheets of its foreign subsidiaries using
year-end exchange rates and translates income statement amounts using the
average exchange rates in effect during the year. The gains and losses resulting
from the change in exchange rates from year to year have been reported
separately as a component of accumulated other comprehensive income (loss) in
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in the consolidated statements of income.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income", for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS No.
130 only requires additional disclosure and does not affect the Company's
financial position or results of operations. At December 31, 2003 and 2002,
accumulated other comprehensive income (loss) consists of cumulative foreign
currency translation adjustments of ($1.5) million and $1.3 million,
respectively, and minimum pension liability adjustments (see Note 3) for
subsidiaries of $5.0 million and $6.2 million, respectively.
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. At December 31, 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
at year end 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
a reporting unit's 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, 2003, 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 for the years ended December 31, 2003 and 2002 are
as follows:
Excess of cost over fair value of net assets of acquired
businesses at December 31, 2001.......................... $61,054,000
Cumulative effect of change in accounting principle
recorded in the first quarter of 2002.................... (47,252,000)
------------
Excess of cost over fair value of net assets of acquired
businesses (technical services) at December 31, 2002
and 2003................................................. $13,802,000
============
The effects of the adoption of SFAS No. 142 on income (loss) from
continuing operations is as follows:
Year Ended December 31
-------------------------------
2002 2001
------------- --------------
Reported income (loss) from
continuing operations........................................... $ (47,511,000) $ 22,388,000
Amortization of excess of cost
over fair value of net assets
of acquired businesses, net
of income taxes................................................. - 2,164,000
Cumulative effect of change in
accounting principle - adoption
of new accounting standard
for goodwill, net of income taxes............................... 45,269,000 -
------------- --------------
Adjusted income (loss) from
continuing operations........................................... $ (2,242,000) $ 24,552,000
============= ==============
Year Ended December 31
-------------------------------
2002 2001
------------- --------------
Reported diluted earnings (loss)
per common share from
continuing operations........................................... $ (1.45) $ 0.64
Amortization of excess of cost over
fair value of net assets of
acquired businesses, net of
income taxes.................................................... - 0.06
Cumulative effect of change in accounting
principle, net of income taxes.................................. 1.38 -
------------ --------------
Adjusted diluted earnings (loss)
per common share from
continuing operations........................................... $ (0.07) $ 0.70
============ ==============
Stock Option Plans
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, "Accounting for Stock-Based
Compensation", the Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123. The Black-Scholes option pricing model has been
used to estimate the value of stock options issued, and the assumptions in the
calculations under such model for the three years ended December 31, 2003
include stock price variance or volatility ranging from 9.32% to 13.38% based on
weekly average variances of the stock for the five year period preceding
issuance, a risk-free rate of return ranging from 3.25% to 4.98% based on the
30-year U.S. treasury bill rate for the five-year expected life of the options,
and no dividend yield.
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:
Year Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Reported net income (loss)............................... $ (13,105,000) $ (47,511,000) $ 25,725,000
Stock-based employee compensation expense determined
under the fair value based method, net of income taxes. (138,000) (620,000) (593,000)
--------------- -------------- --------------
Pro forma net income (loss).............................. $ (13,243,000) $ (48,131,000) $ 25,132,000
=============== ============== ==============
Earning (loss) per share:
Basic - as reported.................................... $ (0.41) $ (1.45) $ 0.78
=============== ============== ==============
Basic - pro forma...................................... $ (0.41) $ (1.48) $ 0.75
=============== ============== ==============
Diluted - as reported.................................. $ (0.41) $ (1.45) $ 0.74
=============== ============== ==============
Diluted - pro forma.................................... $ (0.41) $ (1.48) $ 0.71
=============== ============== ==============
Change in Presentation
Certain prior year financial statement items have been reclassified to
conform with the 2003 presentation.
Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
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.
In December 2003, the FASB issued Interpretation No. 46 (Revised December
2003), "Consolidation of Variable Interest Entities ("FIN 46R"), primarily to
clarify the required accounting for interests in variable interest entities
("VIEs"). This standard replaces FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, that was issued in January 2003 to address certain
situations in which a company should include in its financial statements the
assets, liabilities and activities of another entity. For the Company,
application of FIN 46R is required for interests in certain VIEs that are
commonly referred to as special-purpose entities, or SPEs, as of December 31,
2003 and for interests in all other types of VIEs as of March 31, 2004. The
application of FIN 46R has not and is not expected to have a material impact 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 consolidated financial statements of the Company.
In December of 2003, SFAS No. 132 (revised), "Employers' Disclosures about
Pensions and Other Postretirement Benefits", was issued. SFAS No. 132 (revised)
prescribes employers' disclosures about pension plans and other postretirement
benefit plans, but does not change the measurement or recognition of those
plans. SFAS No. 132 (revised) retains and revises the disclosure requirements
contained in the original SFAS No. 132 and requires additional disclosures about
the assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans. SFAS No 132
(revised), which applies to a defined benefits pension plan of a foreign
subsidiary of the Company, must be adopted by the Company in the fiscal year
ending December 31, 2004.
2. INCOME TAXES
Income (loss) from continuing operations before cumulative effect of change
in accounting principle and income tax expense is comprised of the following
components:
Year Ended December 31,
-----------------------------------------------------
2003 2002 2001
-------------- ------------- -------------
Domestic operations......................... $ (12,562,000) $ (11,427,000) $ 3,246,000
Foreign operations.......................... 8,182,000 5,916,000 6,103,000
-------------- ------------- ------------
Income (loss) before income taxes........... $ (4,380,000) $ (5,511,000) $ 9,349,000
============== ============= ============
Income tax expense (benefit) from continuing operations before cumulative
effect of change in accounting principle is comprised of the following
components:
Year Ended
December 31, Federal Foreign State Total
------------------------- ------------- ------------ ------------ -------------
2003:
Current............... $ (1,704,000) $ 2,623,000 $ (57,000) $ 862,000
Deferred.............. 8,616,000 (1,530,000) 777,000 7,863,000
------------- ------------ ------------ -------------
$ 6,912,000 $ 1,093,000 $ 720,000 $ 8,725,000
============= ============ ============ =============
2002:
Current............... $ (2,140,000) $ 65,000 $ 72,000 $ (2,003,000)
Deferred.............. (1,825,000) 1,427,000 (868,000) (1,266,000)
------------- ------------ ------------ -------------
$ (3,965,000) $ 1,492,000 $ (796,000) $ (3,269,000)
============= ============ ============ =============
2001:
Current............... $ 1,483,000 $ 649,000 $ 265,000 $ 2,397,000
Deferred.............. (15,418,000) 919,000 (937,000) (15,436,000)
------------- ------------ ------------ -------------
$ (13,935,000) $ 1,568,000 $ (672,000) $ (13,039,000)
============= ============ ============ =============
The reasons for the differences between the amount of tax expense (benefit)
provided and the amount of tax expense (benefit) computed by applying the
statutory federal income tax rate to income (loss) from continuing operations
before income taxes and cumulative effect of change in accounting principle for
the years 2003, 2002 and 2001 are as follows:
Year Ended December 31,
-----------------------------------------------------------------
2003 2002 2001
----------------- ------------------ -----------------
Expected tax expense (benefit)
at statutory rates............. $ (1,533,000) $ (1,929,000) $ 3,272,000
Increase (decrease) in taxes
resulting from:
Change in valuation allowance.. 12,112,000 - -
State income taxes, net........ (468,000) (517,000) (437,000)
Foreign tax rate differences... (1,689,000) (629,000) 141,000
Goodwill amortization ......... - - 664,000
Benefit from recapitalization
of foreign subsidiary........ - - (18,137,000)
Resolution of state and foreign
tax issues and other......... 303,000 (194,000) 1,458,000
----------------- ------------------ ----------------
$ 8,725,000 $ (3,269,000) $ (13,039,000)
================= ================== ================
At December 31, 2003, the Company had available domestic tax net operating
loss carryforwards ("NOLs"), which will expire, if unused, as follows:
$1,211,000 in 2006; $3,033,000 in 2007; $13,365,000 in 2022; and, $9,564,000 in
2023. The utilization of these NOLs could be subject to significant limitation
in the event of a "change in ownership", as defined in the tax laws, which might
be caused by purchases or sales of the Company's securities by persons or groups
now or in the future having 5% or greater ownership of the Company's common
stock.
For the year ended December 31, 2001, income taxes include $18.1 million in
tax benefits resulting from the recapitalization of a foreign subsidiary.
Additionally, income taxes for the year ended December 31, 2001 includes
benefits of $0.6 million related to favorable developments pertaining to certain
state and foreign income tax issues.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2003 and 2002 are as follows:
December 31,
-------------------------------------
2003 2002
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards......................... $ 9,610,000 $ 5,793,000
Alternative minimum tax credit carryforwards............. 2,505,000 4,385,000
Accrued liabilities...................................... 1,547,000 1,076,000
Intangibles.............................................. 1,528,000 1,739,000
Foreign deferred tax assets.............................. 2,036,000 424,000
Other.................................................... 1,399,000 889,000
-------------- --------------
Total gross deferred tax assets.......................... 18,625,000 14,306,000
Deferred tax liabilities-plant and equipment, principally due to
differences in depreciation.............................. (343,000) (355,000)
-------------- --------------
Net deferred tax asset before valuation allowance.......... 18,282,000 13,951,000
Less valuation allowance................................... (16,246,000) (4,134,000)
-------------- --------------
Net deferred tax asset................................... $ 2,036,000 $ 9,817,000
============== ==============
The Company maintains a valuation allowance to adjust the basis of net
deferred tax assets in accordance with SFAS No. 109 "Accounting for Income
Taxes". Based on evaluations performed by the Company pursuant to SFAS No. 109
in the fourth quarter of 2003, a non-cash valuation allowance of $12.1 million
was provided with respect to the Company's federal and state net deferred tax
assets.
3. RETIREMENT PLANS
The Company has a defined contribution plan which covers substantially all
domestic employees and provides for varying levels of employer matching.
Contributions from continuing operations to this plan were $0.7 million, $0.8
million and $0.8 million for 2003, 2002 and 2001, respectively.
One of the Company's foreign subsidiaries has a defined benefit pension
plan covering substantially all of its United Kingdom employees (the "U.K.
Plan"). The benefit is based on the average of the employee's salary for the
last three years of employment. Generally, the employee contributes 5.5% to
12.0% and the employer contributes up to 12% of pay. Plan assets are primarily
invested in unitized pension funds managed by United Kingdom registered fund
managers. The most recent valuation of the U.K. Plan was performed as of October
31, 2003.
Net pension cost for the U.K. Plan included the following components:
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
-------------- ------------- -------------
Net periodic pension cost:
Service cost................................ $ 787,000 $ 658,000 $ 515,000
Interest cost............................... 2,954,000 2,522,000 2,287,000
Expected return on plan assets.............. (2,946,000) (3,012,000) (3,516,000)
Amortization of prior service cost.......... 16,000 15,000 15,000
Recognized net (gain) loss.................. 768,000 4,000 (321,000)
-------------- ------------- -------------
Net periodic pension cost (benefit)........... $ 1,579,000 $ 187,000 $ (1,020,000)
============== ============= =============
Actuarial assumptions used in the accounting for the U.K. Plan were a
weighted average discount rate of 6.0% for 2003, 2002 and 2001, an expected
long-term rate of return on assets of 7.5% for 2003, 2002 and 2001 and a rate of
increase in compensation levels of 3.3% for 2003 and 3.0% for 2002 and 2001. The
funded status of the U.K. Plan is as follows:
December 31,
--------------------------------
2003 2002
-------------- --------------
Projected benefit obligation:
Beginning of year.......................................... $ 48,326,000 $ 40,798,000
Service cost............................................... 787,000 658,000
Interest cost.............................................. 2,954,000 2,522,000
Contributions.............................................. 761,000 607,000
Benefits paid.............................................. (1,472,000) (1,243,000)
Foreign currency translation adjustment and other.......... 5,110,000 4,984,000
------------- -------------
End of year................................................ 56,466,000 48,326,000
------------- -------------
Fair value of plan assets:
Beginning of year.......................................... 38,234,000 38,980,000
Actual gain (loss) on plan assets.......................... 4,667,000 (4,569,000)
Contributions.............................................. 761,000 607,000
Benefits paid.............................................. (1,472,000) (1,243,000)
Foreign currency translation adjustment and other.......... 4,632,000 4,459,000
------------- -------------
End of year................................................ 46,822,000 38,234,000
------------- -------------
December 31,
--------------------------------
2003 2002
-------------- --------------
Excess projected obligation over fair value at end of year... $ (9,644,000) $ (10,092,000)
Unrecognized net actuarial loss.............................. 13,591,000 13,115,000
Unamortized prior service cost............................... (1,416,000) 119,000
------------- -------------
Net pension prepaid asset.................................... 2,531,000 3,142,000
Additional minimum liability................................. (8,845,000) (9,184,000)
------------- -------------
Net pension liability........................................ $ (6,314,000) $ (6,042,000)
============= =============
The Company recognizes a minimum pension liability for underfunded plans
equal to the excess of the accumulated benefit obligation over plan assets. A
corresponding amount is recognized as either an intangible asset, to the extent
of previously unrecognized prior service cost, or a reduction of accumulated
other comprehensive income included in stockholders' equity. In 2003 and 2002,
the Company recorded adjustments to minimum liabilities of $(1.9) million and
$4.9 million, respectively, which, net of deferred income taxes of $(0.7) and
$1.5 million, respectively, is recorded as a reduction in accumulated other
comprehensive income.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is as follows:
Estimated
Useful December 31,
Life --------------------------------
(Years) 2003 2002
-------------- -------------- --------------
Technical services........................ 3 - 20 $ 31,237,000 $ 26,833,000
Information technology services........... 3 - 7 6,962,000 8,149,000
General corporate......................... 3 - 10 3,953,000 3,848,000
-------------- --------------
Total property and equipment.............. 42,152,000 38,830,000
Less accumulated depreciation
and amortization........................ 29,879,000 24,875,000
-------------- --------------
Net property and equipment................ $ 12,273,000 $ 13,955,000
============== ==============
Equipment under capital leases is included in the cost, and accumulated
depreciation and amortization, of property and equipment as follows:
December 31,
--------------------------------
2003 2002
-------------- --------------
Technical services equipment........................... $ 2,707,000 $ 2,808,000
Less accumulated depreciation and amortization ........ 1,160,000 887,000
-------------- --------------
Net equipment acquired under capital leases............ $ 1,547,000 $ 1,921,000
============== ==============
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
--------------------------------
2003 2002
-------------- --------------
Technical services credit facility due in January
of 2009.............................................. $ 14,296,000 $ 16,286,000
Technical services foreign subsidiary notes, with
interest ranging from 3.00% to 8.0%, due through
2012................................................. 301,000 1,010,000
Technical services subsidiary capital leases........... 1,598,000 1,930,000
Parent company 8.75% convertible subordinated
debentures due in 2008............................... 5,000,000 9,930,000
-------------- --------------
Total long-term debt................................... 21,195,000 29,156,000
Less current portion................................... 738,000 747,000
-------------- --------------
Total long-term debt, less current portion............. $ 20,457,000 $ 28,409,000
============== ==============
At December 31, 2003, $14.3 million was outstanding under a $25 million
Amended and Restated Bank Loan Agreement ("Loan Agreement") that provides
working capital for the technical services group and is without recourse to the
Company. Borrowings under the Loan Agreement bear interest at the option of the
borrower at variable rates (2.88% at December 31, 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 group, including percentage of tangible assets and
revenues related to certain geographical areas, ratios of debt to cash flow, as
defined in the Loan Agreement, and cash flow to fixed charges and capital
expenditures. At December 31, 2003, the Company was in compliance with all
covenants. The Loan Agreement matures in January 2009 and is secured by
substantially all of the tangible assets of the technical services group.
The Company's 8.75% subordinated debentures ($5.0 million outstanding at
December 31, 2003) are convertible into shares of the Company's common stock at
the conversion price, adjusted in 2001 for the Distribution of KSL, of $5.26 per
share. On March 1, 2002, the Company purchased $10.0 million of subordinated
debentures at par value, which satisfies 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. The purchases were funded with cash on hand.
At December 31, 2003, annual sinking fund requirements and debt maturities
on consolidated debt, including capital leases, were as follows: $0.7 million;
$0.5 million; $0.4 million; $0.3 million; and $5.0 million; respectively, for
each of the five years ending December 31, 2008.
6. CAPITAL STOCK
The changes in the number of issued and outstanding shares of the Company's
common stock are summarized as follows:
Common Stock
--------------------------------------------------
Issued Held in Treasury Outstanding
------------ ---------------- --------------
Balance at January 1, 2001.......................... 36,641,121 5,499,419 31,141,702
Common shares issued (repurchased), net............. 168,146 (1,401,572) 1,569,718
------------ ------------ --------------
Balance at December 31, 2001........................ 36,809,267 4,097,847 32,711,420
Common shares issued (repurchased), net............. 526,909 1,686,609 (1,159,700)
------------ ------------ --------------
Balance at December 31, 2002........................ 37,336,176 5,784,456 31,551,720
Common shares issued (repurchased), net............. - (28,806) 28,806
------------ ------------ --------------
Balance at December 31, 2003........................ 37,336,176 5,755,650 31,580,526
============ ============ ==============
In connection with a stock repurchase plan authorized by the Company's
Board of Directors, the Company purchased in 2002 approximately 1,744,000 shares
of the Company's common stock, at a cost of $3.3 million. The stock purchases
were funded with cash on hand.
Series A Preferred Stock
On March 30, 2001, the Company redeemed its 567,950 shares of Cumulative
Class A Adjustable Rate Preferred Stock, Series A ("Series A Preferred") for
cash at the stated redemption price of $10.67 per share, plus accrued and unpaid
dividends, for a total cost of approximately $6.1 million. The redemption cost
included a $0.4 million redemption premium, which was recognized as dividends
and redemption premium applicable to preferred stock in 2001.
Series B Preferred Stock
On April 9, 1998, the Board of Directors of the Company declared a dividend
distribution of one stock purchase right ("Right") for each outstanding share of
common stock to stockholders of record on April 19, 1998. These Rights are
substantially similar to, and were issued in replacement of, rights that expired
on April 19, 1998, pursuant to the Company's Stockholders Rights Plan. Pursuant
to the replacement plan, each Right entitles the holder, upon the occurrence of
certain events, to purchase from the Company one one-hundredth of a share of
Series B Junior Participating Preferred Stock, no par value, at a price of $15,
subject to adjustment. The Rights will not separate from the common stock or
become exercisable until a person or group either acquires beneficial ownership
of 15% or more of the Company's common stock or commences a tender or exchange
offer that would result in ownership of 20% or more, whichever occurs earlier.
The Rights, which expire on April 19, 2008, are redeemable in whole, but not in
part, at the Company's option at any time for a price of $0.01 per Right. At
December 31, 2003 and 2002 there were no Series B Preferred shares outstanding.
Stock Compensation Plans
Series C and F Preferred Stock - On June 12, 2001, the Company exchanged in
non-cash transactions, 1,356,777 shares of the Company's common stock for all
Adjustable Rate Cumulative Class A Preferred Stock, Series C and Series F shares
issued to certain officers of the Company.
Stock Option Plans - The Company has stock option plans and agreements for
officers, directors and key employees. The options granted under these plans and
agreements generally vest over periods ranging from zero to five years and
expire ten years from date of grant. All options were granted at prices greater
than or equal to the market price at the date of grant or repricing. At December
31, 2003, options on 3,008,711 shares at prices ranging from $.54 to $3.05 were
outstanding, of which 1,925,330, were exercisable at prices ranging from $.54 to
$3.05. At December 31, 2002, options on 3,103,014 shares at prices ranging from
$.54 to $3.05 were outstanding, of which 1,749,743 were exercisable at prices
ranging from $.54 to $3.05. At December 31, 2001, options on 3,049,083 shares at
prices ranging from $.54 to $3.05 were outstanding, of which 2,168,083 were
exercisable at prices ranging from $.54 to $3.05. The aggregate weighted average
fair market value of options at the time of grant for the years 2003, 2002 and
2001 was $0.1 million, $0.8 million and $1.0 million, respectively, calculated
using the Black-Scholes option pricing model.
At December 31, 2003, the range of option exercise prices, number of
options outstanding, number of options exercisable and weighted average exercise
price, are as follows:
Shares Average Price
Range of Exercise ---------------------------------- per Outstanding
Price Outstanding Exercisable Share
------------------------------- --------------- --------------- ---------------
$0.54 - $0.81.................. 70,000 70,000 $ 0.56
$0.82 - $1.23.................. 817,629 817,629 $ 0.90
$1.24 - $1.86.................. 579,853 543,853 $ 1.57
$1.87 - $2.81.................. 1,382,229 385,248 $ 2.36
$2.82 - $3.05.................. 159,000 108,600 $ 2.95
--------------- ---------------
3,008,711 1,925,330 $ 1.80
=============== ================
The changes in stock options outstanding for the Company's plans for the
years 2003, 2002 and 2001 were as follows:
Average Price
Shares per Share
------------- --------------
Outstanding at January 1, 2001......................... 2,198,283 $ 3.54
Granted................................................ 1,016,000 $ 2.67
Exercised.............................................. (165,200) $ 2.89
-------------
Outstanding at December 31, 2001....................... 3,049,083 $ 1.66
Granted................................................ 956,132 $ 2.20
Exercised.............................................. (533,234) $ 1.09
Forfeited.............................................. (368,967) $ 2.71
-------------
Outstanding at December 31, 2002....................... 3,103,014 $ 1.80
Granted................................................ 155,000 $ 2.58
Forfeited.............................................. (249,303) $ 2.22
-------------
Outstanding at December 31, 2003....................... 3,008,711 $ 1.80
=============
There were no stock options which expired during the years ended December
31, 2003, 2002 or 2001.
In connection with the Distribution, the exercise price for each option to
purchase shares of the Company's common stock was reduced to an amount equal to
the result of (1) the fair market value of a share of the Company's common stock
on the ex-dividend date multiplied by (2) a fraction, the numerator of which is
the original exercise price for the option and the denominator of which was the
fair market value of a share of the Company's common stock on the last trading
date prior to the ex-dividend date. The number of shares subject to the
Company's stock options were not changed as a result of the Distribution.
Additionally, KSL agreed to issue to the Company's option holders an option to
purchase KSL shares. The exercise price applicable to a given KSL option was
that price that created the same ratio of exercise price to market price as in
the adjusted exercise price applicable to the holder's Company option. The
number of common shares subject to KSL options was such number as was necessary
to produce an intrinsic value (determined as of the ex-dividend date) that, when
added to the intrinsic value of the adjusted Company option (determined as of
the ex-dividend date), equaled the pre-distribution intrinsic value of the
Company's option, if any, (determined as of the last trading date prior to the
ex-dividend date). However, options to purchase fractional KSL common shares
were not granted. The fair market values of shares of the Company's common stock
and KSL common shares were based upon the closing sales price of the stock on
the last trading date prior to the ex-distribution date and the opening sales
price of the shares on the ex-distribution date. Further, excluding the
Company's corporate staff, the Company removed restrictions on exercise or
"vested" all Company options which were not yet exercisable prior to the
Distribution.
Deferred Stock Unit Plans - In 2002, the Company initiated a Deferred Stock
Unit Plan (the "2002 DSU Plan"), pursuant to which key employees of the Company
have, from time to time, been given the opportunity to defer a portion of their
compensation for a specified period toward the purchase of deferred stock units
("DSUs"), an instrument designed to track the Company's common stock. Under the
2002 DSU Plan, DSUs are purchased at a value equal to the closing price of the
Company's common stock on the day by which the employee must elect (if they so
desire) to participate in the 2002 DSU Plan; which date is established by the
Compensation Committee, from time to time (the "Election Date"). During a
vesting period of one to three years following the Election Date, a
participant's DSUs vest only in an amount equal to the lesser of the
compensation actually deferred to date or the value (based upon the then-current
closing price of the Company's common stock) of the pro-rata portion (as of such
date) of the number of DSUs acquired. After the expiration of the vesting
period, which is typically the same length as the deferral period, the DSUs
become fully vested, but may only be distributed through the issuance of a like
number of shares of the Company's common stock on a pre-selected date, which is
irrevocably selected by the participant on the Election Date and which is
typically at or after the expiration of the vesting period and no later than ten
years after the Election Date, or at the time of a "change of control" of the
Company, if earlier. DSU accounts are unfunded by the Company. Each person that
elects to participate in the 2002 DSU Plan is awarded, under the Company's stock
incentive plan, an option to purchase a number of shares of the Company's common
stock ranging from one-half to one and one-half times (depending on the length
of deferral) the number of DSUs purchased by such person at 100% of the closing
price of the Company's common stock on the Election Date, which options become
exercisable over a specified period after the grant, according to a schedule
determined by the Compensation Committee. At December 31, 2003, 1,696 DSUs had
vested under the 2002 DSU Plan.
In 1996, the Company initiated a Deferred Stock Unit plan (the "1996 DSU
Plan") with terms and conditions similar to the 2002 DSU Plan. In connection
with the Distribution, KSL agreed to issue to all DSU holders the number of DSUs
equivalent in price to KSL shares issuable in the Distribution. All other terms
remained unchanged. Similarly, the Company agreed to issue to employees of KSL
who hold DSUs, the number of shares of the Company's common stock subject to the
DSUs held by those employees. At December 31, 2003, approximately 407,000 shares
of the Company's common stock were issuable to employees of the Company and KSL
employees under this arrangement and the terms of the 1996 DSU Plan.
7. EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per share
("EPS") from continuing operations before cumulative effect of change in
accounting principle:
Weighted
Average
Net Common Per-Share
Income (loss) Shares Amount
--------------- ----------- -------------
Year Ended December 31, 2003
----------------------------
Basic EPS -
Income (loss) from continuing
operations applicable to
common stock......................... $ (13,105,000) 31,995,000 $ (0.41)
Effect of dilutive securities............. - -
--------------- --------------
Diluted EPS -
Income (loss) from continuing operations
applicable to common stock........... $ (13,105,000) 31,995,000 $ (0.41)
=============== ============== =============
Year Ended December 31, 2002
----------------------------
Basic EPS -
Income (loss) from continuing
operations applicable to common
stock, before cumulative effect of
change in accounting principle....... $ (2,242,000) 32,747,000 $ (0.07)
==============
Effect of dilutive securities............. - -
--------------- --------------
Diluted EPS -
Income (loss) from continuing
operations applicable to common
stock, before cumulative effect
of change in accounting principle.... $ (2,242,000) 32,747,000 $ (0.07)
=============== ============== ==============
Year Ended December 31, 2001
----------------------------
Income from continuing operations......... $ 22,388,000
Dividends and redemption premium
applicable to preferred stock.......... (493,000)
---------------
Basic EPS -
Income applicable to common stock...... 21,895,000 32,503,000 $ 0.68
==============
Effect of dilutive securities -
Common stock options, Series F
Preferred Stock and DSUs............. - 1,631,000
--------------- --------------
Diluted EPS -
Income applicable to common stock,
Series F Preferred stock, DSUs
and assumed options exercised........ $ 21,895,000 34,134,000 $ 0.64
=============== ============== ==============
As a result of the losses from continuing operations applicable to common
stock for 2003 and 2002, all 3,008,711 and 3,103,014 stock options, at weighted
average prices of $1.80 and $1.80 for 2003 and 2002, respectively, were excluded
from the computation of diluted earnings per share because the effects would be
anti-dilutive. Options to purchase 959,000 shares of common stock at weighted
average prices of $2.71 were outstanding at December 31, 2001, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common stock. Additionally, the
Company's 8.75% convertible subordinated debentures were excluded from the
computation of diluted EPS for all years presented because the effect of assumed
conversion is anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
The Company leases vehicles, office space, office equipment and other items
of personal property under leases expiring at various dates. Management expects
that, in the normal course of business, leases that expire will be renewed or
replaced by other leases. Total rent expense incurred under operating leases
attributable to continuing operations was $4.1 million for 2003, $3.9 million
for 2002 and $3.6 million for 2001.
At December 31, 2003, future minimum rental commitments attributable under
all capital leases and operating leases are as follows:
Capital Operating
Leases Leases
-------------- --------------
2004..................................................... $ 689,000 $ 3,326,000
2005..................................................... 441,000 2,519,000
2006 .................................................... 369,000 1,792,000
2007..................................................... 275,000 1,119,000
2008..................................................... 6,000 248,000
Thereafter............................................... - 1,473,000
-------------- --------------
Total minimum lease payments............................. 1,780,000 $ 10,477,000
==============
Less amounts representing interest....................... 182,000
--------------
Present value of net minimum lease payments.............. $ 1,598,000
==============
The Company was the Plaintiff in a legal proceeding involving malpractice
issues with a professional service provider previously used by the Company. This
matter was settled in December 2001 with a payment to the Company which, net of
expenses, totaled $6.0 million and is included in other income for the year
ended December 31, 2001.
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, results of operations or liquidity of the Company.
9. BUSINESS SEGMENT DATA
The Company provides technical services to an international client base
that includes refineries, chemical plants, pipelines, offshore drilling and
production platforms, steel mills, food and drink processing facilities, power
generation, and other process industries. Additionally, the Company's
information technology services segment provides consulting services, hardware
sales and other related information management and processing services to
healthcare, governmental, insurance and financial institutions. General
corporate includes compensation and benefits paid to officers and employees of
the Company, insurance premiums, general and administrative costs, tax and
financial reporting costs, legal and audit fees not reasonably allocable to
specific business segments. General corporate assets include cash, deferred
taxes and other assets not related to its segments.
The Company measures segment profit as operating income. Total assets are
those assets, including excess of cost over fair value of net assets of acquired
businesses, controlled by each reportable segment.
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Business segment revenues:
Technical services.......................... $ 101,018,000 $ 90,747,000 $ 96,321,000
Information technology services............. 34,702,000 40,689,000 48,383,000
--------------- -------------- --------------
$ 135,720,000 $ 131,436,000 $ 144,704,000
=============== ============== ==============
Technical services segment revenues:
Under pressure services..................... $ 41,875,000 $ 41,192,000 $ 39,903,000
Turnaround services......................... 48,768,000 41,949,000 48,301,000
Other services.............................. 10,375,000 7,606,000 8,117,000
--------------- -------------- --------------
$ 101,018,000 $ 90,747,000 $ 96,321,000
=============== ============== ==============
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Business segment profit (loss):
Technical services ......................... $ 6,337,000 $ 3,580,000 $ 5,581,000
Information technology services............. (6,518,000) (3,796,000) 3,651,000
General corporate........................... (3,186,000) (3,991,000) (3,803,000)
--------------- -------------- --------------
Operating income (loss)................... (3,367,000) (4,207,000) 5,429,000
Interest income............................. 260,000 460,000 665,000
Other income................................ - - 6,741,000
Interest expense............................ (1,273,000) (1,764,000) (3,486,000)
--------------- -------------- --------------
Income (loss) from continuing operations
before income taxes and cumulative
effect of change in accounting principle.. $ (4,380,000) $ (5,511,000) $ 9,349,000
=============== ============== ==============
Business segment assets:
Depreciation and amortization:
Technical services........................ $ 2,609,000 $ 2,540,000 $ 4,514,000
Information technology services........... 3,251,000 1,125,000 694,000
--------------- -------------- --------------
$ 5,860,000 $ 3,665,000 $ 5,208,000
=============== ============== ==============
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Capital expenditures (excluding acquisitions):
Technical services........................ $ 1,897,000 $ 2,912,000 $ 3,331,000
Information technology services........... 1,309,000 2,592,000 1,294,000
General corporate......................... 105,000 - -
--------------- -------------- --------------
$ 3,311,000 $ 5,504,000 $ 4,625,000
=============== ============== ==============
December 31,
---------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Total assets:
Technical services........................ $ 66,117,000 $ 63,319,000 $ 102,147,000
Information technology services........... 14,902,000 26,956,000 30,877,000
General corporate......................... 23,771,000 37,372,000 53,195,000
--------------- -------------- --------------
$ 104,790,000 $ 127,647,000 $ 186,219,000
=============== ============== ==============
The following geographical area data includes revenues and operating income
(loss) based on location of the operating segment and net property and equipment
based on physical location:
Year Ended December 31,
---------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Geographical area revenues:
United States............................ $ 57,987,000 $ 66,888,000 $ 84,171,000
Europe................................... 62,995,000 53,187,000 48,554,000
Asia-Pacific............................. 14,738,000 11,361,000 11,979,000
--------------- -------------- --------------
$ 135,720,000 $ 131,436,000 $ 144,704,000
=============== ============== ==============
Geographical area operating income (loss):
United States............................ $ (13,270,000) $ (11,204,000) $ (2,461,000)
Europe................................... 7,756,000 5,990,000 7,011,000
Asia-Pacific............................. 2,147,000 1,007,000 879,000
--------------- -------------- --------------
$ (3,367,000) $ (4,207,000) $ 5,429,000
=============== ============== ==============
December 31,
---------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Geographical area property and equipment, net:
United States............................ $ 5,128,000 $ 7,269,000 $ 5,346,000
Europe................................... 5,874,000 5,652,000 5,110,000
Asia-Pacific............................. 1,271,000 1,034,000 930,000
--------------- -------------- --------------
$ 12,273,000 $ 13,955,000 $ 11,386,000
=============== ============== ==============
10. DISCONTINUED OPERATIONS - BUSINESSES DISTRIBUTED TO COMMON SHAREHOLDERS
The results of operations for the pipeline, terminaling and product
marketing businesses are reflected in the accompanying consolidated statements
of income as "Discontinued operations - businesses distributed to common
shareholders" (See Note 1). Prior to the Distribution, KSL held the 2% general
partner interest and a 25% limited partner interest in Kaneb Pipe Line Partners,
L.P. ("KPP") and the Company's previously wholly-owned petroleum marketing
subsidiary. A summary of operating results of discontinued operations for the
year ended December 31, 2001 (through date of Distribution on June 29, 2001) is
presented below:
Year Ended
December 31, 2001
-----------------
Revenues:
Pipeline and terminaling.......................... $ 101,021,000
Product marketing business........................ 187,231,000
---------------
$ 288,252,000
===============
Operating profit:
Pipeline and terminaling.......................... $ 39,896,000
Product marketing business........................ (264,000)
Distribution expenses............................. (1,923,000)
---------------
$ 37,709,000
===============
Income before income taxes and interest of outside
non-controlling partners in KPP's net income and
extraordinary item................................ $ 32,653,000
Income taxes........................................ (3,090,000)
Extraordinary loss on KPP debt
extinguishment, net of income taxes
and interest of outside non-controlling
partners in KPP's net income...................... (859,000)
Interest of outside non-controlling partners
in KPP's net income............................... (25,367,000)
---------------
Income from discontinued operations,
net of income taxes............................... $ 3,337,000
===============
On January 3, 2001, KPP, through a wholly-owned subsidiary, acquired Shore
Terminals LLC ("Shore") for $107 million in cash and 1,975,090 KPP limited
partnership units (valued at $56.5 million on the date of agreement and its
announcement). Financing for the cash portion of the purchase price was supplied
under KPP's $275 million unsecured revolving credit agreement with a group of
banks. The acquisition has been accounted for using the purchase method of
accounting. As a result of KPP issuing additional units to unrelated parties,
the Company's pro-rata share of net assets of KPP increased by $9.9 million.
Accordingly, the Company recorded a $9.9 million increase in additional paid-in
capital, before deferred income taxes of $3.8 million, in 2001.
In March of 2001, a wholly-owned subsidiary of KPP entered into two
contracts for the purpose of locking in interest rates on $100 million of
anticipated ten-year public debt offerings. As the interest rate locks were not
designated as hedging instruments pursuant to the requirements of SFAS No. 133,
increases or decreases in the fair value of the contracts are recognized by KPP
in results of operations on a current basis. On May 22, 2001, the contracts were
settled resulting in an aggregate gain to KPP of $3.8 million.
11. ACCRUED EXPENSES
Accrued expenses are comprised of the following components:
December 31,
---------------------------------
2003 2002
-------------- --------------
Accrued compensation and benefits............................. $ 9,664,000 $ 8,694,000
Accrued taxes other than income............................... 703,000 582,000
Accrued interest.............................................. 202,000 456,000
Other......................................................... 7,686,000 11,687,000
-------------- --------------
$ 18,255,000 $ 21,419,000
============== ==============
12. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash equivalents, accounts receivable and
accounts payable approximate their carrying amounts due to the relatively short
period to maturity of these instruments. The estimated fair value of all debt
(excluding capital leases) as of December 31, 2003 and 2002 was approximately
$22 million and $27 million as compared to the carrying value of $21 million and
$27 million, respectively. These fair values were estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements, when quoted market prices were not
available. The Company has not determined the fair value of its capital leases
as it is not practicable. The estimates presented above are not necessarily
indicative of the amounts that would be realized in a current market exchange.
The Company has no derivative financial instruments.
The technical services segment provides services to an international client
base that includes petroleum refineries, chemical plants, offshore energy
production platforms, steel mills, nuclear power stations, conventional power
stations, pulp and paper mills, food and beverage processing plants and other
flow-process facilities. The information technology services segment provides
services and related products to the U. S. Government and commercial sectors.
The Company does not believe that it has a significant concentration of credit
risk at December 31, 2003, as the Company's accounts receivable are generated
from these distinct business segments with customers located throughout the
United States, Europe and Asia-Pacific.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 2003 and 2002 are summarized as follows:
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------- --------------- -------------- --------------
2003:
Revenues.......................... $ 32,224,000 $ 33,233,000 $ 37,742,000 $ 32,521,000
============== =============== ============== ==============
Operating income (loss)........... $ 226,000 $ 689,000 $ 238,000 $ (4,520,000)
============== =============== ============== ==============
Net income (loss)................. $ 143,000 $ 420,000 $ 367,000 $ (14,035,000)(a)
============== =============== ============== ==============
Earnings (loss) per common share -
basic and diluted............... $ - $ 0.01 $ 0.01 $ (0.44)
============== =============== ============== ==============
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------- --------------- -------------- --------------
2002:
Revenues.......................... $ 28,168,000 $ 32,413,000 $ 31,884,000 $ 38,971,000
============== =============== ============== ==============
Operating income (loss)........... $ (1,396,000) $ (1,155,000) $ (1,244,000) $ (412,000)
============== =============== ============== ==============
Net income (loss) before
cumulative effect of change
in accounting principle......... $ (914,000) $ (573,000) $ (431,000) $ (324,000)
Cumulative effect of change
in accounting principle, net
of income taxes (b)............. (45,269,000) - - -
-------------- --------------- -------------- --------------
Net income (loss)................. $ (46,183,000) $ (573,000) $ (431,000) $ (324,000)
============== =============== ============== ==============
Earnings (loss) per common share -
basic and diluted:
Before cumulative effect
of change in accounting
principle.................. $ (0.03) $ (0.02) $ (0.01) $ (0.01)
Cumulative effect of change
in accounting principle (b) (1.36) - - -
------------- -------------- ------------- --------------
Total.................... $ (1.39) $ (0.02) $ (0.01) $ (0.01)
============= ============== ============= ==============
(a) See Note 2 regarding increase in valuation allowance for deferred tax
assets. Additionally, fourth quarter 2003 results include a charge of
$3.5 million pertaining to the write-down of inventory and software
costs, and employee and other termination expenses resulting from the
closing of such operations.
(b) See Note 1 regarding cumulative effect of change in accounting
principle resulting from adoption of new accounting standard for
goodwill.
Schedule I
XANSER CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------------
2003 2002 2001
------------- ------------- --------------
General and administrative expenses..................... $ (3,186,000) $ (3,991,000) $ (3,803,000)
Interest expense........................................ (693,000) (991,000) (2,270,000)
Interest and other income, net.......................... 159,000 360,000 7,254,000
Equity in income (loss) of subsidiaries................. (1,426,000) (1,969,000) 6,558,000
------------- ------------- --------------
Income (loss) from continuing operations
before income taxes and cumulative effect
of change in accounting principle.................... (5,146,000) (6,591,000) 7,739,000
Income tax benefit (expense)............................ (7,959,000) 4,349,000 14,649,000
------------- ------------- --------------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle.. (13,105,000) (2,242,000) 22,388,000
Cumulative effect of change in accounting principle -
adoption of new accounting standard for
goodwill, net of income taxes........................ - (45,269,000) -
------------- ------------- --------------
Income (loss) from continuing operations................ (13,105,000) (47,511,000) 22,388,000
Income from discontinued operations - businesses
distributed to common shareholders, net of
income taxes......................................... - - 3,337,000
------------- ------------- --------------
Net income (loss)....................................... (13,105,000) (47,511,000) 25,725,000
Dividends and redemption premium applicable
to preferred stock................................... - - 493,000
------------- ------------- --------------
Net income (loss) applicable to common stock........... $ (13,105,000) $ (47,511,000) $ 25,232,000
============= ============= ==============
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of change in
accounting principle.......................... $ (0.41) $ (0.07) $ 0.68
Cumulative effect of change in accounting
principle..................................... - (1.38) -
------------- ------------- --------------
(0.41) (1.45) 0.68
Discontinued operations........................... - - 0.10
------------- ------------- --------------
$ (0.41) $ (1.45) $ 0.78
============= ============= ==============
Diluted:
Continuing operations:
Before cumulative effect of change in
accounting principle.......................... $ (0.41) $ (0.07) $ 0.64
Cumulative effect of change in accounting
principle..................................... - (1.38) -
------------- ------------- --------------
(0.41) (1.45) 0.64
Discontinued operations........................... - - 0.10
------------- ------------- --------------
$ (0.41) $ (1.45) $ 0.74
============= ============= ==============
See "Notes to Consolidated Financial Statements" of Xanser
Corporation and Subsidiaries included in this report.
F - 26
Schedule I
(Continued)
XANSER CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31,
--------------------------------------
2003 2002
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 13,109,000 $ 17,432,000
Receivable from businesses distributed to common shareholders........ 7,564,000 7,412,000
Current deferred income tax assets................................... - 253,000
Prepaid expenses and other........................................... 961,000 561,000
--------------- ---------------
Total current assets............................................... 21,634,000 25,658,000
--------------- ---------------
Property and equipment.................................................. 3,953,000 3,848,000
Less accumulated depreciation and amortization.......................... 3,848,000 3,848,000
--------------- ---------------
Net property and equipment......................................... 105,000 -
--------------- ---------------
Investments in, advances to and notes receivable
from subsidiaries..................................................... 43,891,000 50,939,000
Deferred income tax and other assets.................................... - 2,499,000
--------------- ---------------
$ 65,630,000 $ 79,096,000
=============== ===============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses................................ $ 7,004,000 $ 6,920,000
--------------- ---------------
Total current liabilities.......................................... 7,004,000 6,920,000
--------------- ---------------
Long-term debt, less current portion.................................... 5,000,000 9,930,000
Other liabilities....................................................... 1,174,000 697,000
Stockholders' equity:
Common stock, without par value...................................... 4,333,000 4,333,000
Additional paid-in capital........................................... 126,561,000 126,675,000
Treasury stock, at cost.............................................. (26,267,000) (26,390,000)
Retained earnings (accumulated deficit).............................. (48,695,000) (35,590,000)
Accumulated comprehensive income (loss).............................. (3,480,000) (7,479,000)
--------------- ---------------
Total stockholders' equity....................................... 52,452,000 61,549,000
--------------- ---------------
$ 65,630,000 $ 79,096,000
=============== ===============
See "Notes to Consolidated Financial Statements" of Xanser
Corporation and Subsidiaries included in this report.
F - 27
Schedule I
(Continued)
XANSER CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------------
2003 2002 2001
----------------- ---------------- ------------------
Operating activities:
Income (loss) from continuing operations.......... $ (13,105,000) $ (47,511,000) $ 22,388,000
Adjustments to reconcile income from
continuing operations to net cash used in
operating activities:
Equity in income of subsidiaries, net of
dividends................................... 1,554,000 (155,000) (3,767,000)
Deferred income taxes......................... 9,393,000 181,000 (21,032,000)
Cumulative effect of change in accounting
principle................................... - 45,269,000 -
Other, net.................................... 477,000 648,000 -
Changes in current assets and liabilities:
Prepaid expenses and other current assets... (400,000) 2,246,000 121,000
Accounts payable and accrued expenses ...... 84,000 (4,672,000) 1,250,000
----------------- ---------------- ------------------
Net cash used in operating activities....... (1,997,000) (3,994,000) (1,040,000)
----------------- ---------------- ------------------
Investing activities:
Capital expenditures.............................. (105,000) - -
Change in other assets, net....................... 2,852,000 1,883,000 (507,000)
----------------- ---------------- ------------------
Net cash provided by (used in)
investing activities...................... 2,747,000 1,883,000 (507,000)
----------------- ---------------- ------------------
Financing activities:
Payments on debt.................................. (4,930,000) (11,466,000) -
Common stock issued............................... 9,000 450,000 545,000
Purchase of treasury stock........................ - (3,286,000) -
Preferred stock dividends and redemption
premium paid.................................... - - (493,000)
Redemption of preferred stock..................... - - (5,676,000)
Increase (decrease) in receivable from businesses
distributed to common shareholders.............. (152,000) 10,492,000 14,076,000
Change in net assets of discontinued operations... - - 2,495,000
----------------- ---------------- ------------------
Net cash provided by (used in)
financing activities...................... (5,073,000) (3,810,000) 10,947,000
----------------- ---------------- ------------------
Increase (decrease) in cash and cash equivalents..... (4,323,000) (5,921,000) 9,400,000
Cash and cash equivalents at beginning of year....... 17,432,000 23,353,000 13,953,000
----------------- ---------------- ------------------
Cash and cash equivalents at end of year............. $ 13,109,000 $ 17,432,000 $ 23,353,000
================= ================ ==================
See "Notes to Consolidated Financial Statements" of Xanser
Corporation and Subsidiaries included in this report.
F - 28
Schedule II
XANSER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Descriptions Period Expenses Accounts Deductions Period
- ------------------------------------ -------------- ------------- ------------- -------------- -------------
ALLOWANCE DEDUCTED FROM
ASSETS TO WHICH THEY APPLY
Year Ended December 31, 2003:
For doubtful receivables
classified as current assets... $ 1,500 $ 979 $ 43(a) $ (1,339)(b) $ 1,183
============= =========== ============ ========== ============
For deferred tax asset valuation
allowance classified as
non-current assets............. $ 4,134 $ 12,112 $ - $ - $ 16,246
============= =========== ============ ========== ============
Year Ended December 31, 2002:
For doubtful receivables
classified as current assets... $ 1,034 $ 719 $ 33(a) $ (286)(b) $ 1,500
============= =========== ============ ========== ============
For deferred tax asset valuation
allowance classified as
non-current assets............. $ 4,134 $ - $ - $ - $ 4,134
============= =========== ============ ========== ============
Year Ended December 31, 2001:
For doubtful receivables
classified as current assets... $ 605 $ 485 $ (9)(a) $ (47)(b) $ 1,034
============= =========== ============ ========== ============
For deferred tax asset valuation
allowance classified as
non-current assets............. $ 2,450 $ 1,684 $ - $ - $ 4,134
============= =========== ============ ========== ============
F - 29
Notes:
(a) Foreign currency translation adjustments.
(b) Receivable write-offs and reclassifications, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Xanser Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
XANSER CORPORATION
By: //s// JOHN R. BARNES
-----------------------------------------
President and Chief Executive Officer
Date: March 25, 2004
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Xanser
Corporation and in the capacities and on the date indicated.
Signature Title Date
- ---------------------------------------- ---------------------------- --------------
Principal Executive Officer
//s// JOHN R. BARNES President, Chief Executive March 25, 2004
- ---------------------------------------- Officer and Director
Principal Accounting Officer
//s// MICHAEL R. BAKKE Controller March 25, 2004
- ----------------------------------------
Directors
//s// SANGWOO AHN Director March 25, 2004
- ----------------------------------------
//s// JOHN R. BARNES Director March 25, 2004
- ---------------------------------------
//s// FRANK M. BURKE, JR. Director March 25, 2004
- ----------------------------------------
//s// CHARLES R. COX Director March 25, 2004
- ----------------------------------------
//s// HANS KESSLER Director March 25, 2004
- ----------------------------------------
//s// JAMES R. WHATLEY Director March 25, 2004
- ----------------------------------------
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Barnes, Chief Executive Officer of Xanser Corporation certify that:
1. I have reviewed this annual report on Form 10-K of Xanser Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers 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 annual report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period cover by this annual report, based on such
evaluation; and
d) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter 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 officers 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: March 25, 2004
//s// JOHN R. BARNES
-------------------------------------
John R. Barnes
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard C. Wadsworth, Chief Financial Officer of Xanser Corporation certify
that:
1. I have reviewed this annual report on Form 10-K of Xanser Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers 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 annual report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period cover by this annual report, based on such
evaluation; and
d) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter 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 officers 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: March 25, 2004
//s// HOWARD C. WADSWORTH
---------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)
Exhibit 32.1
CERTIFICATION 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, to his knowledge, the Company's Annual
Report on Form 10-K for the year ended December 31, 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 Annual Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-K. A signed original 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.
Date: March 25, 2004
//s// JOHN R. BARNES
-------------------------------------
John R. Barnes
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION 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, to his knowledge, the Company's Annual
Report on Form 10-K for the year ended December 31, 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 Annual Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-K. A signed original 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.
Date: March 25, 2004
//s// HOWARD C. WADSWORTH
---------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)