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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-5083
KANEB SERVICES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 74-1191271
(State or other jurisdiction (IRS Employee Identification No.)
of incorporation or organization)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, Without Par Value New York Stock Exchange
Adjustable Rate Cumulative Class A New York Stock Exchange
Preferred Stock
8 3/4% Convertible Subordinated New York Stock Exchange
Debentures due 2008
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[ X ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant: $124,484,300. This figure is estimated as of March 15, 1999, at
which date the closing price of the Registrant's Common Stock on the New York
Stock Exchange was $4.1875 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 15, 1999: 31,415,622.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is incorporated by reference from portions of the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year covered by this Report.
PART I
Item 1. Business
GENERAL
Kaneb Services, Inc. ("Kaneb" or the "Company") conducts its principal
businesses in three industry segments, specialized industrial field services,
pipeline, terminaling and product marketing and information services. Each
segment operates through separate groups of wholly-owned subsidiaries, Furmanite
Worldwide, Inc., Kaneb Pipe Line Company and Kaneb Information Services, Inc.,
respectively. Furmanite Worldwide, Inc., and its domestic and international
subsidiaries and affiliates (collectively, "Furmanite"), provide specialized
industrial field services, including underpressure leak sealing, 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 Western Europe, North America, Latin America and the
Pacific Rim. See "Industrial Field Services." Kaneb Pipe Line Company ("KPL")
operates and manages refined petroleum products pipeline transportation systems
and petroleum products and specialty liquids terminal storage and pipeline
facilities for the benefit of Kaneb Pipe Line Partners, L.P. ("KPP" or the
"Partnership"), which owns such systems and facilities through its subsidiaries.
KPL also conducts product marketing activities through another wholly-owned
subsidiary. Acquired by KPL in March 1998, this business provides wholesale
motor fuel marketing services throughout the Great Lakes and Rocky Mountain
regions and in California. See "Pipeline, Terminaling and Product Marketing
Services." Kaneb Information Services, Inc. is engaged in the information
management services industry through its wholly-owned subsidiaries, which offer
products and services that, among other functions, enable financial institutions
to monitor the insurance coverage of their loan collateral, provide computer
hardware and consulting services to federal and state governmental agencies and
private sector customers and provide consulting services to hospitals and
hospital networks implementing telemedicine systems. See "Information Services."
Kaneb Services, Inc. was incorporated in Delaware on January 23, 1953.
The Company is a holding company that conducts its business through the
subsidiaries identified above, among others. Kaneb's principal operating office
is located at 2435 North Central Expressway, Richardson, Texas 75080 and its
telephone number is (972) 699-4000.
OPERATING SEGMENTS
Financial information regarding Kaneb's operating segments and foreign
operations is presented under the caption "Business Segment Data" in Note 10 to
the Company's consolidated financial statements. Such information is hereby
incorporated by reference into this Item 1.
INDUSTRIAL FIELD SERVICES
The Furmanite group of companies offers a variety of specialized
industrial field services to an international base of flow-process industry
clients. Founded in Virginia Beach, Virginia in the 1920s as a manufacturer of
leak sealing kits, Furmanite has evolved into an international service company.
In the 1960s, Furmanite expanded within the United Kingdom, primarily through
its leak sealing products and services, and, during the 1970's and 1980's, grew
through geographic expansion and the addition of new techniques, processes and
services to become one of the largest leak sealing and on-site machining
companies in the world. Kaneb acquired Furmanite in 1991 to diversify the
Company's operations and take advantage of anticipated international growth
opportunities. For the year ended December 31, 1998, Furmanite's sales and
operating income were approximately $115,116,000 and $6,656,000, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Products and Services
Furmanite is an industry leader in providing 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, heat exchanger repair and
pipeline engineering services. Furmanite also performs diagnostic services on
valves and motors by, among other methods, utilizing its patented Trevitest(R)
system and employing proprietary diagnostic equipment under license from
Framatome Technologies. In performing these services, Furmanite technicians
generally work at the customer's location, frequently responding on an emergency
basis. Over its history, Furmanite has established a reputation for delivering
quality service and helping its customers avoid or delay costly plant or
equipment shutdowns. For each of the years ended December 31, 1998, 1997, and
1996, underpressure services represented approximately 38%, 35% and 37%,
respectively, of Furmanite's revenues, while turnaround services accounted for
approximately 46%, 45% and 41%, respectively, and product sales and other
industrial services represented approximately 16%, 20% and 22%, respectively, of
Furmanite's revenues for each of such years.
Furmanite's on-line, underpressure leak sealing services are performed
on a variety of flow-process industry machinery, often in difficult situations.
Many of Furmanite's techniques and materials are proprietary and/or patented
and, the Company believes, provide Furmanite with a competitive advantage over
other organizations that provide similar services. Furmanite'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 in order to effect the
necessary repairs. These efforts are supported by an internal quality control
group that works together with the on-site technicians in crafting these
materials.
Customers and Markets
Furmanite's customer base spans a broad industry spectrum, which
includes petroleum refineries, chemical plants, offshore energy production
platforms, steel mills, power generation and other flow-process industries in
more than 25 countries. Over 80% of Furmanite's revenues are derived from fossil
and nuclear fuel power generation companies, petroleum refiners and chemical
producers, while other significant markets include offshore oil producers and
steel manufacturers. As the worldwide industrial infrastructure continues to
age, additional repair and maintenance expenditures are expected to be required
for the specialized services provided by Furmanite and similarly situated
organizations. Other factors that may influence the markets served by Furmanite
include regulations governing construction of industrial plants, safety and
environmental compliance requirements, and fulfillment of specialized services
through the increased use of outsourcing, rather than an organization's in-house
staff.
Furmanite serves its customers from its Houston, Texas worldwide
headquarters and maintains a strong presence in England, continental Europe and
the Asia-Pacific. Furmanite currently operates North American offices in the
United States in Baton Rouge, Beaumont, Benecia, Charlotte, Chicago, Houston,
Merrillville, New Jersey and Salt Lake City; and in Edmonton, Alberta and
Sarnia, Ontario, Canada. Furmanite's worldwide strength is further supported by
offices currently located in Australia (6 offices), Belgium, China, France,
Germany, Hong Kong, Malaysia, the Netherlands, New Zealand, Norway, Singapore,
South Africa and the United Kingdom (6 locations) and by licensee, agency and/or
minority ownership interest arrangements in Argentina, Brazil, Chile, Croatia,
Cyprus, Czech Republic, Egypt, Finland, Hungary, India, Indonesia, Italy, Japan,
Kuwait, Macedonia, Poland, Portugal, Puerto Rico, Saudi Arabia, Slovak Republic,
Korea, Sweden, Thailand, Trinidad, Ukraine, the United Arab Emirates and
Venezuela. Sales by major geographic region for 1998 were 31% for the United
States, 59% for Europe and 10% for Asia-Pacific. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 10 to
the Company's consolidated financial statements.
Furmanite's underpressure leak sealing and other specialty field
services are marketed primarily through direct sales calls on customers by
salesmen 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, to date, has had no material warranty claims.
Furmanite competes on the basis of service, product performance and price,
generally on a localized basis with smaller companies and the in-house
maintenance departments of its customers or potential customers. In addition to
staff reductions and the trend toward outsourcing, Furmanite believes it
currently has an advantage over in-house maintenance departments because of the
ability of its multi-disciplined technicians to use Furmanite's proprietary and
patented techniques to perform quality repairs on a timely basis while customer
equipment remains in service.
Safety, Environmental and Other Regulatory Matters
Many aspects of Furmanite's operations are subject to governmental
regulation. National, state and local authorities of the U.S. and various
foreign countries have each adopted safety, environmental and other regulations
relating to the use of certain methods, practices and materials in connection
with the performance of Furmanite's services and which otherwise affect its
operations. Additionally, Furmanite participates, from time to time, with
various regulatory authorities in certain studies, reviews and inquiries of its
projects and/or operations. Further, because of its international presence,
Furmanite is subject to a number of political and economic uncertainties,
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.
Underpressure leak sealing 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 professionally qualified 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.
PIPELINE, TERMINALING AND PRODUCT MARKETING SERVICES
Through its KPL subsidiary, Kaneb manages and operates its refined
petroleum products pipeline transportation system and petroleum products and
specialty liquids terminal storage business, for the benefit of KPP, which owns
such systems and facilities through its subsidiaries. The pipeline business
consists primarily of the transportation, as a common carrier, of refined
petroleum products in Colorado, Iowa, Kansas, Nebraska, North Dakota, South
Dakota and Wyoming, as well as related terminaling activities. The terminaling
business is conducted by KPP under the tradenames of "ST Services" and
"StanTrans, Inc.," among others (collectively, "ST"). Kaneb operates ST's 33
terminal storage facilities in 18 states and the District of Columbia and six
terminal storage facilities in the United Kingdom (See "Recent Development"),
with total storage capacity of approximately 27,566,000 barrels. Including those
situated along its refined petroleum products pipeline systems, the
Partnership's terminal storage operations comprise the third largest independent
liquids terminaling company in the United States. For a more detailed discussion
of the business, activities and results of operations of KPP than that which is
contained herein, reference is made to its Annual Report on Form 10-K for the
year ended December 31, 1998, and other publicly filed documents of the
Partnership (NYSE: KPP).
Additionally, in March 1998, a wholly-owned subsidiary of KPL acquired
a products marketing business which provides wholesale motor fuel marketing
services throughout the Great Lakes and Rocky Mountain regions and in
California. See "Product Marketing Operations."
Pipeline Transportation Systems
Markets Served
Initially built in 1953, the KPP pipeline transportation operations
currently consist of two primary pipeline systems: the East and West Pipelines
(the "Pipelines"), with its operational headquarters located in Wichita, Kansas.
The East Pipeline is a 2,092 mile integrated pipeline, ranging between six and
sixteen inches in diameter, that transports refined petroleum products received
from refineries in southeast Kansas or other interconnecting pipelines to
terminals in Iowa, Kansas, Nebraska, North Dakota and South Dakota and to
receiving pipeline connections in Kansas. The East Pipeline has direct
connections to two Kansas refineries and has direct access by third-party
pipelines to four other refineries in Kansas, Oklahoma and Texas. The East
Pipeline also provides access to Gulf Coast suppliers of refined petroleum
products through connecting pipelines which receive products from a pipeline
originating on the Gulf Coast and receives propane through five connecting
pipelines from gas processing plants in Kansas, New Mexico, Oklahoma and Texas.
The East Pipeline's operation also includes 16 public truck loading terminals
located in five states, comprised of a total of 233 tanks having storage
capacity of approximately 3,500,000 barrels of product, and has intermediate
storage facilities in McPherson and El Dorado, Kansas, consisting of 23 tanks
having an aggregate storage capacity of approximately 922,000 barrels.
The West Pipeline, acquired by the Partnership from Wyco Pipe Line
Company in February 1995, consists of approximately 550 miles of six to eight
inch diameter pipeline that transports refined petroleum products received
directly and by other interconnecting pipelines from refineries located in
Colorado, Montana, South Dakota and Wyoming to terminals in Colorado, South
Dakota and Wyoming. The West Pipeline's operations include four public truck
loading terminals, also located in Colorado, South Dakota and Wyoming, having
storage capacity of over 1,700,000 barrels of product. Through these facilities
and operations, the West Pipeline serves the Denver and northeastern Colorado
markets and supplies jet fuel to Ellsworth Air Force Base, Rapid City, South
Dakota.
The West Pipeline is the nearest pipeline system paralleling the East
Pipeline to the west. Consequently, there is a high level of commonality of
shippers on the Pipelines and, due to the proximity of the East and West
Pipelines to one another, they often face similar competitive issues. The
Pipelines' more significant competitors include refineries, common carrier
pipelines, proprietary pipelines owned and operated by major integrated and
large independent oil companies and other companies in the areas where the
Partnership's pipeline systems and operations deliver products. In particular,
the Pipelines' major competitor is an independent regulated common carrier
pipeline system that operates approximately 100 miles east of and parallel to
the East Pipeline. Competition between common carrier pipelines is primarily
based upon transportation charges, quality of customer service and proximity to
end users. KPL, in its capacity as General Partner of the Partnership, believes
that high capital costs, tariff regulation, environmental considerations and
problems in acquiring rights-of-way make it unlikely that other competing
pipeline systems comparable in size and scope to the Pipelines will be built in
the near future, provided that the pipeline has available capacity to satisfy
demand and its tariffs remain at reasonable levels. Further, while pipeline
transportation systems are generally the lowest cost method for intermediate and
long-haul overland movement of refined petroleum products, trucks may also
competitively deliver products in some of the areas served by the Pipelines.
However, as trucking costs render that mode of transportation uncompetitive for
longer hauls or larger volumes, Kaneb does not believe that, over the long term,
trucks are effective competition to the Pipelines' long-haul volumes.
Products
The mix of refined petroleum products delivered by the Pipelines varies
seasonally, with gasoline demand peaking in early summer, diesel fuel demand
peaking in late summer and propane demand higher in the fall. In addition,
weather conditions in the geographic areas served by the Pipelines affect the
demand for and the mix of the refined petroleum products delivered through the
Pipelines, although any such impact on the volumes shipped has historically been
short-term. Most of the refined petroleum products delivered through the East
Pipeline are ultimately used in agricultural operations, including fuel for farm
equipment, irrigation systems, crop-drying facilities and trucks used to
transport crops to a variety of destinations; while the West Pipeline's products
are generally delivered to a more urban and commercial marketplace. The
agricultural sector served by the East Pipeline is also affected by governmental
policy and crop prices. Further, the Pipelines are dependent upon adequate
levels of production of refined petroleum products by refineries that are
connected to the Pipeline, which refineries are, in turn, dependent upon
adequate supplies of suitable grades of crude oil. KPL, in its capacity as
General Partner of the Partnership, believes that, in the event that operations
at any one refinery were discontinued (and assuming unchanged demand in the
markets served by the Pipelines), the effects thereof would be short-term in
nature and the Company's business would not be materially adversely affected
over the long term. However, a substantial reduction of output by several
refineries as a group could affect the Pipelines' operations to the extent that
a greater percentage of the supply would have to come from refineries outside
the Pipelines' connecting access pipelines.
Tariffs
Substantially all of the Pipelines' operations constitute common
carrier activities that are subject to Federal or state tariff regulation. Such
common carrier activities are those under which transportation services through
the pipeline are available at published tariffs, as filed with the Federal
Energy Regulatory Commission ("FERC") or the applicable state regulatory
authority, to any shipper of refined petroleum products who requests such
services, provided that each refined petroleum product for which transportation
is requested satisfies the conditions, requirements and specifications for
transportation.
Terminal Storage Operations
Facilities
Acquired by the Partnership in 1993, the terminaling business has a
proven track record of more than 40 years of quality service and experience in
the operation of specialty liquids terminal storage facilities. ST's terminal
facilities provide throughput and storage on a fee basis for a wide variety of
products from petroleum products to specialty chemicals and edible and other
liquids. ST's 33 facilities offer storage capacity ranging from 40,000 to 5.4
million barrels, comprised of two to 124 tanks per facility. As of December 31,
1998, ST's six largest facilities were located at Piney Point, Maryland
(5,403,000 Bbls capacity; 28 tanks); Linden, New Jersey (3,900,000 Bbls
capacity; 22 tanks); Jacksonville, Florida (2,066,000 Bbls capacity; 30 tanks);
Texas City, Texas (2,002,000 Bbls capacity; 124 tanks); Westwego, Louisiana
(858,000 Bbls capacity; 54 tanks); and, Baltimore, Maryland (821,000 Bbls
capacity; 49 tanks). The Linden, New Jersey terminal was acquired as a part of a
November 1998 joint venture transaction with Northville Industries Corp. in
which ST acquired a 50% interest in, and the management of, the facility. In
addition to the foregoing, the other domestic ST facilities are located in
Alabama (2), Arizona, California, the District of Columbia (2), Florida (2),
Georgia (6), Illinois (3), Indiana, Kansas, Maryland, Minnesota, New Mexico,
Oklahoma, Texas, Virginia (2), Washington and Wisconsin. In February 1999, ST
acquired six terminals in the United Kingdom, having aggregate capacity of
approximately 5.5 million Bbls capacity in 307 tanks. These terminals provide ST
with a geographically diverse base of customers and revenue. ST's operational
headquarters is located in Dallas, Texas.
The independent liquids terminaling industry is fragmented and includes
both large, well financed publicly-traded companies that own and/or operate many
terminal locations and small private companies that may own and/or operate only
a single terminal location. In addition to the terminals owned by independent
terminal operators, many major energy and chemical companies also own extensive
terminal facilities. Although such terminals often have the same capabilities as
those owned by independent operators, they generally do not provide terminaling
services to third parties. In many instances, major energy and chemical
companies that own storage facilities are also significant customers of
independent terminal operators, when independent terminals have more cost
effective locations near key transportation links such as deep water ports.
Major energy and chemical companies also require independent terminal storage
when their captive storage facilities are inadequate, either because of size
constraints, the nature of the stored material or specialized handling
requirements. Independent terminal owners, such as ST, compete on the basis of
location, versatility of terminals, service and price. For example, a favorably
located terminal will have access to various means of cost-effective
transportation both to and from the terminal. Terminal versatility is a function
of the operator's ability to offer safe handling for a diverse group of products
having complex handling requirements. The service function typically provided by
the terminal includes, among other things, the safe storage of the product at
specified temperature, moisture and other conditions, as well as variety in the
method of loading and unloading of product at the terminal. Additionally,
another increasingly important service factor is the ability of a terminal
operator to offer product handling and storage that complies with applicable
environmental, safety and health regulations, among others.
Products
The variety of products that can be stored at ST's terminal storage
facilities is a significant part of what KPL, in its capacity as General Partner
of the Partnership, believes is its competitive advantage among similarly
situated organizations. ST's terminals provide storage capacity for such
products as petroleum products, specialty chemicals, asphalt, fertilizer,
herbicides, latex and caustic solutions, and edible liquids, including animal
and vegetable fats and oils. Further, the terminaling and pipeline
transportation of jet fuel for the U.S. Department of Defense is an important
part of its business. Eleven of ST's terminal sites are involved in the
terminaling or transport (via pipeline) of jet fuel for the Defense Department.
Seven of the eleven locations are utilized solely by the Defense Department and
six of these locations include pipelines that deliver jet fuel directly to
nearby military bases. Revenue attributable to Department of Defense activities
is derived from a combination of terminal contracts and tenders for the handling
and movement of jet fuel. The terminal contracts provide a fixed monthly revenue
for a period of one to four years per contract, with additional revenues
generated if specific throughput levels are exceeded. The tenders provide for
charges per barrel of throughput and have no minimum guarantees. From time to
time, military base closings or other events have impacted the operation of
certain of ST's facilities. Presently, two of ST's terminals are unproductive
due to loss of military business. However, KPL, in its capacity as General
Partner of the Partnership, does not believe that, in the aggregate, the
Partnership will experience a significant decrease in cash flows for the
foreseeable future as a result of Department of Defense changes in activity, nor
that its business is dependent upon any one customer or any small group of
customers.
Safety, Environmental and Other Regulatory Matters
In addition to tariff regulation of the Partnership's pipeline
activities, certain operations of the Partnership are subject to Federal, state
and local laws and regulations relating to the construction, maintenance and
management of its facilities, the safety of its personnel and the protection of
the environment. Although KPL, in its capacity as General Partner of the
Partnership, believes that the operations of the Partnership are in general
compliance with applicable laws and regulations, risks of substantial costs and
liabilities are inherent in both pipeline and terminaling operations, and there
can be no assurance that significant costs and liabilities will not be incurred
by the Partnership. For example, contamination resulting from spills or releases
of refined petroleum products within the petroleum pipeline industry, or refined
petroleum or other products within the terminaling industry, are not unusual in
such industries. From time to time, the Partnership has experienced limited
contamination along the pipelines and at certain of its pipeline-related
terminal sites, resulting from spills or leakage of refined petroleum products.
In each instance, the appropriate regulatory authorities have been notified of
these events and appropriate remediation activities have either been completed
or are ongoing. In connection with the formation of the Partnership, the Company
agreed to bear the costs associated with environmental contamination relating to
the operations of the East Pipeline arising prior to October 3, 1989; however,
such costs have not been, and are not in the future anticipated to be, material.
In May 1998, the West Pipeline, at a point between Dupont, Colorado and
Fountain, Colorado failed and approximately 1,000 barrels of product was
released. Containment and remedial action was immediately commenced. Upon
investigation, it appeared that the failure of the pipeline was due to damage
caused by third party excavations. The Partnership has made claim to the third
party as well as to its insurance carriers. The Partnership has entered into a
Compliance Order on Consent with the State of Colorado with respect to the
remediation. As of December 31, 1998, the Partnership has incurred $1.1 million
of cost in connection with this incident. Future costs are not anticipated to be
significant, and the Partnership expects to recover substantially all of its
costs from either the third party or its insurance carrier.
Additionally, from time to time, the Partnership has experienced
limited contamination at certain of its current and former terminal storage
facilities, as a result of operations at or around these locations. Again, in
each instance, the appropriate regulatory authorities have been notified of
these events and appropriate remediation activities have either been completed,
are ongoing or are under investigation. In certain instances where other
unrelated companies may also have responsibility for the contamination of a
particular facility or area, the Partnership, through the appropriate operating
subsidiary, has entered into agreements (or is in the process of negotiating
such agreements) with such company or companies providing for the allocation of
the costs and/or responsibilities of remediation of such facilities or areas.
Recent Development
In February 1999, ST acquired six terminal storage facilities located
in the United Kingdom from GATX Terminals Limited for a purchase price of
(pound)22.6 million (approximately $37.4 million) plus the assumption of certain
liabilities. This acquisition, which was financed by bank borrowings,
represented the first international expansion of ST's operations. The terminals
have an aggregate capacity of approximately 5.5 million barrels in 307 tanks
and, consistent with most other ST facilities, handle a variety of liquids. The
facilities are located in Eastham, Runcorn and Grays, England; Glasgow and
Leith, Scotland; and, Belfast, Northern Ireland.
Product Marketing Operations
In March 1998, Kaneb, through a wholly-owned subsidiary of KPL,
acquired a products marketing business for a purchase price of $1.5 million,
plus the cost of product inventories. For over 40 years, this operation and its
predecessors have engaged in the business of acquiring quantities of motor fuels
in large batches and reselling them in smaller lots at truck racks located in
terminal storage facilities along pipelines primarily located throughout
California, Colorado, Illinois, Indiana, Ohio, Wisconsin and Wyoming. Kaneb's
products marketing subsidiary does not own any retail outlets, pipelines or
terminals.
The products marketing business serves a wide range of wholesale
customers, from the major oil companies to jobbers, by providing supplies of
gasoline, fuel oils, ethanol and natural gasoline to areas where these marketers
have inadequate distribution capabilities. The Company's customers in this
business are primarily independent distributors and often cannot buy product
supplies from major oil companies because they are not associated with a major
oil company brand. Some of its suppliers offer their products through product
exchanges, either to broaden their distribution areas or to obtain types of
products not readily available to these companies. The Company works with
commodities traders, as well, to provide sufficient supplies of products to the
markets served by the Company.
The petroleum products marketing industry is a highly competitive,
price sensitive business. The Company attempts to minimize risk due to pricing
changes by maintaining a high inventory turnover rate (approximately 10 days of
on-hand inventory, on average) and through product exchanges. The Company does
not currently engage in commodity futures trading to hedge against such pricing
volatility, but may do so in connection with these operations in a limited
fashion in the future, as its volumes and inventory capacities increase.
Consistent with industry practice, prices are electronically posted at each
distribution point. This pricing system assists the Company in maintaining
current information with regard to market pricing.
INFORMATION SERVICES
Kaneb Information Services, Inc. and its wholly-owned subsidiaries
(collectively, "KIS") provide information management services to a variety of
targeted customers in specialized industries. KIS assists financial institutions
in monitoring the insurance coverage of their loan collateral. Using its
proprietary software applications and other products and services, KIS
coordinates communications between and among financial institutions, insurance
companies and borrowers regarding the status of insurance coverage that protects
the institution's loan collateral. In the event of a lapse in coverage in the
institution's loan collateral, KIS assists the institution in identifying
suitable replacement coverage with insurance carriers.
Through another wholly-owned subsidiary, KIS provides information
technology services and products to Federal and state government agencies and
commercial clients and also provides consulting services to hospital networks
and other medical facilities in the implementation of telemedicine systems. KIS
offers hardware, software and staffing solutions to agencies throughout the
federal government sector through its General Services Administration ("GSA")
schedule of products and services and assists its clients in the configuration,
installation and maintenance of general purpose data networks and provides
training on the use and operation of these systems. Additionally, KIS offers a
wide variety of products manufactured by others, including computers, servers,
routers, hubs, monitors, operating and application software, and peripheral
devices such as printers and scanners. KIS maintains an office in Fairfax,
Virginia in order to more effectively serve its Washington, DC-based government
clients and promote awareness of its products, services and capabilities. KIS
also provides consulting services in support of the purchase and implementation
of digital radiology systems, known as Picture Archival and Communication
Systems ("PACS"), by hospitals, radiology clinics, doctors offices and other
medical facilities, which systems are used in connection with such procedures as
magnetic resonance imaging ("MRI"), computed-tomography ("CT") scans,
ultrasounds, and digital x-rays, among others. KIS offers technical services to
support its clients during all phases of a PACS project, including, planning and
feasibility studies, workflow redesign, specification development, procurement
assistance, on-site technical supervision of PACS vendors and quality assurance,
including acceptance testing. KIS also coordinates with medical and
administrative staffs in the processing of warranty and service issues that may
arise with the manufacturers of PACS systems. These services are performed by a
highly trained staff of degreed electrical, biomedical and clinical system
engineers, among others. KIS manages its businesses from its headquarters in
Richardson, Texas.
ENVIRONMENTAL CONTROLS
Many of Kaneb's operations are subject to Federal, state and local laws
and regulations relating to protection of the environment. Although Kaneb
believes that its operations are in general compliance with applicable
environmental regulation, risks of additional costs and liabilities are inherent
in its operations, and there can be no assurance that significant costs and
liabilities will not be incurred by the Company. Moreover, it is possible that
other developments, such as increasingly stringent environmental laws,
regulations, enforcement policies thereunder, and claims for damages to property
or persons resulting from the operations of the Company could result in
substantial costs and liabilities.
EMPLOYEES
At December 31, 1998, Kaneb and its subsidiaries employed 1,857
persons, of which a total of 1,168 persons were employed by the Furmanite group
of companies; 540 persons were employed by KPL, its subsidiaries and
subsidiaries of KPP; and, 118 were employed by the KIS group of companies. The
Partnership itself has no employees, as the business and operations of the KPP
are conducted by KPL, the General Partner of KPP and a wholly-owned subsidiary
of Kaneb. As of December 31, 1998, approximately 538 of the persons employed by
Furmanite were subject to representation by unions or other similar associations
for collective bargaining or other similar purposes; however, there were no
significant collective bargaining or other similar contracts covering the
Furmanite employees in effect at that date. Additionally, as of December 31,
1998, approximately 183 of the persons employed by KPL were subject to
representation by unions for collective bargaining purposes; however, only 77
persons employed at four of KPL's terminal unit locations were subject to
collective bargaining or similar contracts at that date. Union contracts
regarding conditions on employment for 36, 12, 20 and 9 employees are in effect
through June 28, 1999, November 1, 2000, June 30, 2001 and February 28, 2002,
respectively. All such contracts are subject to automatic renewal for successive
one year periods unless either party provides written notice to terminate or
modify such agreement in a timely manner.
Item 2. Properties
The properties owned or utilized by Kaneb and its subsidiaries are
generally described in Item 1 of this Report. Additional information concerning
the obligations of Kaneb and its subsidiaries for lease and rental commitments
is presented under the caption "Commitments and Contingencies" in Note 9 to the
Company's consolidated financial statements. Such descriptions and information
are hereby incorporated by reference into this Item 2.
Kaneb's corporate headquarters is located in an office building in
Richardson, Texas, pursuant to a lease agreement that expires in 2002, subject
to a five-year renewal option. The facilities used in the operations of the
Company's subsidiaries, other than the Partnership, are generally held under
lease agreements having various expiration dates, rental rates and other terms,
except for three Furmanite properties located in the United Kingdom, which are
owned in fee. The properties used in the operations of the Pipelines are owned
by KPP, through its subsidiary entities, except for KPL's operational
headquarters, located in Wichita, Kansas, which is held under a lease that
expires in 2004. The majority of ST's facilities are owned, while the remainder,
including most of its terminal facilities located in port areas and its
operational headquarters, located in Dallas, Texas, are held pursuant to lease
agreements having various expiration dates, rental rates and other terms. For
additional information regarding the properties utilized in the operations of
the Partnership, reference is made to the Annual Report on Form 10-K of the
Partnership.
Item 3. Legal Proceedings
A subsidiary of the Company that is no longer actively conducting any
operations was notified in 1989 that it is a "potentially responsible party" in
connection with a governmental investigation relating to a waste disposal
facility which has been subject to remedial action as a location listed on the
Environmental Protection Agency's ("EPA") Superfund National Priority List
("Superfund"). Proceedings arising under Superfund typically involve numerous
waste generators and other waste transportation and disposal companies for each
identified facility and seek to allocate or recover costs associated with site
investigation and cleanup, which costs could be substantial. This proceeding
involves actions allegedly taken by a former operating subsidiary of the Company
at a time prior to the acquisition of such subsidiary by the Company. The
Company's subsidiary has been included within a de minimis group of waste
generators that are involved in this proceeding, who have been negotiating a
collective settlement of their liabilities with the EPA. However, the Company
has joined with others within this de minimis group who are each contesting
their respective liability. Proceedings in this matter are ongoing. The Company
has reviewed its potential exposure, if any, in connection with this matter,
giving consideration to the nature, accuracy and strength of evidence relating
to the Company's alleged relationship to the location, the amount and nature of
waste taken to the location, and the number, relationship and financial ability
of other named and unnamed "potentially responsible parties" at the location.
While the Company does not anticipate that the amount of expenditures from its
involvement in the above matter will have a material adverse effect on the
Company's operations or financial condition, the possibility remains that
technological, regulatory, enforcement or legal developments, the results of
environmental studies or other factors could materially alter this expectation
at any time.
The Company is Plaintiff in unrelated legal proceedings involving
malpractice issues with two professional service providers previously used by
the Company. These actions are in the initial stages of discovery and
proceedings. Accordingly, at this time the Company is unable to reasonably
estimate potential recoveries, if any, under such actions.
Certain subsidiaries of KPP are defendants in a lawsuit filed in a
Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from
whom KPP acquired ST in 1993, involving certain issues allegedly arising out of
KPP's acquisition of ST. Grace alleges that the defendants assumed
responsibility for certain environmental damages to a former ST facility located
in Massachusetts that occurred at a time prior to KPP's acquisition of ST. The
defendants have also received and responded to inquiries from two governmental
authorities in connection with the same allegation by Grace. The defendants'
consistent position is that it did not acquire the facility in question as part
of the 1993 ST transaction and, consequently, did not assume any responsibility
for the environmental damage. The case is set for trial in June, 1999.
In addition, from time to time, Kaneb and certain of its subsidiaries
are defendants in various litigation and other legal proceedings in the ordinary
course of business. However, the Company believes that resolution of these
matters will not have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Kaneb did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders in the fourth quarter of 1998.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Shares of Kaneb Common Stock are listed and traded principally on the
New York Stock Exchange, under the symbol KAB. At March 15, 1999, there were
approximately 4,500 holders of Common Stock of record. The following table sets
forth, for the fiscal periods indicated, the quoted high and low sales prices of
the shares on the New York Stock Exchange.
Quoted Stock Prices
-----------------------------
Calendar Year High Low
--------------------- ------ -----
1997:
First Quarter 4 1/2 3 1/8
Second Quarter 4 1/8 3 1/2
Third Quarter 5 3/8 3 5/8
Fourth Quarter 6 5/16 4 1/2
1998:
First Quarter 5 11/16 4 13/16
Second Quarter 6 7/6 5 3/16
Third Quarter 6 4 1/8
Fourth Quarter 5 1/16 3 1/2
1999:
First Quarter 4 5/8 3 7/8
(through 3/15/99)
Kaneb 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. Kaneb'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 and KPL 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 and Operating Data
The following selected financial data (in thousands, except per share
amounts) is derived from Kaneb's consolidated financial statements and should be
read in conjunction with the consolidated financial statements and related notes
thereto included elsewhere in this report. Kaneb has not declared a dividend on
its Common Stock for any of the periods presented.
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ---------- ---------- ---------
Income Statement Data:
Revenues............................ $ 375,857 $ 236,936 $ 228,861 $ 212,062 $ 208,722
========== ========= ========== ========== ==========
Operating income.................... $ 61,312 $ 58,660 $ 53,815 $ 43,465 $ 31,964
========== ========= ========== ========== ==========
Income before gain on
sale of KPP units................ $ 13,576 $ 10,643 $ 7,024 $ 5,024 $ 2,035
Gain on sale of KPP units......... - - - 54,157 -
---------- --------- ---------- ---------- ----------
Net income..................... $ 13,576 $ 10,643 $ 7,024 $ 59,181 $ 2,035
========== ========= ========== ========== ==========
Per Share Data:
Earnings per common share:
Basic............................ $ .41 $ .31 $ .19 $ 1.72 $ .02
========== ========= ========== ========== ==========
Diluted.......................... $ .40 $ .30 $ .19 $ 1.59 $ .02
========== ========= ========== ========== ==========
Cash Flow Data - Net cash provided
by operating activities.......... $ 54,206 $ 55,120 $ 48,628 $ 39,964 $ 25,890
Balance Sheet Data:
Cash and cash equivalents........... $ 9,134 $ 23,025 $ 23,693 $ 30,389 $ 9,506
Working capital..................... 5,632 20,423 20,033 16,302 (42,797)
Total assets........................ 448,045 402,273 404,691 409,827 284,213
Long-term debt...................... 196,958 181,052 186,544 191,846 103,376
Stockholders' equity (a)............ 87,445 78,447 75,366 69,022 18,844
(a) See Note 7 to the Company's Consolidated Financial Statements for a
discussion of the Company's Preferred Stock.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion should be read in conjunction with the consolidated
financial statements of Kaneb and notes thereto included elsewhere in this
report.
Consolidated Results of Operations
(in millions)
-----------------------------------------
1998 1997 1996
----------- ----------- ------------
Consolidated revenues................. $ 375.9 $ 236.9 $ 228.9
Consolidated operating income......... $ 61.3 $ 58.7 $ 53.8
Consolidated net income............... $ 13.6 $ 10.6 $ 7.0
Consolidated capital expenditures,
excluding acquisitions........... $ 12.3 $ 13.0 $ 10.7
For the year ended December 31, 1998, consolidated revenues increased
$139.0 million, or 59%, when compared to 1997, largely from the $114.2 million
in revenues generated by the products marketing business acquired in late March
of 1998. In addition, revenues from the industrial field services operations,
the pipeline and terminaling operations and the information services business
increased by $6.9 million, $4.6 million and $13.1 million, respectively, in
1998. Consolidated operating income in 1998 increased by $2.6 million, or 5%,
with the most significant improvements in the pipeline, terminaling and product
marketing and the information services businesses.
For the year ended December 31, 1997, consolidated revenues increased
$8.0 million, or 3%, primarily the result of improvements in the industrial
field services operations and improvements in operations of the terminaling
assets that were acquired by Kaneb Pipe Line Partners, L.P. ("KPP") in 1996.
Consolidated operating income increased $4.9 million, or 9%, in 1997, when
compared to 1996, with substantial improvements in the industrial field services
operations.
Industrial Field Services
Kaneb's industrial field services business is conducted through
Furmanite. Furmanite provides specialized services, including under pressure
leak sealing, on-site machining, safety and relief valve testing and repair,
passive fire protection and fugitive emissions inspections to the process and
power industries worldwide.
(in millions)
-----------------------------------------
1998 1997 19960
----------- ----------- ------------
Revenues:
United States................... $ 35.5 $ 33.7 $ 32.7
Europe.......................... 68.1 66.4 65.9
Asia-Pacific.................... 11.5 8.1 4.7
----------- ----------- ------------
$ 115.1 $ 108.2 $ 103.3
=========== =========== ============
Operating income:
United States................... $ 1.7 $ 1.8 $ 1.5
Europe.......................... 5.5 6.1 4.0
Asia-Pacific.................... 1.0 1.1 .9
Headquarters.................... (1.5) (1.6) (1.3)
----------- ----------- -----------
$ 6.7 $ 7.4 $ 5.1
=========== =========== ===========
Capital expenditures,
excluding acquisitions.......... $ 2.6 $ 2.0 $ 3.5
=========== =========== ===========
For the year ended December 31, 1998, Furmanite's revenues increased by
$6.9 million, or 6%, when compared to 1997, due to overall increases in each of
the three geographical areas. In the United States, revenues increased by $1.8
million, or 5%, due primarily to improvements in on-site machining and leak
sealing services. In Europe, revenues increased by $1.7 million, or 3%, due to
increases in leak sealing, passive fire protection and turnaround services. The
increase in Asia-Pacific revenues is primarily attributable to the Australian
operations, acquired effective July 1, 1997. In 1997, Furmanite's revenues
increased $4.9 million, or 5%, compared to 1996, primarily as a result of
improvements in turnaround services in Europe and the United States and the
Australian acquisition, in spite of a large non-recurring engineering contract
that was completed in Germany in 1996.
Furmanite's operating income decreased by $0.7 million, or 9%, in 1998,
compared to 1997, due primarily to lower margin work performed in the United
Kingdom as a result of a general economic slowdown during the last half of 1998.
Operating income increased $2.3 million, or 45%, in 1997, with substantial
improvements in the core businesses in Europe and the United States in addition
to the Australian business acquired in 1997.
Capital expenditures are primarily related to field services equipment
and the implementation of new services. Capital expenditures for 1999 are
currently estimated to be $3 million to $5 million, depending on the economic
environment and the needs of the business.
Pipeline, Terminaling and Product Marketing Services
This business segment includes the operations of KPP and Kaneb's
products marketing business acquired in March 1998. KPP provides transportation
services of refined petroleum products through a pipeline system that extends
through the Midwest and Eastern Rocky Mountain areas and provides terminaling
and storage services for petroleum products and specialty chemicals. Kaneb
operates, manages and controls the pipeline and terminaling operations of KPP
through its 2% general partner interest and a 31% limited partner interest in
the Partnership. The products marketing business provides wholesale motor fuel
marketing services in the Great Lakes and Rocky Mountain regions, as well as
California.
(in millions)
-----------------------------------------
1998 1997 1996
----------- ----------- ------------
Revenues:
Pipeline and terminaling........ $ 125.8 $ 121.2 $ 117.6
Product marketing............... 114.2 - -
----------- ----------- -----------
$ 240.0 $ 121.2 $ 117.6
=========== =========== ===========
Operating income .................... $ 56.1 $ 53.4 $ 51.3
=========== =========== ===========
Capital expenditures,
excluding acquisitions.......... $ 9.4 $ 10.6 $ 7.1
=========== =========== ===========
For the year ended December 31, 1998, pipeline and terminaling revenues
increased by $4.6 million, or 4%, compared to 1997, due to a $2.5 million
increase in terminaling revenues and a $2.1 million increase in pipeline
revenues. The increase in terminaling revenues is due to terminal acquisitions
in 1998 and an increase in tank utilization resulting from favorable market
conditions, partially offset by a decrease in the overall price realized for
storage in 1998. The increase in pipeline revenues for 1998 is due to increases
in volumes shipped, when compared to the same period in 1997. The $2.7 million
increase in operating income for the year ended December 31, 1998, compared to
1997, is due primarily to improved pipeline operating income, due to increases
in volumes shipped, and from the products marketing business acquired in March
1998.
Revenues increased $3.6 million, or 3%, in 1997 and operating income
increased $2.1 million, or 4%, primarily due to improvements in tankage
utilization at terminals acquired by KPP in December 1995, terminaling assets
acquired in 1996 and increases in prices charged for storage.
The interest of outside non-controlling partners in KPP's net income
was $29.2 million, $27.7 million and $27.0 million in 1998, 1997 and 1996,
respectively. Distributions paid to the outside non-controlling unitholders of
KPP aggregated approximately $28.5 million, $26.9 million and $24.7 million in
1998, 1997 and 1996, respectively.
Capital expenditures relate to the maintenance of existing operations.
Routine capital expenditures for 1999 are currently estimated to be between $12
million and $16 million.
On October 30, 1998, KPP entered into acquisition and joint venture
agreements with Northville Industries Corp. ("Northville") to acquire and manage
the former Northville terminal located in Linden, New Jersey. Under the
agreements, KPP acquired a 50% interest in the newly-formed ST Linden Terminal
LLC for $20.5 million plus transaction costs. The petroleum storage facility,
which has capacity of 3.9 million barrels in 22 tanks, was financed by KPP's
existing revolving credit facility and a $10 million revolving promissory note.
On February 1, 1999, KPP acquired six terminals in the United Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.4 million)
plus transaction costs and the assumption of certain liabilities. The
acquisition of the six locations, which have an aggregate tankage capacity of
5.5 million barrels, was financed by term loans from a bank. Three of the
terminals, handling petroleum products, chemicals and molten sulfur,
respectively, operate in England. The remaining three facilities, two in
Scotland and one in Northern Ireland, are primarily petroleum terminals. All six
terminals are served by deepwater marine docks.
Information Services
Kaneb's information services business is conducted through a variety of
wholly-owned subsidiaries. The information services group provides computer
hardware manufactured by others and consulting services, insurance tracking
services and other related information management and processing services
primarily for governmental, insurance and financial institutions.
(in millions)
-----------------------------------------
1998 1997 1996
----------- ----------- ------------
Revenues............................. $ 20.7 $ 7.6 $ 8.0
=========== =========== ===========
Operating income .................... $ 3.7 $ 2.7 $ 2.2
=========== =========== ===========
Capital expenditures,
excluding acquisitions.......... $ 0.3 $ 0.3 $ 0.1
=========== =========== ===========
For the year ended December 31, 1998, revenues increased $13.1 million,
or 172%, and operating income increased $1.0 million, or 37%, when compared to
1997, primarily from increased computer hardware sales and consulting services
provided to various federal governmental agencies. For the year ended December
31, 1997, revenues decreased $0.4 million, or 5%, and operating income increased
$0.5 million, or 23%, when compared to 1996, due primarily to improvements in
the operations of the segment's insurance and financial institution information
management and processing services.
Liquidity and Capital Resources
Cash provided by consolidated operating activities was $54.2 million,
$55.1 million and $48.6 million during the years 1998, 1997 and 1996,
respectively. The decrease in 1998, compared to 1997, was due primarily to
increases in working capital requirements resulting from the products marketing
business acquired in March 1998. The increase in 1997 resulted from an overall
improvement in revenues and operating income in both the industrial field
services and the pipeline and terminaling businesses.
At December 31, 1998, $17.8 million was outstanding under a credit
facility, as amended, that was originally obtained by a wholly-owned subsidiary
in conjunction with the acquisition of Furmanite. The credit facility, which is
without recourse to the parent company, is due 2001, bears interest (6.25% at
December 31, 1998) at the option of the borrower at variable rates based on
either the LIBOR rate or the prime rate plus a differential of up to 150 basis
points and contains certain financial and operational covenants with respect to
the industrial field services group of companies.
KPP has a credit agreement with two banks that currently provides a $25
million revolving credit facility for working capital and other Partnership
purposes. Borrowings under the credit facility bear interest at variable rates
and are due and payable on January 1, 2001. The credit agreement, which is
without recourse to the parent company, has a commitment fee of 0.15% per annum
of the unused credit facility. At December 31, 1998, $25.0 million was drawn
under the credit facility.
In October 1998, a wholly-owned subsidiary of KPP entered into a
Promissory Note Agreement with a bank that, as amended on February 1, 1999,
provides a $15 million revolving credit availability through June 30, 1999. The
Promissory Note Agreement, which is without recourse to the parent company,
bears interest at variable interest rates (7.75% at December 31, 1998) and has a
commitment fee of 0.35% per annum of the unused available balance. At December
31, 1998, $10.0 million was drawn under the Promissory Note Agreement.
In December 1995, Kaneb entered into an agreement with an international
bank that provides for a $15 million revolving credit facility through December
1, 2000 that bears interest at a variable rate at the Company's option based on
the LIBOR rate plus 100 basis points or at the prime rate in effect from time to
time with a commitment fee of 0.5% per annum of the unused credit facility. No
amounts were drawn under the credit facility at December 31, 1998, 1997 or 1996.
In March 1998, a wholly-owned subsidiary of the Company entered into a
credit agreement with a bank that provides for a $20 million revolving credit
facility through March 1999. The credit facility bears interest at variable
rates, has a commitment fee of 0.25% per annum on unutilized amounts and
contains certain financial and operational covenants. The credit facility, which
is without recourse to the parent company, is secured by essentially all of the
tangible and intangible assets of the products marketing business and by 500,000
KPP limited partnership units held by a wholly-owned subsidiary of the Company.
At December 31, 1998, $2.9 million was drawn on the facility. The Company is in
the process of negotiating an amendment to the credit agreement which, among
other items, is expected to extend the revolving credit facility through March
2001.
Consolidated capital expenditures for 1999 have been budgeted at $15
million to $21 million, depending on the economic environment and the needs of
the business. Consolidated debt maturities are $15.3 million (including $10.0
million of KPP debt); $2.4 million; $109.5 million (including $93.0 million of
KPP debt); $29.2 million (including $27.0 million of KPP debt); and $10.1
million (including $8.0 million of KPP debt), respectively, for each of the five
years ending December 31, 2003. Capital expenditures (excluding acquisitions) in
1999 are expected to be funded from existing cash and anticipated cash flows
from operations.
Year 2000 Issue
Although Kaneb believes that most of its activities and operations are
not materially impacted by Year 2000 issues ("Y2K"), the Company recognizes the
challenges associated with Y2K and has undertaken a review and testing of its
computer systems to identify Y2K-related issues associated with any items of
software or hardware used in its business operations. Most of the software
systems used by Kaneb are licensed from third parties and are Y2K compliant or
will be upgraded to Y2K compliant releases before the end of 1999. This issue is
being addressed by Kaneb in multiple phases, including assessment, remediation,
testing and implementation, and progress is being monitored by the Company's
senior management. All material systems, on a world-wide basis, including
non-information technology systems which may house non-compliant, embedded
technology are being evaluated.
In addition to addressing Kaneb's own systems, as described above, the
Company must assess the state of readiness of the systems of other entities with
which it does business. Failure by these third parties to adequately resolve
their Y2K problems could have a material adverse effect on the Company's
operations.
Kaneb believes its success in being Y2K compliant will not be
conclusively known until the year 2000 is actually reached. Although failure by
one or more of the Company's own systems could result in lost revenues and/or
additional expenses required to carry out manual processing of transactions, the
Company cannot predict the effect that external forces could have on its
business. Failures by banking institutions, the telecommunications industry and
others could have far-reaching effects on the entire economy and the Company.
The Company's operations (including both information technology and
non-information technology systems) are in varying states of readiness for
compliance with Y2K issues. The initial assessment phase has been completed for
substantially all of the Company's operations, and in many cases, remediation,
testing and implementation activities have also been completed. The Company
expects to complete all phases of its Y2K program prior to December 31, 1999.
Kaneb believes that it is not possible to determine with certainty that
all Y2K problems affecting the Company have been identified or corrected. The
number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, the Company cannot accurately
predict how many failures related to the Y2K problem will occur or the severity,
duration or financial consequences of such failures. The Company has hired an
outside Y2K consultant to assist the Company in meeting its goals and in
developing contingency plans to define and address the worst-case scenario
likely to be faced by the Company. The plan is expected to be in place by the
end of the second quarter of 1999.
Expenses incurred by Kaneb during 1997 and 1998, related to assessing,
remediating and testing its information technology systems, which were not
material, have been expensed as incurred and funded from operations. The Company
does not anticipate that the cost to become fully Y2K compliant will be
material.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the
adverse changes in market rates and prices) to which the Company is exposed are
interest rates on the Company's debt and investment portfolios. The Company
centrally manages its debt and investment portfolios considering investment
opportunities and risks, tax consequences and overall financing strategies. The
Company's investment portfolio consists of cash equivalents; accordingly, the
carrying amounts approximate fair value. The Company's investments are not
material to the financial position or performance of the Company. Assuming
year-end 1998 variable rate debt and investment levels, a one percent change in
interest rates would increase net interest expense and decrease interest of
outside non-controlling partners in KPP's net income by approximately $0.6
million and $0.2 million, respectively.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data of the
Company begins on page F-1 of this report. Such information is hereby
incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Reference is made to the Registrant's Current Reports on Forms 8-K and
8-K/A, dated November 6, 1998 and March 9, 1999, respectively, which reports are
incorporated herein by reference.
PART III
The information required by Part III (Items 10, 11, 12 and 13) of Form
10-K is incorporated by reference from portions of the Registrant's definitive
proxy statement to be filed with the Securities and Exchange Commission not
later than 120 days after the close of the fiscal year covered by this Report.
0 PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Beginning
(a) (1) Financial Statements Page
Set forth below are financial statements
appearing in this report.
Reports of Independent Accountants........................... F - 1
Financial Statements of Kaneb Services, Inc., and Subsidiaries:
Consolidated Statements of Income - Years Ended
December 31, 1998, 1997 and 1996....................... F - 3
Consolidated Balance Sheets - December 31, 1998 and 1997. F - 4
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996........... F - 5
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended December 31, 1998, 1997 and 1996.. 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 - Kaneb Services, Inc. (Parent Company)
Condensed Financial Statements:
Statements of Income - Years Ended December 31, 1998,
1997 and 1996.......................................... F - 24
Balance Sheets - December 31, 1998 and 1997.............. F - 25
Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996....................... F - 26
Schedule II - Kaneb Services, Inc. Valuation and
Qualifying Accounts -
Years Ended December 31, 1998, 1997 and 1996........... F - 27
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 presented in the Annual Report to
Stockholders.
(a) (3) List of Exhibits
3.1 Restated Certificate of Incorporation of the Registrant, dated
September 26, 1979, filed as Exhibit 3.1 of the exhibits to the
Registrant's Registration Statement on Form S-16, which exhibit is
hereby incorporated by reference.
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated April 30, 1981, filed as Exhibit 3.2 of the
exhibits to the Registrant's Annual Report on Form 10-K ("Form 10-K")
for the year ended December 31, 1981, which exhibit is hereby
incorporated by reference.
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated May 28, 19875, filed as Exhibit 4.1 of the
exhibits to the Registrant's Quarterly Report on Form 10-Q ("Form
10-Q") for the quarter ended June 30, 1985, which exhibit is hereby
incorporated by reference.
3.4 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated September 17, 1985, filed as Exhibit 4.1 of
the exhibits to the Registrant's Form 10-Q for the quarter ended
September 30, 1985, which exhibit is hereby incorporated by reference.
3.5 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated July 10, 1990, filed as Exhibit 3.5 of the
exhibits to the Registrant's Form 10-K for the year ended December 31,
1990, which exhibit is hereby incorporated by reference.
3.6 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated September 21, 1990, filed as Exhibit 3.5 of
the exhibits to the Registrant's Form 10-Q for the quarter ended
September 30, 1990, which exhibit is hereby incorporated by reference.
3.7 By-laws of the Registrant, filed herewith.
4.1 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, filed as Exhibit 4 of the exhibits
to the Registrant's Form 10-Q for the quarter ended September 30, 1983,
which exhibit is hereby incorporated by reference.
4.2 Certificate of Designation, Preferences and Rights related to the
Registrant's Series B Junior Participating Preferred Stock, filed as
Exhibit 1 of the exhibits to the Registrant's Current Report on Form
8-K and Registration Statement on Form 8-A, dated April 5, 1988, which
exhibit is hereby incorporated by reference.
4.3 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, Series C, dated April 23, 1991,
filed as Exhibit 4.4 of the exhibits to Registrant's Form 10-K for the
year ended December 31, 1991, which exhibit is hereby incorporated by
reference.
4.4 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, Series F, dated June 12, 1997,
filed as Exhibit 4.4 of the Exhibits to Registrant's Form 10-K for the
year ended December 31, 1997, which exhibit is hereby incorporated by
reference.
4.5 Indenture between Moran Energy Inc. ("Moran") and First City National
Bank of Houston ("First City"), dated January 15, 1984, under which
Moran issued the 8 3/4% Convertible Subordinated Debentures due 2008,
filed as Exhibit 4.1 to Moran's Registration Statement on Form S-3 (SEC
File No.
2-81227), which exhibit is hereby incorporated by reference.
4.6 First Supplemental Indenture between the Registrant and First City,
dated as of March 20, 1984, under which the Registrant assumed
obligations under the Indenture listed as Exhibit 4.5 above, filed as
Exhibit 4.7 of the Registrant's Form 10-K for the year ended December
31, 1983, which exhibit is hereby incorporated by reference.
10.1 Kaneb Services, Inc. Savings Investment Plan, as amended, filed as
Exhibit 4.10 of the exhibits to the Registrant's Registration Statement
on Form S-8 ("Form S-8") (S.E.C. File No. 33-41295) and as Exhibit 4.1
to the exhibits of Registrant's Form S-8 (S.E.C. File No. 333-14067),
which exhibits are hereby incorporated by reference.
10.2 Kaneb Services, Inc. 1984 Nonqualified Stock Option Plan, filed as
Exhibit 10.26 to the exhibits of the Registrant's Form S-8 (S.E.C. File
No. 2-90929), which exhibit is hereby incorporated by reference.
10.3 Kaneb Services, Inc. 1994 Stock Incentive Plan, filed as Exhibit 4.12
to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
33-54027), which exhibit is hereby incorporated by reference.
10.4 Kaneb Services, Inc. Deferred Stock Unit Plan, as amended, filed as
Exhibit 4.1 to the exhibits of the Registrant's Form S-8 (S.E.C. File
No. 333-08725) and as Exhibit 10.1 to the Exhibits of the Registrant's
Current Report on Form 8-K ("Form 8-K"), which exhibits are hereby
incorporated by reference.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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 herewith.
10.12 Amended and Restated Loan Agreement between Furmanite PLC, Bank of
Scotland and certain other Lenders, dated May 1, 1991, as amended,
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, and
Exhibit 10.12 of the Registrant's Form 10-K for the year ended December
31, 1997, which exhibits are hereby incorporated by reference.
10.13 Loan Agreement between the Registrant, KPL and Bank of Scotland, dated
as of December 1, 1995, filed as Exhibit 10.10 of the exhibits to the
Registrant's Form 10-K for the year ended December 31, 1995, which
exhibit is hereby incorporated by reference.
21 List of subsidiaries of the Registrant, filed herewith.
23 Consents of independent accountants: KPMG LLP and
PricewaterhouseCoopers LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
99.1 Current Report on Form 8-K regarding a change in the Registrant's
Certifying Accountant, dated November 6, 1998, which Report is hereby
incorporated by reference.
99.2 Current Report on Form 8-K/A regarding a change in the Registrant's
Certifying Accountant, dated March 9, 1999, which Report is hereby
incorporated by reference.
Certain instruments respecting long-term debt of the Registrant have
been omitted pursuant to instructions as to Exhibits. The Registrant
agrees to furnish copies of any of such instruments to the Commission
upon request.
(b) Reports on Form 8-K
Current Report on Form 8-K regarding a change in the Registrant's
Certifying Accountant, dated November 6, 1998.
Current Report on Form 8-K/A regarding a change in the Registrant's
Certifying Accountant, dated March 9, 1999.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Kaneb Services, Inc.
We have audited the 1998 consolidated financial statements of Kaneb Services,
Inc. and its subsidiaries (the "Company") as listed in the index appearing under
Item 14(a)(1) on page 18. In connection with our audit of the 1998 consolidated
financial statements, we have also audited the 1998 financial statement
schedules as listed in the index appearing under Item 14(a)(2) on page 18. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Also, in our opinion, the related 1998 financial statement schedules, when
considered in relation to the 1998 basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
KPMG LLP
Dallas, Texas
February 25, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Kaneb Services, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of cash flows and of changes in stockholder's equity as of
and for each of the two years in the period ended December 31, 1997 (listed in
the index appearing under Item 14(a)(1) and (2) on page 18) present fairly, in
all material respects, the financial position, results of operations and cash
flows of Kaneb Services, Inc. and its subsidiaries (the "Company") as of and for
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Kaneb Services, Inc. and its
subsidiaries for any period subsequent to December 31, 1997.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 19, 1998
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
Revenues................................................... $ 375,857,000 $ 236,936,000 $ 228,861,000
-------------- -------------- ---------------
Costs and expenses:
Operating costs........................................ 171,742,000 156,654,000 154,935,000
Cost of sales.......................................... 121,509,000 - -
Depreciation and amortization.......................... 16,203,000 16,715,000 15,434,000
General and administrative............................. 5,091,000 4,907,000 4,677,000
-------------- -------------- ---------------
Total costs and expenses............................. 314,545,000 178,276,000 175,046,000
-------------- -------------- ---------------
Operating income........................................... 61,312,000 58,660,000 53,815,000
Interest income............................................ 189,000 533,000 859,000
Other income (expense)..................................... 679,000 (696,000) (832,000)
Interest expense........................................... (15,714,000) (15,531,000) (15,420,000)
Amortization of excess of cost over fair
value of net assets of acquired businesses............. (1,948,000) (1,879,000) (1,848,000)
-------------- --------------- ---------------
Income before interest of outside non-controlling partners
in KPP's net income and income tax expense............. 44,518,000 41,087,000 36,574,000
Interest of outside non-controlling partners
in KPP's net income.................................... (29,174,000) (27,655,000) (26,969,000)
Income tax expense......................................... (1,768,000) (2,789,000) (2,581,000)
-------------- --------------- ---------------
Net income................................................. 13,576,000 10,643,000 7,024,000
Dividends applicable to preferred stock.................... 508,000 538,000 502,000
-------------- -------------- ---------------
Net income applicable to common stock...................... $ 13,068,000 $ 10,105,000 $ 6,522,000
============== ============== ===============
Earnings per common share:
Basic.................................................. $ .41 $ .31 $ .19
============== ============== ===============
Diluted................................................ $ .40 $ .30 $ .19
============== ============== ===============
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
1998 1997
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 9,134,000 $ 23,025,000
Accounts receivable, trade (net of allowance for doubtful accounts
of $925,000 in 1998 and $570,000 in 1997).................... 47,540,000 35,268,000
Inventories.................................................... 13,465,000 7,079,000
Prepaid expenses and other current assets...................... 6,615,000 5,693,000
-------------- --------------
Total current assets......................................... 76,754,000 71,065,000
-------------- --------------
Property and equipment............................................ 432,290,000 383,078,000
Less accumulated depreciation and amortization.................... 130,759,000 121,717,000
-------------- --------------
Net property and equipment..................................... 301,531,000 261,361,000
-------------- --------------
Excess of cost over fair value of net assets of acquired businesses 62,521,000 62,719,000
Other assets...................................................... 7,239,000 7,128,000
-------------- --------------
$ 448,045,000 $ 402,273,000
============== ==============
LIABILITIES AND EQUITY
Current liabilities:
Short-term and current portion of long-term debt:
Industrial field services.................................... $ 2,441,000 $ 3,059,000
Pipeline, terminaling and product marketing services......... 12,852,000 2,335,000
-------------- --------------
Total short-term and current portion of long-term debt..... 15,293,000 5,394,000
Accounts payable............................................... 14,520,000 9,569,000
Accrued expenses............................................... 41,309,000 35,679,000
-------------- --------------
Total current liabilities.................................... 71,122,000 50,642,000
-------------- --------------
Long-term debt, less current portion:
Industrial field services..................................... 20,292,000 25,268,000
Pipeline, terminaling and product marketing services........... 153,000,000 132,118,000
Parent company................................................. 23,666,000 23,666,000
-------------- --------------
Total long-term debt, less current portion................... 196,958,000 181,052,000
-------------- --------------
Deferred income taxes and other liabilities....................... 15,626,000 15,903,000
Interest of outside non-controlling partners in KPP............... 76,894,000 76,229,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value............................. 5,792,000 5,792,000
Common stock, without par value. Authorized
60,000,000 shares; issued 36,554,206 shares in
1998 and 36,527,283 shares in 1997........................... 4,239,000 4,234,000
Additional paid-in capital..................................... 197,263,000 197,242,000
Treasury stock, at cost........................................ (29,775,000) (25,216,000)
Unamortized restricted stock................................... (141,000) -
Accumulated deficit............................................ (88,423,000) (101,491,000)
Accumulated other comprehensive income (loss) -
foreign currency translation adjustment...................... (1,510,000) (2,114,000)
-------------- --------------
Total stockholders' equity................................... 87,445,000 78,447,000
-------------- --------------
$ 448,045,000 $ 402,273,000
============== ==============
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
------------- ------------- --------------
Operating activities:
Net income ............................................ $ 13,576,000 $ 10,643,000 $ 7,024,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization...................... 16,203,000 16,715,000 15,434,000
Amortization of excess of cost over fair value
of net assets of acquired businesses............. 1,948,000 1,879,000 1,848,000
Interest of outside non-controlling partners in KPP 29,174,000 27,655,000 26,969,000
Deferred income
taxes........................................... 518,000 86,000 766,000
Changes in current assets and liabilities:
Accounts receivable.............................. (12,272,000) (2,111,000) (449,000)
Inventories...................................... (4,600,000) (373,000) (897,000)
Prepaid expenses and other current assets........ (922,000) 674,000 1,098,000
Accounts payable and accrued expenses............ 10,581,000 (48,000) (3,165,000)
------------- -------------- ---------------
Net cash provided by operating activities............ 54,206,000 55,120,000 48,628,000
------------- ------------- --------------
Investing activities:
Capital expenditures................................... (12,256,000) (13,011,000) (10,685,000)
Acquisitions........................................... (47,947,000) (4,855,000) (8,507,000)
Decrease (increase) in other assets, net............... (8,000) (1,819,000) 3,320,000
------------- -------------- --------------
Net cash used in investing activities................ (60,211,000) (19,685,000) (15,872,000)
------------- -------------- --------------
Financing activities:
Issuance of short-term and long-term debt ............. 40,717,000 8,619,000 76,235,000
Payments on long-term debt and capital leases ......... (14,912,000) (12,768,000) (81,414,000)
Distributions to outside non-controlling partners in KPP (28,509,000) (26,864,000) (24,667,000)
Preferred stock dividends paid......................... (508,000) (538,000) (502,000)
Redemption of preferred stock.......................... - - (8,025,000)
Common stock issued.................................... 194,000 33,000 -
Purchase of treasury stock............................. (4,868,000) (4,585,000) (1,079,000)
------------- -------------- --------------
Net cash used in financing activities................ (7,886,000) (36,103,000) (39,452,000)
------------- -------------- ---------------
Decrease in cash and cash equivalents..................... (13,891,000) (668,000) (6,696,000)
Cash and cash equivalents at beginning of year............ 23,025,000 23,693,000 30,389,000
------------- ------------- --------------
Cash and cash equivalents at end of year.................. $ 9,134,000 $ 23,025,000 $ 23,693,000
============= ============= ==============
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Common Additional Treasury
Stock Stock Paid-In Capital Stock
------------- ------------- --------------- -------------
Balance at January 1, 1996 $ 5,814,000 $ 4,230,000 $ 197,151,000 $ (19,552,000)
Net income for the year....... - - - -
Common stock issued........... - - 10,000 -
Purchase of treasury stock.... - - - (1,079,000)
Preferred stock dividends
declared.................... - - - -
Converstion of Series D
preferred stock............. - - 30,000 -
Series C preferred stock
redemption.. ............... (22,000) - 22,000 -
Foreign currency translation
adjustment.................. - - - -
------------- ------------ ------------- -------------
Comprehensive income
for the year.................
Balance at December 31, 1996 5,792,000 4,230,000 197,213,000 (20,631,000)
Net income for the year....... - - - -
Common stock issued........... - 4,000 29,000 -
Purchase of treasury stock ... - - - (4,585,000)
Preferred stock dividends
declared.................... - - - -
Foreign currency translation
adjustment ................. - - - -
------------- ------------ ------------- -------------
Comprehensive income
for the year.................
Balance at December 31, 1997 5,792,000 4,234,000 197,242,000 (25,216,000)
Net income for the year...... - - - -
Common stock issued.......... - 5,000 21,000 309,000
Purchase of treasury stock .. - - - (4,868,000)
Preferred stock dividends
declared..................... - - - -
Foreign currency translation
adjustment ............. - - - -
------------- ------------- ------------- -------------
Comprehensive income
for the year.................
Balance at December 31, 1998 $ 5,792,000 $ 4,239,000 $ 197,263,000 $ (29,775,000)
============= ============= ============= ==============
Unamortized Accumulated Other
Restricted Accumulated Comprehensive Comprehensive
Stock Deficit Income (Loss) Income
------------- ------------- --------------- -------------
Balance at January 1, 1996 $ - $(118,118,000) $ (503,000) $ -
Net income for the year....... - 7,024,000 - 7,024,000
Common stock issued........... - - - -
Purchase of treasury stock.... - - - -
Preferred stock dividends
declared..................... - (502,000) - -
Conversion of Series D
preferred stock............. - - - -
Series C preferred stock
redemption.................. - - - -
Foreign currency translation
adjustment............... - - 861,000 861,000
------------- ------------ ------------- ------------
Comprehensive income
for the year................. $ 7,885,000
=============
Balance at December 31, 1996 - (111,596,000) 358,000 -
Net income for the year....... - 10,643,000 - 10,643,000
Common stock issued........... - - - -
Purchase of treasury stock ... - - - -
Preferred stock dividends
declared..................... - (538,000) - -
Foreign currency translation
adjustment .............. - - (2,472,000) (2,472,000)
------------- ------------ ------------- -------------
Comprehensive income
for the year................. $ 8,171,000
=============
Balance at December 31, 1997 - (101,491,000) (2,114,000) -
Net income for the year...... - 13,576,000 - 13,576,000
Common stock issued.......... (141,000) - - -
Purchase of treasury stock .. - - - -
Preferred stock dividends
declared..................... - (508,000) - -
Foreign currency translation
adjustment ............. - - 604,000 604,000
------------- ------------- ------------- -------------
Comprehensive income
for the year................. $ 14,180,000
=============
Balance at December 31, 1998 $ 141,000) $ (88,423,000) $ (1,510,000)
============= ============= =============
KANEB SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by Kaneb
Services, Inc. (the "Company") and its subsidiaries in the preparation of
its consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and Kaneb Pipe Line Partners, L.P. ("KPP"). The
Company controls the operations of KPP through its 2% general partner
interest and 31% limited partner interest as of December 31, 1998. 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 finished goods of the industrial
services segment and petroleum products purchased for resale in the
products marketing business and are valued at the lower of cost or
market. Cost is determined using the weighted average cost method.
Property and Equipment
Property and equipment are carried at original cost. Certain leases have
been capitalized and the leased assets have been included in property and
equipment. Additions of new equipment and major renewals and replacements
of existing equipment are capitalized. Repairs and minor replacements
that do not materially increase values or extend useful lives are
expensed.
Depreciation of property and equipment is provided on the straight-line
basis at rates based upon the expected useful lives of the various
classes of assets. The rates used for pipeline and certain storage
facilities, which are subject to regulation, are the same as those
promulgated by the Federal Energy Regulatory Commission.
The carrying value of property and equipment is periodically evaluated
using undiscounted future cash flows as the basis for determining if
impairment exists under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS
121"). To the extent impairment is indicated to exist, an impairment loss
will be recognized under SFAS 121 based on fair value.
Revenue Recognition
Substantially all revenues are recognized when services to customers have
been rendered. Pipeline transportation revenues are recognized upon
receipt of the products into the pipeline system.
Earnings Per Share
The amount of earnings for the period applicable to each share of common
stock outstanding during the period ("Basic" earnings per share) and the
amount of earnings for the period applicable to each share of common
stock outstanding during the period and to each share that would have
been outstanding assuming the issuance of common shares for dilutive
potential common shares outstanding during the period ("Diluted" earnings
per share) have been presented in the consolidated statements of income.
Foreign Currency Translation
The Company translates the balance sheets of its foreign subsidiaries
using year-end exchange rates and translates income statement amounts
using the average exchange rates in effect during the year. The gains and
losses resulting from the change in exchange rates from year to year have
been reported separately as a component of accumulated other
comprehensive income (loss) in stockholders' equity. Gains and losses
resulting from foreign currency transactions are included in the
statements of income.
Excess of Cost Over Fair Value of Net Assets of Acquired Businesses
The excess of the cost over the fair value of net assets of acquired
businesses is being amortized on a straight-line basis over a period of
40 years. Accumulated amortization was $14.1 million and $12.2 million at
December 31, 1998 and 1997, respectively.
The Company periodically evaluates the propriety of the carrying amount
of the excess of cost over fair value of net assets of acquired
businesses, as well as the amortization period, to determine whether
current events or circumstances warrant adjustments to the carrying value
and/or revised estimates of useful lives. The Company believes that no
such impairment has occurred and that no reduction in estimated useful
lives is warranted.
Environmental
KPP environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are
recorded when environmental assessments and/or remedial efforts are
probable, and the costs can be reasonably estimated. Generally, the
timing of these accruals coincides with the completion of a feasibility
study or KPP's commitment to a formal plan of action.
Comprehensive Income
Effective January 1, 1998, the Company has adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income", which establishes standards
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.
Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Change in Presentation
Certain prior year financial statement items have been reclassified to
conform with the 1998 presentation.
2. ASSET ACQUISITIONS
On March 25, 1998, a wholly-owned subsidiary of the Company acquired a
products marketing business for $1.5 million, plus the cost of product
inventories. The products marketing business provides wholesale motor
fuel marketing services throughout the Great Lakes and Rocky Mountain
regions, as well as California. The asset purchase agreement includes a
provision for an earn-out based on annual operating results of the
acquired business for a five-year period ending in March 2003. No amounts
were payable under the earn-out provision in 1998. The acquisition was
accounted for using the purchase method of accounting.
On October 30, 1998, KPP entered into acquisition and joint venture
agreements with Northville Industries Corp. ("Northville") to acquire and
manage the former Northville terminal located in Linden, New Jersey.
Under the agreements, KPP acquired a 50% interest in the newly-formed ST
Linden Terminal LLC for $20.5 million plus transaction costs. The
investment was financed by KPP's existing revolving credit facility and a
revolving promissory note. The investment is being accounted for by the
equity method of accounting, with the excess cost over net book value of
the equity investment being amortized over the life of the underlying
assets. During 1998, KPP acquired other terminals and pipelines for
aggregate consideration of $23.9 million. The pro forma effects of these
acquisitions, including the two described above, were not material to the
results of operations.
On February 1, 1999, KPP acquired six terminals in the United Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.4
million) plus transaction costs and the assumption of certain
liabilities. The acquisition was financed by term loans from a bank. The
acquisition will be accounted for, beginning in February 1999, using the
purchase method of accounting.
3. INCOME TAXES
Income (loss) before income tax expense is comprised of the following
components:
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Domestic operations......................... $ 16,682,000 $ 11,769,000 $ 12,580,000
Foreign operations.......................... (1,338,000) 1,663,000 (2,975,000)
-------------- ------------- -------------
$ 15,344,000 $ 13,432,000 $ 9,605,000
============== ============= =============
Income tax expense is comprised of the following components:
Year Ended
December 31, Federal Foreign State Total
-------------------------- ------------- ------------ ------------ ------------
1998:
Current................. $ 330,000 $ 320,000 $ 600,000 $ 1,250,000
Deferred................ 518,000 - - 518,000
------------- ------------ ------------ ------------
$ 848,000 $ 320,000 $ 600,000 $ 1,768,000
============= ============ ============ ============
1997:
Current............... $ 577,000 $ 925,000 $ 1,201,000 $ 2,703,000
Deferred.............. 74,000 12,000 - 86,000
------------- ------------ ------------ ------------
$ 651,000 $ 937,000 $ 1,201,000 $ 2,789,000
============= ============ ============ ============
Year Ended
December 31, Federal Foreign State Total
------------------------ ------------- ------------ ------------ ------------
1996:
Current............... $ 435,000 $ 423,000 $ 957,000 $ 1,815,000
Deferred.............. 500,000 266,000 - 766,000
------------- ------------ ------------ ------------
$ 935,000 $ 689,000 $ 957,000 $ 2,581,000
============= ============ ============ ============
Deferred income tax provisions or benefits result from temporary
differences between the tax basis of assets (principally fixed assets)
and liabilities of foreign subsidiaries and certain domestic subsidiaries
not included in the Company's consolidated Federal tax return, and their
reported amounts in the financial statements that will result in
differences between income for tax purposes and income for financial
statement purposes in future years.
The Company has recorded deferred tax assets of approximately $51 million
and $58 million as of December 31, 1998 and 1997, respectively, primarily
relating to the Company's domestic net operating loss carryforwards,
partially offset by a valuation reserve of approximately $49 million and
$56 million, respectively. The Company has recorded a deferred tax
liability of $3.9 million and $3.4 million as of December 31, 1998 and
1997, which is associated with certain domestic and foreign subsidiaries
not included in the Company's consolidated Federal income tax return.
The reasons for the differences between the amount of tax expense
provided and the amount of tax expense computed by applying the statutory
Federal income tax rate to income before income taxes for the years 1998,
1997 and 1996 are as follows:
Year Ended December 31,
---------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------- ---------------------
Amount % Amount % Amount %
-------------- ----- ------------- ---- -------------- ----
Tax expense at
statutory rates................ $ 5,370,000 35.0 $ 4,701,000 35.0 $ 3,360,000 35.0
Increase (decrease) in taxes
resulting from:
Domestic loss carryforward
adjustments.................. (4,929,000) (32.1) (3,048,000) (22.7) (3,215,000) (33.5)
State income taxes, net........ 390,000 2.5 781,000 5.8 622,000 6.5
Foreign losses not
benefited and foreign
income taxes................. 937,000 6.1 355,000 2.7 1,814,000 18.9
------------- ----- ------------ ----- -------------- -----
$ 1,768,000 11.5 $ 2,789,000 20.8 $ 2,581,000 26.9
============= ===== ============ ===== ============== =====
At December 31, 1998, the Company had available domestic tax net
operating loss carryforwards ("NOLs"), which will expire, if unused, as
follows: $72,026,000 in 2002, $12,626,000 in 2003, $16,866,000 in 2005,
$17,508,000 in 2006 and $3,033,000 in 2007.
Additionally, at December 31, 1998, the Company had investment tax
credits aggregating $3,957,000, which will expire, if unused, in varying
amounts through 2000, that could be used to offset current domestic
income taxes, but only after all available NOLs are utilized.
If certain substantial changes in the Company's ownership should occur,
there would be an annual limitation on the amount of the tax
carryforwards which could be utilized.
4. RETIREMENT PLANS
The Company has a defined contribution plan which covers substantially
all domestic employees and provides for varying levels of employer
matching. Company contributions to this plan were $1.2 million, $1.1
million and $1.0 million for 1998, 1997 and 1996, respectively.
One of the Company's foreign subsidiaries has a defined benefit pension
plan covering substantially all of its United Kingdom employees (the
"U.K. Plan"). The benefit is based on the average of the employee's
salary for the last three years of employment. Generally, the employee
contributes 5% and the employer contributes up to 12% of pay. Plan assets
are primarily invested in unitized pension funds managed by United
Kingdom registered funds managers. The most recent valuation of the U.K.
Plan was performed as of October 31, 1998.
Net pension cost for the U.K. Plan included the following components:
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
-------------- ------------- ------------
Net periodic benefit cost:
Service cost................................ $ 1,352,000 $ 1,254,000 $ 1,269,000
Interest cost............................... 2,311,000 2,021,000 1,617,000
Expected return on plan assets.............. (2,527,000) (2,720,000) (2,200,000)
Amortization of prior service cost.......... 27,000 27,000 27,000
Recognized net gain......................... (508,000) (121,000) (91,000)
-------------- ------------- -------------
Net periodic pension cost..................... $ 655,000 $ 461,000 $ 622,000
============== ============= =============
Actuarial assumptions used in the accounting for the U.K. Plan were a
weighted average discount rate of 6.25% for 1998, 7.5% for 1997 and 8.5%
for 1996, an expected long-term rate of return on assets of 7.5% for 1998
and 9.0% for 1997 and 1996 and a rate of increase in compensation levels
of 3.0% for 1998, 5.5% for 1997 and 6% for 1996. The funded status of the
U.K. Plan is as follows:
December 31,
--------------------------------
1998 1997
-------------- --------------
Projected benefit obligation:
Beginning of year.......................................... $ 30,564,000 $ 24,449,000
Service cost............................................... 1,352,000 1,254,000
Interest cost.............................................. 2,311,000 2,021,000
Contributions.............................................. 1,116,000 1,346,000
Benefits paid.............................................. (525,000) (358,000)
Other...................................................... 620,000 1,852,000
------------- -------------
End of year................................................ 35,438,000 30,564,000
------------- -------------
Fair value of plan assets:
Beginning of year.......................................... 33,138,000 29,557,000
Actual return on plan assets............................... 1,957,000 3,829,000
Contributions.............................................. 1,116,000 1,346,000
Benefits paid.............................................. (525,000) (358,000)
Other...................................................... 580,000 (1,236,000)
------------- -------------
End of year................................................ 36,266,000 33,138,000
------------- -------------
December 31,
--------------------------------
1998 1997
-------------- --------------
Excess fair value over projected obligation.................. $ 828,000 $ 2,574,000
Unrecognized net actuarial gain.............................. (990,000) (3,213,000)
Unamortized prior service cost............................... 299,000 322,000
------------- -------------
Net pension prepaid asset (liability)........................ $ 137,000 $ (317,000)
============= =============
5. PROPERTY AND EQUIPMENT
The cost of property and equipment is as follows:
December 31,
--------------------------------
1998 1997
-------------- --------------
Industrial field services.............................. $ 26,782,000 $ 30,388,000
Pipeline, terminaling and product marketing services... 398,306,000 345,802,000
Information services................................... 3,354,000 3,040,000
General corporate...................................... 3,848,000 3,848,000
-------------- --------------
Total property and equipment........................... 432,290,000 383,078,000
Accumulated depreciation and amortization.............. (130,759,000) (121,717,000)
-------------- --------------
Net property and equipment............................. $ 301,531,000 $ 261,361,000
============== ==============
Equipment under capital leases and included in the cost of property and
equipment is as follows:
December 31,
--------------------------------
1998 1997
-------------- --------------
Industrial field services equipment.................... $ 4,044,000 $ 5,530,000
Pipeline, terminaling and product marketing
services equipment................................... - 22,513,000
-------------- --------------
Total equipment acquired under capital leases.......... 4,044,000 28,043,000
Accumulated depreciation............................... (3,147,000) (13,570,000)
-------------- --------------
Net equipment acquired under capital leases............ $ 897,000 $ 14,473,000
============== ==============
In December 1998, KPP exercised its option to purchase pipeline equipment
previously held under a capital lease for $5.1 million in cash.
6. DEBT
Debt is summarized as follows:
December 31,
--------------------------------
1998 1997
-------------- --------------
Industrial field services:
Credit facility due through 2001..................... $ 17,764,000 $ 23,408,000
Various notes of foreign subsidiaries, with interest
ranging from 6.75% to 8.0%, due through 2001....... 4,020,000 3,278,000
Capital leases....................................... 949,000 1,641,000
-------------- --------------
Total debt...................................... 22,733,000 28,327,000
Less current portion................................. 2,441,000 3,059,000
-------------- --------------
$ 20,292,000 $ 25,268,000
============== ==============
Pipeline, terminaling and product marketing services:
Mortgage notes due 2001 and 2002..................... $ 60,000,000 $ 60,000,000
Mortgage notes due 2001 through 2016................. 68,000,000 68,000,000
Capital lease........................................ - 6,453,000
Revolving credit facility due January 2001......... 25,000,000 -
Promissory note due June 1999........................ 10,000,000 -
Revolving credit facility due March 1999............. 2,852,000 -
-------------- --------------
Total debt...................................... 165,852,000 134,453,000
Less short-term and current portion.................. 12,852,000 2,335,000
-------------- --------------
$ 153,000,000 $ 132,118,000
============== ==============
Parent company:
8.75% convertible subordinated debentures
due through 2008................................... $ 23,666,000 $ 23,666,000
Revolving credit facility............................ - -
-------------- --------------
Total debt..................................... 23,666,000 23,666,000
Less current portion................................. - -
-------------- --------------
$ 23,666,000 $ 23,666,000
============== ==============
Total consolidated debt................................ $ 212,251,000 $ 186,446,000
Short-term and current portion......................... 15,293,000 5,394,000
-------------- --------------
Total consolidated debt, less short-term and
current portion...................................... $ 196,958,000 $ 181,052,000
============== ==============
Industrial Field Services
At December 31, 1998, $17.8 million was outstanding under a credit
facility, as amended, that was obtained by a wholly-owned subsidiary in
conjunction with the acquisition of Furmanite. The credit facility, which
is without recourse to the parent company, is due 2001, bears interest
(6.25% at December 31, 1998) at the option of the borrower at variable
rates based on either the LIBOR rate or the prime rate plus a
differential of up to 150 basis points, has a commitment fee equal to
one-half of one percent per annum on unutilized amounts, contains certain
financial and operational covenants with respect to the industrial field
services group of companies, and restricts the subsidiary from paying
dividends to the parent company under certain circumstances. This credit
facility is secured by substantially all of the tangible assets of the
industrial field services group.
Pipeline, Terminaling and Product Marketing Services
In October 1998, a wholly-owned subsidiary of KPP entered into a
Promissory Note Agreement with a bank that, as amended on February 1,
1999, provides for a $15 million revolving credit availability through
June 30, 1999. The Promissory Note Agreement, which is without recourse
to the parent company, bears interest at variable interest rates (7.75%
at December 31, 1998) and has a commitment fee of 0.35% per annum of the
unused available balance. At December 31, 1998, $10.0 million was drawn
under the Promissory Note Agreement and included in current liabilities.
In March 1998, a wholly-owned subsidiary of the Company entered into a
credit agreement with a bank that provides for a $20 million revolving
credit facility through March 1999. The credit facility bears interest at
variable rates, has a commitment fee of 0.25% per annum on unutilized
amounts and contains certain financial and operational covenants. The
credit facility, which is without recourse to the parent company, is
secured by
essentially all of the tangible and intangible assets of the products
marketing business and by 500,000 KPP limited partnership units held by a
wholly-owned subsidiary of the Company. At December 31, 1998, $2.9
million was drawn on the facility. The Company is in the process of
negotiating an amendment to the credit agreement which, among other
items, is expected to extend the revolving credit facility through March
2001.
In 1994, KPP, through a wholly-owned subsidiary, entered into a restated
credit agreement with a group of banks that, as subsequently amended,
provides for a $25 million revolving credit facility through January 31,
2001. The credit facility, which is without recourse to the parent
company, bears interest at variable interest rates and has a commitment
fee of 0.15% per annum of the unused credit facility. At December 31,
1998, $25.0 million was drawn under the credit facility.
Also in 1994, KPP, through another wholly-owned subsidiary, issued $33
million of first mortgage notes ("Notes") to a group of insurance
companies. The Notes bear interest at the rate of 8.05% per annum and are
due on December 22, 2001. In 1995, KPP issued $27 million of additional
Notes due February 24, 2002 which bear interest at the rate of 8.37% per
annum. The Notes and credit facility, which are without recourse to the
parent company, are secured by a mortgage on the East Pipeline and
contain certain financial and operational covenants.
In June 1996, KPP issued $68 million of new first mortgage notes bearing
interest at rates ranging from 7.08% to 7.98%. $35.0 million of these
notes is due June 2001, $8.0 million is due June 2003, $10.0 million is
due June 2006 and $15.0 million is due June 2016. The loan, which is
without recourse to the parent company, is secured, pari passu with the
existing Notes and credit facility, by a mortgage on the East Pipeline.
Parent Company
The 8.75% subordinated debentures are convertible into shares of the
Company's common stock at a conversion price of $17.54 per share. The
Company has satisfied the sinking fund requirements on these subordinated
debentures through 2000.
On February 1, 1996, the Company retired an 8.85% senior note, which was
convertible into shares of the Company's common stock at a conversion
price of $6.00 per share.
In December 1995, the Company entered into an agreement with an
international bank that provides for a $15 million revolving credit
facility through December 1, 2000, that bears interest at a variable rate
at the Company's option based on the LIBOR rate plus 100 basis points or
at the prime rate in effect from time to time with a commitment fee of
0.5% per annum of the unused credit facility. The credit facility is
secured by 1.0 million of the Company's limited partnership units in KPP.
No amounts were drawn under the credit facility at December 31, 1998 or
1997.
Consolidated Maturities
Annual sinking fund requirements and debt maturities on consolidated
debt, including capital leases, are: $15.3 million (including $10.0
million of KPP debt); $2.4 million; $109.5 million (including $93.0
million of KPP debt); $29.2 million (including $27.0 million of KPP
debt); and $10.1 million (including $8.0 million of KPP debt),
respectively, for each of the five years ending December 31, 2003.
7. CAPITAL STOCK
The changes in the number of issued and outstanding shares of the
Company's preferred and common stock are summarized as follows:
Common Stock
-------------------------------------------------
Preferred Held in
Stock Issued Treasury Outstanding
------------- -------------- -------------- ----------------
Balance at January 1, 1996................. 568,450 36,479,954 2,832,876 33,647,078
Common shares issued or purchased.......... - 11,073 323,200 (312,127)
------------- -------------- -------------- ----------------
Balance at December 31, 1996............... 568,450 36,491,027 3,156,076 33,334,951
Series F Preferred Stock issued............ 1,000 - - -
Common shares issued or purchased.......... - 36,256 1,190,900 (1,154,644)
------------- -------------- -------------- ----------------
Balance at December 31, 1997............... 569,450 36,527,283 4,346,976 32,180,307
Common shares issued or purchased.......... - 26,923 797,608 (770,685)
------------- -------------- -------------- ----------------
Balance at December 31, 1998............... 569,450 36,554,206 5,144,584 31,409,622
============= ============== ============== ================
Series A Preferred Stock
The Company has 567,950 shares of Cumulative Class A Adjustable Rate
Preferred Stock, Series A ("Series A Preferred") with a stated value of
$10 per share outstanding at December 31, 1998. Dividends accrue
quarterly at the applicable U.S. Treasury rate plus 2.00 percentage
points (200 basis points) ("Applicable Rate"), but will in no event be
less than 7.5% per annum or greater than 14% per annum. If dividends are
in arrears for two or more quarters, additional dividends accrue on all
dividends in arrears at a rate equal to the Applicable Rate plus 25 basis
points for each quarter dividends are in arrears (but not more than the
lesser of 14% per annum or 300 basis points more than the Applicable
Rate). If unpaid accrued dividends exist with respect to eight or more
quarters, the holders of the Series A Preferred may elect individually to
require the Company to redeem their shares at a price of $12 per share
plus dividends in arrears. No such arrearages existed as of December 31,
1998, 1997 and 1996. The Company, at its option, may redeem shares at any
time at a price of $12 per share (reduced ratably to $10 over 15 years
unless unpaid accrued dividends exist with respect to eight or more
quarters) plus accrued and unpaid dividends thereon.
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, 1998, 1997 and 1996 there
were no Series B Preferred shares outstanding.
Series C Preferred Stock
In April 1991, the Company authorized 1,000 shares of Adjustable Rate
Cumulative Class A Preferred Stock, Series C ("Series C Preferred") which
have a preference value of $1.00 per share and are only entitled to a
dividend if the value of the Company's common stock increases. The Series
C Preferred, as an entire class, is entitled to an annual dividend
commencing January 1, 1992, equal to 1/2 of 1% (proportionately reduced
for authorized but unissued shares in the class) of the increase in the
average per share market value of the Company's common stock during the
year preceding payment of the dividend, over $4.79 (the average per share
market value of the Company's common stock during 1990) multiplied by the
average number of shares of common stock outstanding. The Series C
Preferred has mandatory redemption requirements in the event of certain
types of corporate reorganizations and may be redeemed at the option of
the Company during the first 60 days of each year commencing 1994. The
redemption price is the sum of (i) one divided by the average annual
yield of all issues of preferred stock listed on the New York Stock
Exchange during the calendar year preceding the date of the redemption
period times the average dividend for the two most recent years plus (ii)
a pro rata portion of the prior year's dividend based upon the number of
elapsed days in the year of redemption plus (iii) any accrued and unpaid
dividends. The Company may also repurchase the shares of a holder at such
redemption price during the first 60 days following the year in which the
holder first ceases to be an employee of the Company. A holder of the
Series C Preferred may, at his option, require the Company to redeem his
shares at 120% of such redemption price if the Company elects, within 10
days after the most recent dividend payment date, not to pay the accrued
dividend. Upon liquidation, holders of the Series C Preferred are
entitled to receive $1.00 per share plus accrued and unpaid dividends. As
of December 31, 1998, there were 500 shares of Series C Preferred issued
and outstanding to certain officers of the Company.
Series F Preferred Stock
In June 1997, the Company authorized and issued 1,000 shares of
Adjustable Rate Cumulative Class A Preferred Stock, Series F ("Series F
Preferred"), with a stated value of $1.00 per share to an officer of the
Company. The annual dividend for the entire class of Series F Preferred,
which accrues on January 1 of each year and is payable on April 1 of each
year, is calculated by multiplying (i) 1% of the annual improvement (but
not including amounts related to any gains or losses on the sale of any
KPP units nor any amounts related to any other gains or losses in excess
of $1 million on the sale of other capital assets) in the Company's
diluted earnings per share of common stock ("Common EPS"), by (ii) the
amount of issued and outstanding shares of the Company's common stock on
January 1, 1997.
If the Common EPS increase for the five-year period ending December 31,
2001 has not exceeded 20% compounded annually, the series will be
redeemed for $1.00 per share on April 1, 2002. Otherwise, the series will
be redeemed on April 1, 2002 at a "Redemption Price" for the entire class
of the series equal to the average percentage increase in excess of 20%
in Common EPS for such period multiplied by (i) seventy-five hundredths
of 1% of the cumulative Common EPS for each calendar year ended for which
the series is outstanding, and (ii) the amount of issued and outstanding
shares of the Company's Common Stock on January 1, 1997.
Redemption of the series may be deferred at the Company's option until no
later than April 1, 2003 if the Common EPS increase for the 2001 calendar
year is less than 15%. The Series F Preferred may be redeemed at the
option of the holder at 120% of the Redemption Price if the Company fails
to pay an annual dividend within 10 days of the due date or in the event
of a change of control, or at the Redemption Price in the event of
certain corporate reorganizations or the authorization of a class of
preferred stock ranking higher in priority to the Series F Preferred.
Upon liquidation, holders of the Series F Preferred are entitled to
receive $1.00 per share plus accrued and unpaid dividends.
Stock Compensation Plans
The Company has stock option plans and agreements for officers, directors
and key employees. The options granted under these plans and agreements
generally expire ten years from date of grant. All options were granted
at prices greater than or equal to the market price at the date of grant
or repricing. At December 31, 1998, options on 2,091,352 shares at prices
ranging from $1.63 to $5.63 were outstanding, of which 626,860 were
exercisable at prices ranging from $1.63 to $5.56.
The changes in stock options outstanding for the Company's plans for
1998, 1997 and 1996 were as follows:
Average Price
Shares per Share
------------- -------------
Outstanding at January 1, 1996..... 1,431,436 $ 4.76
Granted............................ 1,277,678 $ 2.67
Exercised.......................... (6,000) $ 1.67
Forfeited.......................... (1,082,936) $ 5.56
-------------
Outstanding at December 31, 1996... 1,620,178 $ 2.60
Granted............................ 138,872 $ 3.74
Exercised.......................... (64,535) $ 2.29
Forfeited.......................... (116,000) $ 2.63
-------------
Outstanding at December 31, 1997... 1,578,515 $ 2.70
Granted............................ 617,347 $ 4.98
Exercised.......................... (59,910) $ 2.51
Forfeited.......................... (44,600) $ 3.75
-------------
Outstanding at December 31, 1998... 2,091,352 $ 3.36
=============
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company applies APB Opinion
25 and related interpretations in accounting for its stock option plans
and, accordingly, does not recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123. The
Black-Scholes option pricing model has been used to estimate the value of
stock options issued and the assumptions in the calculations under such
model include stock price variance or volatility ranging from 11.35% to
12.19% based on weekly average variances of the stock for the five year
period preceding issuance, a risk-free rate of return ranging from 4.53%
to 5.73% based on the 30-year U.S. Treasury bill rate for the five-year
expected life of the options, and no dividend yield. Using estimates
calculated by such option pricing model, pro forma net income, basic
earnings per share and diluted earnings per share would have been
$13,020,000, $0.39 and $0.39, respectively for the year ended December
31, 1998, as compared to the reported amounts of $13,576,000, $0.41 and
$0.40, respectively. For the year ended December 31, 1997, pro forma net
income, basic earnings per share and diluted earnings per share would
have been $10,327,000, $0.30 and $0.30, respectively, as compared to the
reported amounts of $10,643,000, $0.31 and $0.30, respectively. For the
year ended December 31, 1996, pro forma net income, basic earnings per
share and diluted earnings per share would have been $6,750,000, $0.19
and $0.19, respectively, as compared to the reported amounts of
$7,024,000, $0.19 and $0.19, respectively.
Deferred Stock Unit Plan
In 1996, the Company initiated a Deferred Stock Unit Plan (the "DSU
Plan"), pursuant to which key employees of the Company have, from time to
time, been given the opportunity to defer a portion of their
compensation, for a specified period toward the purchase of deferred
stock units ("DSUs"), an instrument designed to track the Company's
Common Stock. Under the plan, as amended in 1998, DSUs are purchased at a
value equal to the closing price of the Company's common stock on the day
by which the employee must elect (if he so desires) to participate in the
DSU Plan; which date is established by the Compensation Committee, from
time to time (the "Election Date"). During a vesting period of one to
three years following the Election Date, a participant's DSUs vest only
in an amount equal to the lesser of the compensation actually deferred to
date or the value (based upon the then-current closing price of the
Company's common stock) of the pro-rata portion (as of such date) of the
number of DSUs acquired. After the expiration of the vesting period,
which is typically the same length as the deferral period, the DSUs
become fully vested, but may only be distributed through the issuance of
a like number of shares of the Company's common stock on a pre-selected
date, which is irrevocably selected by
the participant on the Election Date and which is typically no earlier
than the expiration of the vesting period and no later than ten years
after the Election Date. DSU accounts are unfunded by the Company and do
not bear interest. Each person that elects to participate in the DSU Plan
is awarded, under the Company's 1994 Stock Incentive Plan, an option to
purchase a number of shares of the Company's common stock ranging from
one-half to one and one-half times (depending on the length of deferral)
the number of DSUs purchased by such person at 100% of the closing price
of the Company's common stock on the Election Date, which options become
exercisable over a specified period after the grant, according to a
schedule determined by the Compensation Committee.
8. EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per
share:
Weighted
Average
Net Common Per-Share
Income Shares Amount
--------------- --------------- --------------
Year Ended December 31, 1998
Net income................................ $ 13,576,000
Dividend applicable to preferred stock.... (508,000)
----------------
Basic EPS -
Net income applicable to common stock.. 13,068,000 31,739,572 $ 0.41
==============
Effect of dilutive securities -
Common stock options and DSUs.......... - 1,057,846
--------------- --------------
Diluted EPS -
Income applicable to common stock, DSUs
and assumed options exercised........ $ 13,068,000 32,797,418 $ 0.40
=============== ============== ==============
Year Ended December 31, 1997
Net income................................ $ 10,643,000
Dividend applicable to preferred stock.... (538,000)
----------------
Basic EPS -
Net income applicable to common stock.. 10,105,000 32,547,371 $ 0.31
==============
Effect of dilutive securities -
Common stock options................... - 585,926
--------------- --------------
Diluted EPS -
Income applicable to common stock
and assumed options exercised........ $ 10,105,000 33,133,297 $ 0.30
=============== ============== ==============
Year Ended December 31, 1996
Net income................................ $ 7,024,000
Dividend applicable to preferred stock.... (502,000)
----------------
Basic EPS -
Net income applicable to common stock.. 6,522,000 33,630,723 $ 0.19
==============
Effect of dilutive securities -
Common stock options................... - 242,600
--------------- --------------
Diluted EPS -
Income applicable to common stock
and assumed options exercised........ $ 6,522,000 33,873,323 $ 0.19
=============== ============== ==============
Options to purchase 189,523, 15,000 and 80,308 shares of common stock at
weighted average prices of $5.50, $5.00 and $3.73, were outstanding at
December 31, 1998, 1997 and 1996, respectively, but were not included in
the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common stock. Additionally,
the Company's 8.75% convertible subordinated debentures were excluded
from the computation of diluted EPS because the effect of assumed
conversion is anti-dilutive.
9. 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
under operating leases was $3.8 million for 1998, $3.5 million for 1997
and $4.0 million for 1996.
At December 31, 1998, minimum rental commitments under all capital leases
and operating leases for future years are as follows: Capital Operating
Leases Leases
1999.......................... $ 354,000 $ 4,064,000
2000.......................... 307,000 3,528,000
2001.......................... 261,000 2,952,000
2002.......................... 76,000 1,888,000
2003.......................... - 1,342,000
2004 and thereafter........... - 1,197,000
-------------- --------------
Total minimum lease payments....... 998,000 $ 14,971,000
==============
Less amounts representing interest. 50,000
--------------
Present value of net minimum
lease payments................. $ 948,000
==============
KPP makes quarterly distributions of 100% of its Available Cash (as
defined in the Partnership Agreement) to holders of limited partnership
units and the general partner. Available Cash consists generally of all
the cash receipts of the Partnership less all of its cash disbursements
and reserves. The assets of KPP, other than Available Cash, cannot be
distributed without a majority vote of the non-affiliated unitholders.
The operations of the Company are subject to Federal, state and local
laws and regulations relating to protection of the environment. Although
KPP believes that its operations are in general compliance with
applicable environmental regulation, risks of additional costs and
liabilities are inherent in its operations, and there can be no assurance
that significant costs and liabilities will not be incurred by KPP.
Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations, enforcement policies
thereunder, and claims for damages to property or persons resulting from
the operations of KPP, could result in substantial costs and liabilities
to KPP. KPP has recorded an undiscounted reserve in other liabilities for
environmental claims of $5.3 million, including $4.5 million related to
acquisitions of pipelines and terminals. During 1998, KPP incurred $0.6
million of costs related to such acquisition reserves and reduced the
liability accordingly.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business.
Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse
effect on the financial position or results of operations of the Company.
10. BUSINESS SEGMENT DATA
The following information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The Company's adoption of SFAS No. 131, effective January 1, 1998 and
applied retroactively, did not alter the composition of its reportable
operating segments.
The Company provides industrial field 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. The Pipeline,
Terminaling and Product Marketing Segment includes: (i) the pipeline and
terminaling operations of KPP which consist of the transportation of
refined petroleum products in the Midwestern states as a common carrier
and the storage of petroleum products, specialty chemicals and other
liquids, and (ii) the Company's products marketing business.
Additionally, the Company provides information services to governmental,
insurance and financial institutions.
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,
---------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Business segment revenues:
Industrial field services................... $ 115,116,000 $ 108,223,000 $ 103,252,000
Pipeline, terminaling and product
marketing services........................ 240,032,000 121,156,000 117,554,000
Information services........................ 20,709,000 7,557,000 8,055,000
--------------- -------------- --------------
$ 375,857,000 $ 236,936,000 $ 228,861,000
=============== ============== ==============
Industrial field services segment revenues:
Underpressure services...................... $ 43,208,000 $ 37,769,000 $ 37,879,000
Turnaround services......................... 52,924,000 48,655,000 42,537,000
Other services.............................. 18,984,000 21,799,000 22,836,000
--------------- -------------- --------------
$ 115,116,000 $ 108,223,000 $ 103,252,000
=============== ============== ==============
Pipeline, terminaling, product marketing
services segment revenues:
Pipeline operations......................... $ 63,421,000 $ 61,320,000 $ 63,441,000
Terminaling operations...................... 62,391,000 59,836,000 54,113,000
Product marketing services.................. 114,220,000 - -
--------------- -------------- --------------
$ 240,032,000 $ 121,156,000 $ 117,554,000
=============== ============== ==============
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Business segment profit:
Industrial field services .................. $ 6,656,000 $ 7,438,000 $ 5,073,000
Pipeline, terminaling and product
marketing services........................ 56,057,000 53,420,000 51,285,000
Information services........................ 3,690,000 2,709,000 2,198,000
General corporate........................... (5,091,000) (4,907,000) (4,741,000)
--------------- -------------- --------------
Operating income.......................... 61,312,000 58,660,000 53,815,000
Interest expense............................ (15,714,000) (15,531,000) (15,420,000)
Other income (expense)...................... 868,000 (163,000) 27,000
Amortization of excess of cost over fair
value of net assets of acquired businesses (1,948,000) (1,879,000) (1,848,000)
-------------- -------------- --------------
Income before interest of outside
non-controlling partners in KPP's net
income and income tax expense............. $ 44,518,000 $ 41,087,000 $ 36,574,000
=============== ============== ==============
Business segment assets:
Depreciation and amortization:
Industrial field services................. $ 3,854,000 $ 4,563,000 $ 4,227,000
Pipeline, terminaling and product
marketing services..................... 12,157,000 11,711,000 10,907,000
Information services...................... 192,000 151,000 234,000
General corporate......................... - 290,000 66,000
--------------- -------------- --------------
$ 16,203,000 $ 16,715,000 $ 15,434,000
=============== ============== ==============
Capital expenditures (including capitalized
leases and excluding acquisitions):
Industrial field services................. $ 2,574,000 $ 2,013,000 $ 3,504,000
Pipeline, terminaling and product
marketing services..................... 9,401,000 10,641,000 7,075,000
Information services...................... 281,000 327,000 83,000
General corporate......................... - 30,000 23,000
--------------- -------------- --------------
$ 12,256,000 $ 13,011,000 $ 10,685,000
=============== ============== ==============
December 31,
---------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Total assets:
Industrial field services................. $ 110,603,000 $ 116,503,000 $ 114,354,000
Pipeline, terminaling and product
marketing services........................ 323,058,000 270,055,000 273,927,000
Information services...................... 11,082,000 5,429,000 3,988,000
General corporate......................... 3,302,000 10,286,000 12,422,000
--------------- -------------- --------------
$ 448,045,000 $ 402,273,000 $ 404,691,000
=============== ============== ==============
The following geographical area data includes revenues based on location
of operating segment and net property and equipment based on physical
location:
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Geographical area revenues:
United States............................ $ 296,336,000 $ 162,367,000 $ 158,274,000
Europe................................... 68,050,000 66,431,000 65,949,000
Asia-Pacific............................. 11,471,000 8,138,000 4,638,000
--------------- -------------- --------------
$ 375,857,000 $ 236,936,000 $ 228,861,000
=============== ============== ==============
Geographical area operating income:
United States............................ $ 54,858,000 $ 51,384,000 $ 48,884,000
Europe................................... 5,456,000 6,139,000 4,001,000
Asia-Pacific............................. 998,000 1,137,000 930,000
--------------- -------------- --------------
$ 61,312,000 $ 58,660,000 $ 53,815,000
=============== ============== ==============
December 31,
---------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Geographical area net property and equipment:
United States............................ $ 292,233,000 $ 249,470,000 $ 252,807,000
Europe................................... 7,781,000 10,419,000 13,648,000
Asia-Pacific............................. 1,517,000 1,472,000 183,000
--------------- -------------- --------------
$ 301,531,000 $ 261,361,000 $ 266,638,000
=============== ============== ==============
11. ACCRUED EXPENSES
Accrued expenses are comprised of the following components at December
31, 1998 and 1997:
December 31,
---------------------------------
1998 1997
-------------- --------------
Accrued distribution payable....... $ 7,127,000 $ 7,177,000
Accrued income taxes............... 2,212,000 3,079,000
Accrued taxes other than income.... 2,631,000 1,957,000
Accrued interest................... 2,454,000 2,380,000
Accrued compensation and benefits.. 3,735,000 2,728,000
Accrued environmental.............. 1,702,000 1,017,000
Deferred terminaling fees.......... 3,526,000 2,892,000
Other accrued expenses............. 17,922,000 14,449,000
-------------- --------------
$ 41,309,000 $ 35,679,000
============== ==============
12. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on cash paid during the period for:
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- --------------- ------------
Interest......... $ 15,385,000 $ 15,373,000 $ 14,502,000
============== =============== ============
Income taxes..... $ 2,310,000 $ 1,535,000 $ 1,340,000
============== =============== ============
13. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash equivalents, accounts receivable and
accounts payable approximate their carrying amounts due to the relatively
short period to maturity of these instruments. The estimated fair value
of all debt (excluding capital leases) as of December 31, 1998 and 1997
was approximately $217 million and $183 million as compared to the
carrying value of $211 million and $178 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 Company does not believe that it has a significant concentration of
credit risk at December 31, 1998, as the Company's accounts receivable
are generated from three distinct business segments with customers
located throughout the United States, Europe and Asia-Pacific.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1998 and 1997 are summarized as follows:
Quarter Ended
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------- --------------- -------------- --------------
1998:
Revenues................ $ 59,501,000 $ 100,492,000 $ 105,476,000 $ 110,388,000
============== =============== ============== ==============
Operating income........ $ 12,607,000 $ 14,981,000 $ 17,907,000 $ 15,817,000
============== =============== ============== ==============
Net income ............. $ 1,836,000 $ 3,365,000 $ 4,434,000 $ 3,941,000
============== =============== ============== ==============
Earnings per
common share:
Basic................ $ .05 $ .10 $ .14 $ .12
============== =============== ============== ==============
Diluted.............. $ .05 $ .10 $ .13 $ .12
============== =============== ============== ==============
1997:
Revenues................ $ 53,154,000 $ 58,388,000 $ 62,074,000 $ 63,320,000
============== =============== ============== ==============
Operating income........ $ 12,444,000 $ 14,245,000 $ 15,695,000 $ 16,276,000
============== =============== ============== ==============
Net income ............. $ 1,529,000 $ 2,707,000 $ 3,276,000 $ 3,131,000
============== =============== ============== ==============
Earnings per
common share:
Basic................ $ .04 $ .08 $ .10 $ .09
============== =============== ============== ==============
Diluted.............. $ .04 $ .08 $ .10 $ .09
============== =============== ============== ==============
Schedule I
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- --------------
General and administrative expenses..................... $ (5,091,000) $ (4,617,000) $ (4,677,000)
Depreciation and amortization........................... - (290,000) (64,000)
Interest expense........................................ (2,212,000) (2,239,000) (2,377,000)
Intercompany fees and expenses.......................... 3,022,000 2,266,000 3,997,000
Interest income......................................... 284,000 372,000 247,000
Other income (expense).................................. 1,354,000 (1,024,000) (332,000)
Equity in income of subsidiaries and KPP................ 16,219,000 16,175,000 10,230,000
------------- ------------- --------------
Net income.............................................. 13,576,000 10,643,000 7,024,000
Dividends applicable to preferred stock................. 508,000 538,000 502,000
------------- ------------- --------------
Net income applicable to common stock.................. $ 13,068,000 $ 10,105,000 $ 6,522,000
============= ============= ==============
Earnings per common share:
Basic................................................ $ .41 $ .31 $ .19
============= ============= ==============
Diluted.............................................. $ .40 $ .30 $ .19
============= ============= ==============
Schedule I
(Continued)
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31,
--------------------------------------
1998 1997
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 875,000 $ 8,043,000
Prepaid expenses and other current assets............................ 177,000 -
--------------- ---------------
Total current assets.................................................... 1,052,000 8,043,000
--------------- ---------------
Property and equipment.................................................. 3,848,000 3,848,000
Less accumulated depreciation........................................... 3,848,000 3,848,000
--------------- ---------------
Net property and equipment......................................... - -
--------------- ---------------
Investments in, advances to and notes receivable
from subsidiaries and KPP............................................. 123,567,000 104,135,000
Other assets............................................................ 2,250,000 2,243,000
--------------- ---------------
$ 126,869,000 $ 114,421,000
=============== ===============
LIABILITIES AND EQUITY
Current liabilities - accounts payable and accrued expenses............. $ 7,367,000 $ 3,987,000
Long-term debt.......................................................... 23,666,000 23,666,000
Deferred credits and other liabilities.................................. 8,391,000 8,321,000
Stockholders' equity:
Preferred stock, without par value................................... 5,792,000 5,792,000
Common stock, without par value...................................... 4,239,000 4,234,000
Additional paid-in capital........................................... 197,263,000 197,242,000
Accumulated deficit.................................................. (88,423,000) (101,491,000)
Treasury stock, at cost.............................................. (29,775,000) (25,216,000)
Unamortized restricted stock......................................... (141,000) -
Accumulated comprehensive income (loss) -
foreign currency translation adjustment............................ (1,510,000) (2,114,000)
--------------- ----------------
Total stockholders' equity....................................... 87,445,000 78,447,000
--------------- ---------------
$ 126,869,000 $ 114,421,000
=============== ===============
Schedule I
(Continued)
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996
----------------- ---------------- ------------------
Operating activities:
Net income ....................................... $ 13,576,000 $ 10,643,000 $ 7,024,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... - 290,000 64,000
Equity in net income of subsidiaries and KPP.... (16,219,000) (16,175,000) (10,230,000)
Changes in current assets and liabilities:
Accounts receivable........................... - 102,000 99,000
Prepaid expenses.............................. (177,000) 818,000 979,000
Accrued expenses ............................. 3,380,000 (4,439,000) (1,245,000)
----------------- ----------------- -------------------
Net cash provided by (used in)
operating activities........................ 560,000 (8,761,000) (3,309,000)
----------------- ----------------- ------------------
Investing activities:
Capital expenditures.............................. - (30,000) (25,000)
Change in other assets, net....................... 667,000 (3,082,000) (129,000)
----------------- ----------------- -------------------
Net cash provided by (used in)
investing activities........................ 667,000 (3,112,000) (154,000)
----------------- ----------------- -------------------
Financing activities:
Payments on long-term debt........................ - - (6,000,000)
Preferred stock dividends paid.................... (508,000) (538,000) (502,000)
Change in investments in, advances to and notes
receivable from subsidiaries and KPP............ (3,213,000) 16,075,000 1,369,000
Common stock issued............................... 194,000 33,000 -
Purchase of treasury stock........................ (4,868,000) (4,585,000) (1,079,000)
------------------ ----------------- -------------------
Net cash provided by (used in) financing
activities.................................. (8,395,000) 10,985,000 (6,212,000)
----------------- ---------------- -------------------
Decrease in cash and cash equivalents................ (7,168,000) (888,000) (9,675,000)
Cash and cash equivalents at beginning of year....... 8,043,000 8,931,000 18,606,000
----------------- ---------------- ------------------
Cash and cash equivalents at end of year............. $ 875,000 $ 8,043,000 $ 8,931,000
================= ================ ==================
Schedule II
KANEB SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
-----------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Descriptions Period Expenses Accounts Deductions Period
- ------------------------------------ ------------- ----------- ------------- -------------- ------------
ALLOWANCE DEDUCTED FROM
ASSETS TO WHICH THEY APPLY
Year Ended December 31, 1998:
For doubtful receivables
classified as current assets... $ 570 $ 430 $ 99(a) $ (174)(b) $ 925
============= ========== ============== ============= ============
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 55,684 $ - $ - $ (7,166) $ 48,518
============= ========== ============== ============= ============
Year Ended December 31, 1997:
For doubtful receivables
classified as current assets... $ 666 $ 246 $ (19)(a) $ (323)(b) $ 570
============= ========== ============== ============= ============
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 86,698 $ - $ - $ (31,014) $ 55,684
============= ========== ============== ============ ===========
Year Ended December 31, 1996:
For doubtful receivables
classified as current assets... $ 1,133 $ 333 $ (23)(a) $ (777)(b) $ 666
============= ========== ============== ============ ===========
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 84,284 $ - $ 6,598 $ (4,184) $ 86,698
============= ========== ============== ============ ===========
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, Kaneb Services, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
KANEB SERVICES, INC.
By: JOHN R. BARNES
President and Chief Executive Officer
Date: March 25, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Kaneb
Services, Inc. and in the capacities and on the date indicated.
Signature Title Date
Principal Executive Officer
JOHN R. BARNES President, Chief Executive March 25, 1999
Officer and Director
Principal Accounting Officer
MICHAEL R. BAKKE Controller March 25, 1999
Directors
SANGWOO AHN Director March 25, 1999
JOHN R. BARNES Director March 25, 1999
FRANK M. BURKE, JR. Director March 25, 1999
CHARLES R. COX Director March 25, 1999
HANS KESSLER Director March 25, 1999
JAMES R. WHATLEY Director March 25, 1999
EXHIBIT INDEX
Exhibit
Number Description
- --------- ----------------------------------------
3.7 By-laws of the Registrant
10.11 Form of Indemnification Agreement
22 List of subsidiaries of the Registrant
23 Consents of independent accountants -
KPMG LLP and PricewaterhouseCoopers LLP
28 Financial Data Schedule