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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, 1996
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
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
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.[ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant: $152,303,169. This figure is estimated as of March 10, 1997, at
which date the closing price of the Registrant's Common Stock on the New York
Stock Exchange was $4.375 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 10, 1997: 33,057,751.
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.
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PART I
ITEM 1. BUSINESS
GENERAL
Kaneb Services, Inc. ("KSI" or the "Company") conducts its principal
businesses in two industry segments: i) specialized industrial field services;
and, ii) pipeline transportation and storage of refined petroleum products. The
Company operates its specialized industrial field services business through its
Furmanite group of wholly-owned subsidiaries (collectively, "Furmanite"), which
provide 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"). The Company's wholly-owned subsidiary, 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 (See: "Pipeline and Terminaling Services"). The
Company is also engaged in the information management services industry through
its wholly-owned subsidiary, Fields Financial Services, Inc. ("Fields"), which
offers products and services that enable financial institutions to monitor the
continual insurance coverage of their loan collateral and provides other
information management services to financial institutions and other customers.
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. The Company's principal operating
office is located at 2435 North Central Expressway, Richardson, Texas 75080 and
its telephone number is (972) 699-4000.
INDUSTRY SEGMENTS
Financial information regarding the Company's industry 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 Company, through Furmanite, offers a variety of specialized industrial
field services to an international base of process industry clients. Founded in
Virginia Beach, Virginia in the 1920's as a manufacturer of leak sealing kits,
Furmanite has evolved into an international service company. In the 1960's,
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 the largest leak sealing company, and one of the largest on-site
machining companies, in the world. In 1991, the Company acquired Furmanite to
diversify the Company's operations and take advantage of anticipated
international growth opportunities. For the year ended December 31, 1996,
Furmanite's sales and operating income were approximately $103,252,000 and
$5,074,000, 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 in
valves, pipes and other components of piping systems and related equipment
("leak sealing") typically used in 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, which 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 a variety of services, such as hot tapping,
fugitive emissions monitoring, passive fire protection, concrete repair, heat
exchanger repair and pipeline engineering, on a regional basis in response to
the needs of a particular regional
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customer base. The Company performs diagnostic services on valves and motors
by, among other methods, utilizing its patented Trevitest(R) system and
employing proprietary diagnostic equipment under an exclusive 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, 1996,
1995, and 1994, on-line, underpressure leak sealing services represented
approximately 33%, 31% and 26%, respectively, of Furmanite's revenues, while
on-site machining accounted for approximately 21%, 21% and 16%, respectively,
and valve repair represented approximately 10%, 13% and 9%, respectively, of
Furmanite's revenues for each of such years.
Furmanite's on-line, underpressure leak sealing services are performed on
a variety of process industry machinery, often in difficult situations. Many of
Furmanite's techniques and materials are proprietary and, the Company believes,
provide Furmanite with a competitive advantage over other organizations that
provide similar services. The Company'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 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 Richardson, Texas worldwide
headquarters and continues to maintain a strong presence in England and
continental Europe. Furmanite currently operates North American offices in the
United States in Baton Rouge, Beaumont, Charlotte, Chicago, Houston, Los
Angeles, Philadelphia, Salt Lake City and San Francisco; and in Edmonton,
Alberta and Sarnia, Ontario, Canada. Furmanite's worldwide strength is further
supported by offices currently located in Austria, Belgium, China, France,
Germany, Holland, Hong Kong, Norway, Singapore and the United Kingdom (10
locations) and by licensee and minority ownership interest arrangements in
Australia, Chile, Finland, India, Indonesia, Italy, Japan, Kuwait, Malaysia,
Portugal, Puerto Rico, Saudi Arabia, South Africa, South Korea, Sweden,
Thailand, Trinidad, the United Arab Emirates and Venezuela. Sales by geographic
region for 1996 were 32% for North America, 34% for the U.K. and 30% for
continental Europe (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 significant
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. In addition to staff
reductions and the trend toward
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outsourcing, Furmanite believes it presently has an advantage over in-house
maintenance departments because of the ability of its multi-disciplined
technicians to use Furmanite's proprietary 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 expropriation of equipment, taxation policies, labor practices,
import and export limitations, foreign exchange restrictions, currency exchange
rate fluctuations and local political conditions. 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 dangerous 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
classroom and field training and supervision, maintaining a system of technical
support 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 AND TERMINALING SERVICES
Through its KPL subsidiary, the Company manages and operates refined
petroleum products pipeline transportation system and petroleum products and
specialty liquids terminal storage businesses, and their associated properties,
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; while, through its Support Terminal Services, Inc.
subsidiary, among others (collectively, "ST"), the Company operates 31 terminal
storage facilities in 16 states and the District of Columbia, with a total
storage capacity of approximately 17,200,000 barrels. Including those situated
along its refined petroleum products pipeline systems, the Company's terminal
storage operations comprise the third largest independent petroleum products
and specialty liquids terminaling companies in the United States. For a more
detailed discussion of the business, activities and results of operations of
the Partnership than that which is contained herein, reference is made to the
Annual Report on Form 10-K and the other publicly filed documents of Kaneb Pipe
Line Partners, L.P. (NYSE: KPP, KPU).
PIPELINE TRANSPORTATION SYSTEMS
MARKETS SERVED
Initially built in 1953, the KPP pipeline transportation operations
currently consist of two pipeline systems: the East and West Pipelines (the
"Pipelines"), with its operational headquarters located in Wichita, Kansas. The
East Pipeline is a 2,075 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 three Kansas refineries; has direct access by third-party
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pipelines to four other refineries in Kansas, Oklahoma and Texas; provides
access to Gulf (of Mexico) Coast suppliers of refined petroleum products
through a connecting pipeline which receives products from a pipeline
originating on the Gulf Coast; and, through five connecting pipelines, receives
propane from gas processing plants in Kansas, New Mexico, Oklahoma and Texas
for shipment through the East Pipeline. The East Pipeline's operation also
includes 16 public truck loading terminals located in five states, comprised of
a total of 235 tanks having storage capacity of approximately 3,200,000 barrels
of product. In addition, the East Pipeline 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 in February 1995, consists
of approximately 550 miles of pipeline, ranging from six to eight inches in
diameter, that transports refined petroleum products received by direct
terminals and other interconnecting pipelines from refineries located in
Colorado, Montana, South Dakota and Wyoming to terminals in Colorado, South
Dakota and Wyoming. Additionally, the West Pipeline's operations include four
public truck loading terminals, also located in Colorado, South Dakota and
Wyoming, having storage capacity of approximately 1,600,000 barrels of product.
Through these facilities and operations, the West Pipeline serves the growing
Denver and northeastern Colorado markets and supplies jet fuel for Ellsworth
Air Force Base, Rapid City, South Dakota. The West Pipeline was acquired from
Wyco Pipe Line Company ("Wyco") for a purchase price of $27,100,000, plus
transaction costs and the assumption of certain environmental liabilities, and
was financed by KPP by the issuance of $27,000,000 of 8.37% first mortgage
notes, due in 2002, to three insurance companies.
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. 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 common carrier pipelines, proprietary pipelines
owned and operated by major integrated and large independent oil companies and
other companies in the areas where the Company'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 with the East Pipeline.
Competition between common carrier pipelines is based primarily on
transportation charges, quality of customer service and proximity to end users.
The Company 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. Trucking costs, however, render that mode of
transportation uncompetitive for longer hauls or larger volumes. The Company
does not believe that over the long term, trucks are effective competition to
the Pipelines' long-haul volumes.
PRODUCTS DELIVERED
The mix of refined petroleum products delivered 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, including Ellsworth Air
Force Base. 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
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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, ST and its predecessors have a proven
track record of more than 30 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 31 facilities offer storage capacity ranging from 40,000 to
5,511,000 barrels, comprised of two to 124 tanks per facility. As of December
31, 1996, ST's five largest facilities were located at Piney Point, Maryland
(5,511,000 Bbls capacity; 30 tanks); Jacksonville, Florida (2,061,000 Bbls
capacity; 28 tanks); Texas City, Texas (2,002,000 Bbls capacity; 124 tanks);
Westwego, Louisiana (858,000 Bbls capacity; 54 tanks); and, Baltimore, Maryland
(826,000 Bbls capacity; 50 tanks). In addition to the foregoing, the other ST
facilities are situated in Alabama (2), Arizona, California (2), the District
of Columbia (2), Florida, Georgia (6), Illinois (2), Indiana, Kansas, Maryland,
Minnesota, New Mexico, Oklahoma, Texas, Virginia (2) and Wisconsin, including
two terminals acquired by the Partnership in 1996 that are located adjacent to
existing facilities owned by KPP. 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 loading and unloading of product at the terminal. An increasingly
important aspect of the versatility and service capabilities of an operator is
that operator's ability to offer product handling and storage which complies
with applicable environmental, safety and health regulations, among others,
especially since customers may retain the liability for certain acts of
non-compliance with such regulations.
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PRODUCTS
The variety of products that can be stored at ST's terminal storage
facilities is a significant part of, what the Company 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, 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 ST's business. Ten of ST's terminal sites are involved in
the terminaling or transport (via pipeline) of jet fuel for the Defense
Department. Seven of the ten 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. 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. KPL, in its capacity as General Partner of the Partnership, does not
believe that ST's 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 groundwater contamination at certain of its Pipeline-related terminal
sites, resulting from spills 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.
Additionally, from time to time, the Partnership has experienced limited
groundwater 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, at times using extraction wells and air strippers, 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. Further, ST has
been named as a "potentially responsible party" for a federally-designated and
EPA-supervised "Superfund" site where a small amount of material handled by the
former operator was attributed to the facility owned by ST. While the Company
believes that the Partnership's obligations in connection with the remediation
process at this location will be de minimis, until a final settlement agreement
is signed with the EPA, there is a possibility that the EPA could bring
additional claims against ST (See:
"Legal Proceedings").
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RECENT DEVELOPMENTS
On January 26, 1996, the Company used approximately $8,000,000 of the
proceeds received through a September 1995 public offering by the Partnership
of 3,500,000 Partnership Preference Units (NYSE: KPU) at a price of $22.50 per
unit to redeem all of the outstanding shares of its 12% Convertible Class A
Preferred Stock, Series D, which were originally issued in connection with the
Company's acquisition of Furmanite. On February 1, 1996, the Company used a
portion of the offering proceeds to retire a $6,000,000 bank loan. The
Preference Units, which had been owned by KPL since 1989, represent a separate
class of units from, and are junior to, the Partnership's Senior Preference
Units (NYSE: KPP) ("SPUs"), which SPUs have been the subject of two previous
public offerings in 1989 and 1993. The Company, through a dividend from its KPL
subsidiary, realized, in 1995, net proceeds of approximately $74,000,000 from
the offering of Preference Units; following which, the Company continued to
retain control of the Partnership through a 2% General Partner interest and an
aggregate 31% limited partner interest in the Partnership. A substantial
portion of the proceeds from the offering were used by the Company in 1995 to
retire two outstanding debt issues: $5,011,000 of Moran Energy Inc. 11.5%
Subordinated Debentures and $43,200,000 of Moran Energy International, N.V. 8%
Convertible Subordinated Debentures, and to repay a $10,000,000 bank term loan.
(See: "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Industrial Field Services - Recent Developments").
ENVIRONMENTAL CONTROLS
The Company believes that it is in substantial compliance with applicable
state, federal and local legislation and regulations relating to environmental
controls, and the existence of such laws and regulations has not had, nor at
this time is expected to have, any materially restrictive effect on the
Company. To date, the Company has not accounted for costs or capital
expenditures incurred for environmental control facilities separately from
other costs incurred in the operation of its businesses. The Company does not,
however, believe that any such costs or expenditures have been material, and
the Company does not expect that under present conditions such costs or
expenditures will become material in the foreseeable future.
EMPLOYEES
At December 31, 1996, the Company and its subsidiaries employed 1,659
persons, of which a total of 1,119 persons were employed by the Company's
Furmanite subsidiaries, collectively, and a total of 426 persons were employed
by KPL. The Partnership has no employees, as the business and operations of the
Partnership are conducted by KPL, the General Partner of the Partnership and a
wholly-owned subsidiary of the Company. As of December 31, 1996, approximately
588 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, 1996, approximately 167 the persons employed
by KPL were subject to representation by unions for collective bargaining
purposes; however, except for approximately 38 persons employed by the terminal
division of KPL who were subject to representation by the Oil, Chemical and
Atomic Workers International Union AFL-CIO ("OCAW"), there were no collective
bargaining or other similar contracts covering employees of KPL in effect at
that date. The terminal division of KPL has an agreement with the OCAW
regarding conditions of employment for such persons, which agreement is in
effect through June 28, 1999 and is subject to automatic renewal for successive
one-year periods unless the terminal division of KPL or OCAW serves written
notice to terminate or modify such agreement in a timely manner.
ITEM 2. PROPERTIES
The corporate headquarters of the Company are located in Richardson,
Texas, in a modern, sixteen story building pursuant to a five year lease
agreement. In addition to properties owned or leased by its industrial field
services and pipeline transportation and liquids terminaling businesses, the
Company, through its wholly-owned subsidiary, Fields Financial Services, Inc.,
also leases office space in Bryan, Texas.
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Descriptions of other properties owned or utilized by the Company (or its
subsidiaries) are contained in Item 1 of this report and such descriptions are
hereby incorporated by reference into this Item 2. Under the caption
"Commitments and Contingencies" in Note 9 to the Company's consolidated
financial statements, additional information is presented concerning
obligations of the Company (or its subsidiaries) for lease and rental
commitments. Such additional information is also incorporated by reference into
this Item 2.
ITEM 3. LEGAL PROCEEDINGS
In August 1996, the Company settled a lawsuit filed in Germany in February
1996 on behalf of Gesellschaft fur Industrieanlagen und Maschineninstandhaltung
GmbH or G.I.M. Engineering ("GIM") against one of the Company's German
subsidiaries, Furmanite Technische Dienstleistungen GmbH ("FTD"), concerning
the consideration received in a German contract that was part of a series of
transactions relating to the sale of one of the Company's domestic
subsidiaries. The settlement of this lawsuit was adequately reserved.
Two of the Company's subsidiaries, which subsidiaries are no longer
actively conducting any operations, have been notified that they are
"potentially responsible parties" in connection with two separate governmental
investigations relating to two separate waste disposal facilities which may
each be subject to remedial action as locations listed on the Environmental
Protection Agency's ("EPA") Superfund National Priority List ("Superfund").
Such 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. These particular
proceedings are based upon allegations that the Company's former operating
subsidiaries disposed of hazardous substances at the facilities in question.
One proceeding involves actions allegedly taken by the Company's former
operating subsidiary at a time prior to the acquisition of such subsidiary by
the Company. The Company's subsidiaries have 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 have been
ongoing since 1989 and there was no significant activity relating to this
matter that occurred during 1996. The second proceeding involves alleged
activity by a corporation in which a former operating subsidiary of the Company
held a 50% interest, which interest is no longer owned by the Company's
subsidiary or any affiliate of the Company. Accordingly, the Company believes
that its liability in this proceeding is governed by the provisions of the
agreement pursuant to which the Company's interest in such corporation was
disposed. The Company has reviewed its potential exposure, if any, in
connection with each location, 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 matters 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.
In addition, from time to time, the Company and certain of its
subsidiaries are involved in various litigation and other legal proceedings in
the ordinary course of business. However, the Company believes that a
resolution of these matters will not have a material adverse affect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders in the fourth quarter of 1996.
9
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of the Company's Common Stock are listed and traded principally on
the New York Stock Exchange. At March 18, 1997, there were approximately 4,619
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
------------- ---- ---
1995:
First Quarter 2 1/4 1 1/2
Second Quarter 2 3/4 1 3/4
Third Quarter 2 5/8 2
Fourth Quarter 2 2/8 1 7/8
1996:
First Quarter 3 1/4 2 1/4
Second Quarter 3 3/4 2 3/8
Third Quarter 3 3/8 2 1/2
Fourth Quarter 3 3/4 3
1997:
First Quarter 4 1/2 3 1/8
(through March 10, 1997)
Dividends on the Company's Adjustable Rate Cumulative Class A Preferred
Stock have been regularly paid since the third quarter of 1990, in accordance
with the provisions of the Certificates of Designation filed with the Delaware
Secretary of State for such Preferred Stock. In connection with its 1991
acquisition of Furmanite, the Company issued a total of 1,098,373 shares of 12%
Convertible Class A Preferred Stock, Series D, stated value of 5.34 Pounds
Sterling. In January 1996, all outstanding Series D shares were redeemed by the
Company with approximately $8,000,000 of the proceeds from the public offering
of 3,500,000 Preference Units of KPP. Also, the Company has issued 600
restricted shares of its Adjustable Rate Cumulative Class A Preferred Stock,
Series C, to three senior officers of the Company, in connection with an
executive compensation program established by the Company. In 1994, the holders
of these shares were paid an aggregate dividend of $28,422, which had been
previously accrued in 1991 and, in 1996, 100 of such shares were redeemed by
the Company. Among other restrictions on payment of dividends on this Series of
Preferred Stock, dividends on the Series C Preferred Stock that are otherwise
payable for a year in which the Company has a net loss are not paid until
completion of a year in which the Company has a net profit (see "Note 8 to
Company's Consolidated Financial Statements"). Additionally, the credit
facilities used to acquire Furmanite and for the working capital of each of
Furmanite and KPL each contain restrictions on the respective subsidiary's
ability to pay dividends or distributions to the Company, if an event of
default exists.
10
11
ITEM 6. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following selected financial data (in thousands, except per share
amounts) is derived from the consolidated financial statements of Kaneb
Services, Inc. and should be read in conjunction with the consolidated
financial statements and related notes included herein. The Company has not
declared a dividend on its common stock for any of the periods presented.
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Revenues $228,861 $212,062 $208,722 $198,549 $176,703
======== ======== ======== ======== ========
Operating income $ 53,815 $ 43,465 $ 31,964 $ 29,530 $ 14,611
======== ======== ======== ======== ========
Net income:
Income from continuing
operations before gains on
sale or issuance of pipeline
partnership units $ 7,024 $ 5,024 $ 2,035 $ 1,032 $ (5,532)
Gains on sale or issuance of
pipeline partnership units -- 54,157 -- 1,512 --
-------- -------- -------- -------- --------
Continuing operations 7,024 59,181 2,035 16,154 (5,532)
Discontinued operations -- -- -- -- 996
Cumulative effect of
accounting changes (a) -- -- -- -- 742
-------- -------- -------- -------- --------
Net income $ 7,024 $ 59,181 $ 2,035 $ 16,154 $ (3,794)
======== ======== ======== ======== ========
PER SHARE DATA:
Earnings per common share:
Continuing operations $ .19 $ 1.72 $ .02 $ .46 $ (.22)
Discontinued operations -- -- -- -- .03
Cumulative effect of
accounting changes(a) -- -- -- -- .02
-------- -------- -------- -------- --------
Total $ .19 $ 1.72 $ .02 $ .46 $ (.17)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash flow provided by operating
activities $ 48,491 $ 39,964 $ 25,890 $ 30,880 $ 19,183
Cash and cash equivalents 23,693 30,389 9,506 24,327 10,596
Working capital 20,033 16,302 (42,797) 15,842 12,555
Total assets 404,691 409,827 284,213 287,472 215,848
Long-term debt 186,544 191,846 103,376 152,678 141,430
Stockholders' equity 75,366 69,022 18,844 14,861 (1,519)
(a) Represents the cumulative effect of accounting changes from the adoption
of new financial accounting standards relating to taxes.
11
12
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 Services, Inc. (the "Company") and notes thereto
included elsewhere in this report.
CONSOLIDATED RESULTS OF OPERATIONS
(in millions)
--------------------------
1996 1995 1994
------ ------ ------
Consolidated revenues ............................ $228.9 $212.1 $208.7
Consolidated operating income .................... $ 53.8 $ 43.5 $ 32.0
Consolidated operating income before
depreciation and amortization ................. $ 69.2 $ 56.5 $ 44.8
Consolidated net income before gains
on sale of pipeline partnership
units ......................................... $ 7.0 $ 5.0 $ 2.0
Consolidated capital expenditures,
excluding acquisitions ........................ $ 10.7 $ 13.4 $ 10.2
Consolidated revenues increased $16.8 million in 1996, primarily as a
result of the acquisition of terminaling assets that were acquired by KPP in
December 1995. Consolidated operating income increased $10.3 million from 1995
to 1996. Pipeline and terminaling services operating income increased $8.8
million in 1996 largely due to the terminaling assets acquired by KPP in
December 1995 and industrial field services operating income increased $1.2
million in 1996. Consolidated capital expenditures, excluding acquisitions,
returned to more normal levels in 1996 after extraordinarily large industrial
field services equipment purchases and pipeline and terminaling capital
maintenance projects in 1995.
Consolidated revenues increased $3.4 million in 1995. Pipeline and
terminaling services revenues increased $18.2 million, primarily as a result of
the acquisition of the West Pipeline by KPP in February 1995. Near the end of
1994, unprofitable operations in eastern Germany, which generated approximately
$18.9 million in revenues in 1994, were sold. Revenues from the remaining core
business in industrial field services increased $5.2 million in 1995.
Consolidated operating income increased $11.5 million in 1995. Improvements in
industrial field services totaled $2.3 million while pipeline and terminaling
services were up $9.5 million, primarily as a result of the acquisition of the
West Pipeline. Consolidated capital expenditures, excluding acquisitions,
increased $3.2 million from 1994 to 1995, principally as a result of higher
industrial field services equipment purchases and pipeline and terminaling
capital maintenance projects.
12
13
Industrial Field Services
The Company's industrial field services business is conducted through
Furmanite, which was acquired in March 1991. Furmanite provides specialized
industrial field services to plants in the process and power industries and to
refineries and chemical plants.
(in millions)
------------------------------
1996 1995 1994
------ ------ ------
Revenues:
United States ......................... $ 32.7 $ 32.8 $ 34.2
United Kingdom ........................ 34.7 37.6 36.3
Germany ............................... 16.1 16.2 33.0
Rest of World ......................... 19.8 17.9 14.7
------ ------ ------
$103.3 $104.5 $118.2
====== ====== ======
Operating income:
United States ......................... $ 1.5 $ 1.9 $ 1.7
United Kingdom ........................ 2.1 3.3 2.4
Germany ............................... .8 (1.2) (3.6)
Rest of World ......................... 2.0 .8 1.3
Headquarters .......................... (1.3) (.9) (.2)
------ ------ ------
$ 5.1 $ 3.9 $ 1.6
====== ====== ======
Operating income before
depreciation and amortization ............ $ 9.3 $ 8.0 $ 6.6
====== ====== ======
Capital expenditures ....................... $ 3.5 $ 4.3 $ 2.8
====== ====== ======
Furmanite's revenues decreased $1.2 million in 1996 primarily as a result
of non-recurring passive fire protection work in the United Kingdom in 1995
that was only partially offset by increases in revenues in other countries.
Revenues increased $5.2 million in 1995, excluding unprofitable general
maintenance projects in eastern Germany that had revenues of approximately
$18.9 million in 1994 and were sold near the end of 1994. Revenues from
traditional underpressure services improved primarily in the United States in
1996 and in 1995 in the United Kingdom and other western European countries
where economic conditions had been sluggish in previous years. Revenues from
turnaround services in 1995 included some large projects that typically do not
recur on an annual basis.
Operating income increased $1.2 million or 31% in 1996 as a result of
improvements in Furmanite's operations around the world, particularly in Rest
of World countries and in Germany. Declines in the United Kingdom in 1996
primarily resulted from non-recurring passive fire protection work in 1995 and
declines in the United States resulted primarily from large turnaround projects
that were completed in 1995. Operating income increased $2.3 million or 144% in
1995 as a result of improvements in Furmanite's operations around the world,
particularly in the United Kingdom and in Germany. Declines in Rest of World
countries in 1995 primarily resulted from non-recurring product sales with high
margins in the Far East in 1994.
Capital expenditures are primarily related to field services equipment and
the implementation of new services. Capital expenditures for 1997 are currently
estimated to be $2 million to $4 million, depending on the economic environment
and the needs of the business.
13
14
Pipeline and Terminaling Services
The Company's pipeline and terminaling services business includes the
operations of KPP which owns refined petroleum products pipeline assets and,
since 1993, petroleum products and specialty liquids storage and terminaling
assets. The Company 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.
(in millions)
----------------------------
1996 1995 1994
------ ------ ------
Revenues ...................................... $117.6 $ 96.9 $ 78.7
====== ====== ======
Operating income .............................. $ 51.3 $ 42.5 $ 33.0
====== ====== ======
Operating income before
depreciation and amortization ............... $ 62.4 $ 50.8 $ 40.2
====== ====== ======
Capital expenditures, excluding
acquisitions ................................ $ 7.1 $ 9.0 $ 7.2
====== ====== ======
Revenues increased $20.7 million or 21% in 1996 and operating income
increased $8.8 million or 21% primarily due to the acquisition of terminaling
assets in December 1995 by KPP combined with continued improvements at the West
Pipeline. Revenues increased $18.2 million or 23%, while operating income
increased $9.5 million or 29% in 1995 primarily attributable to the acquisition
of the West Pipeline by KPP in February 1995.
The interest of outside non-controlling partners in KPP's net income was
$27.0 million, $18.0 million and $12.6 million in 1996, 1995 and 1994,
respectively. The increases in both 1996 and 1995 are attributable to the sale
by the Company in September 1995 of 3.5 million of the preference units that it
had owned since 1989. Proceeds from the 1995 sale were used to permanently
retire debt and redeem a preferred stock issue. Distributions paid to the
outside non-controlling unitholders of KPP aggregated approximately $24.7
million, $16.3 million and $16.2 million in 1996, 1995 and 1994, respectively.
Capital expenditures relate to the maintenance of existing operations.
Routine capital expenditures for 1997 are currently estimated to be between $5
to $7 million.
In February 1995, KPP, through a wholly-owned subsidiary, acquired the
pipeline assets of WYCO Pipe Line Company (the "West Pipeline"), a company
jointly owned by GATX Terminals Corporation and Amoco Pipeline Company, for
$27.1 million plus transaction costs and the assumption of certain
environmental liabilities. KPP financed the acquisition by the sale of first
mortgage notes due February 24, 2002, which bear interest at the rate of 8.37%
per annum.
In December 1995 KPP, through a wholly-owned subsidiary, acquired the
liquids terminaling assets of Steuart Petroleum Company and certain of its
affiliates (collectively "Steuart") for $68 million plus transaction costs and
the assumption of certain environmental liabilities. KPP initially financed the
acquisition by a bank bridge loan, which was later refinanced with first
mortgage notes due in varying amounts in June 2001, 2003, 2006 and 2016 bearing
interest at rates ranging from 7.08% to 7.98% per annum.
Other Operations
The Company had revenues of $8.0 million, $10.6 million, and $11.8 million
in 1996, 1995 and 1994, respectively, and operating income of $2.2 million,
$1.7 million and $1.5 million for the same periods related to subsidiaries that
provide information processing, payment and collection services primarily to
financial institutions.
14
15
New Accounting Pronouncements
In 1995, The Financial Accounting Standards Board ("FASB") issued
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). SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995 and requires the write-down to market of
certain long-lived assets. The Company adopted SFAS 121 in the first quarter of
1996 and such adoption did not have a material effect on the Company's
financial position or results of operations.
Also in 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation, which permits either recording the estimated fair value of
stock-based compensation over the applicable vesting period or disclosing the
unrecorded cost and the related effect on earnings per share in the notes to
the consolidated financial statements. In accordance with the provisions of
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. The Notes to the Consolidated Financial Statements contain a
summary of the pro forma effects to reported net income and earnings per share
for 1996 and 1995 if the Company had elected to recognize compensation cost
based on the estimated fair value of the options granted at the grant date as
prescribed by SFAS 123.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by consolidated operating activities was $48.6 million,
$40.0 million and $25.9 million during the years 1996, 1995 and 1994,
respectively. A substantial portion of the increases in both 1996 and 1995
related to pipeline and terminaling services, primarily as a result of the
acquisitions by KPP of the Steuart terminals in December 1995 and the West
Pipeline in February 1995.
At December 31, 1996, $23.0 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 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 specialized industrial
field services group of companies.
In 1994 KPP, through a 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 1994, another wholly-owned subsidiary of KPP entered into a Restated Credit
Agreement with a group of banks that provides a $15 million revolving credit
facility through January 31, 1998. The credit facility bears interest at
variable interest rates and has a commitment fee of .2% per annum of the unused
credit facility. At December 31, 1996, $5 million was outstanding under the
credit facility. No amounts were drawn under the credit facility at December
31, 1995. In 1995 KPP financed the acquisition of the West Pipeline with the
issuance of $27 million of Notes due February 24, 2002, which bear interest at
the rate of 8.37% per annum. The Notes and credit facility are secured by a
mortgage on substantially all of the pipeline assets of KPP and contain certain
financial and operational covenants. The acquisition by KPP of the Steuart
terminaling assets in December 1995 was initially financed by a $68 million
bridge loan from a bank. KPP refinanced this bridge loan in June 1996 with a
series of first mortgage notes (the "Steuart Notes") bearing interest at rates
ranging from 7.08% to 7.98% and maturing in varying amounts in June 2001, 2003,
2006 and 2016. The Steuart Notes are secured, pari passu with the Notes and
credit facility, by a mortgage on the East Pipeline.
In September 1995 the Company, through a wholly-owned subsidiary, sold in
a public offering 3.5 million Preference Units it held in KPP. The Company
received net cash proceeds of approximately $74 million related to the sale and
recorded a gain of $54.2 million. The Company used the proceeds from the sale
to retire its 8% convertible subordinated debentures totaling $43.2 million,
retire its 11.5% subordinated debentures totaling $5.0 million, repay its $10
million term loan, redeem, in 1996, its Series D Preferred Stock for
approximately $8.0 million and retire, in 1996, its $6.0 million 8.85% senior
note. The Company continues to control the pipeline and terminaling operations
of KPP through its 2% general partner interest and a 31% limited partner
interest.
15
16
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 .5% per annum of the
unused credit facility. No amounts were drawn under the credit facility at
December 31, 1996 or 1995.
Consolidated capital expenditures for 1997 have been budgeted at $7
million to $11 million, depending on the economic environment and the needs of
the business. Consolidated debt maturities are $4.6 million, $8.8 million, $2.2
million, $1.5 million and $69.4 million for each of the five years ending
December 31, 2001. Capital expenditures in 1997 are expected to be funded from
existing cash and anticipated cash from operations.
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
None.
PART III
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K is
incorporated by reference from portions of the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the fiscal year covered by this Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS PAGE
----
Set forth below are financial statements appearing in this report.
Report of Independent Accountants ............................... F-1
Financial Statements of Kaneb Services, Inc., and Subsidiaries:
Consolidated Statements of Income - Years Ended December 31,
1996, 1995 and 1994 ......................................... F-2
Consolidated Balance Sheets - December 31, 1996 and 1995 ...... F-3
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994 ................ F-4
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended December 31, 1996, 1995 and 1994 ....... F-5
Notes to Consolidated Financial Statements .................... F-6
16
17
(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, 1996,
1995 and 1994 ............................................... F-20
Balance Sheets - December 31, 1996 and 1995 ................... F-21
Statements of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994 ............................ F-22
Schedule II - Kaneb Services, Inc. Valuation and Qualifying
Accounts - Years Ended December 31, 1996, 1995 and 1994 ....... F-23
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 for the year
ended December 31, 1981, which exhibit is hereby incorporated by
reference.
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated May 28, 1985, filed as Exhibit 4.1 of the
exhibits to the Registrant's Quarterly Report on Form 10-Q 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 Quarterly Report on 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 Annual Report on Form 10-K for the year
ended December 31, 1990 ("1990 Form 10-K"), 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 Quarterly Report on Form 10-Q for the
quarter ended September 30, 1990, which exhibit is hereby incorporated
by reference.
3.7 By-laws of the Registrant, filed as Exhibit 3.5 of the exhibits to the
Registrant's Annual Report on Form 10-K for year ended December 31,
1985, which exhibit is hereby incorporated by reference.
4.1 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, filed as Exhibit 4 of the exhibits
to the Registrant's Quarterly Report of Form 10-Q for the quarter
ended September 30, 1983, which exhibit is hereby incorporated by
reference.
17
18
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 D, dated February 11, 1991,
filed as Exhibit 4.3 of the exhibits to the Registrant's 1990 Form
10-K, 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 C, dated April 23, 1991,
filed as Exhibit 4.4 of the exhibits to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991, 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 Annual Report on 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 of the exhibits to the Annual Report on Form 10-K for
the year ended December 31, 1984, 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, filed as Exhibit 4.1 to
the exhibits of the Registrant's Form S-8 (S.E.C. File No. 333-08725),
which exhibit is 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), which exhibit is 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
Registrant's Form S-8 (S.E.C. File No. 333-22109), 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), which exhibit is hereby incorporated by
reference.
10.10 Form of Termination Agreement, filed herewith.
18
19
10.11 Amended and Restated Loan Agreement between Furmanite PLC, Bank of
Scotland and certain other Lenders, dated May 1, 1991 (the "Furmanite
Loan Agreement"), filed as Exhibit 10.8 of the exhibits to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994 ("1994 Form 10-K"), which exhibit is hereby incorporated by
reference.
10.12 Amendments to the Furmanite Loan Agreement, filed herewith.
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 Annual Report on Form 10-K for the year ended December
31, 1995 (the "1995 Form 10-K"), which exhibit is hereby incorporated
by reference.
21 List of subsidiaries of the Registrant, filed herewith.
23 Consent of independent accountants: Price Waterhouse LLP, filed
herewith.
27 Financial Data Schedule, filed herewith.
Certain instruments respecting long-term debt of the Registrant have
been omitted pursuant to instructions as to Exhibits. The Registrant agrees to
furnish copies of any of such instruments to the Commission upon request.
(b) REPORTS ON FORM 8-K - NONE.
19
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Kaneb Services, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on pages 16 and 17 present fairly, in all
material respects, the financial position of Kaneb Services, Inc. and its
subsidiaries ("the Company") at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, 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.
PRICE WATERHOUSE LLP
Dallas, Texas
February 20, 1997
F-1
21
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenues .......................................... $228,861,000 $212,062,000 $208,722,000
------------ ------------ ------------
Costs and expenses:
Operating costs ............................... 154,935,000 151,014,000 159,913,000
Depreciation and amortization ................. 15,434,000 13,055,000 12,807,000
General and administrative .................... 4,677,000 4,528,000 4,038,000
------------ ------------ ------------
Total costs and expenses .................... 175,046,000 168,597,000 176,758,000
------------ ------------ ------------
Operating income .................................. 53,815,000 43,465,000 31,964,000
Interest income ................................... 859,000 858,000 446,000
Other expense ..................................... (832,000) (1,037,000) (251,000)
Interest expense .................................. (15,420,000) (15,927,000) (13,752,000)
Amortization of excess of cost over
fair value of net assets of acquired
business ...................................... (1,848,000) (1,847,000) (1,846,000)
------------ ------------ ------------
Income before interest of outside non-controlling
partners in pipeline partnership's net income,
income taxes and gain on sale of pipeline
partnership units ............................. 36,574,000 25,512,000 16,561,000
Interest of outside non-controlling partners
in pipeline partnership's net income .......... (26,969,000) (17,953,000) (12,567,000)
Gain on sale of pipeline
partnership units ............................. -- 54,157,000 --
Income tax expense ................................ (2,581,000) (2,535,000) (1,959,000)
------------ ------------ ------------
Net income ........................................ 7,024,000 59,181,000 2,035,000
Dividends applicable to preferred stock ........... 502,000 1,527,000 1,489,000
------------ ------------ ------------
Net income applicable to common stock ............. $ 6,522,000 $ 57,654,000 $ 546,000
============ ============ ============
Earnings per common share - primary
and fully diluted ............................. $ .19 $ 1.72 $ .02
============ ============ ============
Weighted average number of common
shares outstanding ........................... 33,631,000 33,450,000 32,664,000
============ ============ ============
See notes to consolidated financial statements.
F-2
22
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 23,693,000 $ 30,389,000
Accounts receivable, trade (net of allowance for
doubtful accounts of $666,000 in 1996
and $1,133,000 in 1995) ............................ 33,157,000 32,708,000
Inventories .......................................... 6,706,000 5,809,000
Prepaid expenses and other current assets ............ 6,367,000 7,465,000
------------ ------------
Total current assets ............................... 69,923,000 76,371,000
------------ ------------
Property and equipment .................................. 373,087,000 363,545,000
Less accumulated depreciation and amortization .......... 106,449,000 99,698,000
------------ ------------
Net property and equipment ........................... 266,638,000 263,847,000
------------ ------------
Excess of cost over fair value of net assets
of acquired business ............................... 63,183,000 65,031,000
------------ ------------
Other assets ............................................ 4,947,000 4,578,000
------------ ------------
$404,691,000 $409,827,000
============ ============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt:
Industrial field services .......................... $ 2,558,000 $ 2,357,000
Pipeline and terminaling services .................. 2,036,000 1,777,000
------------ ------------
Total current portion of long-term debt .......... 4,594,000 4,134,000
Accounts payable ..................................... 9,015,000 11,947,000
Accrued expenses ..................................... 36,281,000 35,787,000
Accrued redemption of preferred stock ................ -- 8,201,000
------------ ------------
Total current liabilities .......................... 49,890,000 60,069,000
------------ ------------
Long-term debt, less current portion:
Industrial field services ........................... 23,425,000 25,691,000
Pipeline and terminaling services .................... 139,453,000 136,489,000
Parent company ....................................... 23,666,000 29,666,000
------------ ------------
Total long-term debt, less current portion ......... 186,544,000 191,846,000
------------ ------------
Net liabilities of discontinued operations .............. 2,759,000 3,320,000
------------ ------------
Deferred income taxes and other liabilities ............. 14,147,000 11,235,000
------------ ------------
Interest of outside non-controlling partners
in pipeline partnership .............................. 75,985,000 74,335,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value ................... 5,792,000 5,814,000
Common stock, without par value. Authorized
60,000,000 shares; issued 36,491,027 shares
in 1996 and 36,479,954 in 1995 ..................... 4,230,000 4,230,000
Additional paid-in capital ........................... 197,213,000 197,151,000
Accumulated deficit .................................. (111,596,000) (118,118,000)
Treasury stock, at cost .............................. (20,631,000) (19,552,000)
Cumulative foreign currency translation adjustment ... 358,000 (503,000)
------------ ------------
Total stockholders' equity ......................... 75,366,000 69,022,000
------------ ------------
$404,691,000 $409,827,000
============ ============
See notes to consolidated financial statements.
F-3
23
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Operating Activities:
Net income ........................................... $ 7,024,000 $ 59,181,000 $ 2,035,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................... 15,434,000 13,055,000 12,807,000
Amortization of excess of cost over
net assets acquired ............................ 1,848,000 1,847,000 1,846,000
Interest of outside non-controlling partners
in pipeline partnership ........................ 26,969,000 17,953,000 12,567,000
Deferred income taxes ............................ 766,000 (778,000) 457,000
Gain on sale of pipeline partnership units ....... -- (54,157,000) --
Changes in current assets and liabilities:
Short-term investments ......................... -- 1,020,000 (1,020,000)
Accounts receivable, net ....................... (449,000) (6,857,000) 1,449,000
Inventories .................................... (897,000) 301,000 79,000
Prepaid expenses and other current assets ...... 1,098,000 (1,968,000) (2,288,000)
Accounts payable and accrued expenses .......... (3,165,000) 10,367,000 (2,042,000)
------------ ------------ ------------
Net cash provided by operating activities .......... 48,628,000 39,964,000 25,890,000
------------ ------------ ------------
Investing Activities:
Capital expenditures ................................. (10,685,000) (13,428,000) (10,185,000)
Acquisitions made by pipeline partnership ............ (8,507,000) (97,850,000) (12,320,000)
Decrease in other assets, net ........................ 3,881,000 4,739,000 1,975,000
------------ ------------ ------------
Net cash used in investing activities .............. (15,311,000) (106,539,000) (20,530,000)
------------ ------------ ------------
Financing Activities:
Issuance of long-term debt ........................... 1,735,000 6,975,000 14,319,000
Issuance of long-term debt by pipeline partnership ... 74,500,000 96,500,000 41,350,000
Payments on long-term debt ........................... (10,138,000) (67,957,000) (15,387,000)
Payments on long term debt by pipeline partnership ... (71,276,000) (3,047,000) (42,201,000)
Distributions to outside non-controlling
partners in pipeline partnership ................... (24,667,000) (16,306,000) (16,168,000)
Preferred stock dividends paid ....................... (502,000) (1,328,000) (1,402,000)
Net proceeds from sale of pipeline
partnership units .................................. -- 73,620,000 --
Redemption of preferred stock ........................ (8,025,000) -- --
Purchase of treasury stock ........................... (1,079,000) -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities ....................................... (39,452,000) 88,457,000 (19,489,000)
------------ ------------ ------------
Cash used in discontinued operations .................... (561,000) (999,000) (692,000)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ........ (6,696,000) 20,883,000 (14,821,000)
Cash and cash equivalents at beginning of year .......... 30,389,000 9,506,000 24,327,000
------------ ------------ ------------
Cash and cash equivalents at end of year ................ $ 23,693,000 $ 30,389,000 $ 9,506,000
============ ============ ============
See notes to consolidated financial statements.
F-4
24
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
FOREIGN
PREFERRED COMMON ADDITIONAL ACCUMULATED TREASURY CURRENCY
STOCK STOCK PAID-IN CAPITAL DEFICIT STOCK TRANSLATION
------------ ------------ --------------- ------------- ------------ ------------
BALANCE AT JANUARY 1, 1994 ............. $ 13,707,000 $ 4,222,000 $ 201,976,000 $(176,318,000) $(28,755,000) $ 29,000
Net income for the year .............. -- -- -- 2,035,000 -- --
Common stock issued .................. -- -- (3,325,000) -- 5,320,000 --
Preferred stock dividends declared ... -- -- -- (1,489,000) -- --
Conversion of Series D
preferred stock .................... (87,000) 2,000 85,000 -- -- --
Foreign currency translation
adjustment ......................... 465,000 -- -- -- -- 977,000
------------ ------------ --------------- ------------- ------------ ------------
BALANCE AT DECEMBER 31, 1994 ........... 14,085,000 4,224,000 198,736,000 (175,772,000) (23,435,000) 1,006,000
Net income for the year .............. -- -- -- 59,181,000 -- --
Common stock issued .................. -- 6,000 (2,764,000) -- 3,883,000 --
Preferred stock dividends declared ... -- -- -- (1,527,000) -- --
Series D preferred stock redemption .. (8,201,000) -- 1,179,000 -- -- (1,179,000)
Foreign currency translation
adjustment ......................... (70,000) -- -- -- -- (330,000)
------------ ------------ --------------- ------------- ------------ ------------
BALANCE AT DECEMBER 31, 1995 ........... 5,814,000 4,230,000 197,151,000 (118,118,000) (19,552,000) (503,000)
Net income for the year .............. -- -- -- 7,024,000 -- --
Common stock issued .................. -- -- 10,000 -- -- --
Purchase of treasury stock ........... -- -- -- -- (1,079,000) --
Preferred stock dividends declared ... -- -- -- (502,000) -- --
Conversion of Series D
preferred stock .................... -- -- 30,000 -- -- --
Series C preferred stock redemption .. (22,000) -- 22,000 -- -- --
Foreign currency translation
adjustment ......................... -- -- -- -- -- 861,000
------------ ------------ --------------- ------------- ------------ ------------
BALANCE AT DECEMBER 31, 1996 ........... $ 5,792,000 $ 4,230,000 $ 197,213,000 $(111,596,000) $(20,631,000) $ 358,000
============ ============ =============== ============= ============ ============
See notes to consolidated financial statements.
F-5
25
KANEB SERVICES, INC.
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
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, 1996. All
significant intercompany transactions and balances are eliminated in
consolidation.
Segment Information
The Company provides specialized industrial field services to an
international client base that includes oil refineries, chemical plants,
pipelines, offshore drilling and production platforms, steel mills, food
and drink processing facilities, power generation, and other process
industries. The Company, as general partner, also manages and operates the
pipeline and terminaling business of KPP.
Cash, Cash Equivalents and Short-term Investments
The Company's policy is to invest cash in highly liquid investments with
maturities of three months or less, upon acquisition. Accordingly,
uninvested cash balances are kept at minimum levels. Such investments are
valued at cost, which approximates market, and are classified as cash
equivalents. Similar investments with original maturities beyond three
months are considered short-term investments and are carried at cost,
which approximates market value. The Company does not have any derivative
financial instruments.
Inventories
Inventories consist primarily of finished goods of the industrial services
segment and are valued at the lower of average 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.
Revenue Recognition
Substantially all revenues are recognized when services to unaffiliated
customers have been rendered. Pipeline transportation revenues are
recognized upon receipt of the products into the pipeline system.
Earnings Per Share
Earnings per common share data have been computed by dividing income
applicable to common stock by the weighted average number of shares
outstanding during each period. The effect of common stock equivalents and
other potentially dilutive securities on such computation was
anti-dilutive or insignificant for each period presented.
F-6
26
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 Business
The excess of the purchase price of a specialized industrial field
services company over the fair value of the net assets acquired is being
amortized on a straight-line basis over a period of 40 years. Accumulated
amortization was $10.3 million and $8.4 million at December 31, 1996 and
1995, respectively.
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 financial statement items for 1995 and 1994 have been reclassified
to conform with the 1996 presentation.
2. ASSET ACQUISITIONS BY PIPELINE PARTNERSHIP
In February 1995, KPP acquired the refined petroleum product pipeline
assets (the "West Pipeline") of Wyco Pipe Line Company for $27.1 million,
plus transaction costs and the assumption of certain environmental
liabilities. The West Pipeline was owned 60% by a subsidiary of GATX
Terminals Corporation and 40% by a subsidiary of Amoco Pipe Line Company.
KPP financed the acquisition by the issuance of $ 27 million of first
mortgage notes. The assets acquired from Wyco Pipe Line Company did not
include certain assets that were leased to Amoco Pipe Line Company and the
purchase agreement did not provide for either (i) the continuation of an
arrangement with Amoco Pipe Line Company for the monitoring and control of
pipeline flows or (ii) the extension or assumption of certain credit
agreements that Wyco Pipe Line company had with its shareholders.
In December 1995, KPP acquired the liquids terminaling assets of Steuart
Petroleum Company and certain of its affiliates (collectively, "Steuart")
for $68 million, plus transaction costs and the assumption of certain
environmental liabilities. KPP financed the acquisition price by the
issuance of $68 million of first mortgage notes. The asset purchase
agreement includes a provision for an earn-out payment based upon revenues
of one of the terminals exceeding a specified amount for a seven-year
period beginning in January 1996. The contracts also include provisions
for the continuation of all terminaling contracts in place at the time of
the acquisition, including those contracts with Steuart.
KPP's acquisitions have been accounted for using the purchase method of
accounting. The total purchase price of each acquisition has been
allocated to the assets and liabilities based on their respective fair
values based on valuations and other studies.
Assuming the above acquisitions in 1995 occurred as of the beginning of
the year ended December 31, 1995, the summarized unaudited pro forma
consolidated revenues, net income and net income per common share for 1995
would be $233,004,000, $59,025,000 and $1.72, respectively. The unaudited
pro forma financial results are for comparative purposes only and may not
be indicative of the results that would have occurred if KPP had
F-7
27
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acquired the pipeline assets of the West Pipeline and the liquids
terminaling assets of Steuart on the dates indicated or which will be
obtained in the future.
3. SALE OF PIPELINE PARTNERSHIP UNITS
In September 1995, the Company through a wholly-owned subsidiary, sold in
a public offering, 3.5 million Preference Units it held in KPP. The
Company received net cash proceeds of $73.6 million related to the sale
and recorded a gain of $54.2 million, net of expenses. The Company used
the proceeds to retire its 8% convertible subordinated debentures totaling
$43.2 million, its 11.5% subordinated debentures totaling $5.0 million and
repay its $10 million term loan in 1995 and, in 1996, to redeem $8 million
of its Series D Preferred Stock and repay $6 million of its long-term
debt. The Company continues to control the operations of KPP through its
2% general partner interest and 31% limited partner interest.
4. INCOME TAXES
Income before income tax expense is comprised of the following components:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Domestic operations ....... $ 12,580,000 $ 63,607,000 $ 8,686,000
Foreign operations ........ (2,975,000) (1,891,000) (4,692,000)
------------ ------------ ------------
$ 9,605,000 $ 61,716,000 $ 3,994,000
============ ============ ============
Income tax expense is comprised of the following components:
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
=========== =========== =========== ===========
1995:
Current ...... $ 1,415,000 $ 328,000 $ 1,570,000 $ 3,313,000
Deferred ..... (791,000) 13,000 -- (778,000)
----------- ----------- ----------- -----------
$ 624,000 $ 341,000 $ 1,570,000 $ 2,535,000
=========== =========== =========== ===========
1994:
Current ...... $ 326,000 $ 488,000 $ 688,000 $ 1,502,000
Deferred ..... 313,000 (1,000) 145,000 457,000
----------- ----------- ----------- -----------
$ 639,000 $ 487,000 $ 833,000 $ 1,959,000
=========== =========== =========== ===========
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 $88 million
and $86 million as of December 31, 1996 and 1995, respectively, primarily
relating to the Company's domestic net operating loss carryforwards and
investment tax credit carryforwards, partially offset by a valuation
reserve of approximately $86 million and
F-8
28
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$84 million, respectively. The Company has recorded a deferred tax
liability of $2.3 million and $1.7 million as of December 31, 1996 and
1995, which is associated with certain domestic 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 from continuing operations before income taxes
for the years 1996, 1995 and 1994 are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994
------------------- -------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
---------- ----- ----------- ----- ---------- -----
Tax expense at
statutory rates .............. $3,360,000 35.0 $21,601,000 35.0 $1,398,000 35.0
Increase (decrease) in taxes
resulting from:
Domestic loss carryforward
adjustments ................ (3,215,000) (33.5) (21,089,000) (34.2) (2,110,000) (52.8)
State income taxes, net ...... 622,000 6.5 1,021,000 1.7 541,000 13.5
Foreign losses not
benefited and foreign
income taxes ............... 1,814,000 18.9 1,002,000 1.6 2,130,000 53.3
---------- ----- ----------- ----- ---------- -----
$2,581,000 26.9 $ 2,535,000 4.1 $1,959,000 49.0
========== ===== =========== ===== ========== =====
At December 31, 1996, the Company had the following domestic tax attribute
carryforwards expiring in the years indicated:
YEAR OF NET OPERATING INVESTMENT
EXPIRATION LOSSES TAX CREDITS
- ---------- ------------- ------------
1997 .......................................... $ 35,662,000 $ 2,483,000
1998 .......................................... 3,971,000 4,319,000
1999 .......................................... 7,820,000 2,171,000
2000 .......................................... -- 1,786,000
2001 .......................................... 39,359,000 --
2002 .......................................... 64,553,000 --
2003 .......................................... 22,048,000 --
2005 .......................................... 16,866,000 --
2006 .......................................... 17,508,000 --
2007 .......................................... 3,038,000 --
------------ ------------
$210,825,000 $ 10,759,000
============ ============
The amounts shown above that expire in the years 1997 through 1999
represent the operating losses and investment tax credits acquired in the
acquisition of Moran Energy, Inc. and its subsidiaries and it is unlikely
that the Company will be able to utilize these specific tax carryforwards
in the future. 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.
5. 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 $1.0 million, $.9 million and $.9
million for 1996, 1995 and 1994, respectively.
F-9
29
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 November 1, 1996.
Net pension cost for the U.K. Plan included the following components:
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Service cost for benefits earned
during the period .................. $1,269,000 $1,107,000 $1,290,000
Interest cost on projected benefit
obligations ........................ 1,617,000 1,416,000 1,267,000
Less actual return on plan assets .... (2,884,000) (2,126,000) (180,000)
Net amortization and deferral ........ 620,000 243,000 (1,663,000)
---------- ---------- ----------
Net pension cost ..................... $ 622,000 $ 640,000 $ 714,000
========== ========== ==========
Actuarial assumptions used in the accounting for the U.K. Plan were a
weighted average discount rate of 8.5% for 1996 and 9% for 1995 and 1994,
an expected long-term rate of return on assets of 9% for 1996, 1995 and
1994 and a rate of increase in compensation levels of 6% for 1996, 1995
and 1994. The funded status of the U.K. Plan is as follows:
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
Actuarial present value of accumulated benefit
obligations (all vested) ..................... $ 23,648,000 $ 18,325,000
============ ============
Actuarial present value of projected benefit
obligations .................................. $(24,449,000) $(18,946,000)
Plan assets at fair value ...................... 29,557,000 22,705,000
Unrecognized net gain .......................... (6,451,000) (5,544,000)
Unrecognized prior service cost ................ 363,000 354,000
------------ ------------
Net pension liability recorded in other
liabilities .................................. $ (980,000) $ (1,431,000)
============ ============
6. PROPERTY AND EQUIPMENT
The cost of property and equipment is as follows:
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
Industrial field services ........................ $ 31,292,000 $ 30,222,000
Pipeline and terminaling services ................ 337,202,000 323,671,000
General corporate ................................ 3,819,000 3,794,000
Other ............................................ 774,000 5,858,000
------------ ------------
$373,087,000 $363,545,000
============ ============
F-10
30
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equipment acquired under capital leases and included in the cost of
property and equipment is as follows:
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
Industrial field services equipment ............ $ 6,638,000 $ 6,199,000
Pipeline and terminaling services equipment (a) 22,271,000 21,972,000
Less accumulated depreciation .................. (12,977,000) (11,775,000)
------------ ------------
Net equipment acquired under capital leases .... $ 15,932,000 $ 16,396,000
============ ============
(a) Secured by certain pipeline equipment. KPP has recorded its option to
purchase this equipment for approximately $ 4.1 million at the
termination of the lease.
7. DEBT
Debt is summarized as follows:
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
Industrial field services:
Credit facility due through 2001 ............... $ 23,003,000 $ 24,803,000
Various notes of foreign subsidiaries ranging
from 6.75% to 8.0% due through 2000 .......... 231,000 320,000
Capital leases ................................. 2,749,000 2,925,000
------------ ------------
Total debt ................................ 25,983,000 28,048,000
Less current portion ........................... 2,558,000 2,357,000
------------ ------------
$ 23,425,000 $ 25,691,000
============ ============
Pipeline and terminaling services:
Mortgage notes due 2001 and 2002 ............... $ 60,000,000 $ 60,000,000
Bank bridge loan refinanced in 1996 ............ -- 68,000,000
Mortgage notes due 2001 through 2016 ........... 68,000,000 --
Capital lease .................................. 8,489,000 10,266,000
Revolving credit facility .................... 5,000,000 --
------------ ------------
Total debt ................................ 141,489,000 138,266,000
Less current portion ........................... 2,036,000 1,777,000
------------ ------------
$139,453,000 $136,489,000
============ ============
Parent company:
8.75% convertible subordinated debentures
due through 2008 ............................. $ 23,666,000 $ 23,666,000
8.85% convertible note ......................... -- 6,000,000
Revolving credit facility ...................... -- --
------------ ------------
Total debt ................................ 23,666,000 29,666,000
Less current portion ........................... -- --
------------ ------------
$ 23,666,000 $ 29,666,000
============ ============
Total consolidated long-term debt ................ $191,138,000 $195,980,000
Current portion .................................. 4,594,000 4,134,000
------------ ------------
Total consolidated long-term debt,
less current portion ......................... $186,544,000 $191,846,000
============ ============
F-11
31
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Industrial Field Services
At December 31, 1996, $23.0 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 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 specialized 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 all of the
tangible assets of the industrial field services group, excluding assets
in Germany.
Pipeline and Terminaling Services
In 1994, KPP, through a 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 1994, a wholly-owned subsidiary entered into a Restated
Credit Agreement with a group of banks that provides a $15 million
revolving credit facility through January 31, 1998. The credit facility
bears interest at variable interest rates and has a commitment fee of .2%
per annum of the unused credit facility. At December 31, 1996, $5.0
million was drawn under the credit facility used to acquire liquids
terminaling facilities. No amounts were drawn under the credit facility at
December 31, 1995. In 1995, KPP financed the acquisition of the West
Pipeline with the issuance of $27 million of Notes due February 24, 2002
which bear interest at the rate of 8.37% per annum. The Notes and credit
facility are secured by a mortgage on substantially all of the pipeline
assets of KPP and contains certain financial and operational covenants.
The acquisition of Steuart by KPP was initially financed by a $68 million
bridge loan from a bank bearing interest at a variable rate based on the
LIBOR rate plus 50 to 100 basis points and its maturity was extended until
March 1997. In June 1996, KPP refinanced this obligation with $68.0
million of new first mortgage notes (the "Steuart notes") bearing interest
at rates ranging from 7.08% to 7.98%. $ 35.0 million of the Steuart 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 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 a 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 .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, 1996 or 1995.
Consolidated Maturities
Annual sinking fund requirements and debt maturities on consolidated long
term debt, including capital leases, are $4.6 million, $8.8 million, $2.2
million, $1.5 million and $69.4 million for each of the five years ending
December 31, 2001.
F-12
32
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CAPITAL STOCK
The changes in the number of issued and outstanding shares of the
Company's preferred and common stock are summarized as follows:
COMMON STOCK
-------------------------------------------
PREFERRED HELD IN
STOCK ISSUED ISSUED TREASURY OUTSTANDING
------------ ------------ ------------ ------------
BALANCE AT JANUARY 1, 1994 ............... 1,569,254 36,410,264 4,117,557 32,292,707
Conversion of Series D preferred stock ... (10,880) 18,398 -- 18,398
Common shares issued ..................... -- 161 (759,942) 760,103
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1994 ............. 1,558,374 36,428,823 3,357,615 33,071,208
Series D preferred stock redemption ...... (990,424) -- -- --
Common shares issued ..................... -- 51,131 (524,739) 575,870
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 ............. 567,950 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 ............. 567,950 36,491,027 3,156,076 33,334,951
============ ============ ============ ============
Series A Preferred Stock
The Company has 567,950 shares of its Cumulative Class A Adjustable Rate
Preferred Stock, Series A ("Series A Preferred") with a stated value of
$10 per share outstanding at December 31, 1996. 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, 1996, 1995 and
1994. 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 March 26, 1988, 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,
1988. 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
$10, 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 20% or more of the Company's Common Stock or
commences a tender or exchange offer that would result in ownership of 30%
or more, whichever occurs earlier. The Rights, which expire on April 19,
1998, are redeemable in whole, but not in part, at the Company's option at
any time for a price of $0.05 per Right. At December 31, 1996, 1995 and
1994 there were no Series B Preferred shares outstanding.
F-13
33
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
has a preference value of $1.00 per share and is 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. The Company
granted 600 shares of Series C Preferred to certain officers in April 1991
and redeemed 100 shares in July 1996.
Series D Preferred Stock
In conjunction with the acquisition of Furmanite, the Company issued
1,098,373 shares of its 12% Convertible Class A Preferred Stock, Series D
("Series D Preferred") with a stated value of L. 5.34 ($8.36) per share.
The Series D Preferred was not redeemable by the holder; however, each
share was convertible at the option of the holder into 1.691 shares of the
Company's Common Stock. During 1994, 10,880 shares of Series D Preferred
shares were converted into 18,398 shares, of the Company's Common Stock.
On December 28, 1995, the Company notified the Series D Preferred
stockholders that it would redeem the Series D Preferred Stock and it was
fully redeemed on January 26, 1996 for $8.0 million. The Company reflected
its obligation in current liabilities on the consolidated balance sheet as
of December 31, 1995.
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, 1996, options on 1,620,178 shares at prices
ranging from $1.50 to $5.00 were outstanding, of which 318,335 were
exercisable at prices ranging from $1.50 to $5.00.
The changes in stock options outstanding for the Company's plans for 1995
and 1996 were as follows:
Average Price
Shares per Share
---------- -------------
Outstanding at January 1, 1995 ................. 1,496,436 $4.82
Granted ........................................ 285,000 $2.13
Exercised ...................................... (30,000) $1.92
Forfeited ...................................... (320,000) $2.88
----------
Outstanding at December 31, 1995 ............... 1,431,436 $4.76
Granted and repriced ........................... 1,277,678 $2.67
Exercised ...................................... (6,000) $1.67
Forfeited and repriced ......................... (1,082,936) $5.56
----------
Outstanding at December 31, 1996 ............... 1,620,178 $2.60
==========
F-14
34
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") 123, "Accounting for Stock-Based Compensation" the
Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plans and, accordingly, does not recognize
compensation cost based on the fair value of the options granted at grant
date as prescribed by SFAS No. 123. The Black-Scholes option pricing model
has been used to estimate the value of stock options issued and the
assumptions in the calculations under such model include stock price
variance or volatility ranging from 11.30% to 11.64% based on weekly
average variances of the stock for the five year period preceding issuance
and a risk-free rate of return ranging from 5.59% to 6.77% based on the
30-year U.S. Treasury bill rate for the five-year expected life of the
options. Using estimates calculated by such option pricing model, pro
forma net income and earnings per share would have been $6,750,000 and
$0.19, respectively, for the year ended December 31, 1996, as compared to
the reported amounts of $7,024,000 and $0.19 respectively. For year ended
December 31, 1995, pro forma net income and earnings per share would have
been $59,134,000 and $1.72, respectively, as compared to the reported
amounts of $59,181,000 and $1.72 respectively.
Deferred Stock Unit Plans
In 1996, the Company instituted Deferred Stock Unit ("DSU") Plans, under
which key employees and directors may irrevocably defer from 5% to 50% (up
to 100% for directors) of their current compensation for two years and
purchase DSUs, which are equivalent in value to the Company's common stock
on the initial deferral date. During the first two years, the DSUs are
only equal in value to the lesser of the compensation deferred to date or
the DSU price (equal to the common stock price) for the prorated portion
of DSUs acquired on the initial deferral date. After two years, the DSUs
are equal in value to the same price as the Company's common stock and are
payable to the participant in common stock at the end of from three to ten
years, as elected by the participant, after the deferral commenced. Each
DSU Plan participant also received stock options, issued from existing
Company plans, equal in number to the DSUs with an exercise price of 100%
of the stock price on the initial deferral date. One-third of the employee
options become exercisable each year starting three years from the grant
date and director options were vested on the grant date.
9. COMMITMENTS AND CONTINGENCIES
The Company leases vehicles, office space, data processing equipment,
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 $4.0 million for
1996 and $3.5 million for 1995 and 1994.
At December 31, 1996, minimum rental commitments under all capital leases
and operating leases for future years are as follows:
CAPITAL OPERATING
LEASES LEASES
----------- -----------
1997 ............................................ $ 4,188,000 $ 2,685,000
1998 ............................................ 8,117,000 2,371,000
1999 ............................................ 726,000 1,956,000
2000 ............................................ 13,000 1,576,000
2001 ............................................ -- 1,138,000
2002 and thereafter ............................. -- 2,179,000
----------- -----------
Total minimum lease payments ....................... 13,044,000 $11,905,000
===========
Less amounts representing interest ................. 1,993,000
-----------
Present value of net minimum lease payments ........ $11,051,000
===========
F-15
35
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 1994, the Company settled two lawsuits filed in the 1980's by
Kanland Associates and Panance Property Corporation that related to the
Company's former office building in Sugar Land, Texas. One of these suits
had alleged damages at more than $38 million plus prejudgment interest,
legal fees, court costs and punitive damages. The settlement of these
lawsuits was adequately reserved.
In March 1995, the Company settled another lawsuit filed in the late
1980's by Stephen R. Herbel and other named individuals doing business as
Pinnacle Petroleum Company ("Pinnacle") that related to an interest in
coalbed gas produced from a property that a subsidiary of the Company
previously owned. The settlement of this lawsuit was also adequately
reserved.
In August 1996, the Company settled a lawsuit filed in Germany in February
1996 on behalf of Gesellschaft fur Industrieanlagen und
Maschineninstandhaltung GmbH or G.I.M. Engineering against one of the
Company's German subsidiaries, Furmanite Technische Dienstleistungen GmbH,
concerning the consideration received in a German contract that was part
of a series of transactions relating to the sale of one of the Company's
domestic subsidiaries. The settlement of this lawsuit was adequately
reserved.
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. KPP believes it will make distributions of Available Cash
for each quarter of not less than $.55 per Unit (the "Minimum Quarterly
Distribution"), or $2.20 per Unit on an annualized basis for the
foreseeable future. The Minimum Quarterly Distribution on the Senior
Preference Units is cumulative and preferential to the partnership units
held by the Company. The assets of KPP, other than Available Cash, cannot
be distributed without a majority vote of the non-affiliated unitholders.
The operations of KPP are subject to federal, state and local laws and
regulations relating to protection of the environment. Although KPP
believes that its operations are in general compliance with applicable
environmental regulation, risks of additional costs and liabilities are
inherent in its operations, and there can be no assurance that significant
costs and liabilities will not be incurred by KPP. Moreover, it is
possible that other developments, such as increasingly stringent
environmental laws, regulations, enforcement policies thereunder, and
claims for damages to property or persons resulting from the operations of
KPP, could result in substantial costs and liabilities to KPP. KPP has
recorded an undiscounted reserve in other liabilities for environmental
claims of $4.3 million, including $3.5 million relating to the
acquisitions of the West Pipeline and Steuart, as of December 31, 1996.
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
Selected financial data pertaining to the operations of the Company's
business segments is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenues:
Industrial field services ........... $103,252,000 $104,500,000 $118,196,000
Pipeline and terminaling services ... 117,554,000 96,928,000 78,745,000
Other ............................... 8,055,000 10,634,000 11,781,000
------------ ------------ ------------
$228,861,000 $212,062,000 $208,722,000
============ ============ ============
F-16
36
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Operating income:
Industrial field services ........... $ 5,073,000 $ 3,855,000 $ 1,649,000
Pipeline and terminaling services ... 51,285,000 42,488,000 32,965,000
General corporate ................... (4,741,000) (4,593,000) (4,118,000)
Other ............................... 2,198,000 1,715,000 1,468,000
------------ ------------ ------------
$ 53,815,000 $ 43,465,000 $ 31,964,000
============ ============ ============
Depreciation and amortization:
Industrial field services ........... $ 4,227,000 $ 4,152,000 $ 4,938,000
Pipeline and terminaling services ... 10,907,000 8,274,000 7,257,000
General corporate ................... 66,000 65,000 80,000
Other ............................... 234,000 564,000 532,000
------------ ------------ ------------
$ 15,434,000 $ 13,055,000 $ 12,807,000
============ ============ ============
Capital expenditures (including
capitalized leases and excluding
acquisitions):
Industrial field services ........... $ 3,504,000 $ 4,323,000 $ 2,783,000
Pipeline and terminaling services ... 7,075,000 8,975,000 7,147,000
General corporate ................... 23,000 32,000 63,000
Other ............................... 83,000 98,000 192,000
------------ ------------ ------------
$ 10,685,000 $ 13,428,000 $ 10,185,000
============ ============ ============
DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Identifiable assets:
Industrial field services ........... $114,354,000 $117,438,000 $117,911,000
Pipeline and terminaling services ... 273,927,000 264,510,000 157,398,000
General corporate ................... 12,422,000 23,718,000 3,937,000
Other ............................... 3,988,000 4,161,000 4,967,000
------------ ------------ ------------
$404,691,000 $409,827,000 $284,213,000
============ ============ ============
Selected financial data pertaining to the operations of the Company in
geographical areas is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenues:
United States ....................... $158,274,000 $140,387,000 $124,723,000
United Kingdom ...................... 34,724,000 37,563,000 36,291,000
Continental Europe .................. 31,224,000 29,822,000 43,245,000
Other ............................... 4,639,000 4,290,000 4,463,000
------------ ------------ ------------
$228,861,000 $212,062,000 $208,722,000
============ ============ ============
Operating income:
United States ....................... $ 48,884,000 $ 40,649,000 $ 31,856,000
United Kingdom ...................... 2,142,000 3,272,000 2,432,000
Continental Europe .................. 1,859,000 (873,000) (3,444,000)
Other ............................... 930,000 417,000 1,120,000
------------ ------------ ------------
$ 53,815,000 $ 43,465,000 $ 31,964,000
============ ============ ============
F-17
37
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Identifiable assets:
United States ................... $302,424,000 $304,227,000 $178,093,000
United Kingdom .................. 84,290,000 87,608,000 91,676,000
Continental Europe .............. 16,039,000 15,951,000 12,457,000
Other ........................... 1,938,000 2,041,000 1,987,000
------------ ------------ ------------
$404,691,000 $409,827,000 $284,213,000
============ ============ ============
11. DISCONTINUED OPERATIONS
Since 1981, the Company has discontinued business segments to reduce debt,
increase cash and concentrate its activities towards ongoing operations.
The former operations of the offshore and onshore drilling, exploration
and production, coal, general contracting, underground storage tank
testing operations and engineering services segments are classified as
discontinued operations in the Company's consolidated financial statements
and related footnotes. The remaining net liabilities of the discontinued
operations have been reclassified in the balance sheet from their
traditional classifications to "Net liabilities of discontinued
operations."
12. ACCRUED EXPENSES
Accrued expenses is comprised of the following components at December 31,
1996 and 1995:
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
Accrued distribution payable ..................... $ 6,588,000 $ 6,037,000
Accrued compensation and benefits ................ 2,650,000 2,796,000
Accrued interest ................................. 1,058,000 1,772,000
Other accrued expenses ........................... 25,985,000 25,182,000
------------ ------------
$ 36,281,000 $ 35,787,000
============ ============
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1996 and 1995 are summarized as follows:
QUARTERS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ ------------ ------------ ------------
1996:
Revenues ........... $ 54,839,000 $ 57,215,000 $ 57,010,000 $ 59,797,000
============ ============ ============ ============
Operating income ... $ 11,683,000 $ 13,469,000 $ 13,984,000 $ 14,679,000
============ ============ ============ ============
Net income ......... $ 831,000 $ 1,700,000 $ 2,313,000 $ 2,180,000
============ ============ ============ ============
Earnings per
common share ..... $ .02 $ .05 $ .06 $ .06
============ ============ ============ ============
1995:
Revenues ........... $ 46,652,000 $ 53,005,000 $ 56,956,000 $ 55,449,000
============ ============ ============ ============
Operating income ... $ 8,695,000 $ 10,548,000 $ 11,717,000 $ 12,505,000
============ ============ ============ ============
Net income ......... $ 623,000 $ 1,549,000 $ 55,779,000 $ 1,230,000
============ ============ ============ ============
Earnings per
common share ..... $ .01 $ .03 $ 1.66 $ .02
============ ============ ============ ============
F-18
38
KANEB SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUPPLEMENTAL CASH FLOW INFORMATION
The Company issued 5,073; 1,113 and 18,398 shares of its common stock upon
conversion of 3,000; 658 and 10,880 shares of its Series D Preferred Stock
in 1996, 1995 and 1994, respectively. The Company contributed 394,739 and
349,942 shares of its common stock to its 401(k) Savings Plan and 160,000
and 410,000 shares of its common stock to its subsidiary's defined benefit
pension plan in 1995 and 1994, respectively, in satisfaction of required
pension payments. No contributions of common stock were made by the
Company to either plan in 1996. During 1996, $5,099,000 in property and
equipment was netted against accumulated depreciation and amortization.
Supplemental information on cash paid during the period for:
1996 1995 1994
------------ ------------ ------------
Interest .......................... $ 14,502,000 $ 15,675,000 $ 13,311,000
============ ============ ============
Income taxes ...................... $ 1,340,000 $ 2,293,000 $ 2,105,000
============ ============ ============
15. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash, cash equivalents, short-term investments
and accounts receivable approximate their carrying amount due to the
relatively short period to maturity of these instruments. The estimated
fair value of all long-term debt (excluding capital leases) as of December
31, 1996 was approximately $178 million as compared to the carrying value
of $180 million. 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, 1996, as approximately 62% of the Company's
accounts receivable are generated from its industrial field services
customers located throughout the United States, the United Kingdom,
Continental Europe and the Pacific Rim.
F-19
39
SCHEDULE I
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
General and administrative expenses ....... $ (4,677,000) $ (4,528,000) $ (4,038,000)
Depreciation and amortization ............. (64,000) (65,000) (80,000)
Interest expense .......................... (2,377,000) (4,343,000) (4,402,000)
Intercompany fees and expenses ............ 3,997,000 1,104,000 (13,000)
Interest income ........................... 247,000 261,000 42,000
Other income (expense) .................... (332,000) (307,000) 55,000
Equity in income of subsidiaries
and pipeline partnership ................ 10,230,000 67,059,000 10,471,000
------------ ------------ ------------
Net income ................................ 7,024,000 59,181,000 2,035,000
Dividends applicable to preferred stock ... 502,000 1,527,000 1,489,000
------------ ------------ ------------
Net income applicable to common stock .... $ 6,522,000 $ 57,654,000 $ 546,000
============ ============ ============
Earnings per common share ................. $ .19 $ 1.72 $ .02
============ ============ ============
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
F-20
40
SCHEDULE I
(CONTINUED)
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 8,931,000 $ 18,606,000
Accounts receivable ........................................ 102,000 201,000
Prepaid expenses and other current assets .................. 818,000 1,797,000
------------ ------------
Total current assets .......................................... 9,851,000 20,604,000
Property and equipment ........................................ 3,819,000 3,794,000
Less accumulated depreciation ................................. 3,559,000 3,507,000
------------ ------------
Net property and equipment ............................... 260,000 287,000
------------ ------------
Investments in, advances to and notes receivable
from subsidiaries and pipeline partnership .................. 104,035,000 94,263,000
------------ ------------
Other assets .................................................. 2,311,000 2,561,000
------------ ------------
$116,457,000 $117,715,000
============ ============
LIABILITIES AND EQUITY
Current liabilities - accounts payable and accrued expenses ... $ 8,426,000 $ 14,973,000
------------ ------------
Long-term debt ................................................ 23,666,000 29,666,000
------------ ------------
Deferred credits and other liabilities ........................ 6,240,000 734,000
------------ ------------
Net liabilities of discontinued operations .................... 2,759,000 3,320,000
------------ ------------
Stockholders' equity:
Preferred stock, without par value ......................... 5,792,000 5,814,000
Common stock, without par value ............................ 4,230,000 4,230,000
Additional paid-in capital ................................. 197,213,000 197,151,000
Accumulated deficit ........................................ (111,596,000) (118,118,000)
Treasury stock, at cost .................................... (20,631,000) (19,552,000)
Cumulative foreign currency translation adjustment ......... 358,000 (503,000)
------------ ------------
Total stockholders' equity ............................... 75,366,000 69,022,000
------------ ------------
$116,457,000 $117,715,000
============ ============
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
F-21
41
SCHEDULE I
(CONTINUED)
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Operating Activities:
Net income ...................................... $ 7,024,000 $ 59,181,000 $ 2,035,000
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization ................. 64,000 65,000 80,000
Equity in net income of subsidiaries
and pipeline partnership .................... (8,203,000) (67,059,000) (10,471,000)
Changes in current assets and liabilities:
Short-term investments ...................... -- 1,020,000 (1,020,000)
Accounts receivable ......................... 99,000 (107,000) (2,000)
Prepaid expenses ............................ 979,000 (1,797,000) --
Accrued expenses ............................ (1,245,000) 2,401,000 (808,000)
------------ ------------ ------------
Net cash used in operating activities ....... (1,282,000) (6,296,000) (10,186,000)
------------ ------------ ------------
Investing Activities:
Capital expenditures ............................ (25,000) (32,000) (63,000)
Decrease in other assets, net ................... 432,000 540,000 7,729,000
------------ ------------ ------------
Net cash provided by investing activities ... 407,000 508,000 7,666,000
------------ ------------ ------------
Financing Activities:
Dividends received from subsidiaries ............ 9,114,000 88,070,000 11,548,000
Payments on long-term debt ...................... (6,000,000) (15,011,000) (381,000)
Payment of subsidiary note ...................... -- (50,000,000) --
Preferred stock dividends paid .................. (502,000) (1,328,000) (1,402,000)
Decrease (increase) in investments in,
advances to and notes receivable
from subsidiaries and pipeline partnership .... (10,333,000) 2,033,000 (9,897,000)
Purchase of treasury stock ...................... (1,079,000) -- --
------------ ------------ ------------
Net cash provided by financing activities ... (8,800,000) 23,764,000 (132,000)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ... (9,675,000) 17,976,000 (2,652,000)
Cash and cash equivalents at beginning of year ..... 18,606,000 630,000 3,282,000
------------ ------------ ------------
Cash and cash equivalents at end of year ........... $ 8,931,000 $ 18,606,000 $ 630,000
============ ============ ============
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
F-22
42
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, 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
============ ============ ============ ============ ============
Year ended December 31, 1995:
For doubtful receivables
classified as current assets ..... $ 854 $ 598 $ 41(a) $ (360)(b) $ 1,133
============ ============ ============ ============ ============
For deferred tax asset valuation
allowance classified as
noncurrent assets ................ $ 108,441 $ -- $ -- $ (24,157) $ 84,284
============ ============ ============ ============ ============
Year ended December 31, 1994:
For doubtful receivables
classified as current assets ..... $ 769 $ 249 $ 60(a) $ (224)(b) $ 854
============ ============ ============ ============ ============
For deferred tax asset valuation
allowance classified as
noncurrent assets ................ $ 113,261 $ -- $ -- $ (4,820) $ 108,441
============ ============ ============ ============ ============
- ---------------------
Notes:
(a) Currency translation adjustments.
(b) Receivable write-offs and reclassifications, net of recoveries.
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
F-23
43
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
March 24, 1997
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 24, 1997
- ----------------------------- Officer and Director
Principal Accounting Officer
TONY M. REGAN Controller March 24, 1997
- -----------------------------
Directors
SANGWOO AHN Director March 24, 1997
- -----------------------------
JOHN R. BARNES Director March 24, 1997
- -----------------------------
FRANK M. BURKE, JR. Director March 24, 1997
- -----------------------------
CHARLES R. COX Director March 24, 1997
- -----------------------------
RALPH A. REHM Director March 24, 1997
- -----------------------------
JAMES R. WHATLEY Director March 24, 1997
- -----------------------------
44
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------
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 for the year ended December 31, 1981, which exhibit is
hereby incorporated by reference.
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated May 28, 1985, filed as
Exhibit 4.1 of the exhibits to the Registrant's Quarterly Report
on Form 10-Q 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 Quarterly
Report on 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 Annual Report on
Form 10-K for the year ended December 31, 1990 ("1990 Form 10-K"),
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 Quarterly
Report on Form 10-Q for the quarter ended September 30, 1990,
which exhibit is hereby incorporated by reference.
3.7 By-laws of the Registrant, filed as Exhibit 3.5 of the exhibits to
the Registrant's Annual Report on Form 10-K for year ended
December 31, 1985, which exhibit is hereby incorporated by
reference.
4.1 Certificate of Designation related to the Registrant's Adjustable
Rate Cumulative Class A Preferred Stock, filed as Exhibit 4 of the
exhibits to the Registrant's Quarterly Report of 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 D, dated February
11, 1991, filed as Exhibit 4.3 of the exhibits to the Registrant's
1990 Form 10-K, 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 C, dated April 23,
1991, filed as Exhibit 4.4 of the exhibits to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991, 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.
45
EXHIBIT INDEX
Continued
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------
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 Annual Report on
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 of the exhibits to the Annual Report on Form 10-K
for the year ended December 31, 1984, 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, filed as Exhibit
4.1 to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
333-08725), which exhibit is 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), which exhibit is 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 Registrant's Form S-8 (S.E.C. File No. 333-22109),
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), which exhibit is hereby
incorporated by reference.
10.10 Form of Termination Agreement, filed herewith.
10.11 Amended and Restated Loan Agreement between Furmanite PLC, Bank of
Scotland and certain other Lenders, dated May 1, 1991 (the
"Furmanite Loan Agreement"), filed as Exhibit 10.8 of the exhibits
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 ("1994 Form 10-K"), which exhibit is hereby
incorporated by reference.
10.12 Amendments to the Furmanite Loan Agreement, filed herewith.
46
EXHIBIT INDEX
Continued
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------
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 Annual Report on Form 10-K for the
year ended December 31, 1995 (the "1995 Form 10-K"), which exhibit
is hereby incorporated by reference.
21 List of subsidiaries of the Registrant, filed herewith.
23 Consent of independent accountants: Price Waterhouse LLP, filed
herewith.
27 Financial Data Schedule, filed herewith.