- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-05083
XANSER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-1191271
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices, including zip code)
(972) 699-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at October 31, 2002
- --------------------- -------------------------------
No par value 31,636,014 shares
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XANSER CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
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Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations - Three and
Nine Month Periods Ended September 30, 2002 and 2001 1
Condensed Consolidated Balance Sheets - September 30, 2002
and December 31, 2001 3
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 18
Item 4. Controls and Procedures 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
Revenues:
Services $ 27,921 $ 31,799 $ 83,248 $ 96,906
Products 3,963 3,136 9,217 12,645
------------- ------------- ------------- --------------
Total revenues 31,884 34,935 92,465 109,551
------------- ------------- ------------- --------------
Costs and expenses:
Operating costs 27,444 28,388 81,721 87,026
Cost of products sold 3,918 2,841 8,982 11,313
Depreciation and amortization 804 1,330 2,707 3,857
General and administrative 962 791 2,850 2,858
------------- ------------- ------------- --------------
Total costs and expenses 33,128 33,350 96,260 105,054
------------- ------------- ------------- --------------
Operating income (loss) (1,244) 1,585 (3,795) 4,497
Other income, net 103 882 352 714
Interest expense (435) (772) (1,353) (2,468)
------------- ------------- ------------- --------------
Income (loss) from continuing operations
before income taxes and cumulative
effect of change in accounting principle (1,576) 1,695 (4,796) 2,743
Income tax benefit (expense) 1,145 (466) 2,878 (456)
------------- ------------- ------------- --------------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle (431) 1,229 (1,918) 2,287
Cumulative effect of change in accounting
principle - adoption of new accounting
standard for goodwill (note 7) - - (45,269) -
------------- ------------- ------------- --------------
Income (loss) from continuing operations (431) 1,229 (47,187) 2,287
Income from discontinued operations -
businesses distributed to common
shareholders, net of income taxes - - - 3,423
------------- ------------- ------------- --------------
Net income (loss) (431) 1,229 (47,187) 5,710
Dividends and redemption premium
applicable to preferred stock - - - 493
------------- ------------- ------------- --------------
Net income (loss) applicable to
common stock $ (431) $ 1,229 $ (47,187) $ 5,217
============= ============= ============= ==============
See notes to consolidated financial statements.
1
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(In Thousands - Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of change
in accounting principle $ (.01) $ .04 $ (.06) $ .06
Cumulative effect of change in
accounting principle - - (1.37) -
------------ ------------- ------------ --------------
(.01) .04 (1.43) .06
Discontinued operations - - - .10
------------ ------------- ------------ --------------
$ (.01) $ .04 $ (1.43) $ .16
============ ============= ============ ==============
Diluted:
Continuing operations:
Before cumulative effect of change
in accounting principle $ (.01) $ .04 $ (.06) $ .05
Cumulative effect of change in
accounting principle - - (1.37) -
------------ ------------- ------------ --------------
(.01) .04 (1.43) .05
Discontinued operations - - - .10
------------ ------------- ------------ --------------
$ (.01) $ .04 $ (1.43) $ .15
============ ============= ============ ==============
See notes to consolidated financial statements.
2
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 27,594 $ 29,545
Accounts receivable, trade 32,886 37,186
Receivable from businesses distributed to
common shareholders 7,725 17,904
Inventories 8,675 8,942
Prepaid expenses and other 4,647 7,532
Current deferred income tax assets 102 2,300
------------- --------------
Total current assets 81,629 103,409
------------- --------------
Property and equipment 37,643 33,381
Less accumulated depreciation and amortization 24,798 21,995
------------- --------------
Net property and equipment 12,845 11,386
------------- --------------
Excess of cost over fair value of net assets
of acquired businesses (note 7) 13,802 61,054
Deferred income taxes and other assets 17,634 10,370
------------- --------------
$ 125,910 $ 186,219
============= ==============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 1,856 $ 2,173
Accounts payable 3,380 6,205
Accrued expenses 14,576 13,159
Accrued income taxes 9,584 10,083
------------- --------------
Total current liabilities 29,396 31,620
------------- --------------
Long-term debt, less current portion:
Technical services 17,633 17,871
Parent company 9,930 19,930
------------- --------------
Total long-term debt, less current portion 27,563 37,801
------------- --------------
Other liabilities 1,751 1,292
Commitments and contingencies
Stockholders' equity:
Common stock, without par value 4,333 4,270
Additional paid-in-capital 129,249 128,744
Treasury stock, at cost (26,130) (23,423)
Retained earnings (accumulated deficit) (note 7) (35,266) 11,921
Accumulated other comprehensive income (loss) (4,986) (6,006)
------------- --------------
Total stockholders' equity 67,200 115,506
------------- --------------
$ 125,910 $ 186,219
============= ==============
See notes to consolidated financial statements.
3
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------------------
2002 2001
------------- --------------
Operating activities:
Income (loss) from continuing operations $ (47,187) $ 2,287
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 2,707 3,857
Deferred income taxes (2,827) (107)
Cumulative effect of change in accounting principle 45,269 -
Other, net 564 (317)
Changes in working capital components 5,545 (7,235)
------------- --------------
Operating activities of continuing operations 4,071 (1,515)
Operating activities of discontinued operations - 59,798
------------- --------------
Net cash provided by operating activities 4,071 58,283
------------- --------------
Investing activities:
Capital expenditures (3,555) (3,227)
Change in other assets, net 347 (28)
Investing activities of discontinued operations - (128,399)
------------- --------------
Net cash used in investing activities (3,208) (131,654)
------------- --------------
Financing activities:
Issuance of debt 2,303 5,470
Payment of debt (12,829) (5,089)
Preferred stock dividends and redemption premium paid - (493)
Issuance of common stock 540 1,078
Purchase of treasury stock (3,007) -
Redemption of preferred stock - (5,680)
Decrease in receivable from businesses distributed
to common shareholders 10,179 13,405
Financing activities of discontinued operations - 71,000
------------- --------------
Net cash provided by (used in) financing activities (2,814) 79,691
------------- --------------
Increase (decrease) in cash and cash equivalents (1,951) 6,320
Cash and cash equivalents at beginning of period 29,545 20,517
------------- --------------
Cash and cash equivalents at end of period $ 27,594 $ 26,837
============= ==============
Supplemental cash flow information:
Cash paid for interest $ 2,091 $ 2,858
============= ==============
Cash paid for income taxes $ 693 $ 922
============= ==============
See notes to consolidated financial statements.
4
XANSER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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1. SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of
Xanser Corporation (the "Company") and its subsidiaries. On June 29, 2001,
the Company distributed its pipeline, terminaling and product marketing
businesses (the "Distribution") to its stockholders in the form of shares
of a new limited liability company, Kaneb Services LLC. As a result of the
Distribution, the accompanying condensed consolidated financial statements
reflect the operations of the pipeline, terminaling and product marketing
businesses of the Company prior to June 29, 2001 as "Discontinued
operations - businesses distributed to common shareholders". All
significant intercompany transactions and balances are eliminated in
consolidation.
The unaudited condensed consolidated financial statements of the Company
for the three and nine month periods ended September 30, 2002 and 2001,
have been prepared in accordance with accounting principles generally
accepted in the United States of America. Significant accounting policies
followed by the Company are disclosed in the notes to the consolidated
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001. In the opinion of the Company's
management, the accompanying condensed consolidated financial statements
contain the adjustments, consisting of normal recurring accruals, necessary
to present fairly the consolidated financial position of the Company and
its consolidated subsidiaries at September 30, 2002 and the consolidated
results of their operations and cash flows for the periods ended September
30, 2002 and 2001. Operating results for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
2. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 2002
and 2001 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
(in thousands)
Net income (loss) $ (431) $ 1,229 $ (47,187) $ 5,710
Foreign currency translation
adjustment 129 666 1,020 (598)
------------- ------------- ------------- --------------
Comprehensive income (loss) $ (302) $ 1,895 $ (46,167) $ 5,112
============= ============= ============= ==============
3. EARNINGS PER SHARE
The following is a reconciliation of Basic and Diluted earnings (loss) per
share from continuing operations before cumulative effect of change in
accounting principle (in thousands, except for per share amounts):
Weighted
Average
Net Common Per-Share
Income (loss) Shares Amount
--------------- --------------- ----------------
Three Months Ended September 30, 2002
-------------------------------------
Basic earnings per share -
Income (loss) from continuing
operations applicable to common
stock before cumulative effect
of change in accounting principle $ (431) 32,249 $ (.01)
============
Effect of dilutive securities - -
--------------- ---------------
Diluted earnings per share -
Income (loss) from continuing
operations applicable to common
stock before cumulative effect
of change in accounting principle $ (431) 32,249 $ (.01)
=============== =============== ============
Three Months Ended September 30, 2001
-------------------------------------
Basic earnings per share -
Income from continuing
operations applicable to
common stock $ 1,229 33,111 $ .04
============
Effect of dilutive securities - 1,235
--------------- ---------------
Diluted earnings per share -
Income applicable to common stock $ 1,229 34,346 $ .04
=============== =============== ============
Nine Months Ended September 30, 2002
------------------------------------
Basic earnings per share -
Income (loss) from continuing
operations applicable to common
stock before cumulative effect
of change in accounting principle $ (1,918) 32,976 $ (.06)
============
Effect of dilutive securities - -
--------------- ---------------
Diluted earnings per share -
Income (loss) from continuing
operations applicable to common
stock before cumulative effect
of change in accounting principle $ (1,918) 32,976 $ (.06)
=============== =============== ============
Nine Months Ended September 30, 2001
------------------------------------
Income from continuing operations $ 2,287
Dividends and redemption premium
applicable to preferred stock (493)
---------------
Basic earnings per share -
Income from continuing
operations applicable to
common stock 1,794 32,252 $ .06
============
Effect of dilutive securities - 1,874
--------------- ---------------
Diluted earnings per share -
Income applicable to common stock $ 1,794 34,126 $ .05
=============== =============== ============
As a result of the losses from continuing operations applicable to common
stock for the three and nine month periods ended September 30, 2002, all
stock options and the Company's 8.75% convertible subordinated debentures
were excluded from the computation of diluted earnings per share because
the effects would be anti-dilutive. Since the average market prices of the
Company's common stock for the three and nine month periods ended September
30, 2001 were in excess of outstanding option exercise prices, all
outstanding options were considered dilutive at September 30, 2001.
Additionally, the Company's 8.75% convertible subordinated debentures were
excluded from the computation of diluted earning per share for the three
and nine month periods ended September 30, 2001 because the effect of
assumed conversion was anti-dilutive.
4. CONTINGENCIES
The Company has contingent liabilities resulting from litigation, claims
and commitments incident to the ordinary course of business. Management
believes that the ultimate resolution of such contingencies will not have a
materially adverse effect on the financial position or results of
operations of the Company.
5. BUSINESS SEGMENT DATA
The Company provides technical services to an international client base
that includes refineries, chemical plants, pipelines, offshore drilling and
production platforms, steel mills, food and drink processing facilities,
power generation, and other process industries. Additionally, the Company's
information technology services segment provides consulting services,
hardware sales and other related information management and processing
services primarily to insurance and financial institutions, the government
and healthcare sectors. General corporate includes compensation and
benefits paid to officers and employees of the Company, insurance premiums,
general and administrative costs, tax and financial reporting costs, legal
and audit fees not reasonably allocable to specific business segments.
General corporate assets include cash, deferred taxes and other assets not
related to the Company's segments.
The Company measures segment profit as operating income. Total assets are
those assets, including excess of cost over fair value of acquired
businesses, controlled by each reportable segment. Business segment data is
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in thousands)
Business segment revenues:
Technical services $ 22,576 $ 24,078 $ 65,216 $ 72,744
Information technology services 9,308 10,857 27,249 36,807
------------ ------------ ------------ ------------
$ 31,884 $ 34,935 $ 92,465 $ 109,551
============ ============ ============ ============
Technical services segment revenues:
Underpressure services $ 10,254 $ 9,698 $ 30,236 $ 29,294
Turnaround services 10,662 12,314 29,656 37,221
Other services 1,660 2,066 5,324 6,229
------------ ------------ ------------ ------------
$ 22,576 $ 24,078 $ 65,216 $ 72,744
============ ============ ============ ============
Business segment profit:
Technical services $ 1,062 $ 1,639 $ 2,249 $ 4,152
Information technology services (1,344) 737 (3,194) 3,203
General corporate (962) (791) (2,850) (2,858)
------------ ------------ ------------ ------------
Operating income (loss) (1,244) 1,585 (3,795) 4,497
Other income, net 103 882 352 714
Interest expense (435) (772) (1,353) (2,468)
------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes
and cumulative effect of change
in accounting principle $ (1,576) $ 1,695 $ (4,796) $ 2,743
============ ============ ============ ============
September 30, December 31,
2002 2001
-------------- ----------------
(in thousands)
Total assets:
Technical services $ 66,265 $ 102,147
Information technology services 20,545 30,877
General corporate 39,100 53,195
------------ ------------
$ 125,910 $ 186,219
============ ============
6. DISCONTINUED OPERATIONS - BUSINESSES DISTRIBUTED TO COMMON SHAREHOLDERS
The results of operations for the pipeline, terminaling and product
marketing businesses prior to the Distribution (see Note 1) are reflected
in the accompanying consolidated statements of operations as "Income from
discontinued operations - businesses distributed to common shareholders,
net of income taxes". The pipeline and terminaling operations are conducted
through Kaneb Pipe Line Partners, L.P. ("KPP"), in which the Company owned
an effective 2% general partner interest and 25% limited partner interest
prior to the Distribution. A summary of operating results of the
discontinued operations included in the Company's condensed consolidated
financial statements for the nine month period ended September 30, 2001 is
presented below:
Nine Months
Ended
September 30, 2001
-------------------
(in thousands)
Revenues:
Pipeline and terminaling services $ 101,021
Product marketing services 187,231
-------------------
$ 288,252
===================
Operating profit:
Pipeline and terminaling services $ 39,896
Product marketing services (264)
Distribution expenses (1,779)
-------------------
$ 37,853
===================
Income before income taxes, interest of outside
non-controlling partners in KPP's net income
and extraordinary item $ 32,797
Income taxes (3,148)
Interest of outside non-controlling partners
in KPP's net income (25,367)
Extraordinary loss on KPP debt extinguishment,
net of income taxes and interest of outside
non-controlling partners in KPP's net income (859)
-------------------
Income from discontinued operations, net of
income taxes $ 3,423
===================
7. ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", which eliminates the amortization for goodwill (excess of cost
over fair value of net assets of acquired businesses) and other intangible
assets with indefinite lives. Under SFAS No. 142, intangible assets with
lives restricted by contractual, legal, or other means will continue to be
amortized over their useful lives. As of September 30, 2002, the Company
had no intangible assets subject to amortization under SFAS No. 142.
Goodwill and other intangible assets not subject to amortization are tested
for impairment annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired. SFAS No. 142
requires a two-step process for testing impairment. First, the fair value
of each reporting unit is compared to its carrying value to determine
whether an indication of impairment exists. If an impairment is indicated,
then second, the implied fair value of the reporting unit's goodwill is
determined by allocating the unit's fair value to its assets and
liabilities (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination. The amount of
impairment for goodwill and other intangible assets is measured as the
excess of its carrying value over its implied fair value. Based on
valuations and analysis performed by independent valuation consultants and
the Company in the first quarter of 2002, the Company determined that the
carrying value of its goodwill exceeded implied fair value, and therefore,
the Company recorded a non-cash charge, after income taxes, of $45.3
million as the cumulative effect of a change in accounting principle. No
impairment charge was appropriate under the previous goodwill impairment
standard (SFAS No. 121), which was based on undiscounted cash flows.
The changes in the carrying amount of excess of cost over fair value of net
assets of acquired businesses as of September 30, 2002 is as follows (in
thousands):
Excess of cost over fair value of net assets of acquired
businesses at December 31, 2001 $ 61,054
Cumulative effect of change in accounting principle
recorded in the first quarter of 2002 (47,252)
-------------
Excess of cost over fair value of net assets of acquired
businesses at September 30, 2002 $ 13,802
=============
The pro forma effects of the adoption of SFAS No. 142 on income (loss) from
continuing operations is as follows (in thousands - except per share
amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
Reported income (loss) from
continuing operations $ (431) $ 1,229 $ (47,187) $ 2,287
Amortization of excess of cost
over fair value of net assets
of acquired businesses, net
of income taxes - 540 - 1,623
Cumulative effect of change in
accounting principle - adoption
of new accounting standard
for goodwill - - 45,269 -
------------- ------------- ------------- --------------
Adjusted income (loss) from
continuing operations $ (431) $ 1,769 $ (1,918) $ 3,910
============= ============= ============= ==============
Reported diluted earnings (loss)
per common share from
continuing operations $ (0.01) $ 0.04 $ (1.43) $ 0.05
Amortization of excess of cost over
fair value of net assets of
acquired businesses, net of
income taxes - 0.01 - 0.05
Cumulative effect of change in
accounting principle - - 1.37 -
------------- ------------- ------------- --------------
Adjusted diluted earnings (loss)
per common share from
continuing operations $ (0.01) $ 0.05 $ (0.06) $ 0.10
============= ============ ============= =============
Additionally, effective January 1, 2002, the Company adopted SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets", which
addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. The adoption of SFAS No. 144, which superceded SFAS
No. 121, did not have a material impact on the condensed consolidated
financial statements of the Company.
8. LONG-TERM DEBT
On August 13, 2002, a wholly-owned subsidiary of the Company entered into a
$25 million Amended and Restated Bank Loan Agreement ("Loan Agreement")
that provides working capital for the technical services group and is
without recourse to the Company. Borrowings under the Loan Agreement bear
interest at the option of the borrower at variable rates, based on either
the LIBOR rate or prime rate, has a commitment fee on the unused portion of
the facility and contains certain financial and operational covenants with
respect to the technical services group. The Loan Agreement matures in 2009
and is secured by substantially all of the tangible assets of the technical
services group.
XANSER CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
This discussion should be read in conjunction with the condensed
consolidated financial statements of Xanser Corporation (the "Company") and
notes thereto included elsewhere in this report.
Operating Results:
Technical Services
This business segment provides specialized industrial services, including
underpressure leak sealing, on-site machining, safety and relief valve
testing and repair, passive fire protection and fugitive emissions
inspections to the process and power industry worldwide.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
2002 2001 2002 2001
----------- ----------- ------------- --------------
(in thousands)
Revenues:
United States $ 5,333 $ 8,726 $ 18,775 $ 27,758
Europe 14,332 12,145 38,449 36,214
Asia-Pacific 2,911 3,207 7,992 8,772
----------- ----------- ------------- --------------
Total Revenues $ 22,576 $ 24,078 $ 65,216 $ 72,744
=========== =========== ============= ==============
Operating income (loss):
United States $ (755) $ 123 $ (1,346) $ 1,099
Europe 1,885 1,940 4,291 5,325
Asia-Pacific 377 524 600 611
Headquarters (445) (948) (1,296) (2,883)
----------- ----------- ------------- --------------
Total operating income $ 1,062 $ 1,639 $ 2,249 $ 4,152
=========== =========== ============= ==============
Capital expenditures,
excluding acquisitions $ 584 $ 935 $ 1,436 $ 2,675
=========== =========== ============= ==============
For the three months ended September 30, 2002, revenues for the technical
services business decreased by $1.5 million, or 6%, when compared to the
same 2001 period, as improvements in Europe business levels were more than
offset by declines in America and Asia-Pacific. In the United States, third
quarter revenues decreased by $3.4 million, or 39%, compared to the same
period in 2001, due to decreases in leaksealing and turnaround services. In
Europe, revenues increased by $2.2 million, or 18%, when compared to the
second quarter of 2001 period, due to increases in leaksealing services and
foreign currency exchange differences. In Asia-Pacific, revenues decreased
by $0.3 million, or 9%, compared to 2001, due to decreases in turnaround
services, partially offset by foreign exchange rates.
13
For the nine months ended September 30, 2002, revenues decreased by $7.5
million, or 10%, when compared to 2001, due to the impact of the economic
downturn on its customers' business. Revenues in the United States
decreased by $9.0 million, or 32%, compared to 2001, due to decreases in
underpressure and turnaround services. In Europe, revenues increased by
$2.2 million, or 6%, compared to the same 2001 period, as increases in
underpressure services and differences in foreign exchange rates more than
offset decreases in turnaround services, other process services and product
sales. Asia-Pacific revenues decreased by $0.8 million, or 9%, compared to
2001, due to decreases in product sales and turnaround services, partially
offset by increases in underpressure services and foreign exchange rates.
Overall, technical services operating income decreased by $0.6 million, or
35%, for the three months ended September 30, 2002, when compared to the
same 2001 period. In the United States, operating income decreased by $0.9
million, compared to the same period in 2001, due to the lower level of
business. In Europe, operating income declined slightly, as a favorable
pension cost adjustment recorded in the third quarter of 2001 was not
totally offset by the margins resulting from increased revenues in 2002. In
Asia-Pacific, operating income decreased by $0.1 million due to the lower
revenues.
Operating income decreased by $1.9 million, or 46%, for the nine months
ended September 30, 2002, when compared to the same 2001 period. In the
United States, operating income decreased by $2.4 million, compared to the
same period in 2001, due to the lower level of business. In Europe,
operating income decreased by $1.0 million, compared to the same 2001
period, due primarily to favorable pension cost adjustments recorded in
2001.
Headquarters costs for the three and nine month periods ended September 30,
2001 includes $0.5 million and $1.4 million, respectively, of amortization
related to excess of cost over fair value of net assets of acquired
businesses. In the first quarter of 2002, the Company adopted Statement of
Financial Accounting Standards "(SFAS") No. 142 "Goodwill and Other
Intangible Assets" which eliminates the amortization of goodwill and other
intangible assets with indefinite lives (see Note 7 to condensed
consolidated financial statements).
Information Technology Services
The information technology services group provides knowledge management
services to the commercial (financial and insurance), government (federal,
state, county and local) and healthcare sectors. The group focuses on
evaluating customer's people (employees and customers), processes and
technology to develop solutions that helps them achieve better outcomes and
results. Services are tailored to the specific needs of the customers and
include consulting, design, development, integration of third party
hardware, maintenance, training and customer service of custom technology
solutions.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
2002 2001 2002 2001
----------- ----------- ------------- --------------
(in thousands)
Revenues $ 9,308 $ 10,857 $ 27,249 $ 36,807
=========== =========== ============= ==============
Operating income (loss) $ (1,344) $ 737 $ (3,194) $ 3,203
=========== =========== ============= ==============
Capital expenditures,
excluding acquisitions $ 790 $ 257 $ 2,119 $ 552
=========== =========== ============= ==============
For the three and nine months ended September 30, 2002, revenues decreased
by $1.5 million, or 14%, and $9.6 million, or 26%, respectively, when
compared to the same 2001 periods. Service revenues decreased in the third
quarter and first nine months of 2002, compared to the same 2001 periods,
primarily due to lower communication-related installation service revenues
from a large customer as a result of the economic downturn in the
technology sector. Revenues from equipment sales, furnished at the request
of selected customers, increased in the third quarter and decreased in the
first nine months of 2002, compared to the same 2001 periods, respectively,
due to normal fluctuations in customer needs.
Information technology services operating income decreased by $2.1 million
and $6.4 million for the three and nine month periods ended September 30,
2002, respectively, compared to the same 2001 periods, primarily due to the
lower revenues and planned investments in management, marketing and product
development costs.
Information technology services operating income for the three and nine
month periods ended September 30, 2001 includes $0.1 million and $0.3
million, respectively, of amortization related to excess of cost over fair
value of net assets of acquired businesses. In the first quarter of 2002,
the Company adopted SFAS No. 142 which eliminates the amortization of
goodwill and other intangible assets with indefinite lives (see Note 7 to
condensed consolidated financial statements).
Interest Expense
Interest expense decreased $0.3 million and $1.1 million for the three
month and nine month periods ended September 30, 2002, respectively,
compared to the same periods in 2001, due to a decrease in debt levels (see
"Liquidity and Capital Resources") combined with lower interest rates on
variable rate borrowings.
Income Taxes
Income tax benefit (expense) for the periods presented differs from the
expected tax at statutory rates due primarily to different tax rates in the
various state and foreign jurisdictions.
Liquidity and Capital Resources
During the first nine months of 2002, the Company's working capital
requirements for operations and capital expenditures were funded through
the use of internally generated funds.
Cash provided by (used in) operating activities from continuing operations
was $4.1 million and ($1.5) million for the nine months ended September 30,
2002 and 2001, respectively. The increase during the first nine months of
2002, compared to the same 2001 period, was due to normal changes in
working capital components resulting from the timing of cash receipts and
disbursements, partially offset by decreases in revenues and operating
income.
Capital expenditures for continuing operations were $3.6 million for the
nine months ended September 30, 2002, compared to $3.2 million in 2001. The
Company expects to fund maintenance capital expenditures in 2002 with
existing cash and anticipated cash flows from operations.
In connection with a stock repurchase plan authorized by the Company's
Board of Directors, the Company purchased approximately 1,575,000 shares of
the Company's common stock, at a cost of $3.0 million, during the nine
months ended September 30, 2002. The stock purchases were funded with cash
on hand.
On August 13, 2002, a wholly-owned subsidiary of the Company entered into a
$25 million Amended and Restated Bank Loan Agreement ("Loan Agreement")
that provides working capital for the technical services group and is
without recourse to the Company. Borrowings under the Loan Agreement bear
interest at the option of the borrower at variable rates, based on either
the LIBOR rate or prime rate, has a commitment fee on the unused portion of
the facility and contains certain financial and operational covenants with
respect to the technical services group. The Loan Agreement matures in 2009
and is secured by substantially all of the tangible assets of the technical
services group.
On March 1, 2002, the Company purchased $10.0 million of its 8.75%
subordinated debentures at par value, which satisfies its sinking fund
requirements on these subordinated debentures until 2008.
On March 30, 2001, the Company's Series A Preferred Stock was redeemed for
cash at the stated redemption price of $10.67 per share, plus accrued and
unpaid dividends, for a total cost of approximately $6.1 million. The
redemption cost includes a $0.4 million redemption premium, which was
recognized as dividends and redemption premium applicable to preferred
stock in the first quarter of 2001.
Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.
Information regarding the Company's Critical Accounting Policies is
included in Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
Recent Accounting Pronouncements
In June of 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations", which establishes requirements for the
removal-type costs associated with asset retirements. The Company is
currently assessing the impact of SFAS No. 143, which must be adopted in
the first quarter of 2003.
In April of 2002, the FASB issued SFAS No. 145, which, among other items,
affects the income statement classification of gains and losses from early
extinguishment of debt. Under SFAS No. 145, which must be adopted by the
first quarter of 2003, early extinguishment of debt is now considered a
risk management strategy, with resulting gains and losses no longer
classified as an extraordinary item, unless the debt extinguishment meets
certain unusual in nature and infrequency of occurrence criteria, which is
expected to be rare. Upon adoption, companies must reclassify prior items
that do not meet the new extraordinary item classification criteria as a
component of operating income. Adoption of SFAS No. 145 will have no effect
on the net income of the Company.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities", which requires all restructurings
initiated after December 31, 2002 be recorded when they are incurred and
can be measured at fair value. The Company is currently assessing the
impact of SFAS No. 146, which must be adopted in the first quarter of 2003.
XANSER CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and investment portfolios. The Company's investment
portfolio consists of cash equivalents; accordingly, the carrying amounts
approximate fair value. The Company's investments are not material to its
financial position or performance. Assuming variable rate debt of $19.5 million
at September 30, 2002, a one percent increase in interest rates would increase
annual net interest expense by approximately $0.2 million.
Item 4. Controls and Procedures
In its recent Release No. 34-46427, effective August 29, 2002, the SEC, among
other things, adopted rules requiring reporting companies to maintain disclosure
controls and procedures to provide reasonable assurance that a registrant is
able to record, process, summarize and report the information required in the
registrant's quarterly and annual reports under the Securities Act of 1934 (the
"Exchange Act"). While the Company believes that its disclosure controls and
procedures have been effective to accomplish these objectives, the Company
intends to continue to examine, refine and formalize its disclosure controls and
procedures and to monitor ongoing developments in this area.
The principal executive officer and the principal financial officers of the
Company have informed the Company that, based upon their evaluation within 90
days of the date of this filing of the Company's disclosure controls and
procedures (as defined in Rule 13a-14(c) and Rule 15d-14(c) under the Exchange
Act), they have concluded that those disclosure controls and procedures are
effective.
There have been no changes in the Company's internal controls or in the other
factors known to the Company that could significantly affect these controls
subsequent to their evaluation, nor have any corrective actions with regard to
significant deficiencies and material weaknesses been necessary.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Restated Certificate of Incorporation of the Registrant, dated
September 26, 1979, filed as Exhibit 3.1 of the exhibits to the
Registrant's Registration Statement on Form S-16, which exhibit
is hereby incorporated by reference.
18
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated April 30, 1981, filed as
Exhibit 3.2 of the exhibits to the Registrant's Annual Report on
Form 10-K ("Form 10-K") for the year ended December 31, 1981,
which exhibit is hereby incorporated by reference.
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated May 28, 1985, filed as
Exhibit 4.1 of the exhibits to the Registrant's Quarterly Report
on Form 10-Q ("Form 10-Q") for the quarter ended June 30, 1985,
which exhibit is hereby incorporated by reference.
3.4 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated September 17, 1985, filed
as Exhibit 4.1 of the exhibits to the Registrant's Form 10-Q for
the quarter ended September 30, 1985, which exhibit is hereby
incorporated by reference.
3.5 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated July 10, 1990, filed as
Exhibit 3.5 of the exhibits to the Registrant's Form 10-K for the
year ended December 31, 1990, which exhibit is hereby
incorporated by reference.
3.6 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated September 21, 1990, filed
as Exhibit 3.5 of the exhibits to the Registrant's Form 10-Q for
the quarter ended September 30, 1990, which exhibit is hereby
incorporated by reference.
3.7 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated August 8, 2001, filed as
Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed
on August 22, 2001, which exhibit is hereby incorporated by
reference.
3.8 By-laws of the Registrant, filed as exhibit 3.7 to Registrant's
Form 10-K for the year ended December 31, 1998, which exhibit is
hereby incorporated by reference.
4.1 Certificate of Designation related to the Registrant's Adjustable
Rate Cumulative Class A Preferred Stock, filed as Exhibit 4 of
the exhibits to the Registrant's Form 10-Q for the quarter ended
September 30, 1983, which exhibit is hereby incorporated by
reference.
4.2 Certificate of Designation, Preferences and Rights related to the
Registrant's Series B Junior Participating Preferred Stock, filed
as Exhibit 4.2 to the Registrant's 10-K for the year ended
December 31, 1998, which exhibit is incorporated herein by
reference.
4.3 Certificate of Designation related to the Registrant's Adjustable
Rate Cumulative Class A Preferred Stock, Series C, dated April
23, 1991, filed as Exhibit 4.4 of the exhibits to Registrant's
Form 10-K for the year ended December 31, 1991, which exhibit is
hereby incorporated by reference.
4.4 Certificate of Designation related to the Registrant's Adjustable
Rate Cumulative Class A Preferred Stock, Series F, dated June 12,
1997, filed as Exhibit 4.4 of the Exhibits to Registrant's Form
10-K for the year ended December 31, 1997, which exhibit is
hereby incorporated by reference.
4.5 Indenture between Moran Energy Inc. ("Moran") and First City
National Bank of Houston ("First City"), dated January 15, 1984,
under which Moran issued the 8 3/4% Convertible Subordinated
Debentures due 2008, filed as Exhibit 4.1 to Moran's Registration
Statement on Form S-3 (SEC File No. 2-81227), which exhibit is
hereby incorporated by reference.
4.6 First Supplemental Indenture between the Registrant and First
City, dated as of March 20, 1984, under which the Registrant
assumed obligations under the Indenture listed as Exhibit 4.5
above, filed as Exhibit 4.7 of the Registrant's Form 10-K for the
year ended December 31, 1983, which exhibit is hereby
incorporated by reference.
10.1 Amended and Restated Loan Agreement between Furmanite PLC, Bank
of Scotland and certain other Lenders, dated May 1, 1991, as
amended, (the "Furmanite Loan Agreement"), filed as Exhibit 10.8
of the exhibits to the Registrant's Form 10-K for the year ended
December 31, 1994; Exhibit 10.12 of the exhibits to the
Registrant's Form 10-K for the year ended December 31, 1996;
Exhibit 10.12 of the Registrant's Form 10-K for the year ended
December 31, 1997; and, Exhibit 10.13 of the Registrant's Form
10-K for the year ended December 31, 1999, which exhibits are
hereby incorporated by reference.
10.2 Amendment and Restatement of the Furmanite Loan Agreement, filed
as Exhibit 10.2 of the exhibits to the Registrant's Form 10Q for
the quarter ended June 30, 2002, which exhibit is hereby
incorporated by reference.
(b) Reports on Form 8-K
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
XANSER CORPORATION
(Registrant)
Date: November 14, 2002 //s//
---------------------------------
Michael R. Bakke
Controller
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
I, John R. Barnes, Chief Executive Officer of Xanser Corporation certify that:
1. I have reviewed this quarterly report on Form 10-Q of Xanser Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report; 3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report; 4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and internal controls and procedures for financial
reporting as of the end of the period covered by this report
("Evaluation Date");
d) Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and
procedures for financial reporting based on our evaluation as of the
Evaluation Date;
e) Disclosed to the registrant's auditors and the audit committee of the
board of directors:
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for
financial reporting which could adversely affect the registrant's
ability to record, process, summarize and report financial
information required to be disclosed by the registrant in the
reports that it files or submits under the Act (15 U.S.C. 78a et
seq.), within the time periods specified in the U.S. Securities
and Exchange Commission's rules and forms; and
(ii) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
f) Indicated in this report any significant changes in the registrant's
internal controls and procedures for financial reporting or in other
factors that could significantly affect internal controls and
procedures for financial reporting made during the period covered by
this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date: November 14, 2002 //s//
-------------------------------------
John R. Barnes
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Howard C. Wadsworth, Chief Financial Officer of Xanser Corporation certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Xanser Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and internal controls and procedures for financial
reporting as of the end of the period covered by this report
("Evaluation Date");
d) Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures and internal controls and
procedures for financial reporting based on our evaluation as of the
Evaluation Date;
e) Disclosed to the registrant's auditors and the audit committee of the
board of directors:
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for
financial reporting which could adversely affect the registrant's
ability to record, process, summarize and report financial
information required to be disclosed by the registrant in the
reports that it files or submits under the Act (15 U.S.C. 78a et
seq.), within the time periods specified in the U.S. Securities
and Exchange Commission's rules and forms; and
(ii) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
f) Indicated in this report any significant changes in the registrant's
internal controls and procedures for financial reporting or in other
factors that could significantly affect internal controls and
procedures for financial reporting made during the period covered by
this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date: November 14, 2002 //s//
-------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002
The undersigned, being the Chief Executive Officer of Xanser Corporation (the
"Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2002, filed with the United States
Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that information contained in such Quarterly Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
Date: November 14, 2002 //s//
-------------------------------------
John R. Barnes
President and Chief Executive Officer
CERTIFICATE OF CHIEF FINANCIAL OFFICER
Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002
The undersigned, being the Chief Financial Officer of Xanser Corporation (the
"Company") hereby certifies that the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2002, filed with the United States
Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that information contained in such Quarterly Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
Date: November 14, 2002 //s//
-------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)